<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 9, 1998
REGISTRATION NO. 333-63305
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
AMENDMENT NO. 1 TO 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(4)
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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. 333-49951 pursuant
to Rule 429 is $671,637,069, and the Registrant previously paid a filing
fee with respect to such securities of $198,132.94 (calculated at the rate
of 1/29th 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).
(4) Previously paid.
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. 333-49951, which became effective on April 23,
1998.
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>
GREEN TREE FINANCIAL CORPORATION
CERTIFICATES FOR HOME IMPROVEMENT AND HOME EQUITY LOANS
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EXPLANATORY NOTE
This Registration Statement includes seven different Base Prospectuses, with
an accompanying form of Prospectus Supplement, describing different
combinations of assets or transaction structures that might be employed by the
Registrant:
Base No. 1Home Equity Loans, REMIC
The assets of the related Trust would consist of home equity loans.
Each such home equity loan would constitute a "qualified mortgage"
for purposes of the REMIC provisions of the Internal Revenue Code.
The Trust would be structured to qualify as a "real estate mortgage
investment conduit"("REMIC") under the Internal Revenue Code, and
would issue certificates constituting "regular interests" in the
REMIC.
Base No. 2 High-LTV Home Equity Loans , Owner Trust
The assets of the related Trust would consist of home equity loans.
For various reasons, which may include a loan-to-value ratio in
excess of 125%, Green Tree is unable to represent that such home
equity loans constitute "qualified mortgages" for purposes of the
REMIC provisions of the Internal Revenue Code. The Trust would be
structured as an "owner trust," issuing notes pursuant to an
indenture representing indebtedness of the Trust, and possibly
issuing certificates representing beneficial interests in the Trust.
Base No. 3 Secured Home Improvement and Home Equity Loans, REMIC
The assets of the related Trust would consist of home improvement
loans and home equity loans. Each such home improvement loan and each
such home equity loan would constitute a "qualified mortgage" for
purposes of the REMIC provisions of the Internal Revenue Code. The
Trust would be structured to qualify as a REMIC under the Internal
Revenue Code, and would issue certificates constituting "regular
interests" in the REMIC.
Base No. 4 Secured Home Improvement Loans, REMIC
The assets of the related Trust would consist of home improvement
loans. Each such home improvement loan would constitute a "qualified
mortgage" for purposes of the REMIC provisions of the Internal
Revenue Code. The Trust would be structured to qualify as a REMIC
under the Internal Revenue Code, and would issue certificates
constituting "regular interests" in the REMIC.
Base No. 5 Unsecured Home Improvement Loans and High-LTV Home Equity Loans ,
Owner Trust
The assets of the related Trust would consist of home improvement
loans and home equity loans. For various reasons, which may include
the lack of a mortgage on the related improved real estate or a loan-
to-value ratio of such loan in excess of 125%, Green Tree is unable
to represent that such home improvement loans and home equity loans
constitute "qualified mortgages" for purposes of the REMIC provisions
of the Internal Revenue Code. The Trust would be structured as an
"owner trust," issuing notes pursuant to an indenture representing
indebtedness of the Trust, and possibly issuing certificates
representing beneficial interests in the Trust.
Base No. 6 Unsecured Home Improvement Loans , Grantor Trust
The assets of the related Trust would consist of home improvement
loans. For various reasons, which may include the lack of a mortgage
on the related improved real estate or a loan-to-value ratio of such
loan in excess of 125%, Green Tree is unable to represent that such
home improvement loans constitute "qualified mortgages" for purposes
of the REMIC provisions of the Internal Revenue Code. The Trust would
be structured to qualify as a "grantor trust" under the Internal
Revenue Code, and would issue certificates representing beneficial
interests in the Trust.
Base No. 7 Unsecured Home Improvement Loans , Owner Trust
The assets of the related Trust would consist of home improvement
loans. For various reasons, which may include the lack of a mortgage
on the related improved real estate or a loan-to-value ratio of such
loan in excess of 125%, Green Tree is unable to represent that such
home improvement loans constitute "qualified mortgages" for purposes
of the REMIC provisions of the Internal Revenue Code. The Trust would
be structured as an "owner trust," issuing notes pursuant to an
indenture representing indebtedness of the Trust, and possibly
issuing certificates representing beneficial interests in the Trust.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+THIS PRELIMINARY PROSPECTUS SUPPLEMENT AND THE INFORMATION CONTAINED HEREIN +
+ARE SUBJECT TO COMPLETION OR AMENDMENT AND PROSPECTIVE PURCHASERS ARE +
+REFERRED TO THE RELATED FINAL PROSPECTUS SUPPLEMENT FOR DEFINITIVE +
+INFORMATION ON ANY MATTER CONTAINED HEREIN. THIS PRELIMINARY PROSPECTUS +
+SUPPLEMENT 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 +
+JURISDICTION IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL +
+PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH +
+JURISDICTION. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS SUPPLEMENT
TO BASE NO. 1
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED , 1998)
$ (APPROXIMATE)
LOGO
[LOGO OF GREENTREE]
SELLER AND SERVICER
CERTIFICATES FOR HOME EQUITY LOANS
SERIES 1998-
$ (APPROX.) CLASS A-1 ARM
(1) (APPROX.) % CLASS A-5 IO
$ (APPROX.) % CLASS A-1
$ (APPROX.) % CLASS M-1
$ (APPROX.) % CLASS A-2
$ (APPROX.) % CLASS M-2
$ (APPROX.) % CLASS A-3
$ (APPROX.) % CLASS B
$ (APPROX.) % CLASS A-4
-------
(PRINCIPAL AND INTEREST PAYABLE ON THE 15TH DAY OF EACH MONTH BEGINNING IN
1998)
The Certificates for Home Equity Loans, Series 1998- , offered hereby (the
"Certificates") will be comprised of nine Classes, designated as the Class A-1
ARM, Class A-1, Class A-2, Class A-3, Class A-4, Class A-5 IO, Class M-1, Class
M-2 and Class B Certificates, respectively. The Certificates will be issued by,
and evidence beneficial ownership interests in, Home Equity Loan Trust
(Continued on next page)
-------
PROSPECTIVE INVESTORS SHOULD CONSIDER THE INFORMATION SET FORTH UNDER "RISK
FACTORS" ON PAGE S- OF THIS PROSPECTUS SUPPLEMENT AND PAGE OF THE
ACCOMPANYING PROSPECTUS.
THE CERTIFICATES REPRESENT INTERESTS IN THE TRUST AND DO NOT REPRESENT
INTERESTS IN OR OBLIGATIONS OF THE COMPANY, EXCEPT TO THE LIMITED EXTENT
DESCRIBED HEREIN AND IN THE PROSPECTUS. THE CERTIFICATES DO NOT
REPRESENT OBLIGATIONS OF, AND WILL NOT BE INSURED OR GUARANTEED BY,
FHA OR ANY OTHER GOVERNMENTAL AGENCY OR INSTRUMENTALITY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS
UNLAWFUL.
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<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC(2) DISCOUNT COMPANY(2)(3)
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<S> <C> <C> <C>
Per Class A-1 ARM
Certificate % % %
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Per Class A-1
Certificate % % %
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Per Class A-2
Certificate % % %
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Per Class A-3
Certificate % % %
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Per Class A-4
Certificate % % %
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Per Class A-5 IO
Certificate % % %
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Per Class M-1
Certificate % % %
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Per Class M-2
Certificate % % %
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Per Class B Certificate % % %
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Total $ $ $
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</TABLE>
(1) Interest will be based on a notional principal amount which will equal
$ (or the Class A Principal Balance for such Payment Date, if
less), for the first Payment Dates, and will thereafter equal zero.
(2) Plus accrued interest, if any, from and including , 1998.
(3) Before deducting expenses, estimated to be $ .
-------
The Certificates are offered subject to prior sale, when, as and if issued by
the Trust and accepted by the Underwriters and subject to their right to reject
orders in whole or in part. It is expected that delivery of the Certificates
will be made in book-entry form only through the Same Day Funds Settlement
system of The Depository Trust Company on or about , 1998 (the actual
such date being hereinafter referred to as the "Closing Date").
