<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 17, 1998
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
GREEN TREE FINANCIAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
--------------
DELAWARE 41-1807858
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
1100 LANDMARK TOWERS
345 ST. PETER STREET
SAINT PAUL, MINNESOTA 55102-1639
(612) 293-3400
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
--------------
JOEL H. GOTTESMAN
1100 LANDMARK TOWERS
345 ST. PETER STREET
SAINT PAUL, MINNESOTA 55102-1639
(612) 293-3400
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
CHARLES F. SAWYER JEFFREY J. MURPHY
DORSEY & WHITNEY LLP THACHER PROFFITT & WOOD
220 SOUTH SIXTH STREET TWO WORLD TRADE CENTER
MINNEAPOLIS, MINNESOTA 55402 NEW YORK, NEW YORK 10048
--------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF SECURITIES TO THE
PUBLIC: As soon as practicable after the effective date of this Registration
Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. [_]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
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<CAPTION>
PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER UNIT(1) OFFERING PRICE FEE(2)
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<S> <C> <C> <C> <C>
Certificates for Home
Improvement and Home
Equity Loans .......... $2,000,000,000 100% $2,000,000,000 $590,000
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Limited Guaranty of
Green Tree Financial
Corporation............ (3) (3) (3) (3)
</TABLE>
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(1) Estimated solely for the purpose of calculating the registration fee on
the basis of the proposed maximum aggregate offering price, pursuant to
Rule 457(c).
(2) The amount of Certificates for Home Improvement and Home Equity Loans
being carried forward from Registration Statement No. 333-32669 pursuant
to Rule 429 is $468,087,069.00, and the Registrant previously paid a
filing fee with respect to such securities of $141,844.57 (calculated at
the rate of 1/33rd of 1% of the amount of securities being registered, the
rate in effect at the time such Registration Statement was filed).
(3) No additional consideration will be paid for the Limited Guaranty;
accordingly, no separate filing fee is being paid herewith pursuant to
Rule 457(n).
Pursuant to Rule 429, the Prospectuses contained in this Registration
Statement also relate to and constitute Post-Effective Amendment No. 1 to
Registration Statement No. 333-32669, which became effective on August 15,
1997.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that the Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section
8(a), may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED FEBRUARY 17, 1998
PROSPECTUS
UNSECURED HOME IMPROVEMENT LOANS --OWNER TRUST
GREEN TREE HOME IMPROVEMENT LOAN TRUSTS
LOAN-BACKED NOTES
LOAN-BACKED CERTIFICATES
-----------
GREEN TREE FINANCIAL CORPORATION
(SELLER AND SERVICER)
-----------
The Loan-Backed Notes (the "Notes") and the Loan-Backed Certificates (the
"Certificates" and, collectively with the Notes, the "Securities") described
herein may be sold from time to time in one or more series (each, a "Series"),
in amounts, at prices and on the terms to be determined at the time of sale and
to be set forth in a supplement to this Prospectus (a "Prospectus Supplement").
Each Series of Securities will include either one or more classes (each, a
"Class") of Notes or, if Certificates are issued as part of a Series, one or
more Classes of Notes and one or more Classes of Certificates, as set forth in
the related Prospectus Supplement.
The Notes and the Certificates, if any, of any Series of Securities will be
issued by a trust (a "Trust") to be formed with respect to such Series by Green
Tree Financial Corporation ("Green Tree"). The assets of each Trust (the "Trust
Property") will include specified interests in separate pools of home
improvement contracts and promissory notes (the "Contracts"), as more
particularly described herein. No Contract will be secured by an interest in
the related real estate. Except as otherwise specified in the related
Prospectus Supplement, the Contracts will have been originated in the ordinary
course of business by Green Tree. Specific information, to the extent
available, regarding the size and composition of the pool of Contracts relating
to each Series of Securities will be set forth in the related Prospectus
Supplement. Green Tree will act as Servicer (in such capacity referred to
herein as the "Servicer") of the Contracts. In addition, if so specified in the
related Prospectus Supplement, the Trust Property will include monies on
deposit in one or more trust accounts to be established with an Indenture
Trustee, which may include a Pre-Funding Account which would be used to
purchase additional Contracts (the "Subsequent Contracts") from the Seller from
time to time during the Pre-Funding Period specified in the related Prospectus
Supplement.
Each Trust will be formed pursuant to a Trust Agreement (the "Trust
Agreement") to be entered into among the Seller, the Owner Trustee and certain
other parties as specified in the related Prospectus Supplement. A Sale and
Servicing Agreement (the "Sale and Servicing Agreement") will be entered into
among Green Tree, as Seller and Servicer, and each Trust. The Trust Agreement
and the Sale and Servicing Agreement are collectively referred to herein as the
"Trust Documents." The Notes of a Series will be issued and secured pursuant to
an Indenture (the "Indenture") between the Trust and the Indenture Trustee
specified in the related Prospectus Supplement (the "Indenture Trustee").
(Continued on next page)
FOR A DISCUSSION OF CERTAIN FACTORS WHICH SHOULD BE CONSIDERED BY PROSPECTIVE
PURCHASERS OF THE SECURITIES, SEE "RISK FACTORS" AT PAGE 15 HEREIN AND IN THE
RELATED PROSPECTUS SUPPLEMENT.
-----------
THE CERTIFICATES REPRESENT INTERESTS IN AND THE NOTES REPRESENT OBLIGATIONS
OF THE RELATED TRUST AND DO NOT REPRESENT INTERESTS IN OR OBLIGATIONS OF GREEN
TREE (EXCEPT TO THE LIMITED EXTENT DESCRIBED HEREIN AND IN THE RELATED
PROSPECTUS SUPPLEMENT) OR ANY AFFILIATE OF GREEN TREE.
-----------
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.
-----------
Retain this Prospectus for future reference. This Prospectus may not be used
to consummate sales of securities offered hereby unless accompanied by a
Prospectus Supplement.
THE DATE OF THIS PROSPECTUS IS , 1998.
<PAGE>
(Continued from previous page)
Except as otherwise provided in the related Prospectus Supplement, each
Class of Securities of any Series will represent the right to receive a
specified amount of payments of principal and interest on the related
Contracts in the manner described herein and in the related Prospectus
Supplement. The right of each Class of Securities to receive payments may be
senior or subordinate to the rights of one or more of the other Classes of
such Series. A Series may include two or more Classes of Certificates or Notes
which differ as to the timing and priority of payment, interest rate or amount
of distributions in respect of principal or interest or both. A Series may
include one or more Classes of Certificates or Notes entitled to distributions
in respect of principal, with disproportionate, nominal or no interest
distributions, or to interest distributions, with disproportionate, nominal or
no distributions in respect of principal. Distributions on Certificates of any
Series, if any, will be subordinated in priority to payments due on the
related Notes to the extent described herein and in the related Prospectus
Supplement. The Certificates will represent fractional undivided interests in
the related Trust.
Each Class of Securities will represent the right to receive distributions
or payments in the amounts, at the rates, and on the dates set forth in the
related Prospectus Supplement. The rate of distributions in respect of
principal on Certificates and payment in respect of principal on Notes of any
Class will depend on the priority of payment of such Class and the rate and
timing of payments (including prepayments, liquidations and repurchases of
Contracts) on the related Contracts.
Except as otherwise specified in the related Prospectus Supplement, the only
obligations of Green Tree with respect to a Series of Securities 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 Securities evidencing interests in a pool of
Contracts are limited to its contractual servicing obligations. If so
specified in the related Prospectus Supplement, the Servicer may be obligated,
under certain terms and conditions, to advance the amount of any delinquent
payments of principal and interest during the immediately preceding Due Period
(as defined herein), but only to the extent the Servicer determines such
advances are recoverable from future payments and collections on the
delinquent Contracts. See "Description of the Trust Documents--Advances."
If specified in the related Prospectus Supplement, a financial guaranty
insurance policy, letter of credit, surety bond, Green Tree guaranty, cash
reserve fund, or other form of credit enhancement, or any combination thereof,
may be provided with respect to a Trust or any Class of Securities.
Unless otherwise provided in the related Prospectus Supplement, the Notes
and the Certificates, if any, of any Series initially will be represented by
certificates and notes registered in the name of Cede & Co., the nominee of
The Depository Trust Company ("DTC"). The interests of beneficial owners of
the Securities will be represented by book entries on the records of the
participating members of DTC. Definitive Securities will be available only
under limited circumstances.
There currently is no secondary market for the Securities. There can be no
assurance that any such market will develop or, if it does develop, that it
will continue. The Securities will not be listed on any securities exchange.
2
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AVAILABLE INFORMATION
Green Tree, as originator of each Trust, has filed with the Securities and
Exchange Commission (the "Commission") a Registration Statement (together with
all amendments and exhibits thereto, referred to herein as the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities
Act"), with respect to the Securities offered pursuant to this Prospectus. For
further information, reference is made to the Registration Statement which is
available for inspection without charge at the office of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of the
Commission at Seven World Trade Center, Suite 1300, New York, New York 10048
and at Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511, and copies of which may be obtained from the
Commission 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.
REPORTS TO SECURITYHOLDERS
Unless otherwise provided in the related Prospectus Supplement, unless and
until Definitive Certificates or Definitive Notes are issued, unaudited
monthly and annual reports, containing information concerning each Trust and
prepared by the Servicer, will be sent on behalf of the Trust to the Trustee
for the Certificateholders, the Indenture Trustee for the Noteholders and Cede
& Co., as registered holder of the Certificates and the Notes and the nominee
of DTC. See "Certain Information Regarding the Securities--Statements to
Securityholders" and "--Book-Entry Registration." Certificateholders and
Noteholders are collectively referred to herein as the "Securityholders."
Certificate Owners or Note Owners may receive such reports, upon written
request, together with a certification that they are Certificate Owners or
Note Owners and payment of reproduction and postage expenses associated with
the distribution of such reports, from the Trustee, with respect to
Certificate Owners, or the Indenture Trustee, with respect to Note Owners, at
the addresses specified in the related Prospectus Supplement. Such reports
will not constitute financial statements prepared in accordance with generally
accepted accounting principles. Green Tree does not intend to send any of its
financial reports to Securityholders. The Servicer, on behalf of each Trust,
will file with the Commission periodic reports concerning each Trust to the
extent required under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and the rules and regulations of the Commission thereunder.
However, unless otherwise specified in the related Prospectus Supplement,
Green Tree expects that each Trust's obligation to file such reports will be
terminated following the end of the year in which such Trust is formed in
accordance with the Exchange Act and the rules and regulations of the
Commission thereunder.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
Green Tree's Annual Report on Form 10-K for the year ended December 31, 1996
(as amended on February , 1998), Quarterly Reports on Form 10-Q for the
periods ended March 31, June 30 and September 30, 1997 and Current Report on
Form 8-K dated January 27, 1998, 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 Servicer on behalf of each Trust 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 related
Securities shall be deemed to be incorporated by reference into this
Prospectus and the related Prospectus Supplement and to be a part hereof and
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 deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus and the related Prospectus Supplement to the
extent that a statement contained herein or in any other subsequently filed
document which also 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 or the related Prospectus Supplement.
Green Tree 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,
Green Tree Financial Corporation, 1100 Landmark Towers, 345 St. Peter Street,
Saint Paul, Minnesota 55102-1639, telephone number (612) 293-3400.
3
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus and by reference to
the information with respect to the Securities contained in the related
Prospectus Supplement to be prepared and delivered in connection with the
offering of each series of Securities. Certain capitalized terms used in this
Prospectus Summary are defined elsewhere in this Prospectus and in the related
Prospectus Supplement.
<TABLE>
<S> <C>
Issuer.............................. With respect to each series of Securities,
a trust (the "Trust") will be formed by
Green Tree pursuant to a Trust Agreement
between the Seller, the trustee (the "Owner
Trustee") specified in the related
Prospectus Supplement and certain other
parties as specified in the related
Prospectus Supplement.
Seller.............................. Green Tree Financial Corporation (in such
capacity referred to herein as "Green
Tree").
Servicer............................ Green Tree Financial Corporation (in such
capacity referred to herein as the
"Servicer," which term shall include any
successor to Green Tree Financial
Corporation in such capacity under the
applicable Sale and Servicing Agreement (as
defined herein)).
Risk Factors........................ Certain special considerations are
particularly relevant to a decision to
invest in any Securities sold hereunder.
See "Risk Factors" herein.
Trustee............................. The Owner Trustee for a Trust, as specified
in the related Prospectus Supplement. The
Owner Trustee for any Trust will be
referred to in this Prospectus as the
"Trustee," although the Prospectus
Supplement will refer to the Trustee as the
"Owner Trustee" in order to distinguish the
Owner Trustee and the Indenture Trustee for
such Series. See "Description of the Trust
Documents--The Trustee."
Indenture Trustee................... With respect to any Series of Securities,
the Indenture Trustee specified in the
related Prospectus Supplement (the
"Indenture Trustee").
</TABLE>
<TABLE>
<S> <C>
The Notes.......................... Each Series of Securities will include one
or more Classes of Notes, which will be
issued pursuant to an Indenture.
Unless otherwise specified in the related
Prospectus Supplement, Notes will be
available for purchase in denominations of
$1,000 and integral multiples thereof, and
will be available in book-entry form only.
Unless otherwise specified in the related
Prospectus Supplement, beneficial owners of
Notes ("Note Owners") will be able to
receive Definitive Notes only in the
limited circumstances described herein or
</TABLE>
4
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<TABLE>
<S> <C>
in the related Prospectus Supplement. See
"Certain Information Regarding the
Securities--Book-Entry Registration."
</TABLE>
<TABLE>
<S> <C>
The Notes will not be guaranteed or insured
by any government agency or, unless
otherwise specified in the related
Prospectus Supplement, other insurer and,
except as described herein and in the
related Prospectus Supplement, the
Contracts will not be guaranteed or insured
by any government agency or other insurer.
Unless otherwise specified in the related
Prospectus Supplement, each Class of Notes
will have a stated principal amount and
will bear interest at a specified rate or
rates (with respect to each Class of Notes,
the "Interest Rate"). Each Class of Notes
may have a different Interest Rate, which
may be a fixed, variable or adjustable
Interest Rate, or any combination of the
foregoing. The related Prospectus
Supplement will specify the Interest Rate
and the method for determining subsequent
changes to the Interest Rate.
A Series may include two or more Classes of
Notes which differ as to the timing and
priority of payment, seniority, allocations
of loss, Interest Rate or amount of
payments of principal or interest, or as to
which payments of principal or interest may
or may not be made upon the occurrence of
specified events or on the basis of
collections from designated portions of the
Contract Pool. In addition, a Series may
include one or more Classes of Notes
("Stripped Notes") entitled to (i)
principal payments with disproportionate,
nominal or no interest payments or (ii)
interest payments with disproportionate,
nominal or no principal payments.
The Notes of a Series may include one or
more Classes ("Subordinated Notes") which
are subordinated in right of distribution
to one or more other Classes of Notes
("Senior Notes"). Notes of a Series which
includes Senior Notes and Subordinated
Notes are referred to herein collectively
as "Senior/Subordinated Notes." A Series of
Senior/Subordinated Notes may include one
or more Classes ("Mezzanine Notes") which
are subordinated to one or more Classes of
Notes and are senior to one or more Classes
of Notes.
If the Seller or the Servicer exercises its
option to purchase the Contracts of a Trust
on the terms and conditions described under
"Description of the Trust Documents--
Termination," the outstanding Notes, if
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
any, of such Series will be redeemed as set
forth in the related Prospectus Supplement.
In addition, if the related Prospectus
Supplement provides that the property of a
Trust will include a Pre-Funding Account
(the "Pre-Funding Account"), the
outstanding Notes, if any, of such Series
will be subject to partial redemption on or
immediately following the end of the Pre-
Funding Period in an amount and manner
specified in the related Prospectus
Supplement (the "Pre-Funding Period"). In
the event of such partial redemption, the
Note Owners may be entitled to receive a
prepayment premium from the Trust, in the
amount and to the extent provided in the
related Prospectus Supplement.
The Certificates.................... With respect to any Series of Securities
including one or more Classes of
Certificates, such Certificates will be
issued pursuant to the related Trust
Documents. For convenience of description,
any reference in this Prospectus to a
"Class" of Certificates includes a
reference to any subclasses of such Class.
If so specified in a Prospectus Supplement,
the Certificates of a Series 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 of Certificates 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. See
"The Certificates."
Unless otherwise specified in the related
Prospectus Supplement, Certificates will be
available for purchase in denominations of
$1,000 and in integral multiples thereof
and will be available in book-entry form
only. Unless otherwise specified in the
related Prospectus Supplement, beneficial
owners of Certificates ("Certificate
Owners") will be able to receive Definitive
Certificates only in the limited
circumstances described herein or in the
related Prospectus Supplement. See "Certain
Information Regarding the Securities--Book-
Entry Registration."
</TABLE>
<TABLE>
<S> <C>
The Certificates of a Series will not be
guaranteed or insured by any government
agency or, unless otherwise
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
specified in the related Prospectus
Supplement, other insurer and, except as
described herein and in the related
Prospectus Supplement, the Contracts will
not be guaranteed or insured by any
government agency or other insurer.
Unless otherwise specified in the related
Prospectus Supplement, each Class of
Certificates will have a stated Certificate
Balance (as defined in the related
Prospectus Supplement) and will accrue
interest on such Certificate Balance at a
specified rate (with respect to each Class
of Certificates, the "Pass-Through Rate").
Each Class of Certificates may have
a different Pass-Through Rate, which may be
a fixed, variable or adjustable Pass-
Through Rate, or any combination of the
foregoing. The related Prospectus
Supplement will specify the Pass-Through
Rate for each Class of Certificates, or the
initial Pass-Through Rate and the method
for determining subsequent changes to the
Pass-Through Rate.
The Certificates of a Series may include
one or more Classes ("Subordinated
Certificates") which are subordinated in
right of distribution to one or more other
Classes of Certificates ("Senior
Certificates"). Certificates of a Series
which includes Senior Certificates 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.
If the Seller or Servicer exercises its
option to purchase the Contracts of a Trust
on the terms and conditions described under
"Description of the Trust Documents--
Termination," Certificate Owners will
receive an amount in respect of the
Certificates as specified in the related
Prospectus Supplement. In addition, if the
related Prospectus Supplement provides that
the property of a Trust will include a Pre-
Funding Account, Certificate Owners will
receive a distribution in respect of
principal on or immediately following the
end of the funding period specified in the
related Prospectus Supplement in an amount
and manner specified in the related
Prospectus Supplement.
Subordination....................... With respect to any Series of Securities
including one or more Classes of
Certificates, distributions in respect of
the Certificates may be subordinated in
priority of payment to payments on the
Notes, to the
extent specified in the related Prospectus
Supplement.
</TABLE>
7
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<TABLE>
<S> <C>
One or more Classes of Notes of any Series
may be Subordinated Notes, as specified in
the related Prospectus Supplement. The
rights of the Subordinated Noteholders to
receive any or a specified portion of
distributions with respect to the Contracts
will be subordinated to the rights of
Senior Noteholders to the extent and in the
manner specified in the related Prospectus
Supplement. If a Series contains more than
one Class of Subordinated Notes,
distributions and losses will be allocated
among such Classes in the manner specified
in the related Prospectus Supplement. The
rights of the Subordinated Noteholders, to
the extent not subordinated, may be on a
parity with those of the Senior
Noteholders. This subordination is intended
to enhance the likelihood of regular
receipt by Senior Noteholders of the full
amount of scheduled monthly payments of
principal and interest due them and to
protect the Senior Noteholders against
losses. If so specified in the applicable
Prospectus Supplement, other Classes of
Subordinated Notes 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.
One or more Classes of Certificates of any
Series may be Subordinated Certificates, as
specified in the related Prospectus
Supplement. The rights of the Subordinated
Certificateholders to receive any or a
specified portion of distributions with
respect to the Contracts will be
subordinated to the rights of Senior
Certificateholders to the extent and in the
manner specified in the related Prospectus
Supplement. If a Series contains more than
one Class of Subordinated Certificates,
distributions and losses will be allocated
among such Classes in the manner specified
in the related Prospectus Supplement. The
rights of the Subordinated
Certificateholders, to the extent not
subordinated, may be on a parity with those
of the Senior Certificateholders. This
subordination is intended to enhance the
likelihood of regular receipt by Senior
Certificateholders of the full amount of
scheduled monthly payments of principal and
interest due them and to protect the Senior
Certificateholders against losses. If so
specified in the applicable Prospectus
Supplement, Mezzanine Certificates or other
Classes of Subordinated Certificates may be
entitled to the benefits of other forms of
credit enhancement and may, if rated in one
of the four
</TABLE>
8
<PAGE>
<TABLE>
<S> <C>
highest rating categories by a nationally
recognized statistical rating organization,
be offered pursuant to this Prospectus and
such Prospectus Supplement.
</TABLE>
<TABLE>
<S> <C>
Trust Property...................... Each Note will represent an obligation of,
and each Certificate, if any, will
represent a fractional undivided interest
in, the related Trust. The assets of
each Trust (the "Trust Property") will
include, among other things, (i) a pool
(the "Contract Pool") of fixed or variable
rate home improvement contacts and
promissory notes, (ii) amounts held in the
Collection Account, including all
investments therein, all income from the
investment of funds therein and all
proceeds thereof, certain other accounts
and the proceeds thereof, (iii) proceeds
from FHA Insurance (with respect to any
FHA-insured Contract included in the
Contract Pool), (iv) any letter of credit,
guarantee, surety bond, insurance policy,
cash reserve fund or other credit
enhancement securing payment of all or part
of a Series of Securities, (v) certain
other rights under the Trust Documents and
(vi) such other property as may be
specified in the related Prospectus
Supplement. In addition, if so specified in
the related Prospectus Supplement, the
Trust Property will include monies on
deposit in a Pre-Funding Account to be
established with the Indenture Trustee or
the Trustee, which will be used to purchase
Subsequent Contracts (as defined below)
from the Seller from time to time during
the Pre-Funding Period specified in the
related Prospectus Supplement, as well as
any Subsequent Contracts so purchased. See
"The Trusts."
If and to the extent provided in the
related Prospectus Supplement, the related
Trust will be obligated to purchase from
Green Tree (subject to the satisfaction of
certain conditions described in the
applicable Sale and Servicing Agreement),
additional Contracts (the "Subsequent
Contracts") from time to time (as
frequently as daily) during the Pre-Funding
Period specified in the related Prospectus
Supplement having an aggregate principal
balance approximately equal to the amount
on deposit in the Pre-Funding Account (the
"Pre-Funded Amount") on such Closing Date.
Green Tree will be obligated to repurchase
Contracts upon the occurrence of certain
breaches of representations and warranties
(a "Repurchase Event"). See "Description of
the Trust Documents--Sale and Assignment of
the Contracts" and "Certain Legal Aspects
of the Contracts--Repurchase Obligations."
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Enhancement......................... If and to the extent specified in the
related Prospectus Supplement, as an
alternative, or in addition, to the credit
enhancement afforded by subordination of
the Subordinated Notes and Subordinated
Certiticates, credit enhancement with
respect to a Trust or any Class of
Securities may include any one or more of
the following: a financial guaranty
insurance policy,
letter of credit, surety bond, Green Tree
guaranty, cash reserve fund, derivative
product, or other form of credit
enhancement, or any combination thereof.
The enhancement with respect to any Trust
or any Class of Securities may be
structured to provide protection against
delinquencies and/or losses on the
Contracts, against changes in interest
rates, or other risks, to the extent and
under the conditions specified in the
related Prospectus Supplement. Unless
otherwise specified in the related
Prospectus Supplement, any form of
enhancement will have certain limitations
and exclusions from coverage thereunder,
which will be described in the related
Prospectus Supplement. Further information
regarding any provider of credit
enhancement, including financial
information when material, will be included
in the related Prospectus Supplement. See
"Description of the Trust Documents--
Enhancement."
Servicing........................... The Servicer will be responsible for
managing, administering, servicing and
making collections on the Contracts held by
each Trust. Unless otherwise specified in
the related Prospectus Supplement, with
respect to each Series of Securities
compensation to the Servicer will include a
monthly fee (the "Monthly Servicing Fee")
which will be payable from the
related Trust to the Servicer on each
Distribution Date, in an amount equal to
the product of one-twelfth of the annual
servicing fee rate described in the
applicable Prospectus Supplement multiplied
by the aggregate principal balance of the
Contracts (the "Aggregate Principal
Balance") as of the first day of the prior
calendar month ("Due Period"), plus any
late fees and other administrative fees and
expenses or similar charges collected with
respect to the Contracts during such Due
Period. See "Description of the Trust
Documents--Servicing."
Advances............................ Unless otherwise specified in the related
Prospectus Supplement, the Servicer will be
obligated to make advances ("Advances")
each month of any scheduled payments on the
Contracts that were due but not received
during the prior Due Period. The Servicer
will be entitled to reimbursement of an
Advance from the Amount Available in the
Collection Account for
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the related Trust. 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 Collection
Account for the related Trust. See
"Description of the Trust Documents--
Advances."
Contracts........................... The Contract Pool underlying a Series of
Securities will consist of fixed or
variable rate Contracts. Such Contracts, as
specified in the related Prospectus
Supplement, will consist of home
improvement contracts and promissory notes
and will be either conventional contracts
or contracts insured by the Federal Housing
Administration ("FHA") pursuant to Title I
of the National Housing Act ("Title I").
The Contracts will not be secured by any
lien on the related real estate.
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The Prospectus Supplement for each Series
will provide information with respect to
(i) the aggregate principal balance of the
Contracts comprising the Contract Pool, as
of the date specified in the Prospectus
Supplement (the "Cut-off Date"); (ii) the
weighted average and range of contractual
rates of interest (each, a "Contract Rate")
on the Contracts; (iii) the weighted
average and ranges of terms to scheduled
maturity of the Contracts as of origination
and as of the Cut-off Date; (iv) the
average outstanding principal balance of
the Contracts as of the Cut-off Date; (v)
the percentage of the Contracts that are
FHA-insured; and (vi) the geographic
location of improved real estate underlying
the Contracts. In addition, if so specified
in the related Prospectus Supplement,
additional Contracts may be purchased
from Green Tree during the Pre-Funding
Period specified in the related Prospectus
Supplement, from funds on deposit in a Pre-
Funding Account.
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Except as otherwise specified in the
related Prospectus Supplement, the
Contracts will have been originated by
Green Tree on an individual basis in the
ordinary course of its business.
Collection Account.................. With respect to each Series of Securities,
the Servicer will establish and maintain
one or more separate accounts (the
"Collection Account") in the name of the
Indenture Trustee for the benefit of the
Certificate Owners and the Note Owners. All
payments from obligors under the Contracts
("Obligors") that are received by the
Servicer on behalf of each Trust will be
deposited in the related Collection Account
no later than one Business Day after
receipt thereof.
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Unless otherwise specified in the related
Prospectus Supplement, all payments from
Obligors and all proceeds (net of
reasonable expenses of collection) with
respect to Liquidated Contracts ("Net
Liquidation Proceeds") that are received by
the Servicer will be deposited in the
related Collection Account no later than
one Business Day after receipt thereof.
Unless otherwise specified in the related
Prospectus Supplement, the Servicer will be
permitted to use any alternative remittance
schedule acceptable to the Rating Agencies
(as defined below). See "Description of the
Trust Documents--Collections."
Representations and Warranties of As a condition to the Seller's conveyance
the Seller........................ of any Contract Pool to the Trust, the
Seller will make certain representations
and warranties in the related Sale and
Servicing Agreement regarding the
Contracts. The Trustee will assign its
right to enforce such representations and
warranties to the related Indenture Trustee
as collateral for the Notes. Under the
terms of the Sale and Servicing Agreement,
if the Seller becomes aware of a breach of
any such representation or warranty that
materially adversely affects the interests
of the Note Owners, the Certificate Owners,
if any, or the related Trust therein (a
"Repurchase Event") in any Contract or
receives written notice of such a breach
from the Trustee, the Indenture Trustee or
the Servicer, then the Seller will be
obligated either to cure such breach or to
repurchase or, if so provided in the
related Prospectus Supplement, substitute
for the affected Contract, in each case
under the conditions further described
herein and in the Prospectus Supplement.
See "Description of the Trust Documents--
Sale and Assignment of the Contracts."
Optional Purchase of Contracts..... Unless otherwise specified in the related
Prospectus Supplement, with respect to each
Series of Securities, the Seller or the
Servicer may purchase all the Contracts
held by the related Trust on any
Distribution Date following the first Due
Period as of which the Aggregate Principal
Balance has declined to 10% or less (or
such other percentage as may be specified
in the related Prospectus Supplement) of
the Aggregate Principal Balance as of the
Cut-off Date (the "Cut-off Date Principal
Balance"), subject to certain provisions in
the related Trust Documents. See
"Description of the Trust Documents--
Termination."
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Tax Status.......................... In the opinion of Counsel to Green Tree,
for federal and Minnesota income tax
purposes, the Notes will be characterized
as debt and the Trust will not be
characterized as an association or a
publicly traded partnership taxable as a
corporation. Each Noteholder, by the
acceptance of a Note, will agree to treat
the Notes as debt. Each Certificateholder,
by the acceptance of a Certificate, will
agree to treat the Trust as a partnership
in which the Certificateholders are
partners for federal income tax purposes.
Alternative characterizations of the Trust,
the Notes and the Certificates are
possible, but would not result in
materially adverse tax consequences to
Noteholders or Certificateholders. See
"Certain Federal Income Tax Consequences"
and "Certain State Income Tax Consequences"
herein.
ERISA Considerations ............... Subject to the considerations discussed
under "ERISA Considerations" herein and in
the related Prospectus Supplement, and
unless otherwise specified in the related
Prospectus Supplement, the Notes will be
eligible for purchase by employee benefit
plans subject to the Employee Retirement
Income Security Act of 1974, as amended
("ERISA"). The related Prospectus
Supplement will provide further information
with respect to the eligibility of a Class
of Certificates for purchase
by employee benefit plans. A fiduciary of
any employee benefit plan subject to ERISA,
or the Internal Revenue Code of 1986, as
amended (the "Code"), should review
carefully with its legal advisors whether
the purchase or holding of a Class of
Certificates could give rise to a
transaction prohibited or otherwise
impermissible under ERISA or the Code. See
"ERISA Considerations" herein and in the
related Prospectus Supplement.
Legal Investment ................... The Securities will not constitute
"mortgage related securities" under the
Secondary Mortgage Market Enhancement Act
of 1984, as amended. See "Legal Investment
Considerations."
Rating.............................. As a condition of issuance, the Securities
of each Series offered pursuant to this
Prospectus will be rated in one of the four
highest rating categories by at least one
nationally recognized rating agency (a
"Rating Agency"). There is no assurance
that the rating initially assigned to such
Securities will not be subsequently lowered
or withdrawn by the Rating Agency. In the
event the rating initially assigned to any
Securities is subsequently lowered for any
reason, no person or entity will be
obligated to provide any
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credit enhancement in addition to the
credit enhancement, if any, specified in
the related Prospectus Supplement.
Registration of Certificates........ Unless otherwise specified in the related
Prospectus Supplement, the Notes and the
Certificates, if any, of each Series will
be registered in the name of Cede & Co., as
the nominee of DTC, and will be available
for purchase only in book-entry form on the
records of DTC and participating members
thereof. Notes and Certificates will be
issued in definitive form only under the
limited circumstances
described herein. All references herein to
"Holders," "Certificateholders" or
"Noteholders" shall reflect the rights of
beneficial owners of Notes ("Note Owners")
or of Certificates ("Certificate Owners"),
as the case may be, as they may indirectly
exercise such rights through DTC and
participating members thereof, except as
otherwise specified herein or in the
related Prospectus Supplement. See "Certain
Information Regarding the Securities--Book-
Entry Registration."
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RISK FACTORS
LIMITATIONS ON AVAILABILITY OF FHA INSURANCE
The related Prospectus Supplement will specify the number and percentage of
the Contracts included in the Contract Pool that are insured by FHA pursuant
to Title I. The availability of FHA Insurance following a default on an FHA-
insured Contract is subject to a number of conditions, including strict
compliance by Green Tree with FHA regulations in originating and servicing the
Contract. Although Green Tree is an FHA-approved lender and believes, and will
represent and warrant in the Sale and Servicing Agreement, that it has
complied with FHA regulations, such regulations are susceptible to substantial
interpretation. Green Tree is not required to obtain, and has not obtained,
approval from FHA of its origination and servicing practices. Failure to
comply with FHA regulations may result in a denial of FHA Insurance claims,
and there can be no assurance that FHA's enforcement of its regulations will
not become stricter in the future. From time to time Green Tree is engaged in
disputes with FHA over the validity of claims submitted and Green Tree's
compliance with FHA regulations in servicing loans insured by FHA, such as the
FHA-insured Contracts. In addition, any insurance claim paid by FHA will cover
only 90% of the sum of the unpaid principal on the Contract, up to nine months
unpaid interest thereon (computed at 7% per annum) and certain liquidation
costs.
The amount of FHA Insurance available with respect to a Series of Securities
at any given time with respect to the FHA-insured Contracts included in a
Contract Pool is limited to the balance of a reserve amount determined with
respect to all FHA Title I loans originated and reported for insurance by
Green Tree and not sold, or sold with recourse, by Green Tree, including
manufactured housing contracts as well as home improvement loans. Such reserve
amount, as of December 31, 1997, was equal to approximately $ , but
will be reduced by the amount of all FHA Insurance claims paid, and will be
increased by an amount equal to 10% of the unpaid principal balance of FHA
Title I loans subsequently originated and reported for insurance by Green
Tree. Severe losses on Green Tree's FHA-insured manufactured housing
contracts, or on other FHA-insured home improvement loans originated by Green
Tree, could reduce or eliminate Green Tree's FHA Insurance reserves, in which
event FHA Insurance would not be available to cover losses on FHA-insured
Contracts. In the event Green Tree were terminated as Servicer due to its
bankruptcy or otherwise, it is anticipated that a proportionate amount of
Green Tree's FHA Insurance reserves would be transferred to the reserve
account of the Trustee or other successor servicer, but there can be no
assurance of the amount, if any, that would be so transferred. See
"Description of FHA Insurance."
LIMITED OBLIGATIONS
Except as otherwise specified in the related Prospectus Supplement, the
Securities of a Series will not represent an interest in or obligation of
Green Tree. The Securities 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.
CONTRACTS UNSECURED
The obligations of the Obligor under the Contract included in a Contract
Pool will not be secured by an interest in the related real estate or
otherwise, and the related Trust, as the owner of such Contract, will be a
general unsecured creditor as to such obligations. As a consequence, in the
event of a default under a Contract, the related Trust will have recourse only
against the Obligor's assets generally, along with all other general unsecured
creditors of the Obligor. In a bankruptcy or insolvency proceeding relating to
an Obligor on a Contract, the obligations of the Obligor under such Contract
may be discharged in their entirety, notwithstanding the fact that the portion
of such Obligor's assets made available to the related Trust as a general
unsecured creditor to pay amounts due and owing thereunder are insufficient to
pay all such amounts. An Obligor on a Contract may not demonstrate the same
degree of concern over performance of the Obligor's obligations under such
Contract as if such obligations were secured by the real estate owned by such
Obligor.
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RISKS TO INVESTORS UPON ANY INSOLVENCY OF GREEN TREE
Green Tree intends that any transfer of Contracts to the related Trust will
constitute a sale, rather than a pledge of the Contracts to secure
indebtedness of Green Tree. However, if Green Tree were to become a debtor
under the federal bankruptcy code or similar applicable state laws
(collectively, "Insolvency Laws"), a creditor or trustee in bankruptcy of
Green Tree or Green Tree as debtor-in-possession might argue that such sale of
Contracts by Green Tree was a pledge of the Contracts rather than a sale. This
position, if presented to or accepted by a court, could cause the related
Trust to experience a delay in or reduction of collections on the Contracts.
SUBORDINATION OF CERTAIN CLASSES OF SECURITIES; LIMITED ASSETS
To the extent specified in the related Prospectus Supplement, distributions
of interest and principal on some or all Classes of Securities of a Series may
be subordinated in priority of payment to interest and principal due on the
Notes of such Series and/or to distributions of interest and principal on
other Classes of Securities of such Series. In addition, holders of certain
Classes of Securities of any Series may have the right to take actions that
are detrimental to the interests of the holders of certain other Classes of
Securities of such Series. For example, holders of a Class of more senior
Securities may be entitled to instruct the Indenture Trustee or Trustee to
liquidate the Trust Property when it is not in the interest of holders of more
junior Classes of Securities of such Series to do so. Conversely, certain
actions may require the consent of a majority of Security Owners of all
Classes of a Series, which may mean that Security Owners of more junior
classes can prevent the Security Owners of more senior Classes of such Series
from taking action. Moreover, no Trust will have any significant assets or
sources of funds other than the Contracts and, to the extent provided in the
related Prospectus Supplement, a Pre-Funding Account and any credit
enhancement specified in the related Prospectus Supplement. The Notes of any
Series will represent obligations solely of, and the Certificates, if any, of
such Series will represent interests solely in, the related Trust, and, except
as specified in the related Prospectus Supplement, neither the Notes nor the
Certificates of any such Series will be insured or guaranteed by Green Tree,
the Servicer, the applicable Owner Trustee, the applicable Indenture Trustee
or any other person or entity. Consequently, holders of the Securities of any
Series must rely for payment upon payments on the related Contracts and, if
and to the extent available, amounts on deposit in the Pre-Funding Account, if
any, and any credit enhancement, if any, as specified in the related
Prospectus Supplement. If specified in the related Prospectus Supplement,
credit enhancement for a Class of Securities of a Series may cover one or more
other Classes of Securities of such Series, and accordingly may be exhausted
for the benefit of some Classes and thereafter be unavailable for such other
Classes.
YIELD AND PREPAYMENT CONSIDERATIONS
The weighted average life of the Securities will be reduced by full or
partial prepayments on the Contracts. The Contracts will generally be
prepayable at any time without penalty. Prepayments (or, for this purpose,
equivalent payments to the related Trust) may result from payments by
Obligors, liquidations due to default, the receipt of proceeds from physical
damage or credit insurance, repurchases by Green Tree as a result of certain
uncured breaches of the warranties made by it with respect to the Contracts,
purchases by the Servicer as a result of certain uncured breaches of the
covenants with respect to the Contracts made by it in the related Sale and
Servicing Agreement, or Green Tree or the Servicer exercising its option to
purchase all of the remaining Contracts.
Unless otherwise specified in the related Prospectus Supplement, the amounts
paid to Securityholders in respect of principal on any Distribution Date will
include all prepayments on the Contracts during the corresponding Due Periods.
The Certificate Owners and the Note Owners will bear all reinvestment risk
resulting from the timing of payments of principal on the Securities.
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LIMITED LIQUIDITY OF THE SECURITIES
There is currently no market for the Securities of any Series. Although
Green Tree expects that the underwriters of any particular Series will intend
to make a secondary market for such Securities, they will have no obligation
to do so. There can be no assurance that any such market will develop or, if
it does develop, that it will provide Certificate Owners or Note Owners with
liquidity of investment or will continue for the life of the Securities. The
Securities will not be listed on any securities exchange.
Unless otherwise specified in the related Prospectus Supplement, the
Securities will be issued in book-entry, rather than physical, form and, as a
result, in certain circumstances, the liquidity of the Securities in the
secondary market and the ability of the Certificate Owners and Note Owners to
pledge them may be adversely affected. See "Plan of Distribution" and "Certain
Information Regarding the Securities--Book-Entry Registration."
THE TRUSTS
With respect to each Series of Securities, Green Tree will establish a Trust
pursuant to the related Trust Documents. Prior to the sale and assignment of
the related Contracts pursuant to the related Trust Documents, the Trust will
have no assets or obligations. The Trust will not engage in any business
activity other than acquiring and holding the Trust Property, issuing the
Notes and the Certificates, if any, of such Series and distributing payments
thereon.
Each Note will represent an obligation of, and each Certificate, if any,
will represent a fractional undivided interest in, the related Trust. The
Trust Property of each Trust will include, among other things, (i) a Contract
Pool, (ii) such amounts as from time to time may be held in the Collection
Account (including all investments in the Collection Account and all income
from the investment of funds therein and all proceeds thereof) and certain
other accounts (including the proceeds thereof), (iii) proceeds from FHA
Insurance (with respect to any FHA-insured Contract included in the Contract
Pool), (iv) any letter of credit, guarantee, surety bond, insurance policy,
cash reserve fund or other credit enhancement securing payment of all or part
of a Series of Securities, (v) certain other rights under the Trust Documents
and (vi) such other property as may be specified in the related Prospectus
Supplement. See "The Contracts" and "Description of the Trust Documents--
Collections." The Trust Property will also include, if so specified in the
related Prospectus Supplement, monies on deposit in a Pre-Funding Account to
be established with the Indenture Trustee or the Trustee, which will be used
to purchase Subsequent Contracts from Green Tree from time to time (and as
frequently as daily) during the Pre-Funding Period specified in the related
Prospectus Supplement. Any Subsequent Contracts so purchased will be included
in the related Contract Pool forming part of the Trust Property, subject to
the prior rights of the related Indenture Trustee and the Noteholders therein.
In addition, to the extent specified in the related Prospectus Supplement, a
form of credit enhancement may be issued to or held by the Trustee or the
Indenture Trustee for the benefit of holders of one or more Classes of
Securities. Holders of Securities of a Series will have interests only in such
Contract Pool and will have no interest in the Contract Pool created with
respect to any other Series of Securities, except with respect to FHA
Insurance reserves.
Except as otherwise specified in the related Prospectus Supplement, all of
the Contracts will have been originated by Green Tree in the ordinary course
of its business. Specific information respecting the Contracts included in
each Trust 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 Securities. A copy of the Sale and Servicing Agreement with
respect to each Series of Securities will be attached to the Form 8-K and will
be available for inspection at the corporate trust office of the Trustee
specified in the related Prospectus Supplement. A schedule of the Contracts
relating to such Series will be attached to the Sale and Servicing Agreement
delivered to the Trustee upon delivery of the Securities.
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Whenever in this Prospectus terms such as "Contract Pool," "Trust," "Sale
and Servicing Agreement," "Interest Rate or "Pass-Through Rate" are used,
those terms respectively apply, unless the context otherwise indicates, to one
specific Contract Pool and Trust, each Sale and Servicing Agreement, each
Interest Rate applicable to the related Class of Notes and each Pass-Through
Rate applicable to the related Class of Certificates.
THE CONTRACT POOLS
Except as otherwise specified in the related Prospectus Supplement, the
Contract Pool will consist of home improvement contracts and promissory notes
(collectively, the "Contracts") originated by Green Tree on an individual
basis in the ordinary course of business. The Contracts will be conventional
home improvement contracts or contracts insured by FHA. No Contract will be
secured by an interest in the related real estate. Except as otherwise
specified in the related Prospectus Supplement, the Contracts will be fully
amortizing and will bear interest at a fixed or variable annual percentage
rate (the "Contract Rate").
For each Series of Securities, Green Tree will assign the Contracts
constituting the Contract Pool to the trustee named in the related Prospectus
Supplement (the "Trustee"). Green Tree, as Servicer (in such capacity referred
to herein as the "Servicer," which term shall include any successor to Green
Tree in such capacity under the applicable Sale and Servicing Agreement), will
service the Contracts pursuant to the Sale and Servicing Agreement. See
"Description of the Trust Documents--Servicing." Unless otherwise specified in
the related Prospectus Supplement, the Contract documents will be held by the
Trustee or a custodian on its behalf.
The related Prospectus Supplement will specify for the Contracts contained
in the related Contract Pool, among other things, the range of the dates of
origination of the Contracts; the range of the Contract Rates and the weighted
average Contract Rate; the minimum and maximum outstanding principal balances
and the average outstanding principal balance as of the Cut-off Date; the
aggregate principal balance of the Contracts included in the Contract Pool as
of the Cut-off Date; the weighted average and range of scheduled terms to
maturity as of origination and as of the Cut-off Date; and the range of
original maturities of the Contracts and the last maturity date of any
Contract. If the Trust includes a Pre-Funding Account, the related Prospectus
Supplement will specify the conditions that must be satisfied prior to any
transfer of Subsequent Contracts, including the requisite characteristics of
the Subsequent Contracts.
Green Tree will make representations and warranties as to the types and
geographical distribution of the Contracts included in a Contract Pool and as
to the accuracy in all material respects of certain information furnished to
the Trustee in respect of each such Contract. Upon a breach of any
representation or warranty that materially and adversely affects the interests
of the Securityholders in a Contract, Green Tree will be obligated to cure the
breach in all material respects, or to repurchase or substitute for
the Contract as described below. This repurchase obligation constitutes the
sole remedy available to the Securityholders or the Trustee for a breach of
representation or warranty by Green Tree. See "Description of the Trust
Documents--Sale and Assignment of the Contracts."
THE TRUSTEE
The Trustee for each Trust will be specified in the related Prospectus
Supplement. The Trustee's liability in connection with the issuance and sale
of the Securities of such Series will be limited solely to the express
obligations of such Trustee set forth in the related Trust Documents. A
Trustee may resign at any time, in which event the General Partner will be
obligated to appoint a successor trustee. The General Partner may also remove
the Trustee if the Trustee ceases to be eligible to continue as Trustee under
the related Trust Documents or if the Trustee becomes insolvent. In such
circumstances, the General Partner will be obligated to appoint a successor
trustee. Any resignation or removal of a Trustee and appointment of a
successor trustee will be subject to any conditions or approvals specified in
the related Prospectus Supplement and will not become effective until
acceptance of the appointment by the successor trustee.
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GREEN TREE FINANCIAL CORPORATION
GENERAL
Green Tree is a Delaware corporation that, as of December 31, 1997, had
stockholders' equity of approximately $1,315,000,000. Through its various
divisions, Green Tree purchases, pools, sells and services retail conditional
sales contracts for manufactured housing and retail installment sales
contracts for home improvements, a variety of consumer products and equipment
finance, and provides credit to manufactured housing dealers for purposes of
purchasing manufactured home inventory from manufacturers. Green Tree 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 Green Tree. Through its principal offices in St.
Paul, Minnesota, and service centers throughout the United States, Green Tree
serves all 50 states. Green Tree began financing FHA-insured home improvement
loans in April 1989 and conventional home improvement loans in September 1992.
Green Tree also purchases, pools and services installment sales contracts for
various consumer products. Its principal executive offices are located at 1100
Landmark Towers, St. Paul, Minnesota 55102-1639 (telephone (612) 293-3400).
Green Tree's Annual Report on Form 10-K for the year ended December 31, 1996,
most recent Proxy Statement and, when available, subsequent quarterly and
annual reports are available from Green Tree upon written request.
CONTRACT ORIGINATION
Through its centralized loan processing operations in St. Paul, Minnesota,
Green Tree arranges to purchase certain contracts from home improvement
contractors located throughout the United States. Green Tree's regional sales
managers contact home improvement contractors and explain Green Tree's
available financing plans, terms, prevailing rates and credit and financing
policies. If the contractor wishes to utilize Green Tree's available customer
financing, the contractor must make an application for contractor approval.
Green Tree has a contractor approval process pursuant to which the financial
condition, business experience and qualifications of the contractor are
reviewed prior to his or her approval to sell contracts to Green Tree. In
addition, Green Tree has a centralized compliance group which reviews and
updates contractor financial condition and reviews contractors on an annual
basis to determine whether such contractor's approval will be continued. Green
Tree also reviews monthly contractor trend reports which show the default and
delinquency trends of the particular contractor with respect to contracts sold
to Green Tree. Green Tree occasionally will originate directly a home
improvement promissory note involving a home improvement transaction.
All contracts that Green Tree originates are written on forms provided or
approved by Green Tree and are purchased on an individually approved basis in
accordance with Green Tree's guidelines. The contractor submits the customer's
credit application and construction contract to Green Tree's office where an
analysis of the creditworthiness of the customer is made using a proprietary
credit scoring system that was implemented by Green Tree in June 1993. If
Green Tree determines that the application meets Green Tree's underwriting
guidelines and applicable FHA regulations (for FHA-insured contracts) and the
credit is approved, Green Tree purchases the contract from the contractor when
the customer verifies satisfactory completion of the work, or, in the case of
staged funding, Green Tree follows up with the customer for the completion
certificate 90 days after funding.
The types of home improvements financed by Green Tree include (i) exterior
renovations, including windows, siding and roofing, (ii) pools and spas, (iii)
kitchen and bath remodeling, and (iv) room additions and garages. Green Tree
may also, under certain limited conditions, extend additional credit beyond
the purchase price of the home improvement for the purpose of debt
consolidation.
The original principal amount of an unsecured FHA-insured home improvement
contract currently may not exceed $7,500 without specific FHA approval, with a
maximum term of 20 years. Certain other criteria for home improvement
contracts eligible for FHA Insurance are described under the caption
"Description of FHA Insurance."
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Green Tree began financing conventional home improvement loans in September
1992. Conventional home improvement loans are not insured by FHA. The
unsecured conventional program allows for an amount financed from $2,500 to
$15,000 (except in Massachusetts where the loan limit may be $20,000). The
allowable term of unsecured contracts is 24 to 120 months. Green Tree's
underwriting standards with respect to unsecured home improvement contracts
are, in general, more stringent than its underwriting standards with respect
to secured home improvement contracts with similar terms. Eligible property
includes an owner-occupied single family home, up to four unit multiple-family
dwelling, owner-occupied condominium or town house, or an owner-occupied
manufactured home located in a Green Tree-approved park or attached to the
real estate.
LOSS AND DELINQUENCY INFORMATION
Each Prospectus Supplement will include Green Tree's loss and delinquency
experience with respect to its entire servicing portfolio of home improvement
contracts. However, there can be no assurance that such experience will be
indicative of the performance of the Contracts included in a particular
Contract Pool.
RATIO OF EARNINGS TO FIXED CHARGES FOR GREEN TREE
Set forth below are Green Tree'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>
YEAR ENDED DECEMBER 31,
------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Ratio of Earnings to Fixed Charges..................... 3.55 4.81 7.98 7.90 7.83
</TABLE>
YIELD CONSIDERATIONS
The Interest Rates, Pass-Through Rates and the weighted average Contract
Rate of the Contracts (as of the related Cut-off Date) relating to each Series
of Securities 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 Securities 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 Securities that is offered at a premium to its principal amount or
without any principal amount.
The yield on some types of Securities which may be offered hereby, such as
Stripped Notes, Interest Only Certificates, Principal Only Certificates and
Fast Pay/Slow Pay Certificates, may be particularly sensitive to prepayment
rates, and to changes in prepayment rates, on the underlying Contracts. If so
stated in the related Prospectus Supplement, the yield on some types of
Securities which may be offered hereby could change and may be negative under
certain prepayment rate scenarios. Accordingly, some types of Securities may
not be legal or appropriate investments for certain financial institutions,
pension funds or others. See "ERISA Considerations" and "Legal Investment
Considerations." In addition, the timing of changes in the rate of prepayment
on the Contracts included in a Contract Pool may significantly affect an
investor's actual yield to maturity, even if the average prepayment rate over
time is consistent with the investor's expectations. In general, the earlier
that prepayments on Contracts occur, the greater the effect on the investor's
yield to maturity.
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MATURITY AND PREPAYMENT CONSIDERATIONS
MATURITY
Unless otherwise described in an applicable Prospectus Supplement, all of
the Contracts will have maturities at origination of not more than 25 years.
PREPAYMENT CONSIDERATIONS
Contracts generally may be prepaid in full or in part without penalty. FHA-
insured Contracts may be prepaid at any time without penalty. Green Tree has
no significant experience with respect to the rate of principal prepayments on
home improvement contracts. Because the Contracts have scheduled due dates
throughout the calendar month, and because (unless otherwise specified in the
related Prospectus Supplement) all principal prepayments will be passed
through to Securityholders of the related Series on the Payment Date following
the Due Period in which such principal prepayment occurred, prepayments on the
Contracts would affect the amount of funds available to make distributions on
the Securities on any Payment Date only if a substantial portion of the
Contracts prepaid prior to their respective due dates in a particular month
(thus paying less than 30 days' interest for that Due Period) while very few
Contracts prepaid after their respective due dates in that month. In addition,
liquidations of defaulted Contracts or the Servicer's or Green Tree's exercise
of its option to repurchase the entire remaining pool of Contracts (see
"Description of the Trust Documents--Termination") will affect the timing of
principal distributions on the Securities 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 Securities. Although the related
Prospectus Supplement will specify the prepayment assumptions used to price
any Series of Securities, there can be no assurance that the Contracts will
prepay at such rate, and it is unlikely that prepayments or liquidations of
the Contracts will occur at any constant rate.
See "Description of the Trust Documents--Termination" for a description of
Green Tree's or the Servicer's option to repurchase the Contracts comprising
part of a Trust when the Aggregate Principal Balance of such Contracts as of
the related Cut-off Date is less than a specified percentage of the Cut-off
Date Principal Balance of such Contracts. See also "The Trusts--The Contract
Pools" for a description of the obligations of Green Tree to repurchase a
Contract in case of a breach of a representation or warranty relative to such
Contract.
POOL FACTOR
The "Certificate Pool Factor" for each Class of Certificates will be an
eight-digit decimal which the Servicer will compute indicating the outstanding
balance (the "Certificate Balance") with respect to such Certificates as of
each Distribution Date (after giving effect to all distributions of principal
made on such Distribution Date), as a fraction of the original Certificate
Balance of such Certificates. The "Note Pool Factor" for each Class of Notes,
if any, will be an eight-digit decimal which the Servicer will compute
indicating the remaining outstanding principal balance with respect to such
Notes as of each Distribution Date (after giving effect to all distributions
of principal on such Distribution Date) as a fraction of the initial
outstanding principal balance of such Class of Notes. Each Certificate Pool
Factor and each Note Pool Factor will initially be 1.00000000; thereafter, the
Certificate Pool Factor and the Note Pool Factor will decline to reflect
reductions in the Certificate Balance of the applicable Class of Certificates
or reductions in the outstanding principal balance of the applicable Class of
Notes, as the case may be. The amount of a Certificateholder's pro rata share
of the Certificate Balance for the related Class of Certificates can be
determined by multiplying the original denomination of the Certificateholder's
Certificate by the then applicable Certificate Pool Factor. The amount of a
Noteholder's pro rata share of the aggregate outstanding principal balance of
the applicable Class of Notes can be determined by multiplying the original
denomination of such Noteholder's Note by the then applicable Note Pool
Factor.
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With respect to each Trust and pursuant to the related Trust Documents, on
each Distribution Date or Payment Date, as the case may be, the related
Certificateholders and Noteholders will receive periodic reports from the
Trustee stating the Certificate Pool Factor or the Note Pool Factor, as the
case may be, and containing various other items of information. Unless and
until Definitive Certificates or Definitive Notes are issued, such reports
will be sent on behalf of the Trust to the Trustee and the Indenture Trustee
and Cede & Co., as registered holder of the Certificates and the Notes and the
nominee of DTC. Certificate Owners and Note Owners may receive such reports,
upon written request, together with a certification that they are Certificate
Owners or Note Owners and payment of any expenses associated with the
distribution of such reports, from the Trustee and the Indenture Trustee at
the addresses specified in the related Prospectus Supplement. See "Certain
Information Regarding the Securities--Statements to Securityholders."
USE OF PROCEEDS
Unless otherwise specified in the related Prospectus Supplement, the net
proceeds to be received by the Trust from the sale of each Series of
Securities will be used to pay to Green Tree the purchase price for the
Contracts and to make the deposit of the Pre-Funded Amount into the Pre-
Funding Account, if any, to repay warehouse lenders and/or to provide for
other forms of credit enhancement specified in the related Prospectus
Supplement. The net proceeds to be received by Green Tree will be used for its
general corporate purposes, including the origination or acquisition of
additional home improvement loan contracts, costs of carrying such contracts
until sale of the related certificates and to pay other expenses connected
with pooling the Contracts and issuing the Securities.
THE NOTES
GENERAL
With respect to each Series of Securities, one or more Classes of Notes will
be issued pursuant to the terms of an Indenture, a form of which has been
filed as an exhibit to the Registration Statement of which this Prospectus
forms a part. Unless otherwise specified in the related Prospectus Supplement,
no Notes will be issued as a part of any Series. The following summary does
not purport to be complete and is subject to, and is qualified in its entirety
by reference to, all of the provisions of the Notes and the Indenture, and the
following summary will be supplemented in whole or in part by the related
Prospectus Supplement. Where particular provisions of or terms used in the
Indenture are referred to, the actual provisions (including definition of
terms) are incorporated by reference as part of this summary.
Unless otherwise specified in the related Prospectus Supplement, each Class
of Notes will initially be represented by a single Note registered in the name
of the nominee of the Depository. See "Certain Information Regarding the
Securities--Book-Entry Registration." Unless otherwise specified in the
related Prospectus Supplement, Notes will be available for purchase in
denominations of $1,000 and integral multiples thereof. Notes may be
transferred or exchanged without the payment of any service charge other than
any tax or governmental charge payable in connection with such transfer or
exchange. Unless otherwise provided in the related Prospectus Supplement, the
Indenture Trustee will initially be designated as the registrar for the Notes.
PRINCIPAL AND INTEREST ON THE NOTES
The timing and priority of payment, seniority, allocations of loss, Interest
Rate and amount of or method of determining payments of principal and interest
on the Notes will be described in the related Prospectus Supplement. The right
of holders of any Class of Notes to receive payments of principal and interest
may be senior or subordinate to the rights of holders of any Class or Classes
of Notes of such Series, or any Class of Certificates, as described in the
related Prospectus Supplement. Unless otherwise provided in the related
Prospectus Supplement, payments of interest on the Notes will be made prior to
payments of principal thereon. A Series may include one or more Classes of
Stripped Notes entitled to (i) principal payments with
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disproportionate, nominal or no interest payment, or (ii) interest payments
with disproportionate, nominal or no principal payments. Each Class of Notes
may have a different Interest Rate, which may be a fixed, variable or
adjustable Interest Rate (and which may be zero for certain Classes of
Stripped Notes), or any combination of the foregoing. The related Prospectus
Supplement will specify the Interest Rate for each Class of Notes, or the
initial Interest Rate and the method for determining the Interest Rate. One or
more Classes of Notes of a Series may be redeemable under the circumstances
specified in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, payments in
respect of interest to Noteholders of all Classes within a Series will have
the same priority. Under certain circumstances, the amount available for such
payments could be less than the amount of interest payable on the Notes on any
of the dates specified for payments in the related Prospectus Supplement
(each, a "Payment Date"), in which case each Class of Noteholders will receive
their ratable share (based upon the aggregate amount of interest due to such
Class of Noteholders) of the aggregate amount available to be distributed in
respect of interest on the Notes.
In the case of a Series of Securities which includes two or more Classes of
Notes, the timing, sequential order and priority of payment in respect of
principal and interest, and any schedule or formula or other provisions
applicable to the determination thereof, of each such Class will be set forth
in the related Prospectus Supplement. Unless otherwise specified in the
related Prospectus Supplement, payments in respect of principal and interest
of any Class of Notes will be made on a pro rata basis among all of the Notes
of such Class.
THE INDENTURE
A form of Indenture has been filed as an exhibit to the Registration
Statement of which this Prospectus forms a part. Green Tree will provide a
copy of the applicable Indenture (without exhibits) upon request to a holder
of Notes issued thereunder.
Modification of Indenture Without Noteholder Consent. Each Trust and related
Indenture Trustee (on behalf of such Trust) may, without consent of the
related Noteholders, enter into one or more supplemental indentures for any of
the following purposes: (i) to correct or amplify the description of the
collateral or add additional collateral; (ii) to provide for the assumption of
the Note and the Indenture obligations by a permitted successor to the Trust;
(iii) to add additional covenants for the benefit of the related Noteholders;
(iv) to convey, transfer, assign, mortgage or pledge any property to or with
the Indenture Trustee; (v) to cure any ambiguity or correct or supplement any
provision in the Indenture or in any supplemental indenture; (vi) to provide
for the acceptance of the appointment of a successor Indenture Trustee or to
add to or change any of the provisions of the Indenture or any supplemental
indenture which may be inconsistent with any other provision of the Indenture
as shall be necessary and permitted to facilitate the administration by more
than one trustee; (vii) to modify, eliminate or add to the provisions of the
Indenture in order to comply with the Trust Indenture Act of 1939, as amended;
and (viii) to add any provisions to, change in any manner, or eliminate any of
the provisions of, the Indenture or modify in any manner the rights of
Noteholders under such Indenture; provided that any action specified in this
clause (viii) shall not, as evidenced by an opinion of counsel, adversely
affect in any material respect the interests of any related Noteholder unless
Noteholder consent is otherwise obtained as described below.
Modifications of Indenture With Noteholder Consent. With respect to each
Trust, with the consent of the holders representing a majority of the
principal balance of the outstanding related Notes (a "Note Majority"), the
Owner Trustee and the Indenture Trustee may execute a supplemental indenture
to add provisions, to change in any manner or eliminate any provisions of, the
related Indenture, or modify in any manner the rights of the related
Noteholders.
Without the consent of the holder of each outstanding related Note affected
thereby, however, no supplemental indenture may: (i) change the due date of
any installment of principal of or interest on any Note or reduce the
principal amount thereof, the interest rate specified thereon or the
redemption price with respect thereto or change the manner of calculating any
such payment, any place of payment where, or the coin or
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currency in which any Note or any interest thereon is payable; (ii) impair the
right to institute suit for the enforcement of certain provisions of the
Indenture regarding payment; (iii) reduce the percentage of the aggregate
amount of the outstanding Notes the consent of the holders of which is
required for any such supplemental indenture or the consent of the holders of
which is required for any waiver of compliance with certain provisions of the
Indenture or of certain defaults thereunder and their consequences as provided
for in the Indenture; (iv) modify or alter the provisions of the Indenture
regarding the voting of Notes held by the related Trust, any other obligor on
the Notes, Green Tree or an affiliate of any of them; (v) reduce the
percentage of the aggregate outstanding amount of the Notes the consent of the
holders of which is required to direct the Indenture Trustee to sell or
liquidate the Contracts if the proceeds of such sale would be insufficient to
pay the principal amount and accrued but unpaid interest on the outstanding
Notes; (vi) decrease the percentage of the aggregate principal amount of the
Notes required to amend the sections of the Indenture which specify the
applicable percentage of aggregate principal amount of the Notes necessary to
amend the Indenture or certain other related agreements; or (vii) permit the
creation of any lien ranking prior to or on a parity with the lien of the
Indenture with respect to any of the collateral for the Notes or, except as
otherwise permitted or contemplated in the Indenture, terminate the lien of
the Indenture on any such collateral or deprive the holder of any Note of the
security afforded by the lien of the Indenture.
Events of Default; Rights Upon Event of Default. With respect to each Trust,
unless otherwise specified in the related Prospectus Supplement, "Events of
Default" under the Indenture will consist of: (i) a default for five days or
more in the payment of any interest on any Note; (ii) a default in the payment
of the principal of or any installment of the principal of any Note when the
same becomes due and payable; (iii) a default in the observance or performance
in any material respect of any covenant or agreement of the Trust made in the
Indenture, or any representation or warranty made by the Trust in the
Indenture or in any certificate delivered pursuant thereto or in connection
therewith having been incorrect as of the time made, and the continuation of
any such default or the failure to cure such breach of a representation or
warranty for a period of 30 days after notice thereof is given to the Trust by
the Indenture Trustee or to the Trust and the Indenture Trustee by the holders
of at least 25% in principal amount of the Notes then outstanding; or (iv)
certain events of bankruptcy, insolvency, receivership or liquidation of the
Trust. However, the amount of principal due and payable on any Class of Notes
on any Payment Date (prior to the final scheduled payment date, if any, for
such Class) will generally be determined by amounts available to be deposited
in the Note Distribution Account for such Payment Date. Therefore, unless
otherwise specified in the related Prospectus Supplement, the failure to pay
principal on a Class of Notes generally will not result in the occurrence of
an Event of Default unless such Class of Notes has a final scheduled payment
date, and then not until such final scheduled payment date for such Class of
Notes.
Unless otherwise specified in the related Prospectus Supplement, if an Event
of Default should occur and be continuing with respect to the Notes of any
Series, the related Indenture Trustee or a Note Majority may declare the
principal of the Notes to be immediately due and payable. Such declaration
may, under certain circumstances, be rescinded by a Note Majority.
Unless otherwise specified in the related Prospectus Supplement, if the
Notes of any Series have been declared due and payable following an Event of
Default with respect thereto, the related Indenture Trustee may institute
proceedings to collect amounts due or foreclose on Trust Property, exercise
remedies as a secured party, sell the related Contracts or elect to have the
Trust maintain possession of such Contracts and continue to apply collections
on such Contracts as if there had been no declaration of acceleration. Unless
otherwise specified in the related Prospectus Supplement, the Indenture
Trustee, however, will be prohibited from selling the related Contracts
following an Event of Default, unless (i) the holders of all the outstanding
related Notes consent to such sale; (ii) the proceeds of such sale are
sufficient to pay in full the principal of and the accrued interest on such
outstanding Notes at the date of such sale; or (iii) the Indenture Trustee
determines that the proceeds of the Contracts would not be sufficient on an
ongoing basis to make all payments on the Notes as such payments would have
become due if such obligations had not been declared due and payable, and the
Indenture Trustee obtains the consent of the holders of 66 2/3% of the
aggregate outstanding amount of the Notes. Unless otherwise specified in the
related Prospectus Supplement, following a declaration upon an Event of
Default that the Notes are
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immediately due and payable, (i) Note Owners will be entitled to ratable
repayment of principal on the basis of their respective unpaid principal
balances and (ii) repayment in full of the accrued interest on and unpaid
principal balances of the Notes will be made prior to any further payment of
interest or principal on the Certificates.
Subject to the provisions of the Indenture relating to the duties of the
Indenture Trustee, if an Event of Default occurs and is continuing with
respect to a Series of Notes, the Indenture Trustee will be under no
obligation to exercise any of the rights or powers under the Indenture at the
request or direction of any of the holders of such Notes, if the Indenture
Trustee reasonably believes it will not be adequately indemnified against the
costs, expenses and liabilities which might be incurred by it in complying
with such request. Subject to the provisions for indemnification and certain
limitations contained in the Indenture, a Note Majority in a Series will have
the right to direct the time, method and place of conducting any proceeding or
any remedy available to the Indenture Trustee, and a Note Majority may, in
certain cases, waive any default with respect thereto, except a default in the
payment of principal or interest or a default in respect of a covenant or
provision of the Indenture that cannot be modified without the waiver or
consent of all of the holders of such outstanding Notes.
No holder of a Note of any Series will have the right to institute any
proceeding with respect to the related Indenture, unless (i) such holder
previously has given to the Indenture Trustee written notice of a continuing
Event of Default, (ii) the holders of not less than 25% in principal amount of
the outstanding Notes of such Series have made written request of the
Indenture Trustee to institute such proceeding in its own name as Indenture
Trustee, (iii) such holder or holders have offered the Indenture Trustee
reasonable indemnity, (iv) the Indenture Trustee has for 60 days failed to
institute such proceeding, and (v) no direction inconsistent with such written
request has been given to the Indenture Trustee during such 60-day period by
the holders of a majority in principal amount of such outstanding Notes.
If an Event of Default occurs and is continuing and if it is known to the
Indenture Trustee, the Indenture Trustee will mail to each Noteholder notice
of the Event of Default within 90 days after it occurs. Except in the case of
a failure to pay principal of or interest on any Note, the Indenture Trustee
may withhold the notice if and so long as it determines in good faith that
withholding the notice is in the interests of the Noteholders.
In addition, each Indenture Trustee and the related Noteholders, by
accepting the related Notes, will covenant that they will not at any time
institute against the Seller or the related Trust any bankruptcy,
reorganization or other proceeding under any federal or state bankruptcy or
similar law.
Neither the Indenture Trustee nor the Trustee in its individual capacity,
nor any holder of a Certificate including, without limitation, Green Tree, nor
any of their respective owners, beneficiaries, agents, officers, directors,
employees, affiliates, successors or assigns will, in the absence of an
express agreement to the contrary, be personally liable for the payment of the
related Notes or for any agreement or covenant of the related Trust contained
in the Indenture.
Certain Covenants. Each Indenture will provide that the related Trust may
not consolidate with or merge into any other entity, unless (i) the entity
formed by or surviving such consolidation or merger is organized under the
laws of the United States or any state, (ii) such entity expressly assumes the
Trust's obligation to make due and punctual payments upon the Notes and the
performance or observance of every agreement and covenant of the Trust under
the Indenture, (iii) no Event of Default shall have occurred and be continuing
immediately after such merger or consolidation, (iv) the Trustee has been
advised that the then current rating of the related Notes or Certificates then
in effect would not be reduced or withdrawn by the Rating Agencies as a result
of such merger or consolidation, (v) the Trustee has received an opinion of
counsel to the effect that such consolidation or merger would have no material
adverse tax consequence to the Trust or to any related Note Owner or
Certificate Owner.
Each Trust will not, among other things, (i) except as expressly permitted
by the Indenture, the Trust Documents or certain related documents for such
Trust (collectively, the "Related Documents"), sell, transfer,
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exchange or otherwise dispose of any of the assets of the Trust, (ii) claim
any credit on or make any deduction from the principal and interest payable in
respect of the related Notes (other than amounts withheld under the Code or
applicable state law) or assert any claim against any present or former holder
of such Notes because of the payment of taxes levied or assessed upon the
Trust, (iii) dissolve or liquidate in whole or in part, (iv) permit the
validity or effectiveness of the related Indenture to be impaired or permit
any person to be released from any covenants or obligations with respect to
the related Notes under such Indenture except as may be expressly permitted
thereby, or (v) except as expressly permitted by the Related Documents, permit
any lien, charge, excise, claim, security interest, mortgage or other
encumbrance to be created on or extend to or otherwise arise upon or burden
the assets of the Trust or any part thereof, or any interest therein or
proceeds thereof.
No Trust may engage in any activity other than as specified under the
section of the related Prospectus Supplement entitled "The Trust." No Trust
will incur, assume or guarantee any indebtedness other than indebtedness
incurred pursuant to the related Notes and the related Indenture or otherwise
in accordance with the Related Documents.
Annual Compliance Statement. Each Trust will be required to file annually
with the related Indenture Trustee a written statement as to the fulfillment
of its obligations under the Indenture.
Indenture Trustee's Annual Report. The Indenture Trustee will be required to
mail each year to all related Noteholders a brief report relating to its
eligibility and qualification to continue as Indenture Trustee under the
related Indenture, any amounts advanced by it under the Indenture, the amount,
interest rate and maturity date of certain indebtedness owing by the Trust to
the Indenture Trustee in its individual capacity, the property and funds
physically held by the Indenture Trustee as such and any action taken by it
that materially affects the Notes and that has not been previously reported.
Note Owners may receive such reports upon written request, together with a
certification that they are Note Owners and payment of reproduction and
postage expenses associated with the distribution of such reports, from the
Indenture Trustee at the address specified in the related Prospectus
Supplement.
Satisfaction and Discharge of Indenture. The Indenture will be discharged
with respect to the collateral securing the related Notes upon the delivery to
the related Indenture Trustee for cancellation of all such Notes or, with
certain limitations, upon deposit with the Indenture Trustee of funds
sufficient for the payment in full of all of such Notes.
THE INDENTURE TRUSTEE
The Indenture Trustee for a Series of Notes will be specified in the related
Prospectus Supplement. The Indenture Trustee may resign at any time, in which
event the Seller will be obligated to appoint a successor trustee. Green Tree
may also remove the Indenture Trustee if the Indenture Trustee ceases to be
eligible to continue as such under the Indenture or if the Indenture Trustee
becomes insolvent. In such circumstances, Green Tree will be obligated to
appoint a successor trustee. Any resignation or removal of the Indenture
Trustee and appointment of a successor trustee will be subject to any
conditions or approvals, if any, specified in the related Prospectus
Supplement and will not become effective until acceptance of the appointment
by a successor trustee.
THE CERTIFICATES
GENERAL
A Series of Securities may include one or more Classes of Certificates
issued pursuant to Trust Documents to be entered into between Green Tree, as
Seller and as Servicer, and the Trustee, forms of which have been filed as
exhibits to the Registration Statement of which this Prospectus forms a part.
The following summary does not purport to be complete and is subject to, and
is qualified in its entirety by reference to, all of the material provisions
of the Trust Documents. Where particular provisions of or terms used in the
Trust Documents are
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referred to, the actual provisions (including definitions of terms) are
incorporated by reference as part of this summary.
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.
Unless otherwise specified in the related Prospectus Supplement, each Class
of Certificates will initially be represented by a single Certificate
registered in the name of the nominee of DTC (together with any successor
depository selected by Green Tree, the "Depository"). See "Certain Information
Regarding the Securities--Book-Entry Registration." Unless otherwise specified
in the related Prospectus Supplement, the Certificates evidencing interests in
a Trust will be available for purchase in denominations of $1,000 initial
principal amount and integral multiples thereof, except that one Certificate
evidencing an interest in such Trust may be issued in a denomination that is
less than $1,000 initial principal amount. Certificates may be transferred or
exchanged without the payment of any service charge other than any tax or
governmental charge payable in connection with such transfer or exchange.
Unless otherwise specified in the related Prospectus Supplement, the Trustee
will initially be designated as the registrar for the Certificates.
DISTRIBUTIONS OF INTEREST AND PRINCIPAL
The timing and priority of distributions, seniority, allocations of loss,
Pass-Through Rate and amount of or method of determining distributions with
respect to principal and interest (or, where applicable, with respect to
principal only or interest only) on the Certificates of any Series will be
described in the related Prospectus Supplement. Distributions of interest on
the Certificates will be made on the dates specified in the related Prospectus
Supplement (each, a "Distribution Date") and, unless otherwise specified in
the related Prospectus Supplement, will be made prior to distributions with
respect to principal. A Series may include one or more Classes of Certificates
("Subordinated Certificates") which are subordinated in right of distribution
to one or more other Classes of Certificates ("Senior Certificates"), as
provided in the related Prospectus Supplement. Certificates of a Series which
includes Senior and Subordinated Certificates are referred to herein
collectively as "Senior/Subordinated Certificates." A Series of
Senior/Subordinated Certificates may include one or more Classes ("Mezzanine
Certificates") which are subordinated to one or more Classes of Certificates
and are senior to one or more Classes of Certificates. The Prospectus
Supplement with respect to a Series of Senior/Subordinated Certificates will
set forth, among other things, the extent to which the Subordinated
Certificates are subordinated (which may include a formula for determining the
subordinated amount or for determining the allocation of the Amount Available
(hereinafter defined) among Senior Certificates and Subordinated
Certificates), the allocation of losses among the Classes of Subordinated
Certificates, the period or periods of such subordination, the minimum
subordinated amount, if any, and any distributions or payments which will not
be affected by such subordination. The protection afforded to the Senior
Certificateholders from the subordination feature described above will be
effected by the preferential right of such Certificateholders to receive
current distributions from the Contract Pool. If a Series of Certificates
contains more than one Class of Subordinated Certificates, losses will be
allocated among such Classes in the manner described in the Prospectus
Supplement. If so specified in the applicable Prospectus Supplement, Mezzanine
Certificates or other Classes of Subordinated Certificates may be entitled to
the benefits of other forms of credit enhancement and may, if rated in one of
the four highest rating categories by a nationally recognized statistical
rating organization, be offered pursuant to this Prospectus and such
Prospectus Supplement.
If so specified in a Prospectus Supplement, a Series may include one or more
Classes of Certificates which (i) are entitled to receive distributions only
in respect of principal ("Principal Only Certificates"), interest
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("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 Pass-Through Rate for
each Class of Certificate, or the initial Pass-Through Rate and the method for
determining the Pass-Through Rate. Unless otherwise specified in the related
Prospectus Supplement, interest on the Certificates will be calculated on the
basis of a 360-day year consisting of twelve 30-day months. Unless otherwise
specified in the related Prospectus Supplement, distributions in respect of
the Certificates will be subordinate to payments in respect of the Notes, if
any, as more fully described in the related Prospectus Supplement.
Distributions in respect of principal of any Class of Certificates will be
made on a pro rata basis among all of the Certificateholders of such Class.
In the case of a Series of Certificates which includes two or more Classes
of Certificates, the timing, sequential order, priority of payment or amount
of distributions in respect of principal, and any schedule or formula or other
provisions applicable to the determination thereof, of each such Class shall
be as set forth in the related Prospectus Supplement.
CERTAIN INFORMATION REGARDING THE SECURITIES
BOOK-ENTRY REGISTRATION
Unless otherwise provided in the related Prospectus Supplement, the
Securities of each Series will be registered in the name of Cede & Co., the
nominee of DTC. DTC is a limited-purpose trust company organized under the
laws of the State of New York, a member of the Federal Reserve System, a
"clearing corporation" within the meaning of the New York Uniform Commercial
Code, and a "clearing agency" registered pursuant to the provisions of Section
17A of the Exchange Act. DTC accepts securities for deposit from its
participating organizations ("Participants") and facilitates the clearance and
settlement of securities transactions between Participants in such securities
through electronic book-entry changes in accounts of Participants, thereby
eliminating the need for physical movement of certificates. Participants
include securities brokers and dealers, banks and trust companies and clearing
corporations and may include certain other organizations. Indirect access to
the DTC system is also available to others such as banks, brokers, dealers and
trust companies that clear through or maintain a custodial relationship with a
Participant, either directly or indirectly ("indirect participants").
Certificate Owners and Note Owners who are not Participants but desire to
purchase, sell or otherwise transfer ownership of Securities may do so only
through Participants (unless and until Definitive Certificates or Definitive
Notes, each as defined below, are issued). In addition, Certificate Owners and
Note Owners will receive all distributions of principal of, and interest on,
the Securities from the Trustee or the Indenture Trustee, as applicable,
through DTC and Participants. Certificate Owners and Note Owners will not
receive or be entitled to receive certificates representing their respective
interests in the Securities, except under the limited circumstances described
below and such other circumstances, if any, as may be specified in the related
Prospectus Supplement.
Unless and until Definitive Securities are issued, it is anticipated that
the only Certificateholder of the Certificates and the only Noteholder of the
Notes, if any, will be Cede & Co., as nominee of DTC. Certificate Owners and
Note Owners will not be recognized by the Trustee as Certificateholders or by
the Indenture Trustee as Noteholders as those terms are used in the related
Trust Documents or Indenture. Certificate Owners and Note
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Owners will be permitted to exercise the rights of Certificateholders or
Noteholders, as the case may be, only indirectly through Participants and DTC.
With respect to any Series of Securities, while the Securities 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 Securities and is required to receive
and transmit distributions of principal of, and interest on, the Securities.
Participants with whom Certificate Owners or Note Owners have accounts with
respect to Securities are similarly required to make book-entry transfers and
receive and transmit such distributions on behalf of their respective
Certificate Owners and Note Owners. Accordingly, although Certificate Owners
and Note Owners will not possess Securities, the Rules provide a mechanism by
which Certificate Owners and Note Owners will receive distributions and will
be able to transfer their interests.
With respect to any series of Securities, unless otherwise specified in the
related Prospectus Supplement, Certificates (if any) and Notes will be issued
in registered form to Certificate Owners and Note Owners, or their nominees,
rather than to DTC (such Certificates and Notes being referred to herein as
"Definitive Certificates" and "Definitive Notes," respectively), only if (i)
DTC, Green Tree or the Servicer advises the Trustee or the Indenture Trustee,
as the case may be, in writing that DTC is no longer willing or able to
discharge properly its responsibilities as nominee and depository with respect
to the Certificates or the Notes, and Green Tree, the Servicer, the Trustee or
the Indenture Trustee, as the case may be, is unable to locate a qualified
successor, (ii) Green Tree or the Administrator (if any) at its sole option
has advised the Trustee or the Indenture Trustee, as the case may be, in
writing that it elects to terminate the book-entry system through DTC and
(iii) after the occurrence of a Servicer Termination Event, the holders
representing a majority of the Certificate Balance (a "Certificate Majority")
or a Note Majority advises the Trustee or the Indenture Trustee, as the case
may be, through DTC, that continuation of a book-entry system is no longer in
their best interests. Upon issuance of Definitive Certificates or Definitive
Notes to Certificate Owners or Note Owners, such Certificates or Notes will be
transferable directly (and not exclusively on a book-entry basis) and
registered holders will deal directly with the Trustee or the Indenture
Trustee, as the case may be, with respect to transfers, notices and
distributions.
DTC has advised Green Tree that, unless and until Definitive Certificates or
Definitive Notes are issued, DTC will take any action permitted to be taken by
a Certificateholder or a Noteholder under the related Trust Documents or
Indenture only at the direction of one or more Participants to whose DTC
accounts the Certificates or Notes are credited. DTC has advised Green Tree
that DTC will take such action with respect to any fractional interest of the
Certificates or the Notes only at the direction of and on behalf of such
Participants beneficially owning a corresponding fractional interest of the
Certificates or the Notes. DTC may take actions, at the direction of the
related Participants, with respect to some Certificates or Notes which
conflict with actions taken with respect to other Certificates or Notes.
Issuance of Certificates and Notes in book-entry form rather than as
physical certificates or notes may adversely affect the liquidity of
Certificates or Notes in the secondary market and the ability of the
Certificate Owners or Note Owners to pledge them. In addition, since
distributions on the Certificates and the Notes will be made by the Trustee or
the Indenture 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
or Note Owners, Certificate Owners and Note Owners may experience delays in
the receipt of such distributions.
STATEMENTS TO SECURITYHOLDERS
On or prior to each Distribution Date, the Servicer will prepare and provide
to the Trustee a statement to be delivered to the related Certificateholders
on such Distribution Date. On or prior to each Distribution Date, the Servicer
will prepare and provide to the Indenture Trustee a statement to be delivered
to the related Noteholders on such Distribution Date. Such statements will be
based on the information in the related Servicer's Certificate setting forth
certain information required under the Trust Documents (the "Servicer's
Certificate"). Unless
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otherwise specified in the related Prospectus Supplement, each such statement
to be delivered to Certificateholders will include the following information
as to the Certificates with respect to such Distribution Date or the period
since the previous Distribution Date, as applicable, and each such statement
to be delivered to Noteholders will include the following information as to
the Notes with respect to such Distribution Date or the period since the
previous Distribution Date, as applicable:
(i) the amount of the distribution allocable to interest on or with
respect to each Class of Securities;
(ii) the amount of the distribution allocable to principal on or with
respect to each Class of Securities;
(iii) the Certificate Balance and the Certificate Pool Factor for each
Class of Certificates and the aggregate outstanding principal balance and
the Note Pool Factor for each Class of Notes, after giving effect to all
payments reported under (ii) above on such date;
(iv) the amount of the Monthly Servicing Fee paid to the Servicer with
respect to the related Due Period or Periods, as the case may be;
(v) the Pass-Through Rate or Interest Rate for the next period for any
Class of Certificates or Notes with variable or adjustable rates;
(vi) the amount of Advances made by the Servicer with respect to such
Distribution Date, and the amount paid to the Servicer on such Distribution
Date as reimbursement of Advances made on previous Distribution Dates;
(vii) the amount, if any, distributed to Certificateholders and
Noteholders applicable to payments under the related form of credit
enhancement, if any;
(viii) Green Tree's FHA Insurance reserve amount;
(ix) the number and aggregate principal balance of Contracts delinquent
(i) 31-59 days, (ii) 60-89 and (iii) 90 or more days;
(x) the number of Contracts liquidated during the Due Period ending
immediately before such Payment Date;
(xi) such customary factual information as is necessary to enable
Securityholders to prepare their tax returns; and
(xii) such other information as may be specified in the related
Prospectus Supplement.
Each amount set forth pursuant to subclauses (i), (ii), (iv) and (vi) with
respect to Certificates or Notes will be expressed as a dollar amount per
$1,000 of the initial Certificate Balance or the initial principal balance of
the Notes, as applicable.
Unless and until Definitive Certificates or Definitive Notes are issued,
such reports with respect to a Series of Securities will be sent on behalf of
the related Trust to the Trustee, the Indenture Trustee and Cede & Co., as
registered holder of the Certificates and the Notes and the nominee of DTC.
Certificate Owners and Note Owners may receive copies of such reports upon
written request, together with a certification that they are Certificate
Owners or Note Owners, as the case may be, and payment of reproduction and
postage expenses associated with the distribution of such reports, from the
Trustee or the Indenture Trustee, as applicable. See "Reports to
Securityholders" and "--Book-Entry Registration" above.
Within the prescribed period of time for tax reporting purposes after the
end of each calendar year during the term of a Trust, the Trustee and the
Indenture Trustee, as applicable, will mail to each holder of a Class of
Securities who at any time during such calendar year has been a
Securityholder, and received any payment thereon, a statement containing
certain information for the purposes of such Securityholder's preparation of
federal income tax returns. DTC will convey such information to its
Participants, who in turn will convey such information to their related
indirect participants in accordance with arrangements among DTC and such
participants. Certificate Owners and Note Owners may receive such reports upon
written request, together with a certification that they are Certificate
Owners or Note Owners and payment of reproduction and postage expenses
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associated with the distribution of such information, from the Trustee, with
respect to Certificate Owners, or from the Indenture Trustee, with respect to
Note Owners, at the addresses specified in the related Prospectus Supplement.
See "Certain Federal Income Tax Consequences."
LISTS OF SECURITYHOLDERS
Unless otherwise provided in the related Prospectus Supplement, with respect
to each Series of Certificates, at such time, if any, as Definitive
Certificates have been issued, the Trustee will, upon written request by three
or more Certificateholders or one or more holders of Certificates evidencing
not less than 25% of the Certificate Balance, within five Business Days after
provision to the Trustee of a statement of the applicants' desire to
communicate with other Certificateholders about their rights under the related
Trust Documents or the Certificates and a copy of the communication that the
applicants propose to transmit, afford such Certificateholders access during
business hours to the current list of Certificateholders for purposes of
communicating with other Certificateholders with respect to their rights under
the Trust Documents. Unless otherwise specified in the related Prospectus
Supplement, the Trust Documents will not provide for holding any annual or
other meetings of Certificateholders.
Unless otherwise provided in the related Prospectus Supplement, with respect
to each Series of Notes, if any, at such time, if any, as Definitive Notes
have been issued, the Indenture Trustee will, upon written request by three or
more Noteholders or one or more holders of Notes evidencing not less than 25%
of the aggregate principal balance of the related Notes, within five Business
Days after provision to the Indenture Trustee of a statement of the
applicants' desire to communicate with other Noteholders about their rights
under the related Indenture or the Notes and a copy of the communication that
the applicants propose to transmit, afford such Noteholders access during
business hours to the current list of Noteholders for purposes of
communicating with other Noteholders with respect to their rights under the
Indenture. Unless otherwise specified in the related Prospectus Supplement,
the Indenture will not provide for holding any annual or other meetings of
Noteholders.
DESCRIPTION OF THE TRUST DOCUMENTS
Except as otherwise specified in the related Prospectus Supplement, the
following summary describes certain terms of the Sale and Servicing Agreements
and the Trust Agreements (collectively referred to as the "Trust Documents")
pursuant to which Green Tree will sell and assign such Contracts to a Trust
and the Servicer will agree to service such Contracts on behalf of the Trust,
and pursuant to which such Trust will be created and Certificates will be
issued. Forms of the Trust Documents have been filed as exhibits to the
Registration Statement of which this Prospectus forms a part. Green Tree will
provide a copy of such agreements (without exhibits) upon request to a holder
of Securities described therein. This summary does not purport to be complete
and is subject to, and qualified in its entirety by reference to, all of the
provisions of the Trust Documents. Where particular provisions or terms used
in the Trust Documents are referred to, the actual provisions (including
definitions of terms) are incorporated by reference as part of such summary.
SALE AND ASSIGNMENT OF THE CONTRACTS
On the Closing Date (as defined in the Prospectus Supplement), Green Tree
will sell and assign to the Trust, without recourse, Green Tree's entire
interest in the related Contracts, including all principal and interest
received on or with respect to the Contracts (other than receipts of principal
and interest due on the Contracts before the Cut-off Date). Each Contract
transferred by Green Tree to the Trust will be identified in a schedule
appearing as an exhibit to the related Trust Documents (the "Schedule of
Contracts"). Concurrently with such sale and assignment, the Trustee will
execute and the Indenture Trustee will authenticate and deliver the Notes to
or upon the order of the Seller, and the Trustee will execute and deliver the
related certificates representing the Certificates, if any, to or upon the
order of Green Tree.
The Schedule of Contracts will include the amount of monthly payments due on
each Contract as of the date of issuance of the Securities, the Contract Rate
on each Contract and the maturity date of each Contract.
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Such list will be available for inspection by any Securityholder at the
principal executive office of the Servicer. Prior to the conveyance of the
Contracts to the Trustee, Green Tree's internal audit department will complete
a review of all of the Contract files confirming the accuracy of the list of
Contracts delivered to the Trustee. Any Contract discovered not to agree with
such list in a manner that is materially adverse to the interests of the
Securityholders will be repurchased or substituted for by Green Tree, or, if
the discrepancy relates to the unpaid principal balance of a Contract, Green
Tree may deposit cash in the separate account maintained at an Eligible
Institution in the name of the Trustee (the "Collection Account") in an amount
sufficient to offset such discrepancy. If the Trust includes a Pre-Funding
Account, the related Prospectus Supplement will specify the conditions that
must be satisfied prior to any transfer of Subsequent Contracts, including the
requisite characteristics of the Subsequent Contracts.
Unless otherwise specified in the related Prospectus Supplement, the Trustee
or its custodian will maintain possession of the Contracts and any other
documents contained in the Contract files. Uniform Commercial Code financing
statements will be filed in Minnesota reflecting the sale and assignment of
the Contracts to the Trustee, and Green Tree's accounting records and computer
systems will also reflect such sale and assignment.
The counsel to Green Tree identified in the applicable Prospectus Supplement
will render an opinion to the Trustee that the transfer of the Contracts from
Green Tree to the related Trust would, in the event Green Tree became a debtor
under the United States Bankruptcy Code, be treated as a true sale and not as
a pledge to secure borrowings. If, however, the transfer of the Contracts from
Green Tree to the Trust were treated as a pledge to secure borrowings by Green
Tree, the distribution of proceeds of the Contracts to the Trust might be
subject to the automatic stay provisions of the United States Bankruptcy Code,
which would delay the distribution of such proceeds for an uncertain period of
time. In addition, a bankruptcy trustee would have the power to sell the
Contracts if the proceeds of such sale could satisfy the amount of the debt
deemed owed by Green Tree, or the bankruptcy trustee could substitute other
collateral in lieu of the Contracts to secure such debt, or such debt could be
subject to adjustment by the bankruptcy trustee if Green Tree were to file for
reorganization under Chapter 11 of the United States Bankruptcy Code.
Except as otherwise specified in the related Prospectus Supplement, Green
Tree will make certain representations and warranties in the Sale and
Servicing Agreement with respect to each Contract as of the related Closing
Date, including that: (a) as of the Cut-off Date the most recent scheduled
payment was made or was not delinquent more than 59 days; (b) no provision of
a Contract has been waived, altered or modified in any respect, except by
instruments or documents included in the Contract file and reflected on the
list of Contracts delivered to the Trustee; (c) each Contract is a legal,
valid and binding obligation of the Obligor and is enforceable in accordance
with its terms (except as may be limited by laws affecting creditors rights
generally); (d) no Contract is subject to any right of rescission, set-off,
counterclaim or defense; (e) each FHA-insured Contract was originated in
accordance with applicable FHA regulations and is insured, without set off,
surcharge or defense, by FHA Insurance; (f) each Contract was either
(i) entered into by a home improvement contractor in the ordinary course of
such contractor's business and, immediately upon funding, assigned to Green
Tree or (ii) was originated by Green Tree directly; (g) no Contract was
originated in or is subject to the laws of any jurisdiction whose laws would
make the transfer of the Contract or an interest therein pursuant to the Sale
and Servicing Agreement or the Securities unlawful; (h) each Contract complies
with all requirements of law; (i) no Contract has been satisfied or rescinded;
(j) all parties to each Contract had full legal capacity to execute such
Contract; (k) no Contract has been sold, conveyed and assigned or pledged to
any other person and Green Tree has good and marketable title to each Contract
free and clear of any encumbrance, equity, loan, pledge, charge, claim or
security interest, and is the sole owner and has full right to transfer such
Contract to the Trustee; (l) as of the Cut-off Date there was no default,
breach, violation or event permitting acceleration under any Contract (except
for payment delinquencies permitted by clause (a) above), no event that with
notice and the expiration of any grace or cure period would constitute a
default, breach, violation or event permitting acceleration under such
Contract, and Green Tree has not waived any of the foregoing; (m) each
Contract is a fully-amortizing loan with a fixed rate of interest and provides
for level payments over the term of such Contract; (n) the description of each
Contract set forth in the list delivered to the Trustee is true and correct;
(o) there is only one original of
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each Contract; and (p) each Contract was originated or purchased in accordance
with Green Tree's then-current underwriting guidelines.
The warranties of Green Tree will be made as of the execution and delivery
of the related Trust Documents and will survive the sale, transfer and
assignment of the related Contracts and other Trust Property to the Trust but
will speak only as of the date made.
Under the terms of the Sale and Servicing Agreement, if Green Tree becomes
aware of a breach of any such representation or warranty that materially
adversely affects the interests of the Note Owners, the Certificate Owners, if
any, or the related Trust in any Contract or receives written notice of such a
breach from the Trustee or the Servicer, then Green Tree will be obligated
either to cure such breach or to repurchase or, if so provided in the related
Prospectus Supplement, substitute for the affected Contract, in each case
under the conditions further described herein and in the Prospectus
Supplement. This repurchase obligation will constitute the sole remedy
available to the Trust and the Securityholders for a breach of a
representation or warranty under the Sale and Servicing Agreement with respect
to the Contracts (but not with respect to any other breach by Green Tree of
its obligations under the Sale and Servicing Agreement).
The "Purchase Amount" of a Contract at any time means the outstanding
principal amount of such Contract (without giving effect to any Advances made
by the Servicer or the Trustee), plus interest at the applicable Contract Rate
on such Contract from the end of the Due Period with respect to which the
Obligor last made a payment (without giving effect to any Advances made by the
Servicer or the Trustee) through the end of the immediately preceding Due
Period.
Upon the purchase by Green Tree of a Contract due to a breach of a
representation or warranty, the Trustee will convey such Contract and the
related Trust Property to Green Tree.
COLLECTIONS
With respect to each Trust, the Servicer will establish one or more
Collection Accounts in the name of the Indenture Trustee for the benefit of
the related Securityholders. If so specified in the related Prospectus
Supplement, the Indenture Trustee will establish and maintain for each Series
an account, in the name of the Indenture Trustee on behalf of the related
Noteholders, in which amounts released from the Collection Account and any
Pre-Funding Account and any amounts received from any source of credit
enhancement for payment to such Noteholders will be deposited and from which
all distributions to such Noteholders will be made (the "Note Distribution
Account"). With respect to any Series including one or more Classes of
Certificates, the Trustee will establish and maintain for each Series an
account, in the name of the Trustee on behalf of the related
Certificateholders, in which amounts released from the Collection Account and
any Pre-Funding Account and any amounts received from any source of credit
enhancement for distribution to such Certificateholders will be deposited and
from which all distributions to such Certificateholders will be made (the
"Certificate Distribution Account"). The Collection Account, the Certificate
Distribution Account (if any), and the Note Distribution Account (if any), are
referred to herein collectively as the "Designated Accounts." Any other
accounts to be established with respect to a Trust will be described in the
related Prospectus Supplement.
Each Designated Account will be an Eligible Account maintained with the
Trustee, the Indenture Trustee and/or other depository institutions. "Eligible
Account" means any account which is (i) an account maintained with an Eligible
Institution (as defined below); (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 (or, if such depository
institution or trust company is a subsidiary of a bank holding company system,
the capital and surplus of the bank holding company) of not less than
$50,000,000 and the securities of such depository institution (or, if such
depository institution is a subsidiary of a bank holding company system and
such depository institution's securities are not rated, the
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securities of the bank holding company) has a credit rating from each rating
agency rating such Series of Notes and/or Certificates (a "Rating Agency") in
one of its generic credit rating categories which signifies investment grade;
or (iv) an account that will not cause any Rating Agency to downgrade or
withdraw its then-current rating assigned to the Securities, as confirmed in
writing by each Rating Agency. "Eligible Institution" means any depository
institution 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 Bank
Insurance Fund (currently administered by the Federal Deposit Insurance
Corporation), whose short-term deposits have been rated in one of the two
highest rating categories or such other rating category as will not adversely
affect the ratings assigned to the Securities of such Series. On the Closing
Date specified in the related Prospectus Supplement, the Servicer will cause
to be deposited in the Collection Account all payments on the Contracts
received by the Servicer after the Cut-off Date and on or prior to the second
Business Day preceding the Closing Date.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer will deposit in the Collection Account on a daily basis all proceeds
and collections received or made by it with respect to the related Contracts
subsequent to the Cut-off Date (including scheduled payments of principal and
interest due after the Cut-off Date but received by the Servicer on or before
the Cut-off Date), including:
(i) all Obligor payments on account of principal, including principal
prepayments, on the Contracts;
(ii) all Obligor payments on account of interest on the Contracts;
(iii) all FHA Insurance payments received by the Servicer;
(iv) all amounts received and retained in connection with the liquidation
of defaulted Contracts, net of liquidation expenses ("Net Liquidation
Proceeds");
(v) any Advances made as described under "Advances" below and certain
other amounts required under the Sale and Servicing Agreement to be
deposited in the Collection Account;
(vi) all amounts received from any credit enhancement provided with
respect to a Series of Securities; and
(vii) all proceeds of any Contract or property acquired in respect
thereof repurchased by the Servicer or Green Tree, as described under "Sale
and Assignment of the Contracts" above or under "Repurchase Option" below.
Notwithstanding the foregoing and unless otherwise provided in the related
Prospectus Supplement, the Servicer may utilize an alternative remittance
schedule, if the Servicer provides to the Trustee and the Indenture Trustee
written confirmation from each Rating Agency that such alternative remittance
schedule will not result in the downgrading or withdrawal by such Rating
Agency of the rating(s) then assigned to the Securities. Green Tree will also
deposit into the Collection Account on or before the Deposit Date the Purchase
Amount of each Contract to be purchased by it for breach of a representation
or warranty.
For any Series of Securities, funds in the Designated Accounts and any other
accounts identified in the related Prospectus Supplement will be invested, as
provided in the related Trust Documents, at the direction of the Servicer in
United States government securities and certain other high-quality investments
meeting the criteria specified in the related Trust Documents ("Eligible
Investments"). Eligible Investments shall mature no later than the Business
Day preceding the applicable Distribution Date for the Due Period to which
such amounts relate. Investments in Eligible Investments will be made in the
name of the Trustee or the Indenture Trustee, as the case may be, and such
investments will not be sold or disposed of prior to their maturity.
Unless otherwise specified in the related Prospectus Supplement, collections
or recoveries on a Contract (other than late fees or certain other similar
fees or charges) received during a Due Period and Purchase Amounts deposited
with the Trustee prior to a Distribution Date will be applied first to any
outstanding Advances made by the Servicer with respect to such Contract, and
then to interest and principal on the Contract in accordance with the terms of
the Contract.
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SERVICING
Pursuant to the Sale and Servicing Agreement, the Servicer will service and
administer the Contracts assigned to the Trustee as more fully set forth
below. The Servicer will perform diligently all services and duties specified
in each Sale and Servicing Agreement, in the same manner as prudent lending
institutions of home improvement contracts of the same type as the Contracts
in those jurisdictions where the related real properties are located or as
otherwise specified in the Sale and Servicing Agreement. The duties to be
performed by the Servicer will include collection and remittance of principal
and interest payments, as well as submission of FHA Insurance claims where
applicable.
The Servicer will make reasonable efforts to collect all payments called for
under the Contracts and, consistent with the Sale and Servicing Agreement and
any FHA Insurance, will follow such collection procedures with respect to the
Contracts as it follows with respect to loans or contracts serviced by it that
are comparable to the Contracts.
Evidence as to Compliance. Unless otherwise specified in the related
Prospectus Supplement, each Sale and Servicing Agreement will require the
Servicer to deliver to the Trustee a monthly report prior to each Payment
Date, setting forth certain information regarding the Contract Pool and the
Securities of such Series as is specified in the related Prospectus
Supplement. Each such report to the Trustee will be accompanied by a statement
from an appropriate officer of the Servicer certifying the accuracy of such
report and stating that the Servicer has not defaulted in the performance of
its obligations under the Sale and Servicing Agreement. On or before May 1 of
each year, the Servicer will deliver to the Trustee a report of a nationally
recognized accounting firm stating that such firm has examined certain
documents and records relating to the servicing of home improvement contracts
serviced by the Servicer under agreements similar to the Sale and Servicing
Agreement and stating that, on the basis of such procedures, such servicing
has been conducted in compliance with the Sale and Servicing 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 a Sale and Servicing 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 Sale and Servicing 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 Sale and
Servicing Agreement (i) a policy or policies of insurance covering errors and
omissions for failure to maintain insurance as required by the Sale and
Servicing Agreement, and (ii) a fidelity bond. Such policy or policies and
such fidelity bond shall be in such form and amount as is generally customary
among persons which service a portfolio of home improvement contracts having
an aggregate principal amount of $10 million or more and which are generally
regarded as servicers acceptable to institutional investors.
Servicing Compensation and Payment of Expenses. For its servicing of the
Contracts, the Servicer will receive servicing fees ("Servicing Fees") which
include a Monthly Servicing Fee (which Green Tree 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 Aggregate Principal Balance for such Payment
Date. As long as Green Tree is the Servicer, the Trustee will pay Green Tree
its Monthly Servicing Fee from any monies remaining after the Securityholders
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, 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.
Customary servicing activities include collecting and recording payments,
communicating with Obligors, investigating payment delinquencies, providing
billing and tax records to Obligors and maintaining internal
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records with respect to each Contract. Administrative services performed by
the Servicer on behalf of the Trust include selecting and packaging the
Contracts, calculating distributions to Securityholders and providing related
data processing and reporting services for Securityholders and on behalf of
the Trustee. Expenses incurred in connection with servicing of the Contracts
and paid by Green Tree from its Monthly Servicing Fees include payment of FHA
Insurance premiums, payment of fees and expenses of accountants, payments of
all fees and expenses incurred in connection with the enforcement of Contracts
(including submission of FHA Insurance claims, if applicable) or payment of
Trustee's fees, and payment of expenses incurred in connection with
distributions and reports to Securityholders, except that the Servicer shall
be reimbursed out of the liquidation proceeds of a liquidated Contract
(including FHA Insurance proceeds) for customary out-of-pocket liquidation
expenses incurred by it.
Events of Termination. Except as otherwise specified in the related
Prospectus Supplement, Events of Termination under each Sale and Servicing
Agreement will occur if (i) any failure by the Servicer to deliver to the
Indenture Trustee for distribution to the Noteholders or to the Trustee for
distribution to the Certificateholders any required payment which continues
unremedied for 5 days (or such other period specified in the related
Prospectus Supplement) after the giving of written notice; (ii) any failure by
the Servicer duly to observe or perform in any material respect any other of
its covenants or agreements in the Trust Documents that materially and
adversely affects the interests of Securityholders, which, in either case,
continues unremedied for 30 days after the giving of written notice of such
failure of breach; (iii) any assignment or delegation by the Servicer of its
duties or rights under the Trust Documents, except as specifically permitted
under the Trust Documents, or any attempt to make such an assignment or
delegation; (iv) certain events of insolvency, readjustment of debt,
marshalling of assets and liabilities or similar proceedings regarding the
Servicer; (v) the Servicer is no longer an Eligible Servicer (as defined in
the Trust Documents) or (vi) if Green Tree is the Servicer, Green Tree's
receiving rights under its master seller-servicer contract with GNMA are
terminated. Notice as used herein shall mean notice to the Servicer by the
Trustee, the Indenture Trustee, if any, or Green Tree, or to Green Tree, the
Servicer, the Indenture Trustee, if any, and the Trustee by the holders of
Securities representing interests aggregating not less than 25% of the
outstanding principal balance of the Securities issued by such Trust.
Unless otherwise specified in the related Prospectus Supplement, if a
Servicer Termination Event occurs and is continuing, the Trustee, the
Indenture Trustee or the holders of at least 25% in aggregate principal
balance of the outstanding Securities issued by such Trust, by notice then
given in writing to the Servicer (and to the Trustee and the Indenture Trustee
if given by the Securityholders) may terminate all of the rights and
obligations of the Servicer under the Trust Documents. Immediately upon the
giving of such notice, and, in the case of a successor Servicer other than the
Trustee, the acceptance by such successor Servicer of its appointment, all
authority of the Servicer will pass to the Trustee or other successor
Servicer. The Trustee, the Indenture Trustee and the successor Servicer may
set off and deduct any amounts owed by the Servicer from any amounts payable
to the outgoing Servicer.
On and after the time the Servicer receives a notice of termination, the
Trustee or other successor Servicer specified in the related Prospectus
Supplement (the "Backup Servicer") will be the successor in all respects to
the Servicer and will be subject to all the responsibilities, restrictions,
duties and liabilities of the Servicer under the related Trust Documents;
provided, however, that the successor Servicer shall have no liability with
respect to any obligation which was required to be performed by the prior
Servicer prior to the date that the successor Servicer becomes the Servicer or
any claim of a third party (including a Securityholder) based on any alleged
action or inaction of the prior Servicer.
In addition, the Trustee will notify FHA of Green Tree's termination as
Servicer of the Contracts and will request that the portion of Green Tree's
FHA Insurance reserves allocable to the FHA-insured Contracts be transferred
to the Trustee or a successor Servicer. See "Description of FHA Insurance."
Notwithstanding such termination, the Servicer shall be entitled to payment of
certain amounts payable to it prior to such termination, for services rendered
prior to such termination. No such termination will affect in any manner Green
Tree's obligation to repurchase certain Contracts for breaches of
representations or warranties under the Trust Documents. In the event that the
Trustee would be obligated to succeed the Servicer but is unwilling or unable
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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 Trust Documents without the
consent of all of the Securityholders.
The Trustee will be under no obligation to take any action or to institute,
conduct or defend any litigation under the Sale and Servicing Agreement at the
request, order or direction of any of the Holders of Securities, unless such
Securityholders have offered to the Trustee reasonable security or indemnity
against the costs, expenses and liabilities which the Trustee may incur.
Green Tree, as Servicer, will be required to pay all expenses incurred by it
in connection with its servicing activities (including fees, expenses and
disbursements of the Trustee, the Indenture Trustee, the Custodian and
independent accountants, taxes imposed on the Servicer and expenses incurred
in connection with distributions and reports to Certificateholders and
Noteholders), except certain expenses incurred in connection with realizing
upon the Contracts.
Upon any termination of, or appointment of a successor to, the Servicer, the
Trustee and the Indenture Trustee will each give prompt written notice thereof
to Certificateholders and Noteholders, respectively, at their respective
addresses appearing in the Certificate Register or the Note Register and to
each Rating Agency.
DISTRIBUTIONS
With respect to each Trust, beginning on the Distribution Date specified in
the related Prospectus Supplement, distributions of principal and interest
(or, where applicable, of principal or interest only) on each Class of
Securities entitled thereto will be made by the Trustee or the Indenture
Trustee, as applicable, to the Certificateholders and the Noteholders. The
timing, calculation, allocation, order, source, priorities of and requirements
for all distributions to each Class of Certificateholders and all payments to
each Class of Noteholders will be set forth in the related Prospectus
Supplement.
Except as otherwise specified in the related Prospectus Supplement, on the
third Business Day prior to each Distribution Date (the "Determination Date"),
the Servicer will determine the Amount Available and the amounts to be
distributed on the Notes and Certificates for such Distribution Date. Except
as otherwise specified in the related Prospectus Supplement, the "Amount
Available" for any Distribution Date will be equal to (i) the funds on deposit
in the Collection Account at the close of business on the last day of the
related Due Period, plus (ii) any Advances to be made by the Servicer with
respect to delinquent payments, plus (iii) any Purchase Amounts to be
deposited by Green Tree with respect to Contracts to be repurchased due to a
breach of a representation or warranty, minus (iv) any amounts paid by
Obligors in the related Due Period, but to be applied in respect of a regular
monthly payment due in a subsequent Due Period (an "Advance Payment"), minus
(v) any amounts incorrectly deposited in the Collection Account.
Except as otherwise specified in the related Prospectus Supplement, on each
Distribution Date, prior to making distributions in respect of the Notes and
Certificates, the Amount Available will be applied, first, if Green Tree is no
longer the Servicer, to pay the Monthly Servicing Fee to the successor
Servicer, and second, to reimburse the Servicer (including Green Tree) for any
Advances made with respect to a prior Due Period and subsequently recovered
and for any Advances previously made that the Servicer has determined are
Uncollectible Advances.
ENHANCEMENT
The amounts and types of enhancement arrangements and the provider thereof,
if applicable, with respect to each Class of Securities will be set forth in
the related Prospectus Supplement. If and to the extent provided in the
related Prospectus Supplement, enhancement may be in the form of a financial
guaranty insurance policy, letter of credit, Green Tree guaranty, cash reserve
fund, derivative product, or other form of enhancement, or
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any combination thereof, as may be described in the related Prospectus
Supplement. If specified in the applicable Prospectus Supplement, enhancement
for a Class of Securities of a Series may cover one or more other Classes of
Securities in such Series, and accordingly may be exhausted for the benefit of
a particular Class and thereafter be unavailable to such other Classes.
Further information regarding any provider of enhancement, including financial
information when material, will be included in the related Prospectus
Supplement.
The presence of enhancement may be intended to enhance the likelihood of
receipt by the Certificateholders and the Noteholders of the full amount of
principal and interest due thereon and to decrease the likelihood that the
Certificateholders and the Noteholders will experience losses, or may be
structured to provide protection against changes in interest rates or against
other risks, to the extent and under the conditions specified in the related
Prospectus Supplement. Unless otherwise specified in the related Prospectus
Supplement, the enhancement for a Class of Securities will not provide
protection against all risks of loss and will not guarantee repayment of the
entire principal and interest thereon. If losses occur which exceed the amount
covered by any enhancement or which are not covered by any enhancement,
Securityholders will bear their allocable share of deficiencies. In addition,
if a form of enhancement covers more than one Class of Securities of a Series,
Securityholders of any such Class will be subject to the risk that such
enhancement will be exhausted by the claims of Securityholders of other
Classes.
ADVANCES
Unless otherwise specified in the related Prospectus Supplement, the
Servicer will be obligated to make Advances each month of any scheduled
payments on the Contracts included in a Trust that were due but not received
during the prior Due Period. The Servicer will be entitled to reimbursement of
an Advance from the Amount Available in the Collection Account for the related
Trust (i) when the delinquent payment is recovered by the Trust, or (ii) when
the Servicer has determined that such Advance has become an Uncollectible
Advance. 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 Collection Account for the related Trust. The
Servicer will be entitled to recoup its advances on a Contract from subsequent
payments by or on behalf of the Obligor and from liquidation proceeds
(including FHA Insurance payments, if applicable), if any, of the Contract,
and will release its right to reimbursements in conjunction with the purchase
of the Contract by Green Tree 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 Net Liquidation Proceeds (including FHA Insurance payments, if
applicable), if any, of the Contract (an "Uncollectible Advance"), the
Servicer will be entitled to reimbursement from payments on other Contracts or
from other funds available therefor.
Unless otherwise specified in the related Prospectus Supplement, if the
Servicer fails to make an Advance required under the Sale and Servicing
Agreement, the Trustee will be obligated to deposit the amount of such Advance
in the Collection Account on the Payment Date. The Trustee will not, however,
be obligated to deposit any such amount if (i) the Trustee does not expect to
recoup such Advance from subsequent collections on the Contract or from
liquidation proceeds thereof, if any, or (ii) the Trustee determines that it
is not legally able to make such Advance.
EVIDENCE AS TO COMPLIANCE
On or before March 31 of each year the Servicer will deliver to each Trustee
and each Indenture Trustee a report of a nationally recognized accounting firm
stating that such firm has examined certain documents and records relating to
the servicing of Contracts serviced by the Servicer under pooling and
servicing agreements or sale and servicing agreements similar to the Trust
Documents and stating that, on the basis of such procedures, such servicing
has been conducted in compliance with the applicable Trust Documents, except
for any exceptions set forth in such report. A copy of such statement may be
obtained by any Certificate Owner or Note Owner upon compliance with the
requirements described above. See "Certain Information Regarding the
Securities--Statements to Securityholders" above.
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INDEMNIFICATION AND LIMITS ON LIABILITY
Unless otherwise specified in the related Prospectus Supplement, the Trust
Documents will provide that the Servicer will be liable only to the extent of
the obligations specifically undertaken by it under the Trust Documents and
will have no other obligations or liabilities thereunder. The Trust Documents
will further provide that neither the Servicer nor any of its directors,
officers, employees and agents will have any liability to the Trust, the
Certificateholders or the Noteholders, except as provided in the Trust
Documents, for any action taken or for refraining from taking any action
pursuant to the Trust Documents, other than any liability that would otherwise
be imposed by reason of the Servicer's breach of the Trust Documents or
willful misfeasance, bad faith or negligence (including errors in judgment) in
the performance of its duties, or by reason of reckless disregard of
obligations and duties under the Trust Documents or any violation of law.
The Servicer may, with the prior consent of the Trustee and the Indenture
Trustee, if any, delegate duties under the related Trust Documents to any of
its affiliates. In addition, the Servicer may at any time perform the specific
duty of repossessing Products through subcontractors who are in the business
of servicing consumer receivables. The Servicer may also perform other
specific duties through subcontractors; provided, however, that no such
delegation of such duties by the Servicer shall relieve the Servicer of its
responsibility with respect thereto.
AMENDMENT
Unless otherwise provided in the related Prospectus Supplement, the Trust
Documents may be amended by the Seller, the Servicer, the Trustee and the
Indenture Trustee, but without the consent of any of the Securityholders, to
cure any ambiguity or to correct or supplement any provision therein, provided
that such action will not, in the opinion of counsel (which may be internal
counsel to Green Tree or the Servicer) reasonably satisfactory to the Trustee
and the Indenture Trustee, materially and adversely affect the interests of
the Securityholders. The Trust Documents may also be amended by Green Tree,
the Servicer and the Trustee and the Indenture Trustee, and a Certificate
Majority and a Note Majority, for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions of the Trust
Documents or of modifying, in any manner, the rights of the Certificateholders
or the Noteholders. No such amendment may (i) increase or reduce in any manner
the amount of, or accelerate or delay the timing of, collections of payments
on the related Contracts or distributions that are required to be made on any
related Certificate or Note or the related Pass-Through Rate or Interest Rate
or (ii) reduce the percentage of the Certificate Balance evidenced by
Certificates or of the aggregate principal amount of Notes then outstanding
required to consent to any such amendment, without the consent of the holders
of all Certificates or all Notes, as the case may be, then outstanding.
TERMINATION
The obligations created by the Trust Documents will terminate upon the date
calculated as specified in the Trust Documents, generally upon (i) the later
of the final payment or other liquidation of the last Contract subject thereto
and the disposition of all property acquired upon repossession of any Product
and (ii) the payment to the Securityholders of all amounts held by the
Servicer or the Trustee and required to be paid to the Securityholders
pursuant to the Trust Documents.
Unless otherwise provided in the related Prospectus Supplement, with respect
to each Series of Securities, in order to avoid excessive administrative
expense, Green Tree and the Servicer each will be permitted, at its option, to
purchase from the Trust, on any Distribution Date immediately following any
Due Period as of the last day of which the Aggregate Principal Balance is
equal to or less than 10% (or such other percentage as may be specified in the
related Prospectus Supplement) of the Cut-off Date Principal Balance, all
remaining Contracts in the related Trust and the other remaining Trust
Property at a price equal to the aggregate of the Purchase Amounts therefor
and the appraised value of any other remaining Trust Property. The exercise of
this right will effect an early retirement of the related Certificates and
Notes.
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If a General Partner is named in the related Prospectus Supplement, unless
otherwise specified in the related Prospectus Supplement, the Trust Agreement
will provide that, in the event that the General Partner becomes insolvent,
withdraws or is expelled as a General Partner or is terminated or dissolved,
the Trust will terminate in 90 days and effect redemption of the Notes and
prepayment of the Certificates (if any) following the winding-up of the
affairs of the related Trust, unless within such 90 days the remaining General
Partner, if any, and holders of a majority of the Certificates of such Series
agree in writing to the continuation of the business of the Trust and to the
appointment of a successor to the former General Partner, and the Owner
Trustee is able to obtain an opinion of counsel to the effect that the Trust
will not thereafter be an association (or publicly traded partnership) taxable
as a corporation for federal income tax purposes.
Unless otherwise specified in the related Prospectus Supplement, with
respect to each Series of Securities, the Trustee will give written notice of
the final distribution with respect to the Certificates (if any), to each
Certificateholder of record and the Indenture Trustee will give written notice
of the final payment with respect to the Notes to each Noteholder of record.
The final distribution to any Certificateholder and the final payment to any
Noteholder will be made only upon surrender and cancellation of such holder's
Certificate or Note at the office or agency of the Trustee, with respect to
Certificates, or of the Indenture Trustee, with respect to Notes, specified in
the notice of termination. Any funds remaining in the Trust, after the Trustee
or the Indenture Trustee has taken certain measures to locate a
Certificateholder or Noteholder, as the case may be, and such measures have
failed, will be distributed to The United Way, and the Certificateholders and
Noteholders, by acceptance of their Certificates and Notes, will waive any
rights with respect to such funds.
THE TRUSTEE
The Trustee or Owner Trustee, as applicable, for each Trust will be
specified in the related Prospectus Supplement. The Trustee, in its individual
capacity or otherwise, and any of its affiliates may hold Certificates or
Notes in their own names or as pledgee. In addition, for the purpose of
meeting the legal requirements of certain jurisdictions, the Trustee, with the
consent of the Servicer, shall have the power to appoint co-trustees or
separate trustees of all or any part of the related Trust. In the event of
such appointment, all rights, powers, duties and obligations conferred or
imposed upon the Trustee by the related Trust Documents will be conferred or
imposed upon the Trustee and such separate trustee or co-trustee jointly, or,
in any jurisdiction where the Trustee is incompetent or unqualified to perform
certain acts, singly upon such separate trustee or co-trustee who shall
exercise and perform such rights, powers, duties and obligations solely at the
direction of the Trustee.
The Trustee of any Trust may resign at any time, in which event the General
Partner, if any, specified in the related Prospectus Supplement or, if no such
General Partner is specified, the Servicer or its successor will be obligated
to appoint a successor trustee. The General Partner, if any, specified in the
related Prospectus Supplement (or, if no such General Partner is specified,
the Servicer) may also remove the Trustee, if the Trustee ceases to be
eligible to serve, becomes legally unable to act, is adjudged insolvent or is
placed in receivership or similar proceedings. In such circumstances, the
General Partner, if any, specified in the related Prospectus Supplement or, if
no such General Partner is specified, the Servicer will 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.
DUTIES OF THE TRUSTEE
The Trustee will make no representation as to the validity or sufficiency of
any Trust Document, the Certificates or the Notes (other than its execution of
the Certificates and the Notes), the Contracts or any related documents, and
will not be accountable for the use or application by the Servicer of any
funds paid to the Servicer in respect of the Certificates, the Notes or the
Contracts prior to deposit in the related Collection Account.
The Trustee will be required to perform only those duties specifically
required of it under the Trust Documents. Generally, those duties will be
limited to the receipt of the various certificates, reports or other
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instruments required to be furnished by the Servicer to the Trustee under the
Trust Documents, in which case it will only be required to examine such
certificates, reports or instruments to determine whether they conform
substantially to the requirements of the Trust Documents.
The Trustee will be under no obligation to exercise any of the rights or
powers vested in it by the Trust Documents or to institute, conduct, or defend
any litigation thereunder or in relation thereto at the request, order or
direction of any of the Certificateholders or Noteholders, unless such
Certificateholders or Noteholders have offered the Trustee reasonable security
or indemnity against the costs, expenses and liabilities which may be incurred
therein or thereby. No Certificateholder nor any Noteholder will have any
right under the Trust Documents to institute any proceeding with respect to
such Trust Documents, unless such holder has given the Trustee written notice
of default and unless the holders of Certificates evidencing not less than 25%
of the Certificate Balance or the holders of Notes evidencing not less than
25% of the aggregate principal balance of the Notes then outstanding, as the
case may be, have made written request to the Trustee to institute such
proceeding in its own name as Trustee thereunder and have offered to the
Trustee reasonable indemnity, and the Trustee for 30 days after the receipt of
such notice, request and offer to indemnify has neglected or refused to
institute any such proceedings.
ADMINISTRATOR
If an Administrator is specified in the related Prospectus Supplement, such
Administrator will enter into an agreement (the "Administration Agreement")
pursuant to which such Administrator will agree, to the extent provided in
such Administration Agreement, to provide the notices and to perform other
administrative obligations required by the related Indenture and the Trust
Agreement.
DESCRIPTION OF FHA INSURANCE
Certain of the Contracts may be FHA-insured, the payments upon which,
subject to the following discussion, are insured by the FHA under Title I of
the National Housing Act.
The insurance available to any Trust will be subject to the limit of a
reserve amount equal to 10% of the principal balance of all Title I insured
loans originated or purchased and reported for FHA Insurance by Green Tree,
which amount will be increased by an amount equal to 10% of the lesser of the
principal balance or the purchase price of insured loans subsequently
originated or purchased of record by Green Tree. Green Tree's reserve amount
may be reduced by 10% of the principal balance of any loans reported to FHA as
sold without recourse by Green Tree. In the Sale and Servicing Agreement,
Green Tree will agree to pay all FHA Insurance premiums required by FHA
Regulations. If Green Tree fails to pay any such premium, the Trustee or the
successor Servicer (if any) with respect to each Series is obligated to pay
such premium and is entitled to be reimbursed by Green Tree and from
collections on the related Contracts.
As of December 31, 1997, Green Tree's FHA Insurance reserve amount was equal
to approximately $ . These insurance reserves were available to cover
losses on approximately $ of FHA-insured manufactured housing
contracts and approximately $ of FHA-insured home improvement
loans, including the FHA-insured Contracts that may be owned by a Trust Fund.
If an Event of Termination (as defined under "Description of the Trust
Documents--Termination") occurs, each Trustee will notify FHA of Green Tree's
termination as Servicer of the related FHA-insured Contracts and will request
that the portion of Green Tree's FHA Insurance reserves allocable to the FHA-
insured Contracts be transferred to the Trustee or a successor servicer.
Although each Trustee will request such a transfer of reserves, FHA is not
obligated to comply with such a request, and may determine that it is not in
FHA's interest to permit such transfer of reserves. In addition, FHA has not
specified how insurance reserves might be allocated in such event, and there
can be no assurance that any reserve amount, if transferred to the Trustee or
a successor Servicer, would not be substantially less than 10% of the
outstanding principal amount of the FHA-insured Contracts. It is likely that
the Trustee or any successor Servicer would be the lender of record on other
FHA Title I loans, so that any
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reserves that are so permitted to be transferred would become commingled with
reserves available for other FHA Title I loans. FHA also reserves the right to
transfer reserves with "earmarking" (segregating such reserves so that they
will not be commingled with the reserves of the transferee) if it is in FHA's
interest to do so.
In general, FHA will insure unsecured property improvement loans up to
$7,500, with a maximum term of 20 years. The loan proceeds must be used for
the purposes described in the loan application, and those improvements must
substantially protect or improve the basic livability or utility of the
property. The Secretary of HUD from time to time publishes a list of
ineligible items and activities which may not be financed with the proceeds of
an FHA-insured home improvement loan.
Following a default on an FHA-insured Contract the Servicer may, subject to
certain conditions, submit a claim to FHA. The availability of FHA Insurance
following a default on an FHA-insured Contract is subject to a number of
conditions, including strict compliance by the Company with FHA regulations in
originating and servicing the Contract. Failure to comply with FHA regulations
may result in a denial of or surcharge on the FHA Insurance claim. Prior to
declaring an FHA-insured Contract in default and submitting a claim to FHA,
the Servicer must take certain steps to attempt to cure the default, including
personal contact with the borrower either by telephone or in a meeting and
providing the borrower with 30 days' written notice prior to declaration of
default. FHA may deny insurance coverage if the borrower's nonpayment is
related to a valid objection to faulty contractor performance. In such event,
the Company will seek to obtain payment by or a judgment against the borrower,
and may resubmit the claim to FHA following such a judgment. As described
under "Green Tree Financial Corporation--Contract Origination," Green Tree
does not purchase a Contract until the customer verifies satisfactory
completion of the work.
Upon submission of a claim to FHA, the related Trust must assign its entire
interest in the Contract to the United States. In general, the claim payment
will equal 90% of the sum of (i) the unpaid principal amount of the Contract
at the date of default and uncollected interest computed at the Contract Rate
earned to the data of default, (ii) accrued and unpaid interest on the unpaid
amount of the Contract from the date of default to the date of submission of
the claim plus 15 calendar days (but in no event more than nine months)
computed at a rate of 7% per annum, (iii) uncollected court costs, and (iv)
legal fees, not to exceed $500.
CERTAIN LEGAL ASPECTS OF THE CONTRACTS; REPURCHASE OBLIGATIONS
As a result of Green Tree's conveyance and assignment of a pool of Contracts
to a Trust, the Securityholders of such Series, as the beneficial owners of
the Trust, will succeed collectively to all of the rights thereunder
(including the right to receive payment on the Contracts). The following
discussion contains summaries of certain legal aspects of home improvement
contracts which are general in nature. These legal aspects are in addition to
the requirements of FHA regulations described in "Description of FHA
Insurance" with respect to the FHA-insured Contracts. Because such legal
aspects are governed by applicable state law (which laws may differ
substantially), the summaries do not purport to be complete nor to reflect the
laws of any particular state, nor to encompass the laws of all states in which
the improved real estate is situated. The summaries are qualified in their
entirety by reference to the applicable federal and state laws governing the
Contracts.
CONSUMER PROTECTION LAWS WITH RESPECT TO CONTRACTS
Numerous Federal and state consumer protection laws impose substantial
requirements upon creditors involved in consumer finance. These laws include
the Federal Truth-in-Lending Act, Regulation "Z", the Equal Credit Opportunity
Act, Regulation "B", the Fair Credit Reporting Act, and related statutes.
These laws can impose specific statutory liabilities upon creditors who fail
to comply with their provisions and may affect the enforceability of the
contract.
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
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transaction (and certain related lenders and assignees) to transfer such
contract free of notice of claims by the debtor thereunder. The effect of this
rule is to subject the assignee of a Contract to all claims and defenses which
the debtor could assert against the home improvement contractor. Liability
under this rule is limited to amounts paid under a Contract; however, the
Obligor also may be able to assert the rule to set off remaining amounts due
as a defense against a claim brought by the Trust against such Obligor.
The obligations of the Obligor under each Contract are not secured by an
interest in the related real estate or otherwise, and the related Trust, as
the owner of a Contract, will be a general unsecured creditor as to such
obligations. As a consequence, in the event of a default under a Contract, the
related Trust will have recourse only against the Obligor's assets generally,
along with all other general unsecured creditors of the Obligor. In a
bankruptcy or insolvency proceeding relating to an Obligor on a Contract, the
obligations of the Obligor under such Contract may be discharged in their
entirety, notwithstanding the fact that the portion of such Obligor's assets
made available to the Trust as a general unsecured creditor to pay amounts due
and owing thereunder are insufficient to pay all such amounts.
ENFORCEABILITY OF CERTAIN PROVISIONS
The standard form of note generally contains provisions obligating the
borrower to pay a late charge if payments are not timely made. In addition to
limitations imposed by FHA regulations with respect to FHA- insured Contracts,
in certain states there are or may be specific limitations upon late charges
which a lender may collect from a borrower for delinquent payments. Under the
Sale and Servicing Agreement, late charges (to the extent permitted by law and
not waived by Green Tree) will be retained by Green Tree as additional
servicing compensation.
The standard form of note also includes a debt-acceleration clause, which
permits the lender to accelerate the debt upon a monetary default of the
borrower, after the applicable cure period. Courts will generally enforce
clauses providing for acceleration in the event of a material payment default.
However, courts, exercising equity jurisdiction, may refuse to allow a lender
to accelerate when an acceleration of the indebtedness would be inequitable or
unjust and the circumstances would render the acceleration unconscionable.
It is Green Tree's practice with some of the Contracts to defer the first
payment thereon for up to 90 days, and to charge the home improvement
contractor points to cover the lost interest due to collecting only 30 days'
interest on the first payment on these deferred payment contracts.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT
Application of the Soldiers' and Sailors' Civil Relief Act of 1940, as
amended (the "Relief Act"), would adversely affect, for an indeterminate
period of time, the ability of the Servicer to collect full amounts of
interest on certain of the Contracts. Any shortfall in interest collections
resulting from the application of the Relief Act or similar legislation, which
would not be recoverable from the related Contracts, would result in a
reduction of the amounts distributable to the Securityholders. In the event
that the Relief Act or similar legislation applies to any Contract which goes
into default, there may be delays in payment on the Securities in connection
therewith. Any other interest shortfalls, deferrals or forgiveness of payments
on the Contracts resulting from similar legislation or regulations may result
in delays in payments or losses to Securityholders.
Green Tree will represent and warrant under each Sale and Servicing
Agreement that each Contract complies with all requirements of law.
Accordingly, if any Obligor has a claim against the related Trust for
violation of any law and such claim materially adversely affects the Trust's
interest in a Contract, such violation would constitute a breach of a
representation and warranty under the Sale and Servicing Agreement and would
create an obligation to repurchase such Contract unless the breach is cured.
See "Description of the Trust Documents--Sale and Assignment of the
Contracts."
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REPURCHASE OBLIGATIONS
Under the Agreement, Green Tree will represent and warrant that each FHA-
insured Contract was originated in compliance with FHA regulations and is
covered by FHA Insurance. In the event FHA were to deny insurance coverage on
an FHA-insured Contract due to a violation of FHA regulations in originating
or servicing such Contracts, such violation would constitute a breach of a
representation and warranty under the Sale and Servicing Agreement and would
create an obligation of the Company to repurchase such Contract unless the
breach is cured. See "Description of the Trust Documents--Sale and Assignment
of the Contracts."
In addition, Green Tree will also represent and warrant under each Sale and
Servicing Agreement that each Contract complies with all requirements of law.
Accordingly, if any Obligor has a claim against the related Trust for
violation of any law and such claim materially adversely affects the Trust's
interest in a Contract, such violation would constitute a breach of a
representation and warranty under the Sale and Servicing Agreement and would
create an obligation to repurchase such Contract unless the breach is cured.
See "Description of the Trust Documents--Sale and Assignment of the
Contracts."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of the material federal income tax
consequences relating to the purchase, ownership, and disposition of the
Securities. The discussion is based upon the current provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), the Treasury
regulations promulgated thereunder and judicial or ruling authority, all of
which are subject to change, which change may be retroactive. The discussion
does not deal with federal income tax consequences applicable to all
categories of investors, some of which may be subject to special rules.
Investors are encouraged to consult their own tax advisors with respect to the
federal, state, local, and any other tax consequences of the purchase,
ownership, and disposition of the Securities.
Dorsey & Whitney LLP, counsel to Green Tree, has delivered an opinion
regarding certain federal income tax matters discussed below. Counsel to Green
Tree identified in the related Prospectus Supplement ("Counsel") will deliver
an opinion regarding tax matters applicable to each Series of Securities. Such
an opinion, however, is not binding on the Internal Revenue Service (the
"Service") or the courts. The opinion of Counsel will specifically address
only those issues specifically identified below as being covered by such
opinion; however, the opinion of Counsel also will state that the additional
discussion set forth below accurately sets forth Counsel's advice with respect
to material tax issues. No ruling on any of the issues discussed below will be
sought from the Service.
TAX STATUS OF THE TRUST
With respect to each Series of Securities which includes both Notes and
Certificates, Counsel will deliver its opinion that the Trust will not be an
association or publicly traded partnership taxable as a corporation for
federal income tax purposes. As a result, in the opinion of Counsel, the Trust
itself will not be subject to federal income tax but, instead, each
Certificateholder will be required to take into account its distributive share
of items of income and deduction (including deductions for distributions of
interest to the Noteholders) of the Trust as though such items had been
realized directly by the Certificateholder. This opinion will be based on the
assumption that the terms of the Trust Agreement and related documents will be
complied with, and on Counsel's conclusion that the nature of the income of
the Trust will exempt it from the rule that certain publicly traded
partnerships are taxable as corporations. There are, however, no cases or
Service rulings on transactions involving a trust issuing both debt and equity
interests with terms similar to those of the Notes and the Certificates. As a
result, the Service may disagree with all or a part of this discussion.
If the Trust were taxable as a corporation for federal income tax purposes,
the Trust would be subject to corporate income tax on its taxable income. The
Trust's taxable income would include all its income on the
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Contracts, possibly reduced by its interest expense on the Notes. Any such
corporate income tax could materially reduce cash available to make payments
on the Notes and distributions on the Certificates.
TAX CONSEQUENCES TO NOTEHOLDERS
Treatment of the Notes as Indebtedness. The Owner Trustee, on behalf of the
Trust, will agree, and the Noteholders will agree by their purchase of Notes,
to treat the Notes as debt for federal income tax purposes. Counsel will
deliver its opinion that the Notes will be classified as debt for federal
income tax purposes. The discussion below assumes this characterization of the
Notes is correct.
Interest Income on the Notes. Interest on the Notes will be taxable as
ordinary interest income when received by Noteholders utilizing the cash-basis
method of accounting and when accrued by Noteholders utilizing the accrual
method of accounting. Under the applicable regulations, the Notes would be
considered issued with original issue discount ("OID") if the "stated
redemption price at maturity" of a Note (generally equal to its principal
amount as of the date of issuance plus all interest other than "qualified
stated interest" payable prior to or at maturity) exceeds the original issue
price (in this case, the initial offering price at which a substantial amount
of the Notes are sold to the public). Any OID would be considered de minimis
under the OID regulations if it does not exceed 1/4% of the stated redemption
price at maturity of a Note multiplied by the number of full years until its
maturity date. It is anticipated that the Notes will not be considered issued
with more than de minimis OID. Under the OID regulations, an owner of a Note
issued with a de minimis amount of OID must include such OID in income, on a
pro rata basis, as principal payments are made on the Note.
While it is not anticipated that the Notes will be issued with more than de
minimis OID, it is possible that they will be so issued or will be deemed to
be issued with OID. This deemed OID could arise, for example, if interest
payments on the Notes are not deemed to be "qualified stated interest" because
the Notes do not provide for default remedies ordinarily available to holders
of debt instruments or do not contain terms and conditions that make the
likelihood of late payment or nonpayment a remote contingency. Based upon
existing authority, however, the Trust will treat interest payments on the
Notes as qualified stated interest under the OID regulations. If the Notes are
issued or are deemed to be issued with OID, all or a portion of the taxable
income to be recognized with respect to the Notes would be includible in the
income of Noteholders as OID. Any amount treated as OID would not, however, be
includible again when the amount is actually received. If the yield on a class
of Notes were not materially different from its coupon, this treatment would
have no significant effect on Noteholders using the accrual method of
accounting. However, cash method Noteholders may be required to report income
with respect to the Notes in advance of the receipt of cash attributable to
such income.
A Noteholder must include OID in income as interest over the term of the
Notes under a constant yield method. In general, OID must be included in
income in advance of the receipt of cash representing that income. Each
Noteholder is encouraged to consult its own tax advisor regarding the impact
of the OID rules if the Notes are issued with OID.
Market Discount. The Notes, whether or not issued with original issue
discount, will be subject to the "market discount rules" of Section 1276 of
the Code. In general, these rules provide that if a Noteholder purchases the
Note at a market discount (i.e., a discount from its original issue price plus
any accrued original issue discount) that exceeds a de minimis amount
specified in the Code, and thereafter recognizes gain upon a disposition, the
lesser of (i) such gain or (ii) the accrued market discount will be taxed as
ordinary interest income. Market discount also will be recognized and taxable
as ordinary interest income as payments of principal are received on the Notes
to the extent that the amount of such payments does not exceed the accrued
market discount. Generally, the accrued market discount will be the total
market discount on the Note multiplied by a fraction, the numerator of which
is the number of days the Noteholder held the Note and the denominator of
which is the number of days after the date the Noteholder acquired the Note
until and including its maturity date. The Noteholder may elect, however, to
determine accrued market discount under the constant-yield method, which
election shall not be revoked without the consent of the Service.
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Limitations imposed by the Code which are intended to match deductions with
the taxation of income may defer deductions for interest on indebtedness
incurred or continued, or short-sale expenses incurred, to purchase or carry a
Note with accrued market discount. A Noteholder may elect to include market
discount in gross income as it accrues and, if such Noteholder makes such an
election, is exempt from this rule. The adjusted basis of a Note 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. Any such election to include market discount in gross income as
it accrues shall apply to all debt instruments held by the Noteholder at the
beginning of the first taxable year to which the election applies or
thereafter acquired and is irrevocable without the consent of the Service.
Amortizable Bond Premium. In general, if a Noteholder purchases a Note at a
premium (i.e., an amount in excess of the amount payable upon the maturity
thereof), such Noteholder will be considered to have purchased such Note with
"amortizable bond premium" equal to the amount of such excess. Such Noteholder
may elect to deduct the amortizable bond premium as it accrues under a
constant-yield method over the remaining term of the Note. Such Noteholder's
tax basis in the Note will be reduced by the amount of the amortizable bond
premium deducted. Amortizable bond premium with respect to a Note will be
treated as an offset to interest income on such Note, and a Noteholder's
deduction for amortizable bond premium with respect to a Note will be limited
in each year to the amount of interest income derived with respect to such
Note for such year. Any election to deduct amortizable bond premium shall
apply to all debt instruments (other than instruments the interest on which is
excludible from gross income) held by the Noteholder at the beginning of the
first taxable year to which the election applies or thereafter acquired and is
irrevocable without the consent of the Service. Bond premium on a Note held by
a Noteholder who does not elect to deduct the premium will decrease the gain
or increase the loss otherwise recognized on the disposition of the Note.
Disposition of Notes. If a Noteholder sells a Note, the Noteholder will
recognize gain or loss in an amount equal to the difference between the amount
realized on the sale and the Noteholder's adjusted tax basis in the Note. The
adjusted tax basis of a Note to a particular Noteholder generally will equal
the Noteholder's cost for the Note, increased by any market discount, OID and
gain previously included by such Noteholder in income with respect to the Note
and decreased by principal payments previously received by such Noteholder and
the amount of bond premium previously amortized with respect to the Note. Any
such gain or loss will be capital gain or loss if the Note was held as a
capital asset, except for gain representing accrued interest and accrued
market discount not previously included in income, and will be short-term,
mid-term or long-term capital gain or loss depending upon whether the Note was
held for more or less than one year or for more than eighteen months. Capital
losses generally may be used only to offset capital gains.
Foreign Holders. Generally, interest paid to a Noteholder who is a
nonresident alien individual or a foreign corporation and who does not hold
the Note in connection with a United States trade or business will be treated
as "portfolio interest" and therefore will be exempt from the 30% withholding
tax. Such a Noteholder will be entitled to receive interest payments on the
Notes free of United States federal income tax provided that such Noteholder
periodically provides the Indenture Trustee (or other person who would
otherwise be required to withhold tax) with a statement certifying under
penalty of perjury that such Noteholder is not a United States person and
providing the name and address of such Noteholder and will not be subject to
federal income tax on gain from the disposition of a Note unless the
Noteholder is an individual who is present in the United States for 183 days
or more during the taxable year in which the disposition takes place and
certain other requirements are met.
Tax Administration and Reporting. The Indenture Trustee will furnish to each
Noteholder with each distribution a statement setting forth the amount of such
distribution allocable to principal and to interest. Reports will be made
annually to the Service and to holders of record that are not excepted from
the reporting requirements regarding such information as may be required with
respect to interest and original issue discount, if any, with respect to the
Notes.
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Backup Withholding. Under certain circumstances, a Noteholder may be subject
to "backup withholding" at a 31% rate. Backup withholding may apply to a
Noteholder 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 Indenture Trustee. Backup withholding may apply,
under certain circumstances, to a Noteholder who is a foreign person if the
Noteholder fails to provide the Indenture Trustee or the Noteholder's
securities broker with the statement necessary to establish the exemption from
federal income and withholding tax on interest on the Note. Backup
withholding, however, does not apply to payments on a Note made to certain
exempt recipients, such as corporations and tax-exempt organizations, and to
certain foreign persons. Noteholders should consult their tax advisors for
additional information concerning the potential application of backup
withholding to payments received by them with respect to a Note.
Possible Alternative Treatment of the Notes. If, contrary to the opinion of
Counsel, the Service successfully asserted that the Notes did not represent
debt for federal income tax purposes, the Notes might be treated as equity
interests in the Trust. If so treated, the Trust would be treated as a
publicly traded partnership that would not be taxable as a corporation because
it would meet certain qualifying income tests. Nonetheless, treatment of the
Notes as equity interests in such a partnership could have adverse tax
consequences to certain holders. For example, income to foreign holders
generally would be subject to federal tax and federal tax return filing and
withholding requirements, income to certain tax-exempt entities (including
pension funds) would be "unrelated business taxable income," and individual
holders might be subject to certain limitations on their ability to deduct
their share of Trust expenses.
TAX CONSEQUENCES TO CERTIFICATEHOLDERS
Treatment of the Trust as a Partnership. Green Tree, the General Partner and
the Owner Trustee will agree, and the Certificateholders will agree by their
purchase of Certificates, to treat the Trust as a partnership for purposes of
federal and state income tax, franchise tax and any other tax measured in
whole or in part by income, with the assets of the partnership being the
assets held by the Trust, the partners of the partnership being the
Certificateholders and the General Partner, and the Notes being debt of the
partnership. The proper characterization of the arrangement involving the
Trust, the Certificates, the Notes, the General Partner, Green Tree and the
Servicer, however, is not certain because there is no authority on
transactions closely comparable to that contemplated herein.
A variety of alternative characterizations are possible. For example,
because the Certificates have certain features characteristic of debt, the
Certificates might be considered debt of the Trust. Any such characterization
would not result in materially adverse tax consequences to Certificateholders
as compared to the consequences from treatment of the Certificates as equity
in a partnership, described below. The following discussion assumes that the
Certificates represent equity interests in a partnership.
Partnership Taxation. As a partnership, the Trust will not be subject to
federal income tax. Rather, each Certificateholder will be required to
separately take into account such holder's allocated share of income, gains,
losses, deductions and credits of the Trust. The Trust's income will consist
primarily of interest and finance charges earned on the Contracts (including
appropriate adjustments for market discount, OID and bond premium) and any
gain upon collection or disposition of the Contracts. The Trust's deductions
will consist primarily of interest accruing with respect to the Notes,
servicing and other fees, and losses or deductions upon collection or
disposition of the Contracts.
The tax items of a partnership are allocable to the partners in accordance
with the Code, Treasury regulations and the partnership agreement (here, the
Trust Agreement and related documents). The Trust Agreement will provide, in
general, that the Certificateholders will be allocated taxable income of the
Trust for each month equal to the sum of (i) the interest that accrues on the
Certificates in accordance with their terms for such month, including interest
accruing at the Pass-Through Rate for such month and interest on amounts
previously due on the Certificates but not yet distributed; (ii) any Trust
income attributable to discount on the Contracts that corresponds to any
excess of the principal amount of the Certificates over their initial issue
price;
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(iii) Prepayment Premium payable to the Certificateholders for such month; and
(iv) any other amounts of income payable to the Certificateholders for such
month. Although it is not anticipated that the Certificates will be issued at
a price which exceeds their principal amount, such allocations of Trust income
to the Certificateholders will be reduced by any amortization by the Trust of
premium on Contracts that corresponds to any such excess of the issue price of
Certificates over their principal amount. All remaining taxable income of the
Trust will be allocated to the General Partner. Based on the economic
arrangement of the parties, this approach for allocating Trust income should
be permissible under applicable Treasury regulations, although no assurance
can be given that the Service would not require a greater amount of income to
be allocated to Certificateholders. Moreover, even under the foregoing method
of allocation, Certificateholders may be allocated income equal to the entire
Pass-Through Rate plus the other items described above even though the Trust
might not have sufficient cash to make current cash distributions of such
amount. Thus, cash basis holders will in effect be required to report income
from the Certificates on the accrual basis, and Certificateholders may become
liable for taxes on Trust income even if they have not received cash from the
Trust to pay such taxes. In addition, because tax allocations and tax
reporting will be done on a uniform basis for all Certificateholders but
Certificateholders may be purchasing Certificates at different times and at
different prices, Certificateholders may be required to report on their tax
returns taxable income that is greater or less than the amount reported to
them by the Trust.
All of the taxable income allocated to a Certificateholder that is a
pension, profit sharing or employee benefit plan or other tax-exempt entity
(including an individual retirement account) will constitute "unrelated
business taxable income" generally taxable to such a holder under the Code.
A Certificateholder's share of expenses of the Trust (including fees to the
Servicer but not interest expense) will be miscellaneous itemized deductions.
An individual, an estate, or a trust that holds a Certificate either directly
or through a pass-through entity will be allowed to deduct such expenses under
Section 212 of the Code only to the extent that, in the aggregate and combined
with certain other itemized deductions, they exceed 2% of the adjusted gross
income of the Certificateholder. 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 determined
under the Code ($121,000 in 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. To the extent that a
Certificateholder is not permitted to deduct servicing fees allocable to a
Certificate, the taxable income of the Certificateholder attributable to that
Certificate will exceed the net cash distributions related to such income.
Certificateholders may deduct any loss on disposition of the Contracts to the
extent permitted under the Code.
Discount and Premium. It is believed that the Contracts were not issued with
OID, and, therefore, the Trust should not have OID income. The purchase price
paid by the Trust for the Contracts may exceed the remaining principal balance
of the Contracts at the time of purchase. If the Trust is deemed to acquire
the Contracts at such a premium or at a market discount, the Trust will elect
to offset any such premium against interest income on the Contracts or to
include any such discount in income currently as it accrues over the life of
the Contracts. The Trust will make this premium or market discount calculation
on an aggregate basis but may be required to recompute it on a Contract-by-
Contract basis. As indicated above, a portion of such premium deduction or
market discount income may be allocated to Certificateholders.
Distributions to Certificateholders. Certificateholders generally will not
recognize gain or loss with respect to distributions from the Trust. A
Certificateholder will recognize gain, however, to the extent that any money
distributed exceeds the Certificateholder's adjusted basis in its Certificates
(as described below under "Disposition of Certificates") immediately before
the distribution. A Certificateholder will recognize loss upon termination of
the Trust or termination of the Certificateholder's interest in the Trust if
the Trust only distributes money to the Certificateholder and the amount
distributed is less than the Certificateholder's adjusted basis in the
Certificates. Any such gain or loss generally will be capital gain or loss if
the Certificates are held as capital assets and will be long-term gain or loss
if the holding period of the Certificates is more than one year.
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Section 708 Termination. Under Section 708 of the Code, the Trust will be
deemed to terminate for federal income tax purposes if 50% or more of the
capital and profits interests in the Trust are sold or exchanged within a 12-
month period. Under Treasury regulations, if such a termination occurs, the
Trust will be considered to have contributed the assets of the Trust (the "Old
Partnership") to a new partnership (the "New Partnership") in exchange for
interests in the New Partnership. Such interests would be deemed distributed
to the partners of the Old Partnership in liquidation thereof, which would not
constitute a sale or exchange for United States federal income tax purposes.
Disposition of Certificates. If a Certificateholder sells a Certificate, the
Certificateholder generally will recognize capital gain or loss in an amount
equal to the difference between the amount realized on the sale and the
seller's tax basis in the Certificate. A Certificateholder's tax basis in a
Certificate generally will equal the Certificateholder's cost increased by the
Certificateholder's share of Trust income and decreased by any distributions
received with respect to such Certificate. In addition, both the tax basis in
the Certificate and the amount realized on a sale of a Certificate would
include the Certificateholder's share of the Notes and other liabilities of
the Trust. A Certificateholder acquiring Certificates at different prices may
be required to maintain a single aggregate adjusted tax basis in such
Certificates, and, upon sale or other disposition of some of the Certificates,
allocate a portion of such aggregate tax basis to the Certificates sold
(rather than maintain a separate tax basis in each Certificate for purposes of
computing gain or loss on a sale of that Certificate).
Any gain on the sale of a Certificate attributable to the
Certificateholder's share of unrecognized accrued market discount on the
Contracts would generally be treated as ordinary income to the
Certificateholder and would give rise to special tax reporting requirements.
The Trust does not expect to have any other assets that would give rise to
such special reporting requirements. Thus, to avoid those special reporting
requirements, the Trust will elect to include market discount in income as it
accrues.
If a Certificateholder is required to recognize an aggregate amount of
income (not including income attributable to disallowed itemized deductions
described above) over the life of the Certificates that exceeds the aggregate
cash distributions with respect thereto, such excess generally will give rise
to a capital loss upon the retirement of the Certificates.
Allocations Between Transferors and Transferees. In general, the Trust's
taxable income and losses will be determined monthly, and the tax items for a
particular calendar month will be apportioned among the Certificateholders in
proportion to the principal amount of Certificates owned by them as of the
close of the related Record Date. As a result, a Certificateholder purchasing
a Certificate may be allocated tax items (which will affect the
Certificateholder's tax liability and tax basis) attributable to periods
before the Certificateholder actually owns the Certificate. The use of such a
convention may not be permitted by existing regulations. If a monthly
convention is not permitted (or only applies to transfers of less than all of
the Certificateholder's interest), taxable income or losses of the Trust may
be reallocated among the Certificateholders. The General Partner is authorized
to revise the Trust's method of allocation between transferors and transferees
to conform to a method permitted by future regulations.
Section 754 Election. In the event that a Certificateholder sells a
Certificate at a profit or loss, the purchasing Certificateholder will have a
higher or lower basis in the Certificate than the selling Certificateholder
had. The tax basis of the Trust's assets will not be adjusted to reflect that
higher or lower basis unless the Trust files an election under Section 754 of
the Code. In order to avoid the administrative complexities that would be
involved in keeping accurate accounting records, as well as potentially
onerous information reporting requirements, the Trust will not make such
election. As a result, Certificateholders may be allocated a greater or lesser
amount of Trust income than would be appropriate based on their own purchase
price for Certificates.
Administrative Matters. Pursuant to the Administration Agreement, the
Trustee will monitor the performance of the following responsibilities of the
Trust by other service providers. The Trust is required to keep or have kept
complete and accurate books of the Trust. Such books will be maintained for
financial reporting and tax purposes on an accrual basis and the fiscal year
of the Trust will be the calendar year. The
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Trust will file a partnership information return (IRS Form 1065) with the
Service for each taxable year of the Trust and will report each
Certificateholder's allocable share of items of Trust income and expense to
Certificateholders and the Service on Schedule K-1. The Trust will provide the
Schedule K-1 information to nominees that fail to provide the Trust with
certain required information statements relating to identification of
beneficial owners of Certificates and such nominees will be required to
forward such information to such beneficial owners. Generally,
Certificateholders must file tax returns that are consistent with the
information return filed by the Trust or be subject to penalties unless the
Certificateholder notifies the Service of all such inconsistencies.
Green Tree or a subsidiary identified in the related Prospectus Supplement
will be designated as the tax matters partner in the Trust Agreement and, as
such, will be responsible for representing the Certificateholders in any
dispute with the Service. The Code provides for administrative examination of
a partnership as if the partnership were a separate and distinct taxpayer.
Generally, the statute of limitations for partnership items does not expire
before three years after the date on which the partnership information return
is filed. Any adverse determination following an audit of the return of the
Trust by the appropriate taxing authorities could result in an adjustment of
the returns of the Certificateholders, and, under certain circumstances, a
Certificateholder may be precluded from separately litigating a proposed
adjustment to the items of the Trust. An adjustment could also result in an
audit of a Certificateholder's returns and adjustments of items not related to
the income and losses of the Trust.
Tax Consequences to Foreign Certificateholders. It is not clear whether the
Trust will be considered to be engaged in a trade or business in the United
States for purposes of federal withholding taxes with respect to non-U.S.
persons because there is no clear authority dealing with that issue under
facts substantially similar to those described herein. Although it is not
expected that the Trust will be engaged in a trade or business in the United
States for such purposes, the Trust will withhold as if it were so engaged in
order to protect the Trust from possible adverse consequences of a failure to
withhold. It is expected that the Trust will withhold on the portion of its
taxable income that is allocable to foreign Certificateholders pursuant to
Section 1446 of the Code, as if such income were effectively connected to a
U.S. trade or business, at a rate of 35% for foreign holders that are taxable
as corporations and 39.6% for all other foreign Certificateholders. Subsequent
adoption of Treasury regulations or the issuance of other administrative
pronouncements may require the Trust to change its withholding procedures. In
determining a Certificateholder's nonforeign status, the Trust may rely on
Form W-8, Form W-9 or the Certificateholder's certification of nonforeign
status signed under penalties of perjury.
Each foreign Certificateholder might be required to file a U.S. individual
or corporate income tax return (including, in the case of a corporation, the
branch profits tax) on its share of the Trust's income. Each foreign
Certificateholder must obtain a taxpayer identification number from the
Service and submit that number to the Trust on Form W-8 in order to assure
appropriate crediting of the taxes withheld. A foreign Certificateholder
generally will be entitled to file with the Service a claim for refund with
respect to taxes withheld by the Trust, taking the position that no taxes are
due because the Trust is not engaged in a U.S. trade or business. However, the
Service may assert that additional taxes are due, and no assurance can be
given as to the appropriate amount of tax liability.
Backup Withholding. Under certain circumstances, a Certificateholder may be
subject to "backup withholding" at a 31% rate. See the discussion above under
"--Tax Consequences to Noteholders--Backup Withholding."
CERTAIN STATE INCOME TAX CONSEQUENCES
The activities to be undertaken by the Servicer in servicing and collecting
the Contracts will take place in Minnesota. The State of Minnesota imposes an
income tax on individuals, trusts and estates and a franchise tax measured by
net income on corporations. This discussion of Minnesota taxation is based
upon current statutory provisions and the regulations promulgated thereunder,
and applicable judicial or ruling authority, all of which
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are subject to change (which may be retroactive). No ruling on any of the
issues discussed below will be sought from the Minnesota Department of
Revenue.
If the Notes are treated as debt for federal income tax purposes, in the
opinion of Counsel this treatment will also apply for Minnesota tax purposes.
Noteholders not otherwise subject to Minnesota income or franchise taxation
would not become subject to such a tax solely because of their ownership of
the Notes. Noteholders already subject to income or franchise taxation in
Minnesota could, however, be required to pay such a tax on all or a portion of
the income generated from ownership of the Notes.
If the Trust is treated as a partnership (not taxable as a corporation) for
federal income tax purposes, in the opinion of Counsel the Trust would also be
treated as a partnership for Minnesota income tax purposes. The partnership
therefore would not be subject to Minnesota taxation. Certificateholders that
are not otherwise subject to Minnesota income or franchise taxation would not
become subject to such a tax solely because of their interests in the
partnership. Certificateholders already subject to income or franchise
taxation in Minnesota could, however, be required to pay such a tax on all or
a portion of the income from the partnership.
If the Certificates are treated as ownership interests in an association or
publicly traded partnership taxable as a corporation for federal income tax
purposes, in the opinion of Counsel this treatment would also apply for
Minnesota income and franchise tax purposes. Pursuant to this treatment, the
Trust would be subject to the Minnesota franchise tax measured by net income
(which could result in reduced distributions to Certificateholders).
Certificateholders that are not otherwise subject to Minnesota income or
franchise taxation would not become subject to such a tax solely because of
their interests in the constructive corporation. Certificateholders already
subject to income or franchise taxation in Minnesota could, however, be
required to pay such a tax on all or a portion of the income from the
constructive corporation.
ERISA CONSIDERATIONS
Section 406 of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), and Section 4975 of the Code prohibit a pension, profit
sharing or other employee benefit plan from engaging in certain transactions
involving "plan assets" with persons that are "parties in interest" under
ERISA or "disqualified persons" under the Code with respect to the plan. ERISA
also imposes certain duties and certain prohibitions on persons who are
fiduciaries of plans subject to ERISA. Under ERISA, generally any person who
exercises any authority or control with respect to the management or
disposition of the assets of a plan is considered to be a fiduciary of such
plan. A violation of these "prohibited transaction" rules may generate excise
tax and other liabilities under ERISA and the Code for such persons.
Certain transactions involving the related Trust might be deemed to
constitute prohibited transactions under ERISA and the Code with respect to a
Benefit Plan that purchased Securities if assets of the related Trust were
deemed to be assets of the Benefit Plan. Under a regulation issued by the
United States Department of Labor (the "Plan Assets Regulation"), the assets
of a Trust would be treated as plan assets of a Benefit Plan for the purposes
of ERISA and the Code only if the Benefit Plan acquired an "equity interest"
in the Trust and none of the exceptions contained in the Plan Assets
Regulation was applicable. An equity interest is defined under the Plan Assets
Regulation as an interest other than an instrument which is treated as
indebtedness under applicable local law and which has no substantial equity
features. The likely treatment of Notes and Certificates will be discussed in
the related Prospectus Supplement.
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.
A plan fiduciary considering the purchase of Securities should consult its
tax and/or legal advisors regarding whether the assets of the Trust would be
considered plan assets, the possibility of exemptive relief from the
prohibited transaction rules and other issues and their potential
consequences.
51
<PAGE>
LEGAL INVESTMENT CONSIDERATIONS
No Securities offered hereby will constitute "mortgage related securities"
for purposes of the Secondary Mortgage Market Enhancement Act of 1984
("SMMEA") because none of the Contracts will be secured as required by SMMEA.
Accordingly, many institutions with legal authority to invest in "mortgage
related securities" may not be legally authorized to invest in the Securities.
There may be other restrictions on the ability of certain investors,
including depository institutions, either to purchase Securities or to
purchase Securities 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 Securities constitute legal
investments for such investors.
RATINGS
It is a condition precedent to the issuance of any Class of Securities sold
under this Prospectus that they be rated by at least one nationally recognized
statistical rating organization in one of its four highest rating categories
(within which there may be sub-categories or gradations indicating relative
standing). A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating agency. The security rating of any Series of Securities
should be evaluated independently of similar security ratings assigned to
other kinds of securities.
UNDERWRITING
Green Tree may sell Securities 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 Securities
directly to other purchasers or through agents. Green Tree intends that
Securities 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 Securities may be made through a
combination of such methods.
The distribution of the Securities 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
Securities, Green Tree or any affiliate thereof may purchase some or all of
one or more Classes of Securities 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 Securities so purchased directly, through one
or more Underwriters to be designated at the time of the offering of such
Securities 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 Securities, Underwriters may receive
compensation from Green Tree or from purchasers of Securities for whom they
may act as agents in the form of discounts, concessions or commissions.
Underwriters may sell the Securities 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 Securities of a Series may be deemed to be
Underwriters, and any discounts or commissions received by them from Green
Tree and any profit on the resale of the Securities by them may be deemed to
be underwriting discounts and commissions, under the Securities Act. Any such
Underwriters or agents will be
52
<PAGE>
identified, and any such compensation received from Green Tree will be
described, in the Prospectus Supplement.
Under agreements which may be entered into by Green Tree, Underwriters and
agents who participate in the distribution of the Securities may be entitled
to indemnification by Green Tree against certain liabilities, including
liabilities under the Securities Act.
If so indicated in the Prospectus Supplement, Green Tree will authorize
Underwriters or other persons acting as Green Tree's agents to solicit offers
by certain institutions to purchase the Securities from Green Tree 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 Green Tree. The obligation of any purchaser under any such
contract will be subject to the condition that the purchaser of the offered
Securities shall not at the time of delivery be prohibited under the laws of
the jurisdiction to which such purchaser is subject from purchasing such
Securities. The Underwriters and such other agents will not have
responsibility in respect of the validity or performance of such contracts.
The Underwriters may, from time to time, buy and sell Securities, 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 Green Tree in the ordinary course of business.
The Indenture Trustee, if any, may, from time to time, invest the funds in
the Designated Accounts in Eligible Investments acquired from the
underwriters.
Under each Underwriting Agreement, the closing of the sale of any Class of
Securities subject thereto will be conditioned on the closing of the sale of
all other such Classes.
The place and time of delivery for the Securities in respect of which this
Prospectus is delivered will be set forth in the related Prospectus
Supplement.
LEGAL MATTERS
Certain matters with respect to the validity of the Certificates and the
Notes will be passed upon for Green Tree by the counsel for Green Tree
identified in the applicable Prospectus Supplement. The validity of the
Certificates and the Notes will be passed upon for the underwriters named in
the related Prospectus Supplement by the counsel for the underwriters
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
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION--PRELIMINARY PROSPECTUS DATED FEBRUARY 17, 1998
HOME EQUITY LOANS
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 , 1998.
<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 (as amended on February , 1998), Quarterly Reports on Form
10-Q for the periods ended March 31, June 30, and September 30, 1997, and
Current Report on Form 8-K dated January 27, 1998, 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
<PAGE>
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 Supplement, 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."
6
<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
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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."
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<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
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<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.
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<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, 1997, had
stockholders' equity of approximately $1,315,000,000. 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, 1997, the Company had approximately $ 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
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<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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<PAGE>
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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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 1998 (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 31........................................ (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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<PAGE>
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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<PAGE>
(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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<PAGE>
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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<PAGE>
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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<PAGE>
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
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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.
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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.
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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED FEBRUARY 17, 1998
SECURED HOME IMPROVEMENT
AND HOME EQUITY LOANS
GREEN TREE FINANCIAL CORPORATION, SELLER AND SERVICER
CERTIFICATES FOR HOME IMPROVEMENT AND HOME EQUITY LOANS
(ISSUABLE IN SERIES)
Certificates for Home Improvement and 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 (i) home
improvement contracts and promissory notes (the "Home Improvement Contracts")
and (ii) closed-end home equity loans (the "Home Equity Contracts," and,
together with the Home Improvement Contracts, collectively the "Contracts"), as
more particularly described herein, and liens on the related real estate.
Except as otherwise specified in the related Prospectus Supplement, the
Contracts will have been originated in the ordinary course of business by Green
Tree Financial Corporation (the "Company"). Specific information, to the extent
available, regarding the size and composition of the pool of Contracts relating
to each Series of Certificates will be set forth in the related Prospectus
Supplement. If specified in the related Prospectus Supplement, a pool insurance
policy, letter of credit, surety bond, guarantee of the Company, cash reserve
fund, or other form of credit enhancement, or any combination thereof, may be
provided with respect to a Series of Certificates, or one or more Classes of
such Series, evidencing interests in the Contracts. The Company will act as
Servicer (in such capacity referred to herein as the "Servicer") of the
Contracts.
Each Series of Certificates may include one or more senior Classes of
Certificates (the "Senior Certificates") and one or more subordinate Classes of
Certificates (the "Subordinated Certificates"). A Series of Senior/Subordinated
Certificates may include one or more Classes ("Mezzanine Certificates") which
are subordinated to one or more Classes of Certificates and are senior to one
or more Classes of Certificates. Certificates of a Series may be divided into
two or more Classes which (i) represent interests in specified percentages
(which may be 0%) of principal or interest, or both, in distributions on the
pool of Contracts relating to such Series, as specified in the related
Prospectus Supplement, and/or (ii) are entitled to receive distributions in
respect of principal before or after specified principal distributions have
been made on one or more other Classes within such Series, or on a planned or
targeted amortization schedule or upon the occurrence of other specified
events. Each Prospectus Supplement will describe the Series and Class or
Classes of Certificates offered thereby.
The Prospectus Supplement will set forth the Pass-Through Rate that will be
paid to Certificateholders of each Class of a given Series. Such Pass-Through
Rate may be fixed, variable or adjustable, as specified in the related
Prospectus Supplement.
Except as otherwise specified in the related Prospectus Supplement, the only
obligations of the Company with respect to a Series of Certificates will be
pursuant to certain limited representations and warranties. Except as otherwise
specified in the related Prospectus Supplement, the Servicer's obligations with
respect to the Certificates evidencing interests in a pool of Contracts are
limited to its contractual servicing obligations. If so specified in the
related Prospectus Supplement, the Servicer may be obligated, under certain
terms and conditions, to advance the amount of any delinquent payments of
principal and interest during the immediately preceding Due Period (as defined
herein), but only to the extent the Servicer determines such advances are
recoverable from future payments and collections on the delinquent Contracts.
See "Description of the Certificates--Advances" and "--Distributions on
Certificates."
There will have been no public market for any Certificates sold hereunder
prior to the offering thereof and there is no assurance that any such market
will develop. The Underwriters named in the Prospectus Supplement relating to a
Series may from time to time buy and sell Certificates of such Series, but
there can be no assurance that an active secondary market therefor will
develop, and there is no assurance that any such market, if established, will
continue.
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 , 1998.
<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 (as amended on February , 1998), Quarterly Reports on Form
10-Q for the periods ended March 31, June 30 and September 30, 1997, and
Current Report on Form 8-K dated January 27, 1998, which have been filed with
the Commission, are hereby incorporated by reference in this Prospectus and
the related Prospectus Supplement.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act, subsequent to the date of this Prospectus and prior
to the termination of the offering of the Certificates, shall
2
<PAGE>
be deemed to be incorporated by reference into this Prospectus and the
Prospectus Supplement relating to a Class of Certificates that is supported by
a guarantee of the Company, and to be a part thereof from the respective dates
of filing of such documents. Any statement contained herein or in a document
all or any portion of which is incorporated or deemed to be incorporated by
reference herein shall be deemed to be modified or superseded for purposes of
this Prospectus to the extent that a statement contained herein or in any
other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.
The Company will provide without charge to any person to whom this
Prospectus is delivered, upon the written or oral request of such person, a
copy of any or all of the foregoing documents incorporated herein by reference
(other than certain exhibits to such documents). Requests for such copies
should be directed to John Dolphin, Vice President and Director of Investor
Relations, 1100 Landmark Towers, 345 St. Peter Street, St. Paul, Minnesota
55102-1639, telephone number (612) 293-3400.
3
<PAGE>
SUMMARY OF TERMS
This summary is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus and in the accompanying
Prospectus Supplement.
Title of Securities.......... Certificates for Home Improvement and Home Eq-
uity Loans (Issuable in Series) (the "Certifi-
cates").
Seller....................... Green Tree Financial Corporation (in such capac-
ity referred to herein as the "Company").
Servicer..................... Green Tree Financial Corporation (in such capac-
ity referred to herein as the "Servicer," which
term shall include any successor to Green Tree
Financial Corporation in such capacity under
the applicable Agreement (as defined herein)).
Risk Factors................. Certain special considerations are particularly
relevant to a decision to invest in any Certif-
icates sold hereunder. See "Risk Factors" here-
in.
Securities Offered........... Certificates evidencing interests in pools of
Contracts (as defined herein) may be issued
from time to time in one or more series (each,
a "Series") pursuant to separate Pooling and
Servicing Agreements (each, an "Agreement") be-
tween the Company, as Seller and Servicer, and
the Trustee specified in the related Prospectus
Supplement for such Series of Certificates (the
"Trustee").
The Contracts................ The Contracts underlying a Series of Certifi-
cates (the "Contract Pool") will be fixed or
variable rate Contracts. Such Contracts, as
specified in the related Prospectus Supplement,
will consist of (1) home improvement contracts
and promissory notes (the "Home Improvement
Contracts"), which will be either conventional
contracts or contracts insured by the Federal
Housing Administration ("FHA") pursuant to Ti-
tle I of the National Housing Act ("Title I"),
and (2) closed-end home equity loans (the "Home
Equity Contracts"). Each Contract will be se-
cured by the related real estate. If so speci-
fied in the related Prospectus Supplement, the
Contract Pool may be divided into two or more
sub-pools, in which event the Certificates of
certain specified Classes may be payable pri-
marily from, and in respect of, the Contracts
comprising a given sub-pool.
The Prospectus Supplement for each Series will
provide information with respect to (i) the ag-
gregate principal balance of the Contracts com-
prising the Contract Pool, as of the date spec-
ified in the Prospectus Supplement (the "Cut-
off Date"); (ii) the weighted average and range
of contractual rates of interest (each, a "Con-
tract Rate") on the Contracts; (iii) the
weighted average and ranges of terms to sched-
uled maturity of the Contracts as of origina-
tion and as of the Cut-off Date; (iv) the per-
centage of the Contracts that are Home Improve-
ment Contracts and Home Equity Contracts, re-
spectively; (v) the percentage of Contracts
that are FHA-insured; (vi) the average out-
standing
4
<PAGE>
principal balance of the Contracts as of the
Cut-off Date; and (vii) the geographic location
of improved real estate underlying the Con-
tracts. In addition, if so specified in the re-
lated Prospectus Supplement, additional Con-
tracts may be purchased from the Company during
the Pre-Funding Period specified in the related
Prospectus Supplement, from funds on deposit in
a Pre-Funding Account.
Except as otherwise specified in the related
Prospectus Sup-plement, the Contracts will have
been originated by the Company on an individual
basis in the ordinary course of its business.
Description of Certificates.. The Certificates of each Series may be issued in
one or more Classes or subclasses as and on the
terms specified in the related Prospectus Sup-
plement, each of which will evidence the inter-
est specified in the related Prospectus Supple-
ment in the Contract Pool and certain other
property held in trust for the benefit of the
Certificateholders (the "Trust Fund"). For con-
venience of description, any reference in this
Prospectus to a "Class" of Certificates in-
cludes a reference to any subclasses of such
Class. If so specified in a Prospectus Supple-
ment, a Series of Certificates may include one
or more Classes which (i) are entitled to re-
ceive distributions only in respect of princi-
pal ("Principal Only Certificates"), interest
("Interest Only Certificates") or any combina-
tion thereof, or in specified proportions in
respect of such payments, and/or (ii) are enti-
tled to receive distributions in respect of
principal before or after specified principal
distributions have been made on one or more
other Classes within such Series ("Fast
Pay/Slow Pay Certificates"), or on a planned
amortization schedule ("PAC Certificates") or
targeted amortization schedule ("TAC Certifi-
cates") or upon the occurrence of other speci-
fied events. See "Description of Certificates."
The Prospectus Supplement will set forth the
rate at which interest will be paid to
Certificateholders of each Class of a given Se-
ries (the "Pass-Through Rate"). Such Pass-
Through Rate may be fixed, variable or adjust-
able, as specified in the related Prospectus
Supplement.
Each Series of Certificates may include one or
more Classes ("Subordinated Certificates")
which are subordinated in right of distribution
to one or more other Classes ("Senior Certifi-
cates"). Certificates of a Series which in-
cludes Senior and Subordinated Certificates are
referred to herein collectively as
"Senior/Subordinated Certificates." A Series of
Senior/Subordinated Certificates may include
one or more Classes ("Mezzanine Certificates")
which are subordinated to one or more Classes
of Certificates and are senior to one or more
Classes of Certificates.
The Certificates will be issuable in fully reg-
istered form in the authorized denominations
specified in the related Prospectus Supplement.
See "Description of the Certificates." The
Certifi-
5
<PAGE>
cates will not be guaranteed or insured by any
government agency or, unless otherwise speci-
fied in the related Prospectus Supplement,
other insurer and, except as described herein
and in the related Prospectus Supplement, the
Contracts will not be guaranteed or insured by
any government agency or other insurer.
Subordinated Certificates.... One or more Classes of any Series may be Subor-
dinated Certificates, as specified in the re-
lated Prospectus Supplement. The rights of the
Subordinated Certificateholders to receive any
or a specified portion of distributions with
respect to the Contracts will be subordinated
to the rights of Senior Certificateholders to
the extent and in the manner specified in the
related Prospectus Supplement. If a Series of
Certificates contains more than one Class of
Subordinated Certificates, distributions and
losses will be allocated among such classes in
the manner specified in the related Prospectus
Supplement. The rights of the Subordinated
Certificateholders, to the extent not subordi-
nated, may be on a parity with those of the Se-
nior Certificateholders. This subordination is
intended to enhance the likelihood of regular
receipt by Senior Certificateholders of the
full amount of scheduled monthly payments of
principal and interest due them and to protect
the Senior Certificateholders against losses.
If so specified in the applicable Prospectus
Supplement, Mezzanine Certificates or other
Classes of Subordinated Certificates may be en-
titled to the benefits of other forms of credit
enhancement and may, if rated in one of the
four highest rating categories by a nationally
recognized statistical rating organization, be
offered pursuant to this Prospectus and such
Prospectus Supplement.
Credit Enhancement........... As an alternative, or in addition, to the credit
enhancement afforded by subordination of the
Subordinated Certificates, credit enhancement
with respect to a Series of Certificates may be
provided by pool insurance, letters of credit,
surety bonds, a guarantee of the Company, cash
reserve funds or other forms of enhancement ac-
ceptable to each nationally recognized rating
agency rating a Series of Certificates, in each
case as described in the related Prospectus
Supplement.
Interest..................... Except as otherwise set forth in the related
Prospectus Supplement, interest on the Certifi-
cates will be paid on the dates specified in
the related Prospectus Supplement (each, a
"Payment Date"). The related Prospectus Supple-
ment will set forth for each Class of Certifi-
cates the Pass-Through Rate, if any, for each
such Class or the method of determining such
Pass-Through Rate. See "Yield Considerations"
and "Description of the Certificates." As spec-
ified in the related Prospectus Supplement,
Classes of a Series of Certificates may be en-
titled to receive no interest or interest which
is not proportionate to the principal allocable
to such Certificates.
Principal (Including Except as otherwise set forth in the related
Prepayments)................ Prospectus Supple-ment, principal on each Con-
tract, including any principal pre-
6
<PAGE>
payments, will be passed through on each Pay-
ment Date. See "Maturity and Prepayment Consid-
erations" and "Description of the Certifi-
cates."
Optional Termination......... Unless otherwise specified in the related Pro-
spectus Supplement, each of the Company or the
Servicer may at its option repurchase all Con-
tracts relating to a Series of Certificates re-
maining outstanding at such time under the cir-
cumstances specified in such Prospectus Supple-
ment. Unless otherwise provided in the related
Prospectus Supplement, the repurchase price
will equal the principal amount of such Con-
tracts plus accrued and unpaid interest there-
on. See "Description of the Certificates--Ter-
mination of the Agreement."
Global Certificates.......... If so specified in the related Prospectus Sup-
plement, the Certificates of a Series, or of
one or more Classes within a Series, will be
issuable in the form of one or more global cer-
tificates (each, a "Global Certificate") to be
held by a depositary (each, a "Depositary") on
behalf of the beneficial owners of the Certifi-
cates, as described herein under "Description
of the Certificates--Global Certificates." The
description of the Certificates in this Pro-
spectus assumes that the Certificates of a Se-
ries will not be issued in the form of Global
Certificates. If some or all of the Certifi-
cates of a Series are issued in the form of one
or more Global Certificates, the term "Global
Certificateholder," as used herein, will refer
to such beneficial owners of such Certificates,
and the rights of such Certificateholders will
be limited as described herein under "Descrip-
tion of the Certificates--Global Certificates."
Representations and
Warranties of the Company...
As a condition to the Company's conveyance of
any Contract Pool to the Trust Fund, the Com-
pany will be required to make certain represen-
tations and warranties in the related Agreement
regarding the Contracts. Under the terms of the
Agreement, if the Company becomes aware of a
breach of any such representation or warranty
that materially adversely affects the Trust
Fund's interest in any Contract or receives
written notice of such a breach from the
Trustee or the Servicer, then the Company will
be obligated either to cure such breach or to
repurchase or, if so provided in the related
Prospectus Supplement, substitute for the af-
fected Contract, in each case under the condi-
tions further described herein and in the Pro-
spectus Supplement. See "Description of the
Certificates--Conveyance of Contracts."
Federal Income Tax If an election (a "REMIC Election") is made to
Considerations.............. treat the Trust Fund represented by a Series of
Certificates or a segregated portion thereof as
a "real estate mortgage investment conduit" (a
"REMIC") under the Internal Revenue Code of
1986, as amended (the "Code"), 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 con-
7
<PAGE>
sequences under the Code described herein and
in such Prospectus Supplement. If so specified
in the applicable Prospectus Supplement, a
Class of Certificates offered hereby may repre-
sent 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 Contract Pool and any
other assets held by the Trust Fund and will be
considered the equitable owner of an undivided
interest in the Contracts included in such Con-
tract Pool. If a REMIC Election is not made
with respect to a Series of Certificates 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 described in the re-
lated Prospectus Supplement. See "Certain Fed-
eral Income Tax Consequences--Non-REMIC Se-
ries."
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. Limitations on Availability of FHA Insurance. The related Prospectus
Supplement will specify the number and percentage of the Home Improvement
Contracts included in the Contract Pool that are insured by FHA pursuant to
Title I of the National Housing Act ("Title I"). The availability of FHA
Insurance following a default on an FHA-insured Home Improvement Contract
is subject to a number of conditions, including strict compliance by the
Company with FHA regulations in originating and servicing the Contract.
Although the Company is an FHA-approved lender and believes, and will
represent and warrant in the Agreement, that it has complied with FHA
regulations, such regulations are susceptible to substantial
interpretation. The Company is not required to obtain, and has not
obtained, approval from FHA of its origination and servicing practices.
Failure to comply with FHA regulations may result in a denial of FHA
Insurance claims, and there can be no assurance that FHA's enforcement of
its regulations will not become stricter in the future. From time to time
the Company is engaged in disputes with FHA over the validity of claims
submitted and the Company's compliance with FHA regulations in servicing
loans insured by FHA, such as the FHA-insured Home Improvement Contracts.
In addition, any insurance claim paid by FHA will cover only 90% of the sum
of the unpaid principal on the Home Improvement Contract, up to nine months
unpaid interest thereon (computed at 7% per annum) and certain liquidation
costs.
The amount of FHA Insurance available with respect to a Series of
Certificates at any given time with respect to the FHA-insured Home
Improvement Contracts included in a Contract Pool is limited to the balance
of a reserve amount determined with respect to all FHA Title I loans
originated and reported for insurance by the Company and not sold, or sold
with recourse, by the Company, including manufactured housing contracts as
well as home improvement loans. Such reserve amount, as of December 31,
1997, was equal to approximately $ , but will be reduced by the
amount of all FHA Insurance claims paid and will be increased by an amount
equal to 10% of the unpaid principal balance of FHA Title I loans
subsequently originated and reported for insurance by the Company. Severe
losses on the Company's FHA-insured manufactured housing contracts, or on
other FHA-insured home improvement loans originated by the Company, could
reduce or eliminate the Company's FHA Insurance reserves, in which event
FHA Insurance would not be available to cover losses on FHA-insured Home
Improvement Contracts. In the event the Company were terminated as Servicer
due to its bankruptcy or otherwise, it is anticipated that a proportionate
amount of the Company's FHA Insurance reserves would be transferred to the
reserve account of the Trustee or other successor servicer, but there can
be no assurance of the amount, if any, that would be so transferred. See
"Description of FHA Insurance."
2. Limited Obligations. Except as otherwise specified in the related
Prospectus Supplement, the Certificates of a Series will not represent an
interest in or obligation of the Company. The Certificates of any Series
will not be insured or guaranteed by any governmental agency or
instrumentality, any Underwriter or its affiliates, the Servicer or (except
as otherwise specified in the related Prospectus Supplement) any other
party.
3. Junior Mortgage Liens; Value of Mortgaged Property. The Company
expects that a substantial number of the liens on the improved real estate
securing the Contracts in a given Contract 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
Contract to be sold upon default of the mortgagor or trustor, thereby
extinguishing the junior mortgagee's or junior beneficiary's lien unless
the Servicer on behalf of the Trust Fund asserts its subordinate interest
in the property in foreclosure litigation and, possibly, satisfies the
defaulted senior loan or loans. See "Certain Legal Aspects of the
Contracts--Repurchase Obligations."
9
<PAGE>
A substantial portion of the Contracts included in a Contract Pool are
expected to have loan-to-value ratios of 90% or more, based on the
aggregate of the outstanding principal balances of all senior mortgages or
deeds of trust and of the Contract on the one hand, and the value of the
home and an estimate of the value of the financed improvement, where
applicable, on the other. See "Green Tree Financial Corporation--Contract
Origination." An overall decline in the residential real estate market, the
general condition of a property securing a Contract or other factors could
adversely affect the value of the property securing a conventional (i.e.,
not insured by FHA) Home Improvement Contract or a Home Equity Contract
such that the remaining balance of such Contract, together with that of any
senior liens on the related property, could equal or exceed the value of
the property. While the same economic decline could affect the value of
property securing an FHA-insured Home Improvement Contract, assuming
compliance with other FHA regulations, an FHA claim would still be payable
to the Company, notwithstanding the decline in property value below the
aggregate outstanding principal balances of the Home Improvement Contract
and of all senior liens on the property.
4. Limited Liquidity. There can be no assurance that a secondary market
will develop for the Certificates of any Series, or, if it does develop,
that it will provide the holders of any of the Certificates with liquidity
of investment or that if such a secondary market develops that it will
continue to exist for the term of any Series of Certificates.
5. Non-recordation of Mortgage Assignments. Because of the expense and
administrative inconvenience involved, the Company may not record the
assignment to the Trustee of the mortgage or deed of trust securing any
Contract. In some states, in the absence of such recordation, the
assignment to the related Trustee of the mortgage or deed of trust securing
a Contract may not be effective against creditors of or purchasers from the
Company or a trustee in bankruptcy of the Company.