-------
[UNDERWRITERS]
, 1998
<PAGE>
(Continued from previous page)
1998- (the "Trust"). The Trust will be created by Green Tree Financial
Corporation (the "Company") pursuant to a Pooling and Servicing Agreement,
dated as of , 1998 (the "Agreement") between the Company and [Trustee],
as Trustee (the "Trustee"). The Trust property will consist primarily of a
pool (the "Loan Pool") comprised of closed-end home equity loans (the
"Loans"), including the right to receive payments due on the Loans after the
"Cut-off Date" (which will be , 1997 (or the date of origination
thereof, if later) for each Loan other than the Subsequent Loans (as defined
herein), and for each Subsequent Loan, the date on which such Loan is
purchased by the Trust), together with liens on the related real estate and
amounts held for the Trust in the Certificate Account and, during the Funding
Period, in the Pre-Funding Account (each as defined herein). The Loans include
adjustable-rate closed-end home equity loans subject to interest rate
adjustments after an initial period of up to months (the "Adjustable Rate
Loans;" all Loans other than the Adjustable Rate Loans are referred to herein
as the "Fixed-Rate Loans"). Each of the Loans is secured by a lien on the
related real estate.
The Agreement provides for a pre-funding account (the "Pre-Funding Account")
to provide the Trust with sufficient funds to purchase additional Loans (the
"Subsequent Loans") for up to 90 days after the Closing Date.
The rights of the holders of the Class M-1, Class M-2 and Class B
Certificates to receive distributions on each Payment Date will be
subordinated to such rights of the holders of the Class A-1 ARM, Class A-1,
Class A-2, Class A-3, Class A-4 and Class A-5 IO Certificates and, in
addition, to such rights of the holders of the Class M-1 Certificates (in the
case of the Class M-2 and Class B Certificates) and of the Class M-2
Certificates (in the case of the Class B Certificates), all to the extent
described herein.
Principal and interest with respect to the Certificates are distributable on
the fifteenth day of each month or, if such fifteenth day is not a Business
Day, the first Business Day thereafter, beginning in 1998. The entitlement
of Certificateholders (other than Class A-5 IO Certificateholders) to such
distributions of principal from available funds includes not only actual
payments and recoveries of principal but also scheduled payments of principal
due on each outstanding Loan during the calendar month preceding the month in
which the related Payment Date occurs (the "Due Period"), provided, however,
that the "Due Period" for the initial Payment Date with respect to the
Certificates includes both 1998 and 1998, and principal distributions
on the Certificates on such initial Payment Date will therefore comprise two
months of scheduled (and unscheduled) payments on certain of the Loans. The
Company will act as servicer (in such capacity, the "Servicer") of the Loans.
The final scheduled Payment Date of the Certificates is in 2029. See
"Description of the Certificates" herein and in the Prospectus.
Elections will be made to treat the Trust as comprising two separate real
estate mortgage investment conduits (the "Master REMIC" and "Subsidiary
REMIC") for federal income tax purposes. As described more fully herein, the
Certificates will constitute "regular interests" in the Master REMIC. The
Class C Subsidiary Certificate, which is not being offered hereby, will
constitute the sole class of "residual interests" in the Subsidiary REMIC, and
the Class C Master Certificate, which is not being offered hereby, will
constitute the sole class of "residual interests" in the Master REMIC. The
Class C Subsidiary Certificate and the Class C Master Certificate are referred
to herein collectively as the "Class C Certificates." See "Certain Federal
Income Tax Consequences" herein and in the Prospectus.
There is currently no secondary market for the Certificates offered hereby,
and there is no assurance that any such market will develop or, if it does
develop, that it will continue. [Underwriters] (the "Underwriters") expect,
but are not obligated, to make a market in the Certificates.
All dollar amounts in this Prospectus Supplement and the Prospectus are
expressed in United States dollars.
The Certificates initially will be represented by certificates registered in
the name of Cede & Co., the nominee of The Depository Trust Company ("DTC").
The interests of beneficial owners of the Certificates will be represented by
book entries on the records of the participating members of DTC. Definitive
Certificates will be available only under the limited circumstances described
herein. Holders of the Certificates may hold through DTC (in the United
States), CEDEL or Euroclear (as defined herein) (in Europe) if they are
participants of such systems, or indirectly through organizations that are
participants in such systems.
S-2
<PAGE>
No prospectus in respect of the Certificates has been or will be prepared
and filed in the United Kingdom pursuant to the United Kingdom Public Offers
of Securities Regulations 1995. Accordingly, the Certificates being offered
hereby may not be offered or sold or re-offered or re-sold to persons in the
United Kingdom except to persons whose ordinary activities involve them in
acquiring, holding, managing and disposing of investments (as principal or
agent) for the purpose of their businesses, or otherwise in circumstances that
will not constitute or result in an offer to the public in the United Kingdom
within the meaning of the United Kingdom Public Offers of Securities
Regulation 1995. Neither this Prospectus Supplement nor the Prospectus nor any
other document inviting applications or offers to purchase Certificates or
offering Certificates for purchase may be passed to any person in the United
Kingdom who does not fall within article 11(3) of the Financial Services Act
1986 (Investment Advisements) (Exemptions) Order 1996 or who is not otherwise
a person to whom the document may lawfully be issued or passed.
Certain persons participating in this offering may engage in transactions
that stabilize, maintain, or otherwise affect the price of the Certificates
offered hereby. Such transactions may include stabilizing and the purchase of
Certificates to cover syndicate short positions. For a description of these
activities, see "Underwriting" herein.
For 90 days after the date of this Prospectus Supplement, all dealers
effecting transactions in the Certificates, whether or not participating in
this distribution, may be required to deliver a Prospectus. This delivery
requirement is in addition to the obligation of dealers to deliver a
Prospectus Supplement and a Prospectus when acting as underwriters and with
respect to their unsold allotments or subscriptions. Upon receipt of a request
by an investor, or his or her representative, within the period during which
there is a Prospectus delivery obligation, the Company or the Underwriters
will transmit or cause to be transmitted promptly, without charge, and in
addition to any such delivery requirements, a paper copy of a Prospectus
Supplement and a Prospectus, or a Prospectus Supplement and a Prospectus
encoded in an electronic format.
The Certificates offered hereby constitute Classes of a Series of
Certificates for Home Equity Loans being offered by the Company from time to
time pursuant to the Prospectus. This Prospectus Supplement does not contain
complete information about the offering of the Certificates. Additional
information is contained in the Prospectus and purchasers are urged to read
both this Prospectus Supplement and the Prospectus in full. Sales of the
Certificates may not be consummated unless the purchaser has received both
this Prospectus Supplement and the Prospectus. To the extent that any
statements in this Prospectus Supplement conflict with statements contained in
the Prospectus, the statements in this Prospectus Supplement shall control.
S-3
<PAGE>
SUMMARY OF THE TERMS OF THE CERTIFICATES
This summary is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus Supplement and in the
accompanying Prospectus. Capitalized terms used herein and not otherwise
defined herein shall have the respective meanings assigned them in the
Prospectus and in Article I of the Agreement, a copy of which is available upon
request made to the Company.
Securities Offered............ Certificates for Home Equity Loans, Series
1998- (the "Certificates"), comprised of nine
Classes designated as the Class A-1 ARM, Class
A-1, Class A-2, Class A-3, Class A-4, Class
A-5 IO, Class M-1, Class M-2 and Class B Cer-
tificates, respectively. The Class A-1 ARM
Certificates are floating-rate and the Certif-
icates of each of the other Classes are fixed-
rate. The Certificates will be issued by, and
evidence beneficial ownership interests in,
Home Equity Loan Trust 1998- (the "Trust"),
the property of which consists primarily of
the Loans, and all rights, benefits, obliga-
tions and proceeds arising therefrom or in
connection therewith, including liens on the
related real estate.
Trustee....................... [Trustee]
Seller and Servicer........... Green Tree Financial Corporation.
Payment Date.................. The fifteenth day of each month or, if such day
is not a Business Day, the next succeeding
Business Day, commencing in 1998.
Cut-off Date.................. , 1997 (or the date of origination of the
Loan, if later) for each Loan other than the
Subsequent Loans, and for each Subsequent
Loan, the date on which the Subsequent Loan is
purchased by the Trust.
Record Date................... The Business Day immediately preceding the re-
lated Payment Date.
Original Certificate $ (approximate).
Principal Balance............
Original Class A-1 ARM
Principal Balance............
$ (approximate).
Original Class A-1 Principal $ (approximate).
Balance......................
Original Class A-2 Principal $ (approximate).
Balance......................
Original Class A-3 Principal $ (approximate).
Balance......................
Original Class A-4 Principal $ (approximate).
Balance......................
Original Class A-5 IO $0. Interest will be calculated on the Class A-
Principal Balance............ 5 IO Certificates on each Payment Date based
on a "Notional Principal Amount" which will,
for the first Payment Dates, equal
$ (or the Class A Principal Balance
for such Payment Date, if less) and will
thereafter equal zero. The Notional Principal
Amount provides a basis for calculating inter-
est payments only, and does not represent the
right to receive any distribution in respect
of principal.
S-4
<PAGE>
Original Class M-1 Principal $ (approximate).
Balance......................
Original Class M-2 Principal $ (approximate).
Balance......................
Original Class B Principal $ (approximate).
Balance......................
Class A-1 ARM Pass-Through A floating rate equal to the lesser of (i) one-
Rate......................... month LIBOR plus the applicable Pass-Through
Margin, (ii) the applicable Available Funds
Pass-Through Rate or (iii) %. The Pass-
Through Margin will equal % per annum
through the Payment Date on which the aggre-
gate outstanding principal balance of the
Loans is % or more of the aggregate out-
standing principal balance of the Loans as of
the Cut-Off Date, and % per annum on each
Payment Date on which the aggregate outstand-
ing principal balance of the Loans is less
than % of the aggregate outstanding princi-
pal balance of the Loans as of the Cut-off
Date. The Available Funds Pass-Through Rate
for any Payment Date is the rate per annum
equal to the weighted average of the Expense
Adjusted Loan Rates on the then outstanding
Adjustable Rate Loans. The Expense Adjusted
Loan Rate on any Adjustable Rate Loan is equal
to the then applicable Loan Rate thereon, mi-
nus the Expense Fee Rate. The Expense Fee Rate
is % per annum. One-month LIBOR with respect
to any monthly interest period will equal the
offered rate for United States dollar deposits
for one month that appears on Telerate Page
3750 as of 11:00 A.M., London time, on the
second LIBOR business day prior to such
monthly interest period. For a description of
the method used to calculate one-month LIBOR,
see "Description of the Certificates--Calcula-
tion of One-Month LIBOR."
Class A-1 Pass-Through Rate... % per annum.
Class A-2 Pass-Through Rate... % per annum.
Class A-3 Pass-Through Rate... % per annum.
Class A-4 Pass-Through Rate... % per annum.
Class A-5 IO Pass-Through % per annum.
Rate.........................
Class M-1 Pass-Through Rate... % per annum.
Class M-2 Pass-Through Rate... % per annum.
Class Class B Pass-Through % per annum.
Rate.........................
Description of Certificates... The Class A-1 ARM, Class A-1, Class A-2, Class
A-3, Class A-4 and Class A-5 IO Certificates
(the "Class A Certificates") are Senior Cer-
tificates and the Class M-1 and Class M-2 Cer-
tificates (the "Class M Certificates") and the
Class B Certificates (the "Class B Certifi-
cates") are Subordinated Certificates, all as
described herein, and are issued by, and pay-
able solely from the property of, the Trust.
The undivided percentage interest of the
holder of any Certificate in the distributions
to be made to the related Class (the "Percent-
age Interest") will be equal to the percentage
obtained by dividing the denomination speci-
fied
S-5
<PAGE>
on such Certificate by the Original Principal
Balance of such Class. The "Principal Balance"
of a Class of Certificates as of any Payment
Date is the Original Principal Balance of such
Class of Certificates less all amounts previ-
ously distributed to such Class on account of
principal.
Distributions on On each Payment Date, distributions on the Cer-
Certificates................ tificates will be made first to the holders of
the Class A Certificates, then to the holders
of the Class M Certificates, and then to the
holders of the Class B Certificates, in the
manner described below.
Distributions of interest and principal to the
holders of a Class of Class A Certificates will
be made, to the extent that the Amount Avail-
able (as defined herein) in the Certificate Ac-
count is sufficient therefor, in an amount
equal to the sum of (i) their respective Per-
centage Interests of the amount of interest
calculated as described below under "A. Class A
Interest," (ii) with respect to the Class A-1
ARM Certificates, their respective Percentage
Interests of the Class A-1 ARM Formula Princi-
pal Distribution Amount (as defined below) and
(iii) with respect to each other Class of Class
A Certificates (other than the Class A-5 IO
Certificates), their respective Percentage In-
terests of the Senior Percentage of the Formula
Principal Distribution Amount (each as defined
below) for the related Payment Date, in the or-
der of priority described below under "B. Class
A Principal." Distributions of interest and
principal to the Class M-1 Certificateholders
will be made in an amount equal to their re-
spective Percentage Interests multiplied by the
Class M-1 Distribution Amount (as described be-
low). Distributions of interest and principal
to the Class M-2 Certificateholders will be
made in an amount equal to their respective
Percentage Interests multiplied by the Class M-
2 Distribution Amount (as described below).
Distributions of interest and principal to the
Class B Certificateholders will be made in an
amount equal to their respective Percentage In-
terests multiplied by the Class B Distribution
Amount (as described below). The rights of the
Class M and Class B Certificateholders to re-
ceive distributions in respect of the Amount
Available are subordinated to the rights of the
Class A Certificateholders; the rights of the
Class M-2 and Class B Certificateholders to re-
ceive such distributions are subordinated to
the rights of the Class A Certificateholders
and the Class M-1 Certificateholders; and the
rights of the Class B Certificateholders to re-
ceive such distributions are subordinated to
the rights of the Class A and Class M
Certificateholders. Distributions will be made
on each Payment Date commencing in 1998 to
holders of record on the related Record Date,
except that the final distribution in respect
of the Certificates will only be made upon pre-
sentation and surrender of the Certificates at
the office or agency appointed by the Trustee
for that purpose in or , Minnesota.
S-6
<PAGE>
The "Amount Available" will consist primarily of
payments made on or in respect of the Loans and
will include amounts otherwise payable to the
Class M Certificateholders, to the Class B
Certificateholders, to the Servicer (so long as
the Company or any wholly owned subsidiary of
the Company is the Servicer) as the Monthly
Servicing Fee with respect to the Loans and to
the Class C Certificateholders.
The "Class M-1 Distribution Amount" for any Pay-
ment Date is intended to be equal to the "Class
M-1 Formula Distribution Amount," which equals
the sum of (i) the amount of interest calcu-
lated as described under "C. Class M-1 Inter-
est" below and (ii) an amount of principal cal-
culated as described under "D. Class M-1 Prin-
cipal" below. The "Class M-1 Distribution
Amount" for any Payment Date will equal the
lesser of (i) the Class M-1 Formula Distribu-
tion Amount for such Payment Date or (ii) the
Amount Available in the Certificate Account
available for distribution to the Class M-1
Certificateholders (after giving effect to the
distribution made to Class A
Certificateholders) on such Payment Date (the
"Class M-1 Remaining Amount Available").
The "Class M-2 Distribution Amount" for any Pay-
ment Date is intended to be equal to the "Class
M-2 Formula Distribution Amount," which equals
the sum of (i) the amount of interest calcu-
lated as described under "E. Class M-2 Inter-
est" below and (ii) an amount of principal cal-
culated as described under "F. Class M-2 Prin-
cipal" below. The "Class M-2 Distribution
Amount" for any Payment Date will equal the
lesser of (i) the Class M-2 Formula Distribu-
tion Amount for such Payment Date or (ii) the
Amount Available in the Certificate Account
available for distribution to the Class M-2
Certificateholders (after giving effect to the
distribution made to Class A and Class M-1
Certificateholders) on such Payment Date (the
"Class M-2 Remaining Amount Available").
The "Class B Distribution Amount" for any Pay-
ment Date is intended to be equal to the "Class
B Formula Distribution Amount," which equals
the sum of (i) the amount of interest calcu-
lated as described under "G. Class B Interest"
below and (ii) an amount of principal calcu-
lated as described under "H. Class B Principal"
below. The "Class B Distribution Amount" for
any Payment Date will equal the lesser of (i)
the Class B Formula Distribution Amount for
such Payment Date or (ii) the Amount Available
in the Certificate Account available for dis-
tribution to the Class B Certificateholders
(after giving effect to the distribution made
to Class A and Class M Certificateholders) on
such Payment Date (the "Class B Remaining
Amount Available").