6. Certain Matters Relating to Insolvency. The Company intends that each
transfer of Contracts to the related Trust Fund constitute a sale, rather
than a pledge of the Contracts to secure indebtedness of the Company.
However, if the Company were to become a debtor under the federal
bankruptcy code, it is possible that a creditor or trustee in bankruptcy of
the Company or the Company as debtor-in-possession may argue that the sale
of the Contracts by the Company was a pledge of the Contracts rather than a
sale. This position, if presented to or accepted by a court, could result
in a delay in or reduction of distributions to the Certificateholders.
THE TRUST FUND
GENERAL
Each Trust Fund will include (i) a Contract Pool, (ii) the amounts held from
time to time in a trust account (the "Certificate Account") maintained by the
Trustee pursuant to the Agreement, (iii) proceeds from FHA Insurance (with
respect to any FHA-insured Home Improvement Contract included in the Contract
Pool), (iv) any letter of credit, guarantee, surety bond, insurance policy,
cash reserve fund or other credit enhancement securing payment of all or part
of a Series of Certificates, and (v) such other property as may be specified
in the related Prospectus Supplement.
Each Certificate will evidence the interest specified in the related
Prospectus Supplement in one Trust Fund, containing one Contract Pool
comprised of Contracts having the aggregate principal balance as of the
specified day of the month of the creation of the pool (the "Cut-off Date")
specified in the related Prospectus Supplement. Holders of Certificates of a
Series will have interests only in such Contract Pool and will have no
interest in the Contract Pool created with respect to any other Series of
Certificates, except with respect to FHA Insurance Reserves. If so specified
in the related Prospectus Supplement, the Contract Pool may be divided into
two or more sub-pools, in which event the Certificates of certain specified
Classes may be payable primarily from, and in respect of, the Contracts
comprising a given sub-pool. If so specified in the related Prospectus
Supplement, the Trust Fund may include a Pre-Funding Account which would be
used to purchase additional Contracts ("Subsequent Contracts") from the
Company during the Pre-Funding Period specified in the related Prospectus
10
<PAGE>
Supplement. The related Prospectus Supplement will specify the conditions that
must be satisfied prior to any transfer of Subsequent Contracts, including the
requisite characteristics of the Subsequent Contracts.
Except as otherwise specified in the related Prospectus Supplement, all of
the Contracts will have been originated by the Company in the ordinary course
of its business. Specific information respecting the Contracts included in
each Trust Fund will be provided in the related Prospectus Supplement and, to
the extent not contained in the related Prospectus Supplement, in a report on
Form 8-K to be filed with the Commission within fifteen days after the initial
issuance of the Certificates. A copy of the Agreement with respect to each
Series of Certificates will be attached to the Form 8-K and will be available
for inspection at the corporate trust office of the Trustee specified in the
related Prospectus Supplement. A schedule of the Contracts relating to such
Series will be attached to the Agreement delivered to the Trustee upon
delivery of the Certificates.
Whenever in this Prospectus terms such as "Contract Pool," "Trust Fund,"
"Agreement" or "Pass-Through Rate" are used, those terms respectively apply,
unless the context otherwise indicates, to one specific Contract Pool and
Trust Fund, each Agreement and each Pass-Through Rate applicable to the
related Class of Certificates.
THE CONTRACT POOLS
Except as otherwise specified in the related Prospectus Supplement, the
Contract Pool will consist of (i) home improvement contracts and promissory
notes (the "Home Improvement Contracts"), and (ii) closed-end home equity
loans (the "Home Equity Contracts" and, together with the Home Improvement
Contracts, collectively the "Contracts"), originated by the Company on an
individual basis in the ordinary course of business. The Home Improvement
Contracts may be conventional home improvement contracts or contracts insured
by FHA. All Contracts will be secured by the related real estate. Except as
otherwise specified in the related Prospectus Supplement, the Contracts will
be fully amortizing and will bear interest at a fixed or variable annual
percentage rate (the "Contract Rate").
For each Series of Certificates, the Company will assign the Contracts
constituting the Contract Pool to the trustee named in the related Prospectus
Supplement (the "Trustee"). The Company, as Servicer (in such capacity
referred to herein as the "Servicer", which term shall include any successor
to the Company in such capacity under the applicable Agreement), will service
the Contracts pursuant to the Agreement. See "Description of the
Certificates--Servicing." Unless otherwise specified in the related Prospectus
Supplement, the Contract documents will be held by the Trustee or a custodian
on its behalf.
Each Contract Pool will be composed of Contracts bearing interest at the
Contract Rates specified in the Prospectus Supplement. Unless otherwise stated
in the related Prospectus Supplement, each registered holder of a Certificate
will be entitled to receive periodic distributions, which will be monthly
unless otherwise specified in the related Prospectus Supplement, of all or a
portion of principal on the underlying Contracts or interest on the principal
balance of such Certificate (or on some other principal balance unrelated to
that of such Certificate) at the Pass-Through Rate, or both.
The related Prospectus Supplement will specify for the Contracts contained
in the related Contract Pool, among other things, the range of the dates of
origination of the Contracts; the range of the Contract Rates and the weighted
average Contract Rate; the minimum and maximum outstanding principal balances
and the average outstanding principal balance as of the Cut-off Date; the
aggregate principal balance of the Contracts included in the Contract Pool as
of the Cut-off Date; the weighted average and range of scheduled terms to
maturity as of origination and as of the Cut-off Date; the range of original
maturities of the Contracts and the last maturity date of any Contract; and
the geographic location of improved real estate securing the Contracts. If the
Trust Fund includes a Pre-Funding Account, the related Prospectus Supplement
will specify the conditions that must be satisfied prior to any transfer of
Subsequent Contracts, including the requisite characteristics of the
Subsequent Contracts.
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The Company will make representations and warranties as to the types and
geographical distribution of the Contracts included in a Contract Pool and as
to the accuracy in all material respects of certain information furnished to
the Trustee in respect of each such Contract. Upon a breach of any
representation or warranty that materially and adversely affects the interests
of the Certificateholders in a Contract, the Company will be obligated to cure
the breach in all material respects, or to repurchase or substitute for the
Contract as described below. This repurchase obligation constitutes the sole
remedy available to the Certificateholders or the Trustee for a breach of
representation or warranty by the Company. See "Description of the
Certificates--Conveyance of Contracts."
USE OF PROCEEDS
Unless otherwise specified in the related Prospectus Supplement,
substantially all of the net proceeds to be received from the sale of each
Series of Certificates will be used by the Company for general corporate
purposes, including the origination or acquisition of additional home
improvement contracts and home equity loans, costs of carrying such contracts
and loans until sale of the related certificates and to pay other expenses
connected with pooling the Contracts and issuing the Certificates.
GREEN TREE FINANCIAL CORPORATION
GENERAL
The Company is a Delaware corporation which, as of December 31, 1997, had
stockholders' equity of approximately $1,315,000,000. 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 are available from the Company upon written request made to the
Company.
CONTRACT ORIGINATION
Home Improvement Contracts. Through its centralized loan processing
operations in St. Paul, Minnesota, the Company arranges to purchase certain
contracts from home improvement contractors located throughout the United
States. The Company's regional sales managers contact home improvement
contractors and explain the Company's available financing plans, terms,
prevailing rates and credit and financing policies. If the contractor wishes
to utilize the Company's available customer financing, the contractor must
make an application for contractor approval. The Company has a contractor
approval process pursuant to which the financial condition, business
experience and qualifications of the contractor are reviewed prior to his or
her approval to sell Contracts to the Company. In addition, the Company has a
centralized compliance group which reviews and updates contractor financial
condition and reviews contractors on an annual basis to determine whether such
contractor's approval will be continued. The Company also reviews monthly
contractor trend reports which show the default and delinquency trends of the
particular contractor with respect to contracts sold to the Company. The
Company occasionally will originate directly a home improvement promissory
note involving a home improvement transaction.
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All contracts that the Company originates are written on forms provided or
approved by the Company and are purchased on an individually approved basis in
accordance with the Company's guidelines. The contractor submits the
customer's credit application and construction contract to the Company's
office where an analysis of the creditworthiness of the customer is made using
a proprietary credit scoring system that was implemented by the Company in
June 1993. If the Company determines that the application meets the Company's
underwriting guidelines and applicable FHA regulations (for FHA-insured
contracts) and the credit is approved, the Company purchases the contract from
the contractor when the customer verifies satisfactory completion of the work,
or, in the case of staged funding, the Company follows up with the customer
for the completion certificate 90 days after funding.
The types of home improvements financed by the Company include (i) exterior
renovations, including windows, siding and roofing, (ii) pools and spas, (iii)
kitchen and bath remodeling, and (iv) room additions and garages. The Company
may also, under certain limited conditions, extend additional credit beyond
the purchase price of the home improvement for the purpose of debt
consolidation.
The original principal amount of an FHA-insured home improvement contract
with respect to a single family property currently may not exceed $25,000
without specific FHA approval, with a maximum term of 20 years. FHA will
insure loans of up to $17,500 for manufactured homes which qualify as real
estate under applicable state law and loans of up to $12,000 per unit or a
$48,000 limit for four units of owner-occupied multiple-family homes. Certain
other criteria for home improvement contracts eligible for FHA Insurance are
described under the caption "Description of FHA Insurance."
The Company began financing conventional home improvement loans in September
1992. Conventional home improvement loans are not insured by FHA. The original
principal amount of a conventional secured home improvement loan may not
exceed $40,000 for the Company's secured "no equity" lien program, and
$100,000 for the Company's secured equity lien program, unless a higher amount
financed is approved by senior management. The original principal amount of a
conventional home improvement loan may not exceed $100,000 for the Company's
secured lien program, unless a higher amount financed is approved by senior
management. The Company requires that any secured home improvement contract be
secured by a recorded lien (which may be a first, second or (with respect to
FHA-insured contracts and some conventional contracts of $30,000 or less)
third lien) on the improved real estate.
The Company's underwriting guidelines and credit scoring process weight
significantly the applicant's creditworthiness and place less weight on the
available equity in the related real estate being improved. While it is the
Company's policy not to exceed 100% in loan-to-value ratio on any Contract, a
substantial portion of the Home Improvement Contracts are expected to have
loan-to-value ratios of 90% or more when considering the estimated value of
the real estate, other liens senior to that of the Home Improvement Contract,
and the improvements being financed. Because the Company does not require
appraisals on most Home Improvement Contracts with loan amounts of less than
$30,000 (which Home Improvement Contracts are expected to comprise a
substantial portion of any Contract Pool), and given the many other factors
that can affect the value of property securing a conventional Home Improvement
Contract, the related Prospectus Supplement will not provide detailed
disclosure of loan-to-value ratios on the Home Improvement Contracts.
Home Equity Contracts. The Company has originated closed-end home equity
loans since January 1996. As of December 31, 1997, the Company had
approximately $ aggregate principal amount of outstanding closed-end
home equity loans.
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
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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 Contract Rate of the
Contracts (as of the related Cut-off Date) relating to each Series of
Certificates will be set forth in the related Prospectus Supplement.
The Prospectus Supplement for each Series will indicate that a lower rate of
principal prepayments than anticipated would negatively affect the total
return to investors of any Class of Certificates that is offered at a discount
to its principal amount, and a higher rate of principal prepayments than
anticipated would negatively affect the total return to investors of any such
Class of Certificates that is offered at a premium to its principal amount or
without any principal amount.
The yield on some types of Certificates which may be offered hereby, such as
Interest Only Certificates, Principal Only Certificates, and Fast Pay/Slow Pay
Certificates, may be particularly sensitive to prepayment rates, and to
changes in prepayment rates, on the underlying Contracts. If so stated in the
related Prospectus Supplement, the yield on some types of Certificates which
may be offered hereby could change and may be negative under certain
prepayment rate scenarios. Accordingly, some types of Certificates may not be
legal or appropriate investments for certain financial institutions, pension
funds or others. See "ERISA Considerations" and "Legal Investment
Considerations." In addition, the timing of changes in the rate of prepayment
on the Contracts included in a Contract Pool may significantly affect an
investor's actual yield to maturity, even if the average prepayment rate over
time is consistent with the investor's expectations. In general, the earlier
that prepayments on Contracts occur, the greater the effect on the investor's
yield to maturity.
MATURITY AND PREPAYMENT CONSIDERATIONS
MATURITY
Unless otherwise described in an applicable Prospectus Supplement, all of
the Contracts will have maturities at origination of not more than 25 years.
PREPAYMENT CONSIDERATIONS
Contracts generally may be prepaid in full or in part without penalty. FHA-
insured Home Improvement Contracts may be prepaid at any time without penalty.
The Company has no significant experience with respect to the rate of
principal prepayments on home improvement contracts or home equity loans.
Because the Contracts have scheduled due dates throughout the calendar month,
and because (unless otherwise specified in the related Prospectus Supplement)
all principal prepayments will be passed through to Certificateholders of the
related Series on the Payment Date following the Due Period in which such
principal prepayment occurred, prepayments on the Contracts would affect the
amount of funds available to make distributions on the Certificates on any
Payment Date only if a substantial portion of the Contracts prepaid prior to
their respective due dates in a particular month (thus paying less than 30
days' interest for that Due Period) while very few Contracts prepaid after
their respective due dates in that month. In addition, liquidations of
defaulted Contracts or the Servicer's or the Company's exercise of its option
to repurchase the entire remaining pool of Contracts (see "Description of the
Certificates--Repurchase Option") will affect the timing of principal
distributions on the Certificates of a Series.
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Information regarding the prepayment standard or model or any other rate of
assumed prepayment, as applicable, will be set forth in the Prospectus
Supplement with respect to a Series of Certificates. Although the related
Prospectus Supplement will specify the prepayment assumptions used to price
any Series of Certificates, there can be no assurance that the Contracts will
prepay at such rate, and it is unlikely that prepayments or liquidations of
the Contracts will occur at any constant rate.
See "Description of the Certificates--Repurchase Option" for a description
of the Company's or Servicer's option to repurchase the Contracts comprising
part of a Trust Fund when the aggregate outstanding principal balance of such
Contracts is less than a specified percentage of the initial aggregate
outstanding principal balance of such Contracts as of the related Cut-off
Date. See also "The Trust Fund--The Contract Pools" for a description of the
obligations of the Company to repurchase a Contract in case of a breach of a
representation or warranty relative to such Contract.
DESCRIPTION OF THE CERTIFICATES
Each Series of Certificates will be issued pursuant to a separate pooling
and servicing agreement (each, an "Agreement") to be entered into among the
Company, as seller and Servicer, and the trustee named in the related
Prospectus Supplement (the "Trustee"), and such other parties, if any, as are
described in the applicable Prospectus Supplement. The following summaries
describe certain provisions expected to be common to each Agreement and the
related Certificates, but do not purport to be complete and are subject to,
and are qualified in their entirety by reference to, the provisions of the
related Agreement and the description set forth in the related Prospectus
Supplement. The provisions of the form of Agreement filed as an exhibit to the
Registration Statement of which this Prospectus is a part (the "Registration
Statement") that are not described herein may differ from the provisions of
any actual Agreement. The material differences will be described in the
related Prospectus Supplement. Capitalized terms used herein and not otherwise
defined herein shall have the meanings assigned to them in the form of
Agreement filed as an exhibit to the Registration Statement.
Each Series of Certificates will have been rated in the rating category by
the rating agency or agencies specified in the related Prospectus Supplement.
GENERAL
The Certificates may be issued in one or more Classes. If the Certificates
of a Series are issued in more than one Class, the Certificates of all or less
than all of such Classes may be sold pursuant to this Prospectus, and there
may be separate Prospectus Supplements relating to one or more of such Classes
so sold. Any reference herein to the Prospectus Supplement relating to a
Series comprised of more than one Class should be understood as a reference to
each of the Prospectus Supplements relating to the Classes sold hereunder. Any
reference herein to the Certificates of a Class should be understood to refer
to the Certificates of a Class within a Series or all of the Certificates of a
single-Class Series, as the context may require. For convenience of
description, any reference in this Prospectus to a "Class" of Certificates
includes a reference to any subclasses of such Class.
The Certificates of each Series will be issued in fully registered form only
and will represent the interests specified in the related Prospectus
Supplement in a separate trust fund (the "Trust Fund") created pursuant to the
related Agreement. The Trust Fund will be held by the Trustee for the benefit
of the Certificateholders. Each Trust Fund, to the extent specified in the
related Prospectus Supplement, will include (i) Contracts (the "Contract
Pool") which are subject to the Agreement, (ii) the amounts held in the
Certificate Account from time to time, (iii) proceeds from FHA Insurance (with
respect to any FHA-insured Home Improvement Contract included in the Contract
Pool), (iv) any letter of credit, guarantee, surety bond, insurance policy,
cash reserve fund or other credit enhancement securing payment of all or part
of a Series of Certificates and (v) such other property as may be specified in
the related Prospectus Supplement. Except as otherwise specified in the
related Prospectus Supplement, the Certificates will be freely transferable
and exchangeable at the corporate trust office of the Trustee at the address
set forth in the related Prospectus Supplement. No service charge will be made
for any
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registration of exchange or transfer of Certificates, but the Trustee may
require payment of a sum sufficient to cover any tax or other governmental
charge.
Ownership of each Contract Pool may be evidenced by one or more Classes of
Certificates, each representing the interest in the Contract Pool specified in
the related Prospectus Supplement. Each Series of Certificates may include one
or more Classes ("Subordinated Certificates") which are subordinated in right
of distribution to one or more other Classes ("Senior Certificates"), as
provided in the related Prospectus Supplement. Certificates of a Series which
includes Senior and Subordinated Certificates are referred to herein
collectively as "Senior/Subordinated Certificates." A Series of
Senior/Subordinated Certificates may include one or more Classes ("Mezzanine
Certificates") which are subordinated to one or more Classes of Certificates
and are senior to one or more Classes of Certificates. The Prospectus
Supplement with respect to a Series of Senior/Subordinated Certificates will
set forth, among other things, the extent to which the Subordinated
Certificates are subordinated (which may include a formula for determining the
subordinated amount or for determining the allocation of the Amount Available
(hereinafter defined) among Senior Certificates and Subordinated
Certificates), the allocation of losses among the Classes of Subordinated
Certificates, the period or periods of such subordination, the minimum
subordinated amount, if any, and any distributions or payments which will not
be affected by such subordination. The protection afforded to the Senior
Certificateholders from the subordination feature described above will be
effected by the preferential right of such Certificateholders to receive
current distributions from the Contract Pool. If a Series of Certificates
contains more than one Class of Subordinated Certificates, losses will be
allocated among such Classes in the manner described in the Prospectus
Supplement. If so specified in the applicable Prospectus Supplement, Mezzanine
Certificates or other Classes of Subordinated Certificates may be entitled to
the benefits of other forms of credit enhancement and may, if rated in one of
the four highest rating categories by a nationally recognized statistical
rating organization, be offered pursuant to this Prospectus and such
Prospectus Supplement.
If so specified in a Prospectus Supplement, a Series of Certificates may
include one or more Classes which (i) are entitled to receive distributions
only in respect of principal ("Principal Only Certificates"), interest
("Interest Only Certificates") or any combination thereof, or in specified
proportions in respect of such payments, and/or (ii) are entitled to receive
distributions in respect of principal before or after specified principal
distributions have been made on one or more other Classes within such Series
("Fast Pay/Slow Pay Certificates"), or on a planned amortization schedule
("PAC Certificates") or targeted amortization schedule ("TAC Certificates") or
upon the occurrence of other specified events. The Prospectus Supplement will
set forth the rate at which interest will be paid to Certificateholders of
each Class of a given Series (the "Pass-Through Rate"). Such Pass-Through Rate
may be fixed, variable or adjustable, as specified in the related Prospectus
Supplement.
The related Prospectus Supplement will specify the minimum denomination or
initial principal amount of Contracts evidenced by a single Certificate of
each Class of Certificates of a Series (a "Single Certificate").
Distributions of principal and interest on the Certificates will be made on
the payment dates set forth in the related Prospectus Supplement (each, a
"Payment Date") to the persons in whose names the Certificates are registered
at the close of business on the related record date specified in the related
Prospectus Supplement (the "Record Date"). Distributions will be made by check
mailed to the address of the person entitled thereto as it appears on the
Certificate Register, or, to the extent described in the related Prospectus
Supplement, by wire transfer, except that the final distribution in retirement
of Certificates will be made only upon presentation and surrender of the
Certificates at the office or agency of the Trustee specified in the final
distribution notice to Certificateholders.
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
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nominee for, a depositary (the "Depositary") identified in the related
Prospectus Supplement. The description of the Certificates contained in this
Prospectus assumes that the Certificates will be issued in definitive form. If
the Certificates of a Class are issued in the form of one or more Global
Certificates, the term "Certificateholder" should be understood to refer to
the beneficial owners of the Global Certificates, and the rights of such
Certificateholders will be limited as described under this subheading.
Global Certificates will be issued in registered form. Unless and until it
is exchanged in whole or in part for a Certificate in definitive form, a
Global Certificate may not be transferred except as a whole by the Depositary
for such Global Certificate to a nominee of such Depositary or by a nominee of
such Depositary to such Depositary or another nominee of such Depositary.
The specific terms of the depositary arrangement with respect to any
Certificates of a Class will be described in the related Prospectus
Supplement. It is anticipated that the following provisions will apply to all
depositary arrangements:
Upon the issuance of a Global Certificate, the Depositary for such Global
Certificate will credit, on its book-entry registration and transfer system,
the respective denominations of the Certificates represented by such Global
Certificate to the accounts of institutions that have accounts with such
Depositary ("participants"). Ownership of beneficial interests in a Global
Certificate will be limited to participants or persons that may hold interests
through participants. Ownership of beneficial interests in such Global
Certificate will be shown on, and the transfer of that ownership will be
effected only through, records maintained by the Depositary for such Global
Certificate or by participants or persons that hold through participants. The
laws of some states require that certain purchasers of securities take
physical delivery of such securities in definitive form. Such limits and such
laws may impair the ability to transfer beneficial interests in a Global
Certificate.
So long as the Depositary for a Global Certificate, or its nominee, is the
owner of such Global Certificate, such Depositary or such nominee, as the case
may be, will be considered the sole owner or holder of the Certificates
represented by such Global Certificate for all purposes under the Agreement
relating to such Certificates. Except as set forth below, owners of beneficial
interests in a Global Certificate will not be entitled to have Certificates of
the Series represented by such Global Certificate registered in their names,
will not receive or be entitled to receive physical delivery of Certificates
of such Series in definitive form and will not be considered the owners or
holders thereof under the Agreement governing such Certificates.
Distributions or payments on Certificates registered in the name of or held
by a Depositary or its nominee will be made to the Depositary or its nominee,
as the case may be, as the registered owner for the holder of the Global
Certificate representing such Certificates. In addition, all reports required
under the applicable Agreement to be made to Certificateholders (as described
below under "Reports to Certificateholders") will be delivered to the
Depositary or its nominee, as the case may be. None of the Company, Servicer,
Trustee, or any agent thereof (including any applicable Certificate Registrar
or Paying Agent), will have any responsibility or liability for any aspect of
the records relating to or payments made on account of beneficial ownership
interests in a Global Certificate or for maintaining, supervising or reviewing
any records relating to such beneficial ownership interests or for providing
reports to the related beneficial owners.
The Company expects that the Depositary for Certificates of a Class, upon
receipt of any distribution or payment in respect of a Global Certificate,
will credit immediately participants' accounts with payments in amounts
proportionate to their respective beneficial interest in such Global
Certificate as shown on the records of such Depositary. The Company also
expects that payments by participants to owners of beneficial interests in
such Global Certificate held through such participants will be governed by
standing instructions and customary practices, as is now the case with
securities held for the accounts of customers registered in "street name," and
will be the responsibility of such participants.
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
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Agreement, the Company will cause to be issued Certificates of such Class in
definitive form in exchange for the related Global Certificate or
Certificates. In addition, the Company may at any time and in its sole
discretion determine not to have any Certificates of a Class represented by
one or more Global Certificates and, in such event, will cause to be issued
Certificates of such Class in definitive form in exchange for the related
Global Certificate or Certificates. Further, if the Company so specifies with
respect to the Certificates of a Class, an owner of a beneficial interest in a
Global Certificate representing Certificates of such Class may, on terms
acceptable to the Company and the Depositary for such Global Certificate,
receive Certificates of such Class in definitive form. In any such instance,
an owner of a beneficial interest in a Global Certificate will be entitled to
physical delivery in definitive form of Certificates of the Class represented
by such Global Certificate equal in denominations to such beneficial interest
and to have such Certificates registered in its name.
CONVEYANCE OF CONTRACTS
The Company will transfer, assign, set over and otherwise convey to the
Trustee all right, title and interest of the Company in the Contracts,
including all principal and interest received on or with respect to the
Contracts (other than receipts of principal and interest due on the Contracts
before the Cut-off Date). On behalf of the Trust Fund, as the issuer of the
related Series of Certificates, the Trustee, concurrently with such
conveyance, will execute and deliver the Certificates to the order of the
Company. The Contracts will be as described on a list attached to the
Agreement. Such list will include the amount of monthly payments due on each
Contract as of the date of issuance of the Certificates, the Contract Rate on
each Contract and the maturity date of each Contract. Such list will be
available for inspection by any Certificateholder at the principal executive
office of the Servicer. Prior to the conveyance of the Contracts to the Trust
Fund, the Company's internal audit department will complete a review of all of
the Contract files confirming the accuracy of the list of Contracts delivered
to the Trustee. Any Contract discovered not to agree with such list in a
manner that is materially adverse to the interests of the Certificateholders
will be repurchased or substituted for by the Company, or, if the discrepancy
relates to the unpaid principal balance of a Contract, the Company may deposit
cash in the separate account maintained at an Eligible Institution in the name
of the Trustee (the "Certificate Account") in an amount sufficient to offset
such discrepancy. If the Trust Fund includes a Pre-Funding Account, the
related Prospectus Supplement will specify the conditions that must be
satisfied prior to any transfer of Subsequent Contracts, including the
requisite characteristics of the Subsequent Contracts.
Unless otherwise specified in the related Prospectus Supplement, the Trustee
or its custodian will maintain possession of the Contracts and any other
documents contained in the Contract files. Uniform Commercial Code financing
statements will be filed in Minnesota reflecting the sale and assignment of
the Contracts to the Trustee, and the Company's accounting records and
computer systems will also reflect such sale and assignment.
The counsel to the Company identified in the applicable Prospectus
Supplement will render an opinion to the Trustee that the transfer of the
Contracts from the Company to the related Trust Fund would, in the event the
Company became a debtor under the United States Bankruptcy Code, be treated as
a true sale and not as a pledge to secure borrowings. If, however, the
transfer of the Contracts from the Company to the Trust Fund were treated as a
pledge to secure borrowings by the Company, the distribution of proceeds of
the Contracts to the Trust Fund might be subject to the automatic stay
provisions of the United States Bankruptcy Code, which would delay the
distribution of such proceeds for an uncertain period of time. In addition, a
bankruptcy trustee would have the power to sell the Contracts if the proceeds
of such sale could satisfy the amount of the debt deemed owed by the Company,
or the bankruptcy trustee could substitute other collateral in lieu of the
Contracts to secure such debt, or such debt could be subject to adjustment by
the bankruptcy trustee if the Company were to file for reorganization under
Chapter 11 of the United States Bankruptcy Code.
Except as otherwise specified in the related Prospectus Supplement, the
Company will make certain representations and warranties in the Agreement with
respect to each Contract as of the related Closing Date, including that: (a)
as of the Cut-off Date the most recent scheduled payment was made or was not
delinquent more than 59 days; (b) no provision of a Contract has been waived,
altered or modified in any respect, except by
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instruments or documents included in the Contract file and reflected on the
list of Contracts delivered to the Trustee; (c) each Contract is a legal,
valid and binding obligation of the Obligor and is enforceable in accordance
with its terms (except as may be limited by laws affecting creditors rights
generally); (d) no Contract is subject to any right of rescission, set-off,
counterclaim or defense; (e) each FHA-insured Home Improvement Contract was
originated in accordance with applicable FHA regulations and is insured,
without set-off, surcharge or defense, by FHA Insurance; (f) each Contract was
either (i) entered into by a home improvement contractor in the ordinary
course of such contractor's business and, immediately upon funding, assigned
to the Company, (ii) was originated by a home equity lender in the ordinary
course of such lender's business and assigned to the Company, or (iii) was
originated by the Company directly; (g) no Contract was originated in or is
subject to the laws of any jurisdiction whose laws would make the transfer of
the Contract or an interest therein pursuant to the Agreement or the
Certificates unlawful; (h) each Contract complies with all requirements of
law; (i) no Contract has been satisfied, subordinated to a lower lien ranking
than its original position (if any) or rescinded; (j) each Contract creates a
valid and perfected lien on the related improved real estate; (k) all parties
to each Contract had full legal capacity to execute such Contract; (l) no
Contract has been sold, conveyed and assigned or pledged to any other person
and the Company has good and marketable title to each Contract free and clear
of any encumbrance, equity, loan, pledge, charge, claim or security interest,
and is the sole owner and has full right to transfer such Contract to the
Trustee; (m) as of the Cut-off Date there was no default, breach, violation or
event permitting acceleration under any Contract (except for payment
delinquencies permitted by clause (a) above), no event that with notice and
the expiration of any grace or cure period would constitute a default, breach,
violation or event permitting acceleration under such Contract, and the
Company has not waived any of the foregoing; (n) each Contract is a fully-
amortizing loan with a fixed rate of interest and provides for level payments
over the term of such Contract; (o) each Contract contains customary and
enforceable provisions such as to render the rights and remedies of the holder
thereof adequate for realization against the collateral; (p) the description
of each Contract set forth in the list delivered to the Trustee is true and
correct; (q) there is only one original of each Contract; and (r) each
Contract was originated or purchased in accordance with the Company's then-
current underwriting guidelines.
Under the terms of the Agreement, if the Company becomes aware of a breach
of any such representation or warranty that materially adversely affects the
Trust Fund's interest in any Contract or receives written notice of such a
breach from the Trustee or the Servicer, then the Company will be obligated
either to cure such breach or to repurchase or, if so provided in the related
Prospectus Supplement, substitute for the affected Contract, in each case
under the conditions further described herein and in the Prospectus
Supplement. This repurchase obligation will constitute the sole remedy
available to the Trust Fund and the Certificateholders for a breach of a
representation or warranty under the Agreement with respect to the Contracts
(but not with respect to any other breach by the Company of its obligations
under the Agreement). If a prohibited transaction tax under the REMIC
provisions of the Code is incurred in connection with such repurchase,
distributions otherwise payable to Residual Certificateholders will be applied
to pay such tax. The Company will be required to pay the amount of such tax
that is not funded out of such distributions.
The "Repurchase Price" of a Contract at any time means the outstanding
principal amount of such Contract (without giving effect to any Advances made
by the Servicer or the Trustee), plus interest at the applicable Pass-Through
Rate on such Contract from the end of the Due Period with respect to which the
Obligor last made a payment (without giving effect to any Advances made by the
Servicer or the Trustee) through the end of the immediately preceding Due
Period.
PAYMENTS ON CONTRACTS
Each Certificate Account will be a trust account established by the Servicer
as to each Series of Certificates in the name of the Trustee (i) with a
depository institution, the long-term unsecured debt obligations of which at
the time of any deposit therein are rated within the two highest rating
categories, or such other rating category as will not adversely affect the
ratings assigned to the Certificates, by each rating agency rating the
Certificates of such Series, (ii) with the trust department of a national
bank, (iii) in an account or accounts the deposits in which are fully insured
by the FDIC, (iv) in an account or accounts the deposits in which are insured
by the FDIC (to
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the limits established by the FDIC), the uninsured deposits in which are
otherwise secured such that, as evidenced by an opinion of counsel, the
Certificateholders have a claim with respect to the funds in the Certificate
Account or a perfected first priority security interest against any collateral
securing such funds that is superior to the claims of any other depositors or
general creditors of the depository institution with which the Certificate
Account is maintained or (v) otherwise acceptable to the rating agency without
reduction or withdrawal of the rating assigned to the relevant Certificates.
The collateral eligible to secure amounts in the Certificate Account is
limited to United States government securities and certain other high-quality
investments specified in the applicable Agreement ("Eligible Investments"). A
Certificate Account may be maintained as an interest-bearing account, or the
funds held therein may be invested pending each succeeding Payment Date in
Eligible Investments.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer will deposit in the Certificate Account on a daily basis all proceeds
and collections received or made by it with respect to the related Contracts
subsequent to the Cut-off Date (including scheduled payments of principal and
interest due after the Cut-off Date but received by the Servicer on or before
the Cut-off Date), including:
(i) all Obligor payments on account of principal, including principal
prepayments, on the Contracts;
(ii) all Obligor payments on account of interest on the Contracts;
(iii) all FHA Insurance payments received by the Servicer;
(iv) all amounts received and retained in connection with the liquidation
of defaulted Contracts, net of liquidation expenses ("Net Liquidation
Proceeds");
(v) any Advances made as described under "Advances" below and certain
other amounts required under the Agreement to be deposited in the
Certificate Account;
(vi) all amounts received from any credit enhancement provided with
respect to a Series of Certificates; and
(vii) all proceeds of any Contract or property acquired in respect
thereof repurchased by the Servicer or the Company, as described under
"Conveyance of Contracts" above or under "Repurchase Option" below.
DISTRIBUTIONS ON CERTIFICATES
Except as otherwise provided in the related Prospectus Supplement, on each
Payment Date for a Series of Certificates, the Trustee will withdraw from the
applicable Certificate Account and distribute to the Certificateholders of
such Series of record on the preceding Record Date an amount equal to, in the
aggregate, the "Amount Available" for such Payment Date. Unless otherwise
specified in the applicable Prospectus Supplement, the "Amount Available" for
a Payment Date is an amount equal to the aggregate of all amounts on deposit
in the Certificate Account as of the seventh Business Day following the end of
the related Due Period, or such other date as may be specified in the related
Prospectus Supplement (the "Determination Date") except: (i) all payments on
the Contracts that were due on or before the Cut-off Date; (ii) all payments
or collections received after the Due Period preceding the month in which the
Payment Date occurs; (iii) all scheduled payments of principal and interest
due on a date or dates subsequent to the Due Period preceding the
Determination Date; (iv) amounts representing reimbursement for Advances, such
reimbursement being limited, if so specified in the related Prospectus
Supplement, to amounts received on particular Contracts as late collections of
principal or interest as to which the Servicer has made an unreimbursed
Advance; and (v) amounts representing reimbursement for any unpaid Servicing
Fee. In the case of a Series of Certificates which includes only one Class,
the Amount Available for each Payment Date will be distributed pro rata to the
holders of such Certificates. In the case of any other Series of Certificates,
the Amount Available for each Payment Date will be allocated and distributed
to holders of the Certificates of such Series pursuant to the method and in
the order of priority specified in the applicable Prospectus Supplement. The
amount of principal and interest specified in the related Prospectus
Supplement to be distributed to Certificateholders is referred to herein as
the "Certificate Distribution Amount."
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Within the time specified in the Agreement and described in the related
Prospectus Supplement, the Servicer will furnish a statement to the Trustee
setting forth the amount to be distributed on the related Payment Date on
account of principal and interest, stated separately, and a statement setting
forth certain information with respect to the Contracts.
ADVANCES
Unless otherwise specified in the related Prospectus Supplement, to the
extent that collections on a Contract in any Due Period are less than the
scheduled payment due thereon, the Servicer will be obligated to make an
advance of the uncollected portion of such scheduled payment. The Servicer
will be obligated to advance a delinquent payment on a Contract only to the
extent that the Servicer, in its sole discretion, expects to recoup such
Advance from subsequent collections on the Contract or from liquidation
proceeds thereof. The Servicer will deposit any Advances in the Certificate
Account no later than one Business Day before the following Payment Date. The
Servicer will be entitled to recoup its advances on a Contract from subsequent
payments by or on behalf of the Obligor and from liquidation proceeds
(including FHA Insurance payments, if applicable, or foreclosure resale
proceeds), if any, of the Contract, and will release its right to
reimbursements in conjunction with the purchase of the Contract by the Company
for breach of representations and warranties. If the Servicer determines in
good faith that an amount previously advanced will not ultimately be
recoverable from payments by or on behalf of the Obligor or from liquidation
proceeds (including FHA Insurance payments, if applicable, or foreclosure
resale proceeds), if any, of the Contract (an "Uncollectible Advance"), the
Servicer will be entitled to reimbursement from payments on other Contracts or
from other funds available therefor.
Unless otherwise specified in the related Prospectus Supplement, if the
Servicer fails to make an Advance required under the Agreement, the Trustee
will be obligated to deposit the amount of such Advance in the Certificate
Account on the Payment Date. The Trustee will not, however, be obligated to
deposit any such amount if (i) the Trustee does not expect to recoup such
Advance from subsequent collections on the Contract or from liquidation
proceeds thereof, if any, or (ii) the Trustee determines that it is not
legally able to make such Advance.
EXAMPLE OF DISTRIBUTIONS
The following is an example of the flow of funds as it would relate to a
hypothetical Series of Certificates issued, and with a Cut-off Date occurring,
in March 1998 (all weekdays are assumed to be business days):
<TABLE>
<S> <C> <C>
March 1......................................... (1) Cut-off Date.
March 1-31...................................... (2) Due Period. Servicer
receives scheduled payments
on the Contracts and any
principal prepayments made
by Obligors and applicable
interest thereon.
March 31........................................ (3) Record Date.
April 9......................................... (4) Determination Date.
Distribution amount
determined.
April 15........................................ (5) Payment Date.
</TABLE>
Succeeding months follow the pattern of (2) through (5). The flow of funds
with respect to any Series of Certificates may differ from the above example,
as specified in the related Prospectus Supplement.
- --------
(1) The initial principal balance of the Contract Pool will be the aggregate
principal balance of the Contracts at the close of business on the Cut-off
Date, after deducting principal payments due on or before such date,
which, together with corresponding interest payments, are not part of the
Contract Pool and will not be passed through to Certificateholders.
(2) Scheduled payments and principal prepayments may be received at any time
during this period and will be deposited in the Certificate Account by the
Servicer for distribution to Certificateholders. When a Contract is
prepaid in full, interest on the amount prepaid is collected from the
Obligor only to the date of payment.
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(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 Contracts) against any and all costs, expenses, losses, damages, claims
and liabilities, including reasonable fees and expenses of counsel and
expenses of litigation (a) arising out of or resulting from the use or
ownership by the Company or the Servicer or any affiliate thereof of any real
estate related to a Contract and (b) for any taxes which may at any time be
asserted with respect to, and as of the date of, the conveyance of the
Contracts to the Trust Fund (but not including any federal, state or other tax
arising out of the creation of the Trust Fund and the issuance of the
Certificates).
The Agreement also requires the Servicer, in connection with its duties as
servicer of the Contracts, to defend and indemnify the Trust Fund, the Trustee
and the Certificateholders (which indemnification will survive any removal of
the Servicer as servicer of the Contracts) against any and all costs,
expenses, losses, damages, claims and liabilities, including reasonable fees
and expenses of counsel and expenses of litigation, in respect of any action
taken by the Servicer with respect to any Contract while it was the Servicer.
SERVICING
Pursuant to the Agreement, the Servicer will service and administer the
Contracts assigned to the Trustee as more fully set forth below. The Servicer
will perform diligently all services and duties specified in each Agreement,
in the same manner as prudent lending institutions of home improvement
contracts and home equity loans of the same type as the Contracts in those
jurisdictions where the related real properties are located or as otherwise
specified in the Agreement. The duties to be performed by the Servicer will
include collection and remittance of principal and interest payments,
collection of insurance claims and, if necessary, foreclosure of Contracts.
The Servicer will make reasonable efforts to collect all payments called for
under the Contracts and, consistent with the Agreement and any FHA Insurance,
will follow such collection procedures with respect to the Contracts as it
follows with respect to mortgage loans or contracts serviced by it that are
comparable to the Contracts.
Evidence as to Compliance. Unless otherwise specified in the related
Prospectus Supplement, each Agreement will require the Servicer to deliver to
the Trustee a monthly report prior to each Payment Date, setting forth certain
information regarding the Contract Pool and the Certificates of such Series as
is specified in the related Prospectus Supplement. Each such report to the
Trustee will be accompanied by a statement from an appropriate officer of the
Servicer certifying the accuracy of such report and stating that the Servicer
has not defaulted in the performance of its obligations under the Agreement.
On or before May 1 of each year, the Servicer will deliver to the Trustee a
report of a nationally recognized accounting firm stating that such firm has
examined certain documents and records relating to the servicing of home
improvement contracts and 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.
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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 improvement contracts and 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
Contracts, the Servicer will receive servicing fees ("Servicing Fees") which
include a Monthly Servicing Fee (which the Company may assign) for each Due
Period (paid on the next succeeding Payment Date) equal to 1/12th of the
product of the annual servicing fee rate described in the applicable
Prospectus Supplement and the Pool Scheduled Principal Balance for such
Payment Date. As long as the Company is the Servicer, the Trustee will pay the
Company its Monthly Servicing Fee from any monies remaining after the
Certificateholders have received all payments of principal and interest for
such Payment Date.
The Monthly Servicing Fee provides compensation for customary third-party
servicing activities to be performed by the Servicer for the Trust Fund, for
additional administrative services performed by the Servicer on behalf of the
Trust Fund and for expenses paid by the Servicer on behalf of the Trust Fund.
Customary servicing activities include collecting and recording payments,
communicating with Obligors, investigating payment delinquencies, providing
billing and tax records to Obligors and maintaining internal records with
respect to each Contract. Administrative services performed by the Servicer on
behalf of the Trust Fund include selecting and packaging the Contracts,
calculating distributions to Certificateholders and providing related data
processing and reporting services for Certificateholders and on behalf of the
Trustee. Expenses incurred in connection with servicing of the Contracts and
paid by the Company from its Monthly Servicing Fees include payment of FHA
Insurance premiums, payment of fees and expenses of accountants, payments of
all fees and expenses incurred in connection with the enforcement of Contracts
or foreclosure on collateral relating thereto (including submission of FHA
Insurance claims, if applicable), payment of Trustee's fees, and payment of
expenses incurred in connection with distributions and reports to
Certificateholders, except that the Servicer shall be reimbursed out of the
liquidation proceeds of a liquidated Contract (including FHA Insurance
proceeds) for customary out-of-pocket liquidation expenses incurred by it.
Events of Termination. Except as otherwise specified in the related
Prospectus Supplement, Events of Termination under each Agreement will occur
if (a) the Servicer fails to make any payment or deposit required under the
Agreement (including an Advance) and such failure continues for four business
days; (b) the Servicer fails to observe or perform in any material respect any
other covenant or agreement in the Agreement which continues unremedied for
thirty days; (c) the Servicer conveys, assigns or delegates its duties or
rights under the Agreement, except as specifically permitted under the
Agreement, or attempts to make such a conveyance, assignment or delegation;
(d) a court having jurisdiction in the premises enters a decree or order for
relief in respect of the Servicer in an involuntary case under any applicable
bankruptcy, insolvency or other similar law now or hereafter in effect, or
appoints a receiver, liquidator, assignee, custodian, trustee, or sequestrator
(or similar official) of the Servicer, as the case may be, or enters a decree
or order for any substantial liquidation of its affairs; (e) the Servicer
commences a voluntary case under any applicable bankruptcy, insolvency or
similar law, or consents to the entry of an order for relief in an 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
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<PAGE>
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
Contracts, and the proceeds thereof, whereupon (subject to applicable law
regarding the Trustee's ability to make advances) the Trustee or a successor
Servicer under the Agreement will succeed to all the responsibilities, duties
and liabilities of the Servicer under the Agreement and will be entitled to
similar compensation arrangements; provided, however, that neither the Trustee
nor any successor Servicer will assume any obligation of the Company to
repurchase Contracts for breaches of representations or warranties, and the
Trustee and such successor Servicer will not be liable for any acts or
omissions of the prior Servicer occurring prior to a transfer of the
Servicer's servicing and related functions or for any breach by such Servicer
of any of its obligations contained in the Agreement. In addition, the Trustee
will notify FHA of the Company's termination as Servicer of the Contracts and
will request that the portion of the Company's FHA Insurance reserves
allocable to the FHA-insured Home Improvement Contracts be transferred to the
Trustee or a successor Servicer. See "Description of FHA Insurance."
Notwithstanding such termination, the Servicer shall be entitled to payment of
certain amounts payable to it prior to such termination, for services rendered
prior to such termination. No such termination will affect in any manner the
Company's obligation to repurchase certain Contracts for breaches of
representations or warranties under the Agreement. In the event that the
Trustee would be obligated to succeed the Servicer but is unwilling or unable
so to act, it may appoint, or petition to a court of competent jurisdiction
for the appointment of, a Servicer. Pending such appointment, the Trustee is
obligated to act in such capacity. The Trustee and such successor may agree
upon the servicing compensation to be paid, which in no event may be greater
than the compensation to the Servicer under the Agreement.
The Trustee will be under no obligation to take any action or to institute,
conduct or defend any litigation under the Agreement at the request, order or
direction of any of the Holders of Certificates, unless such
Certificateholders have offered to the Trustee reasonable security or
indemnity against the costs, expenses and liabilities which the Trustee may
incur.
REPORTS TO CERTIFICATEHOLDERS
The Trustee will forward to each Certificateholder on each Payment Date, or
as soon thereafter as is practicable, as specified in the related Prospectus
Supplement, a statement setting forth, among other things:
(a) the amount of such distribution which constitutes Monthly Principal,
specifying the amounts constituting scheduled payments by Obligors,
principal prepayments on the Contracts, and other payments with respect to
the Contracts;
(b) the amount of such distribution which constitutes Monthly Interest;
(c) the remaining Principal Balance represented by such
Certificateholder's interest;
(d) the Company's FHA Insurance reserve amount;
(e) the amount of fees payable out of the Trust Fund;
(f) the Pool Factor (a percentage derived from a fraction the numerator
of which is the remaining Principal Balance of the Certificates and the
denominator of which is the Initial Principal Amount of the Certificates)
immediately before and immediately after such Payment Date;
(g) the number and aggregate principal balance of Contracts delinquent
(i) 31-59 days, (ii) 60-89 and (iii) 90 or more days;
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<PAGE>
(h) the number of Contracts liquidated during the Due Period ending
immediately before such Payment Date;
(i) such customary factual information as is necessary to enable
Certificateholders to prepare their tax returns; and
(j) such other customary factual information available to the Servicer
without unreasonable expense as is necessary to enable Certificateholders
to comply with regulatory requirements.
REPURCHASE OPTION
Unless otherwise specified in the related Prospectus Supplement, each
Agreement will provide that on any Payment Date on which the Pool Scheduled
Principal Balance is less than 10% of the Cut-Off Date Pool Principal Balance,
the Company or the Servicer will have the option to repurchase, on 30 days'
prior written notice to the Trustee, all outstanding Contracts in the related
Contract Pool at a price equal to the greatest of (i) the principal balance of
the Contracts on the prior Payment Date plus 30 days' accrued interest thereon
at the applicable Pass-Through Rate and any delinquent payments of interest
thereon, plus the fair market value (as determined by the Servicer) of any
acquired properties, (ii) the fair market value of all of the assets of the
Trust Fund, and (iii) an amount equal to the Aggregate Certificate Principal
Balance of the related Certificates plus interest on such Certificates payable
on and prior to the Payment Date occurring in the month following such
repurchase (less amounts on deposit in the Certificate Account and available
to pay such principal and interest). Such price will be paid on the Payment
Date on which such purchase occurs to the Certificateholders of record on the
last Business Day of the immediately preceding Due Period in immediately
available funds against the Trustee's delivery of the Contracts and any
acquired properties to the Servicer. The distribution of such purchase price
to Certificateholders will be in lieu of any other distribution to be made on
such Payment Date with respect to the related Contracts.
AMENDMENT
Unless otherwise specified in the related Prospectus Supplement, the
Agreement may be amended by the Company, the Servicer and the Trustee without
the consent of the Certificateholders, (i) to cure any ambiguity, (ii) to
correct or supplement any provision therein that may be inconsistent with any
other provision therein, (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 Contracts which are required to be
distributed on any Certificate may be effective without the consent of the
Holders of each such Certificate.
TERMINATION OF THE AGREEMENT
The obligations created by each Agreement will terminate (after distribution
of all Monthly Principal and Monthly Interest then due to Certificateholders)
on the earlier of (a) the Payment Date next succeeding the later of the final
payment or other liquidation of the last Contract or the disposition of all
property acquired upon foreclosure of any Contract; or (b) the Payment Date on
which the Company or the Servicer repurchases the Contracts as described under
"Description of the Certificates--Repurchase Option." However, the Company's
representations, warranties and indemnities will survive any termination of
the Agreement.
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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 Contract, Contract file or related
documents, and will not be accountable for the use or application by the
Company of any funds paid to the Company, as seller, in consideration of the
conveyance of the Contracts, or deposited into or withdrawn from the
Certificate Account by the Servicer. If no Event of Termination has occurred,
the Trustee will be required to perform only those duties specifically
required of it under the Agreement. However, upon receipt of the various
certificates, reports or other instruments required to be furnished to it, the
Trustee will be required to examine them to determine whether they conform as
to form to the requirements of the Agreement. Whether or not an Event of
Termination has occurred, the Trustee is not required to expend or risk its
own funds or otherwise incur any financial liability in the performance of its
duties or the exercise of its powers if it has reasonable grounds to believe
that repayment of such funds or adequate indemnity against such risk or
liability is not reasonably assured to it.
Under the Agreement, the Servicer agrees to pay to the Trustee on each
Payment Date (a) reasonable compensation for all services rendered by it
thereunder (which compensation shall not be limited by any provision of law in
regard to the compensation of a trustee of an express trust) and (b)
reimbursement for all reasonable expenses, disbursements and advances incurred
or made by the Trustee in accordance with any provision of the Agreement
(including FHA Insurance premiums not paid by the Servicer and reasonable
compensation and the expenses and disbursements of its agents and counsel),
except any such expense, disbursement or advance as may be attributable to the
Trustee's negligence or bad faith. The Company has agreed to indemnify the
Trustee for, and to hold it harmless against, any loss, liability or expense
incurred without negligence or bad faith on its part, arising out of or in
connection with the acceptance or administration of the Trust Fund and the
Trustee's duties thereunder, including the costs and expenses of defending
itself against any claim or liability in connection with the exercise or
performance of any of the Trustee's powers or duties thereunder.
DESCRIPTION OF FHA INSURANCE
Certain of the Home Improvement Contracts may be FHA-insured, the payments
upon which, subject to the following discussion, are insured by the FHA under
Title I of the National Housing Act.
The insurance available to any Trust Fund will be subject to the limit of a
reserve amount equal to 10% of the principal balance of all Title I insured
loans originated or purchased and reported for FHA Insurance by the Company,
which amount will be increased by an amount equal to 10% of the lesser of the
principal balance or the purchase price of insured loans subsequently
originated or purchased of record by the Company. The Company's reserve amount
may be reduced by 10% of the principal balance of any loans reported to FHA as
sold without recourse by the Company. In the Agreement, the Company will agree
to pay all FHA Insurance premiums required by FHA Regulations. If the Company
fails to pay any such premium, the Trustee or the successor Servicer (if any)
with respect to each Series is obligated to pay such premium and is entitled
to be reimbursed by the Company and from collections on the related Home
Improvement Contracts.
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As of December 31, 1997, the Company's FHA Insurance reserve amount was
equal to approximately $ . These insurance reserves were available
to cover losses on approximately $ of FHA-insured manufactured
housing contracts and approximately $ of FHA-insured home
improvement loans, including the FHA-insured Home Improvement Contracts that
may be owned by a Trust Fund. If an Event of Termination (as defined under
"Description of the Certificates--Events of Termination") occurs, each Trustee
will notify FHA of the Company's termination as Servicer of the related FHA-
insured Home Improvement Contracts and will request that the portion of the
Company's FHA Insurance reserves allocable to the FHA-insured Home Improvement
Contracts be transferred to the Trustee or a successor Servicer. Although each
Trustee will request such a transfer of reserves, FHA is not obligated to
comply with such a request, and may determine that it is not in FHA's interest
to permit such transfer of reserves. In addition, FHA has not specified how
insurance reserves might be allocated in such event, and there can be no
assurance that any reserve amount, if transferred to the Trustee or a
successor Servicer, would not be substantially less than 10% of the
outstanding principal amount of the FHA-insured Home Improvement Contracts. It
is likely that the Trustee or any successor Servicer would be the lender of
record on other FHA Title I loans, so that any reserves that are so permitted
to be transferred would become commingled with reserves available for other
FHA Title I loans. FHA also reserves the right to transfer reserves with
"earmarking" (segregating such reserves so that they will not be commingled
with the reserves of the transferee) if it is in FHA's interest to do so.
In general, FHA will insure property improvement loans up to $25,000 for a
single-family property, with a maximum term of 20 years. FHA will insure loans
of up to $17,500 for manufactured homes which qualify as real estate under
applicable state law and loans of up to $12,000 per unit for a $48,000 limit
for four units for owner-occupied multiple-family homes. If the loan amount is
$15,000 or more, FHA requires a drive-by appraisal, the current tax assessment
value, or a full Uniform Residential Appraisal Report dated within 12 months
of the closing to verify the property's value. The maximum loan amount on
transactions requiring an appraisal is the amount of equity in the property
shown by the market value determination of the property. The loan proceeds
must be used for the purposes described in the loan application, and those
improvements must substantially protect or improve the basic livability or
utility of the property. The Secretary of HUD from time to time publishes a
list of ineligible items and activities which may not be financed with the
proceeds of an FHA-insured home improvement loan.
Following a default on an FHA-insured Home Improvement Contract the Servicer
may, subject to certain conditions, either commence foreclosure proceedings
against the improved property securing the loan, if applicable, or submit a
claim to FHA, but may submit a claim to FHA after proceeding against the
improved property only with the prior approval of the Secretary of HUD. The
availability of FHA Insurance following a default on an FHA-insured Home
Improvement Contract is subject to a number of conditions, including strict
compliance by the Company with FHA regulations in originating and servicing
the Home Improvement Contract. Failure to comply with FHA regulations may
result in a denial of or surcharge on the FHA Insurance claim. Prior to
declaring an FHA-insured Home Improvement Contract in default and submitting a
claim to FHA, the Servicer must take certain steps to attempt to cure the
default, including personal contact with the borrower either by telephone or
in a meeting and providing the borrower with 30 days' written notice prior to
declaration of default. FHA may deny insurance coverage if the borrower's
nonpayment is related to a valid objection to faulty contractor performance.
In such event, the Company will seek to obtain payment by or a judgment
against the borrower, and may resubmit the claim to FHA following such a
judgment. As described under "Green Tree Financial Corporation--Contract
Origination," the Company does not purchase a Home Improvement Contract until
the customer verifies satisfactory completion of the work.
Upon submission of a claim to FHA, the related Trust Fund must assign its
entire interest in the Home Improvement Contract to the United States. In
general, the claim payment will equal 90% of the sum of (i) the unpaid
principal amount of the Home Improvement Contract at the date of default and
uncollected interest computed at the Contract Rate earned to the date of
default, (ii) accrued and unpaid interest on the unpaid amount of the Home
Improvement Contract from the date of default to the date of submission of the
claim plus 15 calendar days (but in no event more than nine months) computed
at a rate of 7% per annum, (iii) uncollected
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court costs, (iv) legal fees, not to exceed $500, and (v) expenses for
recording the assignment of the lien to the United States, if applicable.
CERTAIN LEGAL ASPECTS OF THE CONTRACTS; REPURCHASE OBLIGATIONS
As a result of the Company's conveyance and assignment of a pool of
Contracts to a Trust Fund, the Certificateholders of such Series, as the
beneficial owners of the Trust Fund, will succeed collectively to all of the
rights thereunder (including the right to receive payment on the Contracts).
The following discussion contains summaries of certain legal aspects of home
improvement contracts and home equity loans secured by residential properties
which are general in nature. These legal aspects are in addition to the
requirements of FHA regulations described in "Description of FHA Insurance"
with respect to the FHA-insured Home Improvement Contracts. Because such legal
aspects are governed by applicable state law (which laws may differ
substantially), the summaries do not purport to be complete nor to reflect the
laws of any particular state, nor to encompass the laws of all states in which
the real estate securing the Contracts may be situated or which may govern any
Contract. The summaries are qualified in their entirety by reference to the
applicable federal and state laws governing the Contracts.
MORTGAGES AND DEEDS OF TRUST
The Contracts 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 Contracts in any Contract Pool are expected to
be second or third mortgages or deeds of trust which are junior to mortgages
or deeds of trust held by other lenders or institutional investors. The rights
of the related Trust Fund (and therefore the Certificateholders), as
beneficiary under a junior deed of trust or as mortgagee under a junior
mortgage, are subordinate to those of the mortgagee or beneficiary under the
senior mortgage or deed of trust, including the prior rights of the senior
mortgagee or beneficiary to receive hazard insurance and condemnation proceeds
and to cause the property securing the Contract 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
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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 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
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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 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
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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 senior mortgages to the senior mortgagees. Accordingly,
with respect to those Contracts which are second or third mortgage loans, if
the lender purchases the property, the lender's title will be subject to all
senior liens and claims and certain governmental liens.
The proceeds received by the referee or trustee from the sale are applied
first to the costs, fees, and expenses of sale and then in satisfaction of the
indebtedness secured by the mortgage or deed of trust under which the sale was
conducted. Any remaining proceeds are generally payable to the holders of
junior mortgages or deeds of trust and other liens and claims in order of
their priority, whether or not the borrower is in default. Any additional
proceeds are generally payable to the mortgagor or trustor. The payment of the
proceeds to the holders of junior mortgages may occur in the foreclosure
action of the senior mortgagee or may require the institution of separate
legal proceeding.
Some states impose prohibitions or limitations on remedies available to the
mortgagee, including the right to recover the debt from the mortgagor. See "--
Anti-Deficiency Legislation and Other Limitations on Lenders" herein.
In certain jurisdictions, real property transfer or recording taxes or fees
may be imposed on the related Trust Fund with respect to its acquisition (by
foreclosure or otherwise) and disposition of real property securing a
Contract, and any such taxes or fees imposed may reduce liquidation proceeds
with respect to such property, as well as distributions payable to the
Certificateholders.
SECOND OR THIRD MORTGAGES
The Contracts may be secured by second or third mortgages or deeds of trust,
which are junior to first or second mortgages or deeds of trust held by other
lenders. The rights of the Certificateholders as the holders of a junior deed
of trust, junior mortgage, or junior security deed are subordinate in lien and
in payment to those of the holder of the senior mortgage, deed of trust, or
security deed including the prior rights of the senior mortgagee or
beneficiary to receive and apply hazard insurance and condemnation proceeds
and, upon default of the mortgagor 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 Contract. 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
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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 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.
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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 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 CONTRACTS
Numerous Federal and state consumer protection laws impose substantial
requirements upon creditors involved in consumer finance. These laws include
the Federal Truth-in-Lending Act, Regulation "Z", the Equal Credit Opportunity
Act, Regulation "B", the Fair Credit Reporting Act, and related statutes. 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 Contracts included in a
Contract 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.
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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 Contract;
however, the Obligor also may be able to assert the rule to set off remaining
amounts due as a defense against a claim brought by the Trust Fund against
such Obligor. The Home Protection Act provides that assignees of certain high-
interest, non-purchase money mortgage loans (which may include some Contracts)
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 addition to limitations imposed by FHA regulations with
respect to FHA-insured Home Improvement Contracts, in certain states there are
or may be specific limitations upon late charges which a lender may collect
from a borrower for delinquent payments. Under the Agreement, late charges (to
the extent permitted by law and not waived by the Company) will be retained by
the Company as additional servicing compensation.
The standard 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.
It is the Company's practice with some of the Home Improvement Contracts to
defer the first payment thereon for up to 90 days, and to charge the home
improvement contractor points to cover the lost interest due to collecting
only 30 days' interest on the first payment on these deferred payment
contracts.
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"DUE-ON-SALE" CLAUSES
All of the Contract 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
Contracts) 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 Contract which contains a "due-on-sale" clause
upon transfer of an interest in the mortgaged property. This ability to
accelerate will not apply to certain types of transfers, including (i) the
granting of a leasehold interest which has a term of three years or less and
which does not contain an option to purchase, (ii) a transfer to a relative
resulting from the death of a mortgagor or trustor, or a transfer where the
spouse or child(ren) becomes an owner of the mortgaged property in each case
where the transferee(s) will occupy the mortgaged property, (iii) a transfer
resulting from a decree of dissolution of marriage, legal separation agreement
or from an incidental property settlement agreement by which the spouse
becomes an owner of the mortgaged property, (iv) the creation of a lien or
other encumbrance subordinate to the lender's security instrument which does
not relate to a transfer of rights of occupancy in the mortgaged property
(provided that such lien or encumbrance is not created pursuant to a contract
for deed), (v) a transfer by devise, descent or operation of law on the death
of a joint tenant or tenant by the entirety, and (vi) other transfers as set
forth in the Garn-St. Germain Act and the regulations thereunder. As a result,
a lesser number of Contracts which contain "due-on-sale" clauses may extend to
full maturity than earlier experience would indicate with respect to single-
family mortgage loans. The extent of the effect of the Garn-St. Germain Act on
the average lives and delinquency rates of the Contracts, however, cannot be
predicted.
The inability to enforce a due-on-sale clause may result in Contracts
bearing an interest rate below the current market rate being assumed by a new
home buyer rather than being paid off, which may have an impact upon the
average life of the Contracts and the number of Contracts which may be
outstanding until maturity.
Although Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980, as amended ("Title V"), provides that, subject to certain
conditions, state usury limitations shall not apply to FHA-insured loans and
to first mortgage secured conventional contracts if the contract is defined as
a "federally related mortgage loan," a number of states have adopted
legislation overriding Title V's exemptions, as permitted by Title V. The
Company will represent and warrant in each Agreement that all Contracts comply
with any applicable usury limitations.
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
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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
Contracts. 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-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 Contracts. Any shortfall in interest collections
resulting from the application of the Relief Act or similar legislation, which
would not be recoverable from the related Contracts, would result in a
reduction of the amounts distributable to the Certificateholders. In addition,
the Relief Act imposes limitations that would impair the ability of the
Servicer to foreclose on an affected mortgage, deed of trust, 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 Contract which goes into default, there may be delays in
payment on the Certificates in connection therewith. Any other interest
shortfalls, deferrals or forgiveness of payments on the Contracts resulting
from similar legislation or regulations may result in delays in payments or
losses to Certificateholders.
REPURCHASE OBLIGATIONS
Under the Agreement, the Company will represent and warrant that each FHA-
insured Home Improvement Contract was originated in compliance with FHA
regulations and is covered by FHA Insurance. In the event FHA were to deny
insurance coverage on an FHA-insured Home Improvement Contract due to a
violation of FHA regulations in originating or servicing such Home Improvement
Contracts, such violation would constitute
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a breach of a representation and warranty under the Agreement and would create
an obligation of the Company to repurchase such Home Improvement Contract
unless the breach is cured. See "Description of the Certificates--Conveyance
of Contracts."
In addition, the Company will also represent and warrant under each
Agreement that each Contract complies with all requirements of law.
Accordingly, if any Obligor has a claim against the related Trust Fund for
violation of any law and such claim materially adversely affects the Trust
Fund's interest in a Contract, such violation would constitute a breach of a
representation and warranty under the Agreement and would create an obligation
to repurchase such Contract unless the breach is cured. See "Description of
the Certificates--Conveyance of Contracts."
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
imposes certain fiduciary and prohibited transaction restrictions on employee
pension and welfare benefit plans subject to ERISA ("ERISA Plans"). Section
4975 of the Code imposes similar prohibited transaction restrictions on tax-
qualified retirement plans described in Section 401(a) of the Code ("Qualified
Retirement Plans") and on Individual Retirement Accounts ("IRAs") described in
Section 408 of the Code (collectively, "Tax-Favored Plans").
Certain employee benefit plans, such as governmental plans (as defined in
Section 3(32) of ERISA), are not subject to the ERISA requirements discussed
herein. Accordingly, assets of such plans may be invested in Certificates
without regard to the ERISA considerations described below, subject to the
provisions of applicable federal and state law. Any such plan that is a
Qualified Retirement Plan and exempt from taxation under Sections 401(a) and
501(a) of the Code, however, is subject to the prohibited transaction rules
set forth in Section 503 of the Code.
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.
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
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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
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.
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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 Contract is principally secured by
an interest in real property if the fair market value of the real property
securing the Contract is at least equal to either (i) 80% of the issue price
(generally, the principal balance) of the Contract at the time it was
originated or (ii) 80% of the adjusted issue price (the then-outstanding
principal balance, with certain adjustments) of the Contract at the time it is
contributed to a REMIC. The fair market value of the underlying real property
is to be determined after taking into account other liens encumbering that
real property. Alternatively, a Contract is principally secured by an interest
in real property if substantially all of the proceeds of the Contract were
used to acquire or to improve or protect an interest in real property that, at
the origination date, is the only security for the Contract (other than the
personal liability of the obligor). A qualified mortgage also includes a
qualified replacement mortgage that is used to replace any qualified mortgage
within three months of the Startup Day or to replace a defective mortgage
within two years of the Startup Day.
"Permitted investments" consist of (a) temporary investments of cash
received under qualified mortgages before distribution to holders of interests
in the REMIC ("cash-flow investments"), (b) amounts, such as a Reserve Fund,
if any, reasonably required to provide for full payment of expenses of the
REMIC, the principal and interest due on regular or residual interests in the
event of defaults on qualified mortgages, lower than expected returns on cash-
flow investments, prepayment interest shortfalls or certain other
contingencies ("qualified reserve assets"), and (c) certain property acquired
as a result of foreclosure of defaulted qualified mortgages ("foreclosure
property"). A reserve fund will not be qualified if more than 30% of the gross
income from the assets in the reserve fund is derived from the sale or other
disposition of property held for three months or less, unless such sale is
necessary to prevent a default in payment of principal or interest on Regular
Certificates. In accordance with Section 860G(a)(7) of the Code, a reserve
fund must be "promptly and appropriately" reduced as payments on contracts are
received. Foreclosure property will be a permitted investment only to the
extent that such property is not held for more than two years.
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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."
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
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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 Contracts 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
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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.
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
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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 Contract 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 Contracts will occur in such a manner that the initial
Pass-Through Rate for a Certificate will not change. Accordingly, interest at
the initial Pass-Through Rate will constitute qualified stated interest
payments for purposes of applying the original issue discount provisions of
the Code. In general, the issue price of a Regular Certificate is the first
price at which a substantial amount of the Regular Certificates of such class
are sold for money to the public (excluding bond houses, brokers or similar
persons or organizations acting in the capacity of underwriters, placement
agents or wholesalers). If a portion of the initial offering price of a
Regular Certificate is allocable to interest that has accrued prior to its
date of issue, the issue price of such a Regular Certificate 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 amount of payments other than payments of qualified stated
interest made during each prior accrual period. The Code requires the present
value of the remaining payments to be determined on the bases of (a) the
original yield to maturity (determined on the basis of compounding at the
close of each accrual period and properly adjusted for the length of the
accrual period), (b) events, including actual prepayments, which have occurred
before the close of the accrual period, and (c) the assumption that the
remaining payments will be made in accordance with the original Prepayment
Assumption. The effect of this method is to increase the portions of original
issue discount that a Regular Certificateholder must include in income to take
into account prepayments with respect to the Contracts held by the Trust Fund
that occur at a rate that exceeds the Prepayment Assumption and to decrease
(but not below zero for any period) the portions of original issue discount
that a Regular Certificateholder must include in income to take into account
prepayments with respect to the Contracts that occur at a rate that is slower
than
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the Prepayment Assumption. Although original issue discount will be reported
to Regular Certificateholders based on the Prepayment Assumption, no
representation is made to Regular Certificateholders that the Contracts will
be prepaid at that rate or at any other rate.
A subsequent purchaser of a Regular Certificate will also be required to
include in such purchaser's ordinary gross income for federal income tax
purposes the original issue discount, if any, accruing with respect to such
Regular Certificate, unless the price paid equals or exceeds the Regular
Certificate's 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.
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
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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.
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.
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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 Contracts, 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 Contracts,
other administrative expenses of a REMIC, and amortization of premium, if any,
with respect to the Contracts.
The taxable income recognized by a Residual Holder in any taxable year will
be affected by, among other factors, the relationship between the timing of
interest, original issue discount or market discount income, or amortization
of premium with respect to the Contracts, on the one hand, and the timing of
deductions for interest (including original issue discount) on the Regular
Certificates, on the other hand. In the event that an interest in the
Contracts is acquired by a REMIC at a discount, and one or more of such
Contracts is prepaid, the Residual Holder may recognize taxable income without
being entitled to receive a corresponding cash distribution because (i) the
prepayment may be used in whole or in part to make distributions on Regular
Certificates, and (ii) the discount on the Contracts which is includable in a
REMIC's income may exceed its deduction with respect to the distributions on
those Regular Certificates. When there is more than one class of Regular
Certificates that
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receive payments sequentially (i.e., a fast-pay, slow-pay structure), this
mismatching of income and deductions is particularly likely to occur in the
early years following issuance of the Regular Certificates, when distributions
are being made in respect of earlier classes of Regular Certificates to the
extent that such classes are not issued with substantial discount. If taxable
income attributable to such a mismatching is realized, in general, losses
would be allowed in later years as distributions on the later classes of
Regular Certificates are made. Taxable income may also be greater in earlier
years than in later years as a result of the fact that interest expense
deductions, expressed as a percentage of the outstanding principal amount of
Regular Certificates, may increase over time as distributions are made on the
lower yielding classes of Regular Certificates, whereas interest income with
respect to any given Contract will remain constant over time as a percentage
of the outstanding principal amount of that loan (assuming it bears interest
at a fixed rate). Consequently, Residual Holders must have sufficient other
sources of cash to pay any federal, state, or local income taxes due as a
result of such mismatching, or such holders must have unrelated deductions
against which to offset such income, subject to the discussion of "excess
inclusions" below under "REMIC Series--Limitations on Offset or Exemption of
REMIC Income." The mismatching of income and deductions described in this
paragraph, if present with respect to a series of Certificates, may have a
significant adverse effect upon the Residual Holder's after-tax rate of
return.
The amount of any net loss of a REMIC that may be taken into account by the
Residual Holder is limited to the adjusted basis of the Residual Certificate
as of the close of the quarter (or time of disposition of the Residual
Certificate if earlier), determined without taking into account the net loss
for the quarter. The initial adjusted basis of a purchaser of a Residual
Certificate is the amount paid for such Residual Certificate. Such adjusted
basis will be increased by the amount of taxable income of the REMIC
reportable by the Residual Holder and decreased (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 Contracts, 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 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 Contracts if,
in general, the basis of the REMIC in such Contracts is exceeded by their
unpaid principal balances. The REMIC's basis in such Contracts is generally
the fair market value of the Contracts immediately after the transfer thereof
to the REMIC (which 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
Contracts that have market
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discount to which Code Section 1276 applies, the accrued portion of such
market discount would be recognized currently as an item of ordinary income.
Market discount income generally should accrue in the manner described above
under "REMIC Series--Market Discount."
Generally, if the basis of a REMIC in the Contracts exceeds the unpaid
principal balances thereof, the REMIC will be considered to have acquired such
Contracts at a premium equal to the amount of such excess. As stated above,
the REMIC's basis in the Contracts is the fair market value of the Contracts
immediately after the transfer thereof to the REMIC. Generally, a REMIC that
holds a Contract as a capital asset will elect to amortize premium on the
Contracts under a constant interest method. See the discussion under "REMIC
Series--Amortizable Premium."
Limitations on Offset or Exemption of REMIC Income. 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 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)
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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 taxable years beginning after December 31, 1997,
notwithstanding the preceding two sentences, in the case of a REMIC Residual
Certificate held by an "electing large partnership," all interests in such
partnership shall be treated as held by disqualified organizations (without
regard to whether the recordholders of the partnership furnish statements
described in the preceding sentence) and the amount that is subject to tax
under the second preceding sentence is excluded from the gross income of the
partnership allocated to the partners (in lieu of allocating to the partners a
deduction for such tax paid by the partnership).
For these purposes, a "Pass-Through Entity" means any regulated investment
company, real estate investment trust, common trust fund, partnership, trust
or estate and certain corporations operating on a cooperative basis. Except as
may be provided in Treasury Regulations, any person holding an interest in a
Pass-Through Entity as a nominee for another will, with respect to such
interest, be treated as a Pass-Through Entity.
Noneconomic Residual Interests. The REMIC Regulations would disregard
certain transfers of Residual Certificates, in which case the transferor would
continue to be treated as the owner of the Residual Certificates and thus
would continue to be subject to tax on its allocable portion of the net income
of the REMIC. Under the REMIC Regulations, a transfer of a "noneconomic
residual interest" (as defined below) to a Residual Holder is disregarded for
all federal income tax purposes if a significant purpose of the transfer is to
enable the transferor to impede the assessment or collection of tax. A
residual interest in a REMIC (including a residual interest with a positive
value at issuance) is a "noneconomic residual interest" unless, at the time of
transfer, (i) the present value of the expected future distributions on the
residual interest at least equals the product of the present value of the
anticipated excess inclusions and the highest corporate income tax rate in
effect for the year in which the transfer occurs, and (ii) the transferor
reasonably expects that the transferee will receive distributions from the
REMIC at or after the time at which taxes accrue on the anticipated excess
inclusions in an amount sufficient to satisfy the accrued taxes. The
anticipated excess inclusions and the present value rate are determined in the
same manner as set forth above. The REMIC Regulations explain that a
significant purpose to impede the assessment or collection of tax exists if
the transferor, at the time of the transfer, either knew or should have known
that the transferee would be unwilling or unable to pay taxes due on its share
of the taxable income of the REMIC. A safe harbor is provided if (i) the
transferor conducted, at the time of the transfer, a reasonable investigation
of the financial condition of the transferee and found that the transferee
historically had paid its debts as they came due and found no significant
evidence to indicate that the transferee would not continue to pay its debts
as they came due in the future, and (ii) the transferee represents to the
transferor that it understands that, as the holder of a non-economic residual
interest, the transferee may incur tax liabilities in excess of any cash flows
generated by the interest and that the transferee intends to pay taxes
associated with holding the residual interest as they become due. The
Agreement with respect to each series of REMIC Certificates will require the
transferee of a
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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 Contract occasioned by default or a
reasonably foreseeable default of the Contract, the assumption of the
Contract, the waiver of a due-on-sale clause or the conversion of an interest
rate by an Obligor pursuant to the terms of a convertible adjustable-rate
Contract will not be treated as a disposition of the Contract. In the event
that a REMIC holds Convertible ARM Loans which are convertible at the option
of the Obligor into fixed-rate, fully amortizing, level payment Contracts, a
sale of such Contracts by the REMIC pursuant to a purchase agreement or other
contract with the Company or other party, if and when the Obligor elects to so
convert the terms of the Contract, 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 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
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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 (except, in the case of a
partnership, to the extent provided in regulations), (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. To the extent prescribed in regulations by
the Secretary of the Treasury, which regulations have not yet been issued, a
trust which was in existence on August 20, 1996 (other than a trust treated as
owned by the grantor under Subpart E of Part I of Subchapter J of Chapter 1 of
the Code), and which was treated as a United States person on August 19, 1996,
may elect to continue to be treated as a United States person notwithstanding
the previous sentence. 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.
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Unless otherwise stated in the related Prospectus Supplement, transfers of
Residual Certificates to Foreign Holders will be prohibited by the related
Agreement.
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 Contract Pool and the arrangement to be
administered by the Company under which the Trustee will hold and the Company
will be obligated to service the Contracts and pursuant to which Non-REMIC
Certificates will be issued to Non-REMIC Certificateholders will not be
classified as an association taxable as a corporation or a "taxable mortgage
pool", within the meaning of Code Section 7701(i), but rather will be
classified as a grantor trust under Subpart E, Part I of Subchapter J of
Chapter 1 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 Contract Pool in which
its Certificate evidences an ownership interest and will be considered the
equitable owner of a pro rata undivided interest in each of the Contracts
included therein. The following discussion assumes the Trust Fund will be so
classified as a grantor trust.
Tax Status of 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
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the related Prospectus Supplement for a discussion of the treatment of Non-
REMIC Certificates and Contracts under these Code sections and should, in
addition, consult with their own tax advisors with respect to these matters.
Tax Treatment of Non-REMIC Certificates. 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 Contracts comprising such Contract 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 Contracts. (For purposes of this discussion,
the term "disposition," when used with respect to the Contracts, includes
scheduled or prepaid collections with respect to the Contracts, as well as the
sale or exchange of a 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 Contracts to the
extent permitted under the Code.
To the extent that any of the Contracts comprising a Contract Pool were
originated on or after March 2, 1984 and under circumstances giving rise to
original issue discount, Certificateholders will be required to report
annually an amount of additional interest income attributable to such discount
in such Contracts prior to receipt of cash related to such discount. To the
extent that the Non-REMIC Certificates represent an interest in any pool of
debt instruments the yield on which may be affected by reason of prepayments,
for taxable years beginning after August 5, 1997, a prepayment assumption must
be used with respect to the Contracts comprising the Contract Pool in
computing the accrual of any original issue discount, market discount or
amortizable premiums. See the discussion above under "REMIC Series--Original
Issue Discount." Similarly, Code provisions concerning market discount and
amortizable premium will apply to the Contracts comprising a Contract Pool to
the extent that the loans were originated after July 18, 1984 and September
27, 1985, respectively. See the discussions above under "REMIC Series--Market
Discount" and "REMIC Series--Amortizable Premium." It is unclear whether a
prepayment assumption would be applicable in accruing or amortizing any such
original issue or market discount or premium with respect to Non-REMIC
Certificates that do not represent an interest in any pool of debt instruments
the yield on which may be affected by reason of prepayments, or for taxable
years beginning prior to August 5, 1997.
Stripped Non-REMIC Certificates. Certain classes of Non-REMIC Certificates
may be subject to the stripped bond rules of Section 1286 of the Code and for
purposes of this discussion will be referred to as "Stripped Certificates." In
general, a Stripped Certificate will be subject to the stripped bond rules
where there has been a separation of ownership of the right to receive some or
all of the principal payments on a Contract from ownership of the right to
receive some or all of the related interest payments. Non-REMIC Certificates
will
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constitute Stripped Certificates and will be subject to these rules under
various circumstances, including the following: (i) if any servicing
compensation is deemed to exceed a reasonable amount; (ii) if the Company or
any other party retains a Retained Yield with respect to the Contracts
comprising a Contract Pool; (iii) if two or more classes of Non-REMIC
Certificates are issued representing the right to non-pro rata percentages of
the interest or principal payments on the Contracts; or (iv) if Non-REMIC
Certificates are issued which represent the right to interest only payments or
principal only payments.
Although not entirely clear, each Stripped Certificate should be considered
to be a single debt instrument issued on the day it is purchased for purposes
of calculating any original issue discount. Original issue discount with
respect to a Stripped Certificate, if any, must be included in ordinary gross
income for federal income tax purposes as it accrues in accordance with the
constant-yield method that takes into account the compounding of interest and
such accrual of income may be in advance of the receipt of any cash
attributable to such income. See "REMIC Series--Original Issue Discount"
above. For purposes of applying the original issue discount provisions of the
Code, the issue price of a Stripped Certificate will be the purchase price
paid by each holder thereof and the stated redemption price at maturity may
include the aggregate amount of all payments to be made with respect to the
Stripped Certificate whether or not denominated as interest. The amount of
original issue discount with respect to a Stripped Certificate may be treated
as zero under the original issue discount de minimis rules described above. A
purchaser of a Stripped Certificate will be required to account for any
discount on the certificate as market discount rather than original issue
discount if either (i) the amount of original issue discount with respect to
the certificate was treated as zero under the original issue discount de
minimis rule when the certificate was stripped or (ii) no more than 100 basis
points (including any amount of servicing in excess of reasonable servicing)
is stripped off of the Contracts. See "REMIC Series--Market Discount" above.
To the extent the Stripped Certificates represent an interest in any pool of
debt instrument the yield on which may by affected by reason of prepayments,
for taxable years beginning after August 5, 1997, a prepayment assumption must
be used in computing yield on the underlying assets of a Trust Fund with
respect to which a REMIC election is not made. It is unclear whether a
prepayment assumption would be applicable to the Stripped Certificates that do
not represent an interest in any such pool or for taxable years beginning
prior to August 5, 1997. 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 that do not
represent an interest in a pool of debt instruments the yield on which may be
affected by reason of prepayments or for taxable years beginning prior to
August 5, 1997. In the absence of authority to the contrary, the Company
intends to base information reports and returns to the Service and the holders
of Stripped Certificates taking into account an appropriate prepayment
assumption. Holders of Stripped Certificates should refer to the related
Prospectus Supplement to determine whether and in what manner the original
issue discount rules will apply thereto.
When an investor purchases more than one class of Stripped Certificates it
is currently unclear whether for federal income tax purposes such classes of
Stripped Certificates should be treated separately or aggregated for purposes
of applying the original issue discount rules described above.
It is possible that the Service may take a contrary position with respect to
some or all of the foregoing tax consequences. For example, a holder of a
Stripped Certificate may be treated as the owner of (i) as many stripped bonds
or stripped coupons as there are scheduled payments of principal and/or
interest on each Contract or (ii) a separate installment obligation for each
Contract representing the Stripped Certificate's pro rata share of principal
and/or interest payments to be made with respect thereto. As a result of these
possible alternative characterizations, investors should consult their own tax
advisors regarding the proper treatment of Stripped Certificates for federal
income tax purposes.
The servicing compensation to be received by the Company and the fee for
credit enhancement, if any, may be questioned by the Service with respect to
certain Certificates or Contracts as exceeding a reasonable fee for the
services being performed in exchange therefor, and a portion of such servicing
compensation could be
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recharacterized as an ownership interest retained by the Company or other
party in a portion of the interest payments to be made pursuant to the
Contracts. In this event, a Certificate might be treated as a Stripped
Certificate subject to the stripped bond rules of Section 1286 of the Code and
the original issue discount provisions rather than to the market discount and
premium rules.
Gain or Loss on Disposition. Upon sale or exchange of a Non-REMIC
Certificate, a Non-REMIC Certificateholder will recognize gain or loss equal
to the difference between the amount realized in the sale and its aggregate
adjusted basis in the Contracts represented by the Non-REMIC Certificate.
Generally, the aggregate adjusted basis will equal the Non-REMIC
Certificateholder's cost for the Non-REMIC Certificate increased by the amount
of any previously reported 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
Series--Taxation of Certain Foreign Investors") will be treated as "portfolio
interest" and therefore will be exempt from the 30% withholding tax. Such Non-
REMIC Certificateholder will be entitled to receive interest payments and
original issue discount on the Non-REMIC Certificates free of United States
federal income tax, but only to the extent the Contracts were originated after
July 18, 1984 and provided that such Non-REMIC Certificateholder periodically
provides the Trustee (or other person who would otherwise be required to
withhold tax) with a statement certifying under penalty of perjury that such
Non-REMIC Certificateholder is not a United States person and providing the
name and address of such Non-REMIC Certificateholder. For additional
information concerning interest or original issue discount paid by the Company
to a Foreign Holder and the treatment of a sale or exchange of a Non-REMIC
Certificate by a Foreign Holder, which will generally have the same tax
consequences as the sale of a Regular Certificate, see the discussion above
under "REMIC Series--Taxation of Certain Foreign Investors."
Tax Administration and Reporting. The Company will furnish to each Non-REMIC
Certificateholder with each distribution a statement setting forth the amount
of such distribution allocable to principal and to interest. In addition, the
Company will furnish, within a reasonable time after the end of each calendar
year, to each Non-REMIC Certificateholder who was a Certificateholder at any
time during such year, information regarding the amount of servicing
compensation received by the Company and any sub-servicer and such other
customary factual information as the Company deems necessary or desirable to
enable Certificateholders to prepare their tax returns. Reports will be made
annually to the Service and to holders of record that are not excepted from
the reporting requirements regarding information as may be required with
respect to interest and original issue discount, if any, with respect to the
Non-REMIC Certificates.
OTHER TAX CONSEQUENCES
No advice has been received as to local income, franchise, personal
property, or other taxation in any state or locality, or as to the tax effect
of ownership of Certificates in any state or locality. Certificateholders are
advised to consult their own tax advisors with respect to any state or local
income, franchise, personal property, or other tax consequences arising out of
their ownership of Certificates.
LEGAL INVESTMENT CONSIDERATIONS
Unless otherwise indicated in the applicable Prospectus Supplement, any
Certificates offered hereby are not expected to constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA") because there will be a substantial number of Contracts that
are secured
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by liens on real estate that are not first liens, as required by SMMEA.
Accordingly, many institutions with legal authority to invest in "mortgage
related securities" may not be legally authorized to invest in the
Certificates.
The Federal Financial Institutions Examination Council, The Federal Deposit
Insurance Corporation, the Office of Thrift Supervision, the Office of the
Comptroller of the Currency and the National Credit Union Administration have
proposed or adopted guidelines regarding investment in various types of
mortgage-backed securities. In addition, certain state regulators have taken
positions that may prohibit regulated institutions subject to their
jurisdiction from holding securities representing residual interests,
including securities previously purchased. There may be other restrictions on
the ability of certain investors, including depository institutions, either to
purchase Certificates or to purchase Certificates representing more than a
specified percentage of the investor's assets. Investors should consult their
own legal advisors in determining whether and to what extent the Certificates
constitute legal investments for such investors.
RATINGS
It is a condition precedent to the issuance of any Class of Certificates
sold under this Prospectus that they be rated by at least one nationally
recognized statistical rating organization in one of its four highest rating
categories (within which there may be sub-categories or gradations indicating
relative standing). A security rating is not a recommendation to buy, sell or
hold securities and may be subject to revision or withdrawal at any time by
the assigning rating agency. The security rating of any Series of Certificates
should be evaluated independently of similar security ratings assigned to
other kinds of securities.
UNDERWRITING
The Company may sell Certificates of each Series to or through underwriters
(the "Underwriters") by a negotiated firm commitment underwriting and public
reoffering by the Underwriters, and also may sell and place Certificates
directly to other purchasers or through agents. The Company intends that
Certificates will be offered through such various methods from time to time
and that offerings may be made concurrently through more than one of these
methods or that an offering of a particular Series of Certificates may be made
through a combination of such methods.
The distribution of the Certificates may be effected from time to time in
one or more transactions at a fixed price or prices, which may be changed, or
at market prices prevailing at the time of sale, at prices related to such
prevailing market prices or at negotiated prices.
If so specified in the Prospectus Supplement relating to a Series of
Certificates, the Company or any affiliate thereof may purchase some or all of
one or more Classes of Certificates of such Series from the Underwriter or
Underwriters at a price specified in such Prospectus Supplement. Such
purchaser may thereafter from time to time offer and sell, pursuant to this
Prospectus, some or all of such Certificates so purchased directly, through
one or more Underwriters to be designated at the time of the offering of such
Certificates or through broker-dealers acting as agent and/or principal. Such
offering may be restricted in the manner specified in such Prospectus
Supplement. Such transactions may be effected at market prices prevailing at
the time of sale, at negotiated prices or at fixed prices.
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
56
<PAGE>
may be deemed to be underwriting discounts and commissions, under the
Securities Act of 1933, as amended (the "Securities Act"). Any such
Underwriters or agents will be identified, and any such compensation received
from the Company will be described, in the Prospectus Supplement.
Under agreements which may be entered into by the Company, Underwriters and
agents who participate in the distribution of the Certificates may be entitled
to indemnification by the Company against certain liabilities, including
liabilities under the Securities Act.
If so indicated in the Prospectus Supplement, the Company will authorize
Underwriters or other persons acting as the Company's agents to solicit offers
by certain institutions to purchase the Certificates from the Company pursuant
to contracts providing for payment and delivery on a future date. Institutions
with which such contracts may be made include commercial and savings banks,
insurance companies, pension funds, investment companies, educational
charitable institutions and others, but in all cases such institutions must be
approved by the Company. The obligation of any purchaser under any such
contract will be subject to the condition that the purchaser of the offered
Certificates shall not at the time of delivery be prohibited under the laws of
the jurisdiction to which such purchaser is subject from purchasing such
Certificates. The Underwriters and such other agents will not have
responsibility in respect of the validity or performance of such contracts.
The Underwriters may, from time to time, buy and sell Certificates, but
there can be no assurance that an active secondary market will develop and
there is no assurance that any such market, if established, will continue.
Certain of the Underwriters and their associates may engage in transactions
with and perform services for the Company in the ordinary course of business.
LEGAL MATTERS
The legality and material federal income tax consequences of the
Certificates will be passed upon for the Company by the counsel to the Company
identified in the applicable Prospectus Supplement.
EXPERTS
The consolidated financial statements of the Company as of December 31, 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.
57
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANYSTATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION--PRELIMINARY PROSPECTUS DATED FEBRUARY 17, 1998
SECURED HOME
IMPROVEMENT LOANS
GREEN TREE FINANCIAL CORPORATION, SELLER AND SERVICER
CERTIFICATES FOR HOME IMPROVEMENT AND HOME EQUITY LOANS
(ISSUABLE IN SERIES)
Certificates for Home Improvement and 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 (i) home
improvement contracts and promissory notes (the "Home Improvement Contracts")
and (ii) closed-end home equity loans (the "Home Equity Contracts," and,
together with the Home Improvement Contracts, collectively the "Contracts"), as
more particularly described herein, and liens on the related real estate.
Except as otherwise specified in the related Prospectus Supplement, the
Contracts will have been originated in the ordinary course of business by Green
Tree Financial Corporation (the "Company"). Specific information, to the extent
available, regarding the size and composition of the pool of Contracts relating
to each Series of Certificates will be set forth in the related Prospectus
Supplement. If specified in the related Prospectus Supplement, a pool insurance
policy, letter of credit, surety bond, guarantee of the Company, cash reserve
fund, or other form of credit enhancement, or any combination thereof, may be
provided with respect to a Series of Certificates, or one or more Classes of
such Series, evidencing interests in the Contracts. The Company will act as
Servicer (in such capacity referred to herein as the "Servicer") of the
Contracts.
Each Series of Certificates may include one or more senior Classes of
Certificates (the "Senior Certificates") and one or more subordinate Classes of
Certificates (the "Subordinated Certificates"). A Series of Senior/Subordinated
Certificates may include one or more Classes ("Mezzanine Certificates") which
are subordinated to one or more Classes of Certificates and are senior to one
or more Classes of Certificates. Certificates of a Series may be divided into
two or more Classes which (i) represent interests in specified percentages
(which may be 0%) of principal or interest, or both, in distributions on the
pool of Contracts relating to such Series, as specified in the related
Prospectus Supplement, and/or (ii) are entitled to receive distributions in
respect of principal before or after specified principal distributions have
been made on one or more other Classes within such Series, or on a planned or
targeted amortization schedule or upon the occurrence of other specified
events. Each Prospectus Supplement will describe the Series and Class or
Classes of Certificates offered thereby.
The Prospectus Supplement will set forth the Pass-Through Rate that will be
paid to Certificateholders of each Class of a given Series. Such Pass-Through
Rate may be fixed, variable or adjustable, as specified in the related
Prospectus Supplement.
Except as otherwise specified in the related Prospectus Supplement, the only
obligations of the Company with respect to a Series of Certificates will be
pursuant to certain limited representations and warranties. Except as otherwise
specified in the related Prospectus Supplement, the Servicer's obligations with
respect to the Certificates evidencing interests in a pool of Contracts are
limited to its contractual servicing obligations. If so specified in the
related Prospectus Supplement, the Servicer may be obligated, under certain
terms and conditions, to advance the amount of any delinquent payments of
principal and interest during the immediately preceding Due Period (as defined
herein), but only to the extent the Servicer determines such advances are
recoverable from future payments and collections on the delinquent Contracts.
See "Description of the Certificates--Advances" and "--Distributions on
Certificates."
There will have been no public market for any Certificates sold hereunder
prior to the offering thereof and there is no assurance that any such market
will develop. The Underwriters named in the Prospectus Supplement relating to a
Series may from time to time buy and sell Certificates of such Series, but
there can be no assurance that an active secondary market therefor will
develop, and there is no assurance that any such market, if established, will
continue.
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 , 1998.
<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 (as amended on February , 1998), Quarterly Reports on Form
10-Q for the periods ended March 31, June 30, and September 30, 1997, and
Current Report on Form 8-K dated January 27, 1998, which have been filed with
the Commission, are hereby incorporated by reference in this Prospectus and
the related Prospectus Supplement.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act, subsequent to the date of this Prospectus and prior
to the termination of the offering of the Certificates, shall
2
<PAGE>
be deemed to be incorporated by reference into this Prospectus and the
Prospectus Supplement relating to a Class of Certificates that is supported by
a guarantee of the Company, and to be a part thereof from the respective dates
of filing of such documents. Any statement contained herein or in a document
all or any portion of which is incorporated or deemed to be incorporated by
reference herein shall be deemed to be modified or superseded for purposes of
this Prospectus to the extent that a statement contained herein or in any
other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.
The Company will provide without charge to any person to whom this
Prospectus is delivered, upon the written or oral request of such person, a
copy of any or all of the foregoing documents incorporated herein by reference
(other than certain exhibits to such documents). Requests for such copies
should be directed to John Dolphin, Vice President and Director of Investor
Relations, 1100 Landmark Towers, 345 St. Peter Street, St. Paul, Minnesota
55102-1639, telephone number (612) 293-3400.
3
<PAGE>
SUMMARY OF TERMS
This summary is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus and in the accompanying
Prospectus Supplement.
Title of Securities.......... Certificates for Home Improvement and Home Eq-
uity Loans (Issuable in Series) (the "Certifi-
cates").
Seller....................... Green Tree Financial Corporation (in such capac-
ity referred to herein as the "Company").
Servicer..................... Green Tree Financial Corporation (in such capac-
ity referred to herein as the "Servicer," which
term shall include any successor to Green Tree
Financial Corporation in such capacity under
the applicable Agreement (as defined herein)).
Risk Factors................. Certain special considerations are particularly
relevant to a decision to invest in any Certif-
icates sold hereunder. See "Risk Factors" here-
in.
Securities Offered........... Certificates evidencing interests in pools of
Contracts (as defined herein) may be issued
from time to time in one or more series (each,
a "Series") pursuant to separate Pooling and
Servicing Agreements (each, an "Agreement") be-
tween the Company, as Seller and Servicer, and
the Trustee specified in the related Prospectus
Supplement for such Series of Certificates (the
"Trustee").
The Contracts................ The Contracts underlying a Series of Certifi-
cates (the "Contract Pool") will be fixed or
variable rate Contracts. Such Contracts, as
specified in the related Prospectus Supplement,
will consist of (1) home improvement contracts
and promissory notes (the "Home Improvement
Contracts"), which will be either conventional
contracts or contracts insured by the Federal
Housing Administration ("FHA") pursuant to Ti-
tle I of the National Housing Act ("Title I"),
and (2) closed-end home equity loans (the "Home
Equity Contracts"). Each Contract will be se-
cured by the related real estate. If so speci-
fied in the related Prospectus Supplement, the
Contract Pool may be divided into two or more
sub-pools, in which event the Certificates of
certain specified Classes may be payable pri-
marily from, and in respect of, the Contracts
comprising a given sub-pool.
The Prospectus Supplement for each Series will
provide information with respect to (i) the ag-
gregate principal balance of the Contracts com-
prising the Contract Pool, as of the date spec-
ified in the Prospectus Supplement (the "Cut-
off Date"); (ii) the weighted average and range
of contractual rates of interest (each, a "Con-
tract Rate") on the Contracts; (iii) the
weighted average and ranges of terms to sched-
uled maturity of the Contracts as of origina-
tion and as of the Cut-off Date; (iv) the per-
centage of the Contracts that are Home Improve-
ment Contracts and Home Equity Contracts, re-
spectively; (v) the percentage of Contracts
that are FHA-insured; (vi) the average out-
standing
4
<PAGE>
principal balance of the Contracts as of the
Cut-off Date; and (vii) the geographic location
of improved real estate underlying the Con-
tracts. In addition, if so specified in the re-
lated Prospectus Supplement, additional Con-
tracts may be purchased from the Company during
the Pre-Funding Period specified in the related
Prospectus Supplement, from funds on deposit in
a Pre-Funding Account.
Except as otherwise specified in the related
Prospectus Supplement, the Contracts will have
been originated by the Company on an individual
basis in the ordinary course of its business.
Description of Certificates.. The Certificates of each Series may be issued in
one or more Classes or subclasses as and on the
terms specified in the related Prospectus Sup-
plement, each of which will evidence the inter-
est specified in the related Prospectus Supple-
ment in the Contract Pool and certain other
property held in trust for the benefit of the
Certificateholders (the "Trust Fund"). For con-
venience of description, any reference in this
Prospectus to a "Class" of Certificates in-
cludes a reference to any subclasses of such
Class. If so specified in a Prospectus Supple-
ment, a Series of Certificates may include one
or more Classes which (i) are entitled to re-
ceive distributions only in respect of princi-
pal ("Principal Only Certificates"), interest
("Interest Only Certificates") or any combina-
tion thereof, or in specified proportions in
respect of such payments, and/or (ii) are enti-
tled to receive distributions in respect of
principal before or after specified principal
distributions have been made on one or more
other Classes within such Series ("Fast
Pay/Slow Pay Certificates"), or on a planned
amortization schedule ("PAC Certificates") or
targeted amortization schedule ("TAC Certifi-
cates") or upon the occurrence of other speci-
fied events. See "Description of Certificates."
The Prospectus Supplement will set forth the
rate at which interest will be paid to
Certificateholders of each Class of a given Se-
ries (the "Pass-Through Rate"). Such Pass-
Through Rate may be fixed, variable or adjust-
able, as specified in the related Prospectus
Supplement.
Each Series of Certificates may include one or
more Classes ("Subordinated Certificates")
which are subordinated in right of distribution
to one or more other Classes ("Senior Certifi-
cates"). Certificates of a Series which in-
cludes Senior and Subordinated Certificates are
referred to herein collectively as
"Senior/Subordinated Certificates." A Series of
Senior/Subordinated Certificates may include
one or more Classes ("Mezzanine Certificates")
which are subordinated to one or more Classes
of Certificates and are senior to one or more
Classes of Certificates.
The Certificates will be issuable in fully reg-
istered form in the authorized denominations
specified in the related Prospectus Supplement.
See "Description of the Certificates." The
Certifi-
5
<PAGE>
cates will not be guaranteed or insured by any
government agency or, unless otherwise speci-
fied in the related Prospectus Supplement,
other insurer and, except as described herein
and in the related Prospectus Supplement, the
Contracts will not be guaranteed or insured by
any government agency or other insurer.
Subordinated Certificates.... One or more Classes of any Series may be Subor-
dinated Certificates, as specified in the re-
lated Prospectus Supplement. The rights of the
Subordinated Certificateholders to receive any
or a specified portion of distributions with
respect to the Contracts will be subordinated
to the rights of Senior Certificateholders to
the extent and in the manner specified in the
related Prospectus Supplement. If a Series of
Certificates contains more than one Class of
Subordinated Certificates, distributions and
losses will be allocated among such classes in
the manner specified in the related Prospectus
Supplement. The rights of the Subordinated
Certificateholders, to the extent not subordi-
nated, may be on a parity with those of the Se-
nior Certificateholders. This subordination is
intended to enhance the likelihood of regular
receipt by Senior Certificateholders of the
full amount of scheduled monthly payments of
principal and interest due them and to protect
the Senior Certificateholders against losses.
If so specified in the applicable Prospectus
Supplement, Mezzanine Certificates or other
Classes of Subordinated Certificates may be en-
titled to the benefits of other forms of credit
enhancement and may, if rated in one of the
four highest rating categories by a nationally
recognized statistical rating organization, be
offered pursuant to this Prospectus and such
Prospectus Supplement.
Credit Enhancement........... As an alternative, or in addition, to the credit
enhancement afforded by subordination of the
Subordinated Certificates, credit enhancement
with respect to a Series of Certificates may be
provided by pool insurance, letters of credit,
surety bonds, a guarantee of the Company, cash
reserve funds or other forms of enhancement ac-
ceptable to each nationally recognized rating
agency rating a Series of Certificates, in each
case as described in the related Prospectus
Supplement.
Interest..................... Except as otherwise set forth in the related
Prospectus Supplement, interest on the Certifi-
cates will be paid on the dates specified in
the related Prospectus Supplement (each, a
"Payment Date"). The related Prospectus Supple-
ment will set forth for each Class of Certifi-
cates the Pass-Through Rate, if any, for each
such Class or the method of determining such
Pass-Through Rate. See "Yield Considerations"
and "Description of the Certificates." As spec-
ified in the related Prospectus Supplement,
Classes of a Series of Certificates may be en-
titled to receive no interest or interest which
is not proportionate to the principal allocable
to such Certificates.
Principal (Including
Prepayments)................ Except as otherwise set forth in the related
Prospectus Supplement, principal on each Con-
tract, including any principal pre-
6
<PAGE>
payments, will be passed through on each Pay-
ment Date. See "Maturity and Prepayment Consid-
erations" and "Description of the Certifi-
cates."
Optional Termination......... Unless otherwise specified in the related Pro-
spectus Supplement, each of the Company or the
Servicer may at its option repurchase all Con-
tracts relating to a Series of Certificates re-
maining outstanding at such time under the cir-
cumstances specified in such Prospectus Supple-
ment. Unless otherwise provided in the related
Prospectus Supplement, the repurchase price
will equal the principal amount of such Con-
tracts plus accrued and unpaid interest there-
on. See "Description of the Certificates--Ter-
mination of the Agreement."
Global Certificates.......... If so specified in the related Prospectus Sup-
plement, the Certificates of a Series, or of
one or more Classes within a Series, will be
issuable in the form of one or more global cer-
tificates (each, a "Global Certificate") to be
held by a depositary (each, a "Depositary") on
behalf of the beneficial owners of the Certifi-
cates, as described herein under "Description
of the Certificates--Global Certificates." The
description of the Certificates in this Pro-
spectus assumes that the Certificates of a Se-
ries will not be issued in the form of Global
Certificates. If some or all of the Certifi-
cates of a Series are issued in the form of one
or more Global Certificates, the term "Global
Certificateholder," as used herein, will refer
to such beneficial owners of such Certificates,
and the rights of such Certificateholders will
be limited as described herein under "Descrip-
tion of the Certificates--Global Certificates."
Representations and
Warranties of the Company... As a condition to the Company's conveyance of
any Contract Pool to the Trust Fund, the Com-
pany will be required to make certain represen-
tations and warranties in the related Agreement
regarding the Contracts. Under the terms of the
Agreement, if the Company becomes aware of a
breach of any such representation or warranty
that materially adversely affects the Trust
Fund's interest in any Contract or receives
written notice of such a breach from the
Trustee or the Servicer, then the Company will
be obligated either to cure such breach or to
repurchase or, if so provided in the related
Prospectus Supplement, substitute for the af-
fected Contract, in each case under the condi-
tions further described herein and in the Pro-
spectus Supplement. See "Description of the
Certificates--Conveyance of Contracts."
Federal Income Tax
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 con-
7
<PAGE>
sequences under the Code described herein and
in such Prospectus Supplement. If so specified
in the applicable Prospectus Supplement, a
Class of Certificates offered hereby may repre-
sent 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 Contract Pool and any
other assets held by the Trust Fund and will be
considered the equitable owner of an undivided
interest in the Contracts included in such Con-
tract Pool. If a REMIC Election is not made
with respect to a Series of Certificates 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 described in the re-
lated Prospectus Supplement. See "Certain Fed-
eral Income Tax Consequences--Non-REMIC Se-
ries."
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. Limitations on Availability of FHA Insurance. The related Prospectus
Supplement will specify the number and percentage of the Home Improvement
Contracts included in the Contract Pool that are insured by FHA pursuant to
Title I of the National Housing Act ("Title I"). The availability of FHA
Insurance following a default on an FHA-insured Home Improvement Contract
is subject to a number of conditions, including strict compliance by the
Company with FHA regulations in originating and servicing the Contract.
Although the Company is an FHA-approved lender and believes, and will
represent and warrant in the Agreement, that it has complied with FHA
regulations, such regulations are susceptible to substantial
interpretation. The Company is not required to obtain, and has not
obtained, approval from FHA of its origination and servicing practices.
Failure to comply with FHA regulations may result in a denial of FHA
Insurance claims, and there can be no assurance that FHA's enforcement of
its regulations will not become stricter in the future. From time to time
the Company is engaged in disputes with FHA over the validity of claims
submitted and the Company's compliance with FHA regulations in servicing
loans insured by FHA, such as the FHA-insured Home Improvement Contracts.
In addition, any insurance claim paid by FHA will cover only 90% of the sum
of the unpaid principal on the Home Improvement Contract, up to nine months
unpaid interest thereon (computed at 7% per annum) and certain liquidation
costs.
The amount of FHA Insurance available with respect to a Series of
Certificates at any given time with respect to the FHA-insured Home
Improvement Contracts included in a Contract Pool is limited to the balance
of a reserve amount determined with respect to all FHA Title I loans
originated and reported for insurance by the Company and not sold, or sold
with recourse, by the Company, including manufactured housing contracts as
well as home improvement loans. Such reserve amount, as of December 31,
1997, was equal to approximately $ , but will be reduced by the
amount of all FHA Insurance claims paid and will be increased by an amount
equal to 10% of the unpaid principal balance of FHA Title I loans
subsequently originated and reported for insurance by the Company. Severe
losses on the Company's FHA-insured manufactured housing contracts, or on
other FHA-insured home improvement loans originated by the Company, could
reduce or eliminate the Company's FHA Insurance reserves, in which event
FHA Insurance would not be available to cover losses on FHA-insured Home
Improvement Contracts. In the event the Company were terminated as Servicer
due to its bankruptcy or otherwise, it is anticipated that a proportionate
amount of the Company's FHA Insurance reserves would be transferred to the
reserve account of the Trustee or other successor servicer, but there can
be no assurance of the amount, if any, that would be so transferred. See
"Description of FHA Insurance."
2. Limited Obligations. Except as otherwise specified in the related
Prospectus Supplement, the Certificates of a Series will not represent an
interest in or obligation of the Company. The Certificates of any Series
will not be insured or guaranteed by any governmental agency or
instrumentality, any Underwriter or its affiliates, the Servicer or (except
as otherwise specified in the related Prospectus Supplement) any other
party.
3. Junior Mortgage Liens; Value of Mortgaged Property. The Company
expects that a substantial number of the liens on the improved real estate
securing the Contracts in a given Contract 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
Contract to be sold upon default of the mortgagor or trustor, thereby
extinguishing the junior mortgagee's or junior beneficiary's lien unless
the Servicer on behalf of the Trust Fund asserts its subordinate interest
in the property in foreclosure litigation and, possibly, satisfies the
defaulted senior loan or loans. See "Certain Legal Aspects of the
Contracts--Repurchase Obligations."
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A substantial portion of the Contracts included in a Contract Pool are
expected to have loan-to-value ratios of 90% or more, based on the
aggregate of the outstanding principal balances of all senior mortgages or
deeds of trust and of the Contract on the one hand, and the value of the
home and an estimate of the value of the financed improvement, where
applicable, on the other. See "Green Tree Financial Corporation--Contract
Origination." An overall decline in the residential real estate market, the
general condition of a property securing a Contract or other factors could
adversely affect the value of the property securing a conventional (i.e.,
not insured by FHA) Home Improvement Contract or a Home Equity Contract
such that the remaining balance of such Contract, together with that of any
senior liens on the related property, could equal or exceed the value of
the property. While the same economic decline could affect the value of
property securing an FHA-insured Home Improvement Contract, assuming
compliance with other FHA regulations, an FHA claim would still be payable
to the Company, notwithstanding the decline in property value below the
aggregate outstanding principal balances of the Home Improvement Contract
and of all senior liens on the property.
4. Limited Liquidity. There can be no assurance that a secondary market
will develop for the Certificates of any Series, or, if it does develop,
that it will provide the holders of any of the Certificates with liquidity
of investment or that if such a secondary market develops that it will
continue to exist for the term of any Series of Certificates.
5. Non-recordation of Mortgage Assignments. Because of the expense and
administrative inconvenience involved, the Company will not record the
assignment to the Trustee of the mortgage or deed of trust securing any
Contract. In some states, in the absence of such recordation, the
assignment to the related Trustee of the mortgage or deed of trust securing
a Contract may not be effective against creditors of or purchasers from the
Company or a trustee in bankruptcy of the Company.
6. Certain Matters Relating to Insolvency. The Company intends that each
transfer of Contracts to the related Trust Fund constitute a sale, rather
than a pledge of the Contracts to secure indebtedness of the Company.
However, if the Company were to become a debtor under the federal
bankruptcy code, it is possible that a creditor or trustee in bankruptcy of
the Company or the Company as debtor-in-possession may argue that the sale
of the Contracts by the Company was a pledge of the Contracts rather than a
sale. This position, if presented to or accepted by a court, could result
in a delay in or reduction of distributions to the Certificateholders.
THE TRUST FUND
GENERAL
Each Trust Fund will include (i) a Contract Pool, (ii) the amounts held from
time to time in a trust account (the "Certificate Account") maintained by the
Trustee pursuant to the Agreement, (iii) proceeds from FHA Insurance (with
respect to any FHA-insured Home Improvement Contract included in the Contract
Pool), (iv) any letter of credit, guarantee, surety bond, insurance policy,
cash reserve fund or other credit enhancement securing payment of all or part
of a Series of Certificates, and (v) such other property as may be specified
in the related Prospectus Supplement.
Each Certificate will evidence the interest specified in the related
Prospectus Supplement in one Trust Fund, containing one Contract Pool
comprised of Contracts having the aggregate principal balance as of the
specified day of the month of the creation of the pool (the "Cut-off Date")
specified in the related Prospectus Supplement. Holders of Certificates of a
Series will have interests only in such Contract Pool and will have no
interest in the Contract Pool created with respect to any other Series of
Certificates, except with respect to FHA Insurance Reserves. If so specified
in the related Prospectus Supplement, the Contract Pool may be divided into
two or more sub-pools, in which event the Certificates of certain specified
Classes may be payable primarily from, and in respect of, the Contracts
comprising a given sub-pool. If so specified in the related Prospectus
Supplement, the Trust Fund may include a Pre-Funding Account which would be
used to purchase additional Contracts ("Subsequent Contracts") from the
Company during the Pre-Funding Period specified in the related Prospectus
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Supplement. The related Prospectus Supplement will specify the conditions that
must be satisfied prior to any transfer of Subsequent Contracts, including the
requisite characteristics of the Subsequent Contracts.
Except as otherwise specified in the related Prospectus Supplement, all of
the Contracts will have been originated by the Company in the ordinary course
of its business. Specific information respecting the Contracts included in
each Trust Fund will be provided in the related Prospectus Supplement and, to
the extent not contained in the related Prospectus Supplement, in a report on
Form 8-K to be filed with the Commission within fifteen days after the initial
issuance of the Certificates. A copy of the Agreement with respect to each
Series of Certificates will be attached to the Form 8-K and will be available
for inspection at the corporate trust office of the Trustee specified in the
related Prospectus Supplement. A schedule of the Contracts relating to such
Series will be attached to the Agreement delivered to the Trustee upon
delivery of the Certificates.
Whenever in this Prospectus terms such as "Contract Pool," "Trust Fund,"
"Agreement" or "Pass-Through Rate" are used, those terms respectively apply,
unless the context otherwise indicates, to one specific Contract Pool and
Trust Fund, each Agreement and each Pass-Through Rate applicable to the
related Class of Certificates.
THE CONTRACT POOLS
Except as otherwise specified in the related Prospectus Supplement, the
Contract Pool will consist of (i) home improvement contracts and promissory
notes (the "Home Improvement Contracts"), and (ii) closed-end home equity
loans (the "Home Equity Contracts" and, together with the Home Improvement
Contracts, collectively the "Contracts"), originated by the Company on an
individual basis in the ordinary course of business. The Home Improvement
Contracts may be conventional home improvement contracts or contracts insured
by FHA. All Contracts will be secured by the related real estate. Except as
otherwise specified in the related Prospectus Supplement, the Contracts will
be fully amortizing and will bear interest at a fixed or variable annual
percentage rate (the "Contract Rate").
For each Series of Certificates, the Company will assign the Contracts
constituting the Contract Pool to the trustee named in the related Prospectus
Supplement (the "Trustee"). The Company, as Servicer (in such capacity
referred to herein as the "Servicer", which term shall include any successor
to the Company in such capacity under the applicable Agreement), will service
the Contracts pursuant to the Agreement. See "Description of the
Certificates--Servicing." Unless otherwise specified in the related Prospectus
Supplement, the Contract documents will be held by the Trustee or a custodian
on its behalf.
Each Contract Pool will be composed of Contracts bearing interest at the
Contract Rates specified in the Prospectus Supplement. Unless otherwise stated
in the related Prospectus Supplement, each registered holder of a Certificate
will be entitled to receive periodic distributions, which will be monthly
unless otherwise specified in the related Prospectus Supplement, of all or a
portion of principal on the underlying Contracts or interest on the principal
balance of such Certificate (or on some other principal balance unrelated to
that of such Certificate) at the Pass-Through Rate, or both.
The related Prospectus Supplement will specify for the Contracts contained
in the related Contract Pool, among other things, the range of the dates of
origination of the Contracts; the range of the Contract Rates and the weighted
average Contract Rate; the minimum and maximum outstanding principal balances
and the average outstanding principal balance as of the Cut-off Date; the
aggregate principal balance of the Contracts included in the Contract Pool as
of the Cut-off Date; the weighted average and range of scheduled terms to
maturity as of origination and as of the Cut-off Date; the range of original
maturities of the Contracts and the last maturity date of any Contract; and
the geographic location of improved real estate securing the Contracts. If the
Trust Fund includes a Pre-Funding Account, the related Prospectus Supplement
will specify the conditions that must be satisfied prior to any transfer of
Subsequent Contracts, including the requisite characteristics of the
Subsequent Contracts.
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The Company will make representations and warranties as to the types and
geographical distribution of the Contracts included in a Contract Pool and as
to the accuracy in all material respects of certain information furnished to
the Trustee in respect of each such Contract. Upon a breach of any
representation or warranty that materially and adversely affects the interests
of the Certificateholders in a Contract, the Company will be obligated to cure
the breach in all material respects, or to repurchase or substitute for the
Contract as described below. This repurchase obligation constitutes the sole
remedy available to the Certificateholders or the Trustee for a breach of
representation or warranty by the Company. See "Description of the
Certificates--Conveyance of Contracts."
USE OF PROCEEDS
Unless otherwise specified in the related Prospectus Supplement,
substantially all of the net proceeds to be received from the sale of each
Series of Certificates will be used by the Company for general corporate
purposes, including the origination or acquisition of additional home
improvement contracts and home equity loans, costs of carrying such contracts
and loans until sale of the related certificates and to pay other expenses
connected with pooling the Contracts and issuing the Certificates.
GREEN TREE FINANCIAL CORPORATION
GENERAL
The Company is a Delaware corporation which, as of December 31, 1997, had
stockholders' equity of approximately $1,315,000,000. 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 are available from the Company upon written request made to the
Company.
CONTRACT ORIGINATION
Home Improvement Contracts. Through its centralized loan processing
operations in St. Paul, Minnesota, the Company arranges to purchase certain
contracts from home improvement contractors located throughout the United
States. The Company's regional sales managers contact home improvement
contractors and explain the Company's available financing plans, terms,
prevailing rates and credit and financing policies. If the contractor wishes
to utilize the Company's available customer financing, the contractor must
make an application for contractor approval. The Company has a contractor
approval process pursuant to which the financial condition, business
experience and qualifications of the contractor are reviewed prior to his or
her approval to sell Contracts to the Company. In addition, the Company has a
centralized compliance group which reviews and updates contractor financial
condition and reviews contractors on an annual basis to determine whether such
contractor's approval will be continued. The Company also reviews monthly
contractor trend reports which show the default and delinquency trends of the
particular contractor with respect to contracts sold to the Company. The
Company occasionally will originate directly a home improvement promissory
note involving a home improvement transaction.
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All contracts that the Company originates are written on forms provided or
approved by the Company and are purchased on an individually approved basis in
accordance with the Company's guidelines. The contractor submits the
customer's credit application and construction contract to the Company's
office where an analysis of the creditworthiness of the customer is made using
a proprietary credit scoring system that was implemented by the Company in
June 1993. If the Company determines that the application meets the Company's
underwriting guidelines and applicable FHA regulations (for FHA-insured
contracts) and the credit is approved, the Company purchases the contract from
the contractor when the customer verifies satisfactory completion of the work,
or, in the case of staged funding, the Company follows up with the customer
for the completion certificate 90 days after funding.
The types of home improvements financed by the Company include (i) exterior
renovations, including windows, siding and roofing, (ii) pools and spas, (iii)
kitchen and bath remodeling, and (iv) room additions and garages. The Company
may also, under certain limited conditions, extend additional credit beyond
the purchase price of the home improvement for the purpose of debt
consolidation.
The original principal amount of an FHA-insured home improvement contract
with respect to a single family property currently may not exceed $25,000
without specific FHA approval, with a maximum term of 20 years. FHA will
insure loans of up to $17,500 for manufactured homes which qualify as real
estate under applicable state law and loans of up to $12,000 per unit or a
$48,000 limit for four units of owner-occupied multiple-family homes. Certain
other criteria for home improvement contracts eligible for FHA Insurance are
described under the caption "Description of FHA Insurance."
The Company began financing conventional home improvement loans in September
1992. Conventional home improvement loans are not insured by FHA. The original
principal amount of a conventional secured home improvement loan may not
exceed $40,000 for the Company's secured "no equity" lien program, and
$100,000 for the Company's secured equity lien program, unless a higher amount
financed is approved by senior management. The original principal amount of a
conventional home improvement loan may not exceed $100,000 for the Company's
secured lien program, unless a higher amount financed is approved by senior
management. The Company requires that any secured home improvement contract be
secured by a recorded lien (which may be a first, second or (with respect to
FHA-insured contracts and some conventional contracts of $30,000 or less)
third lien) on the improved real estate.
The Company's underwriting guidelines and credit scoring process weight
significantly the applicant's creditworthiness and place less weight on the
available equity in the related real estate being improved. While it is the
Company's policy not to exceed 100% in loan-to-value ratio on any Contract, a
substantial portion of the Home Improvement Contracts are expected to have
loan-to-value ratios of 90% or more when considering the estimated value of
the real estate, other liens senior to that of the Home Improvement Contract,
and the improvements being financed. Because the Company does not require
appraisals on most Home Improvement Contracts with loan amounts of less than
$30,000 (which Home Improvement Contracts are expected to comprise a
substantial portion of any Contract Pool), and given the many other factors
that can affect the value of property securing a conventional Home Improvement
Contract, the related Prospectus Supplement will not provide detailed
disclosure of loan-to-value ratios on the Home Improvement Contracts.
Home Equity Contracts. The Company has originated closed-end home equity
loans since January 1996. As of December 31, 1997, the Company had
approximately $ aggregate principal amount of outstanding closed-end
home equity loans.
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
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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 Contract Rate of the
Contracts (as of the related Cut-off Date) relating to each Series of
Certificates will be set forth in the related Prospectus Supplement.
The Prospectus Supplement for each Series will indicate that a lower rate of
principal prepayments than anticipated would negatively affect the total
return to investors of any Class of Certificates that is offered at a discount
to its principal amount, and a higher rate of principal prepayments than
anticipated would negatively affect the total return to investors of any such
Class of Certificates that is offered at a premium to its principal amount or
without any principal amount.
The yield on some types of Certificates which may be offered hereby, such as
Interest Only Certificates, Principal Only Certificates, and Fast Pay/Slow Pay
Certificates, may be particularly sensitive to prepayment rates, and to
changes in prepayment rates, on the underlying Contracts. If so stated in the
related Prospectus Supplement, the yield on some types of Certificates which
may be offered hereby could change and may be negative under certain
prepayment rate scenarios. Accordingly, some types of Certificates may not be
legal or appropriate investments for certain financial institutions, pension
funds or others. See "ERISA Considerations" and "Legal Investment
Considerations." In addition, the timing of changes in the rate of prepayment
on the Contracts included in a Contract Pool may significantly affect an
investor's actual yield to maturity, even if the average prepayment rate over
time is consistent with the investor's expectations. In general, the earlier
that prepayments on Contracts occur, the greater the effect on the investor's
yield to maturity.
MATURITY AND PREPAYMENT CONSIDERATIONS
MATURITY
Unless otherwise described in an applicable Prospectus Supplement, all of
the Contracts will have maturities at origination of not more than 25 years.
PREPAYMENT CONSIDERATIONS
Contracts generally may be prepaid in full or in part without penalty. FHA-
insured Home Improvement Contracts may be prepaid at any time without penalty.
The Company has no significant experience with respect to the rate of
principal prepayments on home improvement contracts or home equity loans.
Because the Contracts have scheduled due dates throughout the calendar month,
and because (unless otherwise specified in the related Prospectus Supplement)
all principal prepayments will be passed through to Certificateholders of the
related Series on the Payment Date following the Due Period in which such
principal prepayment occurred, prepayments on the Contracts would affect the
amount of funds available to make distributions on the Certificates on any
Payment Date only if a substantial portion of the Contracts prepaid prior to
their respective due dates in a particular month (thus paying less than 30
days' interest for that Due Period) while very few Contracts prepaid after
their respective due dates in that month. In addition, liquidations of
defaulted Contracts or the Servicer's or the Company's exercise of its option
to repurchase the entire remaining pool of Contracts (see "Description of the
Certificates--Repurchase Option") will affect the timing of principal
distributions on the Certificates of a Series.
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Information regarding the prepayment standard or model or any other rate of
assumed prepayment, as applicable, will be set forth in the Prospectus
Supplement with respect to a Series of Certificates. Although the related
Prospectus Supplement will specify the prepayment assumptions used to price
any Series of Certificates, there can be no assurance that the Contracts will
prepay at such rate, and it is unlikely that prepayments or liquidations of
the Contracts will occur at any constant rate.
See "Description of the Certificates--Repurchase Option" for a description
of the Company's or Servicer's option to repurchase the Contracts comprising
part of a Trust Fund when the aggregate outstanding principal balance of such
Contracts is less than a specified percentage of the initial aggregate
outstanding principal balance of such Contracts as of the related Cut-off
Date. See also "The Trust Fund--The Contract Pools" for a description of the
obligations of the Company to repurchase a Contract in case of a breach of a
representation or warranty relative to such Contract.
DESCRIPTION OF THE CERTIFICATES
Each Series of Certificates will be issued pursuant to a separate pooling
and servicing agreement (each, an "Agreement") to be entered into among the
Company, as seller and Servicer, and the trustee named in the related
Prospectus Supplement (the "Trustee"), and such other parties, if any, as are
described in the applicable Prospectus Supplement. The following summaries
describe certain provisions expected to be common to each Agreement and the
related Certificates, but do not purport to be complete and are subject to,
and are qualified in their entirety by reference to, the provisions of the
related Agreement and the description set forth in the related Prospectus
Supplement. The provisions of the form of Agreement filed as an exhibit to the
Registration Statement of which this Prospectus is a part (the "Registration
Statement") that are not described herein may differ from the provisions of
any actual Agreement. The material differences will be described in the
related Prospectus Supplement. Capitalized terms used herein and not otherwise
defined herein shall have the meanings assigned to them in the form of
Agreement filed as an exhibit to the Registration Statement.
Each Series of Certificates will have been rated in the rating category by
the rating agency or agencies specified in the related Prospectus Supplement.
GENERAL
The Certificates may be issued in one or more Classes. If the Certificates
of a Series are issued in more than one Class, the Certificates of all or less
than all of such Classes may be sold pursuant to this Prospectus, and there
may be separate Prospectus Supplements relating to one or more of such Classes
so sold. Any reference herein to the Prospectus Supplement relating to a
Series comprised of more than one Class should be understood as a reference to
each of the Prospectus Supplements relating to the Classes sold hereunder. Any
reference herein to the Certificates of a Class should be understood to refer
to the Certificates of a Class within a Series or all of the Certificates of a
single-Class Series, as the context may require. For convenience of
description, any reference in this Prospectus to a "Class" of Certificates
includes a reference to any subclasses of such Class.
The Certificates of each Series will be issued in fully registered form only
and will represent the interests specified in the related Prospectus
Supplement in a separate trust fund (the "Trust Fund") created pursuant to the
related Agreement. The Trust Fund will be held by the Trustee for the benefit
of the Certificateholders. Each Trust Fund, to the extent specified in the
related Prospectus Supplement, will include (i) Contracts (the "Contract
Pool") which are subject to the Agreement, (ii) the amounts held in the
Certificate Account from time to time, (iii) proceeds from FHA Insurance (with
respect to any FHA-insured Home Improvement Contract included in the Contract
Pool), (iv) any letter of credit, guarantee, surety bond, insurance policy,
cash reserve fund or other credit enhancement securing payment of all or part
of a Series of Certificates and (v) such other property as may be specified in
the related Prospectus Supplement. Except as otherwise specified in the
related Prospectus Supplement, the Certificates will be freely transferable
and exchangeable at the corporate trust office of the Trustee at the address
set forth in the related Prospectus Supplement. No service charge will be made
for any
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registration of exchange or transfer of Certificates, but the Trustee may
require payment of a sum sufficient to cover any tax or other governmental
charge.
Ownership of each Contract Pool may be evidenced by one or more Classes of
Certificates, each representing the interest in the Contract Pool specified in
the related Prospectus Supplement. Each Series of Certificates may include one
or more Classes ("Subordinated Certificates") which are subordinated in right
of distribution to one or more other Classes ("Senior Certificates"), as
provided in the related Prospectus Supplement. Certificates of a Series which
includes Senior and Subordinated Certificates are referred to herein
collectively as "Senior/Subordinated Certificates." A Series of
Senior/Subordinated Certificates may include one or more Classes ("Mezzanine
Certificates") which are subordinated to one or more Classes of Certificates
and are senior to one or more Classes of Certificates. The Prospectus
Supplement with respect to a Series of Senior/Subordinated Certificates will
set forth, among other things, the extent to which the Subordinated
Certificates are subordinated (which may include a formula for determining the
subordinated amount or for determining the allocation of the Amount Available
(hereinafter defined) among Senior Certificates and Subordinated
Certificates), the allocation of losses among the Classes of Subordinated
Certificates, the period or periods of such subordination, the minimum
subordinated amount, if any, and any distributions or payments which will not
be affected by such subordination. The protection afforded to the Senior
Certificateholders from the subordination feature described above will be
effected by the preferential right of such Certificateholders to receive
current distributions from the Contract Pool. If a Series of Certificates
contains more than one Class of Subordinated Certificates, losses will be
allocated among such Classes in the manner described in the Prospectus
Supplement. If so specified in the applicable Prospectus Supplement, Mezzanine
Certificates or other Classes of Subordinated Certificates may be entitled to
the benefits of other forms of credit enhancement and may, if rated in one of
the four highest rating categories by a nationally recognized statistical
rating organization, be offered pursuant to this Prospectus and such
Prospectus Supplement.
If so specified in a Prospectus Supplement, a Series of Certificates may
include one or more Classes which (i) are entitled to receive distributions
only in respect of principal ("Principal Only Certificates"), interest
("Interest Only Certificates") or any combination thereof, or in specified
proportions in respect of such payments, and/or (ii) are entitled to receive
distributions in respect of principal before or after specified principal
distributions have been made on one or more other Classes within such Series
("Fast Pay/Slow Pay Certificates"), or on a planned amortization schedule
("PAC Certificates") or targeted amortization schedule ("TAC Certificates") or
upon the occurrence of other specified events. The Prospectus Supplement will
set forth the rate at which interest will be paid to Certificateholders of
each Class of a given Series (the "Pass-Through Rate"). Such Pass-Through Rate
may be fixed, variable or adjustable, as specified in the related Prospectus
Supplement.
The related Prospectus Supplement will specify the minimum denomination or
initial principal amount of Contracts evidenced by a single Certificate of
each Class of Certificates of a Series (a "Single Certificate").
Distributions of principal and interest on the Certificates will be made on
the payment dates set forth in the related Prospectus Supplement (each, a
"Payment Date") to the persons in whose names the Certificates are registered
at the close of business on the related record date specified in the related
Prospectus Supplement (the "Record Date"). Distributions will be made by check
mailed to the address of the person entitled thereto as it appears on the
Certificate Register, or, to the extent described in the related Prospectus
Supplement, by wire transfer, except that the final distribution in retirement
of Certificates will be made only upon presentation and surrender of the
Certificates at the office or agency of the Trustee specified in the final
distribution notice to Certificateholders.
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
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nominee for, a depositary (the "Depositary") identified in the related
Prospectus Supplement. The description of the Certificates contained in this
Prospectus assumes that the Certificates will be issued in definitive form. If
the Certificates of a Class are issued in the form of one or more Global
Certificates, the term "Certificateholder" should be understood to refer to
the beneficial owners of the Global Certificates, and the rights of such
Certificateholders will be limited as described under this subheading.
Global Certificates will be issued in registered form. Unless and until it
is exchanged in whole or in part for a Certificate in definitive form, a
Global Certificate may not be transferred except as a whole by the Depositary
for such Global Certificate to a nominee of such Depositary or by a nominee of
such Depositary to such Depositary or another nominee of such Depositary.
The specific terms of the depositary arrangement with respect to any
Certificates of a Class will be described in the related Prospectus
Supplement. It is anticipated that the following provisions will apply to all
depositary arrangements:
Upon the issuance of a Global Certificate, the Depositary for such Global
Certificate will credit, on its book-entry registration and transfer system,
the respective denominations of the Certificates represented by such Global
Certificate to the accounts of institutions that have accounts with such
Depositary ("participants"). Ownership of beneficial interests in a Global
Certificate will be limited to participants or persons that may hold interests
through participants. Ownership of beneficial interests in such Global
Certificate will be shown on, and the transfer of that ownership will be
effected only through, records maintained by the Depositary for such Global
Certificate or by participants or persons that hold through participants. The
laws of some states require that certain purchasers of securities take
physical delivery of such securities in definitive form. Such limits and such
laws may impair the ability to transfer beneficial interests in a Global
Certificate.
So long as the Depositary for a Global Certificate, or its nominee, is the
owner of such Global Certificate, such Depositary or such nominee, as the case
may be, will be considered the sole owner or holder of the Certificates
represented by such Global Certificate for all purposes under the Agreement
relating to such Certificates. Except as set forth below, owners of beneficial
interests in a Global Certificate will not be entitled to have Certificates of
the Series represented by such Global Certificate registered in their names,
will not receive or be entitled to receive physical delivery of Certificates
of such Series in definitive form and will not be considered the owners or
holders thereof under the Agreement governing such Certificates.
Distributions or payments on Certificates registered in the name of or held
by a Depositary or its nominee will be made to the Depositary or its nominee,
as the case may be, as the registered owner for the holder of the Global
Certificate representing such Certificates. In addition, all reports required
under the applicable Agreement to be made to Certificateholders (as described
below under "Reports to Certificateholders") will be delivered to the
Depositary or its nominee, as the case may be. None of the Company, Servicer,
Trustee, or any agent thereof (including any applicable Certificate Registrar
or Paying Agent), will have any responsibility or liability for any aspect of
the records relating to or payments made on account of beneficial ownership
interests in a Global Certificate or for maintaining, supervising or reviewing
any records relating to such beneficial ownership interests or for providing
reports to the related beneficial owners.
The Company expects that the Depositary for Certificates of a Class, upon
receipt of any distribution or payment in respect of a Global Certificate,
will credit immediately participants' accounts with payments in amounts
proportionate to their respective beneficial interest in such Global
Certificate as shown on the records of such Depositary. The Company also
expects that payments by participants to owners of beneficial interests in
such Global Certificate held through such participants will be governed by
standing instructions and customary practices, as is now the case with
securities held for the accounts of customers registered in "street name," and
will be the responsibility of such participants.
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
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Agreement, the Company will cause to be issued Certificates of such Class in
definitive form in exchange for the related Global Certificate or
Certificates. In addition, the Company may at any time and in its sole
discretion determine not to have any Certificates of a Class represented by
one or more Global Certificates and, in such event, will cause to be issued
Certificates of such Class in definitive form in exchange for the related
Global Certificate or Certificates. Further, if the Company so specifies with
respect to the Certificates of a Class, an owner of a beneficial interest in a
Global Certificate representing Certificates of such Class may, on terms
acceptable to the Company and the Depositary for such Global Certificate,
receive Certificates of such Class in definitive form. In any such instance,
an owner of a beneficial interest in a Global Certificate will be entitled to
physical delivery in definitive form of Certificates of the Class represented
by such Global Certificate equal in denominations to such beneficial interest
and to have such Certificates registered in its name.
CONVEYANCE OF CONTRACTS
The Company will transfer, assign, set over and otherwise convey to the
Trustee all right, title and interest of the Company in the Contracts,
including all principal and interest received on or with respect to the
Contracts (other than receipts of principal and interest due on the Contracts
before the Cut-off Date). On behalf of the Trust Fund, as the issuer of the
related Series of Certificates, the Trustee, concurrently with such
conveyance, will execute and deliver the Certificates to the order of the
Company. The Contracts will be as described on a list attached to the
Agreement. Such list will include the amount of monthly payments due on each
Contract as of the date of issuance of the Certificates, the Contract Rate on
each Contract and the maturity date of each Contract. Such list will be
available for inspection by any Certificateholder at the principal executive
office of the Servicer. Prior to the conveyance of the Contracts to the Trust
Fund, the Company's internal audit department will complete a review of all of
the Contract files confirming the accuracy of the list of Contracts delivered
to the Trustee. Any Contract discovered not to agree with such list in a
manner that is materially adverse to the interests of the Certificateholders
will be repurchased or substituted for by the Company, or, if the discrepancy
relates to the unpaid principal balance of a Contract, the Company may deposit
cash in the separate account maintained at an Eligible Institution in the name
of the Trustee (the "Certificate Account") in an amount sufficient to offset
such discrepancy. If the Trust Fund includes a Pre-Funding Account, the
related Prospectus Supplement will specify the conditions that must be
satisfied prior to any transfer of Subsequent Contracts, including the
requisite characteristics of the Subsequent Contracts.
Unless otherwise specified in the related Prospectus Supplement, the Trustee
or its custodian will maintain possession of the Contracts and any other
documents contained in the Contract files. Uniform Commercial Code financing
statements will be filed in Minnesota reflecting the sale and assignment of
the Contracts to the Trustee, and the Company's accounting records and
computer systems will also reflect such sale and assignment.
The counsel to the Company identified in the applicable Prospectus
Supplement will render an opinion to the Trustee that the transfer of the
Contracts from the Company to the related Trust Fund would, in the event the
Company became a debtor under the United States Bankruptcy Code, be treated as
a true sale and not as a pledge to secure borrowings. If, however, the
transfer of the Contracts from the Company to the Trust Fund were treated as a
pledge to secure borrowings by the Company, the distribution of proceeds of
the Contracts to the Trust Fund might be subject to the automatic stay
provisions of the United States Bankruptcy Code, which would delay the
distribution of such proceeds for an uncertain period of time. In addition, a
bankruptcy trustee would have the power to sell the Contracts if the proceeds
of such sale could satisfy the amount of the debt deemed owed by the Company,
or the bankruptcy trustee could substitute other collateral in lieu of the
Contracts to secure such debt, or such debt could be subject to adjustment by
the bankruptcy trustee if the Company were to file for reorganization under
Chapter 11 of the United States Bankruptcy Code.
Except as otherwise specified in the related Prospectus Supplement, the
Company will make certain representations and warranties in the Agreement with
respect to each Contract as of the related Closing Date, including that: (a)
as of the Cut-off Date the most recent scheduled payment was made or was not
delinquent more than 59 days; (b) no provision of a Contract has been waived,
altered or modified in any respect, except by
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instruments or documents included in the Contract file and reflected on the
list of Contracts delivered to the Trustee; (c) each Contract is a legal,
valid and binding obligation of the Obligor and is enforceable in accordance
with its terms (except as may be limited by laws affecting creditors rights
generally); (d) no Contract is subject to any right of rescission, set-off,
counterclaim or defense; (e) each FHA-insured Home Improvement Contract was
originated in accordance with applicable FHA regulations and is insured,
without set-off, surcharge or defense, by FHA Insurance; (f) each Contract was
either (i) entered into by a home improvement contractor in the ordinary
course of such contractor's business and, immediately upon funding, assigned
to the Company, (ii) was originated by a home equity lender in the ordinary
course of such lender's business and assigned to the Company, or (iii) was
originated by the Company directly; (g) no Contract was originated in or is
subject to the laws of any jurisdiction whose laws would make the transfer of
the Contract or an interest therein pursuant to the Agreement or the
Certificates unlawful; (h) each Contract complies with all requirements of
law; (i) no Contract has been satisfied, subordinated to a lower lien ranking
than its original position (if any) or rescinded; (j) each Contract creates a
valid and perfected lien on the related improved real estate; (k) all parties
to each Contract had full legal capacity to execute such Contract; (l) no
Contract has been sold, conveyed and assigned or pledged to any other person
and the Company has good and marketable title to each Contract free and clear
of any encumbrance, equity, loan, pledge, charge, claim or security interest,
and is the sole owner and has full right to transfer such Contract to the
Trustee; (m) as of the Cut-off Date there was no default, breach, violation or
event permitting acceleration under any Contract (except for payment
delinquencies permitted by clause (a) above), no event that with notice and
the expiration of any grace or cure period would constitute a default, breach,
violation or event permitting acceleration under such Contract, and the
Company has not waived any of the foregoing; (n) each Contract is a fully-
amortizing loan with a fixed rate of interest and provides for level payments
over the term of such Contract; (o) each Contract contains customary and
enforceable provisions such as to render the rights and remedies of the holder
thereof adequate for realization against the collateral; (p) the description
of each Contract set forth in the list delivered to the Trustee is true and
correct; (q) there is only one original of each Contract; and (r) each
Contract was originated or purchased in accordance with the Company's then-
current underwriting guidelines.
Under the terms of the Agreement, if the Company becomes aware of a breach
of any such representation or warranty that materially adversely affects the
Trust Fund's interest in any Contract or receives written notice of such a
breach from the Trustee or the Servicer, then the Company will be obligated
either to cure such breach or to repurchase or, if so provided in the related
Prospectus Supplement, substitute for the affected Contract, in each case
under the conditions further described herein and in the Prospectus
Supplement. This repurchase obligation will constitute the sole remedy
available to the Trust Fund and the Certificateholders for a breach of a
representation or warranty under the Agreement with respect to the Contracts
(but not with respect to any other breach by the Company of its obligations
under the Agreement). If a prohibited transaction tax under the REMIC
provisions of the Code is incurred in connection with such repurchase,
distributions otherwise payable to Residual Certificateholders will be applied
to pay such tax. The Company will be required to pay the amount of such tax
that is not funded out of such distributions.
The "Repurchase Price" of a Contract at any time means the outstanding
principal amount of such Contract (without giving effect to any Advances made
by the Servicer or the Trustee), plus interest at the applicable Pass-Through
Rate on such Contract from the end of the Due Period with respect to which the
Obligor last made a payment (without giving effect to any Advances made by the
Servicer or the Trustee) through the end of the immediately preceding Due
Period.
PAYMENTS ON CONTRACTS
Each Certificate Account will be a trust account established by the Servicer
as to each Series of Certificates in the name of the Trustee (i) with a
depository institution, the long-term unsecured debt obligations of which at
the time of any deposit therein are rated within the two highest rating
categories, or such other rating category as will not adversely affect the
ratings assigned to the Certificates, by each rating agency rating the
Certificates of such Series, (ii) with the trust department of a national
bank, (iii) in an account or accounts the deposits in which are fully insured
by the FDIC, (iv) in an account or accounts the deposits in which are insured
by the FDIC (to
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the limits established by the FDIC), the uninsured deposits in which are
otherwise secured such that, as evidenced by an opinion of counsel, the
Certificateholders have a claim with respect to the funds in the Certificate
Account or a perfected first priority security interest against any collateral
securing such funds that is superior to the claims of any other depositors or
general creditors of the depository institution with which the Certificate
Account is maintained or (v) otherwise acceptable to the rating agency without
reduction or withdrawal of the rating assigned to the relevant Certificates.
The collateral eligible to secure amounts in the Certificate Account is
limited to United States government securities and certain other high-quality
investments specified in the applicable Agreement ("Eligible Investments"). A
Certificate Account may be maintained as an interest-bearing account, or the
funds held therein may be invested pending each succeeding Payment Date in
Eligible Investments.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer will deposit in the Certificate Account on a daily basis all proceeds
and collections received or made by it with respect to the related Contracts
subsequent to the Cut-off Date (including scheduled payments of principal and
interest due after the Cut-off Date but received by the Servicer on or before
the Cut-off Date), including:
(i) all Obligor payments on account of principal, including principal
prepayments, on the Contracts;
(ii) all Obligor payments on account of interest on the Contracts;
(iii) all FHA Insurance payments received by the Servicer;
(iv) all amounts received and retained in connection with the liquidation
of defaulted Contracts, net of liquidation expenses ("Net Liquidation
Proceeds");
(v) any Advances made as described under "Advances" below and certain
other amounts required under the Agreement to be deposited in the
Certificate Account;
(vi) all amounts received from any credit enhancement provided with
respect to a Series of Certificates; and
(vii) all proceeds of any Contract or property acquired in respect
thereof repurchased by the Servicer or the Company, as described under
"Conveyance of Contracts" above or under "Repurchase Option" below.
DISTRIBUTIONS ON CERTIFICATES
Except as otherwise provided in the related Prospectus Supplement, on each
Payment Date for a Series of Certificates, the Trustee will withdraw from the
applicable Certificate Account and distribute to the Certificateholders of
such Series of record on the preceding Record Date an amount equal to, in the
aggregate, the "Amount Available" for such Payment Date. Unless otherwise
specified in the applicable Prospectus Supplement, the "Amount Available" for
a Payment Date is an amount equal to the aggregate of all amounts on deposit
in the Certificate Account as of the seventh Business Day following the end of
the related Due Period, or such other date as may be specified in the related
Prospectus Supplement (the "Determination Date") except: (i) all payments on
the Contracts that were due on or before the Cut-off Date; (ii) all payments
or collections received after the Due Period preceding the month in which the
Payment Date occurs; (iii) all scheduled payments of principal and interest
due on a date or dates subsequent to the Due Period preceding the
Determination Date; (iv) amounts representing reimbursement for Advances, such
reimbursement being limited, if so specified in the related Prospectus
Supplement, to amounts received on particular Contracts as late collections of
principal or interest as to which the Servicer has made an unreimbursed
Advance; and (v) amounts representing reimbursement for any unpaid Servicing
Fee. In the case of a Series of Certificates which includes only one Class,
the Amount Available for each Payment Date will be distributed pro rata to the
holders of such Certificates. In the case of any other Series of Certificates,
the Amount Available for each Payment Date will be allocated and distributed
to holders of the Certificates of such Series pursuant to the method and in
the order of priority specified in the applicable Prospectus Supplement. The
amount of principal and interest specified in the related Prospectus
Supplement to be distributed to Certificateholders is referred to herein as
the "Certificate Distribution Amount."
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Within the time specified in the Agreement and described in the related
Prospectus Supplement, the Servicer will furnish a statement to the Trustee
setting forth the amount to be distributed on the related Payment Date on
account of principal and interest, stated separately, and a statement setting
forth certain information with respect to the Contracts.
ADVANCES
Unless otherwise specified in the related Prospectus Supplement, to the
extent that collections on a Contract in any Due Period are less than the
scheduled payment due thereon, the Servicer will be obligated to make an
advance of the uncollected portion of such scheduled payment. The Servicer
will be obligated to advance a delinquent payment on a Contract only to the
extent that the Servicer, in its sole discretion, expects to recoup such
Advance from subsequent collections on the Contract or from liquidation
proceeds thereof. The Servicer will deposit any Advances in the Certificate
Account no later than one Business Day before the following Payment Date. The
Servicer will be entitled to recoup its advances on a Contract from subsequent
payments by or on behalf of the Obligor and from liquidation proceeds
(including FHA Insurance payments, if applicable, or foreclosure resale
proceeds), if any, of the Contract, and will release its right to
reimbursements in conjunction with the purchase of the Contract by the Company
for breach of representations and warranties. If the Servicer determines in
good faith that an amount previously advanced will not ultimately be
recoverable from payments by or on behalf of the Obligor or from liquidation
proceeds (including FHA Insurance payments, if applicable, or foreclosure
resale proceeds), if any, of the Contract (an "Uncollectible Advance"), the
Servicer will be entitled to reimbursement from payments on other Contracts or
from other funds available therefor.
Unless otherwise specified in the related Prospectus Supplement, if the
Servicer fails to make an Advance required under the Agreement, the Trustee
will be obligated to deposit the amount of such Advance in the Certificate
Account on the Payment Date. The Trustee will not, however, be obligated to
deposit any such amount if (i) the Trustee does not expect to recoup such
Advance from subsequent collections on the Contract or from liquidation
proceeds thereof, if any, or (ii) the Trustee determines that it is not
legally able to make such Advance.
EXAMPLE OF DISTRIBUTIONS
The following is an example of the flow of funds as it would relate to a
hypothetical Series of Certificates issued, and with a Cut-off Date occurring,
in March 1998 (all weekdays are assumed to be business days):
<TABLE>
<S> <C> <C>
March 1......................................... (1) Cut-off Date.
March 1-31...................................... (2) Due Period. Servicer
receives scheduled payments
on the Contracts and any
principal prepayments made
by Obligors and applicable
interest thereon.
March 31........................................ (3) Record Date.
April 9......................................... (4) Determination Date.
Distribution amount
determined.
April 15........................................ (5) Payment Date.
</TABLE>
Succeeding months follow the pattern of (2) through (5). The flow of funds
with respect to any Series of Certificates may differ from the above example,
as specified in the related Prospectus Supplement.
- --------
(1) The initial principal balance of the Contract Pool will be the aggregate
principal balance of the Contracts at the close of business on the Cut-off
Date, after deducting principal payments due on or before such date,
which, together with corresponding interest payments, are not part of the
Contract Pool and will not be passed through to Certificateholders.
(2) Scheduled payments and principal prepayments may be received at any time
during this period and will be deposited in the Certificate Account by the
Servicer for distribution to Certificateholders. When a Contract is
prepaid in full, interest on the amount prepaid is collected from the
Obligor only to the date of payment.
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(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 Contracts) against any and all costs, expenses, losses, damages, claims
and liabilities, including reasonable fees and expenses of counsel and
expenses of litigation (a) arising out of or resulting from the use or
ownership by the Company or the Servicer or any affiliate thereof of any real
estate related to a Contract and (b) for any taxes which may at any time be
asserted with respect to, and as of the date of, the conveyance of the
Contracts to the Trust Fund (but not including any federal, state or other tax
arising out of the creation of the Trust Fund and the issuance of the
Certificates).
The Agreement also requires the Servicer, in connection with its duties as
servicer of the Contracts, to defend and indemnify the Trust Fund, the Trustee
and the Certificateholders (which indemnification will survive any removal of
the Servicer as servicer of the Contracts) against any and all costs,
expenses, losses, damages, claims and liabilities, including reasonable fees
and expenses of counsel and expenses of litigation, in respect of any action
taken by the Servicer with respect to any Contract while it was the Servicer.
SERVICING
Pursuant to the Agreement, the Servicer will service and administer the
Contracts assigned to the Trustee as more fully set forth below. The Servicer
will perform diligently all services and duties specified in each Agreement,
in the same manner as prudent lending institutions of home improvement
contracts and home equity loans of the same type as the Contracts in those
jurisdictions where the related real properties are located or as otherwise
specified in the Agreement. The duties to be performed by the Servicer will
include collection and remittance of principal and interest payments,
collection of insurance claims and, if necessary, foreclosure of Contracts.
The Servicer will make reasonable efforts to collect all payments called for
under the Contracts and, consistent with the Agreement and any FHA Insurance,
will follow such collection procedures with respect to the Contracts as it
follows with respect to mortgage loans or contracts serviced by it that are
comparable to the Contracts.
Evidence as to Compliance. Unless otherwise specified in the related
Prospectus Supplement, each Agreement will require the Servicer to deliver to
the Trustee a monthly report prior to each Payment Date, setting forth certain
information regarding the Contract Pool and the Certificates of such Series as
is specified in the related Prospectus Supplement. Each such report to the
Trustee will be accompanied by a statement from an appropriate officer of the
Servicer certifying the accuracy of such report and stating that the Servicer
has not defaulted in the performance of its obligations under the Agreement.
On or before May 1 of each year, the Servicer will deliver to the Trustee a
report of a nationally recognized accounting firm stating that such firm has
examined certain documents and records relating to the servicing of home
improvement contracts and 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.
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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 improvement contracts and 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
Contracts, the Servicer will receive servicing fees ("Servicing Fees") which
include a Monthly Servicing Fee (which the Company may assign) for each Due
Period (paid on the next succeeding Payment Date) equal to 1/12th of the
product of the annual servicing fee rate described in the applicable
Prospectus Supplement and the Pool Scheduled Principal Balance for such
Payment Date. As long as the Company is the Servicer, the Trustee will pay the
Company its Monthly Servicing Fee from any monies remaining after the
Certificateholders have received all payments of principal and interest for
such Payment Date.
The Monthly Servicing Fee provides compensation for customary third-party
servicing activities to be performed by the Servicer for the Trust Fund, for
additional administrative services performed by the Servicer on behalf of the
Trust Fund and for expenses paid by the Servicer on behalf of the Trust Fund.
Customary servicing activities include collecting and recording payments,
communicating with Obligors, investigating payment delinquencies, providing
billing and tax records to Obligors and maintaining internal records with
respect to each Contract. Administrative services performed by the Servicer on
behalf of the Trust Fund include selecting and packaging the Contracts,
calculating distributions to Certificateholders and providing related data
processing and reporting services for Certificateholders and on behalf of the
Trustee. Expenses incurred in connection with servicing of the Contracts and
paid by the Company from its Monthly Servicing Fees include payment of FHA
Insurance premiums, payment of fees and expenses of accountants, payments of
all fees and expenses incurred in connection with the enforcement of Contracts
or foreclosure on collateral relating thereto (including submission of FHA
Insurance claims, if applicable), payment of Trustee's fees, and payment of
expenses incurred in connection with distributions and reports to
Certificateholders, except that the Servicer shall be reimbursed out of the
liquidation proceeds of a liquidated Contract (including FHA Insurance
proceeds) for customary out-of-pocket liquidation expenses incurred by it.
Events of Termination. Except as otherwise specified in the related
Prospectus Supplement, Events of Termination under each Agreement will occur
if (a) the Servicer fails to make any payment or deposit required under the
Agreement (including an Advance) and such failure continues for four business
days; (b) the Servicer fails to observe or perform in any material respect any
other covenant or agreement in the Agreement which continues unremedied for
thirty days; (c) the Servicer conveys, assigns or delegates its duties or
rights under the Agreement, except as specifically permitted under the
Agreement, or attempts to make such a conveyance, assignment or delegation;
(d) a court having jurisdiction in the premises enters a decree or order for
relief in respect of the Servicer in an involuntary case under any applicable
bankruptcy, insolvency or other similar law now or hereafter in effect, or
appoints a receiver, liquidator, assignee, custodian, trustee, or sequestrator
(or similar official) of the Servicer, as the case may be, or enters a decree
or order for any substantial liquidation of its affairs; (e) the Servicer
commences a voluntary case under any applicable bankruptcy, insolvency or
similar law, or consents to the entry of an order for relief in an 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
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<PAGE>
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
Contracts, and the proceeds thereof, whereupon (subject to applicable law
regarding the Trustee's ability to make advances) the Trustee or a successor
Servicer under the Agreement will succeed to all the responsibilities, duties
and liabilities of the Servicer under the Agreement and will be entitled to
similar compensation arrangements; provided, however, that neither the Trustee
nor any successor Servicer will assume any obligation of the Company to
repurchase Contracts for breaches of representations or warranties, and the
Trustee and such successor Servicer will not be liable for any acts or
omissions of the prior Servicer occurring prior to a transfer of the
Servicer's servicing and related functions or for any breach by such Servicer
of any of its obligations contained in the Agreement. In addition, the Trustee
will notify FHA of the Company's termination as Servicer of the Contracts and
will request that the portion of the Company's FHA Insurance reserves
allocable to the FHA-insured Home Improvement Contracts be transferred to the
Trustee or a successor Servicer. See "Description of FHA Insurance."
Notwithstanding such termination, the Servicer shall be entitled to payment of
certain amounts payable to it prior to such termination, for services rendered
prior to such termination. No such termination will affect in any manner the
Company's obligation to repurchase certain Contracts for breaches of
representations or warranties under the Agreement. In the event that the
Trustee would be obligated to succeed the Servicer but is unwilling or unable
so to act, it may appoint, or petition to a court of competent jurisdiction
for the appointment of, a Servicer. Pending such appointment, the Trustee is
obligated to act in such capacity. The Trustee and such successor may agree
upon the servicing compensation to be paid, which in no event may be greater
than the compensation to the Servicer under the Agreement.
The Trustee will be under no obligation to take any action or to institute,
conduct or defend any litigation under the Agreement at the request, order or
direction of any of the Holders of Certificates, unless such
Certificateholders have offered to the Trustee reasonable security or
indemnity against the costs, expenses and liabilities which the Trustee may
incur.
REPORTS TO CERTIFICATEHOLDERS
The Trustee will forward to each Certificateholder on each Payment Date, or
as soon thereafter as is practicable, as specified in the related Prospectus
Supplement, a statement setting forth, among other things:
(a) the amount of such distribution which constitutes Monthly Principal,
specifying the amounts constituting scheduled payments by Obligors,
principal prepayments on the Contracts, and other payments with respect to
the Contracts;
(b) the amount of such distribution which constitutes Monthly Interest;
(c) the remaining Principal Balance represented by such
Certificateholder's interest;
(d) the Company's FHA Insurance reserve amount;
(e) the amount of fees payable out of the Trust Fund;
(f) the Pool Factor (a percentage derived from a fraction the numerator
of which is the remaining Principal Balance of the Certificates and the
denominator of which is the Initial Principal Amount of the Certificates)
immediately before and immediately after such Payment Date;
(g) the number and aggregate principal balance of Contracts delinquent
(i) 31-59 days, (ii) 60-89 and (iii) 90 or more days;
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(h) the number of Contracts liquidated during the Due Period ending
immediately before such Payment Date;
(i) such customary factual information as is necessary to enable
Certificateholders to prepare their tax returns; and
(j) such other customary factual information available to the Servicer
without unreasonable expense as is necessary to enable Certificateholders
to comply with regulatory requirements.
REPURCHASE OPTION
Unless otherwise specified in the related Prospectus Supplement, each
Agreement will provide that on any Payment Date on which the Pool Scheduled
Principal Balance is less than 10% of the Cut-Off Date Pool Principal Balance,
the Company or the Servicer will have the option to repurchase, on 30 days'
prior written notice to the Trustee, all outstanding Contracts in the related
Contract Pool at a price equal to the greatest of (i) the principal balance of
the Contracts on the prior Payment Date plus 30 days' accrued interest thereon
at the applicable Pass-Through Rate and any delinquent payments of interest
thereon, plus the fair market value (as determined by the Servicer) of any
acquired properties, (ii) the fair market value of all of the assets of the
Trust Fund, and (iii) an amount equal to the Aggregate Certificate Principal
Balance of the related Certificates plus interest on such Certificates payable
on and prior to the Payment Date occurring in the month following such
repurchase (less amounts on deposit in the Certificate Account and available
to pay such principal and interest). Such price will be paid on the Payment
Date on which such purchase occurs to the Certificateholders of record on the
last Business Day of the immediately preceding Due Period in immediately
available funds against the Trustee's delivery of the Contracts and any
acquired properties to the Servicer. The distribution of such purchase price
to Certificateholders will be in lieu of any other distribution to be made on
such Payment Date with respect to the related Contracts.
AMENDMENT
Unless otherwise specified in the related Prospectus Supplement, the
Agreement may be amended by the Company, the Servicer and the Trustee without
the consent of the Certificateholders, (i) to cure any ambiguity, (ii) to
correct or supplement any provision therein that may be inconsistent with any
other provision therein, (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 Contracts which are required to be
distributed on any Certificate may be effective without the consent of the
Holders of each such Certificate.
TERMINATION OF THE AGREEMENT
The obligations created by each Agreement will terminate (after distribution
of all Monthly Principal and Monthly Interest then due to Certificateholders)
on the earlier of (a) the Payment Date next succeeding the later of the final
payment or other liquidation of the last Contract or the disposition of all
property acquired upon foreclosure of any Contract; or (b) the Payment Date on
which the Company or the Servicer repurchases the Contracts as described under
"Description of the Certificates--Repurchase Option." However, the Company's
representations, warranties and indemnities will survive any termination of
the Agreement.
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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 Contract, Contract file or related
documents, and will not be accountable for the use or application by the
Company of any funds paid to the Company, as seller, in consideration of the
conveyance of the Contracts, or deposited into or withdrawn from the
Certificate Account by the Servicer. If no Event of Termination has occurred,
the Trustee will be required to perform only those duties specifically
required of it under the Agreement. However, upon receipt of the various
certificates, reports or other instruments required to be furnished to it, the
Trustee will be required to examine them to determine whether they conform as
to form to the requirements of the Agreement. Whether or not an Event of
Termination has occurred, the Trustee is not required to expend or risk its
own funds or otherwise incur any financial liability in the performance of its
duties or the exercise of its powers if it has reasonable grounds to believe
that repayment of such funds or adequate indemnity against such risk or
liability is not reasonably assured to it.
Under the Agreement, the Servicer agrees to pay to the Trustee on each
Payment Date (a) reasonable compensation for all services rendered by it
thereunder (which compensation shall not be limited by any provision of law in
regard to the compensation of a trustee of an express trust) and (b)
reimbursement for all reasonable expenses, disbursements and advances incurred
or made by the Trustee in accordance with any provision of the Agreement
(including FHA Insurance premiums not paid by the Servicer and reasonable
compensation and the expenses and disbursements of its agents and counsel),
except any such expense, disbursement or advance as may be attributable to the
Trustee's negligence or bad faith. The Company has agreed to indemnify the
Trustee for, and to hold it harmless against, any loss, liability or expense
incurred without negligence or bad faith on its part, arising out of or in
connection with the acceptance or administration of the Trust Fund and the
Trustee's duties thereunder, including the costs and expenses of defending
itself against any claim or liability in connection with the exercise or
performance of any of the Trustee's powers or duties thereunder.
DESCRIPTION OF FHA INSURANCE
Certain of the Home Improvement Contracts may be FHA-insured, the payments
upon which, subject to the following discussion, are insured by the FHA under
Title I of the National Housing Act.
The insurance available to any Trust Fund will be subject to the limit of a
reserve amount equal to 10% of the principal balance of all Title I insured
loans originated or purchased and reported for FHA Insurance by the Company,
which amount will be increased by an amount equal to 10% of the lesser of the
principal balance or the purchase price of insured loans subsequently
originated or purchased of record by the Company. The Company's reserve amount
may be reduced by 10% of the principal balance of any loans reported to FHA as
sold without recourse by the Company. In the Agreement, the Company will agree
to pay all FHA Insurance premiums required by FHA Regulations. If the Company
fails to pay any such premium, the Trustee or the successor Servicer (if any)
with respect to each Series is obligated to pay such premium and is entitled
to be reimbursed by the Company and from collections on the related Home
Improvement Contracts.
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As of December 31, 1997, the Company's FHA Insurance reserve amount was
equal to approximately $ . These insurance reserves were available
to cover losses on approximately $ of FHA-insured manufactured
housing contracts and approximately $ of FHA-insured home
improvement loans, including the FHA-insured Home Improvement Contracts that
may be owned by a Trust Fund. If an Event of Termination (as defined under
"Description of the Certificates--Events of Termination") occurs, each Trustee
will notify FHA of the Company's termination as Servicer of the related FHA-
insured Home Improvement Contracts and will request that the portion of the
Company's FHA Insurance reserves allocable to the FHA-insured Home Improvement
Contracts be transferred to the Trustee or a successor Servicer. Although each
Trustee will request such a transfer of reserves, FHA is not obligated to
comply with such a request, and may determine that it is not in FHA's interest
to permit such transfer of reserves. In addition, FHA has not specified how
insurance reserves might be allocated in such event, and there can be no
assurance that any reserve amount, if transferred to the Trustee or a
successor Servicer, would not be substantially less than 10% of the
outstanding principal amount of the FHA-insured Home Improvement Contracts. It
is likely that the Trustee or any successor Servicer would be the lender of
record on other FHA Title I loans, so that any reserves that are so permitted
to be transferred would become commingled with reserves available for other
FHA Title I loans. FHA also reserves the right to transfer reserves with
"earmarking" (segregating such reserves so that they will not be commingled
with the reserves of the transferee) if it is in FHA's interest to do so.
In general, FHA will insure property improvement loans up to $25,000 for a
single-family property, with a maximum term of 20 years. FHA will insure loans
of up to $17,500 for manufactured homes which qualify as real estate under
applicable state law and loans of up to $12,000 per unit for a $48,000 limit
for four units for owner-occupied multiple-family homes. If the loan amount is
$15,000 or more, FHA requires a drive-by appraisal, the current tax assessment
value, or a full Uniform Residential Appraisal Report dated within 12 months
of the closing to verify the property's value. The maximum loan amount on
transactions requiring an appraisal is the amount of equity in the property
shown by the market value determination of the property. The loan proceeds
must be used for the purposes described in the loan application, and those
improvements must substantially protect or improve the basic livability or
utility of the property. The Secretary of HUD from time to time publishes a
list of ineligible items and activities which may not be financed with the
proceeds of an FHA-insured home improvement loan.
Following a default on an FHA-insured Home Improvement Contract the Servicer
may, subject to certain conditions, either commence foreclosure proceedings
against the improved property securing the loan, if applicable, or submit a
claim to FHA, but may submit a claim to FHA after proceeding against the
improved property only with the prior approval of the Secretary of HUD. The
availability of FHA Insurance following a default on an FHA-insured Home
Improvement Contract is subject to a number of conditions, including strict
compliance by the Company with FHA regulations in originating and servicing
the Home Improvement Contract. Failure to comply with FHA regulations may
result in a denial of or surcharge on the FHA Insurance claim. Prior to
declaring an FHA-insured Home Improvement Contract in default and submitting a
claim to FHA, the Servicer must take certain steps to attempt to cure the
default, including personal contact with the borrower either by telephone or
in a meeting and providing the borrower with 30 days' written notice prior to
declaration of default. FHA may deny insurance coverage if the borrower's
nonpayment is related to a valid objection to faulty contractor performance.
In such event, the Company will seek to obtain payment by or a judgment
against the borrower, and may resubmit the claim to FHA following such a
judgment. As described under "Green Tree Financial Corporation--Contract
Origination," the Company does not purchase a Home Improvement Contract until
the customer verifies satisfactory completion of the work.
Upon submission of a claim to FHA, the related Trust Fund must assign its
entire interest in the Home Improvement Contract to the United States. In
general, the claim payment will equal 90% of the sum of (i) the unpaid
principal amount of the Home Improvement Contract at the date of default and
uncollected interest computed at the Contract Rate earned to the date of
default, (ii) accrued and unpaid interest on the unpaid amount of the Home
Improvement Contract from the date of default to the date of submission of the
claim plus 15 calendar days (but in no event more than nine months) computed
at a rate of 7% per annum, (iii) uncollected
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court costs, (iv) legal fees, not to exceed $500, and (v) expenses for
recording the assignment of the lien to the United States, if applicable.
CERTAIN LEGAL ASPECTS OF THE CONTRACTS; REPURCHASE OBLIGATIONS
As a result of the Company's conveyance and assignment of a pool of
Contracts to a Trust Fund, the Certificateholders of such Series, as the
beneficial owners of the Trust Fund, will succeed collectively to all of the
rights thereunder (including the right to receive payment on the Contracts).
The following discussion contains summaries of certain legal aspects of home
improvement contracts and home equity loans secured by residential properties
which are general in nature. These legal aspects are in addition to the
requirements of FHA regulations described in "Description of FHA Insurance"
with respect to the FHA-insured Home Improvement Contracts. Because such legal
aspects are governed by applicable state law (which laws may differ
substantially), the summaries do not purport to be complete nor to reflect the
laws of any particular state, nor to encompass the laws of all states in which
the real estate securing the Contracts may be situated or which may govern any
Contract. The summaries are qualified in their entirety by reference to the
applicable federal and state laws governing the Contracts.
MORTGAGES AND DEEDS OF TRUST
The Contracts 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 Contracts in any Contract Pool are expected to
be second or third mortgages or deeds of trust which are junior to mortgages
or deeds of trust held by other lenders or institutional investors. The rights
of the related Trust Fund (and therefore the Certificateholders), as
beneficiary under a junior deed of trust or as mortgagee under a junior
mortgage, are subordinate to those of the mortgagee or beneficiary under the
senior mortgage or deed of trust, including the prior rights of the senior
mortgagee or beneficiary to receive hazard insurance and condemnation proceeds
and to cause the property securing the Contract 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
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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 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
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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 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
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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 senior mortgages to the senior mortgagees. Accordingly,
with respect to those Contracts which are second or third mortgage loans, if
the lender purchases the property, the lender's title will be subject to all
senior liens and claims and certain governmental liens.
The proceeds received by the referee or trustee from the sale are applied
first to the costs, fees, and expenses of sale and then in satisfaction of the
indebtedness secured by the mortgage or deed of trust under which the sale was
conducted. Any remaining proceeds are generally payable to the holders of
junior mortgages or deeds of trust and other liens and claims in order of
their priority, whether or not the borrower is in default. Any additional
proceeds are generally payable to the mortgagor or trustor. The payment of the
proceeds to the holders of junior mortgages may occur in the foreclosure
action of the senior mortgagee or may require the institution of separate
legal proceeding.
Some states impose prohibitions or limitations on remedies available to the
mortgagee, including the right to recover the debt from the mortgagor. See "--
Anti-Deficiency Legislation and Other Limitations on Lenders" herein.
In certain jurisdictions, real property transfer or recording taxes or fees
may be imposed on the related Trust Fund with respect to its acquisition (by
foreclosure or otherwise) and disposition of real property securing a
Contract, and any such taxes or fees imposed may reduce liquidation proceeds
with respect to such property, as well as distributions payable to the
Certificateholders.
SECOND OR THIRD MORTGAGES
The Contracts may be secured by second or third mortgages or deeds of trust,
which are junior to first or second mortgages or deeds of trust held by other
lenders. The rights of the Certificateholders as the holders of a junior deed
of trust, junior mortgage, or junior security deed are subordinate in lien and
in payment to those of the holder of the senior mortgage, deed of trust, or
security deed including the prior rights of the senior mortgagee or
beneficiary to receive and apply hazard insurance and condemnation proceeds
and, upon default of the mortgagor 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 Contract. 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
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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 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.
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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 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 CONTRACTS
Numerous Federal and state consumer protection laws impose substantial
requirements upon creditors involved in consumer finance. These laws include
the Federal Truth-in-Lending Act, Regulation "Z", the Equal Credit Opportunity
Act, Regulation "B", the Fair Credit Reporting Act, and related statutes. 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 Contracts included in a
Contract 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.
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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 Contract;
however, the Obligor also may be able to assert the rule to set off remaining
amounts due as a defense against a claim brought by the Trust Fund against
such Obligor. The Home Protection Act provides that assignees of certain high-
interest, non-purchase money mortgage loans (which may include some Contracts)
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 addition to limitations imposed by FHA regulations with
respect to FHA-insured Home Improvement Contracts, in certain states there are
or may be specific limitations upon late charges which a lender may collect
from a borrower for delinquent payments. Under the Agreement, late charges (to
the extent permitted by law and not waived by the Company) will be retained by
the Company as additional servicing compensation.
The standard 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.
It is the Company's practice with some of the Home Improvement Contracts to
defer the first payment thereon for up to 90 days, and to charge the home
improvement contractor points to cover the lost interest due to collecting
only 30 days' interest on the first payment on these deferred payment
contracts.
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"DUE-ON-SALE" CLAUSES
All of the Contract 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
Contracts) 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 Contract which contains a "due-on-sale" clause
upon transfer of an interest in the mortgaged property. This ability to
accelerate will not apply to certain types of transfers, including (i) the
granting of a leasehold interest which has a term of three years or less and
which does not contain an option to purchase, (ii) a transfer to a relative
resulting from the death of a mortgagor or trustor, or a transfer where the
spouse or child(ren) becomes an owner of the mortgaged property in each case
where the transferee(s) will occupy the mortgaged property, (iii) a transfer
resulting from a decree of dissolution of marriage, legal separation agreement
or from an incidental property settlement agreement by which the spouse
becomes an owner of the mortgaged property, (iv) the creation of a lien or
other encumbrance subordinate to the lender's security instrument which does
not relate to a transfer of rights of occupancy in the mortgaged property
(provided that such lien or encumbrance is not created pursuant to a contract
for deed), (v) a transfer by devise, descent or operation of law on the death
of a joint tenant or tenant by the entirety, and (vi) other transfers as set
forth in the Garn-St. Germain Act and the regulations thereunder. As a result,
a lesser number of Contracts which contain "due-on-sale" clauses may extend to
full maturity than earlier experience would indicate with respect to single-
family mortgage loans. The extent of the effect of the Garn-St. Germain Act on
the average lives and delinquency rates of the Contracts, however, cannot be
predicted.
The inability to enforce a due-on-sale clause may result in Contracts
bearing an interest rate below the current market rate being assumed by a new
home buyer rather than being paid off, which may have an impact upon the
average life of the Contracts and the number of Contracts which may be
outstanding until maturity.
Although Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980, as amended ("Title V"), provides that, subject to certain
conditions, state usury limitations shall not apply to FHA-insured loans and
to first mortgage secured conventional contracts if the contract is defined as
a "federally related mortgage loan," a number of states have adopted
legislation overriding Title V's exemptions, as permitted by Title V. The
Company will represent and warrant in each Agreement that all Contracts comply
with any applicable usury limitations.
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
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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
Contracts. 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-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 Contracts. Any shortfall in interest collections
resulting from the application of the Relief Act or similar legislation, which
would not be recoverable from the related Contracts, would result in a
reduction of the amounts distributable to the Certificateholders. In addition,
the Relief Act imposes limitations that would impair the ability of the
Servicer to foreclose on an affected mortgage, deed of trust, 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 Contract which goes into default, there may be delays in
payment on the Certificates in connection therewith. Any other interest
shortfalls, deferrals or forgiveness of payments on the Contracts resulting
from similar legislation or regulations may result in delays in payments or
losses to Certificateholders.
REPURCHASE OBLIGATIONS
Under the Agreement, the Company will represent and warrant that each FHA-
insured Home Improvement Contract was originated in compliance with FHA
regulations and is covered by FHA Insurance. In the event FHA were to deny
insurance coverage on an FHA-insured Home Improvement Contract due to a
violation of FHA regulations in originating or servicing such Home Improvement
Contracts, such violation would constitute
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a breach of a representation and warranty under the Agreement and would create
an obligation of the Company to repurchase such Home Improvement Contract
unless the breach is cured. See "Description of the Certificates--Conveyance
of Contracts."
In addition, the Company will also represent and warrant under each
Agreement that each Contract complies with all requirements of law.
Accordingly, if any Obligor has a claim against the related Trust Fund for
violation of any law and such claim materially adversely affects the Trust
Fund's interest in a Contract, such violation would constitute a breach of a
representation and warranty under the Agreement and would create an obligation
to repurchase such Contract unless the breach is cured. See "Description of
the Certificates--Conveyance of Contracts."
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
imposes certain fiduciary and prohibited transaction restrictions on employee
pension and welfare benefit plans subject to ERISA ("ERISA Plans"). Section
4975 of the Code imposes similar prohibited transaction restrictions on tax-
qualified retirement plans described in Section 401(a) of the Code ("Qualified
Retirement Plans") and on Individual Retirement Accounts ("IRAs") described in
Section 408 of the Code (collectively, "Tax-Favored Plans").
Certain employee benefit plans, such as governmental plans (as defined in
Section 3(32) of ERISA), are not subject to the ERISA requirements discussed
herein. Accordingly, assets of such plans may be invested in Certificates
without regard to the ERISA considerations described below, subject to the
provisions of applicable federal and state law. Any such plan that is a
Qualified Retirement Plan and exempt from taxation under Sections 401(a) and
501(a) of the Code, however, is subject to the prohibited transaction rules
set forth in Section 503 of the Code.
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.
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
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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
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.
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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 Contract is principally secured by
an interest in real property if the fair market value of the real property
securing the Contract is at least equal to either (i) 80% of the issue price
(generally, the principal balance) of the Contract at the time it was
originated or (ii) 80% of the adjusted issue price (the then-outstanding
principal balance, with certain adjustments) of the Contract at the time it is
contributed to a REMIC. The fair market value of the underlying real property
is to be determined after taking into account other liens encumbering that
real property. Alternatively, a Contract is principally secured by an interest
in real property if substantially all of the proceeds of the Contract were
used to acquire or to improve or protect an interest in real property that, at
the origination date, is the only security for the Contract (other than the
personal liability of the obligor). A qualified mortgage also includes a
qualified replacement mortgage that is used to replace any qualified mortgage
within three months of the Startup Day or to replace a defective mortgage
within two years of the Startup Day.
"Permitted investments" consist of (a) temporary investments of cash
received under qualified mortgages before distribution to holders of interests
in the REMIC ("cash-flow investments"), (b) amounts, such as a Reserve Fund,
if any, reasonably required to provide for full payment of expenses of the
REMIC, the principal and interest due on regular or residual interests in the
event of defaults on qualified mortgages, lower than expected returns on cash-
flow investments, prepayment interest shortfalls or certain other
contingencies ("qualified reserve assets"), and (c) certain property acquired
as a result of foreclosure of defaulted qualified mortgages ("foreclosure
property"). A reserve fund will not be qualified if more than 30% of the gross
income from the assets in the reserve fund is derived from the sale or other
disposition of property held for three months or less, unless such sale is
necessary to prevent a default in payment of principal or interest on Regular
Certificates. In accordance with Section 860G(a)(7) of the Code, a reserve
fund must be "promptly and appropriately" reduced as payments on contracts are
received. Foreclosure property will be a permitted investment only to the
extent that such property is not held for more than two years.
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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."
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
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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 Contracts 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
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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.
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 Contract Pool, may not be treated as qualified stated
interest. In such case, the OID Regulations would treat interest under such
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rates as contingent interest which generally must be included in income by the
Regular Certificateholder when the interest becomes fixed, as opposed to when
it accrues. Until further guidance is issued concerning the treatment of such
interest payable on Regular Certificates, the REMIC will treat such interest
as being payable at a variable rate tied to a single objective index of market
rates. Prospective investors should consult their tax advisors regarding the
treatment of such interest under the OID Regulations. In the absence of
authority to the contrary and if otherwise appropriate, the Company expects to
determine the stated redemption price at maturity of a Regular Certificate by
assuming that the anticipated rate of prepayment for all Contracts will occur
in such a manner that the initial Pass-Through Rate for a Certificate will not
change. Accordingly, interest at the initial Pass-Through Rate will constitute
qualified stated interest payments for purposes of applying the original issue
discount provisions of the Code. In general, the issue price of a Regular
Certificate is the first price at which a substantial amount of the Regular
Certificates of such class are sold for money to the public (excluding bond
houses, brokers or similar persons or organizations acting in the capacity of
underwriters, placement agents or wholesalers). If a portion of the initial
offering price of a Regular Certificate is allocable to interest that has
accrued prior to its date of issue, the issue price of such a Regular
Certificate 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 amount of payments other than payments of qualified stated
interest made during each prior accrual period. The Code requires the present
value of the remaining payments to be determined on the bases of (a) the
original yield to maturity (determined on the basis of compounding at the
close of each accrual period and properly adjusted for the length of the
accrual period), (b) events, including actual prepayments, which have occurred
before the close of the accrual period, and (c) the assumption that the
remaining payments will be made in accordance with the original Prepayment
Assumption. The effect of this method is to increase the portions of original
issue discount that a Regular Certificateholder must include in income to take
into account prepayments with respect to the Contracts held by the Trust Fund
that occur at a rate that exceeds the Prepayment Assumption and to decrease
(but not below zero for any period) the portions of original issue discount
that a Regular Certificateholder must include in income to take into account
prepayments with respect to the Contracts that occur at a rate that is slower
than the Prepayment Assumption. Although original issue discount will be
reported to Regular Certificateholders based on the Prepayment Assumption, no
representation is made to Regular Certificateholders that the Contracts will
be prepaid at that rate or at any other rate.
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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.
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.
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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.
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
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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 Contracts, 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 Contracts,
other administrative expenses of a REMIC, and amortization of premium, if any,
with respect to the Contracts.
The taxable income recognized by a Residual Holder in any taxable year will
be affected by, among other factors, the relationship between the timing of
interest, original issue discount or market discount income, or amortization
of premium with respect to the Contracts, on the one hand, and the timing of
deductions for interest (including original issue discount) on the Regular
Certificates, on the other hand. In the event that an interest in the
Contracts is acquired by a REMIC at a discount, and one or more of such
Contracts is prepaid, the Residual Holder may recognize taxable income without
being entitled to receive a corresponding cash distribution because (i) the
prepayment may be used in whole or in part to make distributions on Regular
Certificates, and (ii) the discount on the Contracts which is includable in a
REMIC's income may exceed its deduction with respect to the distributions on
those Regular Certificates. When there is more than one class of Regular
Certificates that receive payments sequentially (i.e., a fast-pay, slow-pay
structure), this mismatching of income and deductions is particularly likely
to occur in the early years following issuance of the Regular Certificates,
when distributions are being made in respect of earlier classes of Regular
Certificates to the extent that such classes are not issued with substantial
discount. If taxable income attributable to such a mismatching is realized, in
general, losses would be allowed in later years as distributions on the later
classes of Regular Certificates are made. Taxable
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income may also be greater in earlier years than in later years as a result of
the fact that interest expense deductions, expressed as a percentage of the
outstanding principal amount of Regular Certificates, may increase over time
as distributions are made on the lower yielding classes of Regular
Certificates, whereas interest income with respect to any given Contract will
remain constant over time as a percentage of the outstanding principal amount
of that loan (assuming it bears interest at a fixed rate). Consequently,
Residual Holders must have sufficient other sources of cash to pay any
federal, state, or local income taxes due as a result of such mismatching, or
such holders must have unrelated deductions against which to offset such
income, subject to the discussion of "excess inclusions" below under "REMIC
Series--Limitations on Offset or Exemption of REMIC Income." The mismatching
of income and deductions described in this paragraph, if present with respect
to a series of Certificates, may have a significant adverse effect upon the
Residual Holder's after-tax rate of return.
The amount of any net loss of a REMIC that may be taken into account by the
Residual Holder is limited to the adjusted basis of the Residual Certificate
as of the close of the quarter (or time of disposition of the Residual
Certificate if earlier), determined without taking into account the net loss
for the quarter. The initial adjusted basis of a purchaser of a Residual
Certificate is the amount paid for such Residual Certificate. Such adjusted
basis will be increased by the amount of taxable income of the REMIC
reportable by the Residual Holder and decreased (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 Contracts, 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 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 Contracts if,
in general, the basis of the REMIC in such Contracts is exceeded by their
unpaid principal balances. The REMIC's basis in such Contracts is generally
the fair market value of the Contracts immediately after the transfer thereof
to the REMIC (which 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
Contracts that have market discount to which Code Section 1276 applies, the
accrued portion of such market discount would be recognized currently as an
item of ordinary income. Market discount income generally should accrue in the
manner described above under "REMIC Series--Market Discount."
Generally, if the basis of a REMIC in the Contracts exceeds the unpaid
principal balances thereof, the REMIC will be considered to have acquired such
Contracts at a premium equal to the amount of such excess. As
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stated above, the REMIC's basis in the Contracts is the fair market value of
the Contracts immediately after the transfer thereof to the REMIC. Generally,
a REMIC that holds a Contract as a capital asset will elect to amortize
premium on the Contracts under a constant interest method. See the discussion
under "REMIC Series--Amortizable Premium."
Limitations on Offset or Exemption of REMIC Income. 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 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,
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a corporate tax on the excess inclusion for the period the residual interest
is actually held by the Disqualified Organization).
In addition, if a "Pass-Through Entity" (as defined below) has excess
inclusion income with respect to a Residual Certificate during a taxable year
and a Disqualified Organization is the record holder of an equity interest in
such entity, then a tax is imposed on such entity equal to the product of (i)
the amount of excess inclusions on the Residual Certificate that are allocable
to the interest in the Pass-Through Entity during the period such interest is
held by such Disqualified Organization, and (ii) the highest marginal federal
income tax rate imposed on corporations. Such tax would be deductible from the
ordinary gross income of the Pass-Through Entity for the taxable year. The
Pass-Through Entity would not be liable for such tax if it has received an
affidavit from such record holder that it is not a Disqualified Organization
and, during the period such person is the record holder of the Residual
Certificate, the Pass-Through Entity does not have actual knowledge that such
affidavit is false.
For these purposes, a "Pass-Through Entity" means any regulated investment
company, real estate investment trust, common trust fund, partnership, trust
or estate and certain corporations operating on a cooperative basis. Except as
may be provided in Treasury Regulations, any person holding an interest in a
Pass-Through Entity as a nominee for another will, with respect to such
interest, be treated as a Pass-Through Entity.