See "Description of the Certificates" for a de-
tailed description of the amounts on deposit in
the Certificate Account that will constitute
the Amount Available on each Payment Date. The
Amount Available will consist primarily of pay-
ments made on or in respect of the Loans and
will include amounts otherwise payable to the
Servicer (so long as the Company or any wholly
S-7
<PAGE>
owned subsidiary of the Company is the
Servicer) as the related Monthly Servicing Fee
with respect to the Loans, and to the Class C
Certificateholders. The Class M-1 Remaining
Amount Available will include amounts otherwise
payable to the holders of the Class M-2 Certif-
icates, to the Class B Certificates, to the
Servicer (so long as the Company or any wholly
owned subsidiary of the Company is the
Servicer) as the related Monthly Servicing Fee
with respect to the Loans, and to the Class C
Certificateholders. The Class M-2 Remaining
Amount Available will include amounts otherwise
payable to the holders of the Class B Certifi-
cates, to the Servicer (so long as the Company
or any wholly owned subsidiary of the Company
is the Servicer) as the related Monthly Servic-
ing Fee with respect to the Loans, and to the
Class C Certificateholders. The Class B Remain-
ing Amount Available will include amounts oth-
erwise payable to the Servicer (so long as the
Company or any wholly owned subsidiary of the
Company is the Servicer) as the related Monthly
Servicing Fee with respect to the Loans, and to
the Class C Certificateholders.
The "Class A Principal Balance" as of any Pay-
ment Date is the sum of the Class A-1 ARM Prin-
cipal Balance, Class A-1 Principal Balance, the
Class A-2 Principal Balance, the Class A-3
Principal Balance and the Class A-4 Principal
Balance. The "Class M Principal Balance" as of
any Payment Date is the sum of the Class M-1
Principal Balance and the Class M-2 Principal
Balance.
A portion of the interest otherwise payable on a
Payment Date to the Class M and Class B
Certificateholders will be subordinated to
other amounts payable to Certificateholders on
that Payment Date if on the preceding Payment
Date the Principal Balance of the Loans is less
than the sum of the Class A, Class M and Class
B Principal Balances, as further described be-
low in the sections describing interest payable
on the Class M and Class B Certificates.
A. Class A Interest.......... Interest on the outstanding Principal Balance of
each Class of Class A Certificates will accrue
from , 1998, or from the most recent Pay-
ment Date on which interest has been paid, to
but excluding the following Payment Date. In-
terest on each Class of Class A Certificates,
other than the Class A-1 ARM Certificates, will
be computed on the basis of a 360-day year of
twelve 30-day months. Interest on the Class A-l
ARM Certificates will be computed on the basis
of actual days elapsed in a 360-day year.
Interest will be paid concurrently on each Class
of Class A Certificates on each Payment Date,
to the extent of the Amount Available for such
date in the Certificate Account, at the related
Pass-Through Rate on the then outstanding Class
A-1 ARM Principal Balance, Class A-1 Principal
Balance, Class A-2 Principal Balance, Class A-3
Principal Balance, Class A-4 Principal Balance
and Class A-5 IO Notional Principal Amount. The
Notional Principal Amount will equal
$ (or The Class A Principal Balance
for such Payment Date, if less), for the first
36 Payment Dates, and will thereafter equal ze-
ro.
S-8
<PAGE>
In the event that, on a particular Payment Date,
the Amount Available in the Certificate Account
is not sufficient to make a full distribution
of interest to the holders of outstanding Class
A Certificates, the amount of interest to be
distributed in respect of the Class A Certifi-
cates will be allocated among each Class
thereof (and within a Class among the Certifi-
cates of such Class) pro rata in accordance
with their respective entitlements to interest,
and the amount of the shortfall will be carried
forward and added to the amount such holders
will be entitled to receive on the next Payment
Date. Any such amount so carried forward will
bear interest at the related Pass-Through Rate,
to the extent legally permissible. See "De-
scription of the Certificates--Distributions on
Certificates--Class A Interest."
B. Class A Principal......... Holders of a Class of Class A Certificates
(other than the Class A-5 IO Certificates) will
be entitled to receive payments of principal on
each Payment Date in the order of priority set
forth below and to the extent of the Amount
Available in the Certificate Account after pay-
ment of all interest payable on each Class of
Class A Certificates. Holders of the Class A-1
ARM Certificates will be entitled to receive,
as payments of principal, an amount equal to
the Class A-1 ARM Formula Principal Distribu-
tion Amount. The "Class A-1 ARM Formula Princi-
pal Distribution Amount" on or before the Pay-
ment Date on which the Class A-1 ARM Certifi-
cates have been paid in full will generally be
equal to the lesser of (A) the Class A-1 ARM
Principal Balance or (B) the sum of the follow-
ing: (i) all scheduled payments of principal
due on each outstanding Adjustable Rate Loan
during the related Due Period; (ii) the Sched-
uled Principal Balance of each Adjustable Rate
Loan which, during the related Due Period, was
purchased by the Company pursuant to the Agree-
ment on account of certain breaches of its rep-
resentations and warranties; (iii) the Sched-
uled Principal Balance of each Adjustable Rate
Loan that became a Liquidated Loan during the
related Due Period; (iv) all partial Principal
Prepayments applied and Principal Prepayments
in Full received on each Adjustable Rate Loan
during the related Due Period; and (v) on any
Payment Date which is on or after the Payment
Date on which the Class A-1, A-2, A-3 and Class
A-4 Certificates have been paid in full, (a)
the Senior Percentage times (x) the sum of the
amounts described in clauses (i) through (vi)
of clause (A) of the definition of the Formula
Principal Distribution Amount less (y) the sum
of the amounts described in clauses (i) through
(iv) of clause (B) of the definition of the
Class A-1 ARM Formula Principal Distribution
Amount less (b) the amount, if any, distributed
in payment of principal on the Class A-1, A-2,
A-3 and A-4 Certificates on such Payment Date.
The Scheduled Principal Balance of a Loan with
respect to any Payment Date is its principal
balance as of the scheduled payment date (the
"Due Date") in the Due Period, after giving
S-9
<PAGE>
effect to any previous partial Principal Pre-
payments applied and to the scheduled payment
due on such Due Date, and after giving effect
to any adjustments due to bankruptcy or similar
proceedings.
The Class A-5 IO Certificates are interest-only
Certificates and are not entitled to receive
distributions of principal.
Holders of the Class A Certificates (other than
the Class A-1 ARM Certificates and the Class A-
5 IO Certificates) will be entitled to receive,
as payments of principal, an amount equal to
the Senior Percentage of the Formula Principal
Distribution Amount. The Formula Principal Dis-
tribution Amount is (A) the sum of (i) all
scheduled payments of principal due on each
outstanding Loan during the related Due Period,
(ii) the Scheduled Principal Balance of each
Loan which, during such Due Period, was pur-
chased by the Company pursuant to the Agreement
on account of certain breaches of its represen-
tations and warranties, (iii) all partial Prin-
cipal Prepayments applied and all Principal
Prepayments in Full received during such Due
Period in respect of the Loans, (iv) the Sched-
uled Principal Balance of each Loan that became
a Liquidated Loan during such Due Period (v)
any amount described in clauses (i) through
(iv) above that was not previously distributed
because of an insufficient amount of funds
available in the Certificate Account, and (vi)
the Extra Principal Distribution Amount (as de-
scribed below), minus (B) the Class A-1 ARM
Formula Principal Distribution Amount. When the
Principal Balance of a Class of Class A Certif-
icates is reduced to zero, no further distribu-
tions of principal will be made to the holders
of such Class.
The Extra Principal Distribution Amount is the
lesser of (i) the Monthly Excess Cashflow and
(ii) $ less the sum of all prior dis-
tributions of the Extra Principal Distribution
Amount. The Monthly Excess Cashflow is, for any
Payment Date, the Amount Available less the sum
of (a) the interest payable on the Certifi-
cates; (b) the sum of the amounts described in
clauses (i) through (v) of clause (A) of the
Formula Principal Distribution Amount; (c) the
Monthly Servicing Fee to be paid to the
Servicer; (d) unreimbursed Advances to the
Trustee or the Servicer, as applicable, with
respect to the Loans made in respect of the
current or prior Payment Dates; and (e) ex-
penses of the holder of the Class C Certifi-
cates incurred by and reimbursable to it with
respect to taxes or charges imposed upon the
Trust as a REMIC or otherwise.