Noneconomic Residual Interests. The REMIC Regulations would disregard
certain transfers of Residual Certificates, in which case the transferor would
continue to be treated as the owner of the Residual Certificates and thus
would continue to be subject to tax on its allocable portion of the net income
of the REMIC. Under the REMIC Regulations, a transfer of a "noneconomic
residual interest" (as defined below) to a Residual Holder is disregarded for
all federal income tax purposes if a significant purpose of the transfer is to
enable the transferor to impede the assessment or collection of tax. A
residual interest in a REMIC (including a residual interest with a positive
value at issuance) is a "noneconomic residual interest" unless, at the time of
transfer, (i) the present value of the expected future distributions on the
residual interest at least equals the product of the present value of the
anticipated excess inclusions and the highest corporate income tax rate in
effect for the year in which the transfer occurs, and (ii) the transferor
reasonably expects that the transferee will receive distributions from the
REMIC at or after the time at which taxes accrue on the anticipated excess
inclusions in an amount sufficient to satisfy the accrued taxes. The
anticipated excess inclusions and the present value rate are determined in the
same manner as set forth above. The REMIC Regulations explain that a
significant purpose to impede the assessment or collection of tax exists if
the transferor, at the time of the transfer, either knew or should have known
that the transferee would be unwilling or unable to pay taxes due on its share
of the taxable income of the REMIC. A safe harbor is provided if (i) the
transferor conducted, at the time of the transfer, a reasonable investigation
of the financial condition of the transferee and found that the transferee
historically had paid its debts as they came due and found no significant
evidence to indicate that the transferee would not continue to pay its debts
as they came due in the future, and (ii) the transferee represents to the
transferor that it understands that, as the holder of a non-economic residual
interest, the transferee may incur tax liabilities in excess of any cash flows
generated by the interest and that the transferee intends to pay taxes
associated with holding the residual interest as they become due. The
Agreement with respect to each series of REMIC Certificates will require the
transferee of a Residual Certificate to certify to the statements in clause
(ii) of the preceding sentence as part of the affidavit described above under
"Restrictions on Transfer of Residual Certificates."
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.
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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 Contract occasioned by default or a
reasonably foreseeable default of the Contract, the assumption of the
Contract, the waiver of a due-on-sale clause or the conversion of an interest
rate by an Obligor pursuant to the terms of a convertible adjustable-rate
Contract will not be treated as a disposition of the Contract. In the event
that a REMIC holds Convertible ARM Loans which are convertible at the option
of the Obligor into fixed-rate, fully amortizing, level payment Contracts, a
sale of such Contracts by the REMIC pursuant to a purchase agreement or other
contract with the Company or other party, if and when the Obligor elects to so
convert the terms of the Contract, 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 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
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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.
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.
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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 Contract Pool and the arrangement to be
administered by the Company under which the Trustee will hold and the Company
will be obligated to service the Contracts and pursuant to which Non-REMIC
Certificates will be issued to Non-REMIC Certificateholders will not be
classified as an association taxable as a corporation or a "taxable mortgage
pool", within the meaning of Code Section 7701(i), but rather will be
classified as a grantor trust under Subpart E, Part 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 Contract Pool in which its
Certificate evidences an ownership interest and will be considered the
equitable owner of a pro rata undivided interest in each of the Contracts
included therein. The following discussion assumes the Trust Fund will be so
classified as a grantor trust.
Tax Status of 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 Contracts under these Code sections and should, in
addition, consult with their own tax advisors with respect to these matters.
Tax Treatment of Non-REMIC Certificates. 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 Contracts comprising such Contract 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 Contracts. (For purposes of this discussion,
the term "disposition," when used with respect to the Contracts, includes
scheduled or prepaid collections with respect to the Contracts, as well as the
sale or exchange of a 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
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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 Contracts to the
extent permitted under the Code.
To the extent that any of the Contracts comprising a Contract Pool were
originated on or after March 2, 1984 and under circumstances giving rise to
original issue discount, Certificateholders will be required to report
annually an amount of additional interest income attributable to such discount
in such Contracts prior to receipt of cash related to such discount. See the
discussion above under "REMIC Series--Original Issue Discount." Similarly,
Code provisions concerning market discount and amortizable premium will apply
to the Contracts comprising a Contract Pool to the extent that the loans were
originated after July 18, 1984 and September 27, 1985, respectively. See the
discussions above under "REMIC Series--Market Discount" and "REMIC Series--
Amortizable Premium." 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 Contract from ownership of the right to
receive some or all of the related interest payments. Non-REMIC Certificates
will constitute Stripped Certificates and will be subject to these rules under
various circumstances, including the following: (i) if any servicing
compensation is deemed to exceed a reasonable amount; (ii) if the Company or
any other party retains a Retained Yield with respect to the Contracts
comprising a Contract Pool; (iii) if two or more classes of Non-REMIC
Certificates are issued representing the right to non-pro rata percentages of
the interest or principal payments on the Contracts; or (iv) if Non-REMIC
Certificates are issued which represent the right to interest only payments or
principal only payments.
Although not entirely clear, each Stripped Certificate should be considered
to be a single debt instrument issued on the day it is purchased for purposes
of calculating any original issue discount. Original issue discount with
respect to a Stripped Certificate, if any, must be included in ordinary gross
income for federal income tax purposes as it accrues in accordance with the
constant-yield method that takes into account the compounding of interest and
such accrual of income may be in advance of the receipt of any cash
attributable to such income. See "REMIC Series--Original Issue Discount"
above. For purposes of applying the original issue discount provisions of the
Code, the issue price of a Stripped Certificate will be the purchase price
paid by each holder thereof and the stated redemption price at maturity may
include the aggregate amount of all payments to be made with respect to the
Stripped Certificate whether or not denominated as interest. The amount of
original issue discount with respect to a Stripped Certificate may be treated
as zero under the original issue discount de minimis rules described above. A
purchaser of a Stripped Certificate will be required to account for any
discount on the certificate as market discount rather than original issue
discount if either (i) the amount of original issue discount with respect to
the certificate was treated as zero under the original issue discount de
minimis rule when the
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certificate was stripped or (ii) no more than 100 basis points (including any
amount of servicing in excess of reasonable servicing) is stripped off of the
Contracts. See "REMIC Series--Market Discount" above.
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 Contract or (ii) a separate installment obligation for each
Contract representing the Stripped Certificate's pro rata share of principal
and/or interest payments to be made with respect thereto. As a result of these
possible alternative characterizations, investors should consult their own tax
advisors regarding the proper treatment of Stripped Certificates for federal
income tax purposes.
The servicing compensation to be received by the Company and the fee for
credit enhancement, if any, may be questioned by the Service with respect to
certain Certificates or Contracts as exceeding a reasonable fee for the
services being performed in exchange therefor, and a portion of such servicing
compensation could be recharacterized as an ownership interest retained by the
Company or other party in a portion of the interest payments to be made
pursuant to the Contracts. In this event, a Certificate might be treated as a
Stripped Certificate subject to the stripped bond rules of Section 1286 of the
Code and the original issue discount provisions rather than to the market
discount and premium rules.
Gain or Loss on Disposition. Upon sale or exchange of a Non-REMIC
Certificate, a Non-REMIC Certificateholder will recognize gain or loss equal
to the difference between the amount realized in the sale and its aggregate
adjusted basis in the Contracts represented by the Non-REMIC Certificate.
Generally, the aggregate adjusted basis will equal the Non-REMIC
Certificateholder's cost for the Non-REMIC Certificate increased by the amount
of any previously reported 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
Series--Taxation of Certain Foreign Investors") will be treated as "portfolio
interest" and therefore will be exempt from the 30% withholding tax. Such Non-
REMIC Certificateholder will be entitled to receive interest payments and
original issue discount on the Non-REMIC Certificates free of United States
federal income tax, but only to the extent the Contracts were originated after
July 18, 1984 and provided that such Non-REMIC Certificateholder periodically
provides the Trustee (or other person who would otherwise be required to
withhold tax) with a statement certifying under penalty of perjury that such
Non-REMIC Certificateholder is not a United States person and providing the
name and address of such Non-REMIC Certificateholder. For additional
information concerning interest or original issue discount paid by the Company
to a Foreign Holder and the treatment of a sale or exchange of a Non-REMIC
Certificate by a Foreign Holder, which will generally have the
54
<PAGE>
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 Contracts 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
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.
55
<PAGE>
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.
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.
56
<PAGE>
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.
57
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED FEBRUARY 17, 1998
PROSPECTUS
HIGH-LTV HOME EQUITY LOANS --OWNER TRUST
GREEN TREE HOME EQUITY LOAN TRUSTS
LOAN-BACKED NOTES
LOAN-BACKED CERTIFICATES
-----------
GREEN TREE FINANCIAL CORPORATION
(SELLER AND SERVICER)
-----------
The Loan-Backed Notes (the "Notes") and the Loan-Backed Certificates (the
"Certificates" and, collectively with the Notes, the "Securities") described
herein may be sold from time to time in one or more series (each, a "Series"),
in amounts, at prices and on the terms to be determined at the time of sale and
to be set forth in a supplement to this Prospectus (a "Prospectus Supplement").
Each Series of Securities will include either one or more classes (each, a
"Class") of Notes or, if Certificates are issued as part of a Series, one or
more Classes of Notes and one or more Classes of Certificates, as set forth in
the related Prospectus Supplement.
The Notes and the Certificates, if any, of any Series of Securities will be
issued by a trust (a "Trust") to be formed with respect to such Series by Green
Tree Financial Corporation ("Green Tree"). The assets of each Trust (the "Trust
Property") will include specified interests in separate pools of closed-end
home equity loans (the "Contracts"), as more particularly described herein and
liens on the related real estate. Except as otherwise specified in the related
Prospectus Supplement, the Contracts will have been originated in the ordinary
course of business by Green Tree. Specific information, to the extent
available, regarding the size and composition of the pool of Contracts relating
to each Series of Securities will be set forth in the related Prospectus
Supplement. Green Tree will act as Servicer (in such capacity referred to
herein as the "Servicer") of the Contracts. In addition, if so specified in the
related Prospectus Supplement, the Trust Property will include monies on
deposit in one or more trust accounts to be established with an Indenture
Trustee, which may include a Pre-Funding Account which would be used to
purchase additional Contracts (the "Subsequent Contracts") from the Seller from
time to time during the Pre-Funding Period specified in the related Prospectus
Supplement.
Each Trust will be formed pursuant to a Trust Agreement (the "Trust
Agreement") to be entered into among the Seller, the Owner Trustee and certain
other parties as specified in the related Prospectus Supplement. A Sale and
Servicing Agreement (the "Sale and Servicing Agreement") will be entered into
among Green Tree, as Seller and Servicer, and each Trust. The Trust Agreement
and the Sale and Servicing Agreement are collectively referred to herein as the
"Trust Documents." The Notes of a Series will be issued and secured pursuant to
an Indenture (the "Indenture") between the Trust and the Indenture Trustee
specified in the related Prospectus Supplement (the "Indenture Trustee").
(Continued on next page)
FOR A DISCUSSION OF CERTAIN FACTORS WHICH SHOULD BE CONSIDERED BY PROSPECTIVE
PURCHASERS OF THE SECURITIES, SEE "RISK FACTORS" AT PAGE 15 HEREIN AND IN THE
RELATED PROSPECTUS SUPPLEMENT.
-----------
THE CERTIFICATES REPRESENT INTERESTS IN AND THE NOTES REPRESENT OBLIGATIONS
OF THE RELATED TRUST AND DO NOT REPRESENT INTERESTS IN OR OBLIGATIONS OF GREEN
TREE (EXCEPT TO THE LIMITED EXTENT DESCRIBED HEREIN AND IN THE RELATED
PROSPECTUS SUPPLEMENT) OR ANY AFFILIATE OF GREEN TREE.
-----------
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.
-----------
Retain this Prospectus for future reference. This Prospectus may not be used
to consummate sales of securities offered hereby unless accompanied by a
Prospectus Supplement.
THE DATE OF THIS PROSPECTUS IS , 1998.
<PAGE>
(Continued from previous page)
Except as otherwise provided in the related Prospectus Supplement, each
Class of Securities of any Series will represent the right to receive a
specified amount of payments of principal and interest on the related
Contracts in the manner described herein and in the related Prospectus
Supplement. The right of each Class of Securities to receive payments may be
senior or subordinate to the rights of one or more of the other Classes of
such Series. A Series may include two or more Classes of Certificates or Notes
which differ as to the timing and priority of payment, interest rate or amount
of distributions in respect of principal or interest or both. A Series may
include one or more Classes of Certificates or Notes entitled to distributions
in respect of principal, with disproportionate, nominal or no interest
distributions, or to interest distributions, with disproportionate, nominal or
no distributions in respect of principal. Distributions on Certificates of any
Series, if any, will be subordinated in priority to payments due on the
related Notes to the extent described herein and in the related Prospectus
Supplement. The Certificates will represent fractional undivided interests in
the related Trust.
Each Class of Securities will represent the right to receive distributions
or payments in the amounts, at the rates, and on the dates set forth in the
related Prospectus Supplement. The rate of distributions in respect of
principal on Certificates and payment in respect of principal on Notes of any
Class will depend on the priority of payment of such Class and the rate and
timing of payments (including prepayments, liquidations and repurchases of
Contracts) on the related Contracts.
Except as otherwise specified in the related Prospectus Supplement, the only
obligations of Green Tree with respect to a Series of Securities 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 Securities evidencing interests in a pool of
Contracts are limited to its contractual servicing obligations. If so
specified in the related Prospectus Supplement, the Servicer may be obligated,
under certain terms and conditions, to advance the amount of any delinquent
payments of principal and interest during the immediately preceding Due Period
(as defined herein), but only to the extent the Servicer determines such
advances are recoverable from future payments and collections on the
delinquent Contracts. See "Description of the Trust Documents--Advances."
If specified in the related Prospectus Supplement, a financial guaranty
insurance policy, letter of credit, surety bond, Green Tree guaranty, cash
reserve fund, or other form of credit enhancement, or any combination thereof,
may be provided with respect to a Trust or any Class of Securities.
Unless otherwise provided in the related Prospectus Supplement, the Notes
and the Certificates, if any, of any Series initially will be represented by
certificates and notes registered in the name of Cede & Co., the nominee of
The Depository Trust Company ("DTC"). The interests of beneficial owners of
the Securities will be represented by book entries on the records of the
participating members of DTC. Definitive Securities will be available only
under limited circumstances.
There currently is no secondary market for the Securities. There can be no
assurance that any such market will develop or, if it does develop, that it
will continue. The Securities will not be listed on any securities exchange.
2
<PAGE>
AVAILABLE INFORMATION
Green Tree, as originator of each Trust, has filed with the Securities and
Exchange Commission (the "Commission") a Registration Statement (together with
all amendments and exhibits thereto, referred to herein as the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities
Act"), with respect to the Securities offered pursuant to this Prospectus. For
further information, reference is made to the Registration Statement which is
available for inspection without charge at the office of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of the
Commission at Seven World Trade Center, Suite 1300, New York, New York 10048
and at Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511, and copies of which may be obtained from the
Commission 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.
REPORTS TO SECURITYHOLDERS
Unless otherwise provided in the related Prospectus Supplement, unless and
until Definitive Certificates or Definitive Notes are issued, unaudited
monthly and annual reports, containing information concerning each Trust and
prepared by the Servicer, will be sent on behalf of the Trust to the Trustee
for the Certificateholders, the Indenture Trustee for the Noteholders and Cede
& Co., as registered holder of the Certificates and the Notes and the nominee
of DTC. See "Certain Information Regarding the Securities--Statements to
Securityholders" and "--Book-Entry Registration." Certificateholders and
Noteholders are collectively referred to herein as the "Securityholders."
Certificate Owners or Note Owners may receive such reports, upon written
request, together with a certification that they are Certificate Owners or
Note Owners and payment of reproduction and postage expenses associated with
the distribution of such reports, from the Trustee, with respect to
Certificate Owners, or the Indenture Trustee, with respect to Note Owners, at
the addresses specified in the related Prospectus Supplement. Such reports
will not constitute financial statements prepared in accordance with generally
accepted accounting principles. Green Tree does not intend to send any of its
financial reports to Securityholders. The Servicer, on behalf of each Trust,
will file with the Commission periodic reports concerning each Trust to the
extent required under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and the rules and regulations of the Commission thereunder.
However, unless otherwise specified in the related Prospectus Supplement,
Green Tree expects that each Trust's obligation to file such reports will be
terminated following the end of the year in which such Trust is formed in
accordance with the Exchange Act and the rules and regulations of the
Commission thereunder.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
Green Tree's Annual Report on Form 10-K for the year ended December 31, 1996
(as amended on February , 1998), Quarterly Reports on Form 10-Q for the
periods ended March 31, June 30 and September 30, 1997, and Current Report on
Form 8-K dated January 27, 1998, 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 Servicer on behalf of each Trust 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 related
Securities shall be deemed to be incorporated by reference into this
Prospectus and the related Prospectus Supplement and to be a part hereof and
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 deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus and the related Prospectus Supplement to the
extent that a statement contained herein or in any other subsequently filed
document which also 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 or the related Prospectus Supplement.
Green Tree 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,
Green Tree Financial Corporation, 1100 Landmark Towers, 345 St. Peter Street,
Saint Paul, Minnesota 55102-1639, telephone number (612) 293-3400.
3
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus and by reference to
the information with respect to the Securities contained in the related
Prospectus Supplement to be prepared and delivered in connection with the
offering of each series of Securities. Certain capitalized terms used in this
Prospectus Summary are defined elsewhere in this Prospectus and in the related
Prospectus Supplement.
<TABLE>
<S> <C>
Issuer.............................. With respect to each series of Securities,
a trust (the "Trust") will be formed by
Green Tree pursuant to a Trust Agreement
between the Seller, the trustee (the "Owner
Trustee") specified in the related
Prospectus Supplement and certain other
parties as specified in the related
Prospectus Supplement.
Seller.............................. Green Tree Financial Corporation (in such
capacity referred to herein as "Green
Tree").
Servicer............................ Green Tree Financial Corporation (in such
capacity referred to herein as the
"Servicer," which term shall include any
successor to Green Tree Financial
Corporation in such capacity under the
applicable Sale and Servicing Agreement (as
defined herein)).
Risk Factors........................ Certain special considerations are
particularly relevant to a decision to
invest in any Securities sold hereunder.
See "Risk Factors" herein.
Trustee............................. The Owner Trustee for a Trust, as specified
in the related Prospectus Supplement. The
Owner Trustee for any Trust will be
referred to in this Prospectus as the
"Trustee," although the Prospectus
Supplement will refer to the Trustee as the
"Owner Trustee" in order to distinguish the
Owner Trustee and the Indenture Trustee for
such Series. See "Description of the Trust
Documents--The Trustee."
Indenture Trustee................... With respect to any Series of Securities,
the Indenture Trustee specified in the
related Prospectus Supplement (the
"Indenture Trustee").
</TABLE>
<TABLE>
<S> <C>
The Notes.......................... Each Series of Securities will include one
or more Classes of Notes, which will be
issued pursuant to an Indenture.
Unless otherwise specified in the related
Prospectus Supplement, Notes will be
available for purchase in denominations of
$1,000 and integral multiples thereof, and
will be available in book-entry form only.
Unless otherwise specified in the related
Prospectus Supplement, beneficial owners of
Notes ("Note Owners") will be able to
receive Definitive Notes only in the
limited circumstances described herein or
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
in the related Prospectus Supplement. See
"Certain Information Regarding the
Securities--Book-Entry Registration."
</TABLE>
<TABLE>
<S> <C>
The Notes will not be guaranteed or insured
by any government agency or, unless
otherwise specified in the related
Prospectus Supplement, other insurer and,
except as described herein and in the
related Prospectus Supplement, the
Contracts will not be guaranteed or insured
by any government agency or other insurer.
Unless otherwise specified in the related
Prospectus Supplement, each Class of Notes
will have a stated principal amount and
will bear interest at a specified rate or
rates (with respect to each Class of Notes,
the "Interest Rate"). Each Class of Notes
may have a different Interest Rate, which
may be a fixed, variable or adjustable
Interest Rate, or any combination of the
foregoing. The related Prospectus
Supplement will specify the Interest Rate
and the method for determining subsequent
changes to the Interest Rate.
A Series may include two or more Classes of
Notes which differ as to the timing and
priority of payment, seniority, allocations
of loss, Interest Rate or amount of
payments of principal or interest, or as to
which payments of principal or interest may
or may not be made upon the occurrence of
specified events or on the basis of
collections from designated portions of the
Contract Pool. In addition, a Series may
include one or more Classes of Notes
("Stripped Notes") entitled to (i)
principal payments with disproportionate,
nominal or no interest payments or (ii)
interest payments with disproportionate,
nominal or no principal payments.
The Notes of a Series may include one or
more Classes ("Subordinated Notes") which
are subordinated in right of distribution
to one or more other Classes of Notes
("Senior Notes"). Notes of a Series which
includes Senior Notes and Subordinated
Notes are referred to herein collectively
as "Senior/Subordinated Notes." A Series of
Senior/Subordinated Notes may include one
or more Classes ("Mezzanine Notes") which
are subordinated to one or more Classes of
Notes and are senior to one or more Classes
of Notes.
If the Seller or the Servicer exercises its
option to purchase the Contracts of a Trust
on the terms and conditions described under
"Description of the Trust Documents--
Termination," the outstanding Notes, if
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
any, of such Series will be redeemed as set
forth in the related Prospectus Supplement.
In addition, if the related Prospectus
Supplement provides that the property of a
Trust will include a Pre-Funding Account
(the "Pre-Funding Account"), the
outstanding Notes, if any, of such Series
will be subject to partial redemption on or
immediately following the end of the Pre-
Funding Period in an amount and manner
specified in the related Prospectus
Supplement (the "Pre-Funding Period"). In
the event of such partial redemption, the
Note Owners may be entitled to receive a
prepayment premium from the Trust, in the
amount and to the extent provided in the
related Prospectus Supplement.
The Certificates.................... With respect to any Series of Securities
including one or more Classes of
Certificates, such Certificates will be
issued pursuant to the related Trust
Documents. For convenience of description,
any reference in this Prospectus to a
"Class" of Certificates includes a
reference to any subclasses of such Class.
If so specified in a Prospectus Supplement,
the Certificates of a Series 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 of Certificates 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. See
"The Certificates."
Unless otherwise specified in the related
Prospectus Supplement, Certificates will be
available for purchase in denominations of
$1,000 and in integral multiples thereof
and will be available in book-entry form
only. Unless otherwise specified in the
related Prospectus Supplement, beneficial
owners of Certificates ("Certificate
Owners") will be able to receive Definitive
Certificates only in the limited
circumstances described herein or in the
related Prospectus Supplement. See "Certain
Information Regarding the Securities--Book-
Entry Registration."
</TABLE>
<TABLE>
<S> <C>
The Certificates of a Series will not be
guaranteed or insured by any government
agency or, unless otherwise
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
specified in the related Prospectus
Supplement, other insurer and, except as
described herein and in the related
Prospectus Supplement, the Contracts will
not be guaranteed or insured by any
government agency or other insurer.
Unless otherwise specified in the related
Prospectus Supplement, each Class of
Certificates will have a stated Certificate
Balance (as defined in the related
Prospectus Supplement) and will accrue
interest on such Certificate Balance at a
specified rate (with respect to each Class
of Certificates, the "Pass-Through Rate").
Each Class of Certificates may have
a different Pass-Through Rate, which may be
a fixed, variable or adjustable Pass-
Through Rate, or any combination of the
foregoing. The related Prospectus
Supplement will specify the Pass-Through
Rate for each Class of Certificates, or the
initial Pass-Through Rate and the method
for determining subsequent changes to the
Pass-Through Rate.
The Certificates of a Series may include
one or more Classes ("Subordinated
Certificates") which are subordinated in
right of distribution to one or more other
Classes of Certificates ("Senior
Certificates"). Certificates of a Series
which includes Senior Certificates 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.
If the Seller or Servicer exercises its
option to purchase the Contracts of a Trust
on the terms and conditions described under
"Description of the Trust Documents--
Termination," Certificate Owners will
receive an amount in respect of the
Certificates as specified in the related
Prospectus Supplement. In addition, if the
related Prospectus Supplement provides that
the property of a Trust will include a Pre-
Funding Account, Certificate Owners will
receive a distribution in respect of
principal on or immediately following the
end of the funding period specified in the
related Prospectus Supplement in an amount
and manner specified in the related
Prospectus Supplement.
Subordination....................... With respect to any Series of Securities
including one or more Classes of
Certificates, distributions in respect of
the Certificates may be subordinated in
priority of payment to payments on the
Notes, to the
extent specified in the related Prospectus
Supplement.
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One or more Classes of Notes of any Series
may be Subordinated Notes, as specified in
the related Prospectus Supplement. The
rights of the Subordinated Noteholders to
receive any or a specified portion of
distributions with respect to the Contracts
will be subordinated to the rights of
Senior Noteholders to the extent and in the
manner specified in the related Prospectus
Supplement. If a Series contains more than
one Class of Subordinated Notes,
distributions and losses will be allocated
among such Classes in the manner specified
in the related Prospectus Supplement. The
rights of the Subordinated Noteholders, to
the extent not subordinated, may be on a
parity with those of the Senior
Noteholders. This subordination is intended
to enhance the likelihood of regular
receipt by Senior Noteholders of the full
amount of scheduled monthly payments of
principal and interest due them and to
protect the Senior Noteholders against
losses. If so specified in the applicable
Prospectus Supplement, other Classes of
Subordinated Notes 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.
One or more Classes of Certificates of any
Series may be Subordinated Certificates, as
specified in the related Prospectus
Supplement. The rights of the Subordinated
Certificateholders to receive any or a
specified portion of distributions with
respect to the Contracts will be
subordinated to the rights of Senior
Certificateholders to the extent and in the
manner specified in the related Prospectus
Supplement. If a Series contains more than
one Class of Subordinated Certificates,
distributions and losses will be allocated
among such Classes in the manner specified
in the related Prospectus Supplement. The
rights of the Subordinated
Certificateholders, to the extent not
subordinated, may be on a parity with those
of the Senior Certificateholders. This
subordination is intended to enhance the
likelihood of regular receipt by Senior
Certificateholders of the full amount of
scheduled monthly payments of principal and
interest due them and to protect the Senior
Certificateholders against losses. If so
specified in the applicable Prospectus
Supplement, Mezzanine Certificates or other
Classes of Subordinated Certificates may be
entitled to the benefits of other forms of
credit enhancement and may, if rated in one
of the four
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highest rating categories by a nationally
recognized statistical rating organization,
be offered pursuant to this Prospectus and
such Prospectus Supplement.
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Trust Property...................... Each Note will represent an obligation of,
and each Certificate, if any, will
represent a fractional undivided interest
in, the related Trust. The assets of
each Trust (the "Trust Property") will
include, among other things, (i) a pool
(the "Contract Pool") of closed-end home
equity loans, (ii) amounts held in the
Collection Account, including all
investments therein, all income from the
investment of funds therein and all
proceeds thereof, certain other accounts
and the proceeds thereof, (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 Securities,
(iv) certain other rights under the Trust
Documents and (v) such other property as
may be specified in the related Prospectus
Supplement. In addition, if so specified in
the related Prospectus Supplement, the
Trust Property will include monies on
deposit in a Pre-Funding Account to be
established with the Indenture Trustee or
the Trustee, which will be used to purchase
Subsequent Contracts (as defined below)
from the Seller from time to time during
the Pre-Funding Period specified in the
related Prospectus Supplement, as well as
any Subsequent Contracts so purchased. See
"The Trusts."
If and to the extent provided in the
related Prospectus Supplement, the related
Trust will be obligated to purchase from
Green Tree (subject to the satisfaction of
certain conditions described in the
applicable Sale and Servicing Agreement),
additional Contracts (the "Subsequent
Contracts") from time to time (as
frequently as daily) during the Pre-Funding
Period specified in the related Prospectus
Supplement having an aggregate principal
balance approximately equal to the amount
on deposit in the Pre-Funding Account (the
"Pre-Funded Amount") on such Closing Date.
Green Tree will be obligated to repurchase
Contracts upon the occurrence of certain
breaches of representations and warranties
(a "Repurchase Event"). See "Description of
the Trust Documents--Sale and Assignment of
the Contracts" and "Certain Legal Aspects
of the Contracts--Repurchase Obligations."
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Enhancement......................... If and to the extent specified in the
related Prospectus Supplement, as an
alternative, or in addition, to the credit
enhancement afforded by subordination of
the Subordinated Notes and Subordinated
Certiticates, credit enhancement with
respect to a Trust or any Class of
Securities may include any one or more of
the following: a financial guaranty
insurance policy,
letter of credit, surety bond, Green Tree
guaranty, cash reserve fund, derivative
product, or other form of credit
enhancement, or any combination thereof.
The enhancement with respect to any Trust
or any Class of Securities may be
structured to provide protection against
delinquencies and/or losses on the
Contracts, against changes in interest
rates, or other risks, to the extent and
under the conditions specified in the
related Prospectus Supplement. Unless
otherwise specified in the related
Prospectus Supplement, any form of
enhancement will have certain limitations
and exclusions from coverage thereunder,
which will be described in the related
Prospectus Supplement. Further information
regarding any provider of credit
enhancement, including financial
information when material, will be included
in the related Prospectus Supplement. See
"Description of the Trust Documents--
Enhancement."
Servicing........................... The Servicer will be responsible for
managing, administering, servicing and
making collections on the Contracts held by
each Trust. Unless otherwise specified in
the related Prospectus Supplement, with
respect to each Series of Securities
compensation to the Servicer will include a
monthly fee (the "Monthly Servicing Fee")
which will be payable from the
related Trust to the Servicer on each
Distribution Date, in an amount equal to
the product of one-twelfth of the annual
servicing fee rate described in the
applicable Prospectus Supplement multiplied
by the aggregate principal balance of the
Contracts (the "Aggregate Principal
Balance") as of the first day of the prior
calendar month ("Due Period"), plus any
late fees and other administrative fees and
expenses or similar charges collected with
respect to the Contracts during such Due
Period. See "Description of the Trust
Documents--Servicing."
Advances............................ Unless otherwise specified in the related
Prospectus Supplement, the Servicer will be
obligated to make advances ("Advances")
each month of any scheduled payments on the
Contracts that were due but not received
during the prior Due Period. The Servicer
will be entitled to reimbursement of an
Advance from the Amount Available in the
Collection Account for
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the related Trust. 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 Collection
Account for the related Trust. See
"Description of the Trust Documents--
Advances."
Contracts........................... The Contract Pool underlying a Series of
Securities will consist of fixed or
variable rate Contracts. Such Contracts, as
specified in the related Prospectus
Supplement, will consist of closed-end home
equity loans. Each Contract will be secured
by the related real estate, but may have a
Loan-to-Value Ratio (as defined herein)
substantially in excess of 100%.
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The Prospectus Supplement for each Series
will provide information with respect to
(i) the aggregate principal balance of the
Contracts comprising the Contract Pool, as
of the date specified in the Prospectus
Supplement (the "Cut-off Date"); (ii) the
weighted average and range of contractual
rates of interest (each, a "Contract Rate")
on the Contracts; (iii) the weighted
average and ranges of terms to scheduled
maturity of the Contracts as of origination
and as of the Cut-off Date; (iv) the
average outstanding principal balance of
the Contracts 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 Contracts. In
addition, if so specified in the related
Prospectus Supplement, additional Contracts
may be purchased
from Green Tree during the Pre-Funding
Period specified in the related Prospectus
Supplement, from funds on deposit in a Pre-
Funding Account.
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Except as otherwise specified in the
related Prospectus Supplement, the
Contracts will have been originated by
Green Tree on an individual basis in the
ordinary course of its business.
Collection Account.................. With respect to each Series of Securities,
the Servicer will establish and maintain
one or more separate accounts (the
"Collection Account") in the name of the
Indenture Trustee for the benefit of the
Certificate Owners and the Note Owners. All
payments from obligors under the Contracts
("Obligors") that are received by the
Servicer on behalf of each Trust will be
deposited in the related Collection Account
no later than one Business Day after
receipt thereof.
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Unless otherwise specified in the related
Prospectus Supplement, all payments from
Obligors and all proceeds (net of
reasonable expenses of collection) with
respect to Liquidated Contracts ("Net
Liquidation Proceeds") that are received by
the Servicer will be deposited in the
related Collection Account no later than
one Business Day after receipt thereof.
Unless otherwise specified in the related
Prospectus Supplement, the Servicer will be
permitted to use any alternative remittance
schedule acceptable to the Rating Agencies
(as defined below). See "Description of the
Trust Documents--Collections."
Representations and Warranties of As a condition to the Seller's conveyance
the Seller........................ of any Contract Pool to the Trust, the
Seller will make certain representations
and warranties in the related Sale and
Servicing Agreement regarding the
Contracts. The Trustee will assign its
right to enforce such representations and
warranties to the related Indenture Trustee
as collateral for the Notes. Under the
terms of the Sale and Servicing Agreement,
if the Seller becomes aware of a breach of
any such representation or warranty that
materially adversely affects the interests
of the Note Owners, the Certificate Owners,
if any, or the related Trust therein (a
"Repurchase Event") in any Contract or
receives written notice of such a breach
from the Trustee, the Indenture Trustee or
the Servicer, then the Seller will be
obligated either to cure such breach or to
repurchase or, if so provided in the
related Prospectus Supplement, substitute
for the affected Contract, in each case
under the conditions further described
herein and in the Prospectus Supplement.
See "Description of the Trust Documents--
Sale and Assignment of the Contracts."
Optional Purchase of Contracts..... Unless otherwise specified in the related
Prospectus Supplement, with respect to each
Series of Securities, the Seller or the
Servicer may purchase all the Contracts
held by the related Trust on any
Distribution Date following the first Due
Period as of which the Aggregate Principal
Balance has declined to 10% or less (or
such other percentage as may be specified
in the related Prospectus Supplement) of
the Aggregate Principal Balance as of the
Cut-off Date (the "Cut-off Date Principal
Balance"), subject to certain provisions in
the related Trust Documents. See
"Description of the Trust Documents--
Termination."
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Tax Status.......................... In the opinion of Counsel to Green Tree,
for federal and Minnesota income tax
purposes, the Notes will be characterized
as debt and the Trust will not be
characterized as an association or a
publicly traded partnership taxable as a
corporation. Each Noteholder, by the
acceptance of a Note, will agree to treat
the Notes as debt. Each Certificateholder,
by the acceptance of a Certificate, will
agree to treat the Trust as a partnership
in which the Certificateholders are
partners for federal income tax purposes.
Alternative characterizations of the Trust,
the Notes and the Certificates are
possible, but would not result in
materially adverse tax consequences to
Noteholders or Certificateholders. See
"Certain Federal Income Tax Consequences"
and "Certain State Income Tax Consequences"
herein.
ERISA Considerations ............... Subject to the considerations discussed
under "ERISA Considerations" herein and in
the related Prospectus Supplement, and
unless otherwise specified in the related
Prospectus Supplement, the Notes will be
eligible for purchase by employee benefit
plans subject to the Employee Retirement
Income Security Act of 1974, as amended
("ERISA"). The related Prospectus
Supplement will provide further information
with respect to the eligibility of a Class
of Certificates for purchase
by employee benefit plans. A fiduciary of
any employee benefit plan subject to ERISA,
or the Internal Revenue Code of 1986, as
amended (the "Code"), should review
carefully with its legal advisors whether
the purchase or holding of a Class of
Certificates could give rise to a
transaction prohibited or otherwise
impermissible under ERISA or the Code. See
"ERISA Considerations" herein and in the
related Prospectus Supplement.
Legal Investment ................... The Securities will not constitute
"mortgage related securities" under the
Secondary Mortgage Market Enhancement Act
of 1984, as amended. See "Legal Investment
Considerations."
Rating.............................. As a condition of issuance, the Securities
of each Series offered pursuant to this
Prospectus will be rated in one of the four
highest rating categories by at least one
nationally recognized rating agency (a
"Rating Agency"). There is no assurance
that the rating initially assigned to such
Securities will not be subsequently lowered
or withdrawn by the Rating Agency. In the
event the rating initially assigned to any
Securities is subsequently lowered for any
reason, no person or entity will be
obligated to provide any
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credit enhancement in addition to the
credit enhancement, if any, specified in
the related Prospectus Supplement.
Registration of Certificates........ Unless otherwise specified in the related
Prospectus Supplement, the Notes and the
Certificates, if any, of each Series will
be registered in the name of Cede & Co., as
the nominee of DTC, and will be available
for purchase only in book-entry form on the
records of DTC and participating members
thereof. Notes and Certificates will be
issued in definitive form only under the
limited circumstances
described herein. All references herein to
"Holders," "Certificateholders" or
"Noteholders" shall reflect the rights of
beneficial owners of Notes ("Note Owners")
or of Certificates ("Certificate Owners"),
as the case may be, as they may indirectly
exercise such rights through DTC and
participating members thereof, except as
otherwise specified herein or in the
related Prospectus Supplement. See "Certain
Information Regarding the Securities--Book-
Entry Registration."
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RISK FACTORS
LIMITED OBLIGATIONS
Except as otherwise specified in the related Prospectus Supplement, the
Securities of a Series will not represent an interest in or obligation of
Green Tree. The Securities 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.
RISKS TO INVESTORS UPON ANY INSOLVENCY OF GREEN TREE
Green Tree intends that any transfer of Contracts to the related Trust will
constitute a sale, rather than a pledge of the Contracts to secure
indebtedness of Green Tree. However, if Green Tree were to become a debtor
under the federal bankruptcy code or similar applicable state laws
(collectively, "Insolvency Laws"), a creditor or trustee in bankruptcy of
Green Tree or Green Tree as debtor-in-possession might argue that such sale of
Contracts by Green Tree was a pledge of the Contracts rather than a sale. This
position, if presented to or accepted by a court, could cause the related
Trust to experience a delay in or reduction of collections on the Contracts.
JUNIOR MORTGAGE LIENS; VALUE OF MORTGAGED PROPERTY
Green Tree expects that a substantial number of the liens on the improved
real estate securing the Contracts in a given Contract Pool will be junior to
other liens on such real estate. The rights of the Trust Contract (and
therefore the Securityholders 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 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 Contract--Repurchase Obligations."
VALUE OF MORTGAGED PROPERTY
A substantial portion of the Contracts included in a Contract Pool are
expected to have loan-to-value ratios of 90% or more, based on the aggregate
of the outstanding principal balances of all senior mortgages or deeds of
trust and of the Contract on the one hand, and the value of the home on the
other. See "Green Tree Financial Corporation--Contract Origination." An
overall decline in the residential real estate market, the general condition
of a property securing a Contract or other factors could adversely affect the
value of the property securing a Contract such that the remaining balance of
such Contract, together with that of any senior liens on the related property,
could equal or exceed the value of the property.
NON-RECORDATION OF MORTGAGE ASSIGNMENTS
Because of the expense and administrative inconvenience involved, Green Tree
will not record the assignment to the Trustee of the mortgage or deed of trust
securing any Contract. In some states, in the absence of such recordation, the
assignment to the related Trustee of the mortgage or deed of trust securing a
Contract may not be effective against creditors of or purchasers from Green
Tree or a trustee in bankruptcy of Green Tree.
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SUBORDINATION OF CERTAIN CLASSES OF SECURITIES; LIMITED ASSETS
To the extent specified in the related Prospectus Supplement, distributions
of interest and principal on some or all Classes of Securities of a Series may
be subordinated in priority of payment to interest and principal due on the
Notes of such Series and/or to distributions of interest and principal on
other Classes of Securities of such Series. In addition, holders of certain
Classes of Securities of any Series may have the right to take actions that
are detrimental to the interests of the holders of certain other Classes of
Securities of such Series. For example, holders of a Class of more senior
Securities may be entitled to instruct the Indenture Trustee or Trustee to
liquidate the Trust Property when it is not in the interest of holders of more
junior Classes of Securities of such Series to do so. Conversely, certain
actions may require the consent of a majority of Security Owners of all
Classes of a Series, which may mean that Security Owners of more junior
classes can prevent the Security Owners of more senior Classes of such Series
from taking action. Moreover, no Trust will have any significant assets or
sources of funds other than the Contracts and, to the extent provided in the
related Prospectus Supplement, a Pre-Funding Account and any credit
enhancement specified in the related Prospectus Supplement. The Notes of any
Series will represent obligations solely of, and the Certificates, if any, of
such Series will represent interests solely in, the related Trust, and, except
as specified in the related Prospectus Supplement, neither the Notes nor the
Certificates of any such Series will be insured or guaranteed by Green Tree,
the Servicer, the applicable Owner Trustee, the applicable Indenture Trustee
or any other person or entity. Consequently, holders of the Securities of any
Series must rely for payment upon payments on the related Contracts and, if
and to the extent available, amounts on deposit in the Pre-Funding Account, if
any, and any credit enhancement, if any, as specified in the related
Prospectus Supplement. If specified in the related Prospectus Supplement,
credit enhancement for a Class of Securities of a Series may cover one or more
other Classes of Securities of such Series, and accordingly may be exhausted
for the benefit of some Classes and thereafter be unavailable for such other
Classes.
YIELD AND PREPAYMENT CONSIDERATIONS
The weighted average life of the Securities will be reduced by full or
partial prepayments on the Contracts. The Contracts will generally be
prepayable at any time without penalty. Prepayments (or, for this purpose,
equivalent payments to the related Trust) may result from payments by
Obligors, liquidations due to default, the receipt of proceeds from physical
damage or credit insurance, repurchases by Green Tree as a result of certain
uncured breaches of the warranties made by it with respect to the Contracts,
purchases by the Servicer as a result of certain uncured breaches of the
covenants with respect to the Contracts made by it in the related Sale and
Servicing Agreement, or Green Tree or the Servicer exercising its option to
purchase all of the remaining Contracts.
Unless otherwise specified in the related Prospectus Supplement, the amounts
paid to Securityholders in respect of principal on any Distribution Date will
include all prepayments on the Contracts during the corresponding Due Periods.
The Certificate Owners and the Note Owners will bear all reinvestment risk
resulting from the timing of payments of principal on the Securities.
LIMITED LIQUIDITY OF THE SECURITIES
There is currently no market for the Securities of any Series. Although
Green Tree expects that the underwriters of any particular Series will intend
to make a secondary market for such Securities, they will have no obligation
to do so. There can be no assurance that any such market will develop or, if
it does develop, that it will provide Certificate Owners or Note Owners with
liquidity of investment or will continue for the life of the Securities. The
Securities will not be listed on any securities exchange.
Unless otherwise specified in the related Prospectus Supplement, the
Securities will be issued in book-entry, rather than physical, form and, as a
result, in certain circumstances, the liquidity of the Securities in the
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secondary market and the ability of the Certificate Owners and Note Owners to
pledge them may be adversely affected. See "Plan of Distribution" and "Certain
Information Regarding the Securities--Book-Entry Registration."
THE TRUSTS
With respect to each Series of Securities, Green Tree will establish a Trust
pursuant to the related Trust Documents. Prior to the sale and assignment of
the related Contracts pursuant to the related Trust Documents, the Trust will
have no assets or obligations. The Trust will not engage in any business
activity other than acquiring and holding the Trust Property, issuing the
Notes and the Certificates, if any, of such Series and distributing payments
thereon.
Each Note will represent an obligation of, and each Certificate, if any,
will represent a fractional undivided interest in, the related Trust. The
Trust Property of each Trust will include, among other things, (i) a Contract
Pool, (ii) such amounts as from time to time may be held in the Collection
Account (including all investments in the Collection Account and all income
from the investment of funds therein and all proceeds thereof) and certain
other accounts (including the proceeds thereof), (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 Securities, (iv)
certain other rights under the Trust Documents and (v) such other property as
may be specified in the related Prospectus Supplement. See "The Contracts" and
"Description of the Trust Documents--Collections." The Trust Property will
also include, if so specified in the related Prospectus Supplement, monies on
deposit in a Pre-Funding Account to be established with the Indenture Trustee
or the Trustee, which will be used to purchase Subsequent Contracts from Green
Tree from time to time (and as frequently as daily) during the Pre-Funding
Period specified in the related Prospectus Supplement. Any Subsequent
Contracts so purchased will be included in the related Contract Pool forming
part of the Trust Property, subject to the prior rights of the related
Indenture Trustee and the Noteholders therein. In addition, to the extent
specified in the related Prospectus Supplement, a form of credit enhancement
may be issued to or held by the Trustee or the Indenture Trustee for the
benefit of holders of one or more Classes of Securities. Holders of Securities
of a Series will have interests only in such Contract Pool and will have no
interest in the Contract Pool created with respect to any other Series of
Securities, except with respect to FHA Insurance reserves.
Except as otherwise specified in the related Prospectus Supplement, all of
the Contracts will have been originated by Green Tree in the ordinary course
of its business. Specific information respecting the Contracts included in
each Trust 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 Securities. A copy of the Sale and Servicing Agreement with
respect to each Series of Securities will be attached to the Form 8-K and will
be available for inspection at the corporate trust office of the Trustee
specified in the related Prospectus Supplement. A schedule of the Contracts
relating to such Series will be attached to the Sale and Servicing Agreement
delivered to the Trustee upon delivery of the Securities.
Whenever in this Prospectus terms such as "Contract Pool," "Trust," "Sale
and Servicing Agreement," "Interest Rate or "Pass-Through Rate" are used,
those terms respectively apply, unless the context otherwise indicates, to one
specific Contract Pool and Trust, each Sale and Servicing Agreement, each
Interest Rate applicable to the related Class of Notes and each Pass-Through
Rate applicable to the related Class of Certificates.
THE CONTRACT POOLS
Except as otherwise specified in the related Prospectus Supplement, the
Contract Pool will consist of closed-end home equity loans (the "Contracts")
originated by Green Tree on an individual basis in the ordinary course of
business. All Contracts will be secured by an interest in the related real
estate. Except as otherwise specified
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in the related Prospectus Supplement, the Contracts will be fully amortizing
and will bear interest at a fixed or variable annual percentage rate (the
"Contract Rate").
For each Series of Securities, Green Tree will assign the Contracts
constituting the Contract Pool to the trustee named in the related Prospectus
Supplement (the "Trustee"). Green Tree, as Servicer (in such capacity referred
to herein as the "Servicer," which term shall include any successor to Green
Tree in such capacity under the applicable Sale and Servicing Agreement), will
service the Contracts pursuant to the Sale and Servicing Agreement. See
"Description of the Trust Documents--Servicing." Unless otherwise specified in
the related Prospectus Supplement, the Contract documents will be held by the
Trustee or a custodian on its behalf.
The related Prospectus Supplement will specify for the Contracts contained
in the related Contract Pool, among other things, the range of the dates of
origination of the Contracts; the range of the Contract Rates and the weighted
average Contract Rate; the minimum and maximum outstanding principal balances
and the average outstanding principal balance as of the Cut-off Date; the
aggregate principal balance of the Contracts included in the Contract Pool as
of the Cut-off Date; the weighted average and range of scheduled terms to
maturity as of origination and as of the Cut-off Date; the range of original
maturities of the Contracts and the last maturity date of any Contract; and
the geographic location of improved real estate securing the Contracts. If the
Trust includes a Pre-Funding Account, the related Prospectus Supplement will
specify the conditions that must be satisfied prior to any transfer of
Subsequent Contracts, including the requisite characteristics of the
Subsequent Contracts.
Green Tree will make representations and warranties as to the types and
geographical distribution of the Contracts included in a Contract Pool and as
to the accuracy in all material respects of certain information furnished to
the Trustee in respect of each such Contract. Upon a breach of any
representation or warranty that materially and adversely affects the interests
of the Securityholders in a Contract, Green Tree will be obligated to cure the
breach in all material respects, or to repurchase or substitute for
the Contract as described below. This repurchase obligation constitutes the
sole remedy available to the Securityholders or the Trustee for a breach of
representation or warranty by Green Tree. See "Description of the Trust
Documents--Sale and Assignment of the Contracts."
THE TRUSTEE
The Trustee for each Trust will be specified in the related Prospectus
Supplement. The Trustee's liability in connection with the issuance and sale
of the Securities of such Series will be limited solely to the express
obligations of such Trustee set forth in the related Trust Documents. A
Trustee may resign at any time, in which event the General Partner will be
obligated to appoint a successor trustee. The General Partner may also remove
the Trustee if the Trustee ceases to be eligible to continue as Trustee under
the related Trust Documents or if the Trustee becomes insolvent. In such
circumstances, the General Partner will be obligated to appoint a successor
trustee. Any resignation or removal of a Trustee and appointment of a
successor trustee will be subject to any conditions or approvals specified in
the related Prospectus Supplement and will not become effective until
acceptance of the appointment by the successor trustee.
GREEN TREE FINANCIAL CORPORATION
GENERAL
Green Tree is a Delaware corporation that, as of December 31, 1997, had
stockholders' equity of approximately $1,315,000,000]. Through its various
divisions, Green Tree purchases, pools, sells and services retail conditional
sales contracts for manufactured housing and retail installment sales
contracts, as well as home equity loans. Green Tree 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 Green Tree. Through its principal offices in St. Paul,
Minnesota, and service centers throughout the United States, Green Tree serves
all 50 states.
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Green Tree also purchases, pools and services installment sales contracts for
various consumer products. Its principal executive offices are located at 1100
Landmark Towers, St. Paul, Minnesota 55102-1639 (telephone (612) 293-3400).
Green Tree's Annual Report on Form 10-K for the year ended December 31, 1996,
most recent Proxy Statement and, when available, subsequent quarterly and
annual reports are available from Green Tree upon written request.
CONTRACT ORIGINATION
Green Tree has originated closed-end home equity loans since January 1996.
As of December 31, 1997, Green Tree had approximately $ aggregate
principal amount of outstanding closed-end home equity loans.
Through a system of regional offices, Green Tree markets its home equity
lending directly to consumers using a variety of marketing techniques. Green
Tree also reviews and re-underwrites loan applications forwarded by
correspondent lenders.
Green Tree'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.
LOSS AND DELINQUENCY INFORMATION
Each Prospectus Supplement will include Green Tree's loss and delinquency
experience with respect to its entire servicing portfolio of home equity
loans. However, there can be no assurance that such experience will be
indicative of the performance of the Contracts included in a particular
Contract Pool.
RATIO OF EARNINGS TO FIXED CHARGES FOR GREEN TREE
Set forth below are Green Tree'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>
YEAR ENDED DECEMBER 31,
------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Ratio of Earnings to Fixed Charges..................... 3.55 4.81 7.98 7.90 7.83
</TABLE>
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YIELD CONSIDERATIONS
The Interest Rates, Pass-Through Rates and the weighted average Contract
Rate of the Contracts (as of the related Cut-off Date) relating to each Series
of Securities 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 Securities 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 Securities that is offered at a premium to its principal amount or
without any principal amount.
The yield on some types of Securities which may be offered hereby, such as
Stripped Notes, Interest Only Certificates, Principal Only Certificates and
Fast Pay/Slow Pay Certificates, may be particularly sensitive to prepayment
rates, and to changes in prepayment rates, on the underlying Contracts. If so
stated in the related Prospectus Supplement, the yield on some types of
Securities which may be offered hereby could change and may be negative under
certain prepayment rate scenarios. Accordingly, some types of Securities may
not be legal or appropriate investments for certain financial institutions,
pension funds or others. See "ERISA Considerations" and "Legal Investment
Considerations." In addition, the timing of changes in the rate of prepayment
on the Contracts included in a Contract Pool may significantly affect an
investor's actual yield to maturity, even if the average prepayment rate over
time is consistent with the investor's expectations. In general, the earlier
that prepayments on Contracts occur, the greater the effect on the investor's
yield to maturity.
MATURITY AND PREPAYMENT CONSIDERATIONS
MATURITY
Unless otherwise described in an applicable Prospectus Supplement, all of
the Contracts will have maturities at origination of not more than 25 years.
PREPAYMENT CONSIDERATIONS
Contracts generally may be prepaid in full or in part without penalty. Green
Tree has no significant experience with respect to the rate of principal
prepayments on home equity loans. Because the Contracts have scheduled due
dates throughout the calendar month, and because (unless otherwise specified
in the related Prospectus Supplement) all principal prepayments will be passed
through to Securityholders of the related Series on the Payment Date following
the Due Period in which such principal prepayment occurred, prepayments on the
Contracts would affect the amount of funds available to make distributions on
the Securities on any Payment Date only if a substantial portion of the
Contracts prepaid prior to their respective due dates in a particular month
(thus paying less than 30 days' interest for that Due Period) while very few
Contracts prepaid after their respective due dates in that month. In addition,
liquidations of defaulted Contracts or the Servicer's or Green Tree's exercise
of its option to repurchase the entire remaining pool of Contracts (see
"Description of the Trust Documents--Termination") will affect the timing of
principal distributions on the Securities 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 Securities. Although the related
Prospectus Supplement will specify the prepayment assumptions used to price
any Series of Securities, there can be no assurance that the Contracts will
prepay at such rate, and it is unlikely that prepayments or liquidations of
the Contracts will occur at any constant rate.
See "Description of the Trust Documents--Termination" for a description of
Green Tree's or the Servicer's option to repurchase the Contracts comprising
part of a Trust when the Aggregate Principal Balance of such Contracts as of
the related Cut-off Date is less than a specified percentage of the Cut-off
Date Principal Balance of such Contracts. See also "The Trusts--The Contract
Pools" for a description of the obligations of Green Tree to repurchase a
Contract in case of a breach of a representation or warranty relative to such
Contract.
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POOL FACTOR
The "Certificate Pool Factor" for each Class of Certificates will be an
eight-digit decimal which the Servicer will compute indicating the outstanding
balance (the "Certificate Balance") with respect to such Certificates as of
each Distribution Date (after giving effect to all distributions of principal
made on such Distribution Date), as a fraction of the original Certificate
Balance of such Certificates. The "Note Pool Factor" for each Class of Notes,
if any, will be an eight-digit decimal which the Servicer will compute
indicating the remaining outstanding principal balance with respect to such
Notes as of each Distribution Date (after giving effect to all distributions
of principal on such Distribution Date) as a fraction of the initial
outstanding principal balance of such Class of Notes. Each Certificate Pool
Factor and each Note Pool Factor will initially be 1.00000000; thereafter, the
Certificate Pool Factor and the Note Pool Factor will decline to reflect
reductions in the Certificate Balance of the applicable Class of Certificates
or reductions in the outstanding principal balance of the applicable Class of
Notes, as the case may be. The amount of a Certificateholder's pro rata share
of the Certificate Balance for the related Class of Certificates can be
determined by multiplying the original denomination of the Certificateholder's
Certificate by the then applicable Certificate Pool Factor. The amount of a
Noteholder's pro rata share of the aggregate outstanding principal balance of
the applicable Class of Notes can be determined by multiplying the original
denomination of such Noteholder's Note by the then applicable Note Pool
Factor.
With respect to each Trust and pursuant to the related Trust Documents, on
each Distribution Date or Payment Date, as the case may be, the related
Certificateholders and Noteholders will receive periodic reports from the
Trustee stating the Certificate Pool Factor or the Note Pool Factor, as the
case may be, and containing various other items of information. Unless and
until Definitive Certificates or Definitive Notes are issued, such reports
will be sent on behalf of the Trust to the Trustee and the Indenture Trustee
and Cede & Co., as registered holder of the Certificates and the Notes and the
nominee of DTC. Certificate Owners and Note Owners may receive such reports,
upon written request, together with a certification that they are Certificate
Owners or Note Owners and payment of any expenses associated with the
distribution of such reports, from the Trustee and the Indenture Trustee at
the addresses specified in the related Prospectus Supplement. See "Certain
Information Regarding the Securities--Statements to Securityholders."
USE OF PROCEEDS
Unless otherwise specified in the related Prospectus Supplement, the net
proceeds to be received by the Trust from the sale of each Series of
Securities will be used to pay to Green Tree the purchase price for the
Contracts and to make the deposit of the Pre-Funded Amount into the Pre-
Funding Account, if any, to repay warehouse lenders and/or to provide for
other forms of credit enhancement specified in the related Prospectus
Supplement. The net proceeds to be received by Green Tree will be used for its
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
Contracts and issuing the Securities.
THE NOTES
GENERAL
With respect to each Series of Securities, one or more Classes of Notes will
be issued pursuant to the terms of an Indenture, a form of which has been
filed as an exhibit to the Registration Statement of which this Prospectus
forms a part. Unless otherwise specified in the related Prospectus Supplement,
no Notes will be issued as a part of any Series. The following summary does
not purport to be complete and is subject to, and is qualified in its entirety
by reference to, all of the provisions of the Notes and the Indenture, and the
following summary will be supplemented in whole or in part by the related
Prospectus Supplement. Where particular provisions of or terms used in the
Indenture are referred to, the actual provisions (including definition of
terms) are incorporated by reference as part of this summary.
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Unless otherwise specified in the related Prospectus Supplement, each Class
of Notes will initially be represented by a single Note registered in the name
of the nominee of the Depository. See "Certain Information Regarding the
Securities--Book-Entry Registration." Unless otherwise specified in the
related Prospectus Supplement, Notes will be available for purchase in
denominations of $1,000 and integral multiples thereof. Notes may be
transferred or exchanged without the payment of any service charge other than
any tax or governmental charge payable in connection with such transfer or
exchange. Unless otherwise provided in the related Prospectus Supplement, the
Indenture Trustee will initially be designated as the registrar for the Notes.
PRINCIPAL AND INTEREST ON THE NOTES
The timing and priority of payment, seniority, allocations of loss, Interest
Rate and amount of or method of determining payments of principal and interest
on the Notes will be described in the related Prospectus Supplement. The right
of holders of any Class of Notes to receive payments of principal and interest
may be senior or subordinate to the rights of holders of any Class or Classes
of Notes of such Series, or any Class of Certificates, as described in the
related Prospectus Supplement. Unless otherwise provided in the related
Prospectus Supplement, payments of interest on the Notes will be made prior to
payments of principal thereon. A Series may include one or more Classes of
Stripped Notes entitled to (i) principal payments with disproportionate,
nominal or no interest payment, or (ii) interest payments with
disproportionate, nominal or no principal payments. Each Class of Notes may
have a different Interest Rate, which may be a fixed, variable or adjustable
Interest Rate (and which may be zero for certain Classes of Stripped Notes),
or any combination of the foregoing. The related Prospectus Supplement will
specify the Interest Rate for each Class of Notes, or the initial Interest
Rate and the method for determining the Interest Rate. One or more Classes of
Notes of a Series may be redeemable under the circumstances specified in the
related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, payments in
respect of interest to Noteholders of all Classes within a Series will have
the same priority. Under certain circumstances, the amount available for such
payments could be less than the amount of interest payable on the Notes on any
of the dates specified for payments in the related Prospectus Supplement
(each, a "Payment Date"), in which case each Class of Noteholders will receive
their ratable share (based upon the aggregate amount of interest due to such
Class of Noteholders) of the aggregate amount available to be distributed in
respect of interest on the Notes.
In the case of a Series of Securities which includes two or more Classes of
Notes, the timing, sequential order and priority of payment in respect of
principal and interest, and any schedule or formula or other provisions
applicable to the determination thereof, of each such Class will be set forth
in the related Prospectus Supplement. Unless otherwise specified in the
related Prospectus Supplement, payments in respect of principal and interest
of any Class of Notes will be made on a pro rata basis among all of the Notes
of such Class.
THE INDENTURE
A form of Indenture has been filed as an exhibit to the Registration
Statement of which this Prospectus forms a part. Green Tree will provide a
copy of the applicable Indenture (without exhibits) upon request to a holder
of Notes issued thereunder.
Modification of Indenture Without Noteholder Consent. Each Trust and related
Indenture Trustee (on behalf of such Trust) may, without consent of the
related Noteholders, enter into one or more supplemental indentures for any of
the following purposes: (i) to correct or amplify the description of the
collateral or add additional collateral; (ii) to provide for the assumption of
the Note and the Indenture obligations by a permitted successor to the Trust;
(iii) to add additional covenants for the benefit of the related Noteholders;
(iv) to convey, transfer, assign, mortgage or pledge any property to or with
the Indenture Trustee; (v) to cure any ambiguity or correct or supplement any
provision in the Indenture or in any supplemental indenture; (vi) to provide
for the acceptance of the appointment of a successor Indenture Trustee or to
add to or change any of the provisions of the Indenture or any supplemental
indenture which may be inconsistent with any other provision of the Indenture
as shall be necessary and permitted to facilitate the administration by more
than one trustee; (vii) to modify,
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<PAGE>
eliminate or add to the provisions of the Indenture in order to comply with
the Trust Indenture Act of 1939, as amended; and (viii) to add any provisions
to, change in any manner, or eliminate any of the provisions of, the Indenture
or modify in any manner the rights of Noteholders under such Indenture;
provided that any action specified in this clause (viii) shall not, as
evidenced by an opinion of counsel, adversely affect in any material respect
the interests of any related Noteholder unless Noteholder consent is otherwise
obtained as described below.
Modifications of Indenture With Noteholder Consent. With respect to each
Trust, with the consent of the holders representing a majority of the
principal balance of the outstanding related Notes (a "Note Majority"), the
Owner Trustee and the Indenture Trustee may execute a supplemental indenture
to add provisions, to change in any manner or eliminate any provisions of, the
related Indenture, or modify in any manner the rights of the related
Noteholders.
Without the consent of the holder of each outstanding related Note affected
thereby, however, no supplemental indenture may: (i) change the due date of
any installment of principal of or interest on any Note or reduce the
principal amount thereof, the interest rate specified thereon or the
redemption price with respect thereto or change the manner of calculating any
such payment, any place of payment where, or the coin or currency in which any
Note or any interest thereon is payable; (ii) impair the right to institute
suit for the enforcement of certain provisions of the Indenture regarding
payment; (iii) reduce the percentage of the aggregate amount of the
outstanding Notes the consent of the holders of which is required for any such
supplemental indenture or the consent of the holders of which is required for
any waiver of compliance with certain provisions of the Indenture or of
certain defaults thereunder and their consequences as provided for in the
Indenture; (iv) modify or alter the provisions of the Indenture regarding the
voting of Notes held by the related Trust, any other obligor on the Notes,
Green Tree or an affiliate of any of them; (v) reduce the percentage of the
aggregate outstanding amount of the Notes the consent of the holders of which
is required to direct the Indenture Trustee to sell or liquidate the Contracts
if the proceeds of such sale would be insufficient to pay the principal amount
and accrued but unpaid interest on the outstanding Notes; (vi) decrease the
percentage of the aggregate principal amount of the Notes required to amend
the sections of the Indenture which specify the applicable percentage of
aggregate principal amount of the Notes necessary to amend the Indenture or
certain other related agreements; or (vii) permit the creation of any lien
ranking prior to or on a parity with the lien of the Indenture with respect to
any of the collateral for the Notes or, except as otherwise permitted or
contemplated in the Indenture, terminate the lien of the Indenture on any such
collateral or deprive the holder of any Note of the security afforded by the
lien of the Indenture.
Events of Default; Rights Upon Event of Default. With respect to each Trust,
unless otherwise specified in the related Prospectus Supplement, "Events of
Default" under the Indenture will consist of: (i) a default for five days or
more in the payment of any interest on any Note; (ii) a default in the payment
of the principal of or any installment of the principal of any Note when the
same becomes due and payable; (iii) a default in the observance or performance
in any material respect of any covenant or agreement of the Trust made in the
Indenture, or any representation or warranty made by the Trust in the
Indenture or in any certificate delivered pursuant thereto or in connection
therewith having been incorrect as of the time made, and the continuation of
any such default or the failure to cure such breach of a representation or
warranty for a period of 30 days after notice thereof is given to the Trust by
the Indenture Trustee or to the Trust and the Indenture Trustee by the holders
of at least 25% in principal amount of the Notes then outstanding; or (iv)
certain events of bankruptcy, insolvency, receivership or liquidation of the
Trust. However, the amount of principal due and payable on any Class of Notes
on any Payment Date (prior to the final scheduled payment date, if any, for
such Class) will generally be determined by amounts available to be deposited
in the Note Distribution Account for such Payment Date. Therefore, unless
otherwise specified in the related Prospectus Supplement, the failure to pay
principal on a Class of Notes generally will not result in the occurrence of
an Event of Default unless such Class of Notes has a final scheduled payment
date, and then not until such final scheduled payment date for such Class of
Notes.
Unless otherwise specified in the related Prospectus Supplement, if an Event
of Default should occur and be continuing with respect to the Notes of any
Series, the related Indenture Trustee or a Note Majority may
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declare the principal of the Notes to be immediately due and payable. Such
declaration may, under certain circumstances, be rescinded by a Note Majority.
Unless otherwise specified in the related Prospectus Supplement, if the
Notes of any Series have been declared due and payable following an Event of
Default with respect thereto, the related Indenture Trustee may institute
proceedings to collect amounts due or foreclose on Trust Property, exercise
remedies as a secured party, sell the related Contracts or elect to have the
Trust maintain possession of such Contracts and continue to apply collections
on such Contracts as if there had been no declaration of acceleration. Unless
otherwise specified in the related Prospectus Supplement, the Indenture
Trustee, however, will be prohibited from selling the related Contracts
following an Event of Default, unless (i) the holders of all the outstanding
related Notes consent to such sale; (ii) the proceeds of such sale are
sufficient to pay in full the principal of and the accrued interest on such
outstanding Notes at the date of such sale; or (iii) the Indenture Trustee
determines that the proceeds of the Contracts would not be sufficient on an
ongoing basis to make all payments on the Notes as such payments would have
become due if such obligations had not been declared due and payable, and the
Indenture Trustee obtains the consent of the holders of 66 2/3% of the
aggregate outstanding amount of the Notes. Unless otherwise specified in the
related Prospectus Supplement, following a declaration upon an Event of
Default that the Notes are immediately due and payable, (i) Note Owners will
be entitled to ratable repayment of principal on the basis of their respective
unpaid principal balances and (ii) repayment in full of the accrued interest
on and unpaid principal balances of the Notes will be made prior to any
further payment of interest or principal on the Certificates.
Subject to the provisions of the Indenture relating to the duties of the
Indenture Trustee, if an Event of Default occurs and is continuing with
respect to a Series of Notes, the Indenture Trustee will be under no
obligation to exercise any of the rights or powers under the Indenture at the
request or direction of any of the holders of such Notes, if the Indenture
Trustee reasonably believes it will not be adequately indemnified against the
costs, expenses and liabilities which might be incurred by it in complying
with such request. Subject to the provisions for indemnification and certain
limitations contained in the Indenture, a Note Majority in a Series will have
the right to direct the time, method and place of conducting any proceeding or
any remedy available to the Indenture Trustee, and a Note Majority may, in
certain cases, waive any default with respect thereto, except a default in the
payment of principal or interest or a default in respect of a covenant or
provision of the Indenture that cannot be modified without the waiver or
consent of all of the holders of such outstanding Notes.
No holder of a Note of any Series will have the right to institute any
proceeding with respect to the related Indenture, unless (i) such holder
previously has given to the Indenture Trustee written notice of a continuing
Event of Default, (ii) the holders of not less than 25% in principal amount of
the outstanding Notes of such Series have made written request of the
Indenture Trustee to institute such proceeding in its own name as Indenture
Trustee, (iii) such holder or holders have offered the Indenture Trustee
reasonable indemnity, (iv) the Indenture Trustee has for 60 days failed to
institute such proceeding, and (v) no direction inconsistent with such written
request has been given to the Indenture Trustee during such 60-day period by
the holders of a majority in principal amount of such outstanding Notes.
If an Event of Default occurs and is continuing and if it is known to the
Indenture Trustee, the Indenture Trustee will mail to each Noteholder notice
of the Event of Default within 90 days after it occurs. Except in the case of
a failure to pay principal of or interest on any Note, the Indenture Trustee
may withhold the notice if and so long as it determines in good faith that
withholding the notice is in the interests of the Noteholders.
In addition, each Indenture Trustee and the related Noteholders, by
accepting the related Notes, will covenant that they will not at any time
institute against the Seller or the related Trust any bankruptcy,
reorganization or other proceeding under any federal or state bankruptcy or
similar law.
Neither the Indenture Trustee nor the Trustee in its individual capacity,
nor any holder of a Certificate including, without limitation, Green Tree, nor
any of their respective owners, beneficiaries, agents, officers, directors,
employees, affiliates, successors or assigns will, in the absence of an
express agreement to the contrary,
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be personally liable for the payment of the related Notes or for any agreement
or covenant of the related Trust contained in the Indenture.
Certain Covenants. Each Indenture will provide that the related Trust may
not consolidate with or merge into any other entity, unless (i) the entity
formed by or surviving such consolidation or merger is organized under the
laws of the United States or any state, (ii) such entity expressly assumes the
Trust's obligation to make due and punctual payments upon the Notes and the
performance or observance of every agreement and covenant of the Trust under
the Indenture, (iii) no Event of Default shall have occurred and be continuing
immediately after such merger or consolidation, (iv) the Trustee has been
advised that the then current rating of the related Notes or Certificates then
in effect would not be reduced or withdrawn by the Rating Agencies as a result
of such merger or consolidation, (v) the Trustee has received an opinion of
counsel to the effect that such consolidation or merger would have no material
adverse tax consequence to the Trust or to any related Note Owner or
Certificate Owner.
Each Trust will not, among other things, (i) except as expressly permitted
by the Indenture, the Trust Documents or certain related documents for such
Trust (collectively, the "Related Documents"), sell, transfer, exchange or
otherwise dispose of any of the assets of the Trust, (ii) claim any credit on
or make any deduction from the principal and interest payable in respect of
the related Notes (other than amounts withheld under the Code or applicable
state law) or assert any claim against any present or former holder of such
Notes because of the payment of taxes levied or assessed upon the Trust, (iii)
dissolve or liquidate in whole or in part, (iv) permit the validity or
effectiveness of the related Indenture to be impaired or permit any person to
be released from any covenants or obligations with respect to the related
Notes under such Indenture except as may be expressly permitted thereby, or
(v) except as expressly permitted by the Related Documents, permit any lien,
charge, excise, claim, security interest, mortgage or other encumbrance to be
created on or extend to or otherwise arise upon or burden the assets of the
Trust or any part thereof, or any interest therein or proceeds thereof.
No Trust may engage in any activity other than as specified under the
section of the related Prospectus Supplement entitled "The Trust." No Trust
will incur, assume or guarantee any indebtedness other than indebtedness
incurred pursuant to the related Notes and the related Indenture or otherwise
in accordance with the Related Documents.
Annual Compliance Statement. Each Trust will be required to file annually
with the related Indenture Trustee a written statement as to the fulfillment
of its obligations under the Indenture.
Indenture Trustee's Annual Report. The Indenture Trustee will be required to
mail each year to all related Noteholders a brief report relating to its
eligibility and qualification to continue as Indenture Trustee under the
related Indenture, any amounts advanced by it under the Indenture, the amount,
interest rate and maturity date of certain indebtedness owing by the Trust to
the Indenture Trustee in its individual capacity, the property and funds
physically held by the Indenture Trustee as such and any action taken by it
that materially affects the Notes and that has not been previously reported.
Note Owners may receive such reports upon written request, together with a
certification that they are Note Owners and payment of reproduction and
postage expenses associated with the distribution of such reports, from the
Indenture Trustee at the address specified in the related Prospectus
Supplement.
Satisfaction and Discharge of Indenture. The Indenture will be discharged
with respect to the collateral securing the related Notes upon the delivery to
the related Indenture Trustee for cancellation of all such Notes or, with
certain limitations, upon deposit with the Indenture Trustee of funds
sufficient for the payment in full of all of such Notes.
THE INDENTURE TRUSTEE
The Indenture Trustee for a Series of Notes will be specified in the related
Prospectus Supplement. The Indenture Trustee may resign at any time, in which
event the Seller will be obligated to appoint a successor
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trustee. Green Tree may also remove the Indenture Trustee if the Indenture
Trustee ceases to be eligible to continue as such under the Indenture or if
the Indenture Trustee becomes insolvent. In such circumstances, Green Tree
will be obligated to appoint a successor trustee. Any resignation or removal
of the Indenture Trustee and appointment of a successor trustee will be
subject to any conditions or approvals, if any, specified in the related
Prospectus Supplement and will not become effective until acceptance of the
appointment by a successor trustee.
THE CERTIFICATES
GENERAL
A Series of Securities may include one or more Classes of Certificates
issued pursuant to Trust Documents to be entered into between Green Tree, as
Seller and as Servicer, and the Trustee, forms of which have been filed as
exhibits to the Registration Statement of which this Prospectus forms a part.
The following summary does not purport to be complete and is subject to, and
is qualified in its entirety by reference to, all of the material provisions
of the Trust Documents. Where particular provisions of or terms used in the
Trust Documents are referred to, the actual provisions (including definitions
of terms) are incorporated by reference as part of this summary.
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.
Unless otherwise specified in the related Prospectus Supplement, each Class
of Certificates will initially be represented by a single Certificate
registered in the name of the nominee of DTC (together with any successor
depository selected by Green Tree, the "Depository"). See "Certain Information
Regarding the Securities--Book-Entry Registration." Unless otherwise specified
in the related Prospectus Supplement, the Certificates evidencing interests in
a Trust will be available for purchase in denominations of $1,000 initial
principal amount and integral multiples thereof, except that one Certificate
evidencing an interest in such Trust may be issued in a denomination that is
less than $1,000 initial principal amount. Certificates may be transferred or
exchanged without the payment of any service charge other than any tax or
governmental charge payable in connection with such transfer or exchange.
Unless otherwise specified in the related Prospectus Supplement, the Trustee
will initially be designated as the registrar for the Certificates.
DISTRIBUTIONS OF INTEREST AND PRINCIPAL
The timing and priority of distributions, seniority, allocations of loss,
Pass-Through Rate and amount of or method of determining distributions with
respect to principal and interest (or, where applicable, with respect to
principal only or interest only) on the Certificates of any Series will be
described in the related Prospectus Supplement. Distributions of interest on
the Certificates will be made on the dates specified in the related Prospectus
Supplement (each, a "Distribution Date") and, unless otherwise specified in
the related Prospectus Supplement, will be made prior to distributions with
respect to principal. A Series may include one or more Classes of Certificates
("Subordinated Certificates") which are subordinated in right of distribution
to one or more other Classes of Certificates ("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
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Certificates are subordinated (which may include a formula for determining the
subordinated amount or for determining the allocation of the Amount Available
(hereinafter defined) among Senior Certificates and Subordinated
Certificates), the allocation of losses among the Classes of Subordinated
Certificates, the period or periods of such subordination, the minimum
subordinated amount, if any, and any distributions or payments which will not
be affected by such subordination. The protection afforded to the Senior
Certificateholders from the subordination feature described above will be
effected by the preferential right of such Certificateholders to receive
current distributions from the Contract Pool. If a Series of Certificates
contains more than one Class of Subordinated Certificates, losses will be
allocated among such Classes in the manner described in the Prospectus
Supplement. If so specified in the applicable Prospectus Supplement, Mezzanine
Certificates or other Classes of Subordinated Certificates may be entitled to
the benefits of other forms of credit enhancement and may, if rated in one of
the four highest rating categories by a nationally recognized statistical
rating organization, be offered pursuant to this Prospectus and such
Prospectus Supplement.
If so specified in a Prospectus Supplement, a Series may include one or more
Classes of Certificates 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 Pass-Through Rate for
each Class of Certificate, or the initial Pass-Through Rate and the method for
determining the Pass-Through Rate. Unless otherwise specified in the related
Prospectus Supplement, interest on the Certificates will be calculated on the
basis of a 360-day year consisting of twelve 30-day months. Unless otherwise
specified in the related Prospectus Supplement, distributions in respect of
the Certificates will be subordinate to payments in respect of the Notes, if
any, as more fully described in the related Prospectus Supplement.
Distributions in respect of principal of any Class of Certificates will be
made on a pro rata basis among all of the Certificateholders of such Class.
In the case of a Series of Certificates which includes two or more Classes
of Certificates, the timing, sequential order, priority of payment or amount
of distributions in respect of principal, and any schedule or formula or other
provisions applicable to the determination thereof, of each such Class shall
be as set forth in the related Prospectus Supplement.
CERTAIN INFORMATION REGARDING THE SECURITIES
BOOK-ENTRY REGISTRATION
Unless otherwise provided in the related Prospectus Supplement, the
Securities of each Series will be registered in the name of Cede & Co., the
nominee of DTC. DTC is a limited-purpose trust company organized under the
laws of the State of New York, a member of the Federal Reserve System, a
"clearing corporation" within the meaning of the New York Uniform Commercial
Code, and a "clearing agency" registered pursuant to the provisions of Section
17A of the Exchange Act. DTC accepts securities for deposit from its
participating organizations ("Participants") and facilitates the clearance and
settlement of securities transactions between Participants in such securities
through electronic book-entry changes in accounts of Participants, thereby
eliminating the need for physical movement of certificates. Participants
include securities brokers and dealers, banks and trust companies and clearing
corporations and may include certain other organizations. Indirect access to
the DTC system is also available to others such as banks, brokers, dealers and
trust companies that clear through or maintain a custodial relationship with a
Participant, either directly or indirectly ("indirect participants").
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Certificate Owners and Note Owners who are not Participants but desire to
purchase, sell or otherwise transfer ownership of Securities may do so only
through Participants (unless and until Definitive Certificates or Definitive
Notes, each as defined below, are issued). In addition, Certificate Owners and
Note Owners will receive all distributions of principal of, and interest on,
the Securities from the Trustee or the Indenture Trustee, as applicable,
through DTC and Participants. Certificate Owners and Note Owners will not
receive or be entitled to receive certificates representing their respective
interests in the Securities, except under the limited circumstances described
below and such other circumstances, if any, as may be specified in the related
Prospectus Supplement.
Unless and until Definitive Securities are issued, it is anticipated that
the only Certificateholder of the Certificates and the only Noteholder of the
Notes, if any, will be Cede & Co., as nominee of DTC. Certificate Owners and
Note Owners will not be recognized by the Trustee as Certificateholders or by
the Indenture Trustee as Noteholders as those terms are used in the related
Trust Documents or Indenture. Certificate Owners and Note Owners will be
permitted to exercise the rights of Certificateholders or Noteholders, as the
case may be, only indirectly through Participants and DTC.
With respect to any Series of Securities, while the Securities 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 Securities and is required to receive
and transmit distributions of principal of, and interest on, the Securities.
Participants with whom Certificate Owners or Note Owners have accounts with
respect to Securities are similarly required to make book-entry transfers and
receive and transmit such distributions on behalf of their respective
Certificate Owners and Note Owners. Accordingly, although Certificate Owners
and Note Owners will not possess Securities, the Rules provide a mechanism by
which Certificate Owners and Note Owners will receive distributions and will
be able to transfer their interests.
With respect to any series of Securities, unless otherwise specified in the
related Prospectus Supplement, Certificates (if any) and Notes will be issued
in registered form to Certificate Owners and Note Owners, or their nominees,
rather than to DTC (such Certificates and Notes being referred to herein as
"Definitive Certificates" and "Definitive Notes," respectively), only if (i)
DTC, Green Tree or the Servicer advises the Trustee or the Indenture Trustee,
as the case may be, in writing that DTC is no longer willing or able to
discharge properly its responsibilities as nominee and depository with respect
to the Certificates or the Notes, and Green Tree, the Servicer, the Trustee or
the Indenture Trustee, as the case may be, is unable to locate a qualified
successor, (ii) Green Tree or the Administrator (if any) at its sole option
has advised the Trustee or the Indenture Trustee, as the case may be, in
writing that it elects to terminate the book-entry system through DTC and
(iii) after the occurrence of a Servicer Termination Event, the holders
representing a majority of the Certificate Balance (a "Certificate Majority")
or a Note Majority advises the Trustee or the Indenture Trustee, as the case
may be, through DTC, that continuation of a book-entry system is no longer in
their best interests. Upon issuance of Definitive Certificates or Definitive
Notes to Certificate Owners or Note Owners, such Certificates or Notes will be
transferable directly (and not exclusively on a book-entry basis) and
registered holders will deal directly with the Trustee or the Indenture
Trustee, as the case may be, with respect to transfers, notices and
distributions.
DTC has advised Green Tree that, unless and until Definitive Certificates or
Definitive Notes are issued, DTC will take any action permitted to be taken by
a Certificateholder or a Noteholder under the related Trust Documents or
Indenture only at the direction of one or more Participants to whose DTC
accounts the Certificates or Notes are credited. DTC has advised Green Tree
that DTC will take such action with respect to any fractional interest of the
Certificates or the Notes only at the direction of and on behalf of such
Participants beneficially owning a corresponding fractional interest of the
Certificates or the Notes. DTC may take actions, at the direction of the
related Participants, with respect to some Certificates or Notes which
conflict with actions taken with respect to other Certificates or Notes.
Issuance of Certificates and Notes in book-entry form rather than as
physical certificates or notes may adversely affect the liquidity of
Certificates or Notes in the secondary market and the ability of the
Certificate
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Owners or Note Owners to pledge them. In addition, since distributions on the
Certificates and the Notes will be made by the Trustee or the Indenture
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 or Note Owners,
Certificate Owners and Note Owners may experience delays in the receipt of
such distributions.
STATEMENTS TO SECURITYHOLDERS
On or prior to each Distribution Date, the Servicer will prepare and provide
to the Trustee a statement to be delivered to the related Certificateholders
on such Distribution Date. On or prior to each Distribution Date, the Servicer
will prepare and provide to the Indenture Trustee a statement to be delivered
to the related Noteholders on such Distribution Date. Such statements will be
based on the information in the related Servicer's Certificate setting forth
certain information required under the Trust Documents (the "Servicer's
Certificate"). Unless otherwise specified in the related Prospectus
Supplement, each such statement to be delivered to Certificateholders will
include the following information as to the Certificates with respect to such
Distribution Date or the period since the previous Distribution Date, as
applicable, and each such statement to be delivered to Noteholders will
include the following information as to the Notes with respect to such
Distribution Date or the period since the previous Distribution Date, as
applicable:
(i) the amount of the distribution allocable to interest on or with
respect to each Class of Securities;
(ii) the amount of the distribution allocable to principal on or with
respect to each Class of Securities;
(iii) the Certificate Balance and the Certificate Pool Factor for each
Class of Certificates and the aggregate outstanding principal balance and
the Note Pool Factor for each Class of Notes, after giving effect to all
payments reported under (ii) above on such date;
(iv) the amount of the Monthly Servicing Fee paid to the Servicer with
respect to the related Due Period or Periods, as the case may be;
(v) the Pass-Through Rate or Interest Rate for the next period for any
Class of Certificates or Notes with variable or adjustable rates;
(vi) the amount of Advances made by the Servicer with respect to such
Distribution Date, and the amount paid to the Servicer on such Distribution
Date as reimbursement of Advances made on previous Distribution Dates;
(vii) the amount, if any, distributed to Certificateholders and
Noteholders applicable to payments under the related form of credit
enhancement, if any;
(viii) the number and aggregate principal balance of Contracts delinquent
(i) 31-59 days, (ii) 60-89 and (iii) 90 or more days;
(ix) the number of Contracts liquidated during the Due Period ending
immediately before such Payment Date;
(x) such customary factual information as is necessary to enable
Securityholders to prepare their tax returns; and
(xi) such other information as may be specified in the related Prospectus
Supplement.
Each amount set forth pursuant to subclauses (i), (ii), (iv) and (vi) with
respect to Certificates or Notes will be expressed as a dollar amount per
$1,000 of the initial Certificate Balance or the initial principal balance of
the Notes, as applicable.
Unless and until Definitive Certificates or Definitive Notes are issued,
such reports with respect to a Series of Securities will be sent on behalf of
the related Trust to the Trustee, the Indenture Trustee and Cede & Co., as
registered holder of the Certificates and the Notes and the nominee of DTC.
Certificate Owners and Note Owners may receive copies of such reports upon
written request, together with a certification that they are Certificate
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Owners or Note Owners, as the case may be, and payment of reproduction and
postage expenses associated with the distribution of such reports, from the
Trustee or the Indenture Trustee, as applicable. See "Reports to
Securityholders" and "--Book-Entry Registration" above.
Within the prescribed period of time for tax reporting purposes after the
end of each calendar year during the term of a Trust, the Trustee and the
Indenture Trustee, as applicable, will mail to each holder of a Class of
Securities who at any time during such calendar year has been a
Securityholder, and received any payment thereon, a statement containing
certain information for the purposes of such Securityholder's preparation of
federal income tax returns. DTC will convey such information to its
Participants, who in turn will convey such information to their related
indirect participants in accordance with arrangements among DTC and such
participants. Certificate Owners and Note Owners may receive such reports upon
written request, together with a certification that they are Certificate
Owners or Note Owners and payment of reproduction and postage expenses
associated with the distribution of such information, from the Trustee, with
respect to Certificate Owners, or from the Indenture Trustee, with respect to
Note Owners, at the addresses specified in the related Prospectus Supplement.
See "Certain Federal Income Tax Consequences."
LISTS OF SECURITYHOLDERS
Unless otherwise provided in the related Prospectus Supplement, with respect
to each Series of Certificates, at such time, if any, as Definitive
Certificates have been issued, the Trustee will, upon written request by three
or more Certificateholders or one or more holders of Certificates evidencing
not less than 25% of the Certificate Balance, within five Business Days after
provision to the Trustee of a statement of the applicants' desire to
communicate with other Certificateholders about their rights under the related
Trust Documents or the Certificates and a copy of the communication that the
applicants propose to transmit, afford such Certificateholders access during
business hours to the current list of Certificateholders for purposes of
communicating with other Certificateholders with respect to their rights under
the Trust Documents. Unless otherwise specified in the related Prospectus
Supplement, the Trust Documents will not provide for holding any annual or
other meetings of Certificateholders.
Unless otherwise provided in the related Prospectus Supplement, with respect
to each Series of Notes, if any, at such time, if any, as Definitive Notes
have been issued, the Indenture Trustee will, upon written request by three or
more Noteholders or one or more holders of Notes evidencing not less than 25%
of the aggregate principal balance of the related Notes, within five Business
Days after provision to the Indenture Trustee of a statement of the
applicants' desire to communicate with other Noteholders about their rights
under the related Indenture or the Notes and a copy of the communication that
the applicants propose to transmit, afford such Noteholders access during
business hours to the current list of Noteholders for purposes of
communicating with other Noteholders with respect to their rights under the
Indenture. Unless otherwise specified in the related Prospectus Supplement,
the Indenture will not provide for holding any annual or other meetings of
Noteholders.
DESCRIPTION OF THE TRUST DOCUMENTS
Except as otherwise specified in the related Prospectus Supplement, the
following summary describes certain terms of the Sale and Servicing Agreements
and the Trust Agreements (collectively referred to as the "Trust Documents")
pursuant to which Green Tree will sell and assign such Contracts to a Trust
and the Servicer will agree to service such Contracts on behalf of the Trust,
and pursuant to which such Trust will be created and Certificates will be
issued. Forms of the Trust Documents have been filed as exhibits to the
Registration Statement of which this Prospectus forms a part. Green Tree will
provide a copy of such agreements (without exhibits) upon request to a holder
of Securities described therein. This summary does not purport to be complete
and is subject to, and qualified in its entirety by reference to, all of the
provisions of the Trust Documents. Where particular provisions or terms used
in the Trust Documents are referred to, the actual provisions (including
definitions of terms) are incorporated by reference as part of such summary.
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SALE AND ASSIGNMENT OF THE CONTRACTS
On the Closing Date (as defined in the Prospectus Supplement), Green Tree
will sell and assign to the Trust, without recourse, Green Tree's entire
interest in the related Contracts, including all principal and interest
received on or with respect to the Contracts (other than receipts of principal
and interest due on the Contracts before the Cut-off Date). Each Contract
transferred by Green Tree to the Trust will be identified in a schedule
appearing as an exhibit to the related Trust Documents (the "Schedule of
Contracts"). Concurrently with such sale and assignment, the Trustee will
execute and the Indenture Trustee will authenticate and deliver the Notes to
or upon the order of the Seller, and the Trustee will execute and deliver the
related certificates representing the Certificates, if any, to or upon the
order of Green Tree.
The Schedule of Contracts will include the amount of monthly payments due on
each Contract as of the date of issuance of the Securities, the Contract Rate
on each Contract and the maturity date of each Contract. Such list will be
available for inspection by any Securityholder at the principal executive
office of the Servicer. Prior to the conveyance of the Contracts to the
Trustee, Green Tree's internal audit department will complete a review of all
of the Contract files confirming the accuracy of the list of Contracts
delivered to the Trustee. Any Contract discovered not to agree with such list
in a manner that is materially adverse to the interests of the Securityholders
will be repurchased or substituted for by Green Tree, or, if the discrepancy
relates to the unpaid principal balance of a Contract, Green Tree may deposit
cash in the separate account maintained at an Eligible Institution in the name
of the Trustee (the "Collection Account") in an amount sufficient to offset
such discrepancy. If the Trust includes a Pre-Funding Account, the related
Prospectus Supplement will specify the conditions that must be satisfied prior
to any transfer of Subsequent Contracts, including the requisite
characteristics of the Subsequent Contracts.
Unless otherwise specified in the related Prospectus Supplement, the Trustee
or its custodian will maintain possession of the Contracts and any other
documents contained in the Contract files. Uniform Commercial Code financing
statements will be filed in Minnesota reflecting the sale and assignment of
the Contracts to the Trustee, and Green Tree's accounting records and computer
systems will also reflect such sale and assignment.
The counsel to Green Tree identified in the applicable Prospectus Supplement
will render an opinion to the Trustee that the transfer of the Contracts from
Green Tree to the related Trust would, in the event Green Tree became a debtor
under the United States Bankruptcy Code, be treated as a true sale and not as
a pledge to secure borrowings. If, however, the transfer of the Contracts from
Green Tree to the Trust were treated as a pledge to secure borrowings by Green
Tree, the distribution of proceeds of the Contracts to the Trust might be
subject to the automatic stay provisions of the United States Bankruptcy Code,
which would delay the distribution of such proceeds for an uncertain period of
time. In addition, a bankruptcy trustee would have the power to sell the
Contracts if the proceeds of such sale could satisfy the amount of the debt
deemed owed by Green Tree, or the bankruptcy trustee could substitute other
collateral in lieu of the Contracts to secure such debt, or such debt could be
subject to adjustment by the bankruptcy trustee if Green Tree were to file for
reorganization under Chapter 11 of the United States Bankruptcy Code.
Except as otherwise specified in the related Prospectus Supplement, Green
Tree will make certain representations and warranties in the Sale and
Servicing Agreement with respect to each Contract as of the related Closing
Date, including that: (a) as of the Cut-off Date the most recent scheduled
payment was made or was not delinquent more than 59 days; (b) no provision of
a Contract has been waived, altered or modified in any respect, except by
instruments or documents included in the Contract file and reflected on the
list of Contracts delivered to the Trustee; (c) each Contract is a legal,
valid and binding obligation of the Obligor and is enforceable in accordance
with its terms (except as may be limited by laws affecting creditors rights
generally); (d) no Contract is subject to any right of rescission, set-off,
counterclaim or defense; (e) each Contract was either (i) originated by a home
equity lender in the ordinary course of such lender's business and assigned to
Green Tree or (ii) was originated by Green Tree directly; (f) no Contract was
originated in or is subject to the laws of any jurisdiction whose laws would
make the transfer of the Contract or an interest therein pursuant to the Sale
and Servicing Agreement or the Securities unlawful; (g) each Contract complies
with all requirements of law;
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(h) no Contract has been satisfied, subordinated to a lower lien ranking than
its original position (if any) or rescinded; (i) each Contract creates a valid
and perfected lien on the related improved real estate (j) all parties to each
Contract had full legal capacity to execute such Contract; (k) no Contract has
been sold, conveyed and assigned or pledged to any other person and Green Tree
has good and marketable title to each Contract free and clear of any
encumbrance, equity, loan, pledge, charge, claim or security interest, and is
the sole owner and has full right to transfer such Contract to the Trustee;
(l) as of the Cut-off Date there was no default, breach, violation or event
permitting acceleration under any Contract (except for payment delinquencies
permitted by clause (a) above), no event that with notice and the expiration
of any grace or cure period would constitute a default, breach, violation or
event permitting acceleration under such Contract, and Green Tree has not
waived any of the foregoing; (m) each Contract is a fully-amortizing loan with
a fixed rate of interest and provides for level payments over the term of such
Contract; (n) each Contract 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 Contract set
forth in the list delivered to the Trustee is true and correct; (p) there is
only one original of each Contract; and (q) each Contract was originated or
purchased in accordance with Green Tree's then-current underwriting
guidelines.
The warranties of Green Tree will be made as of the execution and delivery
of the related Trust Documents and will survive the sale, transfer and
assignment of the related Contracts and other Trust Property to the Trust but
will speak only as of the date made.
Under the terms of the Sale and Servicing Agreement, if Green Tree becomes
aware of a breach of any such representation or warranty that materially
adversely affects the interests of the Note Owners, the Certificate Owners, if
any, or the related Trust in any Contract or receives written notice of such a
breach from the Trustee or the Servicer, then Green Tree will be obligated
either to cure such breach or to repurchase or, if so provided in the related
Prospectus Supplement, substitute for the affected Contract, in each case
under the conditions further described herein and in the Prospectus
Supplement. This repurchase obligation will constitute the sole remedy
available to the Trust and the Securityholders for a breach of a
representation or warranty under the Sale and Servicing Agreement with respect
to the Contracts (but not with respect to any other breach by Green Tree of
its obligations under the Sale and Servicing Agreement).
The "Purchase Amount" of a Contract at any time means the outstanding
principal amount of such Contract (without giving effect to any Advances made
by the Servicer or the Trustee), plus interest at the applicable Contract Rate
on such Contract from the end of the Due Period with respect to which the
Obligor last made a payment (without giving effect to any Advances made by the
Servicer or the Trustee) through the end of the immediately preceding Due
Period.
Upon the purchase by Green Tree of a Contract due to a breach of a
representation or warranty, the Trustee will convey such Contract and the
related Trust Property to Green Tree.
COLLECTIONS
With respect to each Trust, the Servicer will establish one or more
Collection Accounts in the name of the Indenture Trustee for the benefit of
the related Securityholders. If so specified in the related Prospectus
Supplement, the Indenture Trustee will establish and maintain for each Series
an account, in the name of the Indenture Trustee on behalf of the related
Noteholders, in which amounts released from the Collection Account and any
Pre-Funding Account and any amounts received from any source of credit
enhancement for payment to such Noteholders will be deposited and from which
all distributions to such Noteholders will be made (the "Note Distribution
Account"). With respect to any Series including one or more Classes of
Certificates, the Trustee will establish and maintain for each Series an
account, in the name of the Trustee on behalf of the related
Certificateholders, in which amounts released from the Collection Account and
any Pre-Funding Account and any amounts received from any source of credit
enhancement for distribution to such Certificateholders will be deposited and
from which all distributions to such Certificateholders will be made (the
"Certificate Distribution Account"). The Collection Account, the Certificate
Distribution Account (if any), and the Note Distribution
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Account (if any), are referred to herein collectively as the "Designated
Accounts." Any other accounts to be established with respect to a Trust will
be described in the related Prospectus Supplement.
Each Designated Account will be an Eligible Account maintained with the
Trustee, the Indenture Trustee and/or other depository institutions. "Eligible
Account" means any account which is (i) an account maintained with an Eligible
Institution (as defined below); (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 (or, if such depository
institution or trust company is a subsidiary of a bank holding company system,
the capital and surplus of the bank holding company) of not less than
$50,000,000 and the securities of such depository institution (or, if such
depository institution is a subsidiary of a bank holding company system and
such depository institution's securities are not rated, the securities of the
bank holding company) has a credit rating from each rating agency rating such
Series of Notes and/or Certificates (a "Rating Agency") in one of its generic
credit rating categories which signifies investment grade; or (iv) an account
that will not cause any Rating Agency to downgrade or withdraw its then-
current rating assigned to the Securities, as confirmed in writing by each
Rating Agency. "Eligible Institution" means any depository institution
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 Bank Insurance
Fund (currently administered by the Federal Deposit Insurance Corporation),
whose short-term deposits have been rated in one of the two highest rating
categories or such other rating category as will not adversely affect the
ratings assigned to the Securities of such Series. On the Closing Date
specified in the related Prospectus Supplement, the Servicer will cause to be
deposited in the Collection Account all payments on the Contracts received by
the Servicer after the Cut-off Date and on or prior to the second Business Day
preceding the Closing Date.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer will deposit in the Collection Account on a daily basis all proceeds
and collections received or made by it with respect to the related Contracts
subsequent to the Cut-off Date (including scheduled payments of principal and
interest due after the Cut-off Date but received by the Servicer on or before
the Cut-off Date), including:
(i) all Obligor payments on account of principal, including principal
prepayments, on the Contracts;
(ii) all Obligor payments on account of interest on the Contracts;
(iii) all amounts received and retained in connection with the
liquidation of defaulted Contracts, net of liquidation expenses ("Net
Liquidation Proceeds");
(iv) any Advances made as described under "Advances" below and certain
other amounts required under the Sale and Servicing Agreement to be
deposited in the Collection Account;
(v) all amounts received from any credit enhancement provided with
respect to a Series of Securities; and
(vi) all proceeds of any Contract or property acquired in respect thereof
repurchased by the Servicer or Green Tree, as described under "Sale and
Assignment of the Contracts" above or under "Repurchase Option" below.
Notwithstanding the foregoing and unless otherwise provided in the related
Prospectus Supplement, the Servicer may utilize an alternative remittance
schedule, if the Servicer provides to the Trustee and the Indenture Trustee
written confirmation from each Rating Agency that such alternative remittance
schedule will not result in the downgrading or withdrawal by such Rating
Agency of the rating(s) then assigned to the Securities. Green Tree will also
deposit into the Collection Account on or before the Deposit Date the Purchase
Amount of each Contract to be purchased by it for breach of a representation
or warranty.
For any Series of Securities, funds in the Designated Accounts and any other
accounts identified in the related Prospectus Supplement will be invested, as
provided in the related Trust Documents, at the direction of the Servicer in
United States government securities and certain other high-quality investments
meeting the
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criteria specified in the related Trust Documents ("Eligible Investments").
Eligible Investments shall mature no later than the Business Day preceding the
applicable Distribution Date for the Due Period to which such amounts relate.
Investments in Eligible Investments will be made in the name of the Trustee or
the Indenture Trustee, as the case may be, and such investments will not be
sold or disposed of prior to their maturity.
Unless otherwise specified in the related Prospectus Supplement, collections
or recoveries on a Contract (other than late fees or certain other similar
fees or charges) received during a Due Period and Purchase Amounts deposited
with the Trustee prior to a Distribution Date will be applied first to any
outstanding Advances made by the Servicer with respect to such Contract, and
then to interest and principal on the Contract in accordance with the terms of
the Contract.
SERVICING
Pursuant to the Sale and Servicing Agreement, the Servicer will service and
administer the Contracts assigned to the Trustee as more fully set forth
below. The Servicer will perform diligently all services and duties specified
in each Sale and Servicing Agreement, in the same manner as prudent lending
institutions of home improvement contracts of the same type as the Contracts
in those jurisdictions where the related real properties are located or as
otherwise specified in the Sale and Servicing 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 Contracts.
The Servicer will make reasonable efforts to collect all payments called for
under the Contracts and, consistent with the Sale and Servicing Agreement,
will follow such collection procedures with respect to the Contracts as it
follows with respect to loans or contracts serviced by it that are comparable
to the Contracts.
Evidence as to Compliance. Unless otherwise specified in the related
Prospectus Supplement, each Sale and Servicing Agreement will require the
Servicer to deliver to the Trustee a monthly report prior to each Payment
Date, setting forth certain information regarding the Contract Pool and the
Securities of such Series as is specified in the related Prospectus
Supplement. Each such report to the Trustee will be accompanied by a statement
from an appropriate officer of the Servicer certifying the accuracy of such
report and stating that the Servicer has not defaulted in the performance of
its obligations under the Sale and Servicing Agreement. On or before May 1 of
each year, the Servicer will deliver to the Trustee a report of a nationally
recognized accounting firm stating that such firm has examined certain
documents and records relating to the servicing of home improvement contracts
serviced by the Servicer under agreements similar to the Sale and Servicing
Agreement and stating that, on the basis of such procedures, such servicing
has been conducted in compliance with the Sale and Servicing 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 a Sale and Servicing 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 Sale and Servicing 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 Sale and
Servicing Agreement (i) a policy or policies of insurance covering errors and
omissions for failure to maintain insurance as required by the Sale and
Servicing Agreement, and (ii) a fidelity bond. Such policy or policies and
such fidelity bond shall be in such form and amount as is generally customary
among persons which service a portfolio of home improvement contracts having
an aggregate principal amount of $10 million or more and which are generally
regarded as servicers acceptable to institutional investors.
Servicing Compensation and Payment of Expenses. For its servicing of the
Contracts, the Servicer will receive servicing fees ("Servicing Fees") which
include a Monthly Servicing Fee (which Green Tree may assign) for each Due
Period (paid on the next succeeding Payment Date) equal to 1/12th of the
product of the
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annual servicing fee rate described in the applicable Prospectus Supplement
and the Aggregate Principal Balance for such Payment Date. As long as Green
Tree is the Servicer, the Trustee will pay Green Tree its Monthly Servicing
Fee from any monies remaining after the Securityholders 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, 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.
Customary servicing activities include collecting and recording payments,
communicating with Obligors, investigating payment delinquencies, providing
billing and tax records to Obligors and maintaining internal records with
respect to each Contract. Administrative services performed by the Servicer on
behalf of the Trust include selecting and packaging the Contracts, calculating
distributions to Securityholders and providing related data processing and
reporting services for Securityholders and on behalf of the Trustee. Expenses
incurred in connection with servicing of the Contracts and paid by Green Tree
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 Contracts or payment of Trustee's fees, and payment of expenses
incurred in connection with distributions and reports to Securityholders,
except that the Servicer shall be reimbursed out of the liquidation proceeds
of a liquidated Contract 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 Sale and Servicing
Agreement will occur if (i) any failure by the Servicer to deliver to the
Indenture Trustee for distribution to the Noteholders or to the Trustee for
distribution to the Certificateholders any required payment which continues
unremedied for 5 days (or such other period specified in the related
Prospectus Supplement) after the giving of written notice; (ii) any failure by
the Servicer duly to observe or perform in any material respect any other of
its covenants or agreements in the Trust Documents that materially and
adversely affects the interests of Securityholders, which, in either case,
continues unremedied for 30 days after the giving of written notice of such
failure of breach; (iii) any assignment or delegation by the Servicer of its
duties or rights under the Trust Documents, except as specifically permitted
under the Trust Documents, or any attempt to make such an assignment or
delegation; (iv) certain events of insolvency, readjustment of debt,
marshalling of assets and liabilities or similar proceedings regarding the
Servicer; (v) the Servicer is no longer an Eligible Servicer (as defined in
the Trust Documents) or (vi) if Green Tree is the Servicer, Green Tree's
receiving rights under its master seller-servicer contract with GNMA are
terminated. Notice as used herein shall mean notice to the Servicer by the
Trustee, the Indenture Trustee, if any, or Green Tree, or to Green Tree, the
Servicer, the Indenture Trustee, if any, and the Trustee by the holders of
Securities representing interests aggregating not less than 25% of the
outstanding principal balance of the Securities issued by such Trust.
Unless otherwise specified in the related Prospectus Supplement, if a
Servicer Termination Event occurs and is continuing, the Trustee, the
Indenture Trustee or the holders of at least 25% in aggregate principal
balance of the outstanding Securities issued by such Trust, by notice then
given in writing to the Servicer (and to the Trustee and the Indenture Trustee
if given by the Securityholders) may terminate all of the rights and
obligations of the Servicer under the Trust Documents. Immediately upon the
giving of such notice, and, in the case of a successor Servicer other than the
Trustee, the acceptance by such successor Servicer of its appointment, all
authority of the Servicer will pass to the Trustee or other successor
Servicer. The Trustee, the Indenture Trustee and the successor Servicer may
set off and deduct any amounts owed by the Servicer from any amounts payable
to the outgoing Servicer.
On and after the time the Servicer receives a notice of termination, the
Trustee or other successor Servicer specified in the related Prospectus
Supplement (the "Backup Servicer") will be the successor in all respects to
the Servicer and will be subject to all the responsibilities, restrictions,
duties and liabilities of the Servicer under the related Trust Documents;
provided, however, that the successor Servicer shall have no liability with
respect to any obligation which was required to be performed by the prior
Servicer prior to the date that the successor
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Servicer becomes the Servicer or any claim of a third party (including a
Securityholder) based on any alleged action or inaction of the prior Servicer.
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 Green Tree's obligation to repurchase certain Contracts for breaches of
representations or warranties under the Trust Documents. 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 Trust Documents without the
consent of all of the Securityholders.
The Trustee will be under no obligation to take any action or to institute,
conduct or defend any litigation under the Sale and Servicing Agreement at the
request, order or direction of any of the Holders of Securities, unless such
Securityholders have offered to the Trustee reasonable security or indemnity
against the costs, expenses and liabilities which the Trustee may incur.
Green Tree, as Servicer, will be required to pay all expenses incurred by it
in connection with its servicing activities (including fees, expenses and
disbursements of the Trustee, the Indenture Trustee, the Custodian and
independent accountants, taxes imposed on the Servicer and expenses incurred
in connection with distributions and reports to Certificateholders and
Noteholders), except certain expenses incurred in connection with realizing
upon the Contracts.
Upon any termination of, or appointment of a successor to, the Servicer, the
Trustee and the Indenture Trustee will each give prompt written notice thereof
to Certificateholders and Noteholders, respectively, at their respective
addresses appearing in the Certificate Register or the Note Register and to
each Rating Agency.
DISTRIBUTIONS
With respect to each Trust, beginning on the Distribution Date specified in
the related Prospectus Supplement, distributions of principal and interest
(or, where applicable, of principal or interest only) on each Class of
Securities entitled thereto will be made by the Trustee or the Indenture
Trustee, as applicable, to the Certificateholders and the Noteholders. The
timing, calculation, allocation, order, source, priorities of and requirements
for all distributions to each Class of Certificateholders and all payments to
each Class of Noteholders will be set forth in the related Prospectus
Supplement.
Except as otherwise specified in the related Prospectus Supplement, on the
third Business Day prior to each Distribution Date (the "Determination Date"),
the Servicer will determine the Amount Available and the amounts to be
distributed on the Notes and Certificates for such Distribution Date. Except
as otherwise specified in the related Prospectus Supplement, the "Amount
Available" for any Distribution Date will be equal to (i) the funds on deposit
in the Collection Account at the close of business on the last day of the
related Due Period, plus (ii) any Advances to be made by the Servicer with
respect to delinquent payments, plus (iii) any Purchase Amounts to be
deposited by Green Tree with respect to Contracts to be repurchased due to a
breach of a representation or warranty, minus (iv) any amounts paid by
Obligors in the related Due Period, but to be applied in respect of a regular
monthly payment due in a subsequent Due Period (an "Advance Payment"), minus
(v) any amounts incorrectly deposited in the Collection Account.
Except as otherwise specified in the related Prospectus Supplement, on each
Distribution Date, prior to making distributions in respect of the Notes and
Certificates, the Amount Available will be applied, first, if Green Tree is no
longer the Servicer, to pay the Monthly Servicing Fee to the successor
Servicer, and second, to reimburse the Servicer (including Green Tree) for any
Advances made with respect to a prior Due Period and subsequently recovered
and for any Advances previously made that the Servicer has determined are
Uncollectible Advances.
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ENHANCEMENT
The amounts and types of enhancement arrangements and the provider thereof,
if applicable, with respect to each Class of Securities will be set forth in
the related Prospectus Supplement. If and to the extent provided in the
related Prospectus Supplement, enhancement may be in the form of a financial
guaranty insurance policy, letter of credit, Green Tree guaranty, cash reserve
fund, derivative product, or other form of enhancement, or any combination
thereof, as may be described in the related Prospectus Supplement. If
specified in the applicable Prospectus Supplement, enhancement for a Class of
Securities of a Series may cover one or more other Classes of Securities in
such Series, and accordingly may be exhausted for the benefit of a particular
Class and thereafter be unavailable to such other Classes. Further information
regarding any provider of enhancement, including financial information when
material, will be included in the related Prospectus Supplement.
The presence of enhancement may be intended to enhance the likelihood of
receipt by the Certificateholders and the Noteholders of the full amount of
principal and interest due thereon and to decrease the likelihood that the
Certificateholders and the Noteholders will experience losses, or may be
structured to provide protection against changes in interest rates or against
other risks, to the extent and under the conditions specified in the related
Prospectus Supplement. Unless otherwise specified in the related Prospectus
Supplement, the enhancement for a Class of Securities will not provide
protection against all risks of loss and will not guarantee repayment of the
entire principal and interest thereon. If losses occur which exceed the amount
covered by any enhancement or which are not covered by any enhancement,
Securityholders will bear their allocable share of deficiencies. In addition,
if a form of enhancement covers more than one Class of Securities of a Series,
Securityholders of any such Class will be subject to the risk that such
enhancement will be exhausted by the claims of Securityholders of other
Classes.
ADVANCES
Unless otherwise specified in the related Prospectus Supplement, the
Servicer will be obligated to make Advances each month of any scheduled
payments on the Contracts included in a Trust that were due but not received
during the prior Due Period. The Servicer will be entitled to reimbursement of
an Advance from the Amount Available in the Collection Account for the related
Trust (i) when the delinquent payment is recovered by the Trust, or (ii) when
the Servicer has determined that such Advance has become an Uncollectible
Advance. 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 Collection Account for the related Trust. The
Servicer will be entitled to recoup its advances on a Contract from subsequent
payments by or on behalf of the Obligor and from liquidation proceeds, if any,
of the Contract, and will release its right to reimbursements in conjunction
with the purchase of the Contract by Green Tree 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 Net Liquidation Proceeds, if any, of the
Contract (an "Uncollectible Advance"), the Servicer will be entitled to
reimbursement from payments on other Contracts or from other funds available
therefor.
Unless otherwise specified in the related Prospectus Supplement, if the
Servicer fails to make an Advance required under the Sale and Servicing
Agreement, the Trustee will be obligated to deposit the amount of such Advance
in the Collection Account on the Payment Date. The Trustee will not, however,
be obligated to deposit any such amount if (i) the Trustee does not expect to
recoup such Advance from subsequent collections on the Contract or from
liquidation proceeds thereof, if any, or (ii) the Trustee determines that it
is not legally able to make such Advance.
EVIDENCE AS TO COMPLIANCE
On or before March 31 of each year the Servicer will deliver to each Trustee
and each Indenture Trustee a report of a nationally recognized accounting firm
stating that such firm has examined certain documents and records relating to
the servicing of Contracts serviced by the Servicer under pooling and
servicing agreements or sale and servicing agreements similar to the Trust
Documents and stating that, on the basis of such procedures,
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such servicing has been conducted in compliance with the applicable Trust
Documents, except for any exceptions set forth in such report. A copy of such
statement may be obtained by any Certificate Owner or Note Owner upon
compliance with the requirements described above. See "Certain Information
Regarding the Securities--Statements to Securityholders" above.
INDEMNIFICATION AND LIMITS ON LIABILITY
Unless otherwise specified in the related Prospectus Supplement, the Trust
Documents will provide that the Servicer will be liable only to the extent of
the obligations specifically undertaken by it under the Trust Documents and
will have no other obligations or liabilities thereunder. The Trust Documents
will further provide that neither the Servicer nor any of its directors,
officers, employees and agents will have any liability to the Trust, the
Certificateholders or the Noteholders, except as provided in the Trust
Documents, for any action taken or for refraining from taking any action
pursuant to the Trust Documents, other than any liability that would otherwise
be imposed by reason of the Servicer's breach of the Trust Documents or
willful misfeasance, bad faith or negligence (including errors in judgment) in
the performance of its duties, or by reason of reckless disregard of
obligations and duties under the Trust Documents or any violation of law.
The Servicer may, with the prior consent of the Trustee and the Indenture
Trustee, if any, delegate duties under the related Trust Documents to any of
its affiliates. In addition, the Servicer may at any time perform the specific
duty of repossessing Products through subcontractors who are in the business
of servicing consumer receivables. The Servicer may also perform other
specific duties through subcontractors; provided, however, that no such
delegation of such duties by the Servicer shall relieve the Servicer of its
responsibility with respect thereto.
AMENDMENT
Unless otherwise provided in the related Prospectus Supplement, the Trust
Documents may be amended by the Seller, the Servicer, the Trustee and the
Indenture Trustee, but without the consent of any of the Securityholders, to
cure any ambiguity or to correct or supplement any provision therein, provided
that such action will not, in the opinion of counsel (which may be internal
counsel to Green Tree or the Servicer) reasonably satisfactory to the Trustee
and the Indenture Trustee, materially and adversely affect the interests of
the Securityholders. The Trust Documents may also be amended by Green Tree,
the Servicer and the Trustee and the Indenture Trustee, and a Certificate
Majority and a Note Majority, for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions of the Trust
Documents or of modifying, in any manner, the rights of the Certificateholders
or the Noteholders. No such amendment may (i) increase or reduce in any manner
the amount of, or accelerate or delay the timing of, collections of payments
on the related Contracts or distributions that are required to be made on any
related Certificate or Note or the related Pass-Through Rate or Interest Rate
or (ii) reduce the percentage of the Certificate Balance evidenced by
Certificates or of the aggregate principal amount of Notes then outstanding
required to consent to any such amendment, without the consent of the holders
of all Certificates or all Notes, as the case may be, then outstanding.
TERMINATION
The obligations created by the Trust Documents will terminate upon the date
calculated as specified in the Trust Documents, generally upon (i) the later
of the final payment or other liquidation of the last Contract subject thereto
and the disposition of all property acquired upon repossession of any Product
and (ii) the payment to the Securityholders of all amounts held by the
Servicer or the Trustee and required to be paid to the Securityholders
pursuant to the Trust Documents.
Unless otherwise provided in the related Prospectus Supplement, with respect
to each Series of Securities, in order to avoid excessive administrative
expense, Green Tree and the Servicer each will be permitted, at its option, to
purchase from the Trust, on any Distribution Date immediately following any
Due Period as of the
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last day of which the Aggregate Principal Balance is equal to or less than 10%
(or such other percentage as may be specified in the related Prospectus
Supplement) of the Cut-off Date Principal Balance, all remaining Contracts in
the related Trust and the other remaining Trust Property at a price equal to
the aggregate of the Purchase Amounts therefor and the appraised value of any
other remaining Trust Property. The exercise of this right will effect an
early retirement of the related Certificates and Notes.
If a General Partner is named in the related Prospectus Supplement, unless
otherwise specified in the related Prospectus Supplement, the Trust Agreement
will provide that, in the event that the General Partner becomes insolvent,
withdraws or is expelled as a General Partner or is terminated or dissolved,
the Trust will terminate in 90 days and effect redemption of the Notes and
prepayment of the Certificates (if any) following the winding-up of the
affairs of the related Trust, unless within such 90 days the remaining General
Partner, if any, and holders of a majority of the Certificates of such Series
agree in writing to the continuation of the business of the Trust and to the
appointment of a successor to the former General Partner, and the Owner
Trustee is able to obtain an opinion of counsel to the effect that the Trust
will not thereafter be an association (or publicly traded partnership) taxable
as a corporation for federal income tax purposes.
Unless otherwise specified in the related Prospectus Supplement, with
respect to each Series of Securities, the Trustee will give written notice of
the final distribution with respect to the Certificates (if any), to each
Certificateholder of record and the Indenture Trustee will give written notice
of the final payment with respect to the Notes to each Noteholder of record.
The final distribution to any Certificateholder and the final payment to any
Noteholder will be made only upon surrender and cancellation of such holder's
Certificate or Note at the office or agency of the Trustee, with respect to
Certificates, or of the Indenture Trustee, with respect to Notes, specified in
the notice of termination. Any funds remaining in the Trust, after the Trustee
or the Indenture Trustee has taken certain measures to locate a
Certificateholder or Noteholder, as the case may be, and such measures have
failed, will be distributed to The United Way, and the Certificateholders and
Noteholders, by acceptance of their Certificates and Notes, will waive any
rights with respect to such funds.
THE TRUSTEE
The Trustee or Owner Trustee, as applicable, for each Trust will be
specified in the related Prospectus Supplement. The Trustee, in its individual
capacity or otherwise, and any of its affiliates may hold Certificates or
Notes in their own names or as pledgee. In addition, for the purpose of
meeting the legal requirements of certain jurisdictions, the Trustee, with the
consent of the Servicer, shall have the power to appoint co-trustees or
separate trustees of all or any part of the related Trust. In the event of
such appointment, all rights, powers, duties and obligations conferred or
imposed upon the Trustee by the related Trust Documents will be conferred or
imposed upon the Trustee and such separate trustee or co-trustee jointly, or,
in any jurisdiction where the Trustee is incompetent or unqualified to perform
certain acts, singly upon such separate trustee or co-trustee who shall
exercise and perform such rights, powers, duties and obligations solely at the
direction of the Trustee.
The Trustee of any Trust may resign at any time, in which event the General
Partner, if any, specified in the related Prospectus Supplement or, if no such
General Partner is specified, the Servicer or its successor will be obligated
to appoint a successor trustee. The General Partner, if any, specified in the
related Prospectus Supplement (or, if no such General Partner is specified,
the Servicer) may also remove the Trustee, if the Trustee ceases to be
eligible to serve, becomes legally unable to act, is adjudged insolvent or is
placed in receivership or similar proceedings. In such circumstances, the
General Partner, if any, specified in the related Prospectus Supplement or, if
no such General Partner is specified, the Servicer will 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.
DUTIES OF THE TRUSTEE
The Trustee will make no representation as to the validity or sufficiency of
any Trust Document, the Certificates or the Notes (other than its execution of
the Certificates and the Notes), the Contracts or any related
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documents, and will not be accountable for the use or application by the
Servicer of any funds paid to the Servicer in respect of the Certificates, the
Notes or the Contracts prior to deposit in the related Collection Account.
The Trustee will be required to perform only those duties specifically
required of it under the Trust Documents. Generally, those duties will be
limited to the receipt of the various certificates, reports or other
instruments required to be furnished by the Servicer to the Trustee under the
Trust Documents, in which case it will only be required to examine such
certificates, reports or instruments to determine whether they conform
substantially to the requirements of the Trust Documents.
The Trustee will be under no obligation to exercise any of the rights or
powers vested in it by the Trust Documents or to institute, conduct, or defend
any litigation thereunder or in relation thereto at the request, order or
direction of any of the Certificateholders or Noteholders, unless such
Certificateholders or Noteholders have offered the Trustee reasonable security
or indemnity against the costs, expenses and liabilities which may be incurred
therein or thereby. No Certificateholder nor any Noteholder will have any
right under the Trust Documents to institute any proceeding with respect to
such Trust Documents, unless such holder has given the Trustee written notice
of default and unless the holders of Certificates evidencing not less than 25%
of the Certificate Balance or the holders of Notes evidencing not less than
25% of the aggregate principal balance of the Notes then outstanding, as the
case may be, have made written request to the Trustee to institute such
proceeding in its own name as Trustee thereunder and have offered to the
Trustee reasonable indemnity, and the Trustee for 30 days after the receipt of
such notice, request and offer to indemnify has neglected or refused to
institute any such proceedings.
ADMINISTRATOR
If an Administrator is specified in the related Prospectus Supplement, such
Administrator will enter into an agreement (the "Administration Agreement")
pursuant to which such Administrator will agree, to the extent provided in
such Administration Agreement, to provide the notices and to perform other
administrative obligations required by the related Indenture and the Trust
Agreement.
CERTAIN LEGAL ASPECTS OF THE CONTRACTS; REPURCHASE OBLIGATIONS
As a result of Green Tree's conveyance and assignment of a pool of Contracts
to a Trust, the Securityholders of such Series, as the beneficial owners of
the Trust, will succeed collectively to all of the rights thereunder
(including the right to receive payment on the Contracts). The following
discussion contains summaries of certain legal aspects of home improvement
contracts which are general in nature. Because such legal aspects are governed
by applicable state law (which laws may differ substantially), the summaries
do not purport to be complete nor to reflect the laws of any particular state,
nor to encompass the laws of all states in which the improved real estate is
situated. The summaries are qualified in their entirety by reference to the
applicable federal and state laws governing the Contracts.
MORTGAGES AND DEEDS OF TRUST
The Contracts 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
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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 Contracts in any Contract Pool are expected to
be second or third mortgages or deeds of trust which are junior to mortgages
or deeds of trust held by other lenders or institutional investors. The rights
of the related Trust (and therefore the Securityholders), 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 Contract 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 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 Green Tree generally
does not cure defaults under a senior mortgage or deed of trust, it is Green
Tree's standard practice to protect its interest by attending any foreclosure
sale and bidding for property only if it is in Green Tree's best interests to
do so.
The standard form of the mortgage or deed of trust used by most
institutional lenders, like that of Green Tree, confers on the mortgagee or
beneficiary the right both to receive all proceeds collected under any hazard
insurance policy and all awards made in connection with any condemnation
proceedings, and to apply such proceeds and awards to any indebtedness secured
by the mortgage or deed of trust, in such order as the mortgagee or
beneficiary may determine. Thus, in the event improvements on the property are
damaged or destroyed by fire or other casualty, or in the event the property
is taken by condemnation, the mortgagee or beneficiary under the underlying
first mortgage or deed of trust will have the prior right to collect any
insurance
proceeds payable under a hazard insurance policy and any award of damages in
connection with the condemnation and to apply the same to the indebtedness
secured by the first mortgage or deed of trust. Proceeds in excess of the
amount of first mortgage indebtedness, in most cases, may be applied to the
indebtedness of a junior mortgage or deed of trust.
The form of mortgage or deed of trust used by institutional lenders may
contain a "future advance" clause, which provides, in essence, that additional
amounts advanced to or on behalf of the mortgagor or trustor by the mortgagee
or beneficiary are to be secured by the mortgage or deed of trust. The
priority of any advance made under the clause depends, in some states, on
whether the advance was an "obligatory" or "optional" advance. If the
mortgagee or beneficiary is obligated to advance the additional amounts, the
advance is entitled to receive the same priority as amounts initially advanced
under the mortgage or deed of trust, notwithstanding the fact that there may
be junior mortgages or deeds of trust and other liens which intervene between
the date of recording of the mortgage or deed of trust and the date of the
future advance, and, in some states, notwithstanding that the senior mortgagee
or beneficiary had actual knowledge of such intervening junior mortgages or
deeds of trust and other liens at the time of the advance. Where the mortgagee
or beneficiary is not obligated to advance additional
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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
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
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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
senior mortgages to the senior mortgagees. Accordingly, with respect to those
Contracts which are second or third mortgage loans, if the lender purchases
the property, the lender's title will be subject to all senior liens and
claims and certain governmental liens.
The proceeds received by the referee or trustee from the sale are applied
first to the costs, fees, and expenses of sale and then in satisfaction of the
indebtedness secured by the mortgage or deed of trust under which the sale was
conducted. Any remaining proceeds are generally payable to the holders of
junior mortgages or deeds of trust and other liens and claims in order of
their priority, whether or not the borrower is in default. Any additional
proceeds are generally payable to the mortgagor or trustor. The payment of the
proceeds to the holders of junior mortgages may occur in the foreclosure
action of the senior mortgagee or may require the institution of separate
legal proceeding.
Some states impose prohibitions or limitations on remedies available to the
mortgagee, including the right to recover the debt from the mortgagor. See "--
Anti-Deficiency Legislation and Other Limitations on Lenders" herein.
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In certain jurisdictions, real property transfer or recording taxes or fees
may be imposed on the related Trust with respect to its acquisition (by
foreclosure or otherwise) and disposition of real property securing a
Contract, and any such taxes or fees imposed may reduce liquidation proceeds
with respect to such property, as well as distributions payable to the
Securityholders.
SECOND OR THIRD MORTGAGES
The Contracts may be secured by second or third mortgages or deeds of trust,
which are junior to first or second mortgages or deeds of trust held by other
lenders. The rights of the Securityholders 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 Contract. 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
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
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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
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
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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
Contract 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 Contract;
however, the Obligor also may be able to assert the rule to set off remaining
amounts due as a defense against a claim brought by the Trust against such
Obligor. The Home Protection Act provides that assignees of certain high-
interest, non-purchase money mortgage loans
(which may include some Contracts) 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 Sale and Servicing Agreement, late charges (to the extent
permitted by law and not waived by Green Tree) will be retained by Green Tree
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.
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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
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 Contracts, however, cannot be predicted.
The inability to enforce a due-on-sale clause may result in Contracts
bearing an interest rate below the current market rate being assumed by a new
home buyer rather than being paid off, which may have an impact upon the
average life of the Contracts and the number of Contracts which may be
outstanding until maturity.
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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 and reduce the amounts otherwise distributable to the holders of
the related Series of Securities 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, Green Tree has not
made and will not make such evaluations prior to the origination of the Loans.
Neither Green Tree nor any replacement Servicer will be required by any Sale
and Servicing Agreement to undertake any such evaluations prior to foreclosure
or accepting a deed-in-lieu of foreclosure. Green Tree 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, Green Tree
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 Securityholders 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 Contracts, would result in a
reduction of the amounts distributable to the Securityholders. 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
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three month period thereafter. Thus, in the event that the Relief Act or
similar legislation applies to any Contract which goes into default, there may
be delays in payment on the Securities in connection therewith. Any other
interest shortfalls, deferrals or forgiveness of payments on the Contracts
resulting from similar legislation or regulations may result in delays in
payments or losses to Securityholders.
REPURCHASE OBLIGATIONS
Green Tree will represent and warrant under each Sale and Servicing
Agreement that each Contract complies with all requirements of law.
Accordingly, if any Obligor has a claim against the related Trust for
violation of any law and such claim materially adversely affects the Trust's
interest in a Contract, such violation would constitute a breach of a
representation and warranty under the Sale and Servicing Agreement and would
create an obligation to repurchase such Contract unless the breach is cured.
See "Description of the Trust Documents--Sale and Assignment of the
Contracts."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of the material federal income tax
consequences relating to the purchase, ownership, and disposition of the
Securities. The discussion is based upon the current provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), the Treasury
regulations promulgated thereunder and judicial or ruling authority, all of
which are subject to change, which change may be retroactive. The discussion
does not deal with federal income tax consequences applicable to all
categories of investors, some of which may be subject to special rules.
Investors are encouraged to consult their own tax advisors with respect to the
federal, state, local, and any other tax consequences of the purchase,
ownership, and disposition of the Securities.
Dorsey & Whitney LLP, counsel to Green Tree, has delivered an opinion
regarding certain federal income tax matters discussed below. Counsel to Green
Tree identified in the related Prospectus Supplement ("Counsel") will deliver
an opinion regarding tax matters applicable to each Series of Securities. Such
an opinion, however, is not binding on the Internal Revenue Service (the
"Service") or the courts. The opinion of Counsel will specifically address
only those issues specifically identified below as being covered by such
opinion; however, the opinion of Counsel also will state that the additional
discussion set forth below accurately sets forth Counsel's advice with respect
to material tax issues. No ruling on any of the issues discussed below will be
sought from the Service.
TAX STATUS OF THE TRUST
With respect to each Series of Securities which includes both Notes and
Certificates, Counsel will deliver its opinion that the Trust will not be an
association or publicly traded partnership taxable as a corporation for
federal income tax purposes. As a result, in the opinion of Counsel, the Trust
itself will not be subject to federal income tax but, instead, each
Certificateholder will be required to take into account its distributive share
of items of income and deduction (including deductions for distributions of
interest to the Noteholders) of the Trust as though such items had been
realized directly by the Certificateholder. This opinion will be based on the
assumption that the terms of the Trust Agreement and related documents will be
complied with, and on Counsel's conclusion that the nature of the income of
the Trust will exempt it from the rule that certain publicly traded
partnerships are taxable as corporations. There are, however, no cases or
Service rulings on transactions involving a trust issuing both debt and equity
interests with terms similar to those of the Notes and the Certificates. As a
result, the Service may disagree with all or a part of this discussion.
If the Trust were taxable as a corporation for federal income tax purposes,
the Trust would be subject to corporate income tax on its taxable income. The
Trust's taxable income would include all its income on the Contracts, possibly
reduced by its interest expense on the Notes. Any such corporate income tax
could materially reduce cash available to make payments on the Notes and
distributions on the Certificates.
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TAX CONSEQUENCES TO NOTEHOLDERS
Treatment of the Notes as Indebtedness. The Owner Trustee, on behalf of the
Trust, will agree, and the Noteholders will agree by their purchase of Notes,
to treat the Notes as debt for federal income tax purposes. Counsel will
deliver its opinion that the Notes will be classified as debt for federal
income tax purposes. The discussion below assumes this characterization of the
Notes is correct.
Interest Income on the Notes. Interest on the Notes will be taxable as
ordinary interest income when received by Noteholders utilizing the cash-basis
method of accounting and when accrued by Noteholders utilizing the accrual
method of accounting. Under the applicable regulations, the Notes would be
considered issued with original issue discount ("OID") if the "stated
redemption price at maturity" of a Note (generally equal to its principal
amount as of the date of issuance plus all interest other than "qualified
stated interest" payable prior to or at maturity) exceeds the original issue
price (in this case, the initial offering price at which a substantial amount
of the Notes are sold to the public). Any OID would be considered de minimis
under the OID regulations if it does not exceed 1/4% of the stated redemption
price at maturity of a Note multiplied by the number of full years until its
maturity date. It is anticipated that the Notes will not be considered issued
with more than de minimis OID. Under the OID regulations, an owner of a Note
issued with a de minimis amount of OID must include such OID in income, on a
pro rata basis, as principal payments are made on the Note.
While it is not anticipated that the Notes will be issued with more than de
minimis OID, it is possible that they will be so issued or will be deemed to
be issued with OID. This deemed OID could arise, for example, if interest
payments on the Notes are not deemed to be "qualified stated interest" because
the Notes do not provide for default remedies ordinarily available to holders
of debt instruments or do not contain terms and conditions that make the
likelihood of late payment or nonpayment a remote contingency. Based upon
existing authority, however, the Trust will treat interest payments on the
Notes as qualified stated interest under the OID regulations. If the Notes are
issued or are deemed to be issued with OID, all or a portion of the taxable
income to be recognized with respect to the Notes would be includible in the
income of Noteholders as OID. Any amount treated as OID would not, however, be
includible again when the amount is actually received. If the yield on a class
of Notes were not materially different from its coupon, this treatment would
have no significant effect on Noteholders using the accrual method of
accounting. However, cash method Noteholders may be required to report income
with respect to the Notes in advance of the receipt of cash attributable to
such income.
A Noteholder must include OID in income as interest over the term of the
Notes under a constant yield method. In general, OID must be included in
income in advance of the receipt of cash representing that income. Each
Noteholder is encouraged to consult its own tax advisor regarding the impact
of the OID rules if the Notes are issued with OID.
Market Discount. The Notes, whether or not issued with original issue
discount, will be subject to the "market discount rules" of Section 1276 of
the Code. In general, these rules provide that if a Noteholder purchases the
Note at a market discount (i.e., a discount from its original issue price plus
any accrued original issue discount) that exceeds a de minimis amount
specified in the Code, and thereafter recognizes gain upon a disposition, the
lesser of (i) such gain or (ii) the accrued market discount will be taxed as
ordinary interest income. Market discount also will be recognized and taxable
as ordinary interest income as payments of principal are received on the Notes
to the extent that the amount of such payments does not exceed the accrued
market discount. Generally, the accrued market discount will be the total
market discount on the Note multiplied by a fraction, the numerator of which
is the number of days the Noteholder held the Note and the denominator of
which is the number of days after the date the Noteholder acquired the Note
until and including its maturity date. The Noteholder may elect, however, to
determine accrued market discount under the constant-yield method, which
election shall not be revoked without the consent of the Service.
Limitations imposed by the Code which are intended to match deductions with
the taxation of income may defer deductions for interest on indebtedness
incurred or continued, or short-sale expenses incurred, to purchase or carry a
Note with accrued market discount. A Noteholder may elect to include market
discount in gross
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income as it accrues and, if such Noteholder makes such an election, is exempt
from this rule. The adjusted basis of a Note 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. Any
such election to include market discount in gross income as it accrues shall
apply to all debt instruments held by the Noteholder at the beginning of the
first taxable year to which the election applies or thereafter acquired and is
irrevocable without the consent of the Service.
Amortizable Bond Premium. In general, if a Noteholder purchases a Note at a
premium (i.e., an amount in excess of the amount payable upon the maturity
thereof), such Noteholder will be considered to have purchased such Note with
"amortizable bond premium" equal to the amount of such excess. Such Noteholder
may elect to deduct the amortizable bond premium as it accrues under a
constant-yield method over the remaining term of the Note. Such Noteholder's
tax basis in the Note will be reduced by the amount of the amortizable bond
premium deducted. Amortizable bond premium with respect to a Note will be
treated as an offset to interest income on such Note, and a Noteholder's
deduction for amortizable bond premium with respect to a Note will be limited
in each year to the amount of interest income derived with respect to such
Note for such year. Any election to deduct amortizable bond premium shall
apply to all debt instruments (other than instruments the interest on which is
excludible from gross income) held by the Noteholder at the beginning of the
first taxable year to which the election applies or thereafter acquired and is
irrevocable without the consent of the Service. Bond premium on a Note held by
a Noteholder who does not elect to deduct the premium will decrease the gain
or increase the loss otherwise recognized on the disposition of the Note.
Disposition of Notes. If a Noteholder sells a Note, the Noteholder will
recognize gain or loss in an amount equal to the difference between the amount
realized on the sale and the Noteholder's adjusted tax basis in the Note. The
adjusted tax basis of a Note to a particular Noteholder generally will equal
the Noteholder's cost for the Note, increased by any market discount, OID and
gain previously included by such Noteholder in income with respect to the Note
and decreased by principal payments previously received by such Noteholder and
the amount of bond premium previously amortized with respect to the Note. Any
such gain or loss will be capital gain or loss if the Note was held as a
capital asset, except for gain representing accrued interest and accrued
market discount not previously included in income, and will be short-term,
mid-term or long-term capital gain or loss depending upon whether the Note was
held for more or less than one year or for more than eighteen months. Capital
losses generally may be used only to offset capital gains.
Foreign Holders. Generally, interest paid to a Noteholder who is a
nonresident alien individual or a foreign corporation and who does not hold
the Note in connection with a United States trade or business will be treated
as "portfolio interest" and therefore will be exempt from the 30% withholding
tax. Such a Noteholder will be entitled to receive interest payments on the
Notes free of United States federal income tax provided that such Noteholder
periodically provides the Indenture Trustee (or other person who would
otherwise be required to withhold tax) with a statement certifying under
penalty of perjury that such Noteholder is not a United States person and
providing the name and address of such Noteholder and will not be subject to
federal income tax on gain from the disposition of a Note unless the
Noteholder is an individual who is present in the United States for 183 days
or more during the taxable year in which the disposition takes place and
certain other requirements are met.
Tax Administration and Reporting. The Indenture Trustee will furnish to each
Noteholder with each distribution a statement setting forth the amount of such
distribution allocable to principal and to interest. Reports will be made
annually to the Service and to holders of record that are not excepted from
the reporting requirements regarding such information as may be required with
respect to interest and original issue discount, if any, with respect to the
Notes.
Backup Withholding. Under certain circumstances, a Noteholder may be subject
to "backup withholding" at a 31% rate. Backup withholding may apply to a
Noteholder 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 Indenture Trustee. Backup withholding may apply,
under certain circumstances, to a Noteholder who is a foreign
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person if the Noteholder fails to provide the Indenture Trustee or the
Noteholder's securities broker with the statement necessary to establish the
exemption from federal income and withholding tax on interest on the Note.
Backup withholding, however, does not apply to payments on a Note made to
certain exempt recipients, such as corporations and tax-exempt organizations,
and to certain foreign persons. Noteholders should consult their tax advisors
for additional information concerning the potential application of backup
withholding to payments received by them with respect to a Note.
Possible Alternative Treatment of the Notes. If, contrary to the opinion of
Counsel, the Service successfully asserted that the Notes did not represent
debt for federal income tax purposes, the Notes might be treated as equity
interests in the Trust. If so treated, the Trust would be treated as a
publicly traded partnership that would not be taxable as a corporation because
it would meet certain qualifying income tests. Nonetheless, treatment of the
Notes as equity interests in such a partnership could have adverse tax
consequences to certain holders. For example, income to foreign holders
generally would be subject to federal tax and federal tax return filing and
withholding requirements, income to certain tax-exempt entities (including
pension funds) would be "unrelated business taxable income," and individual
holders might be subject to certain limitations on their ability to deduct
their share of Trust expenses.
TAX CONSEQUENCES TO CERTIFICATEHOLDERS
Treatment of the Trust as a Partnership. Green Tree, the General Partner and
the Owner Trustee will agree, and the Certificateholders will agree by their
purchase of Certificates, to treat the Trust as a partnership for purposes of
federal and state income tax, franchise tax and any other tax measured in
whole or in part by income, with the assets of the partnership being the
assets held by the Trust, the partners of the partnership being the
Certificateholders and the General Partner, and the Notes being debt of the
partnership. The proper characterization of the arrangement involving the
Trust, the Certificates, the Notes, the General Partner, Green Tree and the
Servicer, however, is not certain because there is no authority on
transactions closely comparable to that contemplated herein.
A variety of alternative characterizations are possible. For example,
because the Certificates have certain features characteristic of debt, the
Certificates might be considered debt of the Trust. Any such characterization
would not result in materially adverse tax consequences to Certificateholders
as compared to the consequences from treatment of the Certificates as equity
in a partnership, described below. The following discussion assumes that the
Certificates represent equity interests in a partnership.
Partnership Taxation. As a partnership, the Trust will not be subject to
federal income tax. Rather, each Certificateholder will be required to
separately take into account such holder's allocated share of income, gains,
losses, deductions and credits of the Trust. The Trust's income will consist
primarily of interest and finance charges earned on the Contracts (including
appropriate adjustments for market discount, OID and bond premium) and any
gain upon collection or disposition of the Contracts. The Trust's deductions
will consist primarily of interest accruing with respect to the Notes,
servicing and other fees, and losses or deductions upon collection or
disposition of the Contracts.
The tax items of a partnership are allocable to the partners in accordance
with the Code, Treasury regulations and the partnership agreement (here, the
Trust Agreement and related documents). The Trust Agreement will provide, in
general, that the Certificateholders will be allocated taxable income of the
Trust for each month equal to the sum of (i) the interest that accrues on the
Certificates in accordance with their terms for such month, including interest
accruing at the Pass-Through Rate for such month and interest on amounts
previously due on the Certificates but not yet distributed; (ii) any Trust
income attributable to discount on the Contracts that corresponds to any
excess of the principal amount of the Certificates over their initial issue
price; (iii) Prepayment Premium payable to the Certificateholders for such
month; and (iv) any other amounts of income payable to the Certificateholders
for such month. Although it is not anticipated that the Certificates will be
issued at a price which exceeds their principal amount, such allocations of
Trust income to the Certificateholders will be reduced by any amortization by
the Trust of premium on Contracts that corresponds to any such excess of the
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issue price of Certificates over their principal amount. All remaining taxable
income of the Trust will be allocated to the General Partner. Based on the
economic arrangement of the parties, this approach for allocating Trust income
should be permissible under applicable Treasury regulations, although no
assurance can be given that the Service would not require a greater amount of
income to be allocated to Certificateholders. Moreover, even under the
foregoing method of allocation, Certificateholders may be allocated income
equal to the entire Pass-Through Rate plus the other items described above
even though the Trust might not have sufficient cash to make current cash
distributions of such amount. Thus, cash basis holders will in effect be
required to report income from the Certificates on the accrual basis, and
Certificateholders may become liable for taxes on Trust income even if they
have not received cash from the Trust to pay such taxes. In addition, because
tax allocations and tax reporting will be done on a uniform basis for all
Certificateholders but Certificateholders may be purchasing Certificates at
different times and at different prices, Certificateholders may be required to
report on their tax returns taxable income that is greater or less than the
amount reported to them by the Trust.
All of the taxable income allocated to a Certificateholder that is a
pension, profit sharing or employee benefit plan or other tax-exempt entity
(including an individual retirement account) will constitute "unrelated
business taxable income" generally taxable to such a holder under the Code.
A Certificateholder's share of expenses of the Trust (including fees to the
Servicer but not interest expense) will be miscellaneous itemized deductions.
An individual, an estate, or a trust that holds a Certificate either directly
or through a pass-through entity will be allowed to deduct such expenses under
Section 212 of the Code only to the extent that, in the aggregate and combined
with certain other itemized deductions, they exceed 2% of the adjusted gross
income of the Certificateholder. 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 determined
under the Code ($121,000 in 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. To the extent that a
Certificateholder is not permitted to deduct servicing fees allocable to a
Certificate, the taxable income of the Certificateholder attributable to that
Certificate will exceed the net cash distributions related to such income.
Certificateholders may deduct any loss on disposition of the Contracts to the
extent permitted under the Code.
Discount and Premium. It is believed that the Contracts were not issued with
OID, and, therefore, the Trust should not have OID income. The purchase price
paid by the Trust for the Contracts may exceed the remaining principal balance
of the Contracts at the time of purchase. If the Trust is deemed to acquire
the Contracts at such a premium or at a market discount, the Trust will elect
to offset any such premium against interest income on the Contracts or to
include any such discount in income currently as it accrues over the life of
the Contracts. The Trust will make this premium or market discount calculation
on an aggregate basis but may be required to recompute it on a Contract-by-
Contract basis. As indicated above, a portion of such premium deduction or
market discount income may be allocated to Certificateholders.
Distributions to Certificateholders. Certificateholders generally will not
recognize gain or loss with respect to distributions from the Trust. A
Certificateholder will recognize gain, however, to the extent that any money
distributed exceeds the Certificateholder's adjusted basis in its Certificates
(as described below under "Disposition of Certificates") immediately before
the distribution. A Certificateholder will recognize loss upon termination of
the Trust or termination of the Certificateholder's interest in the Trust if
the Trust only distributes money to the Certificateholder and the amount
distributed is less than the Certificateholder's adjusted basis in the
Certificates. Any such gain or loss generally will be capital gain or loss if
the Certificates are held as capital assets and will be long-term gain or loss
if the holding period of the Certificates is more than one year.
Section 708 Termination. Under Section 708 of the Code, the Trust will be
deemed to terminate for federal income tax purposes if 50% or more of the
capital and profits interests in the Trust are sold or exchanged within a 12-
month period. Under Treasury regulations, if such a termination occurs, the
Trust will be considered to have contributed the assets of the Trust (the "Old
Partnership") to a new partnership (the "New Partnership") in
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exchange for interests in the New Partnership. Such interests would be deemed
distributed to the partners of the Old Partnership in liquidation thereof,
which would not constitute a sale or exchange for United States federal income
tax purposes.
Disposition of Certificates. If a Certificateholder sells a Certificate, the
Certificateholder generally will recognize capital gain or loss in an amount
equal to the difference between the amount realized on the sale and the
seller's tax basis in the Certificate. A Certificateholder's tax basis in a
Certificate generally will equal the Certificateholder's cost increased by the
Certificateholder's share of Trust income and decreased by any distributions
received with respect to such Certificate. In addition, both the tax basis in
the Certificate and the amount realized on a sale of a Certificate would
include the Certificateholder's share of the Notes and other liabilities of
the Trust. A Certificateholder acquiring Certificates at different prices may
be required to maintain a single aggregate adjusted tax basis in such
Certificates, and, upon sale or other disposition of some of the Certificates,
allocate a portion of such aggregate tax basis to the Certificates sold
(rather than maintain a separate tax basis in each Certificate for purposes of
computing gain or loss on a sale of that Certificate).
Any gain on the sale of a Certificate attributable to the
Certificateholder's share of unrecognized accrued market discount on the
Contracts would generally be treated as ordinary income to the
Certificateholder and would give rise to special tax reporting requirements.
The Trust does not expect to have any other assets that would give rise to
such special reporting requirements. Thus, to avoid those special reporting
requirements, the Trust will elect to include market discount in income as it
accrues.
If a Certificateholder is required to recognize an aggregate amount of
income (not including income attributable to disallowed itemized deductions
described above) over the life of the Certificates that exceeds the aggregate
cash distributions with respect thereto, such excess generally will give rise
to a capital loss upon the retirement of the Certificates.
Allocations Between Transferors and Transferees. In general, the Trust's
taxable income and losses will be determined monthly, and the tax items for a
particular calendar month will be apportioned among the Certificateholders in
proportion to the principal amount of Certificates owned by them as of the
close of the related Record Date. As a result, a Certificateholder purchasing
a Certificate may be allocated tax items (which will affect the
Certificateholder's tax liability and tax basis) attributable to periods
before the Certificateholder actually owns the Certificate. The use of such a
convention may not be permitted by existing regulations. If a monthly
convention is not permitted (or only applies to transfers of less than all of
the Certificateholder's interest), taxable income or losses of the Trust may
be reallocated among the Certificateholders. The General Partner is authorized
to revise the Trust's method of allocation between transferors and transferees
to conform to a method permitted by future regulations.
Section 754 Election. In the event that a Certificateholder sells a
Certificate at a profit or loss, the purchasing Certificateholder will have a
higher or lower basis in the Certificate than the selling Certificateholder
had. The tax basis of the Trust's assets will not be adjusted to reflect that
higher or lower basis unless the Trust files an election under Section 754 of
the Code. In order to avoid the administrative complexities that would be
involved in keeping accurate accounting records, as well as potentially
onerous information reporting requirements, the Trust will not make such
election. As a result, Certificateholders may be allocated a greater or lesser
amount of Trust income than would be appropriate based on their own purchase
price for Certificates.
Administrative Matters. Pursuant to the Administration Agreement, the
Trustee will monitor the performance of the following responsibilities of the
Trust by other service providers. The Trust is required to keep or have kept
complete and accurate books of the Trust. Such books will be maintained for
financial reporting and tax purposes on an accrual basis and the fiscal year
of the Trust will be the calendar year. The Trust will file a partnership
information return (IRS Form 1065) with the Service for each taxable year of
the Trust and will report each Certificateholder's allocable share of items of
Trust income and expense to Certificateholders and the Service on Schedule K-
1. The Trust will provide the Schedule K-1 information to nominees that fail
to provide the Trust with certain required information statements relating to
identification of
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beneficial owners of Certificates and such nominees will be required to
forward such information to such beneficial owners. Generally,
Certificateholders must file tax returns that are consistent with the
information return filed by the Trust or be subject to penalties unless the
Certificateholder notifies the Service of all such inconsistencies.
Green Tree or a subsidiary identified in the related Prospectus Supplement
will be designated as the tax matters partner in the Trust Agreement and, as
such, will be responsible for representing the Certificateholders in any
dispute with the Service. The Code provides for administrative examination of
a partnership as if the partnership were a separate and distinct taxpayer.
Generally, the statute of limitations for partnership items does not expire
before three years after the date on which the partnership information return
is filed. Any adverse determination following an audit of the return of the
Trust by the appropriate taxing authorities could result in an adjustment of
the returns of the Certificateholders, and, under certain circumstances, a
Certificateholder may be precluded from separately litigating a proposed
adjustment to the items of the Trust. An adjustment could also result in an
audit of a Certificateholder's returns and adjustments of items not related to
the income and losses of the Trust.
Tax Consequences to Foreign Certificateholders. It is not clear whether the
Trust will be considered to be engaged in a trade or business in the United
States for purposes of federal withholding taxes with respect to non-U.S.
persons because there is no clear authority dealing with that issue under
facts substantially similar to those described herein. Although it is not
expected that the Trust will be engaged in a trade or business in the United
States for such purposes, the Trust will withhold as if it were so engaged in
order to protect the Trust from possible adverse consequences of a failure to
withhold. It is expected that the Trust will withhold on the portion of its
taxable income that is allocable to foreign Certificateholders pursuant to
Section 1446 of the Code, as if such income were effectively connected to a
U.S. trade or business, at a rate of 35% for foreign holders that are taxable
as corporations and 39.6% for all other foreign Certificateholders. Subsequent
adoption of Treasury regulations or the issuance of other administrative
pronouncements may require the Trust to change its withholding procedures. In
determining a Certificateholder's nonforeign status, the Trust may rely on
Form W-8, Form W-9 or the Certificateholder's certification of nonforeign
status signed under penalties of perjury.
Each foreign Certificateholder might be required to file a U.S. individual
or corporate income tax return (including, in the case of a corporation, the
branch profits tax) on its share of the Trust's income. Each foreign
Certificateholder must obtain a taxpayer identification number from the
Service and submit that number to the Trust on Form W-8 in order to assure
appropriate crediting of the taxes withheld. A foreign Certificateholder
generally will be entitled to file with the Service a claim for refund with
respect to taxes withheld by the Trust, taking the position that no taxes are
due because the Trust is not engaged in a U.S. trade or business. However, the
Service may assert that additional taxes are due, and no assurance can be
given as to the appropriate amount of tax liability.
Backup Withholding. Under certain circumstances, a Certificateholder may be
subject to "backup withholding" at a 31% rate. See the discussion above under
"--Tax Consequences to Noteholders--Backup Withholding."
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CERTAIN STATE INCOME TAX CONSEQUENCES
The activities to be undertaken by the Servicer in servicing and collecting
the Contracts will take place in Minnesota. The State of Minnesota imposes an
income tax on individuals, trusts and estates and a franchise tax measured by
net income on corporations. This discussion of Minnesota taxation is based
upon current statutory provisions and the regulations promulgated thereunder,
and applicable judicial or ruling authority, all of which are subject to
change (which may be retroactive). No ruling on any of the issues discussed
below will be sought from the Minnesota Department of Revenue.
If the Notes are treated as debt for federal income tax purposes, in the
opinion of Counsel this treatment will also apply for Minnesota tax purposes.
Noteholders not otherwise subject to Minnesota income or franchise taxation
would not become subject to such a tax solely because of their ownership of
the Notes. Noteholders already subject to income or franchise taxation in
Minnesota could, however, be required to pay such a tax on all or a portion of
the income generated from ownership of the Notes.
If the Trust is treated as a partnership (not taxable as a corporation) for
federal income tax purposes, in the opinion of Counsel the Trust would also be
treated as a partnership for Minnesota income tax purposes. The partnership
therefore would not be subject to Minnesota taxation. Certificateholders that
are not otherwise subject to Minnesota income or franchise taxation would not
become subject to such a tax solely because of their interests in the
partnership. Certificateholders already subject to income or franchise
taxation in Minnesota could, however, be required to pay such a tax on all or
a portion of the income from the partnership.
If the Certificates are treated as ownership interests in an association or
publicly traded partnership taxable as a corporation for federal income tax
purposes, in the opinion of Counsel this treatment would also apply for
Minnesota income and franchise tax purposes. Pursuant to this treatment, the
Trust would be subject to the Minnesota franchise tax measured by net income
(which could result in reduced distributions to Certificateholders).
Certificateholders that are not otherwise subject to Minnesota income or
franchise taxation would not become subject to such a tax solely because of
their interests in the constructive corporation. Certificateholders already
subject to income or franchise taxation in Minnesota could, however, be
required to pay such a tax on all or a portion of the income from the
constructive corporation.
ERISA CONSIDERATIONS
Section 406 of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), and Section 4975 of the Code prohibit a pension, profit
sharing or other employee benefit plan from engaging in certain transactions
involving "plan assets" with persons that are "parties in interest" under
ERISA or "disqualified persons" under the Code with respect to the plan. ERISA
also imposes certain duties and certain prohibitions on persons who are
fiduciaries of plans subject to ERISA. Under ERISA, generally any person who
exercises any authority or control with respect to the management or
disposition of the assets of a plan is considered to be a fiduciary of such
plan. A violation of these "prohibited transaction" rules may generate excise
tax and other liabilities under ERISA and the Code for such persons.
Certain transactions involving the related Trust might be deemed to
constitute prohibited transactions under ERISA and the Code with respect to a
Benefit Plan that purchased Securities if assets of the related Trust were
deemed to be assets of the Benefit Plan. Under a regulation issued by the
United States Department of Labor (the "Plan Assets Regulation"), the assets
of a Trust would be treated as plan assets of a Benefit Plan for the purposes
of ERISA and the Code only if the Benefit Plan acquired an "equity interest"
in the Trust and none of the exceptions contained in the Plan Assets
Regulation was applicable. An equity interest is defined under the Plan Assets
Regulation as an interest other than an instrument which is treated as
indebtedness under applicable local law and which has no substantial equity
features. The likely treatment of Notes and Certificates will be discussed in
the related Prospectus Supplement.
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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.
A plan fiduciary considering the purchase of Securities should consult its
tax and/or legal advisors regarding whether the assets of the Trust would be
considered plan assets, the possibility of exemptive relief from the
prohibited transaction rules and other issues and their potential
consequences.
LEGAL INVESTMENT CONSIDERATIONS
Unless otherwise indicated in the applicable Prospectus Supplement, any
Securities offered hereby are not expected to constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA") because there will be a substantial number of Contracts that
are 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
Securities.
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 Securities or to purchase Securities 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 Securities
constitute legal investments for such investors.
RATINGS
It is a condition precedent to the issuance of any Class of Securities sold
under this Prospectus that they be rated by at least one nationally recognized
statistical rating organization in one of its four highest rating categories
(within which there may be sub-categories or gradations indicating relative
standing). A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating agency. The security rating of any Series of Securities
should be evaluated independently of similar security ratings assigned to
other kinds of securities.
UNDERWRITING
Green Tree may sell Securities 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 Securities
directly to other purchasers or through agents. Green Tree intends that
Securities 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 Securities may be made through a
combination of such methods.
The distribution of the Securities 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
Securities, Green Tree or any affiliate thereof may purchase some or all of
one or more Classes of Securities 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 Securities so purchased directly, through one
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or more Underwriters to be designated at the time of the offering of such
Securities 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 Securities, Underwriters may receive
compensation from Green Tree or from purchasers of Securities for whom they
may act as agents in the form of discounts, concessions or commissions.
Underwriters may sell the Securities 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 Securities of a Series may be deemed to be
Underwriters, and any discounts or commissions received by them from Green
Tree and any profit on the resale of the Securities by them may be deemed to
be underwriting discounts and commissions, under the Securities Act. Any such
Underwriters or agents will be identified, and any such compensation received
from Green Tree will be described, in the Prospectus Supplement.
Under agreements which may be entered into by Green Tree, Underwriters and
agents who participate in the distribution of the Securities may be entitled
to indemnification by Green Tree against certain liabilities, including
liabilities under the Securities Act.
If so indicated in the Prospectus Supplement, Green Tree will authorize
Underwriters or other persons acting as Green Tree's agents to solicit offers
by certain institutions to purchase the Securities from Green Tree 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 Green Tree. The obligation of any purchaser under any such
contract will be subject to the condition that the purchaser of the offered
Securities shall not at the time of delivery be prohibited under the laws of
the jurisdiction to which such purchaser is subject from purchasing such
Securities. The Underwriters and such other agents will not have
responsibility in respect of the validity or performance of such contracts.
The Underwriters may, from time to time, buy and sell Securities, 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 Green Tree in the ordinary course of business.
The Indenture Trustee, if any, may, from time to time, invest the funds in
the Designated Accounts in Eligible Investments acquired from the
underwriters.
Under each Underwriting Agreement, the closing of the sale of any Class of
Securities subject thereto will be conditioned on the closing of the sale of
all other such Classes.
The place and time of delivery for the Securities in respect of which this
Prospectus is delivered will be set forth in the related Prospectus
Supplement.
LEGAL MATTERS
Certain matters with respect to the validity of the Certificates and the
Notes will be passed upon for Green Tree by the counsel for Green Tree
identified in the applicable Prospectus Supplement. The validity of the
Certificates and the Notes will be passed upon for the underwriters named in
the related Prospectus Supplement by the counsel for the underwriters
identified in the applicable Prospectus Supplement.
58
<PAGE>
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.
59
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED FEBRUARY 17, 1998
PROSPECTUS
UNSECURED HOME IMPROVEMENT LOANS AND HIGH-LTV HOME EQUITY LOANS--OWNER TRUST
GREEN TREE HOME IMPROVEMENT AND HOME EQUITY LOAN TRUSTS
LOAN-BACKED NOTES
LOAN-BACKED CERTIFICATES
-----------
GREEN TREE FINANCIAL CORPORATION
(SELLER AND SERVICER)
-----------
The Loan-Backed Notes (the "Notes") and the Loan-Backed Certificates (the
"Certificates" and, collectively with the Notes, the "Securities") described
herein may be sold from time to time in one or more series (each, a "Series"),
in amounts, at prices and on the terms to be determined at the time of sale and
to be set forth in a supplement to this Prospectus (a "Prospectus Supplement").
Each Series of Securities will include either one or more classes (each, a
"Class") of Notes or, if Certificates are issued as part of a Series, one or
more Classes of Notes and one or more Classes of Certificates, as set forth in
the related Prospectus Supplement.
The Notes and the Certificates, if any, of any Series of Securities will be
issued by a trust (a "Trust") to be formed with respect to such Series by Green
Tree Financial Corporation ("Green Tree"). The assets of each Trust (the "Trust
Property") will include specified interests in separate pools of (i) home
improvement contracts and promissory notes (the "Home Improvement Contracts")
and (ii) closed-end home equity loans, and liens on the related real estate
(the "Home Equity Contracts," and, together with the Home Improvement
Contracts, the "Contracts"), as more particularly described herein. Except as
otherwise specified in the related Prospectus Supplement, the Contracts will
have been originated in the ordinary course of business by Green Tree. Specific
information, to the extent available, regarding the size and composition of the
pool of Contracts relating to each Series of Securities will be set forth in
the related Prospectus Supplement. Green Tree will act as Servicer (in such
capacity referred to herein as the "Servicer") of the Contracts. In addition,
if so specified in the related Prospectus Supplement, the Trust Property will
include monies on deposit in one or more trust accounts to be established with
an Indenture Trustee, which may include a Pre-Funding Account which would be
used to purchase additional Contracts (the "Subsequent Contracts") from the
Seller from time to time during the Pre-Funding Period specified in the related
Prospectus Supplement.
Each Trust will be formed pursuant to a Trust Agreement (the "Trust
Agreement") to be entered into among the Seller, the Owner Trustee and certain
other parties as specified in the related Prospectus Supplement. A Sale and
Servicing Agreement (the "Sale and Servicing Agreement") will be entered into
among Green Tree, as Seller and Servicer, and each Trust. The Trust Agreement
and the Sale and Servicing Agreement are collectively referred to herein as the
"Trust Documents." The Notes of a Series will be issued and secured pursuant to
an Indenture (the "Indenture") between the Trust and the Indenture Trustee
specified in the related Prospectus Supplement (the "Indenture Trustee").
(Continued on next page)
FOR A DISCUSSION OF CERTAIN FACTORS WHICH SHOULD BE CONSIDERED BY PROSPECTIVE
PURCHASERS OF THE SECURITIES, SEE "RISK FACTORS" AT PAGE 15 HEREIN AND IN THE
RELATED PROSPECTUS SUPPLEMENT.
-----------
THE CERTIFICATES REPRESENT INTERESTS IN AND THE NOTES REPRESENT OBLIGATIONS
OF THE RELATED TRUST AND DO NOT REPRESENT INTERESTS IN OR OBLIGATIONS OF GREEN
TREE (EXCEPT TO THE LIMITED EXTENT DESCRIBED HEREIN AND IN THE RELATED
PROSPECTUS SUPPLEMENT) OR ANY AFFILIATE OF GREEN TREE.
-----------
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.
-----------
Retain this Prospectus for future reference. This Prospectus may not be used
to consummate sales of securities offered hereby unless accompanied by a
Prospectus Supplement.
THE DATE OF THIS PROSPECTUS IS , 1998.
<PAGE>
(Continued from previous page)
Except as otherwise provided in the related Prospectus Supplement, each
Class of Securities of any Series will represent the right to receive a
specified amount of payments of principal and interest on the related
Contracts in the manner described herein and in the related Prospectus
Supplement. The right of each Class of Securities to receive payments may be
senior or subordinate to the rights of one or more of the other Classes of
such Series. A Series may include two or more Classes of Certificates or Notes
which differ as to the timing and priority of payment, interest rate or amount
of distributions in respect of principal or interest or both. A Series may
include one or more Classes of Certificates or Notes entitled to distributions
in respect of principal, with disproportionate, nominal or no interest
distributions, or to interest distributions, with disproportionate, nominal or
no distributions in respect of principal. Distributions on Certificates of any
Series, if any, will be subordinated in priority to payments due on the
related Notes to the extent described herein and in the related Prospectus
Supplement. The Certificates will represent fractional undivided interests in
the related Trust.
Each Class of Securities will represent the right to receive distributions
or payments in the amounts, at the rates, and on the dates set forth in the
related Prospectus Supplement. The rate of distributions in respect of
principal on Certificates and payment in respect of principal on Notes of any
Class will depend on the priority of payment of such Class and the rate and
timing of payments (including prepayments, liquidations and repurchases of
Contracts) on the related Contracts.
Except as otherwise specified in the related Prospectus Supplement, the only
obligations of Green Tree with respect to a Series of Securities 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 Securities evidencing interests in a pool of
Contracts are limited to its contractual servicing obligations. If so
specified in the related Prospectus Supplement, the Servicer may be obligated,
under certain terms and conditions, to advance the amount of any delinquent
payments of principal and interest during the immediately preceding Due Period
(as defined herein), but only to the extent the Servicer determines such
advances are recoverable from future payments and collections on the
delinquent Contracts. See "Description of the Trust Documents--Advances."
If specified in the related Prospectus Supplement, a financial guaranty
insurance policy, letter of credit, surety bond, Green Tree guaranty, cash
reserve fund, or other form of credit enhancement, or any combination thereof,
may be provided with respect to a Trust or any Class of Securities.
Unless otherwise provided in the related Prospectus Supplement, the Notes
and the Certificates, if any, of any Series initially will be represented by
certificates and notes registered in the name of Cede & Co., the nominee of
The Depository Trust Company ("DTC"). The interests of beneficial owners of
the Securities will be represented by book entries on the records of the
participating members of DTC. Definitive Securities will be available only
under limited circumstances.
There currently is no secondary market for the Securities. There can be no
assurance that any such market will develop or, if it does develop, that it
will continue. The Securities will not be listed on any securities exchange.
2
<PAGE>
AVAILABLE INFORMATION
Green Tree, as originator of each Trust, has filed with the Securities and
Exchange Commission (the "Commission") a Registration Statement (together with
all amendments and exhibits thereto, referred to herein as the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities
Act"), with respect to the Securities offered pursuant to this Prospectus. For
further information, reference is made to the Registration Statement which is
available for inspection without charge at the office of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of the
Commission at Seven World Trade Center, Suite 1300, New York, New York 10048
and at Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511, and copies of which may be obtained from the
Commission 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.
REPORTS TO SECURITYHOLDERS
Unless otherwise provided in the related Prospectus Supplement, unless and
until Definitive Certificates or Definitive Notes are issued, unaudited
monthly and annual reports, containing information concerning each Trust and
prepared by the Servicer, will be sent on behalf of the Trust to the Trustee
for the Certificateholders, the Indenture Trustee for the Noteholders and Cede
& Co., as registered holder of the Certificates and the Notes and the nominee
of DTC. See "Certain Information Regarding the Securities--Statements to
Securityholders" and "--Book-Entry Registration." Certificateholders and
Noteholders are collectively referred to herein as the "Securityholders."
Certificate Owners or Note Owners may receive such reports, upon written
request, together with a certification that they are Certificate Owners or
Note Owners and payment of reproduction and postage expenses associated with
the distribution of such reports, from the Trustee, with respect to
Certificate Owners, or the Indenture Trustee, with respect to Note Owners, at
the addresses specified in the related Prospectus Supplement. Such reports
will not constitute financial statements prepared in accordance with generally
accepted accounting principles. Green Tree does not intend to send any of its
financial reports to Securityholders. The Servicer, on behalf of each Trust,
will file with the Commission periodic reports concerning each Trust to the
extent required under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and the rules and regulations of the Commission thereunder.
However, unless otherwise specified in the related Prospectus Supplement,
Green Tree expects that each Trust's obligation to file such reports will be
terminated following the end of the year in which such Trust is formed in
accordance with the Exchange Act and the rules and regulations of the
Commission thereunder.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
Green Tree's Annual Report on Form 10-K for the year ended December 31, 1996
(as amended on February , 1998), Quarterly Reports on Form 10-Q for the
periods ended March 31, June 30 and September 30, 1997 and Current Report on
Form 8-K dated January 27, 1998, 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 Servicer on behalf of each Trust 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 related
Securities shall be deemed to be incorporated by reference into this
Prospectus and the related Prospectus Supplement and to be a part hereof and
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 deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus and the related Prospectus Supplement to the
extent that a statement contained herein or in any other subsequently filed
document which also 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 or the related Prospectus Supplement.
Green Tree 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,
Green Tree Financial Corporation, 1100 Landmark Towers, 345 St. Peter Street,
Saint Paul, Minnesota 55102-1639, telephone number (612) 293-3400.
3
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus and by reference to
the information with respect to the Securities contained in the related
Prospectus Supplement to be prepared and delivered in connection with the
offering of each series of Securities. Certain capitalized terms used in this
Prospectus Summary are defined elsewhere in this Prospectus and in the related
Prospectus Supplement.
<TABLE>
<S> <C>
Issuer.............................. With respect to each series of Securities,
a trust (the "Trust") will be formed by
Green Tree pursuant to a Trust Agreement
between the Seller, the trustee (the "Owner
Trustee") specified in the related
Prospectus Supplement and certain other
parties as specified in the related
Prospectus Supplement.
Seller.............................. Green Tree Financial Corporation (in such
capacity referred to herein as "Green
Tree").
Servicer............................ Green Tree Financial Corporation (in such
capacity referred to herein as the
"Servicer," which term shall include any
successor to Green Tree Financial
Corporation in such capacity under the
applicable Sale and Servicing Agreement (as
defined herein)).
Risk Factors........................ Certain special considerations are
particularly relevant to a decision to
invest in any Securities sold hereunder.
See "Risk Factors" herein.
Trustee............................. The Owner Trustee for a Trust, as specified
in the related Prospectus Supplement. The
Owner Trustee for any Trust will be
referred to in this Prospectus as the
"Trustee," although the Prospectus
Supplement will refer to the Trustee as the
"Owner Trustee" in order to distinguish the
Owner Trustee and the Indenture Trustee for
such Series. See "Description of the Trust
Documents--The Trustee."
Indenture Trustee................... With respect to any Series of Securities,
the Indenture Trustee specified in the
related Prospectus Supplement (the
"Indenture Trustee").
</TABLE>
<TABLE>
<S> <C>
The Notes.......................... Each Series of Securities will include one
or more Classes of Notes, which will be
issued pursuant to an Indenture.
Unless otherwise specified in the related
Prospectus Supplement, Notes will be
available for purchase in denominations of
$1,000 and integral multiples thereof, and
will be available in book-entry form only.
Unless otherwise specified in the related
Prospectus Supplement, beneficial owners of
Notes ("Note Owners") will be able to
receive Definitive Notes only in the
limited circumstances described herein or
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
in the related Prospectus Supplement. See
"Certain Information Regarding the
Securities--Book-Entry Registration."
</TABLE>
<TABLE>
<S> <C>
The Notes will not be guaranteed or insured
by any government agency or, unless
otherwise specified in the related
Prospectus Supplement, other insurer and,
except as described herein and in the
related Prospectus Supplement, the
Contracts will not be guaranteed or insured
by any government agency or other insurer.
Unless otherwise specified in the related
Prospectus Supplement, each Class of Notes
will have a stated principal amount and
will bear interest at a specified rate or
rates (with respect to each Class of Notes,
the "Interest Rate"). Each Class of Notes
may have a different Interest Rate, which
may be a fixed, variable or adjustable
Interest Rate, or any combination of the
foregoing. The related Prospectus
Supplement will specify the Interest Rate
and the method for determining subsequent
changes to the Interest Rate.
A Series may include two or more Classes of
Notes which differ as to the timing and
priority of payment, seniority, allocations
of loss, Interest Rate or amount of
payments of principal or interest, or as to
which payments of principal or interest may
or may not be made upon the occurrence of
specified events or on the basis of
collections from designated portions of the
Contract Pool. In addition, a Series may
include one or more Classes of Notes
("Stripped Notes") entitled to (i)
principal payments with disproportionate,
nominal or no interest payments or (ii)
interest payments with disproportionate,
nominal or no principal payments.
The Notes of a Series may include one or
more Classes ("Subordinated Notes") which
are subordinated in right of distribution
to one or more other Classes of Notes
("Senior Notes"). Notes of a Series which
includes Senior Notes and Subordinated
Notes are referred to herein collectively
as "Senior/Subordinated Notes." A Series of
Senior/Subordinated Notes may include one
or more Classes ("Mezzanine Notes") which
are subordinated to one or more Classes of
Notes and are senior to one or more Classes
of Notes.
If the Seller or the Servicer exercises its
option to purchase the Contracts of a Trust
on the terms and conditions described under
"Description of the Trust Documents--
Termination," the outstanding Notes, if
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
any, of such Series will be redeemed as set
forth in the related Prospectus Supplement.
In addition, if the related Prospectus
Supplement provides that the property of a
Trust will include a Pre-Funding Account
(the "Pre-Funding Account"), the
outstanding Notes, if any, of such Series
will be subject to partial redemption on or
immediately following the end of the Pre-
Funding Period in an amount and manner
specified in the related Prospectus
Supplement (the "Pre-Funding Period"). In
the event of such partial redemption, the
Note Owners may be entitled to receive a
prepayment premium from the Trust, in the
amount and to the extent provided in the
related Prospectus Supplement.
The Certificates.................... With respect to any Series of Securities
including one or more Classes of
Certificates, such Certificates will be
issued pursuant to the related Trust
Documents. For convenience of description,
any reference in this Prospectus to a
"Class" of Certificates includes a
reference to any subclasses of such Class.
If so specified in a Prospectus Supplement,
the Certificates of a Series 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 of Certificates 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. See
"The Certificates."
Unless otherwise specified in the related
Prospectus Supplement, Certificates will be
available for purchase in denominations of
$1,000 and in integral multiples thereof
and will be available in book-entry form
only. Unless otherwise specified in the
related Prospectus Supplement, beneficial
owners of Certificates ("Certificate
Owners") will be able to receive Definitive
Certificates only in the limited
circumstances described herein or in the
related Prospectus Supplement. See "Certain
Information Regarding the Securities--Book-
Entry Registration."
</TABLE>
<TABLE>
<S> <C>
The Certificates of a Series will not be
guaranteed or insured by any government
agency or, unless otherwise
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
specified in the related Prospectus
Supplement, other insurer and, except as
described herein and in the related
Prospectus Supplement, the Contracts will
not be guaranteed or insured by any
government agency or other insurer.
Unless otherwise specified in the related
Prospectus Supplement, each Class of
Certificates will have a stated Certificate
Balance (as defined in the related
Prospectus Supplement) and will accrue
interest on such Certificate Balance at a
specified rate (with respect to each Class
of Certificates, the "Pass-Through Rate").
Each Class of Certificates may have
a different Pass-Through Rate, which may be
a fixed, variable or adjustable Pass-
Through Rate, or any combination of the
foregoing. The related Prospectus
Supplement will specify the Pass-Through
Rate for each Class of Certificates, or the
initial Pass-Through Rate and the method
for determining subsequent changes to the
Pass-Through Rate.
The Certificates of a Series may include
one or more Classes ("Subordinated
Certificates") which are subordinated in
right of distribution to one or more other
Classes of Certificates ("Senior
Certificates"). Certificates of a Series
which includes Senior Certificates 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.
If the Seller or Servicer exercises its
option to purchase the Contracts of a Trust
on the terms and conditions described under
"Description of the Trust Documents--
Termination," Certificate Owners will
receive an amount in respect of the
Certificates as specified in the related
Prospectus Supplement. In addition, if the
related Prospectus Supplement provides that
the property of a Trust will include a Pre-
Funding Account, Certificate Owners will
receive a distribution in respect of
principal on or immediately following the
end of the funding period specified in the
related Prospectus Supplement in an amount
and manner specified in the related
Prospectus Supplement.
Subordination....................... With respect to any Series of Securities
including one or more Classes of
Certificates, distributions in respect of
the Certificates may be subordinated in
priority of payment to payments on the
Notes, to the
extent specified in the related Prospectus
Supplement.
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
One or more Classes of Notes of any Series
may be Subordinated Notes, as specified in
the related Prospectus Supplement. The
rights of the Subordinated Noteholders to
receive any or a specified portion of
distributions with respect to the Contracts
will be subordinated to the rights of
Senior Noteholders to the extent and in the
manner specified in the related Prospectus
Supplement. If a Series contains more than
one Class of Subordinated Notes,
distributions and losses will be allocated
among such Classes in the manner specified
in the related Prospectus Supplement. The
rights of the Subordinated Noteholders, to
the extent not subordinated, may be on a
parity with those of the Senior
Noteholders. This subordination is intended
to enhance the likelihood of regular
receipt by Senior Noteholders of the full
amount of scheduled monthly payments of
principal and interest due them and to
protect the Senior Noteholders against
losses. If so specified in the applicable
Prospectus Supplement, other Classes of
Subordinated Notes 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.
One or more Classes of Certificates of any
Series may be Subordinated Certificates, as
specified in the related Prospectus
Supplement. The rights of the Subordinated
Certificateholders to receive any or a
specified portion of distributions with
respect to the Contracts will be
subordinated to the rights of Senior
Certificateholders to the extent and in the
manner specified in the related Prospectus
Supplement. If a Series contains more than
one Class of Subordinated Certificates,
distributions and losses will be allocated
among such Classes in the manner specified
in the related Prospectus Supplement. The
rights of the Subordinated
Certificateholders, to the extent not
subordinated, may be on a parity with those
of the Senior Certificateholders. This
subordination is intended to enhance the
likelihood of regular receipt by Senior
Certificateholders of the full amount of
scheduled monthly payments of principal and
interest due them and to protect the Senior
Certificateholders against losses. If so
specified in the applicable Prospectus
Supplement, Mezzanine Certificates or other
Classes of Subordinated Certificates may be
entitled to the benefits of other forms of
credit enhancement and may, if rated in one
of the four
</TABLE>
8
<PAGE>
<TABLE>
<S> <C>
highest rating categories by a nationally
recognized statistical rating organization,
be offered pursuant to this Prospectus and
such Prospectus Supplement.
</TABLE>
<TABLE>
<S> <C>
Trust Property...................... Each Note will represent an obligation of,
and each Certificate, if any, will
represent a fractional undivided interest
in, the related Trust. The assets of
each Trust (the "Trust Property") will
include, among other things, (i) a pool
(the "Contract Pool") of fixed or variable
rate home improvement contacts and
promissory notes and closed-end home equity
loans, (ii) amounts held in the Collection
Account, including all investments therein,
all income from the investment of funds
therein and all proceeds thereof, certain
other accounts and the proceeds thereof,
(iii) proceeds from FHA Insurance (with
respect to any FHA-insured Home Improvement
Contract included in the Contract Pool),
(iv) any letter of credit, guarantee,
surety bond, insurance policy, cash reserve
fund or other credit enhancement securing
payment of all or part of a Series of
Securities, (v) certain other rights under
the Trust Documents and (vi) such other
property as may be specified in the related
Prospectus Supplement. In addition, if so
specified in the related Prospectus
Supplement, the Trust Property will include
monies on deposit in a Pre-Funding Account
to be established with the Indenture
Trustee or the Trustee, which will be used
to purchase Subsequent Contracts (as
defined below) from the Seller from time to
time during the Pre-Funding Period
specified in the related Prospectus
Supplement, as well as any Subsequent
Contracts so purchased. See "The Trusts."
If and to the extent provided in the
related Prospectus Supplement, the related
Trust will be obligated to purchase from
Green Tree (subject to the satisfaction of
certain conditions described in the
applicable Sale and Servicing Agreement),
additional Contracts (the "Subsequent
Contracts") from time to time (as
frequently as daily) during the Pre-Funding
Period specified in the related Prospectus
Supplement having an aggregate principal
balance approximately equal to the amount
on deposit in the Pre-Funding Account (the
"Pre-Funded Amount") on such Closing Date.
Green Tree will be obligated to repurchase
Contracts upon the occurrence of certain
breaches of representations and warranties
(a "Repurchase Event"). See "Description of
the Trust Documents--Sale and Assignment of
the Contracts" and "Certain Legal Aspects
of the Contracts--Repurchase Obligations."
</TABLE>
9
<PAGE>
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Enhancement......................... If and to the extent specified in the
related Prospectus Supplement, as an
alternative, or in addition, to the credit
enhancement afforded by subordination of
the Subordinated Notes and Subordinated
Certiticates, credit enhancement with
respect to a Trust or any Class of
Securities may include any one or more of
the following: a financial guaranty
insurance policy,
letter of credit, surety bond, Green Tree
guaranty, cash reserve fund, derivative
product, or other form of credit
enhancement, or any combination thereof.
The enhancement with respect to any Trust
or any Class of Securities may be
structured to provide protection against
delinquencies and/or losses on the
Contracts, against changes in interest
rates, or other risks, to the extent and
under the conditions specified in the
related Prospectus Supplement. Unless
otherwise specified in the related
Prospectus Supplement, any form of
enhancement will have certain limitations
and exclusions from coverage thereunder,
which will be described in the related
Prospectus Supplement. Further information
regarding any provider of credit
enhancement, including financial
information when material, will be included
in the related Prospectus Supplement. See
"Description of the Trust Documents--
Enhancement."
Servicing........................... The Servicer will be responsible for
managing, administering, servicing and
making collections on the Contracts held by
each Trust. Unless otherwise specified in
the related Prospectus Supplement, with
respect to each Series of Securities
compensation to the Servicer will include a
monthly fee (the "Monthly Servicing Fee")
which will be payable from the
related Trust to the Servicer on each
Distribution Date, in an amount equal to
the product of one-twelfth of the annual
servicing fee rate described in the
applicable Prospectus Supplement multiplied
by the aggregate principal balance of the
Contracts (the "Aggregate Principal
Balance") as of the first day of the prior
calendar month ("Due Period"), plus any
late fees and other administrative fees and
expenses or similar charges collected with
respect to the Contracts during such Due
Period. See "Description of the Trust
Documents--Servicing."
Advances............................ Unless otherwise specified in the related
Prospectus Supplement, the Servicer will be
obligated to make advances ("Advances")
each month of any scheduled payments on the
Contracts that were due but not received
during the prior Due Period. The Servicer
will be entitled to reimbursement of an
Advance from the Amount Available in the
Collection Account for
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the related Trust. 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 Collection
Account for the related Trust. See
"Description of the Trust Documents--
Advances."
Contracts........................... The Contract Pool underlying a Series of
Securities will consist of fixed or
variable rate Contracts. Such Contracts, as
specified in the related Prospectus
Supplement, will consist of (1) home
improvement contracts and promissory notes
(the "Home Improvement Contracts"), which
will be either conventional contracts or
contracts insured by the Federal Housing
Administration ("FHA") pursuant to Title I
of the National Housing Act ("Title I"),
and (2) closed-end home equity loans (the
"Home Equity Contracts"). The Home
Improvement Contracts will not be secured
by any lien on the related real estate, and
the Home Equity Loans may have a loan-to-
value ratio substantially in excess of
100%. If so specified in the related
Prospectus Supplement, the Contract Pool
may be divided into two or more sub-pools,
in which event the Securities of certain
specified Classes may be payable primarily
from, and in respect of, the Contracts
comprising a given sub-pool.
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The Prospectus Supplement for each Series
will provide information with respect to
(i) the aggregate principal balance of the
Contracts comprising the Contract Pool, as
of the date specified in the Prospectus
Supplement (the "Cut-off Date"); (ii) the
weighted average and range of contractual
rates of interest (each, a "Contract Rate")
on the Contracts; (iii) the weighted
average and ranges of terms to scheduled
maturity of the Contracts as of origination
and as of the Cut-off Date; (iv) the
percentage of the Contracts that are Home
Improvement Contracts and Home Equity
Contracts, respectively; (v) the average
outstanding principal balance of the
Contracts as of the Cut-off Date; (vi) the
percentage of the Contracts that are FHA-
insured; and (vii) the geographic location
of improved real estate underlying the
Contracts. In addition, if so specified in
the related Prospectus Supplement,
additional Contracts may be purchased from
Green Tree during the Pre-Funding Period
specified in the related Prospectus
Supplement, from funds on deposit in a Pre-
Funding Account.
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Except as otherwise specified in the
related Prospectus Supplement, the
Contracts will have been originated by
Green Tree on an individual basis in the
ordinary course of its business.
Collection Account................. With respect to each Series of Securities,
the Servicer will establish and maintain
one or more separate accounts (the
"Collection Account") in the name of the
Indenture Trustee for the benefit of the
Certificate Owners and the Note Owners. All
payments from obligors under the Contracts
("Obligors") that are received by the
Servicer on behalf of each Trust will be
deposited in the related Collection Account
no later than one Business Day after
receipt thereof.
Unless otherwise specified in the related
Prospectus Supplement, all payments from
Obligors and all proceeds (net of
reasonable expenses of collection) with
respect to Liquidated Contracts ("Net
Liquidation Proceeds") that are received by
the Servicer will be deposited in the
related Collection Account no later than
one Business Day after receipt thereof.
Unless otherwise specified in the related
Prospectus Supplement, the Servicer will be
permitted to use any alternative remittance
schedule acceptable to the Rating Agencies
(as defined below). See "Description of the
Trust Documents--Collections."
Representations and Warranties of As a condition to the Seller's conveyance
the Seller........................ of any Contract Pool to the Trust, the
Seller will make certain representations
and warranties in the related Sale and
Servicing Agreement regarding the
Contracts. The Trustee will assign its
right to enforce such representations and
warranties to the related Indenture Trustee
as collateral for the Notes. Under the
terms of the Sale and Servicing Agreement,
if the Seller becomes aware of a breach of
any such representation or warranty that
materially adversely affects the interests
of the Note Owners, the Certificate Owners,
if any, or the related Trust therein (a
"Repurchase Event") in any Contract or
receives written notice of such a breach
from the Trustee, the Indenture Trustee or
the Servicer, then the Seller will be
obligated either to cure such breach or to
repurchase or, if so provided in the
related Prospectus Supplement, substitute
for the affected Contract, in each case
under the conditions further described
herein and in the Prospectus Supplement.
See "Description of the Trust Documents--
Sale and Assignment of the Contracts."
Optional Purchase of Contracts..... Unless otherwise specified in the related
Prospectus Supplement, with respect to each
Series of Securities, the Seller or the
Servicer may purchase all the
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Contracts held by the related Trust on any
Distribution Date following the first Due
Period as of which the Aggregate Principal
Balance has declined
to 10% or less (or such other percentage as
may be specified in the related Prospectus
Supplement) of the Aggregate Principal
Balance as of the Cut-off Date (the "Cut-
off Date Principal Balance"), subject to
certain provisions in the related Trust
Documents. See "Description of the Trust
Documents--Termination."
Tax Status.......................... In the opinion of Counsel to Green Tree,
for federal and Minnesota income tax
purposes, the Notes will be characterized
as debt and the Trust will not be
characterized as an association or a
publicly traded partnership taxable as a
corporation. Each Noteholder, by the
acceptance of a Note, will agree to treat
the Notes as debt. Each Certificateholder,
by the acceptance of a Certificate, will
agree to treat the Trust as a partnership
in which the Certificateholders are
partners for federal income tax purposes.
Alternative characterizations of the Trust,
the Notes and the Certificates are
possible, but would not result in
materially adverse tax consequences to
Noteholders or Certificateholders. See
"Certain Federal Income Tax Consequences"
and "Certain State Income Tax Consequences"
herein.
ERISA Considerations ............... Subject to the considerations discussed
under "ERISA Considerations" herein and in
the related Prospectus Supplement, and
unless otherwise specified in the related
Prospectus Supplement, the Notes will be
eligible for purchase by employee benefit
plans subject to the Employee Retirement
Income Security Act of 1974, as amended
("ERISA"). The related Prospectus
Supplement will provide further information
with respect to the eligibility of a Class
of Certificates for purchase
by employee benefit plans. A fiduciary of
any employee benefit plan subject to ERISA,
or the Internal Revenue Code of 1986, as
amended (the "Code"), should review
carefully with its legal advisors whether
the purchase or holding of a Class of
Certificates could give rise to a
transaction prohibited or otherwise
impermissible under ERISA or the Code. See
"ERISA Considerations" herein and in the
related Prospectus Supplement.
Legal Investment ................... The Securities will not constitute
"mortgage related securities" under the
Secondary Mortgage Market Enhancement Act
of 1984, as amended. See "Legal Investment
Considerations."
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Rating.............................. As a condition of issuance, the Securities
of each Series offered pursuant to this
Prospectus will be rated in one of the four
highest rating categories by at least one
nationally recognized rating agency (a
"Rating Agency"). There is no assurance
that the rating initially assigned to such
Securities will not be subsequently lowered
or withdrawn by the Rating Agency. In the
event the rating initially assigned to any
Securities is subsequently lowered for any
reason, no person or entity will be
obligated to provide any
credit enhancement in addition to the
credit enhancement, if any, specified in
the related Prospectus Supplement.
Registration of Certificates........ Unless otherwise specified in the related
Prospectus Supplement, the Notes and the
Certificates, if any, of each Series will
be registered in the name of Cede & Co., as
the nominee of DTC, and will be available
for purchase only in book-entry form on the
records of DTC and participating members
thereof. Notes and Certificates will be
issued in definitive form only under the
limited circumstances
described herein. All references herein to
"Holders," "Certificateholders" or
"Noteholders" shall reflect the rights of
beneficial owners of Notes ("Note Owners")
or of Certificates ("Certificate Owners"),
as the case may be, as they may indirectly
exercise such rights through DTC and
participating members thereof, except as
otherwise specified herein or in the
related Prospectus Supplement. See "Certain
Information Regarding the Securities--Book-
Entry Registration."
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RISK FACTORS
LIMITATIONS ON AVAILABILITY OF FHA INSURANCE
The related Prospectus Supplement will specify the number and percentage of
Contracts included in the Contract Pool that are insured by FHA pursuant to
Title I. The availability of FHA Insurance following a default on an FHA-
insured Home Improvement Contract is subject to a number of conditions,
including strict compliance by Green Tree with FHA regulations in originating
and servicing the Home-Improvement Contract. Although Green Tree is an FHA-
approved lender and believes, and will represent and warrant in the Sale and
Servicing Agreement, that it has complied with FHA regulations, such
regulations are susceptible to substantial interpretation. Green Tree is not
required to obtain, and has not obtained, approval from FHA of its origination
and servicing practices. Failure to comply with FHA regulations may result in
a denial of FHA Insurance claims, and there can be no assurance that FHA's
enforcement of its regulations will not become stricter in the future. From
time to time Green Tree is engaged in disputes with FHA over the validity of
claims submitted and Green Tree's compliance with FHA regulations in servicing
loans insured by FHA, such as the FHA-insured Home Improvement Contracts. In
addition, any insurance claim paid by FHA will cover only 90% of the sum of
the unpaid principal on the Home Improvement Contract, up to nine months
unpaid interest thereon (computed at 7% per annum) and certain liquidation
costs.
The amount of FHA Insurance available with respect to a Series of Securities
at any given time with respect to the FHA-insured Home Improvement Contracts
included in a Contract Pool is limited to the balance of a reserve amount
determined with respect to all FHA Title I loans originated and reported for
insurance by Green Tree and not sold, or sold with recourse, by Green Tree,
including manufactured housing contracts as well as home improvement loans.
Such reserve amount, as of December 31, 1997, was equal to approximately
$ , but will be reduced by the amount of all FHA Insurance claims paid,
and will be increased by an amount equal to 10% of the unpaid principal
balance of FHA Title I loans subsequently originated and reported for
insurance by Green Tree. Severe losses on Green Tree's FHA-insured
manufactured housing contracts, or on other FHA-insured home improvement loans
originated by Green Tree, could reduce or eliminate Green Tree's FHA Insurance
reserves, in which event FHA Insurance would not be available to cover losses
on FHA-insured Contracts. In the event Green Tree were terminated as Servicer
due to its bankruptcy or otherwise, it is anticipated that a proportionate
amount of Green Tree's FHA Insurance reserves would be transferred to the
reserve account of the Trustee or other successor servicer, but there can be
no assurance of the amount, if any, that would be so transferred. See
"Description of FHA Insurance."
LIMITED OBLIGATIONS
Except as otherwise specified in the related Prospectus Supplement, the
Securities of a Series will not represent an interest in or obligation of
Green Tree. The Securities 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.
JUNIOR MORTGAGE LIENS
Green Tree expects that a substantial number of the liens on the improved
real estate securing the Contracts in a given Contract Pool will be junior to
other liens on such real estate. The rights of the Trust (and therefore the
Securityholders 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 Home Equity Contract to be sold
upon default of the mortgagor or trustor, thereby extinguishing the junior
mortgagee's or junior beneficiary's lien unless the Servicer on behalf of the
Trust asserts its subordinate interest in the property in foreclosure
litigation and, possibly, satisfies the defaulted senior loan or loans. See
"Certain Legal Aspects of the Contracts--Repurchase Obligations."
HOME IMPROVEMENT CONTRACTS UNSECURED
The obligations of the Obligor under each Home Improvement Contract included
in a Contract Pool will not be secured by an interest in the related real
estate or otherwise, and the related Trust, as the owner of such
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Home Improvement Contract, will be a general unsecured creditor as to such
obligations. As a consequence, in the event of a default under a Home
Improvement Contract, the related Trust will have recourse only against the
Obligor's assets generally, along with all other general unsecured creditors
of the Obligor. In a bankruptcy or insolvency proceeding relating to an
Obligor on a Home Improvement Contract, the obligations of the Obligor under
such Home Improvement Contract may be discharged in their entirety,
notwithstanding the fact that the portion of such Obligor's assets made
available to the related Trust as a general unsecured creditor to pay amounts
due and owing thereunder are insufficient to pay all such amounts. An Obligor
on a Home Improvement Contract may not demonstrate the same degree of concern
over performance of the Obligor's obligations under such Home Improvement
Contract as if such obligations were secured by the real estate owned by such
Obligor.
RISKS TO INVESTORS UPON ANY INSOLVENCY OF GREEN TREE
Green Tree intends that any transfer of Contracts to the related Trust will
constitute a sale, rather than a pledge of the Contracts to secure
indebtedness of Green Tree. However, if Green Tree were to become a debtor
under the federal bankruptcy code or similar applicable state laws
(collectively, "Insolvency Laws"), a creditor or trustee in bankruptcy of
Green Tree or Green Tree as debtor-in-possession might argue that such sale of
Contracts by Green Tree was a pledge of the Contracts rather than a sale. This
position, if presented to or accepted by a court, could cause the related
Trust to experience a delay in or reduction of collections on the Contracts.
VALUE OF MORTGAGED PROPERTY
A substantial portion of the Home Equity Contracts included in a Contract
Pool are expected to have loan-to-value ratios of 90% or more, based on the
aggregate of the outstanding principal balances of all senior mortgages or
deeds of trust and of the Contract on the one hand, and the value of the home
and an estimate of the value of the financed improvement, where applicable, on
the other. See "Green Tree Financial Corporation--Contract Origination." An
overall decline in the residential real estate market, the general condition
of a property securing a Contract or other factors could adversely affect the
value of the property securing a conventional (i.e., not insured by FHA) Home
Improvement Contract or a Home Equity Contract such that the remaining balance
of such Contract, together with that of any senior liens on the related
property, could equal or exceed the value of the property.
NON-RECORDATION OF MORTGAGE ASSIGNMENTS
Because of the expense and administrative inconvenience involved, Green Tree
will not record the assignment to the Trustee of the mortgage or deed of trust
securing any Home Equity Contract. In some states, in the absence of such
recordation, the assignment to the related Trustee of the mortgage or deed of
trust securing a Home Equity Contract may not be effective against creditors
of or purchasers from Green Tree or a trustee in bankruptcy of Green Tree.
SUBORDINATION OF CERTAIN CLASSES OF SECURITIES; LIMITED ASSETS
To the extent specified in the related Prospectus Supplement, distributions
of interest and principal on some or all Classes of Securities of a Series may
be subordinated in priority of payment to interest and principal due on the
Notes of such Series and/or to distributions of interest and principal on
other Classes of Securities of such Series. In addition, holders of certain
Classes of Securities of any Series may have the right to take actions that
are detrimental to the interests of the holders of certain other Classes of
Securities of such Series. For example, holders of a Class of more senior
Securities may be entitled to instruct the Indenture Trustee or Trustee to
liquidate the Trust Property when it is not in the interest of holders of more
junior Classes of Securities of such Series to do so. Conversely, certain
actions may require the consent of a majority of Security Owners of all
Classes of a Series, which may mean that Security Owners of more junior
classes can prevent the Security Owners of more senior Classes of such Series
from taking action. Moreover, no Trust will have any significant
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assets or sources of funds other than the Contracts and, to the extent
provided in the related Prospectus Supplement, a Pre-Funding Account and any
credit enhancement specified in the related Prospectus Supplement. The Notes
of any Series will represent obligations solely of, and the Certificates, if
any, of such Series will represent interests solely in, the related Trust,
and, except as specified in the related Prospectus Supplement, neither the
Notes nor the Certificates of any such Series will be insured or guaranteed by
Green Tree, the Servicer, the applicable Owner Trustee, the applicable
Indenture Trustee or any other person or entity. Consequently, holders of the
Securities of any Series must rely for payment upon payments on the related
Contracts and, if and to the extent available, amounts on deposit in the Pre-
Funding Account, if any, and any credit enhancement, if any, as specified in
the related Prospectus Supplement. If specified in the related Prospectus
Supplement, credit enhancement for a Class of Securities of a Series may cover
one or more other Classes of Securities of such Series, and accordingly may be
exhausted for the benefit of some Classes and thereafter be unavailable for
such other Classes.
YIELD AND PREPAYMENT CONSIDERATIONS
The weighted average life of the Securities will be reduced by full or
partial prepayments on the Contracts. The Contracts will generally be
prepayable at any time without penalty. Prepayments (or, for this purpose,
equivalent payments to the related Trust) may result from payments by
Obligors, liquidations due to default, the receipt of proceeds from physical
damage or credit insurance, repurchases by Green Tree as a result of certain
uncured breaches of the warranties made by it with respect to the Contracts,
purchases by the Servicer as a result of certain uncured breaches of the
covenants with respect to the Contracts made by it in the related Sale and
Servicing Agreement, or Green Tree or the Servicer exercising its option to
purchase all of the remaining Contracts.
Unless otherwise specified in the related Prospectus Supplement, the amounts
paid to Securityholders in respect of principal on any Distribution Date will
include all prepayments on the Contracts during the corresponding Due Periods.
The Certificate Owners and the Note Owners will bear all reinvestment risk
resulting from the timing of payments of principal on the Securities.
LIMITED LIQUIDITY OF THE SECURITIES
There is currently no market for the Securities of any Series. Although
Green Tree expects that the underwriters of any particular Series will intend
to make a secondary market for such Securities, they will have no obligation
to do so. There can be no assurance that any such market will develop or, if
it does develop, that it will provide Certificate Owners or Note Owners with
liquidity of investment or will continue for the life of the Securities. The
Securities will not be listed on any securities exchange.
Unless otherwise specified in the related Prospectus Supplement, the
Securities will be issued in book-entry, rather than physical, form and, as a
result, in certain circumstances, the liquidity of the Securities in the
secondary market and the ability of the Certificate Owners and Note Owners to
pledge them may be adversely affected. See "Plan of Distribution" and "Certain
Information Regarding the Securities--Book-Entry Registration."
THE TRUSTS
With respect to each Series of Securities, Green Tree will establish a Trust
pursuant to the related Trust Documents. Prior to the sale and assignment of
the related Contracts pursuant to the related Trust Documents, the Trust will
have no assets or obligations. The Trust will not engage in any business
activity other than acquiring and holding the Trust Property, issuing the
Notes and the Certificates, if any, of such Series and distributing payments
thereon.
Each Note will represent an obligation of, and each Certificate, if any,
will represent a fractional undivided interest in, the related Trust. The
Trust Property of each Trust will include, among other things, (i) a Contract
Pool, (ii) such amounts as from time to time may be held in the Collection
Account (including all investments in
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the Collection Account and all income from the investment of funds therein and
all proceeds thereof) and certain other accounts (including the proceeds
thereof), (iii) proceeds from FHA Insurance (with respect to any FHA-insured
Home Improvement Contract included in the Contract Pool), (iv) any letter of
credit, guarantee, surety bond, insurance policy, cash reserve fund or other
credit enhancement securing payment of all or part of a Series of Securities,
(v) certain other rights under the Trust Documents and (vi) such other
property as may be specified in the related Prospectus Supplement. See "The
Contracts" and "Description of the Trust Documents--Collections." The Trust
Property will also include, if so specified in the related Prospectus
Supplement, monies on deposit in a Pre-Funding Account to be established with
the Indenture Trustee or the Trustee, which will be used to purchase
Subsequent Contracts from Green Tree from time to time (and as frequently as
daily) during the Pre-Funding Period specified in the related Prospectus
Supplement. Any Subsequent Contracts so purchased will be included in the
related Contract Pool forming part of the Trust Property, subject to the prior
rights of the related Indenture Trustee and the Noteholders therein. In
addition, to the extent specified in the related Prospectus Supplement, a form
of credit enhancement may be issued to or held by the Trustee or the Indenture
Trustee for the benefit of holders of one or more Classes of Securities.
Holders of Securities of a Series will have interests only in such Contract
Pool and will have no interest in the Contract Pool created with respect to
any other Series of Securities, except with respect to FHA Insurance reserves.
Except as otherwise specified in the related Prospectus Supplement, all of
the Contracts will have been originated by Green Tree in the ordinary course
of its business. Specific information respecting the Contracts included in
each Trust 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 Securities. A copy of the Sale and Servicing Agreement with
respect to each Series of Securities will be attached to the Form 8-K and will
be available for inspection at the corporate trust office of the Trustee
specified in the related Prospectus Supplement. A schedule of the Contracts
relating to such Series will be attached to the Sale and Servicing Agreement
delivered to the Trustee upon delivery of the Securities.
Whenever in this Prospectus terms such as "Contract Pool," "Trust," "Sale
and Servicing Agreement," "Interest Rate or "Pass-Through Rate" are used,
those terms respectively apply, unless the context otherwise indicates, to one
specific Contract Pool and Trust, each Sale and Servicing Agreement, each
Interest Rate applicable to the related Class of Notes and each Pass-Through
Rate applicable to the related Class of Certificates.
THE CONTRACT POOLS
Except as otherwise specified in the related Prospectus Supplement, the
Contract Pool will consist of (i) home improvement contracts and promissory
notes (the "Home Improvement Contracts"), and (ii) closed-end home equity
loans (the "Home Equity Contracts" and, together with the Home Improvement
Contracts, the "Contracts"), originated by Green Tree on an individual basis
in the ordinary course of business. The Home Improvement Contracts may be
conventional home improvement contracts or contracts insured by FHA. The Home
Improvement Contracts will not be secured by any lien on the related real
estate, and the Home Equity Loans may have a loan-to-value ratio substantially
in excess of 100%. Except as otherwise specified in the related Prospectus
Supplement, the Contracts will be fully amortizing and will bear interest at a
fixed or variable annual percentage rate (the "Contract Rate").
For each Series of Securities, Green Tree will assign the Contracts
constituting the Contract Pool to the trustee named in the related Prospectus
Supplement (the "Trustee"). Green Tree, as Servicer (in such capacity referred
to herein as the "Servicer," which term shall include any successor to Green
Tree in such capacity under the applicable Sale and Servicing Agreement), will
service the Contracts pursuant to the Sale and Servicing Agreement. See
"Description of the Trust Documents--Servicing." Unless otherwise specified in
the related Prospectus Supplement, the Contract documents will be held by the
Trustee or a custodian on its behalf.
The related Prospectus Supplement will specify for the Contracts contained
in the related Contract Pool, among other things, the range of the dates of
origination of the Contracts; the range of the Contract Rates and
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the weighted average Contract Rate; the minimum and maximum outstanding
principal balances and the average outstanding principal balance as of the
Cut-off Date; the aggregate principal balance of the Contracts included in the
Contract Pool as of the Cut-off Date; the weighted average and range of
scheduled terms to maturity as of origination and as of the Cut-off Date; the
range of original maturities of the Contracts and the last maturity date of
any Contract; and the geographic location of improved real estate securing the
Contracts. If the Trust includes a Pre-Funding Account, the related Prospectus
Supplement will specify the conditions that must be satisfied prior to any
transfer of Subsequent Contracts, including the requisite characteristics of
the Subsequent Contracts.
Green Tree will make representations and warranties as to the types and
geographical distribution of the Contracts included in a Contract Pool and as
to the accuracy in all material respects of certain information furnished to
the Trustee in respect of each such Contract. Upon a breach of any
representation or warranty that materially and adversely affects the interests
of the Securityholders in a Contract, Green Tree will be obligated to cure the
breach in all material respects, or to repurchase or substitute for
the Contract as described below. This repurchase obligation constitutes the
sole remedy available to the Securityholders or the Trustee for a breach of
representation or warranty by Green Tree. See "Description of the Trust
Documents--Sale and Assignment of the Contracts."
THE TRUSTEE
The Trustee for each Trust will be specified in the related Prospectus
Supplement. The Trustee's liability in connection with the issuance and sale
of the Securities of such Series will be limited solely to the express
obligations of such Trustee set forth in the related Trust Documents. A
Trustee may resign at any time, in which event the General Partner will be
obligated to appoint a successor trustee. The General Partner may also remove
the Trustee if the Trustee ceases to be eligible to continue as Trustee under
the related Trust Documents or if the Trustee becomes insolvent. In such
circumstances, the General Partner will be obligated to appoint a successor
trustee. Any resignation or removal of a Trustee and appointment of a
successor trustee will be subject to any conditions or approvals specified in
the related Prospectus Supplement and will not become effective until
acceptance of the appointment by the successor trustee.
GREEN TREE FINANCIAL CORPORATION
GENERAL
Green Tree is a Delaware corporation that, as of December 31, 1997, had
stockholders' equity of approximately $1,315,000,000. Through its various
divisions, Green Tree purchases, pools, sells and services retail conditional
sales contracts for manufactured housing and retail installment sales
contracts for home improvements, a variety of consumer products and equipment
finance, and home equity loans. Green Tree 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 Green Tree. Through its principal offices in St. Paul,
Minnesota, and service centers throughout the United States, Green Tree serves
all 50 states. Green Tree began financing FHA-insured home improvement loans
in April 1989 and conventional home improvement loans in September 1992. Green
Tree also purchases, pools and services installment sales contracts for
various consumer products. Its principal executive offices are located at 1100
Landmark Towers, St. Paul, Minnesota 55102-1639 (telephone (612) 293-3400).
Green Tree's Annual Report on Form 10-K for the year ended December 31, 1996,
most recent Proxy Statement and, when available, subsequent quarterly and
annual reports are available from Green Tree upon written request.
CONTRACT ORIGINATION
Home Improvement Contracts. Through its centralized loan processing
operations in St. Paul, Minnesota, Green Tree arranges to purchase certain
contracts from home improvement contractors located throughout the United
States. Green Tree's regional sales managers contact home improvement
contractors and explain Green
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Tree's available financing plans, terms, prevailing rates and credit and
financing policies. If the contractor wishes to utilize Green Tree's available
customer financing, the contractor must make an application for contractor
approval. Green Tree has a contractor approval process pursuant to which the
financial condition, business experience and qualifications of the contractor
are reviewed prior to his or her approval to sell contracts to Green Tree. In
addition, Green Tree has a centralized compliance group which reviews and
updates contractor financial condition and reviews contractors on an annual
basis to determine whether such contractor's approval will be continued. Green
Tree also reviews monthly contractor trend reports which show the default and
delinquency trends of the particular contractor with respect to contracts sold
to Green Tree. Green Tree occasionally will originate directly a home
improvement promissory note involving a home improvement transaction.
All contracts that Green Tree originates are written on forms provided or
approved by Green Tree and are purchased on an individually approved basis in
accordance with Green Tree's guidelines. The contractor submits the customer's
credit application and construction contract to Green Tree's office where an
analysis of the creditworthiness of the customer is made using a proprietary
credit scoring system that was implemented by Green Tree in June 1993. If
Green Tree determines that the application meets Green Tree's underwriting
guidelines and applicable FHA regulations (for FHA-insured contracts) and the
credit is approved, Green Tree purchases the contract from the contractor when
the customer verifies satisfactory completion of the work, or, in the case of
staged funding, Green Tree follows up with the customer for the completion
certificate 90 days after funding.
The types of home improvements financed by Green Tree include (i) exterior
renovations, including windows, siding and roofing, (ii) pools and spas, (iii)
kitchen and bath remodeling, and (iv) room additions and garages. Green Tree
may also, under certain limited conditions, extend additional credit beyond
the purchase price of the home improvement for the purpose of debt
consolidation.
The original principal amount of an unsecured FHA-insured home improvement
contract currently may not exceed $7,500 without specific FHA approval, with a
maximum term of 20 years. Certain other criteria for home improvement
contracts eligible for FHA Insurance are described under the caption
"Description of FHA Insurance."
Green Tree began financing conventional home improvement loans in September
1992. Conventional home improvement loans are not insured by FHA. The
unsecured conventional program allows for an amount financed from $2,500 to
$15,000 (except in Massachusetts where the loan limit may be $20,000). The
allowable term of unsecured contracts is 24 to 120 months. Green Tree's
underwriting standards with respect to unsecured home improvement contracts
are, in general, more stringent than its underwriting standards with respect
to secured home improvement contracts with similar terms. Eligible property
includes an owner-occupied single family home, up to four unit multiple-family
dwelling, owner-occupied condominium or town house, or an owner-occupied
manufactured home located in a Green Tree-approved park or attached to the
real estate.
Home Equity Contracts. Green Tree has originated closed-end home equity
loans since January 1996. As of December 31, 1996, Green Tree had
approximately $812,558,053 aggregate principal amount of outstanding closed-
end home equity loans.
Through a system of regional offices, Green Tree markets its home equity
lending directly to consumers using a variety of marketing techniques. Green
Tree also reviews and re-underwrites loan applications forwarded by
correspondent lenders.
Green Tree'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
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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.
LOSS AND DELINQUENCY INFORMATION
Each Prospectus Supplement will include Green Tree's loss and delinquency
experience with respect to its entire servicing portfolio of home improvement
contracts and home equity loans. However, there can be no assurance that such
experience will be indicative of the performance of the Contracts included in
a particular Contract Pool.
RATIO OF EARNINGS TO FIXED CHARGES FOR GREEN TREE
Set forth below are Green Tree'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>
YEAR ENDED DECEMBER 31,
------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Ratio of Earnings to Fixed Charges..................... 3.55 4.81 7.98 7.90 7.83
</TABLE>
YIELD CONSIDERATIONS
The Interest Rates, Pass-Through Rates and the weighted average Contract
Rate of the Contracts (as of the related Cut-off Date) relating to each Series
of Securities 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 Securities 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 Securities that is offered at a premium to its principal amount or
without any principal amount.
The yield on some types of Securities which may be offered hereby, such as
Stripped Notes, Interest Only Certificates, Principal Only Certificates and
Fast Pay/Slow Pay Certificates, may be particularly sensitive to prepayment
rates, and to changes in prepayment rates, on the underlying Contracts. If so
stated in the related Prospectus Supplement, the yield on some types of
Securities which may be offered hereby could change and may be negative under
certain prepayment rate scenarios. Accordingly, some types of Securities may
not be legal or appropriate investments for certain financial institutions,
pension funds or others. See "ERISA Considerations" and "Legal Investment
Considerations." In addition, the timing of changes in the rate of prepayment
on the Contracts included in a Contract Pool may significantly affect an
investor's actual yield to maturity, even if the average prepayment rate over
time is consistent with the investor's expectations. In general, the earlier
that prepayments on Contracts occur, the greater the effect on the investor's
yield to maturity.
MATURITY AND PREPAYMENT CONSIDERATIONS
MATURITY
Unless otherwise described in an applicable Prospectus Supplement, all of
the Contracts will have maturities at origination of not more than 25 years.
PREPAYMENT CONSIDERATIONS
Contracts generally may be prepaid in full or in part without penalty. FHA-
insured Contracts may be prepaid at any time without penalty. Green Tree has
no significant experience with respect to the rate of principal
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prepayments on home improvement contracts and home equity loans. Because the
Contracts have scheduled due dates throughout the calendar month, and because
(unless otherwise specified in the related Prospectus Supplement) all
principal prepayments will be passed through to Securityholders of the related
Series on the Payment Date following the Due Period in which such principal
prepayment occurred, prepayments on the Contracts would affect the amount of
funds available to make distributions on the Securities on any Payment Date
only if a substantial portion of the Contracts prepaid prior to their
respective due dates in a particular month (thus paying less than 30 days'
interest for that Due Period) while very few Contracts prepaid after their
respective due dates in that month. In addition, liquidations of defaulted
Contracts or the Servicer's or Green Tree's exercise of its option to
repurchase the entire remaining pool of Contracts (see "Description of the
Trust Documents--Termination") will affect the timing of principal
distributions on the Securities 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 Securities. Although the related
Prospectus Supplement will specify the prepayment assumptions used to price
any Series of Securities, there can be no assurance that the Contracts will
prepay at such rate, and it is unlikely that prepayments or liquidations of
the Contracts will occur at any constant rate.
See "Description of the Trust Documents--Termination" for a description of
Green Tree's or the Servicer's option to repurchase the Contracts comprising
part of a Trust when the Aggregate Principal Balance of such Contracts as of
the related Cut-off Date is less than a specified percentage of the Cut-off
Date Principal Balance of such Contracts. See also "The Trusts--The Contract
Pools" for a description of the obligations of Green Tree to repurchase a
Contract in case of a breach of a representation or warranty relative to such
Contract.
POOL FACTOR
The "Certificate Pool Factor" for each Class of Certificates will be an
eight-digit decimal which the Servicer will compute indicating the outstanding
balance (the "Certificate Balance") with respect to such Certificates as of
each Distribution Date (after giving effect to all distributions of principal
made on such Distribution Date), as a fraction of the original Certificate
Balance of such Certificates. The "Note Pool Factor" for each Class of Notes,
if any, will be an eight-digit decimal which the Servicer will compute
indicating the remaining outstanding principal balance with respect to such
Notes as of each Distribution Date (after giving effect to all distributions
of principal on such Distribution Date) as a fraction of the initial
outstanding principal balance of such Class of Notes. Each Certificate Pool
Factor and each Note Pool Factor will initially be 1.00000000; thereafter, the
Certificate Pool Factor and the Note Pool Factor will decline to reflect
reductions in the Certificate Balance of the applicable Class of Certificates
or reductions in the outstanding principal balance of the applicable Class of
Notes, as the case may be. The amount of a Certificateholder's pro rata share
of the Certificate Balance for the related Class of Certificates can be
determined by multiplying the original denomination of the Certificateholder's
Certificate by the then applicable Certificate Pool Factor. The amount of a
Noteholder's pro rata share of the aggregate outstanding principal balance of
the applicable Class of Notes can be determined by multiplying the original
denomination of such Noteholder's Note by the then applicable Note Pool
Factor.
With respect to each Trust and pursuant to the related Trust Documents, on
each Distribution Date or Payment Date, as the case may be, the related
Certificateholders and Noteholders will receive periodic reports from the
Trustee stating the Certificate Pool Factor or the Note Pool Factor, as the
case may be, and containing various other items of information. Unless and
until Definitive Certificates or Definitive Notes are issued, such reports
will be sent on behalf of the Trust to the Trustee and the Indenture Trustee
and Cede & Co., as registered holder of the Certificates and the Notes and the
nominee of DTC. Certificate Owners and Note Owners may receive such reports,
upon written request, together with a certification that they are Certificate
Owners or Note Owners and payment of any expenses associated with the
distribution of such reports, from the Trustee and the Indenture Trustee at
the addresses specified in the related Prospectus Supplement. See "Certain
Information Regarding the Securities--Statements to Securityholders."
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USE OF PROCEEDS
Unless otherwise specified in the related Prospectus Supplement, the net
proceeds to be received by the Trust from the sale of each Series of
Securities will be used to pay to Green Tree the purchase price for the
Contracts and to make the deposit of the Pre-Funded Amount into the Pre-
Funding Account, if any, to repay warehouse lenders and/or to provide for
other forms of credit enhancement specified in the related Prospectus
Supplement. The net proceeds to be received by Green Tree will be used for its
general corporate purposes, including the origination or acquisition of
additional home improvement loan contracts and home equity loans, costs of
carrying such contracts until sale of the related certificates and to pay
other expenses connected with pooling the Contracts and issuing the
Securities.
THE NOTES
GENERAL
With respect to each Series of Securities, one or more Classes of Notes will
be issued pursuant to the terms of an Indenture, a form of which has been
filed as an exhibit to the Registration Statement of which this Prospectus
forms a part. Unless otherwise specified in the related Prospectus Supplement,
no Notes will be issued as a part of any Series. The following summary does
not purport to be complete and is subject to, and is qualified in its entirety
by reference to, all of the provisions of the Notes and the Indenture, and the
following summary will be supplemented in whole or in part by the related
Prospectus Supplement. Where particular provisions of or terms used in the
Indenture are referred to, the actual provisions (including definition of
terms) are incorporated by reference as part of this summary.
Unless otherwise specified in the related Prospectus Supplement, each Class
of Notes will initially be represented by a single Note registered in the name
of the nominee of the Depository. See "Certain Information Regarding the
Securities--Book-Entry Registration." Unless otherwise specified in the
related Prospectus Supplement, Notes will be available for purchase in
denominations of $1,000 and integral multiples thereof. Notes may be
transferred or exchanged without the payment of any service charge other than
any tax or governmental charge payable in connection with such transfer or
exchange. Unless otherwise provided in the related Prospectus Supplement, the
Indenture Trustee will initially be designated as the registrar for the Notes.
PRINCIPAL AND INTEREST ON THE NOTES
The timing and priority of payment, seniority, allocations of loss, Interest
Rate and amount of or method of determining payments of principal and interest
on the Notes will be described in the related Prospectus Supplement. The right
of holders of any Class of Notes to receive payments of principal and interest
may be senior or subordinate to the rights of holders of any Class or Classes
of Notes of such Series, or any Class of Certificates, as described in the
related Prospectus Supplement. Unless otherwise provided in the related
Prospectus Supplement, payments of interest on the Notes will be made prior to
payments of principal thereon. A Series may include one or more Classes of
Stripped Notes entitled to (i) principal payments with disproportionate,
nominal or no interest payment, or (ii) interest payments with
disproportionate, nominal or no principal payments. Each Class of Notes may
have a different Interest Rate, which may be a fixed, variable or adjustable
Interest Rate (and which may be zero for certain Classes of Stripped Notes),
or any combination of the foregoing. The related Prospectus Supplement will
specify the Interest Rate for each Class of Notes, or the initial Interest
Rate and the method for determining the Interest Rate. One or more Classes of
Notes of a Series may be redeemable under the circumstances specified in the
related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, payments in
respect of interest to Noteholders of all Classes within a Series will have
the same priority. Under certain circumstances, the amount available for such
payments could be less than the amount of interest payable on the Notes on any
of the dates specified for payments in the related Prospectus Supplement
(each, a "Payment Date"), in which case each Class
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of Noteholders will receive their ratable share (based upon the aggregate
amount of interest due to such Class of Noteholders) of the aggregate amount
available to be distributed in respect of interest on the Notes.
In the case of a Series of Securities which includes two or more Classes of
Notes, the timing, sequential order and priority of payment in respect of
principal and interest, and any schedule or formula or other provisions
applicable to the determination thereof, of each such Class will be set forth
in the related Prospectus Supplement. Unless otherwise specified in the
related Prospectus Supplement, payments in respect of principal and interest
of any Class of Notes will be made on a pro rata basis among all of the Notes
of such Class.
THE INDENTURE
A form of Indenture has been filed as an exhibit to the Registration
Statement of which this Prospectus forms a part. Green Tree will provide a
copy of the applicable Indenture (without exhibits) upon request to a holder
of Notes issued thereunder.
Modification of Indenture Without Noteholder Consent. Each Trust and related
Indenture Trustee (on behalf of such Trust) may, without consent of the
related Noteholders, enter into one or more supplemental indentures for any of
the following purposes: (i) to correct or amplify the description of the
collateral or add additional collateral; (ii) to provide for the assumption of
the Note and the Indenture obligations by a permitted successor to the Trust;
(iii) to add additional covenants for the benefit of the related Noteholders;
(iv) to convey, transfer, assign, mortgage or pledge any property to or with
the Indenture Trustee; (v) to cure any ambiguity or correct or supplement any
provision in the Indenture or in any supplemental indenture; (vi) to provide
for the acceptance of the appointment of a successor Indenture Trustee or to
add to or change any of the provisions of the Indenture or any supplemental
indenture which may be inconsistent with any other provision of the Indenture
as shall be necessary and permitted to facilitate the administration by more
than one trustee; (vii) to modify, eliminate or add to the provisions of the
Indenture in order to comply with the Trust Indenture Act of 1939, as amended;
and (viii) to add any provisions to, change in any manner, or eliminate any of
the provisions of, the Indenture or modify in any manner the rights of
Noteholders under such Indenture; provided that any action specified in this
clause (viii) shall not, as evidenced by an opinion of counsel, adversely
affect in any material respect the interests of any related Noteholder unless
Noteholder consent is otherwise obtained as described below.
Modifications of Indenture With Noteholder Consent. With respect to each
Trust, with the consent of the holders representing a majority of the
principal balance of the outstanding related Notes (a "Note Majority"), the
Owner Trustee and the Indenture Trustee may execute a supplemental indenture
to add provisions, to change in any manner or eliminate any provisions of, the
related Indenture, or modify in any manner the rights of the related
Noteholders.
Without the consent of the holder of each outstanding related Note affected
thereby, however, no supplemental indenture may: (i) change the due date of
any installment of principal of or interest on any Note or reduce the
principal amount thereof, the interest rate specified thereon or the
redemption price with respect thereto or change the manner of calculating any
such payment, any place of payment where, or the coin or currency in which any
Note or any interest thereon is payable; (ii) impair the right to institute
suit for the enforcement of certain provisions of the Indenture regarding
payment; (iii) reduce the percentage of the aggregate amount of the
outstanding Notes the consent of the holders of which is required for any such
supplemental indenture or the consent of the holders of which is required for
any waiver of compliance with certain provisions of the Indenture or of
certain defaults thereunder and their consequences as provided for in the
Indenture; (iv) modify or alter the provisions of the Indenture regarding the
voting of Notes held by the related Trust, any other obligor on the Notes,
Green Tree or an affiliate of any of them; (v) reduce the percentage of the
aggregate outstanding amount of the Notes the consent of the holders of which
is required to direct the Indenture Trustee to sell or liquidate the Contracts
if the proceeds of such sale would be insufficient to pay the principal amount
and accrued but unpaid interest on the outstanding Notes; (vi) decrease the
percentage of the aggregate principal amount of the Notes required to amend
the sections of the Indenture which specify the applicable percentage of
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aggregate principal amount of the Notes necessary to amend the Indenture or
certain other related agreements; or (vii) permit the creation of any lien
ranking prior to or on a parity with the lien of the Indenture with respect to
any of the collateral for the Notes or, except as otherwise permitted or
contemplated in the Indenture, terminate the lien of the Indenture on any such
collateral or deprive the holder of any Note of the security afforded by the
lien of the Indenture.
Events of Default; Rights Upon Event of Default. With respect to each Trust,
unless otherwise specified in the related Prospectus Supplement, "Events of
Default" under the Indenture will consist of: (i) a default for five days or
more in the payment of any interest on any Note; (ii) a default in the payment
of the principal of or any installment of the principal of any Note when the
same becomes due and payable; (iii) a default in the observance or performance
in any material respect of any covenant or agreement of the Trust made in the
Indenture, or any representation or warranty made by the Trust in the
Indenture or in any certificate delivered pursuant thereto or in connection
therewith having been incorrect as of the time made, and the continuation of
any such default or the failure to cure such breach of a representation or
warranty for a period of 30 days after notice thereof is given to the Trust by
the Indenture Trustee or to the Trust and the Indenture Trustee by the holders
of at least 25% in principal amount of the Notes then outstanding; or (iv)
certain events of bankruptcy, insolvency, receivership or liquidation of the
Trust. However, the amount of principal due and payable on any Class of Notes
on any Payment Date (prior to the final scheduled payment date, if any, for
such Class) will generally be determined by amounts available to be deposited
in the Note Distribution Account for such Payment Date. Therefore, unless
otherwise specified in the related Prospectus Supplement, the failure to pay
principal on a Class of Notes generally will not result in the occurrence of
an Event of Default unless such Class of Notes has a final scheduled payment
date, and then not until such final scheduled payment date for such Class of
Notes.
Unless otherwise specified in the related Prospectus Supplement, if an Event
of Default should occur and be continuing with respect to the Notes of any
Series, the related Indenture Trustee or a Note Majority may declare the
principal of the Notes to be immediately due and payable. Such declaration
may, under certain circumstances, be rescinded by a Note Majority.
Unless otherwise specified in the related Prospectus Supplement, if the
Notes of any Series have been declared due and payable following an Event of
Default with respect thereto, the related Indenture Trustee may institute
proceedings to collect amounts due or foreclose on Trust Property, exercise
remedies as a secured party, sell the related Contracts or elect to have the
Trust maintain possession of such Contracts and continue to apply collections
on such Contracts as if there had been no declaration of acceleration. Unless
otherwise specified in the related Prospectus Supplement, the Indenture
Trustee, however, will be prohibited from selling the related Contracts
following an Event of Default, unless (i) the holders of all the outstanding
related Notes consent to such sale; (ii) the proceeds of such sale are
sufficient to pay in full the principal of and the accrued interest on such
outstanding Notes at the date of such sale; or (iii) the Indenture Trustee
determines that the proceeds of the Contracts would not be sufficient on an
ongoing basis to make all payments on the Notes as such payments would have
become due if such obligations had not been declared due and payable, and the
Indenture Trustee obtains the consent of the holders of 66 2/3% of the
aggregate outstanding amount of the Notes. Unless otherwise specified in the
related Prospectus Supplement, following a declaration upon an Event of
Default that the Notes are immediately due and payable, (i) Note Owners will
be entitled to ratable repayment of principal on the basis of their respective
unpaid principal balances and (ii) repayment in full of the accrued interest
on and unpaid principal balances of the Notes will be made prior to any
further payment of interest or principal on the Certificates.
Subject to the provisions of the Indenture relating to the duties of the
Indenture Trustee, if an Event of Default occurs and is continuing with
respect to a Series of Notes, the Indenture Trustee will be under no
obligation to exercise any of the rights or powers under the Indenture at the
request or direction of any of the holders of such Notes, if the Indenture
Trustee reasonably believes it will not be adequately indemnified against the
costs, expenses and liabilities which might be incurred by it in complying
with such request. Subject to the provisions for indemnification and certain
limitations contained in the Indenture, a Note Majority in a Series will have
the right to direct the time, method and place of conducting any proceeding or
any remedy available to the
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Indenture Trustee, and a Note Majority may, in certain cases, waive any
default with respect thereto, except a default in the payment of principal or
interest or a default in respect of a covenant or provision of the Indenture
that cannot be modified without the waiver or consent of all of the holders of
such outstanding Notes.
No holder of a Note of any Series will have the right to institute any
proceeding with respect to the related Indenture, unless (i) such holder
previously has given to the Indenture Trustee written notice of a continuing
Event of Default, (ii) the holders of not less than 25% in principal amount of
the outstanding Notes of such Series have made written request of the
Indenture Trustee to institute such proceeding in its own name as Indenture
Trustee, (iii) such holder or holders have offered the Indenture Trustee
reasonable indemnity, (iv) the Indenture Trustee has for 60 days failed to
institute such proceeding, and (v) no direction inconsistent with such written
request has been given to the Indenture Trustee during such 60-day period by
the holders of a majority in principal amount of such outstanding Notes.
If an Event of Default occurs and is continuing and if it is known to the
Indenture Trustee, the Indenture Trustee will mail to each Noteholder notice
of the Event of Default within 90 days after it occurs. Except in the case of
a failure to pay principal of or interest on any Note, the Indenture Trustee
may withhold the notice if and so long as it determines in good faith that
withholding the notice is in the interests of the Noteholders.
In addition, each Indenture Trustee and the related Noteholders, by
accepting the related Notes, will covenant that they will not at any time
institute against the Seller or the related Trust any bankruptcy,
reorganization or other proceeding under any federal or state bankruptcy or
similar law.
Neither the Indenture Trustee nor the Trustee in its individual capacity,
nor any holder of a Certificate including, without limitation, Green Tree, nor
any of their respective owners, beneficiaries, agents, officers, directors,
employees, affiliates, successors or assigns will, in the absence of an
express agreement to the contrary, be personally liable for the payment of the
related Notes or for any agreement or covenant of the related Trust contained
in the Indenture.
Certain Covenants. Each Indenture will provide that the related Trust may
not consolidate with or merge into any other entity, unless (i) the entity
formed by or surviving such consolidation or merger is organized under the
laws of the United States or any state, (ii) such entity expressly assumes the
Trust's obligation to make due and punctual payments upon the Notes and the
performance or observance of every agreement and covenant of the Trust under
the Indenture, (iii) no Event of Default shall have occurred and be continuing
immediately after such merger or consolidation, (iv) the Trustee has been
advised that the then current rating of the related Notes or Certificates then
in effect would not be reduced or withdrawn by the Rating Agencies as a result
of such merger or consolidation, (v) the Trustee has received an opinion of
counsel to the effect that such consolidation or merger would have no material
adverse tax consequence to the Trust or to any related Note Owner or
Certificate Owner.
Each Trust will not, among other things, (i) except as expressly permitted
by the Indenture, the Trust Documents or certain related documents for such
Trust (collectively, the "Related Documents"), sell, transfer, exchange or
otherwise dispose of any of the assets of the Trust, (ii) claim any credit on
or make any deduction from the principal and interest payable in respect of
the related Notes (other than amounts withheld under the Code or applicable
state law) or assert any claim against any present or former holder of such
Notes because of the payment of taxes levied or assessed upon the Trust, (iii)
dissolve or liquidate in whole or in part, (iv) permit the validity or
effectiveness of the related Indenture to be impaired or permit any person to
be released from any covenants or obligations with respect to the related
Notes under such Indenture except as may be expressly permitted thereby, or
(v) except as expressly permitted by the Related Documents, permit any lien,
charge, excise, claim, security interest, mortgage or other encumbrance to be
created on or extend to or otherwise arise upon or burden the assets of the
Trust or any part thereof, or any interest therein or proceeds thereof.
No Trust may engage in any activity other than as specified under the
section of the related Prospectus Supplement entitled "The Trust." No Trust
will incur, assume or guarantee any indebtedness other than
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indebtedness incurred pursuant to the related Notes and the related Indenture
or otherwise in accordance with the Related Documents.
Annual Compliance Statement. Each Trust will be required to file annually
with the related Indenture Trustee a written statement as to the fulfillment
of its obligations under the Indenture.
Indenture Trustee's Annual Report. The Indenture Trustee will be required to
mail each year to all related Noteholders a brief report relating to its
eligibility and qualification to continue as Indenture Trustee under the
related Indenture, any amounts advanced by it under the Indenture, the amount,
interest rate and maturity date of certain indebtedness owing by the Trust to
the Indenture Trustee in its individual capacity, the property and funds
physically held by the Indenture Trustee as such and any action taken by it
that materially affects the Notes and that has not been previously reported.
Note Owners may receive such reports upon written request, together with a
certification that they are Note Owners and payment of reproduction and
postage expenses associated with the distribution of such reports, from the
Indenture Trustee at the address specified in the related Prospectus
Supplement.
Satisfaction and Discharge of Indenture. The Indenture will be discharged
with respect to the collateral securing the related Notes upon the delivery to
the related Indenture Trustee for cancellation of all such Notes or, with
certain limitations, upon deposit with the Indenture Trustee of funds
sufficient for the payment in full of all of such Notes.
THE INDENTURE TRUSTEE
The Indenture Trustee for a Series of Notes will be specified in the related
Prospectus Supplement. The Indenture Trustee may resign at any time, in which
event the Seller will be obligated to appoint a successor trustee. Green Tree
may also remove the Indenture Trustee if the Indenture Trustee ceases to be
eligible to continue as such under the Indenture or if the Indenture Trustee
becomes insolvent. In such circumstances, Green Tree will be obligated to
appoint a successor trustee. Any resignation or removal of the Indenture
Trustee and appointment of a successor trustee will be subject to any
conditions or approvals, if any, specified in the related Prospectus
Supplement and will not become effective until acceptance of the appointment
by a successor trustee.
THE CERTIFICATES
GENERAL
A Series of Securities may include one or more Classes of Certificates
issued pursuant to Trust Documents to be entered into between Green Tree, as
Seller and as Servicer, and the Trustee, forms of which have been filed as
exhibits to the Registration Statement of which this Prospectus forms a part.
The following summary does not purport to be complete and is subject to, and
is qualified in its entirety by reference to, all of the material provisions
of the Trust Documents. Where particular provisions of or terms used in the
Trust Documents are referred to, the actual provisions (including definitions
of terms) are incorporated by reference as part of this summary.
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.
Unless otherwise specified in the related Prospectus Supplement, each Class
of Certificates will initially be represented by a single Certificate
registered in the name of the nominee of DTC (together with any successor
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depository selected by Green Tree, the "Depository"). See "Certain Information
Regarding the Securities--Book-Entry Registration." Unless otherwise specified
in the related Prospectus Supplement, the Certificates evidencing interests in
a Trust will be available for purchase in denominations of $1,000 initial
principal amount and integral multiples thereof, except that one Certificate
evidencing an interest in such Trust may be issued in a denomination that is
less than $1,000 initial principal amount. Certificates may be transferred or
exchanged without the payment of any service charge other than any tax or
governmental charge payable in connection with such transfer or exchange.
Unless otherwise specified in the related Prospectus Supplement, the Trustee
will initially be designated as the registrar for the Certificates.
DISTRIBUTIONS OF INTEREST AND PRINCIPAL
The timing and priority of distributions, seniority, allocations of loss,
Pass-Through Rate and amount of or method of determining distributions with
respect to principal and interest (or, where applicable, with respect to
principal only or interest only) on the Certificates of any Series will be
described in the related Prospectus Supplement. Distributions of interest on
the Certificates will be made on the dates specified in the related Prospectus
Supplement (each, a "Distribution Date") and, unless otherwise specified in
the related Prospectus Supplement, will be made prior to distributions with
respect to principal. A Series may include one or more Classes of Certificates
("Subordinated Certificates") which are subordinated in right of distribution
to one or more other Classes of Certificates ("Senior Certificates"), as
provided in the related Prospectus Supplement. Certificates of a Series which
includes Senior and Subordinated Certificates are referred to herein
collectively as "Senior/Subordinated Certificates." A Series of
Senior/Subordinated Certificates may include one or more Classes ("Mezzanine
Certificates") which are subordinated to one or more Classes of Certificates
and are senior to one or more Classes of Certificates. The Prospectus
Supplement with respect to a Series of Senior/Subordinated Certificates will
set forth, among other things, the extent to which the Subordinated
Certificates are subordinated (which may include a formula for determining the
subordinated amount or for determining the allocation of the Amount Available
(hereinafter defined) among Senior Certificates and Subordinated
Certificates), the allocation of losses among the Classes of Subordinated
Certificates, the period or periods of such subordination, the minimum
subordinated amount, if any, and any distributions or payments which will not
be affected by such subordination. The protection afforded to the Senior
Certificateholders from the subordination feature described above will be
effected by the preferential right of such Certificateholders to receive
current distributions from the Contract Pool. If a Series of Certificates
contains more than one Class of Subordinated Certificates, losses will be
allocated among such Classes in the manner described in the Prospectus
Supplement. If so specified in the applicable Prospectus Supplement, Mezzanine
Certificates or other Classes of Subordinated Certificates may be entitled to
the benefits of other forms of credit enhancement and may, if rated in one of
the four highest rating categories by a nationally recognized statistical
rating organization, be offered pursuant to this Prospectus and such
Prospectus Supplement.
If so specified in a Prospectus Supplement, a Series may include one or more
Classes of Certificates 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 Pass-Through Rate for
each Class of Certificate, or the initial Pass-Through Rate and the method for
determining the Pass-Through Rate. Unless otherwise specified in the related
Prospectus Supplement, interest on the Certificates will be calculated on the
basis of a 360-day year consisting of twelve 30-day months. Unless otherwise
specified in the related Prospectus Supplement, distributions in respect of
the Certificates will be subordinate to payments in respect of the Notes, if
any, as more
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fully described in the related Prospectus Supplement. Distributions in respect
of principal of any Class of Certificates will be made on a pro rata basis
among all of the Certificateholders of such Class.
In the case of a Series of Certificates which includes two or more Classes
of Certificates, the timing, sequential order, priority of payment or amount
of distributions in respect of principal, and any schedule or formula or other
provisions applicable to the determination thereof, of each such Class shall
be as set forth in the related Prospectus Supplement.
CERTAIN INFORMATION REGARDING THE SECURITIES
BOOK-ENTRY REGISTRATION
Unless otherwise provided in the related Prospectus Supplement, the
Securities of each Series will be registered in the name of Cede & Co., the
nominee of DTC. DTC is a limited-purpose trust company organized under the
laws of the State of New York, a member of the Federal Reserve System, a
"clearing corporation" within the meaning of the New York Uniform Commercial
Code, and a "clearing agency" registered pursuant to the provisions of Section
17A of the Exchange Act. DTC accepts securities for deposit from its
participating organizations ("Participants") and facilitates the clearance and
settlement of securities transactions between Participants in such securities
through electronic book-entry changes in accounts of Participants, thereby
eliminating the need for physical movement of certificates. Participants
include securities brokers and dealers, banks and trust companies and clearing
corporations and may include certain other organizations. Indirect access to
the DTC system is also available to others such as banks, brokers, dealers and
trust companies that clear through or maintain a custodial relationship with a
Participant, either directly or indirectly ("indirect participants").
Certificate Owners and Note Owners who are not Participants but desire to
purchase, sell or otherwise transfer ownership of Securities may do so only
through Participants (unless and until Definitive Certificates or Definitive
Notes, each as defined below, are issued). In addition, Certificate Owners and
Note Owners will receive all distributions of principal of, and interest on,
the Securities from the Trustee or the Indenture Trustee, as applicable,
through DTC and Participants. Certificate Owners and Note Owners will not
receive or be entitled to receive certificates representing their respective
interests in the Securities, except under the limited circumstances described
below and such other circumstances, if any, as may be specified in the related
Prospectus Supplement.
Unless and until Definitive Securities are issued, it is anticipated that
the only Certificateholder of the Certificates and the only Noteholder of the
Notes, if any, will be Cede & Co., as nominee of DTC. Certificate Owners and
Note Owners will not be recognized by the Trustee as Certificateholders or by
the Indenture Trustee as Noteholders as those terms are used in the related
Trust Documents or Indenture. Certificate Owners and Note Owners will be
permitted to exercise the rights of Certificateholders or Noteholders, as the
case may be, only indirectly through Participants and DTC.
With respect to any Series of Securities, while the Securities 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 Securities and is required to receive
and transmit distributions of principal of, and interest on, the Securities.
Participants with whom Certificate Owners or Note Owners have accounts with
respect to Securities are similarly required to make book-entry transfers and
receive and transmit such distributions on behalf of their respective
Certificate Owners and Note Owners. Accordingly, although Certificate Owners
and Note Owners will not possess Securities, the Rules provide a mechanism by
which Certificate Owners and Note Owners will receive distributions and will
be able to transfer their interests.
With respect to any series of Securities, unless otherwise specified in the
related Prospectus Supplement, Certificates (if any) and Notes will be issued
in registered form to Certificate Owners and Note Owners, or their
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nominees, rather than to DTC (such Certificates and Notes being referred to
herein as "Definitive Certificates" and "Definitive Notes," respectively),
only if (i) DTC, Green Tree or the Servicer advises the Trustee or the
Indenture Trustee, as the case may be, in writing that DTC is no longer
willing or able to discharge properly its responsibilities as nominee and
depository with respect to the Certificates or the Notes, and Green Tree, the
Servicer, the Trustee or the Indenture Trustee, as the case may be, is unable
to locate a qualified successor, (ii) Green Tree or the Administrator (if any)
at its sole option has advised the Trustee or the Indenture Trustee, as the
case may be, in writing that it elects to terminate the book-entry system
through DTC and (iii) after the occurrence of a Servicer Termination Event,
the holders representing a majority of the Certificate Balance (a "Certificate
Majority") or a Note Majority advises the Trustee or the Indenture Trustee, as
the case may be, through DTC, that continuation of a book-entry system is no
longer in their best interests. Upon issuance of Definitive Certificates or
Definitive Notes to Certificate Owners or Note Owners, such Certificates or
Notes will be transferable directly (and not exclusively on a book-entry
basis) and registered holders will deal directly with the Trustee or the
Indenture Trustee, as the case may be, with respect to transfers, notices and
distributions.
DTC has advised Green Tree that, unless and until Definitive Certificates or
Definitive Notes are issued, DTC will take any action permitted to be taken by
a Certificateholder or a Noteholder under the related Trust Documents or
Indenture only at the direction of one or more Participants to whose DTC
accounts the Certificates or Notes are credited. DTC has advised Green Tree
that DTC will take such action with respect to any fractional interest of the
Certificates or the Notes only at the direction of and on behalf of such
Participants beneficially owning a corresponding fractional interest of the
Certificates or the Notes. DTC may take actions, at the direction of the
related Participants, with respect to some Certificates or Notes which
conflict with actions taken with respect to other Certificates or Notes.
Issuance of Certificates and Notes in book-entry form rather than as
physical certificates or notes may adversely affect the liquidity of
Certificates or Notes in the secondary market and the ability of the
Certificate Owners or Note Owners to pledge them. In addition, since
distributions on the Certificates and the Notes will be made by the Trustee or
the Indenture 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
or Note Owners, Certificate Owners and Note Owners may experience delays in
the receipt of such distributions.
STATEMENTS TO SECURITYHOLDERS
On or prior to each Distribution Date, the Servicer will prepare and provide
to the Trustee a statement to be delivered to the related Certificateholders
on such Distribution Date. On or prior to each Distribution Date, the Servicer
will prepare and provide to the Indenture Trustee a statement to be delivered
to the related Noteholders on such Distribution Date. Such statements will be
based on the information in the related Servicer's Certificate setting forth
certain information required under the Trust Documents (the "Servicer's
Certificate"). Unless otherwise specified in the related Prospectus
Supplement, each such statement to be delivered to Certificateholders will
include the following information as to the Certificates with respect to such
Distribution Date or the period since the previous Distribution Date, as
applicable, and each such statement to be delivered to Noteholders will
include the following information as to the Notes with respect to such
Distribution Date or the period since the previous Distribution Date, as
applicable:
(i) the amount of the distribution allocable to interest on or with
respect to each Class of Securities;
(ii) the amount of the distribution allocable to principal on or with
respect to each Class of Securities;
(iii) the Certificate Balance and the Certificate Pool Factor for each
Class of Certificates and the aggregate outstanding principal balance and
the Note Pool Factor for each Class of Notes, after giving effect to all
payments reported under (ii) above on such date;
(iv) the amount of the Monthly Servicing Fee paid to the Servicer with
respect to the related Due Period or Periods, as the case may be;
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(v) the Pass-Through Rate or Interest Rate for the next period for any
Class of Certificates or Notes with variable or adjustable rates;
(vi) the amount of Advances made by the Servicer with respect to such
Distribution Date, and the amount paid to the Servicer on such Distribution
Date as reimbursement of Advances made on previous Distribution Dates;
(vii) the amount, if any, distributed to Certificateholders and
Noteholders applicable to payments under the related form of credit
enhancement, if any;
(viii) Green Tree's FHA Insurance reserve amount;
(ix) the number and aggregate principal balance of Contracts delinquent
(i) 31-59 days, (ii) 60-89 and (iii) 90 or more days;
(x) the number of Contracts liquidated during the Due Period ending
immediately before such Payment Date;
(xi) such customary factual information as is necessary to enable
Securityholders to prepare their tax returns; and
(xii) such other information as may be specified in the related
Prospectus Supplement.
Each amount set forth pursuant to subclauses (i), (ii), (iv) and (vi) with
respect to Certificates or Notes will be expressed as a dollar amount per
$1,000 of the initial Certificate Balance or the initial principal balance of
the Notes, as applicable.
Unless and until Definitive Certificates or Definitive Notes are issued,
such reports with respect to a Series of Securities will be sent on behalf of
the related Trust to the Trustee, the Indenture Trustee and Cede & Co., as
registered holder of the Certificates and the Notes and the nominee of DTC.
Certificate Owners and Note Owners may receive copies of such reports upon
written request, together with a certification that they are Certificate
Owners or Note Owners, as the case may be, and payment of reproduction and
postage expenses associated with the distribution of such reports, from the
Trustee or the Indenture Trustee, as applicable. See "Reports to
Securityholders" and "--Book-Entry Registration" above.
Within the prescribed period of time for tax reporting purposes after the
end of each calendar year during the term of a Trust, the Trustee and the
Indenture Trustee, as applicable, will mail to each holder of a Class of
Securities who at any time during such calendar year has been a
Securityholder, and received any payment thereon, a statement containing
certain information for the purposes of such Securityholder's preparation of
federal income tax returns. DTC will convey such information to its
Participants, who in turn will convey such information to their related
indirect participants in accordance with arrangements among DTC and such
participants. Certificate Owners and Note Owners may receive such reports upon
written request, together with a certification that they are Certificate
Owners or Note Owners and payment of reproduction and postage expenses
associated with the distribution of such information, from the Trustee, with
respect to Certificate Owners, or from the Indenture Trustee, with respect to
Note Owners, at the addresses specified in the related Prospectus Supplement.
See "Certain Federal Income Tax Consequences."
LISTS OF SECURITYHOLDERS
Unless otherwise provided in the related Prospectus Supplement, with respect
to each Series of Certificates, at such time, if any, as Definitive
Certificates have been issued, the Trustee will, upon written request by three
or more Certificateholders or one or more holders of Certificates evidencing
not less than 25% of the Certificate Balance, within five Business Days after
provision to the Trustee of a statement of the applicants' desire to
communicate with other Certificateholders about their rights under the related
Trust Documents or the Certificates and a copy of the communication that the
applicants propose to transmit, afford such Certificateholders access during
business hours to the current list of Certificateholders for purposes of
communicating with other Certificateholders with respect to their rights under
the Trust Documents. Unless
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otherwise specified in the related Prospectus Supplement, the Trust Documents
will not provide for holding any annual or other meetings of
Certificateholders.
Unless otherwise provided in the related Prospectus Supplement, with respect
to each Series of Notes, if any, at such time, if any, as Definitive Notes
have been issued, the Indenture Trustee will, upon written request by three or
more Noteholders or one or more holders of Notes evidencing not less than 25%
of the aggregate principal balance of the related Notes, within five Business
Days after provision to the Indenture Trustee of a statement of the
applicants' desire to communicate with other Noteholders about their rights
under the related Indenture or the Notes and a copy of the communication that
the applicants propose to transmit, afford such Noteholders access during
business hours to the current list of Noteholders for purposes of
communicating with other Noteholders with respect to their rights under the
Indenture. Unless otherwise specified in the related Prospectus Supplement,
the Indenture will not provide for holding any annual or other meetings of
Noteholders.
DESCRIPTION OF THE TRUST DOCUMENTS
Except as otherwise specified in the related Prospectus Supplement, the
following summary describes certain terms of the Sale and Servicing Agreements
and the Trust Agreements (collectively referred to as the "Trust Documents")
pursuant to which Green Tree will sell and assign such Contracts to a Trust
and the Servicer will agree to service such Contracts on behalf of the Trust,
and pursuant to which such Trust will be created and Certificates will be
issued. Forms of the Trust Documents have been filed as exhibits to the
Registration Statement of which this Prospectus forms a part. Green Tree will
provide a copy of such agreements (without exhibits) upon request to a holder
of Securities described therein. This summary does not purport to be complete
and is subject to, and qualified in its entirety by reference to, all of the
provisions of the Trust Documents. Where particular provisions or terms used
in the Trust Documents are referred to, the actual provisions (including
definitions of terms) are incorporated by reference as part of such summary.
SALE AND ASSIGNMENT OF THE CONTRACTS
On the Closing Date (as defined in the Prospectus Supplement), Green Tree
will sell and assign to the Trust, without recourse, Green Tree's entire
interest in the related Contracts, including all principal and interest
received on or with respect to the Contracts (other than receipts of principal
and interest due on the Contracts before the Cut-off Date). Each Contract
transferred by Green Tree to the Trust will be identified in a schedule
appearing as an exhibit to the related Trust Documents (the "Schedule of
Contracts"). Concurrently with such sale and assignment, the Trustee will
execute and the Indenture Trustee will authenticate and deliver the Notes to
or upon the order of the Seller, and the Trustee will execute and deliver the
related certificates representing the Certificates, if any, to or upon the
order of Green Tree.
The Schedule of Contracts will include the amount of monthly payments due on
each Contract as of the date of issuance of the Securities, the Contract Rate
on each Contract and the maturity date of each Contract. Such list will be
available for inspection by any Securityholder at the principal executive
office of the Servicer. Prior to the conveyance of the Contracts to the
Trustee, Green Tree's internal audit department will complete a review of all
of the Contract files confirming the accuracy of the list of Contracts
delivered to the Trustee. Any Contract discovered not to agree with such list
in a manner that is materially adverse to the interests of the Securityholders
will be repurchased or substituted for by Green Tree, or, if the discrepancy
relates to the unpaid principal balance of a Contract, Green Tree may deposit
cash in the separate account maintained at an Eligible Institution in the name
of the Trustee (the "Collection Account") in an amount sufficient to offset
such discrepancy. If the Trust includes a Pre-Funding Account, the related
Prospectus Supplement will specify the conditions that must be satisfied prior
to any transfer of Subsequent Contracts, including the requisite
characteristics of the Subsequent Contracts.
Unless otherwise specified in the related Prospectus Supplement, the Trustee
or its custodian will maintain possession of the Contracts and any other
documents contained in the Contract files. Uniform Commercial Code
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financing statements will be filed in Minnesota reflecting the sale and
assignment of the Contracts to the Trustee, and Green Tree's accounting
records and computer systems will also reflect such sale and assignment.
The counsel to Green Tree identified in the applicable Prospectus Supplement
will render an opinion to the Trustee that the transfer of the Contracts from
Green Tree to the related Trust would, in the event Green Tree became a debtor
under the United States Bankruptcy Code, be treated as a true sale and not as
a pledge to secure borrowings. If, however, the transfer of the Contracts from
Green Tree to the Trust were treated as a pledge to secure borrowings by Green
Tree, the distribution of proceeds of the Contracts to the Trust might be
subject to the automatic stay provisions of the United States Bankruptcy Code,
which would delay the distribution of such proceeds for an uncertain period of
time. In addition, a bankruptcy trustee would have the power to sell the
Contracts if the proceeds of such sale could satisfy the amount of the debt
deemed owed by Green Tree, or the bankruptcy trustee could substitute other
collateral in lieu of the Contracts to secure such debt, or such debt could be
subject to adjustment by the bankruptcy trustee if Green Tree were to file for
reorganization under Chapter 11 of the United States Bankruptcy Code.
Except as otherwise specified in the related Prospectus Supplement, Green
Tree will make certain representations and warranties in the Sale and
Servicing Agreement with respect to each Contract as of the related Closing
Date, including that: (a) as of the Cut-off Date the most recent scheduled
payment was made or was not delinquent more than 59 days; (b) no provision of
a Contract has been waived, altered or modified in any respect, except by
instruments or documents included in the Contract file and reflected on the
list of Contracts delivered to the Trustee; (c) each Contract is a legal,
valid and binding obligation of the Obligor and is enforceable in accordance
with its terms (except as may be limited by laws affecting creditors rights
generally); (d) no Contract is subject to any right of rescission, set-off,
counterclaim or defense; (e) each FHA-insured Home Improvement Contract was
originated in accordance with applicable FHA regulations and is insured,
without set off, surcharge or defense, by FHA Insurance; (f) each Contract was
either (i) entered into by a home improvement contractor in the ordinary
course of such contractor's business and, immediately upon funding, assigned
to Green Tree or (ii) was originated by a home equity lender in the ordinary
course of such lender's business and assigned to Green Tree or (iii) was
originated by Green Tree directly; (g) no Contract was originated in or is
subject to the laws of any jurisdiction whose laws would make the transfer of
the Contract or an interest therein pursuant to the Sale and Servicing
Agreement or the Securities unlawful; (h) each Contract complies with all
requirements of law; (i) no Contract has been satisfied, subordinated to a
lower lien ranking than its original position (if any) or rescinded; (j) all
parties to each Contract had full legal capacity to execute such Contract; (k)
no Contract has been sold, conveyed and assigned or pledged to any other
person and Green Tree has good and marketable title to each Contract free and
clear of any encumbrance, equity, loan, pledge, charge, claim or security
interest, and is the sole owner and has full right to transfer such Contract
to the Trustee; (l) as of the Cut-off Date there was no default, breach,
violation or event permitting acceleration under any Contract (except for
payment delinquencies permitted by clause (a) above), no event that with
notice and the expiration of any grace or cure period would constitute a
default, breach, violation or event permitting acceleration under such
Contract, and Green Tree has not waived any of the foregoing; (m) each
Contract is a fully-amortizing loan with a fixed rate of interest and provides
for level payments over the term of such Contract; (n) the description of each
Contract set forth in the list delivered to the Trustee is true and correct;
(o) there is only one original of each Contract; and (p) each Contract was
originated or purchased in accordance with Green Tree's then-current
underwriting guidelines.
The warranties of Green Tree will be made as of the execution and delivery
of the related Trust Documents and will survive the sale, transfer and
assignment of the related Contracts and other Trust Property to the Trust but
will speak only as of the date made.
Under the terms of the Sale and Servicing Agreement, if Green Tree becomes
aware of a breach of any such representation or warranty that materially
adversely affects the interests of the Note Owners, the Certificate Owners, if
any, or the related Trust in any Contract or receives written notice of such a
breach from the Trustee or the Servicer, then Green Tree will be obligated
either to cure such breach or to repurchase or, if so provided in the related
Prospectus Supplement, substitute for the affected Contract, in each case
under the conditions
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further described herein and in the Prospectus Supplement. This repurchase
obligation will constitute the sole remedy available to the Trust and the
Securityholders for a breach of a representation or warranty under the Sale
and Servicing Agreement with respect to the Contracts (but not with respect to
any other breach by Green Tree of its obligations under the Sale and Servicing
Agreement).
The "Purchase Amount" of a Contract at any time means the outstanding
principal amount of such Contract (without giving effect to any Advances made
by the Servicer or the Trustee), plus interest at the applicable Contract Rate
on such Contract from the end of the Due Period with respect to which the
Obligor last made a payment (without giving effect to any Advances made by the
Servicer or the Trustee) through the end of the immediately preceding Due
Period.
Upon the purchase by Green Tree of a Contract due to a breach of a
representation or warranty, the Trustee will convey such Contract and the
related Trust Property to Green Tree.
COLLECTIONS
With respect to each Trust, the Servicer will establish one or more
Collection Accounts in the name of the Indenture Trustee for the benefit of
the related Securityholders. If so specified in the related Prospectus
Supplement, the Indenture Trustee will establish and maintain for each Series
an account, in the name of the Indenture Trustee on behalf of the related
Noteholders, in which amounts released from the Collection Account and any
Pre-Funding Account and any amounts received from any source of credit
enhancement for payment to such Noteholders will be deposited and from which
all distributions to such Noteholders will be made (the "Note Distribution
Account"). With respect to any Series including one or more Classes of
Certificates, the Trustee will establish and maintain for each Series an
account, in the name of the Trustee on behalf of the related
Certificateholders, in which amounts released from the Collection Account and
any Pre-Funding Account and any amounts received from any source of credit
enhancement for distribution to such Certificateholders will be deposited and
from which all distributions to such Certificateholders will be made (the
"Certificate Distribution Account"). The Collection Account, the Certificate
Distribution Account (if any), and the Note Distribution Account (if any), are
referred to herein collectively as the "Designated Accounts." Any other
accounts to be established with respect to a Trust will be described in the
related Prospectus Supplement.
Each Designated Account will be an Eligible Account maintained with the
Trustee, the Indenture Trustee and/or other depository institutions. "Eligible
Account" means any account which is (i) an account maintained with an Eligible
Institution (as defined below); (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 (or, if such depository
institution or trust company is a subsidiary of a bank holding company system,
the capital and surplus of the bank holding company) of not less than
$50,000,000 and the securities of such depository institution (or, if such
depository institution is a subsidiary of a bank holding company system and
such depository institution's securities are not rated, the securities of the
bank holding company) has a credit rating from each rating agency rating such
Series of Notes and/or Certificates (a "Rating Agency") in one of its generic
credit rating categories which signifies investment grade; or (iv) an account
that will not cause any Rating Agency to downgrade or withdraw its then-
current rating assigned to the Securities, as confirmed in writing by each
Rating Agency. "Eligible Institution" means any depository institution
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 Bank Insurance
Fund (currently administered by the Federal Deposit Insurance Corporation),
whose short-term deposits have been rated in one of the two highest rating
categories or such other rating category as will not adversely affect the
ratings assigned to the Securities of such Series. On the Closing Date
specified in the related Prospectus Supplement, the Servicer will cause to be
deposited in the Collection Account all payments on the Contracts received by
the Servicer after the Cut-off Date and on or prior to the second Business Day
preceding the Closing Date.
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Unless otherwise specified in the related Prospectus Supplement, the
Servicer will deposit in the Collection Account on a daily basis all proceeds
and collections received or made by it with respect to the related Contracts
subsequent to the Cut-off Date (including scheduled payments of principal and
interest due after the Cut-off Date but received by the Servicer on or before
the Cut-off Date), including:
(i) all Obligor payments on account of principal, including principal
prepayments, on the Contracts;
(ii) all Obligor payments on account of interest on the Contracts;
(iii) all FHA Insurance payments received by the Servicer;
(iv) all amounts received and retained in connection with the liquidation
of defaulted Contracts, net of liquidation expenses ("Net Liquidation
Proceeds");
(v) any Advances made as described under "Advances" below and certain
other amounts required under the Sale and Servicing Agreement to be
deposited in the Collection Account;
(vi) all amounts received from any credit enhancement provided with
respect to a Series of Securities; and
(vii) all proceeds of any Contract or property acquired in respect
thereof repurchased by the Servicer or Green Tree, as described under "Sale
and Assignment of the Contracts" above or under "Repurchase Option" below.
Notwithstanding the foregoing and unless otherwise provided in the related
Prospectus Supplement, the Servicer may utilize an alternative remittance
schedule, if the Servicer provides to the Trustee and the Indenture Trustee
written confirmation from each Rating Agency that such alternative remittance
schedule will not result in the downgrading or withdrawal by such Rating
Agency of the rating(s) then assigned to the Securities. Green Tree will also
deposit into the Collection Account on or before the Deposit Date the Purchase
Amount of each Contract to be purchased by it for breach of a representation
or warranty.
For any Series of Securities, funds in the Designated Accounts and any other
accounts identified in the related Prospectus Supplement will be invested, as
provided in the related Trust Documents, at the direction of the Servicer in
United States government securities and certain other high-quality investments
meeting the criteria specified in the related Trust Documents ("Eligible
Investments"). Eligible Investments shall mature no later than the Business
Day preceding the applicable Distribution Date for the Due Period to which
such amounts relate. Investments in Eligible Investments will be made in the
name of the Trustee or the Indenture Trustee, as the case may be, and such
investments will not be sold or disposed of prior to their maturity.
Unless otherwise specified in the related Prospectus Supplement, collections
or recoveries on a Contract (other than late fees or certain other similar
fees or charges) received during a Due Period and Purchase Amounts deposited
with the Trustee prior to a Distribution Date will be applied first to any
outstanding Advances made by the Servicer with respect to such Contract, and
then to interest and principal on the Contract in accordance with the terms of
the Contract.
SERVICING
Pursuant to the Sale and Servicing Agreement, the Servicer will service and
administer the Contracts assigned to the Trustee as more fully set forth
below. The Servicer will perform diligently all services and duties specified
in each Sale and Servicing Agreement, in the same manner as prudent lending
institutions of home improvement contracts of the same type as the Contracts
in those jurisdictions where the related real properties are located or as
otherwise specified in the Sale and Servicing Agreement. The duties to be
performed by the Servicer will include collection and remittance of principal
and interest payments, as well as submission of FHA Insurance claims where
applicable.
The Servicer will make reasonable efforts to collect all payments called for
under the Contracts and, consistent with the Sale and Servicing Agreement and
any FHA Insurance, will follow such collection procedures
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with respect to the Contracts as it follows with respect to loans or contracts
serviced by it that are comparable to the Contracts.
Evidence as to Compliance. Unless otherwise specified in the related
Prospectus Supplement, each Sale and Servicing Agreement will require the
Servicer to deliver to the Trustee a monthly report prior to each Payment
Date, setting forth certain information regarding the Contract Pool and the
Securities of such Series as is specified in the related Prospectus
Supplement. Each such report to the Trustee will be accompanied by a statement
from an appropriate officer of the Servicer certifying the accuracy of such
report and stating that the Servicer has not defaulted in the performance of
its obligations under the Sale and Servicing Agreement. On or before May 1 of
each year, the Servicer will deliver to the Trustee a report of a nationally
recognized accounting firm stating that such firm has examined certain
documents and records relating to the servicing of home improvement contracts
serviced by the Servicer under agreements similar to the Sale and Servicing
Agreement and stating that, on the basis of such procedures, such servicing
has been conducted in compliance with the Sale and Servicing 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 a Sale and Servicing 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 Sale and Servicing 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 Sale and
Servicing Agreement (i) a policy or policies of insurance covering errors and
omissions for failure to maintain insurance as required by the Sale and
Servicing Agreement, and (ii) a fidelity bond. Such policy or policies and
such fidelity bond shall be in such form and amount as is generally customary
among persons which service a portfolio of home improvement contracts having
an aggregate principal amount of $10 million or more and which are generally
regarded as servicers acceptable to institutional investors.
Servicing Compensation and Payment of Expenses. For its servicing of the
Contracts, the Servicer will receive servicing fees ("Servicing Fees") which
include a Monthly Servicing Fee (which Green Tree 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 Aggregate Principal Balance for such Payment
Date. As long as Green Tree is the Servicer, the Trustee will pay Green Tree
its Monthly Servicing Fee from any monies remaining after the Securityholders
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, 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.
Customary servicing activities include collecting and recording payments,
communicating with Obligors, investigating payment delinquencies, providing
billing and tax records to Obligors and maintaining internal records with
respect to each Contract. Administrative services performed by the Servicer on
behalf of the Trust include selecting and packaging the Contracts, calculating
distributions to Securityholders and providing related data processing and
reporting services for Securityholders and on behalf of the Trustee. Expenses
incurred in connection with servicing of the Contracts and paid by Green Tree
from its Monthly Servicing Fees include payment of FHA Insurance premiums,
payment of fees and expenses of accountants, payments of all fees and expenses
incurred in connection with the enforcement of Contracts (including submission
of FHA Insurance claims, if applicable) or payment of Trustee's fees, and
payment of expenses incurred in connection with distributions and reports to
Securityholders, except that the Servicer shall be reimbursed out of the
liquidation proceeds of a liquidated Contract (including FHA Insurance
proceeds) for customary out-of-pocket liquidation expenses incurred by it.
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Events of Termination. Except as otherwise specified in the related
Prospectus Supplement, Events of Termination under each Sale and Servicing
Agreement will occur if (i) any failure by the Servicer to deliver to the
Indenture Trustee for distribution to the Noteholders or to the Trustee for
distribution to the Certificateholders any required payment which continues
unremedied for 5 days (or such other period specified in the related
Prospectus Supplement) after the giving of written notice; (ii) any failure by
the Servicer duly to observe or perform in any material respect any other of
its covenants or agreements in the Trust Documents that materially and
adversely affects the interests of Securityholders, which, in either case,
continues unremedied for 30 days after the giving of written notice of such
failure of breach; (iii) any assignment or delegation by the Servicer of its
duties or rights under the Trust Documents, except as specifically permitted
under the Trust Documents, or any attempt to make such an assignment or
delegation; (iv) certain events of insolvency, readjustment of debt,
marshalling of assets and liabilities or similar proceedings regarding the
Servicer; (v) the Servicer is no longer an Eligible Servicer (as defined in
the Trust Documents) or (vi) if Green Tree is the Servicer, Green Tree's
receiving rights under its master seller-servicer contract with GNMA are
terminated. Notice as used herein shall mean notice to the Servicer by the
Trustee, the Indenture Trustee, if any, or Green Tree, or to Green Tree, the
Servicer, the Indenture Trustee, if any, and the Trustee by the holders of
Securities representing interests aggregating not less than 25% of the
outstanding principal balance of the Securities issued by such Trust.
Unless otherwise specified in the related Prospectus Supplement, if a
Servicer Termination Event occurs and is continuing, the Trustee, the
Indenture Trustee or the holders of at least 25% in aggregate principal
balance of the outstanding Securities issued by such Trust, by notice then
given in writing to the Servicer (and to the Trustee and the Indenture Trustee
if given by the Securityholders) may terminate all of the rights and
obligations of the Servicer under the Trust Documents. Immediately upon the
giving of such notice, and, in the case of a successor Servicer other than the
Trustee, the acceptance by such successor Servicer of its appointment, all
authority of the Servicer will pass to the Trustee or other successor
Servicer. The Trustee, the Indenture Trustee and the successor Servicer may
set off and deduct any amounts owed by the Servicer from any amounts payable
to the outgoing Servicer.
On and after the time the Servicer receives a notice of termination, the
Trustee or other successor Servicer specified in the related Prospectus
Supplement (the "Backup Servicer") will be the successor in all respects to
the Servicer and will be subject to all the responsibilities, restrictions,
duties and liabilities of the Servicer under the related Trust Documents;
provided, however, that the successor Servicer shall have no liability with
respect to any obligation which was required to be performed by the prior
Servicer prior to the date that the successor Servicer becomes the Servicer or
any claim of a third party (including a Securityholder) based on any alleged
action or inaction of the prior Servicer.
In addition, the Trustee will notify FHA of Green Tree's termination as
Servicer of the Contracts and will request that the portion of Green Tree's
FHA Insurance reserves allocable to the FHA-insured Contracts be transferred
to the Trustee or a successor Servicer. See "Description of FHA Insurance."
Notwithstanding such termination, the Servicer shall be entitled to payment of
certain amounts payable to it prior to such termination, for services rendered
prior to such termination. No such termination will affect in any manner Green
Tree's obligation to repurchase certain Contracts for breaches of
representations or warranties under the Trust Documents. 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 Trust Documents without the
consent of all of the Securityholders.
The Trustee will be under no obligation to take any action or to institute,
conduct or defend any litigation under the Sale and Servicing Agreement at the
request, order or direction of any of the Holders of Securities, unless such
Securityholders have offered to the Trustee reasonable security or indemnity
against the costs, expenses and liabilities which the Trustee may incur.
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Green Tree, as Servicer, will be required to pay all expenses incurred by it
in connection with its servicing activities (including fees, expenses and
disbursements of the Trustee, the Indenture Trustee, the Custodian and
independent accountants, taxes imposed on the Servicer and expenses incurred
in connection with distributions and reports to Certificateholders and
Noteholders), except certain expenses incurred in connection with realizing
upon the Contracts.
Upon any termination of, or appointment of a successor to, the Servicer, the
Trustee and the Indenture Trustee will each give prompt written notice thereof
to Certificateholders and Noteholders, respectively, at their respective
addresses appearing in the Certificate Register or the Note Register and to
each Rating Agency.
DISTRIBUTIONS
With respect to each Trust, beginning on the Distribution Date specified in
the related Prospectus Supplement, distributions of principal and interest
(or, where applicable, of principal or interest only) on each Class of
Securities entitled thereto will be made by the Trustee or the Indenture
Trustee, as applicable, to the Certificateholders and the Noteholders. The
timing, calculation, allocation, order, source, priorities of and requirements
for all distributions to each Class of Certificateholders and all payments to
each Class of Noteholders will be set forth in the related Prospectus
Supplement.
Except as otherwise specified in the related Prospectus Supplement, on the
third Business Day prior to each Distribution Date (the "Determination Date"),
the Servicer will determine the Amount Available and the amounts to be
distributed on the Notes and Certificates for such Distribution Date. Except
as otherwise specified in the related Prospectus Supplement, the "Amount
Available" for any Distribution Date will be equal to (i) the funds on deposit
in the Collection Account at the close of business on the last day of the
related Due Period, plus (ii) any Advances to be made by the Servicer with
respect to delinquent payments, plus (iii) any Purchase Amounts to be
deposited by Green Tree with respect to Contracts to be repurchased due to a
breach of a representation or warranty, minus (iv) any amounts paid by
Obligors in the related Due Period, but to be applied in respect of a regular
monthly payment due in a subsequent Due Period (an "Advance Payment"), minus
(v) any amounts incorrectly deposited in the Collection Account.
Except as otherwise specified in the related Prospectus Supplement, on each
Distribution Date, prior to making distributions in respect of the Notes and
Certificates, the Amount Available will be applied, first, if Green Tree is no
longer the Servicer, to pay the Monthly Servicing Fee to the successor
Servicer, and second, to reimburse the Servicer (including Green Tree) for any
Advances made with respect to a prior Due Period and subsequently recovered
and for any Advances previously made that the Servicer has determined are
Uncollectible Advances.
ENHANCEMENT
The amounts and types of enhancement arrangements and the provider thereof,
if applicable, with respect to each Class of Securities will be set forth in
the related Prospectus Supplement. If and to the extent provided in the
related Prospectus Supplement, enhancement may be in the form of a financial
guaranty insurance policy, letter of credit, Green Tree guaranty, cash reserve
fund, derivative product, or other form of enhancement, or any combination
thereof, as may be described in the related Prospectus Supplement. If
specified in the applicable Prospectus Supplement, enhancement for a Class of
Securities of a Series may cover one or more other Classes of Securities in
such Series, and accordingly may be exhausted for the benefit of a particular
Class and thereafter be unavailable to such other Classes. Further information
regarding any provider of enhancement, including financial information when
material, will be included in the related Prospectus Supplement.
The presence of enhancement may be intended to enhance the likelihood of
receipt by the Certificateholders and the Noteholders of the full amount of
principal and interest due thereon and to decrease the likelihood that the
Certificateholders and the Noteholders will experience losses, or may be
structured to provide protection against changes in interest rates or against
other risks, to the extent and under the conditions specified in the
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related Prospectus Supplement. Unless otherwise specified in the related
Prospectus Supplement, the enhancement for a Class of Securities will not
provide protection against all risks of loss and will not guarantee repayment
of the entire principal and interest thereon. If losses occur which exceed the
amount covered by any enhancement or which are not covered by any enhancement,
Securityholders will bear their allocable share of deficiencies. In addition,
if a form of enhancement covers more than one Class of Securities of a Series,
Securityholders of any such Class will be subject to the risk that such
enhancement will be exhausted by the claims of Securityholders of other
Classes.
ADVANCES
Unless otherwise specified in the related Prospectus Supplement, the
Servicer will be obligated to make Advances each month of any scheduled
payments on the Contracts included in a Trust that were due but not received
during the prior Due Period. The Servicer will be entitled to reimbursement of
an Advance from the Amount Available in the Collection Account for the related
Trust (i) when the delinquent payment is recovered by the Trust, or (ii) when
the Servicer has determined that such Advance has become an Uncollectible
Advance. 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 Collection Account for the related Trust. The
Servicer will be entitled to recoup its advances on a Contract from subsequent
payments by or on behalf of the Obligor and from liquidation proceeds
(including FHA Insurance payments, if applicable), if any, of the Contract,
and will release its right to reimbursements in conjunction with the purchase
of the Contract by Green Tree 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 Net Liquidation Proceeds (including FHA Insurance payments, if
applicable), if any, of the Contract (an "Uncollectible Advance"), the
Servicer will be entitled to reimbursement from payments on other Contracts or
from other funds available therefor.
Unless otherwise specified in the related Prospectus Supplement, if the
Servicer fails to make an Advance required under the Sale and Servicing
Agreement, the Trustee will be obligated to deposit the amount of such Advance
in the Collection Account on the Payment Date. The Trustee will not, however,
be obligated to deposit any such amount if (i) the Trustee does not expect to
recoup such Advance from subsequent collections on the Contract or from
liquidation proceeds thereof, if any, or (ii) the Trustee determines that it
is not legally able to make such Advance.
EVIDENCE AS TO COMPLIANCE
On or before March 31 of each year the Servicer will deliver to each Trustee
and each Indenture Trustee a report of a nationally recognized accounting firm
stating that such firm has examined certain documents and records relating to
the servicing of Contracts serviced by the Servicer under pooling and
servicing agreements or sale and servicing agreements similar to the Trust
Documents and stating that, on the basis of such procedures, such servicing
has been conducted in compliance with the applicable Trust Documents, except
for any exceptions set forth in such report. A copy of such statement may be
obtained by any Certificate Owner or Note Owner upon compliance with the
requirements described above. See "Certain Information Regarding the
Securities--Statements to Securityholders" above.
INDEMNIFICATION AND LIMITS ON LIABILITY
Unless otherwise specified in the related Prospectus Supplement, the Trust
Documents will provide that the Servicer will be liable only to the extent of
the obligations specifically undertaken by it under the Trust Documents and
will have no other obligations or liabilities thereunder. The Trust Documents
will further provide that neither the Servicer nor any of its directors,
officers, employees and agents will have any liability to the Trust, the
Certificateholders or the Noteholders, except as provided in the Trust
Documents, for any action taken or for refraining from taking any action
pursuant to the Trust Documents, other than any liability that would otherwise
be imposed by reason of the Servicer's breach of the Trust Documents or
willful misfeasance, bad
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faith or negligence (including errors in judgment) in the performance of its
duties, or by reason of reckless disregard of obligations and duties under the
Trust Documents or any violation of law.
The Servicer may, with the prior consent of the Trustee and the Indenture
Trustee, if any, delegate duties under the related Trust Documents to any of
its affiliates. In addition, the Servicer may at any time perform the specific
duty of repossessing Products through subcontractors who are in the business
of servicing consumer receivables. The Servicer may also perform other
specific duties through subcontractors; provided, however, that no such
delegation of such duties by the Servicer shall relieve the Servicer of its
responsibility with respect thereto.
AMENDMENT
Unless otherwise provided in the related Prospectus Supplement, the Trust
Documents may be amended by the Seller, the Servicer, the Trustee and the
Indenture Trustee, but without the consent of any of the Securityholders, to
cure any ambiguity or to correct or supplement any provision therein, provided
that such action will not, in the opinion of counsel (which may be internal
counsel to Green Tree or the Servicer) reasonably satisfactory to the Trustee
and the Indenture Trustee, materially and adversely affect the interests of
the Securityholders. The Trust Documents may also be amended by Green Tree,
the Servicer and the Trustee and the Indenture Trustee, and a Certificate
Majority and a Note Majority, for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions of the Trust
Documents or of modifying, in any manner, the rights of the Certificateholders
or the Noteholders. No such amendment may (i) increase or reduce in any manner
the amount of, or accelerate or delay the timing of, collections of payments
on the related Contracts or distributions that are required to be made on any
related Certificate or Note or the related Pass-Through Rate or Interest Rate
or (ii) reduce the percentage of the Certificate Balance evidenced by
Certificates or of the aggregate principal amount of Notes then outstanding
required to consent to any such amendment, without the consent of the holders
of all Certificates or all Notes, as the case may be, then outstanding.
TERMINATION
The obligations created by the Trust Documents will terminate upon the date
calculated as specified in the Trust Documents, generally upon (i) the later
of the final payment or other liquidation of the last Contract subject thereto
and the disposition of all property acquired upon repossession of any Product
and (ii) the payment to the Securityholders of all amounts held by the
Servicer or the Trustee and required to be paid to the Securityholders
pursuant to the Trust Documents.
Unless otherwise provided in the related Prospectus Supplement, with respect
to each Series of Securities, in order to avoid excessive administrative
expense, Green Tree and the Servicer each will be permitted, at its option, to
purchase from the Trust, on any Distribution Date immediately following any
Due Period as of the last day of which the Aggregate Principal Balance is
equal to or less than 10% (or such other percentage as may be specified in the
related Prospectus Supplement) of the Cut-off Date Principal Balance, all
remaining Contracts in the related Trust and the other remaining Trust
Property at a price equal to the aggregate of the Purchase Amounts therefor
and the appraised value of any other remaining Trust Property. The exercise of
this right will effect an early retirement of the related Certificates and
Notes.
If a General Partner is named in the related Prospectus Supplement, unless
otherwise specified in the related Prospectus Supplement, the Trust Agreement
will provide that, in the event that the General Partner becomes insolvent,
withdraws or is expelled as a General Partner or is terminated or dissolved,
the Trust will terminate in 90 days and effect redemption of the Notes and
prepayment of the Certificates (if any) following the winding-up of the
affairs of the related Trust, unless within such 90 days the remaining General
Partner, if any, and holders of a majority of the Certificates of such Series
agree in writing to the continuation of the business of the Trust and to the
appointment of a successor to the former General Partner, and the Owner
Trustee is able to obtain an
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opinion of counsel to the effect that the Trust will not thereafter be an
association (or publicly traded partnership) taxable as a corporation for
federal income tax purposes.
Unless otherwise specified in the related Prospectus Supplement, with
respect to each Series of Securities, the Trustee will give written notice of
the final distribution with respect to the Certificates (if any), to each
Certificateholder of record and the Indenture Trustee will give written notice
of the final payment with respect to the Notes to each Noteholder of record.
The final distribution to any Certificateholder and the final payment to any
Noteholder will be made only upon surrender and cancellation of such holder's
Certificate or Note at the office or agency of the Trustee, with respect to
Certificates, or of the Indenture Trustee, with respect to Notes, specified in
the notice of termination. Any funds remaining in the Trust, after the Trustee
or the Indenture Trustee has taken certain measures to locate a
Certificateholder or Noteholder, as the case may be, and such measures have
failed, will be distributed to The United Way, and the Certificateholders and
Noteholders, by acceptance of their Certificates and Notes, will waive any
rights with respect to such funds.
THE TRUSTEE
The Trustee or Owner Trustee, as applicable, for each Trust will be
specified in the related Prospectus Supplement. The Trustee, in its individual
capacity or otherwise, and any of its affiliates may hold Certificates or
Notes in their own names or as pledgee. In addition, for the purpose of
meeting the legal requirements of certain jurisdictions, the Trustee, with the
consent of the Servicer, shall have the power to appoint co-trustees or
separate trustees of all or any part of the related Trust. In the event of
such appointment, all rights, powers, duties and obligations conferred or
imposed upon the Trustee by the related Trust Documents will be conferred or
imposed upon the Trustee and such separate trustee or co-trustee jointly, or,
in any jurisdiction where the Trustee is incompetent or unqualified to perform
certain acts, singly upon such separate trustee or co-trustee who shall
exercise and perform such rights, powers, duties and obligations solely at the
direction of the Trustee.
The Trustee of any Trust may resign at any time, in which event the General
Partner, if any, specified in the related Prospectus Supplement or, if no such
General Partner is specified, the Servicer or its successor will be obligated
to appoint a successor trustee. The General Partner, if any, specified in the
related Prospectus Supplement (or, if no such General Partner is specified,
the Servicer) may also remove the Trustee, if the Trustee ceases to be
eligible to serve, becomes legally unable to act, is adjudged insolvent or is
placed in receivership or similar proceedings. In such circumstances, the
General Partner, if any, specified in the related Prospectus Supplement or, if
no such General Partner is specified, the Servicer will 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.
DUTIES OF THE TRUSTEE
The Trustee will make no representation as to the validity or sufficiency of
any Trust Document, the Certificates or the Notes (other than its execution of
the Certificates and the Notes), the Contracts or any related documents, and
will not be accountable for the use or application by the Servicer of any
funds paid to the Servicer in respect of the Certificates, the Notes or the
Contracts prior to deposit in the related Collection Account.
The Trustee will be required to perform only those duties specifically
required of it under the Trust Documents. Generally, those duties will be
limited to the receipt of the various certificates, reports or other
instruments required to be furnished by the Servicer to the Trustee under the
Trust Documents, in which case it will only be required to examine such
certificates, reports or instruments to determine whether they conform
substantially to the requirements of the Trust Documents.
The Trustee will be under no obligation to exercise any of the rights or
powers vested in it by the Trust Documents or to institute, conduct, or defend
any litigation thereunder or in relation thereto at the request, order or
direction of any of the Certificateholders or Noteholders, unless such
Certificateholders or Noteholders have
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offered the Trustee reasonable security or indemnity against the costs,
expenses and liabilities which may be incurred therein or thereby. No
Certificateholder nor any Noteholder will have any right under the Trust
Documents to institute any proceeding with respect to such Trust Documents,
unless such holder has given the Trustee written notice of default and unless
the holders of Certificates evidencing not less than 25% of the Certificate
Balance or the holders of Notes evidencing not less than 25% of the aggregate
principal balance of the Notes then outstanding, as the case may be, have made
written request to the Trustee to institute such proceeding in its own name as
Trustee thereunder and have offered to the Trustee reasonable indemnity, and
the Trustee for 30 days after the receipt of such notice, request and offer to
indemnify has neglected or refused to institute any such proceedings.
ADMINISTRATOR
If an Administrator is specified in the related Prospectus Supplement, such
Administrator will enter into an agreement (the "Administration Agreement")
pursuant to which such Administrator will agree, to the extent provided in
such Administration Agreement, to provide the notices and to perform other
administrative obligations required by the related Indenture and the Trust
Agreement.
DESCRIPTION OF FHA INSURANCE
Certain of the Home Improvement Contracts may be FHA-insured, the payments
upon which, subject to the following discussion, are insured by the FHA under
Title I of the National Housing Act.
The insurance available to any Trust will be subject to the limit of a
reserve amount equal to 10% of the principal balance of all Title I insured
loans originated or purchased and reported for FHA Insurance by Green Tree,
which amount will be increased by an amount equal to 10% of the lesser of the
principal balance or the purchase price of insured loans subsequently
originated or purchased of record by Green Tree. Green Tree's reserve amount
may be reduced by 10% of the principal balance of any loans reported to FHA as
sold without recourse by Green Tree. In the Sale and Servicing Agreement,
Green Tree will agree to pay all FHA Insurance premiums required by FHA
Regulations. If Green Tree fails to pay any such premium, the Trustee or the
successor Servicer (if any) with respect to each Series is obligated to pay
such premium and is entitled to be reimbursed by Green Tree and from
collections on the related Home Improvement Contracts.
As of December 31, 1997, Green Tree's FHA Insurance reserve amount was equal
to approximately $ . These insurance reserves were available to
cover losses on approximately $ of FHA-insured manufactured
housing contracts and approximately $ of FHA-insured home
improvement loans, including the FHA-insured Contracts that may be owned by a
Trust Fund. If an Event of Termination (as defined under "Description of the
Trust Documents--Termination") occurs, each Trustee will notify FHA of Green
Tree's termination as Servicer of the related FHA-insured Contracts and will
request that the portion of Green Tree's FHA Insurance reserves allocable to
the FHA-insured Contracts be transferred to the Trustee or a successor
servicer. Although each Trustee will request such a transfer of reserves, FHA
is not obligated to comply with such a request, and may determine that it is
not in FHA's interest to permit such transfer of reserves. In addition, FHA
has not specified how insurance reserves might be allocated in such event, and
there can be no assurance that any reserve amount, if transferred to the
Trustee or a successor Servicer, would not be substantially less than 10% of
the outstanding principal amount of the FHA-insured Contracts. It is likely
that the Trustee or any successor Servicer would be the lender of record on
other FHA Title I loans, so that any reserves that are so permitted to be
transferred would become commingled with reserves available for other FHA
Title I loans. FHA also reserves the right to transfer reserves with
"earmarking" (segregating such reserves so that they will not be commingled
with the reserves of the transferee) if it is in FHA's interest to do so.
In general, FHA will insure unsecured property improvement loans up to
$7,500, with a maximum term of 20 years. The loan proceeds must be used for
the purposes described in the loan application, and those improvements must
substantially protect or improve the basic livability or utility of the
property. The Secretary
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of HUD from time to time publishes a list of ineligible items and activities
which may not be financed with the proceeds of an FHA-insured home improvement
loan.
Following a default on an FHA-insured Home Improvement Contract the Servicer
may, subject to certain conditions, submit a claim to FHA. The availability of
FHA Insurance following a default on an FHA-insured Contract is subject to a
number of conditions, including strict compliance by the Company with FHA
regulations in originating and servicing the Contract. Failure to comply with
FHA regulations may result in a denial of or surcharge on the FHA Insurance
claim. Prior to declaring an FHA-insured Home Improvement Contract in default
and submitting a claim to FHA, the Servicer must take certain steps to attempt
to cure the default, including personal contact with the borrower either by
telephone or in a meeting and providing the borrower with 30 days' written
notice prior to declaration of default. FHA may deny insurance coverage if the
borrower's nonpayment is related to a valid objection to faulty contractor
performance. In such event, the Company will seek to obtain payment by or a
judgment against the borrower, and may resubmit the claim to FHA following
such a judgment. As described under "Green Tree Financial Corporation--
Contract Origination," Green Tree does not purchase a Contract until the
customer verifies satisfactory completion of the work.
Upon submission of a claim to FHA, the related Trust must assign its entire
interest in the Contract to the United States. In general, the claim payment
will equal 90% of the sum of (i) the unpaid principal amount of the Home
Improvement Contract at the date of default and uncollected interest computed
at the Contract Rate earned to the data of default, (ii) accrued and unpaid
interest on the unpaid amount of the Contract from the date of default to the
date of submission of the claim plus 15 calendar days (but in no event more
than nine months) computed at a rate of 7% per annum, (iii) uncollected court
costs, and (iv) legal fees, not to exceed $500.
CERTAIN LEGAL ASPECTS OF THE CONTRACTS; REPURCHASE OBLIGATIONS
As a result of Green Tree's conveyance and assignment of a pool of Contracts
to a Trust, the Securityholders of such Series, as the beneficial owners of
the Trust, will succeed collectively to all of the rights thereunder
(including the right to receive payment on the Contracts). The following
discussion contains summaries of certain legal aspects of home improvement
contracts which are general in nature. These legal aspects are in addition to
the requirements of FHA regulations described in "Description of FHA
Insurance" with respect to the FHA-insured Home Improvement Contracts. Because
such legal aspects are governed by applicable state law (which laws may differ
substantially), the summaries do not purport to be complete nor to reflect the
laws of any particular state, nor to encompass the laws of all states in which
the improved real estate is situated. The summaries are qualified in their
entirety by reference to the applicable federal and state laws governing the
Contracts.
MORTGAGES AND DEEDS OF TRUST
The Home Equity Contracts (but not the Home Improvement Contracts) 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,
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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 Home Equity Contracts in any Contract Pool are
expected to be second or third mortgages or deeds of trust which are junior to
mortgages or deeds of trust held by other lenders or institutional investors.
The rights of the related Trust (and therefore the Securityholders), 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 Contract 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 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
Green Tree generally does not cure defaults under a senior mortgage or deed of
trust, it is Green Tree's standard practice to protect its interest by
attending any foreclosure sale and bidding for property only if it is in Green
Tree's best interests to do so.
The standard form of the mortgage or deed of trust used by most
institutional lenders, like that of Green Tree, confers on the mortgagee or
beneficiary the right both to receive all proceeds collected under any hazard
insurance policy and all awards made in connection with any condemnation
proceedings, and to apply such proceeds and awards to any indebtedness secured
by the mortgage or deed of trust, in such order as the mortgagee or
beneficiary may determine. Thus, in the event improvements on the property are
damaged or destroyed by fire or other casualty, or in the event the property
is taken by condemnation, the mortgagee or beneficiary under the underlying
first mortgage or deed of trust will have the prior right to collect any
insurance proceeds payable under a hazard insurance policy and any award of
damages in connection with the condemnation and to apply the same to the
indebtedness secured by the first mortgage or deed of trust. Proceeds in
excess of the amount of first mortgage indebtedness, in most cases, may be
applied to the indebtedness of a junior mortgage or deed of trust.
The form of mortgage or deed of trust used by institutional lenders may
contain a "future advance" clause, which provides, in essence, that additional
amounts advanced to or on behalf of the mortgagor or trustor by the mortgagee
or beneficiary are to be secured by the mortgage or deed of trust. The
priority of any advance made under the clause depends, in some states, on
whether the advance was an "obligatory" or "optional" advance. If the
mortgagee or beneficiary is obligated to advance the additional amounts, the
advance is entitled to receive the same priority as amounts initially advanced
under the mortgage or deed of trust, notwithstanding the fact that there may
be junior mortgages or deeds of trust and other liens which intervene between
the date of recording of the mortgage or deed of trust and the date of the
future advance, and, in some states, notwithstanding that the senior mortgagee
or beneficiary had actual knowledge of such intervening junior mortgages or
deeds of trust and other liens at the time of the advance. Where the mortgagee
or beneficiary is not obligated to advance additional amounts or, in some
states, has actual knowledge of the intervening junior mortgages or deeds of
trust and other liens, the advance will be subordinate to such intervening
junior mortgages or deeds of trust and other liens. Priority of advances under
the clause rests, in some states, on state statutes giving priority to all
advances made under the loan agreement to a "credit limit" amount stated in
the recorded mortgage.
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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 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
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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 senior mortgages to the senior mortgagees. Accordingly,
with respect to those Contracts which are second or third mortgage loans, if
the lender purchases the property, the lender's title will be subject to all
senior liens and claims and certain governmental liens.
The proceeds received by the referee or trustee from the sale are applied
first to the costs, fees, and expenses of sale and then in satisfaction of the
indebtedness secured by the mortgage or deed of trust under which the sale was
conducted. Any remaining proceeds are generally payable to the holders of
junior mortgages or deeds of trust and other liens and claims in order of
their priority, whether or not the borrower is in default. Any additional
proceeds are generally payable to the mortgagor or trustor. The payment of the
proceeds to the holders of junior mortgages may occur in the foreclosure
action of the senior mortgagee or may require the institution of separate
legal proceeding.
Some states impose prohibitions or limitations on remedies available to the
mortgagee, including the right to recover the debt from the mortgagor. See "--
Anti-Deficiency Legislation and Other Limitations on Lenders" herein.
In certain jurisdictions, real property transfer or recording taxes or fees
may be imposed on the related Trust with respect to its acquisition (by
foreclosure or otherwise) and disposition of real property securing a
Contract, and any such taxes or fees imposed may reduce liquidation proceeds
with respect to such property, as well as distributions payable to the
Securityholders.
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SECOND OR THIRD MORTGAGES
The Home Equity Contracts may be secured by second or third mortgages or
deeds of trust, which are junior to first or second mortgages or deeds of
trust held by other lenders. The rights of the Securityholders 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 Contract. 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 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.
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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 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.
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CONSUMER PROTECTION LAWS WITH RESPECT TO CONTRACTS
Numerous Federal and state consumer protection laws impose substantial
requirements upon creditors involved in consumer finance. These laws include
the Federal Truth-in-Lending Act, Regulation "Z", the Equal Credit Opportunity
Act, Regulation "B", the Fair Credit Reporting Act, and related statutes. 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 Contracts included in a
Contract 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 Contract;
however, the Obligor also may be able to assert the rule to set off remaining
amounts due as a defense against a claim brought by the Trust against such
Obligor. The Home Protection Act provides that assignees of certain high-
interest, non-purchase money mortgage loans (which may include some Contracts)
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 addition to limitations imposed by FHA regulations with
respect to FHA-insured Home Improvement Contracts, in certain states there are
or may be specific limitations upon late charges which a lender may collect
from a borrower for delinquent payments. Under the Sale and Servicing
Agreement, late charges (to the extent permitted by law and not waived by
Green Tree) will be retained by Green Tree 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
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determine the causes for the borrower's default and the likelihood that the
borrower will be able to reinstate the loan. In some cases, courts have
required lenders to reinstate loans or recast payment schedules to accommodate
borrowers who are suffering from temporary financial disability. In some
cases, courts have limited the right of lenders to foreclose if the default
under the mortgage instrument is not monetary, such as the borrower failing to
adequately maintain the property or the borrower executing a junior mortgage
or deed of trust affecting the property. In other cases, some courts have been
faced with the issue whether federal or state constitutional provisions
reflecting due process concerns for adequate notice require that borrowers
under mortgages or the deeds of trust receive notices in addition to
statutorily-prescribed minimum requirements. For the most part, these cases
have upheld the notice provisions as being reasonable or have found that the
sale by a trustee under a deed of trust or under a mortgage having a power of
sale does not involve sufficient state action to afford constitutional
protection to the borrower.
It is Green Tree's practice with some of the Home Improvement Contracts to
defer the first payment thereon for up to 90 days, and to charge the home
improvement contractor points to cover the lost interest due to collecting
only 30 days' interest on the first payment on these deferred payment
contracts.
"DUE-ON-SALE" CLAUSES
All of the Contract 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
Contracts) 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 Contract which contains a "due-on-sale" clause
upon transfer of an interest in the mortgaged property. This ability to
accelerate will not apply to certain types of transfers, including (i) the
granting of a leasehold interest which has a term of three years or less and
which does not contain an option to purchase, (ii) a transfer to a relative
resulting from the death of a mortgagor or trustor, or a transfer where the
spouse or child(ren) becomes an owner of the mortgaged property in each case
where the transferee(s) will occupy the mortgaged property, (iii) a transfer
resulting from a decree of dissolution of marriage, legal separation agreement
or from an incidental property settlement agreement by which the spouse
becomes an owner of the mortgaged property, (iv) the creation of a lien or
other encumbrance subordinate to the lender's security instrument which does
not relate to a transfer of rights of occupancy in the mortgaged property
(provided that such lien or encumbrance is not created pursuant to a contract
for deed), (v) a transfer by devise, descent or operation of law on the death
of a joint tenant or tenant by the entirety, and (vi) other transfers as set
forth in the Garn-St. Germain Act and the regulations thereunder. As a result,
a lesser number of Contracts which contain "due-on-sale" clauses may extend to
full maturity than earlier experience would indicate with respect to single-
family mortgage loans. The extent of the effect of the Garn-St. Germain Act on
the average lives and delinquency rates of the Contracts, however, cannot be
predicted.
The inability to enforce a due-on-sale clause may result in Contracts
bearing an interest rate below the current market rate being assumed by a new
home buyer rather than being paid off, which may have an impact upon the
average life of the Contracts and the number of Contracts which may be
outstanding until maturity.
Although Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980, as amended ("Title V"), provides that, subject to certain
conditions, state usury limitations shall not apply to FHA-
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insured loans and to first mortgage secured conventional contracts if the
contract is defined as a "federally related mortgage loan," a number of states
have adopted legislation overriding Title V's exemptions, as permitted by
Title V. Green Tree will represent and warrant in each Sale and Servicing
Agreement that all Contracts comply with any applicable usury limitations.
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 and reduce the amounts otherwise distributable to the holders of
the related Series of Securities 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, Green Tree has not
made and will not make such evaluations prior to the origination of the
Contracts. Neither Green Tree nor any replacement Servicer will be required by
any Sale and Servicing Agreement to undertake any such evaluations prior to
foreclosure or accepting a deed-in-lieu of foreclosure. Green Tree 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, Green
Tree 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 Securityholders 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
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on certain of the Contracts. Any shortfall in interest collections resulting
from the application of the Relief Act or similar legislation, which would not
be recoverable from the related Contracts, would result in a reduction of the
amounts distributable to the Securityholders. 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 Contract
which goes into default, there may be delays in payment on the Securities in
connection therewith. Any other interest shortfalls, deferrals or forgiveness
of payments on the Contracts resulting from similar legislation or regulations
may result in delays in payments or losses to Securityholders.
REPURCHASE OBLIGATIONS
Under the Sale and Servicing Agreement, Green Tree will represent and
warrant that each FHA-insured Home Improvement Contract was originated in
compliance with FHA regulations and is covered by FHA Insurance. In the event
FHA were to deny insurance coverage on an FHA-insured Home Improvement
Contract due to a violation of FHA regulations in originating or servicing
such Home Improvement Contracts, such violation would constitute a breach of a
representation and warranty under the Sale and Servicing Agreement and would
create an obligation of Green Tree to repurchase such Home Improvement
Contract unless the breach is cured. See "Description of the Trust Documents--
Sale and Assignment of the Contracts."
In addition, Green Tree will also represent and warrant under each Sale and
Servicing Agreement that each Contract complies with all requirements of law.
Accordingly, if any Obligor has a claim against the related Trust for
violation of any law and such claim materially adversely affects the Trust's
interest in a Contract, such violation would constitute a breach of a
representation and warranty under the Agreement and would create an obligation
to repurchase such Contract unless the breach is cured. See "Description of
the Trust Documents--Sale and Assignment of the Contracts."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of the material federal income tax
consequences relating to the purchase, ownership, and disposition of the
Securities. The discussion is based upon the current provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), the Treasury
regulations promulgated thereunder and judicial or ruling authority, all of
which are subject to change, which change may be retroactive. The discussion
does not deal with federal income tax consequences applicable to all
categories of investors, some of which may be subject to special rules.
Investors are encouraged to consult their own tax advisors with respect to the
federal, state, local, and any other tax consequences of the purchase,
ownership, and disposition of the Securities.
Dorsey & Whitney LLP, counsel to Green Tree, has delivered an opinion
regarding certain federal income tax matters discussed below. Counsel to Green
Tree identified in the related Prospectus Supplement ("Counsel") will deliver
an opinion regarding tax matters applicable to each Series of Securities. Such
an opinion, however, is not binding on the Internal Revenue Service (the
"Service") or the courts. The opinion of Counsel will specifically address
only those issues specifically identified below as being covered by such
opinion; however, the opinion of Counsel also will state that the additional
discussion set forth below accurately sets forth Counsel's advice with respect
to material tax issues. No ruling on any of the issues discussed below will be
sought from the Service.
TAX STATUS OF THE TRUST
With respect to each Series of Securities which includes both Notes and
Certificates, Counsel will deliver its opinion that the Trust will not be an
association or publicly traded partnership taxable as a corporation for
federal income tax purposes. As a result, in the opinion of Counsel, the Trust
itself will not be subject to federal
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income tax but, instead, each Certificateholder will be required to take into
account its distributive share of items of income and deduction (including
deductions for distributions of interest to the Noteholders) of the Trust as
though such items had been realized directly by the Certificateholder. This
opinion will be based on the assumption that the terms of the Trust Agreement
and related documents will be complied with, and on Counsel's conclusion that
the nature of the income of the Trust will exempt it from the rule that
certain publicly traded partnerships are taxable as corporations. There are,
however, no cases or Service rulings on transactions involving a trust issuing
both debt and equity interests with terms similar to those of the Notes and
the Certificates. As a result, the Service may disagree with all or a part of
this discussion.
If the Trust were taxable as a corporation for federal income tax purposes,
the Trust would be subject to corporate income tax on its taxable income. The
Trust's taxable income would include all its income on the Contracts, possibly
reduced by its interest expense on the Notes. Any such corporate income tax
could materially reduce cash available to make payments on the Notes and
distributions on the Certificates.
TAX CONSEQUENCES TO NOTEHOLDERS
Treatment of the Notes as Indebtedness. The Owner Trustee, on behalf of the
Trust, will agree, and the Noteholders will agree by their purchase of Notes,
to treat the Notes as debt for federal income tax purposes. Counsel will
deliver its opinion that the Notes will be classified as debt for federal
income tax purposes. The discussion below assumes this characterization of the
Notes is correct.
Interest Income on the Notes. Interest on the Notes will be taxable as
ordinary interest income when received by Noteholders utilizing the cash-basis
method of accounting and when accrued by Noteholders utilizing the accrual
method of accounting. Under the applicable regulations, the Notes would be
considered issued with original issue discount ("OID") if the "stated
redemption price at maturity" of a Note (generally equal to its principal
amount as of the date of issuance plus all interest other than "qualified
stated interest" payable prior to or at maturity) exceeds the original issue
price (in this case, the initial offering price at which a substantial amount
of the Notes are sold to the public). Any OID would be considered de minimis
under the OID regulations if it does not exceed 1/4% of the stated redemption
price at maturity of a Note multiplied by the number of full years until its
maturity date. It is anticipated that the Notes will not be considered issued
with more than de minimis OID. Under the OID regulations, an owner of a Note
issued with a de minimis amount of OID must include such OID in income, on a
pro rata basis, as principal payments are made on the Note.
While it is not anticipated that the Notes will be issued with more than de
minimis OID, it is possible that they will be so issued or will be deemed to
be issued with OID. This deemed OID could arise, for example, if interest
payments on the Notes are not deemed to be "qualified stated interest" because
the Notes do not provide for default remedies ordinarily available to holders
of debt instruments or do not contain terms and conditions that make the
likelihood of late payment or nonpayment a remote contingency. Based upon
existing authority, however, the Trust will treat interest payments on the
Notes as qualified stated interest under the OID regulations. If the Notes are
issued or are deemed to be issued with OID, all or a portion of the taxable
income to be recognized with respect to the Notes would be includible in the
income of Noteholders as OID. Any amount treated as OID would not, however, be
includible again when the amount is actually received. If the yield on a class
of Notes were not materially different from its coupon, this treatment would
have no significant effect on Noteholders using the accrual method of
accounting. However, cash method Noteholders may be required to report income
with respect to the Notes in advance of the receipt of cash attributable to
such income.
A Noteholder must include OID in income as interest over the term of the
Notes under a constant yield method. In general, OID must be included in
income in advance of the receipt of cash representing that income. Each
Noteholder is encouraged to consult its own tax advisor regarding the impact
of the OID rules if the Notes are issued with OID.
Market Discount. The Notes, whether or not issued with original issue
discount, will be subject to the "market discount rules" of Section 1276 of
the Code. In general, these rules provide that if a Noteholder
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purchases the Note at a market discount (i.e., a discount from its original
issue price plus any accrued original issue discount) that exceeds a de
minimis amount specified in the Code, and thereafter recognizes gain upon a
disposition, the lesser of (i) such gain or (ii) the accrued market discount
will be taxed as ordinary interest income. Market discount also will be
recognized and taxable as ordinary interest income as payments of principal
are received on the Notes to the extent that the amount of such payments does
not exceed the accrued market discount. Generally, the accrued market discount
will be the total market discount on the Note multiplied by a fraction, the
numerator of which is the number of days the Noteholder held the Note and the
denominator of which is the number of days after the date the Noteholder
acquired the Note until and including its maturity date. The Noteholder may
elect, however, to determine accrued market discount under the constant-yield
method, which election shall not be revoked without the consent of the
Service.
Limitations imposed by the Code which are intended to match deductions with
the taxation of income may defer deductions for interest on indebtedness
incurred or continued, or short-sale expenses incurred, to purchase or carry a
Note with accrued market discount. A Noteholder may elect to include market
discount in gross income as it accrues and, if such Noteholder makes such an
election, is exempt from this rule. The adjusted basis of a Note 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. Any such election to include market discount in gross income as
it accrues shall apply to all debt instruments held by the Noteholder at the
beginning of the first taxable year to which the election applies or
thereafter acquired and is irrevocable without the consent of the Service.
Amortizable Bond Premium. In general, if a Noteholder purchases a Note at a
premium (i.e., an amount in excess of the amount payable upon the maturity
thereof), such Noteholder will be considered to have purchased such Note with
"amortizable bond premium" equal to the amount of such excess. Such Noteholder
may elect to deduct the amortizable bond premium as it accrues under a
constant-yield method over the remaining term of the Note. Such Noteholder's
tax basis in the Note will be reduced by the amount of the amortizable bond
premium deducted. Amortizable bond premium with respect to a Note will be
treated as an offset to interest income on such Note, and a Noteholder's
deduction for amortizable bond premium with respect to a Note will be limited
in each year to the amount of interest income derived with respect to such
Note for such year. Any election to deduct amortizable bond premium shall
apply to all debt instruments (other than instruments the interest on which is
excludible from gross income) held by the Noteholder at the beginning of the
first taxable year to which the election applies or thereafter acquired and is
irrevocable without the consent of the Service. Bond premium on a Note held by
a Noteholder who does not elect to deduct the premium will decrease the gain
or increase the loss otherwise recognized on the disposition of the Note.
Disposition of Notes. If a Noteholder sells a Note, the Noteholder will
recognize gain or loss in an amount equal to the difference between the amount
realized on the sale and the Noteholder's adjusted tax basis in the Note. The
adjusted tax basis of a Note to a particular Noteholder generally will equal
the Noteholder's cost for the Note, increased by any market discount, OID and
gain previously included by such Noteholder in income with respect to the Note
and decreased by principal payments previously received by such Noteholder and
the amount of bond premium previously amortized with respect to the Note. Any
such gain or loss will be capital gain or loss if the Note was held as a
capital asset, except for gain representing accrued interest and accrued
market discount not previously included in income, and will be short-term,
mid-term or long-term capital gain or loss depending upon whether the Note was
held for more or less than one year or for more than eighteen months. Capital
losses generally may be used only to offset capital gains.
Foreign Holders. Generally, interest paid to a Noteholder who is a
nonresident alien individual or a foreign corporation and who does not hold
the Note in connection with a United States trade or business will be treated
as "portfolio interest" and therefore will be exempt from the 30% withholding
tax. Such a Noteholder will be entitled to receive interest payments on the
Notes free of United States federal income tax provided that such Noteholder
periodically provides the Indenture Trustee (or other person who would
otherwise be required to withhold tax) with a statement certifying under
penalty of perjury that such Noteholder is not a United States person and
providing the name and address of such Noteholder and will not be subject to
federal income tax on
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gain from the disposition of a Note unless the Noteholder is an individual who
is present in the United States for 183 days or more during the taxable year
in which the disposition takes place and certain other requirements are met.
Tax Administration and Reporting. The Indenture Trustee will furnish to each
Noteholder with each distribution a statement setting forth the amount of such
distribution allocable to principal and to interest. Reports will be made
annually to the Service and to holders of record that are not excepted from
the reporting requirements regarding such information as may be required with
respect to interest and original issue discount, if any, with respect to the
Notes.
Backup Withholding. Under certain circumstances, a Noteholder may be subject
to "backup withholding" at a 31% rate. Backup withholding may apply to a
Noteholder 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 Indenture Trustee. Backup withholding may apply,
under certain circumstances, to a Noteholder who is a foreign person if the
Noteholder fails to provide the Indenture Trustee or the Noteholder's
securities broker with the statement necessary to establish the exemption from
federal income and withholding tax on interest on the Note. Backup
withholding, however, does not apply to payments on a Note made to certain
exempt recipients, such as corporations and tax-exempt organizations, and to
certain foreign persons. Noteholders should consult their tax advisors for
additional information concerning the potential application of backup
withholding to payments received by them with respect to a Note.
Possible Alternative Treatment of the Notes. If, contrary to the opinion of
Counsel, the Service successfully asserted that the Notes did not represent
debt for federal income tax purposes, the Notes might be treated as equity
interests in the Trust. If so treated, the Trust would be treated as a
publicly traded partnership that would not be taxable as a corporation because
it would meet certain qualifying income tests. Nonetheless, treatment of the
Notes as equity interests in such a partnership could have adverse tax
consequences to certain holders. For example, income to foreign holders
generally would be subject to federal tax and federal tax return filing and
withholding requirements, income to certain tax-exempt entities (including
pension funds) would be "unrelated business taxable income," and individual
holders might be subject to certain limitations on their ability to deduct
their share of Trust expenses.
TAX CONSEQUENCES TO CERTIFICATEHOLDERS
Treatment of the Trust as a Partnership. Green Tree, the General Partner and
the Owner Trustee will agree, and the Certificateholders will agree by their
purchase of Certificates, to treat the Trust as a partnership for purposes of
federal and state income tax, franchise tax and any other tax measured in
whole or in part by income, with the assets of the partnership being the
assets held by the Trust, the partners of the partnership being the
Certificateholders and the General Partner, and the Notes being debt of the
partnership. The proper characterization of the arrangement involving the
Trust, the Certificates, the Notes, the General Partner, Green Tree and the
Servicer, however, is not certain because there is no authority on
transactions closely comparable to that contemplated herein.
A variety of alternative characterizations are possible. For example,
because the Certificates have certain features characteristic of debt, the
Certificates might be considered debt of the Trust. Any such characterization
would not result in materially adverse tax consequences to Certificateholders
as compared to the consequences from treatment of the Certificates as equity
in a partnership, described below. The following discussion assumes that the
Certificates represent equity interests in a partnership.
Partnership Taxation. As a partnership, the Trust will not be subject to
federal income tax. Rather, each Certificateholder will be required to
separately take into account such holder's allocated share of income, gains,
losses, deductions and credits of the Trust. The Trust's income will consist
primarily of interest and finance charges earned on the Contracts (including
appropriate adjustments for market discount, OID and bond premium) and any
gain upon collection or disposition of the Contracts. The Trust's deductions
will consist primarily of
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interest accruing with respect to the Notes, servicing and other fees, and
losses or deductions upon collection or disposition of the Contracts.
The tax items of a partnership are allocable to the partners in accordance
with the Code, Treasury regulations and the partnership agreement (here, the
Trust Agreement and related documents). The Trust Agreement will provide, in
general, that the Certificateholders will be allocated taxable income of the
Trust for each month equal to the sum of (i) the interest that accrues on the
Certificates in accordance with their terms for such month, including interest
accruing at the Pass-Through Rate for such month and interest on amounts
previously due on the Certificates but not yet distributed; (ii) any Trust
income attributable to discount on the Contracts that corresponds to any
excess of the principal amount of the Certificates over their initial issue
price; (iii) Prepayment Premium payable to the Certificateholders for such
month; and (iv) any other amounts of income payable to the Certificateholders
for such month. Although it is not anticipated that the Certificates will be
issued at a price which exceeds their principal amount, such allocations of
Trust income to the Certificateholders will be reduced by any amortization by
the Trust of premium on Contracts that corresponds to any such excess of the
issue price of Certificates over their principal amount. All remaining taxable
income of the Trust will be allocated to the General Partner. Based on the
economic arrangement of the parties, this approach for allocating Trust income
should be permissible under applicable Treasury regulations, although no
assurance can be given that the Service would not require a greater amount of
income to be allocated to Certificateholders. Moreover, even under the
foregoing method of allocation, Certificateholders may be allocated income
equal to the entire Pass-Through Rate plus the other items described above
even though the Trust might not have sufficient cash to make current cash
distributions of such amount. Thus, cash basis holders will in effect be
required to report income from the Certificates on the accrual basis, and
Certificateholders may become liable for taxes on Trust income even if they
have not received cash from the Trust to pay such taxes. In addition, because
tax allocations and tax reporting will be done on a uniform basis for all
Certificateholders but Certificateholders may be purchasing Certificates at
different times and at different prices, Certificateholders may be required to
report on their tax returns taxable income that is greater or less than the
amount reported to them by the Trust.
All of the taxable income allocated to a Certificateholder that is a
pension, profit sharing or employee benefit plan or other tax-exempt entity
(including an individual retirement account) will constitute "unrelated
business taxable income" generally taxable to such a holder under the Code.
A Certificateholder's share of expenses of the Trust (including fees to the
Servicer but not interest expense) will be miscellaneous itemized deductions.
An individual, an estate, or a trust that holds a Certificate either directly
or through a pass-through entity will be allowed to deduct such expenses under
Section 212 of the Code only to the extent that, in the aggregate and combined
with certain other itemized deductions, they exceed 2% of the adjusted gross
income of the Certificateholder. 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 determined
under the Code ($121,000 in 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. To the extent that a
Certificateholder is not permitted to deduct servicing fees allocable to a
Certificate, the taxable income of the Certificateholder attributable to that
Certificate will exceed the net cash distributions related to such income.
Certificateholders may deduct any loss on disposition of the Contracts to the
extent permitted under the Code.
Discount and Premium. It is believed that the Contracts were not issued with
OID, and, therefore, the Trust should not have OID income. The purchase price
paid by the Trust for the Contracts may exceed the remaining principal balance
of the Contracts at the time of purchase. If the Trust is deemed to acquire
the Contracts at such a premium or at a market discount, the Trust will elect
to offset any such premium against interest income on the Contracts or to
include any such discount in income currently as it accrues over the life of
the Contracts. The Trust will make this premium or market discount calculation
on an aggregate basis but may be required to recompute it on a Contract-by-
Contract basis. As indicated above, a portion of such premium deduction or
market discount income may be allocated to Certificateholders.
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Distributions to Certificateholders. Certificateholders generally will not
recognize gain or loss with respect to distributions from the Trust. A
Certificateholder will recognize gain, however, to the extent that any money
distributed exceeds the Certificateholder's adjusted basis in its Certificates
(as described below under "Disposition of Certificates") immediately before
the distribution. A Certificateholder will recognize loss upon termination of
the Trust or termination of the Certificateholder's interest in the Trust if
the Trust only distributes money to the Certificateholder and the amount
distributed is less than the Certificateholder's adjusted basis in the
Certificates. Any such gain or loss generally will be capital gain or loss if
the Certificates are held as capital assets and will be long-term gain or loss
if the holding period of the Certificates is more than one year.
Section 708 Termination. Under Section 708 of the Code, the Trust will be
deemed to terminate for federal income tax purposes if 50% or more of the
capital and profits interests in the Trust are sold or exchanged within a 12-
month period. Under Treasury regulations, if such a termination occurs, the
Trust will be considered to have contributed the assets of the Trust (the "Old
Partnership") to a new partnership (the "New Partnership") in exchange for
interests in the New Partnership. Such interests would be deemed distributed
to the partners of the Old Partnership in liquidation thereof, which would not
constitute a sale or exchange for United States federal income tax purposes.
Disposition of Certificates. If a Certificateholder sells a Certificate, the
Certificateholder generally will recognize capital gain or loss in an amount
equal to the difference between the amount realized on the sale and the
seller's tax basis in the Certificate. A Certificateholder's tax basis in a
Certificate generally will equal the Certificateholder's cost increased by the
Certificateholder's share of Trust income and decreased by any distributions
received with respect to such Certificate. In addition, both the tax basis in
the Certificate and the amount realized on a sale of a Certificate would
include the Certificateholder's share of the Notes and other liabilities of
the Trust. A Certificateholder acquiring Certificates at different prices may
be required to maintain a single aggregate adjusted tax basis in such
Certificates, and, upon sale or other disposition of some of the Certificates,
allocate a portion of such aggregate tax basis to the Certificates sold
(rather than maintain a separate tax basis in each Certificate for purposes of
computing gain or loss on a sale of that Certificate).
Any gain on the sale of a Certificate attributable to the
Certificateholder's share of unrecognized accrued market discount on the
Contracts would generally be treated as ordinary income to the
Certificateholder and would give rise to special tax reporting requirements.
The Trust does not expect to have any other assets that would give rise to
such special reporting requirements. Thus, to avoid those special reporting
requirements, the Trust will elect to include market discount in income as it
accrues.
If a Certificateholder is required to recognize an aggregate amount of
income (not including income attributable to disallowed itemized deductions
described above) over the life of the Certificates that exceeds the aggregate
cash distributions with respect thereto, such excess generally will give rise
to a capital loss upon the retirement of the Certificates.
Allocations Between Transferors and Transferees. In general, the Trust's
taxable income and losses will be determined monthly, and the tax items for a
particular calendar month will be apportioned among the Certificateholders in
proportion to the principal amount of Certificates owned by them as of the
close of the related Record Date. As a result, a Certificateholder purchasing
a Certificate may be allocated tax items (which will affect the
Certificateholder's tax liability and tax basis) attributable to periods
before the Certificateholder actually owns the Certificate. The use of such a
convention may not be permitted by existing regulations. If a monthly
convention is not permitted (or only applies to transfers of less than all of
the Certificateholder's interest), taxable income or losses of the Trust may
be reallocated among the Certificateholders. The General Partner is authorized
to revise the Trust's method of allocation between transferors and transferees
to conform to a method permitted by future regulations.
Section 754 Election. In the event that a Certificateholder sells a
Certificate at a profit or loss, the purchasing Certificateholder will have a
higher or lower basis in the Certificate than the selling Certificateholder
had. The tax basis of the Trust's assets will not be adjusted to reflect that
higher or lower basis unless the Trust files an
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election under Section 754 of the Code. In order to avoid the administrative
complexities that would be involved in keeping accurate accounting records, as
well as potentially onerous information reporting requirements, the Trust will
not make such election. As a result, Certificateholders may be allocated a
greater or lesser amount of Trust income than would be appropriate based on
their own purchase price for Certificates.
Administrative Matters. Pursuant to the Administration Agreement, the
Trustee will monitor the performance of the following responsibilities of the
Trust by other service providers. The Trust is required to keep or have kept
complete and accurate books of the Trust. Such books will be maintained for
financial reporting and tax purposes on an accrual basis and the fiscal year
of the Trust will be the calendar year. The Trust will file a partnership
information return (IRS Form 1065) with the Service for each taxable year of
the Trust and will report each Certificateholder's allocable share of items of
Trust income and expense to Certificateholders and the Service on Schedule K-
1. The Trust will provide the Schedule K-1 information to nominees that fail
to provide the Trust with certain required information statements relating to
identification of beneficial owners of Certificates and such nominees will be
required to forward such information to such beneficial owners. Generally,
Certificateholders must file tax returns that are consistent with the
information return filed by the Trust or be subject to penalties unless the
Certificateholder notifies the Service of all such inconsistencies.
Green Tree or a subsidiary identified in the related Prospectus Supplement
will be designated as the tax matters partner in the Trust Agreement and, as
such, will be responsible for representing the Certificateholders in any
dispute with the Service. The Code provides for administrative examination of
a partnership as if the partnership were a separate and distinct taxpayer.
Generally, the statute of limitations for partnership items does not expire
before three years after the date on which the partnership information return
is filed. Any adverse determination following an audit of the return of the
Trust by the appropriate taxing authorities could result in an adjustment of
the returns of the Certificateholders, and, under certain circumstances, a
Certificateholder may be precluded from separately litigating a proposed
adjustment to the items of the Trust. An adjustment could also result in an
audit of a Certificateholder's returns and adjustments of items not related to
the income and losses of the Trust.
Tax Consequences to Foreign Certificateholders. It is not clear whether the
Trust will be considered to be engaged in a trade or business in the United
States for purposes of federal withholding taxes with respect to non-U.S.
persons because there is no clear authority dealing with that issue under
facts substantially similar to those described herein. Although it is not
expected that the Trust will be engaged in a trade or business in the United
States for such purposes, the Trust will withhold as if it were so engaged in
order to protect the Trust from possible adverse consequences of a failure to
withhold. It is expected that the Trust will withhold on the portion of its
taxable income that is allocable to foreign Certificateholders pursuant to
Section 1446 of the Code, as if such income were effectively connected to a
U.S. trade or business, at a rate of 35% for foreign holders that are taxable
as corporations and 39.6% for all other foreign Certificateholders. Subsequent
adoption of Treasury regulations or the issuance of other administrative
pronouncements may require the Trust to change its withholding procedures. In
determining a Certificateholder's nonforeign status, the Trust may rely on
Form W-8, Form W-9 or the Certificateholder's certification of nonforeign
status signed under penalties of perjury.
Each foreign Certificateholder might be required to file a U.S. individual
or corporate income tax return (including, in the case of a corporation, the
branch profits tax) on its share of the Trust's income. Each foreign
Certificateholder must obtain a taxpayer identification number from the
Service and submit that number to the Trust on Form W-8 in order to assure
appropriate crediting of the taxes withheld. A foreign Certificateholder
generally will be entitled to file with the Service a claim for refund with
respect to taxes withheld by the Trust, taking the position that no taxes are
due because the Trust is not engaged in a U.S. trade or business. However, the
Service may assert that additional taxes are due, and no assurance can be
given as to the appropriate amount of tax liability.
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Backup Withholding. Under certain circumstances, a Certificateholder may be
subject to "backup withholding" at a 31% rate. See the discussion above under
"--Tax Consequences to Noteholders--Backup Withholding."
CERTAIN STATE INCOME TAX CONSEQUENCES
The activities to be undertaken by the Servicer in servicing and collecting
the Contracts will take place in Minnesota. The State of Minnesota imposes an
income tax on individuals, trusts and estates and a franchise tax measured by
net income on corporations. This discussion of Minnesota taxation is based
upon current statutory provisions and the regulations promulgated thereunder,
and applicable judicial or ruling authority, all of which are subject to
change (which may be retroactive). No ruling on any of the issues discussed
below will be sought from the Minnesota Department of Revenue.
If the Notes are treated as debt for federal income tax purposes, in the
opinion of Counsel this treatment will also apply for Minnesota tax purposes.
Noteholders not otherwise subject to Minnesota income or franchise taxation
would not become subject to such a tax solely because of their ownership of
the Notes. Noteholders already subject to income or franchise taxation in
Minnesota could, however, be required to pay such a tax on all or a portion of
the income generated from ownership of the Notes.
If the Trust is treated as a partnership (not taxable as a corporation) for
federal income tax purposes, in the opinion of Counsel the Trust would also be
treated as a partnership for Minnesota income tax purposes. The partnership
therefore would not be subject to Minnesota taxation. Certificateholders that
are not otherwise subject to Minnesota income or franchise taxation would not
become subject to such a tax solely because of their interests in the
partnership. Certificateholders already subject to income or franchise
taxation in Minnesota could, however, be required to pay such a tax on all or
a portion of the income from the partnership.
If the Certificates are treated as ownership interests in an association or
publicly traded partnership taxable as a corporation for federal income tax
purposes, in the opinion of Counsel this treatment would also apply for
Minnesota income and franchise tax purposes. Pursuant to this treatment, the
Trust would be subject to the Minnesota franchise tax measured by net income
(which could result in reduced distributions to Certificateholders).
Certificateholders that are not otherwise subject to Minnesota income or
franchise taxation would not become subject to such a tax solely because of
their interests in the constructive corporation. Certificateholders already
subject to income or franchise taxation in Minnesota could, however, be
required to pay such a tax on all or a portion of the income from the
constructive corporation.
ERISA CONSIDERATIONS
Section 406 of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), and Section 4975 of the Code prohibit a pension, profit
sharing or other employee benefit plan from engaging in certain transactions
involving "plan assets" with persons that are "parties in interest" under
ERISA or "disqualified persons" under the Code with respect to the plan. ERISA
also imposes certain duties and certain prohibitions on persons who are
fiduciaries of plans subject to ERISA. Under ERISA, generally any person who
exercises any authority or control with respect to the management or
disposition of the assets of a plan is considered to be a fiduciary of such
plan. A violation of these "prohibited transaction" rules may generate excise
tax and other liabilities under ERISA and the Code for such persons.
Certain transactions involving the related Trust might be deemed to
constitute prohibited transactions under ERISA and the Code with respect to a
Benefit Plan that purchased Securities if assets of the related Trust were
deemed to be assets of the Benefit Plan. Under a regulation issued by the
United States Department of Labor (the "Plan Assets Regulation"), the assets
of a Trust would be treated as plan assets of a Benefit Plan for the purposes
of ERISA and the Code only if the Benefit Plan acquired an "equity interest"
in the Trust and none of
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the exceptions contained in the Plan Assets Regulation was applicable. An
equity interest is defined under the Plan Assets Regulation as an interest
other than an instrument which is treated as indebtedness under applicable
local law and which has no substantial equity features. The likely treatment
of Notes and Certificates will be discussed in the related Prospectus
Supplement.
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.
A plan fiduciary considering the purchase of Securities should consult its
tax and/or legal advisors regarding whether the assets of the Trust would be
considered plan assets, the possibility of exemptive relief from the
prohibited transaction rules and other issues and their potential
consequences.
LEGAL INVESTMENT CONSIDERATIONS
Unless otherwise indicated in the applicable Prospectus Supplement, any
Securities offered hereby are not expected to constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA") because there will be a substantial number of Contracts that
are 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
Securities.
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 Securities or to purchase Securities 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 Securities
constitute legal investments for such investors.
RATINGS
It is a condition precedent to the issuance of any Class of Securities sold
under this Prospectus that they be rated by at least one nationally recognized
statistical rating organization in one of its four highest rating categories
(within which there may be sub-categories or gradations indicating relative
standing). A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating agency. The security rating of any Series of Securities
should be evaluated independently of similar security ratings assigned to
other kinds of securities.
UNDERWRITING
Green Tree may sell Securities 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 Securities
directly to other purchasers or through agents. Green Tree intends that
Securities 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 Securities may be made through a
combination of such methods.
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The distribution of the Securities 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
Securities, Green Tree or any affiliate thereof may purchase some or all of
one or more Classes of Securities 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 Securities so purchased directly, through one
or more Underwriters to be designated at the time of the offering of such
Securities 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 Securities, Underwriters may receive
compensation from Green Tree or from purchasers of Securities for whom they
may act as agents in the form of discounts, concessions or commissions.
Underwriters may sell the Securities 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 Securities of a Series may be deemed to be
Underwriters, and any discounts or commissions received by them from Green
Tree and any profit on the resale of the Securities by them may be deemed to
be underwriting discounts and commissions, under the Securities Act. Any such
Underwriters or agents will be identified, and any such compensation received
from Green Tree will be described, in the Prospectus Supplement.
Under agreements which may be entered into by Green Tree, Underwriters and
agents who participate in the distribution of the Securities may be entitled
to indemnification by Green Tree against certain liabilities, including
liabilities under the Securities Act.
If so indicated in the Prospectus Supplement, Green Tree will authorize
Underwriters or other persons acting as Green Tree's agents to solicit offers
by certain institutions to purchase the Securities from Green Tree 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 Green Tree. The obligation of any purchaser under any such
contract will be subject to the condition that the purchaser of the offered
Securities shall not at the time of delivery be prohibited under the laws of
the jurisdiction to which such purchaser is subject from purchasing such
Securities. The Underwriters and such other agents will not have
responsibility in respect of the validity or performance of such contracts.
The Underwriters may, from time to time, buy and sell Securities, 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 Green Tree in the ordinary course of business.
The Indenture Trustee, if any, may, from time to time, invest the funds in
the Designated Accounts in Eligible Investments acquired from the
underwriters.
Under each Underwriting Agreement, the closing of the sale of any Class of
Securities subject thereto will be conditioned on the closing of the sale of
all other such Classes.
The place and time of delivery for the Securities in respect of which this
Prospectus is delivered will be set forth in the related Prospectus
Supplement.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION--PRELIMINARY PROSPECTUS DATED FEBRUARY 17, 1998
UNSECURED HOME
IMPROVEMENT LOANS
--GRANTOR TRUST
GREEN TREE FINANCIAL CORPORATION, SELLER AND SERVICER
CERTIFICATES FOR HOME IMPROVEMENT LOANS
(ISSUABLE IN SERIES)
Certificates for Home Improvement Loans ("Certificates") of one or more
series (each, a "Series") may be sold from time to time under this Prospectus
and a Prospectus Supplement for each such Series. The Certificates of each
Series may be issued in one or more classes or subclasses (each, a "Class"), as
further described herein. If the Certificates of a Series are issued in more
than one Class, all or less than all of such Classes may be sold under this
Prospectus, and there may be separate Prospectus Supplements for one or more of
such Classes so sold. Any reference herein to the Prospectus Supplement
relating to a Series comprised of more than one Class should be understood to
refer to each of the Prospectus Supplements relating to the Classes sold
hereunder.
The Certificates evidence specified interests in separate pools of home
improvement contracts and promissory notes (the "Contracts"), as more
particularly described herein. No Contract will be secured by an interest in
the related real estate. Except as otherwise specified in the related
Prospectus Supplement, the Contracts will have been originated in the ordinary
course of business by Green Tree Financial Corporation (the "Company").
Specific information, to the extent available, regarding the size and
composition of the pool of Contracts relating to each Series of Certificates
will be set forth in the related Prospectus Supplement. If specified in the
related Prospectus Supplement, a pool insurance policy, letter of credit,
surety bond, guarantee of the Company, cash reserve fund, or other form of
credit enhancement, or any combination thereof, may be provided with respect to
a Series of Certificates, or one or more Classes of such Series, evidencing
interests in the Contracts. The Company will act as Servicer (in such capacity
referred to herein as the "Servicer") of the Contracts.
Each Series of Certificates may include one or more senior Classes of
Certificates (the "Senior Certificates") and one or more subordinate Classes of
Certificates (the "Subordinated Certificates"). A Series of Senior/Subordinated
Certificates may include one or more Classes ("Mezzanine Certificates") which
are subordinated to one or more Classes of Certificates and are senior to one
or more Classes of Certificates. Certificates of a Series may be divided into
two or more Classes which (i) represent interests in specified percentages
(which may be 0%) of principal or interest, or both, in distributions on the
pool of Contracts relating to such Series, as specified in the related
Prospectus Supplement, and/or (ii) are entitled to receive distributions in
respect of principal before or after specified principal distributions have
been made on one or more other Classes within such Series, or on a planned or
targeted amortization schedule or upon the occurrence of other specified
events. Each Prospectus Supplement will describe the Series and Class or
Classes of Certificates offered thereby.
The Prospectus Supplement will set forth the Pass-Through Rate that will be
paid to Certificateholders of each Class of a given Series. Such Pass-Through
Rate may be fixed, variable or adjustable, as specified in the related
Prospectus Supplement.
Except as otherwise specified in the related Prospectus Supplement, the only
obligations of the Company with respect to a Series of Certificates will be
pursuant to certain limited representations and warranties. Except as otherwise
specified in the related Prospectus Supplement, the Servicer's obligations with
respect to the Certificates evidencing interests in a pool of Contracts are
limited to its contractual servicing obligations. If so specified in the
related Prospectus Supplement, the Servicer may be obligated, under certain
terms and conditions, to advance the amount of any delinquent payments of
principal and interest during the immediately preceding Due Period (as defined
herein), but only to the extent the Servicer determines such advances are
recoverable from future payments and collections on the delinquent Contracts.
See "Description of the Certificates--Advances" and "--Distributions on
Certificates."
There will have been no public market for any Certificates sold hereunder
prior to the offering thereof and there is no assurance that any such market
will develop. The Underwriters named in the Prospectus Supplement relating to a
Series may from time to time buy and sell Certificates of such Series, but
there can be no assurance that an active secondary market therefor will
develop, and there is no assurance that any such market, if established, will
continue.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
This Prospectus may not be used to consummate sales of all or a portion of
any Series of Certificates unless accompanied by a Prospectus Supplement
relating to those particular Classes of Certificates.
The date of this Prospectus is , 1998.
<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 (as amended in February , 1998), Quarterly Reports on Form
10-Q for the periods ended March 31, June 30, and September 30, 1997, and
Current Report on Form 8-K dated January 27, 1998 which have been filed with
the Commission, are hereby incorporated by reference in this Prospectus and
the related Prospectus Supplement.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act, subsequent to the date of this Prospectus and prior
to the termination of the offering of the Certificates, shall
2
<PAGE>
be deemed to be incorporated by reference into this Prospectus and the
Prospectus Supplement relating to a Class of Certificates that is supported by
a guarantee of the Company, and to be a part thereof from the respective dates
of filing of such documents. Any statement contained herein or in a document
all or any portion of which is incorporated or deemed to be incorporated by
reference herein shall be deemed to be modified or superseded for purposes of
this Prospectus to the extent that a statement contained herein or in any
other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.
The Company will provide without charge to any person to whom this
Prospectus is delivered, upon the written or oral request of such person, a
copy of any or all of the foregoing documents incorporated herein by reference
(other than certain exhibits to such documents). Requests for such copies
should be directed to John Dolphin, Vice President and Director of Investor
Relations, 1100 Landmark Towers, 345 St. Peter Street, St. Paul, Minnesota
55102-1639, telephone number (612) 293-3400.
3
<PAGE>
SUMMARY OF TERMS
This summary is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus and in the accompanying
Prospectus Supplement.
Title of Securities.......... Certificates for Home Improvement Loans (Issua-
ble in Series) (the "Certificates").
Seller....................... Green Tree Financial Corporation (in such capac-
ity referred to herein as the "Company").
Servicer..................... Green Tree Financial Corporation (in such capac-
ity referred to herein as the "Servicer," which
term shall include any successor to Green Tree
Financial Corporation in such capacity under
the applicable Agreement (as defined herein)).
Risk Factors................. Certain special considerations are particularly
relevant to a decision to invest in any Certif-
icates sold hereunder. See "Risk Factors" here-
in.
Securities Offered........... Certificates evidencing interests in pools of
Contracts (as defined herein) may be issued
from time to time in one or more series (each,
a "Series") pursuant to separate Pooling and
Servicing Agreements (each, an "Agreement") be-
tween the Company, as Seller and Servicer, and
the Trustee specified in the related Prospectus
Supplement for such Series of Certificates (the
"Trustee").
The Contracts................ The Contracts underlying a Series of Certifi-
cates (the "Contract Pool") will be fixed or
variable rate Contracts. Such Contracts, as
specified in the related Prospectus Supplement,
will consist of home improvement contracts and
promissory notes and will be either conven-
tional contracts or contracts insured by the
Federal Housing Administration ("FHA") pursuant
to Title I of the National Housing Act ("Title
I"). No Contract will be secured by an interest
in the related real estate.
The Prospectus Supplement for each Series will
provide information with respect to (i) the ag-
gregate principal balance of the Contracts com-
prising the Contract Pool, as of the date spec-
ified in the Prospectus Supplement (the "Cut-
off Date"); (ii) the weighted average and range
of contractual rates of interest (each, a "Con-
tract Rate") on the Contracts; (iii) the
weighted average and ranges of terms to sched-
uled maturity of the Contracts as of origina-
tion and as of the Cut-off Date; (iv) the aver-
age outstanding principal balance of the Con-
tracts as of the Cut-off Date; (v) the percent-
age of the Contracts that are FHA-issued; and
(vi) the geographic location of improved real
estate underlying the Contracts. In addition,
if so specified in the related Prospectus Sup-
plement, additional Contracts may be purchased
from the Company during the Pre-Funding Period
specified in the related Prospectus Supplement,
from funds on deposit in a Pre-Funding Account.
4
<PAGE>
Except as otherwise specified in the related
Prospectus Supplement, the Contracts will have
been originated by the Company on an individual
basis in the ordinary course of its business.
Description of Certificates.. The Certificates of each Series may be issued in
one or more Classes or subclasses as and on the
terms specified in the related Prospectus Sup-
plement, each of which will evidence the inter-
est specified in the related Prospectus Supple-
ment in the Contract Pool and certain other
property held in trust for the benefit of the
Certificateholders (the "Trust Fund"). For con-
venience of description, any reference in this
Prospectus to a "Class" of Certificates in-
cludes a reference to any subclasses of such
Class. If so specified in a Prospectus Supple-
ment, a Series of Certificates may include one
or more Classes which (i) are entitled to re-
ceive distributions only in respect of princi-
pal ("Principal Only Certificates"), interest
("Interest Only Certificates") or any combina-
tion thereof, or in specified proportions in
respect of such payments, and/or (ii) are enti-
tled to receive distributions in respect of
principal before or after specified principal
distributions have been made on one or more
other Classes within such Series ("Fast
Pay/Slow Pay Certificates"), or on a planned
amortization schedule ("PAC Certificates") or
targeted amortization schedule ("TAC Certifi-
cates") or upon the occurrence of other speci-
fied events. See "Description of Certificates."
The Prospectus Supplement will set forth the
rate at which interest will be paid to
Certificateholders of each Class of a given Se-
ries (the "Pass-Through Rate"). Such Pass-
Through Rate may be fixed, variable or adjust-
able, as specified in the related Prospectus
Supplement.
Each Series of Certificates may include one or
more Classes ("Subordinated Certificates")
which are subordinated in right of distribution
to one or more other Classes ("Senior Certifi-
cates"). Certificates of a Series which in-
cludes Senior and Subordinated Certificates are
referred to herein collectively as
"Senior/Subordinated Certificates." A Series of
Senior/Subordinated Certificates may include
one or more Classes ("Mezzanine Certificates")
which are subordinated to one or more Classes
of Certificates and are senior to one or more
Classes of Certificates.
The Certificates will be issuable in fully reg-
istered form in the authorized denominations
specified in the related Prospectus Supplement.
See "Description of the Certificates." The Cer-
tificates will not be guaranteed or insured by
any government agency or, unless otherwise
specified in the related Prospectus Supplement,
other insurer and, except as described herein
and in the related Prospectus Supplement, the
Contracts will not be guaranteed or insured by
any government agency or other insurer.
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<PAGE>
Subordinated Certificates.... One or more Classes of any Series may be Subor-
dinated Certificates, as specified in the re-
lated Prospectus Supplement. The rights of the
Subordinated Certificateholders to receive any
or a specified portion of distributions with
respect to the Contracts will be subordinated
to the rights of Senior Certificateholders to
the extent and in the manner specified in the
related Prospectus Supplement. If a Series of
Certificates contains more than one Class of
Subordinated Certificates, distributions and
losses will be allocated among such classes in
the manner specified in the related Prospectus
Supplement. The rights of the Subordinated
Certificateholders, to the extent not subordi-
nated, may be on a parity with those of the Se-
nior Certificateholders. This subordination is
intended to enhance the likelihood of regular
receipt by Senior Certificateholders of the
full amount of scheduled monthly payments of
principal and interest due them and to protect
the Senior Certificateholders against losses.
If so specified in the applicable Prospectus
Supplement, Mezzanine Certificates or other
Classes of Subordinated Certificates may be en-
titled to the benefits of other forms of credit
enhancement and may, if rated in one of the
four highest rating categories by a nationally
recognized statistical rating organization, be
offered pursuant to this Prospectus and such
Prospectus Supplement.
Credit Enhancement........... As an alternative, or in addition, to the credit
enhancement afforded by subordination of the
Subordinated Certificates, credit enhancement
with respect to a Series of Certificates may be
provided by pool insurance, letters of credit,
surety bonds, a guarantee of the Company, cash
reserve funds or other forms of enhancement ac-
ceptable to each nationally recognized rating
agency rating a Series of Certificates, in each
case as described in the related Prospectus
Supplement.
Interest..................... Except as otherwise set forth in the related
Prospectus Supplement, interest on the Certifi-
cates will be paid on the dates specified in
the related Prospectus Supplement (each, a
"Payment Date"). The related Prospectus Supple-
ment will set forth for each Class of Certifi-
cates the Pass-Through Rate, if any, for each
such Class or the method of determining such
Pass-Through Rate. See "Yield Considerations"
and "Description of the Certificates." As spec-
ified in the related Prospectus Supplement,
Classes of a Series of Certificates may be en-
titled to receive no interest or interest which
is not proportionate to the principal allocable
to such Certificates.
Principal (Including Except as otherwise set forth in the related
Prepayments)................ Prospectus Supple-ment, principal on each Con-
tract, including any principal prepayments,
will be passed through on each Payment Date.
See "Maturity and Prepayment Considerations"
and "Description of the Certificates."
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<PAGE>
Optional Termination......... Unless otherwise specified in the related Pro-
spectus Supplement, each of the Company or the
Servicer may at its option repurchase all Con-
tracts relating to a Series of Certificates re-
maining outstanding at such time under the cir-
cumstances specified in such Prospectus Supple-
ment. Unless otherwise provided in the related
Prospectus Supplement, the repurchase price
will equal the principal amount of such Con-
tracts plus accrued and unpaid interest there-
on. See "Description of the Certificates--Ter-
mination of the Agreement."
Global Certificates.......... If so specified in the related Prospectus Sup-
plement, the Certificates of a Series, or of
one or more Classes within a Series, will be
issuable in the form of one or more global cer-
tificates (each, a "Global Certificate") to be
held by a depositary (each, a "Depositary") on
behalf of the beneficial owners of the Certifi-
cates, as described herein under "Description
of the Certificates--Global Certificates." The
description of the Certificates in this Pro-
spectus assumes that the Certificates of a Se-
ries will not be issued in the form of Global
Certificates. If some or all of the Certifi-
cates of a Series are issued in the form of one
or more Global Certificates, the term "Global
Certificateholder," as used herein, will refer
to such beneficial owners of such Certificates,
and the rights of such Certificateholders will
be limited as described herein under "Descrip-
tion of the Certificates--Global Certificates."
Representations and
Warranties of the Company...
As a condition to the Company's conveyance of
any Contract Pool to the Trust Fund, the Com-
pany will be required to make certain represen-
tations and warranties in the related Agreement
regarding the Contracts. Under the terms of the
Agreement, if the Company becomes aware of a
breach of any such representation or warranty
that materially adversely affects the Trust
Fund's interest in any Contract or receives
written notice of such a breach from the
Trustee or the Servicer, then the Company will
be obligated either to cure such breach or to
repurchase or, if so provided in the related
Prospectus Supplement, substitute for the af-
fected Contract, in each case under the condi-
tions further described herein and in the Pro-
spectus Supplement. See "Description of the
Certificates--Conveyance of Contracts."
Federal Income Tax The Trust Fund represented by a Series of Cer-
Considerations.............. tificates may be treated as a grantor trust for
federal income tax purposes and not as an asso-
ciation taxable as a corporation. In such
event, each Certificateholder will be treated
as the owner of an undivided pro rata interest
in income and corpus attributable to the re-
lated Contract Pool and any other assets held
by the Trust Fund and will be considered the
equitable owner of an undivided interest in the
Contracts included in such Contact Pool. If the
Trust Fund represented by a Series of Certifi-
cates will not be treated as a grantor trust,
the federal income tax consequences of owner-
ship
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<PAGE>
of such Certificates will be described in the
related Prospectus Supplement. See "Certain
Federal Income Tax Consequences."
ERISA Considerations......... A fiduciary of any employee benefit plan subject
to the Employee Retirement Income Security Act
of 1974, as amended ("ERISA"), or the Internal
Revenue Code of 1986, as amended (the "Code"),
should review carefully with its legal advisors
whether the purchase or holding of Certificates
could give rise to a transaction prohibited or
otherwise impermissible under ERISA or the
Code. See "ERISA Considerations."
Legal Investment............. The Certificates will not constitute "mortgage
related securities" under the Secondary Mort-
gage Market Enhancement Act of 1984, as amend-
ed. See "Legal Investment."
Ratings...................... It is a condition precedent to the issuance of
any Class of Certificates sold under this Pro-
spectus that they be rated in one of the four
highest rating categories (within which there
may be sub-categories or gradations indicating
relative standing) of at least one nationally
recognized statistical rating organization. A
security rating is not a recommendation to buy,
sell or hold securities and may be subject to
revision or withdrawal at any time by the as-
signing rating agency. See "Ratings."
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<PAGE>
RISK FACTORS
Prospective investors in Certificates should consider, among other things,
the following factors in connection with the purchase of the Certificates:
1. Limitations on Availability of FHA Insurance. The related Prospectus
Supplement will specify the number and percentage of the Contracts included
in the Contract Pool that are insured by FHA pursuant to Title I of the
National Housing Act ("Title I"). The availability of FHA Insurance
following a default on an FHA-insured Contract is subject to a number of
conditions, including strict compliance by the Company with FHA regulations
in originating and servicing the Contract. Although the Company is an FHA-
approved lender and believes, and will represent and warrant in the
Agreement, that it has complied with FHA regulations, such regulations are
susceptible to substantial interpretation. The Company is not required to
obtain, and has not obtained, approval from FHA of its origination and
servicing practices. Failure to comply with FHA regulations may result in a
denial of FHA Insurance claims, and there can be no assurance that FHA's
enforcement of its regulations will not become stricter in the future. From
time to time the Company is engaged in disputes with FHA over the validity
of claims submitted and the Company's compliance with FHA regulations in
servicing loans insured by FHA, such as the FHA-insured Contracts. In
addition, any insurance claim paid by FHA will cover only 90% of the sum of
the unpaid principal on the Contract, up to nine months unpaid interest
thereon (computed at 7% per annum) and certain liquidation costs.
The amount of FHA Insurance available with respect to a Series of
Certificates at any given time with respect to the FHA-insured Contracts
included in a Contract Pool is limited to the balance of a reserve amount
determined with respect to all FHA Title I loans originated and reported
for insurance by the Company and not sold, or sold with recourse, by the
Company, including manufactured housing contracts as well as home
improvement loans. Such reserve amount, as of December 31, 1996, was equal
to approximately $96,880,000, but will be reduced by the amount of all FHA
Insurance claims paid, and will be increased by an amount equal to 10% of
the unpaid principal balance of FHA Title I loans subsequently originated
and reported for insurance by the Company. Severe losses on the Company's
FHA-insured manufactured housing contracts, or on other FHA-insured home
improvement loans originated by the Company, could reduce or eliminate the
Company's FHA Insurance reserves, in which event FHA Insurance would not be
available to cover losses on FHA-insured Contracts. In the event the
Company were terminated as Servicer due to its bankruptcy or otherwise, it
is anticipated that a proportionate amount of the Company's FHA Insurance
reserves would be transferred to the reserve account of the Trustee or
other successor servicer, but there can be no assurance of the amount, if
any, that would be so transferred. See "Description of FHA Insurance."
2. Limited Obligations. Except as otherwise specified in the related
Prospectus Supplement, the Certificates of a Series will not represent an
interest in or obligation of the Company. The Certificates of any Series
will not be insured or guaranteed by any governmental agency or
instrumentality, any Underwriter or its affiliates, the Servicer or (except
as otherwise specified in the related Prospectus Supplement) any other
party.
3. Limited Liquidity. There can be no assurance that a secondary market
will develop for the Certificates of any Series, or, if it does develop,
that it will provide the holders of any of the Certificates with liquidity
of investment or that if such a secondary market develops that it will
continue to exist for the term of any Series of Certificates.
4. Contracts Unsecured. The obligations of the Obligor under the Contract
included in a Contract Pool will not be secured by an interest in the
related real estate or otherwise, and the related Trust Fund, as the owner
of such Contract, will be a general unsecured creditor as to such
obligations. As a consequence, in the event of a default under a Contract,
the related Trust Fund will have recourse only against the Obligor's assets
generally, along with all other general unsecured creditors of the Obligor.
In a bankruptcy or insolvency proceeding relating to an Obligor on a
Contract, the obligations of the Obligor under such Contract may be
discharged in their entirety, notwithstanding the fact that the portion of
such Obligor's
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<PAGE>
assets made available to the related Trust Fund as a general unsecured
creditor to pay amounts due and owing thereunder are insufficient to pay
all such amounts. An Obligor on a Contract may not demonstrate the same
degree of concern over performance of the Obligor's obligations under such
Contract as if such obligations were secured by the real estate owned by
such Obligor.
5. Certain Matters Relating to Insolvency. The Company intends that each
transfer of Contracts to the related Trust Fund constitute a sale, rather
than a pledge of the Contracts to secure indebtedness of the Company.
However, if the Company were to become a debtor under the federal
bankruptcy code, it is possible that a creditor or trustee in bankruptcy of
the Company or the Company as debtor-in-possession may argue that the sale
of the Contracts by the Company was a pledge of the Contracts rather than a
sale. This position, if presented to or accepted by a court, could result
in a delay in or reduction of distributions to the Certificateholders.
THE TRUST FUND
GENERAL
Each Trust Fund will include (i) a Contract Pool, (ii) the amounts held from
time to time in a trust account (the "Certificate Account") maintained by the
Trustee pursuant to the Agreement, (iii) proceeds from FHA Insurance (with
respect to any FHA-insured Contract included in the Contract Pool), (iv) any
letter of credit, guarantee, surety bond, insurance policy, cash reserve fund
or other credit enhancement securing payment of all or part of a Series of
Certificates, and (v) such other property as may be specified in the related
Prospectus Supplement.
Each Certificate will evidence the interest specified in the related
Prospectus Supplement in one Trust Fund, containing one Contract Pool
comprised of Contracts having the aggregate principal balance as of the
specified day of the month of the creation of the pool (the "Cut-off Date")
specified in the related Prospectus Supplement. Holders of Certificates of a
Series will have interests only in such Contract Pool and will have no
interest in the Contract Pool created with respect to any other Series of
Certificates, except with respect to FHA Insurance reserves. If so specified
in the related Prospectus Supplement, the Trust Fund may include a Pre-Funding
Account which would be used to purchase additional Contracts ("Subsequent
Contracts") from the Company during the Pre-Funding Period specified in the
related Prospectus Supplement. The related Prospectus Supplement will specify
the conditions that must be satisfied prior to any transfer of Subsequent
Contracts, including the requisite characteristics of the Subsequent
Contracts.
Except as otherwise specified in the related Prospectus Supplement, all of
the Contracts will have been originated by the Company in the ordinary course
of its business. Specific information respecting the Contracts included in
each Trust Fund will be provided in the related Prospectus Supplement and, to
the extent not contained in the related Prospectus Supplement, in a report on
Form 8-K to be filed with the Commission within fifteen days after the initial
issuance of the Certificates. A copy of the Agreement with respect to each
Series of Certificates will be attached to the Form 8-K and will be available
for inspection at the corporate trust office of the Trustee specified in the
related Prospectus Supplement. A schedule of the Contracts relating to such
Series will be attached to the Agreement delivered to the Trustee upon
delivery of the Certificates.
Whenever in this Prospectus terms such as "Contract Pool," "Trust Fund,"
"Agreement" or "Pass-Through Rate" are used, those terms respectively apply,
unless the context otherwise indicates, to one specific Contract Pool and
Trust Fund, each Agreement and each Pass-Through Rate applicable to the
related Class of Certificates.
THE CONTRACT POOLS
Except as otherwise specified in the related Prospectus Supplement, the
Contract Pool will consist of home improvement contracts and promissory notes
(collectively, the "Contracts") originated by the Company on an
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<PAGE>
individual basis in the ordinary course of business. The Contracts will be
conventional home improvement contracts or contracts insured by FHA. No
Contract will be secured by an interest in the related real estate. Except as
otherwise specified in the related Prospectus Supplement, the Contracts will
be fully amortizing and will bear interest at a fixed or variable annual
percentage rate (the "Contract Rate").
For each Series of Certificates, the Company will assign the Contracts
constituting the Contract Pool to the trustee named in the related Prospectus
Supplement (the "Trustee"). The Company, as Servicer (in such capacity
referred to herein as the "Servicer", which term shall include any successor
to the Company in such capacity under the applicable Agreement), will service
the Contracts pursuant to the Agreement. See "Description of the
Certificates--Servicing." Unless otherwise specified in the related Prospectus
Supplement, the Contract documents will be held by the Trustee or a custodian
on its behalf.
Each Contract Pool will be composed of Contracts bearing interest at the
Contract Rates specified in the Prospectus Supplement. Unless otherwise stated
in the related Prospectus Supplement, each registered holder of a Certificate
will be entitled to receive periodic distributions, which will be monthly
unless otherwise specified in the related Prospectus Supplement, of all or a
portion of principal on the underlying Contracts or interest on the principal
balance of such Certificate (or on some other principal balance unrelated to
that of such Certificate) at the Pass-Through Rate, or both.
The related Prospectus Supplement will specify for the Contracts contained
in the related Contract Pool, among other things, the range of the dates of
origination of the Contracts; the range of the Contract Rates and the weighted
average Contract Rate; the minimum and maximum outstanding principal balances
and the average outstanding principal balance as of the Cut-off Date; the
aggregate principal balance of the Contracts included in the Contract Pool as
of the Cut-off Date; the weighted average and range of scheduled terms to
maturity as of origination and as of the Cut-off Date; and the range of
original maturities of the Contracts and the last maturity date of any
Contract. If the Trust Fund includes a Pre-Funding Account, the related
Prospectus Supplement will specify the conditions that must be satisfied prior
to any transfer of Subsequent Contracts, including the requisite
characteristics of the Subsequent Contracts.
The Company will make representations and warranties as to the types and
geographical distribution of the Contracts included in a Contract Pool and as
to the accuracy in all material respects of certain information furnished to
the Trustee in respect of each such Contract. Upon a breach of any
representation or warranty that materially and adversely affects the interests
of the Certificateholders in a Contract, the Company will be obligated to cure
the breach in all material respects, or to repurchase or substitute for
the Contract as described below. This repurchase obligation constitutes the
sole remedy available to the Certificateholders or the Trustee for a breach of
representation or warranty by the Company. See "Description of the
Certificates--Conveyance of Contracts."
USE OF PROCEEDS
Unless otherwise specified in the related Prospectus Supplement,
substantially all of the net proceeds to be received from the sale of each
Series of Certificates will be used by the Company for general corporate
purposes, including the origination or acquisition of additional home
improvement loan contracts, costs of carrying such contracts until sale of the
related certificates and to pay other expenses connected with pooling the
Contracts and issuing the Certificates.
GREEN TREE FINANCIAL CORPORATION
GENERAL
The Company is a Delaware corporation which, as of December 31, 1997, had
stockholders' equity of approximately $1,315,000,000. 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
11
<PAGE>
is the largest servicer of government-insured manufactured housing contracts
and conventional manufactured housing contracts in the United States.
Servicing functions are performed through Green Tree Financial Servicing
Corporation, a wholly owned subsidiary of the Company. Through its principal
offices in St. Paul, Minnesota, and service centers throughout the United
States, the Company serves all 50 states. The Company began financing
FHA-insured home improvement loans in April 1989 and conventional home
improvement loans in September 1992. The Company also purchases, pools and
services installment sales contracts for various consumer products. The
Company's principal executive offices are located at 1100 Landmark Towers,
345 St. Peter Street, St. Paul, Minnesota 55102-1639 (telephone (612) 293-
3400). The Company's quarterly and annual reports are available from the
Company upon written request made to the Company.
CONTRACT ORIGINATION
Through its centralized loan processing operations in St. Paul, Minnesota,
the Company arranges to purchase certain contracts from home improvement
contractors located throughout the United States. The Company's regional sales
managers contact home improvement contractors and explain the Company's
available financing plans, terms, prevailing rates and credit and financing
policies. If the contractor wishes to utilize the Company's available customer
financing, the contractor must make an application for contractor approval.
The Company has a contractor approval process pursuant to which the financial
condition, business experience and qualifications of the contractor are
reviewed prior to his or her approval to sell Contracts to the Company. In
addition, the Company has a centralized compliance group which reviews and
updates contractor financial condition and reviews contractors on an annual
basis to determine whether such contractor's approval will be continued. The
Company also reviews monthly contractor trend reports which show the default
and delinquency trends of the particular contractor with respect to contracts
sold to the Company. The Company occasionally will originate directly a home
improvement promissory note involving a home improvement transaction.
All contracts that the Company originates are written on forms provided or
approved by the Company and are purchased on an individually approved basis in
accordance with the Company's guidelines. The contractor submits the
customer's credit application and construction contract to the Company's
office where an analysis of the creditworthiness of the customer is made using
a proprietary credit scoring system that was implemented by the Company in
June 1993. If the Company determines that the application meets the Company's
underwriting guidelines and applicable FHA regulations (for FHA-insured
contracts) and the credit is approved, the Company purchases the contract from
the contractor when the customer verifies satisfactory completion of the work,
or, in the case of staged funding, the Company follows up with the customer
for the completion certificate 90 days after funding.
The types of home improvements financed by the Company include (i) exterior
renovations, including windows, siding and roofing, (ii) pools and spas, (iii)
kitchen and bath remodeling, and (iv) room additions and garages. The Company
may also, under certain limited conditions, extend additional credit beyond
the purchase price of the home improvement for the purpose of debt
consolidation.
The original principal amount of an unsecured FHA-insured home improvement
contract currently may not exceed $7,500 without specific FHA approval, with a
maximum term of 20 years. Certain other criteria for home improvement
contracts eligible for FHA Insurance are described under the caption
"Description of FHA Insurance."
The Company began financing conventional home improvement loans in September
1992. Conventional home improvement loans are not insured by FHA. The
unsecured conventional program allows for an amount financed from $2,500 to
$15,000 (except in Massachusetts where the loan limit may be $20,000). The
allowable term of unsecured contracts is 24 to 120 months. The Company's
underwriting standards with respect to unsecured home improvement contracts
are, in general, more stringent than its underwriting standards with respect
to secured home improvement contracts with similar terms. Eligible property
includes an owner-occupied single family home, up to four unit multiple-family
dwelling, owner-occupied condominium or town house, or an owner-occupied
manufactured home located in a Company-approved park or attached to the real
estate.
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<PAGE>
YIELD CONSIDERATIONS
The Pass-Through Rates and the weighted average Contract Rate of the
Contracts (as of the related Cut-off Date) relating to each Series of
Certificates will be set forth in the related Prospectus Supplement.
The Prospectus Supplement for each Series will indicate that a lower rate of
principal prepayments than anticipated would negatively affect the total
return to investors of any Class of Certificates that is offered at a discount
to its principal amount, and a higher rate of principal prepayments than
anticipated would negatively affect the total return to investors of any such
Class of Certificates that is offered at a premium to its principal amount or
without any principal amount.
The yield on some types of Certificates which may be offered hereby, such as
Interest Only Certificates, Principal Only Certificates, and Fast Pay/Slow Pay
Certificates, may be particularly sensitive to prepayment rates, and to
changes in prepayment rates, on the underlying Contracts. If so stated in the
related Prospectus Supplement, the yield on some types of Certificates which
may be offered hereby could change and may be negative under certain
prepayment rate scenarios. Accordingly, some types of Certificates may not be
legal or appropriate investments for certain financial institutions, pension
funds or others. See "ERISA Considerations" and "Legal Investment
Considerations." In addition, the timing of changes in the rate of prepayment
on the Contracts included in a Contract Pool may significantly affect an
investor's actual yield to maturity, even if the average prepayment rate over
time is consistent with the investor's expectations. In general, the earlier
that prepayments on Contracts occur, the greater the effect on the investor's
yield to maturity.
MATURITY AND PREPAYMENT CONSIDERATIONS
MATURITY
Unless otherwise described in an applicable Prospectus Supplement, all of
the Contracts will have maturities at origination of not more than 25 years.
PREPAYMENT CONSIDERATIONS
Contracts generally may be prepaid in full or in part without penalty. FHA-
insured Contracts may be prepaid at any time without penalty. The Company has
no significant experience with respect to the rate of principal prepayments on
home improvement contracts. Because the Contracts have scheduled due dates
throughout the calendar month, and because (unless otherwise specified in the
related Prospectus Supplement) all principal prepayments will be passed
through to Certificateholders of the related Series on the Payment Date
following the Due Period in which such principal prepayment occurred,
prepayments on the Contracts would affect the amount of funds available to
make distributions on the Certificates on any Payment Date only if a
substantial portion of the Contracts prepaid prior to their respective due
dates in a particular month (thus paying less than 30 days' interest for that
Due Period) while very few Contracts prepaid after their respective due dates
in that month. In addition, liquidations of defaulted Contracts or the
Servicer's or the Company's exercise of its option to repurchase the entire
remaining pool of Contracts (see "Description of the Certificates--Repurchase
Option") will affect the timing of principal distributions on the Certificates
of a Series.
Information regarding the prepayment standard or model or any other rate of
assumed prepayment, as applicable, will be set forth in the Prospectus
Supplement with respect to a Series of Certificates. Although the related
Prospectus Supplement will specify the prepayment assumptions used to price
any Series of Certificates, there can be no assurance that the Contracts will
prepay at such rate, and it is unlikely that prepayments or liquidations of
the Contracts will occur at any constant rate.
See "Description of the Certificates--Repurchase Option" for a description
of the Company's or Servicer's option to repurchase the Contracts comprising
part of a Trust Fund when the aggregate outstanding principal balance of such
Contracts is less than a specified percentage of the initial aggregate
outstanding principal balance
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of such Contracts as of the related Cut-off Date. See also "The Trust Fund--
The Contract Pools" for a description of the obligations of the Company to
repurchase a Contract in case of a breach of a representation or warranty
relative to such Contract.
DESCRIPTION OF THE CERTIFICATES
Each Series of Certificates will be issued pursuant to a separate pooling
and servicing agreement (each, an "Agreement") to be entered into among the
Company, as seller and Servicer, and the trustee named in the related
Prospectus Supplement (the "Trustee"), and such other parties, if any, as are
described in the applicable Prospectus Supplement. The following summaries
describe certain provisions expected to be common to each Agreement and the
related Certificates, but do not purport to be complete and are subject to,
and are qualified in their entirety by reference to, the provisions of the
related Agreement and the description set forth in the related Prospectus
Supplement. The provisions of the form of Agreement filed as an exhibit to the
Registration Statement of which this Prospectus is a part (the "Registration
Statement") that are not described herein may differ from the provisions of
any actual Agreement. The material differences will be described in the
related Prospectus Supplement. Capitalized terms used herein and not otherwise
defined herein shall have the meanings assigned to them in the form of
Agreement filed as an exhibit to the Registration Statement.
Each Series of Certificates will have been rated in the rating category by
the rating agency or agencies specified in the related Prospectus Supplement.
GENERAL
The Certificates may be issued in one or more Classes. If the Certificates
of a Series are issued in more than one Class, the Certificates of all or less
than all of such Classes may be sold pursuant to this Prospectus, and there
may be separate Prospectus Supplements relating to one or more of such Classes
so sold. Any reference herein to the Prospectus Supplement relating to a
Series comprised of more than one Class should be understood as a reference to
each of the Prospectus Supplements relating to the Classes sold hereunder. Any
reference herein to the Certificates of a Class should be understood to refer
to the Certificates of a Class within a Series or all of the Certificates of a
single-Class Series, as the context may require. For convenience of
description, any reference in this Prospectus to a "Class" of Certificates
includes a reference to any subclasses of such Class.
The Certificates of each Series will be issued in fully registered form only
and will represent the interests specified in the related Prospectus
Supplement in a separate trust fund (the "Trust Fund") created pursuant to the
related Agreement. The Trust Fund will be held by the Trustee for the benefit
of the Certificateholders. Each Trust Fund, to the extent specified in the
related Prospectus Supplement, will include (i) Contracts (the "Contract
Pool") which are subject to the Agreement, (ii) the amounts held in the
Certificate Account from time to time, (iii) proceeds from FHA Insurance (with
respect to any FHA-insured Contract included in the Contract Pool), (iv) any
letter of credit, guarantee, surety bond, insurance policy, cash reserve fund
or other credit enhancement securing payment of all or part of a Series of
Certificates and (v) such other property as may be specified in the related
Prospectus Supplement. Except as otherwise specified in the related Prospectus
Supplement, the Certificates will be freely transferable and exchangeable at
the corporate trust office of the Trustee at the address set forth in the
related Prospectus Supplement. No service charge will be made for any
registration of exchange or transfer of Certificates, but the Trustee may
require payment of a sum sufficient to cover any tax or other governmental
charge.
Ownership of each Contract Pool may be evidenced by one or more Classes of
Certificates, each representing the interest in the Contract Pool specified in
the related Prospectus Supplement. Each Series of Certificates may include one
or more Classes ("Subordinated Certificates") which are subordinated in right
of distribution to one or more other Classes ("Senior Certificates"), as
provided in the related Prospectus Supplement. Certificates of a Series which
includes Senior and Subordinated Certificates are referred to herein
collectively as "Senior/Subordinated Certificates." A Series of
Senior/Subordinated Certificates may include one
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<PAGE>
or more Classes ("Mezzanine Certificates") which are subordinated to one or
more Classes of Certificates and are senior to one or more Classes of
Certificates. The Prospectus Supplement with respect to a Series of
Senior/Subordinated Certificates will set forth, among other things, the
extent to which the Subordinated Certificates are subordinated (which may
include a formula for determining the subordinated amount or for determining
the allocation of the Amount Available (hereinafter defined) among Senior
Certificates and Subordinated Certificates), the allocation of losses among
the Classes of Subordinated Certificates, the period or periods of such
subordination, the minimum subordinated amount, if any, and any distributions
or payments which will not be affected by such subordination. The protection
afforded to the Senior Certificateholders from the subordination feature
described above will be effected by the preferential right of such
Certificateholders to receive current distributions from the Contract Pool. If
a Series of Certificates contains more than one Class of Subordinated
Certificates, losses will be allocated among such Classes in the manner
described in the Prospectus Supplement. If so specified in the applicable
Prospectus Supplement, Mezzanine Certificates or other Classes of Subordinated
Certificates may be entitled to the benefits of other forms of credit
enhancement and may, if rated in one of the four highest rating categories by
a nationally recognized statistical rating organization, be offered pursuant
to this Prospectus and such Prospectus Supplement.
If so specified in a Prospectus Supplement, a Series of Certificates may
include one or more Classes which (i) are entitled to receive distributions
only in respect of principal ("Principal Only Certificates"), interest
("Interest Only Certificates") or any combination thereof, or in specified
proportions in respect of such payments, and/or (ii) are entitled to receive
distributions in respect of principal before or after specified principal
distributions have been made on one or more other Classes within such Series
("Fast Pay/Slow Pay Certificates"), or on a planned amortization schedule
("PAC Certificates") or targeted amortization schedule ("TAC Certificates") or
upon the occurrence of other specified events. The Prospectus Supplement will
set forth the rate at which interest will be paid to Certificateholders of
each Class of a given Series (the "Pass-Through Rate"). Such Pass-Through Rate
may be fixed, variable or adjustable, as specified in the related Prospectus
Supplement.
The related Prospectus Supplement will specify the minimum denomination or
initial principal amount of Contracts evidenced by a single Certificate of
each Class of Certificates of a Series (a "Single Certificate").
Distributions of principal and interest on the Certificates will be made on
the payment dates set forth in the related Prospectus Supplement (each, a
"Payment Date") to the persons in whose names the Certificates are registered
at the close of business on the related record date specified in the related
Prospectus Supplement (the "Record Date"). Distributions will be made by check
mailed to the address of the person entitled thereto as it appears on the
Certificate Register, or, to the extent described in the related Prospectus
Supplement, by wire transfer, except that the final distribution in retirement
of Certificates will be made only upon presentation and surrender of the
Certificates at the office or agency of the Trustee specified in the final
distribution notice to Certificateholders.
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.
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The specific terms of the depositary arrangement with respect to any
Certificates of a Class will be described in the related Prospectus
Supplement. It is anticipated that the following provisions will apply to all
depositary arrangements:
Upon the issuance of a Global Certificate, the Depositary for such Global
Certificate will credit, on its book-entry registration and transfer system,
the respective denominations of the Certificates represented by such Global
Certificate to the accounts of institutions that have accounts with such
Depositary ("participants"). Ownership of beneficial interests in a Global
Certificate will be limited to participants or persons that may hold interests
through participants. Ownership of beneficial interests in such Global
Certificate will be shown on, and the transfer of that ownership will be
effected only through, records maintained by the Depositary for such Global
Certificate or by participants or persons that hold through participants. The
laws of some states require that certain purchasers of securities take
physical delivery of such securities in definitive form. Such limits and such
laws may impair the ability to transfer beneficial interests in a Global
Certificate.