The Senior Percentage will equal 100% on each
Payment Date on which the Class B Principal
Distribution Test (as described below) is not
satisfied. On each Payment Date on which the
Class B Principal Distribution Test has been
satisfied, the Senior Percentage will equal a
fraction, expressed as a percentage, the
S-10
<PAGE>
numerator of which is the sum of the Class A
Principal Balance (excluding the Class A-1 ARM
Principal Balance) and the Class M Principal
Balance for such Payment Date, and the denomi-
nator of which is the Pool Scheduled Principal
Balance of the Fixed-Rate Loans for the immedi-
ately preceding Payment Date.
The Pool Scheduled Principal Balance, with re-
spect to the Loan Pool as of any Payment Date
is the aggregate of the Scheduled Principal
Balances of Loans comprising the Loan Pool that
were outstanding during the preceding Due Peri-
od. A Liquidated Loan is a defaulted Loan as to
which all amounts that the Servicer expects to
recover on account of such Loan have been re-
ceived.
The Senior Percentage of the Formula Principal
Distribution Amount will be distributed, to the
extent of the Amount Available after payment of
interest on each Class of Class A Certificates,
as follows: (i) that portion, if any, of the
Senior Percentage of the Formula Principal Dis-
tribution Amount equal to the Class A-4 Lockout
Pro Rata Distribution Amount will be distrib-
uted to the Class A-4 Certificateholders; and
(ii) the remainder of the Senior Percentage of
the Formula Principal Distribution Amount will
be distributed in the following order: first,
to the Class A-1 Certificateholders until the
Class A-1 Principal Balance has been reduced to
zero, then to the Class A-2 Certificateholders
until the Class A-2 Principal Balance has been
reduced to zero, then to the Class A-3
Certificateholders until the Class A-3 Princi-
pal Balance has been reduced to zero. After the
Class A-3 Principal Balance has been reduced to
zero, Holders of the Class A-4 Certificates
will be entitled to receive the entire Senior
Percentage of the Formula Principal Distribu-
tion Amount up to the amount necessary to re-
duce the Class A-4 Principal Balance to zero,
to the extent the remaining Amount Available is
sufficient therefor.
The "Class A-4 Lockout Pro Rata Distribution
Amount," as to any Payment Date, is an amount
equal to the lesser of:
(a) the product of (1) the Class A-4 Lockout
Percentage, and (2) the product of (A) a
fraction, the numerator of which is the Class
A-4 Principal Balance immediately preceding
such Payment Date and the denominator of which
is the Class A Principal Balance less the
Class A-1 ARM Principal Balance immediately
preceding such Payment Date, and (B) the
Senior Percentage of the Formula Principal
Distribution Amount for such Payment Date, and
(b) the Class A-4 Principal Balance immediately
preceding such Payment Date.
S-11
<PAGE>
The "Class A-4 Lockout Percentage," as to any
Payment Date occurring during the periods set
forth below, is the percentage designated as
such as follows:
<TABLE>
<CAPTION>
CLASS A-4
PERIODS (DATES INCLUSIVE) LOCKOUT PERCENTAGE
------------------------- ------------------
<S> <C>
1998 through 2001................ %
2001 through 2003................ %
2003 through 2004................ %
2004 through 2005................ %
2005 and thereafter.................. %
</TABLE>
On any Payment Date as to which there is a Class
A Liquidation Loss Principal Amount (which is
the amount, if any, by which the Pool Scheduled
Principal Balance plus the Pre-Funded Amount is
less than the Class A Principal Balance), the
remaining Amount Available will be distributed
pro rata to each Class of Class A Certificates
based on the Class Principal Balance of each
Class (but in no event will such amount exceed
the Class Principal Balance of any such Class).
If, as to any Payment Date, the Amount Available
remaining after distributions of interest on
the Class A Certificates is less than the sum
of the Senior Percentage of the Formula
Principal Distribution Amount and the Class A-1
ARM Formula Principal Distribution Amount, the
amounts to be distributed to the Class A
Certificateholders (including the Class A-1 ARM
Certificateholders) will be allocated pro rata
based upon the respective portions of the
Amount Available that would have been
distributed to the Class A Certificateholders,
as described above, had the remaining Amount
Available been sufficient therefor.
C. Class M-1 Interest........ Interest on the outstanding Class M-1 Principal
Balance will accrue from , 1998, or from
the most recent Payment Date on which interest
has been paid, to but excluding the following
Payment Date, and will be computed on the basis
of a 360-day year of twelve 30-day months.
To the extent of the Class M-1 Remaining Amount
Available, if any, for a Payment Date after
payment of the Class A Distribution Amount for
such date, interest will be paid to the Class
M-1 Certificateholders on such Payment Date in
an amount (the "Class M-1 Interest Payment
Amount") equal to the product of (a) the Class
M-1 Pass-Through Rate and (b) the then out-
standing Class M-1 Principal Balance less the
Class M-1 Liquidation Loss Principal Amount, if
any. The "Class M-1 Liquidation Loss Principal
Amount" as of any Payment Date will equal the
excess, if any, of the Aggregate Liquidation
Loss Principal Amount over the aggregate of the
Principal Balances of the Class M-2 Certifi-
cates and the Class B Certificates. The "Aggre-
gate Liquidation Loss Principal Amount" as of
any Payment Date will equal the excess, if any,
of (i) the sum of the Class A
S-12
<PAGE>
Principal Balance, the Class M Principal Bal-
ance and the Class B Principal Balance as of
the preceding Payment Date (after giving effect
to distributions of principal thereon) over
(ii) sum of the Pool Scheduled Principal Bal-
ance plus the Pre-Funded Amount for such pre-
ceding Payment Date.
In the event that, on a particular Payment Date,
the Class M-1 Remaining Amount Available, plus
other funds in the Certificate Account avail-
able therefor, are not sufficient to make a
full distribution of the Class M-1 Interest
Payment Amount, the amount of interest to be
distributed in respect of the Class M-1 Certif-
icates will be allocated among the Class M-1
Certificates pro rata in accordance with their
respective entitlements to interest, and the
amount of the deficiency will be carried for-
ward as an amount that the Class M-1
Certificateholders are entitled to receive on
the next Payment Date. Any amount so carried
forward will, to the extent legally permissi-
ble, bear interest at the Class M-1 Pass-
Through Rate. See "Description of the Certifi-
cates--Distributions on Certificates--Class M-1
Interest."
D. Class M-1 Principal....... Payments of principal on the Class M-1 Certifi-
cates will not commence until the Class A Prin-
cipal Balance has been reduced to zero. On each
Payment Date on or after the date on which the
Class A Principal Balance has been reduced to
zero, holders of Class M-1 Certificates will be
entitled to receive the Senior Percentage of
the Formula Principal Distribution Amount, un-
til the Class M-1 Principal Balance has been
reduced to zero.
E. Class M-2 Interest........ Interest on the outstanding Class M-2 Principal
Balance will accrue from , 1998, or from
the most recent Payment Date on which interest
has been paid, to but excluding the following
Payment Date, and will be computed on the basis
of a 360-day year of twelve 30-day months.
To the extent of the Class M-2 Remaining Amount
Available, if any, for a Payment Date after
payment of the Class A Distribution Amount and
the Class M-1 Distribution Amount for such
date, interest will be paid to the Class M-2
Certificateholders on such Payment Date in an
amount (the "Class M-2 Interest Payment
Amount") equal to the product of (a) the Class
M-2 Pass-Through Rate and (b) the then out-
standing Class M-2 Principal Balance less the
Class M-2 Liquidation Loss Principal Amount, if
any. The "Class M-2 Liquidation Loss Principal
Amount" as of any Payment Date will equal the
excess, if any, of the Aggregate Liquidation
Loss Principal Amount over the Class B Princi-
pal Balance.
In the event that, on a particular Payment Date,
the Class M-2 Remaining Amount Available, plus
other funds in the Certificate Account avail-
able therefor, are not sufficient to make a
full distribution of the Class M-2 Interest
Payment Amount, the amount of interest to be
distributed in respect of the Class M-2 Certif-
icates will be allocated among the Class M-2
Certificates pro rata
S-13
<PAGE>
in accordance with their respective entitle-
ments to interest, and the amount of the defi-
ciency will be carried forward as an amount
that the Class M-2 Certificateholders are enti-
tled to receive on the next Payment Date. Any
amount so carried forward will, to the extent
legally permissible, bear interest at the Class
M-2 Pass-Through Rate. See "Description of the
Certificates--Distributions on Certificates--
Class M-2 Interest."