So long as the Depositary for a Global Certificate, or its nominee, is the
owner of such Global Certificate, such Depositary or such nominee, as the case
may be, will be considered the sole owner or holder of the Certificates
represented by such Global Certificate for all purposes under the Agreement
relating to such Certificates. Except as set forth below, owners of beneficial
interests in a Global Certificate will not be entitled to have Certificates of
the Series represented by such Global Certificate registered in their names,
will not receive or be entitled to receive physical delivery of Certificates
of such Series in definitive form and will not be considered the owners or
holders thereof under the Agreement governing such Certificates.
Distributions or payments on Certificates registered in the name of or held
by a Depositary or its nominee will be made to the Depositary or its nominee,
as the case may be, as the registered owner for the holder of the Global
Certificate representing such Certificates. In addition, all reports required
under the applicable Agreement to be made to Certificateholders (as described
below under "Reports to Certificateholders") will be delivered to the
Depositary or its nominee, as the case may be. None of the Company, Servicer,
Trustee, or any agent thereof (including any applicable Certificate Registrar
or Paying Agent), will have any responsibility or liability for any aspect of
the records relating to or payments made on account of beneficial ownership
interests in a Global Certificate or for maintaining, supervising or reviewing
any records relating to such beneficial ownership interests or for providing
reports to the related beneficial owners.
The Company expects that the Depositary for Certificates of a Class, upon
receipt of any distribution or payment in respect of a Global Certificate,
will credit immediately participants' accounts with payments in amounts
proportionate to their respective beneficial interest in such Global
Certificate as shown on the records of such Depositary. The Company also
expects that payments by participants to owners of beneficial interests in
such Global Certificate held through such participants will be governed by
standing instructions and customary practices, as is now the case with
securities held for the accounts of customers registered in "street name," and
will be the responsibility of such participants.
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.
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CONVEYANCE OF CONTRACTS
The Company will transfer, assign, set over and otherwise convey to the
Trustee all right, title and interest of the Company in the Contracts,
including all principal and interest received on or with respect to the
Contracts (other than receipts of principal and interest due on the Contracts
before the Cut-off Date). On behalf of the Trust Fund, as the issuer of the
related Series of Certificates, the Trustee, concurrently with such
conveyance, will execute and deliver the Certificates to the order of the
Company. The Contracts will be as described on a list attached to the
Agreement. Such list will include the amount of monthly payments due on each
Contract as of the date of issuance of the Certificates, the Contract Rate on
each Contract and the maturity date of each Contract. Such list will be
available for inspection by any Certificateholder at the principal executive
office of the Servicer. Prior to the conveyance of the Contracts to the Trust
Fund, the Company's internal audit department will complete a review of all of
the Contract files confirming the accuracy of the list of Contracts delivered
to the Trustee. Any Contract discovered not to agree with such list in a
manner that is materially adverse to the interests of the Certificateholders
will be repurchased or substituted for by the Company, or, if the discrepancy
relates to the unpaid principal balance of a Contract, the Company may deposit
cash in the separate account maintained at an Eligible Institution in the name
of the Trustee (the "Certificate Account") in an amount sufficient to offset
such discrepancy. If the Trust Fund includes a Pre-Funding Account, the
related Prospectus Supplement will specify the conditions that must be
satisfied prior to any transfer of Subsequent Contracts, including the
requisite characteristics of the Subsequent Contracts.
Unless otherwise specified in the related Prospectus Supplement, the Trustee
or its custodian will maintain possession of the Contracts and any other
documents contained in the Contract files. Uniform Commercial Code financing
statements will be filed in Minnesota reflecting the sale and assignment of
the Contracts to the Trustee, and the Company's accounting records and
computer systems will also reflect such sale and assignment.
The counsel to the Company identified in the applicable Prospectus
Supplement will render an opinion to the Trustee that the transfer of the
Contracts from the Company to the related Trust Fund would, in the event the
Company became a debtor under the United States Bankruptcy Code, be treated as
a true sale and not as a pledge to secure borrowings. If, however, the
transfer of the Contracts from the Company to the Trust Fund were treated as a
pledge to secure borrowings by the Company, the distribution of proceeds of
the Contracts to the Trust Fund might be subject to the automatic stay
provisions of the United States Bankruptcy Code, which would delay the
distribution of such proceeds for an uncertain period of time. In addition, a
bankruptcy trustee would have the power to sell the Contracts if the proceeds
of such sale could satisfy the amount of the debt deemed owed by the Company,
or the bankruptcy trustee could substitute other collateral in lieu of the
Contracts to secure such debt, or such debt could be subject to adjustment by
the bankruptcy trustee if the Company were to file for reorganization under
Chapter 11 of the United States Bankruptcy Code.
Except as otherwise specified in the related Prospectus Supplement, the
Company will make certain representations and warranties in the Agreement with
respect to each Contract as of the related Closing Date, including that: (a)
as of the Cut-off Date the most recent scheduled payment was made or was not
delinquent more than 59 days; (b) no provision of a Contract has been waived,
altered or modified in any respect, except by instruments or documents
included in the Contract file and reflected on the list of Contracts delivered
to the Trustee; (c) each Contract is a legal, valid and binding obligation of
the Obligor and is enforceable in accordance with its terms (except as may be
limited by laws affecting creditors rights generally); (d) no Contract is
subject to any right of rescission, set-off, counterclaim or defense; (e) each
FHA-insured Contract was originated in accordance with applicable FHA
regulations and is insured, without set off, surcharge or defense, by FHA
Insurance; (f) each Contract was either (i) entered into by a home improvement
contractor in the ordinary course of such contractor's business and,
immediately upon funding, assigned to the Company or (ii) was originated by
the Company directly; (g) no Contract was originated in or is subject to the
laws of any jurisdiction whose laws would make the transfer of the Contract or
an interest therein pursuant to the Agreement or the Certificates unlawful;
(h) each Contract complies with all requirements of law; (i) no Contract has
been satisfied or rescinded; (j) all parties to each Contract had full legal
capacity to execute such Contract; (k) no Contract has been sold, conveyed and
assigned or pledged to any other person and the Company has good and
marketable title to each
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Contract free and clear of any encumbrance, equity, loan, pledge, charge,
claim or security interest, and is the sole owner and has full right to
transfer such Contract to the Trustee; (l) as of the Cut-off Date there was no
default, breach, violation or event permitting acceleration under any Contract
(except for payment delinquencies permitted by clause (a) above), no event
that with notice and the expiration of any grace or cure period would
constitute a default, breach, violation or event permitting acceleration under
such Contract, and the Company has not waived any of the foregoing; (m) each
Contract is a fully-amortizing loan with a fixed rate of interest and provides
for level payments over the term of such Contract; (n) the description of each
Contract set forth in the list delivered to the Trustee is true and correct;
(o) there is only one original of each Contract; and (p) each Contract was
originated or purchased in accordance with the Company's then-current
underwriting guidelines.
Under the terms of the Agreement, if the Company becomes aware of a breach
of any such representation or warranty that materially adversely affects the
Trust Fund's interest in any Contract or receives written notice of such a
breach from the Trustee or the Servicer, then the Company will be obligated
either to cure such breach or to repurchase or, if so provided in the related
Prospectus Supplement, substitute for the affected Contract, in each case
under the conditions further described herein and in the Prospectus
Supplement. This repurchase obligation will constitute the sole remedy
available to the Trust Fund and the Certificateholders for a breach of a
representation or warranty under the Agreement with respect to the Contracts
(but not with respect to any other breach by the Company of its obligations
under the Agreement).
The "Repurchase Price" of a Contract at any time means the outstanding
principal amount of such Contract (without giving effect to any Advances made
by the Servicer or the Trustee), plus interest at the applicable Pass-Through
Rate on such Contract from the end of the Due Period with respect to which the
Obligor last made a payment (without giving effect to any Advances made by the
Servicer or the Trustee) through the end of the immediately preceding Due
Period.
PAYMENTS ON CONTRACTS
Each Certificate Account will be a trust account established by the Servicer
as to each Series of Certificates in the name of the Trustee (i) with a
depository institution, the long-term unsecured debt obligations of which at
the time of any deposit therein are rated within the two highest rating
categories, or such other rating category as will not adversely affect the
ratings assigned to the Certificates, by each rating agency rating the
Certificates of such Series, (ii) with the trust department of a national
bank, (iii) in an account or accounts the deposits in which are fully insured
by the FDIC, (iv) in an account or accounts the deposits in which are insured
by the FDIC (to the limits established by the FDIC), the uninsured deposits in
which are otherwise secured such that, as evidenced by an opinion of counsel,
the Certificateholders have a claim with respect to the funds in the
Certificate Account or a perfected first priority security interest against
any collateral securing such funds that is superior to the claims of any other
depositors or general creditors of the depository institution with which the
Certificate Account is maintained or (v) otherwise acceptable to the rating
agency without reduction or withdrawal of the rating assigned to the relevant
Certificates. The collateral eligible to secure amounts in the Certificate
Account is limited to United States government securities and certain other
high-quality investments specified in the applicable Agreement ("Eligible
Investments"). A Certificate Account may be maintained as an interest-bearing
account, or the funds held therein may be invested pending each succeeding
Payment Date in Eligible Investments.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer will deposit in the Certificate Account on a daily basis all proceeds
and collections received or made by it with respect to the related Contracts
subsequent to the Cut-off Date (including scheduled payments of principal and
interest due after the Cut-off Date but received by the Servicer on or before
the Cut-off Date), including:
(i) all Obligor payments on account of principal, including principal
prepayments, on the Contracts;
(ii) all Obligor payments on account of interest on the Contracts;
(iii) all FHA Insurance payments received by the Servicer;
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(iv) all amounts received and retained in connection with the liquidation
of defaulted Contracts, net of liquidation expenses ("Net Liquidation
Proceeds");
(v) any Advances made as described under "Advances" below and certain
other amounts required under the Agreement to be deposited in the
Certificate Account;
(vi) all amounts received from any credit enhancement provided with
respect to a Series of Certificates; and
(vii) all proceeds of any Contract or property acquired in respect
thereof repurchased by the Servicer or the Company, as described under
"Conveyance of Contracts" above or under "Repurchase Option" below.
DISTRIBUTIONS ON CERTIFICATES
Except as otherwise provided in the related Prospectus Supplement, on each
Payment Date for a Series of Certificates, the Trustee will withdraw from the
applicable Certificate Account and distribute to the Certificateholders of
such Series of record on the preceding Record Date an amount equal to, in the
aggregate, the "Amount Available" for such Payment Date. Unless otherwise
specified in the applicable Prospectus Supplement, the "Amount Available" for
a Payment Date is an amount equal to the aggregate of all amounts on deposit
in the Certificate Account as of the seventh Business Day following the end of
the related Due Period, or such other date as may be specified in the related
Prospectus Supplement (the "Determination Date") except: (i) all payments on
the Contracts that were due on or before the Cut-off Date; (ii) all payments
or collections received after the Due Period preceding the month in which the
Payment Date occurs; (iii) all scheduled payments of principal and interest
due on a date or dates subsequent to the Due Period preceding the
Determination Date; (iv) amounts representing reimbursement for Advances, such
reimbursement being limited, if so specified in the related Prospectus
Supplement, to amounts received on particular Contracts as late collections of
principal or interest as to which the Servicer has made an unreimbursed
Advance; and (v) amounts representing reimbursement for any unpaid Servicing
Fee. In the case of a Series of Certificates which includes only one Class,
the Amount Available for each Payment Date will be distributed pro rata to the
holders of such Certificates. In the case of any other Series of Certificates,
the Amount Available for each Payment Date will be allocated and distributed
to holders of the Certificates of such Series pursuant to the method and in
the order of priority specified in the applicable Prospectus Supplement. The
amount of principal and interest specified in the related Prospectus
Supplement to be distributed to Certificateholders is referred to herein as
the "Certificate Distribution Amount."
Within the time specified in the Agreement and described in the related
Prospectus Supplement, the Servicer will furnish a statement to the Trustee
setting forth the amount to be distributed on the related Payment Date on
account of principal and interest, stated separately, and a statement setting
forth certain information with respect to the Contracts.
ADVANCES
Unless otherwise specified in the related Prospectus Supplement, to the
extent that collections on a Contract in any Due Period are less than the
scheduled payment due thereon, the Servicer will be obligated to make an
advance of the uncollected portion of such scheduled payment. The Servicer
will be obligated to advance a delinquent payment on a Contract only to the
extent that the Servicer, in its sole discretion, expects to recoup such
Advance from subsequent collections on the Contract or from liquidation
proceeds thereof. The Servicer will deposit any Advances in the Certificate
Account no later than one Business Day before the following Payment Date. The
Servicer will be entitled to recoup its advances on a Contract from subsequent
payments by or on behalf of the Obligor and from liquidation proceeds
(including FHA Insurance payments, if applicable), if any, of the Contract,
and will release its right to reimbursements in conjunction with the purchase
of the Contract by the Company for breach of representations and warranties.
If the Servicer determines in good faith that an amount previously advanced
will not ultimately be recoverable from payments by or on behalf of the
Obligor or
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from liquidation proceeds (including FHA Insurance payments, if applicable),
if any, of the Contract (an "Uncollectible Advance"), the Servicer will be
entitled to reimbursement from payments on other Contracts or from other funds
available therefor.
Unless otherwise specified in the related Prospectus Supplement, if the
Servicer fails to make an Advance required under the Agreement, the Trustee
will be obligated to deposit the amount of such Advance in the Certificate
Account on the Payment Date. The Trustee will not, however, be obligated to
deposit any such amount if (i) the Trustee does not expect to recoup such
Advance from subsequent collections on the Contract or from liquidation
proceeds thereof, if any, or (ii) the Trustee determines that it is not
legally able to make such Advance.
EXAMPLE OF DISTRIBUTIONS
The following is an example of the flow of funds as it would relate to a
hypothetical Series of Certificates issued, and with a Cut-off Date occurring,
in March 1996 (all weekdays are assumed to be business days):
<TABLE>
<S> <C> <C>
March 1......................................... (1) Cut-off Date.
March 1-31...................................... (2) Due Period. Servicer
receives scheduled payments
on the Contracts and any
principal prepayments made
by Obligors and applicable
interest thereon.
March 29........................................ (3) Record Date.
April 9......................................... (4) Determination Date.
Distribution amount
determined.
April 15........................................ (5) Payment Date.
</TABLE>
Succeeding months follow the pattern of (2) through (5). The flow of funds
with respect to any Series of Certificates may differ from the above example,
as specified in the related Prospectus Supplement.
- --------
(1) The initial principal balance of the Contract Pool will be the aggregate
principal balance of the Contracts at the close of business on the Cut-off
Date, after deducting principal payments due on or before such date,
which, together with corresponding interest payments, are not part of the
Contract Pool and will not be passed through to Certificateholders.
(2) Scheduled payments and principal prepayments may be received at any time
during this period and will be deposited in the Certificate Account by the
Servicer for distribution to Certificateholders. When a Contract is
prepaid in full, interest on the amount prepaid is collected from the
Obligor only to the date of payment.
(3) Distributions on April 15 will be made to Certificateholders of record at
the close of business on the last Business Day of March, being the month
immediately preceding the month of distribution.
(4) On April 9 (the seventh Business Day following the end of the prior Due
Period), the Servicer will determine the amounts of principal and interest
which will be passed through on April 15. In addition, the Servicer may
advance funds to cover any delinquencies, in which event the distribution
to Certificateholders on April 15 will include the full amounts of
principal and interest due during March. The Servicer will also calculate
any changes in the relative interests evidenced by the Senior Certificates
and the Subordinated Certificates in the Trust Fund.
(5) On April 15, the amounts determined on April 9 will be distributed to
Certificateholders.
INDEMNIFICATION
The Agreement requires the Company to defend and indemnify the Trust Fund,
the Trustee (including any agent of the Trustee) and the Certificateholders
(which indemnification will survive any removal of the Servicer as servicer of
the Contracts) against any and all costs, expenses, losses, damages, claims
and liabilities, including reasonable fees and expenses of counsel and
expenses of litigation for any taxes which may at any time be
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asserted with respect to, and as of the date of, the conveyance of the
Contracts to the Trust Fund (but not including any federal, state or other tax
arising out of the creation of the Trust Fund and the issuance of the
Certificates).
The Agreement also requires the Servicer, in connection with its duties as
servicer of the Contracts, to defend and indemnify the Trust Fund, the Trustee
and the Certificateholders (which indemnification will survive any removal of
the Servicer as servicer of the Contracts) against any and all costs,
expenses, losses, damages, claims and liabilities, including reasonable fees
and expenses of counsel and expenses of litigation, in respect of any action
taken by the Servicer with respect to any Contract while it was the Servicer.
SERVICING
Pursuant to the Agreement, the Servicer will service and administer the
Contracts assigned to the Trustee as more fully set forth below. The Servicer
will perform diligently all services and duties specified in each Agreement,
in the same manner as prudent lending institutions of home improvement
contracts of the same type as the Contracts in those jurisdictions where the
related real properties are located or as otherwise specified in the
Agreement. The duties to be performed by the Servicer will include collection
and remittance of principal and interest payments, as well as submission of
FHA Insurance claims where applicable.
The Servicer will make reasonable efforts to collect all payments called for
under the Contracts and, consistent with the Agreement and any FHA Insurance,
will follow such collection procedures with respect to the Contracts as it
follows with respect to loans or contracts serviced by it that are comparable
to the Contracts.
Evidence as to Compliance. Unless otherwise specified in the related
Prospectus Supplement, each Agreement will require the Servicer to deliver to
the Trustee a monthly report prior to each Payment Date, setting forth certain
information regarding the Contract Pool and the Certificates of such Series as
is specified in the related Prospectus Supplement. Each such report to the
Trustee will be accompanied by a statement from an appropriate officer of the
Servicer certifying the accuracy of such report and stating that the Servicer
has not defaulted in the performance of its obligations under the Agreement.
On or before May 1 of each year, the Servicer will deliver to the Trustee a
report of a nationally recognized accounting firm stating that such firm has
examined certain documents and records relating to the servicing of home
improvement contracts serviced by the Servicer under pooling and servicing
agreements similar to the Agreement and stating that, on the basis of such
procedures, such servicing has been conducted in compliance with the
Agreement, except for any exceptions set forth in such report.
Certain Matters Regarding the Servicer. The Servicer may not resign from its
obligations and duties under an Agreement except upon a determination that its
duties thereunder are no longer permissible under applicable law. No such
resignation will become effective until the Trustee or a successor servicer
has assumed the Servicer's obligations and duties under such Agreement. The
Servicer can only be removed as servicer upon the occurrence of an Event of
Termination as discussed below.
The Servicer shall keep in force throughout the term of the Agreement (i) a
policy or policies of insurance covering errors and omissions for failure to
maintain insurance as required by the Agreement, and (ii) a fidelity bond.
Such policy or policies and such fidelity bond shall be in such form and
amount as is generally customary among persons which service a portfolio of
home improvement contracts having an aggregate principal amount of $10 million
or more and which are generally regarded as servicers acceptable to
institutional investors.
Servicing Compensation and Payment of Expenses. For its servicing of the
Contracts, the Servicer will receive servicing fees ("Servicing Fees") which
include a Monthly Servicing Fee (which the Company may assign) for each Due
Period (paid on the next succeeding Payment Date) equal to 1/12th of the
product of the annual servicing fee rate described in the applicable
Prospectus Supplement and the Pool Scheduled Principal Balance for such
Payment Date. As long as the Company is the Servicer, the Trustee will pay the
Company its
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Monthly Servicing Fee from any monies remaining after the Certificateholders
have received all payments of principal and interest for such Payment Date.
The Monthly Servicing Fee provides compensation for customary third-party
servicing activities to be performed by the Servicer for the Trust Fund, for
additional administrative services performed by the Servicer on behalf of the
Trust Fund and for expenses paid by the Servicer on behalf of the Trust Fund.
Customary servicing activities include collecting and recording payments,
communicating with Obligors, investigating payment delinquencies, providing
billing and tax records to Obligors and maintaining internal records with
respect to each Contract. Administrative services performed by the Servicer on
behalf of the Trust Fund include selecting and packaging the Contracts,
calculating distributions to Certificateholders and providing related data
processing and reporting services for Certificateholders and on behalf of the
Trustee. Expenses incurred in connection with servicing of the Contracts and
paid by the Company from its Monthly
Servicing Fees include payment of FHA Insurance premiums, payment of fees and
expenses of accountants, payments of all fees and expenses incurred in
connection with the enforcement of Contracts (including submission of FHA
Insurance claims, if applicable) or payment of Trustee's fees, and payment of
expenses incurred in connection with distributions and reports to
Certificateholders, except that the Servicer shall be reimbursed out of the
liquidation proceeds of a liquidated Contract (including FHA Insurance
proceeds) for customary out-of-pocket liquidation expenses incurred by it.
Events of Termination. Except as otherwise specified in the related
Prospectus Supplement, Events of Termination under each Agreement will occur
if (a) the Servicer fails to make any payment or deposit required under the
Agreement (including an Advance) and such failure continues for four business
days; (b) the Servicer fails to observe or perform in any material respect any
other covenant or agreement in the Agreement which continues unremedied for
thirty days; (c) the Servicer conveys, assigns or delegates its duties or
rights under the Agreement, except as specifically permitted under the
Agreement, or attempts to make such a conveyance, assignment or delegation;
(d) a court having jurisdiction in the premises enters a decree or order for
relief in respect of the Servicer in an involuntary case under any applicable
bankruptcy, insolvency or other similar law now or hereafter in effect, or
appoints a receiver, liquidator, assignee, custodian, trustee, or sequestrator
(or similar official) of the Servicer, as the case may be, or enters a decree
or order for any substantial liquidation of its affairs; (e) the Servicer
commences a voluntary case under any applicable bankruptcy, insolvency or
similar law, or consents to the entry of an order for relief in an involuntary
case under any such law, or consents to the appointment of or taking
possession by a receiver, liquidator, assignee, trustee, custodian or its
creditors, or fails to, or admits in writing its inability to, pay its debts
as they become due, or takes any corporate action in furtherance of the
foregoing; (f) the Servicer fails to be an Eligible Servicer; or (g) if the
Company is the Servicer, the Company's receiving rights under its master
seller-servicer contract with GNMA are terminated. The Servicer will be
required under the Agreement to give the Trustee and the Certificateholders
notice of an Event of Termination promptly upon the occurrence of such event.
Rights Upon Event of Termination. Except as otherwise specified in the
related Prospectus Supplement, so long as an Event of Termination remains
unremedied, the Trustee may, and at the written direction of
Certificateholders representing 25% or more of the Aggregate Certificate
Principal Balance of a Series shall, terminate all of the rights and
obligations of the Servicer under the related Agreement and in and to the
Contracts, and the proceeds thereof, whereupon (subject to applicable law
regarding the Trustee's ability to make advances) the Trustee or a successor
Servicer under the Agreement will succeed to all the responsibilities, duties
and liabilities of the Servicer under the Agreement and will be entitled to
similar compensation arrangements; provided, however, that neither the Trustee
nor any successor Servicer will assume any obligation of the Company to
repurchase Contracts for breaches of representations or warranties, and the
Trustee and such successor Servicer will not be liable for any acts or
omissions of the prior Servicer occurring prior to a transfer of the
Servicer's servicing and related functions or for any breach by such Servicer
of any of its obligations contained in the Agreement. In addition, the Trustee
will notify FHA of the Company's termination as Servicer of the Contracts and
will request that the portion of the Company's FHA Insurance reserves
allocable to the FHA-insured Contracts be transferred to the Trustee or a
successor Servicer. See "Description of FHA
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Insurance." Notwithstanding such termination, the Servicer shall be entitled
to payment of certain amounts payable to it prior to such termination, for
services rendered prior to such termination. No such termination will affect
in any manner the Company's obligation to repurchase certain Contracts for
breaches of representations or warranties under the Agreement. In the event
that the Trustee would be obligated to succeed the Servicer but is unwilling
or unable so to act, it may appoint, or petition to a court of competent
jurisdiction for the appointment of, a Servicer. Pending such appointment, the
Trustee is obligated to act in such capacity. The Trustee and such successor
may agree upon the servicing compensation to be paid, which in no event may be
greater than the compensation to the Servicer under the Agreement without the
consent of all of the Certificateholders.
The Trustee will be under no obligation to take any action or to institute,
conduct or defend any litigation under the Agreement at the request, order or
direction of any of the Holders of Certificates, unless such
Certificateholders have offered to the Trustee reasonable security or
indemnity against the costs, expenses and liabilities which the Trustee may
incur.
REPORTS TO CERTIFICATEHOLDERS
The Trustee will forward to each Certificateholder on each Payment Date, or
as soon thereafter as is practicable, as specified in the related Prospectus
Supplement, a statement setting forth, among other things:
(a) the amount of such distribution which constitutes Monthly Principal,
specifying the amounts constituting scheduled payments by Obligors,
principal prepayments on the Contracts, and other payments with respect to
the Contracts;
(b) the amount of such distribution which constitutes Monthly Interest;
(c) the remaining Principal Balance represented by such
Certificateholder's interest;
(d) the Company's FHA Insurance reserve amount;
(e) the amount of fees payable out of the Trust Fund;
(f) the Pool Factor (a percentage derived from a fraction the numerator
of which is the remaining Principal Balance of the Certificates and the
denominator of which is the Initial Principal Amount of the Certificates)
immediately before and immediately after such Payment Date;
(g) the number and aggregate principal balance of Contracts delinquent
(i) 31-59 days, (ii) 60-89 and (iii) 90 or more days;
(h) the number of Contracts liquidated during the Due Period ending
immediately before such Payment Date;
(i) such customary factual information as is necessary to enable
Certificateholders to prepare their tax returns; and
(j) such other customary factual information available to the Servicer
without unreasonable expense as is necessary to enable Certificateholders
to comply with regulatory requirements.
REPURCHASE OPTION
Unless otherwise specified in the related Prospectus Supplement, each
Agreement will provide that on any Payment Date on which the Pool Scheduled
Principal Balance is less than 10% of the Cut-off Date Pool Principal Balance,
the Company or the Servicer will have the option to repurchase, on 30 days'
prior written notice to the Trustee, all outstanding Contracts in the related
Contract Pool at a price equal to the greatest of (i) the principal balance of
the Contracts on the prior Payment Date plus 30 days' accrued interest thereon
at the applicable Pass-Through Rate and any delinquent payments of interest
thereon, plus the fair market value (as determined by the Servicer) of any
acquired properties, (ii) the fair market value of all of the assets of the
Trust Fund, and (iii) an amount equal to the Aggregate Certificate Principal
Balance of the related Certificates plus interest on such Certificates payable
on and prior to the Payment Date occurring in the month following such
repurchase (less amounts on deposit in the Certificate Account and available
to pay such principal and interest). Such price will
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be paid on the Payment Date on which such purchase occurs to the
Certificateholders of record on the last Business Day of the immediately
preceding Due Period in immediately available funds against the Trustee's
delivery of the Contracts and any acquired properties to the Servicer. The
distribution of such purchase price to Certificateholders will be in lieu of
any other distribution to be made on such Payment Date with respect to the
related Contracts.
AMENDMENT
Unless otherwise specified in the related Prospectus Supplement, the
Agreement may be amended by the Company, the Servicer and the Trustee without
the consent of the Certificateholders, (i) to cure any ambiguity, (ii) to
correct or supplement any provision therein that may be inconsistent with any
other provision therein or (iii) to make any other provisions with respect to
matters or questions arising under such Agreement that are not inconsistent
with the provisions thereof, provided that such action will not adversely
affect in any material respect the interests of the Certificateholders of the
related Series. Unless otherwise specified in the related Prospectus
Supplement, the Agreement may also be amended by the Company, the Servicer and
the Trustee with the consent of the Certificateholders (other than holders of
Residual Certificates) representing 66 2/3% or more of the Aggregate
Certificate Principal Balance of a Series for the purpose of adding any
provisions to or changing in any manner or eliminating any of the provisions
of such Agreement or of modifying in any manner the rights of the
Certificateholders; provided, however, that no such amendment that reduces in
any manner the amount of, or delays the timing of, any payment received on or
with respect to Contracts which are required to be distributed on any
Certificate may be effective without the consent of the Holders of each such
Certificate.
TERMINATION OF THE AGREEMENT
The obligations created by each Agreement will terminate (after distribution
of all Monthly Principal and Monthly Interest then due to Certificateholders)
on the earlier of (a) the Payment Date next succeeding the final payment or
other liquidation of the last Contract or (b) the Payment Date on which the
Company or the Servicer repurchases the Contracts as described under
"Description of the Certificates--Repurchase Option." However, the Company's
representations, warranties and indemnities will survive any termination of
the Agreement.
THE TRUSTEE
The Prospectus Supplement for a Series of Certificates will specify the
Trustee under the related Agreement. The Trustee may have customary commercial
banking relationships with the Company or its affiliates and the Servicer or
its affiliates.
The Trustee may resign at any time, in which event the Company will be
obligated to appoint a successor Trustee. The Company may also remove the
Trustee if the Trustee ceases to be eligible to continue as such under the
Agreement or if the Trustee becomes insolvent. Any resignation or removal of
the Trustee and appointment of a successor Trustee will not become effective
until acceptance of the appointment by the successor Trustee.
The Trustee will make no representation as to the validity or sufficiency of
the Agreement, the Certificates or any Contract, Contract file or related
documents, and will not be accountable for the use or application by the
Company of any funds paid to the Company, as seller, in consideration of the
conveyance of the Contracts, or deposited into or withdrawn from the
Certificate Account by the Servicer. If no Event of Termination has occurred,
the Trustee will be required to perform only those duties specifically
required of it under the Agreement. However, upon receipt of the various
certificates, reports or other instruments required to be furnished to it, the
Trustee will be required to examine them to determine whether they conform as
to form to the requirements of the Agreement. Whether or not an Event of
Termination has occurred, the Trustee is not required to expend or risk its
own funds or otherwise incur any financial liability in the performance of its
duties or the exercise of its powers if it has reasonable grounds to believe
that repayment of such funds or adequate indemnity against such risk or
liability is not reasonably assured to it.
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Under the Agreement, the Servicer agrees to pay to the Trustee on each
Payment Date (a) reasonable compensation for all services rendered by it
thereunder (which compensation shall not be limited by any provision of law in
regard to the compensation of a trustee of an express trust) and (b)
reimbursement for all reasonable expenses, disbursements and advances incurred
or made by the Trustee in accordance with any provision of the Agreement
(including FHA Insurance premiums not paid by the Servicer and reasonable
compensation and the expenses and disbursements of its agents and counsel),
except any such expense, disbursement or advance as may be attributable to the
Trustee's negligence or bad faith. The Company has agreed to indemnify the
Trustee for, and to hold it harmless against, any loss, liability or expense
incurred without negligence or bad faith on its part, arising out of or in
connection with the acceptance or administration of the Trust Fund and the
Trustee's duties thereunder, including the costs and expenses of defending
itself against any claim or liability in connection with the exercise or
performance of any of the Trustee's powers or duties thereunder.
DESCRIPTION OF FHA INSURANCE
Certain of the Contracts may be FHA-insured, the payments upon which,
subject to the following discussion, are insured by the FHA under Title I of
the National Housing Act.
The insurance available to any Trust Fund will be subject to the limit of a
reserve amount equal to 10% of the principal balance of all Title I insured
loans originated or purchased and reported for FHA Insurance by the Company,
which amount will be increased by an amount equal to 10% of the lesser of the
principal balance or the purchase price of insured loans subsequently
originated or purchased of record by the Company. The Company's reserve amount
may be reduced by 10% of the principal balance of any loans reported to FHA as
sold without recourse by the Company. In the Agreement, the Company will agree
to pay all FHA Insurance premiums required by FHA Regulations. If the Company
fails to pay any such premium, the Trustee or the successor Servicer (if any)
with respect to each Series is obligated to pay such premium and is entitled
to be reimbursed by the Company and from collections on the related Contracts.
As of December 31, 1997, the Company's FHA Insurance reserve amount was
equal to approximately $ . These insurance reserves were available to
cover losses on approximately $ of FHA-insured manufactured
housing contracts and approximately $ of FHA-insured home
improvement loans, including the FHA-insured Contracts that may be owned by a
Trust Fund. If an Event of Termination (as defined under "Description of the
Certificates--Events of Termination") occurs, each Trustee will notify FHA of
the Company's termination as Servicer of the related FHA-insured Contracts and
will request that the portion of the Company's FHA Insurance reserves
allocable to the FHA-insured Contracts be transferred to the Trustee or a
successor servicer. Although each Trustee will request such a transfer of
reserves, FHA is not obligated to comply with such a request, and may
determine that it is not in FHA's interest to permit such transfer of
reserves. In addition, FHA has not specified how insurance reserves might be
allocated in such event, and there can be no assurance that any reserve
amount, if transferred to the Trustee or a successor Servicer, would not be
substantially less than 10% of the outstanding principal amount of the FHA-
insured Contracts. It is likely that the Trustee or any successor Servicer
would be the lender of record on other FHA Title I loans, so that any reserves
that are so permitted to be transferred would become commingled with reserves
available for other FHA Title I loans. FHA also reserves the right to transfer
reserves with "earmarking" (segregating such reserves so that they will not be
commingled with the reserves of the transferee) if it is in FHA's interest to
do so.
In general, FHA will insure unsecured property improvement loans up to
$7,500, with a maximum term of 20 years. The loan proceeds must be used for
the purposes described in the loan application, and those improvements must
substantially protect or improve the basic livability or utility of the
property. The Secretary of HUD from time to time publishes a list of
ineligible items and activities which may not be financed with the proceeds of
an FHA-insured home improvement loan.
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Following a default on an FHA-insured Contract the Servicer may, subject to
certain conditions, submit a claim to FHA. The availability of FHA Insurance
following a default on an FHA-insured Contract is subject to a number of
conditions, including strict compliance by the Company with FHA regulations in
originating and servicing the Contract. Failure to comply with FHA regulations
may result in a denial of or surcharge on the FHA Insurance claim. Prior to
declaring an FHA-insured Contract in default and submitting a claim to FHA,
the Servicer must take certain steps to attempt to cure the default, including
personal contact with the borrower either by telephone or in a meeting and
providing the borrower with 30 days' written notice prior to declaration of
default. FHA may deny insurance coverage if the borrower's nonpayment is
related to a valid objection to faulty contractor performance. In such event,
the Company will seek to obtain payment by or a judgment against the borrower,
and may resubmit the claim to FHA following such a judgment. As described
under "Green Tree Financial Corporation--Contract Origination," the Company
does not purchase a Contract until the customer verifies satisfactory
completion of the work.
Upon submission of a claim to FHA, the related Trust Fund must assign its
entire interest in the Contract to the United States. In general, the claim
payment will equal 90% of the sum of (i) the unpaid principal amount of the
Contract at the date of default and uncollected interest computed at the
Contract Rate earned to the data of default, (ii) accrued and unpaid interest
on the unpaid amount of the Contract from the date of default to the date of
submission of the claim plus 15 calendar days (but in no event more than nine
months) computed at a rate of 7% per annum, (iii) uncollected court costs, and
(iv) legal fees, not to exceed $500.
CERTAIN LEGAL ASPECTS OF THE CONTRACTS; REPURCHASE OBLIGATIONS
As a result of the Company's conveyance and assignment of a pool of
Contracts to a Trust Fund, the Certificateholders of such Series, as the
beneficial owners of the Trust Fund, will succeed collectively to all of the
rights thereunder (including the right to receive payment on the Contracts).
The following discussion contains summaries of certain legal aspects of home
improvement contracts which are general in nature. These legal aspects are in
addition to the requirements of FHA regulations described in "Description of
FHA Insurance" with respect to the FHA-insured Contracts. Because such legal
aspects are governed by applicable state law (which laws may differ
substantially), the summaries do not purport to be complete nor to reflect the
laws of any particular state, nor to encompass the laws of all states in which
the improved real estate is situated. The summaries are qualified in their
entirety by reference to the applicable federal and state laws governing the
Contracts.
CONSUMER PROTECTION LAWS WITH RESPECT TO CONTRACTS
Numerous Federal and state consumer protection laws impose substantial
requirements upon creditors involved in consumer finance. These laws include
the Federal Truth-in-Lending Act, Regulation "Z", the Equal Credit Opportunity
Act, Regulation "B", the Fair Credit Reporting Act, and related statutes.
These laws can impose specific statutory liabilities upon creditors who fail
to comply with their provisions and may affect the enforceability of the
contract.
The so-called "Holder-in-Due-Course" rule of the Federal Trade Commission is
intended to defeat the ability of the transferor of a consumer credit contract
which is the seller of goods which gave rise to the transaction (and certain
related lenders and assignees) to transfer such contract free of notice of
claims by the debtor thereunder. The effect of this rule is to subject the
assignee of a Contract to all claims and defenses which the debtor could
assert against the home improvement contractor. Liability under this rule is
limited to amounts paid under a Contract; however, the Obligor also may be
able to assert the rule to set off remaining amounts due as a defense against
a claim brought by the Trust Fund against such Obligor.
The obligations of the Obligor under each Contract are not secured by an
interest in the related real estate or otherwise, and the related Trust Fund,
as the owner of a Contract, will be a general unsecured creditor as to
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such obligations. As a consequence, in the event of a default under a
Contract, the related Trust Fund will have recourse only against the Obligor's
assets generally, along with all other general unsecured creditors of the
Obligor. In a bankruptcy or insolvency proceeding relating to an Obligor on a
Contract, the obligations of the Obligor under such Contract may be discharged
in their entirety, notwithstanding the fact that the portion of such Obligor's
assets made available to the Trust Fund as a general unsecured creditor to pay
amounts due and owing thereunder are insufficient to pay all such amounts.
ENFORCEABILITY OF CERTAIN PROVISIONS
The standard form of note generally contains provisions obligating the
borrower to pay a late charge if payments are not timely made. In addition to
limitations imposed by FHA regulations with respect to FHA- insured Contracts,
in certain states there are or may be specific limitations upon late charges
which a lender may collect from a borrower for delinquent payments. Under the
Agreement, late charges (to the extent permitted by law and not waived by the
Company) will be retained by the Company as additional servicing compensation.
The standard form of note also includes a debt-acceleration clause, which
permits the lender to accelerate the debt upon a monetary default of the
borrower, after the applicable cure period. Courts will generally enforce
clauses providing for acceleration in the event of a material payment default.
However, courts, exercising equity jurisdiction, may refuse to allow a lender
to accelerate when an acceleration of the indebtedness would be inequitable or
unjust and the circumstances would render the acceleration unconscionable.
Courts have imposed general equitable principles upon foreclosure. These
equitable principles are generally designed to relieve the borrower from the
legal effect of defaults under the loan documents. Examples of judicial
remedies that may be fashioned include judicial requirements that the lender
undertake affirmative actions to determine the causes for the borrower's
default and the likelihood that the borrower will be able to reinstate the
loan. In some cases, courts have required lenders to reinstate loans or recast
payment schedules to accommodate borrowers who are suffering from temporary
financial disability. In some cases, courts have limited the right of lenders
to foreclose if the default under the mortgage instrument is not monetary,
such as the borrower failing to adequately maintain the property or the
borrower executing a junior mortgage or deed of trust affecting the property.
In other cases, some courts have been faced with the issue whether federal or
state constitutional provisions reflecting due process concerns for adequate
notice require that borrowers under mortgages or the deeds of trust receive
notices in addition to statutorily-prescribed minimum requirements. For the
most part, these cases have upheld the notice provisions as being reasonable
or have found that the sale by a trustee under a deed of trust or under a
mortgage having a power of sale does not involve sufficient state action to
afford constitutional protection to the borrower.
It is the Company's practice with some of the Contracts to defer the first
payment thereon for up to 90 days, and to charge the home improvement
contractor points to cover the lost interest due to collecting only 30 days'
interest on the first payment on these deferred payment contracts.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT
Application of the Soldiers' and Sailors' Civil Relief Act of 1940, as
amended (the "Relief Act"), would adversely affect, for an indeterminate
period of time, the ability of the Servicer to collect full amounts of
interest on certain of the Contracts. Any shortfall in interest collections
resulting from the application of the Relief Act or similar legislation, which
would not be recoverable from the related Contracts, would result in a
reduction of the amounts distributable to the Certificateholders. In the event
that the Relief Act or similar legislation applies to any Contract which goes
into default, there may be delays in payment on the Certificates in connection
therewith. Any other interest shortfalls, deferrals or forgiveness of payments
on the Contracts resulting from similar legislation or regulations may result
in delays in payments or losses to Certificateholders.
The Company will represent and warrant under each Agreement that each
Contract complies with all requirements of law. Accordingly, if any Obligor
has a claim against the related Trust Fund for violation of any
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law and such claim materially adversely affects the Trust Fund's interest in a
Contract, such violation would constitute a breach of a representation and
warranty under the Agreement and would create an obligation to repurchase such
Contract unless the breach is cured. See "Description of the Certificates--
Conveyance of Contracts."
REPURCHASE OBLIGATIONS
Under the Agreement, the Company will represent and warrant that each FHA-
insured Contract was originated in compliance with FHA regulations and is
covered by FHA Insurance. In the event FHA were to deny insurance coverage on
an FHA-insured Contract due to a violation of FHA regulations in originating
or servicing such Contracts, such violation would constitute a breach of a
representation and warranty under the Agreement and would create an obligation
of the Company to repurchase such Contract unless the breach is cured. See
"Description of the Certificates--Conveyance of Contracts."
In addition, the Company will also represent and warrant under each
Agreement that each Contract complies with all requirements of law.
Accordingly, if any Obligor has a claim against the related Trust Fund for
violation of any law and such claim materially adversely affects the Trust
Fund's interest in a Contract, such violation would constitute a breach of a
representation and warranty under the Agreement and would create an obligation
to repurchase such Contract unless the breach is cured. See "Description of
the Certificates--Conveyance of Contracts."
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
imposes certain fiduciary and prohibited transaction restrictions on employee
pension and welfare benefit plans subject to ERISA ("ERISA Plans"). Section
4975 of the Code imposes similar prohibited transaction restrictions on tax-
qualified retirement plans described in Section 401(a) of the Code ("Qualified
Retirement Plans") and on Individual Retirement Accounts ("IRAs") described in
Section 408 of the Code (collectively, "Tax-Favored Plans").
Certain employee benefit plans, such as governmental plans (as defined in
Section 3(32) of ERISA), are not subject to the ERISA requirements discussed
herein. Accordingly, assets of such plans may be invested in Certificates
without regard to the ERISA considerations described below, subject to the
provisions of applicable federal and state law. Any such plan that is a
Qualified Retirement Plan and exempt from taxation under Sections 401(a) and
501(a) of the Code, however, is subject to the prohibited transaction rules
set forth in Section 503 of the Code.
In addition to imposing general fiduciary requirements, including those of
investment prudence and diversification and the requirement that a Plan's
investment be made in accordance with the documents governing the Plan,
Section 406 of ERISA and Section 4975 of the Code prohibit a broad range of
transactions involving the "plan assets" of ERISA Plans and Tax-Favored Plans
(collectively, "Plans") and persons ("Parties in Interest" under ERISA or
"Disqualified Persons" under the Code) who have certain specified
relationships to the Plans, unless a statutory or administrative exemption is
available. Certain Parties in Interest (or Disqualified Persons) that
participate in a prohibited transaction may be subject to a penalty (or an
excise tax) imposed pursuant to Section 502(i) of ERISA or Section 4975 of the
Code, unless a statutory or administrative exemption is available.
PLAN ASSET REGULATIONS
Certain transactions involving the Trust Fund might be deemed to constitute
prohibited transactions under ERISA and the Code with respect to a Plan that
purchased Certificates, if assets of the Trust Fund were deemed to be assets
of the Plan. An investment of Plan Assets (as defined below) in Certificates
may cause the underlying assets included in the Trust to be deemed "plan
assets" of such Plan. The U.S. Department of Labor (the
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"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
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.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of certain federal income tax
consequences relating to the purchase, ownership, and disposition of the
Certificates. The discussion is based upon laws, regulations, rulings, and
decisions now in effect, all of which are subject to change (which change may
be retroactive) or possibly differing interpretations. The discussion does not
purport to deal with federal income tax consequences applicable to all
categories of investors, some of which may be subject to special rules.
Investors should consult their own tax advisors to determine the federal,
state, local, and any other tax consequences of the purchase, ownership, and
disposition of the Certificates.
Tax Status of the Trust Fund. Counsel will, unless otherwise specified in
the related Prospectus Supplement, have advised the Company that, in their
opinion, each Contract Pool and the arrangement to be administered by the
Company under which the Trustee will hold and the Company will be obligated to
service the Contracts and pursuant to which Certificates will be issued to
Certificateholders will not be classified as an association taxable as a
corporation or a "taxable mortgage pool," within the meaning of Section
7701(i) of the Internal Revenue Code of 1986, as amended (the "Code"), but
rather will be classified as a grantor trust under Subpart E, Part I of
Subchapter J of the Code. In such event, each Certificateholder will be
treated as the owner of a pro rata undivided interest in the ordinary income
and corpus portions of the trust attributable to the Contract Pool in which
its Certificate evidences an ownership interest and will be considered the
equitable owner of a pro rata undivided interest in each of the Contracts
included therein. The following discussion assumes the Trust Fund will be so
classified as a grantor trust.
Tax Status of Certificates. In general, (i) Certificates held by a "domestic
building and loan association" within the meaning of Section 7701(a)(19) of
the Code will not be considered to represent "loans secured by an interest in
real property" within the meaning of Section 7701(a)(19)(C)(v) of the Code and
(ii) Certificates held by a real estate investment trust will not constitute
"real estate assets" within the meaning of Section 856(c)(5)(A) of the Code
and interest thereon will not be considered "interest on obligations secured
by mortgages on real property" within the meaning of Section 856(c)(3)(B) of
the Code. Investors affected by the foregoing provisions of the Code should
consult with their own tax advisors with respect to these matters.
Tax Treatment of Certificates. Subject to the discussion below of the
"stripped bond" rules of the Code, Certificateholders will be required to
report on their federal income tax returns, and in a manner consistent with
their respective methods of accounting, their pro rata share of the entire
income arising from the Contracts comprising such Contract Pool, including
interest, market or original issue discount, if any, prepayment fees,
assumption fees, and late payment charges received by the Company, and any
gain upon disposition of such Contracts. (For purposes of this discussion, the
term "disposition," when used with respect to the Contracts, includes
scheduled or prepaid collections with respect to the Contracts, as well as the
sale or exchange of a Certificate.) Subject to the discussion below of certain
limitations on itemized deductions, Certificateholders will be entitled under
Section 162 or 212 of the Code to deduct their pro rata share of related
servicing fees, administrative and other non-interest expenses, including
assumption fees and late payment charges retained by the Company. An
individual, an estate, or a trust that holds a Certificate either directly or
through a pass-through entity will be allowed to deduct such expenses under
Section 212 of the Code only to the extent that, in the aggregate and combined
with certain other itemized deductions, they exceed 2% of the adjusted gross
income of the holder. In addition, Section 68 of the Code provides that the
amount of itemized deductions (including those provided for in Section 212 of
the Code) otherwise allowable for the taxable year for an individual whose
adjusted gross income exceeds a threshold amount specified in the Code
($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 Certificate, no deduction will be allowed for such
holder's allocable portion of the foregoing expenses, even though an amount
equal to the total of such expenses will be included in such holder's gross
income for alternative minimum tax purposes. To the extent that a
Certificateholder is not permitted to deduct servicing fees allocable to a
Certificate, the taxable income of the Certificateholder
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attributable to that Certificate will exceed the net cash distributions
related to such income. Certificateholders may deduct any loss on disposition
of the Contracts to the extent permitted under the Code.
A Certificateholder will be treated as purchasing an interest in each
Contract comprising the Contract Pool at a price determined by allocating the
purchase price paid for the Certificate among all such Contracts in proportion
to their fair market values at the time of purchase of the Certificate. To the
extent that the portion of the purchase price of a Certificate allocated to a
Contract is greater than or less than the portion of the principal balance of
the Contract allocable to the Certificate, that interest in the Contract will
be deemed to have been acquired with premium or discount, respectively.
Market Discount. A Certificateholder generally will be treated as having
acquired an interest in a Contract at a market discount if, at the time the
Certificate is acquired, the unpaid principal balance on such Contract
allocable to the Certificate exceeds the portion of the price paid for the
Certificate by such Certificateholder that is allocated to that Contract. A
Certificateholder who acquires an interest in a Contract at a market discount
will be required to recognize accrued market discount as ordinary income as
payments of principal are received on such Contract or upon the sale or
exchange of the Certificate. Section 1276(b)(3) of the Code authorizes the
issuance of regulations providing for the method for accruing market discount
on debt instruments, the principal of which is payable in more than one
installment, such as a Contract. Until such regulations are issued, the
legislative history associated with this provision indicates certain methods
which are to be used. In general, the holder of a Certificate may elect to
treat market discount as accruing either (i) under a constant yield method
that is similar to the method for the accrual of original issue discount or
(ii) under a ratable accrual method (pursuant to which the market discount is
treated as accruing in equal daily installments during the period the
Certificate is held by the purchaser), in each case computed taking into
account the prepayment assumption used in pricing the initial offering of such
Certificate (the "Prepayment Assumption"). Because the regulations referred to
above have not been issued, it is not possible to predict what effect, if any,
such regulations, when issued, might have on the tax treatment of an interest
in a Contract purchased at a discount.
The Code provides that the market discount in respect of a Contract will be
considered to be zero if the amount of discount allocable to the Contract is
less than 0.25% of the Contract's stated redemption price at maturity
multiplied by the number of complete years remaining to its maturity after the
holder acquired the obligation. If market discount is treated as de minimis
under this rule, the actual discount would be allocated among a portion of
each scheduled payment representing the stated redemption price of such
Contract and that portion of the discount allocable to such payment would be
reported as income when such payment occurs or is due.
The Code further provides that any principal payment with respect to a
Contract acquired with market discount or any gain on disposition of such a
Contract shall be treated as ordinary income to the extent it does not exceed
the accrued market discount at the time of such payment. The amount of accrued
market discount for purposes of determining the amount of ordinary income to
be recognized with respect to subsequent payments on such a Contract is to be
reduced by the amount previously treated as ordinary income.
In general, limitations imposed by the Code that are intended to match
deductions with the taxation of income may require a holder of an interest in
a Contract having market discount to defer a portion of the interest
deductions attributable to any indebtedness incurred or continued to purchase
or carry such Contract. Alternatively, a holder of an interest in a Contract
may elect to include market discount in gross income as it accrues and, if he
makes such an election, is exempt from this rule. The adjusted basis of a
Certificate subject to such election will be increased to reflect market
discount included in gross income, thereby reducing any gain or increasing any
loss on a sale or taxable disposition.
The treatment of any discount will depend upon whether the discount
represents market discount or original issue discount. It is not anticipated
that the Contracts will have original issue discount, unless they are subject
to the "stripped bond" rules of the Code described below. If the Contracts are
subject to the stripped bond rules of the Code, the market discount rules
discussed above may not apply.
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<PAGE>
Amortizable Premium. A holder of a Certificate who holds the Certificate as
a capital asset and who is treated as having purchased an interest in a
Contract at a cost greater than its stated redemption price at maturity will
be considered to have purchased the interest in the Contract at a premium. In
general, the Certificateholder may elect to deduct the amortizable bond
premium as it accrues under a constant yield method. A Certificateholder's tax
basis in the Certificate will be reduced by the amount of the amortizable bond
premium deducted. It appears that the Prepayment Assumption should be taken
into account in determining the term of a Contract for this purpose.
Amortizable bond premium with respect to an interest in a Contract will be
treated as an offset to interest income on such Contract, and a
Certificateholder's deduction for amortizable bond premium will be limited in
each year to the amount of interest income derived with respect to such
Contract for such year. Any election to deduct amortizable bond premium will
apply to all debt instruments (other than instruments the interest on which is
excludable from gross income) held by the Certificateholder at the beginning
of the first taxable year to which the election applies or thereafter
acquired, and may be revoked only with the consent of the Service. Bond
premium on an interest in a Contract held by a Certificateholder who does not
elect to deduct the premium will decrease the gain or increase the loss
otherwise recognized on the disposition of the Certificate. Certificateholders
who pay a premium for a Certificate should consult their tax advisors
concerning such an election and rules for determining the method for
amortizing bond premium.
Stripped Certificates. Certain classes of Certificates may be subject to the
stripped bond rules of Section 1286 of the Code and for purposes of this
discussion will be referred to as "Stripped Certificates." In general, a
Stripped Certificate will be subject to the stripped bond rules where there
has been a separation of ownership of the right to receive some or all of the
principal payments on a Contract from ownership of the right to receive some
or all of the related interest payments. Certificates will constitute Stripped
Certificates and will be subject to these rules under various circumstances,
including the following: (i) if any servicing compensation is deemed to exceed
a reasonable amount; (ii) if the Company or any other party retains a portion
of the payments to be made under the Contracts comprising a Contract Pool;
(iii) if two or more classes of Certificates are issued representing the right
to non-pro rata percentages of the interest or principal payments on the
Contracts; or (iv) if Certificates are issued which represent the right to
interest only payments or principal only payments.
Although not entirely clear, each Stripped Certificate should be considered
to be a single debt instrument issued on the day it is purchased for purposes
of calculating any original issue discount. Rules governing original issue
discount are set forth in Sections 1271-1273 and 1275 of the Code and the
Treasury Regulations issued thereunder (the "OID Regulations"). In general, in
the hands of the original holder of a Stripped Certificate, original issue
discount, if any, is the difference between the "stated redemption price at
maturity" of the Certificate and its "issue price." For purposes of applying
the original issue discount provisions of the Code, the issue price of a
Stripped Certificate will be the purchase price paid by each holder thereof
and the stated redemption price at maturity may include the aggregate amount
of all payments to be made with respect to the Stripped Certificate whether or
not denominated as interest. The amount of original issue discount with
respect to a Stripped Certificate may be treated as zero under the original
issue discount de minimis rules if it is less than .25% of the principal
amount of the Certificate multiplied by the weighted average maturity of the
Certificate as defined in the OID Regulations. A purchaser of a Stripped
Certificate may be required to account for any discount on the certificate as
market discount rather than original issue discount if either (i) the amount
of original issue discount with respect to the certificate was treated as zero
under the original issue discount de minimis rule when the certificate was
stripped or (ii) no more than 100 basis points (including any amount of
servicing in excess of reasonable servicing) is stripped off of the Contracts.
See "Market Discount" above.
Original issue discount with respect to a Stripped Certificate, if any, must
be included in ordinary gross income for federal income tax purposes as it
accrues in advance of the receipt of any cash attributable to such income. The
amount of original issue discount, if any, required to be included in a
Stripped Certificateholder's ordinary gross income in any taxable year will be
computed in accordance with Section 1272(a) of the code and the OID
Regulations. Under such Section and the OID Regulations, original issue
discount accrues on a daily basis under a constant yield method that takes
into account the compounding of interest. Although the OID Regulations suggest
that a prepayment assumption is not to be used in computing the yield on the
underlying
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<PAGE>
assets of a Trust Fund, the Code appears to require that such a prepayment
assumption be used in computing yield with respect to Stripped Certificates.
In the absence of authority to the contrary, the Company intends to base
information reports and returns to the Service and the holders of Stripped
Certificates taking into account an appropriate prepayment assumption. Holders
of Stripped Certificates should refer to the related Prospectus Supplement to
determine whether and in what manner the original issue discount rules will
apply thereto.
When an investor purchases more than one class of Stripped Certificates it
is currently unclear whether for federal income tax purposes such classes of
Stripped Certificates should be treated separately or aggregated for purposes
of applying the original issue discount rules described above.
It is possible that the Service may take a contrary position with respect to
some or all of the foregoing tax consequences. For example, a holder of a
Stripped Certificate may be treated as the owner of (i) as many stripped bonds
or stripped coupons as there are scheduled payments of principal and/or
interest on each Contract or (ii) a separate installment obligation for each
Contract representing the Stripped Certificate's pro rata share of principal
and/or interest payments to be made with respect thereto. As a result of these
possible alternative characterizations, investors should consult their own tax
advisors regarding the proper treatment of Stripped Certificates for federal
income tax purposes.
The servicing compensation to be received by the Company and the fee for
credit enhancement, if any, may be questioned by the Service with respect to
certain Certificates or Contracts as exceeding a reasonable fee for the
services being performed in exchange therefor, and a portion of such servicing
compensation could be recharacterized as an ownership interest retained by the
Company or other party in a portion of the interest payments to be made
pursuant to the Contracts. In this event, a Certificate might be treated as a
Stripped Certificate subject to the stripped bond rules of Section 1286 of the
Code and the original issue discount provisions rather than to the market
discount and premium rules.
Gain or Loss on Disposition. Upon sale or exchange of a Certificate, a
Certificateholder will recognize gain or loss equal to the difference between
the amount realized in the sale and its aggregate adjusted basis in the
Contracts represented by the Certificate. Generally, the aggregate adjusted
basis will equal the Certificateholder's cost for the Certificate increased by
the amount of any previously reported income or gain with respect to the
Certificate and decreased by the amount of any losses previously reported with
respect to the Certificate and the amount of any distributions received
thereon. Except as provided above with respect to the original issue discount
and market discount rules, any such gain or loss would be capital gain or loss
if the Certificate was held as a capital asset.
Taxation of Certain Foreign Investors. For purposes of this discussion, a
"Foreign Holder" is a Certificateholder who holds a Certificate and who is not
(i) a citizen or resident of the United States, (ii) a corporation,
partnership, or other entity organized in or under the laws of the United
States or a political subdivision thereof, (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
execute 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 Certificate is effectively
connected with the conduct by the Foreign Holder of a trade or business within
the United States, the Foreign Holder is not subject to federal income or
withholding tax on interest (or original issue discount, if any) on a
Certificate (subject to possible backup withholding of tax, discussed below).
To qualify for this tax exemption, the Foreign Holder will be required to
provide periodically a statement signed under penalties of perjury certifying
that the Foreign Holder meets the requirements for treatment as a Foreign
Holder and providing the Foreign Holder's name and address. The statement,
which may be made on a Form W-8 or substantially similar substitute form,
generally must be provided in the year a payment occurs or in either of the
two preceding years. The statement must be provided, either directly or
through clearing organization or financial institution intermediaries, to the
person that otherwise would withhold tax. If the interest on a Certificate is
effectively connected with the conduct by a Foreign Holder of a trade or
business within the United States, then the Foreign Holder will be subject to
tax at
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<PAGE>
regular graduated rates. In addition, the foregoing rules will not apply to
exempt a U.S. shareholder of a controlled foreign corporation from taxation on
such U.S. shareholder's allocable portion of the interest income received by
such controlled foreign corporation. Foreign Holders should consult their own
tax advisors regarding the specific tax consequences of their owning a
Certificate.
Any gain recognized by a Foreign Holder upon a sale, retirement or other
taxable disposition of a Certificate generally will not be subject to United
States federal income tax unless either (i) the Foreign Holder is a
nonresident alien individual who holds the Certificate as a capital asset and
who is present in the United States for 183 days or more in the taxable year
of the disposition and either the gain is attributable to an office or other
fixed place of business maintained in the U.S. by the individual or the
individual has a "tax home" in the United States, or (ii) the gain is
effectively connected with the conduct by the Foreign Holder of a trade or
business within the United States.
It appears that a Certificate will not be included in the estate of a
Foreign Holder and will not be subject to United States estate taxes. However,
Foreign Holders should consult their own tax advisors regarding estate tax
consequences.
Backup Withholding. Under certain circumstances, a Certificateholder may be
subject to "backup withholding" at a 31% rate. Backup withholding may apply to
a Certificateholder who is a United States person if the holder, among other
circumstances, fails to furnish his Social Security number or other taxpayer
identification number to the Trustee. Backup withholding may apply, under
certain circumstances, to a Certificateholder who is a foreign person if the
Certificateholder fails to provide the Trustee or the Certificateholder's
securities broker with the statement necessary to establish the exemption from
federal income and withholding tax on interest on the Certificate. Backup
withholding, however, does not apply to payments on a Certificate made to
certain exempt recipients, such as corporations and tax-exempt organizations,
and to certain foreign persons. Certificateholders should consult their tax
advisors for additional information concerning the potential application of
backup withholding to payments received by them with respect to a Certificate.
Tax Administration and Reporting. The Company will furnish to each
Certificateholder with each distribution a statement setting forth the amount
of such distribution allocable to principal and to interest. In addition, the
Company will furnish, within a reasonable time after the end of each calendar
year, to each Certificateholder who was a Certificateholder at any time during
such year, information regarding the amount of servicing compensation received
by the Company and any sub-servicer and such other customary factual
information as the Company deems necessary or desirable to enable
Certificateholders to prepare their tax returns. Reports will be made annually
to the Service and to holders of record that are not excepted from the
reporting requirements regarding information as may be required with respect
to interest and original issue discount, if any, with respect to the
Certificates.
Other Tax Consequences. No advice has been received as to local income,
franchise, personal property, or other taxation in any state or locality, or
as to the tax effect of ownership of Certificates in any state or locality.
Certificateholders are advised to consult their own tax advisors with respect
to any state or local income, franchise, personal property, or other tax
consequences arising out of their ownership of Certificates.
LEGAL INVESTMENT CONSIDERATIONS
No Certificates offered hereby will constitute "mortgage related securities"
for purposes of the Secondary Mortgage Market Enhancement Act of 1984
("SMMEA") because none of the Contracts will be secured as required by SMMEA.
Accordingly, many institutions with legal authority to invest in "mortgage
related securities" may not be legally authorized to invest in the
Certificates.
There may be other restrictions on the ability of certain investors,
including depository institutions, either to purchase Certificates or to
purchase Certificates representing more than a specified percentage of the
investor's assets. Investors should consult their own legal advisors in
determining whether and to what extent the Certificates constitute legal
investments for such investors.
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RATINGS
It is a condition precedent to the issuance of any Class of Certificates
sold under this Prospectus that they be rated by at least one nationally
recognized statistical rating organization in one of its four highest rating
categories (within which there may be sub-categories or gradations indicating
relative standing). A security rating is not a recommendation to buy, sell or
hold securities and may be subject to revision or withdrawal at any time by
the assigning rating agency. The security rating of any Series of Certificates
should be evaluated independently of similar security ratings assigned to
other kinds of securities.
UNDERWRITING
The Company may sell Certificates of each Series to or through underwriters
(the "Underwriters") by a negotiated firm commitment underwriting and public
reoffering by the Underwriters, and also may sell and place Certificates
directly to other purchasers or through agents. The Company intends that
Certificates will be offered through such various methods from time to time
and that offerings may be made concurrently through more than one of these
methods or that an offering of a particular Series of Certificates may be made
through a combination of such methods.
The distribution of the Certificates may be effected from time to time in
one or more transactions at a fixed price or prices, which may be changed, or
at market prices prevailing at the time of sale, at prices related to such
prevailing market prices or at negotiated prices.
If so specified in the Prospectus Supplement relating to a Series of
Certificates, the Company or any affiliate thereof may purchase some or all of
one or more Classes of Certificates of such Series from the Underwriter or
Underwriters at a price specified in such Prospectus Supplement. Such
purchaser may thereafter from time to time offer and sell, pursuant to this
Prospectus, some or all of such Certificates so purchased directly, through
one or more Underwriters to be designated at the time of the offering of such
Certificates or through broker-dealers acting as agent and/or principal. Such
offering may be restricted in the manner specified in such Prospectus
Supplement. Such transactions may be effected at market prices prevailing at
the time of sale, at negotiated prices or at fixed prices.
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
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<PAGE>
purchaser of the offered Certificates shall not at the time of delivery be
prohibited under the laws of the jurisdiction to which such purchaser is
subject from purchasing such Certificates. The Underwriters and such other
agents will not have responsibility in respect of the validity or performance
of such contracts.
The Underwriters may, from time to time, buy and sell Certificates, but
there can be no assurance that an active secondary market will develop and
there is no assurance that any such market, if established, will continue.
Certain of the Underwriters and their associates may engage in transactions
with and perform services for the Company in the ordinary course of business.
LEGAL MATTERS
The legality and material federal income tax consequences of the
Certificates will be passed upon for the Company by the counsel to the Company
identified in the applicable Prospectus Supplement.
EXPERTS
The consolidated financial statements of the Company as of December 31, 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 reports given upon their
authority as experts in accounting and auditing.
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PART II.
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. Other Expenses of Issuance and Distribution
<TABLE>
<S> <C>
SEC registration fee.............................................. $ 590,000
Blue Sky fees and expenses........................................ 10,000
Accountant's fee and expenses..................................... 40,000
Attorneys' fees and expenses...................................... 160,000
Trustee's fees and expenses....................................... 20,000
Printing and engraving expenses................................... 100,000
Rating Agency fee................................................. 180,000
Miscellaneous..................................................... 40,000
----------
Total......................................................... $1,140,000
==========
</TABLE>
ITEM 15. Indemnification of Directors and Officers
Green Tree Financial Corporation is incorporated under the laws of Delaware.
Section 145 of the Delaware General Corporation Law provides that a Delaware
corporation may indemnify any persons, including officers and directors, who
are, or are threatened to be made, parties to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (other than an action by or in the right of such corporation,
by reason of the fact that such person was an officer, director, employee or
agent of such corporation, or is or was serving at the request of such
corporation as a director, employee or agent of such corporation, or is or was
serving at the request of such corporation as a director, officer, employee or
agent of another corporation or enterprise). The indemnity may include
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by such person in connection with
such action, suit or proceeding, provided such person acted in good faith and
in a manner he reasonably believed to be in or not opposed to the
corporation's best interests and, for criminal proceedings, had no reasonable
cause to believe that his conduct was illegal. A Delaware corporation may
indemnify officers and directors in an action by or in the right of the
corporation under the same conditions, except that no indemnification is
permitted without judicial approval if the officer or director is adjudged to
be liable to the corporation. Where and officer or director is successful on
the merits or otherwise in the defense of any action referred to above, the
corporation must indemnify him against the expenses which such officer or
director actually and reasonably incurred.
The Certificate of Incorporation and Bylaws of Green Tree Financial
Corporation provide, in effect, that, subject to certain limited exceptions,
such corporation will indemnify its officers and directors to the extent
permitted by the Delaware General Corporation Law.
Green Tree Financial Corporation maintains a directors' and officers'
insurance policy.
Pursuant to the form of Underwriting Agreement, a copy of which is
incorporated by reference as Exhibit 1.1 hereto, the Underwriters will agree,
subject to certain conditions, to indemnify the Company, its directors,
certain of its officers and persons who control the Company within the meaning
of the Securities Act of 1933, as amended (the "Securities Act"), against
certain liabilities.
ITEM 16. EXHIBITS
<TABLE>
<C> <S>
1.1 Proposed form of Underwriting Agreement (1)
3.1 Certificate of Incorporation of Green Tree Financial Corporation (2)
3.2 By-Laws of Green Tree Financial Corporation (2)
4.1 Form of Pooling and Servicing Agreement (3)
*4.2 Form of Sale and Servicing Agreement.
</TABLE>
II-1
<PAGE>
<TABLE>
<S> <C>
*4.3 Form of Trust Agreement.
*4.4 Form of Indenture between the Trust and the Indenture Trustee, including form of Note.
5.1 Opinion and consent of Dorsey & Whitney LLP with respect to legality
8.1 Opinion of Dorsey & Whitney with respect to tax matters
12.1 Computation of Ratio of Earnings to Fixed Charges (4)
23.1 Consent of KPMG Peat Marwick LLP
23.2 Consent of Dorsey & Whitney LLP (included as part of Exhibit 5.1)
23.3 Consent of Dorsey & Whitney LLP (included as part of Exhibit 8.1)
24.1 Power of attorney from officers and directors of the Registrant signed by an attorney-in-fact
(included on page II-4)
25.1 Form of T-1 Statement of Eligibility under the Trust Indenture Act of 1939 of the Indenture Trustee
(5)
99.1 Form of Prospectus Supplement Relating to Secured Contracts (6)
99.2 Form of Prospectus Supplement Relating to Unsecured Contracts (7)
99.3 Form of Prospectus Supplement Relating to Home Equity Loans (8)
</TABLE>
- --------
* To be filed by amendment.
(1) Incorporated by reference to the similarly numbered exhibit (unless
otherwise indicated) to the Registrant's Registration Statement on Form
S-3 (File No. 33-55853), as amended, which became effective on November
10, 1994.
(2) Incorporated by reference to the similarly numbered exhibit (unless
otherwise indicated) to the Registrant's Registration Statement No. 33-
60869.
(3) Incorporated by reference to the similarly numbered exhibit (unless
otherwise indicated) to the Registrant's Current Report on Form 8-K
dated December 19, 1997.
(4) Incorporated by reference to the similarly numbered exhibit (unless
otherwise indicated) to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1996 and its Quarterly Report on Form 10-Q
for the Quarter ended September 30, 1997.
(5) To be filed subsequently pursuant to Section 305(b)(2) of the Trust
Indenture Act of 1939, as amended.
(6) Incorporated by reference herein is the Registrant's Prospectus
Supplement to the Registrant's Prospectus dated December 10, 1997
relating to Certificates for Home Improvement Loans Series 1997-E as
filed with the Securities and Exchange Commission on December 11, 1997
pursuant to Rule 424(b) and relating to the Registrant's Registration
Statement on Form S-3 (File No. 333-32669).
(7) Incorporated by reference herein is the Registrant's Prospectus
Supplement to the Registrant's Prospectus dated September 17, 1996
relating to Certificates for Home Improvement Loans Series 1996-E as
filed with the Securities and Exchange Commission on September 19, 1996
pursuant to Rule 424(b) and relating to the Registrant's Registration
Statements on Form S-3 (File No. 33-64183).
(8) Incorporated by reference herein is the Registrant's Prospectus
Supplement to the Registrant's Prospectus dated May 23, 1997 as filed
with the Securities and Exchange Commission on May 28, 1997 pursuant to
Rule 424(b) and relating to the Registrant's Registration Statement on
Form S-3 (File No. 333-20335).
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers, and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that, in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
II-2
<PAGE>
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as a part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change to such information in the
registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change in the information set forth in the registration
statement;
Provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if
the registration statement is on Form S-3 or Form S-8, and the
information required to be included in a post-effective amendment by
those paragraphs is contained in periodic reports filed by the
registrant pursuant to section 13 or section 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in the
registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
The undersigned registrant hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is sent
or given, the latest annual report to security holders that is incorporated by
reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or rule 14c-3 under the Securities Exchange Act of
1934; and, where interim financial information required to be presented by
Article 3 of Regulation S-X are not set forth in the prospectus, to deliver,
or cause to be delivered to each person to whom the prospectus is sent or
given, the latest quarterly report that is specifically incorporated by
reference in the prospectus to provide such interim financial information.
II-3
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE
REQUIREMENTS FOR FILING ON FORM S-3 AND HAS DULY CAUSED THIS THE REGISTRATION
STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, IN THE CITY OF SAINT PAUL, STATE OF MINNESOTA, ON THE 17TH DAY OF
FEBRUARY, 1998.
Green Tree Financial Corporation
/s/ Scott T. Young
By __________________________________
SCOTT T. YOUNG
Senior Vice President and
Controller
POWER OF ATTORNEY
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THIS REGISTRATION
STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON
THE DATE INDICATED. EACH PERSON WHOSE SIGNATURE TO THIS REGISTRATION STATEMENT
APPEARS BELOW HEREBY CONSTITUTES AND APPOINTS JOEL H. GOTTESMANN AND SCOTT T.
YOUNG AND EACH OF THEM, AS HIS TRUE AND LAWFUL ATTORNEY-IN-FACT AND AGENT,
WITH FULL POWER OF SUBSTITUTION, TO SIGN ON HIS BEHALF INDIVIDUALLY AND IN THE
CAPACITY STATED BELOW AND TO PERFORM ANY ACTS NECESSARY TO BE DONE IN ORDER TO
FILE ALL AMENDMENTS AND POST-EFFECTIVE AMENDMENTS TO THIS REGISTRATION
STATEMENT, AND ANY AND ALL INSTRUMENTS OR DOCUMENTS FILED AS PART OF OR IN
CONNECTION WITH THIS REGISTRATION STATEMENT OR THE AMENDMENTS THERETO AND EACH
OF THE UNDERSIGNED DOES HEREBY RATIFY AND CONFORM ALL THAT SAID ATTORNEY-IN-
FACT AND AGENT, OR HIS SUBSTITUTES, SHALL DO OR CAUSE TO BE DONE BY VIRTUE
HEREOF.
SIGNATURE TITLE DATE
/s/ Lawrence M. Coss Chairman of the February 17,
- ------------------------------------- Board and Chief 1998
LAWRENCE M. COSS Executive Officer
(Principal
Executive Officer
and Director)
/s/ Edward L. Finn Executive Vice February 17,
- ------------------------------------- President and Chief 1998
EDWARD L. FINN Financial Officer
(Principal
Financial Officer)
/s/ Scott T. Young Senior Vice February 17,
- ------------------------------------- President and 1998
Controller
SCOTT T. YOUNG (Principal
Accounting Officer)
/s/ Richard G. Evans Director
- ------------------------------------- February 17,
RICHARD G. EVANS 1998
/s/ W. Max McGee Director
- ------------------------------------- February 17,
W. MAX MCGEE 1998
/s/ Robert S. Nickoloff Director
- ------------------------------------- February 17,
ROBERT S. NICKOLOFF 1998
II-4
<PAGE>
INDEX TO EXHIBITS
PAGE
----
<TABLE>
<S> <C>
1.1 Proposed form of Underwriting Agreement (1)
3.1 Certificate of Incorporation of Green Tree (2)
3.2 By-Laws of Green Tree (2)
4.1 Form of Pooling and Servicing Agreement (3)
*4.2 Form of Sale and Servicing Agreement.
*4.3 Form of Trust Agreement.
*4.4 Form of Indenture between the Trust and the Indenture Trustee,
including form of
Note.
5.1 Opinion and consent of Dorsey & Whitney LLP with respect to legality
8.1 Opinion of Dorsey & Whitney with respect to tax matters
12.1 Computation of Ratio of Earnings to Fixed Charges (4)
23.1 Consent of KPMG Peat Marwick LLP
23.2 Consent of Dorsey & Whitney LLP (included as part of Exhibit 5.1)
23.3 Consent of Dorsey & Whitney LLP (included as part of Exhibit 8.1)
24.1 Power of attorney from officers and directors of the Registrant signed
by an
attorney-in-fact (included on page II-4)
25.1 Form of T-1 Statement of Eligibility under the Trust Indenture Act of
1939 of the
Indenture Trustee (5)
99.1 Form of Prospectus Supplement Relating to Secured Contracts (6)
99.2 Form of Prospectus Supplement Relating to Unsecured Contracts (7)
99.3 Form of Prospectus Supplement Relating to Home Equity Loans (8)
</TABLE>
- --------
*To be filed by amendment.
(1) Incorporated by reference to the similarly numbered exhibit (unless
otherwise indicated) to the Registrant's Registration Statement on Form
S-3 (File No. 33-55853), as amended, which became effective on November
10, 1994.
(2) Incorporated by reference to the similarly numbered exhibit (unless
otherwise indicated) to the Registrant's Registration Statement No. 33-
60869
(3) Incorporated by reference to the similarly numbered exhibit (unless
otherwise indicated) to the Registrant's Current Report on Form 8-K
dated December 19, 1997.
(4) Incorporated by reference to the similarly numbered exhibit (unless
otherwise indicated) to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1996 and its Quarterly Report on Form 10-Q
for the Quarter ended September 30, 1997.
(5) To be filed subsequently pursuant to Section 305(b)(2) of the Trust
Indenture Act of 1939, as amended
(6) Incorporated by reference herein is the Registrant's Prospectus
Supplement to the Registrant's Prospectus dated December, 1997 relating
to Certificates for Home Improvement Loans Series 1997-E as filed with
the Securities and Exchange Commission on December 11, 1997 pursuant to
Rule 424(b) and relating to the Registrant's Registration Statement on
Form S-3 (File No. 333-32669).
(7) Incorporated by reference herein is the Registrant's Prospectus
Supplement to the Registrant's Prospectus dated September 17, 1996
relating to Certificates for Home Improvement Loans Series 1996-E as
filed with the Securities and Exchange Commission on September 19, 1996
pursuant to Rule 424(b) and relating to the Registrant's Registration
Statements on Form S-3 (File No. 33-64183).
(8) Incorporated by reference herein is the Registrant's Prospectus
Supplement to the Registrant's Prospectus dated May 23, 1997 as filed
with the Securities and Exchange Commission on May 28, 1997 pursuant to
Rule 424(b) and relating to the Registrant's Registration Statement on
Form S-3 (File No. 333-20335).
<PAGE>
EXHIBIT 4.2
================================================================================
GREEN TREE [HOME IMPROVEMENT AND HOME EQUITY] TRUST _____
SALE AND SERVICING AGREEMENT
between
GREEN TREE [HOME IMPROVEMENT AND HOME EQUITY] TRUST _____
and
GREEN TREE FINANCIAL CORPORATION
as Seller and Servicer
Dated as of _____
================================================================================
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
----
<S> <C> <C>
ARTICLE I DEFINITIONS............................................................ 1-1
SECTION 1.01. General....................................................... 1-1
SECTION 1.02. Specific Terms................................................ 1-1
ARTICLE II TRANSFER OF CONTRACTS.................................................. 2-1
SECTION 2.01. Transfer of Contracts......................................... 2-1
SECTION 2.02. Conditions to Acceptance by Trustee........................... 2-1
SECTION 2.03. Conveyance of the Subsequent Contracts........................ 2-1
ARTICLE III REPRESENTATIONS AND WARRANTIES........................................ 3-1
SECTION 3.01. Representations and Warranties Regarding the
Company....................................................... 3-1
SECTION 3.02. Representations and Warranties Regarding Each
Contract...................................................... 3-2
SECTION 3.03. Representations and Warranties Regarding the
Contracts in the Aggregate.................................... 3-5
SECTION 3.04. Representations and Warranties Regarding the
Contract Files................................................ 3-5
SECTION 3.05. Repurchase of Contracts for Breach of
Representations and Warranties................................ 3-6
ARTICLE IV PERFECTION OF TRANSFER AND PROTECTION OF
SECURITY INTERESTS.................................................... 4-1
SECTION 4.01. Custody of Contracts.......................................... 4-1
SECTION 4.02. Filings....................................................... 4-2
SECTION 4.03. Name Change or Relocation..................................... 4-2
SECTION 4.04. Chief Executive Office........................................ 4-3
SECTION 4.05. Costs and Expenses............................................ 4-3
ARTICLE V SERVICING OF CONTRACTS................................................ 5-1
SECTION 5.01. Responsibility for Contract Administration.................... 5-1
SECTION 5.02. Standard of Care.............................................. 5-1
SECTION 5.03. Records....................................................... 5-1
SECTION 5.04. Inspection; Computer Tape..................................... 5-1
SECTION 5.05. Collections................................................... 5-2
SECTION 5.06. Enforcement................................................... 5-3
SECTION 5.07. Owner Trustee to Cooperate.................................... 5-4
SECTION 5.08. Costs and Expenses............................................ 5-4
SECTION 5.09. Maintenance of Insurance...................................... 5-5
SECTION 5.10. Repossession.................................................. 5-6
SECTION 5.11. Commingling of Funds.......................................... 5-6
SECTION 5.12. Retitling; Security Interests................................. 5-6
SECTION 5.13. Servicer Advances............................................. 5-7
</TABLE>
-i-
<PAGE>
<TABLE>
<S> <C> <C>
SECTION 5.14. Monthly Reports; Certificate of Servicing Officer............. 5-7
SECTION 5.15. Annual Report of Accountants.................................. 5-8
SECTION 5.16. Certain Duties of the Servicer Under the Trust
Agreement..................................................... 5-8
SECTION 5.17. INTENTIONALLY OMITTED......................................... 5-8
SECTION 5.18. Annual Statement as to Compliance; Notice of
Servicer Termination Event.................................... 5-8
SECTION 5.19. INTENTIONALLY OMITTED......................................... 5-9
SECTION 5.20. Maintenance of Security Interests in Contracts................ 5-9
SECTION 5.21. Covenants, Representations, and
Warranties of Servicer........................................ 5-10
SECTION 5.22. Purchase of Contracts Upon Breach of Covenant................. 5-10
ARTICLE VI DISTRIBUTIONS; SPREAD ACCOUNT; LIMITED
GUARANTY; STATEMENTS TO SECURITY HOLDERS............................... 6-1
SECTION 6.01. Trust Accounts................................................ 6-1
SECTION 6.02. Collection Account Deposits................................... 6-2
SECTION 6.03. Permitted Withdrawals......................................... 6-2
SECTION 6.04. Reserve Account Withdrawals................................... 6-3
SECTION 6.05. Limited Guaranty.............................................. 6-3
SECTION 6.06. Distributions................................................. 6-4
SECTION 6.07. Sub-Pool HI Pre-Funding Account............................... 6-5
SECTION 6.08. Sub-Pool HI Pre-Funding Account............................... 6-5
SECTION 6.09. Statements to Securityholders................................. 6-5
ARTICLE VII SERVICE TRANSFER...................................................... 7-1
SECTION 7.01. Event of Termination.......................................... 7-1
SECTION 7.02. Transfer...................................................... 7-2
SECTION 7.03. Indenture Trustee to Act; Appointment of Successor............ 7-2
SECTION 7.04. Notification to Securityholders............................... 7-3
SECTION 7.05 Effect of Transfer............................................ 7-3
SECTION 7.06. Transfer of Collection Account................................ 7-4
SECTION 7.07. Limits on Liability........................................... 7-4
SECTION 7.08. Waiver of Past Defaults....................................... 7-4
ARTICLE VIII TERMINATION.......................................................... 8-1
SECTION 8.01. Company's or Servicer's Repurchase Option..................... 8-1
SECTION 8.02. Liquidation of Trust Estate................................... 8-2
ARTICLE IX INDEMNITIES.......................................................... 9-1
SECTION 9.01. Company's Indemnities......................................... 9-1
SECTION 9.02. Liabilities to Obligors....................................... 9-1
SECTION 9.03. Servicer's Indemnities........................................ 9-1
SECTION 9.04. Operation of Indemnities...................................... 9-2
ARTICLE X MISCELLANEOUS....................................................... 10-1
</TABLE>
-ii-
<PAGE>
<TABLE>
<S> <C> <C>
SECTION 10.01 Servicer Not to Assign Duties or Resign;
Delegation of Servicing Duties............................... 10-1
SECTION 10.02 Assignment or Delegation by Company.......................... 10-2
SECTION 10.03 Amendment.................................................... 10-2
SECTION 10.04 Notices...................................................... 10-3
SECTION 10.05 Merger and Integration....................................... 10-5
SECTION 10.06 Headings..................................................... 10-5
SECTION 10.07 Governing Law................................................ 10-5
SECTION 10.08 Limitation of Liability...................................... 10-5
Exhibit A -- Form of Assignment
Exhibit B -- Form of Certificate Regarding Repurchased
Contracts
Exhibit C -- Form of Monthly Report
Exhibit D -- Form of Certificate of Servicing Officer
Exhibit M-1 -- Form of Certificate Regarding Repurchased
Contracts
Exhibit M-2 -- Form of Certificate Regarding Repurchased
Contracts
Exhibit O-1 -- List of Home Improvement Contracts
Exhibit O-2 -- List of Fixed Rate Home Equity Contracts
Exhibit O-3 -- List of Adjustable Rate Home Equity Contracts
Exhibit R -- Form of Addition Notice
Exhibit S -- Form of Subsequent Transfer Instrument
Exhibit T -- Form of Officer's Certificate (Subsequent Transfer)
</TABLE>
-iii-
<PAGE>
THIS SALE AND SERVICING AGREEMENT, dated as of _____, between Green Tree
[Home Improvement and Home Equity] Trust _____ (the "Issuer" or the "Trust") and
Green Tree Financial Corporation, a corporation organized and existing under the
laws of the State of Delaware, as Seller and Servicer (the "Company").
WHEREAS, the Issuer wishes to purchase from the Company certain home
improvement contracts and promissory notes ("Home Improvement Contracts"), which
contracts and notes provide for installment payments by or on behalf of the
purchasers of the home improvements and grant mortgages, deeds of trust or
security deeds on the real estate that is the subject of the home improvements,
and certain home equity loans ("Home Equity Contracts" and, together with the
Home Improvement Contracts, the "Contracts"), which loans provide for
installment payments by or on behalf of the borrowers and grant mortgages, deeds
of trust or security deeds on certain real estate securing such loan; and
WHEREAS, the Company and the Issuer wish to set forth the terms and
conditions pursuant to which the Issuer will acquire the "Contracts," as
hereinafter defined, and the Company will service the Contracts;
NOW, THEREFORE, in consideration of the premises and the mutual agreements
hereinafter set forth, the Company and the Issuer agree as provided herein:
<PAGE>
ARTICLE I
DEFINITIONS
SECTION 1.01. General.
-------
For the purpose of this Agreement, except as otherwise expressly provided
or unless the context otherwise requires, the terms defined in this Article
include the plural as well as the singular, the words "herein," "hereof" and
"hereunder" and other words of similar import refer to this Agreement as a whole
and not to any particular Article, Section or other subdivision, and Section
references refer to Sections of this Agreement.
SECTION 1.02. Specific Terms.
--------------
All terms defined in any Related Document and not otherwise defined in this
Agreement shall have the meanings given them in such Related Document.
"Addition Notice" means with respect to the transfer of Subsequent Home
---------------
Improvement Contracts or Subsequent Home Equity Contracts to the Trust pursuant
to Section 2.03 of this Agreement, a notice, substantially in the form of
Exhibit R, which shall be given not later than five Business Days prior to the
related Subsequent Transfer Date, of the Company's designation of Subsequent
Home Improvement Contracts and/or Subsequent Home Equity Contracts, as
applicable, to be sold to the Trust and the aggregate Cut-off Date Principal
Balances of such Subsequent Home Equity Contracts and/or Subsequent Home Equity
Contracts.
"Adjustable Rate Home Equity Contract" means each closed-end home equity
------------------------------------
loan identified as such in the List of Contracts, which Adjustable Rate Home
Equity Contract is to be assigned and conveyed by the Company to the Trust, and
includes, without limitation, all related mortgages, deeds of trust and security
deeds and any and all rights to receive payments due pursuant thereto after the
Cut-off Date, or Subsequent Cut-off Date in the case of a Subsequent Home Equity
Contract.
"Advance Payment" means any payment by an Obligor in advance of the Due
---------------
Period in which it would be due under such Contract and which payment is not a
Principal Prepayment.
"Affiliate" of any specified Person means any other Person controlling or
---------
controlled by or under common control with such specified Person. For the
purposes of this definition, "control" when used with respect to any specified
Person means the power to direct the management and policies of such Person,
directly or indirectly, whether through the ownership of voting securities, by
contract or otherwise; and the terms "controlling" or "controlled" have meanings
correlative to the foregoing.
1-1
<PAGE>
"Agreement" means this Sale and Servicing Agreement as the same may be
---------
amended or supplemented from time to time.
"Aggregate Certificate Principal Balance" means the sum of the Sub-Pool HI
---------------------------------------
Certificate Principal Balance and the Sub-Pool HE Certificate Principal Balance.
"Amount Available" means, as to any Distribution Date, an amount equal to
----------------
the Collected Funds for that Distribution Date plus any amounts required to be
deposited in the Collection Account on or before such Distribution Date pursuant
to Sections 6.05, 8.01 and 8.02 of this Agreement.
"Amount Held for Future Distribution" means, as to any Payment Date, (1)
-----------------------------------
with respect to the Home Improvement Contracts, the total of the amounts held in
the Certificate Account in respect of the Home Improvement Contracts on the last
day of the preceding Due Period on account of Advance Payments on the Home
Improvement Contracts in respect of such Due Period and (2) with respect to the
Home Equity Contracts, the total of the amounts held in the Certificate Account
in respect of the Home Equity Contracts on the last day of the preceding Due
Period on account of Advance Payments on the Home Equity Contracts in respect of
such Due Period.
"Available Funds Pass-Through Rate" means, for any Payment Date, a rate per
---------------------------------
annum equal to the weighted average of the Expense Adjusted Contract Rates on
the then outstanding Adjustable Rate Home Equity Contracts.
"Balloon Loan" means a Home Equity Contract that provides for the payment
------------
of the unamortized principal balance of such Contract in a single payment at the
maturity of such Contract that is greater than the preceding monthly payment.
"Average Excess Spread" means, as to any Distribution Date, the arithmetic
---------------------
average of the Excess Spread for such Distribution Date and the immediately
preceding Distribution Date.
"Business Day" means any day other than (a) a Saturday or a Sunday, or (b)
------------
another day on which banking institutions in the city in which a Person is
taking action hereunder are authorized or obligated by law, executive order or
governmental decree to be closed.
"Calculation Agent" means the Person appointed by the Indenture Trustee to
-----------------
establish LIBOR with respect to each Interest Reset Period. The Calculation
Agent shall be the Indenture Trustee unless the Indenture Trustee is unable or
unwilling so to act, in which case the Calculation Agent shall be a financial
institution appointed by the Trust.
"Certificate Distribution Account" means the account established and
--------------------------------
maintained pursuant to Section 6.01(d).
1-2
<PAGE>
"Certificate Interest Amount" means, as to any Distribution Date, an amount
---------------------------
equal to one month's interest (or, with respect to the first Distribution Date,
interest from and including the Closing Date to but excluding _____) at the
Certificate Pass-Through Rate on the Certificate Principal Balance.
"Certificate Interest Carryover Shortfall" means as to any Distribution
----------------------------------------
Date, the amount, if any, by which the amount distributed to Holders of the
Certificates on such Distribution Date pursuant to Section 5.2(a)(i) of the
Trust Agreement is less than the Certificate Interest Amount for such
Distribution Date.
"Certificate Liquidation Loss Interest Amount" means, as to any
--------------------------------------------
Distribution Date, an amount equal to one month's interest at the Certificate
Pass-Through Rate on the Unpaid Certificate Principal Liquidation Loss, if any.
"Certificate Liquidation Loss Interest Shortfall" means, as to any
-----------------------------------------------
Distribution Date, the amount, if any, by which the amount distributed to
Holders of the Certificates on such Distribution Date pursuant to Section
5.2(a)(v) of the Trust Agreement is less than the Certificate Liquidation Loss
Interest Amount for such Distribution Date.
"Certificate Majority" means Holders of Certificates representing more than
--------------------
50% of the Certificate Principal Balance.
"Certificate Pass-Through Rate" means _____% per annum, computed on the
-----------------------------
basis of a 360-day year of twelve 30-day months.
"Certificate Percentage" means with respect to any Distribution Date, a
----------------------
percentage equal to 100% minus the Noteholders' Percentage for such Distribution
Date.
"Certificate Pool Factor" means, with respect to any Distribution Date, an
-----------------------
eight-digit decimal figure equal to the outstanding principal balance of the
Certificates as of such Distribution Date (after giving effect to all
distributions on such date) divided by the Original Certificate Principal
Balance.
"Certificate Principal Balance" means, as to any Distribution Date, the
-----------------------------
Original Certificate Principal Balance less the sum of: (i) all amounts
distributed to Holders of Certificates on prior Distribution Dates on account of
principal pursuant to Section 5.2(a)(iii), (iv) or (vii) of the Trust Agreement
or pursuant to a Guaranty Payment, and (ii) the Unpaid Certificate Principal
Liquidation Loss as of such Distribution Date.
"Certificate Principal Liquidation Loss" means, as to any Distribution
--------------------------------------
Date, the lesser of: (a) the amount, if any, by which the Certificate Principal
Balance and Note Principal Balance as of the immediately preceding Distribution
Date, minus the aggregate amount of principal distributed on account of the
Notes and
1-3
<PAGE>
Certificates on that Distribution Date (exclusive of any Guaranty
Payment on that Distribution Date in respect of any Certificate Principal
Liquidation Loss), exceeds the Pool Scheduled Principal Balance as of such
Distribution Date, or (b) the Certificate Principal Balance as of the
immediately preceding Distribution Date minus the aggregate amount of principal
distributed on account of the Certificates on that Distribution Date (exclusive
of any Guaranty Payment on that Distribution Date in respect of any Certificate
Principal Liquidation Loss).
"Certificate Principal Shortfall" means, as to any Distribution Date, the
-------------------------------
amount, if any, by which the amount distributed to Holders of Certificates on
such Distribution Date pursuant to Section 5.2(a)(iii) of the Trust Agreement is
less than the Certificateholders' Monthly Principal Distributable Amount for
such Distribution Date.
"Certificateholders' Distributable Amount" means, with respect to any
----------------------------------------
Distribution Date, the sum of the Certificateholders' Principal Distributable
Amount and the Certificateholders' Interest Distributable Amount.
"Certificateholders' Interest Distributable Amount" means, with respect to
-------------------------------------------------
any Distribution Date, the sum of the amounts payable in respect of the
Certificates pursuant to Sections 5.2(a)(i), (ii), (v) and (vi) of the Trust
Agreement.
"Certificateholders' Monthly Principal Distributable Amount" means, with
----------------------------------------------------------
respect to any Distribution Date the Certificate Percentage of the Formula
Principal Distribution Amount plus, on the Distribution Date on which the Note
Principal Balance is reduced to $0, an amount equal to the Noteholders'
Percentage of the Formula Principal Distribution Amount on such Distribution
Date minus amounts deposited in the Note Distribution Account on such
Distribution Date pursuant to Section 6.06(a)(iii) to reduce the Note Principal
Balance to zero, but in no event more than the outstanding Certificate Principal
Balance.
"Certificateholders' Principal Distributable Amount" means, with respect to
--------------------------------------------------
any Distribution Date, the sum of the Certificateholders' Monthly Principal
Distributable Amount for such Distribution Date and the Unpaid Certificate
Principal Shortfall as of the close of the preceding Distribution Date;
provided, however, that on the Final Scheduled Distribution Date, the principal
- -------- -------
required to be deposited into the Certificate Distribution Account shall not be
less than the amount that is necessary (after giving effect to the other amounts
to be deposited in the Certificate Distribution Account on such Distribution
Date and allocable to principal) to reduce to zero the Certificate Principal
Balance plus the Unpaid Certificate Principal Liquidation Loss.
"Certificates" means the _____% Loan-Backed Certificates issued under the
------------
Trust Agreement.
"Class" means pertaining to each Class of Notes.
-----
1-4
<PAGE>
"Class A-1 Notes" means the Class A-1 Notes.
---------------
"Class A-1 Percentage" means the result, expressed as a percentage,
--------------------
obtained by dividing: (i) the Original Class A-1 Principal Balance by (ii) the
Original Note Principal Balance.
"Class A-1 Final Scheduled Distribution Date" means _____ (or, if such day
-------------------------------------------
is not a Business Day, the next succeeding Business Day thereafter).
"Class A-1 Interest Amount" means, with respect to any Distribution Date
-------------------------
and the related Interest Reset Period, an amount equal to interest at the Class
A-1 Interest Rate on the Class A-1 Principal Balance.
"Class A-1 Interest Carryover Shortfall" means, with respect to any
--------------------------------------
Distribution Date, the amount, if any, by which the amount distributed to
Holders of the Class A-1 Notes on such Distribution Date pursuant to Section
8.02(c)(1)(i) of the Indenture is less than the Class A-1 Interest Amount for
such Distribution Date.
"Class A-1 Interest Rate" means, with respect to any Interest Reset Period,
-----------------------
a per annum rate of interest equal to [ _____ %, calculated on the basis of
actual days elapsed and a year of 360 days] [the lesser of _____% or LIBOR plus
_____ %, in each case calculated on the basis of actual days elapsed and a year
of 360 days].
"Class A-1 Liquidation Loss Interest Amount" means, as to any Distribution
------------------------------------------
Date and the related Interest Reset Period, an amount equal to interest at the
Class A-1 Interest Rate on the Unpaid Class A-1 Principal Liquidation Loss, if
any.
"Class A-1 Liquidation Loss Interest Shortfall" means, as to any
---------------------------------------------
Distribution Date, the amount, if any, by which the amount distributed to
Holders of the Class A-1 Notes on such Distribution Date pursuant to Section
8.02(c)(1)(v) of the Indenture is less than the Class A-1 Liquidation Loss
Interest Amount for such Distribution Date.
"Class A-1 Notes" means the Class A-1 [Floating Rate] [Fixed Rate] Asset-
---------------
Backed Notes issued by the Trust pursuant to the Indenture.
"Class A-1 Percentage" means the result, expressed as a percentage,
--------------------
obtained by dividing: (i) the Original Class A-1 Principal Balance by (ii) the
Original Note Principal Balance.
"Class A-1 Principal Balance" means, as to any Distribution Date, the
---------------------------
Original Class A-1 Principal Balance less the sum of: (i) all amounts
distributed to Holders of Class A-1 Notes on any prior Distribution Date on
account of principal pursuant to Section 8.02(c)(1)(iii), (iv) or (vii) of the
Indenture; and (ii) the Unpaid Class A-1 Principal Liquidation Loss as of such
Distribution Date.
1-5
<PAGE>
"Class A-1 Principal Liquidation Loss" means, as to any Distribution Date,
------------------------------------
the lesser of:
(1) the Class A-1 Percentage of the amount, if any, by which (x) the
remainder of (i) the Note Principal Balance plus the Certificate Principal
Balance as of the immediately preceding Distribution Date, minus (ii) the
sum of the aggregate amount of principal distributed on account of the
Notes and Certificates on that Distribution Date, plus the amount of any
Class A-2 Principal Liquidation Loss and Certificate Principal Liquidation
Loss determined as of that Distribution Date, exceeds (y) the Pool
Scheduled Principal Balance as of such Distribution Date; or
(2) the Class A-1 Principal Balance as of that Distribution Date.
"Class A-1 Principal Shortfall" means, as to any Distribution Date, the
-----------------------------
amount, if any, by which the amount distributed to Holders of Class A-1 Notes on
such Distribution Date pursuant to Section 8.02(c)(1)(iii) of the Indenture is
less than 67% of the Class A-1 Percentage of the Formula Principal Distribution
Amount for such Distribution Date.
"Class A-2 Final Scheduled Distribution Date" means _____ (or, if such day
-------------------------------------------
is not a Business Day, the next succeeding Business Day thereafter).
"Class A-2 Interest Amount" means, with respect to any Distribution Date
-------------------------
and the related Interest Reset Period, an amount equal to interest at the Class
A-2 Interest Rate on the Class A-2 Principal Balance.
"Class A-2 Interest Carryover Shortfall" means, with respect to any
--------------------------------------
Distribution Date, the amount, if any, by which the amount distributed to
Holders of the Class A-2 Notes on such Distribution Date pursuant to Section
8.02(c)(2)(i) of the Indenture is less than the Class A-2 Interest Amount for
such Payment Date.
"Class A-2 Interest Rate" means, with respect to any Interest Reset Period,
-----------------------
a per annum rate of interest equal to [ _____ %, calculated on the basis of
actual days elapsed and a year of 360 days] [the lesser of _____% or LIBOR plus
_____ %, in each case calculated on the basis of actual days elapsed and a year
of 360 days].
"Class A-2 Liquidation Loss Interest Amount" means, as to any Distribution
------------------------------------------
Date and the related Interest Reset Period, an amount equal to interest at the
Class A-2 Interest Rate on the Unpaid Class A-2 Principal Liquidation Loss, if
any.
"Class A-2 Liquidation Loss Interest Shortfall" means, as to any
---------------------------------------------
Distribution Date, the amount, if any, by which the amount distributed to
Holders of the Class A-2 Notes on such Distribution Date pursuant to Section
8.02(c)(2)(v) of the Indenture is less than the Class A-2 Liquidation Loss
Interest Amount for such Distribution Date.
1-6
<PAGE>
"Class A-2 Notes" means the Class A-2 [Floating Rate] [Fixed Rate] Asset-
---------------
Backed Notes issued by the Trust pursuant to the Indenture.
"Class A-2 Percentage" means the result, expressed as a percentage,
--------------------
obtained by dividing: (i) the Original Class A-2 Principal Balance by (ii) the
Original Note Principal Balance.
"Class A-2 Principal Balance" means, as to any Distribution Date, the
---------------------------
Original Class A-2 Principal Balance less the sum of: (i) all amounts
distributed to Holders of Class A-2 Notes on prior Distribution Dates on account
of principal pursuant to Sections 8.02(c)(2)(iii), (iv) or (vii) of the
Indenture; and (ii) the Unpaid Class A-2 Principal Liquidation Loss as of such
Distribution Date.
"Class A-2 Principal Liquidation Loss" means, as to any Distribution Date,
------------------------------------
the lesser of:
(1) the amount, if any, by which (x) the remainder of (i) the Note
Principal Balance and the Certificate Principal Balance as of the
immediately preceding Distribution Date, minus (ii) the sum of the
aggregate amount of principal distributed on account of the Notes and
Certificates on that Distribution Date, plus the amount of any Class A-3
Principal Liquidation Loss, Class A-2 Principal Liquidation Loss and
Certificate Principal Liquidation Loss determined as of that Distribution
Date, exceeds (y) the Pool Scheduled Principal Balance as of such
Distribution Date; or
(2) the Class A-2 Principal Balance as of that Distribution Date.
"Class A-2 Principal Shortfall" means, as to any Distribution Date, the
-----------------------------
amount, if any, by which the amount distributed on such Distribution Date to the
Holders of the Class A-2 Notes pursuant to Section 8.02(c)(2)(iii) of the
Indenture is less than the Class A-2 Percentage of the Formula Principal
Distribution Amount for such Distribution Date.
"Class Percentage Interest" means, as to any Note, the percentage interest
-------------------------
evidenced thereby in distributions made on the related Class, such percentage
interest being equal to the percentage (carried to eight places) obtained from
dividing the denomination of such Note by the aggregate denomination of all
Notes of the related Class (which equals the Original Class A-1 Principal
Balance in the case of a Class A-1 Note and the Original Class A-2 Principal
Balance in the case of a Class A-2 Note). The aggregate Class Percentage
Interests for each Class of Notes shall equal 100%.
"Class Principal Balance" means, as to any date, the Class A-1 Principal
-----------------------
Balance or the Class A-2 Principal Balance, as appropriate.
"Closing Date" means _____.
------------
1-7
<PAGE>
"Code" means the Internal Revenue Code of 1986, as amended.
----
"Collected Funds" means, as to any Distribution Date, an amount equal to
---------------
(a) the sum of (i) the amount on deposit in the Collection Account as of the
close of business on the last day of the related Due Period (exclusive of any
amounts deposited therein pursuant to Sections 6.05, 8.01 or 8.02), (ii) any
amounts required to be deposited in the Collection Account on or before the
Business Day immediately preceding such Distribution Date pursuant to Sections
5.09 or 5.13, and (iii) any amount deposited in the Collection Account in
respect of principal on the Contracts (exclusive of any amounts deposited
therein pursuant to Sections 6.05, 8.01 or 8.02) after the last day of the
related Due Period through and including the third Business Day prior to the
Distribution Date, but in no event later than the 10th day of the month in which
such Distribution Date occurs, reduced by (b) the sum as of the close of
business on the last day of the related Due Period of (i) the Amount Held for
Future Distribution, (ii) amounts permitted to be withdrawn by the Trustee from
the Collection Account pursuant to clauses (b) - (e), inclusive, of Section
6.03; and (iii) with respect to all Distribution Dates other than the
Distribution Date in _____, any amount deposited in the Collection Account in
respect of principal on the Contracts (exclusive of any amounts deposited
therein pursuant to Sections 6.05, 8.01 or 8.02) on or after the first day of
the related Due Period and through and including the third Business Day of the
preceding Distribution Date, but in no event later than the 10th day of the
related Due Period.
"Collection Account" means the account established and maintained pursuant
------------------
to Section 6.01.
"Company" means Green Tree Financial Corporation.
-------
"Computer Tape" means the computer tape generated by the Company which
-------------
provides information relating to the Contracts and which was used by the Company
in selecting the Contracts, and includes the master file and the history file.
"Contract File" means, as to each Contract, (a) the original copy of the
-------------
Contract which is comprised of the related contract and/or promissory note, (b)
the original or a copy of the mortgage, deed of trust or security deed or
similar evidence of a lien on the related improved property and evidence of due
recording of such mortgage, deed of trust or security deed, if available, and
(c) if such Contract was originated by a contractor or lender other than the
Company, the original or a copy of an assignment of the mortgage, deed of trust
or security deed by the contractor or lender to the Company.
"Contract Rate" means, with respect to any particular Contract, the rate of
-------------
annual interest specified in that Contract and computed in accordance with the
method specified in that Contract.
"Contracts" means the Home Improvement Contracts and Home Equity
---------
1-8
<PAGE>
Contracts.
"Corporate Trust Office" means with respect to the Owner Trustee, the
----------------------
principal office of the Owner Trustee at which at any particular time its
corporate trust business shall be administered, which office at the Closing Date
is located at _____; the telecopy number for the Corporate Trust Office of the
Owner Trustee on the date of the execution of this Agreement is _____; with
respect to the Indenture Trustee, the principal office of the Indenture Trustee
at which at any particular time its corporate trust business shall be
administered, which office at the Closing Date is located at _____; the telecopy
number for the Corporate Trust Office of the Indenture Trustee on the date of
execution of this Agreement is _____.
"Counsel for the Company" means Dorsey & Whitney LLP, or other legal
-----------------------
counsel for the Company.
"Cut-off Date" means _____ (or the date of origination of the Contract, if
------------
later).
"Cut-off Date Pool Principal Balance" means, with respect to all Contracts
-----------------------------------
or the Contracts comprising a given Sub-Pool, the aggregate of the Cut-off Date
Principal Balances of all Contracts or the Contracts comprising such Sub-Pool,
as the case may be.
"Cut-off Date Principal Balance" means, (i) as to any Home Improvement
------------------------------
Contract or Home Equity Contract, the unpaid principal balance thereof at the
Cut-off Date after giving effect to all installments of principal due prior
thereto, and (ii) as to any Subsequent Home Improvement Contract or Subsequent
Home Equity Contract, the unpaid principal balance thereof at the related
Subsequent Cut-off Date, after giving effect to all installments of principal
due prior thereto.
"Defaulted Contract" means a Contract with respect to which the Servicer
------------------
commenced foreclosure proceedings, made a sale of such Contract to a third party
for foreclosure or enforcement, or, in the case of an FHA-Insured Contract,
submitted a claim to FHA, or as to which there was a Delinquent Payment 180 or
more days past due.
"Delinquent Payment" means, as to any Contract, with respect to any Due
------------------
Period, any payment or portion of a payment that was originally scheduled to be
made during such Due Period under such Contract and was not received or applied
during such Due Period and deposited in the Collection Account, whether or not
any payment extension has been granted by the Servicer; provided, however, that
-------- -------
with respect to any Liquidated Contract, the payment scheduled to be made in the
Due Period in which such Contract became a Liquidated Contract shall not be
deemed a Delinquent Payment.
"Determination Date" means the third Business Day prior to each
------------------
1-9
<PAGE>
Distribution Date during the term of this Agreement.
"Distribution Date" means, with respect to the Certificates, the fifteenth
-----------------
day of each calendar month during the term of this Agreement, or if such day is
not a Business Day, the next succeeding Business Day, commencing in _____.
"Due Date" means, as to any Contract, the date of the month on which the
--------
scheduled monthly payment for such Contract is due.
"Due Period" means a calendar month during the term of this Agreement. With
----------
respect to a Distribution Date, "related Due Period" means the calendar month
immediately preceding the month in which the Distribution Date occurs.
"Electronic Ledger" means the electronic master record of conditional sales
-----------------
contracts and promissory notes of the Company.
"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
trust account (which shall be 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 Indenture Trustee, which depository institution
or trust company shall have capital and surplus (or, if such depository
institution or trust company is a subsidiary of a bank holding company system,
the capital and surplus of the bank holding company) of not less than
$50,000,000 and the securities of such depository institution (or, if such
depository institution is a subsidiary of a bank holding company system and such
depository institution's securities are not rated, the securities of the bank
holding company) shall have a credit rating from _____ (if rated by _____) and
_____ (if rated by _____) in one of its generic credit rating categories which
signifies investment grade; or (iv) an account that will not cause _____ and
_____ to downgrade or withdraw their then-current ratings assigned to the Notes,
as confirmed in writing by _____ and _____.
"Eligible Institution" means any depository institution (which may be the
--------------------
Owner Trustee, the Indenture Trustee or an Affiliate of either) 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 Bank Insurance Fund (currently
administered by the Federal Deposit Insurance Corporation), which is subject to
supervision and examination by federal or state authorities and whose short-term
deposits have been rated _____ by _____ and _____ by _____ (if rated by _____),
or whose unsecured long-term debt has been rated in one of the two highest
rating categories by _____ and _____ (if rated by _____) in the case of
unsecured long-term debt, or who shall otherwise be acceptable to _____ and
_____.
1-10
<PAGE>
"Eligible Investments" are any of the following:
--------------------
(i) direct obligations of, and obligations fully guaranteed by, the
United States of America, the Federal Home Loan Mortgage Corporation, the
Federal National Mortgage Association, or any agency or instrumentality of
the United States of America the obligations of which are backed by the
full faith and credit of the United States of America and which are
noncallable;
(ii) demand and time deposits in, certificates of deposit of, bankers'
acceptances issued by, or federal funds sold by any depository institution
or trust company (including the Indenture Trustee or any Affiliate of the
Indenture Trustee, acting in its commercial capacity) incorporated under
the laws of the United States of America or any State thereof and subject
to supervision and examination by federal and/or state authorities, so long
as, at the time of such investment or contractual commitment providing for
such investment, the commercial paper or other short-term deposits of such
depository institution or trust company (or, in the case of a depository
institution which is the principal subsidiary of a holding company, the
commercial paper or other short-term debt obligations of such holding
company) are rated at least _____ by _____ and at least _____ by _____ (if
rated by _____);
(iii) shares of an investment company registered under the Investment
Company Act of 1940, whose shares are registered under the Securities Act
of 1933 and have the highest credit rating then available from _____ (if
rated by _____) and _____ and whose only investments are in securities
described in clauses (i) and (ii) above;
(iv) repurchase obligations with respect to (A) any security described
in clause (i) above or (B) any other security issued or guaranteed by an
agency or instrumentality of the United States of America, in either case
entered into with a depository institution or trust company (acting as
principal) described in clause (ii)(A) above;
(v) securities bearing interest or sold at a discount issued by any
corporation incorporated under the laws of the United States of America or
any State thereof which have a credit rating of at least Aaa by _____ and
in one of the two highest rating categories from _____ (if rated by _____)
at the time of such investment; provided, however, that securities issued
-------- -------
by any particular corporation will not be Eligible Investments to the
extent that investment therein will cause the then outstanding principal
amount of securities issued by such corporation and held as part of the
corpus of the Trust to exceed 10% of amounts held in the Collection
Account; and
(vi) commercial paper having a rating of at least _____ from _____ and
at least _____ by _____ (if rated by _____) at the time of such
1-11
<PAGE>
investment or pledge as a security.
Notwithstanding the foregoing, securities that represent the right to receive
payments only of interest due on underlying obligations shall not be included as
Eligible Investments, whether or not such securities otherwise fall within (i)
through (vi) above.
Each of the Indenture Trustee and the Owner Trustee may trade with itself
or an Affiliate in the purchase or sale of such Eligible Investments.
"Eligible Servicer" means the Trustee or a Person qualified to act as
-----------------
servicer of the Contracts under applicable Federal and State laws and
regulations, which is a Title I approved lender under FHA regulations and which
services not less than an aggregate of $100,000,000 in outstanding principal
amount of FHA-insured home improvement contracts and promissory notes,
manufactured housing conditional sales contracts and installment loan agreements
and home equity loans.
"Eligible Substitute Contract" means, as to any Replaced Contract for which
----------------------------
such Eligible Substitute Contract is being substituted pursuant to Section
3.05(b), a Contract that (a) as of the date of its substitution, satisfies all
of the representations and warranties (which, except when expressly stated to be
as of origination, shall be deemed to be determined as of the date of its
substitution rather than as of the Cut-off Date, Subsequent Cut-off Date or the
Closing Date) in Section 3.02 and does not cause any of the representations and
warranties in Section 3.03, after giving effect to such substitution, to be
incorrect, (b) after giving effect to the scheduled payment due in the month of
such substitution, has a Scheduled Principal Balance that is not greater than
the Scheduled Principal Balance of such Replaced Contract, (c) has a Contract
Interest Rate that is at least equal to the Contract Interest Rate of such
Replaced Contract, (d) has a remaining term to scheduled maturity that is not
greater than the remaining term to scheduled maturity of the Replaced Contract,
and (e) if an Adjustable Rate Home Equity Contract, bears interest at a Contract
Interest Rate that (i) is subject to adjustment based on the same index as the
Replaced Contract, (ii) is calculated by adding a specified percentage amount
(the "gross margin") to the index that is no less than the gross margin on the
Replaced Contract, and (iii) is subject to a minimum rate of interest no less
than the minimum rate of interest on the Replaced Contract and a maximum rate of
interest no more than 1.0% greater than the rate of interest on the Replaced
Contract.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
-----
amended.
"Errors and Omissions Protection Policy" means the employee errors and
--------------------------------------
omissions policy maintained by the Servicer or any similar replacement policy
covering errors and omissions by the Servicer's employees, and meeting the
requirements of Section 5.09, all as such policy relates to Contracts comprising
a portion of the corpus of the Trust.
1-12
<PAGE>
"Event of Termination" has the meaning assigned in Section 7.01.
--------------------
"Excess Spread" means, as to any Distribution Date, 12 multiplied by a
-------------
fraction, the numerator of which is equal to (i) the Collected Funds minus (ii)
the sum of the amounts specified in Section 6.06(a)(i) - (iv) and the
denominator of which is equal to the Pool Scheduled Principal Balance for such
Distribution Date.
"Expense Adjusted Mortgage Rate" means, with respect to any Adjustable Rate
------------------------------
Home Equity Contract, the then applicable mortgage rate thereon, minus the
Expense Fee Rate.
"Expense Fee Rate" means .75%.
----------------
"FHA" means the Federal Housing Administration, or any successor thereto.
---
"FHA Insurance" means the credit insurance provided by FHA pursuant to
-------------
Title I of the National Housing Act, as evidenced by the Company's Contract of
Insurance.
"FHA-Insured Contracts" means those Home Improvement Contracts that have
---------------------
been or are being reported to FHA as eligible for FHA Insurance, a list of which
is attached to this Agreement as Exhibit [P].
"FHA Regulations" means the regulations promulgated by HUD relating to
---------------
Title I home improvement loans, currently found at 24 C.F.R. (S)201.
"Fidelity Bond" means the fidelity bond maintained by the Servicer or any
--------------
similar replacement bond, meeting the requirements of Section 5.09, as such bond
relates to Contracts comprising a portion of the corpus of the Trust.
"Final Scheduled Distribution Date" means _____ (or, if such day is not a
---------------------------------
Business Day, the next succeeding Business Day).
"Fixed Rate Home Equity Contract" means each closed-end home equity loan
-------------------------------
identified as such in the List of Contracts, which Home Equity Contract is to be
assigned and conveyed by the Company to the Trust, and includes, without
limitation, all related mortgages, deeds of trust and security deeds and any and
all rights to receive payments due pursuant thereto after the Cut-off Date, or
Subsequent Cut-off Date with respect to a Subsequent Home Equity Contract.
"Formula Principal Distribution Amount" means, as of any Distribution Date
-------------------------------------
(but subject to the last sentence of this definition), the sum of the following
amounts with respect to the related Due Period, in each case computed in
accordance with the method specified in the relevant Contract:
(i) all scheduled payments of principal due on each outstanding
1-13
<PAGE>
Contract during the related Due Period as specified in the amortization
schedule at the time applicable thereto (after adjustments for previous
Partial Principal Prepayments but before any adjustment to such
amortization schedule by reason of any bankruptcy of an Obligor or similar
proceeding or any moratorium or similar waiver or grace period); plus
(ii) all Partial Principal Prepayments applied and all Principal
Prepayments in Full received during the related Due Period; plus
(iii) the aggregate Scheduled Principal Balance of all Contracts that
became Liquidated Contracts during the related Due Period; plus
(iv) the aggregate Scheduled Principal Balance of all Contracts
repurchased during the prior Due Period pursuant to Section 3.05 or 5.22,
plus
(v) any amount deposited in the Collection Account in respect of
principal on the Contracts (exclusive of any amounts deposited therein
pursuant to Sections 6.05, 8.01 or 8.02) after the last day of the related
Due Period and up to and including the third Business Day prior to the
Distribution Date, but in no event later than the 10th day of the month in
which such Distribution Date occurs; minus
(vi) with respect to all Distribution Dates other than the
Distribution Date in _____, any amount deposited in the Collection Account
in respect of principal on the Contracts (exclusive of any amounts
deposited therein pursuant to Sections 6.05, 8.01 or 8.02) on or after the
first day of the related Due Period and up to and including the third
Business Day prior to the preceding Distribution Date, but in no event
later than the 10th day of the related Due Period.
The Formula Principal Distribution Amount for the Distribution Date in _____
shall be the sum of the Note Principal Balance and the Certificate Principal
Balance.
"[General Partner]" means _____, a _____ corporation.
----------------
"GNMA" means the Government National Mortgage Association, or any successor
----
thereto.
"Home Equity Contract" means each Fixed Rate Home Equity Contract or
--------------------
Adjustable Rate Home Equity Contract.
"Home Improvement Contract" means each home improvement contract and
-------------------------
promissory note described in the List of Contracts, which Home Improvement
Contract is to be assigned and conveyed by the Company to the Trust, and
includes, without limitation, all related mortgages, deeds of trust and security
deeds and any and all rights to receive payments due pursuant thereto after the
Cut-off Date, or
1-14
<PAGE>
Subsequent Cut-off Date with respect to a Subsequent Home Improvement Contract.
"HUD" means the United States Department of Housing and Urban Development,
---
or any successor thereto.
"Indenture" means the Indenture, dated as of _____, between the Trust and
---------
_____, as Indenture Trustee, as the same may be amended and supplemented from
time to time.
"Indenture Trustee" means the Person acting as Trustee under the Indenture,
-----------------
its successors in interest and any successor Trustee under the Indenture.
"Independent" means, when used with respect to any specified Person, Dorsey
-----------
& Whitney LLP, or any Person who (i) is in fact independent of the Company and
the Servicer, (ii) does not have any direct financial interest or any material
indirect financial interest in the Company or the Servicer or in an Affiliate of
either and (iii) is not connected with the Company or the Servicer as an
officer, employee, promoter, underwriter, trustee, partner, director or person
performing similar functions. Whenever it is provided herein that any
Independent Person's opinion or certificate shall be furnished to the Trustee,
such opinion or certificate shall state that the signatory has read this
definition and is Independent within the meaning set forth herein.
"Initial Contract" means a Home Equity Contract or Home Improvement
----------------
Contract originated on or prior to _____ (in the case of the Initial Home Equity
Contracts) or _____ (in the case of the Initial Home Improvement Contracts) and
identified as such on the List of Contracts attached hereto.
"Interest Reset Period" means, with respect to any Distribution Date, the
---------------------
period from and including the prior Distribution Date (or, with respect to the
first Distribution Date, from and including the Closing Date) to but excluding
such Distribution Date.
"Issuer" means the Trust.
------
"LIBOR" means, with respect to any Interest Reset Period, the offered rate,
-----
as established by the Calculation Agent, for United States dollar deposits for
one month that appears on Telerate Page 3750 as of 11:00 A.M., London time, on
the LIBOR Determination Date for such Interest Reset Period. 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
1-15
<PAGE>
on such date will be the arithmetic mean, rounded upwards, if necessary, to the
nearest 1/100,000 of 1% (.00001%), 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 upwards, if necessary,
to the nearest 1/100,000 of 1% (.00001%), 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 Interest Reset Period immediately preceding such
Interest Reset Period.
"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.
"LIBOR Determination Date" means the second LIBOR Business Day prior to the
------------------------
first day of the related Interest Reset Period.
"Limited Guaranty" means the obligation of the Company to make Guaranty
----------------
Payments pursuant to Section 6.05.
"Liquidated Contract" means with respect to any Due Period, either
-------------------
(1) a Defaulted Contract as to which (a) the Servicer has received from the
Obligor, or a third party purchaser of the Contract, all amounts which the
Servicer reasonably and in good faith expects to recover from or on account of
such Contract, or (b) in the case of an FHA-Insured Contract, either (i) FHA has
paid the claim or (ii) the Servicer has determined in good faith that FHA will
not pay the claim, or
(2) a Contract (a) upon which all or a portion of the first payment of
interest due by the Obligor was added to principal, and (b) on which the Obligor
failed to pay the full amount of principal due on the Contract, as computed by
the Servicer;
provided, however, that any Contract which the Company is obligated to
- --------- -------
repurchase pursuant to Section 3.05, and did so repurchase or substitute
therefor an Eligible Substitute Contract in accordance with Section 3.05, shall
be deemed not to be a Liquidated Contract; and provided, further, that with
--------- -------
respect to Due Periods beginning on or after _____ (in the case of a Home
Improvement Contract) or _____ (in the case of a Home Equity Contract), a
Liquidated Contract also means any Contract as to which the Servicer has
commenced foreclosure proceedings, made a sale of the Contract to a third party
for foreclosure or enforcement, or, in the case of an FHA-Insured Contract,
submitted a claim to FHA.
1-16
<PAGE>
"Liquidation Expenses" means out-of-pocket expenses (exclusive of any
--------------------
overhead expenses) which are incurred by the Servicer in connection with the
liquidation of any defaulted Contract, including, without limitation, legal fees
and expenses, and any related and unreimbursed expenditures for property taxes,
property preservation or restoration of the property to marketable condition.
"Liquidation Proceeds" means cash (including insurance proceeds) received
--------------------
in connection with the liquidation of defaulted Contracts, whether through
repossession, foreclosure sale or otherwise.
"List of Contracts" means the lists identifying each Contract constituting
-----------------
part of the Trust Fund and attached either to this Agreement as Exhibit O-1, O-
2, or O-3 or to a Subsequent Transfer Instrument as Exhibit A or B, as such
lists may be amended from time to time pursuant to Section 3.05(b) to add
Eligible Substitute Contracts and delete Replaced Contracts. Each List of
Contracts shall set forth as to each Contract identified on it (i) the Cut-off
Date Principal Balance, (ii) the amount of monthly payments due from the
Obligor, (iii) the Contract Rate and (iv) the maturity date.
"Monthly Report" has the meaning assigned in Section 5.13.
--------------
"Monthly Servicing and Guaranty Fee" means, as to any Distribution Date,
----------------------------------
the Amount Available in the Collection Account on that Distribution Date after
payment in full of all amounts payable under Section 6.06(a)(i) through (v).
"Monthly Servicing Fee" means, as of any Distribution Date on which the
---------------------
Company is not acting as Servicer, any amount agreed to by the Trustee and the
successor Servicer that does not exceed one-twelfth of the product of 0.75% and
the Pool Scheduled Principal Balance for the immediately preceding Distribution
Date.
"Net Liquidation Loss" means, as to a Liquidated Contract, the difference
--------------------
between (a) the Repurchase Price of such Contract, and (b) the Net Liquidation
Proceeds with respect to such Liquidated Contract, where such difference is a
positive number.
"Net Liquidation Proceeds" means, as to a Liquidated Contract, the proceeds
------------------------
received, or, for Contracts which become Liquidated Contracts pursuant to the
last proviso in the definition of "Liquidated Contract," the estimated proceeds
to be received, as of the last day of the Due Period in which such Contract
became a Liquidated Contract, from the Obligor, from a third party purchaser of
the Contract, under FHA Insurance, under insurance other than FHA insurance, or
otherwise, net of Liquidation Expenses.
"Note Distribution Account" means the account designated as such,
-------------------------
established and maintained pursuant to Section 6.01(b).
1-17
<PAGE>
"Note Majority" means, as to each Class of Notes, Holders of Notes
-------------
representing a majority of the Principal Balance of such Class of Notes.
"Note Pool Factor" means, with respect to any Distribution Date and each
----------------
Class of Notes, an eight-digit decimal figure equal to the outstanding principal
balance of such class of Notes as of such Distribution Date (after giving effect
to all distributions on such date) divided by the Original Principal Balance of
such Class of Notes as of the Closing Date.
"Note Principal Balance" means, as of any Distribution Date, the sum of the
----------------------
Class A-1 Principal Balance and the Class A-2 Principal Balance.
"Noteholders' Distributable Amount" means, with respect to any Distribution
---------------------------------
Date, the sum of the Noteholders' Principal Distributable Amount and the
Noteholders' Interest Distributable Amount.
"Noteholders' Interest Carryover Shortfall" means, with respect to any
-----------------------------------------
Distribution Date, the amounts payable in respect of the Notes pursuant to
Sections 8.02(c)(1)(ii) and (vi), 8.02(c)(2)(ii) and (vi), 8.02(c)(3)(ii) and
(vi), and 8.02(c)(4)(ii) and (vi) of the Indenture.
"Noteholders' Interest Distributable Amount" means, with respect to any
------------------------------------------
Distribution Date, the sum of the Noteholders' Monthly Interest Distributable
Amount for such Distribution Date and the Noteholders' Interest Carryover
Shortfall for such Distribution Date.
"Noteholders' Monthly Interest Distributable Amount" means, with respect to
--------------------------------------------------
any Distribution Date, the amounts payable in respect of the Notes pursuant to
Sections 8.02(c)(1)(i) and (v), 8.02(c)(2)(i) and (v), 8.02(c)(3)(i) and (v) and
8.02(c)(4)(i) and (v) of the Indenture.
"Noteholders' Monthly Principal Distributable Amount" means, with respect
---------------------------------------------------
to any Distribution Date, the Noteholders' Percentage of the Formula Principal
Distribution Amount (but not to exceed the Note Principal Balance) plus the
aggregate Principal Liquidation Loss of each Class of Notes.
"Noteholders' Percentage" means 100% until and including the Distribution
-----------------------
Date on which the Note Principal Balance and the aggregate Principal Liquidation
Losses (if any) are paid in full and 0% thereafter.
"Noteholders' Principal Distributable Amount" means, with respect to any
-------------------------------------------
Distribution Date, the sum of the Noteholders' Monthly Principal Distributable
Amount for such Distribution Date and the Noteholders' Unpaid Principal
Shortfall as of the close of the preceding Distribution Date; provided, that (i)
the Noteholders' Principal Distributable Amount on the Final Scheduled
Distribution Date shall not
1-18
<PAGE>
be less than the amount that is necessary (after giving effect to other amounts
to be deposited in the Note Distribution Account on such Distribution Date and
allocable to principal) to reduce the Note Principal Balance plus the Unpaid
Class A-1 and A-2 Principal Liquidation Losses to zero.
"Noteholders' Unpaid Principal Shortfall" means, with respect to any
---------------------------------------
Distribution Date, the amounts payable in respect of the Notes pursuant to
Sections 8.02(c)(1)(iv), 8.02(c)(2)(iv), 8.02(c)(3)(iv), and 8.02(c)(4)(iv) of
the Indenture.
"Notes" means the Class A-1 or Class A-2 Notes.
-----
"NRSRO" means any nationally recognized statistical rating organization.
-----
[ "N.Y.U.C.C." means the Uniform Commercial Code as in effect in the State of
----------
New York.]
"Obligor" means the person who owes payments under a Contract.
-------
"Officer's Certificate" means a certificate signed by the Chairman of the
---------------------
Board, President or any Vice President of the Company and delivered to the
Trustee.
"Opinion of Counsel" means a written opinion of counsel, who may, except as
------------------
expressly provided herein, be salaried counsel for the Company, acceptable to
the Indenture Trustee, the Owner Trustee and the Company.
"Original Certificate Principal Balance" means $ _____.
--------------------------------------
"Original Class A-1 Principal Balance" means $ _____.
------------------------------------
"Original Class A-2 Principal Balance" means $ _____.
------------------------------------
"Original Class Principal Balance" means, with respect to any Class, the
--------------------------------
Original Class A-1 Principal Balance or the Original Class A-2 Principal Balance
as appropriate.
"Original Note Principal Balance" means the sum of the Class A-1 and Class
-------------------------------
A-2 Original Class Principal Balances.
"Original Sub-Pool HE Certificate Principal Balance" means $_____.
--------------------------------------------------
"Original Sub-Pool HI Certificate Principal Balance" means $_____.
--------------------------------------------------
"Original Sub-Pool HE Pre-Funded Amount" means $_____.
--------------------------------------
"Original Sub-Pool HI Pre-Funded Amount" means $_____.
--------------------------------------
1-19
<PAGE>
"Owner Trustee" means _____, acting not individually but solely as trustee,
-------------
or its successor in interest, and any successor appointed as provided in the
Trust Agreement.
"Partial Principal Prepayment" means (a) any Principal Prepayment other
----------------------------
than a Principal Prepayment in Full and (b) any cash amount deposited in the
Collection Account pursuant to the proviso in Section 3.05(a).
"Payment Date" means, with respect to the Notes, the fifteenth day of each
------------
calendar month during the term of this Agreement, or if such day is not a
Business Day, the next succeeding Business Day, commencing in ____.
"Person" means any individual, corporation, partnership, limited liability
------
company, joint venture, association, joint stock company, trust (including any
beneficiary thereof), unincorporated organization or government or any agency or
political subdivision thereof.
"Pool Scheduled Principal Balance" means, with respect to all Contracts or
--------------------------------
the Contracts comprising a given Sub-Pool, as of any Payment Date, the aggregate
Scheduled Principal Balance of all Contracts or the Contracts comprising such
Sub-Pool, as the case may be, that were outstanding during the immediately
preceding Due Period.
"Post-Funding Payment Date" means the Payment Date on, or the first Payment
-------------------------
Date after, the last day of the Pre-Funding Period.
"Pre-Funding Period" means the period beginning on the Closing Date and
------------------
ending on the earliest of (a) the date on which the amount on deposit in the
Sub-Pool HE Pre-Funding Account is less than $10,000.00 and the amount on
deposit in the Sub-Pool HI Pre-Funding Account is less than $10,000.00, or (b)
the close of business on the date which is 60 days after the Closing Date or (c)
the date on which an Event of Termination occurs.
"Principal Liquidation Loss" means, with respect to any Distribution Date
--------------------------
and any Class of Notes, the amount by which the aggregate Principal Balance of
such Class and each junior Class and the Certificate Principal Balance exceeds
the Scheduled Pool Principal Balance, after giving effect to all distributions
of principal on such Distribution Date.
"Principal Prepayment" means a payment or other recovery of principal on a
--------------------
Contract (exclusive of Liquidation Proceeds) which is received in advance of its
scheduled due date and applied upon receipt (or, in the case of a Partial
Principal Prepayment, upon the next scheduled payment date on such Contract) to
reduce the outstanding principal amount due on such Contract prior to the date
or dates on which such principal amount is due.
"Principal Prepayment in Full" means any Principal Prepayment of the entire
----------------------------
principal balance of a Contract.
"[Rating Agency]" means _____ , or any successor thereto; provided that if
1-20
<PAGE>
_____ no longer has a rating outstanding on the Class A-1 Notes nor on the Class
A-2 Notes, nor on the Certificates, then references herein to "_____" shall be
deemed to refer to the NRSRO then rating any Class of the Notes (or, if more
than one such NRSRO is then rating any Class of the Notes, to such NRSRO as may
be designated by the Servicer), and references herein to ratings by or
requirements of _____ shall be deemed to have the equivalent meanings with
respect to ratings by or requirements of such NRSRO.
"Record Date" means the Business Day immediately preceding the related
-----------
Distribution Date.
"Related Documents" means the Trust Agreement, the Indenture, the
-----------------
Administration Agreement, the Certificates, the Notes and the Underwriting
Agreement. The Related Documents executed by any party are referred to herein
as "such party's Related Documents," "its Related Documents" or by a similar
expression.
"Replaced Contract" has the meaning assigned in Section 3.05(b).
-----------------
"Repurchase Price" means, with respect to a Contract to be repurchased
----------------
pursuant to Section 3.05 or Section 5.22, an amount equal to (a) the remaining
principal amount outstanding on such Contract, plus (b) interest at the Contract
Rate on such Contract from the end of the Due Period with respect to which the
Obligor last made a payment through the end of the immediately preceding Due
Period.
"Reserve Account" means the segregated trust account held by the Indenture
---------------
Trustee for the benefit of the Holders of the Notes pursuant to Section 6.01(c).
"Reserve Account Required Amount" means
-------------------------------
(i) prior to the first Distribution Date on which the Certificate
Principal Balance is equal to or greater than _____ % of the Pool
Scheduled Principal Balance, an amount equal to _____ % of the Cut-off
Date Pool Principal Balance;
(ii) on such Distribution Date and each Distribution Date thereafter,
(A) if the Average Excess Spread for such Distribution Date is
greater than _____ %, an amount equal to _____ % of the Cut-off
Date Pool Principal Balance; or
(B) if the Average Excess Spread for such Distribution Date is equal
to or less than _____ %, an amount equal to _____ % of the Cut-
off Date Pool Principal Balance plus the Pool Scheduled Principal
Balance for such Distribution Date multiplied by the
1-21
<PAGE>
difference, if any (but not less than zero) of
(1) _____ %, minus
(2) the difference (which may be a positive or a negative number)
between (X) the fraction, expressed as a percentage, equal to
the Certificate Principal Balance divided by the Pool
Scheduled Principal Balance, minus (Y) _____ %;
provided, however, that in no event may the Reserve Account Required Amount
- -------- -------
exceed the Note Principal Balance for such Distribution Date.
"Responsible Officer" means, with respect to the Owner Trustee, the
-------------------
chairman and any vice chairman of the board of directors, the president, the
chairman and vice chairman of any executive committee of the board of directors,
every vice president, assistant vice president, the secretary, every assistant
secretary, cashier or any assistant cashier, controller or assistant controller,
the treasurer, every assistant treasurer, every trust officer, assistant trust
officer and every other officer or assistant officer of the Trustee customarily
performing functions similar to those performed by persons who at the time shall
be such officers, respectively, or to whom a corporate trust matter is referred
because of knowledge of, familiarity with, and authority to act with respect to
a particular matter.
"Scheduled Principal Balance" means, with respect to any Contract and any
---------------------------
Payment Date, the Cut-off Date or any Subsequent Cut-off Date, the principal
balance of such Contract as of the due date in the Due Period immediately
preceding such Payment Date, Cut-off Date or Subsequent Cut-off Date, as the
case may be, as specified in the amortization schedule at the time relating
thereto (before any adjustment to such amortization schedule by reason of any
bankruptcy of an Obligor or similar proceeding or any moratorium or similar
waiver or grace period) after giving effect to any previous partial Principal
Prepayments and to the payment of principal due on such due date and
irrespective of any delinquency in payment by, or extension granted to, the
related Obligor. If for any Contract the Cut-off Date is the date of
origination of the Contract, its Scheduled Principal Balance as of the Cut-off
Date is the principal balance of the Contract on its date of origination.
"Securities" means the Notes and the Certificates.
----------
"Securityholders" means the Noteholders and the Certificateholders.
---------------
"Seller" means the Company.
------
"Service Transfer" has the meaning assigned in Section 7.02.
----------------
"Servicer" means the Company until any Service Transfer hereunder and
--------
thereafter means the new servicer appointed pursuant to Article VII.
1-22
<PAGE>
"Servicer Advance" means, with respect to any Distribution Date, the
----------------
amount, if any, deposited by the Servicer in the Collection Account pursuant to
Section 5.13.
"Servicing Officer" means any officer of the Servicer involved in, or
-----------------
responsible for, the administration and servicing of Contracts whose name
appears on a list of servicing officers appearing in an Officer's Certificate
furnished to the Trustee by the Servicer, as the same may be amended from time
to time.
"Step-up Rate Contract" means any Fixed Rate Home Equity Contract bearing
---------------------
interest during an initial period or periods at a fixed rate or fixed rates that
are lower than the fixed rate borne thereafter.
"Sub-Pool" means Sub-Pool HI or Sub-Pool HE.
--------
"Sub-Pool HE Pre-Funding ARM Subaccount" means the account so designated,
--------------------------------------
established and maintained pursuant to Section 6.08
"Sub-Pool HE Pre-Funding Fixed Rate Subaccount" means the account so
---------------------------------------------
designated, established and maintained pursuant to Section 6.08.
"Sub-Pool HE Pre-Funding Account" means the account so designated,
-------------------------------
established and maintained pursuant to Section 6.08.
"Sub-Pool HI Pre-Funding Account" means the account so designated,
-------------------------------
established and maintained pursuant to Section 6.07.
"Subsequent Cut-off Date" means, with respect to a Subsequent Home Equity
-----------------------
Contract or Subsequent Home Improvement Contract, the related Subsequent
Transfer Date.
"Subsequent Home Equity Contract" means a Fixed Rate Home Equity Contract
-------------------------------
or an Adjustable Rate Home Equity Contract sold by the Company to the Trust
pursuant to Section 2.03, such Contract being identified on Exhibit A or Exhibit
B, respectively, attached to a Subsequent Transfer Instrument.
"Subsequent Home Improvement Contract" means a Home Improvement Contract
------------------------------------
sold by the Company to the Trust pursuant to Section 2.03, such Contract being
identified on Exhibit C attached to a Subsequent Transfer Instrument.
"Subsequent Transfer Date" means, with respect to each Subsequent Transfer
------------------------
Instrument, the date on which the related Subsequent Home Equity Contracts
and/or Subsequent Home Improvement Contracts are sold to the Trust.
1-23
<PAGE>
"Subsequent Transfer Instrument" means each Subsequent Transfer Instrument
------------------------------
dated as of a Subsequent Transfer Date executed by the Trustee and the Company
substantially in the form of Exhibit S, by which the Company sells Subsequent
Home Equity Contracts and/or Subsequent Home Improvement Contracts to the Trust.
"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 nominated as the information vendor by the
Calculation Agent, for the purpose of displaying London interbank offered rates
of major banks).
"Trust" means the Green Tree [Home Improvement and Home Equity] Trust
-----
_____.
"Trust Accounts" means the Collection Account, the Note Distribution
--------------
Account and the Reserve Account.
"Trust Agreement" means the Trust Agreement dated as of _____ between the
---------------
Company, GTGP and the Owner Trustee, as the same may be amended and supplemented
from time to time.
"Trust Property" means the property conveyed to the Trust pursuant to
--------------
Section 2.01(a).
"Uncollectible Advance" means, with respect to any Determination Date, the
---------------------
portion of any Servicer Advances which the Servicer has determined in good faith
will not be ultimately recoverable by the Servicer. The determination by the
Servicer that it has made an Uncollectible Advance shall be evidenced by an
Officer's Certificate delivered to the Trustee.
"Undelivered Contract" means as of any date of determination an Initial
--------------------
Home Equity Contract identified, on the exception report attached to the
Acknowledgement delivered by the Trustee under Section 2.04, as a Contract as to
which the Trustee did not receive the related Contract File as of the Closing
Date and has not received the related Contract File and remitted payment to the
Company pursuant to Section 6.08(c).
"Undelivered ARM Contract Subaccount" means the subaccount so designated
-----------------------------------
and established and maintained pursuant to Section 6.08.
"Undelivered Fixed Rate Contract Subaccount" means the subaccount so
------------------------------------------
designated and established and maintained pursuant to Section 6.08.
"Underwriting Agreement" means the Underwriting Agreement and related Terms
----------------------
Agreement, each dated _____, by and among [Underwriter] and Green Tree.
1-24
<PAGE>
"Unpaid Certificate Interest Shortfall" means, as to any Distribution Date,
-------------------------------------
the amount, if any, of the remainder of (x) the Certificate Interest Carryover
Shortfall, if any, for the immediately prior Distribution Date, plus (y) the
Unpaid Certificate Interest Shortfall determined as of such immediately prior
Distribution Date, minus (z) all amounts distributed to the Holders of
Certificates on account of any Unpaid Certificate Interest Shortfall pursuant to
Section 5.2(a)(ii) of the Trust Agreement on such immediately prior Distribution
Date, plus accrued interest (to the extent payment thereof is legally
permissible) at the Certificate Pass-Through Rate on such remainder from such
immediately prior Distribution Date to the current Distribution Date.
"Unpaid Certificate Liquidation Loss Interest Shortfall" means, as to any
------------------------------------------------------
Distribution Date, the amount, if any, of the remainder of (x) the Certificate
Liquidation Loss Interest Shortfall, if any, for the immediately prior
Distribution Date, plus (y) the Unpaid Certificate Liquidation Loss Interest
Shortfall determined as of such immediately prior Distribution Date, minus (z)
all amounts distributed to the Holders of Certificates on account of any Unpaid
Certificate Liquidation Loss Interest Shortfall pursuant to Section 5.2(a)(vi)
of the Trust Agreement on such immediately prior Distribution Date, plus accrued
interest (to the extent payment thereof is legally permissible) at the
Certificate Pass-Through Rate on such remainder from such immediately prior
Distribution Date to the current Distribution Date.
"Unpaid Certificate Principal Liquidation Loss" means, as to any
---------------------------------------------
Distribution Date, the amount, if any, by which the sum of all Certificate
Principal Liquidation Losses for all prior Distribution Dates is in excess of
the amounts distributed on prior Distribution Dates to Holders of Certificates
pursuant to Section 5.2(a)(vii) of the Trust Agreement or pursuant to a Guaranty
Payment.
"Unpaid Certificate Principal Shortfall" means, as to any Distribution
--------------------------------------
Date, the amount, if any, by which the aggregate of the Certificate Principal
Shortfalls for all prior Distribution Dates is in excess of the amounts
distributed on prior Distribution Dates to Holders of Certificates pursuant to
Section 5.2(a)(iv) of the Trust Agreement.
"Unpaid Class A-1 Interest Shortfall" means, as to any Distribution Date,
-----------------------------------
the amount, if any, of the remainder of (x) the Class A-1 Interest Carryover
Shortfall, if any, for the immediately prior Distribution Date, plus (y) the
Unpaid Class A-1 Interest Shortfall determined as of such immediately prior
Distribution Date, minus (z) all amounts distributed to the Holders of Class A-1
Notes on account of any Unpaid Class A-1 Interest Shortfalls pursuant to Section
8.02(c)(1)(ii) of the Indenture on such immediately prior Distribution Date,
plus accrued interest (to the extent payment thereof is legally permissible) at
the Class A-1 Interest Rate on such remainder from such immediately prior
Distribution Date to the current Distribution Date.
1-25
<PAGE>
"Unpaid Class A-1 Liquidation Loss Interest Shortfall" means, as to any
----------------------------------------------------
Distribution Date, the amount, if any, of the remainder of (x) the Class A-1
Liquidation Loss Interest Shortfall, if any, for the immediately prior
Distribution Date, plus (y) the Unpaid Class A-1 Liquidation Loss Interest
Shortfall determined as of such immediately prior Distribution Date, minus (z)
all amounts distributed to the Holders of Class A-1 Notes on account of any
Unpaid Class A-1 Liquidation Loss Interest Shortfalls pursuant to Section
8.02(c)(1)(vi) of the Indenture on such immediately prior Distribution Date,
plus accrued interest (to the extent payment thereof is legally permissible) at
the Class A-1 Interest Rate on such remainder from such immediately prior
Distribution Date to the current Distribution Date.
"Unpaid Class A-1 Principal Liquidation Loss" means, as to any Distribution
-------------------------------------------
Date, the amount, if any, by which the sum of all Class A-1 Principal
Liquidation Losses for all prior Distribution Dates is in excess of the amounts
distributed on prior Distribution Dates to Holders of Class A-1 Notes pursuant
to Section 8.02(c)(1)(vii) of the Indenture.
"Unpaid Class A-1 Principal Shortfall" means, as to any Distribution Date,
------------------------------------
the amount, if any, by which the aggregate of the Class A-1 Principal Shortfalls
for all prior Distribution Dates is in excess of the amounts distributed on
prior Distribution Dates to Holders of Class A-1 Notes pursuant to Section
8.02(c)(1)(iv) of the Indenture.
"Unpaid Class A-2 Interest Shortfall" means, as to any Distribution Date,
-----------------------------------
the amount, if any, of the remainder of (x) the Class A-2 Interest Carryover
Shortfall, if any, for the immediately prior Distribution Date, plus (y) the
Unpaid Class A-2 Interest Shortfall determined as of such immediately prior
Distribution Date, minus (z) all amounts distributed to the Holders of Class A-2
Notes on account of any Unpaid Class A-2 Interest Shortfall pursuant to Section
8.02(c)(2)(ii) of the Indenture on such immediately prior Distribution Date,
plus accrued interest (to the extent payment thereof is legally permissible) at
the Class A-2 Interest Rate on such remainder from such immediately prior
Distribution Date to the current Distribution Date.
"Unpaid Class A-2 Liquidation Loss Interest Shortfall" means, as to any
----------------------------------------------------
Distribution Date, the amount, if any, of the remainder of (x) the Class A-2
Liquidation Loss Interest Shortfall, if any, for the immediately prior
Distribution Date, plus (y) the Unpaid Class A-2 Liquidation Loss Interest
Shortfall determined as of such immediately prior Distribution Date, minus (z)
all amounts distributed to the Holders of Class A-2 Notes on account of any
Unpaid Class A-2 Liquidation Loss Interest Shortfall pursuant to Section
8.02(c)(2)(vi) of the Indenture on such immediately prior Distribution Date,
plus accrued interest (to the extent payment thereof is legally permissible) at
the Class A-2 Interest Rate on such remainder from such immediately prior
Distribution Date to the current Distribution Date.
"Unpaid Class A-2 Principal Liquidation Loss" means, as to any Distribution
-------------------------------------------
1-26
<PAGE>
Date, the amount, if any, by which the sum of all Class A-2 Principal
Liquidation Losses for all prior Distribution Dates is in excess of the amounts
distributed on prior Distribution Dates to Holders of Class A-2 Notes pursuant
to Section 8.02(c)(2)(vii) of the Indenture.
"Unpaid Class A-2 Principal Shortfall" means, as to any Distribution Date,
------------------------------------
the amount, if any, by which the aggregate of the Class A-2 Principal Shortfalls
for all prior Distribution Dates is in excess of the amounts distributed on
prior Distribution Dates to Holders of Class A-2 Notes pursuant to Section
8.02(c)(2)(iv) of the Indenture.
"Weighted Average Home Equity Contract Rate" means, as to any Payment Date,
------------------------------------------
the weighted average (determined by Scheduled Principal Balance) of the Contract
Rates for all Home Equity Contracts that were outstanding during the immediately
preceding month.
"Weighted Average Home Improvement Contract Rate" means, as to any Payment
-----------------------------------------------
Date, the weighted average (determined by Scheduled Principal Balance) of the
Contract Rates for all Home Improvement Contracts that were outstanding during
the immediately preceding month.
1-27
<PAGE>
ARTICLE II
TRANSFER OF CONTRACTS
SECTION 2.01. Transfer of Contracts.
---------------------
(a) Subject to the terms and conditions of this Agreement, the Company
hereby transfers, assigns, sets over and otherwise conveys to the Trust by
execution of an Assignment substantially in the form of Exhibit A hereto all
right, title and interest of the Company in and to (i) the home improvement
contracts and promissory notes and home equity loans identified in the List of
Contracts attached to the Agreement (including, without limitation, all related
mortgages, deeds of trust and security deeds and any and all rights to receive
payments on or with respect to the Initial Contracts due after the applicable
Cut-off Date or Subsequent Cut-off Date in respect of the Subsequent Home Equity
Contracts and the Subsequent Home Improvement Contracts, (ii) all rights under
FHA Insurance in respect of each FHA-Insured Contract, (iii) all rights under
any hazard, flood or other individual insurance policy on the real estate
securing an Initial Contract for the benefit of the creditor of such Initial
Contract, (iv) all rights the Company may have against the originating
contractor or lender with respect to Initial Contracts originated by a
contractor or lender other than the Company, (v) all rights under the Errors and
Omissions Protection Policy and the Fidelity Bond as such policy and bond relate
to the Initial Contracts, (vi) all rights under any title insurance policies, if
applicable, on any of the properties securing Initial Contracts, (vii) all
documents contained in the Contract Files relating to the Initial Contracts,
(viii) the Trust Accounts and all funds on deposit therein from time to time and
all investments and proceeds thereof (including all income thereon) and (ix) all
proceeds and products of the foregoing.
(b) Although the parties intend that the conveyance of the Company's right,
title and interest in and to the Contracts pursuant to this Agreement shall
constitute a purchase and sale and not a pledge of security for loans from the
Certificateholders and/or the Noteholders, if such conveyances are deemed to be
a pledge of security for loans from the Certificateholders, the Noteholders or
any other Persons (the "Secured Obligations"), the parties intend that the
rights and obligations of the parties to the Secured Obligations shall be
established pursuant to the terms of this Agreement. The parties also intend
and agree that the Company shall be deemed to have granted to the Trust, and the
Company does hereby grant to the Trust, a perfected first-priority security
interest in the items designated in Section 2.01(a)(1) through 2.01(a)(6) above,
and all proceeds thereof, to secure the Secured Obligations, and that this
Agreement shall constitute a security agreement under applicable law. If the
trust created by this Agreement terminates prior to the satisfaction of the
claims of any Person under any Certificates, any Notes or the Secured
Obligations, the security interest created hereby shall continue in full force
and effect and the Owner Trustee shall be deemed to be the collateral agent for
the benefit of such Person.
2-1
<PAGE>
SECTION 2.02. Conditions to Acceptance by Owner Trustee.
-----------------------------------------
As conditions to the Owner Trustee's execution and delivery of the Notes on
behalf of the Trust and the execution, authentication and delivery of the
Certificates on behalf of the Trust on the Closing Date, the Owner Trustee on
behalf of the Trust shall have received the following on or before the Closing
Date:
(a) The List of Contracts attached to this Agreement as Exhibits [O-1,
O-2 and O-3], certified by the Chairman of the Board, President or any Vice
President of the Company (which certification may be part of the Assignment
delivered pursuant to Section 2.02(f)).
(b) A letter from _____ or another nationally recognized accounting
firm, stating that such firm has reviewed the Initial Contracts on a
statistical sampling basis and, based on such sampling, concluding that,
except with respect to those Initial Contracts so specified in the letter,
the Contracts conform in all material respects to the List of Contracts
attached hereto as Exhibits [O-1, O-2 and O-3], to a confidence level of
_____ %, with an error rate generally not in excess of _____ %.
(c) Copies of resolutions of the board of directors of the Company or
of the executive committee of the board of directors of the Company
approving the execution, delivery and performance of this Agreement, the
Related Documents and the transactions contemplated hereunder, certified in
each case by the secretary or an assistant secretary of the Company.
(d) Officially certified recent evidence of due incorporation and good
standing of the Company under the laws of the State of Delaware.
(e) Evidence of filing with the Secretary of State of Minnesota of a
UCC-1 financing statement, executed by the Company as debtor, naming the
Trust as secured party and listing the Contracts as collateral.
(f) An executed copy of the Assignment substantially in the form of
Exhibit A hereto.
(g) Evidence of continued coverage of the Company under the Errors and
Omissions Protection Policy.
(h) Evidence of deposit in the Collection Account of all funds
received with respect to the Contracts prior to the Closing Date which were
due on or after the Cut-off Date, together with an Officer's Certificate to
the effect that such amount is correct.
(i) An Officer's Certificate confirming that the Company's internal
audit department has reviewed the original or a copy of each Contract and
2-2
<PAGE>
each Contract File, that each Contract and Contract File conforms in all
material respects with the List of Contracts and that each Contract File is
complete in all material respects.
(j) Evidence of the deposit of $18,684,337.14 in the Sub-Pool HE Pre-
Funding ARM Subaccount, $135,012,291.19 in the Sub-Pool HE Pre-Funding
Fixed Rate Subaccount, and $27,716,798.63 in the Sub-Pool HI Pre-Funding
Account.
(k) Evidence of the deposit (a) in the Undelivered ARM Contract
Subaccount of an amount equal to the difference between the aggregate Cut-
off Date Principal Balances of the Initial Adjustable Rate Home Equity
Contracts and the aggregate Cut-off Date Principal Balances of the
Undelivered ARM Contracts and (b) in the Undelivered Fixed Rate Contract
Subaccount of an amount equal to the difference between the aggregate Cut-
off Date Principal Balances of the Initial Fixed Rate Home Equity Contracts
and the aggregate Cut-off Date Principal Balances of the Undelivered Fixed
Rate Contracts.
(l) Such other documents and certificates as the Trust may request.
SECTION 2.03. Conveyance of the Subsequent Contracts.
--------------------------------------
(a) Subject to the conditions set forth in paragraph (b) below, in
consideration of the Trustee's delivery on the related Subsequent Transfer Dates
to or upon the order of the Company of all or a portion of the balance of funds
in the Sub-Pool HE Pre-Funding ARM Subaccount, Sub-Pool HE Pre-Funding Fixed
Rate Subaccount and Sub-Pool HI Pre-Funding Account, the Company shall on any
Subsequent Transfer Date sell, transfer, assign, set over and convey to the
Trust by execution and delivery of a Subsequent Transfer Instrument, all the
right, title and interest of the Company in and to the Subsequent Home Equity
Contracts and/or Subsequent Home Improvement Contracts identified on the List of
Contracts attached to the Subsequent Transfer Instrument, including all rights
to receive payments on or with respect to the Subsequent Home Equity Contracts
and/or Subsequent Home Improvement Contracts due after the related Subsequent
Cut-off Date, and all items with respect to such Subsequent Home Equity
Contracts and/or Subsequent Home Improvement Contracts in the related Contract
Files. The transfer to the Trustee by the Company of the Subsequent Home Equity
Contracts and/or Subsequent Home Improvement Contracts shall be absolute and is
intended by the Company, the Trustee, the Certificateholders and the Class C
Certificateholders to constitute and to be treated as a sale of the Subsequent
Home Equity Contracts and/or Subsequent Home Improvement Contracts by the
Company to the Trust.
The purchase price paid by the Trustee shall be one-hundred percent (100%)
2-3
<PAGE>
of the aggregate Cut-off Date Principal Balances of such Subsequent Home Equity
Contracts and/or Subsequent Home Improvement Contracts. The purchase price of
Subsequent Fixed Rate Home Equity Contracts shall be paid solely with amounts in
the Sub-Pool HE Pre-Funding Fixed Rate Subaccount. The purchase price of
Subsequent Adjustable Rate Home Equity Contracts shall be paid solely with
amounts in the Sub-Pool HE Pre-Funding ARM Subaccount. The purchase price of
Subsequent Home Improvement Contracts shall be paid solely with amounts in the
Sub-Pool HI Pre-Funding Account. This Agreement shall constitute a fixed price
contract in accordance with Section 860G(a)(3)(A)(ii) of the Code.
(b) The Company shall transfer to the Trustee for Sub-Pool HE the
Subsequent Home Equity Contracts and for Sub-Pool HI the Subsequent Home
Improvement Contracts, and the Trustee shall release funds from the Sub-Pool HE
Pre-Funding ARM Subaccount, Sub-Pool HE Pre-Funding Fixed Rate Subaccount or
Sub-Pool HI Pre-Funding Account, as applicable, only upon the satisfaction of
each of the following conditions on or prior to the related Subsequent Transfer
Date:
(i) the Company shall have provided the Trustee with an Addition
Notice at least five Business Days prior to the Subsequent Transfer Date
and shall have provided any information reasonably requested by the Trustee
with respect to the Subsequent Home Equity Contracts and Subsequent Home
Improvement Contracts;
(ii) the Company shall have delivered the related Contract File for
each Subsequent Home Equity Contract and each Subsequent Home Improvement
Contract to the Trustee at least two Business Days prior to the Subsequent
Transfer Date;
(iii) the Company shall have delivered to the Trustee a duly executed
Subsequent Transfer Instrument substantially in the form of Exhibit S,
which shall include a List of Contracts identifying the related Subsequent
Home Equity Contracts and Subsequent Home Improvement Contracts;
(iv) as of each Subsequent Transfer Date, as evidenced by delivery
of the Subsequent Transfer Instrument, the Company shall not be insolvent
nor shall it have been made insolvent by such transfer nor shall it be
aware of any pending insolvency;
(v) the Pre-Funding Period shall not have ended;
(vi) the Company shall have delivered to the Trustee an Officer's
Certificate, substantially in the form attached hereto as Exhibit T,
confirming the satisfaction of each condition precedent and the
representations specified in this Section 2.03 and in Sections 3.01, 3.02,
3.03 and 3.04;
(vii) the Company shall have delivered to the Trustee Opinions of
2-4
<PAGE>
Counsel addressed to the Rating Agencies and the Trustee with respect to
the transfer of the Subsequent Home Equity Contracts and Subsequent Home
Improvement Contracts substantially in the form of the Opinions of Counsel
delivered to the Trustee on the Closing Date regarding certain bankruptcy,
corporate and tax matters; and
(viii) No Subsequent Home Equity Contract will have a loan-to-value
ratio greater than 100%.
(c) Before the last day of the Pre-Funding Period, the Company shall
deliver to the Trustee:
(i) A letter from _____ or another nationally recognized
accounting firm retained by the Company (with copies provided to [the
Rating Agencies], the Underwriters and the Trustee) that is in form,
substance and methodology the same as that dated _____ and delivered under
Section 2.02(d) of this Agreement, except that it shall address the
Subsequent Home Equity Contracts and Subsequent Home Improvement Contracts
and their conformity (and the conformity of Sub-Pool HE or Sub-Pool HI, as
applicable) in all material respects to the characteristics described in
Sections 2.03 (b)(ix) and 3.03(b) of this Agreement.
(ii) Evidence that as a result of the purchase by the Trust of the
Subsequent Home Equity Contracts and Subsequent Home Improvement Contracts,
neither the Class HI: A Certificates nor the Class HE: A Certificates shall
receive from [either Rating Agency] a lower credit rating than the rating
assigned to such Certificates as of the Closing Date.
(iii) Evidence that the aggregate Cut-off Date Principal Balances
of the Subsequent Home Equity Contracts, not specifically identified as
Subsequent Home Equity Contracts as of the Closing Date, do not exceed 25%
of the Original Sub-Pool HE Certificate Principal Balance, and evidence
that the aggregate Cut-off Date Principal Balance of the Subsequent Home
Improvement Contracts, not specifically identified as Subsequent Home
Improvement Contracts as of the Closing Date, do not exceed 25% of the
Original Sub-Pool HI Certificate Principal Balance.
2-5
<PAGE>
ARTICLE III
REPRESENTATIONS AND WARRANTIES
The Company makes the following representations and warranties, effective
as of the Closing Date, on which the Trust will rely in accepting the Contracts
and the other Trust Property in trust and on which the Owner Trustee relies in
executing and delivering, on behalf of the Trust, the Certificates and the
Notes. The repurchase obligation of the Company set forth in Section 3.05
constitutes the sole remedy available to the Trust, the Owner Trustee, the
Indenture Trustee, and the Securityholders for a breach of a representation or
warranty of the Company set forth in the Officer's Certificate delivered
pursuant to Section 2.02(i) or Section 3.02, 3.03 or 3.04 of this Agreement.
SECTION 3.01. Representations and Warranties Regarding the Company.
----------------------------------------------------
a. Organization and Good Standing. The Company is a corporation duly
------------------------------
organized, validly existing and in good standing under the laws of the
jurisdiction of its organization and has the corporate power to own its
assets and to transact the business in which it is currently engaged. The
Company is duly qualified to do business as a foreign corporation and is in
good standing in each jurisdiction in which the character of the business
transacted by it or properties owned or leased by it requires such
qualification and in which the failure so to qualify would have a material
adverse effect on the business, properties, assets, or condition (financial
or other) of the Company.
b. Authorization; Binding Obligations. The Company has the power and
----------------------------------
authority to make, execute, deliver and perform this Agreement and all of
the transactions contemplated under this Agreement, and to create the Trust
and cause it to make, execute, deliver and perform its obligations under
this Agreement and has taken all necessary corporate action to authorize
the execution, delivery and performance of this Agreement and to cause the
Trust to be created. When executed and delivered, this Agreement will
constitute the legal, valid and binding obligation of the Company
enforceable in accordance with its terms, except as enforcement of such
terms may be limited by bankruptcy, insolvency or similar laws affecting
the enforcement of creditors' rights generally and by the availability of
equitable remedies.
c. No Consent Required. The Company is not required to obtain the
-------------------
consent of any other party or any consent, license, approval or
authorization from, or registration or declaration with, any governmental
authority, bureau or agency in connection with the execution, delivery,
performance, validity or enforceability of this Agreement.
d. No Violations. The execution, delivery and performance of this
-------------
3-1
<PAGE>
Agreement by the Company will not violate any provision of any existing law
or regulation or any order or decree of any court or the Certificate of
Incorporation or Bylaws of the Company, or constitute a material breach of
any mortgage, indenture, contract or other agreement to which the Company
is a party or by which the Company may be bound.
e. Litigation. No litigation or administrative proceeding of or
----------
before any court, tribunal or governmental body is currently pending, or to
the knowledge of the Company threatened, against the Company or any of its
properties or with respect to this Agreement, the Notes or the Certificates
which, if adversely determined, would in the opinion of the Company have a
material adverse effect on the transactions contemplated by this Agreement.
f. Licensing. The Company is duly licensed in each state in which
---------
Contracts were originated to the extent the Company is required to be
licensed by applicable law in connection with the origination and servicing
of the Contracts.
g. Chief Executive Office. The chief executive office of the Company
----------------------
is at 1100 Landmark Towers, 345 St. Peter Street, St. Paul, Minnesota
55102-1639.
SECTION 3.02. Representations and Warranties Regarding Each Contract. The
------------------------------------------------------
Company represents and warrants to the Noteholders and the Certificateholders,
as of the Closing Date with respect to each Contract identified on the List of
Contracts attached to this Agreement as Exhibits [O-1, O-2, and O-3] and as of
each Subsequent Transfer Date with respect to each Subsequent Home Equity
Contract and each Subsequent Home Improvement Contract identified on the List of
Contracts attached to the related Subsequent Transfer Instrument:
a. List of Contracts. The information set forth in the List of
-----------------
Contracts is true and correct as of its date.
b. Payments. No scheduled payment due under the Contract was
--------
delinquent over 59 days as of the Cut-off Date or as of the related
Subsequent Cut-off Date in the case of a Subsequent Home Equity Contract or
Subsequent Home Improvement Contract.
c. Costs Paid and No Waivers. The terms of the Contract have not
-------------------------
been waived, altered or modified in any respect, except by instruments or
documents identified in the Contract File. All costs, fees and expenses
incurred in making, closing and perfecting the lien of the Contract have
been paid. The subject real property has not been released from the lien
of such Contract.
d. Binding Obligation. The Contract is the legal, valid and binding
------------------
3-2
<PAGE>
obligation of the Obligor thereunder and is enforceable in accordance with
its terms, except as such enforceability may be limited by laws affecting
the enforcement of creditors' rights generally.
e. No Defenses. The Contract is not subject to any right of
-----------
rescission, setoff, counterclaim or defense, including the defense of
usury, and the operation of any of the terms of the Contract or the
exercise of any right thereunder will not render the Contract unenforceable
in whole or in part or subject to any right of rescission, setoff,
counterclaim or defense, including the defense of usury, and no such right
of rescission, setoff, counterclaim or defense has been asserted with
respect thereto.
f. Insurance Coverage. The Company has been named as an additional
------------------
insured party under any hazard insurance on the property described in the
Contract, to the extent required by the Company's underwriting guidelines.
If upon origination of the Contract, the property securing the Contract was
in an area identified in the Federal Register by the Federal Emergency
Management Agency as having special flood hazards (and if flood insurance
was required by federal regulation and such flood insurance has been made
available in the locale where the Mortgaged Property is located), the
property is covered by a flood insurance policy of the nature and in an
amount which is consistent with the servicing standard set forth in Section
5.02.
g. FHA Insurance. If the Contract is an FHA-Insured Contract, such
-------------
Contract was originated in compliance with FHA Regulations and is insured,
without setoff, surcharge or defense, by FHA Insurance. Following the
assignment of such FHA-Insured Contract to the Trustee, the Trustee on
behalf of the Trust will be entitled to the full benefits of the FHA
Insurance.
h. Lawful Assignment. The Contract was not originated in and is not
-----------------
subject to the laws of any jurisdiction whose laws would make the transfer
of the Contract under this Agreement or pursuant to transfers of the Notes
or Certificates unlawful or render the Contract unenforceable. The Company
has duly executed a valid blanket assignment of the Contracts transferred
to the Trust, and has transferred all its right, title and interest in such
Contracts, including all rights the Company may have against the
originating contractor or lender with respect to Contracts originated by a
contractor or lender rather than the Company, to the Trust. The blanket
assignment, any and all documents executed and delivered by the Company
pursuant to Sections 2.01(b) and 2.03(b)(ii), and this Agreement each
constitutes the legal, valid and binding obligation of the Company
enforceable in accordance with its respective terms.
i. Compliance with Law. At the date of origination of the Contract,
-------------------
all requirements of any federal and state laws, rules and regulations
applicable
3-3
<PAGE>
to the Contract, including, without limitation, usury and truth
in lending laws and (if such Contract is an FHA-Insured Contract) the FHA
Regulations have been complied with, and the Company shall for at least the
period of this Agreement, maintain in its possession, available for the
Trustee's inspection, and shall deliver to the Trustee upon demand,
evidence of compliance with all such requirements.
j. Contract in Force. The Contract has not been satisfied or
-----------------
subordinated in whole or in part or rescinded, and the real estate securing
such Contract has not been released from the lien of such Contract in whole
or in part.
k. Valid Lien. The Contract has been duly executed and delivered by
----------
the Obligor, and the lien created thereby has been duly recorded, or has
been delivered to the appropriate governmental authority for recording and
will be duly recorded within 180 days, and constitutes a valid and
perfected first, second, third or fourth priority lien on the real estate
described in such Contract.
l. Capacity of Parties. The signature(s) of the Obligor(s) on the
-------------------
Contract are genuine and all parties to the Contract had full legal
capacity to execute the Contract.
m. Good Title. The Company is the sole owner of the Contract and, if
----------
such Contract is an FHA-Insured Contract, because the Trustee is a lender
approved by HUD to originate and purchase Title I loans under a valid Title
I contract of insurance, has the authority to sell, transfer and assign
such Contract to the Trust under the terms of this Agreement. There has
been no assignment, sale or hypothecation of the Contract by the Company
except the usual past hypothecation of the Contract in connection with the
Company's normal banking transactions in the conduct of its business, which
hypothecation terminates upon sale of the Contract to the Trust. The
Company has good and marketable title to the Contract, free and clear of
any encumbrance, equity, loan, pledge, charge, claim, lien or encumbrance
of any type and has full right to transfer the Contract to the Trust.
n. No Defaults. As of the Cut-off Date or Subsequent Cut-off Date,
-----------
as applicable, there was no default, breach, violation or event permitting
acceleration existing under the Contract and no event which, with notice
and the expiration of any grace or cure period, would constitute such a
default, breach, violation or event permitting acceleration under such
Contract (except payment delinquencies permitted by clause (b) above). The
Company has not waived any such default, breach, violation or event
permitting acceleration except payment delinquencies permitted by clause
(b) above.
o. Equal Installments. The Contract, unless it is a Step-up Rate
------------------
3-4
<PAGE>
Contract or an Adjustable Rate Home Equity Contract, has a fixed Contract
Rate and provides for monthly payments (except, in the case of a Balloon
Loan, for the final monthly payment of such loan) which fully amortize the
loan over its term.
p. Enforceability. Each Contract contains customary and enforceable
--------------
provisions so as to render the rights and remedies of the holder thereof
adequate for the realization against the collateral of the benefits of the
lien provided thereby.
q. One Original. There is only one original executed Contract, which
------------
Contract has been delivered to the Trustee or its Custodian on or before
the Closing Date or Subsequent Transfer Date if a Subsequent Home Equity
Contract or Subsequent Home Improvement Contract.
r. Genuine Documents. All documents submitted are genuine, and all
-----------------
other representations as to each Contract, including the List of Contracts,
are true and correct. Any copies of documents provided by the Company are
accurate and complete (except that, with respect to each Contract that was
originated by a contractor or lender other than the Company, the Company
makes such representation and warranty only to the best of the Company's
knowledge).
s. Origination. Each Home Improvement Contract was originated by a
-----------
home improvement contractor in the ordinary course of such contractor's
business or was originated by the Company directly. Each Home Equity
Contract was originated by a home equity lender in the ordinary course of
such lender's business or was originated by the Company directly.
t. Underwriting Guidelines. Each Contract was originated or
-----------------------
purchased in accordance with the Company's then-current underwriting
guidelines.
u. Good Repair. The property described in the Contract is, to the
-----------
best of the Company's knowledge, free of damage and in good repair.
v. Interest Rate and Payment Amount Adjustments. With respect to
--------------------------------------------
each Contract which does not provide for a fixed interest rate over the
life of the Contract, the Contract Rate and monthly payment have been
adjusted in accordance with the terms of the Contract. All required
notices of interest rate and payment amount adjustments have been sent to
the Obligor on a timely basis and the computations of such adjustments were
properly calculated. All Contract Rate adjustments have been made in
strict compliance with state and federal law and the terms of the related
Contract.
w. Adjustable Rate Home Equity Contracts. If an Adjustable Rate
-------------------------------------
3-5
<PAGE>
Home Equity Contract, it is covered by an American Land Title Association
lender's title insurance policy, with an adjustable rate mortgage
endorsement, such endorsement substantially in the form of ALTA Form 6.0 or
6.1. The applicable terms of the Adjustable Rate Home Equity Contract
pertaining to adjustments of the Contract Rate and the monthly payment and
payment adjustments in connection therewith are enforceable and will not
affect the priority of the lien of the related mortgage. The Contract Rate
and monthly payment on the Adjustable Rate Home Equity Contract have been
timely and appropriately adjusted, if such adjustment is required, and the
respective Obligor timely and appropriately advised.
SECTION 3.03. Representations and Warranties Regarding the Contracts in
---------------------------------------------------------
the Aggregate. The Company represents and warrants to the Noteholders and
- -------------
Certificateholders, as of the Closing Date with respect to the Initial and
Subsequent Contracts and each Sub-Pool, as applicable, and as of each Subsequent
Transfer Date with respect to the related Subsequent Contracts and related Sub-
Pool, as applicable, that:
a. Amounts. The Cut-off Date Pool Principal Balance of Sub-Pool HI,
-------
plus the Original Sub-Pool HI Pre-Funded Amount, equals at least the
Original Sub-Pool HI Certificate Principal Balance. As of the Closing
Date, the sum of the Cut-off Date Pool Principal Balance of Sub-Pool HE,
plus the Original Sub-Pool HE Pre-Funded Amount, equals at least the
Original Sub-Pool HE Certificate Principal Balance. By Cut-off Date
Principal Balance, the Initial Home Equity Contracts plus the Subsequent
Home Equity Contracts specifically identified as of the Closing Date
represent at least 75% of the Original Sub-Pool HE Certificate Principal
Balance and the Initial Home Improvement Contracts plus the Subsequent Home
Improvement Contracts specifically identified as of the Closing Date
represent at least 75% of the Original Sub-Pool HI Certificate Principal
Balance.
b. Characteristics.
---------------
Home Improvement Contracts. The Home Improvement Contracts will have
--------------------------
the following characteristics: (i) 100% are secured by a mortgage, deed of
trust or security deed on the related real estate; (ii) none has a
remaining maturity of more than 360 months; (iii) none has a final
scheduled payment date later than Exhibits _____; (iv) none has a Contract
Rate less than _____ %; and (v) none was originated before _____.
The weighted average (by Scheduled Principal Balance) of the Contract
Rates of Sub-Pool HI as of the Post-Funding Payment Date will not be more
than _____ basis points less than the weighted average of the Contract
Rates of the Initial Home Improvement Contracts. No more than _____ % (by
Cut-off Date Principal Balance) of the Subsequent Home Improvement
Contracts have a Contract Rate less than _____ %.
3-6
<PAGE>
Fixed Rate Home Equity Contracts. The Fixed Rate Home Equity
--------------------------------
Contracts will have the following characteristics: (i) 100% are secured by
a mortgage, deed of trust or security deed on the related real estate; (ii)
none has a remaining maturity of more than 360 months; (iii) none has a
final scheduled payment date later than _____; and (iv) none has a Contract
Rate less than _____ %.
The weighted average (by Scheduled Principal Balance) loan to value
ratio of the Fixed Rate Home Equity Contracts as of the Post-Funding
Payment Date will not be more than _____ basis points more than such ratio
with respect to the Initial Fixed Rate Home Equity Contracts.
The weighted average (by Scheduled Principal Balance) of the Contract
Rates of the Fixed Rate Home Equity Contracts as of the Post-Funding
Payment Date will not be more than _____ basis points less than the
weighted average of the Contract Rates of the Initial Fixed Rate Home
Equity Contracts. No more than _____ % (by Cut-off Date Principal Balance)
of the Subsequent Fixed Rate Home Equity Contracts have a Contract Rate
less than _____ %.
The percentage (by Scheduled Principal Balance) of the Fixed Rate Home
Equity Contracts as of the Post-Funding Payment Date which are identified
by the Company under its standard underwriting criteria as "B," "C," and
"D" credits will not be more than _____ basis points, _____ basis points,
and _____ basis points, respectively, more than the percentage of Initial
Fixed Rate Home Equity Contracts identified as B, C, and D credits.
Adjustable Rate Home Equity Contracts. The Adjustable Rate Home
-------------------------------------
Equity Contracts will have the following characteristics: (i) 100% are
secured by a mortgage, deed of trust or security deed on the related real
estate; (ii) none has a remaining maturity of more than 360 months; (iii)
none has a final scheduled payment date later than _____; (iv) the Contract
Rate on each is subject to annual or semiannual adjustment, after an
initial period of up to 36 months, to equal the sum of (A) the 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, plus (B) a fixed
percentage amount specified in the related Contract (the "gross margin"),
provided that the Contract Rate will not increase or decrease on any
adjustment date by more than _____ % per annum and will not exceed a
maximum rate specified in the related Contract; (v) none has a gross margin
of less than _____ % or more than _____ %; and (vi) no more than _____ %
(by Cut-off Date Principal Balance) of the Cut-off Date Pool Principal
Balance of Sub-Pool HE consists of Adjustable Rate Home Equity Contracts
having a Contract Rate less than _____ %.
3-7
<PAGE>
The weighted average (by Scheduled Principal Balance) loan to value
ratio of the Adjustable Rate Home Equity Contracts as of the Post-Funding
Payment Date will not be more than _____ basis points more than such ratio
with respect to the Initial Adjustable Rate Home Equity Contracts.
The weighted average (by Scheduled Principal Balance) of the Contract
Rates of the Adjustable Rate Home Equity Contracts as of the Post-Funding
Payment Date will not be more than _____ basis points less than the
weighted average of the Contract Rates of the Initial Adjustable Rate Home
Equity Contracts.
The percentage (by Scheduled Principal Balance) of the Adjustable Rate
Home Equity Contracts as of the Post-Funding Payment Date which are
identified by the Company under its standard underwriting criteria as "B,"
"C," and "D" credits will not be more than _____ basis points, _____ basis
points, and _____ basis points, respectively, more than the percentage of
Initial Adjustable Rate Home Equity Contracts identified as B, C, and D
credits.
c. Geographic Concentrations.
-------------------------
Home Improvement Contracts. By Cut-off Date Principal Balance, _____
--------------------------
% of the Initial Home Improvement Contracts are secured by property located
in California, _____ % in New York and _____ % in _____. No other state
represents more than 5% of the aggregate Cut-off Date Principal Balances of
the Initial Home Improvement Contracts.
No more than 1% of the Home Improvement Contracts by Cut-off Date
Principal Balance are secured by property located in an area with the same
five-digit zip code.
Fixed Rate Home Equity Contracts. By Cut-off Date Principal Balance,
--------------------------------
_____ % of the Initial Fixed Rate Home Equity Contracts are secured by
property located in _____, _____ % in _____ and _____ % in _____. No other
state represents more than 5% of the aggregate Cut-off Date Principal
Balances of the Initial Fixed Rate Home Equity Contracts.
No more than 1% of Fixed Rate Home Equity Contracts by Cut-off Date
Principal Balance are secured by property located in an area with the same
five-digit zip code.
Adjustable Rate Home Equity Contracts. By Cut-off Date Principal
-------------------------------------
Balance, _____ % of the Initial Adjustable Rate Home Equity Contracts are
secured by property located in _____, _____ % in _____ and _____ % in
_____. No other state represents more than 5% of the aggregate Cut-off
Date Principal Balances of the Initial Adjustable Rate Home Equity
Contracts.
3-8
<PAGE>
No more than 1% of the Adjustable Rate Home Equity Contracts by Cut-
off Date Principal Balance are secured by property located in an area with
the same five-digit zip code.
d. Marking Records. The Company has caused the portions of the
---------------
Electronic Ledger relating to the Contracts to be clearly and unambiguously
marked to indicate that such Contracts constitute part of the Trust and are
owned by the Trust in accordance with the terms of the Trust created
hereunder.
e. No Adverse Selection. No adverse selection procedures have been
--------------------
employed in selecting the Contracts.
f. Contractor/Lender Concentration. No more than ___% of the Home
------------------------------- ---
Improvement Contracts and no more than ___% of the Home Equity Contracts,
by Cut-off Date Principal Balance, were originated by any one contractor or
lender (other than the Company).
SECTION 3.04. Representations and Warranties Regarding the Contract Files.
-----------------------------------------------------------
The Company represents and warrants to the Noteholders and Certificateholders
that:
a. Possession. Immediately prior to the Closing Date, the Company
----------
will have possession of each original Initial Home Improvement Contract and
Initial Home Equity Contract and the related Contract File. Immediately
prior to each Subsequent Transfer Date, the Company will have possession of
each original Subsequent Home Improvement Contract and Subsequent Home
Equity Contract and the related Contract File. There are and there will be
no custodial agreements or servicing contracts in effect materially and
adversely affecting the rights of the Company to make, or cause to be made,
any delivery required hereunder.
b. Bulk Transfer Laws. The transfer, assignment and conveyance of
------------------
the Contracts and the Contract Files by the Company pursuant to this
Agreement is not subject to the bulk transfer or any similar statutory
provisions in effect in any applicable jurisdiction.
SECTION 3.05. Repurchase of Contracts for Breach of Representations and
---------------------------------------------------------
Warranties.
- ----------
(a) The Company shall repurchase a Contract, at its Repurchase Price, not
later than the last day of the Due Period prior to the Due Period that is 90
days after the day on which the Company, the Servicer, the Owner Trustee or the
Indenture Trustee first discovers, or the Company or the Servicer should have
discovered, a breach of a representation or warranty of the Company set forth in
Sections 3.02, 3.03 or 3.04 of this Agreement or the Officer's Certificates
delivered pursuant to Sections
3-9
<PAGE>
2.02(i) and 2.03(b)(vii) that materially adversely affects the interest of the
Trust or the Securityholders in such Contract and which breach has not been
cured; provided, however, that (i) in the event that a party other than the
-------- -------
Company first becomes aware of such a breach, such discovering party shall
notify the Company in writing within five Business Days of the date of such
discovery and (ii) with respect to any Contract incorrectly described on the
List of Contracts with respect to unpaid principal balance, which the Company
would otherwise be required to repurchase pursuant to this Section, the Company
may, in lieu of repurchasing such Contract, deposit in the Collection Account no
later than the first Determination Date that is 90 or more days from the date of
such discovery cash in an amount sufficient to cure such deficiency or
discrepancy. Any such cash so deposited shall be accounted for as a collection
of principal or interest on such Contract, according to the nature of the
deficiency or discrepancy. Notwithstanding any other provision of this
Agreement, the obligation of the Company under this Section shall not terminate
upon a Service Transfer pursuant to Article VII. Notwithstanding the foregoing,
the Company shall repurchase any Contract, at such Contract's Repurchase Price,
if the Company has failed to deliver the related Contract File to the Servicer,
for the benefit of the Trust within 30 days of the Closing Date.
(b) On or prior to the date that is the second anniversary of the Closing
Date, the Company may, at its election, substitute an Eligible Substitute
Contract for a Contract that it is obligated to repurchase pursuant to Section
3.05(a) (such Contract being referred to as the "Replaced Contract") upon
satisfaction of the following conditions:
(i) the Company shall have conveyed to the Trustee the Contract to
be substituted for the Replaced Contract and the Contract File related to
such Contract and the Company shall have marked the Electronic Ledger
indicating that such Contract constitutes part of the Trust;
(ii) the Contract to be substituted is an Eligible Substitute
Contract and the Company delivers an Officers' Certificate, substantially
in the form of Exhibit M-2 hereto, to the Trustee certifying that such
Contract is an Eligible Substitute Contract;
(iii) the Company shall have delivered to the Trustee evidence of
filing of a UCC-1 financing statement executed by the Company as debtor,
naming the Trustee as secured party and filed in Minnesota, listing such
Contract to be substituted as collateral;
(iv) the Company shall have delivered to the Trustee an executed
assignment to the Trustee on behalf of the Trust in recordable form for the
mortgage securing such Contract to be substituted; and
(v) if the Scheduled Principal Balance of such Replaced Contract is
greater than the Scheduled Principal Balance of the Contract to be
substituted,
3-10
<PAGE>
the Company shall have deposited in the Certificate Account the amount of
such excess and shall have included in the Officers' Certificate required
by clause (ii) above a certification that such deposit has been made.
Upon satisfaction of such conditions, the Trustee shall add such Contract
to be substituted to, and delete such Replaced Contract from, the List of
Contracts. Such substitution shall be effected prior to the first Determination
Date that occurs more than 90 days after the Company becomes aware, or should
have become aware, or receives written notice from the Trustee, of the breach
referred to in Section 3.05(a). Promptly after any such substitution of a
Contract, the Company shall give written notice of such substitution to [the
Rating Agencies].