F. Class M-2 Principal....... Payments of principal on the Class M-2 Certifi-
cates will not commence until the Class A Prin-
cipal Balance and the Class M-1 Principal Bal-
ance have been reduced to zero. On each Payment
Date on or after the date on which the Class A
Principal Balance and the Class M-1 Principal
Balance have been reduced to zero, holders of
Class M-2 Certificates will be entitled to re-
ceive the Senior Percentage of the Formula
Principal Distribution Amount, until the Class
M-2 Principal Balance has been reduced to zero.
G. Class B Interest.......... Interest on the outstanding Class B Principal
Balance will accrue from , 1998, or from
the most recent Payment Date on which interest
has been paid, to but excluding the following
Payment Date, and will be computed on the basis
of a 360-day year of twelve 30-day months.
To the extent of the Class B Remaining Amount
Available, if any, for a Payment Date after
payment of the Class A Distribution Amount, the
Class M-1 Distribution Amount and the Class M-2
Distribution Amount for such date, interest
will be paid to the Class B Certificateholders
on such Payment Date in an amount (the "Class B
Interest Payment Amount") equal to the product
of (a) the Class B Pass-Through Rate and (b)
the then outstanding Class B Principal Balance
less the Class B Liquidation Loss Principal
Amount, if any. The "Class B Liquidation Loss
Principal Amount" as of any Payment Date will
equal the lesser of the Aggregate Liquidation
Loss Principal Amount and the Class B Principal
Balance.
In the event that, on a particular Payment Date,
the Class B Remaining Amount Available, plus
other funds in the Certificate Account avail-
able therefor, are not sufficient to make a
full distribution of the Class B Interest Pay-
ment Amount, the amount of interest to be dis-
tributed in respect of the Class B Certificates
will be allocated among the Class B Certifi-
cates pro rata in accordance with their respec-
tive entitlements to interest, and the amount
of the deficiency will be carried forward as an
amount that the Class B Certificateholders are
entitled to receive on the next Payment Date.
Any amount so carried forward will, to the ex-
tent legally permissible, bear interest at the
Class B Pass-Through Rate. See "Description of
the Certificates--Distributions on Certifi-
cates--Class B Interest."
H. Class B Principal......... Payments of principal on the Class B Certifi-
cates will not be made unless the Class B Prin-
cipal Distribution Test is satisfied. The Class
B Principal Distribution Test will be deemed to
be satisfied on a Payment Date if either (a)
the Class A Principal Bal-
S-14
<PAGE>
ance and the Class M Principal Balance have
each been reduced to zero or (b) each of the
following conditions is met (i) the average
sixty-day delinquency ratio as of the Payment
Date and the prior two Payment Dates must not
exceed %; (ii) the average thirty-day delin-
quency ratio as of the Payment Date and the
prior two Payment Dates must not exceed %;
(iii) the cumulative realized losses as of the
Payment Date must not exceed %; (iv) the
current realized losses as of the Payment Date
must not exceed %; (v) the Payment Date is
on or after 2001; and (vi) the sum of the
Class B Principal Balance and all prior distri-
butions of the Extra Principal Distribution
Amount, divided by the Pool Scheduled Principal
Balance as of the immediately preceding Payment
Date must be equal to or greater than %.
On each Payment Date on which the Class B Dis-
tribution Test is satisfied, the Class B Per-
centage of the Formula Principal Distribution
Amount will be paid to the Class B Certifi-
cateholders to the extent of the Class B Re-
maining Amount Available after payment of in-
terest on the Class B Certificates. Class B
Certificateholders will be entitled to receive
payments of principal until the Class B Princi-
pal Balance has been reduced to zero.
The Class B Percentage for any Payment Date will
be equal to 100% minus the Senior Percentage.
The Class B Percentage for each Payment Date,
if any, after the Class A Principal Balance and
the Class M Principal Balance have been reduced
to zero, will be equal to 100%.
Subordination of Class M and
Class B Certificates........
The rights of the holders of the Class M Certif-
icates and Class B Certificates to receive dis-
tributions with respect to the Loans, as well
as any other amounts constituting the Amount
Available, will be subordinated, to the extent
described herein, to such rights of the holders
of the Class A Certificates. This subordination
is intended to enhance the likelihood of regu-
lar receipt by the holders of the Class A Cer-
tificates of the full amount of their scheduled
monthly payments of interest and principal and
to afford such holders protection against
losses on Liquidated Loans.
The protection afforded to the holders of the
Class A Certificates by means of the subordina-
tion of the Class M and Class B Certificates
will be accomplished by the preferential right
of the Class A Certificateholders to receive,
prior to any distribution being made on a Pay-
ment Date in respect of the Class M and Class B
Certificates, the amounts of interest and prin-
cipal due them on each Payment Date out of the
Amount Available on such date in the Certifi-
cate Account and, if necessary, by the right of
such Class A Certificateholders to receive fu-
ture distributions of Amounts Available that
would otherwise be payable to the holders of
the Class M and Class B Certificates.
In addition, the rights of the holders of the
Class M-2 Certificates and Class B Certificates
to receive distributions with respect to
S-15
<PAGE>
the Loans, as well as any other amounts consti-
tuting the Amount Available, will be subordi-
nated, to the extent described herein, to such
rights of the holders of the Class M-1 Certifi-
cates. This subordination is intended to en-
hance the likelihood of regular receipt by the
holders of the Class M-1 Certificates of the
full amount of their scheduled monthly payments
of interest and principal and to afford such
holders protection against losses on Liquidated
Loans.
The protection afforded to the holders of the
Class M-1 Certificates by means of the subordi-
nation of the Class M-2 and Class B Certifi-
cates will be accomplished by the preferential
right of the Class M-1 Certificateholders to
receive, prior to any distribution being made
on a Payment Date in respect of the Class M-2
and Class B Certificates, the amounts of inter-
est and principal due them on each Payment Date
out of the Class M-1 Remaining Amount Available
on such date in the Certificate Account and, if
necessary, by the right of such Class M-1
Certificateholders to receive future distribu-
tions of Class M-1 Remaining Amounts Available
that would otherwise be payable to the holders
of the Class M-2 and Class B Certificates.
In addition, the rights of the holders of the
Class B Certificates to receive distributions
with respect to the Loans, as well as any other
amounts constituting the Amount Available, will
be subordinated, to the extent described here-
in, to such rights of the holders of the Class
M-2 Certificates. This subordination is in-
tended to enhance the likelihood of regular re-
ceipt by the holders of the Class M-2 Certifi-
cates of the full amount of their scheduled
monthly payments of interest and principal and
to afford such holders protection against
losses on Liquidated Loans.
The protection afforded to the holders of the
Class M-2 Certificates by means of the subordi-
nation of the Class B Certificates will be ac-
complished by the preferential right of the
Class M-2 Certificateholders to receive prior
to any distribution being made on a Payment
Date in respect of the Class B Certificates,
the amounts of interest and principal due them
on each Payment Date out of the Class M-2 Re-
maining Amount Available on such date in the
Certificate Account and, if necessary, by the
right of such Class M-2 Certificateholders to
receive future distributions of Class M-2 Re-
maining Amounts Available that would otherwise
be payable to the holders of the Class B Cer-
tificates.
Losses on Liquidated Loans... As described above, the distribution of princi-
pal to the Class A Certificateholders is in-
tended to include the Senior Percentage of the
Scheduled Principal Balance of each Loan (other
than the Adjustable Rate Loans) that became a
Liquidated Loan during the preceding Due Period
and the Scheduled Principal Balance of each Ad-
justable Rate Loan that became a Liquidated
Loan during the preceding Due Period. If the
Net Liquidation Proceeds from such Liquidated
Loans are less than the Scheduled
S-16
<PAGE>
Principal Balance of such Liquidated Loans plus
accrued and unpaid interest thereon, the defi-
ciency will, in effect, be absorbed by the
Class C Certificateholders, then the related
Monthly Servicing Fee otherwise payable to the
Servicer (so long as the Company or any wholly
owned subsidiary of the Company is the
Servicer) with respect to the Loans, then the
Class B Certificateholders, then the Class M-2
Certificateholders and then the Class M-1
Certificateholders, since a portion of the
Amount Available equal to such deficiency and
otherwise distributable to them will be paid to
the Class A Certificateholders. Likewise, to
the extent the Class M-1 Certificateholders or
the Class M-2 Certificateholders are entitled
to receive distributions of principal, similar
deficiencies could result for each Class of
Certificates with a lower payment priority.
If the Amount Available is not sufficient to
cover the entire amount distributable to the
Class A Certificateholders, the Class M-1
Certificateholders or the Class M-2 Certifi-
cateholders on a particular Payment Date, then
the Senior Percentage on future Payment Dates
may be increased and the Class B Percentage on
future Payment Dates may be reduced as a result
of such deficiency.
But for the effect of the subordination of the
Class M-2, Class B and Class C Certificates and
the related Monthly Servicing Fee otherwise
payable to the Servicer (so long as the Company
or any wholly owned subsidiary of the Company
is the Servicer) with respect to the Loans, the
Class M-1 Certificateholders will absorb all
losses on each Liquidated Loan in the amount by
which its Net Liquidation Proceeds are less
than its unpaid principal balance plus accrued
and unpaid interest thereon less the related
Monthly Servicing Fee. See "Description of the
Certificates--Subordination of Class M Certifi-
cates and Class B Certificates."
But for the effect of the subordination of the
Class B and Class C Certificates and the re-
lated Monthly Servicing Fee otherwise payable
to the Servicer (so long as the Company or any
wholly owned subsidiary of the Company is the
Servicer) with respect to the Loans, the Class
M-2 Certificateholders will absorb all losses
on each Liquidated Loan in the amount by which
its Net Liquidation Proceeds are less than its
unpaid principal balance plus accrued and un-
paid interest thereon less the related Monthly
Servicing Fee. See "Description of the Certifi-
cates--Subordination of Class M Certificates
and Class B Certificates."
But for the effect of the subordination of the
Class C Certificates and the related Monthly
Servicing Fee otherwise payable to the Servicer
(so long as the Company or any wholly owned
subsidiary of the Company is the Servicer) with
respect to the Loans, the Class B Certificate-
holders will absorb all losses on each
S-17
<PAGE>
Liquidated Loan in the amount by which its Net
Liquidation Proceeds are less than its unpaid
principal balance plus accrued and unpaid in-
terest thereon less the related Monthly Servic-
ing Fee. See "Description of the Certificates--
Subordination of Class M Certificates and Class
B Certificates."
Registration of The Certificates initially will each be repre-
Certificates................ sented by one or more certificates registered
in the name of Cede & Co. ("Cede") as the nomi-
nee of The Depository Trust Company ("DTC"),
and will only be available in the form of book-
entries on the records of DTC and participating
members thereof. Holders of the Class A-1 ARM
Certificates may elect to hold their Certifi-
cate interests in Europe through Cedel Bank,
societe anonyme ("CEDEL") or the Euroclear Sys-
tem ("Euroclear"). Certificates will otherwise
be issued in definitive form only under the
limited circumstances described herein. All
references herein to the rights of "holders" or
"Certificateholders" shall reflect the rights
of beneficial owners as they may indirectly ex-
ercise such rights through DTC and participat-
ing members thereof, except as otherwise speci-
fied herein. See "Description of the Certifi-
cates--Registration of the Certificates" here-
in.
Fixed-Rate Loans ............ The Loan Pool includes Fixed-Rate Loans (meaning
all Loans other than the Adjustable Rate
Loans). This Prospectus Supplement contains in-
formation regarding certain Fixed-Rate Loans
(the "Initial Fixed-Rate Loans"), which will
represent approximately % of all Fixed-Rate
Loans. The Agreement provides that additional
Fixed-Rate Loans (the "Additional Fixed-Rate
Loans") may be purchased by the Trust on the
Closing Date. The Agreement also provides that
Fixed-Rate Loans (the "Subsequent Fixed-Rate
Loans"), which together with the Subsequent Ad-
justable Rate Loans will represent no more than
% of the Loan Pool, may be purchased by the
Trust for a period of up to days after the
Closing Date. The Initial Fixed-Rate Loans con-
sist of closed-end home equity loans (of
which are Balloon Loans), including any and
all rights to receive payments due thereunder
on and after the Cut-off Date. The obligations
of the Obligor under each Fixed-Rate Loan are
secured by the related real estate. The Initial
Fixed-Rate Loans arise from loans relating to
real estate located in states and the Dis-
trict of Columbia. The Loan Rate on the Initial
Fixed-Rate Loans as of the Cut-off Date ranges
from % to % with a weighted average of
%. The Initial Fixed-Rate Loans had a
weighted average term to scheduled maturity, as
of origination, of months, and a weighted
average term to scheduled maturity, as of the
Cut-off Date, of months. The weighted aver-
age Loan Rate on the Balloon Loans is %.
The Balloon Loans had a weighted average term
to scheduled maturity, as of origination, of
months, and a weighted average term to
scheduled maturity, as of the Cut-off Date, of
S-18
<PAGE>
months. The final scheduled payment date on the
Initial Fixed-Rate Loan with the latest sched-
uled maturity is in 2028. See "The Loans--
Fixed-Rate Loans" herein.
Adjustable Rate Loans........ The Loan Pool includes Adjustable Rate Loans.
This Prospectus Supplement contains information
regarding certain Adjustable Rate Loans (the
"Initial Adjustable Rate Loans"), which will
represent approximately % of all Adjustable
Rate Loans. The Agreement provides that addi-
tional Adjustable Rate Loans (the "Additional
Adjustable Rate Loans" together with the Addi-
tional Fixed-Rate Loans, the "Additional
Loans") may be purchased by the Trust on the
Closing Date. The Agreement also provides that
Adjustable Rate Loans (the "Subsequent Adjust-
able Rate Loans"), which together with the Sub-
sequent Fixed-Rate Loans will represent no more
than % of the Loan Pool, may be purchased by
the Trust for a period of up to days after
the Closing Date. The Initial Adjustable Rate
Loans consist of closed-end home equity
loans including any and all rights to receive
payments due thereunder on and after the Cut-
off Date. The Initial Adjustable Rate Loans ac-
crue interest at a fixed rate for up to
months and thereafter, the interest rate ad-
justs annually or semiannually to equal the sum
of the Six-Month LIBOR Index and the Gross Mar-
gin specified in the related Loan. The obliga-
tions of the Obligor under each Adjustable Rate
Loan are secured by the related real estate.
The Initial Adjustable Rate Loans arise from
loans relating to real estate located in
states and the District of Columbia. The Loan
Rate on the Initial Adjustable Rate Loans as of
the Cut-off Date ranges from % to %
with a weighted average of %. The Initial
Adjustable Rate Loans had a weighted average
term to scheduled maturity, as of origination,
of months, and a weighted average term to
scheduled maturity, as of the Cut-off Date, of
months. The final scheduled payment date on
the Initial Adjustable Rate Loan with the lat-
est scheduled maturity is in 2028. See "The
Loans--Adjustable Rate Loans" herein.
Pre-Funding Account.......... On the Closing Date, the Company will pay to the
Trustee up to approximately $ (as re-
duced from time to time, the "Pre-Funded
Amount") for deposit in the Pre-Funding Account
to provide the Trust with sufficient funds to
purchase the Subsequent Loans. The Pre-Funded
Amount will be reduced during the Funding Pe-
riod (as defined herein) by the amount used to
purchase the Subsequent Loans. See "Description
of the Certificates--Conveyance of Subsequent
Loans and Pre-Funding Account."
The Class A Certificates (other than the Class
A-5 IO Certificates) will be prepaid in part on
the first Payment Date after the Funding Period
in the event that any amount remains on deposit
in
S-19
<PAGE>
the Pre-Funding Account on such Payment Date
after the purchase by the Trust of the Subse-
quent Loans. Any amounts remaining which had
been allocated to the purchase of Subsequent
Adjustable Rate Loans will be paid to the Class
A-1 ARM Certificateholders and any amounts re-
maining which had been allocated to the pur-
chase of Subsequent Fixed-Rate Loans will be
paid on a pro rata basis to the Class A-1,
Class A-2, Class A-3 and Class A-4
Certificateholders.
Although no assurance can be given, the Company
anticipates that the principal amount of the
Subsequent Loans purchased by the Trust will
require the application of substantially all of
the Pre-Funded Amount and that there should be
no material amount of principal prepaid to the
Class A Certificateholders from the Pre-Funding
Account. However, it is unlikely that the Com-
pany will be able to deliver Subsequent Loans
with an aggregate principal balance identical
to the Pre-Funded Amount. See "Yield and Pre-
payment Considerations" herein.