(c) If the Company is required to repurchase a Contract under Section
3.05(a) or has elected to substitute an Eligible Substitute Contract for a
Contract under Section 3.05(b), and if the reason for such repurchase or
substitution is that the Company has failed to deliver to the Trustee the
Contract File for the Contract to be repurchased or substituted for (except in
the case of a failure to deliver evidence of the lien on the related improved
property and evidence of due recording of such mortgage, deed of trust or
security deed, if available), then, notwithstanding the time periods set out in
Sections 3.05(a) and 3.05(b), the Company shall either (i) repurchase such
Contract, at its respective Repurchase Price, within 30 days of the Closing
Date, or (ii) substitute an Eligible Substitute Contract for the Contract within
90 days of the Closing Date.
(d) Upon receipt by the Trust by deposit in the Collection Account of the
Repurchase Price under subsection (a) above, and upon receipt of a certificate
of a Servicing Officer in the form attached hereto as Exhibit B, the Indenture
Trustee shall release its security interest in such Contract and the Owner
Trustee on behalf of the Trust shall convey and assign to the Company all of the
Securityholders' right, title and interest in the repurchased Contract without
recourse, representation or warranty, except as to the absence of liens, charges
or encumbrances created by or arising as a result of actions of the Trust.
(e) The Company shall defend and indemnify the Owner Trustee, the Trust,
the Indenture Trustee, and the Securityholders against all costs, expenses,
losses, damages, claims and liabilities, including reasonable fees and expenses
of counsel, arising out of any claims which may be asserted against or incurred
by any of them as a result of any third-party action arising out of any breach
of any representation set forth in the Officer's Certificate delivered pursuant
to Section 2.02(i) or Section 3.02, 3.03 or 3.04 of this Agreement.
3-11
<PAGE>
ARTICLE IV
PERFECTION OF TRANSFER AND
PROTECTION OF SECURITY INTERESTS
SECTION 4.01. Transfer of Contracts.
---------------------
(a) On or prior to the Closing Date, or the Subsequent Transfer Date in the
case of Subsequent Home Improvement Contracts and Subsequent Home Equity
Contracts, the Company shall deliver the Contract Files to the Trustee. The
Trustee shall maintain the Contract Files at its office or with a duly appointed
Custodian, who shall act as the agent of the Trustee on behalf of the
Certificateholders. The Trustee may release a Contract File to the Servicer
pursuant to Section 5.07. The Company has filed a form UCC-1 financing
statement regarding the sale of the Contracts to the Trustee, and shall file
continuation statements in respect of such UCC-1 financing statement as if such
financing statement were necessary to perfect such sale. The Company shall take
any other actions necessary to maintain the perfection of the sale of the
Contracts to the Trustee.
(b) If at any time during the term of this Agreement the Company does not
have a long-term senior debt rating of BBB+ or higher from both [the Rating
Agencies], (i) the Company shall within 30 days execute and deliver to the
Trustee (if it has not previously done so) endorsements of each Home Improvement
Contract and assignments in recordable form of each mortgage, deed of trust or
security deed securing a Home Improvement Contract, and (ii) the Trustee, at the
Company's expense, shall within 60 days file in the appropriate recording
offices the assignments to the Trustee on behalf of the Trust of each mortgage,
deed of trust or security deed securing a Home Improvement Contract.
(c) If at any time during the term of this Agreement the Company does not
have a long-term senior debt rating of A- or higher from [the Rating Agencies],
(i) the Company shall within 30 days execute and deliver to the Trustee (if it
has not previously done so) endorsements of each Home Equity Contract and
assignments in recordable form of each mortgage, deed of trust or security deed
securing a Home Equity Contract, and (ii) the Trustee, at the Company's expense,
shall within 60 days file in the appropriate recording offices the assignments
to the Trustee on behalf of the Trust of each mortgage, deed of trust or
security deed securing a Home Equity Contract; provided, however, that such
--------- -------
execution and filing of the assignments with respect to the Home Equity
Contracts shall not be required if the Trustee receives written confirmation
from both [the Rating Agencies] that the ratings of the Certificates would not
be reduced or withdrawn by the failure to execute and file such assignments.
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SECTION 4.02. Costs and Expenses. The Servicer agrees to pay all
------------------
reasonable costs and disbursements in connection with the vesting (including the
perfection and the maintenance of perfection, as against all third parties) in
the Trust of all right, title and interest in and to the Contracts (including,
without limitation, the mortgage or deed of trust on the related real estate
granted thereby).
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<PAGE>
ARTICLE V
SERVICING OF CONTRACTS
SECTION 5.01. Responsibility for Contract Administration.
------------------------------------------
The Servicer will have the sole obligation to manage, administer, service
and make collections on the Contracts and perform or cause to be performed all
contractual and customary undertakings of the holder of the Contracts to the
Obligor. The Company, if it is the Servicer, may delegate some or all of its
servicing duties to a wholly owned subsidiary of the Company, for so long as
such subsidiary remains, directly or indirectly, a wholly owned subsidiary of
the Company. Notwithstanding any such delegation the Company shall retain all of
the rights and obligations of the Servicer hereunder. The Servicer may also
perform other specific duties through subcontractors; provided that the Servicer
gives notice to each of the Trust, the Indenture Trustee, _____ and _____ of the
use of any such subcontractors; and provided further that no such delegation of
duties by the Servicer shall relieve the Servicer of its responsibility with
respect thereto. The Owner Trustee, on behalf of the Trust and at the request
of a Servicing Officer, shall furnish the Servicer with any powers of attorney
or other documents necessary or appropriate to enable the Servicer to carry out
its servicing and administrative duties hereunder. The Company is hereby
appointed the Servicer until such time as any Service Transfer shall be effected
under Article VII.
The Servicer shall, with respect to each Contract which does not provide
for a fixed interest rate over the life of the Contract, make adjustments to the
interest rate and the payments due on such Contract in compliance with
applicable regulatory adjustable mortgage loan requirements and the terms of the
Contract. The Servicer shall establish procedures to monitor the interest rate
adjustment dates and the interest rate in order to assure that it correctly
calculates any applicable interest rate change, and it will comply with those
procedures. The Servicer shall execute and deliver all appropriate notices
required by the applicable adjustable mortgage loan laws and regulations and the
Contracts regarding such interest rate adjustments and payment adjustments.
SECTION 5.02. Standard of Care.
----------------
In managing, administering, servicing and making collections on the
Contracts pursuant to this Agreement, the Servicer will exercise that degree of
skill and care required by FHA (in the case of FHA-Insured Contracts) and
otherwise consistent with the highest degree of skill and care that the Servicer
exercises with respect to similar contracts (including manufactured housing
contracts) serviced by the Servicer; provided, however, that such degree of
--------- -------
skill and care shall be at least as favorable as the degree of skill and care
generally applied by prudent servicers of home improvement contracts and home
equity loans for prudent institutional investors.
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SECTION 5.03. Records.
-------
The Servicer shall, during the period it is servicer hereunder, maintain
such books of account and other records as will enable the Trust and the
Indenture Trustee to determine the status of each Contract.
SECTION 5.04. Inspection; Computer Tape.
-------------------------
(a) At all times during the term hereof, the Servicer shall afford the
Trust and Indenture Trustee and their authorized agents reasonable access during
normal business hours to the Servicer's records relating to the Contracts and
will cause its personnel to assist in any examination of such records by the
Trust and Indenture Trustee or their authorized agents. The examination
referred to in this Section will be conducted in a manner which does not
unreasonably interfere with the Servicer's normal operations or customer or
employee relations. Without otherwise limiting the scope of the examination the
Trust and Indenture Trustee may make, the Trust and Indenture Trustee may, using
generally accepted audit procedures, verify the status of each Contract and
review the Electronic Ledger and records relating thereto for conformity to
Monthly Reports prepared pursuant to Section 5.14 and compliance with the
standards represented to exist as to each Contract in this Agreement.
The Servicer shall provide to any Securityholder such access to the records
relating to the Contracts only in such cases where the Servicer is required by
applicable statutes or regulations, whether applicable to the Servicer or to
such Securityholder, to permit Securityholder to review such documentation. In
each case, such access shall be afforded without charge but only upon reasonable
request and during normal business hours. Nothing in this Section shall
derogate from the obligation of the Servicer to observe any applicable law
prohibiting disclosure of information regarding the Obligors, and the failure of
the Servicer to provide access as provided in this Section as a result of such
obligation shall not constitute a breach of this Section. Any Securityholder,
by its acceptance of a Certificate or Note (or by acquisition of its beneficial
interest therein), as applicable, shall be deemed to have agreed to keep
confidential and not to use for its own benefit any information obtained by it
pursuant to this Section, except as may be required by applicable law.
(b) At all times during the term hereof, the Servicer shall keep available
a copy of the List of Contracts at its principal executive office for inspection
by the Trust and the Indenture Trustee.
(c) A Certificateholder holding Certificates representing in the aggregate
at least 5% of the Aggregate Certificate Principal Balance shall have the rights
of inspection afforded to the Trustee pursuant to this Section 5.04.
(d) On or before the ninth Business Day of each month, the Servicer will
provide to the Indenture Trustee a Computer Tape setting forth a list of all the
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outstanding Contracts and the outstanding principal balance of each such
Contract as of the end of the next preceding Due Period.
SECTION 5.05. Collections.
-----------
(a) The Servicer shall pay into the Collection Account: (i) as promptly as
practicable (not later than the next Business Day) following receipt thereof all
payments from Obligors and Net Liquidation Proceeds (other than late payment
penalty fees, extension fees and assumption fees, which shall be retained by the
Servicer as additional compensation for servicing the Contracts, and any
payments that were due prior to the Cut-off Date, which shall be remitted to the
Company); and (ii) on the Business Day immediately prior to each Distribution
Date, all Servicer Advances required to be made with respect to such
Distribution Date pursuant to Section 5.13.
(b) If the Servicer so directs, the institution maintaining the Collection
Account shall, in the name of the Indenture Trustee in its capacity as such,
invest the amounts in the Collection Account in Eligible Investments that mature
not later than one Business Day prior to the next succeeding Distribution Date.
Once such funds are invested, such institution shall not change the investment
of such funds. All income and gain from such investments shall be added to the
Collection Account and distributed on such Distribution Date pursuant to Section
8.03(a). The Company, the Servicer and the Indenture Trustee shall in no way be
liable for losses on amounts invested in accordance with the provisions hereof.
The Servicer shall deposit in the Collection Account an amount equal to any net
loss on such investments immediately as realized. Funds in the Collection
Account not so invested must be insured to the extent permitted by law by the
Federal Deposit Insurance Corporation.
SECTION 5.06. Enforcement.
-----------
(a) The Servicer shall, consistent with customary servicing procedures, act
with respect to the Contracts in such manner as will maximize the receipt of
principal and interest on such Contracts and Liquidation Proceeds with respect
to Liquidated Contracts. The Company shall pay all FHA Insurance premiums
required by FHA Regulations in respect of FHA-Insured Contracts; if the Company
is no longer the Servicer and fails to pay such FHA Insurance premiums, the
successor Servicer shall pay such premiums and shall be entitled to
reimbursement therefor in accordance with Section 6.03. The Servicer shall
comply with FHA Regulations in servicing FHA-Insured Contracts so that the
related FHA Insurance remains in full force and effect, except for good-faith
disputes relating to FHA Regulations or such FHA Insurance.
(b) In accordance with the standard of care specified in Paragraph 5.02,
the Servicer may, in its own name, if possible, or as agent for the Trust,
commence proceedings for the foreclosure of any subject real estate, or may take
such other
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steps that in the Servicer's reasonable judgment will maximize Liquidation
Proceeds with respect to the Contract, including, for example, the sale of the
Contract to a third party for foreclosure or enforcement and, in the case of any
default on a related prior mortgage loan, the advancing of funds to correct such
default and the advancing of funds to pay off a related prior mortgage loan,
which advances are Liquidation Expenses that will be reimbursed to the Servicer
out of related Liquidation Proceeds before the related Net Liquidation Proceeds
are paid to Noteholders and Certificateholders. The Servicer shall also deposit
in the Certificate Account any Net Liquidation Proceeds received in connection
with any Contract which became a Liquidated Contract in a prior Due Period.
(c) The Servicer may sue to enforce or collect upon Contracts, in its own
name, if possible, or as agent for the Trust. If the Servicer elects to
commence a legal proceeding to enforce a Contract, the act of commencement shall
be deemed to be an automatic assignment of the Contract to the Servicer for
purposes of collection only. If, however, in any enforcement suit or legal
proceeding it is held that the Servicer may not enforce a Contract on the ground
that it is not a real party in interest or a holder entitled to enforce the
Contract, the Owner Trustee on behalf of the Trust shall, at the Servicer's
expense, take such steps as the Servicer deems necessary to enforce the
Contract, including bringing suit in its name or the names of the Noteholders
and Certificateholders.
(d) The Servicer may grant to the Obligor on any Contract any rebate,
refund or adjustment out of the Collection Account that the Servicer in good
faith believes is required because of Principal Prepayment in Full of the
Contract. The Servicer will not permit any rescission or cancellation of any
Contract.
(e) The Servicer shall enforce any due-on-sale clause in a Contract if such
enforcement is called for under its then current servicing policies for
obligations similar to the Contracts, provided that such enforcement is
permitted by applicable law and will not adversely affect any applicable
insurance policy. If an assumption of a Contract is permitted by the Servicer,
upon conveyance of the related property the Servicer shall use its best efforts
to obtain an assumption agreement in connection therewith.
(f) If, following the termination of the Trust pursuant to the Trust
Agreement, HUD demands reimbursement of an FHA Insurance claim paid on an FHA-
Insured Contract prior to the termination of the Trust, the Servicer agrees that
it will not seek to recover any such amount from the Trustee or the
Certificateholders.
(g) Any provision of this Agreement to the contrary notwithstanding, the
Servicer shall not agree to the modification or waiver of any provision of a
Contract at a time when such Contract is not in default or such default is not
reasonably foreseeable, if such modification or waiver would be treated as a
taxable exchange under Section 1001 of the Code or any proposed, temporary or
final Treasury
5-4
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Regulations promulgated thereunder.
SECTION 5.07. Owner Trustee to Cooperate.
--------------------------
(a) Upon payment in full on any Contract, the Servicer will notify the
Owner Trustee and the Company (if the Company is not the Servicer) on the next
succeeding Payment Date by certification of a Servicing Officer (which
certification shall include a statement to the effect that all amounts received
in connection with such payments which are required to be deposited in the
Collection Account pursuant to Section 5.05 have been so deposited) and shall
request delivery of the Contract and Contract File to the Servicer. Upon
receipt of such delivery and request, the Owner Trustee shall promptly release
or cause to be released such Contract and Contract File to the Servicer. Upon
receipt of such Contract and Contract File, each of the Company (if different
from the Servicer) and the Servicer is authorized to execute an instrument in
satisfaction of such Contract and to do such other acts and execute such other
documents as the Servicer deems necessary to discharge the Obligor thereunder
and eliminate any lien on the related real estate. The Servicer shall determine
when a Contract has been paid in full; provided that, to the extent that
--------
insufficient payments are received on a Contract credited by the Servicer as
prepaid or paid in full and satisfied, the shortfall shall be paid by the
Servicer out of its own funds, without any right of reimbursement therefor
(except from additional amounts recovered from the related Obligor or otherwise
in respect of such Contract), and deposited in the Collection Account.
(b) If the Servicer elects to submit a claim to FHA under the FHA Insurance
in respect of an FHA-Insured Contract and payment is received from FHA, the
Servicer shall notify the Trustee and the Company (if the Company is not the
Servicer) on the next succeeding Payment Date by certification of a Servicing
Officer (which certification shall include a statement to the effect that all
amounts received in connection with such payments which are required to be
deposited in the Collection Account pursuant to Section 5.05 have been so
deposited) and shall request delivery of the Contract and Contract File to the
Servicer. Upon receipt of such delivery and request, the Owner Trustee shall
promptly release or cause to be released such Contract and Contract File to the
Servicer.
(c) From time to time as appropriate for servicing, foreclosing, and making
a claim for FHA Insurance coverage in connection with an FHA-Insured Contract,
the Owner Trustee shall, upon written request of a Servicing Officer and
delivery to the Trustee of a receipt signed by such Servicing Officer, cause the
original Contract and the related Contract File to be released to the Servicer
and shall execute such documents as the Servicer shall deem necessary to the
prosecution of any such proceedings. Upon request of a Servicing Officer, the
Trustee shall perform such other acts as reasonably requested by the Servicer
and otherwise cooperate with the Servicer in enforcement of the
Certificateholders' rights and remedies with respect to Contracts.
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<PAGE>
(d) The Servicer's receipt of a Contract and/or Contract File shall
obligate the Servicer to return the original Contract and the related Contract
File to the Owner Trustee when its need by the Servicer has ceased unless the
Contract shall be liquidated or repurchased or replaced as described in Section
3.05 or 8.06.
SECTION 5.08. Costs and Expenses.
------------------
Except as provided in Sections 6.06 for the reimbursement of Servicer
Advances, all costs and expenses incurred by the Servicer in carrying out its
duties hereunder (including payment of FHA Insurance premiums, fees and expenses
of accountants and payments of all fees and expenses incurred in connection with
the enforcement of Contracts (including enforcement of Contracts and
foreclosures upon real estate securing any such Contracts) and all other fees
and expenses not expressly stated hereunder to be for the account of the Trust)
shall be paid by the Servicer and the Servicer shall not (except as otherwise
provided in Section 6.06) be entitled to reimbursement hereunder, except that
the Servicer shall be reimbursed out of the Liquidation Proceeds of a Liquidated
Contract (including FHA Insurance proceeds) for customary out-of-pocket
Liquidation Expenses incurred by it. The Servicer shall not incur such
Liquidation Expenses unless it determines in its good faith business judgment
that incurring such expenses will increase the Net Liquidation Proceeds on the
related Contract. The Servicer's out-of-pocket Liquidation Expenses in
connection with the submission of a claim to FHA currently do not exceed $100
per Contract.
If the Servicer fails to make a timely interest rate or monthly payment
adjustment on a Contract which does not provide for a fixed interest rate over
the life of the Contract, the Servicer shall use its own funds to satisfy any
shortage in the Obligor's remittance so long as such shortage shall continue;
any such amount paid by the Servicer shall be reimbursable to it from any
subsequent amounts collected on account of the related Contract with respect to
such adjustments.
SECTION 5.09. Maintenance of Insurance.
------------------------
The Servicer shall at all times keep in force a policy or policies of
insurance covering errors and omissions for failure to maintain insurance as
required by this Agreement, and a fidelity bond. Such policy or policies and
such fidelity bond shall be in such form and amount as is generally customary
among persons who service a portfolio of home improvement contracts and home
equity loans having an aggregate principal amount of $10,000,000 or more, and
which are generally regarded as servicers acceptable to institutional investors.
The Servicer shall cause to be maintained with respect to any real property
securing an FHA-Insured Contract such hazard insurance and flood insurance as
may be required by the FHA Regulations, it being understood that at the Closing
Date hazard insurance was not required to be maintained under the FHA
Regulations. The Servicer shall cause to be maintained with respect to the real
property securing a conventional Contract hazard insurance (excluding flood
insurance coverage) if such conventional
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Contract is secured by a first priority mortgage, deed of trust or security deed
or the initial principal balance of such conventional Contract exceeds $30,000.
SECTION 5.10. INTENTIONALLY OMITTED.
---------------------
SECTION 5.11. Commingling of Funds.
--------------------
So long as the Company is Servicer, any collections in respect of Contracts
collected by the Company shall, prior to the deposit thereof in the Collection
Account, be held in bank accounts entitled substantially as follows: "[name of
depository], as agent for _____ and other trustees and Green Tree Financial
Corporation, as their interests may appear."
SECTION 5.12. INTENTIONALLY OMITTED.
---------------------
SECTION 5.13. Servicer Advances.
-----------------
Not later than the Business Day immediately preceding each Distribution
Date, the Servicer shall advance to the Trust (each such advance, a "Servicer
Advance") all Delinquent Payments for the immediately preceding Due Period by
depositing the aggregate amount of such Delinquent Payments in the Collection
Account, provided, however, that the Servicer shall be obligated to advance
Delinquent Payments only to the extent that the Servicer, in its sole
discretion, expects to be able to recover such advances from subsequent
collections, including Net Liquidation Proceeds.
SECTION 5.14. Monthly Reports; Certificate of Servicing Officer.
-------------------------------------------------
(a) No later than 1:00 p.m. on each Determination Date, the Servicer shall
deliver to the Trust, the Indenture Trustee, the Paying Agent, the Company (if
the Company is not the Servicer), and [Rating Agencies] a "Monthly Report,"
substantially in the form of Exhibit C hereto.
(b) Each Monthly Report pursuant to Section 5.14(a) shall be accompanied by
a certificate of a Servicing Officer substantially in the form of Exhibit D,
certifying the accuracy of the Monthly Report and that no Event of Termination
or event that with notice or lapse of time or both would become an Event of
Termination has occurred, or if such event has occurred and is continuing,
specifying the event and its status.
(c) The Company and (if different from the Company) the Servicer shall, on
request of the Trust, the Indenture Trustee, [Rating Agencies] or a
Securityholder, furnish the Trust, the Indenture Trustee, [Rating Agencies] or a
Securityholder such underlying data as may be reasonably requested.
SECTION 5.15. Annual Report of Accountants.
----------------------------
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<PAGE>
On or before May 1 of each year, commencing May 1, 1998, the Servicer at
its expense shall cause a firm of independent public accountants which is a
member of the American Institute of Certified Public Accountants to issue to the
Servicer a report that such firm has examined selected documents, records and
management's assertions relating to loans serviced by the Servicer and stating
that, on the basis of such examination, such servicing has been conducted in
compliance with the minimum servicing standards identified in the Mortgage
Bankers Association of America's Uniform Single Attestation Program for Mortgage
Bankers, or any successor uniform program, except for such significant
exceptions or errors in records that, in the opinion of such firm, generally
accepted attestation standards requires it to report.
SECTION 5.16. Certain Duties of the Servicer Under the Trust Agreement.
--------------------------------------------------------
The Servicer shall, and hereby agrees that it will, monitor the Trust's
compliance with all applicable provisions of state and federal securities laws,
notify the Trust and the Administrator of any actions to be taken by the trust
necessary for compliance with such laws and prepare on behalf of the Trust and
the Administrator all notices, filings or other documents or instruments
required to be filed under such laws.
SECTION 5.17. INTENTIONALLY OMITTED.
SECTION 5.18. Annual Statement as to Compliance; Notice of Servicer
-----------------------------------------------------
Termination Event.
- -----------------
(a) The Servicer shall deliver to the Trust, the Indenture Trustee, and
each of _____ and _____, on or before March 31 (or 90 days after the end of the
Servicer's fiscal year, if other than December 31) of each year, beginning on
March 31, 1998, an officer's certificate signed by any Responsible Officer of
the Servicer, dated as of December 31 (or other applicable date) of the
immediately preceding year, stating that (i) a review of the activities of the
Servicer during the preceding 12-month period (or such other period as shall
have elapsed from the Closing Date to the date of the first such certificate)
and of its performance under this Agreement has been made under such officer's
supervision, and (ii) to such officer's knowledge, based on such review, the
Servicer has fulfilled all its obligations under this Agreement throughout such
period, or, if there has been a default in the fulfillment of any such
obligation, specifying each such default known to such officer and the nature
and status thereof.
(b) The Company or the Servicer shall deliver to the Trust, the Indenture
Trustee, the Servicer or the Company (as applicable) and each Rating Agency
promptly after having obtained knowledge thereof, but in no event later than 2
Business Days thereafter, written notice in an officer's certificate of any
event which with the giving of notice or lapse of time, or both, would become an
Event of Termination under Section 7.01.
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<PAGE>
SECTION 5.19. INTENTIONALLY OMITTED.
SECTION 5.20. INTENTIONALLY OMITTED.
---------------------
SECTION 5.21. Covenants, Representations, and Warranties of Servicer. By
------------------------------------------------------
its execution and delivery of this Agreement, the Servicer makes the following
representations, warranties and covenants on which the Trust relies in accepting
the Contracts and issuing the Notes and the Certificates and on which the
Indenture Trustee relies in authenticating the Notes.
(a) No Impairment. The Servicer shall do nothing to impair the rights of
-------------
the Trust, the Indenture Trustee or the Securityholders in the Contracts, the
Insurance Policies or the other Trust Property; and
(b) No Amendments. The Servicer shall not extend or otherwise amend the
-------------
terms of any Contract, except in accordance with Section 5.06.
SECTION 5.22. Purchase of Contracts Upon Breach of Covenant. Upon
---------------------------------------------
discovery by any of the Servicer, the Trust or the Indenture Trustee of a breach
of any of the covenants set forth in Section 5.20(a) or 5.21, the party
discovering such breach shall give prompt written notice to the others;
provided, however, that the failure to give any such notice shall not affect any
- -------- -------
obligation of the Servicer. Not later than the last day of the Due Period that
is 90 days after its discovery or receipt of notice of any breach of any such
covenant which materially and adversely affects the interests of the
Securityholders or the Trust in any Contract (including any Liquidated
Contract), the Servicer shall, unless it shall have cured such breach in all
material respects, purchase from the Trust the Contract affected by such breach
and pay the related Repurchase Price. It is understood and agreed that the
obligation of the Servicer to purchase any Contract (including any Liquidated
Contract) with respect to which such a breach has occurred and is continuing
shall, if such obligation is fulfilled, constitute the sole remedy against the
Servicer for such breach available to the Securityholders, the Trust, or the
Indenture Trustee on behalf of the Noteholders; provided, however, that the
-------- -------
Servicer shall indemnify the Owner Trustee, the Trust, the Indenture Trustee,
and the Securityholders against all costs, expenses, losses, damages, claims and
liabilities, including reasonable fees and expenses of counsel, which may be
asserted against or incurred by any of them as a result of third party claims
arising out of the events or facts giving rise to such breach.
SECTION 5.23. Merger or Consolidation of Servicer. Any Person into which
-----------------------------------
the Servicer may be merged or converted or with which it may be consolidated, or
any Person resulting from any merger, conversion or consolidation to which the
Servicer shall be a party shall be the successor of the Servicer hereunder,
provided such Person shall be an Eligible Servicer, without the execution or
- --------
filing of any paper or any further act on the part of any of the parties hereto,
anything herein to the contrary notwithstanding. The Servicer shall promptly
notify S&P and Fitch in
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<PAGE>
the event it is a party to any merger, conversion or consolidation.
5-10
<PAGE>
ARTICLE VI
DISTRIBUTIONS; RESERVE ACCOUNT; LIMITED GUARANTY;
STATEMENTS TO SECURITYHOLDERS
SECTION 6.01. Trust Accounts.
--------------
(a) The Servicer shall establish the Collection Account in the name of the
Indenture Trustee for the benefit of the Securityholders. The Collection
Account shall be an Eligible Account and initially shall be a segregated trust
account established with the Indenture Trustee and maintained with the Indenture
Trustee.
(b) The Servicer shall establish the Note Distribution Account in the name
of the Indenture Trustee for the benefit of the Noteholders. The Note
Distribution Account shall be an Eligible Account and initially shall be a
segregated trust account established with the Indenture Trustee and maintained
with the Indenture Trustee.
(c) The Servicer shall establish the Reserve Account in the name of the
Indenture Trustee for the benefit of the Noteholders. The Reserve Account shall
be an Eligible Account and initially shall be a segregated trust account
established with the Indenture Trustee and maintained with the Indenture
Trustee.
(d) The Servicer shall establish the Certificate Distribution Account in
the name of the Owner Trustee for the benefit of the Certificateholders. The
Certificate Distribution Account shall be an Eligible Account and initially
shall be a segregated trust account established with the Indenture Trustee and
maintained with the Indenture Trustee, so long as the Indenture Trustee is
acting as Paying Agent under Section 3.9 of the Trust Agreement.
(e) All amounts held in the Collection Account, the Note Distribution
Account and the Reserve Account (collectively, the "Trust Accounts") other than
the Certificate Distribution Account shall, to the extent permitted by
applicable laws, rules and regulations, be invested, as directed by the
Servicer, in Eligible Investments that mature not later than one Business Day
prior to the Distribution Date for the Due Period to which such amounts relate.
Any such written direction shall certify that any such investment is authorized
by this Section 6.01(e). Such investments in Eligible Investments shall be made
in the name of the Indenture Trustee on behalf of the Trust, and such
investments shall not be sold or disposed of prior to their maturity. Any
investment of funds in the Trust Accounts shall be made in Eligible Investments
held by a financial institution with respect to which (a) such institution has
noted the Indenture Trustee's interest therein by book entry or otherwise and
(b) a confirmation of the Indenture Trustee's interest has been sent to the
Indenture Trustee by such institution, provided that such Eligible Investments
are (i) specific certificated securities (as such term is used in [N.Y. UCC (S)
336.8-313(1)(d)(i))], and (ii) either (A) in the possession of such institution
or (B) in the possession of a clearing corporation (as such term is used in
[N.Y. UCC (S)
6-1
<PAGE>
336.8-313(1)(g))] in [New York] or Minnesota, registered in the name of such
clearing corporation, not endorsed for collection or surrender or any other
purpose not involving transfer, not containing any evidence of a right or
interest inconsistent with the Indenture Trustee's security interest therein,
and held by such clearing corporation in an account of such institution. Subject
to the other provisions hereof, the Indenture Trustee shall have sole control
over each such investment and the income thereon, and any certificate or other
instrument evidencing any such investment, if any, shall be delivered directly
to the Indenture Trustee or its agent, together with each document of transfer,
if any, necessary to transfer title to such investment to the Indenture Trustee
in a manner which complies with this Section 6.01. All interest, dividends,
gains upon sale and other income from, or earnings on, investments of funds in
the Trust Accounts shall be deposited in the Collection Account and distributed
on the next Distribution Date pursuant to Section 6.06. The Servicer shall
deposit in the applicable Trust Account an amount equal to any net loss on such
investments immediately as realized.
SECTION 6.02. Collection Account Deposits.
---------------------------
(a) Collections. The Servicer shall remit directly to the Collection
-----------
Account (no later than the next Business Day as specified in Section 5.05) all
payments by or on behalf of the Obligors on the Contracts and all Liquidation
Proceeds received by the Servicer and all proceeds of FHA Insurance claims
received by the Servicer, other than extension fees and assumption fees, which
fees shall be retained by the Servicer as compensation for servicing the
Contracts, and other than Liquidation Expenses permitted by Section 5.08. The
Trustee shall pay into the Collection Account as promptly as practicable all
proceeds of FHA Insurance claims with respect to FHA-Insured Contracts received
by the Trustee. The Trustee shall hold all amounts paid into the Collection
Account under this Agreement in trust for the Trustee, the Noteholders and
Certificateholders until payment of any such amounts is authorized under this
Agreement. Only the Trustee may withdraw funds from the Certificate Account.
(b) Servicer Advances. The Servicer shall deposit in the Collection
-----------------
Account immediately prior to each Distribution Date all Servicer Advances
required to be made pursuant to Section 5.13.
(c) Repurchased Contracts. The Company shall deposit in the Collection
---------------------
Account the Repurchase Price for each Contract repurchased by it under Section
3.05. The Servicer shall deposit in the Collection Account the Repurchase Price
for each Contract repurchased by it under Section 5.22.
SECTION 6.03. Permitted Withdrawals.
---------------------
The Indenture Trustee may, from time to time as provided herein, make
withdrawals from the Collection Account of amounts deposited in said account
that are attributable to the Contracts only for the following purposes:
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(a) to make payments in the amounts and in the manner provided for in
Section 6.06;
(b) to pay to the Company with respect to each Contract or property
acquired in respect thereof that has been repurchased pursuant to Section
3.05, all amounts received thereon and not required to be distributed to
Noteholders or Certificateholders as of the date on which the related
Scheduled Principal Balance or Repurchase Price is determined;
(c) to reimburse the Servicer out of Liquidation Proceeds for
Liquidation Expenses incurred by it, to the extent such reimbursement is
permitted pursuant to Section 5.08;
(d) to withdraw any amount deposited in the Collection Account that
was not required to be deposited therein; or
(e) to make any rebates or adjustments deemed necessary by the
Servicer pursuant to Section 5.06(d).
Since, in connection with withdrawals pursuant to clauses (a) and (b), the
Company's or the Servicer's entitlement thereto is limited to collections or
other recoveries on the related Contract, the Servicer shall keep and maintain a
separate accounting, on a Contract by Contract basis, for the purpose of
justifying any withdrawal from the Collection Account pursuant to such clauses.
SECTION 6.04. Reserve Account Withdrawals.
---------------------------
Not later than the Business Day prior to each Distribution Date, based on
the information set forth in the related Monthly Statement, if there are
insufficient funds in the Note Distribution Account to make the distributions in
the amounts described in Section 8.02(c) of the Indenture, the Servicer shall
deliver to the Indenture Trustee, with a copy to the Trust and the Paying Agent,
if any, by hand deliver, telex or facsimile transmission, a written notice (a
"Deficiency Notice") specifying the amount of the insufficiency for such
Distribution Date. Such Deficiency Notice shall direct the Indenture Trustee to
remit such amount (to the extent of funds then on deposit) from the Reserve
Account for deposit in the Note Distribution Account on the Distribution Date.
SECTION 6.05. Limited Guaranties.
------------------
a. Class HI: B-2 Limited Guaranty
------------------------------
(i) No later than the third Business Day prior to each Payment Date,
the Servicer (if other than the Company) shall notify the Company of the
amount of the Class HI: B-2 Guaranty Payment (if any) for such Payment
Date. Not later than the Business Day preceding each Payment Date, the
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Company shall deposit the Class HI: B-2 Guaranty Payment, if any, for such
Payment Date into the Collection Account. Any Class HI: B-2 Guaranty
Payment shall be distributable to Class HI: B-2 Certificateholders pursuant
to Section 5.2 of the Trust Agreement.
(ii) The obligations of the Company under this Section 6.05 shall not
terminate upon or otherwise be affected by a Service Transfer pursuant to
Article VII of this Agreement.
(iii) The obligation of the Company to provide the Class HI: B-2
Limited Guaranty under this Agreement shall terminate on the Final Payment
Date.
(iv) The obligation of the Company to make the Class HI: B-2 Guaranty
Payments described in subsection (1) above shall be unconditional and
irrevocable. The Company acknowledges that its obligation to make the
Class HI: B-2 Guaranty Payments described in subsection (1) above shall be
deemed a guaranty by the Company of indebtedness of the Trust for money
borrowed from the Class HI: B-2 Certificateholders.
(v) If the Company fails to make a Class HI: B-2 Guaranty Payment in
whole or in part, the Company shall promptly notify the Owner Trustee, and
the Owner Trustee shall promptly notify [the Rating Agencies].
(vi) In consideration of providing the Class HI: B-2 Limited
Guaranty, the Company shall be entitled to the Class HI: B-2 Guarantee Fee
payable in accordance with Section 5.2(b)(15) of the Trust Agreement.
b. Class HE: B-2 Limited Guaranty
------------------------------
(i) No later than the third Business Day prior to each Payment Date,
the Servicer (if other than the Company) shall notify the Company of the
amount of the Class HE: B-2 Guaranty Payment (if any) for such Payment
Date. Not later than the Business Day preceding each Payment Date, the
Company shall deposit the Class HE: B-2 Guaranty Payment, if any, for such
Payment Date into the Collection Account. Any Class HE: B-2 Guaranty
Payment shall be distributable to Class HE: B-2 Certificateholders pursuant
to Section 5.2 of the Trust Agreement.
(ii) The obligations of the Company under this Section 6.05(b) shall
not terminate upon or otherwise be affected by a Service Transfer pursuant
to Article VII of this Agreement.
(iii) The obligation of the Company to provide the Class HE: B-2
Limited Guaranty under this Agreement shall terminate on the Final Payment
Date.
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(iv) The obligation of the Company to make the Class HE: B-2 Guaranty
Payments described in subsection (1) above shall be unconditional and
irrevocable. The Company acknowledges that its obligation to make the
Class HE: B-2 Guaranty Payments described in subsection (1) above shall be
deemed a guaranty by the Company of indebtedness of the Trust for money
borrowed from the Class HE: B-2 Certificateholders.
(v) If the Company fails to make a Class HE: B-2 Guaranty Payment in
whole or in part, the Company shall promptly notify the Owner Trustee, and
the Owner Trustee shall promptly notify [the Rating Agencies].
(vi) In consideration of providing the Class HE: B-2 Limited
Guaranty, the Company shall be entitled to the Class HE: B-2 Guarantee Fee
payable in accordance with Section 5.2(d)(15) of the Trust Agreement.
SECTION 6.06. Distributions.
-------------
(a) On each Distribution Date, the Servicer shall instruct the Indenture
Trustee (based on the information contained in the Monthly Report delivered
pursuant to Section 5.14) to make the following deposits and distributions by
11:00 a.m. (Minnesota time), to the extent of the Amount Available for such
Distribution Date and in the following order of priority, provided that any
Guaranty Payment shall be distributed solely to the Certificate Distribution
Account pursuant to Section 6.06(b):
(i) Servicing Fee. If the Company or an Affiliate is not the
-------------
Servicer, then to the Servicer, the Servicing Fee for the related Due
Period.
(ii) Servicer Advances. After payment of the amount specified in
-----------------
clause (i) above, to reimburse the Servicer for Uncollectible Advances and
for Servicer Advances made with respect to Delinquent Payments that were
recovered during the related Due Period.
(iii) Notes; Reserve Account Replenishment. After payment of the
------------------------------------
amounts specified in clauses (i) and (ii) above, to the Note Distribution
Account the sum of the Noteholders' Distributable Amount plus the amount,
if any, required to be deposited in the Reserve Account pursuant to Section
8.02(c)(5) of the Indenture.
(iv) Certificates. After payment of the amounts specified in clauses
------------
(i) through (iii) above, to the Certificate Distribution Account, the
Certificateholders' Distributable Amount.
(v) Reserve Account. After payment of the amounts specified in
---------------
clauses (i) through (iv) above, to the Reserve Account, the amount, if any,
by which the balance in the Reserve Account is less than the Reserve
Account
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Required Amount.
(vi) Monthly Servicing and Guaranty Fee. After payment of the
----------------------------------
amounts specified in clauses (i) through (v) above, to the Company, the
Monthly Servicing and Guaranty Fee (which shall be due and payable even if
the Company is no longer acting as Servicer) equal to the remaining Amount
Available as compensation for its providing the Limited Guaranty and acting
as initial Servicer and (if the Company is acting as Servicer) any other
compensation owed to the Servicer pursuant to Section 7.02.
(b) Guaranty Payments. On each Distribution Date the Servicer shall
-----------------
instruct the Indenture Trustee to distribute to the Certificate Distribution
Account any Guaranty Payment deposited in the Collection Account pursuant to
Section 6.05.
(c) Reserve Account. On each Distribution Date on which the amount on
---------------
deposit in the Reserve Account after all distributions made in accordance with
this Section 6.06 exceeds the Reserve Required Amount, the Servicer shall
instruct the Indenture Trustee to pay such excess to [the General Partner].
SECTION 6.07. Sub-Pool HI Pre-Funding Account.
-------------------------------
a. On or before the Closing Date, the Owner Trustee shall establish the
Sub-Pool HI Pre-Funding Account on behalf of the Trust, which must be an
Eligible Account, and shall deposit therein the amounts received from the
Company pursuant to Section 2.02(j). The Sub-Pool HI Pre-Funding Account shall
be entitled "Sub-Pool HI Pre-Funding Account, [Owner Trustee] as Owner Trustee
for the benefit of holders of [Home Improvement and Home Equity] Loan
Securities, Series _____." Funds deposited in the Sub-Pool HI Pre-Funding
Account shall be held in trust by the Owner Trustee for the Holders of the Notes
and Certificates for the uses and purposes set forth herein.
b. Amounts on deposit in the Sub-Pool HI Pre-Funding Account shall be
withdrawn by the Owner Trustee as follows:
(i) On any Subsequent Transfer Date, the Owner Trustee shall withdraw
an amount equal to 100% of the Cut-off Date Principal Balance of each
Subsequent Home Improvement Contract transferred and assigned to the Owner
Trustee on such Subsequent Transfer Date and pay such amount to or upon the
order of the Company upon satisfaction of the conditions set forth in
Section 2.03(b) with respect to such transfer and assignment.
(ii) On the Business Day immediately preceding the Post-Funding
Payment Date, the Owner Trustee shall deposit into the Collection Account
any amounts remaining in the Sub-Pool HI Pre-Funding Account, net of
investment earnings.
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<PAGE>
c. The Owner Trustee on behalf of the Trust shall be the legal owner of
the Sub-Pool HI Pre-Funding Account. The Company shall be the beneficial owner
of the Sub-Pool HI Pre-Funding Account, subject to the foregoing power of the
Owner Trustee to transfer amounts in the Sub-Pool HI Pre-Funding Account to the
Collection Account. Funds in the Sub-Pool HI Pre-Funding Account shall, at the
direction of the Servicer, be invested in Eligible Investments of the kind
described in clauses (i) and (ii) of the definition of "Eligible Investment" and
that mature no later than the Business Day prior to the next succeeding Payment
Date. All amounts earned on deposits in the Sub-Pool HI Pre-Funding Account
shall be taxable to the Company. The Owner Trustee shall release to the Company
all investment earnings in the Sub-Pool HI Pre-Funding Account on the Post-
Funding Payment Date.
SECTION 6.08. Sub-Pool HE Pre-Funding Account.
-------------------------------
a. On or before the Closing Date, the Owner Trustee shall establish the
Sub-Pool HE Pre-Funding Account on behalf of the Trust, which must be an
Eligible Account, and shall deposit therein the amounts received from the
Company pursuant to Sections 2.02(j) and (k). The Sub-Pool HE Pre-Funding
Account shall be entitled "Sub-Pool HE Pre-Funding Account, [Owner Trustee] as
Owner Trustee for the benefit of holders of [Home Improvement and Home Equity]
Loan Securities, Series _____." The Owner Trustee shall maintain within the
Sub-Pool HE Pre-Funding Account four subaccounts: the "Pre-Funding ARM
Subaccount" and the "Pre-Funding Fixed Rate Subaccount" which pertain to the
pre-funded Subsequent Home Equity Contracts; and the Undelivered ARM Contract
Subaccount and the Undelivered Fixed Rate Contract Subaccount which pertain to
those Contracts transferred to the Trust on the Closing Date that are
Undelivered Contracts. Funds deposited in the Sub-Pool HE Pre-Funding Account
shall be held in trust by the Owner Trustee for the Holders of the Notes and
Certificates for the uses and purposes set forth herein.
b. On or before the Closing Date the Company shall deposit in the Pre-
Funding ARM Subaccount and the Pre-Funding Fixed Rate Subaccount, the respective
amounts specified in Section 2.02(j). Amounts on deposit in such subaccounts
shall be withdrawn by the Owner Trustee as follows:
(i) On any Subsequent Transfer Date, the Owner Trustee shall withdraw
an amount equal to 100% of the Cut-off Date Principal Balance of each
Subsequent Adjustable Rate Home Equity Contract transferred and assigned to
the Owner Trustee on such Subsequent Transfer Date and pay such amount to
or upon the order of the Company upon satisfaction of the conditions set
forth in Section 2.03(b) with respect to such transfer and assignment.
(ii) On any Subsequent Transfer Date, the Owner Trustee shall withdraw
an amount equal to 100% of the Cut-off Date Principal Balance of
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each Subsequent Fixed Rate Home Equity Contract transferred and assigned to
the Owner Trustee on such Subsequent Transfer Date and pay such amount to
or upon the order of the Company upon satisfaction of the conditions set
forth in Section 2.03(b) with respect to such transfer and assignment.
(iii) On the Business Day immediately preceding the Post-Funding
Payment Date, the Owner Trustee shall deposit into the Collection Account
any amounts remaining in the Pre-Funding ARM Subaccount and Pre-Funding
Fixed Rate Subaccount, net of investment earnings.
c. On or before the Closing Date the Company shall deposit in the
Undelivered ARM Contract Subaccount and the Undelivered Fixed Rate Contract
Subaccount the respective amounts specified in Section 2.02(k). Amounts on
deposit in such subaccounts shall be withdrawn by the Owner Trustee as follows:
(i) If the Company delivers the related Contract File for an
Undelivered Adjustable Rate Home Equity Contract to the Owner Trustee at
least two Business Days before the last day of the Pre-Funding Period, the
Owner Trustee shall withdraw an amount equal to 100% of the Cut-off Date
Principal Balance of such Contract and pay such amount to or upon the order
of the Company.
(ii) If the Company delivers the related Contract File for an
Undelivered Fixed Rate Home Equity Contract to the Owner Trustee at least
two Business Days before the last day of the Pre-Funding Period, the Owner
Trustee shall withdraw an amount equal to 100% of the Cut-off Date
Principal Balance of such Contract and pay such amount to or upon the order
of the Company.
(iii) The Company shall give the Owner Trustee telephonic notice of
its intended delivery of Contract Files. The Owner Trustee will use
reasonable efforts to process Contract Files and remit any amount payable
for them to the Company in a timely manner.
(iv) On the Business Day immediately preceding the Post-Funding
Payment Date, the Owner Trustee shall deposit into the Collection Account
any amounts remaining in the Undelivered ARM Contract and Undelivered Fixed
Contract Rate Subaccounts, net of investment earnings.
d. The Owner Trustee on behalf of the Trust shall be the legal owner of
the Sub-Pool HE Pre-Funding Account. The Company shall be the beneficial owner
of the Sub-Pool HE Pre-Funding Account, subject to the foregoing power of the
Owner Trustee to transfer amounts in the Sub-Pool HE Pre-Funding Account to the
Collection Account. Funds in the Sub-Pool HE Pre-Funding Account shall, at the
direction of the Servicer, be invested in Eligible Investments of the kind
described in clauses (i) and (ii) of the definition of "Eligible Investment" and
that mature no later
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<PAGE>
than the Business Day prior to the next succeeding Payment Date. All amounts
earned on deposits in the Sub-Pool HE Pre-Funding Account shall be taxable to
the Company. The Owner Trustee shall release to the Company all investment
earnings in the Sub-Pool HE Pre-Funding Account on the first Payment Date after
the end of the Pre-Funding Period.
SECTION 6.09. Statements to Securityholders.
-----------------------------
(a) The Servicer shall prepare and furnish to the Indenture Trustee the
statements specified below relating to the Class A-1 Notes and the Class A-2
Notes, and to the Owner Trustee the statements specified below relating to the
Class HI: A Certificates, the Class HI: M Certificates, the Class HI: B
Certificates, the Class HE: A Certificates, the Class HE: M Certificates and the
Class HE: B Certificates on or before the third Business Day next preceding each
Payment Date.
(b) On each Distribution Date, the Indenture Trustee shall include with
each distribution to each Noteholder, and the Owner Trustee shall include with
each distribution to each Certificateholder, a statement (which statement shall
also be provided to each Rating Agency) based on information in the Monthly
Report delivered on the related Determination Date pursuant to Section 5.14,
setting forth the following information:
(i) the amount of such distribution to Holders of each Class of
Notes and the Certificates allocable to interest, separately identifying
any Unpaid Class A-1 Interest Shortfall, Unpaid Class A-2 Interest
Shortfall and any Unpaid Certificate Interest Shortfall included in such
distribution and any remaining Unpaid Class A-1 Interest Shortfall, Unpaid
Class A-2 Interest Shortfall and any Unpaid Certificate Interest Shortfall
after giving effect to such distribution;
(ii) the Class A-1 Interest Carryover Shortfall, the Class A-2
Interest Carryover Shortfall and the Certificate Interest Carryover
Shortfall, if any, for such Distribution Date;
(iii) the amount of such distribution to Holders of each Class of
Notes and the Certificates allocable to principal, separately identifying
the aggregate amount of any Principal Prepayments and Unpaid Class A-1
Principal Shortfall, Unpaid Class A-2 Principal Shortfall and any Unpaid
Certificate Principal Shortfall included therein, and any remaining Unpaid
Class A-1 Principal Shortfall, Unpaid Class A-2 Principal Shortfall and any
Unpaid Certificate Principal Shortfall after giving effect to such
distribution;
(iv) the Class A-1 Principal Shortfall, the Class A-2 Principal
Shortfall and the Certificate Principal Shortfall, if any, for such
Distribution Date;
(v) the Class A-1 Principal Balance, the Class A-2 Principal Balance
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and the Certificate Principal Balance after giving effect to the
distribution of principal on such Distribution Date;
(vi) the amount, if any, of any Class A-1 Principal Liquidation
Loss, Class A-2 Principal Liquidation Loss, and Certificate Principal
Liquidation Loss determined as of that Distribution Date;
(vii) the amount of such distribution to Holders of each Class of
Notes and the Certificates allocable to liquidation losses, separately
identifying the Class A-1 Liquidation Loss Interest Amount, the Class A-2
Liquidation Loss Interest Amount, the Certificate Liquidation Loss Interest
Amount and any Unpaid Class A-1 Liquidation Loss Interest Shortfall, Unpaid
Class A-1 Principal Liquidation Loss, Unpaid Class A-2 Liquidation Loss
Interest Shortfall, Unpaid Class A-2 Principal Liquidation Loss, Unpaid
Certificate Liquidation Loss Interest Shortfall and Unpaid Certificate
Principal Liquidation Loss included therein, and any remaining Unpaid Class
A-1 Liquidation Loss Interest Shortfall, Unpaid Class A-1 Principal
Liquidation Loss, Unpaid Class A-2 Liquidation Loss Interest Shortfall,
Unpaid Class A-2 Principal Liquidation Loss, Unpaid Certificate Liquidation
Loss Interest Shortfall and Unpaid Certificate Principal Liquidation Loss
after giving effect to such distribution;
(viii) the Class A-1 Liquidation Loss Interest Shortfall, the Class
A-2 Liquidation Loss Interest Shortfall and the Certificate Liquidation
Loss Interest Shortfall, if any, for such Distribution Date;
(ix) the amount, if any, deposited in or withdrawn from the Reserve
Account on such Distribution Date;
(x) the amount, if any, on deposit in the Reserve Account after
giving effect to all withdrawals and deposits on such Distribution Date;
(xi) the amount, if any, of the Guaranty Payment on such
Distribution Date;
(xii) the amount of the Monthly Servicing and Guaranty Fee, if any,
paid to the Company with respect to the related Due Period and (if the
Company is not acting as Servicer) the amount of the Monthly Servicing Fee
paid to the Servicer with respect to such Due Period;
(xiii) the amount of any payment to [the General Partner];
(xiv) the Pool Scheduled Principal Balance for such Distribution
Date;
(xv) the Note Pool Factor for each Class and the Certificate Pool
Factor after giving effect to the distribution of principal on such
Distribution
6-10
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Date;
(xvi) the number and aggregate principal balances of Contracts
delinquent (a) 30-59 days and (b) 60 or more days;
(xvii) the number of Liquidated Home Improvement Contracts and
Liquidated Home Equity Contracts, identifying such Contracts and the Net
Liquidation Loss on such Contracts;
(xviii) the aggregate number and principal amount of FHA-Insured
Contracts on which either (i) the Servicer has submitted a claim for FHA
Insurance, HUD rejected such claim and the Servicer has determined not to
resubmit such claim, or (ii) the Servicer has determined not to submit a
claim for FHA Insurance because such claim would not be paid by HUD;
(xix) the amount in the Company's FHA Insurance reserve available to
pay FHA Insurance claims on the FHA-Insured Contracts;
(xx) the Sub-Pool HI Pre-Funded Amount and Sub-Pool HE Pre-Funded
Amount as of such Payment Date; and
(xxi) the aggregate amount of Servicer Advances made by the Servicer
with respect to such Distribution Date, and the aggregate amount paid to
the Servicer as reimbursement of Servicer Advances made on prior
Distribution Dates.
In the case of information furnished pursuant to clauses (i) through (vi)
above, the amounts shall be expressed as a dollar amount per $1,000 denomination
of Note or Certificate, as applicable.
(c) Concurrently with each distribution to Certificateholders, the Owner
Trustee shall, so long as it has received the Monthly Report from the Servicer,
forward or cause to be forwarded by mail to each Holder of a Class HI: A
Certificate and (if the Company is not the Servicer) the Company a statement
setting forth the following:
(i) the amount of such distribution to Holders of each Class of Class
HI: A Certificates allocable to interest, separately identifying any Unpaid
Class HI: A Interest Shortfall included in such distribution and any
remaining Unpaid Class HI: A Interest Shortfall after giving effect to such
distribution;
(ii) the amount of such distribution to Holders of each Class of Class
HI: A Certificates allocable to principal, separately identifying the
aggregate amount of any Principal Prepayments included therein;
(iii) the amount, if any, by which the Class HI: A Formula
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Distribution Amount for such Payment Date exceeds the Class HI: A
Distribution Amount for such Payment Date;
(iv) the Class HI: A-1 Principal Balance, the Class HI: A-2
Principal Balance, and the Class HI: A-3 Principal Balance after giving
effect to the distribution of principal on such Payment Date;
(v) the Pool Scheduled Principal Balance of Sub-Pool HI for such
Payment Date;
(vi) the Sub-Pool HI Senior Percentage for such Payment Date;
(vii) the Sub-Pool HI Pool Factor;
(viii) the number and aggregate principal balances of Home
Improvement Contracts delinquent (a) 31-59 days and (b) 60 or more days;
(ix) the Class HI: B Principal Balance Test (as set forth in
Exhibit Q hereto);
(x) the Class HI: B Principal Distribution Test (as set forth in
Exhibit Q hereto);
(xi) the Class HI: M-1 Interest Deficiency Amount, if any, for such
Payment Date;
(xii) the Class HI: M-2 Interest Deficiency Amount, if any, for such
Payment Date;
(xiii) the Class HI: B-1 Interest Deficiency Amount, if any, for such
Payment Date;
(xiv) the number of Liquidated Home Improvement Contracts,
identifying such Contracts and the Net Liquidation Loss on such Contracts;
(xv) the aggregate number and principal amount of FHA-Insured
Contracts on which either (i) the Servicer has submitted a claim for FHA
Insurance, HUD rejected such claim and the Servicer has determined not to
resubmit such claim, or (ii) the Servicer has determined not to submit a
claim for FHA Insurance because such claim would not be paid by HUD;
(xvi) the amount in the Company's FHA Insurance reserve available to
pay FHA Insurance claims on the FHA-Insured Contracts; and
(xvii) the Sub-Pool HI Pre-Funded Amount as of such Payment Date.
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<PAGE>
The Owner Trustee and the Servicer shall, if any Certificateholder,
Noteholder or Underwriter inquires by telephone, provide the information
contained in the most recent Monthly Report.
In the case of information furnished pursuant to clauses (i) through (iv)
above, the amounts shall be expressed as a dollar amount per Class HI: A
Certificate with a 1% Percentage Interest or per $1,000 denomination of Class
HI: A Certificate.
Within 75 days after the end of each calendar year, the Certificate
Registrar shall furnish or cause to be furnished to each Person who at any time
during the calendar year was the Holder of a Class HI: A Certificate a statement
containing the information with respect to interest accrued and principal paid
on its Class HI: A Certificates during such calendar year. Such obligation of
the Certificate Registrar shall be deemed to have been satisfied to the extent
that substantially comparable information shall be provided by the Certificate
Registrar pursuant to any requirements of the Code as from time to time in
force.
(d) On each Payment Date, the Owner Trustee shall forward or cause to be
forwarded by mail to each Holder of a Class HI: M-1 Certificate a copy of the
monthly statement forwarded to the Holders of Class HI: A Certificates on such
Payment Date. The Servicer shall also furnish to the Owner Trustee, which shall
forward such information to the Class HI: M-1 Certificateholders as part of
their monthly statement, the following information:
(i) the amount of such distribution to Holders of Class HI: M-1
Certificates allocable to interest, separately identifying any Unpaid Class
HI: M-1 Interest Shortfall included in such distribution and any remaining
Unpaid Class HI: M-1 Interest Shortfall after giving effect to such
distribution;
(ii) the amount of such distribution to Holders of Class HI: M-1
Certificates allocable to principal, separately identifying the aggregate
amount of any Principal Prepayments included therein;
(iii) the amount, if any, by which the Class HI: M-1 Formula
Distribution Amount for such Payment Date exceeds the Sub-Pool HI Amount
Available less the Class HI: A Distribution Amount for such Payment Date;
(iv) the Class HI: M-1 Principal Balance after giving effect to the
distribution of principal on such Payment Date;
(v) the Unpaid Class HI: M-1 Liquidation Loss Interest Shortfall
after giving effect to any distribution on such Payment Date pursuant to
Section 8.04(b)(8)(i); and
(vi) the information set forth in clauses (v) through (xvi) of
Section
6-13
<PAGE>
6.05(b).
In the case of the information in clauses (i) through (iv) above, the
amounts shall be expressed as a dollar amount per Class HI: M-1 Certificate with
a 1% Percentage Interest or per $1,000 denomination of Class HI: M-1
Certificate.
Within 75 days after the end of each calendar year, the Certificate
Registrar shall furnish or cause to be furnished to each Person who at any time
during the calendar year was the Holder of a Class HI: M-1 Certificate a
statement containing the applicable distribution information provided pursuant
to this Section aggregated for such calendar year or applicable portion thereof
during which such Person was the Holder of a Class HI: M-1 Certificate. Such
obligation of the Certificate Registrar shall be deemed to have been satisfied
to the extent that substantially comparable information shall be provided by the
Certificate Registrar pursuant to any requirements of the Code as from time to
time in force.
(e) On each Payment Date, the Owner Trustee shall forward or cause to be
forwarded by mail to each Holder of a Class HI: M-2 Certificate a copy of the
monthly statements forwarded to the Holders of Class HI: A and Class HI: M-1
Certificates on such Payment Date. The Servicer shall also furnish to the Owner
Trustee, which shall forward such information to the Class HI: M-2
Certificateholders as part of their monthly statement, the following
information:
(i) the amount of such distribution to Holders of Class HI: M-2
Certificates allocable to interest, separately identifying any Unpaid Class
HI: M-2 Interest Shortfall included in such distribution and any remaining
Unpaid Class HI: M-2 Interest Shortfall after giving effect to such
distribution;
(ii) the amount of such distribution to Holders of Class HI: M-2
Certificates allocable to principal, separately identifying the aggregate
amount of any Principal Prepayments included therein;
(iii) the amount, if any, by which the Class HI: M-2 Formula
Distribution Amount for such Payment Date exceeds the Sub-Pool HI Amount
Available less the sum of the Class HI: A Distribution Amount and the Class
HI: M-1 Distribution Amount for such Payment Date;
(iv) the Class HI: M-2 Principal Balance after giving effect to the
distribution of principal on such Payment Date;
(v) the Unpaid Class HI: M-2 Liquidation Loss Interest Shortfall,
after giving effect to any distribution on such Payment Date pursuant to
Section 8.04(b)(8)(ii); and
(vi) the information set forth in clauses (v) through (xvi) of
Section 6.05(b).
6-14
<PAGE>
In the case of the information in clauses (i) through (iv) above, the
amounts shall be expressed as a dollar amount per Class HI: M-2 Certificate with
a 1% Percentage Interest or per $1,000 denomination of Class HI: M-2
Certificate.
Within 75 days after the end of each calendar year, the Certificate
Registrar shall furnish or cause to be furnished to each Person who at any time
during the calendar year was the Holder of a Class HI: M-2 Certificate a
statement containing the applicable distribution information provided pursuant
to this Section aggregated for such calendar year or applicable portion thereof
during which such Person was the Holder of a Class HI: M-2 Certificate. Such
obligation of the Certificate Registrar shall be deemed to have been satisfied
to the extent that substantially comparable information shall be provided by the
Certificate Registrar pursuant to any requirements of the Code as from time to
time in force.
(f) On each Payment Date, the Owner Trustee shall forward or cause to be
forwarded by mail to each Holder of a Class HI: B-1 Certificate a copy of the
monthly statements forwarded to the Holders of Class HI: A and Class HI: M
Certificates on such Payment Date. The Servicer shall also furnish to the Owner
Trustee, which shall forward such information to the Class HI: B-1
Certificateholders as part of their monthly statement, the following
information:
(i) the amount of such distribution to Holders of Class HI: B-1
Certificates allocable to interest, separately identifying any Unpaid Class
HI: B-1 Interest Shortfall included in such distribution and any remaining
Unpaid Class HI: B-1 Interest Shortfall after giving effect to such
distribution;
(ii) the amount of such distribution to Holders of Class HI: B-1
Certificates allocable to principal, separately identifying the aggregate
amount of any Principal Prepayments included therein;
(iii) the amount, if any, by which the Class HI: B-1 Formula
Distribution Amount for such Payment Date exceeds the Sub-Pool HI Amount
Available less the sum of the Class HI: A Distribution Amount, the Class
HI: M-1 Distribution Amount and the Class HI: M-2 Distribution Amount for
such Payment Date;
(iv) the Class HI: B-1 Principal Balance after giving effect to the
distribution of principal on such Payment Date;
(v) the Unpaid Class HI: B-1 Liquidation Loss Interest Shortfall,
after giving effect to any distribution on such Payment Date pursuant to
Section 8.04(b)(8)(iii);
(vi) the Class HI: B Percentage for such Payment Date; and
(vii) the information set forth in clauses (v) through (xvi) of
Section
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<PAGE>
6.05(b).
In the case of the information in clauses (i) through (iv) above, the
amounts shall be expressed as a dollar amount per Class HI: B-1 Certificate with
a 1% Percentage Interest or per $1,000 denomination of Class HI: B-1
Certificate.
Within 75 days after the end of each calendar year, the Certificate
Registrar shall furnish or cause to be furnished to each Person who at any time
during the calendar year was the Holder of a Class HI: B-1 Certificate a
statement containing the applicable distribution information provided pursuant
to this Section aggregated for such calendar year or applicable portion thereof
during which such Person was the Holder of a Class HI: B-1 Certificate. Such
obligation of the Certificate Registrar shall be deemed to have been satisfied
to the extent that substantially comparable information shall be provided by the
Certificate Registrar pursuant to any requirements of the Code as from time to
time in force.
(g) On each Payment Date, the Owner Trustee shall forward or cause to be
forwarded by mail to each Holder of a Class HI: B-2 Certificate a copy of the
monthly statements forwarded to the Holders of Class HI: A, Class HI: M and
Class HI: B-1 Certificates on such Payment Date. The Servicer shall also
furnish to the Owner Trustee, which shall forward such information to the Class
HI: B-2 Certificateholders as part of their monthly statement, the following
information:
(i) the amount of such distribution to Holders of Class HI: B-2
Certificates allocable to interest, separately identifying any Unpaid Class
HI: B-2 Interest Shortfall included in such distribution and any remaining
Unpaid Class HI: B-2 Interest Shortfall after giving effect to such
distribution;
(ii) the amount of such distribution to Holders of Class HI: B-2
Certificates allocable to principal, separately identifying the aggregate
amount of any Principal Prepayments included therein;
(iii) the amount, if any, by which the sum of the Class HI: B-2
Formula Distribution Amount and the Class HI: B-2 Liquidation Loss
Principal Amount, if any, for such Payment Date exceeds the Class HI: B-2
Distribution Amount for such Payment Date;
(iv) the Class HI: B-2 Principal Balance after giving effect to the
distribution of principal on such Payment Date;
(v) the Unpaid Class HI: B-2 Liquidation Loss Interest Shortfall,
after giving effect to any distribution on such Payment Date pursuant to
Section 8.04(b)(8)(iv);
(vi) the Class HI: B Percentage for such Payment Date; and
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(vii) the information set forth in clauses (v) through (xvi) of
Section 6.05(b).
In the case of the information in clauses (i) through (iv) and (ix) above,
the amounts shall be expressed as a dollar amount per Class HI: B-2 Certificate
with a 1% Percentage Interest or per $1,000 denomination of Class HI: B-2
Certificate.
Within 75 days after the end of each calendar year, the Certificate
Registrar shall furnish or cause to be furnished to each Person who at any time
during the calendar year was the Holder of a Class HI: B-2 Certificate a
statement containing the applicable distribution information provided pursuant
to this Section aggregated for such calendar year or applicable portion thereof
during which such Person was the Holder of a Class HI: B-2 Certificate. Such
obligation of the Certificate Registrar shall be deemed to have been satisfied
to the extent that substantially comparable information shall be provided by the
Certificate Registrar pursuant to any requirements of the Code as from time to
time in force.
(h) Concurrently with each distribution to Certificateholders, the Owner
Trustee shall, so long as it has received the Monthly Report from the Servicer,
forward or cause to be forwarded by mail to each Holder of a Class HE: A
Certificate and (if the Company is not the Servicer) the Company a statement
setting forth the following:
(i) the amount of such distribution to Holders of each Class of Class
HE: A Certificates allocable to interest, separately identifying any Unpaid
Class HE: A Interest Shortfall included in such distribution and any
remaining Unpaid Class HE: A Interest Shortfall after giving effect to such
distribution;
(ii) the amount of such distribution to Holders of each Class of Class
HE: A Certificates allocable to principal, separately identifying (A) the
aggregate amount of any Principal Prepayments included therein, and (B)
that portion of any such distribution to Class HE: A-6 Certificateholders
constituting Class HE: A-6 Lockout Pro Rata Distribution Amount;
(iii) the amount, if any, by which the Class HE: A Formula
Distribution Amount for such Payment Date exceeds the Class HE: A
Distribution Amount for such Payment Date;
(iv) the Class HE: A-1 ARM Principal Balance, the Class HE: A-1
Principal Balance, the Class HE: A-2 Principal Balance, the Class HE: A-3
Principal Balance, the Class HE A-4 Principal Balance, the Class HE: A-5
Principal Balance, the Class HE: A-6 Principal Balance and the Class HE: A-
7 IO Notional Principal Amount after giving effect to the distribution of
principal on such Payment Date;
(v) the Pool Scheduled Principal Balance of Sub-Pool HE, and of that
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amount the aggregate Scheduled Principal Balance of the Adjustable Rate
Home Equity Contracts, for such Payment Date;
(vi) the Sub-Pool HE Senior Percentage and the Class HE: A-6 Lockout
Percentage for such Payment Date;
(vii) the Sub-Pool HE Pool Factor;
(viii) the number and aggregate principal balances of Home Equity
Contracts, identifying separately the Adjustable Rate Home Equity
Contracts, delinquent (a) 30-59 days and (b) 60 or more days;
(ix) the Class HE: B Principal Balance Test (as set forth in Exhibit
Q hereto)
(x) the Class HE: B Principal Distribution Test (as set forth in
Exhibit Q hereto);
(xi) the Class HE: M-1 Interest Deficiency Amount, if any, for such
Payment Date;
(xii) the Class HE: M-2 Interest Deficiency Amount, if any, for such
Payment Date;
(xiii) the Class HE: B-1 Interest Deficiency Amount, if any, for such
Payment Date; and
(xiv) the number of Liquidated Home Equity Contracts, identifying
such Contracts (including those which are Adjustable Rate Home Equity
Contracts) and the Net Liquidation Loss on such Contracts; and
(xv) the Sub-Pool HE Pre-Funded ARM Amount and the Sub-Pool HE Pre-
Funded Fixed Rate Amount as of such Payment Date.
The Owner Trustee and the Servicer shall, if any Certificateholder,
Noteholder or Underwriter inquires by telephone, provide the information
contained in the most recent Monthly Report.
In the case of information furnished pursuant to clauses (i) through (iv)
above, the amounts shall be expressed as a dollar amount per Class HE: A
Certificate with a 1% Percentage Interest or per $1,000 denomination of Class
HE: A Certificate.
Within 75 days after the end of each calendar year, the Certificate
Registrar shall furnish or cause to be furnished to each Person who at any time
during the calendar year was the Holder of a Class HE: A Certificate a statement
containing the information with respect to interest accrued and principal paid
on its Class HE: A
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Certificates during such calendar year. Such obligation of the Certificate
Registrar shall be deemed to have been satisfied to the extent that
substantially comparable information shall be provided by the Certificate
Registrar pursuant to any requirements of the Code as from time to time in
force.
(i) On each Payment Date, the Owner Trustee shall forward or cause to be
forwarded by mail to each Holder of a Class HE: M-1 Certificate a copy of the
monthly statement forwarded to the Holders of Class HE: A Certificates on such
Payment Date. The Servicer shall also furnish to the Owner Trustee, which shall
forward such information to the Class HE: M-1 Certificateholders as part of
their monthly statement, the following information:
(i) the amount of such distribution to Holders of Class HE: M-1
Certificates allocable to interest, separately identifying any Unpaid Class
HE: M-1 Interest Shortfall included in such distribution and any remaining
Unpaid Class HE: M-1 Interest Shortfall after giving effect to such
distribution;
(ii) the amount of such distribution to Holders of Class HE: M-1
Certificates allocable to principal, separately identifying the aggregate
amount of any Principal Prepayments included therein;
(iii) the amount, if any, by which the Class HE: M-1 Formula
Distribution Amount for such Payment Date exceeds the Sub-Pool HE Amount
Available less the Class HE: A Distribution Amount for such Payment Date;
(iv) the Class HE: M-1 Principal Balance after giving effect to the
distribution of principal on such Payment Date;
(v) the Unpaid Class HE: M-1 Liquidation Loss Interest Shortfall after
giving effect to any distribution on such Payment Date pursuant to Section
8.04(d)(8)(i); and
(vi) the information set forth in clauses (v) through (xv) of Section
6.05(g).
In the case of the information in clauses (i) through (iv) above, the
amounts shall be expressed as a dollar amount per Class HE: M-1 Certificate with
a 1% Percentage Interest or per $1,000 denomination of Class HE: M-1
Certificate.
Within 75 days after the end of each calendar year, the Certificate
Registrar shall furnish or cause to be furnished to each Person who at any time
during the calendar year was the Holder of a Class HE: M-1 Certificate a
statement containing the applicable distribution information provided pursuant
to this Section aggregated for such calendar year or applicable portion thereof
during which such Person was
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<PAGE>
the Holder of a Class HE: M-1 Certificate. Such obligation of the Certificate
Registrar shall be deemed to have been satisfied to the extent that
substantially comparable information shall be provided by the Certificate
Registrar pursuant to any requirements of the Code as from time to time in
force.
(j) On each Payment Date, the Owner Trustee shall forward or cause to be
forwarded by mail to each Holder of a Class HE: M-2 Certificate a copy of the
monthly statements forwarded to the Holders of Class HE: A and Class HE: M-1
Certificates on such Payment Date. The Servicer shall also furnish to the Owner
Trustee, which shall forward such information to the Class HE: M-2
Certificateholders as part of their monthly statement, the following
information:
(i) the amount of such distribution to Holders of Class HE: M-2
Certificates allocable to interest, separately identifying any Unpaid Class
HE: M-2 Interest Shortfall included in such distribution and any remaining
Unpaid Class HE: M-2 Interest Shortfall after giving effect to such
distribution;
(ii) the amount of such distribution to Holders of Class HE: M-2
Certificates allocable to principal, separately identifying the aggregate
amount of any Principal Prepayments included therein;
(iii) the amount, if any, by which the Class HE: M-2 Formula
Distribution Amount for such Payment Date exceeds the Sub-Pool HE Amount
Available less the sum of the Class HE: A Distribution Amount and the Class
HE: M-1 Distribution Amount for such Payment Date;
(iv) the Class HE: M-2 Principal Balance after giving effect to the
distribution of principal on such Payment Date;
(v) the Unpaid Class HE: M-2 Liquidation Loss Interest Shortfall,
after giving effect to any distribution on such Payment Date pursuant to
Section 8.04(d)(8)(ii); and
(vi) the information set forth in clauses (v) through (xv) of Section
6.05(g).
In the case of the information in clauses (i) through (iv) above, the
amounts shall be expressed as a dollar amount per Class HE: M-2 Certificate with
a 1% Percentage Interest or per $1,000 denomination of Class HE: M-2
Certificate.
Within 75 days after the end of each calendar year, the Certificate
Registrar shall furnish or cause to be furnished to each Person who at any time
during the calendar year was the Holder of a Class HE: M-2 Certificate a
statement containing the applicable distribution information provided pursuant
to this Section aggregated for such calendar year or applicable portion thereof
during which such Person was
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<PAGE>
the Holder of a Class HE: M-2 Certificate. Such obligation of the Certificate
Registrar shall be deemed to have been satisfied to the extent that
substantially comparable information shall be provided by the Certificate
Registrar pursuant to any requirements of the Code as from time to time in
force.
(k) On each Payment Date, the Owner Trustee shall forward or cause to be
forwarded by mail to each Holder of a Class HE: B-1 Certificate a copy of the
monthly statements forwarded to the Holders of Class HE: A and Class HE: M
Certificates on such Payment Date. The Servicer shall also furnish to the Owner
Trustee, which shall forward such information to the Class HE: B-1
Certificateholders as part of their monthly statement, the following
information:
(i) the amount of such distribution to Holders of Class HE: B-1
Certificates allocable to interest, separately identifying any Unpaid Class
HE: B-1 Interest Shortfall included in such distribution and any remaining
Unpaid Class HE: B-1 Interest Shortfall after giving effect to such
distribution;
(ii) the amount of such distribution to Holders of Class HE: B-1
Certificates allocable to principal, separately identifying the aggregate
amount of any Principal Prepayments included therein;
(iii) the amount, if any, by which the Class HE: B-1 Formula
Distribution Amount for such Payment Date exceeds the Sub-Pool HE Amount
Available less the sum of the Class HE: A Distribution Amount, the Class
HE: M-1 Distribution Amount and the Class HE: M-2 Distribution Amount for
such Payment Date;
(iv) the Class HE: B-1 Principal Balance after giving effect to the
distribution of principal on such Payment Date;
(v) the Unpaid Class HE: B-1 Liquidation Loss Interest Shortfall,
after giving effect to any distribution on such Payment Date pursuant to
Section 8.04(d)(8)(iii);
(vi) the Class HE: B Percentage for such Payment Date; and
(vii) the information set forth in clauses (v) through (xv) of
Section 6.05(g).
In the case of the information in clauses (i) through (iv) above, the
amounts shall be expressed as a dollar amount per Class HE: B-1 Certificate with
a 1% Percentage Interest or per $1,000 denomination of Class HE: B-1
Certificate.
Within 75 days after the end of each calendar year, the Certificate
Registrar shall furnish or cause to be furnished to each Person who at any time
during the calendar year was the Holder of a Class HE: B-1 Certificate a
statement containing
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<PAGE>
the applicable distribution information provided pursuant to this Section
aggregated for such calendar year or applicable portion thereof during which
such Person was the Holder of a Class HE: B-1 Certificate. Such obligation of
the Certificate Registrar shall be deemed to have been satisfied to the extent
that substantially comparable information shall be provided by the Certificate
Registrar pursuant to any requirements of the Code as from time to time in
force.
(l) On each Payment Date, the Owner Trustee shall forward or cause to be
forwarded by mail to each Holder of a Class HE: B-2 Certificate a copy of the
monthly statements forwarded to the Holders of Class HE: A, Class HE: M and
Class HE: B-1 Certificates on such Payment Date. The Servicer shall also
furnish to the Owner Trustee, which shall forward such information to the Class
HE: B-2 Certificateholders as part of their monthly statement, the following
information:
(i) the amount of such distribution to Holders of Class HE: B-2
Certificates allocable to interest, separately identifying any Unpaid Class
HE: B-2 Interest Shortfall included in such distribution and any remaining
Unpaid Class HE: B-2 Interest Shortfall after giving effect to such
distribution;
(ii) the amount of such distribution to Holders of Class HE: B-2
Certificates allocable to principal, separately identifying the aggregate
amount of any Principal Prepayments included therein;
(iii) the amount, if any, by which the sum of the Class HE: B-2
Formula Distribution Amount and the Class HE: B-2 Liquidation Loss
Principal Amount, if any, for such Payment Date exceeds the Class HE: B-2
Distribution Amount for such Payment Date;
(iv) the Class HE: B-2 Principal Balance after giving effect to the
distribution of principal on such Payment Date;
(v) the Unpaid Class HE: B-2 Liquidation Loss Interest Shortfall,
after giving effect to any distribution on such Payment Date pursuant to
Section 8.04(d)(8)(iv);
(vi) the Class HE: B Percentage for such Payment Date; and
(vii) the information set forth in clauses (v) through (xv) of
Section 6.05(g).
In the case of the information in clauses (i) through (iv) and (ix) above,
the amounts shall be expressed as a dollar amount per Class HE: B-2 Certificate
with a 1% Percentage Interest or per $1,000 denomination of Class HE: B-2
Certificate.
Within 75 days after the end of each calendar year, the Certificate
Registrar shall furnish or cause to be furnished to each Person who at any time
during the
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calendar year was the Holder of a Class HE: B-2 Certificate a statement
containing the applicable distribution information provided pursuant to this
Section aggregated for such calendar year or applicable portion thereof during
which such Person was the Holder of a Class HE: B-2 Certificate. Such obligation
of the Certificate Registrar shall be deemed to have been satisfied to the
extent that substantially comparable information shall be provided by the
Certificate Registrar pursuant to any requirements of the Code as from time to
time in force.
(l) Copies of all reports and statements provided to the Owner Trustee for
the Certificateholders shall also be provided to [the Rating Agencies].
(m) The Owner Trustee and the Indenture Trustee shall inform any of the
Noteholders or Certificateholders or [Underwriter] inquiring by telephone of the
information contained in the most recent Monthly Report.
(n) Certificateholders may obtain copies of the statements delivered by the
Owner Trustee pursuant to subsection (b) above upon written request to the Owner
Trustee at the Corporate Trust Office (together with a certification that such
Person is a Certificateholder and payment of any expenses associated with the
distribution thereof). Noteholders may obtain copies of the statements
delivered by the Indenture Trustee pursuant to subsections (c) through (k) above
upon written request to the Indenture Trustee at its Corporate Trust Office
(together with a certification that such Person is a Noteholder and payment of
any expenses associated with the distribution thereof).
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<PAGE>
ARTICLE VII
SERVICE TRANSFER
SECTION 7.01. Event of Termination.
--------------------
"Event of Termination" means the occurrence of any of the following:
--------------------
(a) Any failure by the Servicer to make any deposit into an account
required to be made hereunder and the continuance of such failure for a period
of five Business Days after the Servicer has become aware, or should have become
aware, that such deposit was required;
(b) Failure on the Servicer's part to observe or perform in any material
respect any covenant or agreement in this Agreement (other than a covenant or
agreement which is elsewhere in this Section specifically dealt with), which
failure shall (i) materially and adversely affect the rights of the Trust, the
Indenture Trustee, or the Securityholders and (ii) continue unremedied for 30
days after the date on which written notice of such failure, requiring the same
to be remedied, shall have been given to the Servicer by the Indenture Trustee
or to the Servicer and the Indenture Trustee by Holders of Notes evidencing not
less than 25% of the Note Principal Balance or, if the Notes have been paid in
full, by Certificateholders evidencing not less than 25% of the Certificate
Principal Balance.
(c) Any assignment by the Servicer of its duties hereunder except as
specifically permitted hereunder, or any attempt to make such an assignment;
(d) A court or other governmental authority having jurisdiction in the
premises shall have entered 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 appointing a receiver,
liquidator, assignee, custodian, trustee, sequestrator (or similar official) of
the Servicer, as the case may be, or for any substantial liquidation of its
affairs, and such order remains undischarged and unstayed for at least 60 days;
(e) The Servicer shall have commenced a voluntary case under any applicable
bankruptcy, insolvency or other similar law now or hereafter in effect, or shall
have consented to the entry of an order for relief in an involuntary case under
any such law, or shall have consented to the appointment of or taking possession
by a receiver, liquidator, assignee, trustee, custodian or sequestrator (or
other similar official) of the Servicer or for any substantial part of its
property, or shall have made any general assignment for the benefit of its
creditors, or shall have failed to, or admitted in writing its inability to, pay
its debts as they become due, or shall have taken any corporate action in
furtherance of the foregoing;
(f) The failure of the Servicer to be an Eligible Servicer; or
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(g) If the Company is the Servicer, the Company's servicing rights under
its master seller-servicer agreement with GNMA are terminated by GNMA.
SECTION 7.02. Transfer.
--------
If an Event of Termination has occurred and is continuing, either the
Trust, the Indenture Trustee, a Note Majority, or a Certificate Majority, by
notice in writing to the Servicer (and to the Indenture Trustee and Trust if
given by the Certificateholders or Noteholders) may terminate all (but not less
than all) of the Servicer's management, administrative, servicing and collection
functions (such termination being herein called a "Service Transfer"). On
receipt of such notice (or, if later, on a date designated therein), or upon
resignation of the Servicer in accordance with Section 10.01, all authority and
power of the Servicer under this Agreement, whether with respect to the
Contracts, the Contract Files or otherwise (except with respect to the
Collection Account, the transfer of which shall be governed by Section 7.06),
shall pass to and be vested in the Indenture Trustee pursuant to and under this
Section 7.02; and, without limitation, the Indenture Trustee is authorized and
empowered to execute and deliver on behalf of the Servicer, as attorney-in-fact
or otherwise, any and all documents and other instruments (including, without
limitation, documents required to make the Indenture Trustee or a successor
servicer the sole lienholder or legal title holder of record of each Product)
and to do any and all acts or things necessary or appropriate to effect the
purposes of such notice of termination. The Indenture Trustee shall cause all
assignments of mortgages, deeds of trust or security deeds securing the
Contracts to be duly recorded. If the Servicer was the lender of record for
purposes of the FHA Insurance relating to FHA-Insured Contracts, the Indenture
Trustee shall notify HUD of such termination and shall request that HUD transfer
the FHA Insurance reserves allocable to such FHA-Insured Contracts to the
successor Servicer; provided, however, that if the Indenture Trustee is the
-----------------
successor Servicer, the Indenture Trustee shall request such transfer of
reserves if and to the extent it is legally able to do so, and the Indenture
Trustee shall use its best efforts to obtain any approvals that may be required
for the Indenture Trustee to receive such transfer of reserves. Each of the
Company and the Servicer agrees to cooperate with the Indenture Trustee in
effecting the termination of the responsibilities and rights of the Servicer
hereunder, including, without limitation, the transfer to the Indenture Trustee
for administration by it of all cash amounts which shall at the time be held by
the Servicer for deposit, or have been deposited by the Servicer, in the
Collection Account, or for its own account in connection with its services
hereafter or thereafter received with respect to the Contracts, and the transfer
of all rights under FHA Insurance relating to FHA-Insured Contracts. The
Servicer shall be entitled to receive any other amounts which are payable to the
Servicer under this Agreement, at the time of the termination of its activities
as Servicer. The Servicer shall transfer to the new servicer (i) the Servicer's
records relating to the Contracts in such electronic form as the new servicer
may reasonably request and (ii) any Contracts and Contract Files in the
Servicer's possession.
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<PAGE>
SECTION 7.03. Indenture Trustee to Act; Appointment of Successor.
--------------------------------------------------
On and after the time the Servicer receives a notice of termination
pursuant to Section 7.02 or the resignation of the Servicer in accordance with
Section 10.01, the Indenture Trustee shall be the successor in all respects to
the Servicer in its capacity as servicer under this Agreement and the
transactions set forth or provided for herein and shall be subject to all the
responsibilities, duties and liabilities relating thereto placed on the Servicer
by the terms and provisions hereof and the Servicer shall be relieved of such
responsibilities, duties and liabilities arising after such Service Transfer;
provided, however, that (i) the Indenture Trustee will not assume any
- -------- -------
obligations of the Company pursuant to Section 3.05 and (ii) the Indenture
Trustee shall not be liable for any acts or omissions of the Servicer occurring
prior to such Service Transfer or for any breach by the Servicer of any of its
obligations contained herein or in any related document or agreement. As
compensation therefor, the Indenture Trustee shall be entitled to receive
reasonable compensation not in excess of the Monthly Servicing Fee.
Notwithstanding the above, the Indenture Trustee may, if it shall be unwilling
so to act, or shall, if it is legally unable so to act, appoint, or petition a
court of competent jurisdiction to appoint, an Eligible Servicer as the
successor to the Servicer hereunder in the assumption of all or any part of the
responsibilities, duties or liabilities of the Servicer hereunder. Pending
appointment of a successor to the Servicer hereunder, unless the Indenture
Trustee is prohibited by law from so acting, the Indenture Trustee shall act in
such capacity as hereinabove provided. In connection with such appointment and
assumption, the Indenture Trustee may make such arrangements for the
compensation of such successor out of payments on Contracts as it and such
successor shall agree; provided, however, that no such monthly compensation
-------- -------
shall, without the written consent of 100% of the Noteholders, exceed the
Monthly Servicing Fee. The Indenture Trustee and such successor shall take such
action, consistent with this Agreement, as shall be necessary to effectuate any
such succession.
SECTION 7.04. Notification to Securityholders.
-------------------------------
(a) Promptly following the occurrence of any Event of Termination, the
Servicer shall give written notice thereof to the Indenture Trustee, the Trust
and the [Rating Agencies].
(b) Within ten days following any termination or appointment of a successor
to the Servicer pursuant to this Article VII, the Owner Trustee on behalf of the
Trust shall give written notice thereof to the [Rating Agencies] and the
Certificateholders at their respective addresses appearing on the Certificate
Register and the Indenture Trustee shall give written notice thereof to
Noteholders at their respective addresses appearing in the Note Register.
(c) The Owner Trustee on behalf of the Trust shall give written notice to
the [Rating Agencies] at least 30 days prior to the date upon which any Eligible
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Servicer (other than the Indenture Trustee) is to assume the responsibilities of
Servicer pursuant to Section 7.03, naming such successor Servicer.
SECTION 7.05. Effect of Transfer.
------------------
(a) After the Service Transfer, the Indenture Trustee or new Servicer may
notify Obligors to make payments directly to the new Servicer that are due under
the Contracts after the effective date of the Service Transfer.
(b) After the Service Transfer, the replaced Servicer shall have no further
obligations with respect to the management, administration, servicing or
collection of the Contracts and the new Servicer shall have all of such
obligations, except that the replaced Servicer will transmit or cause to be
------
transmitted directly to the new Servicer for its own account, promptly on
receipt and in the same form in which received, any amounts (properly endorsed
where required for the new Servicer to collect them) received as payments upon
or otherwise in connection with the Contracts.
(c) A Service Transfer shall not affect the rights and duties of the
parties hereunder (including but not limited to the indemnities of the Servicer
and the Company pursuant to Article IX and Sections 3.05 and 5.19) other than
those relating to the management, administration, servicing or collection of the
Contracts.
SECTION 7.06. Transfer of Collection Account.
------------------------------
Notwithstanding the provisions of Section 7.02, if the Collection Account
shall be maintained with the Servicer and an Event of Termination shall occur
and be continuing, the Servicer shall, after five days' written notice from the
Indenture Trustee, or in any event within ten days after the occurrence of the
Event of Termination, establish an Eligible Account with an institution other
than the Servicer and promptly transfer all funds in the Collection Account to
such new account, which shall thereafter be deemed the Collection Account for
the purposes hereof.
SECTION 7.07. Limits on Liability.
-------------------
The Servicer will be liable to the Trust, the Owner Trustee, the Indenture
Trustee and the Securityholders only to the extent of the obligations
specifically undertaken by the Servicer under this Agreement and will have no
other obligations or liabilities hereunder. Neither the Servicer nor any of its
directors, officers, employees or agents will have any liability to the Trust,
the Owner Trustee, the Indenture Trustee or the Securityholders (except as
explicitly provided in this Agreement) for any action taken, or for refraining
from taking any action, pursuant to this Agreement, other than any liability
that would otherwise be imposed by reason of the Servicer's breach of this
Agreement or willful misfeasance, bad faith or negligence (including errors in
judgment) in the performance of its duties, or by
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<PAGE>
reason of reckless disregard of obligations and duties under this Agreement or
any violation of law.
SECTION 7.08. Waiver of Past Defaults.
-----------------------
A Note Majority or Certificate Majority may, on behalf of all Holders of
Notes and Certificates, waive any default by the Servicer in the performance of
its obligations hereunder and its consequences. Upon any such waiver of a past
default, such default shall cease to exist, and any Event of Termination arising
therefrom shall be deemed to have been remedied for every purpose of this
Agreement. No such waiver shall extend to any subsequent or other default or
impair any right consequent thereon.
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ARTICLE VIII
TERMINATION
SECTION 8.01. Company's or Servicer's Repurchase Option.
-----------------------------------------
(a) The Company or the Servicer shall, subject to subsection (b) hereof,
have the option to purchase all of the Contracts and all property acquired in
respect of any Contract remaining in the Trust at a price equal to the greatest
of:
(i) the sum of (x) 100% of the principal balance of each Contract
(other than any Contract as to which title to the underlying property has
been acquired and whose fair market value is included pursuant to clause
(y) below), together with accrued and unpaid interest on each such Contract
at the Weighted Average Pass-Through Rate, plus (y) the fair market value
of such acquired property (as reasonably determined by the Servicer as of
the close of business on the third Business Day preceding the date of such
purchase),
(ii) the aggregate fair market value (as reasonably determined by the
Company or the Servicer as of the close of business on such third Business
Day) of all of the assets of the Trust, and
(iii) the aggregate Note Principal Balance and Certificate Principal
Balance,
plus, one month's interest at the applicable Contract Rate on the Scheduled
Principal Balance of each Contract (including any Contract as to which the
related Product has been repossessed).
(b) The purchase by the Company or the Servicer of all of the Contracts
pursuant to Section 8.01(a) shall be at the option of the Company or the
Servicer on any Distribution Date, but shall be conditioned upon (1) the Pool
Scheduled Principal Balance, as of the end of the Due Period immediately
preceding such Distribution Date, aggregating an amount equal to or less than
10% of the Cut-off Date Pool Principal Balance, (2) the Company or the Servicer
having provided the Indenture Trustee and the Owner Trustee and the Depository
(if any) with at least 30 days' written notice (which may be given prior to the
end of the Due Period referred to in clause (1) above) and (3) the Company or
the Servicer (as applicable) shall have delivered to the Indenture Trustee and
the Owner Trustee an unqualified Opinion of Counsel stating that payment of the
purchase price to the Securityholders will not constitute a voidable preference
or fraudulent transfer under the United States Bankruptcy Code. In the event
the notice described in the preceding sentence is given in connection with the
Company's election to purchase the Contracts, the Company shall deposit in the
Collection Account on the relevant Distribution Date in immediately available
funds an amount equal to the above-described purchase
8-1
<PAGE>
price and the Indenture Trustee shall distribute the amounts so deposited in
accordance with Section 6.06. Upon certification to the Indenture Trustee by a
Servicing Officer, following such final deposit, the Indenture Trustee shall
promptly release to the Company the Contract Files for the remaining Contracts,
and the Indenture Trustee and Owner Trustee on behalf of the Trust shall execute
all assignments, endorsements and other instruments necessary to effectuate such
transfer.
SECTION 8.02. Liquidation of Trust Estate.
---------------------------
Upon any sale of the assets of the Trust pursuant to Section 9.2 of the
Trust Agreement, the Trust shall instruct the Indenture Trustee to deposit the
proceeds from such sale after all payments and reserves therefrom have been made
(the "Insolvency Proceeds") in the Collection Account. On the Distribution Date
on which the Insolvency Proceeds are deposited in the Collection Account (or, if
such proceeds are not so deposited on a Distribution Date, on the Distribution
Date immediately following such deposit), the Trust shall instruct the Indenture
Trustee to distribute such funds, together with all other Available Funds, in
accordance with the terms of Section 6.06(a).
8-2
<PAGE>
ARTICLE IX
INDEMNITIES
SECTION 9.01. Company's Indemnities.
---------------------
The Company will defend and indemnify the Trust, the Owner Trustee, the
Indenture Trustee (including the paying agent and any other agents of the Owner
Trustee and the Indenture Trustee), and the Securityholders against any and all
costs, expenses, losses, damages, taxes, claims and liabilities, including
reasonable fees and expenses of counsel and expenses of litigation of any third-
party claims arising out of or resulting from (i) the origination of any
Contract (including but not limited to truth in lending requirements) or the
servicing of such Contract prior to its transfer to the Trust (but only to the
extent such cost, expense, loss, damage, tax, claim or liability is not provided
for by the Company's repurchase of such Contract pursuant to Section 3.05), (ii)
the use or ownership of any real estate related to a Contract by the Company or
the Servicer or any Affiliate of either, or (iii) the Company's or the Trust's
violation of federal or state securities laws in connection with the offering
and sale of the Securities. Notwithstanding any other provision of this
Agreement, the obligation of the Company under this Section shall not terminate
upon a Service Transfer pursuant to Article VII, except that the obligation of
the Company under this Section shall not relate to the actions of any subsequent
Servicer after a Service Transfer.
SECTION 9.02. Liabilities to Obligors.
-----------------------
No obligation or liability to any Obligor under any of the Contracts is
intended to be assumed by the Trust, the Owner Trustee, Indenture Trustee, or
the Securityholders under or as a result of this Agreement and the transactions
contemplated hereby and, to the maximum extent permitted and valid under
mandatory provisions of law, the Trust, the Owner Trustee, Indenture Trustee,
and the Securityholders expressly disclaim such assumption.
SECTION 9.03. Servicer's Indemnities.
----------------------
The Servicer shall defend and indemnify the Trust, the Owner Trustee, the
Indenture Trustee (including the Paying Agent and any other agents of the Owner
Trustee and the Indenture Trustee) and the Securityholders against any and all
costs, expenses, losses, damages, taxes, claims and liabilities, including any
failure to comply with FHA Regulations in enforcing an FHA Insured Contract,
including reasonable fees and expenses of counsel and expenses of litigation, in
respect of any action taken or omitted to be taken by the Servicer with respect
to any Contract. This indemnity shall survive any Service Transfer (but the
original Servicer's obligations under this Section 9.03 shall not relate to any
actions of any subsequent Servicer after a Service Transfer) and any payment of
the amount owing under, or any repurchase by the Company of, any such Contract.
9-1
<PAGE>
SECTION 9.04. Operation of Indemnities.
------------------------
Indemnification under this Article shall include, without limitation,
reasonable fees and expenses of counsel and expenses of litigation. If the
Company or the Servicer has made any indemnity payments pursuant to this Article
and the recipient thereafter collects any of such amounts from others, the
recipient will repay such amounts collected to the Company or the Servicer, as
the case may be, without interest.
9-2
<PAGE>
ARTICLE X
MISCELLANEOUS
SECTION 10.01. Servicer Not to Assign Duties or Resign; Delegation of
------------------------------------------------------
Servicing Duties.
- ----------------
The Servicer may not sell or assign its rights and duties as Servicer
hereunder, except as expressly provided for herein, provided that the Servicer
may pledge or assign the right to receive all or any portion of the Monthly
Servicing Fee or Monthly Servicing and Guaranty Fee payable to it. The Servicer
shall not resign from the obligations and duties hereby imposed on it except
upon determination that the performance of its duties hereunder is no longer
permissible under applicable law or is in material conflict by reason of
applicable law with any other activities carried on by it. Any such
determination permitting the resignation of the Servicer shall be evidenced by
an Opinion of Counsel for the Servicer to such effect addressed and delivered to
the Trust and the Indenture Trustee. No such resignation shall become effective
until the Indenture Trustee or a successor servicer shall have assumed the
responsibilities and obligations of the Servicer in accordance with Sections
7.02 and 7.03.
Notwithstanding the foregoing:
(a) Any person into which the Servicer may be merged or consolidated,
or any corporation resulting from any merger, conversion or consolidation
to which the Servicer shall be a party, or any Person succeeding to the
business of the Servicer, shall be the successor of the Servicer hereunder,
without the execution or filing of any paper or any further act on the part
of any of the parties hereto, anything herein to the contrary
notwithstanding; provided, however, that the successor or surviving Person
-------- -------
to the Servicer shall satisfy the criteria set forth in the definition of
an Eligible Servicer. The Servicer shall promptly notify _____ and _____
of any such merger to which it is a party.
(b) The Servicer may delegate duties under this Agreement to any of
the Servicer's Affiliates. In addition, the Servicer may at any time
perform the specific duty of repossessing Products through subcontractors
who are in the business of servicing consumer receivables, and may also
perform other specific duties through subcontractors; provided that the
Servicer gives notice to the Trust and the Indenture Trustee and each of
_____ and _____, and provided further that no such delegation of duties by
the Servicer shall relieve the Servicer of its responsibility with respect
thereto.
10-1
<PAGE>
SECTION 10.02. Assignment or Delegation by Company.
-----------------------------------
Except as specifically authorized hereunder, and except for its obligations
as Servicer which are dealt with under Article V and Article VII, the Company
may not convey and assign or delegate any of its rights or obligations hereunder
absent the prior written consent of a Note Majority and a Certificate Majority,
and any attempt to do so without such consent shall be void. It is understood
that the foregoing does not prohibit the pledge or assignment by the Company of
any right to payment pursuant to Article VI.
Notwithstanding the foregoing, any person into which the Company may be
merged or consolidated, or any corporation resulting from any merger, conversion
or consolidation to which the Company shall be a party, or any Person succeeding
to the business of the Company, shall be the successor of the Company hereunder,
without the execution or filing of any paper or any further act on the part of
any of the parties hereto, anything herein to the contrary notwithstanding. The
Company shall promptly notify the [Rating Agencies] of any such merger to which
it is a party.
SECTION 10.03. Amendment.
---------
(a) This Agreement may be amended from time to time by the Company, the
Servicer and the Trust, with the prior written consent of the Indenture Trustee
but without the consent of any of the Securityholders, to correct manifest
error, to cure any ambiguity, to correct or supplement any provisions herein
which may be inconsistent with any other provisions herein, as the case may be,
including, without limitation, to add or amend any provision as required by the
[Rating Agencies] or any other nationally recognized statistical rating
organization in order to improve or maintain the rating of any Class of Notes or
the Certificates, provided, however, that such action shall not, as evidenced by
-------- -------
an Opinion of Counsel for the Company, adversely affect in any material respect
the interests of any Securityholder.
(b) This Agreement may also be amended from time to time by the Company,
the Servicer and the Trust with the prior written consent of the Indenture
Trustee and with the consent of a Certificate Majority and a Note Majority with
respect to each Class (which consent of any Holder of a Certificate or Note
given pursuant to this Section or pursuant to any other provision of this
Agreement shall be conclusive and binding on such Holder and on all future
Holders of such Certificate or Note and of any Certificate or Note issued upon
the transfer thereof or in exchange thereof or in lieu thereof whether or not
notation of such consent is made upon the Certificate or Note) for the purpose
of adding any provisions to or changing in any manner or eliminating any of the
provisions of this Agreement, or of modifying in any manner the rights of the
Holders of Certificates or Notes; provided, however, no such amendment shall (a)
-------- -------
increase or reduce in any manner the amount of, or accelerate or delay the
timing of, collections of payments on Contracts or distributions required to be
made on any Certificate or
10-2
<PAGE>
Note or the Certificate Pass-Through Rate, Class A-1 Interest Rate or Class A-2
Interest Rate, (b) amend any provisions of Section 6.06 in such a manner as to
affect the priority of payment of interest, principal or premium to Noteholders
or Certificateholders, or (c) reduce the aforesaid percentage required to
consent to any such amendment or any waiver hereunder, without the consent of
the Holders of all Securities then outstanding, and provided further, that the
----------------
Rating Agency Condition has been satisfied.
(c) Concurrently with the solicitation of any consent pursuant to this
Section 10.03, the Indenture Trustee shall furnish written notification to the
[Rating Agencies] of such solicitation. Promptly after the execution of any
amendment pursuant to this Section 10.03, the Indenture Trustee shall furnish
written notification of the substance of such amendment to the [Rating Agencies]
and each Securityholder.
(d) It shall not be necessary for the consent of Securityholders under this
Section 10.03 to approve the particular form of any proposed amendment, but it
shall be sufficient if such consent shall approve the substance thereof. The
manner of obtaining such consents and of evidencing the authorization of the
execution thereof by Securityholders shall be subject to such reasonable
requirements as the Indenture Trustee may prescribe.
(e) Each of the Owner Trustee and Indenture Trustee may, but shall not be
obligated to, enter into any such amendment which affects its own rights, duties
or immunities under this Agreement or otherwise.
(f) In connection with any amendment pursuant to this Section, the Owner
Trustee and Indenture Trustee shall be entitled to receive an unqualified
Opinion of Counsel to the Servicer to the effect that such amendment is
authorized or permitted by the Agreement.
(g) Upon the execution of any amendment or consent pursuant to this Section
10.03, this Agreement shall be modified in accordance therewith, and such
amendment or consent shall form a part of this Agreement for all purposes, and
every Securityholder hereunder shall be bound thereby.
(h) This Agreement may also be amended by agreement of the Trust, the
Servicer and the Company at any time without the consent of the Noteholders or
the Certificateholders to effect the transfer of FHA Insurance reserves to
another entity in compliance with revisions to FHA Regulations, provided that
--------
prior to any such amendment [both of the Rating Agencies] have each confirmed in
writing that the rating of the Notes and Certificates will not be lowered or
withdrawn following such amendment.
10-3
<PAGE>
SECTION 10.04. Notices.
-------
All communications and notices pursuant hereto to the Servicer, the
Company, the Trust, the Owner Trustee, the Indenture Trustee and the [Rating
Agencies] shall be in writing and delivered (by facsimile or other means) or
mailed to it at the appropriate following address:
If to the Company or the Servicer:
Green Tree Financial Corporation
1100 Landmark Towers
345 St. Peter Street
St. Paul, Minnesota 55102-1639
Attention: Chief Financial Officer
Telecopier Number: (612) 293-5746
If to the Trust or Owner Trustee:
[Address]
If to the Indenture Trustee:
[Address]
If to [Rating Agency]
[Address]
If to [Rating Agency]:
[Address]
or at such other address as the party may designate by notice to the other
parties hereto, which notice shall be effective when received.
All communications and notices pursuant hereto to a Securityholder shall be
in writing and delivered or mailed at the address shown in the Note Register or
the Certificate Register, as applicable.
SECTION 10.05. Merger and Integration.
----------------------
Except as specifically stated otherwise herein, this Agreement sets forth
the entire understanding of the parties relating to the subject matter hereof,
and all prior understandings, written or oral, are superseded by this Agreement.
This Agreement may not be modified, amended, waived or supplemented except as
10-4
<PAGE>
provided herein.
SECTION 10.06. Headings.
--------
The headings herein are for purposes of reference only and shall not
otherwise affect the meaning or interpretation of any provision hereof.
SECTION 10.07. Governing Law.
-------------
This Agreement shall be governed by, and construed and enforced in
accordance with, the laws of the State of Minnesota.
SECTION 10.08. Limitation of Liability.
-----------------------
It is expressly understood and agreed by the parties hereto that (a) this
Agreement is executed and delivered by [Owner Trustee], not individually or
personally but solely as trustee of Green Tree [Home Improvement and Home
Equity] Trust _____ under the Trust Agreement, in the exercise of the powers and
authority conferred and vested in it, (b) each of the representations,
undertakings and agreements herein made on the part of the Trust is made and
intended not as personal representations, undertakings and agreements by [Owner
Trustee] but is made and intended for the purpose for binding only the Trust,
(c) nothing herein contained shall be construed as creating any liability on
[Owner Trustee], individually or personally, to perform any covenant either
expressed or implied contained herein, all such liability, if any, being
expressly waived by the parties hereto and by any Person claiming by, through or
under the parties hereto and (d) under no circumstances shall [Owner Trustee] be
personally liable for the payment of any indebtedness or expenses of the Trust
or be liable for the breach or failure of any obligation, representation,
warranty or covenant made or undertaken by the Trust under this Agreement or the
other Related Documents.
10-5
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective officers thereunto duly authorized this _____
day of _____, _____.
ISSUER:
GREEN TREE [HOME IMPROVEMENT
AND HOME EQUITY] TRUST _____
By [OWNER TRUST], not in its
individual capacity but solely on
behalf of the Issuer as Owner Trustee
under the Trust Agreement
By
--------------------------------------
Name:
Title:
SELLER AND SERVICER:
GREEN TREE FINANCIAL CORPORATION
By
--------------------------------------
Name:
Title:
Acknowledged and Accepted:
[INDENTURE TRUSTEE],
not in its individual capacity but
solely as Indenture Trustee
By
--------------------------------------
Name:
Title:
By
--------------------------------------
Name:
Title:
10-6
<PAGE>
EXHIBIT A
FORM OF ASSIGNMENT
In accordance with the Sale and Servicing Agreement (the "Agreement") dated
as of _____ between Green Tree Financial Corporation (the "Company") and Green
Tree [Home Improvement and Home Equity] Trust _____, the Company does hereby
transfer, assign, set over and otherwise convey to the Trust all right, title
and interest of the Company in (i) the home improvement contracts and promissory
notes and home equity loans identified in the List of Contracts attached to the
Agreement (including, without limitation, all related mortgages, deeds of trust
and security deeds and any and all rights to receive payments on or with respect
to the Initial Contracts due after the applicable Cut-off Date or Subsequent
Cut-off Date in respect of the Subsequent Home Equity Contracts and the
Subsequent Home Improvement Contracts, (ii) all rights under FHA Insurance in
respect of each FHA-Insured Contract, (iii) all rights under any hazard, flood
or other individual insurance policy on the real estate securing an Initial
Contract for the benefit of the creditor of such Initial Contract, (iv) all
rights the Company may have against the originating contractor or lender with
respect to Initial Contracts originated by a contractor or lender other than the
Company, (v) all rights under the Errors and Omissions Protection Policy and the
Fidelity Bond as such policy and bond relate to the Initial Contracts, (vi) all
rights under any title insurance policies, if applicable, on any of the
properties securing Initial Contracts, (vii) all documents contained in the
Contract Files relating to the Initial Contracts, (viii) the Trust Accounts and
all funds on deposit therein from time to time and all investments and proceeds
thereof (including all income thereon) and (ix) all proceeds and products of the
foregoing.
This Assignment is made pursuant to and upon the representation and
warranties on the part of the undersigned contained in Article III of the
Agreement and no others. All undefined capitalized terms used in this
Assignment have the meanings given them in the Agreement.
IN WITNESS WHEREOF, the undersigned has caused this Assignment to be duly
executed this ______ day of _____, _____.
GREEN TREE FINANCIAL CORPORATION
By
--------------------------
Name:
Title:
A-1
<PAGE>
EXHIBIT B
FORM OF CERTIFICATE REGARDING
REPURCHASED CONTRACTS
GREEN TREE FINANCIAL CORPORATION
CERTIFICATE REGARDING REPURCHASED CONTRACTS
The undersigned certifies that he/she is a [title] of Green Tree Financial
-----
Corporation, a Delaware corporation (the "Company"); he/she is duly authorized
to execute and deliver this certificate on behalf of the Servicer pursuant to
Section 3.05 of the Sale and Servicing Agreement (the "Agreement"), dated as of
_____ between the Company and Green Tree [Home Improvement and Home Equity]
Trust _____ (the "Trust") (all capitalized terms used herein without definition
having the respective meanings specified in the Agreement):
1. The Contracts on the attached schedule are to be repurchased by
the [Company] [Servicer] on the date hereof pursuant to Section [3.05]
[5.22] of the Agreement.
2. Upon deposit of the Repurchase Price for such Contracts, such
Contracts may, pursuant to Section [3.05] [5.22] of the Agreement, be
assigned by the Trust to the [Company] [Servicer].
IN WITNESS WHEREOF, I have affixed hereunto my signature this ____ day of
________, 19__.
GREEN TREE FINANCIAL CORPORATION
By
--------------------------
Name:
Title:
B-1
<PAGE>
EXHIBIT C
FORM OF MONTHLY REPORT
GREEN TREE [HOME IMPROVEMENT AND HOME EQUITY] TRUST _____
Distribution Date: ________
1. Amount Available ________
(a) Collection Account balance as of last day
of related Due Period ________
(b) Payments on account
of principal deposited during
first 10 days of current month ________
(c) Less payments on account of principal deposited
during first 10 days of preceding month ________
(d) Repurchase Proceeds ________
(e) Servicer Advances ________
(f) Guaranty Payment ________
(g) Self-Insurance Payments ________
(h) Termination Payments ________
(i) Reserve Account Withdrawals deposited
in Collection Account ________
(j) Payments on Liquidation of Trust Estate ________
2. Monthly Servicing Fee ________
3. Servicer Advances Reimbursed ________
Class A-1 Notes
Class A-1 Interest
4. Amount distributed on account of interest ________
5. Class A-1 Interest Amount ________
6. Amount Applied to Class A-1 Interest Amount ________
7. Class A-1 Interest Carryover Shortfall ________
8. Amount applied to Unpaid Class A-1 Interest Shortfall ________
9. Remaining Unpaid Class A-1 Interest Shortfall ________
C-1
<PAGE>
Class A-1 Principal
10. Amount due on account of principal: ________
(a) Scheduled principal ________
(b) Principal Prepayments ________
(c) Liquidated Contracts ________
(d) Repurchases ________
11. Class A-1 Percentage of amount due or Class A-1 Principal
Balance, whichever is less ________
12. Amount distributed on account of principal ________
13. Class A-1 Principal Shortfall ________
14. Unpaid Class A-1 Principal Shortfall
(if any) following prior Distribution Date ________
15. Amount applied to Unpaid Class A-1 Principal Shortfall
(if any) on current Distribution Date ________
16. Remaining Unpaid Class A-1 Principal Shortfall ________
Class A-1 Liquidation Loss Interest and Principal
17. Class A-1 Liquidation Loss Interest Amount ________
18. Amount distributed on account of Class A-1 Liquidation
Loss Interest Amount ________
19. Class A-1 Liquidation Loss Interest Shortfall ________
20. Amount applied to Unpaid Class A-1 Liquidation Loss
Interest Shortfall ________
21. Remaining Unpaid Class A-1 Liquidation Loss Interest
Shortfall ________
22. Class A-1 Principal Liquidation Loss ________
23. Amount applied to Unpaid Class A-1 Principal
Liquidation Loss ________
24. Remaining Unpaid Class A-1 Principal
Liquidation Loss ________
C-2
<PAGE>
25. Class A-1 Principal Balance after giving effect to
Distribution and Class A-1 Principal Liquidation Loss ________
CLASS A-2 NOTES
- ---------------
Class A-2 Interest
26. Amount distributed on account of interest ________
27. Class A-2 Interest Amount ________
28. Amount Applied to Class A-2 Interest Amount ________
29. Class A-2 Interest Carryover Shortfall ________
30. Amount applied to Unpaid Class A-2 Interest Shortfall ________
31. Remaining Unpaid Class A-2 Interest Shortfall ________
Class A-2 Principal
32. Amount due on account of principal:
(a) Scheduled principal ________
(b) Principal Prepayments ________
(c) Liquidated Contracts ________
(d) Repurchases ________
33. Class A-2 Percentage of amount due or Class A-2 Principal
Balance, whichever is less ________
34. Amount distributed on account of principal ________
35. Class A-2 Principal Shortfall ________
36. Unpaid Class A-2 Principal Shortfall
(if any) following prior Distribution Date ________
37. Amount applied to Unpaid Class A-2 Principal Shortfall
(if any) on current Distribution Date ________
38. Remaining Unpaid Class A-2 Principal Shortfall ________
Class A-2 Liquidation Loss Interest and Principal
39. Class A-2 Liquidation Loss Interest Amount ________
C-3
<PAGE>
40. Amount distributed on account of Class A-2 Liquidation
Loss Interest Amount ________
41. Class A-2 Liquidation Loss Interest Shortfall ________
42. Amount applied to Unpaid Class A-2 Liquidation Loss
Interest Shortfall ________
43. Remaining Unpaid Class A-2 Liquidation Loss Interest
Shortfall ________
44. Class A-2 Principal Liquidation Loss ________
45. Amount applied to Unpaid Class A-2 Principal
Liquidation Loss ________
46. Remaining Unpaid Class A-2 Principal
Liquidation Loss ________
47. Class A-2 Principal Balance after giving effect to
Distribution and Class A-2 Principal Liquidation Loss ________
SUB-POOL HI
- -----------
1(a) Sub-Pool HI Amount Available (including Monthly ________
Servicing Fee)
(b) Class HI: M-1 Interest Deficiency Amount (if
any), Class HI: M-2 Interest Deficiency Amount
(if any) and Class HI: B-1 Interest Deficiency
Amount (if any) withdrawn for prior
Payment Date ________
(c) Sub-Pool HI Amount Available after giving effect to
withdrawal of any Class HI: M-1 Interest
Deficiency Amount, Class HI: M-2 Interest
Deficiency Amount and Class HI: B-1
Interest Deficiency Amount for prior
Payment Date ________
2. Sub-Pool HI Formula Principal Distribution Amount: ________
(a) Scheduled principal ________
(b) Principal Prepayments ________
(c) Liquidated Contracts ________
(d) Repurchases ________
(e) Sub-Pool HI Pre-Funded Amount, if any
C-4
<PAGE>
(Post-Funding Payment Date) Previously
undistributed (a)-(d) amounts _______
3. Sub-Pool HI Senior Percentage _______
4. Class HI: B Percentage _______
C-5
<PAGE>
CLASS HI: A CERTIFICATES
- ------------------------
INTEREST
5. Aggregate interest
(a) Class HI: A-1 Pass-through Rate (6.14%)
(b) Class HI: A-l Interest _______
(c) Class HI: A-2 Pass-through Rate (6.45%)
(d) Class HI: A-2 Interest _______
(e) Class HI: A-3 Pass-through Rate (6.77%)
(f) Class HI: A-3 Interest _______
6. Amount applied to Unpaid Class HI: A Interest Shortfall _______
7. Remaining Unpaid Class HI: A Interest Shortfall _______
PRINCIPAL
8. Class HI: A principal distribution:/1/
(a) Class HI: A-1 _______
(b) Class HI: A-2 _______
(c) Class HI: A-3 _______
9. (a) Class HI: A-1 Principal Balance _______
(b) Class HI: A-2 Principal Balance _______
(c) Class HI: A-3 Principal Balance _______
10. Amount, if any, by which Class HI: A Formula
Distribution Amount exceeds Class HI: A Distribution Amount _______
CLASS HI: M-1 CERTIFICATES
- --------------------------
11. Sub-Pool HI Amount Available less the Class HI: A
Distribution Amount (including Monthly Servicing Fee) _______
- ---------------------
/1/If there is a Class HI: A Liquidation Loss Principal Amount, pro rata to each
Class based on Class Principal Balance; otherwise sequentially.
C-6
<PAGE>
INTEREST ON CLASS HI: M-1 PRINCIPAL BALANCE LESS
CLASS HI: M-1 LIQUIDATION LOSS PRINCIPAL AMOUNT
12. Current Interest
(a) Class HI: M-1 Pass-through Rate (7.16%)
(b) Class HI: M-1 Interest -------
13. Amount applied to Unpaid Class HI: M-1
Interest Shortfall -------
14. Remaining Unpaid Class HI: M-1
Interest Shortfall -------
15. Class HI: M-1 Interest
Deficiency Amount -------
16. Class HI: M-1 Interest Deficiency
Amount unpaid -------
PRINCIPAL
17. Class HI: M-1 principal distribution -------
18. Class HI: M-1 Principal Balance -------
19. Amount, if any, by which the Class HI: M-1
Formula Distribution Amount exceeds
Class HI: M-1 Distribution Amount -------
CLASS HI: M-2 CERTIFICATES
- --------------------------
20. Sub-Pool HI Amount Available less the Class HI: A
Distribution Amount and Class HI: M-1
Distribution Amount (including
Monthly Servicing Fee) -------
INTEREST ON CLASS HI: M-2 PRINCIPAL BALANCE LESS
CLASS HI: M-2 LIQUIDATION LOSS PRINCIPAL AMOUNT
21. Current interest
(a) Class HI: M-2 Pass-through Rate (7.35%)
(b) Class HI: M-2 Interest -------
C-7
<PAGE>
22. Amount applied to Unpaid Class HI: M-2
Interest Shortfall -------
23. Remaining Unpaid Class HI: M-2
Interest Shortfall -------
24. Class HI: M-2 Interest Deficiency Amount -------
25. Class HI: M-2 Interest Deficiency Amount unpaid -------
PRINCIPAL
26. Class HI: M-2 principal distribution -------
27. Class HI: M-2 Principal Balance -------
CLASS HI: B PRINCIPAL DISTRIBUTION TESTS (tests must be satisfied
- ----------------------------------------
on and after the Payment Date occurring in October 2000)
28. Sub-Pool HI Average Sixty-Day Delinquency Ratio Test
(a) Sixty-Day Delinquency Ratio for
current Payment Date -------
(b) Sub-Pool HI Average Sixty-Day Delinquency Ratio Test
(arithmetic average of ratios for this
month and two preceding months;
may not exceed 2.5%) -------
29. Sub-Pool HI Average Thirty-Day Delinquency Ratio Test
(a) Thirty-Day Delinquency Ratio for
current Payment Date -------
(b) Sub-Pool HI Average Thirty-Day Delinquency Ratio
Test (arithmetic average of ratios
for this month and two preceding
months; may not exceed 5%) -------
30. Sub-Pool HI Cumulative Realized Losses Test
Cumulative Realized Losses
for current Payment Date
(as a percentage of Cut-off Date
Pool Principal Balance may not
exceed 10%) -------
C-8
<PAGE>
31. Sub-Pool HI Current Realized Losses Test
(a) Current Realized Losses
for current Payment Date -------
(b) Current Realized Loss Ratio (total
Realized Losses for most recent
three months, multiplied by 4,
divided by arithmetic
average of Pool Scheduled Principal
Balances for third preceding
Remittance and for current Remittance
Date; may not exceed 2.5%) -------
32. Class HI: B Principal Balance Test
Class HI: B Principal Balance (before
any distributions on current
Payment Date) divided by Pool
Scheduled Principal Balance for
prior Payment Date (must equal
or exceed 14.0%) -------
CLASS HI: B-1 CERTIFICATES
- --------------------------
33. Sub-Pool HI Amount Available less the Class HI: A
Distribution Amount and Class HI: M
Distribution Amount (including
Monthly Servicing Fee) -------
INTEREST ON CLASS HI: B-1 PRINCIPAL BALANCE LESS
CLASS HI: B-1 LIQUIDATION LOSS PRINCIPAL AMOUNT
34. Current interest
(a) Class HI: B-1 Pass-through Rate (7.22%)
(b) Class HI: B-1 Interest -------
35. Amount applied to Unpaid
Class HI: B-1 Interest Shortfall -------
36. Remaining Unpaid Class HI: B-1
Interest Shortfall -------
37. Class HI: B-1 Interest Deficiency Amount -------
C-9
<PAGE>
38. Class HI: B-1 Interest Deficiency Amount unpaid -------
PRINCIPAL
39. Class HI: B-1 principal distribution -------
40. Class HI: B-1 Principal Balance -------
41. Amount, if any, by which Class HI: B-1
Formula Principal Distribution Amount
exceeds Class HI: B-1 Distribution Amount -------
CLASS HI: B-2 CERTIFICATES
- --------------------------
42. Remaining Sub-Pool HI Amount Available -------
INTEREST ON CLASS HI: B-2 PRINCIPAL BALANCE LESS
LIQUIDATION LOSS PRINCIPAL AMOUNT
43. Current interest
(a) Class HI: B-2 Pass-through Rate (7.54%)
(b) Class HI: B-2 Interest -------
44. Amount applied to Unpaid Class
B-2 Interest Shortfall -------
45. Remaining Unpaid Class HI: B-2
Interest Shortfall -------
PRINCIPAL
46. Class HI: B-2 principal distribution -------
47. Class HI: B-2 Guaranty Payment -------
48. Class HI: B-2 Principal Balance -------
49. Amount, if any, by which Class HI: B-2
Formula Distribution Amount plus Class HI: B-2
Liquidation Loss Principal Amount exceeds
Class HI: B-2 Distribution Amount -------
C-10
<PAGE>
INTEREST ON CLASS HI: M-1, M-2, B-1 AND B-2
LIQUIDATION LOSS PRINCIPAL AMOUNT
50. CLASS HI: M-1
(a) Class HI: M-1 Liquidation Loss Principal Amount -------
(b) Interest at Class HI: M-1 Pass-Through Rate on
Class HI: M-1 Liquidation Loss Principal Amount -------
(c) Amount applied to Unpaid Class HI: M-1
Liquidation Loss Interest Shortfall -------
(d) Remaining Unpaid Class HI: M-1 Liquidation
Loss Interest Shortfall -------
51. CLASS HI: M-2
(a) Class HI: M-2 Liquidation Loss Principal Amount -------
(b) Interest at Class HI: M-2 Pass-Through Rate on
Class HI: M-2 Liquidation Loss Principal Amount -------
(c) Amount applied to Unpaid Class HI: M-2
Liquidation Loss Interest Shortfall -------
(d) Remaining Unpaid Class HI: M-2 Liquidation Loss
Interest Shortfall -------
52. CLASS HI: B-1
(a) Class HI: B-1 Liquidation Loss Principal Amount -------
(b) Interest at Class HI: B-1 Pass-Through Rate on
Class HI: B-1 Liquidation Loss Principal Amount -------
(c) Amount applied to Unpaid Class HI: B-1 Liquidation
Loss Interest Shortfall -------
(d) Remaining Unpaid Class HI: B-1 Liquidation Loss
Interest Shortfall -------
53. CLASS HI: B-2
(a) Class HI: B-2 Liquidation Loss Principal Amount
(b) Interest at Class HI: B-2 Pass-Through Rate on
Class HI: B-2 Liquidation Loss Principal Amount -------
(c) Amount applied to Unpaid Class HI: B-2 Liquidation
Loss Interest Shortfall -------
(d) Remaining Unpaid Class HI: B-2 Liquidation Loss
Interest Shortfall -------
C-11
<PAGE>
CLASS HI: A, CLASS HI: M AND CLASS HI: B CERTIFICATES
- ------------------------------------------------------
54. Pool Scheduled Principal Balance of Sub-Pool HI -------
55. Sub-Pool HI Pool Factor -------
56. Home Improvement Contracts Delinquent:
30 - 59 days -------
60 or more days -------
57. Principal Balance of Defaulted Home
Improvement Contracts -------
58. Number of Liquidated Home Improvement
Contracts and Net Liquidation Loss -------
59. Number of Home Improvement Contracts Remaining -------
60. Number and Principal Balance of Home
Improvement Contracts with FHA claims finally
rejected, or no FHA claim was submitted
because FHA Insurance was unavailable -------
61. FHA Insurance reserve amount -------
62. Amount received from FHA Insurance -------
COMPANY AND CLASS C SUBSIDIARY CERTIFICATES
- -------------------------------------------
63. Monthly Servicing Fee -------
64. Class HI: B-2 Guaranty Fee -------
65. Class C Subsidiary Residual Payment -------
66. Sub-Pool HI Pre-Funded Amount -------
C-12
<PAGE>
SUB-POOL HE
1. (a) Sub-Pool HE Amount Available (including Monthly
Servicing Fee) -------
(b) Class HE: M-1 Interest Deficiency Amount (if
any), Class HE: M-2 Interest Deficiency Amount
(if any) and Class HE: B-1 Interest Deficiency
Amount (if any) withdrawn for prior
Payment Date -------
(c) Sub-Pool HE Amount Available after giving effect to
withdrawal of any Class HE: M-1 Interest
Deficiency Amount, Class HE: M-2 Interest
Deficiency Amount and Class HE: B-1
Interest Deficiency Amount for prior
Payment Date -------
2. Sub-Pool HE Formula Principal Distribution Amount: -------
(a) Scheduled principal -------
(b) Principal Prepayments -------
(c) Liquidated Contracts -------
(d) Repurchases -------
(e) Previously undistributed (a)-(d) amounts -------
(f) Pre-Funded Fixed Rate Amount, if any -------
(g) Less Class HE: A-1 ARM Formula Principal
Distribution Amount -------
3. Class HE: A-1 ARM Formula Principal
Distribution Amount (lesser of -------
Class HE: A-1 ARM Principal Balance
or sum of (a)-(f))
(a) Scheduled principal -------
(b) Principal Prepayments -------
(c) Liquidated Contracts -------
(d) Repurchases -------
(e) Pre-Funded ARM Amount, if any -------
(f) Clause (vi) of definition -------
4. Sub-Pool HE Senior Percentage -------
5. Class HE: B Percentage -------
C-13
<PAGE>
CLASS HE: A CERTIFICATES
INTEREST
6. Aggregate interest
(a) Class HE: A-1 ARM Pass-through Rate
(b) Class HE: A-1 ARM Interest -------
(c) Class HE: A-1 Pass-through Rate (___%)
(d) Class HE: A-l Interest -------
(e) Class HE: A-2 Pass-through Rate (___%)
(f) Class HE: A-2 Interest -------
(g) Class HE: A-3 Pass-through Rate (___%)
(h) Class HE: A-3 Interest -------
(i) Class HE: A-4 Pass-through Rate (___%)
(j) Class HE: A-4 Interest -------
(k) Class HE: A-5 Pass-through Rate (___%)
(l) Class HE: A-5 Interest -------
(m) Class HE: A-6 Pass-through Rate (___%)
(n) Class HE: A-6 Interest -------
(o) Class HE: A-7 IO Pass-through Rate (___%)
(p) Class HE: A-7 IO Interest -------
7. Amount applied to Unpaid Class HE: A Interest Shortfall -------
8. Remaining Unpaid Class HE: A Interest Shortfall -------
PRINCIPAL
9. Class HE: A-6 Lockout Percentage for such
Payment Date -------
C-14
<PAGE>
10. Class HE: A principal distribution:/2/
(a) Class HE: A-1 ARM -------
(b) Class HE: A-6 Lockout Pro Rata Distribution Amount -------
(c) Balance of Sub-Pool HE Senior Percentage of Sub-Pool
HE Formula Principal Distribution Amount:
(i) Class HE: A-1
-------
(ii) Class HE: A-2
-------
(iii) Class HE: A-3
-------
(iv) Class HE: A-4
-------
(v) Class HE: A-5
-------
(vi) Class HE: A-6
-------
11. (a) Class HE: A-1 ARM Principal Balance -------
(b) Class HE: A-1 Principal Balance -------
(c) Class HE: A-2 Principal Balance -------
(d) Class HE: A-3 Principal Balance -------
(e) Class HE: A-4 Principal Balance -------
(f) Class HE: A-5 Principal Balance -------
(g) Class HE: A-6 Principal Balance -------
CLASS HE: M-1 CERTIFICATES
- --------------------------
12. Sub-Pool HE Amount Available less the Class HE: A
Distribution Amount (including
Monthly Servicing Fee) ------
INTEREST ON CLASS HE: M-1 PRINCIPAL BALANCE LESS
CLASS HE: M-1 LIQUIDATION LOSS PRINCIPAL AMOUNT
13. Current interest
(a) Class HE: M-1 Pass-through Rate (___%)
(b) Class HE: M-1 Interest ------
- -------------------
/2/If a Class HE: A Liquidation Loss Principal Amount, the remaining Sub-Pool HE
Amount Available, pro rata to each Class of Class HE: A Certificates (other than
Class HE: A IO) based on the Class Principal Balance of each Class; If remaining
Sub-Pool HE Amount Available is less than Class HE: A Formula Principal
Distribution Amount, then such remaining Amount Available pro rata to each Class
of Class HE: A Certificates (other than Class HE: A-7 IO) based on amount
distributable had such remaining Amount Available not been less than Class HE: A
Formula Principal Distribution Amount; Otherwise, the Class HE: A-1 ARM Formula
Principal Distribution Amount and the Sub-Pool HE Series Percentage of the Sub-
Pool HE Formula Principal Distribution Amount sequentially as described in item
10.
C-15
<PAGE>
14. Amount applied to Unpaid Class HE: M-1
Interest Shortfall -------
15. Remaining Unpaid Class HE: M-1
Interest Shortfall -------
16. Class HE: M-1 Interest Deficiency Amount -------
17. Class HE: M-1 Interest Deficiency Amount unpaid -------
PRINCIPAL
18. Class HE: M-1 principal distribution -------
19. Class HE: M-1 Principal Balance -------
20. Amount, if any, by which Class HE: M-1 Formula
Principal Distribution Amount exceeds
Class HE: M-1 Distribution Amount -------
CLASS HE: M-2 CERTIFICATES
- --------------------------
21. Sub-Pool HE Amount Available less the Class HE: A
Distribution Amount and Class HE: M-1
Distribution Amount (including
Monthly Servicing Fee) -------
INTEREST ON CLASS HE: M-2 PRINCIPAL BALANCE LESS
CLASS HE: M-2 LIQUIDATION LOSS PRINCIPAL AMOUNT
22. Current interest
(a) Class HE: M-2 Pass-through Rate (___%)
(b) Class HE: M-2 Interest -------
23. Amount applied to Unpaid Class HE: M-2
Interest Shortfall -------
24. Remaining Unpaid Class HE: M-2
Interest Shortfall -------
25. Class HE: M-2 Interest Deficiency Amount -------
26. Class HE: M-2 Interest Deficiency Amount unpaid -------
C-16
<PAGE>
PRINCIPAL
27. Class HE: M-2 principal distribution ------
28. Class HE: M-2 Principal Balance ------
29. Amount, if any, by which Class HE: M-2
Formula Principal Distribution Amount
exceeds Class HE: M-2 Distribution Amount ------
CLASS HE: B PRINCIPAL DISTRIBUTION TESTS (tests must be satisfied
- ----------------------------------------
on and after the Payment Date occurring in October 2000)
30. Sub-Pool HE Average Sixty-Day Delinquency Ratio Test
(a) Sixty-Day Delinquency Ratio for
current Payment Date ------
(b) Sub-Pool HE Average Sixty-Day Delinquency
Ratio Test (arithmetic average of ratios for this
month and two preceding months;
may not exceed 6.0%) ------
31. Sub-Pool HE Average Thirty-Day Delinquency Ratio Test
(a) Thirty-Day Delinquency Ratio for
current Payment Date ------
(b) Sub-Pool HE Average Thirty-Day Delinquency Ratio
Test (arithmetic average of ratios
for this month and two preceding
months; may not exceed 12%) ------
32. Sub-Pool HE Cumulative Realized Losses Test
Cumulative Realized Losses
for current Payment Date
(as a percentage of Cut-off Date
Pool Principal Balance may not
exceed 7.5%) ------
C-17
<PAGE>
33. Sub-Pool HE Current Realized Losses Test
(a) Current Realized Losses
for current Payment Date ------
(b) Current Realized Loss Ratio (total
Realized Losses for most recent
three months, multiplied by 4,
divided by arithmetic
average of Pool Scheduled Principal
Balances for third preceding
Remittance and for current Remittance
Date; may not exceed 2.0%) ------
34. Class HE: B Principal Balance Test
Class HE: B Principal Balance (before
any distributions on current
Payment Date) divided by Pool
Scheduled Principal Balance for
prior Payment Date (must equal
or exceed 9% ------
CLASS HE: B-1 CERTIFICATES
35. Sub-Pool HE Amount Available less the Class HE: A
Distribution Amount and Class HE: M
Distribution Amount (including
Monthly Servicing Fee) ------
INTEREST ON CLASS HE: B-1 PRINCIPAL BALANCE LESS
CLASS HE: B-1 LIQUIDATION LOSS PRINCIPAL AMOUNT
36. Current Interest
(a) Class HE: B-1 Pass-through Rate (___%)
(b) Class HE: B-1 Interest ------
37. Amount applied to Unpaid
Class HE: B-1 Interest Shortfall ------
38. Remaining Unpaid Class HE: B-1
Interest Shortfall ------
39. Class HE: B-1 Interest Deficiency Amount ------
C-18
<PAGE>
40. Class HE: B-1 Interest Deficiency Amount unpaid ------
PRINCIPAL
41. Class HE: B principal distribution ------
42. Class HE: B-1 Principal Balance ------
43. Amount, if any, by which Class HE: B-1
Formula Distribution Amount exceeds
Class HE: B-1 Distribution Amount ------
CLASS HE: B-2 CERTIFICATES
- --------------------------
44. Remaining Sub-Pool HE Amount Available ------
INTEREST ON CLASS HE: B-2 PRINCIPAL BALANCE LESS
LIQUIDATION LOSS PRINCIPAL AMOUNT
45. Current interest
(a) Class HE: B-2 Pass-through Rate (7.54%) ------
(b) Class HE: B-2 Interest ------
46. Amount applied to Unpaid Class
B-2 Interest Shortfall ------
47. Remaining Unpaid Class HE: B-2
Interest Shortfall ------
PRINCIPAL
48. Class HE: B-2 principal distribution ------
49. Class HE: B-2 Guaranty Payment ------
50. Class HE: B-2 Principal Balance ------
51. Amount, if any, on which Class HE: B-2 Formula
Distribution Amount and Class HE: B-2 Liquidation
Loss Principal Amount exceeds Class HE: B-2
Distribution Amount ------
C-19
<PAGE>
INTEREST ON CLASS HE: M-1, M-2, B-1 AND B-2 LIQUIDATION LOSS PRINCIPAL AMOUNT
52. CLASS HE: M-1
(a) Class HE: M-1 Liquidation Loss Principal Amount ------
(b) Interest at Class HE: M-1 Pass-Through Rate on
Class HE: M-1 Liquidation Loss Principal Amount ------
(c) Amount applied to Unpaid Class HE: M-1 Liquidation
Loss Interest Shortfall ------
(d) Remaining Unpaid Class HE: M-1 Liquidation Loss
Interest Shortfall ------
53. CLASS HE: M-2
(a) Class HE: M-2 Liquidation Loss Principal Amount ------
(b) Interest at Class HE: M-2 Pass-Through Rate on
Class HE: M-2 Liquidation Loss Principal Amount ------
(c) Amount applied to Unpaid Class HE: M-2
Liquidation Loss Interest Shortfall ------
(d) Remaining Unpaid Class M-2 Liquidation Loss
Interest Shortfall ------
54. CLASS HE: B-1
(a) Class HE: B-1 Liquidation Loss Principal Amount ------
(b) Interest at Class HE: B-1 Pass-Through Rate on
Class HE: B-1 Liquidation Loss Principal Amount ------
(c) Amount applied to Unpaid Class HE: B-1 Liquidation
Loss Interest Shortfall ------
(d) Remaining Unpaid Class HE: B-1 Liquidation Loss
Interest Shortfall ------
C-20
<PAGE>
55. CLASS HE: B-2
(a) Interest at Class HE: B-2 Pass-Through Rate on
Class HE: B-2 Liquidation Loss Principal Amount ------
(b) Amount applied to Unpaid Class HE: B-2 Liquidation
Loss Interest Shortfall ------
(c) Remaining Unpaid Class HE: B-2 Liquidation Loss
Interest Shortfall ------
CLASS HE: A, CLASS HE: M AND CLASS HE: B CERTIFICATES
- ------------------------------------------------------
56. Pool Scheduled Principal Balance of Sub-Pool HE ------
(a) Fixed Rate Home Equity Contracts ------
(b) Adjustable Rate Home Equity Contracts ------
57. Sub-Pool HE Pool Factor ------
58. Home Equity Contracts Delinquent:
30 - 59 days
Fixed Rate ------
Adjustable Rate ------
60 or more days
Fixed Rate ------
Adjustable Rate ------
59. Principal Balance of Defaulted Home Equity Contracts
Fixed Rate ------
Adjustable Rate ------
60. Number of Liquidated Home Equity Contracts and
Net Liquidation Loss ______________
--------------
Fixed Rate ------
Adjustable Rate ------
C-21
<PAGE>
61. Number of Home Equity Contracts Remaining
Fixed Rate ------
Adjustable Rate ------
62. Sub-Pool Pre-Funded ARM Amount ------
63. Sub-Pool Pre-Funded Fixed Rate Amount ------
Notes and Certificates
- ----------------------
70. Amount of Guaranty Payment ------
71. Monthly Servicing and Guaranty Fee ------
72. GTGP Fee ------
73. Pool Scheduled Principal Balance ------
74. Pool Factor
(a) Class A-1 ------
(b) Class A-1B ------
(c) Class A-2 ------
(d) Class A-3 ------
(e) Class A-2 ------
(f) Certificate ------
Aggregate Scheduled Balances of delinquent Contracts as of Determination Date
75. 30 - 59 days
(a) Number ------
(b) Aggregate Principal Amount ------
76. 60 days or more
(a) Number ------
(b) Aggregate Principal Amount ------
77. Number of Products repossessed (by Product type) ------
78. Number of Products repossessed (by Product type) ------
but remaining in inventory ------
79. Number of Contracts that became Liquidated Contracts ------
80. Aggregate Amount of Servicer Advances with
respect to Current Distribution Date ------
C-22
<PAGE>
81. Amount paid to Servicer as Reimbursement for
Prior Servicer Advances ------
The amounts set out in lines ________ through ________ above are expressed
as a dollar amount per Note or Certificate with a 1% Class Percentage Interest
or per $1,000 denomination of Note or Certificate.
Please contact ____________________ of _____, ____________________ with any
questions regarding this Statement or your Distribution.
C-23
<PAGE>
EXHIBIT D
FORM OF CERTIFICATE OF SERVICING OFFICER
GREEN TREE FINANCIAL CORPORATION
The undersigned certifies that he/she is a [Title] of Green Tree Financial
Corporation, a Delaware corporation (the "Servicer"), and that as such he/she is
duly authorized to execute and deliver this certificate on behalf of the
Servicer pursuant to Section 5.14 of the Sale and Servicing Agreement (the
"Agreement") dated as of _____ between the Company and Green Tree [Home
Improvement and Home Equity] Trust _____ (all capitalized terms used herein
without definition having the respective meanings specified in the Agreement),
and further certifies that:
1. The Monthly Report for the period from ____________________ to
____________________ attached to this certificate is complete and accurate
in accordance with the requirements of Section 5.14 of the Agreement; and
2. As of the date hereof, no Event of Termination or event that with
notice or lapse of time or both would become an Event of Termination has
occurred.
IN WITNESS WHEREOF, I have affixed hereunto my signature this __________
day of _________________________, 19_____.
GREEN TREE FINANCIAL CORPORATION
By
Name:
Title:
D-1
<PAGE>
EXHIBIT 4.3
================================================================================
TRUST AGREEMENT
Dated as of
-----
among
GREEN TREE FINANCIAL CORPORATION,
as depositor
[GENERAL PARTNER]
and
[TRUSTEE],
as owner trustee
GREEN TREE [HOME IMPROVEMENT AND HOME EQUITY] TRUST
================================================================================
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE I DEFINITIONS.......................................... 1-1
SECTION 1.1. Definitions.......................................... 1-1
SECTION 1.2. Usage of Terms....................................... 1-5
SECTION 1.3. Calculations......................................... 1-5
SECTION 1.4. Section References................................... 1-5
SECTION 1.5. Action by or Consent of Certificateholders........... 1-5
ARTICLE II CREATION OF TRUST.................................... 2-1
SECTION 2.1. Creation of Trust.................................... 2-1
SECTION 2.2. Office............................................... 2-1
SECTION 2.3. Purposes and Powers.................................. 2-1
SECTION 2.4. Appointment of Owners Trustee........................ 2-2
SECTION 2.5. Initial Capital Contribution of Trust Estate......... 2-2
SECTION 2.6. Declaration of Trust................................. 2-2
SECTION 2.7. Liability of the Owners.............................. 2-3
SECTION 2.8. Title to Trust Property.............................. 2-3
SECTION 2.9. Situs of Trust....................................... 2-4
SECTION 2.10. Representations and Warranties of the
Depositor and [General Partner]...................... 2-4
SECTION 2.11. Federal Income Tax Allocations....................... 2-7
SECTION 2.12. Covenants of the General Partner..................... 2-8
SECTION 2.13. Covenants of the Certificate Owners.................. 2-9
ARTICLE III THE CERTIFICATES..................................... 3-1
SECTION 3.1. Initial Ownership.................................... 3-1
SECTION 3.2. The Certificates..................................... 3-1
SECTION 3.3. Authentication of Certificates....................... 3-1
SECTION 3.4. Registration of Transfer and Exchange of Certificates 3-1
SECTION 3.5. Mutilated, Destroyed, Lost or Stolen Certificates.... 3-4
SECTION 3.6. Persons Deemed Owners................................ 3-5
SECTION 3.7. Access to List of Certificateholders' Names and
Addresses............................................ 3-5
SECTION 3.8. Maintenance of Office or Agency...................... 3-5
SECTION 3.9. Appointment of Paying Agent.......................... 3-5
ARTICLE IV ACTIONS BY OWNER TRUSTEE............................. 4-1
SECTION 4.1. Restriction on Power of Certificate Owner
and Certificateholder................................ 4-1
SECTION 4.2. Prior Notice to Certificateholders with Respect
to Certain Matters................................... 4-1
SECTION 4.3. Action by Certificateholders with Respect to
Bankruptcy........................................... 4-1
SECTION 4.4. Restrictions on Certificateholders' Power............ 4-2
-i-
<PAGE>
ARTICLE V APPLICATION OF TRUST FUNDS; CERTAIN DUTIES........... 5-1
SECTION 5.1. Trust Accounts....................................... 5-1
SECTION 5.2. Monthly Payments on Certificates..................... 5-2
SECTION 5.3. Application of Funds in Certificate Distribution
Account.............................................. 5-2
SECTION 5.4. Method of Payment.................................... 5-4
SECTION 5.5. No Segregation of Monies; No Interest................ 5-4
SECTION 5.6. Accounting; Reports; Tax Returns..................... 5-4
ARTICLE VI AUTHORITY AND DUTIES OF OWNER TRUSTEE................ 6-1
SECTION 6.1. General Authority.................................... 6-1
SECTION 6.2. General Duties....................................... 6-1
SECTION 6.3. Action upon Instruction.............................. 6-1
SECTION 6.4. No Duties Except as Specified in this Agreement
or in Instructions................................... 6-3
SECTION 6.5. No Action Except under Specified Documents
or Instructions...................................... 6-4
SECTION 6.6. Restrictions......................................... 6-4
SECTION 6.7 Administration Agreement............................. 6-4
ARTICLE VII CONCERNING THE OWNER TRUSTEE......................... 7-1
SECTION 7.1. Acceptance of Trust and Duties....................... 7-1
SECTION 7.2. Furnishing of Documents.............................. 7-3
SECTION 7.3. Representations and Warranties....................... 7-3
SECTION 7.4. Reliance; Advice of Counsel.......................... 7-4
SECTION 7.5. Not Acting in Individual Capacity.................... 7-4
SECTION 7.6. Owner Trustee Not Liable for Certificates,
Notes or Contracts................................... 7-5
SECTION 7.7. Owner Trustee May Own Certificates and Notes......... 7-5
SECTION 7.8. Certain Matters Relating to FHA Insurance............ 7-5
ARTICLE VIII COMPENSATION OF OWNER TRUSTEE........................ 8-1
SECTION 8.1. Owner Trustee's Fees and Expenses.................... 8-1
SECTION 8.2. Indemnification...................................... 8-1
SECTION 8.3. Nonrecourse Obligations.............................. 8-1
ARTICLE IX TERMINATION.......................................... 9-1
SECTION 9.1. Termination of the Trust............................. 9-1
SECTION 9.2. Dissolution Events with respect to General Partner... 9-2
ARTICLE X SUCCESSOR OWNER TRUSTEES AND ADDITIONAL
OWNER TRUSTEES....................................... 10-1
SECTION 10.1. Eligibility Requirements for Owner Trustee........... 10-1
SECTION 10.2. Resignation or Removal of Owner Trustee.............. 10-1
SECTION 10.3. Successor Owner Trustee.............................. 10-2
SECTION 10.4. Merger or Consolidation of Owner Trustee............. 10-2
SECTION 10.5. Appointment of Co-Trustee or Separate Trustee........ 10-3
-ii-
<PAGE>
ARTICLE XI MISCELLANEOUS PROVISIONS............................. 11-1
SECTION 11.1. Amendment............................................ 11-1
SECTION 11.2. No Recourse.......................................... 11-2
SECTION 11.3. Governing Law........................................ 11-2
SECTION 11.4. Severability of Provisions........................... 11-2
SECTION 11.5. Certificates Nonassessable and Fully Paid............ 11-3
SECTION 11.6. Third-Party Beneficiaries............................ 11-3
SECTION 11.7. Counterparts......................................... 11-3
SECTION 11.8. Notices.............................................. 11-3
Exhibit A -- Form of Certificate of Trust
Exhibit B -- Form of Certificate
Exhibit C -- Form of Certificate Depository Agreement
-iii-
<PAGE>
THIS TRUST AGREEMENT, dated as of _____, is made among Green Tree Financial
Corporation, a Delaware corporation, as depositor (the "Seller"), [General
Partner], a Minnesota corporation, as General Partner ("[General Partner]"), and
[TRUSTEE], a _____, as owner trustee (in such capacity, the "Owner Trustee").
In consideration of the mutual agreements herein contained, and of other
good and valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.1. Definitions.
Unless otherwise expressly defined herein, the terms defined in the Sale
and Servicing Agreement (defined below) shall have the same meanings in this
Agreement. Whenever capitalized and used in this Agreement, the following words
and phrases, unless otherwise specified, shall have the following meanings:
Administration Agreement: The Administration Agreement, dated as of _____,
among the Administrator, the Trust, and the Indenture Trustee, as the same may
be amended and supplemented from time to time.
Administrator: Green Tree Financial Servicing Corporation, a Delaware
Corporation, or any successor Administrator under the Administration Agreement.
Agreement or "this Agreement": This Trust Agreement, all amendments and
supplements thereto and all exhibits and schedules to any of the foregoing.
Authentication Agent: _____, or its successor in interest, and any
successor authentication agent appointed as provided in this Agreement.
Benefit Plan: The meaning assigned in Section 3.4(i).
Book-Entry Certificate: Any Certificate registered in the name of the
Depository or its nominee, ownership of which is reflected on the books of the
Depository or on the books of a person maintaining an account with such
Depository (directly or as an indirect participant in accordance with the rules
of such Depository).
Business Trust Statute: [Chapter 38 of Title 12 of the Delaware Code, 12
Del. Code (S) 3801 et seq., as the same may be amended from time to time.]
Certificate: The trust certificates evidencing the beneficial interest of
an
1-1
<PAGE>
Owner in the Trust, substantially in the form attached as Exhibit B.
Certificate Depository Agreement: The agreement among the Trust, the
Owner Trustee, the Administrator and The Depository Trust Company, as the
initial Depository, dated as of the Closing Date, relating to the Certificates,
substantially in the form attached as Exhibit C.
Certificate Distribution Account: The account designated as the
Certificate Distribution Account in, and which is established and maintained
pursuant to, Section 5.1.
Certificate of Trust: The Certificate of Trust substantially in the form
of Exhibit A hereto, filed for the Trust pursuant to Section 3810(a) of the
Business Trust Statute.
Certificate Register and Certificate Registrar: The register maintained
and the registrar appointed pursuant to Section 3.4.
Certificateholder or Holder: A Person in whose name a Certificate is
registered in the Certificate Register.
Class HE: A Certificates: The Class HE: A-1 ARM, Class HE: A-1, Class HE:
A-2, Class HE: A-3, Class HE: A-4, Class HE: A-5, Class HE: A-6 and Class HE: A-
7 IO Certificates, collectively.
Class HE: A Distribution Amount: As to any Distribution Date, the
lesser of (a) the Sub-Pool HE Amount Available and (b) the Class HE: A Formula
Distribution Amount; provided that, after the Class HE: A-6 Cross-over Date, the
Class HE: A Distribution Amount shall be zero.
Class HE: A Formula Distribution Amount: As to any Distribution Date, an
amount equal to the sum of (a) one month's interest (or, as to the first
Distribution Date, interest from and including the Closing Date to but excluding
_____) at (1) the Class HE: A-1 ARM Pass-Through Rate on the Class HE: A-1 ARM
Principal Balance, (2) the Class HE: A-1 Pass-Through Rate on the Class HE: A-1
Principal Balance, (3) the Class HE: A-2 Pass-Through Rate on the Class HE: A-2
Principal Balance, (4) the Class HE: A-3 Pass-Through Rate on the Class HE: A-3
Principal Balance, (5) the Class HE: A-4 Pass-Through Rate on the Class HE: A-4
Principal Balance, (6) the Class HE: A-5 Pass-Through Rate on the Class HE: A-5
Principal Balance, (7) the Class HE: A-6 Pass-Through Rate on the Class HE: A-6
Principal Balance and (8) the Class HE: A-7 IO Pass-Through Rate on the Class
HE: A-7 IO Notional Principal Amount, in each case to be calculated immediately
prior to such Distribution Date, (b) the aggregate of the Unpaid Class HE: A
Interest Shortfalls, if any, with respect to each Class of Class HE: A
Certificates, and (c)(i) if there is no Class HE: A Liquidation Loss Principal
Amount as to such Distribution Date, the Class HE: A Formula Principal
Distribution Amount, or (ii) if there is a Class HE: A Liquidation Loss
Principal Amount as to such Distribution Date, the amount determined in
accordance with Section 5.3(d)(3)(i); provided, however, that the aggregate of
all amounts distributed for all Distribution Dates pursuant to clause (c) shall
not exceed the aggregate of the Original Class Principal Balances of Class HE:
A.
Class HE: A Formula Interest Distribution Amount: As to each Class of
Class HE: A Certificates and any Distribution Date, the sum of (1) the amount
specified in clause (a)(1), (2), (3), (4), (5), (6), (7) or (8), as appropriate,
of the definition of the term "Class HE: A Formula Distribution Amount" and (2)
the Unpaid Class HE: A Interest Shortfall, if any, with respect to such Class.
Class HE: A Formula Principal Distribution Amount: As to any Distribution
Date, the sum of the Class HE: A-1 ARM Formula Principal Distribution Amount and
the Sub-Pool HE Senior Percentage of the Sub-Pool HE Formula Principal
Distribution Amount.
Class HE: A Interest Shortfall: As to each Class of Class HE: A
Certificates and any Distribution Date, the amount, if any, by which the Class
HE: A Formula Interest Distribution Amount for such Class exceeds the amount
distributed to
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Holders of such Class on such Distribution Date pursuant to Section 5.3(d)(2).
Class HE: A Liquidation Loss Principal Amount: As to any Distribution
Date, the amount, if any, by which the sum of the Pool Scheduled Principal
Balance of Sub-Pool HE plus the Sub-Pool HE Pre-Funded Amount is less than the
Class HE: A Principal Balance.
Class HE: A Principal Balance: As to any Distribution Date, the sum of the
Class HE: A-1 ARM Principal Balance, the Class HE: A-1 Principal Balance, the
Class HE: A-2 Principal Balance, the Class HE: A-3 Principal Balance, the Class
HE: A-4 Principal Balance, the Class HE: A-5 Principal Balance and the Class HE:
A-6 Principal Balance.
Class HE: A-1 ARM Certificate: Any one of the Class HE: A-1 ARM
Certificates executed and delivered by the Trustee and authenticated by the
Certificate Registrar substantially in the form set forth in Exhibit B.
Class HE: A-1 ARM Distribution Amount: As to any Distribution Date, that
portion of the Class HE: A Distribution Amount to be distributed to the Class
HE: A-1 ARM Certificateholders pursuant to Section 5.3(d) on such Distribution
Date.
Class HE: A-1 ARM Formula Principal Distribution Amount: Zero as to any
Distribution Date after the Class HE: A-1 ARM Principal Balance has been reduced
to zero, and as to any Distribution Date on or before the Distribution Date on
which the Class HE: A-1 ARM Principal Balance has been reduced to zero, the
lesser of (A) the Class HE: A-1 ARM Principal Balance, or (B) the sum of the
following amounts with respect to the related Due Period, in each case computed
in accordance with the method specified in the relevant Adjustable Rate Home
Equity Contract:
(i) all scheduled payments of principal due on each outstanding
Adjustable Rate Home Equity Contract during the prior Due Period as
specified in the amortization schedule at the time applicable thereto
(after adjustments for previous Partial Principal Prepayments and any
adjustment to such amortization schedule by reason of any bankruptcy of an
Obligor or similar proceeding or any moratorium or similar waiver or grace
period); plus
(ii) all Partial Principal Prepayments applied and all Principal
Prepayments in Full received during the prior Due Period in respect of the
Adjustable Rate Home Equity Contracts; plus
(iii) the aggregate Scheduled Principal Balance of all Adjustable
Rate Home Equity Contracts that became Liquidated Contracts during the
prior Due Period plus the amount of any reduction in principal balance of
any
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Adjustable Rate Home Equity Contracts during the prior Due Period
pursuant to bankruptcy proceedings involving the related Obligor; plus
(iv) the aggregate Scheduled Principal Balance of all Adjustable Rate
Home Equity Contracts repurchased, and all amounts deposited in lieu of the
repurchase of any Adjustable Rate Home Equity Contract, during the prior
Due Period pursuant to Section 3.05(A) or, in the event of a substitution
of an Adjustable Rate Home Equity Contract in accordance with Section
3.05(b), any amount required to be deposited by the Company in the
Certificate Distribution Account during the prior Due Period pursuant to
Section 3.05(b)(vi); plus
(v) on the Distribution Date which is on or after the last day of the
Pre-Funding Period, the Pre-Funded ARM Amount; plus
(vi) on each Distribution Date which is on or after the Distribution
Date on which the Class HE: A Certificates other than the Class HE: A-1 ARM
Certificates have been paid in full, (a) the Sub-Pool HE Senior Percentage
of (A) the sum of the amounts described in clauses (i) through (v) of the
definition of Sub-Pool HE Formula Principal Distribution Amount less (B)
the sum of the amounts described in clauses (i) through (iv) above, less
(b) the amount, if any, distributed in payment of principal on the Class
HE: A Certificates other than the Class HE: A-1 ARM Certificates on such
Distribution Date.
Class HE: A-1 ARM Principal Balance: As to any Distribution Date, the
Original Class HE: A-1 ARM Principal Balance less all amounts previously
distributed to Holders of Class HE: A-1 ARM Certificates in respect of
principal.
Class HE: A-1 Certificate: Any one of the Class HE: A-1 Certificates
executed and delivered by the Trustee and authenticated by the Certificate
Registrar substantially in the form set forth in Exhibit B.
Class HE: A-1 Cross-over Date: The Distribution Date on which the Class
HE: A-1 Principal Balance (after giving effect to the distributions of principal
on the Class HE: A-1 Certificates on such Distribution Date) is reduced to zero.
Class HE: A-1 Distribution Amount: As to any Distribution Date, that
portion of the Class HE: A Distribution Amount to be distributed to the Class
HE: A-1 Certificateholders pursuant to Section 5.3(d) on such Distribution Date.
Class HE: A-1 Principal Balance: As to any Distribution Date, the Original
Class HE: A-1 Principal Balance less all amounts previously distributed to
Holders of Class HE: A-1 Certificates in respect of principal.
Class HE: A-2 Certificate: Any one of the Class HE: A-2 Certificates
executed
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and delivered by the Trustee and authenticated by the Certificate
Registrar substantially in the form set forth in Exhibit B.
Class HE: A-2 Cross-over Date: The Distribution Date on which the Class
HE: A-2 Principal Balance (after giving effect to the distributions of principal
on the Class HE: A-2 Certificates on such Distribution Date) is reduced to zero.
Class HE: A-2 Distribution Amount: As to any Distribution Date, that
portion of the Class HE: A Distribution Amount to be distributed to the Class
HE: A-2 Certificateholders pursuant to Section 5.3(d) on such Distribution Date.
Class HE: A-2 Principal Balance: As to any Distribution Date, the Original
Class HE: A-2 Principal Balance less all amounts previously distributed to
Holders of Class HE: A-2 Certificates in respect of principal.
Class HE: A-3 Certificate: Any one of the Class HE: A-3 Certificates
executed and delivered by the Trustee and authenticated by the Certificate
Registrar substantially in the form set forth in Exhibit B.
Class HE: A-3 Cross-over Date: The Distribution Date on which the Class
HE: A-3 Principal Balance (after giving effect to the distributions of principal
on the Class HE: A-3 Certificates on such Distribution Date) is reduced to zero.
Class HE: A-3 Distribution Amount: As to any Distribution Date, that
portion of the Class HE: A Distribution Amount to be distributed to the Class
HE: A-3 Certificateholders pursuant to Section 5.3(d) on such Distribution Date.
Class HE: A-3 Principal Balance: As to any Distribution Date, the Original
Class HE: A-3 Principal Balance less all amounts previously distributed to
Holders of Class HE: A-3 Certificates in respect of principal.
Class HE: A-4 Certificate: Any one of the Class HE: A-4 Certificates
executed and delivered by the Trustee and authenticated by the Certificate
Registrar substantially in the form set forth in Exhibit B.
Class HE: A-4 Cross-over Date: The Distribution Date on which the Class
HE: A-4 Principal Balance (after giving effect to the distributions of principal
on the Class HE: A-4 Certificates on such Distribution Date) is reduced to zero.
Class HE: A-4 Distribution Amount: As to any Distribution Date, that
portion of the Class HE: A Distribution Amount to be distributed to the Class
HE: A-4 Certificateholders pursuant to Section 5.3(d) on such Distribution Date.
Class HE: A-4 Principal Balance: As to any Distribution Date, the Original
Class HE: A-4 Principal Balance less all amounts previously distributed to
Holders of Class HE: A-4 Certificates in respect of principal.
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Class HE: A-5 Certificate: Any one of the Class HE: A-5 Certificates
executed and delivered by the Trustee and authenticated by the Certificate
Registrar substantially in the form set forth in Exhibit B.
Class HE: A-5 Cross-over Date: The Distribution Date on which the Class
HE: A-5 Principal Balance (after giving effect to the distributions of principal
on the Class HE: A-5 Certificates on such Distribution Date) is reduced to zero.
Class HE: A-5 Distribution Amount: As to any Distribution Date, that
portion of the Class HE: A Distribution Amount to be distributed to the Class
HE: A-5 Certificateholders pursuant to Section 5.3(d) on such Distribution Date.
Class HE: A-5 Principal Balance: As to any Distribution Date, the Original
Class HE: A-5 Principal Balance less all amounts previously distributed to
Holders of Class HE: A-5 Certificates in respect of principal.
Class HE: A-6 Certificate: Any one of the Class HE: A-6 Certificates
executed and delivered by the Trustee and authenticated by the Certificate
Registrar substantially in the form set forth in Exhibit B.
Class HE: A-6 Cross-over Date: The latest to occur of (a) the Class HE: A-
5 Cross-over Date or (b) the Distribution Date on which the Class HE: A-6
Principal Balance (after giving effect to the distributions of principal on the
Class HE: A-6 Certificates on such Distribution Date) is reduced to zero or (c)
the Distribution Date on which the Class HE: A-1 ARM Principal Balance (after
giving effect to the distributions of principal on the Class HE: A-1 ARM
Certificates on such Distribution Date) is reduced to zero.
Class HE: A-6 Distribution Amount: As to any Distribution Date, that
portion of the Class HE: A Distribution Amount to be distributed to the Class
HE: A-6 Certificateholders pursuant to Section 5.3(d) on such Distribution Date.
Class HE: A-6 Principal Balance: As to any Distribution Date, the Original
Class HE: A-6 Principal Balance less all amounts previously distributed to
Holders of Class HE: A-6 Certificates in respect of principal.
Class HE: A-6 Lockout Percentage: As to any Distribution Date occurring
during the periods set forth below, the percentage designated as such as
follows:
Class HE: A-6
Period (dates inclusive) Lockout Percentage
_____ through _____ _____ %
_____ through _____ _____ %
_____ through _____ _____ %
_____ through _____ _____ %
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_____ through _____ _____ %
Class HE: A-6 Lockout Pro Rata Distribution Amount: As to any Distribution
Date, an amount equal to the lesser of:
(a) the product of (1) the Class HE: A-6 Lockout Percentage, and (2)
the product of (A) a fraction, the numerator of which is the Class HE: A-6
Principal Balance immediately preceding such Distribution Date and the
denominator of which is the Class HE: A Principal Balance less the Class
HE: A-1 ARM Principal Balance, immediately preceding such Distribution
Date, and (B) the Sub-Pool HE Senior Percentage of the Sub-Pool HE Formula
Principal Distribution Amount for such Distribution Date, and
(b) the Class HE: A-6 Principal Balance immediately preceding such
Distribution Date.
Class HE: A-7 IO Certificate: Any one of the Class HE: A-7 IO Certificates
executed and delivered by the Trustee and authenticated by the Certificate
Registrar substantially in the form set forth in Exhibit B.
Class HE: A-7 IO Distribution Amount: As to any Distribution Date, that
portion of the Class HE: A Distribution Amount to be distributed to the Class
HE: A-7 IO Certificateholders pursuant to Section 5.3(d) on such Distribution
Date.
Class HE: A-7 IO Notional Principal Amount: As of any Distribution Date,
an amount equal to __________.
Class HE: A-7 IO Original Notional Amount: $_____.
Class HE: B Certificates: The Class HE: B-1 and Class HE: B-2
Certificates, collectively.
Class HE: B Cross-over Date" means the earlier of:
(a) the Class HE: M-2 Cross-over Date, and
(b) the first Distribution Date on or after the Distribution Date
occurring in _____ on which the fraction, expressed as a percentage, the
numerator of which is the Class HE: B Principal Balance as of such
Distribution Date and the denominator of which is the Pool Scheduled
Principal Balance of Sub-Pool HE as of the immediately preceding
Distribution Date, is equal to or greater than _____ %.
Class HE: B Percentage: 100% minus the Sub-Pool HE Senior Percentage.
Class HE: B Principal Balance: As to any Distribution Date, the sum of the
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Class HE: B-1 Principal Balance and the Class HE: B-2 Principal Balance.
Class HE: B Principal Balance Test: To be considered "satisfied" for any
Distribution Date, when the fraction, expressed as a percentage, the numerator
of which is the Class HE: B Principal Balance as of such Distribution Date and
the denominator of which is the Pool Scheduled Principal Balance of Sub-Pool HE
as of the immediately preceding Distribution Date, is equal to or greater than
_____ %.
Class HE: B Principal Distribution Test: As to any Distribution Date, each
of the Sub-Pool HE Average Sixty-Day Delinquency Ratio Test, the Sub-Pool HE
Average Thirty-Day Delinquency Ratio Test, the Class HE: B Principal Balance
Test, the Sub-Pool HE Cumulative Realized Losses Test and the Sub-Pool HE
Current Realized Losses Test.
Class HE: B-1 Certificate: Any one of the Class HE: B-1 Certificates
executed and delivered by the Trustee and authenticated by the Certificate
Registrar substantially in the form set forth in Exhibit B.
Class HE: B-1 Cross-over Date: The Distribution Date on which the Class
HE: B-1 Principal Balance (after giving effect to the distributions of principal
on the Class HE: B-1 Certificates on such Distribution Date) is reduced to zero.
Class HE: B-1 Distribution Amount: As to any Distribution Date, the lesser
of (a) the Sub-Pool HE Amount Available less the sum of the Class HE: A
Distribution Amount, the Class HE: M-1 Distribution Amount and the Class HE: M-2
Distribution Amount, and (b) the Class HE: B-1 Formula Distribution Amount;
provided that after the Class HE: B-1 Cross-over Date the Class HE: B-1
Distribution Amount shall be zero.
Class HE: B-1 Formula Distribution Amount: As to any Distribution Date, an
amount equal to the sum of (a) one month's interest (or, as to the first
Distribution Date, interest from and including the Closing Date to but excluding
_____) at the Class HE: B-1 Pass-Through Rate on the excess of the Class HE: B-1
Principal Balance over the Class HE: B-1 Liquidation Loss Principal Amount, to
be calculated immediately prior to such Distribution Date, (b) any Unpaid Class
HE: B-1 Interest Shortfall, and (c) if such Distribution Date is on or prior to
the Class HE: B-1 Cross-over Date, the Class HE: B Percentage of the Sub-Pool HE
Formula Principal Distribution Amount; provided, however, that on the Class HE:
M-2 Cross-over Date, the balance of any amounts that would have been
distributable on such date pursuant to clause (c) of the definition of the term
"Class HE: M-2 Formula Distribution Amount" (assuming a sufficient Sub-Pool HE
Amount Available) but for the operation of the second proviso in such definition
shall instead be included in clause (c) of this definition; and provided,
further, that the aggregate of all amounts distributed pursuant to clause (c) of
this definition shall not exceed the Original Class HE: B-1 Principal Balance.
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Class HE: B-1 Formula Interest Distribution Amount: As to any Distribution
Date, the sum of (a) the amount specified in clause (a) of the definition of the
term "Class HE: B-1 Formula Distribution Amount" and (b) the Unpaid Class HE: B-
1 Interest Shortfall, if any.
Class HE: B-1 Formula Liquidation Loss Interest Distribution Amount: As to
any Distribution Date, the sum of (a) one month's interest (or, as to the first
Distribution Date, interest from and including the Closing Date to but excluding
_____) at the Class HE: B-1 Pass-Through Rate on the Class HE: B-1 Liquidation
Loss Principal Amount, to be calculated immediately prior to such Distribution
Date, and (b) the Unpaid Class HE: B-1 Liquidation Loss Interest Shortfall, if
any.
Class HE: B-1 Interest Deficiency Amount: As to any Distribution Date, the
amount, if any, by which (a) the Class HE: B-1 Formula Interest Distribution
Amount exceeds (b) the amount available for distribution to the Class HE: B-1
Certificateholders pursuant to Sections 5.3(d)(6)(i) and (ii) on such
Distribution Date.
Class HE: B-1 Interest Shortfall: As to any Distribution Date, the amount,
if any, by which (a) the Class HE: B-1 Formula Interest Distribution Amount
exceeds (b) the sum of (1) the amount distributed to Class HE: B-1
Certificateholders on such Distribution Date pursuant to Sections 5.3(d)(6)(i)
and (ii), and (2) the amount distributed to Class HE: B-1 Certificateholders on
such Distribution Date pursuant to Section 5.3(e).
Class HE: B-1 Liquidation Loss Interest Shortfall: As to any Distribution
Date, the amount, if any, by which (a) the Class HE: B-1 Formula Liquidation
Loss Interest Distribution Amount exceeds (b) the amount distributed to Class
HE: B-1 Certificateholders on such Distribution Date pursuant to Section
5.3(d)(8)(iii).
Class HE: B-1 Liquidation Loss Principal Amount: As to any Distribution
Date, the lesser of (a) the excess, if any, of the Sub-Pool HE Aggregate
Liquidation Loss Principal Amount over the Class HE: B-2 Principal Balance, and
(b) the Class HE: B-1 Principal Balance.
Class HE: B-1 Principal Balance: As to any Distribution Date, the Original
Class HE: B-1 Principal Balance less all amounts previously distributed to
Holders of Class HE: B-1 Certificates in respect of principal.
Class HE: B-2 Certificate: Any one of the Class HE: B-2 Certificates
executed and delivered by the Trustee and authenticated by the Certificate
Registrar substantially in the form set forth in Exhibit B.
Class HE: B-2 Distribution Amount: As to any Distribution Date, the lesser
of (a) the Class HE: B-2 Remaining Sub-Pool HE Amount Available, and (b) the
Class HE: B-2 Formula Distribution Amount.
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Class HE: B-2 Formula Distribution Amount: As to any Distribution Date, an
amount equal to the sum of (a) one month's interest (or, as to the first
Distribution Date, interest from and including the Closing Date to but excluding
_____) at the Class HE: B-2 Pass-Through Rate on the excess of the Class HE: B-2
Principal Balance over the Class HE: B-2 Liquidation Loss Principal Amount, to
be calculated immediately prior to such Distribution Date, (b) any Unpaid Class
HE: B-2 Interest Shortfall, and (c) if such Distribution Date is after the Class
HE: B-1 Cross-over Date, the Class HE: B Percentage of the Sub-Pool HE Formula
Principal Distribution Amount; provided, however, that on the Class HE: B-1
Cross-over Date, the balance of any amounts that would have been distributable
on such date pursuant to clause (c) of the definition of the term "Class HE: B-1
Formula Distribution Amount" (assuming a sufficient Sub-Pool HE Amount
Available) but for the operation of the second proviso in such definition shall
instead be included in clause (c) of this definition; and provided, further,
that the aggregate of all amounts distributed pursuant to clause (c) of this
definition shall not exceed the Original Class HE: B-2 Principal Balance.
Class HE: B-2 Formula Interest Distribution Amount: As to any Distribution
Date, the sum of (a) the amount specified in clause (a) of the definition of the
term "Class HE: B-2 Formula Distribution Amount" and (b) the Unpaid Class HE: B-
2 Interest Shortfall, if any.
Class HE: B-2 Formula Liquidation Loss Interest Distribution Amount: As to
any Distribution Date, the sum of (a) one month's interest (or, as to the first
Distribution Date, interest from and including the Closing Date to but excluding
_____) at the Class HE: B-2 Pass-Through Rate on the Class HE: B-2 Liquidation
Loss Principal Amount, to be calculated immediately prior to such Distribution
Date, and (b) the Unpaid Class HE: B-2 Liquidation Loss Interest Shortfall, if
any.
Class HE: B-2 Guaranty Fee: As of any Distribution Date, the lesser of (a)
one-twelfth of the product of _____ % and the sum of the Pool Scheduled
Principal Balance of Sub-Pool HE for the immediately preceding Distribution Date
(or, in the case of the _____ Distribution Date, the Cut-Off Date), and the Sub-
Pool HE Pre-Funded Amount as of the immediately preceding Distribution Date (or,
in the case of the _____ Distribution Date, the Closing Date), or (b) the Sub-
Pool HE Amount Available less the amounts payable under Sections 5.3(d)(1)-(13).
Class HE: B-2 Guaranty Payment: As to any Distribution Date, the amount,
if any, by which (a) the sum of the Class HE: B-2 Total Formula Distribution
Amount and the Class HE: B-2 Liquidation Loss Principal Amount exceeds (b) the
Class HE: B-2 Total Distribution Amount; provided that the Class HE: B-2
Guaranty Payment shall not exceed the amount necessary to reduce the Class HE:
B-2 Principal Balance to zero.
Class HE: B-2 Interest Shortfall: As to any Distribution Date, the amount,
if any, by which (a) the Class HE: B-2 Formula Interest Distribution Amount
exceeds
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(b) the sum of the amount distributed to Class HE: B-2 Certificateholders on
such Distribution Date pursuant to Sections 5.3(d)(7)(i) and (ii) and any Class
HE: B-2 Guaranty Payment.
Class HE: B-2 Limited Guaranty: The limited guaranty of the Company
provided pursuant to Section 8.03(b).
Class HE: B-2 Liquidation Loss Interest Shortfall: As to any Distribution
Date, the amount, if any, by which the Class HE: B-2 Formula Liquidation Loss
Interest Distribution Amount exceeds (a) the sum of (1) the Class HE: B-2 Total
Formula Distribution Amount and (2) the Class HE: B-2 Liquidation Loss Principal
Amount less (b) the sum of (1) the Class HE: B-2 Total Distribution Amount, (2)
any Class HE: B-2 Guaranty Payment and (3) any Class HE: B-2 Interest Shortfall.
Class HE: B-2 Liquidation Loss Principal Amount: As to any Distribution
Date, the lesser of the Sub-Pool HE Aggregate Liquidation Loss Principal Amount
and the Class HE: B-2 Principal Balance.
Class HE: B-2 Principal Balance: As to any Distribution Date, the Original
Class HE: B-2 Principal Balance less all amounts previously distributed to
Holders of Class HE: B-2 Certificates in respect of principal.
Class HE: B-2 Total Formula Distribution Amount: As to any Distribution
Date, the sum of the Class HE: B-2 Formula Distribution Amount and the Class HE:
B-2 Formula Liquidation Loss Interest Distribution Amount.
Class HE: B-2 Total Distribution Amount: As to any Distribution Date, the
sum of the Class HE: B-2 Distribution Amount and amounts distributed on such
Distribution Date pursuant to Section 5.3(d)(8)(iv).
Class HE: M Certificates: The Class HE: M-1 and Class HE: M-2
Certificates, collectively.
Class HE: M Principal Balance: As to any Distribution Date, the sum of the
Class HE: M-1 Principal Balance and the Class HE: M-2 Principal Balance.
Class HE: M-1 Certificate: Any one of the Class HE: M-1 Certificates
executed and delivered by the Trustee and authenticated by the Certificate
Registrar substantially in the form set forth in Exhibit B.
Class HE: M-1 Cross-over Date: The Distribution Date on which the Class
HE: M-1 Principal Balance (after giving effect to the distributions of principal
on the Class HE: M-1 Certificates on such Distribution Date) is reduced to zero.
Class HE: M-1 Distribution Amount: As to any Distribution Date, the lesser
of (a) the Sub-Pool HE Amount Available less the Class HE: A Distribution Amount
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and (b) the Class HE: M-1 Formula Distribution Amount; provided that after the
Class HE: M-1 Cross-over Date the Class HE: M-1 Distribution Amount shall be
zero.
Class HE: M-1 Formula Distribution Amount: As to any Distribution Date, an
amount equal to the sum of (a) one month's interest (or, as to the first
Distribution Date, interest from and including the Closing Date to but excluding
_____) at the Class HE: M-1 Pass-Through Rate on the excess of the Class HE: M-1
Principal Balance over the Class HE: M-1 Liquidation Loss Principal Amount, to
be calculated immediately prior to such Distribution Dates, (b) any Unpaid Class
HE: M-1 Interest Shortfall and (c) if such Distribution Date is after the Class
HE: A-6 Cross-over Date, but on or prior to the Class HE: M-1 Cross-over Date,
the Sub-Pool HE Senior Percentage of the Sub-Pool HE Formula Principal
Distribution Amount; provided, however, that on the Class HE: A-6 Cross-over
Date, the balance of any amounts that would have been distributable on such date
pursuant to clause (c) of the definition of the term "Class HE: A Formula
Distribution Amount" (assuming a sufficient Sub-Pool HE Amount Available) but
for the operation of the proviso in such definition shall instead be included in
clause (c) of this definition; and provided, further, that the aggregate of all
amounts distributed for all Distribution Dates pursuant to clause (c) of this
definition shall not exceed the Original Class HE: M-1 Principal Balance.
Class HE: M-1 Formula Interest Distribution Amount: As to any Distribution
Date, the sum of (a) the amount specified in clause (a) of the definition of the
term "Class HE: M-1 Formula Distribution Amount" and (b) the Unpaid Class HE: M-
1 Interest Shortfall, if any.
Class HE: M-1 Formula Liquidation Loss Interest Distribution Amount: As to
any Distribution Date, the sum of (a) one month's interest (or, as to the first
Distribution Date, interest from and including the Closing Date to but excluding
_____) at the Class HE: M-1 Pass-Through Rate on the Class HE: M-1 Liquidation
Loss Principal Amount, to be calculated immediately prior to such Distribution
Date, and (b) the Unpaid Class HE: M-1 Liquidation Loss Interest Shortfall, if
any.
Class HE: M-1 Interest Deficiency Amount: As to any Distribution Date, the
amount, if any, by which (a) the Class HE: M-1 Formula Interest Distribution
Amount exceeds (b) the amount available for distribution to the Class HE: M-1
Certificateholders pursuant to Sections 5.3(d)(4)(i) and (ii) on such
Distribution Date.
Class HE: M-1 Interest Shortfall: As to any Distribution Date, the amount,
if any, by which (a) the Class HE: M-1 Formula Interest Distribution Amount
exceeds (b) the sum of (1) the amount distributed to Class HE: M-1
Certificateholders on such Distribution Date pursuant to Sections 5.3(d)(4)(i)
and (ii), and (2) the amount distributed to Class HE: M-1 Certificateholders on
such Distribution Date pursuant to Section 5.3(e).
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Class HE: M-1 Liquidation Loss Interest Shortfall: As to any Distribution
Date, the amount, if any, by which (a) the Class HE: M-1 Formula Liquidation
Loss Interest Distribution Amount exceeds (b) any amount distributed to Class
HE: M-1 Certificateholders on such Distribution Date pursuant to Section
5.3(d)(8)(i).
Class HE: M-1 Liquidation Loss Principal Amount: As of any Distribution
Date, the lesser of (a) the excess, if any, of the Sub-Pool HE Aggregate
Liquidation Loss Principal Amount over the aggregate of the Class HE: M-2
Principal Balance and the Class HE: B Principal Balance, and (b) the Class HE:
M-1 Principal Balance.
Class HE: M-1 Principal Balance: As to any Distribution Date, the Original
Class HE: M-1 Principal Balance less all amounts previously distributed to
Holders of Class HE: M-1 Certificates in respect of principal.
Class HE: M-2 Certificate: Any one of the Class HE: M-2 Certificates
executed and delivered by the Trustee and authenticated by the Certificate
Registrar substantially in the form set forth in Exhibit B.
Class HE: M-2 Cross-over Date: The Distribution Date on which the Class
HE: M-2 Principal Balance (after giving effect to the distributions of principal
on the Class HE: M-2 Certificates on such Distribution Date) is reduced to zero.
Class HE: M-2 Distribution Amount: As to any Distribution Date, the lesser
of (a) the Sub-Pool HE Amount Available less the Class HE: A Distribution Amount
and the Class HE: M-1 Distribution Amount and (b) the Class HE: M-2 Formula
Distribution Amount; provided that after the Class HE: M-2 Cross-over Date the
Class HE: M-2 Distribution Amount shall be zero.
Class HE: M-2 Formula Distribution Amount: As to any Distribution Date, an
amount equal to the sum of (a) one month's interest (or, as to the first
Distribution Date, interest from and including the Closing Date to but excluding
_____) at the Class HE: M-2 Pass-Through Rate on the excess of the Class HE: M-2
Principal Balance over the Class HE: M-2 Liquidation Loss Principal Amount, to
be calculated immediately prior to such Distribution Date, (b) any Unpaid Class
HE: M-2 Interest Shortfall and (c) if such Distribution Date is after the Class
HE: M-1 Cross-over Date, but on or prior to the Class HE: M-2 Cross-over Date,
the Sub-Pool HE Senior Percentage of the Sub-Pool HE Formula Principal
Distribution Amount; provided, however, that on the Class HE: M-1 Cross-over
Date, the balance of any amounts that would have been distributable on such date
pursuant to clause (c) of the definition of the term "Class HE: M-1 Formula
Distribution Amount" (assuming a sufficient Sub-Pool HE Amount Available) but
for the operation of the proviso in such definition shall instead be included in
clause (c) of this definition; and provided, further, that the aggregate of all
amounts distributed for all Distribution Dates pursuant to clause (c) of this
definition shall not exceed the Original Class HE: M-2 Principal Balance.
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Class HE: M-2 Formula Interest Distribution Amount: As to any Distribution
Date, the sum of (a) the amount specified in clause (a) of the definition of the
term "Class HE: M-2 Formula Distribution Amount" and (b) the Unpaid Class HE: M-
2 Interest Shortfall, if any.
Class HE: M-2 Formula Liquidation Loss Interest Distribution Amount: As to
any Distribution Date, the sum of (a) one month's interest (or, as to the first
Distribution Date, interest from and including the Closing Date to but excluding
_____) at the Class HE: M-2 Pass-Through Rate on the Class HE: M-2 Liquidation
Loss Principal Amount, to be calculated immediately prior to such Distribution
Date, and (b) the Unpaid Class HE: M-2 Liquidation Loss Interest Shortfall, if
any.
Class HE: M-2 Interest Deficiency Amount: As to any Distribution Date, the
amount, if any, by which (a) the Class HE: M-2 Formula Interest Distribution
Amount exceeds (b) the amount available for distribution to the Class HE: M-2
Certificateholders pursuant to Sections 5.3(d)(5)(i) and (ii) on such
Distribution Date.
Class HE: M-2 Interest Shortfall: As to any Distribution Date, the amount,
if any, by which (a) the Class HE: M-2 Formula Interest Distribution Amount,
exceeds (b) the sum of (1) the amount distributed to Class HE: M-2
Certificateholders on such Distribution Date pursuant to Sections 5.3(d)(5)(i)
and (ii), and (2) the amount distributed to Class HE: M-2 Certificateholders on
such Distribution Date pursuant to Section 5.3(e).
Class HE: M-2 Liquidation Loss Interest Shortfall: As to any Distribution
Date, the amount, if any, by which the Class HE: M-2 Formula Liquidation Loss
Interest Distribution Amount exceeds any amount distributed to Class HE: M-2
Certificateholders on such Distribution Date pursuant to Section 5.3(d)(8)(iv).
Class HE: M-2 Liquidation Loss Principal Amount: The lesser of (a) the
excess, if any, of the Sub-Pool HE Aggregate Liquidation Loss Principal Amount
over the Class HE: B Principal Balance, and (b) the Class HE: M-2 Principal
Balance.
Class HE: M-2 Principal Balance: As to any Distribution Date, the Original
Class HE: M-2 Principal Balance less all amounts previously distributed to
Holders of Class HE: M-2 Certificates in respect of principal.
Class HI: A Certificates: The Class HI: A-1, Class HI: A-2, and Class HI:
A-3 Certificates, collectively.
Class HI: A Distribution Amount: As to any Distribution Date, the lesser
of (a) the Sub-Pool HI Amount Available and (b) the Class HI: A Formula
Distribution Amount; provided that, after the Class HI: A-3 Cross-over Date, the
Class HI: A Distribution Amount shall be zero.
Class HI: A Formula Distribution Amount: As to any Distribution Date, an
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amount equal to the sum of (a) one month's interest (or, as to the first
Distribution Date, interest from and including the Closing Date to but excluding
_____) at (1) the Class HI: A-1 Pass-Through Rate on the Class HI: A-1 Principal
Balance, (2) the Class HI: A-2 Pass-Through Rate on the Class HI: A-2 Principal
Balance, and (3) the Class HI: A-3 Pass-Through Rate on the Class HI: A-3
Principal Balance, in each case to be calculated immediately prior to such
Distribution Date, (b) the aggregate of the Unpaid Class HI: A Interest
Shortfalls, if any, with respect to each Class of Class HI: A Certificates, and
(c)(i) if there is no Class HI: A Liquidation Loss Principal Amount as to such
Distribution Date, the Sub-Pool HI Senior Percentage of the Sub-Pool HI Formula
Principal Distribution Amount, or (ii) if there is a Class HI: A Liquidation
Loss Principal Amount as to such PDistribution Date, the amount determined in
accordance with Section 5.3(b)(3)(i); provided, however, that the aggregate of
all amounts distributed for all Distribution Dates pursuant to clause (c) shall
not exceed the sum of the Original Class HI: A Principal Balance.
Class HI: A Formula Interest Distribution Amount: As to each Class of
Class HI: A Certificates and any Distribution Date, the sum of (a) the amount
specified in clause (a)(1), (2) or (3), as appropriate, of the definition of the
term "Class HI: A Formula Distribution Amount" and (2) the Unpaid Class HI: A
Interest Shortfall, if any, with respect to such Class.
Class HI: A Interest Shortfall: As to each Class of Class HI: A
Certificates and any Distribution Date, the amount, if any, by which the Class
HI: A Formula Interest Distribution Amount for such Class exceeds the amount
distributed to Holders of such Class on such Distribution Date pursuant to
Section 5.3(b)(2).
Class HI: A Liquidation Loss Principal Amount: As to any Distribution
Date, the amount, if any, by which the sum of the Pool Scheduled Principal
Balance of Sub-Pool HI plus the Sub-Pool HI Pre-Funded Amount is less than the
Class HI: A Principal Balance.
Class HI: A Principal Balance: As to any Distribution Date, the sum of the
Class HI: A-1 Principal Balance, the Class HI: A-2 Principal Balance and the
Class HI: A-3 Principal Balance.
Class HI: A-1 Certificate: Any one of the Class HI: A-1 Certificates
executed and delivered by the Trustee and authenticated by the Certificate
Registrar substantially in the form set forth in Exhibit B.
Class HI: A-1 Cross-over Date: The Distribution Date on which the Class
HI: A-1 Principal Balance (after giving effect to the distributions of principal
on the Class HI: A-1 Certificates on such Distribution Date) is reduced to zero.
Class HI: A-1 Distribution Amount: As to any Distribution Date, that
portion of the Class HI: A Distribution Amount to be distributed to the Class
HI: A-1 Certificateholders pursuant to Section 5.3(b) on such Distribution Date.
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Class HI: A-1 Principal Balance: As to any Distribution Date, the Original
Class HI: A-1 Principal Balance less all amounts previously distributed to
Holders of Class HI: A-1 Certificates in respect of principal.
Class HI: A-2 Certificate: Any one of the Class HI: A-2 Certificates
executed and delivered by the Trustee and authenticated by the Certificate
Registrar substantially in the form set forth in Exhibit B.
Class HI: A-2 Cross-over Date: The Distribution Date on which the Class
HI: A-2 Principal Balance (after giving effect to the distributions of principal
on the Class HI: A-2 Certificates on such Distribution Date) is reduced to zero.
Class HI: A-2 Distribution Amount: As to any Distribution Date, that
portion of the Class HI: A Distribution Amount to be distributed to the Class
HI: A-2 Certificateholders pursuant to Section 5.3(b) on such Distribution Date.
Class HI: A-2 Principal Balance: As to any Distribution Date, the Original
Class HI: A-2 Principal Balance less all amounts previously distributed to
Holders of Class HI: A-2 Certificates in respect of principal.
Class HI: A-3 Certificate: Any one of the Class HI: A-3 Certificates
executed and delivered by the Trustee and authenticated by the Certificate
Registrar substantially in the form set forth in Exhibit B.
Class HI: A-3 Cross-over Date: The Distribution Date on which the Class
HI: A-3 Principal Balance (after giving effect to the distributions of principal
on the Class HI: A-3 Certificates on such Distribution Date) is reduced to zero.
Class HI: A-3 Distribution Amount: As to any Distribution Date, that
portion of the Class HI: A Distribution Amount to be distributed to the Class
HI: A-3 Certificateholders pursuant to Section 5.3(b) on such Distribution Date.
Class HI: A-3 Principal Balance: As to any Distribution Date, the Original
Class HI: A-3 Principal Balance less all amounts previously distributed to
Holders of Class HI: A-3 Certificates in respect of principal.
Class HI: B Certificates: The Class HI: B-1 and Class HI: B-2
Certificates, collectively.
Class HI: B Cross-over Date: The earlier of:
(a) the Class HI: M-2 Cross-over Date, and
(b) the first Distribution Date on or after the Distribution Date
occurring in _____ on which the fraction, expressed as a percentage, the
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numerator of which is the Class HI: B Principal Balance as of such
Distribution Date and the denominator of which is the Pool Scheduled
Principal Balance of Sub-Pool HI as of the immediately preceding
PDistribution Date, is equal to or greater than _____ %.
Class HI: B Percentage: 100% minus the Sub-Pool HI Senior Percentage.
Class HI: B Principal Balance: As to any Distribution Date, the sum of the
Class HI: B-1 Principal Balance and the Class HI: B-2 Principal Balance.
Class HI: B Principal Balance Test: To be considered "satisfied" for any
Distribution Date, when the fraction, expressed as a percentage, the numerator
of which is the Class HI: B Principal Balance as of such Distribution Date and
the denominator of which is the Pool Scheduled Principal Balance of Sub-Pool HI
as of the immediately preceding Distribution Date, is equal to or greater than
_____ %.
Class HI: B Principal Distribution Test: As to any Distribution Date, each
of the Sub-Pool HI Average Sixty-Day Delinquency Ratio Test, the Sub-Pool HI
Average Thirty-Day Delinquency Ratio Test, the Class HI: B Principal Balance
Test, the Sub-Pool HI Cumulative Realized Losses Test and the Sub-Pool HI
Current Realized Losses Test.
Class HI: B-1 Certificate: Any one of the Class HI: B-1 Certificates
executed and delivered by the Trustee and authenticated by the Certificate
Registrar substantially in the form set forth in Exhibit B.
Class HI: B-1 Cross-over Date: The Distribution Date on which the Class
HI: B-1 Principal Balance (after giving effect to the distributions of principal
on the Class HI: B-1 Certificates on such Distribution Date) is reduced to zero.
Class HI: B-1 Distribution Amount: As to any Distribution Date, the lesser
of (a) the Sub-Pool HI Amount Available less the sum of the Class HI: A
Distribution Amount, the Class HI: M-1 Distribution Amount and the Class HI: M-2
Distribution Amount, and (b) the Class HI: B-1 Formula Distribution Amount;
provided that after the Class HI: B-1 Cross-over Date the Class HI: B-1
Distribution Amount shall be zero.
Class HI: B-1 Formula Distribution Amount: As to any Distribution Date, an
amount equal to the sum of (a) one month's interest (or, as to the first
Distribution Date, interest from and including the Closing Date to but excluding
_____) at the Class HI: B-1 Pass-Through Rate on the excess of the Class HI: B-1
Principal Balance over the Class HI: B-1 Liquidation Loss Principal Amount, to
be calculated immediately prior to such Distribution Date, (b) any Unpaid Class
HI: B-1 Interest Shortfall, and (c) if such Distribution Date is on or prior to
the Class HI: B-1 Cross-over Date, the Class HI: B Percentage of the Sub-Pool HI
Formula Principal Distribution Amount; provided, however, that on the Class HI:
M-2 Cross-over
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Date, the balance of any amounts that would have been distributable on such date
pursuant to clause (c) of the definition of the term "Class HI: M-2 Formula
Distribution Amount" (assuming a sufficient Sub-Pool HI Amount Available) but
for the operation of the second proviso in such definition shall instead be
included in clause (c) of this definition; and provided, further, that the
aggregate of all amounts distributed pursuant to clause (c) of this definition
shall not exceed the Original Class HI: B-1 Principal Balance.
Class HI: B-1 Formula Interest Distribution Amount: As to any Distribution
Date, the sum of (a) the amount specified in clause (a) of the definition of the
term "Class HI: B-1 Formula Distribution Amount" and (b) the Unpaid Class HI: B-
1 Interest Shortfall, if any.
Class HI: B-1 Formula Liquidation Loss Interest Distribution Amount: As to
any Distribution Date, the sum of (a) one month's interest (or, as to the first
Distribution Date, interest from and including the Closing Date to but excluding
_____) at the Class HI: B-1 Pass-Through Rate on the Class HI: B-1 Liquidation
Loss Principal Amount, to be calculated immediately prior to such Distribution
Date, and (b) the Unpaid Class HI: B-1 Liquidation Loss Interest Shortfall, if
any.
Class HI: B-1 Interest Deficiency Amount: As to any Distribution Date, the
amount, if any, by which (a) the Class HI: B-1 Formula Interest Distribution
Amount exceeds (b) the amount available for distribution to the Class HI: B-1
Certificateholders pursuant to Sections 5.3(b)(6)(i) and (ii) on such
Distribution Date.
Class HI: B-1 Interest Shortfall: As to any Distribution Date, the amount,
if any, by which (a) the Class HI: B-1 Formula Interest Distribution Amount
exceeds (b) the sum of (1) the amount distributed to Class HI: B-1
Certificateholders on such Distribution Date pursuant to Sections 5.3(b)(6)(i)
and (ii), and (2) the amount distributed to Class HI: B-1 Certificateholders on
such Distribution Date pursuant to Section 5.3(c).
Class HI: B-1 Liquidation Loss Interest Shortfall: As to any Distribution
Date, the amount, if any, by which (a) the Class HI: B-1 Formula Liquidation
Loss Interest Distribution Amount exceeds (b) the amount distributed to Class
HI: B-1 Certificateholders on such Distribution Date pursuant to Section
5.3(b)(8)(iii).
Class HI: B-1 Liquidation Loss Principal Amount: As to any Distribution
Date, the lesser of (a) the excess, if any, of the Sub-Pool HI Aggregate
Liquidation Loss Principal Amount over the Class HI: B-2 Principal Balance, and
(b) the Class HI: B-1 Principal Balance.
Class HI: B-1 Principal Balance: As to any Distribution Date, the Original
Class HI: B-1 Principal Balance less all amounts previously distributed to
Holders of Class HI: B-1 Certificates in respect of principal.
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Class HI: B-2 Certificate: Any one of the Class HI: B-2 Certificates
executed and delivered by the Trustee and authenticated by the Certificate
Registrar substantially in the form set forth in Exhibit B.
Class HI: B-2 Distribution Amount: As to any Distribution Date, the lesser
of (a) the Class HI: B-2 Remaining Sub-Pool HI Amount Available, and (b) the
Class HI: B-2 Formula Distribution Amount.
Class HI: B-2 Formula Distribution Amount: As to any Distribution Date, an
amount equal to the sum of (a) one month's interest (or, as to the first
Distribution Date, interest from and including the Closing Date to but excluding
_____) at the Class HI: B-2 Pass-Through Rate on the excess of the Class HI: B-2
Principal Balance over the Class HI: B-2 Liquidation Loss Principal Amount, to
be calculated immediately prior to such Distribution Date, (b) any Unpaid Class
HI: B-2 Interest Shortfall, and (c) if such Distribution Date is after the Class
HI: B-1 Cross-over Date, the Class HI: B Percentage of the Sub-Pool HI Formula
Principal Distribution Amount; provided, however, that on the Class HI: B-1
Cross-over Date, the balance of any amounts that would have been distributable
on such date pursuant to clause (c) of the definition of the term "Class HI: B-1
Formula Distribution Amount" (assuming a sufficient Sub-Pool HI Amount
Available) but for the operation of the second proviso in such definition shall
instead be included in clause (c) of this definition; and provided, further,
that the aggregate of all amounts distributed pursuant to clause (c) of this
definition shall not exceed the Original Class HI: B-2 Principal Balance.
Class HI: B-2 Formula Interest Distribution Amount: As to any Distribution
Date, the sum of (a) the amount specified in clause (a) of the definition of the
term "Class HI: B-2 Formula Distribution Amount" and (b) the Unpaid Class HI: B-
2 Interest Shortfall, if any.
Class HI: B-2 Formula Liquidation Loss Interest Distribution Amount: As to
any Distribution Date, the sum of (a) one month's interest (or, as to the first
Distribution Date, interest from and including the Closing Date to but excluding
_____) at the Class HI: B-2 Pass-Through Rate on the Class HI: B-2 Liquidation
Loss Principal Amount, to be calculated immediately prior to such Distribution
Date, and (b) the Unpaid Class HI: B-2 Liquidation Loss Interest Shortfall, if
any.
Class HI: B-2 Guaranty Fee: As of any Distribution Date, the lesser of (a)
one-twelfth of the product of _____ % and the sum of the Pool Scheduled
Principal Balance for Sub-Pool HI for the immediately preceding Distribution
Date (or, in the case of the _____ Distribution Date, the Cut-Off Date) and the
Sub-Pool HI Pre-Funded Amount as of the immediately preceding Distribution Date
(or, in the case of the _____ Distribution Date, the Closing Date), or (b) the
Sub-Pool HI Amount Available less the amounts payable under Sections 5.3(b)(1)-
(14).
Class HI: B-2 Guaranty Payment: As to any Distribution Date, the amount,
if
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any, by which (a) the sum of the Class HI: B-2 Total Formula Distribution
Amount and the Class HI: B-2 Liquidation Loss Principal Amount exceeds (b) the
Class HI: B-2 Total Distribution Amount; provided that the Class HI: B-2
Guaranty Payment shall not exceed the amount necessary to reduce the Class HI:
B-2 Principal Balance to zero.
Class HI: B-2 Interest Shortfall: As to any Distribution Date, the amount,
if any, by which (a) the Class HI: B-2 Formula Interest Distribution Amount
exceeds (b) the sum of the amount distributed to Class HI: B-2
Certificateholders on such Distribution Date pursuant to Sections 5.3(b)(7)(i)
and (ii) and any Class HI: B-2 Guaranty Payment.
Class HI: B-2 Limited Guaranty: The limited guaranty of the Company
provided pursuant to Section 8.03(a).
Class HI: B-2 Liquidation Loss Interest Shortfall: As to any Distribution
Date, the amount, if any, by which the Class HI: B-2 Formula Liquidation Loss
Interest Distribution Amount exceeds (a) the sum of (1) the Class HI: B-2 Total
Formula Distribution Amount and (2) the Class HI: B-2 Liquidation Loss Principal
Amount less (b) the sum of (1) the Class HI: B-2 Total Distribution Amount, (2)
any Class HI: B-2 Guaranty Payment and (3) any Class HI: B-2 Interest Shortfall.
Class HI: B-2 Liquidation Loss Principal Amount: As to any Distribution
Date, the lesser of the Sub-Pool HI Aggregate Liquidation Loss Principal Amount
and the Class HI: B-2 Principal Balance.
Class HI: B-2 Principal Balance: As to any Distribution Date, the Original
Class HI: B-2 Principal Balance less all amounts previously distributed to
Holders of Class HI: B-2 Certificates in respect of principal.
Class HI: B-2 Total Formula Distribution Amount: As to any Distribution
Date, the sum of the Class HI: B-2 Formula Distribution Amount and the Class HI:
B-2 Formula Liquidation Loss Interest Distribution Amount.
Class HI: B-2 Total Distribution Amount: As to any Distribution Date, the
sum of the Class HI: B-2 Distribution Amount and amounts distributed on such
Distribution Date pursuant to Section 5.3(b)(8)(iv).
Class HI: M Certificates: The Class HI: M-1 and Class HI: M-2
Certificates, collectively.
Class HI: M Principal Balance: As to any Distribution Date, the sum of the
Class HI: M-1 Principal Balance and the Class HI: M-2 Principal Balance.
Class HI: M-1 Certificate: Any one of the Class HI: M-1 Certificates
executed and delivered by the Trustee and authenticated by the Certificate
Registrar substantially in the form set forth in Exhibit B.
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Class HI: M-1 Cross-over Date: The Distribution Date on which the Class
HI: M-1 Principal Balance (after giving effect to the distributions of principal
on the Class HI: M-2 Certificates on such Distribution Date) is reduced to zero.
Class HI: M-1 Distribution Amount: As to any Distribution Date, the lesser
of (a) the Sub-Pool HI Amount Available less the Class HI: A Distribution Amount
and (b) the Class HI: M-1 Formula Distribution Amount; provided that after the
Class HI: M-1 Cross-over Date the Class HI: M-1 Distribution Amount shall be
zero.
Class HI: M-1 Formula Distribution Amount: As to any Distribution Date, an
amount equal to the sum of (a) one month's interest (or, as to the first
Distribution Date, interest from and including the Closing Date to but excluding
_____) at the Class HI: M-1 Pass-Through Rate on the excess of the Class HI: M-1
Principal Balance over the Class HI: M-1 Liquidation Loss Principal Amount, to
be calculated immediately prior to such Distribution Date, (b) any Unpaid Class
HI: M-1 Interest Shortfall and (c) if such Distribution Date is after the Class
HI: A-3 Cross-over Date, but on or prior to the Class HI: M-1 Cross-over Date,
the Sub-Pool HI Senior Percentage of the Sub-Pool HI Formula Principal
Distribution Amount; provided, however, that on the Class HI: A-3 Cross-over
Date, the balance of any amounts that would have been distributable on such date
pursuant to clause (c) of the definition of the term "Class HI: A Formula
Distribution Amount" (assuming a sufficient Sub-Pool HI Amount Available) but
for the operation of the proviso in such definition shall instead be included in
clause (c) of this definition; and provided, further, that the aggregate of all
amounts distributed for all Distribution Dates pursuant to clause (c) of this
definition shall not exceed the Original Class HI: M-1 Principal Balance.
Class HI: M-1 Formula Interest Distribution Amount: As to any Distribution
Date, the sum of (a) the amount specified in clause (a) of the definition of the
term "Class HI: M-1 Formula Distribution Amount" and (b) the Unpaid Class HI: M-
1 Interest Shortfall, if any.
Class HI: M-1 Formula Liquidation Loss Interest Distribution Amount: As to
any Distribution Date, the sum of (a) one month's interest (or, as to the first
Distribution Date, interest from and including the Closing Date to but excluding
_____) at the Class HI: M-1 Pass-Through Rate on the Class HI: M-1 Liquidation
Loss Principal Amount, to be calculated immediately prior to such Distribution
Date, and (b) the Unpaid Class HI: M-1 Liquidation Loss Interest Shortfall, if
any.
Class HI: M-1 Interest Deficiency Amount: As to any Distribution Date, the
amount, if any, by which (a) the Class HI: M-1 Formula Interest Distribution
Amount exceeds (b) the amount available for distribution to the Class HI: M-1
Certificateholders pursuant to Sections 5.3(b)(4)(i) and (ii) on such
Distribution Date.
Class HI: M-1 Interest Shortfall: As to any Distribution Date, the amount,
if any, by which (a) the Class HI: M-1 Formula Interest Distribution Amount
exceeds (b) the sum of (1) the amount distributed to Class HI: M-1
Certificateholders on such Distribution Date pursuant to Sections 5.3(b)(4)(i)
and (ii), and (2) the amount
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distributed to Class HI: M-1 Certificateholders on such Distribution Date
pursuant to Section 5.3(c).
Class HI: M-1 Liquidation Loss Interest Shortfall: As to any Distribution
Date, the amount, if any, by which (a) the Class HI: M-1 Formula Liquidation
Loss Interest Distribution Amount exceeds (b) any amount distributed to Class
HI: M-1 Certificateholders on such Distribution Date pursuant to Section
5.3(b)(8)(i).
Class HI: M-1 Liquidation Loss Principal Amount: As of any Distribution
Date, the lesser of (a) the excess, if any, of the Sub-Pool HI Aggregate
Liquidation Loss Principal Amount over the aggregate of the Class HI: M-2
Principal Balance and the Class HI: B Principal Balance, and (b) the Class HI:
M-1 Principal Balance.
Class HI: M-1 Principal Balance: As to any Distribution Date, the Original
Class HI: M-1 Principal Balance less all amounts previously distributed to
Holders of Class HI: M-1 Certificates in respect of principal.
Class HI: M-2 Certificate: Any one of the Class HI: M-2 Certificates
executed and delivered by the Trustee and authenticated by the Certificate
Registrar substantially in the form set forth in Exhibit B.
Class HI: M-2 Cross-over Date: The Distribution Date on which the Class
HI: M-2 Principal Balance (after giving effect to the distributions of principal
on the Class HI: M-2 Certificates on such Distribution Date) is reduced to zero.
Class HI: M-2 Distribution Amount: As to any Distribution Date, the lesser
of (a) the Sub-Pool HI Amount Available less the Class HI: A Distribution Amount
and the Class HI: M-1 Distribution Amount and (b) the Class HI: M-2 Formula
Distribution Amount; provided that after the Class HI: M-2 Cross-over Date the
Class HI: M-2 Distribution Amount shall be zero.
Class HI: M-2 Formula Distribution Amount: As to any Distribution Date, an
amount equal to the sum of (a) one month's interest (or, as to the first
Distribution Date, interest from and including the Closing Date to but excluding
_____) at the Class HI: M-2 Pass-Through Rate on the excess of the Class HI: M-2
Principal Balance over the Class HI: M-2 Liquidation Loss Principal Amount, to
be calculated immediately prior to such Distribution Date, (b) any Unpaid Class
HI: M-2 Interest Shortfall and (c) if such Distribution Date is after the Class
HI: M-1 Cross-over Date, but on or prior to the Class HI: M-2 Cross-over Date,
the Sub-Pool HI Senior Percentage of the Sub-Pool HI Formula Principal
Distribution Amount; provided, however, that on the Class HI: M-1 Cross-over
Date, the balance of any amounts that would have been distributable on such date
pursuant to clause (c) of the definition of the term "Class HI: M-1 Formula
Distribution Amount" (assuming a sufficient Sub-Pool HI Amount Available) but
for the operation of the proviso in such definition shall instead be included in
clause (c) of this definition; and provided, further, that the aggregate of all
amounts distributed for all Distribution Dates pursuant to clause (c) of this
definition shall not exceed the Original Class
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HI: M-2 Principal Balance.
Class HI: M-2 Formula Interest Distribution Amount: As to any Distribution
Date, the sum of (a) the amount specified in clause (a) of the definition of the
term "Class HI: M-2 Formula Distribution Amount" and (b) the Unpaid Class HI: M-
2 Interest Shortfall, if any.
Class HI: M-2 Formula Liquidation Loss Interest Distribution Amount: As to
any Distribution Date, the sum of (a) one month's interest (or, as to the first
Distribution Date, interest from and including the Closing Date to but excluding
_____) at the Class HI: M-2 Pass-Through Rate on the Class HI: M-2 Liquidation
Loss Principal Amount, to be calculated immediately prior to such Distribution
Date, and (b) the Unpaid Class HI: M-2 Liquidation Loss Interest Shortfall, if
any.
Class HI: M-2 Interest Deficiency Amount: As to any Distribution Date, the
amount, if any, by which (a) the Class HI: M-2 Formula Interest Distribution
Amount exceeds (b) the amount available for distribution to the Class HI: M-2
Certificateholders pursuant to Sections 5.3(b)(5)(i) and (ii) on such
Distribution Date.
Class HI: M-2 Interest Shortfall: As to any Distribution Date, the amount,
if any, by which (a) the Class HI: M-2 Formula Interest Distribution Amount,
exceeds (b) the sum of (1) the amount distributed to Class HI: M-2
Certificateholders on such Distribution Date pursuant to Sections 5.3(b)(5)(i)
and (ii), and (2) the amount distributed to Class HI: M-2 Certificateholders on
such Distribution Date pursuant to Section 5.3(c).
Class HI: M-2 Liquidation Loss Interest Shortfall: As to any Distribution
Date, the amount, if any, by which the Class HI: M-2 Formula Liquidation Loss
Interest Distribution Amount exceeds any amount distributed to Class HI: M-2
Certificateholders on such Distribution Date pursuant to Section 5.3(b)(8)(iv).
Class HI: M-2 Liquidation Loss Principal Amount: The lesser of (a) the
excess, if any, of the Sub-Pool HI Aggregate Liquidation Loss Principal Amount
over the Class HI: B Principal Balance, and (b) the Class HI: M-2 Principal
Balance.
Class HI: M-2 Principal Balance: As to any Distribution Date, the Original
Class HI: M-2 Principal Balance less all amounts previously distributed to
Holders of Class HI: M-2 Certificates in respect of principal.
Class Principal Balance: Any of the Class HI: A-1, Class HI: A-2, Class
HI: A-3, Class HI: M-1, Class HI: M-2, Class HI: B-1, Class HI: B-2, Class HE:
A-1 ARM, Class HE: A-1, Class HE: A-2, Class HE: A-3, Class HE: A-4, Class HE:
A-5, Class HE: A-6, Class HE: M-1, Class HE: M-2, Class HE: B-1 or Class HE: B-2
Principal Balances.
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Code: The Internal Revenue Code of 1986, as amended.
Corporate Trust Office: The principal office of the Owner Trustee at which
at any particular time its corporate trust business shall be administered, which
office at the Closing Date is located at _____; the telecopy number for the
Corporate Trust Office on the date of the execution of this Agreement is _____.
Definitive Certificate: The meaning specified in Section 3.4(g).
Depositor: The Seller in its capacity as depositor hereunder.
Depository: the initial Depository, The Depository Trust Company, the
nominee of which is Cede & Co., as the registered Holder of (i) one Class HI: A-
1 Certificate evidencing $ _____ in Original Class HI: A-1 Principal Balance,
(ii) one Class HI: A-2 Certificate evidencing $ _____ in Original Class HI: A-2
Principal Balance, (iii) one Class HI: A-3 Certificate evidencing $ _____ in
Original Class HI: A-3 Principal Balance, (iv) one Class HI: M-1 Certificate
evidencing $ _____ Original Class HI: M-1 Principal Balance, (v) one Class HI:
M-2 Certificate evidencing $ _____ in Original Class HI: M-2 Principal Balance,
(vi) one Class HI: B-1 Certificate evidencing $ _____ in Original Class HI: B-1
Principal Balance, (vii) one Class HI: B-2 Certificate evidencing $ _____ in
Original Class HI: B-2 Principal Balance, (viii) one Class HE: A-1 ARM
Certificate evidencing $ _____ in Original HE: A-1 ARM Principal Balance; (ix)
two Class HE: A-1 Certificates evidencing $ _____ in Original Class HE: A-1
Principal Balance, (x) one Class HE: A-2 Certificate evidencing $ _____ in
Original Class HE: A-2 Principal Balance, (xi) one Class HE: A-3 Certificate
evidencing $ _____ in Original Class HE: A-3 Principal Balance, (xii) one Class
HE: A-4 Certificate evidencing $ _____ in Original Class HE: A-4 Principal
Balance, (xiii) one Class HE: A-5 Certificate evidencing $ _____ in Original
Class HE: A-5 Principal Balance, (xiv) one Class HE: A-6 Certificate evidencing
$ _____ in Original Class HE: A-6 Principal Balance, (xv) one Class HE: A-7 IO
Certificate evidencing an Original Notional Amount of $ _____; (xvii) one Class
HE: M-1 Certificate evidencing $ _____ in Original Class HE: M-1 Principal
Balance, (xviii) one Class HE: M-2 Certificate evidencing $ _____ in Original
Class HE: M-2 Principal Balance, (xix) one Class HE: B-1 Certificate evidencing
$ _____ in Original Class HE: B-1 Principal Balance, and (xx) one Class HE: B-2
Certificate evidencing $ _____ in Original Class HE: B-2 Principal Balance and
any permitted successor depository. The Depository shall at all times be a
"clearing corporation" as defined in Section 8-102(5) of the Uniform Commercial
Code of the State of New York.
Depository Agreement: Either the Certificate Depository Agreement or the
Note Depository Agreement.
Depository Participant: A broker, dealer, bank or other financial
institution or other Person for whom from time to time a Depository effects
book-entry transfers and pledges of securities deposited with the Depository.
Dissolution Event: With respect to any General Partner, the withdrawal or
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expulsion of such Person as General Partner of the Trust or the termination or
dissolution of such Person, or the occurrence of an Insolvency Event with
respect to such Person.
ERISA: The meaning assigned to such term in Section 3.4(i).
Expenses: The meaning assigned to such term in Section 8.2.
General Partner: [General Partner] or any subsequent General Partner as
permitted by this Agreement.
Green Tree: Green Tree Financial Corporation, a Delaware corporation, and
its successors in interest.
Indemnified Parties: The meaning assigned to such term in Section 8.2.
Insolvency Event: With respect to a specified Person, (a) the commencement
of an involuntary case against such Person under the federal bankruptcy laws, as
now or hereinafter in effect, or another present or future federal or state
bankruptcy, insolvency or similar law, and such case is not dismissed within 60
days; or (b) the filing of a decree or entry of an order for relief by a court
having jurisdiction in the premises in respect of such Person or any substantial
part of its property in an involuntary case under any applicable federal or
state bankruptcy, insolvency or other similar law now or hereafter in effect, or
appointing a receiver, liquidator, assignee, custodian, trustee, sequestrator or
similar official for such Person or for any substantial part of its property, or
ordering the winding-up or liquidation of such Person's affairs; or (c) the
commencement by such Person of a voluntary case under any applicable federal or
state bankruptcy, insolvency or other similar law now or hereafter in effect, or
the consent by such Person to the entry of an order for relief in an involuntary
case under any such law, or the consent by such Person to the appointment of or
taking possession by a receiver, liquidator, assignee, custodian, trustee,
sequestrator or similar official for such Person or for any substantial part of
its property, or the making by such Person of any general assignment for the
benefit of creditors, or the failure by such Person generally to pay its debts
as such debts become due, or the taking of action by such Person in furtherance
of any of the foregoing.
Note Depository Agreement: The agreement among the Trust, the Indenture
Trustee, the Administrator and The Depository Trust Company, dated as of the
Closing Date, relating to the Notes, substantially in the form attached as
Exhibit B to the Indenture.
Original Certificate Principal Balance: $ _____.
Owner or Certificate Owner: With respect to any Book-Entry Certificate,
each Person who is the beneficial owner of a Book-Entry Certificate as reflected
in the
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records of the Depository, or if a Depository Participant is not the Certificate
Owner, then as reflected in the records of a Person maintaining an account with
the Depository (directly or indirectly, in accordance with the rules of the
Depository); and with respect to any Definitive Certificate, the
Certificateholder.
Owner Trustee: _____, or its successor in interest, acting not individually
but solely as trustee hereunder, and any successor trustee appointed as provided
in this Agreement.
Paying Agent: Any paying agent or co-paying agent appointed pursuant to
Section 3.9, which initially shall be _____.
Percentage Interest: As to any Certificate, the percentage interest
evidenced thereby in distributions made on the related Class, such percentage
interest being equal to the percentage (carried to eight places) obtained from
dividing the denomination of such Certificate by the Original Principal Balance
of the related Class or, in the case of a Class HE: A-7 IO Certificate, by the
Original Notional Amount. The aggregate Percentage Interests for each Class of
Certificates shall equal 100%.
Record Date: With respect to any Distribution Date, the close of business
on the last Business Day immediately preceding such Distribution Date.
Related Documents: The Sale and Servicing Agreement, the Indenture, the
Certificates, the Notes, the Administration Agreement, the Certificate
Depository Agreement, the Note Depository Agreement and the Underwriting
Agreement. The Related Documents executed by any party are referred to herein as
"such party's Related Documents," "its Related Documents" or by a similar
expression.
Sale and Servicing Agreement: The Sale and Servicing Agreement, dated as
of _____ between the Trust and Green Tree, as Seller and as Servicer, as the
same may be amended and supplemented from time to time.
Secretary of State: The Secretary of State of the State of [Delaware].
Seller: Green Tree, or its successor in interest.
Servicer's Certificate: The Monthly Report delivered by the Servicer to
the Owner Trustee pursuant to Section 5.14 of the Sale and Servicing Agreement.
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Sub-Pool: Sub-Pool HI or Sub-Pool HE.
Sub-Pool HE: The sub-pool comprised of the Home Equity Contracts.
Sub-Pool HE Aggregate Liquidation Loss Principal Amount: As of any
Distribution Date, the excess, if any, of (a) the Sub-Pool HE Certificate
Principal Balance as of the preceding Distribution Date (after giving effect to
distributions of principal thereon) over (b) the sum of the Pool Scheduled
Principal Balance of Sub-Pool HE (excluding the Undelivered Contracts) plus the
Sub-Pool HE Pre-Funded Amount as of such preceding Distribution Date.
Sub-Pool HE Amount Available: As to any Distribution Date, an amount equal
to: (a) the sum of (1) the amount on deposit in the Certificate Distribution
Account in respect of the Home Equity Contracts as of the close of business on
the last day of the preceding Due Period and (2) that portion of the Sub-Pool HI
Amount Available (determined without regard to clause (a)(2) of the definition
thereof) remaining after payment of the amounts provided for in clauses (1)
through (8) of Section 5.3(b) and (3) any amount withdrawn from the Sub-Pool HE
Pre-Funding Account pursuant to SECTION 8.08 and deposited in the Certificate
Distribution Account, reduced by (b) the sum as of the close of business on the
Business Day preceding such Distribution Date of (1) the Amount Held for Future
Distribution in respect of the Home Equity Contracts, (2) amounts permitted to
be withdrawn by the Trustee from the Certificate Distribution Account in respect
of the Home Equity Contracts pursuant to clauses (ii) through (v) of Section
5.3(a), and (3) the amount, if any, withdrawn by the Trustee from the
Certificate Distribution Account pursuant to Section 5.3(e) with respect to the
immediately preceding Distribution Date.
Sub-Pool HE Average Sixty-Day Delinquency Ratio Test: To be considered
"satisfied" for any Distribution Date, when the arithmetic average of the Sub-
Pool HE Sixty-Day Delinquency Ratios for such Distribution Date and for the two
immediately preceding Distribution Dates is less than or equal to _____ %.
Sub-Pool HE Average Thirty-Day Delinquency Ratio Test: To be considered
"satisfied" for any Distribution Date, when the arithmetic average of the Sub-
Pool HE Thirty-Day Delinquency Ratios for such Distribution Date and for the two
immediately preceding Distribution Dates is less than or equal to _____ %.
Sub-Pool HE Certificate: As Certificate for [Home Improvement and Home
Equity] Loans, Series _____, Class HE: A-1 ARM, Class HE: A-1, Class HE: A-2,
Class HE: A-3, Class HE: A-4, Class HE: A-5, Class HE: A-6, Class HE: A-7 IO,
Class HE: M-1, Class HE: M-2, Class HE: B-1 or Class HE: B-2, executed and
delivered by the Trustee substantially in the form of Exhibit B.
Sub-Pool HE Certificate Principal Balance: The sum of the Class HE: A-1
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ARM, Class HE: A-1, Class HE: A-2, Class HE: A-3, Class HE: A-4, Class HE: A-5,
Class HE: A-6, Class HE: M-1, Class HE: M-2, Class HE: B-1 and Class HE: B-2
Principal Balances.
Sub-Pool HE Cumulative Realized Loss Ratio: For any Distribution Date, a
fraction, expressed as a percentage, the numerator of which is the Sub-Pool HE
Cumulative Realized Losses for that Distribution Date, and the denominator of
which is the Cut-Off Date Pool Principal Balance of Sub-Pool HE.
Sub-Pool HE Cumulative Realized Losses: As to any Distribution Date, the
sum of the Sub-Pool HE Realized Losses for that Distribution Date and each
preceding Distribution Date since the Cut-off Date.
Sub-Pool HE Cumulative Realized Losses Test: To be considered "satisfied"
for any Distribution Date, when the Sub-Pool HE Cumulative Realized Loss Ratio
as of such Distribution Date is less than or equal to _____ %.
Sub-Pool HE Current Realized Loss Ratio: As to any Distribution Date, a
fraction, expressed as a percentage, the numerator of which is the aggregate
Sub-Pool HE Realized Losses for such Distribution Date and each of the two
immediately preceding Distribution Dates, multiplied by four, and the
denominator of which is the arithmetic average of the Pool Scheduled Principal
Balance of Sub-Pool HE as of the third preceding Distribution Date and the Pool
Scheduled Principal Balance of Sub-Pool HE as of such Distribution Date.
Sub-Pool HE Current Realized Losses Test: To be considered "satisfied" for
any Distribution Date, when the Sub-Pool HE Current Realized Loss Ratio for such
Distribution Date is less than or equal to _____ %.
Sub-Pool HE Formula Principal Distribution Amount: As to any Distribution
Date, the sum of:
(a) all scheduled payments of principal due on each outstanding Home
Equity Contract during the prior Due Period as specified in the
amortization schedule at the time applicable thereto (after adjustments for
previous Partial Principal Prepayments and after any adjustment to such
amortization schedule by reason of any bankruptcy of an Obligor or similar
proceeding or any moratorium or similar waiver or grace period); plus
(b) all Partial Principal Prepayments applied and all Principal
Prepayments in Full received during the prior Due Period with respect to
the Home Equity Contracts; plus
(c) the aggregate Scheduled Principal Balance of all Home Equity
Contracts that became Liquidated Contracts during the prior Due Period plus
the amount of any reduction in principal balance of any Home Equity
Contract during the prior Due Period pursuant to bankruptcy proceedings
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involving the related Obligor; plus
(d) the aggregate Scheduled Principal Balance of all Home Equity
Contracts repurchased, and all amounts deposited in lieu of the repurchase
of any Home Equity Contract, during the prior Due Period pursuant to
Section 3.05(A) or, in the event of a substitution of a Home Equity
Contract in accordance with Section 3.05(b), any amount required to be
deposited by the Company in the Certificate Distribution Account during the
prior Due Period pursuant to Section 3.05(b)(vi); plus
(e) any amount described in clauses (a) through (d) above that was not
previously distributed because of an insufficient amount of funds available
in the Certificate Distribution Account if (1) the Distribution Date occurs
on or after the Distribution Date on which the Class HE: B-2 Principal
Balance has been reduced to zero, or (2) such amount was not covered by a
Class HE: B-2 Guaranty Payment and corresponding reduction in the Class HE:
B-2 Principal Balance; plus
(f) on the Distribution Date on or after the last day of the Pre-
Funding Period, the Sub-Pool HE Pre-Funded Fixed Rate Amount; minus
(g) the Class HE: A-1 ARM Formula Principal Distribution Amount.
Sub-Pool HE Pool Factor: At any time, the percentage derived from a
fraction, the numerator of which is the Sub-Pool HE Certificate Principal
Balance at such time and the denominator of which is the Original Sub-Pool HE
Certificate Principal Balance.
Sub-Pool HE Pre-Funded Amount: With respect to any date of determination,
the sum of the Sub-Pool HE Pre-Funded ARM Amount and the Sub-Pool HE Pre-Funded
Fixed Rate Amount.
Sub-Pool HE Pre-Funded ARM Amount: With respect to any date of
determination, the sum of (i) the amount then on deposit in the Pre-Funding ARM
Subaccount, after giving effect to any sale of Subsequent Adjustable Rate Home
Equity Contracts to the Trust on such date, and (ii) the amount then on deposit
in the Undelivered ARM Contract Subaccount, after giving effect to any release
of funds to the Company on that date pursuant to Section 8.08(c).
Sub-Pool HE Pre-Funded Fixed Rate Amount: With respect to any date of
determination, the sum of (i) the amount then on deposit in the Sub-Pool HE Pre-
Funding Fixed Rate Subaccount, after giving effect to any sale of Subsequent
Fixed Rate Home Equity Contracts to the Trust on such date, and (ii) the amount
then on deposit in the Undelivered Fixed Rate Contract Subaccount, after giving
effect to any release of funds to the Company on that date pursuant to Section
8.08(c).
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Sub-Pool HE Pre-Funding ARM Subaccount: The account so designated,
established and maintained pursuant to SECTION 8.08.
Sub-Pool HE Pre-Funding Fixed Rate Subaccount: The account so designated,
established and maintained pursuant to SECTION 8.08.
Sub-Pool HE Pre-Funding Account: The account so designated, established
and maintained pursuant to SECTION 8.08.
Sub-Pool HE Realized Losses: As to any Distribution Date, the aggregate
Net Liquidation Losses for all Home Equity Contracts that became Liquidated
Contracts during the immediately preceding Due Period.
Sub-Pool HE Senior Percentage: With respect to the Sub-Pool HE
Certificates:
(a) as to any Distribution Date prior to the Class HE: B Cross-over
Date, 100%;
(b) as to any Distribution Date on or after the Class HE: B Cross-over
Date but on or prior to the Class HE: M-2 Cross-over Date, and on which any
Class HE: B Principal Distribution Test is not satisfied, 100%;
(c) as to any Distribution Date on or after the Class HE: B Cross-over
Date but on or prior to the Class HE: M-2 Cross-over Date, and on which
each Class HE: B Principal Distribution Test is satisfied, a fraction,
expressed as a percentage, the numerator of which is the sum of the Class
HE: A Principal Balance (excluding the Class HE: A-1 ARM Principal
Balance), and the Class HE: M Principal Balance as of such Distribution
Date, and the denominator of which is the Pool Scheduled Principal Balance
of Sub-Pool HE as of the immediately preceding Distribution Date less the
Scheduled Principal Balance of the Adjustable Rate Home Equity Contracts as
of the immediately preceding Distribution Date; and
(d) as to any Distribution Date after the Class HE: M-2 Cross-
over Date, 0%.
Sub-Pool HE Sixty-Day Delinquency Ratio: As to any Distribution Date, a
fraction, expressed as a percentage, the numerator of which is the aggregate of
the outstanding balances of all Home Equity Contracts that were delinquent 60
days or more as of the end of the prior Due Period (including Home Equity
Contracts in respect of which the related real estate has been foreclosed upon
but is still in inventory), and the denominator of which is the Pool Scheduled
Principal Balance of Sub-Pool HE as of such Distribution Date.
Sub-Pool HE Thirty-Day Delinquency Ratio: As to any Distribution Date, a
fraction, expressed as a percentage, the numerator of which is the aggregate of
the outstanding balances of all Home Equity Contracts that were delinquent 30
days or
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more as of the end of the prior Due Period (including Home Equity Contracts in
respect of which the related real estate has been foreclosed upon but is still
in inventory), and the denominator of which is the Pool Scheduled Principal
Balance of Sub-Pool HE as of such Distribution Date.
Sub-Pool HI: The sub-pool comprised of the Home Improvement Contracts.
Sub-Pool HI Aggregate Liquidation Loss Principal Amount: As of any
Distribution Date, the excess, if any, of (a) the Sub-Pool HI Certificate
Principal Balance as of the preceding Distribution Date (after giving effect to
distributions of principal thereon) over (b) the Pool Scheduled Principal
Balance of Sub-Pool HI plus the Sub-Pool HI Pre-Funded Amount as of such
preceding Distribution Date for such preceding Distribution Date.
Sub-Pool HI Amount Available: As to any Distribution Date, an amount equal
to: (a) the sum of (1) the amount on deposit in the Certificate Distribution
Account in respect of the Home Improvement Contracts as of the close of business
on the last day of the preceding Due Period, (2) that portion of the Sub-Pool HE
Amount Available (determined without regard to clause (a)(2) of the definition
thereof) remaining after payment of the amounts provided for in clauses (1)
through (8) of Section 5.3(d), reduced by (b) the sum as of the close of
business on the Business Day preceding such Distribution Date of (1) the Amount
Held for Future Distribution in respect of the Home Improvement Contracts, (2)
amounts permitted to be withdrawn by the Trustee from the Certificate
Distribution Account in respect of the Home Improvement Contracts pursuant to
clauses (ii) through (v) of Section 5.3(a), and (3) the amount, if any,
withdrawn by the Trustee from the Certificate Distribution Account pursuant to
Section 5.3(c) with respect to the immediately preceding Distribution Date.
Sub-Pool HI Average Sixty-Day Delinquency Ratio Test: To be considered
"satisfied" for any Distribution Date, when the arithmetic average of the Sub-
Pool HI Sixty-Day Delinquency Ratios for such Distribution Date and for the two
immediately preceding Distribution Dates is less than or equal to _____ %.
Sub-Pool HI Average Thirty-Day Delinquency Ratio Test: To be considered
"satisfied" for any Distribution Date, when the arithmetic average of the Sub-
Pool HI Thirty-Day Delinquency Ratios for such Distribution Date and for the two
immediately preceding Distribution Dates is less than or equal to _____ %.
Sub-Pool HI Certificate: A Certificate for [Home Improvement and Home
Equity Loans], Series _____, Class HI: A-1, Class HI: A-2, Class HI: A-3, Class
HI: M-1, Class HI: M-2, Class HI: B-1 or Class HI: B-2, executed and delivered
by the Trustee substantially in the form of Exhibit B.
Sub-Pool HI Certificate Principal Balance: The sum of the Class HI: A-1,
Class HI: A-2, Class HI: A-3, Class HI: M-1, Class HI: M-2, Class HI: B-1 and
Class HI: B-2 Principal Balances.
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Sub-Pool HI Cumulative Realized Loss Ratio: For any Distribution Date, a
fraction, expressed as a percentage, the numerator of which is the Sub-Pool HI
Cumulative Realized Losses for that Distribution Date, and the denominator of
which is the Cut-Off Date Pool Principal Balance of Sub-Pool HI.
Sub-Pool HI Cumulative Realized Losses: As to any Distribution Date, the
sum of the Sub-Pool HI Realized Losses for that Distribution Date and each
preceding Distribution Date since the Cut-off Date.
Sub-Pool HI Cumulative Realized Losses Test: To be considered "satisfied"
for any Distribution Date, that the Sub-Pool HI Cumulative Realized Loss Ratio
as of such Distribution Date is less than or equal to _____ %.
Sub-Pool HI Current Realized Loss Ratio: As to any Distribution Date, a
fraction, expressed as a percentage, the numerator of which is the aggregate
Sub-Pool HI Realized Losses for such Distribution Date and each of the two
immediately preceding Distribution Dates, multiplied by four, and the
denominator of which is the arithmetic average of the Pool Scheduled Principal
Balance of Sub-Pool HI as of the third preceding Distribution Date and the Pool
Scheduled Principal Balance of Sub-Pool HI as of such Distribution Date.
Sub-Pool HI Current Realized Losses Test: To be considered "satisfied" for
any Distribution Date, when the Sub-Pool HI Current Realized Loss Ratio for such
Distribution Date is less than or equal to _____ %.
Sub-Pool HI Formula Principal Distribution Amount: As to any Distribution
Date, the sum of:
(a) all scheduled payments of principal due on each outstanding Home
Improvement Contract during the prior Due Period as specified in the
amortization schedule at the time applicable thereto (after adjustments for
previous Partial Principal Prepayments and after any adjustment to such
amortization schedule by reason of any bankruptcy of an Obligor or similar
proceeding or any moratorium or similar waiver or grace period); plus
(b) all Partial Principal Prepayments applied and all Principal
Prepayments in Full received during the prior Due Period with respect to
the Home Improvement Contracts; plus
(c) the aggregate Scheduled Principal Balance of all Home Improvement
Contracts that became Liquidated Contracts during the prior Due Period plus
the amount of any reduction in principal balance of any Home Improvement
Contract during the prior Due Period pursuant to bankruptcy proceedings
involving the related Obligor; plus
(d) the aggregate Scheduled Principal Balance of all Home Improvement
Contracts repurchased during the prior Due Period pursuant to
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SECTION 3.05(a) or, in the event of a substitution of a Home Improvement
Contract in accordance with SECTION 3.05(B), any amount required to be
deposited by the Company in the Certificate Distribution Account pursuant
to SECTION 3.05(b)(vi); Plus
(e) on the Post-Funding Distribution Date, the Sub-Pool HI Pre-Funded
Amount; plus
(f) any amount described in clauses (a) through (d) above that was not
previously distributed because of an insufficient amount of funds available
in the Certificate Distribution Account if (1) the Distribution Date occurs
on or after the Distribution Date on which the Class HI: B-2 Principal
Balance has been reduced to zero, or (2) such amount was not covered by a
Class HI: B-2 Guaranty Payment and corresponding reduction in the Class HI:
B-2 Principal Balance.
Sub-Pool HI Pool Factor: At any time, the percentage derived from a
fraction, the numerator of which is the Sub-Pool HI Certificate Principal
Balance at such time and the denominator of which is the Original Sub-Pool HI
Certificate Principal Balance.
Sub-Pool HI Pre-Funding Account: The account so designated, established
and maintained pursuant to SECTION 8.07.
Sub-Pool HI Realized Losses: As to any Distribution Date, the aggregate
Net Liquidation Losses for all Home Improvement Contracts that became Liquidated
Contracts during the immediately preceding Due Period.
Sub-Pool HI Senior Percentage: With respect to the Sub-Pool HI
Certificates:
(a) as to any Distribution Date prior to the Class HI: B Cross-over
Date, 100%;
(b) as to any Distribution Date on or after the Class HI: B Cross-over
Date but on or prior to the Class HI: M-2 Cross-over Date, and on which any
Class HI: B Principal Distribution Test is not satisfied, 100%;
(c) as to any Distribution Date on or after the Class HI: B Cross-over
Date but on or prior to the Class HI: M-2 Cross-over Date, and on which
each Class HI: B Principal Distribution Test is satisfied, a fraction,
expressed as a percentage, the numerator of which is the sum of the Class
HI: A Principal Balance and the Class HI: M Principal Balance as of such
Distribution Date, and the denominator of which is the Pool Scheduled
Principal Balance of Sub-Pool HI as of the immediately preceding
Distribution Date; and
(d) as to any Distribution Date after the Class HI: M-2 Cross-over
Date, 0%.
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Sub-Pool HI Sixty-Day Delinquency Ratio: As to any Distribution Date, a
fraction, expressed as a percentage, the numerator of which is the aggregate of
the outstanding balances of all Home Improvement Contracts that were delinquent
60 days or more as of the end of the prior Due Period (including Home
Improvement Contracts in respect of which the related real estate has been
foreclosed upon but is still in inventory), and the denominator of which is the
Pool Scheduled Principal Balance of Sub-Pool HI as of such Distribution Date.
Sub-Pool HI Thirty-Day Delinquency Ratio: As to any Distribution Date, a
fraction, expressed as a percentage, the numerator of which is the aggregate of
the outstanding balances of all Home Improvement Contracts that were delinquent
30 days or more as of the end of the prior Due Period (including Home
Improvement Contracts in respect of which the related real estate has been
foreclosed upon but is still in inventory), and the denominator of which is the
Pool Scheduled Principal Balance of Sub-Pool HI as of such Distribution Date.
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Trust: The trust created by this Agreement, the estate of which consists
of the Trust Property, which trust shall be known as "Green Tree [Home Equity
and Home Improvement Trust _____."
Trust Accounts: The Collection Account, the Reserve Account, the
Certificate Distribution Account and the Note Distribution Account.
Trust Property: The property and proceeds of every description conveyed
pursuant to Section 2.5 hereof and Section 2.01 of the Sale and Servicing
Agreement, together with the Trust Accounts (including all Eligible Investments
therein and all proceeds therefrom).
Underwriting Agreement: The Underwriting Agreement and related Terms
Agreement, each dated _____, by and among [Underwriter] and Green Tree.
Unpaid Class HE: A Interest Shortfall: As to each Class of Class HE: A
Certificates and any Distribution Date, the amount, if any, of the Class HE: A
Interest Shortfall applicable to such Class for the prior Distribution Date,
plus one month's interest thereon (to the extent payment thereof is legally
permissible) at the related Pass-Through Rate.
Unpaid Class HE: B-1 Interest Shortfall: With respect to the Class HE: B-1
Certificates and any Distribution Date, the amount, if any, of the Class HE: B-1
Interest Shortfall for the prior Distribution Date, plus one month's interest
thereon (to the extent payment thereof is legally permissible) at the Class HE:
B-1 Pass-Through Rate.
Unpaid Class HE: B-1 Liquidation Loss Interest Shortfall: With respect to
the Class HE: B-1 Certificates and any Distribution Date, the amount, if any, of
the Class HE: B-1 Liquidation Loss Interest Shortfall for the prior Distribution
Date, plus one month's interest thereon (to the extent payment thereof is
legally permissible) at the Class HE: B-1 Pass-Through Rate.
Unpaid Class HE: B-2 Interest Shortfall: With respect to the Class HE: B-2
Certificates and any Distribution Date, the amount, if any, of the Class HE: B-2
Interest Shortfall for the prior Distribution Date, plus one month's interest
thereon (to the extent payment thereof is legally permissible) at the Class HE:
B-2 Pass-Through Rate.
Unpaid Class HE: B-2 Liquidation Loss Interest Shortfall: With respect to
the Class HE: B-2 Certificates and any Distribution Date, the amount, if any, of
the Class HE: B-2 Liquidation Loss Interest Shortfall for the prior Distribution
Date, plus one month's interest thereon (to the extent payment thereof is
legally permissible) at the Class HE: B-2 Pass-Through Rate.
Unpaid Class HE: M-1 Interest Shortfall: With respect to the Class HE: M-1
Certificates and any Distribution Date, the amount, if any, of the Class HE: M-1
Interest Shortfall for the prior Distribution Date, plus one month's interest
thereon (to the extent payment thereof is legally permissible) at the Class HE:
M-1 Pass-Through Rate.
Unpaid Class HE: M-1 Liquidation Loss Interest Shortfall: With respect to
the Class HE: M-1 Certificates and any Distribution Date, the amount, if any, of
the Class HE: M-1 Liquidation Loss Interest Shortfall for the prior Distribution
Date, plus one month's interest thereon (to the extent payment thereof is
legally permissible) at the Class HE: M-1 Pass-Through Rate.
Unpaid Class HE: M-2 Interest Shortfall: With respect to the Class HE: M-2
Certificates and any Distribution Date, the amount, if any, of the Class HE: M-2
Interest Shortfall for the prior Distribution Date, plus one month's interest
thereon
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(to the extent payment thereof is legally permissible) at the Class HE: M-2
Pass-Through Rate.
Unpaid Class HE: M-2 Liquidation Loss Interest Shortfall: With respect to
the Class HE: M-2 Certificates and any Distribution Date, the amount, if any, of
the Class HE: M-2 Liquidation Loss Interest Shortfall for the prior Distribution
Date, plus one month's interest thereon (to the extent payment thereof is
legally permissible) at the Class HE: M-2 Pass-Through Rate.
Unpaid Class HI: A Interest Shortfall: As to each Class of Class HI: A
Certificates and any Distribution Date, the amount, if any, of the Class HI: A
Interest Shortfall applicable to such Class for the prior Distribution Date,
plus one month's interest thereon (to the extent payment thereof is legally
permissible) at the related Pass-Through Rate.
Unpaid Class HI: B-1 Interest Shortfall: With respect to the Class HI: B-1
Certificates and any Distribution Date, the amount, if any, of the Class HI: B-1
Interest Shortfall for the prior Distribution Date, plus one month's interest
thereon (to the extent payment thereof is legally permissible) at the Class HI:
B-1 Pass-Through Rate.
Unpaid Class HI: B-1 Liquidation Loss Interest Shortfall: With respect to
the Class HI: B-1 Certificates and any Distribution Date, the amount, if any, of
the Class HI: B-1 Liquidation Loss Interest Shortfall for the prior Distribution
Date, plus one month's interest thereon (to the extent payment thereof is
legally permissible) at the Class HI: B-1 Pass-Through Rate.
Unpaid Class HI: B-2 Interest Shortfall: With respect to the Class HI: B-2
Certificates and any Distribution Date, the amount, if any, of the Class HI: B-2
Interest Shortfall for the prior Distribution Date, plus one month's interest
thereon (to the extent payment thereof is legally permissible) at the Class HI:
B-2 Pass-Through Rate.
Unpaid Class HI: B-2 Liquidation Loss Interest Shortfall: With respect to
the Class HI: B-2 Certificates and any Distribution Date, the amount, if any, of
the Class HI: B-2 Liquidation Loss Interest Shortfall for the prior Distribution
Date, plus one month's interest thereon (to the extent payment thereof is
legally permissible) at the Class HI: B-2 Pass-Through Rate.
Unpaid Class HI: M-1 Interest Shortfall: With respect to the Class HI: M-1
Certificates and any Distribution Date, the amount, if any, of the Class HI: M-1
Interest Shortfall for the prior Distribution Date, plus one month's interest
thereon (to the extent payment thereof is legally permissible) at the Class HI:
M-1 Pass-Through Rate.
Unpaid Class HI: M-1 Liquidation Loss Interest Shortfall: With respect to
the Class HI: M-1 Certificates and any Distribution Date, the amount, if any, of
the Class
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HI: M-1 Liquidation Loss Interest Shortfall for the prior PDistribution Date,
plus one month's interest thereon (to the extent payment thereof is legally
permissible) at the Class HI: M-1 Pass-Through Rate.
Unpaid Class HI: M-2 Interest Shortfall: With respect to the Class HI: M-2
Certificates and any Distribution Date, the amount, if any, of the Class HI: M-2
Interest Shortfall for the prior Distribution Date, plus one month's interest
thereon (to the extent payment thereof is legally permissible) at the Class HI:
M-2 Pass-Through Rate.
Unpaid Class HI: M-2 Liquidation Loss Interest Shortfall: With respect to
the Class HI: M-2 Certificates and any Distribution Date, the amount, if any, of
the Class HI: M-2 Liquidation Loss Interest Shortfall for the prior Distribution
Date, plus one month's interest thereon (to the extent payment thereof is
legally permissible) at the Class HI: M-2 Pass-Through Rate.
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SECTION 1.2. Usage of Terms.
With respect to all terms used in this Agreement, the singular includes the
plural and the plural the singular; words importing any gender include the other
genders; references to "writing" include printing, typing, lithography, and
other means of reproducing words in a visible form; references to agreements and
other contractual instruments include all subsequent amendments thereto or
changes therein entered into in accordance with their respective terms and not
prohibited by this Agreement; references to Persons include their permitted
successors and assigns; and the terms "include" or "including" mean "include
without limitation" or "including without limitation." To the extent that
definitions are contained in this Agreement, or in any such certificate or other
document, such definitions shall control.
SECTION 1.3. Calculations.
All calculations of the amount of interest accrued on the Certificates
shall be made on the basis of a 360-day year consisting of twelve 30-day months.
SECTION 1.4. Section References.
All references to Articles, Sections, paragraphs, subsections, clauses,
exhibits and schedules shall be to such portions of this Agreement unless
otherwise specified.
SECTION 1.5. Action by or Consent of Certificateholders.
(a) Except as expressly provided herein, any action that may be taken by
the Certificateholders under this Agreement may be taken by a majority of the
Certificateholders voting together. Except as expressly provided herein, any
written notice or consent of the Certificateholders delivered pursuant to this
Agreement shall be effective if signed by Holders of the Certificates evidencing
not less than a majority of the Certificate Principal Balance represented by the
Certificates at the time of the delivery of such notice.
(b) Whenever any provision of this Agreement refers to action to be taken,
or consented to, by Certificateholders, such provision shall be deemed to refer
to Certificateholders of record as of the Record Date immediately preceding the
date on which such action is to be taken, or consent given, by
Certificateholders. Solely for the purposes of any action to be taken, or
consented to, by Certificateholders, any Certificate owned by or registered in
the name of [General Partner], Green Tree or any Affiliate thereof shall be
deemed not to be outstanding and the Certificate Principal Balance represented
thereby shall not be taken into account in determining whether the requisite
percentage of the Certificate Principal Balance necessary to effect any such
action or consent has been obtained; provided, however, that, solely for the
purpose of determining whether the Owner Trustee is entitled to
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rely upon any such action or consent, only Certificates which the Owner Trustee
knows to be so owned shall be so disregarded.
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ARTICLE II
CREATION OF TRUST
SECTION 2.1. Creation of Trust.
There is hereby formed a trust to be known as "Green Tree [Home Equity &
Home Improvement] Trust _____," in which name the Trust may conduct business,
make and execute contracts and other instruments and sue and be sued.
SECTION 2.2. Office.
The office of the Trust shall be in care of the Owner Trustee at the
Corporate Trust Office or at such other address in [Delaware] as the Owner
Trustee may designate by written notice to the Certificateholders and the
Depositor.
SECTION 2.3. Purposes and Powers.
The sole purpose of the Trust is to conserve the Trust Property and collect
and disburse the periodic income therefrom for the use and benefit of the Owners
and the Noteholders, and in furtherance of such purpose the Trust shall have the
power and authority, to engage in the following activities:
(i) to issue the Notes pursuant to the Indenture and the Certificates
pursuant to this Agreement and to sell the Notes and the Certificates;
(ii) with the proceeds of the sale of the Notes and the Certificates,
to pay the organizational, start-up and transactional expenses of the Trust
and to pay the balance to the Seller pursuant to the Sale and Servicing
Agreement;
(iii) to assign, grant, transfer, pledge, mortgage and convey the
Trust Property to the Indenture Trustee pursuant to the Indenture for the
benefit of the Noteholders and to hold, manage and distribute to the
Certificateholders pursuant to the terms of the Sale and Servicing
Agreement any portion of the Trust Property released from the lien of, and
remitted to the Trust pursuant to, the Indenture;
(iv) to enter into and perform its obligations under the Related
Documents to which it is or is to be a party;
(v) to engage in those activities, including entering into agreements,
that are necessary, suitable or convenient to accomplish the foregoing or
are incidental thereto or connected therewith; and
(vi) subject to compliance with the Related Documents, to engage in
such other activities as may be required in connection with conservation of
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the Trust Property and the making of distributions to the Owners and the
Noteholders.
The Trust is hereby authorized to engage in the foregoing activities and any
activities that are necessary or incidental thereto. The Trust shall not engage
in any activity other than in connection with the foregoing or other than as
required or expressly authorized by the terms of this Agreement or the Related
Documents. Similarly, the Owner Trustee shall have no discretionary duties other
than performing those ministerial acts set forth above necessary to accomplish
the purpose of this Trust as set forth in the introductory sentence of this
Section.
SECTION 2.4. Appointment of Owner Trustee.
The Depositor hereby appoints the Owner Trustee as trustee of the Trust
effective as of the date hereof, to have all the rights, powers and duties set
forth herein and in the Business Trust Statute, and the Owner Trustee hereby
accepts such appointment.
SECTION 2.5. Initial Capital Contribution of Trust Estate.
The Depositor hereby sells, assigns, transfers, conveys and sets over to
the Owner Trustee, as of the date hereof, the sum of $10.00. The Owner Trustee
hereby acknowledges receipt in trust from the Depositor, as of the date hereof,
of the foregoing contribution, which shall constitute the initial Trust Property
and shall be deposited in the Certificate Distribution Account. The Depositor
shall pay organizational expenses of the Trust as they may arise or shall, upon
the request of the Owner Trustee, promptly reimburse the Owner Trustee for any
such expenses paid by the Owner Trustee.
SECTION 2.6. Declaration of Trust.
The Owner Trustee hereby declares that it will hold the Trust Property in
trust upon and subject to the conditions set forth herein for the use and
benefit of the Owners, subject to the interests and rights in the Trust Property
granted to other Persons by the Related Documents. It is the intention and
agreement of the parties hereto that the Trust constitute a business trust under
the Business Trust Statute and that this Agreement constitute the governing
instrument of such business trust. It is the intention and agreement of the
parties hereto that, solely for income and franchise tax purposes, the Trust
shall be treated as a partnership, with the assets of the partnership being the
Contracts and other assets held by the Trust, the partners of the partnership
being the Certificateholders and the General Partner, and the Notes being debt
of the partnership. None of the parties hereto shall make the election provided
in Treasury Regulation (S) 301.7701-3(c) to have the Trust classified as an
association taxable as a corporation. The parties agree that, unless otherwise
required by appropriate tax authorities, the Trust will file or cause to be
filed annual or other necessary returns, reports and other forms consistent with
the
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characterization of the Trust as a partnership for such tax purposes. On or
before the date hereof, the Owner Trustee shall file in the Office of the
Secretary of State the Certificate of Trust required by Section 3810(a) of the
Business Trust Statute, to be effective on the Closing Date. Effective as of
the date hereof, the Owner Trustee shall have all rights, powers and duties set
forth herein and in the Business Trust Statute with respect to accomplishing the
purposes of the Trust.
SECTION 2.7. Liability of the Owners.
(a) The General Partner shall be liable directly to indemnify each injured
party for all actions, suits, losses, claims, damages, liabilities, taxes and
expenses of the Trust, to the extent not paid out of the Trust Property, to the
extent that such Person would be liable if the Trust were a partnership under
the [Delaware Revised Uniform Limited Partnership Act] and such Person were a
general partner; provided, however, that the General Partner shall not be liable
for any losses incurred by a Certificate Owner in the capacity of an investor in
the Certificates or a Note Owner in the capacity of an investor in the Notes;
provided, further, that the General Partner shall not be liable to indemnify any
injured party if such party has agreed that its recourse against the Trust for
any obligation or liability of the Trust to such party shall be limited to the
assets of the Trust. In addition, any third party creditors of the Trust (other
than in connection with the obligations described in the provisos to the
preceding sentence for which the General Partner shall not be liable) shall be
deemed third party beneficiaries of this paragraph.
(b) No Owner, other than to the extent set forth in paragraph (a), shall
have any personal liability for any liability or obligation of the Trust or by
reason of any action taken by the parties to this Agreement pursuant to any
provisions of this Agreement or any Related Document.
SECTION 2.8. Title to Trust Property.
(a) Legal title to all the Trust Property shall be vested at all times in
the Trust as a separate legal entity except where applicable law in any
jurisdiction requires title to any part of the Trust Property to be vested in a
trustee or trustees, in which case title shall be deemed to be vested in the
Owner Trustee, a co-trustee and/or a separate trustee, as the case may be.
(b) The Owners shall not have legal title to any part of the Trust
Property. The Owners shall be entitled to receive distributions with respect to
their undivided ownership interest therein only in accordance with Articles V
and IX. No transfer, by operation of law or otherwise, of any right, title or
interest by any Certificateholder of its ownership interest in the Trust
Property shall operate to terminate this Agreement or the trusts hereunder or
entitle any transferee to an accounting or to the transfer to it of legal title
to any part of the Trust Property.
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SECTION 2.9. Situs of Trust.
The Trust will be located and administered in the State of [Delaware]. All
bank accounts maintained by the Owner Trustee on behalf of the Trust shall be
located in the State of [Delaware] or the State of Minnesota. The Trust shall
not have any employees in any state other than [Delaware]; provided, however,
that nothing herein shall restrict or prohibit the Owner Trustee, the Servicer
or any agent of the Trust from having employees within or without the State of
[Delaware]. Payments will be received by the Trust only in [Delaware], and
payments will be made by the Trust only from [Delaware]. The only office of the
Trust will be at the Corporate Trust Office in [Delaware].
SECTION 2.10. Representations and Warranties of the Depositor and [General
Partner].
(a) By execution of this Agreement, the Depositor makes the following
representations and warranties with respect to itself on which the Owner Trustee
relies in accepting the Trust Property in trust and issuing the Certificates.
(i) Organization and Good Standing. It has been duly organized and is
validly existing as a corporation in good standing under the laws of the
State of Delaware, with power and authority to own its properties and to
conduct its business as such properties are currently owned and as such
business is currently conducted and is proposed to be conducted pursuant to
this Agreement and the Related Documents.
(ii) Due Qualification. It is duly qualified to do business as a
foreign corporation in good standing, and has obtained all necessary
licenses and approvals, in all jurisdictions in which the ownership or
lease of its property, the conduct of its business and the performance of
its obligations under this Agreement and the Related Documents requires
such qualification.
(iii) Power and Authority; Binding Obligations. It has the power and
authority to execute and deliver this Agreement and its Related Documents
and to perform its obligations pursuant thereto; and the execution,
delivery and performance of this Agreement and its Related Documents have
been duly authorized by all necessary corporate action. When executed and
delivered, this Agreement and the Related Documents will constitute the
legal, valid and binding obligations of the Depositor enforceable in
accordance with their terms, except as enforcement of such terms may be
limited by bankruptcy, insolvency or similar laws affecting the enforcement
of creditors' rights generally and by the availability of equitable
remedies.
(iv) No Consent Required. No consent, license, approval or
authorization or registration or declaration with any Person or with any
governmental authority, bureau or agency is required in connection with the
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execution, delivery or performance of this Agreement and the Related
Documents, except for such as have been obtained, effected or made.
(v) No Violation. The consummation of the transactions contemplated
by this Agreement and the Depositor's Related Documents and the fulfillment
of its obligations under this Agreement and its Related Documents shall not
conflict with, result in any breach of any of the terms and provisions of
or constitute (with or without notice, lapse of time or both) a default
under, its certificate of incorporation or bylaws, or any indenture,
agreement, mortgage, deed of trust or other instrument to which it is a
party or by which it is bound, or result in the creation or imposition of
any Lien upon any of its properties pursuant to the terms of any such
indenture, agreement, mortgage, deed of trust or other instrument, or
violate any law, order, rule or regulation applicable to it of any court or
of any federal or state regulatory body, administrative agency or other
governmental instrumentality having jurisdiction over it or any of its
properties.
(vi) No Proceedings. There are no proceedings or investigations
pending or, to its knowledge, threatened against it before any court,
regulatory body, administrative agency or other tribunal or governmental
instrumentality having jurisdiction over it or its properties (A) asserting
the invalidity of this Agreement or any of the Related Documents, (B)
seeking to prevent the issuance of the Certificates or the Notes or the
consummation of any of the transactions contemplated by this Agreement or
any of the Related Documents, (C) seeking any determination or ruling that
might materially and adversely affect its performance of its obligations
under, or the validity or enforceability of, this Agreement or any of the
Related Documents, or (D) seeking to adversely affect the federal income
tax or other federal, state or local tax attributes of the Certificates.
(b) By execution of this Agreement [General Partner] makes the following
representations and warranties with respect to itself on which the Owner Trustee
relies in accepting the Trust Property in trust and issuing the Certificates.
(i) Organization and Good Standing. It has been duly organized and is
validly existing as a corporation in good standing under the laws of the
State of Minnesota, with power and authority to own its properties and to
conduct its business as such properties are currently owned and as such
business is currently conducted and is proposed to be conducted pursuant to
this Agreement and the Related Documents.
(ii) Due Qualification. It is duly qualified to do business as a
foreign corporation in good standing, and has obtained all necessary
licenses and approvals, in all jurisdictions in which the ownership or
lease of its property, the conduct of its business and the performance of
its obligations under this Agreement and the Related Documents requires
such qualification.
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(iii) Power and Authority; Binding Obligation. It has the power and
authority to execute and deliver this Agreement and its Related Documents
and to perform its obligations pursuant thereto; and the execution,
delivery and performance of this Agreement and its Related Documents have
been duly authorized by all necessary corporate action. When executed and
delivered, this Agreement and the Related Documents will constitute the
legal, valid and binding obligations of [General Partner] enforceable in
accordance with their terms, except as enforcement of such terms may be
limited by bankruptcy, insolvency or similar laws affecting the enforcement
of creditors' rights generally and by the availability of equitable
remedies.
(iv) No Consent Required. No consent, license, approval or
authorization or registration or declaration with, any Person or with any
governmental authority, bureau or agency is required in connection with the
execution, delivery or performance of this Agreement and the Related
Documents, except for such as have been obtained, effected or made.
(v) No Violation. The consummation of the transactions contemplated
by this Agreement and [General Partner]'s Related Documents and the
fulfillment of its obligations under this Agreement and its Related
Documents shall not conflict with, result in any breach of any of the terms
and provisions of or constitute (with or without notice, lapse of time or
both) a default under, its certificate of incorporation or bylaws, or any
indenture, agreement, mortgage, deed of trust or other instrument to which
it is a party or by which it is bound, or result in the creation or
imposition of any Lien upon any of its properties pursuant to the terms of
any such indenture, agreement, mortgage, deed of trust or other instrument,
or violate any law, order, rule or regulation applicable to it of any court
or of any federal or state regulatory body, administrative agency or other
governmental instrumentality having jurisdiction over it or any of its
properties.
(vi) No Proceedings. There are no proceedings or investigations
pending or, to its knowledge, threatened against it before any court,
regulatory body, administrative agency or other tribunal or governmental
instrumentality having jurisdiction over it or its properties (A) asserting
the invalidity of this Agreement or any of the Related Documents, (B)
seeking to prevent the issuance of the Certificates or the Notes or the
consummation of any of the transactions contemplated by this Agreement or
any of the Related Documents, (C) seeking any determination or ruling that
might materially and adversely affect its performance of its obligations
under, or the validity or enforceability of, this Agreement or any of the
Related Documents, or (D) seeking to adversely affect the federal income
tax or other federal, state or local tax attributes of the Certificates.
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SECTION 2.11. Federal Income Tax Allocations.
Net income of the Trust for any month as determined for Federal income tax
purposes (and each item of income, gain, loss and deduction entering into the
computation thereof) shall be allocated:
(a) among the Certificateholders as of the first Record Date following
the end of such month, in proportion to their ownership of the Certificate
Principal Balance on such date, an amount of net income up to the sum of
(i) the interest payable in respect of the Certificates for such month
pursuant to Section 5.2(a), and (ii) the portion of the market discount on
the Contracts accrued during such month that is allocable to the excess of
the Original Certificate Principal Balance over their initial aggregate
issue price; and
(b) next, to the General Partner to the extent of any remaining net
income.
If the net income of the Trust for any month is insufficient for the allocations
described in clause (a) above, subsequent net income shall first be allocated to
make up such shortfall before being allocated as provided in clause (b). Net
losses of the Trust, if any, for any month as determined for Federal income tax
purposes (and each item of income, gain, loss and deduction entering into the
computation thereof) shall be allocated to the General Partner to the extent the
General Partner is reasonably expected to bear the economic burden of such net
losses, then net losses shall be allocated among the Certificateholders as of
the first Record Date following the end of such month in proportion to their
ownership of principal amount of Certificates on such Record Date until the
total amount of losses allocated to the Certificateholders pursuant to this
Section 2.11 plus the total principal amount distributed to the
Certificateholder(s) equals the Original Certificate Principal Balance of the
Certificates, and any remaining net losses shall be allocated to the General
Partner. The General Partner is authorized to modify the allocations in this
paragraph if necessary or appropriate, in its sole discretion, for the
allocations to fairly reflect the economic income, gain or loss to the General
Partner, the Certificateholders, or to comply with the provisions of the Code
and the accompanying Treasury Regulations.
SECTION 2.12. Covenants of the General Partner.
The General Partner agrees and covenants for the benefit of each Owner and
the Owner Trustee, during the term of this Agreement, and to the fullest extent
permitted by applicable law, that:
(a) it shall not sell, assign, transfer, give or encumber, by
operation of law or otherwise, in whole or in part, its general partnership
interest in the Trust;
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(b) it shall not create, incur or suffer to exist any indebtedness or
engage in any business, except, in each case, as permitted by its articles
of incorporation and the Related Documents;
(c) it shall not, for any reason, institute proceedings for the Trust
to be adjudicated a bankrupt or insolvent, or consent to the institution of
bankruptcy or insolvency proceedings against the Trust, or file a petition
seeking or consenting to reorganization or relief under any applicable
federal or state law relating to the bankruptcy of the Trust, or consent to
the appointment of a receiver, liquidator, assignee, trustee, sequestrator
(or other similar official) of the Trust or a substantial part of the
property of the Trust or cause or permit the Trust to make any assignment
for the benefit of creditors, or admit in writing the inability of the
Trust to pay its debts generally as they become due, or declare or effect a
moratorium on the debt of the Trust or take any action in furtherance of
any such action;
(d) it shall obtain from each counterparty to each Related Document to
which it or the Trust is a party and each other agreement entered into on
or after the date hereof to which it or the Trust is a party, an agreement
by each such counterparty that prior to the occurrence of the event
specified in Section 9.1(e) such counterparty shall not institute against,
or join any other Person in instituting against, it or the Trust, any
bankruptcy, reorganization, arrangement, insolvency or liquidation
proceedings or other similar proceedings under the laws of the United
States or any state of the United States; and
(e) it shall not, for any reason, withdraw or attempt to withdraw from
this Agreement, dissolve, institute proceedings for it to be adjudicated a
bankrupt or insolvent, or consent to the institution of bankruptcy or
insolvency proceedings against it, or file a petition seeking or consenting
to reorganization or relief under any applicable federal or state law
relating to bankruptcy, or consent to the appointment of a receiver,
liquidator, assignee, trustee, sequestrator (or other similar official) of
it or a substantial part of its property, or make any assignment for the
benefit of creditors, or admit in writing its inability to pay its debts
generally as they become due, or declare or effect a moratorium on its debt
or take any action in furtherance of any such action.
SECTION 2.13. Covenants of the Certificate Owners.
Each Certificate Owner by becoming a beneficial owner of a Book-Entry
Certificate agrees:
(a) to be bound by the terms and conditions of the Certificates of
which such Owner is the beneficial owner and of this Agreement, including
any supplements or amendments hereto and to perform the obligations of an
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Owner as set forth therein or herein, in all respects as if it were a
signatory hereto. This undertaking is made for the benefit of the Trust,
the Owner Trustee and all other Owners present and future.
(b) to hereby appoint the General Partner as such Owner's agent and
attorney-in-fact to sign any federal income tax information return filed on
behalf of the Trust and agree that, if requested by the Trust, it will sign
such federal income tax information return in its capacity as holder of an
interest in the Trust. Each Owner also hereby agrees that in its tax
returns it will not take any position inconsistent with those taken in any
tax returns filed by the Trust.
(c) if such Owner is other than an individual or other entity holding
its Certificate through a broker who reports securities sales on Form 1099-
B, to notify the Owner Trustee of any transfer by it of a Certificate in a
taxable sale or exchange, within 30 days of the date of the transfer.
(d) until the completion of the events specified in Section 9.1(e),
not to, for any reason, institute proceedings for the Trust, the Seller or
the General Partner to be adjudicated a bankrupt or insolvent, or consent
to the institution of bankruptcy or insolvency proceedings against the
Trust, the Seller or the General Partner, or file a petition seeking or
consenting to reorganization or relief under any applicable federal or
state law relating to bankruptcy, or consent to the appointment of a
receiver, liquidator, assignee, trustee, sequestrator (or other similar
official) of the Trust, the Seller or the General Partner or a substantial
part of its property, or cause or permit the Trust, the Seller or the
General Partner to make any assignment for the benefit of its creditors, or
admit in writing its inability to pay its debts generally as they become
due, or declare or effect a moratorium on its debt or take any action in
furtherance of any such action.
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ARTICLE III
THE CERTIFICATES
SECTION 3.1. Initial Ownership.
Upon the formation of the Trust by the contribution by the Depositor
pursuant to Section 2.5 and until the issuance of the Certificates, the
Depositor shall be the sole beneficiary of the Trust.
SECTION 3.2. The Certificates.
The Class HI: A, the Class HI: M-1, the Class HI: M-2, the Class HI: B-1,
the Class HI: B-2, the Class HE: A, the Class HE: M-1, the Class HE: M-2, the
Class HE: B-1 and the Class HE: B-2 Certificates shall be substantially in the
forms set forth in Exhibit B, and shall, on original issue, be executed by the
Trustee on behalf of the Trust to or upon the order of the Company. The
Certificates shall be evidenced by (i) one or more Class HI: A-1 Certificates
representing $ _____ in Original Class HI: A-1 Principal Balance, (ii) one or
more Class HI: A-2 Certificates representing $ _____ in Original Class HI: A-2
Principal Balance, (iii) one or more Class HI: A-3 Certificates representing $
_____ in Original Class HI: A-3 Principal Balance, (iv) one or more Class HI: M-
1 Certificates representing $ _____ in Original Class HI: M-1 Principal Balance,
(v) one or more Class HI: M-2 Certificates representing $ _____ in Original
Class HI: M-2 Principal Balance, (vi) one or more Class HI: B-1 Certificates
representing $ _____ in Original Class HI: B-1 Principal Balance, (vii) one or
more Class HI: B-2 Certificates representing $ _____ in Original Class HI: B-2
Principal Balance, (viii) one or more Class HE: A-1 ARM Certificates
representing $ _____ in Original Class HE: A-1 ARM Principal Balance, (ix) one
or more Class HE: A-1 Certificates representing $ _____ in Original Class HE: A-
1 Principal Balance, (x) one or more Class HE: A-2 Certificates representing $
_____ in Original Class HE: A-2 Principal Balance, (xi) one or more Class HE: A-
3 Certificates representing $ _____ in Original Class HE: A-3 Principal Balance,
(xii) one or more Class HE: A-4 Certificates representing $ _____ in Original
Class HE: A-4 Principal Balance, (xiii) one or more Class HE: A-5 Certificates
representing $ _____ in Original Class HE: A-5 Principal Balance; (xiv) one or
more Class HE: A-6 Certificates representing $ _____ in Original Class HE: A-6
Principal Balance; (xv) one or more Class HE: A-7 IO Certificates representing $
_____ in Original Class HE: A-7 IO Notional Amount; (xvi) one or more Class HE:
M-1 Certificates representing $ _____ in Original Class HE: M-1 Principal
Balance, (xvii) one or more Class HE: M-2 Certificates representing $ _____ in
Original Class HE: M-2 Principal Balance, (xviii) one or more Class HE: B-1
Certificates representing $ _____ in Original Class HE: B-1 Principal Balance,
and (xix) one or more Class HE: B-2 Certificates representing $ _____ in
Original Class HE: B-2 Principal Balance, beneficial ownership of such Classes
of Certificates to be held through Book-Entry Certificates in minimum dollar
denominations of $1,000.
The Certificates shall be executed by manual signature on behalf of the
Trustee by a duly authorized Responsible Officer or authorized signatory.
Certificates bearing the signatures of individuals who were at any time the
proper officers of the Trustee shall bind the Trustee, notwithstanding that such
individuals or any of them have ceased to hold such offices prior to the
execution and delivery of such Certificate, or did not hold such offices at the
date of such Certificates. No Certificate shall be entitled to any benefit
under this Agreement, or be valid for any purpose, unless such Certificate has
been executed by manual signature in accordance with this Section, and such
signature upon any Certificate shall be conclusive evidence, and the only
evidence, that such Certificate has been duly executed and delivered hereunder.
All Certificates shall be dated the date of their
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execution, except for those Certificates executed on the Closing Date, which
shall be dated the Closing Date.
SECTION 3.3. Authentication of Certificates.
Simultaneously with the sale, assignment and transfer to the Trust of the
Contracts and the delivery to the Trust of the Contract Files and the other
Trust Property pursuant to the Sale and Servicing Agreement, the Owner Trustee
shall cause Certificates in authorized denominations in an aggregate principal
amount equal to the Certificate Principal Balance to be executed on behalf of
the Trust, authenticated and delivered to or upon the order of the Depositor.
No Certificate shall entitle its Holder to any benefit under this Agreement, or
shall be valid for any purpose, unless there shall appear on such Certificate a
certificate of authentication substantially in the form set forth in Exhibit B,
executed by the Owner Trustee or the Authentication Agent, by manual or
facsimile signature; such authentication shall constitute conclusive evidence
that such Certificate shall have been duly authenticated and delivered
hereunder. _____ is hereby initially appointed Authentication Agent. All
Certificates shall be dated the date of their authentication.
SECTION 3.4. Registration of Transfer and Exchange of Certificates.
(a) The Certificate Registrar shall maintain, or cause to be maintained, at
the office or agency maintained pursuant to Section 3.8, a Certificate Register
in
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which, subject to such reasonable regulations as it may prescribe, the Owner
Trustee shall provide for the registration of Certificates and of transfers and
exchanges of Certificates as provided in this Agreement. The Owner Trustee is
hereby initially appointed Certificate Registrar for the purpose of registering
Certificates and transfers and exchanges of Certificates as provided in this
Agreement.
(b) Upon surrender for registration of transfer of any Certificate at the
office or agency maintained pursuant to Section 3.8, the Owner Trustee shall
execute, authenticate and deliver (or shall cause the Authentication Agent to
authenticate and deliver), in the name of the designated transferee or
transferees, one or more new Certificates in authorized denominations of a like
class and aggregate proportion of Certificate Principal Balance dated the date
of authentication by the Owner Trustee or any authenticating agent. At the
option of a Holder, Certificates may be exchanged for other Certificates of the
same class in authorized denominations of a like aggregate amount upon surrender
of the Certificates to be exchanged at the office or agency maintained pursuant
to Section 3.8.
(c) Every Certificate presented or surrendered for registration of transfer
or exchange shall be accompanied by a written instrument of transfer in form
satisfactory to the Owner Trustee and the Certificate Registrar duly executed by
the Holder or his attorney duly authorized in writing. Each Certificate
surrendered for registration of transfer or exchange shall be canceled and
subsequently disposed of by the Owner Trustee in accordance with its customary
practice.
(d) No service charge shall be made for any registration of transfer or
exchange of Certificates, but the Owner Trustee or the Certificate Registrar may
require payment of a sum sufficient to cover any tax or governmental charge that
may be imposed in connection with any transfer or exchange of Certificates.
(e) Except as provided in paragraph (g) below, the Book-Entry Certificates
shall at all times remain registered in the name of the Depository or its
nominee and at all times: (i) registration of the Book-Entry Certificates may
not be transferred by the Owner Trustee except to a successor depository
designated pursuant to paragraph (f) below; (ii) the Depository shall maintain
book-entry records with respect to the Certificate Owners and with respect to
ownership and transfers of such Certificates; (iii) ownership and transfers of
registration of the Book-Entry Certificates on the books of the Depository shall
be governed by applicable rules established by the Depository; (iv) the
Depository may collect its usual and customary fees, charges and expenses from
its Depository Participants; (v) the Owner Trustee shall deal with the
Depository, Depository Participants and indirect participating firms as
representatives of the Certificate Owners for purposes of exercising the rights
of Holders under this Agreement (and requests and directions for and votes of
such representatives shall not be deemed to be inconsistent if they are made
with respect to different Certificate Owners); and (vi) the Owner Trustee may
rely and shall be fully protected in relying upon information furnished by the
Depository with respect to its Depository Participants and furnished by the
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Depository Participants with respect to indirect participating firms and persons
shown on the books of such indirect participating firms as direct or indirect
Certificate Owners.
(f) If the Administrator, the Servicer or the Depository advises the Owner
Trustee in writing that the Depository is no longer willing or able properly to
discharge its duties as Depository, the Owner Trustee shall so notify the
Depository and demand the return of all Certificates held by the Depository.
The Certificate Registrar shall thereupon register the transfer of such
Certificates to a successor Depository named by the Seller and acceptable to the
Servicer and the Owner Trustee.
(g) If (x)(i) the Administrator, the Servicer or the Depository advises the
Owner Trustee in writing that the Depository is no longer willing or able
properly to discharge its responsibilities as Depository, and (ii) the
Administrator, the Seller or the Servicer is unable to locate a qualified
successor, (y) the Administrator at its sole option advises the Owner Trustee in
writing that it elects to terminate the book-entry system through the
Depository, or (z) upon the occurrence of a Servicer Termination Event,
Certificateholders representing a majority of the Certificate Principal Balance
advise the Owner Trustee through the Depository that the continuation of a book-
entry system is no longer in the best interests of the Certificate Owners of
such class or classes of Certificates, the Owner Trustee shall notify all
Certificate Owners of such class or classes, as applicable, through the
Depository of the occurrence of any such event and of the availability of
definitive, fully registered Certificates (the "Definitive Certificates") to
Certificate Owners of such class or classes, as applicable, requesting the same.
Upon surrender to the Owner Trustee of the Certificates by the Depository,
accompanied by registration instructions from the Depository for registration of
transfer, the Owner Trustee shall issue the Definitive Certificates in
accordance with such instructions. Neither the Certificate Registrar nor the
Owner Trustee shall be liable for any delay in delivery of such instructions and
may conclusively rely on, and shall be protected in relying on, such
instructions. The Seller shall pay all expenses incurred in connection with the
notification of Certificate Owners and the issuance of Definitive Certificates
hereunder. Upon the issuance of Definitive Certificates the Owner Trustee shall
recognize the Holders of the Definitive Certificates as Certificateholders
hereunder.
(h) On or prior to the Closing Date, there shall be delivered to the
Depository one Class HI: A-1 Certificate, one Class HI: A-2 Certificate, one
Class HI: A-3 Certificate, one Class HI: M-1 Certificate, one Class HI: M-2
Certificate, one Class HI: B-1 Certificate, one Class HI: B-2 Certificate, one
Class HE: A-1 ARM Certificate, two Class HE: A-1 Certificates, one Class HE: A-2
Certificate, one Class HE: A-3 Certificate, one Class HE: A-4 Certificate, one
Class HE: A-5 Certificate, one Class HE: A-6 Certificate, one Class HE: A-7 IO
Certificate, one Class HE: M-1 Certificate, one Class HE: M-2 Certificate, one
Class HE: B-1 Certificate and one Class HE: B-2 Certificate each in registered
form registered in the name of the Depository's nominee, Cede & Co., the total
face amount of which represents 100% of the Original Class Principal Balance of
each Class, respectively. Each such Certificate registered in the name of the
Depositary's nominee shall bear the following legend:
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"Unless this Certificate is presented by an authorized representative
of The Depository Trust Company, a New York corporation ("DTC"), to the
Owner Trustee or its agent for registration of transfer, exchange or
payment, and any certificate issued is registered in the name of Cede & Co.
or in such other name as requested by an authorized representative of DTC
(and any payment is made to Cede & Co. or to such other entity as is
requested by an authorized representative of DTC), ANY TRANSFER, PLEDGE OR
OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL
inasmuch as the registered owner hereof, Cede & Co., has an interest
herein."
(i) The Certificates may not be acquired by or for the account of (i) an
employee benefit plan (as defined in Section 3(3) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA")) that is subject to the
provisions of Title 1 of ERISA, (ii) a plan described in Section 4975(e)(1) of
the Internal Revenue Code of 1985, as amended, or (iii) any entity whose
underlying assets include plan assets by reason of a plan's investment in the
entity (each, a "Benefit Plan"). By accepting and holding a Certificate, the
Holder thereof shall be deemed to have represented and warranted that it is not
a Benefit Plan.
(j) Notwithstanding anything contained herein to the contrary, the Owner
Trustee shall not be responsible for ascertaining whether any transfer complies
with the registration provisions or exemptions from the Securities Act of 1933,
as amended, the Securities Act of 1934, as amended, applicable state securities
law or the Investment Company Act of 1940, as amended, or the exemption
provisions of ERISA; provided, however, that if a certificate is specifically
required to be delivered to the Owner Trustee by a purchaser or transferee of a
Certificate, the Owner Trustee shall be under a duty to examine the same to
determine whether it conforms to the requirements of this Agreement and shall
promptly notify the party delivering the same if such certificate does not so
conform.
(k) Notwithstanding the preceding provisions of this Section, the Owner
Trustee shall not be required to make, and the Certificate Registrar shall not
be required to register, transfers or exchanges of Certificates for a period of
15 days preceding the due date for any payment with respect to the Certificate.
SECTION 3.5. Mutilated, Destroyed, Lost or Stolen Certificates.
If (a) any mutilated Certificate is surrendered to the Certificate
Registrar, or the Certificate Registrar receives evidence to its satisfaction of
the destruction, loss or theft of any Certificate, and (b) there is delivered to
the Certificate Registrar and the Owner Trustee such security or indemnity as
may be required by them to save each of them harmless, then, in the absence of
notice to the Certificate Registrar or the Owner Trustee that such Certificate
has been acquired by a bona fide purchaser, the Owner Trustee on behalf of the
Trust shall execute, authenticate and deliver (or the Authentication Agent shall
authenticate and deliver), in exchange for or in lieu
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of any such mutilated, destroyed, lost or stolen Certificate, a new Certificate
of like tenor and portion of Certificate Principal Balance. In connection with
the issuance of any new Certificate under this Section 3.5, the Owner Trustee
may require the payment of a sum sufficient to cover any tax or other
governmental charge that may be imposed in relation thereto and any other
expenses (including the fees and expenses of the Owner Trustee and the
Certificate Registrar) connected therewith. Any duplicate Certificate issued
pursuant to this Section 3.5 shall constitute conclusive evidence of ownership
in the Trust, as if originally issued, whether or not the lost, stolen or
destroyed Certificate shall be found at any time.
SECTION 3.6. Persons Deemed Owners.
Prior to due presentation of a Certificate for registration of transfer,
the Owner Trustee, the Certificate Registrar and any agent of the Owner Trustee
or the Certificate Registrar may treat the person in whose name any Certificate
is registered as the owner of such Certificate for the purpose of receiving
distributions pursuant to Section 5.2 and for all other purposes whatsoever, and
neither the Owner Trustee, the Certificate Registrar nor any agent of the Owner
Trustee or the Certificate Registrar shall be affected by any notice to the
contrary.
SECTION 3.7. Access to List of Certificateholders' Names and Addresses.
The Owner Trustee shall furnish or cause to be furnished to the Servicer,
within 15 days after receipt by the Owner Trustee of a written request therefor,
a list, in such form as the Servicer may reasonably require, of the names and
addresses of the Certificateholders as of the most recent Record Date for
payment of distributions to Certificateholders. If Definitive Certificates have
been issued and three or more Certificateholders of a class, or one or more
Certificateholders evidencing not less than 25% of the Certificate Principal
Balance (hereinafter referred to as "Applicants"), apply in writing to the Owner
Trustee, and such application states that the Applicants desire to communicate
with other Certificateholders with respect to their rights under this Agreement
or under the Certificates and is accompanied by a copy of the communication that
such Applicants propose to transmit, then the Owner Trustee shall, within five
Business Days after the receipt of such application, afford such Applicants
access, during normal business hours, to the current list of Certificateholders.
Every Certificateholder, by receiving and holding a Certificate, agrees that
none of the Servicer or the Owner Trustee, nor any agent thereof, shall be held
accountable by reason of the disclosure of any such information as to the names
and addresses of the Certificateholders under this Agreement, regardless of the
source from which such information was derived.
SECTION 3.8. Maintenance of Office or Agency.
The Owner Trustee shall maintain in _____, an office or offices or agency
or agencies where Certificates may be surrendered for registration of transfer
or exchange and where notices and demands to or upon the Owner Trustee in
respect
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of the Certificates and the Related Documents may be served. The Owner Trustee
initially designates its principal corporate trust office in _____ for such
purposes. The Owner Trustee shall give prompt written notice to the Depositor
and to the Certificateholders of any change in the location of the Certificate
Register or any such office of agency.
SECTION 3.9. Appointment of Paying Agent.
The Paying Agent shall make distributions to Certificateholders from the
Certificate Distribution Account pursuant to Section 5.2 and shall report the
amounts of such distributions to the Owner Trustee. Any Paying Agent shall have
the revocable power to withdraw funds from the Certificate Distribution Account
for the purpose of making the distributions referred to above. The Owner
Trustee may revoke such power and remove the Paying Agent if the Owner Trustee
determines in its sole discretion that the Paying Agent shall have failed to
perform its obligations under this Agreement in any material respect. The
Paying Agent shall initially be _____. _____ shall be permitted to resign as
Paying Agent upon 30 days' written notice to the Owner Trustee. In the event
that _____ shall no longer be the Paying Agent, the Owner Trustee shall appoint
a successor to act as Paying Agent (which shall be a bank or trust company).
The Owner Trustee shall cause such successor Paying Agent or any additional
Paying Agent appointed by the Owner Trustee to execute and deliver to the Owner
Trustee an instrument in which such successor Paying Agent or additional Paying
Agent shall agree with the Owner Trustee that as Paying Agent, such successor
Paying Agent or additional Paying Agent will hold all sums, if any, held by it
for payment to the Certificateholders in trust for the benefit of the
Certificateholders entitled thereto until such sums shall be paid to such
Certificateholders. The Paying Agent shall return all unclaimed funds to the
Owner Trustee, and upon removal of a Paying Agent, such Paying Agent shall also
return all funds in its possession to the Owner Trustee. The provisions of
Sections 7.1, 7.3, 7.4 and 8.1 shall apply to the Owner Trustee also in its role
as Paying Agent for so long as the Owner Trustee shall act as Paying Agent and,
to the extent applicable, to any other Paying Agent appointed hereunder. Any
reference in this Agreement to the Paying Agent shall include any co-paying
agent unless the context requires otherwise.
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ARTICLE IV
ACTIONS BY OWNER TRUSTEE
SECTION 4.1. Restriction on Power of Certificate Owner and
Certificateholder.
No Certificate Owner or Certificateholder shall have any right to vote or
in any manner otherwise control the operation and management of the Trust except
as expressly provided in this Agreement.
SECTION 4.2. Prior Notice to Certificateholders with Respect to Certain
Matters.
The Owner Trustee shall not take any of the following actions, unless at
least 30 days (or such shorter period as shall be required under the
circumstances) before the taking of such action, the Owner Trustee shall have
notified the Certificateholders in writing of the proposed action and the
Certificateholders shall not have notified the Owner Trustee in writing prior to
the 30th day after such notice is given that such Certificateholders have
withheld consent or provided alternative direction:
(a) the election by the Trust to file an amendment to the Certificate
of Trust unless such amendment is required to be filed under the Business
Trust Statute or unless such amendment would not materially and adversely
affect the interests of the Certificate Owners;
(b) the amendment of the Indenture by a supplemental indenture in
circumstances where the consent of any Noteholder is required unless such
amendment would not materially and adversely affect the interests of the
Certificate Owners; or
(c) the amendment, change or modification of the Administration
Agreement, unless such amendment would not materially and adversely affect
the interests of the Certificate Owners.
SECTION 4.3. Action by Certificateholders with Respect to Bankruptcy.
The Owner Trustee shall not have the power to commence a voluntary
proceeding in bankruptcy relating to the Trust without the unanimous prior
approval of all Certificateholders and the delivery to the Owner Trustee by each
such Certificateholder of a certificate certifying that such Certificateholder
reasonably believes that the Trust is insolvent.
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SECTION 4.4. Restrictions on Certificateholders' Power.
No Certificateholder shall have any right by virtue or by availing itself
of any provisions of this Agreement to institute any suit, action, or proceeding
in equity or at law upon or under or with respect to this Agreement or any
Related Document, unless the Certificateholders are the instructing party
pursuant to Section 6.3 and unless a Certificateholder previously shall have
given to the Owner Trustee a written notice of default and of the continuance
thereof, as provided in this Agreement and unless Certificateholders evidencing
not less than 25% of the Certificate Principal Balance represented by the
Certificates shall have made written request upon the Owner Trustee to institute
such action, suit or proceeding in its own name as Owner Trustee under this
Agreement and shall have offered to the Owner Trustee such reasonable indemnity
as it may require against the costs, expenses and liabilities to be incurred
therein or thereby, and the Owner Trustee, for 30 days after its receipt of such
notice, request, and offer of indemnity, shall have neglected or refused to
institute any such action, suit, or proceeding, and during such 30-day period no
request or waiver inconsistent with such written request has been given to the
Owner Trustee pursuant to and in compliance with this Section or Section 6.3; it
being understood and intended, and being expressly covenanted by each
Certificateholder with every other Certificateholder and the Owner Trustee, that
no one or more Holders of Certificates shall have any right in any manner
whatever by virtue or by availing itself or themselves of any provisions of this
Agreement to affect, disturb, or prejudice the rights of the Holders of any
other of the Certificates, or to obtain or seek to obtain priority over or
preference to any other such Holder, or to enforce any right under this
Agreement, except in the manner provided in this Agreement and for the equal,
ratable, and common benefit of all Certificateholders. For the protection and
enforcement of the provisions of this Section 4.4, each and every
Certificateholder and the Owner Trustee shall be entitled to such relief as can
be given either at law or in equity.
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ARTICLE V
APPLICATION OF TRUST FUNDS; CERTAIN DUTIES
SECTION 5.1. Trust Accounts.
(a) On or prior to the Closing Date, the Depositor shall cause the Servicer
to establish the Certificate Distribution Account in the name of the Owner
Trustee for the benefit of the Certificateholders as provided in Section 6.01(d)
of the Sale and Servicing Agreement. The Certificate Distribution Account shall
be an Eligible Account and initially shall be a segregated trust account
established with the Indenture Trustee and maintained with the Indenture
Trustee, so long as the Indenture Trustee is acting as Paying Agent under
Section 3.9.
(b) The Owner Trustee shall possess all right, title and interest in all
funds on deposit from time to time in the Certificate Distribution Account and
in all proceeds thereof. If, at any time, the Certificate Distribution Account
ceases to be an Eligible Account, the Owner Trustee shall within 5 Business Days
(or such longer period, not to exceed 30 calendar days, as to which each Rating
Agency may consent) establish a new Certificate Distribution Account as an
Eligible Account and shall transfer any cash and/or any investments to such new
Certificate Distribution Account.
(c) All amounts held in the Certificate Distribution Account shall, to the
extent permitted by applicable laws, rules and regulations, be invested by the
Owner Trustee in Eligible Investments pursuant to the written instructions of
the Administrator that mature not later than one Business Day prior to the
Distribution Date for the Monthly Period to which such amounts relate.
Investments in Eligible Investments shall be made in the name of the Trust, and
such investments shall not be sold or disposed of prior to their maturity. Any
investment of funds in the Certificate Distribution Account shall be made in
Eligible Investments held by a financial institution with respect to which (a)
such institution has noted the Owner Trustee's interest therein by book entry or
otherwise and (b) a confirmation of the Owner Trustee's interest has been sent
to the Owner Trustee by such institution, provided that such Eligible
Investments are (i) specific certificated securities, and (ii) either (A) in the
possession of such institution or (B) in the possession of a clearing
corporation in New York or Delaware, registered in the name of such clearing
corporation, not endorsed for collection or surrender or any other purpose not
involving transfer, not containing any evidence of a right or interest
inconsistent with the Owner Trustee's security interest therein, and held by
such clearing corporation in an account of such institution. Subject to the
other provisions hereof, the Owner Trustee shall have sole control over each
such investment and the income thereon, and any certificate or other instrument
evidencing any such investment, if any, shall be delivered directly to the Owner
Trustee or its agent, together with each document of transfer, if any, necessary
to transfer title to such investment to the Owner Trustee in a manner which
complies
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with this Section 5.1. All interest, dividends, gains upon sale and other income
from, or earnings on investment of funds in the Certificate Distribution Account
shall be distributed on the next Distribution Date pursuant to Section 5.2(a).
The Seller shall deposit in the Certificate Distribution Account an amount equal
to any net loss on such investments immediately as realized.
SECTION 5.2. Monthly Payments on Certificates
(a) Subject to the terms of this Article V, each holder of a Certificate as
of a Record Date shall be paid on the next succeeding Distribution Date by check
mailed to such Certificateholder at the address for such Certificateholder
appearing on the Certificate Register (or, if such Certificateholder holds
Certificates of a Class with an aggregate Percentage Interest of at least 5% of
such Class and so requests, by wire transfer pursuant to instructions delivered
to the Trustee at least 10 days prior to such Distribution Date), the sum equal
to such Certificateholder's Percentage Interest of the Class HI: A-1
Distribution Amount, the Class HI: A-2 Distribution Amount, the Class HI: A-3
Distribution Amount, the Class HI: M-1 Distribution Amount plus any amounts
distributable pursuant to Sections 5.3(b)(8)(i) and 5.3(c), the Class HI: M-2
Distribution Amount plus any amounts distributable pursuant to Sections
5.3(b)(8)(ii) and 5.3(c), the Class HI: B-1 Distribution Amount plus any amounts
distributable pursuant to Sections 5.3(b)(8)(iii) and 5.3(c), the Class HI: B-2
Distribution Amount plus any amounts distributable pursuant to Section
5.3(b)(8)(iv), any Class HI: B-2 Guaranty Payment, the Class HE: A-1 ARM
Distribution Amount, the Class HE: A-1 Distribution Amount, the Class HE: A-2
Distribution Amount, the Class HE: A-3 Distribution Amount, the Class HE: A-4
Distribution Amount, the Class HE: A-5 Distribution Amount, the Class HE: A-6
Distribution Amount, the Class HE: A-7 IO Distribution Amount, the Class HE: M-1
Distribution Amount plus any amounts distributable pursuant to Sections
5.3(d)(8)(i) and 5.3(e), the Class HE: M-2 Distribution Amount plus any amounts
distributable pursuant to Sections 5.3(d)(8)(ii) and 5.3(e), the Class HE: B-1
Distribution Amount plus any amounts distributable pursuant to Sections
5.3(d)(8)(iii) and 5.3(e), the Class HE: B-2 Distribution Amount plus any
amounts distributable pursuant to Section 5.3(d)(8)(iv), or any Class HE: B-2
Guaranty Payment, as applicable. Final payment of any Certificate shall be made
only upon presentation of such Certificate at the office or agency of the Paying
Agent.
(b) Each distribution with respect to a Book-Entry Certificate shall be
paid to the Depository, which shall credit the amount of such distribution to
the accounts of its Depository Participants in accordance with its normal
procedures. Each Depository Participant shall be responsible for disbursing
such distribution to the Certificate Owners that it represents and to each
indirect participating brokerage firm (a "brokerage firm" or "indirect
participating firm") for which it acts as agent. Each brokerage firm shall be
responsible for disbursing funds to the Certificate Owners that it represents.
All such credits and disbursements with respect to a Book-Entry Certificate are
to be made by the Depository and the Depository Participants in accordance with
the provisions of the Book-Entry Certificates. Neither the Trustee, the
Certificate Registrar nor the Company shall have any responsibility therefor
except as otherwise provided by applicable law. To the extent applicable and
not contrary to the rules of the Depository, the Trustee shall comply with the
provisions of the form of the Certificates as set forth in Exhibit B hereto.
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(c) The Trustee shall either act as the paying agent or appoint an Eligible
Institution to be the paying agent (in either such case, the "Paying Agent") to
make the payments to the Certificateholders required hereunder. The Trustee's
corporate trust operations department, with an office at _____, shall initially
act as Paying Agent. The Trustee shall require the Paying Agent (if other than
the Trustee) to agree in writing that all amounts held by the Paying Agent for
payment hereunder will be held in trust for the benefit of the
Certificateholders and that it will notify the Trustee of any failure by the
Servicer to make funds available to the Paying Agent for the payment of amounts
due on the Certificates.
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SECTION 5.3. Application of Funds in Certificate Distribution Account.
(a) On each Payment Date the Owner Trustee or the Paying Agent will,
based on the information contained in the Servicer's Certificate delivered on
the related Determination Date pursuant to Section 5.14 of the Sale and
Servicing Agreement, distribute to Certificateholders, on a pro rata basis to
the extent of the funds available, amounts deposited in the Certificate
Distribution Account to make payments in the amounts and in the manner provided
for in Sections 5.3(b) and 5.3(d) below.
(b) On each Distribution Date, the Trustee shall apply the Sub-Pool HI
Amount Available (as determined on the immediately preceding Determination Date)
in the Certificate Distribution Account to make payment in the following order
of priority, subject to the last sentence of this Section 5.3(b):
(1) if neither the Company nor a wholly owned subsidiary of the
Company is the Servicer, to pay, with respect to the Home Improvement
Contracts, the Monthly Servicing Fee and any other compensation owed to the
Servicer pursuant to SECTION 7.03;
(2) to pay the Class HI: A Formula Interest Distribution Amount as
follows (and in the following order of priority):
(i) the amount in clause (a)(1) of the definition of Class HI: A
Formula Distribution Amount to the Class HI: A-1 Certificateholders; the
amount in clause (a)(2) of the definition of Class HI: A Formula
Distribution Amount to the Class HI: A-2 Certificateholders; the amount in
clause (a)(3) of the definition of Class HI: A Formula Distribution Amount
to the Class HI: A-3 Certificateholders; or, if the Sub-Pool HI Amount
Available is less than the amount necessary to pay all Class HI: A Formula
Interest Distribution Amounts, pro rata to each Class of Class HI: A
Certificates in accordance with their respective entitlements to interest;
and
(ii) to each Class of Class HI: A Certificates the amount, if
any, of the Unpaid Class HI: A Interest Shortfall of such Class, or, if the
remaining Sub-Pool HI Amount Available is less than the amount necessary to
pay all Unpaid Class HI: A Interest Shortfalls, pro rata to each Class of
Class HI: A Certificates based on the Unpaid Class HI: A Interest Shortfall
of each such Class;
(3) after payment of the amounts specified in clauses (1) and (2)
above, to pay principal in respect of the Class HI: A Certificates as
follows:
(i) if there is a Class HI: A Liquidation Loss Principal Amount
as to such Distribution Date, the remaining Sub-Pool HI Amount Available,
pro rata to each Class of Class HI: A Certificates based on the Class
Principal Balance of each Class (but in no event shall such amount exceed
the Class Principal Balance of any such Class); and
(ii) if there is no Class HI: A Liquidation Loss Principal Amount
as to such Distribution Date:
(A) if such Distribution Date is on or prior to the Class HI: A-1
Cross-over Date, the Sub-Pool HI Senior Percentage of
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the Sub-Pool HI Formula Principal Distribution Amount to the Class HI: A-1
Certificateholders, but in no event more than is necessary to reduce the
Class HI: A-1 Principal Balance to zero;
(B) if such Distribution Date is on or after the Class HI: A-1
Cross-over Date, but on or prior to the Class HI: A-2 Cross-over Date, the
Sub-Pool HI Senior Percentage of the Sub-Pool HI Formula Principal
Distribution Amount to the Class HI: A-2 Certificateholders (reduced, if
such Distribution Date is on the Class HI: A-1 Cross-over Date, by that
portion of the Sub-Pool HI Senior Percentage of the Sub-Pool HI Formula
Principal Distribution Amount to be distributed to the Class HI: A-1
Certificateholders on such date in accordance with clause (A) above), but
in no event more than is necessary to reduce the Class HI: A-2 Principal
Balance to zero; and
(C) if such Distribution Date is on or after the Class HI: A-2
Cross-over Date, but on or prior to the Class HI: A-3 Cross-over Date, the
Sub-Pool HI Senior Percentage of the Sub-Pool HI Formula Principal
Distribution Amount to the Class HI: A-3 Certificateholders (reduced, if
such Distribution Date is on the Class HI: A-2 Cross-over Date, by that
portion of the Sub-Pool HI Senior Percentage of the Sub-Pool HI Formula
Principal Distribution Amount to be distributed to the Class HI: A-2
Certificateholders on such date in accordance with clause (B) above), but
in no event more than is necessary to reduce the Class HI: A-3 Principal
Balance to zero.
(4) after payment of the amounts specified in clauses (1) through (3)
above, to the Class HI: M-1 Certificateholders as follows (and in the
following order of priority):
(i) the amount in clause (a) of the definition of Class HI: M-1
Formula Distribution Amount;
(ii) any Unpaid Class HI: M-1 Interest Shortfall; and
(iii) the amount in clause (c) of the definition of Class HI: M-1
Formula Distribution Amount;
(5) after payment of the amounts specified in clauses (1) through (4)
above, to the Class HI: M-2 Certificateholders as follows (and in the
following order of priority):
(i) the amount in clause (a) of the definition of Class HI: M-2
Formula Distribution Amount;
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(ii) any Unpaid Class HI: M-2 Interest Shortfall; and
(iii) the amount in clause (c) of the definition of Class HI: M-2
Formula Distribution Amount;
(6) after payment of the amounts specified in clauses (1) through (5)
above, to the Class HI: B-1 Certificateholders as follows (and in the
following order of priority):
(i) the amount in clause (a) of the definition of Class HI: B-1
Formula Distribution Amount;
(ii) any Unpaid Class HI: B-1 Interest Shortfall; and
(iii) the amount in clause (c) of the definition of Class HI: B-1
Formula Distribution Amount;
(7) after payment of the amounts specified in clauses (1) through (6)
above, to the Class HI: B-2 Certificateholders as follows (and in the
following order of priority):
(i) the amount in clause (a) of the definition of Class HI: B-2
Formula Distribution Amount;
(ii) any Unpaid Class HI: B-2 Interest Shortfall; and
(iii) the amount in clause (c) of the definition of Class HI: B-2
Formula Distribution Amount;
(8) after payment of the amounts specified in clauses (1) through (7)
above, to the Class HI: M and Class HI: B Certificateholders as follows
(and in the following order of priority):
(i) to the Class HI: M-1 Certificateholders, first an amount
equal to the amount specified in clause (a) of the definition of the term
"Class HI: M-1 Formula Liquidation Loss Interest Distribution Amount" and
then to any Unpaid Class HI: M-1 Liquidation Loss Interest Shortfall;
(ii) to the Class HI: M-2 Certificateholders, first an amount
equal to the amount specified in clause (a) of the definition of the term
"Class HI: M-2 Formula Liquidation Loss Interest Distribution Amount" and
then to any Unpaid Class HI: M-2 Liquidation Loss Interest Shortfall;
(iii) to the Class HI: B-1 Certificateholders, first an amount
equal to the amount specified in clause (a) of the definition of the term
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"Class HI: B-1 Formula Liquidation Loss Interest Distribution Amount" and
then to any Unpaid Class HI: B-1 Liquidation Loss Interest Shortfall; and
(iv) to the Class HI: B-2 Certificateholders, first an amount
equal to the amount specified in clause (a) of the definition of the term
"Class HI: B-2 Formula Liquidation Loss Interest Distribution Amount" and
then to any Unpaid Class HI: B-2 Liquidation Loss Interest Shortfall;
(9) after payment of the amounts specified in clauses (1) through (8),
above, if the Sub-Pool HE Amount Available for such Distribution Date
(determined without regard to clause (a)(2) of the definition thereof) is
less than the amounts provided for in clauses (1) through (8) of Section
5.3(d), to add to the Sub-Pool HE Amount Available the amount of such
deficiency (or the remaining Sub-Pool HI Amount Available, if less);
(10) if the Company or a wholly owned subsidiary of the Company is the
Servicer, to pay the Servicer the Monthly Servicing Fee with respect to the
Home Improvement Contracts;
(11) to reimburse the Trustee or any successor Servicer for any
payments of FHA Insurance premiums in respect of FHA-Insured Contracts not
paid by the Company and for which the Trustee or such successor Servicer
has not been reimbursed by the Company;
(12) to reimburse the Servicer or the Trustee, as applicable, for any
unreimbursed Advances made with respect to the Home Improvement Contracts
in respect of current or prior Distribution Dates;
(13) [Reserved];
(14) to reimburse the Company for any prior unreimbursed Class HI: B-2
Guaranty Payments;
(15) to pay the Class HI: B-2 Guarantee Fee to the Company; and
(16) to pay the remainder, if any, of the Sub-Pool HI Amount Available
to the [Company].
(c) If the applicable Monthly Report indicates a Class HI: M-1 Interest
Deficiency Amount, a Class HI: M-2 Interest Deficiency Amount and/or a Class HI:
B-1 Interest Deficiency Amount for such Distribution Date, the Trustee shall,
provided that there is no Class HI: A Interest Shortfall for such Distribution
Date, withdraw from the Certificate Distribution Account (to the extent of funds
on deposit therein in respect of Home Improvement Contracts two Business Days
prior to such Distribution Date, after taking into account the distribution of
the Sub-Pool
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HI Amount Available pursuant to Section 5.3(b) and any Class HI: B-2 Guaranty
Payment to be distributed on such Distribution Date) an amount equal to the
lesser of (i) the excess of such funds, after giving effect to any payment
required as of the next succeeding Distribution Date under Section 5.3(b)(1),
over the amount payable to Class HI: A Certificateholders on the next succeeding
Distribution Date under clauses (a) and (b) of the definition of Class HI: A
Formula Distribution Amount and (ii) the sum of the Class HI: M-1 Interest
Deficiency Amount, the Class HI: M-2 Interest Deficiency Amount and the Class
HI: B-1 Interest Deficiency Amount, and distribute such amount, first, to the
Class HI: M-1 Certificateholders up to the amount of any Class HI: M-1 Interest
Deficiency Amount, then to the Class HI: M-2 Certificateholders up to the amount
of any Class HI: M-2 Interest Deficiency Amount, and then to the Class HI: B-1
Certificateholders up to the amount of any Class HI: B-1 Interest Deficiency
Amount.
(d) On each Distribution Date, the Trustee shall apply the Sub-Pool HE
Amount Available (as determined on the immediately preceding Determination Date)
in the Certificate Distribution Account to make payment in the following order
of priority, subject to the last sentence of this Section 5.3(d):
(1) if neither the Company nor a wholly owned subsidiary of the
Company is the Servicer, to pay, with respect to the Home Equity Contracts,
the Monthly Servicing Fee and any other compensation owed to the Servicer
pursuant to SECTION 7.03;
(2) to pay the Class HE: A Formula Interest Distribution Amount as
follows (and in the following order of priority):
(i) the amount in clause (a)(1) of the definition of Class HE: A
Formula Distribution Amount to the Class HE: A-1 ARM Certificateholders;
the amount in clause (a)(2) of the definition of Class HE: A Formula
Distribution Amount to the Class HE: A-1 Certificateholders; the amount in
clause (a)(3) of the definition of Class HE: A Formula Distribution Amount
to the Class HE: A-2 Certificateholders; the amount in clause (a)(4) of the
definition of Class HE: A Formula Distribution Amount to the Class HE: A-3
Certificateholders; the amount in clause (a)(5) of the definition of Class
HE: A Formula Distribution Amount to the Class HE: A-4 Certificateholders;
the amount in clause (a)(6) of the definition of Class HE: A Formula
Distribution Amount to the Class HE: A-5 Certificateholders; the amount in
clause (a)(7) of the definition of Class HE: A Formula Distribution Amount
to the Class HE: A-6 Certificateholders; the amount in clause (a)(8) of the
definition of Class HE: A Formula Distribution Amount to the Class HE: A-7
IO Certificateholders; or, if the Sub-Pool HE Amount Available is less than
the amount necessary to pay all Class HE: A Formula Interest Distribution
Amounts, pro rata to each Class of Class HE: A Certificates in accordance
with their respective entitlements to interest; and
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(ii) to each Class of Class HE: A Certificates the amount, if
any, of the Unpaid Class HE: A Interest Shortfall of such Class or, if
the remaining Sub-Pool HE Amount Available is less than the amount
necessary to pay all Unpaid Class HE: A Interest Shortfalls, pro rata
to each Class of Class HE: A Certificates based on the Unpaid Class
HE: A Interest Shortfall of each such Class;
(3) after payment of the amounts specified in clauses (1) and (2)
above, to pay principal in respect of the Class HE: A Certificates as
follows:
(i) if there is a Class HE: A Liquidation Loss Principal Amount
as to such Distribution Date, the remaining Sub-Pool HE Amount
Available, pro rata to each Class of Class HE: A Certificates (other
than the Class A-7 IO Certificates) based on the Class Principal
Balance of each Class (but in no event shall such amount for any Class
exceed the Class Principal Balance of any such Class); and
(ii) if there is no Class HE: A Liquidation Loss Principal
Amount as to such Distribution Date, and if such Distribution Date is
on or prior to the Class HE: A-6 Cross-over Date, the remaining Sub-
Pool HE Amount Available up to the Class HE: A Formula Principal
Distribution Amount as follows:
(A) if the remaining Sub-Pool HE Amount Available is less
than the Class HE: A Formula Principal Distribution Amount, then pro
rata to each Class of Class HE: A Certificates (other than the Class
HE: A-7 IO Certificates) based upon the amounts that would have been
distributed pursuant to clause (B), below, had the remaining Sub-Pool
HE Amount Available been equal to the Class HE: A Formula Principal
Distribution Amount;
(B) if the remaining Sub-Pool HE Amount Available is not
less than the Class HE: A Formula Principal Distribution Amount, then
(a) to the Class HE: A-1 ARM Certificateholders, the
Class HE: A-1 ARM Formula Principal Distribution Amount;
(b) to the Class HE: A-6 Certificateholders, the Class
HE: A-6 Lockout Pro Rata Distribution Amount, if any, but in no
event more than is necessary to reduce the Class HE: A-6
Principal Balance to zero;
(c) if such Distribution Date is on or prior to the
Class HE: A-1 Cross-over Date, to the Class HE: A-1
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Certificateholders, but in no event more than is necessary to
reduce the Class HE: A-1 Principal Balance to zero;
(d) if such Distribution Date is on or after the Class
HE: A-1 Cross-over Date, but on or prior to the Class HE: A-2
Cross-over Date, to the Class HE: A-2 Certificateholders, but in
no event more than is necessary to reduce the Class HE: A-2
Principal Balance to zero;
(e) if such Distribution Date is on or after the Class
HE: A-2 Cross-over Date, but on or prior to the Class HE: A-3
Cross-over Date, to the Class HE: A-3 Certificateholders, but in
no event more than is necessary to reduce the Class HE: A-3
Principal Balance to zero;
(f) if such Distribution Date is on or after the Class
HE: A-3 Cross-over Date, but on or prior to the Class HE: A-4
Cross-over Date, to the Class HE: A-4 Certificateholders, but in
no event more than is necessary to reduce the Class HE: A-4
Principal Balance to zero;
(g) if such Distribution Date is on or after the Class
HE: A-4 Cross-over Date, but on or prior to the Class HE: A-5
Cross-over Date, to the Class HE: A-5 Certificateholders, but in
no event more than is necessary to reduce the Class HE: A-5
Principal Balance to zero;
(h) if such Distribution Date is on or after the Class
HE: A-5 Cross-over Date, but on or prior to the Class HE: A-6
Cross-over Date, to the Class HE: A-6 Certificateholders, but in
no event more than is necessary (after taking into account any
distribution to the Class HE: A-6 Certificateholders pursuant to
clause (b) above) to reduce the Class HE: A-6 Principal Balance
to zero.
(4) after payment of the amounts specified in clauses (1) through (3)
above, to the Class HE: M-1 Certificateholders as follows (and in the
following order of priority):
(i) the amount in clause (a) of the definition of Class HE: M-1
Formula Distribution Amount;
(ii) any Unpaid Class HE: M-1 Interest Shortfall; and
(iii) the amount in clause (c) of the definition of Class HE:
M-1 Formula Distribution Amount;
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(5) after payment of the amounts specified in clauses (1) through (4)
above, to the Class HE: M-2 Certificateholders as follows (and in the
following order of priority):
(i) the amount in clause (a) of the definition of Class HE: M-2
Formula Distribution Amount;
(ii) any Unpaid Class HE: M-2 Interest Shortfall; and
(iii) the amount in clause (c) of the definition of Class HE: M-2
Formula Distribution Amount;
(6) after payment of the amounts specified in clauses (1) through (5)
above, to the Class HE: B-1 Certificateholders as follows (and in the
following order of priority):
(i) the amount in clause (a) of the definition of Class HE: B-1
Formula Distribution Amount;
(ii) any Unpaid Class HE: B-1 Interest Shortfall; and
(iii) the amount in clause (c) of the definition of Class HE: B-1
Formula Distribution Amount;
(7) after payment of the amounts specified in clauses (1) through (6)
above, to the Class HE: B-2 Certificateholders as follows (and in the
following order of priority):
(i) the amount in clause (a) of the definition of Class HE: B-2
Formula Distribution Amount;
(ii) any Unpaid Class HE: B-2 Interest Shortfall; and
(iii) the amount in clause (c) of the definition of Class HE:
B-2 Formula Distribution Amount;
(8) after payment of the amounts specified in clauses (1) through (7)
above, to the Class HE: M and Class HE: B Certificateholders as follows
(and in the following order of priority):
(i) to the Class HE: M-1 Certificateholders, first an amount
equal to the amount specified in clause (a) of the definition of the term
"Class HE: M-1 Formula Liquidation Loss Interest Distribution Amount" and
then to any Unpaid Class HE: M-1 Liquidation Loss Interest Shortfall;
(ii) to the Class HE: M-2 Certificateholders, first an amount
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equal to the amount specified in clause (a) of the definition of the term
"Class HE: M-2 Formula Liquidation Loss Interest Distribution Amount" and
then to any Unpaid Class HE: M-2 Liquidation Loss Interest Shortfall;
(iii) to the Class HE: B-1 Certificateholders, first an amount
equal to the amount specified in clause (a) of the definition of the term
"Class HE: B-1 Formula Liquidation Loss Interest Distribution Amount" and
then to any Unpaid Class HE: B-1 Liquidation Loss Interest Shortfall; and
(iv) to the Class HE: B-2 Certificateholders, first an amount
equal to the amount specified in clause (a) of the definition of the term
"Class HE: B-2 Formula Liquidation Loss Interest Distribution Amount" and
then to any Unpaid Class HE: B-2 Liquidation Loss Interest Shortfall.
(9) after payment of the amounts specified in clauses (1) through
(10) above, if the Sub-Pool HI Amount Available for such Distribution Date
(determined without regarding to clause (a)(2) of the definition thereof)
is less than the amounts provided for in clauses (1) through (8) of Section
5.3(b), to add to the Sub-Pool HI Amount Available the amount of such
deficiency (or the remaining Sub-Pool HE Amount Available, if less).
(10) if the Company or a wholly owned subsidiary of the Company is the
Servicer, to pay the Servicer the Monthly Servicing Fee with respect to the
Home Equity Contracts;
(11) to reimburse the Servicer or the Trustee, as applicable, for any
unreimbursed Advances made with respect to the Home Equity Contracts in
respect of current or prior Distribution Dates and to reimburse the Company
for any unreimbursed advances made pursuant to SECTION 8.02(c);
(12) [Reserved];
(13) to reimburse the Company for any prior unreimbursed Class HE: B-2
Guaranty Payments;
(14) to pay the Class HE: B-2 Guarantee Fee to the Company; and
(15) to pay the remainder, if any, of the Sub-Pool HE Amount Available
to the Company.
(e) If the applicable Monthly Report indicates a Class HE: M-1 Interest
Deficiency Amount, a Class HE: M-2 Interest Deficiency Amount and/or a Class HE:
B-1 Interest Deficiency Amount for such Distribution Date, the Trustee shall,
provided that there is no Class HE: A Interest Shortfall for such Distribution
Date,
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withdraw from the Certificate Distribution Account (to the extent of funds on
deposit therein in respect of Home Equity Contracts two Business Days prior to
such Distribution Date, after taking into account the distribution of the Sub-
Pool HE Amount Available pursuant to Section 5.3(d) and any Class HE: B-2
Guaranty Payment to be distributed on such Distribution Date) an amount equal to
the lesser of (i) the excess of such funds, after giving effect to any payment
required as of the next succeeding Distribution Date under Section 5.3(d)(1),
over the amount payable to Class HE: A Certificateholders on the next succeeding
Distribution Date under clauses (a) and (b) of the definition of Class HE: A
Formula Distribution Amount and (ii) the sum of the Class HE: M-1 Interest
Deficiency Amount, the Class HE: M-2 Interest Deficiency Amount and the Class
HE: B-1 Interest Deficiency Amount, and distribute such amount, first, to the
Class HE: M-1 Certificateholders up to the amount of any Class HE: M-1 Interest
Deficiency Amount, then to the Class HE: M-2 Certificateholders up to the amount
of any Class HE: M-2 Interest Deficiency Amount, and then to the Class HE: B-1
Certificateholders up to the amount of any Class HE: B-1 Interest Deficiency
Amount.
(f) If the Trustee shall not have received the applicable Monthly Report by
any Distribution Date, the Trustee shall, in accordance with Sections 5.3(b) and
(d), distribute all funds then in the Certificate Distribution Account to
Certificateholders, to the extent of such funds, on such Distribution Date.
(g) On the Distribution Date following the date on which amounts received
in respect of the Seller's or the Servicer's exercise of its option to purchase
the corpus of the Trust pursuant to Section 8.01 of the Sale and Servicing
Agreement are deposited in the Certificate Distribution Account, the Owner
Trustee or the Paying Agent will distribute such amounts to Certificateholders
on a pro rata basis, taking into account any concurrent distribution made
pursuant to Section 5.2(b) or 5.2(d).
(h) On the Distribution Date on which Insolvency Proceeds are deposited in
the Certificate Distribution Account pursuant to Section 8.02 of the Sale and
Servicing Agreement (or on the Distribution Date immediately following such
deposit if such proceeds are not deposited in the Certificate Distribution
Account on a Distribution Date), the Owner Trustee will distribute the
Insolvency Proceeds so deposited in the Certificate Distribution Account to
Certificateholders on a pro rata basis, taking into account any concurrent
distribution made pursuant to Section 5.2(b) or 5.2(d).
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(i) On the Distribution Date following the date on which the Indenture
Trustee makes payments of money or property in respect of liquidation of the
Trust Property pursuant to Section 5.06 of the Indenture and deposits funds
received in connection with such liquidation in the Certificate Distribution
Account, the Owner Trustee will distribute such funds to Certificateholders on a
pro rata basis, taking into account any concurrent distribution made pursuant to
Section 5.2(a).
(j) On each Distribution Date, the Owner Trustee shall send to each
Certificateholder the statement required pursuant to Section 6.09 of the Sale
and Servicing Agreement.
(k) The Owner Trustee agrees, to the extent required by the Internal
Revenue Code, and applicable federal regulations promulgated thereunder, as the
same may be amended from time to time (collectively, the "Code"), to withhold
from each payment due hereunder or under any Certificate, United States
withholding taxes at the appropriate rate, and, on a timely basis, to deposit
such amounts with an authorized depository and make such returns, filings and
other reports in connection therewith as are required of it under the Code. Any
Certificateholder which is eligible for an exemption from or reduction of
withholding of United States federal income taxes shall, from time to time,
provide to the Owner Trustee in a timely manner all appropriate and properly
completed forms indicating such eligibility, as may be necessary to permit the
Owner Trustee not to withhold taxes from payments due to such Certificateholder.
In connection with the foregoing, the Owner Trustee shall promptly furnish to
each Certificateholder in a timely fashion such U.S. Treasury forms as are
required by the Code to be furnished to such Certificateholder indicating
payment of any taxes withheld from any payments by the Owner Trustee to such
Certificateholder. The Owner Trustee shall be fully protected in relying upon,
and each Certificateholder by its acceptance of a Certificate hereunder agrees
to indemnify and hold the Owner Trustee harmless against all claims or liability
of any kind arising in connection with or related to the Owner Trustee's
reliance upon any documents, forms or information provided by any
Certificateholder to the Owner Trustee. In addition, if the Owner Trustee has
not withheld taxes on any payment made to any Certificateholder, and the Owner
Trustee is subsequently required to remit to any taxing authority any such
amount not withheld, such Certificateholder shall return such amount to the
Owner Trustee upon written demand by the Owner Trustee. In no event shall the
Owner Trustee be liable for consequential damages to any Certificateholder.
(l) Any funds remaining in the Certificate Distribution Account after
distribution of all amounts specified in this Section 5.2 shall be distributed
to the General Partner.
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SECTION 5.4. Method of Payment.
Subject to Section 9.1(c), distributions required to be made to
Certificateholders on any Distribution Date shall be made to each
Certificateholder of record on the preceding Record Date either by wire
transfer, in immediately available funds, to the account of such Holder at a
bank or other entity having appropriate facilities therefor, if such
Certificateholder shall have provided to the Certificate Registrar appropriate
written instructions at least five Business Days prior to such Distribution Date
and such Holder's Certificates in the aggregate evidence a denomination of not
less than $1,000,000 (or if such Certificateholder is a Depository or an
Affiliate thereof), or, if not, by check mailed to such Certificateholder at the
address of such holder appearing in the Certificate Register.
SECTION 5.5. No Segregation of Monies; No Interest.
Subject to Sections 5.1 and 5.2, monies received by the Owner Trustee
hereunder need not be segregated in any manner except to the extent required by
law or by the Sale and Servicing Agreement and may be deposited under such
general conditions as may be prescribed by law, and the Owner Trustee shall not
be liable for any interest thereon.
SECTION 5.6. Accounting; Reports; Tax Returns.
(a) The Administrator has agreed pursuant to the Administration Agreement
that the Administrator shall (i) maintain (or cause to be maintained) the books
of the Trust on a calendar year basis on the accrual method of accounting, (ii)
deliver to each Owner and the General Partner, as may be required by the Code
and applicable Treasury Regulations, such information as may be required
(including Schedule K-1) to enable each Owner and the General Partner to prepare
its Federal and state income tax returns, (iii) obtain a federal tax
identification number for the Trust, and file or cause to be filed such tax
returns relating to the Trust (including a partnership information return, Form
1065), and direct the Owner Trustee to make such elections as may from time to
time be required or appropriate under any applicable state or Federal statute or
rule or regulation thereunder so as to maintain the Trust's characterization as
a partnership for Federal income tax purposes, (iv) collect or cause to be
collected any withholding tax as described in and in accordance with Section
5.2(f) with respect to income or distributions to Owners and (v) file or cause
to be filed all documents required to be filed by the Trust with the Commission
and otherwise take or cause to be taken all such actions as are notified by the
Servicer to the Administrator as being required for the Trust's compliance with
all applicable provisions of state and federal securities laws.
(b) The Owner Trustee shall make all elections pursuant to this Section 5.5
as directed in writing by the General Partner. The Owner Trustee shall elect
under Section 1278 of the Code to include in income currently any market
discount that
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accrues with respect to the Contracts. The Owner Trustee shall not make the
election provided under Section 754 of the Code.
(c) The Owner Trustee shall sign on behalf of the Trust the tax returns of
the Trust, unless applicable law requires an Owner or the General Partner to
sign such documents, in which case such documents shall be signed by the General
Partner. In signing any tax return of the Trust, the Owner Trustee shall rely
entirely upon, and shall have no liability for, information or calculations
provided by the General Partner.
(d) The General Partner shall be the "tax matters partner" of the Trust
pursuant to the Code.
(e) None of the parties hereto shall make the election provided in Treasury
Regulation (S) 301.7701-3(c) to have the Trust classified as an association
taxable as a corporation.
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ARTICLE VI
AUTHORITY AND DUTIES OF OWNER TRUSTEE
SECTION 6.1. General Authority.
The Owner Trustee is authorized and directed to execute and deliver the
Related Documents to which the Trust is to be a party and each certificate or
other document attached as an exhibit to or contemplated by the Related
Documents to which the Trust is to be a party and any amendment thereto, and on
behalf of the Trust, to direct the Indenture Trustee to authenticate and deliver
the Class A-1 Notes in the aggregate principal amount of $_____ and the Class A-
2 Notes in the aggregate principal amount of $_____. In addition to the
foregoing, the Owner Trustee is authorized, but shall not be obligated, to take
all actions required of the Trust pursuant to the Related Documents. The Owner
Trustee is further authorized, on behalf of the Trust, to enter into the
Administration Agreement, to appoint a successor Administrator and to take from
time to time such action as the General Partner recommends with respect to the
Related Documents so long as such actions are consistent with the terms of the
Related Documents.
SECTION 6.2. General Duties.
It shall be the duty of the Owner Trustee to discharge (or cause to be
discharged through the Administrator or such agents as shall be appointed) all
of its responsibilities pursuant to the terms of this Agreement and the Related
Documents and to administer the Trust in the interest of the Owners, subject to
the Related Documents and in accordance with the provisions of this Agreement.
The Owner Trustee undertakes to perform such duties, and only such duties, as
are specifically set forth in this Agreement or as it shall be directed in
writing by the instructing party. No implied covenants or agreements shall be
read into this Agreement. Notwithstanding the foregoing, the Owner Trustee
shall be deemed to have discharged its duties and responsibilities hereunder and
under the Related Documents to the extent the Administrator has agreed in the
Administration Agreement to perform any act or to discharge any duty of the
Owner Trustee hereunder or under any Related Document, and the Owner Trustee
shall not be liable for the default or failure of the Administrator to carry out
its obligations under the Administration Agreement.
SECTION 6.3. Action upon Instruction.
(a) Subject to Article IV, the Certificateholders shall have the exclusive
right to direct the actions of the Owner Trustee in the management of the Trust,
so long as such instructions are not inconsistent with the express terms set
forth herein or in any Related Document. The Certificateholders shall not
instruct the Owner Trustee in a manner inconsistent with this Agreement or the
Related Documents.
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(b) The Owner Trustee shall not be required to take any action hereunder or
under any Related Document if the Owner Trustee shall have reasonably
determined, or shall have been advised by counsel, that such action is contrary
to the terms hereof or of any Related Document or is otherwise contrary to law.
(c) No provision of this Agreement shall require the Owner Trustee to
expend or risk its own funds or otherwise incur financial liability in the
performance of its duties hereunder or in the exercise of any of its rights or
powers if it shall have reasonable grounds to believe that repayment of such
funds or adequate indemnity against such risk or liability is not reasonably
assured to it.
(d) In accepting the trusts hereby created, the Owner Trustee acts solely
as trustee hereunder and not in its individual capacity. The Owner Trustee
agrees to disburse all moneys actually received by it constituting part of the
Trust Property upon the terms of this Agreement. Notwithstanding anything in
this Agreement to the contrary, the Owner Trustee, when acting in such capacity,
shall not be personally liable or accountable to any Person, under any
circumstances, except by reason of its gross negligence, willful misconduct or
breach of its representations, warranties or covenants.
(e) The Owner Trustee shall be under no liability (except as provided in
(d) above) for any action taken by the Owner Trustee in good faith in reliance
upon any paper, order, list, demand, request, consent, affidavit, notice,
opinion, direction, endorsement, assignment, resolution, draft or other
document, believed by it to be genuine and to have been signed by the proper
party or parties or for the disposition of moneys or Trust Property pursuant to
this Agreement. As to any fact or matter, the manner of ascertainment of which
is not specifically prescribed herein, the Owner Trustee may for all purposes
hereof rely on a certificate, signed by the president or any vice president or
by the treasurer or other authorized officer of the relevant party, as to such
fact or matter, and such certificate shall constitute full protection to the
Owner Trustee for any action taken or omitted to be taken by it in good faith in
reliance thereon.
(f) Whenever the Owner Trustee is unable to decide between alternative
courses of action permitted or required by the terms of this Agreement or any
Related Document, the Owner Trustee shall promptly give notice (in such form as
shall be appropriate under the circumstances) to the Certificateholders
requesting instruction as to the course of action to be adopted, and to the
extent the Owner Trustee acts in good faith in accordance with any written
instruction received from the Certificateholders, the Owner Trustee shall not be
liable on account of such action to any Person. If the Owner Trustee shall not
have received appropriate instruction within ten days of such notice (or within
such shorter period of time as reasonably may be specified in such notice or may
be necessary under the circumstances) it may, but shall be under no duty to,
take or refrain from taking such action, not inconsistent with this Agreement or
the Related Documents, as it shall deem to be in the best interests of the
Owners, and shall have no liability to
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any Person for such action or inaction.
(g) In the event that the Owner Trustee is unsure as to the application of
any provision of this Agreement or any Related Document or any such provision is
ambiguous as to its application, or is, or appears to be, in conflict with any
other applicable provision, or in the event that this Agreement permits any
determination by the Owner Trustee or is silent or is incomplete as to the
course of action that the Owner Trustee is required to take with respect to a
particular set of facts, the Owner Trustee may give notice (in such form as
shall be appropriate under the circumstances) to the Certificateholders
requesting instruction and, to the extent that the Owner Trustee acts or
refrains from acting in good faith in accordance with any such instruction
received, the Owner Trustee shall not be liable, on account of such action or
inaction, to any Person. If the Owner Trustee shall not have received
appropriate instruction within 10 days of such notice (or within such shorter
period of time as reasonably may be specified in such notice or may be necessary
under the circumstances) it may, but shall be under no duty to, take or refrain
from taking such action, not inconsistent with this Agreement or the Related
Documents, as it shall deem to be in the best interests of the Owners, and shall
have no liability to any Person for such action or inaction.
SECTION 6.4. No Duties Except as Specified in this Agreement or in
Instructions.
The Owner Trustee shall not have any duty or obligation to manage, make any
payment with respect to, register, record, sell, dispose of, or otherwise deal
with the Trust Property, or to otherwise take or refrain from taking any action
under, or in connection with, any document contemplated hereby to which the
Trust is a party, except as expressly provided by the terms of this Agreement
(including as provided in Section 6.2) or in any written instruction received by
the Owner Trustee pursuant to Section 6.3; and no implied duties or obligations
shall be read into this Agreement or any Related Document against the Owner
Trustee. The Owner Trustee shall have no responsibility for preparing,
monitoring or filing any financing or continuation statements in any public
office at any time or otherwise to perfect or maintain the perfection of any
security interest or lien granted to it hereunder or to record this Agreement or
any Related Document; however, the Owner Trustee will from time to time execute
and deliver such financing or continuation statements as are prepared by the
Servicer and delivered to the Owner Trustee in final execution form for its
execution on behalf of the Trust for the purpose of perfecting or maintaining
the perfection of such a security interest or lien or effecting such a
recording. The Owner Trustee nevertheless agrees that it will, at its own cost
and expense (and not at the expense of the Trust), promptly take all action as
may be necessary to discharge any liens on any part of the Trust Property that
are attributable to claims against the Owner Trustee in its individual capacity
that are not related to the ownership or the administration of the Trust
Property.
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SECTION 6.5. No Action Except under Specified Documents or Instructions.
The Owner Trustee shall not manage, control, use, sell, dispose of or
otherwise deal with any part of, the Trust Property except (i) in accordance
with the powers granted to and the authority conferred upon the Owner Trustee
pursuant to this Agreement, (ii) in accordance with the Related Documents and
(iii) in accordance with any document or instruction delivered to the Owner
Trustee pursuant to Section 6.3.
SECTION 6.6. Restrictions.
The Owner Trustee shall not take any action (a) that is inconsistent with
the purposes of the Trust set forth in Section 2.3 or (b) that, to the actual
knowledge of the Owner Trustee, would result in the Trust's becoming taxable as
a corporation for Federal income tax purposes. The Owners shall not direct the
Owner Trustee to take action that would violate the provisions of this Section.
SECTION 6.7. Administration Agreement.
(a) The Administrator is authorized to execute on behalf of the Trust all
documents, reports, filings, instruments, certificates and opinions as it shall
be the duty of the Trust to prepare, file or deliver pursuant to the Related
Documents. Upon written request, the Owner Trustee shall execute and deliver to
the Administrator a power of attorney appointing the Administrator its agent and
attorney-in-fact to execute all such documents, reports, filings, instruments,
certificates and opinions.
(b) If the Administrator shall resign or be removed pursuant to the terms
of the Administration Agreement, the Owner Trustee may, and is hereby authorized
and empowered to, appoint or consent to the appointment of a successor
Administrator pursuant to the Administration Agreement.
(c) If the Administration Agreement is terminated, the Owner Trustee may,
and is hereby authorized and empowered to, appoint or consent to the appointment
of a Person to perform substantially the same duties as are assigned to the
Administrator in the Administration Agreement pursuant to an agreement
containing substantially the same provisions as are contained in the
Administration Agreement.
(d) The Owner Trustee shall promptly notify each Owner of any default by or
misconduct of the Administrator under the Administration Agreement of which the
Owner Trustee has received written notice or of which a Responsible Officer has
actual knowledge.
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ARTICLE VII
CONCERNING THE OWNER TRUSTEE
SECTION 7.1. Acceptance of Trust and Duties.
The Owner Trustee accepts the trusts hereby created and agrees to perform
its duties hereunder with respect to such trusts but only upon the terms of this
Agreement. The Owner Trustee also agrees to disburse all monies actually
received by it constituting part of the Trust Property upon the terms of the
Related Documents and this Agreement. The Owner Trustee shall not be answerable
or accountable hereunder or under any Related Document under any circumstances,
except (i) for its own willful misconduct or gross negligence, (ii) in the case
of the inaccuracy of any representation or warranty contained in Section 7.3,
(iii) for liabilities arising from the failure of the Owner Trustee to perform
obligations expressly undertaken by it in the last sentence of Section 6.4
hereof, (iv) for any investments issued by the Owner Trustee or any branch or
affiliate thereof in its commercial capacity or (v) for taxes, fees or other
charges on, based on or measured by, any fees, commissions or compensation
received by the Owner Trustee in connection with any of the transactions
contemplated by this Agreement or any Related Document. In particular, but not
by way of limitation (and subject to the exceptions set forth in the preceding
sentence):
(a) the Owner Trustee shall not be liable for any error of judgment
made in good faith by a Responsible Officer of the Owner Trustee;
(b) the Owner Trustee shall not be liable with respect to any action
taken or omitted to be taken by it in good faith in accordance with the
instructions of the Certificateholders;
(c) no provision of this Agreement or any Related Document shall
require the Owner Trustee to expend or risk funds or otherwise incur any
financial liability in the performance of any of its rights or powers
hereunder or under any Related Document if the Owner Trustee shall have
reasonable grounds for believing that repayment of such funds or adequate
indemnity against such risk or liability is not reasonably assured or
provided to it;
(d) under no circumstances shall the Owner Trustee be liable for
indebtedness evidenced by or arising under this Agreement or any of the
Related Documents, including the principal of and interest on the
Certificates or the Notes;
(e) the Owner Trustee shall not be responsible for or in respect of
the recitals herein, the validity or sufficiency of this Agreement or for
the due execution hereof by the Depositor or the General Partner or for the
form, character, genuineness, sufficiency, value or validity of any of the
Trust
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Property or for or in respect of the validity or sufficiency of the Related
Documents, other than the certificate of authentication on the
Certificates, and the Owner Trustee shall in no event assume or incur any
liability, duty, or obligation to the Indenture Trustee, any Noteholder or
to any Owner, other than as expressly provided for herein and in the
Related Documents;
(f) the Owner Trustee shall not be liable for the default or
misconduct of the Administrator, the Indenture Trustee or the Servicer
under any of the Related Documents or otherwise and the Owner Trustee shall
have no obligation or liability to monitor the performance of or to perform
the obligations of the Trust under this Agreement or the Related Documents
that are required to be performed by the Administrator under the
Administration Agreement, the Indenture Trustee under the Indenture or the
Servicer under the Sale and Servicing Agreement;
(g) the Owner Trustee shall be under no obligation to exercise any of
the rights or powers vested in it by this Agreement, or to institute,
conduct or defend any litigation under this Agreement or otherwise or in
relation to this Agreement or any Related Document, at the request, order
or direction of the Certificateholders, unless such Certificateholders have
offered to the Owner Trustee security or indemnity satisfactory to it
against the costs, expenses and liabilities that may be incurred by the
Owner Trustee therein or thereby. The right of the Owner Trustee to
perform any discretionary act enumerated in this Agreement or in any
Related Document shall not be construed as a duty, and the Owner Trustee
shall not be answerable for other than its gross negligence or willful
misconduct in the performance of any such act;
(h) The Owner Trustee shall not be under any obligation to appear in,
prosecute or defend any action, which in its opinion may require it to
incur any out-of-pocket expense or any liability unless it shall be
furnished with such reasonable security and indemnity against such expense
or liability as it may require in accordance with the terms hereof. The
Owner Trustee may, but shall be under no duty to, undertake such action as
it may deem necessary at any and all times to protect the Trust Property
and the respective rights and interests of the Noteholders and the
Certificate Owners pursuant to the terms of the Indenture and this
Agreement;
(i) The Owner Trustee may (at the expense of the Seller) consult with
counsel, and the written advice of counsel or any opinion of counsel shall
be full and complete authorization and protection in respect of any action
taken or omitted by the Owner Trustee in good faith reliance thereon; and
(j) Notwithstanding anything contained herein to the contrary, neither
_____ nor the Owner Trustee shall be required to take any action in any
jurisdiction other than in the State of [Delaware] if the taking of such
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action will (i) require the consent or approval or authorization or order
of or giving of notice to, or the registration with or the taking of any
other action in respect of, any state or other governmental authority or
agency of any jurisdiction other than the State of [Delaware]; (ii) result
in any fee, tax or other governmental charge under the laws of any
jurisdiction or any political subdivisions thereof in existence on the date
hereof other than the State of [Delaware] becoming payable by _____; or
(iii) subject _____ to personal jurisdiction in any jurisdiction other than
the State of [Delaware] for causes of action arising from acts unrelated to
the consummation of the transactions by _____ or the Owner Trustee as the
case may be, contemplated hereby. The Owner Trustee shall be entitled to
obtain (at the expense of the Seller) an opinion of counsel to determine
whether any action required to be taken pursuant to this Agreement results
in the consequences described in clauses (i), (ii) and (iii) of the
preceding sentence. In the event that said counsel advises the Owner
Trustee that such action will result in such consequences, the Owner
Trustee will appoint an additional or separate trustee to proceed with such
action.
SECTION 7.2. Furnishing of Documents.
The Owner Trustee shall furnish to the Owners, promptly upon receipt of a
written request therefor, duplicates or copies of all reports, notices,
requests, demands, certificates, financial statements and any other instruments
furnished to the Owner Trustee under the Related Documents unless the Owners
have previously received such items.
SECTION 7.3. Representations and Warranties.
The Owner Trustee hereby represents and warrants to the Depositor and the
Owners that:
(a) It is a banking corporation duly organized and validly existing in
good standing under the laws of the State of [Delaware]. It has all
requisite corporate power and authority and all franchises, grants,
authorizations, consents, orders and approvals from all governmental
authorities necessary to execute, deliver and perform its obligations under
this Agreement.
(b) It has taken all corporate action necessary to authorize the
execution and delivery by it of this Agreement and each Related Document to
which the Trust is a party, and this Agreement and each Related Document
will be executed and delivered by one of its officers who is duly
authorized to execute and deliver this Agreement on its behalf.
(c) Neither the execution nor the delivery by it of this Agreement,
nor the consummation by it of the transactions contemplated hereby nor
compliance by it with any of the terms or provisions hereof will contravene
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any Federal or [Delaware] law, governmental rule or regulation governing
the banking or trust powers of the Owner Trustee or any judgment or order
binding on it, or constitute any default under its charter documents or
bylaws or any indenture, mortgage, contract, agreement or instrument to
which it is a party or by which any of its properties may be bound or
result in the creation or imposition of any lien, charge or encumbrance on
the Trust Property resulting from actions by or claims against the Owner
Trustee individually which are unrelated to this Agreement or the Related
Documents.
SECTION 7.4. Reliance; Advice of Counsel.
(a) The Owner Trustee shall incur no liability to anyone in acting upon any
signature, instrument, notice, resolution, request, consent, order, certificate,
report, opinion, bond, or other document or paper believed by it to be genuine
and believed by it to be signed by the proper party or parties. The Owner
Trustee may accept a certified copy of a resolution of the board of directors or
other governing body of any corporate party as conclusive evidence that such
resolution has been duly adopted by such body and that the same is in full force
and effect. As to any fact or matter the method of the determination of which
is not specifically prescribed herein, the Owner Trustee may for all purposes
hereof rely on a certificate, signed by the president or any vice president or
by the treasurer or other authorized officers of the relevant party, as to such
fact or matter, and such certificate shall constitute full protection to the
Owner Trustee for any action taken or omitted to be taken by it in good faith in
reliance thereon.
(b) In the exercise or administration of the trusts hereunder and in the
performance of its duties and obligations under this Agreement or the Related
Documents, the Owner Trustee (i) may act directly or through its agents or
attorneys pursuant to agreements entered into with any of them, and the Owner
Trustee shall not be liable for the conduct or misconduct of such agents or
attorneys if such agents or attorneys shall have been selected by the Owner
Trustee with reasonable care, and (ii) may consult with counsel, accountants and
other skilled persons to be selected with reasonable care and employed by it.
The Owner Trustee shall not be liable for anything done, suffered or omitted in
good faith by it in accordance with the written opinion or advice of any such
counsel, accountants or other such persons and not contrary to this Agreement or
any Related Document.
(c) The Trustee may rely and shall be protected in acting or refraining
from taking any action in reliance on the advice of the Servicer in all matters
with respect to FHA Insurance. The Trustee shall not be liable for any actions
taken by the Servicer with respect to FHA Insurance, including but not limited
to the maintenance of such insurance and the submission of claims to FHA.
SECTION 7.5. Not Acting in Individual Capacity.
Except as provided in this Article VII, in accepting the trusts hereby
created _____ acts solely as Owner Trustee hereunder and not in its individual
capacity and all Persons having any claim against the Owner Trustee by reason of
the transactions contemplated by this Agreement or any Related Document shall
look only to the Trust Property for payment or satisfaction thereof.
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SECTION 7.6. Owner Trustee Not Liable for Certificates, Notes or
Contracts.
The recitals contained herein and in the Certificates and the Notes (other
than the signature and counter-signature of the Owner Trustee on the
Certificates and the Notes) shall be taken as the statements of the Depositor,
and the Owner Trustee assumes no responsibility for the correctness thereof.
The Owner Trustee makes no representations as to the validity or sufficiency of
this Agreement, of any Related Document or of the Certificates (other than the
signature and counter-signature of the Owner Trustee on the Certificates) or the
Notes (other than the signature or countersignature of the Owner Trustee on the
Notes), or of any Contract, Contract File or related document. The Owner
Trustee shall at no time have any responsibility or liability for or with
respect to the legality, validity and enforceability of any Contract, or for or
with respect to the sufficiency of the Trust Property or its ability to generate
the payments to be distributed to Certificateholders under this Agreement or the
Noteholders under the Indenture, including, without limitation: the existence
and contents of any Contract or any computer or other record thereof; the
validity of the assignment of any Contract to the Trust or of any intervening
assignment; the completeness of any Contract; the performance or enforcement of
any Contract; the compliance by the Seller or the Servicer with any warranty or
representation made under any Related Document or in any related document or the
accuracy of any such warranty or representation or any action of the Indenture
Trustee or the Servicer taken in the name of the Owner Trustee.
SECTION 7.7. Owner Trustee May Own Certificates and Notes.
The Owner Trustee in its individual or any other capacity may become the
owner or pledgee of Certificates or Notes and may deal with the Depositor, the
Seller, the General Partner, the Indenture Trustee and the Servicer in banking
or other transactions with the same rights as it would have if it were not Owner
Trustee.
SECTION 7.8 Certain Matters Relating to FHA Insurance.
(a) In the event the Company and the successor Servicer, if any, shall fail
to pay all FHA Insurance premiums with respect to the FHA-Insured Contracts
required by FHA Regulations, the Trustee shall pay such FHA Insurance premiums
and shall be entitled to reimbursement for such amounts pursuant to Section
5.3(b)(9).
(b) If, following the termination of the Trust pursuant to SECTION 12.04,
HUD demands reimbursement from the Trustee of an FHA Insurance claim paid on an
FHA-Insured Contract prior to the termination of the Trust, the Trustee agrees
that it will not seek to recover any such amount from any Person other than the
Servicer that submitted such claim.
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ARTICLE VIII
COMPENSATION OF OWNER TRUSTEE
SECTION 8.1. Owner Trustee's Fees and Expenses.
The Owner Trustee shall receive as compensation for its services hereunder
such fees as have been separately agreed upon before the date hereof between
Green Tree and the Owner Trustee (or, with respect to any successor Owner
Trustee, reasonable compensation for all services rendered by it hereunder), and
the Owner Trustee shall be entitled to be reimbursed by Green Tree for its other
reasonable expenses hereunder, including the reasonable compensation, expenses
and disbursements of such agents, representatives, experts and counsel as the
Owner Trustee may employ in connection with the exercise and performance of its
rights and its duties hereunder; provided, however, that the Owner Trustee shall
only be entitled to reimbursement for expenses hereunder to the extent such
expenses (i) are fees of outside counsel engaged by the Owner Trustee in respect
of the performance of its obligations hereunder or (ii) relate to the
performance of its obligations pursuant to Section 5.5 hereof.
SECTION 8.2. Indemnification.
Green Tree shall be liable as primary obligor for, and shall indemnify the
Owner Trustee in its individual capacity and its successors, assigns, agents and
servants, and any co-trustee (collectively, the "Indemnified Parties") from and
against, any and all liabilities, obligations, losses, damages, taxes, claims,
actions and suits, and any and all reasonable costs, expenses and disbursements
(including reasonable legal fees and expenses) of any kind and nature whatsoever
(collectively, "Expenses") which may at any time be imposed on, incurred by, or
asserted against the Owner Trustee or any Indemnified Party in any way relating
to or arising out of this Agreement, the Related Documents, the Trust Property,
the administration of the Trust Property or the action or inaction of the Owner
Trustee hereunder, except only that Green Tree shall not be liable for or
required to indemnify the Owner Trustee from and against Expenses arising or
resulting from any of the matters described in the third sentence of Section
7.1. The indemnities contained in this Section shall survive the resignation or
termination of the Owner Trustee or the termination of this Agreement.
SECTION 8.3. Nonrecourse Obligations.
Notwithstanding anything in this Agreement or any Related Document, the
Owner Trustee agrees in its individual capacity and in its capacity as Owner
Trustee for the Trust that all obligations of the Trust to the Owner Trustee
individually or as Owner Trustee for the Trust shall be recourse to the Trust
Property only and specifically shall not be recourse to the assets of any Owner.
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ARTICLE IX
TERMINATION
SECTION 9.1. Termination of the Trust.
(a) Unless sooner terminated pursuant to Section 9.2, the respective
obligations and responsibilities of the Depositor, the General Partner and the
Owner Trustee created by this Agreement and the Trust created by this Agreement
shall terminate upon the later of (i) the maturity or other liquidation of the
last Contract (including the purchase as of any Distribution Date by the Seller
or the Servicer at its option of the corpus of the Trust as described in Section
8.01 of the Sale and Servicing Agreement) and the subsequent distribution of
amounts in respect of such Contracts as provided in the Related Documents, or
(ii) the payment to Certificateholders of all amounts required to be paid to
them pursuant to this Agreement. In any case, there shall be delivered to the
Owner Trustee, the Indenture Trustee and the Rating Agencies an Opinion of
Counsel that all applicable preference periods under federal, state and local
bankruptcy, insolvency and similar laws have expired with respect to the
payments pursuant to clause (ii); provided, however, that in no event shall the
trust created by this Agreement continue beyond the expiration of 21 years from
the death of the last survivor of the descendants living on the date of this
Agreement of Rose Kennedy of the Commonwealth of Massachusetts; and provided,
further, that the rights to indemnification under Section 8.2 shall survive the
termination of the Trust. The Servicer shall promptly notify the Owner Trustee
of any prospective termination pursuant to this Section 9.1. Except as provided
in Section 9.2, the bankruptcy, liquidation, dissolution, termination,
resignation, expulsion, withdrawal, death or incapacity of any Owner, shall not
(x) operate to terminate this Agreement or the Trust, nor (y) entitle such
Owner's legal representatives or heirs to claim an accounting or to take any
action or proceeding in any court for a partition or winding up of all or any
part of the Trust or Trust Property nor (z) otherwise affect the rights,
obligations and liabilities of the parties hereto.
(b) Except as provided in Section 9.1(a), neither the Depositor nor any
Certificate Owner shall be entitled to revoke or terminate the Trust.
(c) Within five Business Days of receipt of notice of final distribution on
the Certificates from the Seller or the Servicer given pursuant to Section
8.01(b) of the Sale and Servicing Agreement, the Owner Trustee shall mail
written notice to the Certificateholders specifying (i) the Distribution Date
upon which final payment of the Certificates shall be made upon presentation and
surrender of Certificates at the office of the Paying Agent therein specified,
(ii) the amount of any such final payment, and (iii) that the Record Date
otherwise applicable to such Distribution Date is not applicable, payments being
made only upon presentation and surrender of the Certificates at the office of
the Paying Agent therein specified. The Owner Trustee shall give such notice to
the Certificate Registrar at the time such notice is
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given to Certificateholders. In the event such notice is given, the Indenture
Trustee shall make deposits into the Certificate Distribution Account in
accordance with Section 6.06 of the Sale and Servicing Agreement, or, in the
case of an optional purchase of Contracts pursuant to Section 8.01 of the Sale
and Servicing Agreement, shall deposit the amount specified in Section 8.01 of
the Sale and Servicing Agreement. Upon presentation and surrender of the
Certificates, the Paying Agent shall cause to be distributed to
Certificateholders amounts distributable on such Distribution Date pursuant to
Section 5.2
(d) In the event that all of the Certificateholders shall not surrender
their Certificates for cancellation within six months after the date specified
in the above-mentioned written notice, the Owner Trustee shall give a second
written notice to the remaining Certificateholders to surrender their
Certificates for cancellation and receive the final distribution with respect
thereto. If within one year after the second notice all the Certificates shall
not have been surrendered for cancellation, the Owner Trustee may take
appropriate steps, or may appoint an agent to take appropriate steps, to contact
the remaining Certificateholders concerning surrender of their Certificates, and
the cost thereof shall be paid out of the funds and other assets that remain
subject to this Agreement. Any funds which are payable to Certificateholders
remaining in the Trust after exhaustion of such remedies shall be distributed by
the Owner Trustee to The United Way (but only upon termination of this
Agreement), and the Certificateholders, by acceptance of their Certificates,
hereby waive any rights with respect to such funds.
(e) Upon the winding up of the Trust and its termination, the Owner Trustee
shall cause the Certificate of Trust to be canceled by filing a certificate of
cancellation with the Secretary of State in accordance with the provisions of
Section 3810 of the Business Trust Statute.
SECTION 9.2. Dissolution Events with respect to General Partner.
In the event that a Dissolution Event shall occur with respect to the
General Partner, the Trust will terminate unless, within 90 days after the
occurrence of the Dissolution Event with respect to the General Partner, (x) the
Holders of a majority of the Certificate Principal Balance agree in writing to
continue the business of the Trust and to the appointment of a Person to become
the General Partner and to assume the liabilities incident thereto and (y) the
Owner Trustee requests and obtains an opinion of counsel acceptable to Green
Tree to the effect that the Trust will not thereafter be an association (or
publicly traded partnership) taxable as a corporation for federal income tax
purposes. Promptly after the occurrence of a Dissolution Event, (i) the General
Partner shall give the Indenture Trustee and the Owner Trustee written notice of
the occurrence of such event, (ii) the Owner Trustee shall, upon the receipt of
such written notice, give prompt written notice to the Certificateholders and
the Indenture Trustee of the occurrence of such event and (iii) the Indenture
Trustee shall, upon receipt of written notice of the occurrence of such event
from the Owner Trustee or the Seller, give prompt written notice to the
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Noteholders of the occurrence of such event; provided, however, that any failure
to give a notice required by this sentence shall not prevent or delay, in any
manner, a termination of the Trust pursuant to the first sentence of this
Section 9.2. Upon a termination pursuant to this Section, the Owner Trustee
shall direct the Indenture Trustee to sell the assets of the Trust (other than
the Trust Accounts) at one or more private or public sales conducted in any
manner permitted by law. The proceeds of such a sale of the assets of the Trust
shall be distributed as provided in Section 8.02 of the Sale and Servicing
Agreement.
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ARTICLE X
SUCCESSOR OWNER TRUSTEES AND ADDITIONAL OWNER TRUSTEES
SECTION 10.1. Eligibility Requirements for Owner Trustee.
The Owner Trustee shall at all times be a corporation (i) satisfying the
provisions of Section 3807(a) of the Business Trust Statute; (ii) authorized to
exercise corporate trust powers; (iii) a Title I approved lender pursuant to FHA
Regulations; (iv) having a combined capital and surplus of at least $50,000,000
and subject to supervision or examination by Federal or State authorities; and
(v) having (or having a parent which has) a rating of at least _____ by _____ or
_____ by _____ or otherwise be acceptable to _____ and _____; and (vi) shall not
be an Affiliate of the Seller. If such corporation shall publish reports of
condition at least annually, pursuant to law or to the requirements of the
aforesaid supervising or examining authority, then for the purpose of this
Section, the combined capital and surplus of such corporation shall be deemed to
be its combined capital and surplus as set forth in its most recent report of
condition so published. In case at any time the Owner Trustee shall cease to be
eligible in accordance with the provisions of this Section, the Owner Trustee
shall resign immediately in the manner and with the effect specified in Section
10.2.
SECTION 10.2. Resignation or Removal of Owner Trustee.
The Owner Trustee may at any time resign and be discharged from the trusts
hereby created by giving written notice thereof to the General Partner and the
Servicer at least 30 days before the date specified in such instrument. Upon
receiving such notice of resignation, the General Partner shall promptly appoint
a successor Owner Trustee meeting the qualifications set forth in Section 10.1
by written instrument, in duplicate, one copy of which instrument shall be
delivered to the resigning Owner Trustee and one copy to the successor Owner
Trustee. If no successor Owner Trustee shall have been so appointed and have
accepted appointment within 30 days after the giving of such notice of
resignation, the resigning Owner Trustee may petition any court of competent
jurisdiction for the appointment of a successor Owner Trustee.
If at any time the Owner Trustee shall cease to be eligible in accordance
with the provisions of Section 10.1 and shall fail to resign after written
request therefor by the General Partner or if at any time the Owner Trustee
shall be legally unable to act, or shall be adjudged bankrupt or insolvent, or a
receiver of the Owner Trustee or of its property shall be appointed, or any
public officer shall take charge or control of the Owner Trustee or of its
property or affairs for the purpose of rehabilitation, conservation or
liquidation, then the General Partner may remove the Owner Trustee. If the
General Partner shall remove the Owner Trustee under the authority of the
immediately preceding sentence, the General Partner shall promptly appoint a
successor Owner Trustee meeting the qualification requirements of Section 10.1
by written instrument, in duplicate, one copy of which instrument shall be
delivered
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to the outgoing Owner Trustee so removed and one copy to the successor
Owner Trustee and payment of all fees owed to the outgoing Owner Trustee.
Any resignation or removal of the Owner Trustee and appointment of a
successor Owner Trustee pursuant to any of the provisions of this Section shall
not become effective until all fees and expenses, including any indemnity
payments, due to the outgoing Owner Trustee have been paid and until acceptance
of appointment by the successor Owner Trustee pursuant to Section 10.3. The
General Partner shall provide notice of such resignation or removal of the Owner
Trustee to each of the Rating Agencies.
SECTION 10.3. Successor Owner Trustee.
Any successor Owner Trustee appointed pursuant to Section 10.2 shall
execute, acknowledge and deliver to the General Partner and to its predecessor
Owner Trustee an instrument accepting such appointment under this Agreement, and
thereupon the resignation or removal of the predecessor Owner Trustee shall
become effective and such successor Owner Trustee, without any further act, deed
or conveyance, shall become fully vested with all the rights, powers, duties,
and obligations of its predecessor under this Agreement, with like effect as if
originally named as Owner Trustee. The predecessor Owner Trustee shall deliver
to the successor Owner Trustee all documents and statements and monies held by
it under this Agreement; and the General Partner and the predecessor Owner
Trustee shall execute and deliver such instruments and do such other things as
may reasonably be required for fully and certainly vesting and confirming in the
successor Owner Trustee all such rights, powers, duties, and obligations.
If the predecessor Trustee is then the lender of record for purposes of FHA
Insurance (due to an Event of Termination), the predecessor Trustee shall submit
a report to FHA describing the transfer of the FHA-Insured Contracts without
recourse, in such form as is then required under FHA Regulations to cause HUD to
transfer to the successor Trustee the FHA insurance reserves applicable to the
FHA-Insured Contracts.
No successor Owner Trustee shall accept appointment as provided in this
Section unless at the time of such acceptance such successor Owner Trustee shall
be eligible pursuant to Section 10.1.
Upon acceptance of appointment by a successor Owner Trustee pursuant to
this Section, the Administrator shall mail notice of the successor of such Owner
Trustee to all Certificateholders, the Indenture Trustee, the Noteholders and
the Rating Agencies. If the Administrator shall fail to mail such notice within
10 days after acceptance of appointment by the successor Owner Trustee, the
successor Owner Trustee shall cause such notice to be mailed at the expense of
the Administrator.
SECTION 10.4. Merger or Consolidation of Owner Trustee.
Any corporation into which the Owner Trustee may be merged or converted or
with which it may be consolidated, or any corporation resulting from any merger,
conversion or consolidation to which the Owner Trustee shall be a party, or any
corporation succeeding to all or substantially all of the corporate trust
business of the Owner Trustee, shall be the successor of the Owner Trustee
hereunder, provided
10-2
<PAGE>
such corporation shall be eligible pursuant to Section 10.1, without the
execution or filing of any instrument or any further act on the part of any of
the parties hereto, anything herein to the contrary notwithstanding, and
provided further that the Owner Trustee shall mail notice of such merger or
consolidation to the Rating Agencies.
SECTION 10.5. Appointment of Co-Trustee or Separate Trustee.
Notwithstanding any other provisions of this Agreement, at any time, for
the purpose of meeting any legal requirements of any jurisdiction in which any
part of the Trust Property may at the time be located, the Administrator and the
Owner Trustee acting jointly shall have the power and shall execute and deliver
all instruments to appoint one or more Persons approved by the Owner Trustee to
act as co-trustee, jointly with the Owner Trustee, or separate trustee or
separate trustees, of all or any part of the Trust Property, and to vest in such
Person, in such capacity, such title to the Trust, or any part thereof, and,
subject to the other provisions of this Section, such powers, duties,
obligations, rights and trusts as the Administrator and the Owner Trustee may
consider necessary or desirable. If the Administrator shall not have joined in
such appointment within 15 days after the receipt by it of a request so to do,
the Owner Trustee shall have the power to make such appointment. No co-trustee
or separate trustee under this Agreement shall be required to meet the terms of
eligibility as a successor trustee pursuant to Section 10.1 and no notice of the
appointment of any co-trustee or separate trustee shall be required pursuant to
Section 10.1.
Each separate trustee and co-trustee shall, to the extent permitted by law,
be appointed and act subject to the following provisions and conditions:
(i) all rights, powers, duties, and obligations conferred or imposed
upon the Owner Trustee shall be conferred upon and exercised or performed
by the Owner Trustee and such separate trustee or co-trustee jointly (it
being understood that such separate trustee or co-trustee is not authorized
to act separately without the Owner Trustee joining in such act), except to
the extent that under any law of any jurisdiction in which any particular
act or acts are to be performed the Owner Trustee shall be incompetent or
unqualified to perform such act or acts, in which event such rights,
powers, duties, and obligations (including the holding of title to the
Trust Property or any portion thereof in any such jurisdiction) shall be
exercised and performed singly by such separate trustee or co-trustee, but
solely at the direction of the Owner Trustee;
(ii) no trustee under this Agreement shall be personally liable by
reason of any act or omission of any other trustee under this Agreement;
and
(iii) the Administrator and the Owner Trustee acting jointly may at
any time accept the resignation of or remove any separate trustee or
10-3
<PAGE>
co-trustee.
Any notice, request or other writing given to the Owner Trustee shall be
deemed to have been given to each of the then separate trustees and co-trustees,
as effectively as if given to each of them. Every instrument appointing any
separate trustee or co-trustee shall refer to this Agreement and the conditions
of this Article. Each separate trustee and co-trustee, upon its acceptance of
the trusts conferred, shall be vested with the estates or property specified in
its instrument of appointment, either jointly with the Owner Trustee or
separately, as may be provided therein, subject to all the provisions of this
Agreement, specifically including every provision of this Agreement relating to
the conduct of, affecting the liability of, or affording protection to, the
Owner Trustee. Each such instrument shall be filed with the Owner Trustee and a
copy thereof given to the Administrator.
Any separate trustee or co-trustee may at any time appoint the Owner
Trustee, its agent or attorney-in-fact with full power and authority, to the
extent not prohibited by law, to do any lawful act under or in respect of this
Agreement on its behalf and in its name. If any separate trustee or co-trustee
shall die, become incapable of acting, resign or be removed, all of its estates,
properties, rights, remedies and trusts shall vest in and be exercised by the
Owner Trustee, to the extent permitted by law, without the appointment of a new
or successor trustee.
10-4
<PAGE>
ARTICLE XI
MISCELLANEOUS PROVISIONS
SECTION 11.1. Amendment.
(a) This Agreement may be amended by the Depositor, the General Partner and
the Owner Trustee, without the consent of any of the Certificateholders or
Noteholders, (i) to cure any ambiguity, or (ii) to correct, supplement or modify
any provisions in this Agreement; provided, however, that such action shall not,
as evidenced by an Opinion of Counsel, adversely affect in any material respect
the interests of any Certificateholder or Noteholder.
(b) This Agreement may also be amended from time to time, by the Depositor,
the General Partner and the Owner Trustee with the consent of a Certificate
Majority of the Certificates and, if such amendment materially and adversely
affects the interests of Noteholders, the consent of a Note Majority (which
consent of any Holder of a Certificate or Note given pursuant to this Section or
pursuant to any other provision of this Agreement shall be conclusive and
binding on such Holder and on all future Holders of such Certificate or Note and
of any Certificate or Note issued upon the transfer thereof or in exchange
thereof or in lieu thereof whether or not notation of such consent is made upon
the Certificate or Note) for the purpose of adding any provisions to or changing
in any manner or eliminating any of the provisions of this Agreement, or of
modifying in any manner the rights of the Holders of Certificates or Notes;
provided, however, that no such amendment shall (a) increase or reduce in any
manner the amount of, or accelerate or delay the timing of, collections of
payments on Contracts or distributions that shall be required to be made on any
Certificate or Note or the Certificate Pass-Through Rate, the Class A-1 Interest
Rate or the Class A-2 Interest Rate, or (b) reduce the aforesaid percentage
required to consent to any such amendment or any waiver hereunder, without the
consent of the Holders of all Certificates and Notes then outstanding.
(c) Prior to the execution of any such amendment or consent, the General
Partner shall furnish written notification of the substance of such amendment or
consent to each Rating Agency.
(d) Promptly after the execution of any such amendment or consent, the
Owner Trustee shall furnish written notification of the substance of such
amendment or consent to each Certificateholder and the Indenture Trustee unless
such parties have previously received such notification.
(e) It shall not be necessary for the consent of Certificateholders or
Noteholders pursuant to Section 11.1(b) to approve the particular form of any
proposed amendment or consent, but it shall be sufficient if such consent shall
approve the substance thereof. The manner of obtaining such consents (and any
11-1
<PAGE>
other consents of Certificateholders and Noteholders provided for in this
Agreement) and of evidencing the authorization of the execution thereof by
Certificateholders shall be subject to such reasonable requirements as the Owner
Trustee may prescribe, including the establishment of record dates.
(f) Prior to the execution of any amendment to this Agreement, the Owner
Trustee shall be entitled to receive and rely upon an Opinion of Counsel stating
that the execution of such amendment is authorized or permitted by this
Agreement and that all conditions precedent to the execution and delivery of
such amendment have been satisfied. The Owner Trustee may, but shall not be
obligated to, enter into any such amendment which affects the Owner Trustee's
own rights, duties or immunities under this Agreement or otherwise.
(g) The Depositor, the General Partner and the Owner Trustee may amend this
Agreement in order to effect a "financial asset securitization investment trust"
("FASIT") election for all or a portion of the Trust; provided, that (i) the
Depositor delivers an Opinion of Counsel to the Owner Trustee to the effect that
such election will not adversely affect the Federal or applicable state income
tax characterization of any outstanding Notes or Certificates or the taxability
of the Trust under Federal or applicable state income tax laws or otherwise have
a material adverse effect on the Certificates or Notes, and (ii) the
requirements of clauses (c), (d) and (f) above are met.
SECTION 11.2. No Recourse.
Each Certificateholder by accepting a Certificate acknowledges that such
Certificateholder's Certificates represent beneficial interests in the Trust
only and do not represent interests in or obligations of the Seller, the General
Partner, the Servicer, the Owner Trustee, the Indenture Trustee or any Affiliate
of any of the foregoing and no recourse may be had against such parties or their
assets, except as may be expressly set forth or contemplated in this Agreement,
the Certificates or the Related Documents.
SECTION 11.3. Governing Law.
This Agreement shall be governed by and construed in accordance with the
laws of the State of [Delaware] without regard to the principles of conflicts of
laws thereof and the obligations, rights and remedies of the parties under this
Agreement shall be determined in accordance with such laws.
SECTION 11.4. Severability of Provisions.
If any one or more of the covenants, agreements, provisions or terms of
this Agreement shall be for any reason whatsoever held invalid, then such
covenants, agreements, provisions or terms shall be deemed severable from the
remaining covenants, agreements, provisions or terms of this Agreement and shall
in no way
11-2
<PAGE>
affect the validity or enforceability of the other provisions of this Agreement
or of the Certificates or the rights of the Holders thereof.
SECTION 11.5. Certificates Nonassessable and Fully Paid.
Certificateholders shall not be personally liable for obligations of the
Trust. The fractional undivided interests in the Trust represented by the
Certificates shall be nonassessable for any losses or expenses of the Trust or
for any reason whatsoever, and Certificates upon execution thereof by the Owner
Trustee pursuant to Section 3.3 are and shall be deemed fully paid.
SECTION 11.6. Third-Party Beneficiaries.
This Agreement shall inure to the benefit of and be binding upon the
parties hereto and their respective successors and permitted assigns. Except as
otherwise provided in this Agreement, no other Person shall have any right or
obligation hereunder.
SECTION 11.7. Counterparts.
For the purpose of facilitating its execution and for other purposes, this
Agreement may be executed simultaneously in any number of counterparts, each of
which counterparts shall be deemed to be an original, and all of which
counterparts shall constitute but one and the same instrument.
SECTION 11.8. Notices.
All demands, notices and communications under this Agreement shall be in
writing, personally delivered or mailed by certified mail, return receipt
requested, and shall be deemed to have been duly given upon receipt (a) in the
case of the [General Partner] or the Depositor, at the following address: c/o
Green Tree Financial Corporation, 1100 Landmark Towers, 345 St. Peter Street,
St. Paul, Minnesota 55102-1639, Attention: Chief Financial Officer, (b) in the
case of the Owner Trustee, at the Corporate Trust Office, and (c) in the case of
each Rating Agency, _____ or at such other address as shall be designated by any
such party in a written notice to the other parties. Notwithstanding the
foregoing, any notice required or permitted to be mailed to a Certificateholder
shall be given by first class mail, postage prepaid, at the address of such
Holder as shown in the Certificate Register, and any notice so mailed within the
time prescribed in this Agreement shall be conclusively presumed to have been
duly given, whether or not the Certificateholder receives such notice.
11-3
<PAGE>
IN WITNESS WHEREOF, the Depositor, [General Partner] and the Owner Trustee
have caused this Trust Agreement to be duly executed by their respective
officers as of the day and year first above written.
GREEN TREE FINANCIAL CORPORATION,
as Depositor
By
-----------------------------------
Name:
Title:
[GENERAL PARTNER]
By
-----------------------------------
Name:
Title:
[TRUSTEE],
as Owner Trustee
By
-----------------------------------
Name:
Title:
11-4
<PAGE>
EXHIBIT A
CERTIFICATE OF TRUST OF
GREEN TREE [HOME IMPROVEMENT AND HOME EQUITY]
TRUST _____
THIS Certificate of Trust of GREEN TREE [HOME IMPROVEMENT AND HOME EQUITY]
TRUST _____ (the "Trust"), dated as of _____, is being duly executed and filed
by _____, a _____ corporation, as trustee, to form a business trust under the
[Delaware Business Trust Act (12 Del. Code, (S) 3801 et seq.)].
1. Name. The name of the business trust formed hereby is GREEN TREE
[HOME EQUITY AND HOME IMPROVEMENT] TRUST _____.
2. [Delaware] Trustee. The name and business address of the trustee of
the Trust in the State of [Delaware] is _____.
3. This Certificate of Trust will be effective _____.
IN WITNESS WHEREOF, the undersigned, being the sole trustee of the Trust,
has executed this Certificate of Trust as of the date first above written.
[OWNER TRUSTEE],
as trustee
By
-----------------------------------
Name:
Title:
A-1
<PAGE>
EXHIBIT B
FORM OF CERTIFICATE
THIS TRUST CERTIFICATE IS SUBORDINATED IN RIGHT OF PAYMENT
TO THE NOTES TO THE EXTENT DESCRIBED IN THE INDENTURE
REFERRED TO HEREIN.
[ THIS CERTIFICATE IS SUBORDINATED IN RIGHT OF PAYMENT TO THE _____
CERTIFICATES AS DESCRIBED IN THE POOLING AND SERVICING AGREEMENT REFERRED TO
HEREIN.]
GREEN TREE [HOME IMPROVEMENT AND HOME EQUITY]
TRUST _____
_____ % LOAN-BACKED CERTIFICATE
evidencing a fractional undivided interest in the Trust, as defined below, the
property of which includes a pool of home improvement contracts and home equity
contracts and sold to the Trust by Green Tree Financial Corporation.
This Certificate does not represent an obligation of, or an interest in, Green
Tree Financial Corporation or any affiliate thereof.
Class ____ Certificate No. Denomination: $
Initial Cut-off Date: Aggregate Denomination of all Class ____
Certificates: $
First Distribution Date: Pass-Through Rate:
Final Scheduled Distribution Date:
Servicer:
Green Tree Financial Corporation
CUSIP: ________
[UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE
DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC") TO THE OWNER TRUSTEE OR
ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE
ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS
REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO
CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR
OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER
HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.]
B-1
<PAGE>
This certifies that ____________________ is the registered owner of the
undivided Percentage Interest represented by the original principal amount set
forth above in the Certificates for [Home Improvement and Home Equity] Loans,
Series _____, Class _____ issued by [Home Improvement and Home Equity] Loan
Trust _____ (the "Trust"), which includes among its assets two sub-pools, one of
which is comprised of home improvement loan contracts and promissory notes (the
"Home Improvement Contracts") and the other of which is comprised of closed-end
home equity loans (the "Home Equity Contracts" and, together with the Home
Improvement Contracts, collectively the "Contracts") (including, without
limitation, all mortgages, deeds of trust and security deeds relating to such
Contracts and any and all rights to receive payments due on such Contracts after
the applicable Cut-off Date or Subsequent Cut-off Date. The Trust was created
pursuant to a Trust Agreement, dated as of _____ (the "Trust Agreement"), among
Green Tree Financial Corporation, as depositor (the "Depositor"), _____ (the
"General Partner"), and _____, not in its individual capacity but solely as
owner trustee (the "Owner Trustee"), a summary of certain of the pertinent
provisions of which is set forth below. To the extent not otherwise defined
herein, the capitalized terms used herein have the meanings assigned to them in
the Trust Agreement or the Sale and Servicing Agreement, dated as of _____ (the
"Sale and Servicing Agreement"), between the Trust and Green Tree Financial
Corporation (the "Seller"), in its individual capacity and as servicer (the
"Servicer").
This Certificate is one of the duly authorized Certificates designated as "
_____ % Loan-Backed Certificates" (herein called the "Certificates"). The Trust
has also issued under the Indenture, dated as of _____, between the Trust and
_____, as trustee, the [Floating Rate] [Fixed Rate] Loan-Backed Notes (the
"Notes") designated as the Class A-1 and Class A-2. This Certificate is issued
under and is subject to the terms, provisions and conditions of the Trust
Agreement, to which Trust Agreement the Holder of this Certificate by virtue of
the acceptance hereof assents and by which such Holder is bound. The property
of the Trust includes (as more fully described in the Trust Agreement) the
Contracts, certain monies due thereunder on or after the Cut-off Date, an
assignment of the Seller's security interests in the Contracts, certain bank
accounts and property (including the right to receive Liquidation Proceeds)
securing the Contracts, and proceeds of all of the foregoing.
Under the Trust Agreement, there will be distributed on the 15th day of
each month or, if such 15th day is not a Business Day, the next succeeding
Business Day (the "Distribution Date"), commencing on _____ to the person in
whose name this Certificate is registered at the close of business on the
Business Day immediately preceding such Distribution Date (the "Record Date"),
such Certificateholder's Percentage Interest of the Class _____ Distribution
Amount (plus the Class _____ Interest Deficiency Amount, if any) for such
Payment Date. Distributions of interest and principal on the Class _____
Certificates will be made primarily from amounts available in respect of the
_____ Contracts. The final scheduled Payment Date of this Certificate is _____
or the next succeeding Business Day if such _____ is not a Business Day.
It is the intent and agreement of the Depositor, the General Partner, the
Servicer and the Certificateholders that, for purposes of Federal income, state
and local income and franchise and any other income taxes, the Trust will be
treated as a partnership and the Certificateholders will be treated as partners
in that partnership. The Certificateholders, by acceptance of a Certificate,
agree to treat, and to take no action inconsistent with the treatment of, the
Certificates for such tax purposes as partnership interests in the Trust.
Each Certificateholder, by its acceptance of a Certificate, covenants and
agrees
B-2
<PAGE>
that such Certificateholder will not at any time institute against the General
Partner or join in any institution against the Depositor, the Trust or the
General Partner of any bankruptcy, reorganization, arrangement, insolvency or
liquidation proceedings, or other proceedings under any United States Federal or
state bankruptcy or similar law in connection with any obligations relating to
the Certificates, the Notes, the Trust Agreement or any of the Related
Documents.
Except as provided in the Trust Agreement, distributions on this
Certificate will be made by the Owner Trustee by check or money order mailed to
the Certificateholder of record in the Certificate Register without the
presentation or surrender of this Certificate or the making of any notation
hereon. Except as otherwise provided in the Trust Agreement and notwithstanding
the above, the final distribution on this Certificate will be made after due
notice by the Owner Trustee of the pendency of such distribution and only upon
presentation and surrender of this Certificate at the office or agency
maintained for that purpose by the Owner Trustee. The Record Date otherwise
applicable to distributions shall not be applicable to such final distribution.
The Certificates do not represent an obligation of, or an interest in, the
Seller, the Servicer, the Owner Trustee or any Affiliate of any of them. The
Certificates are limited in right of payment to certain collections and
recoveries respecting the Contracts, all as more specifically set forth in the
Trust Agreement. A copy of the Trust Agreement may, upon request, be examined
by any Certificateholder during normal business hours at the principal office of
the Seller and at such other places, if any, designated by the Seller.
The Trust Agreement permits, with certain exceptions therein provided, the
amendment thereof and the modification of the rights and obligations of the
parties thereto and the rights of the Certificateholders under the Trust
Agreement at any time by the Depositor, the General Partner and the Owner
Trustee. In certain limited circumstances, the Trust Agreement may only be
amended with the consent of the Holders of Certificates evidencing not less than
a majority of the Certificate Principal Balance and, in certain circumstances,
100% of the Certificate Principal Balance. Any such consent by the Holder of
this Certificate shall be conclusive and binding on such Holder and on all
future Holders of this Certificate and of any Certificate issued upon the
transfer hereof or in exchange herefor or in lieu hereof whether or not notation
of such consent is made upon this Certificate.
As provided in the Trust Agreement and subject to certain limitations set forth
therein, the transfer of this Certificate is registrable in the Certificate
Registrar upon surrender of this Certificate for registration of transfer at the
offices or agencies of the Certificate Registrar maintained by the Owner Trustee
in _____ accompanied by a written instrument of transfer in form satisfactory to
the Owner Trustee and the Certificate Registrar duly executed by the Holder
hereof or such Holder's attorney duly authorized in writing, and thereupon one
or more new Certificates of authorized denominations evidencing the same
aggregate fractional
B-3
<PAGE>
undivided interest in the Trust issued to the designated transferee. The initial
Certificate Registrar appointed under the Trust Agreement is _____.
The Certificates may not be acquired by (a) an employee benefit plan (as
defined in Section 3(3) of ERISA) that is subject to the provisions of Title 1
of ERISA, (b) a plan described in Section 4975(e)(1) of the Code or (c) any
entity whose underlying assets include plan assets by reason of a plan's
investment in the entity (each, a "Benefit Plan"). By accepting and holding
this Certificate, the Holder hereof shall be deemed to have represented and
warranted that it is not a Benefit Plan.
The Certificates are issuable only as registered Certificates without
coupons in denominations of $1,000 and integral multiples thereof. As provided
in the Trust Agreement and subject to certain limitations therein set forth,
Certificates are exchangeable for new Certificates of authorized denominations
of a like aggregate fractional undivided interest, as requested by the Holder
surrendering the same. No service charge will be made for any such registration
of transfer or exchange, but the Owner Trustee may require payment of a sum
sufficient to cover any tax or governmental charges payable in connection
therewith.
The Owner Trustee, the Certificate Registrar and any agent of the Owner
Trustee or the Certificate Registrar may treat the person in whose name this
Certificate is registered as the owner hereof for the purpose of receiving
distributions and for all other purposes, and neither the Owner Trustee, the
Certificate Registrar nor any such agent shall be affected by any notice to the
contrary.
The obligations and responsibilities created by the Trust Agreement and
Trust created thereby shall terminate upon the payment to Certificateholders of
all amounts required to be paid to them pursuant to the Trust Agreement and the
disposition of all property held as part of the Trust. The Servicer or the
Seller may at its option purchase the corpus of the Trust at a price specified
in the Sale and Servicing Agreement, and such purchase of the Contracts and
other property of the Trust will effect early retirement of the Certificates;
provided, however, such right of purchase is exercisable only as of a Record
Date as of which the Pool Scheduled Principal Balance is less than or equal to
10% of the Cut-off Date Pool Principal Balance.
The recitals contained herein shall be taken as the statements of the
Depositor, the General Partner or the Servicer, as the case may be, and the
Owner Trustee assumes no responsibility for the correctness thereof. The Owner
Trustee makes no representations as to the validity or sufficiency of this
Certificate or of any Contract or related document.
Unless the certificate of authentication hereon shall have been executed by
an authorized officer of the Owner Trustee, by manual or facsimile signature,
this Certificate shall not entitle the Holder hereof to any benefit under the
Trust
B-4
<PAGE>
Agreement or the Sale and Servicing Agreement or be valid for any purpose.
B-5
<PAGE>
IN WITNESS WHEREOF, the Owner Trustee on behalf of the Trust and not in its
individual capacity has caused this Certificate to be duly executed.
Dated:
GREEN TREE [HOME IMPROVEMENT AND HOME
EQUITY] TRUST _____
By [OWNER TRUSTEE], not in its
individual capacity but solely on
behalf of the Issuer as Owner Trustee
under the Trust Agreement
By
-----------------------------------
Name:
Title:
Attest
--------------------------------
Name:
Title:
B-6
<PAGE>
OWNER TRUSTEE'S CERTIFICATE OF AUTHENTICATION
This is one of the Certificates referred to in the within-mentioned Trust
Agreement.
[OWNER TRUSTEE],
not in its individual capacity but
solely as Owner Trustee
By
----------------------------------
as Authenticating Agent
B-7
<PAGE>
ASSIGNMENT
FOR VALUE RECEIVED the undersigned hereby sells, assigns and transfers
unto (PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE)
(Please print or typewrite name and address, including postal zip code, of
assignee)
the within Certificate, and all rights thereunder, hereby irrevocably
constituting and appointing
Attorney to transfer said Certificate on the books of the Certificate Registrar,
with full power of substitution in the premises.
Dated: *
Signature Guaranteed:
*
*NOTICE: The signature to this assignment must correspond with the name as it
appears upon the face of the within Certificate in every particular, without
alteration, enlargement or any change whatsoever. Such signature must be
guaranteed by a member firm of The New York Stock Exchange, Inc. or a commercial
bank or trust company.
B-8
<PAGE>
EXHIBIT C
FORM OF DEPOSITORY AGREEMENT
C-1
<PAGE>
Exhibit 4.4
=============================================================================
GREEN TREE [HOME IMPROVEMENT AND HOME EQUITY] TRUST _____
____________________
INDENTURE
Dated as of _____
____________________
[TRUSTEE]
Trustee
=============================================================================
<PAGE>
CROSS REFERENCE TABLE
TIA Indenture
Section Section
- ------- ----------
310(a)(1)........................................................ 6.11
(a)(2)......................................................... 6.11
(a)(3)......................................................... 6.10
(a)(4)......................................................... N.A.
(a)(5)......................................................... 6.11
(b)............................................................ 6.08; 6.11
(c)............................................................ N.A.
311(a)........................................................... 6.12
(b)............................................................ 6.12
(c)............................................................ N.A.
312(a)........................................................... 7.01
(b)............................................................ 7.02
(c)............................................................ 7.02
313(a)........................................................... 7.04
(b)(1)......................................................... 7.04
(b)(2)......................................................... 7.04
(c)............................................................ 11.05
(d)............................................................ 7.04
314(a)........................................................... 7.03
(b)............................................................ 3.06 11.15
(c)(1)......................................................... 11.01
(c)(2)......................................................... 11.01
(c)(3)......................................................... 11.01
(d)............................................................ 11.01
(e)............................................................ 11.01
(f)............................................................ 11.01
315(a)........................................................... 6.01
(b)............................................................ 6.05 11.05
(c)............................................................ 6.01
(d)............................................................ 6.01
(e)............................................................ 5.14
316(a)(last sentence)............................................ 1.01
(a)(1)(A)...................................................... 5.12
(a)(1)(B)...................................................... 5.13
(a)(2)......................................................... N.A.
(b)............................................................ 5.08
(c)............................................................ N.A.
317(a)(1)........................................................ 5.03
(a)(2)......................................................... 5.03
(b)............................................................ 3.03
318(a)........................................................... 11.07
- -----------------------------------
Note: This Cross Reference Table shall not, for any purpose, be deemed to be
part of this Indenture. N.A. means Not Applicable.
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE I DEFINITIONS AND INCORPORATION BY REFERENCE................... 1-1
SECTION 1.01. Definitions.......................................... 1-1
SECTION 1.02. Incorporation by Reference of Trust Indenture Act.... 1-15
SECTION 1.03. Rules of Construction................................ 1-16
ARTICLE II THE NOTES.................................................... 2-1
SECTION 2.01. Form................................................. 2-1
SECTION 2.02. Execution, Authentication and Delivery............... 2-1
SECTION 2.03. Temporary Notes...................................... 2-2
SECTION 2.04. Registration; Registration of Transfer and Exchange.. 2-2
SECTION 2.05. Mutilated, Destroyed, Lost or Stolen Notes........... 2-3
SECTION 2.06. Person Deemed Owner.................................. 2-4
SECTION 2.07. Payment of Principal and Interest; Defaulted
Interest............................................. 2-4
SECTION 2.08. Cancellation......................................... 2-5
SECTION 2.09. Book-Entry Notes..................................... 2-6
SECTION 2.10. Notices to Depository................................ 2-6
SECTION 2.11. Definitive Notes..................................... 2-7
ARTICLE III COVENANTS................................................... 3-1
SECTION 3.01. Payment of Principal, Interest and Premium........... 3-1
SECTION 3.02. Maintenance of Office or Agency...................... 3-1
SECTION 3.03. Money for Payments To Be Held in Trust............... 3-1
SECTION 3.04. Existence............................................ 3-3
SECTION 3.05. Protection of Trust Estate........................... 3-3
SECTION 3.06. Opinions as to Trust Estate.......................... 3-4
SECTION 3.07. Performance of Obligations; Servicing of Contracts... 3-4
SECTION 3.08. Negative Covenants................................... 3-5
SECTION 3.09. Annual Statement as to Compliance.................... 3-6
SECTION 3.10. Issuer May Consolidate, etc. Only on Certain Terms... 3-6
SECTION 3.11. Successor or Transferee.............................. 3-8
SECTION 3.12. No Other Business.................................... 3-8
SECTION 3.13. No Borrowing......................................... 3-9
SECTION 3.14. Servicer's Obligations............................... 3-9
SECTION 3.15. Guarantees, Loans, Advances and Other Liabilities.... 3-9
SECTION 3.16. Capital Expenditures................................. 3-9
SECTION 3.17. Restricted Payments.................................. 3-9
SECTION 3.18. Notice of Events of Default.......................... 3-9
SECTION 3.19. Further Instruments and Acts......................... 3-9
SECTION 3.20. Compliance with Laws................................. 3-10
SECTION 3.21. Amendments of Sale and Servicing Agreement and
Trust Agreement...................................... 3-10
SECTION 3.22. Removal of Administrator............................. 3-10
SECTION 3.23. Income Tax Characterization.......................... 3-10
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ARTICLE IV SATISFACTION AND DISCHARGE.................................. 4-1
SECTION 4.01. Satisfaction and Discharge of Indenture.............. 4-1
SECTION 4.02. Application of Trust Money........................... 4-2
SECTION 4.03. Repayment of Moneys Held by Paying Agent............. 4-2
SECTION 4.04. Release of Trust Estate.............................. 4-2
ARTICLE V REMEDIES..................................................... 5-1
SECTION 5.01. Events of Default.................................... 5-1
SECTION 5.02. Rights upon Event of Default......................... 5-2
SECTION 5.03. Collection of Indebtedness and Suits for Enforcement
by Trustee; Authority of Trustee..................... 5-2
SECTION 5.04. Remedies............................................. 5-4
SECTION 5.05. Optional Preservation of the Contracts............... 5-5
SECTION 5.06. Priorities........................................... 5-5
SECTION 5.07. Limitation of Suits.................................. 5-6
SECTION 5.08. Unconditional Rights of Noteholders To Receive
Principal and Interest............................... 5-6
SECTION 5.09. Restoration of Rights and Remedies................... 5-7
SECTION 5.10. Rights and Remedies Cumulative....................... 5-7
SECTION 5.11. Delay or Omission Not a Waiver....................... 5-7
SECTION 5.12. Control by Noteholders............................... 5-7
SECTION 5.13. Waiver of Past Defaults.............................. 5-8
SECTION 5.14. Undertaking for Costs................................ 5-8
SECTION 5.15. Waiver of Stay or Extension Laws..................... 5-8
SECTION 5.16. Action on Notes...................................... 5-9
SECTION 5.17. Performance and Enforcement of Certain Obligations... 5-9
ARTICLE VI THE TRUSTEE.................................................. 6-1
SECTION 6.01. Duties of Trustee.................................... 6-1
SECTION 6.02. Rights of Trustee.................................... 6-2
SECTION 6.03. Individual Rights of Trustee......................... 6-4
SECTION 6.04. Trustee's Disclaimer................................. 6-4
SECTION 6.05. Notice of Defaults................................... 6-4
SECTION 6.06. Reports by Trustee to Holders........................ 6-4
SECTION 6.07. Compensation and Indemnity........................... 6-4
SECTION 6.08. Replacement of Trustee............................... 6-5
SECTION 6.09. Successor Trustee by Merger.......................... 6-6
SECTION 6.10. Appointment of Co-Trustee or Separate Trustee........ 6-6
SECTION 6.11. Eligibility; Disqualification........................ 6-8
SECTION 6.12. Preferential Collection of Claims Against Issuer..... 6-8
ARTICLE VII NOTEHOLDERS' LISTS AND REPORTS.............................. 7-1
SECTION 7.01. Issuer To Furnish Trustee Names and Addresses
to Noteholders....................................... 7-1
SECTION 7.02. Preservation of Information; Communications
to Noteholders....................................... 7-1
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SECTION 7.03. Reports by Issuer.................................... 7-1
SECTION 7.04. Reports by Trustee................................... 7-2
ARTICLE VIII ACCOUNTS, DISBURSEMENTS AND RELEASES........................ 8-1
SECTION 8.01. Collection of Money.................................. 8-1
SECTION 8.02. Trust Accounts....................................... 8-1
SECTION 8.03. General Provisions Regarding Accounts................ 8-4
ARTICLE IX SUPPLEMENTAL INDENTURES..................................... 9-1
SECTION 9.01. Supplemental Indentures Without Consent of
Noteholders.......................................... 9-1
SECTION 9.02. Supplemental Indentures With Consent of
Noteholders.......................................... 9-2
SECTION 9.03. Execution of Supplemental Indentures................. 9-3
SECTION 9.04. Effect of Supplemental Indenture..................... 9-4
SECTION 9.05. Conformity With Trust Indenture Act.................. 9-4
SECTION 9.06. Reference in Notes to Supplemental Indentures........ 9-4
ARTICLE X REDEMPTION OF NOTES.......................................... 10-1
SECTION 10.01. Redemption........................................... 10-1
SECTION 10.02. Form of Redemption Notice............................ 10-1
SECTION 10.03. Notes Payable on Redemption Date..................... 10-2
ARTICLE XI MISCELLANEOUS................................................ 11-1
SECTION 11.01. Compliance Certificates and Opinions, etc............ 11-1
SECTION 11.02. Form of Documents Delivered to Trustee............... 11-2
SECTION 11.03. Acts of Noteholders.................................. 11-3
SECTION 11.04. Notices, etc., to Trustee, Issuer and
Rating Agencies...................................... 11-4
SECTION 11.05. Notices to Noteholders; Waiver....................... 11-5
SECTION 11.06. Alternate Payment and Notice Provisions.............. 11-5
SECTION 11.07. Conflict with Trust Indenture Act.................... 11-5
SECTION 11.08. Effect of Headings and Table of Contents............. 11-6
SECTION 11.09. Successors and Assigns............................... 11-6
SECTION 11.10. Severability......................................... 11-6
SECTION 11.11. Benefits of Indenture................................ 11-6
SECTION 11.12. Legal Holidays....................................... 11-6
SECTION 11.13. Governing Law........................................ 11-6
SECTION 11.14. Counterparts......................................... 11-6
SECTION 11.15. Recording of Indenture............................... 11-7
SECTION 11.16. Trust Obligation..................................... 11-7
SECTION 11.17. No Petition.......................................... 11-7
SECTION 11.18. Inspection........................................... 11-7
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Exhibit A - Schedule of Contracts
Exhibit B - Form of Depository Agreement
Exhibit C-1 - Form of Class A-1 Note
Exhibit C-2 - Form of Class A-2 Note
<PAGE>
INDENTURE, dated as of _____, between Green Tree [Home Improvement and Home
Equity] Trust _____, a [Delaware] business trust (the "Issuer"), and [Trustee],
a _____ organized and existing under the laws of _____, in its capacities as
trustee (the "Trustee") and not in its individual capacity.
Each party agrees as follows for the benefit of the other party and for the
equal and ratable benefit of the Holders of the Issuer's Class A-1 [Floating
Rate] [Fixed Rate] Loan-Backed Notes (the "Class A-1 Notes") and Class A-2
[Floating Rate] [Fixed Rate] Loan-Backed Notes (the "Class A-2 Notes") (the
Class A-1 Notes and the Class A-2 Notes are referred to collectively as the
"Notes"):
As security for the payment and performance by the Issuer of its
obligations under this Indenture and the Notes, the Issuer has agreed to assign
the Indenture Collateral (as defined below) as collateral for the benefit of the
Trustee on behalf of the Noteholders.
GRANTING CLAUSE
The Issuer hereby Grants, transfers and assigns to the Trustee at the
Closing Date, on behalf of and for the benefit of the Noteholders, without
recourse, all of the Issuer's right, title and interest in and to: (i) all
right, title and interest in the home improvement contracts and promissory notes
and home equity loans identified in the List of Contracts attached to the
Agreement (including, without limitation, all related mortgages, deeds of trust
and security deeds and any and all rights to receive payments on or with respect
to the Initial Contracts due after the applicable Cut-off Date, (ii) all rights
under FHA Insurance in respect of each FHA-Insured Contract, (iii) all rights
under any hazard, flood or other individual insurance policy on the real estate
securing an Initial Contract for the benefit of the creditor of such Initial
Contract, (iv) all rights the Company may have against the originating
contractor or lender with respect to Initial Contracts originated by a
contractor or lender other than the Company, (v) all rights under the Errors and
Omissions Protection Policy and the Fidelity Bond as such policy and bond relate
to the Initial Contracts, (vi) all rights under any title insurance policies, if
applicable, on any of the properties securing Initial Contracts, (vii) all
documents contained in the Contract Files relating to the Initial Contracts,
(viii) the Trust Accounts and all funds on deposit therein from time to time and
all investments and proceeds thereof (including all income thereon) and (ix) all
proceeds and products of the foregoing (collectively, the "Indenture
Collateral").
The foregoing Grant is made in trust to secure the payment of principal of
and interest on, and any other amounts owing in respect of, the Notes, equally
and ratably without prejudice, priority or distinction, and to secure compliance
with the provisions of this Indenture, all as provided in this Indenture.
The Trustee, for the benefit of the Holders of the Notes acknowledges such
Grant. The Trustee on behalf of the Holders of the Notes accepts the trusts
under this Indenture in accordance with the provisions of this Indenture and
agrees to
<PAGE>
perform its duties required in this Indenture to the best of its ability to the
end that the interests of the Holders of the Notes may be adequately and
effectively protected.
<PAGE>
ARTICLE I
DEFINITIONS AND INCORPORATION BY REFERENCE
SECTION 1.01. Definitions.
Except as otherwise specified herein or as the context may otherwise
require, the following terms have the respective meanings set forth below for
all purposes of this Indenture. Except as otherwise defined herein, all terms
defined in the Sale and Servicing Agreement or the Trust Agreement have the
meanings given them in such Related Document.
"Act" has the meaning specified in Section 11.03(a).
"Administration Agreement" means the Administration Agreement, dated as of
_____, among the Administrator, the Issuer and the Trustee, and the same may be
amended and supplemented from time to time.
"Administrator" means Green Tree Financial Servicing Corporation, a
Delaware corporation, or any successor Administrator under the Administration
Agreement.
"Affiliate" means, with respect to any specified Person, any other Person
controlling or controlled by or under common control with such specified Person.
For the purposes of this definition, "control" when used with respect to any
specified Person means the power to direct the management and policies of such
Person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings correlative to the foregoing.
"Authorized Officer" means, with respect to the Issuer, any officer of the
Owner Trustee who is authorized to act for the Owner Trustee in matters relating
to the Issuer and who is identified on the list of Authorized Officers delivered
by the Owner Trustee to the Trustee on the Closing Date (as such list may be
modified or supplemented from time to time thereafter).
"Book-Entry Note" means any Note registered in the name of the Depository
or its nominee, ownership of which is reflected on the books of the Depository
or on the books of a person maintaining an account with such Depository
(directly or as an indirect participant in accordance with the rules of such
Depository).
"Business Day" means any day other than a Saturday, Sunday, legal holiday
or other day on which commercial banking institutions in Minneapolis, Minnesota,
New York, New York, [_____] or any other location of any successor Servicer,
successor Owner Trustee or successor Trustee are authorized or obligated by law,
executive order or governmental decree to remain closed.
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"Calculation Agent" means the Person who establishes LIBOR with respect to
each Interest Reset Period. The Calculation Agent shall be the Trustee unless
the Trustee is unable or unwilling so to act, in which case the Calculation
Agent shall be a financial institution appointed by the Issuer.
"Certificate of Trust" means the Certificate of Trust of the Issuer
substantially in the form of Exhibit A to the Trust Agreement.
"Certificates" means the _____% Loan-Backed Certificates issued under the
Trust Agreement.
"Class A-1 Notes" means the Class A-1 [Floating Rate] [Fixed Rate] Loan-
Backed Notes substantially in the form of Exhibit C-1.
"Class A-2 Notes" means the Class A-2 [Floating Rate] [Fixed Rate] Loan-
Backed Notes substantially in the form of Exhibit C-2.
"Closing Date" means _____.
"Code" means the Internal Revenue Code of 1986, as amended from time to
time, and Treasury Regulations promulgated thereunder.
"Collection Account" means the account established and maintained pursuant
to Section 6.01 of the Sale and Servicing Agreement.
"Company" means Green Tree Financial Corporation.
"Corporate Trust Office" means the principal office of the Trustee at which
at any particular time its corporate trust business shall be administered which
office at date of the execution of this Indenture is located at _____; or at
such other address as the Trustee may designate from time to time by notice to
the Noteholders and the Issuer, or the principal corporate trust office of any
successor Trustee (and such successor Trustee will notify the Noteholders and
the Issuer of its address).
"Default" means any occurrence that is, or with notice or the lapse of time
or both would become, an Event of Default.
"Definitive Notes" has the meaning specified in Section 2.09.
"Depository" means the initial Depository, The Depository Trust Company,
the nominee of which is Cede & Co., as the registered Holder of $ _____ in
aggregate principal amount of the Class A-1 Notes, $ _____ in aggregate
principal amount of the Class A-2 Notes, as of the Closing Date, and any
permitted successor depository. The Depository shall at all times be a
"clearing corporation" as defined in the Uniform Commercial Code of the State of
New York.
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"Depository Agreement" means the agreement among the Issuer, the Trustee,
the Administrator, and The Depository Trust Company, as the initial Depository,
dated as of the Closing Date, relating to the Notes substantially in the form of
Exhibit B.
"Depository Participant" means a broker, dealer, bank or other financial
institution or other Person for whom from time to time a Depository effects
book-entry transfers and pledges of securities deposited with the Depository.
"Distribution Date" means the fifteenth day of each calendar month during
the term of this Indenture or if such day is not a Business Day, the next
succeeding Business Day, commencing in _____.
"Event of Default" has the meaning specified in Section 5.01.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Executive Officer" means, with respect to any corporation, the Chief
Executive Officer, Chief Operating Officer, Chief Financial Officer, President,
Executive Vice President, any Vice President, any Responsible Officer, the
Secretary or the Treasurer of such corporation; and with respect to any
partnership, any general partner thereof.
"Final Scheduled Distribution Date" means _____ (or, if such day is not a
Business Day, the next succeeding Business Day).
"General Partner" means each Certificateholder obligated to pay the
expenses of the Issuer pursuant to Section 2.7 of the Trust Agreement.
"Grant" means mortgage, pledge, bargain, sell, warrant, alienate, remise,
release, convey, assign, transfer, create, and grant a lien upon and a security
interest in and right of set-off against, deposit, set over and confirm pursuant
to this Indenture. A Grant of the Indenture Collateral or of any other
agreement or instrument shall include all rights, powers and options (but none
of the obligations) of the Granting party thereunder, including the immediate
and continuing right to claim for, collect, receive and give receipt for
principal and interest payments in respect of the Indenture Collateral and all
other moneys payable thereunder, to give and receive notices and other
communications, to make waivers or other agreements, to exercise all rights and
options, to bring Proceedings in the name of the Granting party or otherwise and
generally to do and receive anything that the Granting party is or may be
entitled to do or receive thereunder or with respect thereto.
"Holder" or "Noteholder" means the Person in whose name a Note is
registered on the Note Register.
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<PAGE>
"Indebtedness" means, with respect to any Person at any time, (a)
indebtedness or liability of such Person for borrowed money whether or not
evidenced by bonds, debentures, notes or other instruments, or for the deferred
purchase price of property or services (including trade obligations); (b)
obligations of such Person as lessee under leases which should have been or
should be, in accordance with generally accepted accounting principles, recorded
as capital leases; (c) current liabilities of such Person in respect of unfunded
vested benefits under plans covered by Title IV of ERISA; (d) obligations issued
for or liabilities incurred on the account of such Person; (e) obligations or
liabilities of such Person arising under acceptance facilities; (f) obligations
of such Person under any guarantees, endorsements (other than for collection or
deposit in the ordinary course of business) and other contingent obligations to
purchase, to provide funds for payment, to supply funds to invest in any Person
or otherwise to assure a creditor against loss; (g) obligations of such Person
secured by any lien on property or assets of such Person, whether or not the
obligations have been assumed by such Person; or (h) obligations of such Person
under any interest rate or currency exchange agreement.
"Indenture" means this Indenture as amended or supplemented from time to
time.
"Indenture Collateral" has the meaning specified in the Granting Clause of
this Indenture.
"Independent" means, when used with respect to any specified Person, that
the Person (a) is in fact independent of the Issuer, any other obligor upon the
Notes, the Company and any Affiliate of any of the foregoing Persons, (b) does
not have any direct financial interest or any material indirect financial
interest in the Issuer, any such other obligor, the Company or any Affiliate of
any of the foregoing Persons and (c) is not connected with the Issuer, any such
other obligor, the Company or any Affiliate of any of the foregoing Persons as
an officer, employee, promoter, underwriter, trustee, partner, director or
person performing similar functions.
"Independent Certificate" means a certificate or opinion to be delivered to
the Trustee under the circumstances described in, and otherwise complying with,
the applicable requirements of Section 11.01, made by an Independent appraiser
or other expert appointed by an Issuer Order and approved by the Trustee in the
exercise of reasonable care, and such opinion or certificate shall state that
the signer has read the definition of "Independent" in this Indenture and that
the signer is Independent within the meaning thereof.
"Interest Rate" means the Class A-1 Interest Rate or the Class A-2 Interest
Rate, as applicable.
"Issuer" means the party named as such in this Indenture until a successor
replaces it and, thereafter, means the successor and, for purposes of any
provision
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<PAGE>
contained herein and required by the TIA, each other obligor on the Notes.
"Issuer Order" and "Issuer Request" means a written order or request signed
in the name of the Issuer by any one of its Authorized Officers and delivered to
the Trustee.
"Note" means a Class A-1 Note or Class A-2 Note.
"Note Distribution Account" means the account designated as such,
established and maintained pursuant to Section 6.01(b) of the Sale and Servicing
Agreement.
"Note Owner" means, with respect to a Book-Entry Note, the Person who is
the owner of such Book-Entry Note, as reflected on the books of the Depository,
or on the books of a Person maintaining an account with such Depository
(directly as a Depository participant or as an indirect participant, in each
case in accordance with the rules of such Depository) and with respect to any
Definitive Notes, the Holder.
"Note Register" and "Note Registrar" have the respective meanings specified
in Section 2.04.
"Officers' Certificate" means a certificate signed by any Authorized
Officer of the Issuer, under the circumstances described in, and otherwise
complying with, the applicable requirements of Section 11.01, and delivered to,
the Trustee. Unless otherwise specified, any reference in this Indenture to an
Officers' Certificate shall be to an Officers' Certificate of any Authorized
Officer of the Issuer.
"Opinion of Counsel" means one or more written opinions of counsel who may,
except as otherwise expressly provided in this Indenture, be employees of or
counsel to the Issuer and who shall be satisfactory to the Trustee and which
shall comply with any applicable requirements of Section 11.01, and shall be in
form and substance satisfactory to the Trustee.
"Original Class A-1 Principal Balance" means $ _____.
"Original Class A-2 Principal Balance" means $ _____.
"Original Note Principal Balance" means the sum of the Original Class A-1
Original Class A-2 Principal Balance.
"Outstanding" means, as of the date of determination, all Notes theretofore
authenticated and delivered under this Indenture except:
(i) Notes theretofore canceled by the Note Registrar or delivered to
the Note Registrar for cancellation;
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<PAGE>
(ii) Notes or portions thereof the payment for which money in the
necessary amount has been theretofore deposited with the Trustee or any
Paying Agent in trust for the Holders of such Notes (provided, however,
that if such Notes are to be redeemed, notice of such redemption has been
duly given pursuant to this Indenture or provision therefor, satisfactory
to the Trustee, has been made); and
(iii) Notes in exchange for or in lieu of other Notes which have been
authenticated and delivered pursuant to this Indenture unless proof
satisfactory to the Trustee is presented that any such Notes are held by a
bona fide purchaser;
provided, however, that in determining whether the Holders of the requisite
Outstanding Amount of the Notes have given any request, demand, authorization,
direction, notice, consent or waiver hereunder or under any Related Document,
Notes owned by the Issuer, any other obligor upon the Notes, the Company or any
Affiliate of any of the foregoing Persons shall be disregarded and deemed not to
be Outstanding, except that, in determining whether the Trustee shall be
protected in relying upon any such request, demand, authorization, direction,
notice, consent or waiver, only Notes that the Trustee knows to be so owned
shall be so disregarded. Notes so owned that have been pledged in good faith may
be regarded as Outstanding if the pledgee establishes to the satisfaction of the
Trustee the pledgee's right so to act with respect to such Notes and that the
pledgee is not the Issuer, any other obligor upon the Notes, the Company or any
Affiliate of any of the foregoing Persons.
"Outstanding Amount" means the aggregate principal amount of all Notes, or
class of Notes, as applicable, Outstanding at the date of determination.
"Owner Trustee" means _____, not in its individual capacity but solely as
Owner Trustee under the Trust Agreement, or any successor owner trustee under
the Trust Agreement.
"Paying Agent" means the Trustee or any other Person that meets the
eligibility standards for the Trustee specified in Section 6.11 and is
authorized by the Issuer to make the distributions from the Note Distribution
Account, including payment of principal of or interest on the Notes on behalf of
the Issuer.
"Person" means any individual, corporation, estate, partnership, limited
liability company, joint venture, association, joint stock company, trust
(including any beneficiary thereof), unincorporated organization or government
or any agency or political subdivision thereof.
"Predecessor Note" means, with respect to any particular Note, every
previous Note evidencing all or a portion of the same debt as that evidenced by
such particular Note; and, for the purpose of this definition, any Note
authenticated and
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<PAGE>
delivered under Section 2.05 in lieu of a mutilated, lost, destroyed or stolen
Note shall be deemed to evidence the same debt as the mutilated, lost, destroyed
or stolen Note.
"Proceeding" means any suit in equity, action at law or other judicial or
administrative proceeding.
"Rating Agency" means each of _____ and _____, so long as such Persons
maintain a rating on the Notes; and if either _____ or _____ no longer maintains
a rating on the Notes, such other nationally recognized statistical rating
organization selected by the Company.
"Rating Agency Condition" means, with respect to any action, that each
Rating Agency shall have been given 10 days (or such shorter period as is
acceptable to each Rating Agency) prior notice thereof and that each of the
Rating Agencies shall have notified the Company, the Servicer, the Trustee, the
Owner Trustee and the Issuer in writing that such action will not result in a
reduction or withdrawal of the then current rating of the Notes.
"Record Date" means, with respect to a Distribution Date or Redemption
Date, the close of business on the last Business Day immediately preceding such
Distribution Date or Redemption Date.
"Redemption Date" means in the case of a redemption of the Notes pursuant
to Section 10.01(a) or a payment to Noteholders pursuant to Section 10.01(b),
the Distribution Date specified by the Servicer or the Issuer pursuant to
Section 10.01(a) or 10.01(b), as applicable.
"Redemption Price" means (a) in the case of a redemption of the Notes
pursuant to Section 10.01(a), an amount equal to the principal amount of the
Notes redeemed plus accrued and unpaid interest on the principal amount of each
class of Notes at the respective Interest Rate for each such class of Notes
being so redeemed to but excluding the Redemption Date, or (b) in the case of a
payment made to Noteholders pursuant to Section 10.01(b), the amount on deposit
in the Note Distribution Account, but not in excess of the amount specified in
clause (a) above.
"Registered Holder" means the Person in whose name a Note is registered on
the Note Register on the applicable Record Date.
"Related Documents" means the Trust Agreement, the Certificates, the Notes,
the Sale and Servicing Agreement, the Administration Agreement, the Depository
Agreement and the Underwriting Agreement and related Terms Agreement, between
the Company and the underwriters of the Certificates and the Notes. The Related
Documents executed by any party are referred to herein as "such party's Related
Documents," "its Related Documents" or by a similar expression.
<PAGE>
"Reserve Account" means the segregated trust account held by the Indenture
Trustee for the benefit of the Holders of the Notes pursuant to Section 6.01(c)
of the Sale and Servicing Agreement.
"Responsible Officer" means, with respect to the Trustee, any officer of
the Trustee assigned by the Trustee to administer its corporate trust affairs
relating to the Trust Estate.
"Sale and Servicing Agreement" means the Sale and Servicing Agreement,
dated as of _____, among the Issuer, the Company and the Servicer.
"Schedule of Contracts" means the listing of the Contracts set forth in
Exhibit A, as supplemented on each Subsequent Transfer Date to reflect the sale
to the Issuer of Subsequent Contracts.
"Secured Obligations" means all amounts and obligations which the Issuer
may at any time owe to or on behalf of the Trustee for the benefit of the
Noteholders under this Indenture or the Notes.
"State" means any one of the 50 states of the United States of America or
the District of Columbia.
"Termination Date" means the date on which the Trustee shall have received
payment and performance of all Secured Obligations.
"Trust Estate" means all money, instruments, rights and other property that
are subject or intended to be subject to the lien and security interest of this
Indenture for the benefit of the Noteholders (including, without limitation, the
Indenture Collateral Granted to the Trustee), including all proceeds thereof.
"Trust Indenture Act" or "TIA" means the Trust Indenture Act of 1939 as in
force on the date hereof, unless otherwise specifically provided.
"Trustee" means _____, a _____ organized under the laws of _____, as
Trustee under this Indenture, or any successor Trustee under this Indenture.
"UCC" means, unless the context otherwise requires, the Uniform Commercial
Code, as in effect in the relevant jurisdiction, as amended from time to time.
SECTION 1.02. Incorporation by Reference of Trust Indenture Act. Whenever
this Indenture refers to a provision of the TIA, the provision is incorporated
by reference in and made a part of this Indenture. The following TIA terms used
in this Indenture have the following meanings:
"Commission" means the Securities and Exchange Commission.
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"indenture securities" means the Notes.
"indenture security holder" means a Noteholder.
"indenture to be qualified" means this Indenture.
"indenture trustee" or "institutional trustee" means the Trustee.
"obligor" on the indenture securities means the Issuer and any other obligor on
the indenture securities.
All other TIA terms used in this Indenture that are defined by the TIA,
defined by TIA reference to another statute or defined by Commission rule have
the meaning assigned to them by such definitions.
SECTION 1.03. Rules of Construction. Unless otherwise specified:
(i) a term has the meaning assigned to it;
(ii) an accounting term not otherwise defined has the meaning assigned
to it in accordance with generally accepted accounting principles as in
effect from time to time;
(iii) "or" is not exclusive;
(iv) "including" means including without limitation;
(v) words in the singular include the plural and words in the plural
include the singular; and
(vi) references to Sections, Subsections, Schedules and Exhibits shall
refer to such portions of this Indenture.
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<PAGE>
ARTICLE II
THE NOTES
SECTION 2.01. Form. The Class A-1 Notes and the Class A-2 Notes, in each
case together with the Trustee's certificate of authentication, shall be in
substantially the forms set forth in Exhibits C-1 and C-2, respectively, with
such appropriate insertions, omissions, substitutions and other variations as
are required or permitted by this Indenture and may have such letters, numbers
or other marks of identification and such legends or endorsements placed thereon
as may, consistently herewith, be determined by the officers executing such
Notes, as evidenced by their execution of the Notes. Any portion of the text of
any Note may be set forth on the reverse thereof, with an appropriate reference
thereto on the face of the Note.
The Notes shall be typewritten, printed, lithographed or engraved or
produced by any combination of these methods all as determined by the officers
executing such Notes, as evidenced by their execution of such Notes.
Each Note shall be dated the date of its authentication. The terms of the
Notes set forth in Exhibits C-1 and C-2 are part of the terms of this Indenture.
SECTION 2.02. Execution, Authentication and Delivery. The Notes shall be
executed on behalf of the Issuer by any of its Authorized Officers. The
signature of any such Authorized Officer on the Notes may be manual or
facsimile. Notes bearing the manual or facsimile signature of individuals who
were at any time Authorized Officers of the Issuer shall bind the Issuer,
notwithstanding that such individuals or any of them have ceased to hold such
offices prior to the authentication and delivery of such Notes or did not hold
such offices at the date of such Notes.
The Trustee shall, upon receipt of an Issuer Order, authenticate and
deliver Class A-1 Notes in an aggregate principal amount of $ _____ and Class A-
2 Notes in an aggregate principal amount of $ _____. The aggregate principal
amount of Class A-1 Notes and Class A-2 Notes outstanding at any time may not
exceed that amount except as provided in Section 2.05.
Each Note shall be dated the date of its authentication. The Notes shall
be issuable as registered Notes in the minimum denomination of $1,000 and in
integral multiples thereof.
No Note shall be entitled to any benefit under this Indenture or be valid
or obligatory for any purpose, unless there appears on such Note a certificate
of authentication substantially in the form provided for herein executed by the
Trustee by the manual signature of one of its authorized signatories, and such
certificate upon any Note shall be conclusive evidence, and the only evidence,
that such Note has been duly authenticated and delivered hereunder.
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SECTION 2.03. Temporary Notes. Pending the preparation of Definitive
Notes, the Issuer may execute, and upon receipt of an Issuer Order the Trustee
shall authenticate and deliver, temporary Notes which are printed, lithographed,
typewritten, mimeographed or otherwise produced, of the tenor of the Definitive
Notes in lieu of which they are issued and with such variations not inconsistent
with the terms of this Indenture as the officers executing such Notes may
determine, as evidenced by their execution of such Notes.
If temporary Notes are issued, the Issuer will cause Definitive Notes to be
prepared without unreasonable delay. After the preparation of Definitive Notes,
the temporary Notes shall be exchangeable for Definitive Notes upon surrender of
the temporary Notes at the office or agency of the Issuer to be maintained as
provided in Section 3.02, without charge to the Holder. Upon surrender for
cancellation of any one or more temporary Notes, the Issuer shall execute and
the Trustee shall authenticate and deliver in exchange therefor a like principal
amount of Definitive Notes of authorized denominations. Until so exchanged, the
temporary Notes shall in all respects be entitled to the same benefits under
this Indenture as Definitive Notes.
SECTION 2.04. Registration; Registration of Transfer and Exchange. The
Issuer shall cause to be kept a register (the "Note Register") in which, subject
to such reasonable regulations as it may prescribe, the Issuer shall provide for
the registration of Notes and the registration of transfers of Notes. The
Trustee shall be "Note Registrar" for the purpose of registering Notes and
transfers of Notes as herein provided. Upon any resignation of any Note
Registrar, the Issuer shall promptly appoint a successor or, if it elects not to
make such an appointment, assume the duties of Note Registrar.
If a Person other than the Trustee is appointed by the Issuer as Note
Registrar, the Issuer will give the Trustee prompt written notice of the
appointment of such Note Registrar and of the location, and any change in the
location, of the Note Register, and the Trustee shall have the right to inspect
the Note Register at all reasonable times and to obtain copies thereof, and the
Trustee shall have the right to rely upon a certificate executed on behalf of
the Note Registrar by an Executive Officer thereof as to the names and addresses
of the Holders of the Notes and the principal amounts and number of such Notes.
Upon surrender for registration of transfer of any Note at the office or
agency of the Issuer to be maintained as provided in Section 3.02, the Issuer
shall execute, and the Trustee shall authenticate and the Noteholder shall
obtain from the Trustee, in the name of the designated transferee or
transferees, one or more new Notes in any authorized denominations, of a like
aggregate principal amount.
At the option of the Holder, Notes may be exchanged for other Notes in any
authorized denominations, of a like aggregate principal amount, upon surrender
of the Notes to be exchanged at such office or agency. Whenever any Notes are
so
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surrendered for exchange, the Issuer shall execute, and the Trustee shall
authenticate and the Noteholder shall obtain from the Trustee, the Notes which
the Noteholder making the exchange is entitled to receive.
All Notes issued upon any registration of transfer or exchange of Notes
shall be the valid obligations of the Issuer, evidencing the same debt, and
entitled to the same benefits under this Indenture, as the Notes surrendered
upon such registration of transfer or exchange.
Every Note presented or surrendered for registration of transfer or
exchange shall be duly endorsed by, or be accompanied by a written instrument of
transfer in form satisfactory to the Trustee duly executed by, the Holder
thereof or such Holder's attorney duly authorized in writing, with such
signature guaranteed by a commercial bank or trust company located, or having a
correspondent located, in [The City of New York] or the city in which the
Corporate Trust Office is located, or by a member firm of a national securities
exchange, and such other documents as the Trustee may require.
No service charge shall be made to a Holder for any registration of
transfer or exchange of Notes, but the Issuer or the Trustee may require payment
of a sum sufficient to cover any tax or other governmental charge that may be
imposed in connection with any registration of transfer or exchange of Notes,
other than exchanges pursuant to Section 2.03 or 9.06 not involving any
transfer.
The preceding provisions of this section notwithstanding, the Issuer shall
not be required to make and the Note Registrar need not register transfers or
exchanges of Notes selected for redemption or of any Note for a period of 15
days preceding the due date for any payment with respect to the Note.
SECTION 2.05. Mutilated, Destroyed, Lost or Stolen Notes. If (i) any
mutilated Note is surrendered to the Trustee, or the Trustee receives evidence
to its satisfaction of the destruction, loss or theft of any Note, and (ii)
there is delivered to the Trustee and such security or indemnity as may be
required by them to hold the Issuer and the Trustee harmless, then, in the
absence of notice to the Issuer, the Note Registrar or the Trustee that such
Note has been acquired by a bona fide purchaser, the Issuer shall execute and
upon its request the Trustee shall authenticate and deliver, in exchange for or
in lieu of any such mutilated, destroyed, lost or stolen Note, a replacement
Note; provided, however, that if any such destroyed, lost or stolen Note, but
not a mutilated Note, shall have become or within seven days shall be due and
payable, or shall have been called for redemption, instead of issuing a
replacement Note, the Issuer may pay such destroyed, lost or stolen Note when so
due or payable or upon the Redemption Date without surrender thereof. If, after
the delivery of such replacement Note or payment of a destroyed, lost or stolen
Note pursuant to the proviso to the preceding sentence, a bona fide purchaser of
the original Note in lieu of which such replacement Note was issued presents for
payment such original Note, the Issuer
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and the Trustee shall be entitled to recover such replacement Note (or such
payment) from the Person to whom it was delivered or any Person taking such
replacement Note from such Person to whom such replacement Note was delivered or
any assignee of such Person, except a bona fide purchaser, and shall be entitled
to recover upon the security or indemnity provided therefor to the extent of any
loss, damage, cost or expense incurred by the Issuer or the Trustee in
connection therewith.
Upon the issuance of any replacement Note under this Section, the Issuer or
the Trustee may require the payment by the Holder of such Note of a sum
sufficient to cover any tax or other governmental charge that may be imposed in
relation thereto and any other reasonable expenses (including the fees and
expenses of the Trustee or the Note Registrar) connected therewith.
Every replacement Note issued pursuant to this Section in replacement of
any mutilated, destroyed, lost or stolen Note shall constitute an original
additional contractual obligation of the Issuer, whether or not the mutilated,
destroyed, lost or stolen Note shall be at any time enforceable by anyone, and
shall be entitled to all the benefits of this Indenture equally and
proportionately with any and all other Notes duly issued hereunder.
The provisions of this Section are exclusive and shall preclude (to the
extent lawful) all other rights and remedies with respect to the replacement or
payment of mutilated, destroyed, lost or stolen Notes.
SECTION 2.06. Person Deemed Owner. Prior to due presentment for
registration of transfer of any Note, the Issuer, the Trustee and any agent of
the Issuer or the Trustee may treat the Person in whose name any Note is
registered (as of the day of determination) as the owner of such Note for the
purpose of receiving payments of principal of and interest, if any, on such Note
and for all other purposes whatsoever, whether or not such Note be overdue, and
none of the Issuer, the Trustee nor any agent of the Issuer or the Trustee shall
be affected by notice to the contrary.
SECTION 2.07. Payment of Principal and Interest; Defaulted Interest.
(a) The Notes shall accrue interest as provided in the forms of the Class
A-1 Note and the Class A-2 Note set forth in Exhibits C-1 and C-2, respectively,
and such interest shall be payable on each Distribution Date as specified
therein, subject to Section 3.01. Any installment of interest or principal, if
any, payable on any Note which is punctually paid or duly provided for by the
Issuer on the applicable Distribution Date shall be paid to the Person in whose
name such Note (or one or more Predecessor Notes) is registered on the Record
Date, by check mailed first-class, postage prepaid to such Person's address as
it appears on the Note Register on such Record Date, except that, unless
Definitive Notes have been issued pursuant to Section 2.11, with respect to
Notes registered on the Record Date in the
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name of the nominee of the Depository, payment will be made by wire transfer in
immediately available funds to the account designated by such nominee and except
for (i) the final installment of principal payable with respect to such Note on
a Distribution Date and (ii) the Redemption Price for any Note called for
redemption pursuant to Section 10.01(a), which shall be payable as provided
below. The funds represented by any such checks returned undelivered shall be
held in accordance with Section 3.03.
(b) The principal of each Note shall be payable in installments on each
Distribution Date as provided in the forms of the Class A-1 Note and the Class
A-2 Note set forth in Exhibits C-1 and C-2, respectively. Notwithstanding the
foregoing, the entire unpaid principal amount of the Notes shall be due and
payable, if not previously paid, on the date on which an Event of Default shall
have occurred and be continuing and the Trustee or a Note Majority have declared
the Notes to be immediately due and payable in the manner provided in Section
5.02. All principal payments on a class of Notes shall be made pro rata to the
Noteholders of such Class entitled thereto. The Trustee shall notify the Person
in whose name a Note is registered at the close of business on the Record Date
preceding the Distribution Date on which the Issuer expects that the final
installment of principal of and interest on such Note will be paid. Such notice
shall be mailed no later than five days prior to such final Distribution Date
and shall specify that such final installment will be payable only upon
presentation and surrender of such Note and shall specify the place where such
Note may be presented and surrendered for payment of such installment. Notices
in connection with redemptions of Notes shall be mailed to Noteholders as
provided in Section 10.02.
SECTION 2.08. Cancellation. All Notes surrendered for payment,
registration of transfer, exchange or redemption shall, if surrendered to any
Person other than the Trustee, be delivered to the Trustee and shall be promptly
canceled by the Trustee. The Issuer may at any time deliver to the Trustee for
cancellation any Notes previously authenticated and delivered hereunder which
the Issuer may have acquired in any manner whatsoever, and all Notes so
delivered shall be promptly canceled by the Trustee. No Notes shall be
authenticated in lieu of or in exchange for any Notes canceled as provided in
this Section, except as expressly permitted by this Indenture. All canceled
Notes may be held or disposed of by the Trustee in accordance with its standard
retention or disposal policy as in effect at the time unless the Issuer shall
direct by an Issuer Order that they be destroyed or returned to it, provided
that such Issuer Order is timely and the Notes have not been previously disposed
of by the Trustee.
SECTION 2.09. Book-Entry Notes. The Notes, upon original issuance, will
be issued in the form of a typewritten Note or Notes representing the Book-Entry
Notes, to be delivered to The Depository Trust Company, the initial Depository,
by, or on behalf of, the Issuer. Each such Note shall initially be registered
on the Note Register in the name of Cede & Co., the nominee of the initial
Depository, and no Note Owner will receive a Definitive Note representing such
Note Owner's interest
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in such Note, except as provided in Section 2.11. Unless
and until definitive, fully registered Notes (the "Definitive Notes") have been
issued to Note Owners pursuant to Section 2.11:
(i) the provisions of this Section shall be in full force and effect;
(ii) the Note Registrar and the Trustee shall be entitled to deal with
the Depository for all purposes of this Indenture (including the payment of
principal of and interest on the Notes and the giving of instructions or
directions hereunder) as the sole holder of the Notes, and shall have no
obligation to the Note Owners;
(iii) to the extent that the provisions of this Section conflict with
any other provisions of this Indenture, the provisions of this Section
shall control;
(iv) the rights of Note Owners shall be exercised only through the
Depository and shall be limited to those established by law and agreements
between such Note Owners and the Depository and/or the Depository
Participants. Pursuant to the Depository Agreement, unless and until
Definitive Notes are issued pursuant to Section 2.11, the initial
Depository will make book-entry transfers among the Depository Participants
and receive and transmit payments of principal of and interest on the Notes
to such Depository Participants; and
(v) whenever this Indenture requires or permits actions to be taken
based upon instructions or directions of Holders of Notes evidencing a
specified percentage of the Outstanding Amount of the Notes, the Depository
shall be deemed to represent such percentage only to the extent that it has
received instructions to such effect from Note Owners and/or Depository
Participants owning or representing, respectively, such required percentage
of the beneficial interest in the Notes and has delivered such instructions
to the Trustee.
SECTION 2.10. Notices to Depository. Whenever a notice or other
communication to the Noteholders is required under this Indenture, unless and
until Definitive Notes shall have been issued to Note Owners pursuant to Section
2.11, the Trustee shall give all such notices and communications specified
herein to be given to Holders of the Notes to the Depository and shall have no
obligation to the Note Owners.
SECTION 2.11. Definitive Notes. If (i) the Administrator advises the
Trustee in writing that the Depository is no longer willing or able properly to
discharge its responsibilities with respect to the Notes, and the Administrator
is unable to locate a qualified successor, (ii) the Administrator at its option
advises the Trustee in writing that it elects to terminate the book-entry system
through the Depository or (iii) after
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the occurrence of an Event of Default, a Note Majority advises the Depository in
writing that the continuation of a book-entry system through the Depository is
no longer in the best interests of the Note Owners, then the Depository shall
notify all Note Owners and the Trustee of the occurrence of any such event and
of the availability of Definitive Notes to Note Owners requesting the same. Upon
surrender to the Trustee of the Note or Notes representing the Book-Entry Notes
by the Depository, accompanied by registration instructions, the Issuer shall
execute and the Trustee shall authenticate the Definitive Notes in accordance
with the instructions of the Depository. None of the Issuer, the Note Registrar
or the Trustee shall be liable for any delay in delivery of such instructions
and may conclusively rely on, and shall be protected in relying on, such
instructions. Upon the issuance of Definitive Notes, the Trustee shall recognize
the Holders of the Definitive Notes as Noteholders.
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ARTICLE III
COVENANTS
SECTION 3.01. Payment of Principal, Interest and Premium. The Issuer will
duly and punctually pay the principal and interest on the Notes in accordance
with the terms of the Notes and this Indenture. Without limiting the foregoing,
the Issuer will cause to be distributed all amounts on deposit in the Note
Distribution Account on a Distribution Date in accordance with Section 8.02(b).
Amounts properly withheld under the Code by any Person from a payment to any
Noteholder of interest and/or principal shall be considered as having been paid
by the Issuer to such Noteholder for all purposes of this Indenture.
SECTION 3.02. Maintenance of Office or Agency. The Issuer will maintain
in St. Paul, Minnesota, an office or agency where Notes may be surrendered for
registration of transfer or exchange, and where notices and demands to or upon
the Issuer in respect of the Notes and this Indenture may be served. The Issuer
hereby initially appoints the Trustee to serve as its agent for the foregoing
purposes. The Issuer will give prompt written notice to the Trustee of the
location, and of any change in the location, of any such office or agency. If
at any time the Issuer shall fail to maintain any such office or agency or shall
fail to furnish the Trustee with the address thereof, such surrenders, notices
and demands may be made or served at the Corporate Trust Office, and the Issuer
hereby appoints the Trustee as its agent to receive all such surrenders, notices
and demands.
SECTION 3.03. Money for Payments To Be Held in Trust. As provided in
Section 8.02, all payments of amounts due and payable with respect to any Notes
that are to be made pursuant to Section 8.02(c) from amounts withdrawn from the
Note Distribution Account, Spread Account, or Reserve Account shall be made on
behalf of the Issuer by the Trustee or by another Paying Agent, and no amounts
so withdrawn from the Note Distribution Account, Spread Account, or Reserve
Account for payment of Notes shall be paid over to the Issuer.
On or before each Distribution Date or Redemption Date, the Issuer shall
deposit or cause to be deposited in the Note Distribution Account an aggregate
sum sufficient to pay the amounts then becoming due, such sum to be held in
trust for the benefit of the Persons entitled thereto and (unless the Paying
Agent is the Trustee) shall promptly notify the Trustee of its action or failure
so to act.
The Issuer will cause each Paying Agent other than the Trustee to execute
and deliver to the Trustee an instrument in which such Paying Agent shall agree
with the Trustee (and if the Trustee acts as Paying Agent, it hereby so agrees),
subject to the provisions of this Section, that such Paying Agent will:
(i) hold all sums held by it for the payment of amounts due with
respect to the Notes in trust for the benefit of the Persons entitled
thereto
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until such sums shall be paid to such Persons or otherwise disposed
of as herein provided and pay such sums to such Persons as herein provided;
(ii) give the Trustee notice of any default (of which it has actual
knowledge) by the Issuer (or any other obligor upon the Notes) in the
making of any payment required to be made with respect to the Notes;
(iii) at any time during the continuance of any such default, upon
the written request of the Trustee, forthwith pay to the Trustee all sums
so held in trust by such Paying Agent;
(iv) immediately resign as a Paying Agent and forthwith pay to the
Trustee all sums held by it in trust for the payment of Notes if at any
time it ceases to meet the standards required to be met by a Paying Agent
at the time of its appointment; and
(v) comply with all requirements of the Code with respect to the
withholding from any payments made by it on any Notes of any applicable
withholding taxes imposed thereon and with respect to any applicable
reporting requirements in connection therewith.
The Issuer may at any time, for the purpose of obtaining the satisfaction
and discharge of this Indenture or for any other purpose, by Issuer Order direct
any Paying Agent to pay to the Trustee all sums held in trust by such Paying
Agent, such sums to be held by the Trustee upon the same trusts as those upon
which the sums were held by such Paying Agent; and upon such payment by any
Paying Agent to the Trustee, such Paying Agent shall be released from all
further liability with respect to such money.
Subject to applicable laws with respect to escheat of funds, any money held
by the Trustee or any Paying Agent in trust for the payment of any amount due
with respect to any Note and remaining unclaimed for two years after such amount
has become due and payable shall be discharged from such trust and upon Issuer
Request shall be deposited by the Trustee in the Collection Account; and the
Holder of such Note shall thereafter, as an unsecured general creditor, look
only to the Issuer for payment thereof, and all liability of the Trustee or such
Paying Agent with respect to such trust money shall thereupon cease; provided,
however, that the Trustee or such Paying Agent, before being required to make
any such repayment, may at the expense of the Issuer cause to be published once,
in a newspaper published in the English language, customarily published on each
Business Day and of general circulation in The City of New York, notice that
such money remains unclaimed and that, after a date specified therein, which
shall not be less than 30 days from the date of such publication, any unclaimed
balance of such money then remaining will be repaid to or for the account of the
Issuer. The Trustee may also adopt and employ, at the expense of the Issuer,
any other reasonable means of notification of such repayment (including, but not
limited to, mailing notice of such
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repayment to Holders whose Notes have been called but have not been surrendered
for redemption or whose right to or interest in moneys due and payable but not
claimed is determinable from the records of the Trustee or of any Paying Agent,
at the last address of record for each such Holder).
SECTION 3.04. Existence. The Issuer will keep in full effect its
existence, rights and franchises as a business trust under the laws of the State
of [Delaware] (unless it becomes, or any successor Issuer hereunder is or
becomes, organized under the laws of any other state or of the United States of
America, in which case the Issuer will keep in full effect its existence, rights
and franchises under the laws of such other jurisdiction) and will obtain and
preserve its qualification to do business in each jurisdiction in which such
qualification is or shall be necessary to protect the validity and
enforceability of this Indenture, the Notes, the Indenture Collateral and each
other instrument or agreement included in the Trust Estate.
SECTION 3.05. Protection of Trust Estate. The Issuer intends the security
interest Granted pursuant to this Indenture in favor of the Trustee to be prior
to all other liens in respect of the Trust Estate, and the Issuer shall take all
actions necessary to obtain and maintain, in favor of the Trustee, for the
benefit of the Noteholders, a first lien on and a first priority, perfected
security interest in the Trust Estate. The Issuer will from time to time
execute and deliver all such supplements and amendments hereto and all such
financing statements, continuation statements, instruments of further assurance
and other instruments, all as prepared by the Servicer and delivered to the
Issuer, and will take such other action necessary or advisable to:
(i) grant more effectively all or any portion of the Trust Estate;
(ii) maintain or preserve the lien and security interest (and the
priority thereof) created by this Indenture or carry out more effectively
the purposes hereof;
(iii) perfect, publish notice of or protect the validity of any Grant
made or to be made by this Indenture;
(iv) enforce any of the Indenture Collateral;
(v) preserve and defend title to the Trust Estate and the rights of
the Trustee in such Trust Estate against the claims of all persons and
parties; or
(vi) pay all taxes or assessments levied or assessed upon the Trust
Estate when due.
The Issuer hereby designates the Trustee its agent and attorney-in-fact to
execute any financing statement, continuation statement or other instrument
required by the Trustee pursuant to this Section.
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SECTION 3.06. Opinions as to Trust Estate.
(a) Promptly after the execution and delivery of this Indenture, the Issuer
shall furnish to the Trustee an Opinion of Counsel to the effect that, in the
opinion of such counsel, either (i) all financing statements and continuation
statements have been executed and filed that are necessary to create and
continue the Trustee's first priority perfected security interest in the
collateral for the benefit of the Noteholders, and reciting the details of such
filings or referring to prior Opinions of Counsel in which such details are
given, or (ii) no such action shall be necessary to perfect such security
interest; and
(b) Within 90 days after the beginning of each calendar year beginning with
the first calendar year beginning more than three months after the Cut-off Date,
the Issuer shall furnish to the Trustee an Opinion of Counsel, dated as of a
date during such 90-day period, to the effect that, in the opinion of such
counsel, either (i) all financing statements and continuation statements have
been executed and filed that are necessary to create and continue the Trustee's
first priority perfected security interest in the collateral for the benefit of
the Noteholders, and reciting the details of such filing or referring to prior
Opinions of Counsel in which such details are given, or (ii) no such action
shall be necessary to perfect such security interest.
SECTION 3.07. Performance of Obligations; Servicing of Contracts.
(a) The Issuer will not take any action and will use its best efforts not
to permit any action to be taken by others that would release any Person from
any of such Person's material covenants or obligations under any instrument or
agreement included in the Trust Estate or that would result in the amendment,
hypothecation, subordination, termination or discharge of, or impair the
validity or effectiveness of, any such instrument or agreement, except as
expressly provided in this Indenture, the Sale and Servicing Agreement or such
other instrument or agreement.
(b) The Issuer may contract with other Persons to assist it in performing
its duties under this Indenture, and any performance of such duties by a Person
identified to the Trustee in an Officers' Certificate of the Issuer shall be
deemed to be action taken by the Issuer. Initially, the Issuer has contracted
with the Servicer and the Administrator to assist the Issuer in performing its
duties under this Indenture.
(c) The Issuer will punctually perform and observe all of its obligations
and agreements contained in this Indenture, the Related Documents and in the
instruments and agreements included in the Trust Estate, including but not
limited to filing or causing to be filed all UCC financing statements and
continuation statements required to be filed by the terms of this Indenture and
the Sale and Servicing Agreement in accordance with and within the time periods
provided for herein and therein.
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(d) If the Issuer shall have knowledge of the occurrence of an "Event of
Termination" under the Sale and Servicing Agreement, the Issuer shall promptly
notify the Trustee and the Rating Agencies thereof, and shall specify in such
notice the action, if any, the Issuer is taking with respect of such default.
If an "Event of Termination" shall arise from the failure of the Servicer to
perform any of its duties or obligations under the Sale and Servicing Agreement
with respect to the Contracts, the Issuer shall take all reasonable steps
available to it to remedy such failure.
(e) If the Issuer has given notice of termination to the Servicer of the
Servicer's rights and powers pursuant to Section 7.02 of the Sale and Servicing
Agreement, as promptly as possible thereafter, a successor servicer shall be
appointed in accordance with Section 7.03 of the Sale and Servicing Agreement.
(f) Upon any termination of the Servicer's rights and powers pursuant to
the Sale and Servicing Agreement, the Issuer shall promptly notify the Trustee.
As soon as a successor Servicer is appointed, the Issuer shall notify the
Trustee of such appointment, specifying in such notice the name and address of
such successor Servicer.
(g) The Issuer agrees that it will not waive timely performance or
observance by the Servicer, the Trustee or the Company of their respective
duties under the Related Documents if the effect thereof would adversely affect
the Holders of the Notes.
SECTION 3.08. Negative Covenants. Until the Termination Date, the Issuer
shall not:
(i) except as expressly permitted by this Indenture or the Sale and
Servicing Agreement, sell, transfer, exchange or otherwise dispose of any
of the properties or assets of the Issuer, including those included in the
Trust Estate, unless directed to do so by the Trustee;
(ii) claim any credit on, or make any deduction from the principal,
interest or premium payable in respect of, the Notes (other than amounts
properly withheld from such payments under the Code) or assert any claim
against any present or former Noteholder by reason of the payment of the
taxes levied or assessed upon any part of the Trust Estate; or
(iii) (A) permit the validity or effectiveness of this Indenture to
be impaired, or permit the lien in favor of the Trustee created by this
Indenture to be amended, hypothecated, subordinated, terminated or
discharged, or permit any Person to be released from any covenants or
obligations with respect to the Notes under this Indenture except as may be
expressly permitted hereby, (B) permit any lien, charge, excise, claim,
security interest, mortgage or other encumbrance (other than the lien in
favor of the Trustee
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created by this Indenture) to be created on or extend to or otherwise arise
upon or burden the Trust Estate or any part thereof or any interest therein
or the proceeds thereof (other than tax liens, mechanics' liens and other
liens that arise by operation of law, in each case arising solely as a
result of an action or omission of the related Obligor), (C) permit the
lien in favor of the Trustee created by this Indenture not to constitute a
valid first priority (other than with respect to any such tax, mechanics'
or other lien) security interest in the Trust Estate, or (D) amend, modify
or fail to comply with the provisions of the Related Documents without the
prior written consent of the Trustee.
SECTION 3.09. Annual Statement as to Compliance. The Issuer will deliver
to the Trustee, within 120 days after the end of each fiscal year of the Issuer
(commencing with the fiscal year ended December 31, _____), an Officers'
Certificate stating, as to the Authorized Officer signing such Officer's
Certificate, that
(i) a review of the activities of the Issuer during such year and of
performance under this Indenture has been made under such Authorized
Officer's supervision; and
(ii) to the best of such Authorized Officer's knowledge, based on such
review, the Issuer has complied with all conditions and covenants under
this Indenture throughout such year, or, if there has been a default in the
compliance of any such condition or covenant, specifying each such default
known to such Authorized Officer and the nature and status thereof.
SECTION 3.10. Issuer May Consolidate, etc. Only on Certain Terms.
--------------------------------------------------
(a) The Issuer shall not consolidate or merge with or into any other
Person, unless
(i) the Person (if other than the Issuer) formed by or surviving such
consolidation or merger shall be a Person organized and existing under the
laws of the United States of America or any State and shall expressly
assume, by an indenture supplemental hereto, executed and delivered to the
Trustee, in form and substance satisfactory to the Trustee, the due and
punctual payment of the principal of and interest on all Notes and the
performance or observance of every agreement and covenant of this Indenture
and each other Related Document on the part of the Issuer to be performed
or observed, all as provided herein;
(ii) immediately after giving effect to such transaction, no Default
or Event of Default shall have occurred and be continuing;
(iii) the Rating Agency Condition shall have been satisfied with
respect to such transaction;
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(iv) the Issuer shall have received an Opinion of Counsel which shall
be delivered to and shall be satisfactory to the Trustee to the effect that
such transaction will not have any material adverse tax consequence to the
Trust, any Noteholder or any Certificateholder;
(v) any action as is necessary to maintain the lien and security
interest created in favor of the Trustee by this Indenture shall have been
taken;
(vi) the Issuer shall have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel (which shall describe the actions
taken as required by clause (a)(v) of this Section 3.10 or that no such
actions will be taken) each stating that such consolidation or merger and
such supplemental indenture comply with this Article III and that all
conditions precedent herein provided for relating to such transaction have
been compiled with (including any filing required by the Exchange Act); and
(vii) the Issuer or the Person (if other than the Issuer) formed by
or surviving such consolidation or merger has a net worth, immediately
after such consolidation or merger, that is (a) greater than zero and (b)
not less than the net worth of the Issuer immediately prior to giving
effect to such consolidation or merger.
(b) The Issuer shall not convey or transfer all or substantially all of its
properties or assets, including those included in the Trust Estate, to any
Person (except as expressly permitted by the Indenture or the Sale and Servicing
Agreement), unless
(i) the Person that acquires by conveyance or transfer the properties
and assets of the Issuer shall (A) be a United States citizen or a Person
organized and existing under the laws of the United States of America or
any State, (B) expressly assume, by an indenture supplemental hereto,
executed and delivered to the Trustee, in form and substance satisfactory
to the Trustee, the due and punctual payment of the principal of and
interest on all Notes and the performance or observance of every agreement
and covenant of this Indenture and each Related Document on the part of the
Issuer to be performed or observed, all as provided herein, (C) expressly
agree by means of such supplemental indenture that all right, title and
interest so conveyed or transferred shall be subject and subordinate to the
rights of Holders of the Notes, (D) unless otherwise provided in such
supplemental indenture, expressly agree to indemnify, defend and hold
harmless the Issuer against and from any loss, liability or expense arising
under or related to this Indenture and the Notes and (E) expressly agree by
means of such supplemental indenture that such Person (or if a group of
Persons, then one specified Person) shall make all filings with the
Commission (and any other appropriate Person) required by the Exchange Act
in connection with the
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Notes;
(ii) immediately after giving effect to such transaction, no Default
or Event of Default shall have occurred and be continuing;
(iii) the Rating Agency Condition shall have been satisfied with
respect to such transaction;
(iv) the Issuer shall have received an Opinion of Counsel which shall
be delivered to and shall be satisfactory to the Trustee to the effect that
such transaction will not have any material adverse tax consequence to the
Trust, any Noteholder or any Certificateholder;
(v) any action as is necessary to maintain the lien and security
interest created in favor of the Trustee by this Indenture shall have been
taken;
(vi) the Issuer shall have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel (which shall describe the actions
taken as required by clause (b)(v) of this Section 3.10 or that no such
actions will be taken) each stating that such conveyance or transfer and
such supplemental indenture comply with this Article III and that all
conditions precedent herein provided for relating to such transaction have
been complied with (including any filing required by the Exchange Act); and
(vii) the Person acquiring by conveyance or transfer the properties
or assets of the Issuer has a net worth, immediately after such conveyance
or transfer, that is (a) greater than zero and (b) not less than the net
worth of the Issuer immediately prior to giving effect to such conveyance
or transfer.
SECTION 3.11. Successor or Transferee.
(a) Upon any consolidation or merger of the Issuer in accordance with
Section 3.10(a), the Person formed by or surviving such consolidation or merger
(if other than the Issuer) shall succeed to, and be substituted for, and may
exercise every right and power of, the Issuer under this Indenture with the same
effect as if such Person had been named as the Issuer herein.
(b) Upon a conveyance or transfer of all the assets and properties of the
Issuer pursuant to Section 3.10(b), the Issuer will be released from every
covenant and agreement of this Indenture to be observed or performed on the part
of the Issuer with respect to the Notes immediately upon the delivery of written
notice to the Trustee stating that the Issuer is to be so released.
SECTION 3.12. No Other Business. The Issuer shall not engage in any
business other than financing, purchasing, owning, selling and managing the
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Contracts in the manner contemplated by this Indenture and the Related Documents
and activities incidental thereto.
SECTION 3.13. No Borrowing. The Issuer shall not issue, incur, assume,
guarantee or otherwise become liable, directly or indirectly, for any
Indebtedness except for (i) the Notes and (ii) any other Indebtedness permitted
by or arising under the Related Documents. The proceeds of the Notes and the
Certificates shall be used exclusively to fund the Issuer's purchase of the
Contracts and the other assets specified in the Sale and Servicing Agreement, to
fund the Spread Account and to pay the Issuer's organizational, transactional
and start-up expenses.
SECTION 3.14. Servicer's Obligations. The Issuer shall cause the Servicer
to fulfill its obligations under the Sale and Servicing Agreement.
SECTION 3.15. Guarantees, Loans, Advances and Other Liabilities. Except
as contemplated by the Sale and Servicing Agreement or this Indenture, the
Issuer shall not make any loan or advance or credit to, or guarantee (directly
or indirectly or by an instrument having the effect of assuming another's
payment or performance on any obligation or capability of so doing or
otherwise), endorse or otherwise become contingently liable, directly or
indirectly, in connection with the obligations, stocks or dividends of, or own,
purchase, repurchase or acquire (or agree contingently to do so) any stock,
obligations, assets or securities of, any other interest in, or make any capital
contribution to, any other Person.
SECTION 3.16. Capital Expenditures. The Issuer shall not make any
expenditure (by long-term or operating lease or otherwise) for capital assets
(either realty or personalty).
SECTION 3.17. Restricted Payments. Except as expressly permitted by this
Indenture or the Sale and Servicing Agreement, the Issuer shall not, directly or
indirectly, (i) make any distribution (by reduction of capital or otherwise),
whether in cash, property, securities or a combination thereof, to the Owner
Trustee or any owner of a beneficial interest in the Issuer or otherwise with
respect to any ownership or equity interest or security in or of the Issuer or
to the Servicer, (ii) redeem, purchase, retire or otherwise acquire for value
any such ownership or equity interest or security or (iii) set aside or
otherwise segregate any amounts for any such purpose. The Issuer will not,
directly or indirectly, make payments to or distributions from the Collection
Account except in accordance with this Indenture and the Related Documents.
SECTION 3.18. Notice of Events of Default. The Issuer agrees to give the
Trustee and the Rating Agencies prompt written notice of each Event of Default
hereunder and each default on the part of the Servicer or the Company of its
obligations under the Sale and Servicing Agreement.
SECTION 3.19. Further Instruments and Acts. Upon request of the Trustee,
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the Issuer will execute and deliver such further instruments and do such further
acts as may be reasonably necessary or proper to carry out more effectively the
purpose of this Indenture.
SECTION 3.20. Compliance with Laws. The Issuer shall comply with the
requirements of all applicable laws, the noncompliance with which would,
individually or in the aggregate, materially and adversely affect the ability of
the Issuer to perform its obligations under the Notes, this Indenture or any
Related Document.
SECTION 3.21. Amendments of Sale and Servicing Agreement and Trust
Agreement. The Issuer shall not agree to any amendment to Section 10.03 of the
Sale and Servicing Agreement or Section 11.1 of the Trust Agreement to eliminate
the requirements thereunder that the Trustee or the Holders of the Notes consent
to amendments thereto as provided therein.
SECTION 3.22. Removal of Administrator. So long as any Notes are issued
and outstanding, the Issuer shall not remove the Administrator without cause
unless the Rating Agency Condition shall have been satisfied in connection with
such removal.
SECTION 3.23. Income Tax Characterization. For purposes of federal
income, state and local income and franchise and any other income taxes, the
Issuer will treat the Notes as indebtedness of the Issuer. The Issuer, by
entering into this Indenture, and each Noteholder, by its acceptance of its Note
(and each Note Owner by its acceptance of an interest in the applicable Book-
Entry Note), agree to treat the Notes for federal, state and local income,
single business and franchise tax purposes as indebtedness of the Issuer.
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ARTICLE IV
SATISFACTION AND DISCHARGE
SECTION 4.01. Satisfaction and Discharge of Indenture. This Indenture
shall cease to be of further effect with respect to the Notes except as to (i)
rights of registration of transfer and exchange, (ii) substitution of mutilated,
destroyed, lost or stolen Notes, (iii) rights of Noteholders to receive payments
of principal, interest and premium, if any, thereon, (iv) [Sections 3.03, 3.04,
3.05, 3.07, 3.08, 3.10, 3.12, 3.13, 3.20, 3.21 and 3.23], (v) the rights,
obligations and immunities of the Trustee hereunder (including the rights of the
Trustee under Section 6.07 and the obligations of the Trustee under Section
4.02) and (vi) the rights of Noteholders as beneficiaries hereof with respect to
the property so deposited with the Trustee payable to all or any of them, and
the Trustee, on demand of and at the expense of the Issuer, shall execute proper
instruments acknowledging satisfaction and discharge of this Indenture with
respect to the Notes, when
(A) either
(1) all Notes theretofore authenticated and delivered (other than
(i) Notes that have been destroyed, lost or stolen and that have been
replaced or paid as provided in Section 2.05 and (ii) Notes for whose
payment money has theretofore been deposited in trust or segregated and
held in trust by the Issuer and thereafter repaid to the Issuer or
discharged from such trust, as provided in Section 3.03) have been
delivered to the Trustee for cancellation; or
(2) all Notes not theretofore delivered to the Trustee for
cancellation
(i) have become due and payable, or
(ii) will become due and payable at the Final Scheduled Maturity
Date within one year, or
(iii) are to be called for redemption within one year under
arrangements satisfactory to the Trustee for the giving of notice of
redemption by the Trustee in the name, and at the expense, of the
Issuer,
and the Issuer, in the case of (i), (ii) or (iii) above, has
irrevocably deposited or caused to be irrevocably deposited with the
Trustee as part of the Trust Estate cash or direct obligations of or
obligations guaranteed by the United States of America (which will mature
prior to the date such amounts are payable), in trust in an Eligible
Account in the name of the Trustee for such purpose, in an amount
sufficient to
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pay and discharge the entire indebtedness on such Notes not theretofore
delivered to the Trustee for cancellation when due to the Final Scheduled
Distribution Date or Redemption Date (if Notes shall have been called for
redemption pursuant to Section 10.01(a)), as the case may be;
(B) the Issuer has paid or caused to be paid all Secured Obligations; and
(C) the Issuer has delivered to the Trustee an Officers' Certificate, an
Opinion of Counsel and (if required by the TIA or the Trustee) an
Independent Certificate from a firm of certified public accountants, each
meeting the applicable requirements of Section 11.01(a) and each stating
that all conditions precedent herein provided for relating to the
satisfaction and discharge of this Indenture have been complied with and
the Rating Agency Condition has been satisfied.
SECTION 4.02. Application of Trust Money. All moneys deposited with the
Trustee pursuant to Section 4.01 hereof shall be held in trust and applied by
it, in accordance with the provisions of the Notes and this Indenture, to the
payment, either directly or through any Paying Agent, as the Trustee may
determine, to the Holders of the particular Notes for the payment or redemption
of which such moneys have been deposited with the Trustee, of all sums due and
to become due thereon for principal and interest; but such moneys need not be
segregated from other funds except to the extent required herein or in the Sale
and Servicing Agreement or required by law.
SECTION 4.03. Repayment of Moneys Held by Paying Agent. In connection
with the satisfaction and discharge of this Indenture with respect to the Notes,
all moneys then held by any Paying Agent other than the Trustee under the
provisions of this Indenture with respect to such Notes shall, upon demand of
the Issuer, be paid to the Trustee to be held and applied according to Section
3.03 and thereupon such Paying Agent shall be released from all further
liability with respect to such moneys.
SECTION 4.04. Release of Trust Estate. The Trustee shall, on or after the
Termination Date, release any remaining portion of the Trust Estate from the
lien created by this Indenture and deposit in the Collection Account any funds
then on deposit in any other Trust Account. The Trustee shall release property
from the lien created by this Indenture pursuant to this Section 4.04 only upon
receipt of an Issuer Request accompanied by an Officer's Certificate, an Opinion
of Counsel and (if required by the TIA) Independent Certificates in accordance
with TIA (S)(S) 314(c) and 314(d)(1) meeting the applicable requirements of
Section 11.01.
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ARTICLE V
REMEDIES
SECTION 5.01. Events of Default. "Event of Default," wherever used
herein, means any one of the following events (whatever the reason for such
Event of Default and whether it shall be voluntary or involuntary or be effected
by operation of law or pursuant to any judgment, decree or order of any court or
any order, rule or regulation of any administrative or governmental body):
(i) default in the payment of any interest on any Note when the same
becomes due and payable, and such default shall continue for a period of
five days; or
(ii) default in the payment of the principal of or any installment of
the principal of any Note when the same becomes due and payable; or
(iii) default in the observance or performance of any covenant or
agreement of the Issuer made in this Indenture (other than a covenant or
agreement, a default in the observance or performance of which is elsewhere
in this Section specifically dealt with), or any representation or warranty
of the Issuer made in this Indenture or in any certificate or other writing
delivered pursuant hereto or in connection herewith proving to have been
incorrect in any material respect as of the time when the same shall have
been made, and such default shall continue or not be cured, or the
circumstance or condition in respect of which such misrepresentation or
warranty was incorrect shall not have been eliminated or otherwise cured,
for a period of 30 days after there shall have been given, by registered or
certified mail, to the Issuer by the Trustee or to the Issuer and the
Trustee by the Holders of at least 25% of the Outstanding Amount of the
Notes, a written notice specifying such default or incorrect representation
or warranty and requiring it to be remedied and stating that such notice is
a "Notice of Default" hereunder; or
(iv) the commencement of an involuntary case against the Issuer under
any applicable Federal or state bankruptcy, insolvency or other similar law
now or hereafter in effect, and such case is not dismissed within 60 days;
or
(v) the commencement by the Issuer of a voluntary case under any
applicable Federal or state bankruptcy, insolvency or other similar law now
or hereafter in effect, the entry of an order for relief in an involuntary
case against the Issuer under any such law, the consent by the Issuer to
the entry of any such order for relief, the consent by the Issuer to the
appointment or taking possession by a receiver, liquidator, assignee,
custodian, trustee, sequestrator or similar official of the Issuer or for
any substantial part of the
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Trust Estate, the making by the Issuer of any general assignment for the
benefit of creditors, the failure by the Issuer generally to pay its debts
as such debts become due, or the taking of action by the Issuer in
furtherance of any of the foregoing.
The Issuer shall deliver to the Trustee, within five days after obtaining
knowledge of the occurrence thereof, written notice in the form of an Officers'
Certificate of any event which with the giving of notice and the lapse of time
would become an Event of Default under clause (iii), its status and what action
the Issuer is taking or proposes to take with respect thereto.
SECTION 5.02. Rights upon Event of Default.
If an Event of Default shall have occurred and be continuing, the Trustee
in its discretion may, or if so requested in writing by Holders holding Notes
representing at least 66-2/3% of the aggregate outstanding principal amount of
each Class of Notes shall, upon prior written notice to the Rating Agencies,
declare by written notice to the Issuer that the Notes become, whereupon they
shall become, immediately due and payable at par, together with accrued interest
thereon. Notwithstanding anything to the contrary in this paragraph (c), if an
Event of Default specified in Section 5.01(iv) or (v) shall occur and be
continuing the Notes shall become immediately due and payable at par, together
with accrued interest thereon. If an Event of Default shall have occurred and
be continuing, the Trustee may exercise any of the remedies specified in Section
5.04(a).
SECTION 5.03. Collection of Indebtedness and Suits for Enforcement by
Trustee; Authority of Trustee.
(a) The Issuer covenants that if any Notes are accelerated following the
occurrence of an Event of Default, the Issuer will, upon demand of the Trustee,
pay to it, for the benefit of the Holders of such Notes, the whole amount then
due and payable on such Notes for principal and interest, with interest upon the
overdue principal, and, to the extent payment at such rate of interest shall be
legally enforceable, upon overdue installments of interest, at the applicable
Interest Rate and in addition thereto such further amount as shall be sufficient
to cover the costs and expenses of collection, including the reasonable
compensation, expenses, disbursements and advances of the Trustee and its agents
and counsel.
(b) If an Event of Default occurs and is continuing, the Trustee may, in
its discretion, proceed to protect and enforce its rights and the rights of the
Noteholders, by such appropriate Proceedings as the Trustee shall deem most
effective to protect and enforce any such rights, whether for the specific
enforcement of any covenant or agreement in this Indenture or in aid of the
exercise of any power granted herein, or to enforce any other proper remedy or
legal or equitable right vested in the Trustee by this Indenture or by law.
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(c) In case there shall be pending, relative to the Issuer or any other
obligor upon the Notes or any Person having or claiming an ownership interest in
the Trust Estate, Proceedings under Title 11 of the United States Code or any
other applicable Federal or state bankruptcy, insolvency or other similar law,
or in case a receiver, assignee or trustee in bankruptcy or reorganization,
liquidator, sequestrator or similar official shall have been appointed for or
taken possession of the Issuer or its property or such other obligor or Person,
or in case of any other comparable judicial Proceedings relative to the Issuer
or other obligor upon the Notes, or to the creditors or property of the Issuer
or such other obligor, the Trustee, irrespective of whether the principal of any
Notes shall then be due and payable as therein expressed or by declaration or
otherwise and irrespective of whether the Trustee shall have made any demand
pursuant to the provisions of this Section, shall be entitled and empowered, by
intervention in such Proceedings or otherwise:
(i) to file and prove a claim or claims for the whole amount of
principal, interest and premium, if any, owing and unpaid in respect of the
Notes and to file such other papers or documents as may be necessary or
advisable in order to have the claims of the Trustee (including any claim
for reasonable compensation to the Trustee and each predecessor Trustee,
and their respective agents, attorneys and counsel, and for reimbursement
of all expenses and liabilities incurred, and all advances made, by the
Trustee and each predecessor Trustee, except as a result of negligence or
bad faith) and of the Noteholders allowed in such Proceedings;
(ii) unless prohibited by applicable law and regulations, to vote on
behalf of the Holders of Notes in any election of a trustee, a standby
trustee or Person performing similar functions in any such Proceedings;
(iii) to collect and receive any moneys or other property payable or
deliverable on any such claims and to distribute all amounts received with
respect to the claims of the Noteholders and of the Trustee on their
behalf; and
(iv) to file such proofs of claim and other papers or documents as may
be necessary or advisable in order to have the claims of the Trustee or the
Holders of Notes allowed in any judicial proceedings relative to the
Issuer, its creditors and its property;
and any trustee, receiver, liquidator, custodian or other similar official in
any such Proceeding is hereby authorized by each of such Noteholders to make
payments to the Trustee, and, in the event that the Trustee shall consent to the
making of payments directly to such Noteholders, to pay to the Trustee such
amounts as shall be sufficient to cover reasonable compensation to the Trustee,
each predecessor Trustee and their respective agents, attorneys and counsel, and
all other expenses and liabilities incurred, and all advances made, by the
Trustee and each predecessor Trustee except as a result of negligence or bad
faith.
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(d) Nothing herein contained shall be deemed to authorize the Trustee to
authorize or consent to or vote for or accept or adopt on behalf of any
Noteholder any plan of reorganization, arrangement, adjustment or composition
affecting the Notes or the rights of any Holder thereof or to authorize the
Trustee to vote in respect of the claim of any Noteholder in any such proceeding
except, as aforesaid, to vote for the election of a trustee in bankruptcy or
similar Person.
(e) All rights of action and of asserting claims under this Indenture or
under any of the Notes, may be enforced by the Trustee without the possession of
any of the Notes or the production thereof in any trial or other Proceedings
relative thereto, and any such action or Proceedings instituted by the Trustee
shall be brought in its own name as trustee of an express trust, and any
recovery of judgment, subject to the payment of the expenses, disbursements and
compensation of the Trustee, each predecessor Trustee and their respective
agents and attorneys, shall be for the ratable benefit of the Holders of the
Notes.
(f) In any Proceedings brought by the Trustee (including any Proceedings
involving the interpretation of any provision of this Indenture), the Trustee
shall be held to represent all the Holders of the Notes, and it shall not be
necessary to make any Noteholder a party to any such Proceedings.
SECTION 5.04. Remedies. (a) If an Event of Default shall have occurred
and be continuing, the Trustee may (subject to Section 5.05):
(i) institute Proceedings in its own name and as or on behalf of a
trustee of an express trust for the collection of all amounts then payable
on the Notes or under this Indenture with respect thereto, whether by
declaration or otherwise, enforce any judgment obtained, and collect from
the Issuer and any other obligor upon such Notes moneys adjudged due;
(ii) institute Proceedings from time to time for the complete or
partial foreclosure of this Indenture with respect to the Trust Estate;
(iii) exercise any remedies of a secured party under the UCC and any
other remedy available to the Trustee and take any other appropriate action
to protect and enforce the rights and remedies of the Trustee on behalf of
the Noteholders; and
(iv) sell the Trust Estate or any portion thereof or rights or
interest therein, at one or more public or private sales called and
conducted in any manner permitted by law; provided, however, that the
Trustee may not sell or otherwise liquidate the Trust Estate following an
Event of Default unless (A) such Event of Default is of the type described
in Section 5.01(i) or (ii), or (B) either (I) the Holders of 100% of the
Outstanding Amount of the Notes consent thereto, (II) the proceeds of such
sale or liquidation distributable to the Noteholders will be sufficient to
discharge in full all amounts then due
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and unpaid upon such Notes for principal and interest, or (III) the Trustee
determines that the Trust Estate will not continue to provide sufficient
funds for the payment of principal of and interest on the Notes as they
would have become due if the Notes had not been declared due and payable,
and the Trustee provides prior written notice to the Rating Agencies and
obtains the consent of Holders of 66-2/3% of the Outstanding Amount of each
Class of Notes. In determining such sufficiency or insufficiency with
respect to clause (II) or (III), the Trustee may, but need not, obtain and
rely upon an opinion of an Independent investment banking or accounting
firm of national reputation as to the feasibility of such proposed action
and as to the sufficiency of the Trust Estate for such purpose.
SECTION 5.05. Optional Preservation of the Contracts. If any Notes have
been declared to be due and payable under Section 5.02 following an Event of
Default and such declaration and its consequences have not been rescinded and
annulled, the Trustee may, but need not, elect to maintain possession of the
Trust Estate. It is the desire of the parties hereto and the Noteholders that
there be at all times sufficient funds for the payment of principal of and
interest on the Notes, and the Trustee shall take such desire into account when
determining whether or not to maintain possession of the Trust Estate. In
determining whether to maintain possession of the Trust Estate, the Trustee may,
but need not, obtain and rely upon an opinion of an Independent investment
banking or accounting firm of national reputation as to the feasibility of such
proposed action and as to the sufficiency of the Trust Estate for such purpose.
SECTION 5.06. Priorities.
If the Trustee collects any money or property pursuant to this Article V,
including any money or property in respect of liquidation of the Trust Estate
pursuant to Section 5.04(a)(iv), the Trustee shall pay out the money or property
as promptly as practicable in the following order:
(i) amounts due and owing and required to be distributed to the
Servicer, pursuant to priorities (i) and (ii) of Section 6.06(a) of the
Sale and Servicing Agreement and not previously distributed, in the order
of such priorities and without preference or priority of any kind within
such priorities;
(ii) to the Holders of the Notes in accordance with Section 8.02(c)
(other than any deposits into the Reserve Account required by Section
8.02(c)(8));
(iii) amounts due and unpaid on the Certificates for interest and
principal, to the Owner Trustee for distribution to Certificateholders in
accordance with Section 5.2(d) of the Trust Agreement;
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provided that any amounts collected from the Reserve Account shall be released
only for amounts due and unpaid on the Notes for interest and principal; and the
excess shall be paid to the General Partner.
SECTION 5.07. Limitation of Suits. No Holder of any Note shall have any
right to institute any Proceeding, judicial or otherwise, with respect to this
Indenture, or for the appointment of a receiver or trustee, or for any other
remedy hereunder, unless:
(i) such Holder has previously given written notice to the Trustee of
a continuing Event of Default;
(ii) the Holders of not less than 25% of the Outstanding Amount of the
Notes have made written request to the Trustee to institute such Proceeding
in respect of such Event of Default in its own name as Trustee hereunder;
(iii) such Holder or Holders have offered to the Trustee reasonable
indemnity against the costs, expenses and liabilities to be incurred in
complying with such request;
(iv) the Trustee for 60 days after its receipt of such notice, request
and offer of indemnity has failed to institute such Proceedings; and
(v) no direction inconsistent with such written request has been given
to the Trustee during such 60-day period by the Holders of a majority of
the Outstanding Amount of the Notes;
it being understood and intended that no one or more Holders of Notes shall have
any right in any manner whatever by virtue of, or by availing of, any provision
of this Indenture to affect, disturb or prejudice the rights of any other
Holders of Notes or to obtain or to seek to obtain priority or preference over
any other Holders or to enforce any right under this Indenture, except in the
manner herein provided.
In the event the Trustee shall receive conflicting or inconsistent requests
and indemnity from two or more groups of Holders of Notes, each representing
less than a majority of the Outstanding Amount of the Notes, the Trustee in its
sole discretion may determine what action, if any, shall be taken,
notwithstanding any other provisions of this Indenture.
SECTION 5.08. Unconditional Rights of Noteholders To Receive Principal and
Interest. Notwithstanding any other provisions in this Indenture, the Holder of
any Note shall have the right, which is absolute and unconditional, to receive
payment of the principal of and interest on such Note on or after the respective
due dates thereof expressed in such Note or in this Indenture (or, in the case
of redemption, on or after the Redemption Date) and to institute suit for the
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enforcement of any such payment, and such right shall not be impaired without
the consent of such Holder.
SECTION 5.09. Restoration of Rights and Remedies. If the Trustee or any
Noteholder has instituted any Proceeding to enforce any right or remedy under
this Indenture and such Proceeding has been discontinued or abandoned for any
reason or has been determined adversely to the Trustee or to such Noteholder,
then and in every such case the Issuer, the Trustee and the Noteholders shall,
subject to any determination in such Proceeding, be restored severally and
respectively to their former positions hereunder, and thereafter all rights and
remedies of the Trustee and the Noteholders shall continue as though no such
Proceeding had been instituted.
SECTION 5.10. Rights and Remedies Cumulative. No right or remedy herein
conferred upon or reserved to the Trustee or to the Noteholders is intended to
be exclusive of any other right or remedy, and every right and remedy shall, to
the extent permitted by law, be cumulative and in addition to every other right
and remedy given hereunder or now or hereafter existing at law or in equity or
otherwise. The assertion or employment of any right or remedy hereunder, or
otherwise, shall not prevent the concurrent assertion or employment of any other
appropriate right or remedy.
SECTION 5.11. Delay or Omission Not a Waiver. No delay or omission of the
Trustee or any Holder of any Note to exercise any right or remedy accruing upon
any Default or Event of Default shall impair any such right or remedy or
constitute a waiver of any such Default or Event of Default or an acquiescence
therein. Every right and remedy given by this Article V or by law to the
Trustee or to the Noteholders may be exercised from time to time, and as often
as may be deemed expedient, by the Trustee or by the Noteholders, as the case
may be.
SECTION 5.12. Control by Noteholders. The Holders of a majority of the
Outstanding Amount of the Notes shall have the right to direct the time, method
and place of conducting any Proceeding for any remedy available to the Trustee
with respect to the Notes or exercising any trust or power conferred on the
Trustee; provided that
(i) such direction shall not be in conflict with any rule of law or
with this Indenture;
(ii) subject to the express terms of Section 5.04, any direction to
the Trustee to sell or liquidate all or any portion of the Trust Estate
shall be by the Holders of Notes representing not less than 100% of the
Outstanding Amount of the Notes;
(iii) the Trustee may take any other action deemed proper by the
Trustee that is not inconsistent with such direction; provided, however,
that,
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subject to Section 6.01, the Trustee need not take any action that it
determines might involve it in liability or might materially adversely
affect the rights of any Noteholders not consenting to such action.
SECTION 5.13. Waiver of Past Defaults. The Holders of Notes of not less
than a majority of the Outstanding Amount of the Notes may waive any past
Default or Event of Default and its consequences except a Default (a) in payment
of principal of or interest on any of the Notes or (b) in respect of a covenant
or provision hereof which cannot be modified or amended without the consent of
the Holder of each Note. In the case of any such waiver, the Issuer, the
Trustee and the Holders of the Notes shall be restored to their former positions
and rights hereunder, respectively; but no such waiver shall extend to any
subsequent or other Default or impair any right consequent thereto. Upon any
such waiver, such Default shall cease to exist and be deemed to have been cured
and not to have occurred, and any Event of Default arising therefrom shall be
deemed to have been cured and not to have occurred, for every purpose of this
Indenture; but no such waiver shall extend to any subsequent or other Default or
Event of Default or impair any right consequent thereto.
SECTION 5.14. Undertaking for Costs. All parties to this Indenture agree,
and each Holder of any Note by such Holder's acceptance thereof shall be deemed
to have agreed, that any court may in its discretion require, in any suit for
the enforcement of any right or remedy under this Indenture, or in any suit
against the Trustee for any action taken, suffered or omitted by it as Trustee,
the filing by any party litigant in such suit of an undertaking to pay the costs
of such suit and that such court may in its discretion assess reasonable costs,
including reasonable attorneys' fees, against any party litigant in such suit,
having due regard to the merits and good faith of the claims or defenses made by
such party litigant; but the provisions of this Section shall not apply to (a)
any suit instituted by the Trustee, (b) any suit instituted by any Noteholder,
or group of Noteholders, in each case holding in the aggregate more than 10% of
the Outstanding Amount of the Notes or (c) any suit instituted by any Noteholder
for the enforcement of the payment of principal of or interest on any Note on or
after the respective due dates expressed in such Note and in this Indenture (or,
in the case of redemption, on or after the Redemption Date).
SECTION 5.15. Waiver of Stay or Extension Laws. The Issuer covenants (to
the extent that it may lawfully do so) that it will not at any time insist upon,
or plead or in any manner whatsoever, claim or take the benefit or advantage of,
any stay or extension law wherever enacted, now or at any time hereafter in
force, that may affect the covenants or the performance of this Indenture; and
the Issuer (to the extent that it may lawfully do so) hereby expressly waives
all benefit or advantages of any such law, and covenants that it will not
hinder, delay or impede the execution of any power herein granted to the
Trustee, but will suffer and permit the execution of every such power as though
no such law had been enacted.
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SECTION 5.16. Action on Notes. The Trustee's right to seek and recover
judgment on the Notes or under this Indenture shall not be affected by the
seeking, obtaining or application of any other relief under or with respect to
this Indenture. Neither the lien of this Indenture nor any rights or remedies of
the Trustee or the Noteholders shall be impaired by the recovery of any judgment
by the Trustee against the Issuer or by the levy of any execution under such
judgment upon any portion of the Trust Estate or upon any of the assets of the
Issuer.
SECTION 5.17. Performance and Enforcement of Certain Obligations.
(a) Promptly following a request from the Trustee to do so and at the
Company's expense, the Issuer agrees to take all such lawful action as the
Trustee may request to compel or secure the performance and observance by the
Company or the Servicer, as applicable, of each of their obligations to the
Issuer under or in connection with the Sale and Servicing Agreement in
accordance with the terms thereof, and to exercise any and all rights, remedies,
powers and privileges lawfully available to the Issuer under or in connection
with the Sale and Servicing Agreement to the extent and in the manner directed
by the Trustee, including the transmission of notices of default on the part of
the Company or the Servicer thereunder and the institution of legal or
administrative actions or proceedings to compel or secure performance by the
Company or the Servicer of each of their obligations under the Sale and
Servicing Agreement.
(b) If an Event of Default has occurred and is continuing, the Trustee may,
and at the direction (which direction shall be in writing, including facsimile)
of the Holders of 66-2/3% of the Outstanding Amount of each Class of Notes
shall, exercise all rights, remedies, powers, privileges and claims of the
Issuer against the Company or the Servicer under or in connection with the Sale
and Servicing Agreement, including the right or power to take any action to
compel or secure performance or observance by the Company or the Servicer of
each of their obligations to the Issuer thereunder and to give any consent,
request, notice, direction, approval, extension or waiver under the Sale and
Servicing Agreement, and any right of the Issuer to take such action shall be
suspended.
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ARTICLE VI
THE TRUSTEE
SECTION 6.01. Duties of Trustee.
(a) If an Event of Default has occurred and is continuing, the Trustee
shall exercise the rights and powers vested in it by this Indenture with the
same degree of care and skill in their exercise as a prudent person would
exercise or use under the circumstances in the conduct of such person's own
affairs.
(b) Except during the continuance of an Event of Default:
(i) the Trustee undertakes to perform such duties and only such duties
as are specifically set forth in this Indenture and no implied covenants or
obligations shall be read into this Indenture against the Trustee; and
(ii) in the absence of bad faith on its part, the Trustee may
conclusively rely, as to the truth of the statements and the correctness of
the opinions expressed therein, upon certificates or opinions furnished to
the Trustee and conforming to the requirements of this Indenture; however,
the Trustee shall examine the certificates and opinions to determine
whether or not they conform to the requirements of this Indenture and, if
applicable, the Trustee's other Related Documents.
(c) The Trustee may not be relieved from liability for its own negligent
action, its own negligent failure to act or its own willful misconduct, except
that:
(i) this paragraph does not limit the effect of paragraph (b) of this
Section;
(ii) the Trustee shall not be liable for any error of judgment made in
good faith by a Responsible Officer unless it is proved that the Trustee
was negligent in ascertaining the pertinent facts; and
(iii) the Trustee shall not be liable with respect to any action it
takes or omits to take in good faith in accordance with a direction
received by it pursuant to Section 5.12.
(d) Every provision of this Indenture that in any way relates to the
Trustee is subject to paragraphs (a), (b) and (c) of this Section.
(e) The Trustee shall not be liable for interest on any money received by
it except as the Trustee may agree in writing with the Issuer.
(f) Money held in trust by the Trustee need not be segregated from other
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funds except to the extent required by law or the terms of this Indenture or the
Sale and Servicing Agreement.
(g) No provision of this Indenture shall require the Trustee to expend or
risk its own funds or otherwise incur financial liability in the performance of
any of its duties hereunder or in the exercise of any of its rights or powers,
if it shall have reasonable grounds to believe that repayments of such funds or
adequate indemnity against such risk or liability is not reasonably assured to
it.
(h) Every provision of this Indenture relating to the conduct or affecting
the liability of or affording protection to the Trustee shall be subject to the
provisions of this Section and to the provisions of the TIA.
(i) In no event shall the Trustee be required to perform, or be responsible
for the manner of performance of, any of the obligations of the Servicer, or any
other party, under the Sale and Servicing Agreement unless and until appointed
successor Servicer in accordance with Section 7.03 thereof.
(j) The Trustee shall, and hereby agrees that it will, perform all of the
obligations and duties required of it under the Sale and Servicing Agreement.
(k) Without limiting the generality of this Section 6.01, the Trustee shall
have no duty (i) to see to any recording, filing or depositing of this Indenture
or any agreement referred to herein or any financing statement evidencing a
security interest in the Contracts, or to see to the maintenance of any such
recording or filing or depositing or to any recording, refiling or redepositing
of any thereof, (ii) to see to any insurance of the Contracts or Obligors or to
effect or maintain any such insurance, (iii) to see to the payment or discharge
of any tax, assessment or other governmental charge or any lien or encumbrance
of any kind owing with respect to, assessed or levied against any part of the
Trust, (iv) to confirm or verify the contents of any reports or certificates
delivered to the Trustee pursuant to this Indenture or the Sale and Servicing
Agreement believed by the Trustee to be genuine and to have been signed or
presented by the proper party or parties, or (v) to inspect the Contracts at any
time or ascertain or inquire as to the performance of observance of any of the
Issuer's, the Company's or the Servicer's representations, warranties or
covenants or the Servicer's duties and obligations as Servicer and as custodian
of the Contract Files under the Sale and Servicing Agreement.
SECTION 6.02. Rights of Trustee.
(a) The Trustee may rely on any document believed by it to be genuine and
to have been signed or presented by the proper person. The Trustee need not
investigate any fact or matter stated in the document.
(b) Before the Trustee acts or refrains from acting, it may require an
Officers' Certificate (with respect to factual matters) or an Opinion of
Counsel, as
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applicable. The Trustee shall not be liable for any action it takes or omits to
take in good faith in reliance on the Officers' Certificate or Opinion of
Counsel, as applicable, or as directed by the requisite amount of Note Owners as
provided herein.
(c) The Trustee may execute any of the trusts or powers hereunder or
perform any duties hereunder either directly or by or through agents or
attorneys or a custodian or nominee, and the Trustee shall not be responsible
for any misconduct or negligence on the part of, or for the supervision of, any
such agent, attorney, custodian or nominee appointed with due care by it
hereunder.
(d) The Trustee shall not be liable for any action it takes or omits to
take in good faith which it believes to be authorized or within its rights or
powers; provided, however, that the Trustee's conduct does not constitute
willful misconduct, negligence or bad faith.
(e) The Trustee may consult with counsel, and the advice or opinion of
counsel with respect to legal matters relating to this Indenture and the Notes
shall be full and complete authorization and protection from liability in
respect to any action taken, omitted or suffered by it hereunder in good faith
and in accordance with the advice or opinion of such counsel.
(f) The Trustee shall be under no obligation to institute, conduct or
defend any litigation under this Indenture or in relation to this Indenture, at
the request, order or direction of any of the Holders of Notes, pursuant to the
provisions of this Indenture, unless such Holders of Notes shall have offered to
the Trustee reasonable security or indemnity against the costs, expenses and
liabilities that may be incurred therein or thereby; provided, however, that the
Trustee shall, upon the occurrence of an Event of Default (that has not been
cured), exercise the rights and powers vested in it by this Indenture with
reasonable care and skill.
(g) The Trustee shall not be bound to make any investigation into the facts
or matters stated in any resolution, certificate, statement, instrument,
opinion, report, notice, request, consent, order, approval, bond or other paper
or document, unless requested in writing to do so by the Holders of Notes
evidencing not less than 25% of the Outstanding Amount thereof; provided,
however, that if the payment within a reasonable time to the Trustee of the
costs, expenses or liabilities likely to be incurred by it in the making of such
investigation is, in the opinion of the Trustee, not reasonably assured to the
Trustee by the security afforded to it by the terms of this Indenture or the
Sale and Servicing Agreement, the Trustee may require reasonable indemnity
against such cost, expense or liability as a condition to so proceeding; the
reasonable expense of every such examination shall be paid by the Person making
such request, or, if paid by the Trustee, shall be reimbursed by the Person
making such request upon demand.
(h) The Trustee may rely and shall be protected in acting or refraining
from taking any action in reliance on the advice of the Servicer in all matters
with respect to FHA Insurance. The Trustee shall not be liable for any actions
taken by the Servicer with respect to FHA Insurance, including but not limited
to the maintenance of such insurance and the submission of claims to FHA.
SECTION 6.03. Individual Rights of Trustee. The Trustee in its individual
or
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any other capacity may become the owner or pledgee of Notes and may otherwise
deal with the Issuer or its Affiliates with the same rights it would have if it
were not Trustee. Any Paying Agent, Note Registrar, co-registrar or co-paying
agent may do the same with like rights. However, the Trustee is required to
comply with Sections 6.11 and 6.12.
SECTION 6.04. Trustee's Disclaimer. The Trustee shall not be responsible
for and makes no representation as to the validity or adequacy of this
Indenture, the Trust Estate or the Notes, it shall not be accountable for the
Issuer's use of the proceeds from the Notes, and it shall not be responsible for
any statement of the Issuer in the Indenture or in any document issued in
connection with the sale of the Notes or in the Notes other than the Trustee's
certificate of authentication.
SECTION 6.05. Notice of Defaults. If a Default occurs and is continuing
and if it is known to a Responsible Officer of the Trustee, the Trustee shall
mail to each Noteholder notice of the Default within 90 days after it occurs.
Except in the case of a Default in payment of principal of or interest on any
Note (including payments pursuant to the mandatory redemption provisions of such
Note), the Trustee may withhold the notice if and so long as a committee of its
Responsible Officers in good faith determines that withholding the notice is in
the interests of Noteholders.
SECTION 6.06. Reports by Trustee to Holders. The Trustee shall deliver to
each Noteholder such information as may be required to enable such holder to
prepare its federal and state income tax returns.
SECTION 6.07. Compensation and Indemnity. The Issuer shall or shall cause
the Administrator to pay to the Trustee from time to time reasonable
compensation for its services. The Trustee's compensation shall not be limited
by any law on compensation of a trustee of an express trust. The Issuer shall
or shall cause the Administrator to reimburse the Trustee for all reasonable
out-of-pocket expenses incurred or made by it, including the costs of
collection, in addition to the compensation for its services. Such expenses
shall include the reasonable compensation and expenses, disbursements and
advances of the Trustee's agents, counsel, accountants and experts. The Issuer
shall or shall cause the Administrator to indemnify the Trustee against any and
all loss, liability or expense (including attorneys' fees) incurred by it in
connection with the administration of this trust and the performance of its
duties hereunder. The Trustee shall notify the Issuer and the Administrator
promptly of any claim for which it may seek indemnity. Failure by the Trustee
to so notify the Issuer and the Administrator shall not relieve the Issuer or
the Administrator of its obligations hereunder. The Issuer shall or shall cause
the Administrator to defend any such claim, and the Trustee may have separate
counsel and the Issuer shall or shall cause the Administrator to pay the fees
and expenses of such counsel. Neither the Issuer not the Administrator need
reimburse any expense or indemnify against any loss, liability or expense
incurred by the Trustee through the Trustee's own wilful misconduct, negligence
or bad faith.
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The Issuer's payment obligations to the Trustee pursuant to this Section
shall survive the discharge of this Indenture. When the Trustee incurs expenses
after the occurrence of a Default specified in Section 5.01(iv) or (v) with
respect to the Issuer, the expenses are intended to constitute expenses of
administration under Title 11 of the United States Code or any other applicable
federal or state bankruptcy, insolvency or similar law.
SECTION 6.08. Replacement of Trustee. The Trustee may resign at any time
by so notifying the Issuer. The Issuer may remove the Trustee if:
(i) the Trustee fails to comply with Section 6.11;
(ii) a court having jurisdiction in the premises in respect of the
Trustee in an involuntary case or proceeding under federal or state banking
or bankruptcy laws, as now or hereafter constituted, or any other
applicable federal or state bankruptcy, insolvency or other similar law,
shall have entered a decree or order granting relief or appointing a
receiver, liquidator, assignee, custodian, trustee, conservator,
sequestrator (or similar official) for the Trustee or for any substantial
part of the Trustee's property, or ordering the winding-up or liquidation
of the Trustee's affairs;
(iii) an involuntary case under the federal bankruptcy laws, as now
or hereafter in effect, or another present or future federal or state
bankruptcy, insolvency or similar law is commenced with respect to the
Trustee and such case is not dismissed within 60 days;
(iv) the Trustee commences a voluntary case under any federal or state
banking or bankruptcy laws, as now or hereafter constituted, or any other
applicable federal or state bankruptcy, insolvency or other similar law, or
consents to the appointment of or taking possession by a receiver,
liquidator, assignee, custodian, trustee, conservator, sequestrator (or
other similar official) for the Trustee or for any substantial part of the
Trustee's property, or makes any assignment for the benefit of creditors or
fails generally to pay its debts as such debts become due or takes any
corporate action in furtherance of any of the foregoing; or
(v) the Trustee otherwise becomes incapable of acting.
If the Trustee resigns or is removed or if a vacancy exists in the office
of Trustee for any reason (the Trustee in such event being referred to herein as
the retiring Trustee), the Issuer shall promptly appoint a successor Trustee.
A successor Trustee shall deliver a written acceptance of its appointment
to the retiring Trustee and to the Issuer. Thereupon the resignation or removal
of the retiring Trustee shall become effective, and the successor Trustee shall
have all the rights, powers and duties of the Trustee under this Indenture. The
successor
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Trustee shall mail a notice of its succession to Noteholders. The retiring
Trustee shall promptly transfer all property held by it as Trustee to the
successor Trustee.
If a successor Trustee does not take office within 60 days after the
retiring Trustee resigns or is removed, the retiring Trustee, the Issuer or the
Holders of a majority in Outstanding Amount of the Notes may petition any court
of competent jurisdiction for the appointment of a successor Trustee.
If the Trustee fails to comply with Section 6.11, any Noteholder may
petition any court of competent jurisdiction for the removal of the Trustee and
the appointment of a successor Trustee.
Any resignation or removal of the Trustee and appointment of a successor
Trustee pursuant to any of the provisions of this Section shall not become
effective until acceptance of appointment by the successor Trustee pursuant to
this Section and payment of all fees and expenses owed to the outgoing Trustee.
Notwithstanding the replacement of the Trustee pursuant to this Section, the
retiring Trustee shall be entitled to payment or reimbursement of such amounts
as such Person is entitled pursuant to Section 6.07.
SECTION 6.09. Successor Trustee by Merger. If the Trustee consolidates
with, merges or converts into, or transfers all or substantially all its
corporate trust business or assets to, another corporation or banking
association, the resulting, surviving or transferee corporation without any
further act shall be the successor Trustee; provided that such corporation or
banking association shall be otherwise qualified and eligible under Section
6.11. The Trustee shall provide the Rating Agencies prompt notice of any such
transaction.
In case at the time such successor or successors by merger, conversion or
consolidation to the Trustee shall succeed to the trusts created by this
Indenture any of the Notes shall have been authenticated but not delivered, any
such successor to the Trustee may adopt the certificate of authentication of any
predecessor trustee, and deliver such Notes so authenticated; and in case at
that time any of the Notes shall not have been authenticated, any successor to
the Trustee may authenticate such Notes either in the name of any predecessor
hereunder or in the name of the successor to the Trustee; and in all such cases
such certificates shall have the full force which it is anywhere in the Notes or
in this Indenture provided that the certificate of the Trustee shall have.
SECTION 6.10. Appointment of Co-Trustee or Separate Trustee.
(a) Notwithstanding any other provisions of this Indenture, at any time,
for the purpose of meeting any legal requirement of any jurisdiction in which
any part of the Trust may at the time be located, the Trustee shall have the
power and may execute and deliver all instruments to appoint one or more Persons
to act as a co-trustee or co-trustees, or separate trustee or separate trustees,
of all or any part of
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the Trust, and to vest in such Person or Persons, in such capacity and for the
benefit of the Noteholders, such title to the Trust Estate, or any part hereof,
and, subject to the other provisions of this Section, such powers, duties,
obligations, rights and trusts as the Trustee may consider necessary or
desirable. No co-trustee or separate trustee hereunder shall be required to meet
the terms of eligibility as a successor Trustee under Section 6.11 and no notice
to Noteholders of the appointment of any co-trustee or separate trustee shall be
required under Section 6.08 hereof.
(b) Every separate trustee and co-trustee shall, to the extent permitted by
law, be appointed and act subject to the following provisions and conditions:
(i) all rights, powers, duties and obligations conferred or imposed
upon the Trustee shall be conferred or imposed upon and exercised or
performed by the Trustee and such separate trustee or co-trustee jointly
(it being understood that such separate trustee or co-trustee is not
authorized to act separately without the Trustee joining in such act),
except to the extent that under any law of any jurisdiction in which any
particular act or acts are to be performed the Trustee shall be incompetent
or unqualified to perform such act or acts, in which event such rights,
powers, duties and obligations (including the holding of title to the Trust
or any portion thereof in any such jurisdiction) shall be exercised and
performed singly by such separate trustee or co-trustee, but solely at the
direction of the Trustee;
(ii) no trustee hereunder shall be personally liable by reason of any
act or omission of any other trustee hereunder; and
(iii) the Trustee may at any time accept the resignation of or
remove any separate trustee or co-trustee.
(c) Any notice, request or other writing given to the Trustee shall be
deemed to have been given to each of the then separate trustees and co-trustees,
as effectively as if given to each of them. Every instrument appointing any
separate trustee or co-trustee shall refer to this Agreement and the conditions
of this Article VI. Each separate trustee and co-trustee, upon its acceptance
of the trusts conferred, shall be vested with the estates or property specified
in its instrument of appointment, either jointly with the Trustee or separately,
as may be provided therein, subject to all the provisions of this Indenture,
specifically including every provision of this Indenture relating to the conduct
of, affecting the liability of, or affording protection to, the Trustee. Every
such instrument shall be filed with the Trustee.
(d) Any separate trustee or co-trustee may at any time constitute the
Trustee, its agent or attorney-in-fact with full power and authority, to the
extent not prohibited by law, to do any lawful act under or in respect of this
Agreement on its behalf and in its name. If any separate trustee or co-trustee
shall die, become incapable of acting, resign or be removed, all of its estates,
properties, rights,
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remedies and trusts shall vest in and be exercised by the Trustee, to the extent
permitted by law, without the appointment of a new or successor trustee.
Notwithstanding anything to the contrary in this Indenture, the appointment of
any separate trustee or co-trustee shall not relieve the Trustee of its
obligations and duties under this Indenture.
SECTION 6.11. Eligibility; Disqualification. The Trustee shall at all
times satisfy the requirements of TIA (S) 310(a). The Trustee shall have a
combined capital and surplus of at least $50,000,000 as set forth in its most
recent published annual report of condition and shall not be an Affiliate of the
Company. The Trustee shall comply with TIA (S) 310(b), including the optional
provision permitted by the second sentence of TIA (S) 310(b)(9); provided,
however, that there shall be excluded from the operation of TIA (S) 310(b)(1)
any indenture or indentures under which other securities of the Issuer are
outstanding if the requirements for such exclusion set forth in TIA (S)
310(b)(1) are met.
SECTION 6.12. Preferential Collection of Claims Against Issuer. The
Trustee shall comply with TIA (S) 311(a), excluding any creditor relationship
listed in TIA (S) 311(b). A Trustee who has resigned or been removed shall be
subject to TIA (S) 311(a) to the extent indicated.
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ARTICLE VII
NOTEHOLDERS' LISTS AND REPORTS
SECTION 7.01. Issuer To Furnish Trustee Names and Addresses to
Noteholders. The Issuer will furnish or cause to be furnished to the Trustee
(a) not more than five days after the earlier of (i) each Record Date and (ii)
three months after the last Record Date, a list, in such form as the Trustee may
reasonably require, of the names and addresses of the Holders of Notes as of
such Record Date, (b) at such other times as the Trustee may request in writing,
within 30 days after receipt by the Issuer of any such request, a list of
similar form and content as of a date not more than 10 days prior to the time
such list is furnished; provided, however, that so long as the Trustee is the
Note Registrar, no such list shall be required to be furnished.
SECTION 7.02. Preservation of Information; Communications to Noteholders.
(a) The Trustee shall preserve, in as current a form as is reasonably
practicable, the names and addresses of the Holders of Notes contained in the
most recent list furnished to the Trustee as provided in Section 7.01 and the
names and addresses of Holders of Notes received by the Trustee in its capacity
as Note Registrar. The Trustee may destroy any list furnished to it as provided
in such Section 7.01 upon receipt of a new list so furnished.
(b) Noteholders may communicate pursuant to TIA (S) 312(b) with other
Noteholders with respect to their rights under this Indenture or under the
Notes.
(c) The Issuer, the Trustee and the Note Registrar shall have the
protection of TIA (S) 312(c).
SECTION 7.03. Reports by Issuer.
(a) The Issuer shall:
(i) file with the Trustee, within 15 days after the Issuer is required
to file the same with the Commission, copies of the annual reports and of
the information, documents and other reports (or copies of such portions of
any of the foregoing as the Commission may from time to time by rules and
regulations prescribe) which the Issuer may be required to file with the
Commission pursuant to Section 13 or 15(d) of the Exchange Act;
(ii) file with the Trustee and the Commission in accordance with rules
and regulations prescribed from time to time by the Commission such
additional information, documents and reports with respect to compliance by
the Issuer with the conditions and covenants of this Indenture as may be
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required from time to time by such rules and regulations; and
(iii) supply to the Trustee (and the Trustee shall transmit by mail
to all Noteholders described in TIA (S) 313(c)) such summaries of any
information, documents and reports required to be filed by the Issuer
pursuant to clauses (i) and (ii) of this Section 7.03(a) as may be required
by rules and regulations prescribed from time to time by the Commission.
(b) Unless the Issuer otherwise determines, the fiscal year of the Issuer
shall end on December 31 of each year.
SECTION 7.04. Reports by Trustee. If required by TIA (S) 313(a), within
60 days after each March 31 beginning with March 31, _____, the Trustee shall
mail to each Noteholder as required by TIA (S) 313(c) a brief report dated as of
such date that complies with TIA (S) 313(a). The Trustee also shall comply with
TIA (S) 313(b).
A copy of each report at the time of its mailing to Noteholders shall be
filed by the Trustee with the Commission and each stock exchange, if any, on
which the Notes are listed. The Issuer shall notify the Trustee if and when the
Notes are listed on any stock exchange.
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ARTICLE VIII
ACCOUNTS, DISBURSEMENTS AND RELEASES
SECTION 8.01. Collection of Money. Except as otherwise expressly provided
herein, the Trustee may demand payment or delivery of, and shall receive and
collect, directly and without intervention or assistance of any fiscal agent or
other intermediary, all money and other property payable to or receivable by the
Trustee pursuant to this Indenture. The Trustee shall apply all such money
received by it as provided in this Indenture. Except as otherwise expressly
provided in this Indenture, if any default occurs in the making of any payment
or performance under any agreement or instrument that is part of this Indenture
or the Notes, the Trustee may take such action as may be appropriate to enforce
such payment or performance, including the institution and prosecution of
appropriate Proceedings. Any such action shall be without prejudice to any right
to claim a Default or Event of Default under this Indenture and any right to
proceed thereafter as provided in Article V.
SECTION 8.02. Trust Accounts.
(a) On or prior to the Closing Date, the Issuer shall cause the Servicer to
establish and maintain, in the name of the Trustee, for the benefit of the
Noteholders and the Certificateholders, the Trust Accounts as provided in
Sections 6.01(a), (b) and (c) of the Sale and Servicing Agreement.
(b) All collections in respect of the Contracts will be deposited in the
Collection Account as provided in Section 6.02 of the Sale and Servicing
Agreement. On or before each Payment Date, all amounts required to be deposited
in the Note Distribution Account pursuant to Section 6.04 of the Sale and
Servicing Agreement will be transferred from the Reserve Account to the Note
Distribution Account.
(c) On each Payment Date, the Trustee shall distribute all amounts on
deposit in the Note Distribution Account to Noteholders in respect of the Notes
to the extent of amounts due and unpaid on the Notes for principal and interest
and to the Reserve Account, in accordance with the instructions of the Servicer
in the following order of priority with respect to amounts withdrawn from the
Reserve Account):
1. Class A-1. To pay the Holders of the Class A-1 Notes the
amounts, and in the priority, set forth below:
(i) the Class A-1 Interest Amount;
(ii) any Unpaid Class A-1 Interest Shortfall;
(iii) the Class A-1 Percentage of the Formula Principal
Distribution
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Amount, to be applied to the Class A-1 Principal Balance, but
in no event more than the outstanding Class A-1 Principal
Balance;
(iv) any Unpaid Class A-1 Principal Shortfall;
(v) any Class A-1 Liquidation Loss Interest Amount;
(vi) any Unpaid Class A-1 Liquidation Loss Interest Shortfall; and
(vii) any Unpaid Class A-1 Principal Liquidation Loss.
2. Class A-2. After payment of the amounts specified in clause (1)
above, to pay the Holders of the Class A-2 Notes the amounts, and in the
priority, set forth below:
(i) the Class A-2 Interest Amount;
(ii) any Unpaid Class A-2 Interest Shortfall;
(iii) the Class A-2 Percentage of the Formula Principal Distribution
Amount, to be applied to the Class A-2 Principal Balance, but in no event
more than the outstanding Class A-2 Principal Balance;
(iv) any Unpaid Class A-2 Principal Shortfall;
(v) any Class A-2 Liquidation Loss Interest Amount;
(vi) any Unpaid Class A-2 Liquidation Loss Interest Shortfall; and
(vii) any Unpaid Class A-2 Principal Liquidation Loss.
3. Reserve Account. After payment on any Payment Date of the amounts
specified in clauses (1) and (2) above, if any amount has been withdrawn
from the Reserve Account pursuant to Section 6.04 of the Sale and Servicing
Agreement, to pay to the Reserve Account the difference, if any, between
the aggregate amount of such withdrawals and the aggregate amounts
deposited in the Reserve Account pursuant to this Section 8.02(c)(3) prior
to such Payment Date (but in no event more than the amount necessary to
cause the amount on deposit in the Reserve Account to equal the Reserve
Account Required Amount).
(d) If the Trustee shall not have received the applicable Monthly Report by
any Distribution Date, the Trustee shall distribute all funds then in the Note
Distribution Account to Noteholders in accordance with Section 8.02(c), to the
extent
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of such funds, on such Distribution Date.
(e) The Trustee agrees, to the extent required by the Code, to withhold
from each payment due hereunder or under any Note, United States withholding
taxes at the appropriate rate, and, on a timely basis, to deposit such amounts
with an authorized depository and make such returns, filings and other reports
in connection therewith as are required of it under the Code. Any Noteholder
which is eligible for an exemption from or reduction of withholding of United
States federal income taxes shall, from time to time, provide to the Trustee in
a timely manner all appropriate and properly completed forms indicating such
eligibility, as may be necessary to permit the Trustee not to withhold taxes
from payments due to such Noteholder. In connection with the foregoing, the
Trustee shall promptly furnish to each Noteholder in a timely fashion such U.S.
Treasury forms as are required by the Code to be furnished to such Noteholder
indicating payment of any taxes withheld from any payments by the Trustee to
such Noteholder. The Trustee shall be fully protected in relying upon, and each
Noteholder by its acceptance of a Note hereunder agrees to indemnify and hold
the Trustee harmless against all claims or liability of any kind arising in
connection with or related to the Trustee's reliance upon any documents, forms
or information provided by any Noteholder to the Trustee. In addition, if the
Trustee has not withheld taxes on any payment made to any Noteholder, and the
Trustee is subsequently required to remit to any taxing authority any such
amount not withheld, such Noteholder shall return such amount to the Trustee
upon written demand by the Trustee. In no event shall the Trustee be liable for
consequential damages to any Noteholder.
SECTION 8.03. General Provisions Regarding Accounts.
(a) So long as no Default or Event of Default shall have occurred and be
continuing, all or a portion of the funds in the Trust Accounts shall be
invested and reinvested in Eligible Investments in accordance with the
provisions of Section 6.01(e) of the Sale and Servicing Agreement. All income
or other gain from investments of moneys deposited in such Trust Accounts shall
be deposited by the Trustee in the Collection Account, and any loss resulting
from such investments shall be charged to the related Trust Account. The Issuer
will not direct the Trustee to make any investment of any funds or to sell any
investment held in any of the Trust Accounts unless the security interest
Granted and perfected in such account will continue to be perfected in such
investment or the proceeds of such sale, in either case without any further
action by any Person, and, in connection with any direction to the Trustee to
make any such investment or sale, if requested by the Trustee, the Issuer shall
deliver to the Trustee an Opinion of Counsel, acceptable to the Trustee, to such
effect.
(b) Subject to Section 6.01(c), the Trustee shall not in any way be held
liable by reason of any insufficiency in any of the Trust Accounts resulting
from any loss on any Eligible Investment included therein except for losses
attributable to the Trustee's failure to make payments on such Eligible
Investments issued by the
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Trustee, in its commercial capacity as principal obligor and not as Trustee, in
accordance with their terms.
(c) If (i) the Issuer shall have failed to give investment directions for
any funds on deposit in the Trust Accounts to the Trustee by 11:00 a.m., [New
York City] time (or such other time as may be agreed by the Issuer and Trustee),
on any Business Day or (ii) a Default or Event of Default shall have occurred
and be continuing with respect to the Notes but the Notes shall not have been
declared due and payable pursuant to Section 5.02 or (iii) if such Notes shall
have been declared due and payable following an Event of Default, amounts
collected or receivable from the Trust Estate are being applied in accordance
with Section 5.05 as if there had not been such a declaration, then the Trustee
shall, to the fullest extent practicable, invest and reinvest funds in the Trust
Accounts in one or more Eligible Investments.
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ARTICLE IX
SUPPLEMENTAL INDENTURES
SECTION 9.01. Supplemental Indentures Without Consent of Noteholders.
(a) Without the consent of the Holders of any Notes but with prior notice
to the Rating Agencies, the Issuer and the Trustee, when authorized by an Issuer
Order, at any time and from time to time, may enter into one or more indentures
supplemental hereto (which shall conform to the provisions of the Trust
Indenture Act as in force at the date of the execution thereof), in form
satisfactory to the Trustee, for any of the following purposes:
(i) to correct or amplify the description of any property at any time
subject to the lien of this Indenture, or better to assure, convey and
confirm unto the Trustee any property subject or required to be subjected
to the lien created by this Indenture, or to subject to the lien created by
this Indenture additional property;
(ii) to evidence the succession, in compliance with the applicable
provisions hereof, of another Person to the Issuer, and the assumption by
any such successor of the covenants of the Issuer herein and in the Notes
contained;
(iii) to add to the covenants of the Issuer, for the benefit of the
Holders of the Notes, or to surrender any right or power herein conferred
upon the Issuer;
(iv) to convey, transfer, assign, mortgage or pledge any property to
or with the Trustee;
(v) to cure any ambiguity, to correct or supplement any provision
herein or in any supplemental indenture which may be inconsistent with any
other provision herein or in any supplemental indenture or to make any
other provisions with respect to matters or questions arising under this
Indenture or in any supplemental indenture; provided that such action shall
not adversely affect the interests of the Holders of the Notes;
(vi) to evidence and provide for the acceptance of the appointment
hereunder by a successor Trustee with respect to the Notes and to add to or
change any of the provisions of this Indenture as shall be necessary to
facilitate the administration of the trusts hereunder by more than one
trustee, pursuant to the requirements of Article VI; or
(vii) to modify, eliminate or add to the provisions of this Indenture
to such extent as shall be necessary to effect the qualification of this
Indenture
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under the TIA or under any similar federal statute hereafter enacted and to
add to this Indenture such other provisions as may be expressly required by
the TIA.
The Trustee is hereby authorized to join in the execution of any such
supplemental indenture and to make any further appropriate agreements and
stipulations that may be therein contained.
(b) The Issuer and the Trustee, when authorized by an Issuer Order, may,
also without the consent of any of the Holders of the Notes but with prior
notice to the Rating Agencies, enter into an indenture or indentures
supplemental hereto for the purpose of adding any provisions to, or changing in
any manner or eliminating any of the provisions of, this Indenture or of
modifying in any manner the rights of the Holders of the Notes under this
Indenture; provided, however, that such action shall not, as evidenced by an
Opinion of Counsel, adversely affect in any material respect the interests of
any Noteholder.
SECTION 9.02. Supplemental Indentures With Consent of Noteholders. The
Issuer and the Trustee, when authorized by an Issuer Order, also may, with prior
notice to the Rating Agencies, and with the consent of the Holders of not less
than a majority of the Outstanding Amount of the Notes, by Act of such Holders
delivered to the Issuer and the Trustee, enter into an indenture or indentures
supplemental hereto for the purpose of adding any provisions to, or changing in
any manner or eliminating any of the provisions of, this Indenture or of
modifying in any manner the rights of the Holders of the Notes under this
Indenture; provided, however, that, no such supplemental indenture shall,
without the consent of the Holder of each Outstanding Note affected thereby:
(i) change the date of payment of any installment of principal of or
interest on any Note, or reduce the principal amount thereof, the interest
rate thereon or the Redemption Price with respect thereto, change the
provision of this Indenture relating to the application of collections on,
or the proceeds of the sale of, the Trust Estate to payment of principal of
or interest on the Notes, or change any place of payment where, or the coin
or currency in which, any Note or the interest thereon is payable, or
impair the right to institute suit for the enforcement of the provisions of
this Indenture requiring the application of funds available therefor, as
provided in Article V, to the payment of any such amount due on the Notes
on or after the respective due dates thereof (or, in the case of
redemption, on or after the Redemption Date);
(ii) reduce the percentage of the Outstanding Amount of the Notes, the
consent of the Holders of which is required for any such supplemental
indenture, or the consent of the Holders of which is required for any
waiver of compliance with certain provisions of this Indenture or certain
defaults hereunder and their consequences provided for in this Indenture;
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(iii) modify or alter the provisions of the proviso to the definition
of the term "Outstanding";
(iv) reduce the percentage of the Outstanding Amount of the Notes
required to direct the Trustee to direct the Issuer to sell or liquidate
the Trust Estate pursuant to Section 5.04;
(v) modify any provision of this Section except to increase any
percentage specified herein or to provide that certain additional
provisions of this Indenture or the Related Documents cannot be modified or
waived without the consent of the Holder of each Outstanding Note affected
thereby;
(vi) modify any of the provisions of this Indenture in such manner as
to affect the calculation of the amount of any payment of interest or
principal due on any Note on any Distribution Date (including the
calculation of any of the individual components of such calculation) or to
affect the rights of the Holders of Notes to the benefit of any provisions
for the mandatory redemption of the Notes contained herein; or
(vii) permit the creation of any lien ranking prior to or on a parity
with the lien created by this Indenture with respect to any part of the
Trust Estate or, except as otherwise permitted or contemplated herein,
terminate the lien created by this Indenture on any property at any time
subject hereto or deprive the Holder of any Note of the security provided
by the lien created by this Indenture.
The Trustee may in its discretion determine whether or not any Notes would
be affected by any supplemental indenture, and any such determination shall be
conclusive upon the Holders of all Notes, whether theretofore or thereafter
authenticated and delivered hereunder. The Trustee shall not be liable for any
such determination made in good faith.
It shall not be necessary for any Act of Noteholders under this Section to
approve the particular form of any proposed supplemental indenture, but it shall
be sufficient if such Act shall approve the substance thereof.
Promptly after the execution by the Issuer and the Trustee of any
supplemental indenture pursuant to this Section, the Trustee shall mail to the
Holders of the Notes to which such amendment or supplemental indenture relates a
notice setting forth in general terms the substance of such supplemental
indenture. Any failure of the Trustee to mail such notice, or any defect
therein, shall not, however, in any way impair or affect the validity of any
such supplemental indenture.
SECTION 9.03. Execution of Supplemental Indentures. In executing, or
permitting the additional trusts created by, any supplemental indenture
permitted
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by this Article IX or the modifications thereby of the trusts created by this
Indenture, the Trustee shall be entitled to receive, and subject to Sections
6.01 and 6.02 shall be fully protected in relying upon, an Opinion of Counsel
stating that the execution of such supplemental indenture is authorized or
permitted by this Indenture. The Trustee may, but shall not be obligated to,
enter into any such supplemental indenture that affects the Trustee's own
rights, duties, liabilities or immunities under this Indenture or otherwise.
SECTION 9.04. Effect of Supplemental Indenture. Upon the execution of any
supplemental indenture pursuant to the provisions hereof, this Indenture shall
be and be deemed to be modified and amended in accordance therewith with respect
to the Notes affected thereby, and the respective rights, limitations of rights,
obligations, duties, liabilities and immunities under this Indenture of the
Trustee, the Issuer and the Holders of the Notes shall thereafter be determined,
exercised and enforced hereunder subject in all respects to such modifications
and amendments, and all the terms and conditions of any such supplemental
indenture shall be and be deemed to be part of the terms and conditions of this
Indenture for any and all purposes.
SECTION 9.05. Conformity With Trust Indenture Act. Every amendment of
this Indenture and every supplemental indenture executed pursuant to this
Article IX shall conform to the requirements of the Trust Indenture Act as then
in effect so long as this Indenture shall then be qualified under the Trust
Indenture Act.
SECTION 9.06. Reference in Notes to Supplemental Indentures. Notes
authenticated and delivered after the execution of any supplemental indenture
pursuant to this Article IX may, and if required by the Trustee shall, bear a
notation in form approved by the Trustee as to any matter provided for in such
supplemental indenture. If the Issuer or the Trustee shall so determine, new
notes so modified as to conform, in the opinion of the Trustee and the Issuer,
to any such supplemental indenture may be prepared and executed by the Issuer
and authenticated and delivered by the Trustee in exchange for Outstanding
Notes.
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ARTICLE X
REDEMPTION OF NOTES
SECTION 10.01. Redemption.
(a) In the event that the Company or the Servicer pursuant to Article VIII
of the Sale and Servicing Agreement purchases the corpus of the Trust, the Notes
are subject to redemption in whole, but not in part, on the Distribution Date on
which such repurchase occurs, for a purchase price equal to the Redemption
Price; provided, however, that the Issuer has available funds sufficient to pay
the Redemption Price. The Company, the Servicer or the Issuer shall furnish the
Rating Agencies notice of such redemption. If the Notes are to be redeemed
pursuant to this Section 10.01(a), the Servicer or the Issuer shall furnish
notice of such election to the Trustee not later than 25 days prior to the
Redemption Date, and the Issuer shall deposit with the Trustee in the Note
Distribution Account the Redemption Price of the Notes to be redeemed, whereupon
all such Notes shall be due and payable on the Redemption Date upon the
furnishing of a notice complying with Section 10.02 to each Holder of the Notes.
(b) In the event that the assets of the Trust are sold pursuant to Section
9.2 of the Trust Agreement, the proceeds of such sale shall be distributed as
provided in Section 5.06. If amounts are to be paid to Noteholders pursuant to
this Section 10.01(b), the Servicer or the Issuer shall, to the extent
practicable, furnish notice of such event to the Trustee not later than 25 days
prior to the Redemption Date whereupon all such amounts shall be payable on the
Redemption Date.
SECTION 10.02. Form of Redemption Notice.
(a) Notice of redemption under Section 10.01(a) shall be given by the
Trustee by first-class mail, postage prepaid, mailed not less than five days
prior to the applicable Redemption Date to each Holder of Notes, as of the close
of business on the Record Date with respect to the Distribution Date immediately
preceding the applicable Redemption Date, at such Holder's address appearing in
the Note Register.
All notices of redemption shall state:
(i) the Redemption Date;
(ii) the Redemption Price; and
(iii) the place where such Notes are to be surrendered for payment
of the Redemption Price (which shall be the office or agency of the Issuer
to be maintained as provided in Section 3.02).
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Notice of redemption of the Notes shall be given by the Trustee in the name
and at the expense of the Issuer. Failure to give notice of redemption, or any
defect therein, to any Holder of any Note shall not impair or affect the
validity of the redemption of any other Note.
(b) Prior notice of redemption under Section 10.01(b) is not required to be
given to Noteholders.
SECTION 10.03. Notes Payable on Redemption Date. The Notes or portions
thereof to be redeemed shall, following notice of redemption (if any) as
required by Section 10.02, on the Redemption Date become due and payable at the
Redemption Price and (unless the Issuer shall default in the payment of the
Redemption Price) no interest shall accrue on the Redemption Price for any
period after the date to which accrued interest is calculated for purposes of
calculating the Redemption Price.
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ARTICLE XI
MISCELLANEOUS
SECTION 11.01. Compliance Certificates and Opinions, etc.
(a) Upon any application or request by the Issuer to the Trustee to take
any action under any provision of this Indenture, the Issuer shall furnish to
the Trustee (i) an Officers' Certificate stating that all conditions precedent,
if any, provided for in this Indenture relating to the proposed action have been
complied with, (ii) an Opinion of Counsel stating that in the opinion of such
counsel all such conditions precedent, if any, have been complied with and (iii)
(if required by the TIA) an Independent Certificate from a firm of certified
public accountants meeting the applicable requirements of this Section, except
that, in the case of any such application or request as to which the furnishing
of such documents is specifically required by any provision of this Indenture,
no additional certificate or opinion need be furnished.
Every certificate or opinion with respect to compliance with a condition or
covenant provided for in this Indenture shall include:
(i) a statement that each signatory of such certificate or opinion has
read or has caused to be read such covenant or condition and the
definitions herein relating thereto;
(ii) a brief statement as to the nature and scope of the examination
or investigation upon which the statements or opinions contained in such
certificate or opinion are based;
(iii) a statement that, in the opinion of each such signatory, such
signatory has made such examination or investigation as is necessary to
enable such signatory to express an informed opinion as to whether or not
such covenant or condition has been complied with; and
(iv) a statement as to whether, in the opinion of each such signatory,
such condition or covenant has been complied with.
(b) (i) Prior to the deposit of any Indenture Collateral or other
property or securities with the Trustee that is to be made the basis for
the release of any property subject to the lien created by this Indenture,
the Issuer shall, in addition to any obligation imposed in Section 11.01(a)
or elsewhere in this Indenture, furnish to the Trustee an Officers'
Certificate certifying or stating the opinion of each person signing such
certificate as to the fair value (within 90 days of such deposit) to the
Issuer of the Indenture Collateral or other property or securities to be so
deposited.
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(ii) Whenever the Issuer is required to furnish to the Trustee an
Officers' Certificate certifying or stating the opinion of any signer
thereof as to the matters described in clause (i) above, the Issuer shall
also deliver to the Trustee an Independent Certificate as to the same
matters, if the fair value to the Issuer of the property to be so deposited
and of all other such property made the basis of any such withdrawal or
release since the commencement of the then-current fiscal year of the
Issuer, as set forth in the certificates delivered pursuant to clause (i)
above and this clause (ii), is 10% or more of the Outstanding Amount of the
Notes, but such a certificate need not be furnished with respect to any
property so deposited, if the fair value thereof to the Issuer as set forth
in the related Officers' Certificate is less than $25,000 or less than one
percent of the Outstanding Amount of the Notes.
(iii) Other than with respect to any release described in clause (A)
or (B) of Section 11.01(b)(v), whenever any property or securities are to
be released from the lien created by this Indenture, the Issuer shall also
furnish to the Trustee an Officers' Certificate certifying or stating the
opinion of each person signing such certificate as to the fair value
(within 90 days of such release) of the property or securities proposed to
be released and stating that in the opinion of such person the proposed
release will not impair the security created by this Indenture in
contravention of the provisions hereof.
(iv) Whenever the Issuer is required to furnish to the Trustee an
Officers' Certificate certifying or stating the opinion of any signer
thereof as to the matters described in clause (iii) above, the Issuer shall
also furnish to the Trustee an Independent Certificate as to the same
matters if the fair value of the property or securities and of all other
property or securities (other than property described in clauses (A) or (B)
of Section 11.01(b)(v)) released from the lien created by this Indenture
since the commencement of the then current fiscal year, as set forth in the
certificates required by clause (iii) above and this clause (iv), equals
10% or more of the Outstanding Amount of the Notes, but such certificate
need not be furnished in the case of any release of property or securities
if the fair value thereof as set forth in the related Officers' Certificate
is less than $25,000 or less than one percent of the then Outstanding
Amount of the Notes.
(v) Notwithstanding any other provision of this Section, the Issuer
may, without compliance with the other provisions of this Section, (A)
collect, liquidate, sell or otherwise dispose of Contracts as and to the
extent permitted or required by the Related Documents (including as
provided in Section 5.06 of the Sale and Servicing Agreement) and (B) make
cash payments out of the Trust Accounts as and to the extent permitted or
required by the Related Documents.
SECTION 11.02. Form of Documents Delivered to Trustee. In any case where
several matters are required to be certified by, or covered by an opinion of,
any
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specified Person, it is not necessary that all such matters be certified by,
or covered by the opinion of, only one such Person, or that they be so certified
or covered by only one document, but one such Person may certify or give an
opinion with respect to some matters and one or more other such Persons as to
other matters, and any such Person may certify or give an opinion as to such
matters in one or several documents.
Any certificate or opinion of an Authorized Officer of the Issuer may be
based, insofar as it relates to legal matters, upon a certificate or opinion of,
or representations by, counsel, unless such officer knows, or in the exercise of
reasonable care should know, that the certificate or opinion or representations
with respect to the matters upon which his certificate or opinion is based are
erroneous. Any such certificate of an Authorized Officer or Opinion of Counsel
may be based, insofar as it relates to factual matters, upon a certificate or
opinion of, or representations by, an officer or officers of the Servicer, the
Company or the Issuer, stating that the information with respect to such factual
matters is in the possession of the Servicer, the Company or the Issuer, unless
such counsel knows, or in the exercise of reasonable care should know, that the
certificate or opinion or representations with respect to such matters are
erroneous.
Where any Person is required to make, give or execute two or more
applications, requests, consents, certificates, statements, opinions or other
instruments under this Indenture, they may, but need not, be consolidated and
form one instrument.
Whenever in this Indenture, in connection with any application or
certificate or report to the Trustee, it is provided that the Issuer shall
deliver any document as a condition of the granting of such application, or as
evidence of the Issuer's compliance with any term hereof, it is intended that
the truth and accuracy, at the time of the granting of such application or at
the effective date of such certificate or report (as the case may be), of the
facts and opinions stated in such document shall in such case be conditions
precedent to the right of the Issuer to have such application granted or to the
sufficiency of such certificate or report. The foregoing shall not, however, be
construed to affect the Trustee's right to rely upon the truth and accuracy of
any statement or opinion contained in any such document as provided in Article
VI.
SECTION 11.03. Acts of Noteholders.
(a) Any request, demand, authorization, direction, notice, consent, waiver
or other action provided by this Indenture to be given or taken by Noteholders
may be embodied in and evidenced by one or more instruments of substantially
similar tenor signed by such Noteholders in person or by agents duly appointed
in writing; and except as herein otherwise expressly provided, such action shall
become effective when such instrument or instruments are delivered to the
Trustee, and, where it is hereby expressly required, to the Issuer. Such
instrument or instruments
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(and the action embodied therein and evidenced thereby) are herein sometimes
referred to as the "Act" of the Noteholders signing such instrument or
instruments. Proof of execution of any such instrument or of a writing
appointing any such agent shall be sufficient for any purpose of this Indenture
and (subject to Section 6.01) conclusive in favor of the Trustee and the Issuer,
if made in the manner provided in this Section.
(b) The fact and date of the execution by any person of any such instrument
or writing may be proved in any manner that the Trustee deems sufficient.
(c) The ownership of Notes shall be proved by the Note Register.
(d) Any request, demand, authorization, direction, notice, consent, waiver
or other action by the Holder of any Notes shall bind the Holder of every Note
issued upon the registration thereof or in exchange therefor or in lieu thereof,
in respect of anything done, omitted or suffered to be done by the Trustee or
the Issuer in reliance thereon, whether or not notation of such action is made
upon such Note.
SECTION 11.04. Notices, etc., to Trustee, Issuer and Rating Agencies. Any
request, demand, authorization, direction, notice, consent, waiver or Act of
Noteholders or other documents provided or permitted by this Indenture to be
made upon, given or furnished to or filed with:
(a) the Trustee by any Noteholder or by the Issuer shall be sufficient
for every purpose hereunder if made, given, furnished or filed in writing
to or with the Trustee at its Corporate Trust Office,
(b) the Issuer by the Trustee or by any Noteholder shall be sufficient
for every purpose hereunder if made in writing and mailed, first-class,
postage prepaid, to the Issuer addressed to: Green Tree [Home Improvement
and Home Equity] Trust, _____, in care of _____ , or at any other address
previously furnished in writing to the Trustee by Issuer. The Issuer shall
promptly transmit any notice received by it from the Noteholders to the
Trustee, or
(c) the Rating Agencies by the Issuer, the Trustee or the Owner
Trustee shall be sufficient for every purpose hereunder if made in writing,
personally delivered or mailed by certified mail, return receipt requested
to (i) in the case of _____, at the following address: _____ and (ii) in
the case of _____, at the following address: _____; or as to each of the
foregoing, at such other address as shall be designated by written notice
to the other parties.
SECTION 11.05. Notices to Noteholders; Waiver. Where this Indenture
provides for notice to Noteholders of any event, such notice shall be
sufficiently
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given (unless otherwise herein expressly provided) if in writing and mailed,
first-class, postage prepaid to each Noteholder affected by such event, at his
or her address as it appears on the Note Register, not later than the latest
date, and not earlier than the earliest date, prescribed for the giving of such
notice. In any case where notice to Noteholders is given by mail, neither the
failure to mail such notice nor any defect in any notice so mailed to any
particular Noteholder shall affect the sufficiency of such notice with respect
to other Noteholders, and any notice that is mailed in the manner herein
provided shall conclusively be presumed to have been duly given.
Where this Indenture provides for notice in any manner, such notice may be
waived in writing by any Person entitled to receive such notice, either before
or after the event, and such waiver shall be the equivalent of such notice.
Waivers of notice by Noteholders shall be filed with the Trustee but such filing
shall not be a condition precedent to the validity of any action taken in
reliance upon such a waiver.
In case, by reason of the suspension of regular mail service as a result of
a strike, work stoppage or similar activity, it shall be impractical to mail
notice of any event of Noteholders when such notice is required to be given
pursuant to any provision of this Indenture, then any manner of giving such
notice as shall be satisfactory to the Trustee shall be deemed to be a
sufficient giving of such notice.
Where this Indenture provides for notice to the Rating Agencies, failure to
give such notice shall not affect any other rights or obligations created
hereunder, and shall not under any circumstance constitute a Default or Event of
Default.
SECTION 11.06. Alternate Payment and Notice Provisions. Notwithstanding
any provision of this Indenture or any of the Notes to the contrary, the Issuer
may enter into any agreement with any Holder of a Note providing for a method of
payment, or notice by the Trustee or any Paying Agent to such Holder, that is
different from the methods provided for in this Indenture for such payments or
notices. The Issuer will furnish to the Trustee a copy of each such agreement
and the Trustee will cause payments to be made and notices to be given in
accordance with such agreements.
SECTION 11.07. Conflict with Trust Indenture Act. If any provision hereof
limits, qualifies or conflicts with another provision hereof that is required to
be included in this indenture by any of the provisions of the Trust Indenture
Act, such required provision shall control.
The provisions of TIA (S)(S) 310 through 317 that impose duties on any
Person (including the provisions automatically deemed included herein unless
expressly excluded by this Indenture) are a part of and govern this Indenture,
whether or not physically contained herein.
11-5
<PAGE>
SECTION 11.08. Effect of Headings and Table of Contents. The Article and
Section headings herein and the Table of Contents are for convenience only and
shall not affect the construction hereof.
SECTION 11.09. Successors and Assigns. All covenants and agreements in
this Indenture and the Notes by the Issuer shall bind its successors and
assigns, whether so expressed or not.
All agreements of the Trustee in this Indenture shall bind its successors.
SECTION 11.10. Severability. In case any provision in this Indenture or
in the Notes shall be invalid, illegal or unenforceable, the validity, legality,
and enforceability of the remaining provisions shall not in any way be affected
or impaired thereby.
SECTION 11.11. Benefits of Indenture. Nothing in this Indenture or in the
Notes, express or implied, shall give to any Person, other than the parties
hereto and their successors hereunder, and the Noteholders, and any other party
secured hereunder, and any other Person with an ownership interest in any part
of the Trust Estate, any benefit or any legal or equitable right, remedy or
claim under this Indenture.
SECTION 11.12. Legal Holidays. In any case where the date on which any
payment is due shall not be a Business Day, then (notwithstanding any other
provision of the Notes or this Indenture) payment need not be made on such date,
but may be made on the next succeeding Business Day with the same force and
effect as if made on the date on which nominally due, and no interest shall
accrue for the period from and after any such nominal date.
SECTION 11.13. Governing Law. THIS INDENTURE SHALL BE CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF MINNESOTA, WITHOUT REFERENCE TO ITS
CONFLICT OF LAW PROVISIONS, AND THE OBLIGATIONS, RIGHTS AND REMEDIES OF THE
PARTIES HEREUNDER SHALL BE DETERMINED IN ACCORDANCE WITH SUCH LAWS.
SECTION 11.14. Counterparts. This Indenture may be executed in any number
of counterparts, each of which so executed shall be deemed to be an original,
but all such counterparts shall together constitute but one and the same
instrument.
SECTION 11.15. Recording of Indenture. If this Indenture is subject to
recording in any appropriate public recording offices, such recording is to be
effected by the Issuer and at its expense accompanied by an Opinion of Counsel
(which may be counsel to the Trustee or any other counsel reasonably acceptable
to the Trustee,) to the effect that such recording is necessary either for the
protection of the Noteholders or any other Person secured hereunder or for the
enforcement of any
11-6
<PAGE>
right or remedy granted to the Trustee under this Indenture.
SECTION 11.16. Trust Obligation. No recourse may be taken, directly or
indirectly, with respect to the obligations of the Issuer, the Owner Trustee or
the Trustee on the Notes or under this Indenture or any certificate or other
writing delivered in connection herewith or therewith, against (i) the Trustee
or the Owner Trustee in its individual capacity, (ii) any owner of a beneficial
interest in the Issuer or (iii) any partner, owner, beneficiary, agent, officer,
director, employee or agent of the Trustee or the Owner Trustee in its
individual capacity, any holder of a beneficial interest in the Issuer, the
Owner Trustee or the Trustee or of any successor or assign of the Trustee or the
Owner Trustee in its individual capacity, except as any such Person may have
expressly agreed (it being understood that the Trustee and the Owner Trustee
have no such obligations in their individual capacity) and except that any such
partner, owner or beneficiary shall be fully liable, to the extent provided by
applicable law, for any unpaid consideration for stock, unpaid capital
contribution or failure to pay any installment or call owing to such entity.
For all purposes of this Indenture, in the performance of any duties or
obligations of the Issuer hereunder, the Owner Trustee shall be subject to, and
entitled to the benefits of, the terms and provisions of Articles VI, VII and
VIII of the Trust Agreement.
SECTION 11.17. No Petition. The Trustee, by entering into this Indenture,
and each Noteholder, by accepting a Note, hereby covenant and agree that they
will not at any time institute against the Company, the Issuer or any General
Partner, or join in any institution against the Company, the Issuer or any
General Partner of, any bankruptcy, reorganization, arrangement, insolvency or
liquidation proceedings, or other proceedings under any United States federal or
state bankruptcy or similar law in connection with any obligations relating to
the Notes, this Indenture or any of the Related Documents.
SECTION 11.18. Inspection. The Issuer agrees that, on reasonable prior
notice, it will permit any representative of the Trustee, during the Issuer's
normal business hours, to examine all the books of account, records, reports,
and other papers of the Issuer, to make copies and extracts therefrom, to cause
such books to be audited by independent certified public accountants, and to
discuss the Issuer's affairs, finances and accounts with the Issuer's officers,
employees, and independent certified public accountants, all at such reasonable
times and as often as may be reasonably requested. The Trustee shall and shall
cause its representatives to hold in confidence all such information except to
the extent disclosure may be required by law (and all reasonable applications
for confidential treatment are unavailing) and except to the extent that the
Trustee may reasonably determine that such disclosure is consistent with its
obligations hereunder.
11-7
<PAGE>
IN WITNESS WHEREOF, the Issuer and the Trustee have caused this Indenture
to be duly executed by their respective officers, thereunto duly authorized, all
as of the day and year first above written.
GREEN TREE [HOME EQUITY AND HOME IMPROVEMENT] TRUST _____
By [OWNER TRUSTEE], not in its individual
capacity but solely on behalf of the Issuer
as Owner Trustee under the Trust Agreement
By
____________________________________________
Name:
Title:
[TRUSTEE], not in its individual capacity
but solely as Trustee
By
____________________________________________
Name:
Title:
<PAGE>
EXHIBIT A
Schedule of Contracts
A-1
<PAGE>
EXHIBIT B
Form of Depository Agreement
B-1
<PAGE>
EXHIBIT C-1
Unless this Note is presented by an authorized representative of The Depository
Trust Company, a New York corporation ("DTC"), to the issuer or its agent for
registration of transfer, exchange or payment, and any Note issued is registered
in the name of Cede & Co. or in such other name as is requested by an authorized
representative of DTC (and any payment is made to Cede & Co. or to such other
entity as is requested by an authorized representative of DTC), ANY TRANSFER,
PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS
WRONGFUL inasmuch as the registered owner hereof, Cede & Co., has an interest
herein.
THE PRINCIPAL OF THIS NOTE IS PAYABLE IN INSTALLMENTS AS SET FORTH HEREIN.
ACCORDINGLY, THE OUTSTANDING PRINCIPAL AMOUNT OF THIS NOTE AT ANY TIME MAY BE
LESS THAN THE AMOUNT SHOWN ON THE FACE HEREOF.
GREEN TREE [HOME IMPROVEMENT AND HOME EQUITY] TRUST 1997-A
CLASS A-1 [FLOATING RATE] [FIXED RATE] LOAN-BACKED NOTE
REGISTERED $________
NO. R-________ CUSIP NO.________
Green Tree [Home Improvement and Home Equity] Trust _____, a business trust
organized and existing under the laws of the State of [Delaware] (herein
referred to as the "Issuer"), for value received, hereby promises to pay to Cede
& Co., or registered assigns, the principal sum of [
] payable on each Distribution Date in an amount equal to the result obtained by
multiplying (i) a fraction the numerator of which is $[INSERT INITIAL PRINCIPAL
AMOUNT OF NOTE] and the denominator of which is $__________ by (ii) the
aggregate amount, if any, payable from the Note Distribution Account in respect
of principal on the Class A-1 Notes pursuant to Section 3.01 of the Indenture;
provided, however, that the entire unpaid principal amount of this Note shall be
due and payable on the earlier of the __________________ Distribution Date (the
"Class A-1 Final Scheduled Distribution Date") and the Redemption Date, if any,
pursuant to Section 10.01(a) or (b) of the Indenture referred to on the reverse
hereof.
The Issuer will pay interest on this Note at the Class A-1 Interest Rate on
each Distribution Date until the principal of this Note is paid or made
available for payment, on the principal amount of this Note outstanding on the
preceding Distribution Date (after giving effect to all payments of principal
made on the preceding Distribution Date). Interest on this Note will accrue for
each Distribution Date from the most recent Distribution Date on which interest
has been paid to but excluding such Distribution Date or, if no interest has yet
been paid, from _____. Interest will be computed on the basis of actual days
elapsed and a year of 360 days.
C-1-1
<PAGE>
Such principal of and interest and premium, if any, on this Note shall be paid
in the manner specified on the reverse hereof.
The principal of and interest on this Note are payable in such coin or
currency of the United States of America as at the time of payment is legal
tender for payment of public and private debts. All payments made by the Issuer
with respect to this Note shall be applied first to interest due and payable on
this Note as provided above and then to the unpaid principal of this Note.
Reference is made to the further provisions of this Note set forth on the
reverse hereof, which shall have the same effect as though fully set forth on
the face of this Note.
Unless the certificate of authentication hereon has been executed by the
Trustee whose name appears below by manual signature, this Note shall not be
entitled to any benefit under the Indenture referred to on the reverse hereof,
or be valid or obligatory for any purpose.
C-1-2
<PAGE>
IN WITNESS WHEREOF, the Issuer has caused this instrument to be signed,
manually or in facsimile, by its Authorized Officer.
Date: ________
GREEN TREE [HOME IMPROVEMENT AND HOME EQUITY] TRUST _____
By [OWNER TRUSTEE], not in its individual
capacity but solely on behalf of the Issuer
as Owner Trustee under the Trust Agreement
By
____________________________________________
Name:
Title:
C-1-3
<PAGE>
TRUSTEE'S CERTIFICATE OF AUTHENTICATION
This is one of the Notes designated above and referred to in the within-
mentioned Indenture.
[TRUSTEE], not in its individual capacity but
solely as Trustee
By
____________________________________________
Authorized Signatory
C-1-4
<PAGE>
[REVERSE OF NOTE]
This Note is one of a duly authorized issue of Notes of the Issuer,
designated as its Class A-1 [Floating Rate] [Fixed Rate] Loan-Backed Notes
(herein called the "Notes"), all issued under an Indenture dated as of _____
(such indenture, as supplemented or amended, herein called the "Indenture"),
between the Issuer and _____, as trustee (the "Trustee," which term includes any
successor Trustee under the Indenture) to which Indenture and all indentures
supplemental thereto reference is hereby made for a statement of the respective
rights and obligations thereunder of the Issuer, the Trustee and the Holders of
the Notes. The Notes are subject to all terms of the Indenture. All terms used
in this Note that are defined in the Indenture, as supplemented or amended,
shall have the meanings assigned to them in or pursuant to the Indenture, as so
supplemented or amended.
The Class A-1 Notes and the Class A-2 Notes (collectively, the "Notes") are
and will be equally and ratably secured by the collateral pledged as security
therefor as provided in the Indenture.
Principal of the Class A-1 Notes will be payable on each Distribution Date
in an amount described on the face hereof. "Distribution Date" means the
fifteenth day of each month, or, if any such date is not a Business Day, the
next succeeding Business Day, commencing _____.
As described above, the entire unpaid principal amount of this Note shall
be due and payable on the earlier of the Class A-1 Final Scheduled Distribution
Date and the Redemption Date, if any, pursuant to Section 10.01(a) or 10.01(b)
of the Indenture. All principal payments on the Class A-1 Notes shall be made
pro rata to the Class A-1 Noteholders entitled thereto.
Payments of interest on this Note due and payable on each Distribution
Date, together with the installment of principal, if any, to the extent not in
full payment of this Note, shall be made by check mailed to the Person whose
name appears as the Registered Holder of this Note (or one or more Predecessor
Notes) on the Note Register as of the close of business on each Record Date,
except that with respect to Notes registered on the Record Date in the name of
the nominee of the Depository (initially, such nominee to be Cede & Co.),
payments will be made by wire transfer in immediately available funds to the
account designated by such nominee. Such checks shall be mailed to the Person
entitled thereto at the address of such Person as it appears on the Note
Register as of the applicable Record Date without requiring that this Note be
submitted for notation of payment. Any reduction in the principal amount of
this Note (or any one or more Predecessor Notes) affected by any payments made
on any Distribution Date shall be binding upon all future Holders of this Note
and of any Note issued upon the registration of transfer hereof or in exchange
hereof or in lieu hereof, whether or not noted hereon. If funds are expected to
be available, as provided in the Indenture, for payment in full of the then
remaining unpaid principal amount of this Note on a Distribution Date, then
C-1-5
<PAGE>
the Trustee, in the name of and on behalf of the Issuer, will notify the Person
who was the Registered Holder hereof as of the Record Date with respect to the
Distribution Date immediately preceding such Redemption Date by notice mailed
within five days of such Redemption Date and the amount then due and payable
shall be payable only upon presentation and surrender of this Note at the
Trustee's principal Corporate Trust Office or at the office of the Trustee's
agent appointed for such purposes located in _____.
The Issuer shall pay interest on overdue installments of interest at the
Class A-1 Interest Rate to the extent lawful.
As provided in the Indenture, the Notes may be redeemed pursuant to Section
10.01(a) of the Indenture, in whole, but not in part, at the option of the
Company or the Servicer on any Distribution Date on or after the date on which
the Pool Scheduled Principal Balance is less than or equal to 10% of the Cut-off
Date Pool Principal Balance.
As provided in the Indenture and subject to certain limitations set forth
therein, the transfer of this Note may be registered on the Note Register upon
surrender of this Note for registration of transfer at the office or agency
designated by the Issuer pursuant to the Indenture, duly endorsed by, or
accompanied by a written instrument of transfer in form satisfactory to the
Trustee duly executed by, the Holder hereof or his attorney duly authorized in
writing, with such signature guaranteed by a commercial bank or trust company
located, or having a correspondent located, in the city in which the Corporate
Trust Office is located, or a member firm of a national securities exchange, and
such other documents as the Trustee may require, and thereupon one or more new
Notes of authorized denominations and in the same aggregate principal amount
will be issued to the designated transferee or transferees. No service charge
will be charged for any registration of transfer or exchange of this Note, but
the transferor may be required to pay a sum sufficient to cover any tax or other
governmental charge that may be imposed in connection with any such registration
of transfer or exchange.
Each Noteholder or Note Owner, by acceptance of a Note or, in the case of a
Note Owner, a beneficial interest in a Note, covenants and agrees that no
recourse may be taken, directly or indirectly, with respect to the obligations
of the Issuer, the Owner Trustee or the Trustee on the Notes or under the
Indenture or any certificate or other writing delivered in connection therewith,
against (i) the Trustee or the Owner Trustee in its individual capacity, (ii)
any owner of a beneficial interest in the Issuer or (iii) any partner, owner,
beneficiary, agent, officer, director or employee of the Trustee or the Owner
Trustee in its individual capacity, any holder of a beneficial interest in the
Issuer, the Owner Trustee or the Trustee or of any successor or assign of the
Trustee or the Owner Trustee in its individual capacity, except as any such
Person may have expressly agreed and except that any such partner, owner or
beneficiary shall be fully liable, to the extent provided by applicable law, for
any unpaid consideration for stock, unpaid capital contribution or failure to
pay any
C-1-6
<PAGE>
installment or call owing to such entity.
Each Noteholder or Note Owner, by acceptance of a Note or, in the case of a
Note Owner, a beneficial interest in a Note, covenants and agrees that by
accepting the benefits of the Indenture and such Note that such Noteholder or
Note Owner will not at any time institute against the Company, the Issuer or any
General Partner, or join in any institution against the Company, the Issuer or
any General Partner of, any bankruptcy, reorganization, arrangement, insolvency
or liquidation proceedings under any United States Federal or state bankruptcy
or similar law in connection with any obligations relating to the Notes, the
Indenture or the Related Documents.
It is the intent and agreement of the Issuer, the Trustee, the Noteholders
and Note Owners that, for purposes of federal income, state and local income and
franchise and any other income taxes, the Notes will be treated as indebtedness
of the Issuer. Each Noteholder and Note Owner, by acceptance of this Note or,
in the case of a Note Owner, a beneficial interest in this Note, covenants and
agrees to treat this Note as indebtedness for such tax purposes and to take no
action inconsistent with such treatment.
Prior to the due presentment for registration of transfer of this Note, the
Issuer, the Trustee and any agent of the Issuer or the Trustee may treat the
Person in whose name this Note (as of the day of determination or as of such
other date as may be specified in the Indenture) is registered as the owner
hereof for all purposes, whether or not this Note be overdue, and neither the
Issuer, the Trustee nor any such agent shall be affected by notice to the
contrary.
The Indenture permits, with certain exceptions as therein provided, the
amendment thereof and the modification of the rights and obligations of the
Issuer and the rights of the Holders of the Notes under the Indenture at any
time by the Issuer with the consent of the Holders of Notes representing a
majority of the Outstanding Amount of each class of Notes at the time
Outstanding. The Indenture also contains provisions permitting the Holders of
Notes representing specified percentages of the Outstanding Amount of each class
of Notes, on behalf of the Holders of all the Notes, to waive compliance by the
Issuer with certain provisions of the Indenture and certain past defaults under
the Indenture and their consequences. Any such consent or waiver by the Holder
of this Note (or any one or more Predecessor Notes) shall be conclusive and
binding upon such Holders and upon all future Holders of this Note and of any
Note issued upon the registration of transfer hereof or in exchange hereof or in
lieu hereof whether or not notation of such consent or waiver is made upon this
Note. The Indenture also permits the Trustee to amend or waive certain terms
and conditions set forth in the Indenture without the consent of Holders of the
Notes issued thereunder.
The term "Issuer" as used in this Note includes any successor to the Issuer
under the Indenture.
C-1-7
<PAGE>
The Issuer is permitted by the Indenture, under certain circumstances, to
merge or consolidate, subject to the rights of the Trustee and the Holder of
Notes under the Indenture.
The Notes are issuable only in registered form in denominations as provided
in the Indenture, subject to certain limitations therein set forth.
This Note and the Indenture shall be construed in accordance with the laws
of the State of Minnesota, without reference to its conflict of law provisions,
and the obligations, rights and remedies of the parties hereunder and thereunder
shall be determined in accordance with such laws.
No reference herein to the Indenture and no provision of this Note or of
the Indenture shall alter or impair the obligation of the Issuer, which is
absolute and unconditional, to pay the principal of and interest on this Note at
the times, place, and rate, and in the coin or currency herein prescribed.
C-1-8
<PAGE>
ASSIGNMENT
Social Security or taxpayer I.D. or other identifying number of assignee:
_________________________
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and
transfers unto_______________________________________________________________
(name and address of assignee)
the within Note and all rights thereunder, and hereby irrevocably constitutes
and appoints attorney, to transfer said Note on the books kept for registration
thereof, with full power of substitution in the premises.
Dated: ________
**
Signature Guaranteed:
- ----------------------------------
- ---------------
** NOTE: The signature to this assignment must correspond with the name of the
registered owner as it appears on the face of the within Note in every
particular, without alteration, enlargement or any change whatsoever.
C-1-9
<PAGE>
EXHIBIT C-2
Unless this Note is presented by an authorized representative of The Depository
Trust Company, a New York corporation ("DTC"), to the issuer or its agent for
registration of transfer, exchange or payment, and any Note issued is registered
in the name of Cede & Co. or in such other name as is requested by an authorized
representative of DTC (and any payment is made to Cede & Co. or to such other
entity as is requested by an authorized representative of DTC), ANY TRANSFER,
PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS
WRONGFUL inasmuch as the registered owner hereof, Cede & Co., has an interest
herein.
THE PRINCIPAL OF THIS NOTE IS PAYABLE IN INSTALLMENTS AS SET FORTH HEREIN.
ACCORDINGLY, THE OUTSTANDING PRINCIPAL AMOUNT OF THIS NOTE AT ANY TIME MAY BE
LESS THAN THE AMOUNT SHOWN ON THE FACE HEREOF.
GREEN TREE [HOME IMPROVEMENT AND HOME EQUITY] TRUST _____
CLASS A-2 [FLOATING RATE] [FIXED RATE] LOAN-BACKED NOTE
REGISTERED $________
NO. R-________ CUSIP NO.________
Green Tree [Home Improvement and Home Equity] Trust _____, a business trust
organized and existing under the laws of the State of Delaware (herein referred
to as the "Issuer"), for value received, hereby promises to pay to Cede & Co.,
or registered assigns, the principal sum of [ ]
payable on each Distribution Date in an amount equal to the result obtained by
multiplying (i) a fraction the numerator of which is $[INSERT INITIAL PRINCIPAL
AMOUNT OF NOTE] and the denominator of which is $__________ by (ii) the
aggregate amount, if any, payable from the Note Distribution Account in respect
of principal on the Class A-2 Notes pursuant to Section 3.01 of the Indenture;
provided, however, that the entire unpaid principal amount of this Note shall be
due and payable on the earlier of the __________________ Distribution Date (the
"Final Scheduled Distribution Date") and the Redemption Date, if any, pursuant
to Section 10.01(a) or (b) of the Indenture referred to on the reverse hereof.
The Issuer will pay interest on this Note at the Class A-2 Interest Rate on
each Distribution Date until the principal of this Note is paid or made
available for payment, on the principal amount of this Note outstanding on the
preceding Distribution Date (after giving effect to all payments of principal
made on the preceding Distribution Date). Interest on this Note will accrue for
each Distribution Date from the most recent Distribution Date on which interest
has been paid to but excluding such Distribution Date or, if no interest has yet
been paid, from _____. Interest will be computed on the basis of actual days
elapsed and a year of 360 days.
C-2-1
<PAGE>
Such principal of and interest and premium, if any, on this Note shall be paid
in the manner specified on the reverse hereof.
The principal of and interest on this Note are payable in such coin or
currency of the United States of America as at the time of payment is legal
tender for payment of public and private debts. All payments made by the Issuer
with respect to this Note shall be applied first to interest due and payable on
this Note as provided above and then to the unpaid principal of this Note.
Reference is made to the further provisions of this Note set forth on the
reverse hereof, which shall have the same effect as though fully set forth on
the face of this Note.
Unless the certificate of authentication hereon has been executed by the
Trustee whose name appears below by manual signature, this Note shall not be
entitled to any benefit under the Indenture referred to on the reverse hereof,
or be valid or obligatory for any purpose.
C-2-2
<PAGE>
IN WITNESS WHEREOF, the Issuer has caused this instrument to be signed,
manually or in facsimile, by its Authorized Officer.
Date: ________
GREEN TREE [HOME IMPROVEMENT
AND HOME EQUITY] TRUST _____
By [OWNER TRUSTEE], not in its individual
capacity but solely on behalf of the Issuer
as Owner Trustee under the Trust Agreement
By
____________________________________________
Name:
Title:
C-2-3
<PAGE>
TRUSTEE'S CERTIFICATE OF AUTHENTICATION
This is one of the Notes designated above and referred to in the within-
mentioned Indenture.
[TRUSTEE], not in its individual capacity but solely as
Trustee
By
____________________________________________
Authorized Signatory
C-2-4
<PAGE>
[REVERSE OF NOTE]
This Note is one of a duly authorized issue of Notes of the Issuer,
designated as its Class A-2 [Floating Rate] [Fixed Rate] Loan-Backed Notes
(herein called the "Notes"), all issued under an Indenture dated as of _____
(such indenture, as supplemented or amended, herein called the "Indenture"),
between the Issuer and First Trust National Association, as trustee (the
"Trustee," which term includes any successor Trustee under the Indenture), to
which Indenture and all indentures supplemental thereto reference is hereby made
for a statement of the respective rights and obligations thereunder of the
Issuer, the Trustee and the Holders of the Notes. The Notes are subject to all
terms of the Indenture. All terms used in this Note that are defined in the
Indenture, as supplemented or amended, shall have the meanings assigned to them
in or pursuant to the Indenture, as so supplemented or amended.
The Class A-1 Notes and the Class A-2 Notes (collectively, the "Notes") are
and will be equally and ratably secured by the collateral pledged as security
therefor as provided in the Indenture.
Principal of the Class A-2 Notes will be payable on each Distribution Date
in an amount described on the face hereof. "Distribution Date" means the
fifteenth day of each month, or, if any such date is not a Business Day, the
next succeeding Business Day, commencing _____.
As described above, the entire unpaid principal amount of this Note shall
be due and payable on the earlier of the Final Scheduled Distribution Date and
the Redemption Date, if any, pursuant to Section 10.01(a) or 10.01(b) of the
Indenture. All principal payments on the Class A-2 Notes shall be made pro rata
to the Class A-2 Noteholders entitled thereto.
Payments of interest on this Note due and payable on each Distribution
Date, together with the installment of principal, if any, to the extent not in
full payment of this Note, shall be made by check mailed to the Person whose
name appears as the Registered Holder of this Note (or one or more Predecessor
Notes) on the Note Register as of the close of business on each Record Date,
except that with respect to Notes registered on the Record Date in the name of
the nominee of the Depository (initially, such nominee to be Cede & Co.),
payments will be made by wire transfer in immediately available funds to the
account designated by such nominee. Such checks shall be mailed to the Person
entitled thereto at the address of such Person as it appears on the Note
Register as of the applicable Record Date without requiring that this Note be
submitted for notation of payment. Any reduction in the principal amount of
this Note (or any one or more Predecessor Notes) affected by any payments made
on any Distribution Date shall be binding upon all future Holders of this Note
and of any Note issued upon the registration of transfer hereof or in exchange
hereof or in lieu hereof, whether or not noted hereon. If funds are expected to
be available, as provided in the Indenture, for payment in full of the
C-2-5
<PAGE>
then remaining unpaid principal amount of this Note on a Distribution Date, then
the Trustee, in the name of and on behalf of the Issuer, will notify the Person
who was the Registered Holder hereof as of the Record Date with respect to the
Distribution Date immediately preceding such Redemption Date by notice mailed
within five days of such Redemption Date and the amount then due and payable
shall be payable only upon presentation and surrender of this Note at the
Trustee's principal Corporate Trust Office or at the office of the Trustee's
agent appointed for such purposes located in _____.
The Issuer shall pay interest on overdue installments of interest at the
Class A-2 Interest Rate to the extent lawful.
As provided in the Indenture, the Notes may be redeemed pursuant to Section
10.01(a) of the Indenture, in whole, but not in part, at the option of the
Company or the Servicer on any Distribution Date on or after the date on which
the Pool Scheduled Principal Balance is less than or equal to 10% of the Cut-off
Date Pool Principal Balance.
As provided in the Indenture and subject to certain limitations set forth
therein, the transfer of this Note may be registered on the Note Register upon
surrender of this Note for registration of transfer at the office or agency
designated by the Issuer pursuant to the Indenture, duly endorsed by, or
accompanied by a written instrument of transfer in form satisfactory to the
Trustee duly executed by, the Holder hereof or his attorney duly authorized in
writing, with such signature guaranteed by a commercial bank or trust company
located, or having a correspondent located, in the city in which the Corporate
Trust Office is located, or a member firm of a national securities exchange, and
such other documents as the Trustee may require, and thereupon one or more new
Notes of authorized denominations and in the same aggregate principal amount
will be issued to the designated transferee or transferees. No service charge
will be charged for any registration of transfer or exchange of this Note, but
the transferor may be required to pay a sum sufficient to cover any tax or other
governmental charge that may be imposed in connection with any such registration
of transfer or exchange.
Each Noteholder or Note Owner, by acceptance of a Note or, in the case of a
Note Owner, a beneficial interest in a Note, covenants and agrees that no
recourse may be taken, directly or indirectly, with respect to the obligations
of the Issuer, the Owner Trustee or the Trustee on the Notes or under the
Indenture or any certificate or other writing delivered in connection therewith,
against (i) the Trustee or the Owner Trustee in its individual capacity, (ii)
any owner of a beneficial interest in the Issuer or (iii) any partner, owner,
beneficiary, agent, officer, director or employee of the Trustee or the Owner
Trustee in its individual capacity, any holder of a beneficial interest in the
Issuer, the Owner Trustee or the Trustee or of any successor or assign of the
Trustee or the Owner Trustee in its individual capacity, except as any such
Person may have expressly agreed and except that any such partner, owner or
beneficiary shall be fully liable, to the extent provided by applicable law, for
any
C-2-6
<PAGE>
unpaid consideration for stock, unpaid capital contribution or failure to
pay any installment or call owing to such entity.
Each Noteholder or Note Owner, by acceptance of a Note or, in the case of a
Note Owner, a beneficial interest in a Note, covenants and agrees that by
accepting the benefits of the Indenture and such Note that such Noteholder or
Note Owner will not at any time institute against the Company, the Issuer or any
General Partner, or join in any institution against the Company, the Issuer or
any General Partner of, any bankruptcy, reorganization, arrangement, insolvency
or liquidation proceedings under any United States Federal or state bankruptcy
or similar law in connection with any obligations relating to the Notes, the
Indenture or the Related Documents.
It is the intent and agreement of the Issuer, the Trustee, the Noteholders
and Note Owners that, for purposes of federal income, state and local income and
franchise and any other income taxes, the Notes will be treated as indebtedness
of the Issuer. Each Noteholder and Note Owner, by acceptance of this Note or,
in the case of a Note Owner, a beneficial interest in this Note, covenants and
agrees to treat this Note as indebtedness for such tax purposes and to take no
action inconsistent with such treatment.
Prior to the due presentment for registration of transfer of this Note, the
Issuer, the Trustee and any agent of the Issuer or the Trustee may treat the
Person in whose name this Note (as of the day of determination or as of such
other date as may be specified in the Indenture) is registered as the owner
hereof for all purposes, whether or not this Note be overdue, and neither the
Issuer, the Trustee nor any such agent shall be affected by notice to the
contrary.
The Indenture permits, with certain exceptions as therein provided, the
amendment thereof and the modification of the rights and obligations of the
Issuer and the rights of the Holders of the Notes under the Indenture at any
time by the Issuer with the consent of the Holders of Notes representing a
majority of the Outstanding Amount of each class of Notes at the time
Outstanding. The Indenture also contains provisions permitting the Holders of
Notes representing specified percentages of the Outstanding Amount of each class
of Notes, on behalf of the Holders of all the Notes, to waive compliance by the
Issuer with certain provisions of the Indenture and certain past defaults under
the Indenture and their consequences. Any such consent or waiver by the Holder
of this Note (or any one or more Predecessor Notes) shall be conclusive and
binding upon such Holders and upon all future Holders of this Note and of any
Note issued upon the registration of transfer hereof or in exchange hereof or in
lieu hereof whether or not notation of such consent or waiver is made upon this
Note. The Indenture also permits the Trustee to amend or waive certain terms
and conditions set forth in the Indenture without the consent of Holders of the
Notes issued thereunder.
The term "Issuer" as used in this Note includes any successor to the Issuer
C-2-7
<PAGE>
under the Indenture.
The Issuer is permitted by the Indenture, under certain circumstances, to
merge or consolidate, subject to the rights of the Trustee and the Holder of
Notes under the Indenture.
The Notes are issuable only in registered form in denominations as provided
in the Indenture, subject to certain limitations therein set forth.
This Note and the Indenture shall be construed in accordance with the laws
of the State of Minnesota, without reference to its conflict of law provisions,
and the obligations, rights and remedies of the parties hereunder and thereunder
shall be determined in accordance with such laws.
No reference herein to the Indenture and no provision of this Note or
of the Indenture shall alter or impair the obligation of the Issuer, which is
absolute and unconditional, to pay the principal of and interest on this Note at
the times, place, and rate, and in the coin or currency herein prescribed.
C-2-8
<PAGE>
ASSIGNMENT
Social Security or taxpayer I.D. or other identifying number of assignee:
_________________________
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and
transfers unto _________________________________________________________________
(name and address of assignee)
the within Note and all rights thereunder, and hereby irrevocably constitutes
and appoints attorney, to transfer said Note on the books kept for registration
thereof, with full power of substitution in the premises.
Dated: ________
**
Signature Guaranteed:
- ------------------------------------
- ---------------
** NOTE: The signature to this assignment must correspond with the name of
the registered owner as it appears on the face of the within Note in every
particular, without alteration, enlargement or any change whatsoever.
C-3-9