Advances..................... The Servicer is obligated to make Advances each
month of any scheduled payments on the Loans
that were due but not received during the prior
Due Period. The Servicer will be entitled to
reimbursement of an Advance from funds avail-
able therefor in the Certificate Account. The
Servicer will be obligated to make an Advance
only to the extent that it determines that such
Advance will be recoverable from subsequent
funds available therefor in the Certificate Ac-
count. If the Servicer fails to make any Ad-
vance required under the Agreement, the Trustee
will be obligated (subject to certain condi-
tions) to make such Advance. See "Description
of the Certificates--Advances" herein and in
the Prospectus.
Repurchase or Substitution The Company has agreed to repurchase any Loan in
Obligations................. which the Trust's or the Certificateholders'
interest is materially and adversely affected
by a breach of a representation and warranty
with respect to such Loan made in the Agreement
if such breach has not been cured within 90
days of the day it was or should have been dis-
covered by the Servicer or the Trustee. In lieu
of repurchasing a Loan, during the two-year pe-
riod following the Closing Date, the Company
may, at its option, substitute another contract
for the Loan that it is otherwise obligated to
repurchase. See "Description of the Certifi-
cates--Conveyance of Loans" herein and in the
Prospectus.
Repurchase Option............ The Servicer will have the option to repurchase
all of the outstanding Loans on any Payment
Date on which the Pool Scheduled Principal Bal-
ance of the Loan Pool is less than % of the
Cut-off Date Pool Principal Balance of the Loan
Pool. See "Description of the Certificates--Re-
purchase Option" herein and in the Prospectus.
Monthly Servicing Fee........ The Servicer will be entitled to monthly compen-
sation for servicing the Loans comprising each
Sub-Pool equal to 1/12 of the product of %
and the Pool Scheduled Principal Balance plus
S-20
<PAGE>
the Pre-Funded Amount (each a "Monthly Servic-
ing Fee"). See "Description of the Certifi-
cates--Servicing Compensation and Payment of
Expenses" and "--Rights upon an Event of Termi-
nation" herein.
Tax Status................... In the opinion of counsel to the Company, the
Trust created by the Agreement will consist of
two segregated asset pools (respectively, the
"Master REMIC" and the "Subsidiary REMIC") and
for federal income tax purposes, each will be
treated as a separate real estate mortgage in-
vestment conduit ("REMIC"). Each Class of Cer-
tificates will constitute "regular interests"
in the Master REMIC and generally will be
treated as debt instruments of the Trust for
federal income tax purposes with payment terms
equivalent to the terms of such Certificates.
The Class C Master Certificate and the Class C
Subsidiary Certificate, which are not being of-
fered hereby, will constitute the "residual in-
terests" in the Master REMIC and the Subsidiary
REMIC, respectively. The holders of Certifi-
cates will be required to include in income in-
terest on such Certificates (including any
original issue discount) in accordance with the
accrual method of accounting. The Class A-5 IO
Certificates will be considered to have been
issued with original issue discount. See "Cer-
tain Federal Income Tax Consequences" herein
and in the Prospectus.
ERISA Considerations......... Subject to the conditions described herein, the
Class A-1 ARM, Class A-1, Class A-2, Class A-3,
Class A-4 and Class A-5 IO Certificates may be
purchased by employee benefit plans that are
subject to the Employee Retirement Income Secu-
rity Act of 1974, as amended ("ERISA"). No
transfer of any other Certificates will be per-
mitted to be made to any employee benefit plan
subject to ERISA or to the Internal Revenue
Code of 1986, as amended (the "Code"), unless
the opinion of counsel described under "ERISA
Considerations" herein and in the Prospectus is
delivered to the Trustee. See "ERISA Considera-
tions" herein and in the Prospectus.
Rating....................... It is a condition precedent to the issuance of
the Certificates that the Class A-1 ARM, Class
A-1, Class A-2, Class A-3 and Class A-4 Certif-
icates each be rated at least ["AAA"] by Stan-
dard & Poor's Rating Services, a division of
The McGraw-Hill Companies, Inc. ("S&P") and
["AAA"] by Fitch IBCA, Inc. ("Fitch"). It is a
condition precedent to the issuance of the
Class A-5 IO Certificates that they be rated at
least ["AAA"] by S&P and ["AAA"] by Fitch. It
is a condition precedent to the issuance of the
Class M-1 Certificates that they be rated at
least ["AA"] by S&P and ["AA"] by Fitch. It is
a condition precedent to the issuance of the
Class M-2 Certificates that they be rated at
least ["A"] by S&P and ["A"] by Fitch. It is a
condition precedent to the issuance of the
Class B Certificates that they be rated at
least ["BBB"] by S&P and ["BBB"] by Fitch.
S-21
<PAGE>
The rating of each Class of Certificates by S&P
addresses the likelihood of timely receipt of
interest and ultimate receipt of principal. The
rating of each Class of Certificates by Fitch
addresses the likelihood of the receipt by
Certificateholders of all distributions to
which such Certificateholders are entitled. 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" in the
Prospectus.
The Company has not requested a rating of the
Certificates from any rating agencies other
than S&P and Fitch. There can be no assurance
as to whether any other rating agency will rate
the Certificates or, if one does, what rating
would be assigned by such rating agency.
Legal Investment The Certificates will not constitute "mortgage
Considerations.............. related securities" for purposes of the Second-
ary Mortgage Market Enhancement Act of 1984
("SMMEA") because there are a substantial num-
ber 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 in-
vest in "mortgage related securities" may not
be legally authorized to invest in the Certifi-
cates. Investors should consult with their own
legal advisors to determine whether and to what
extent the Certificates constitute legal in-
vestments for them.
S-22
<PAGE>
RISK FACTORS
Prospective Certificateholders should consider, in addition to the factors
described under "Risk Factors" in the Prospectus, the following factors in
connection with the purchase of the Certificates:
Limited Historical Data With Respect to Home Equity Loans. The Company began
originating, purchasing and servicing home equity loans in January 1996, and
thus has no significant historical experience with respect to the performance,
including the rate of prepayments, of such loans. Accordingly, no information
has been included herein with respect to the Company's loan loss or
liquidation experience for home equity loans, inasmuch as such information as
is available would likely not be indicative of the performance of the Loans.
Balloon Loans. A substantial number of the Loans provide for the payment of
the unamortized principal balance of the loan in a single payment at the
maturity of the loan that is greater than the preceding monthly payment (the
"Balloon Loans"). All of the Balloon Loans provide for equal monthly payments,
consisting of principal and interest, based on a stated amortization schedule,
and a single payment of the remaining principal balance of the Balloon Loan at
the end of a specified period following origination. The remainder of the
Loans provide for a schedule of substantially equal payments that are, if
timely paid, sufficient to amortize fully the principal balance of the loan on
or before its maturity date. Because borrowers under Balloon Loans are
required to make a relatively large single payment upon maturity, it is
possible that the default risk associated with Balloon Loans is greater than
that associated with fully-amortizing Loans.
Certain Truth-In-Lending Considerations. It is likely that some Loans
included in the Loan Pool will be subject to the Home Ownership and Equity
Protection Act of 1994 (the "Home Protection Act"). The Home Protection Act
adds certain additional provisions to Regulation Z, the implementing
regulation of the Federal Truth-In-Lending Act. These provisions impose
additional disclosure and other requirements on creditors with respect to non-
purchase money mortgage loans with high interest rates or high up-front fees
and charges. In general, mortgage loans within the purview of the Home
Protection Act have annual percentage rates over 10% greater than the yield on
Treasury Securities of comparable maturity and/or fees and points which exceed
the greater of 8% of the total loan amount or $400. These provisions can
impose specific statutory liabilities upon creditors who fail to comply with
their provisions and may affect the enforceability of the related loans. In
addition, any assignee of the creditor would generally be subject to all
claims and defenses that the consumer could assert against the creditor,
including, without limitation, the right to rescind the mortgage loan. The
Company will represent and warrant in the Agreement that each of the Loans was
originated in compliance with all applicable laws, including the Truth-In-
Lending Act, as amended. If any Loan is found to be in breach of such
representation and warranty, the Company will be required by the Agreement to
repurchase such Loan at a price equal to the principal amount thereof plus
accrued interest thereon. The amount of such purchase price will be treated as
a Principal Prepayment in Full of the related Loan. In lieu of purchasing a
Loan, the Company may under certain circumstances substitute another loan.
Variations in Loan Characteristics. The Additional Loans and Subsequent
Loans will have characteristics that differ somewhat from the Initial Loans
described herein. However, each of such Additional Loans and Subsequent Loans
must satisfy the eligibility criteria described under "Description of the
Certificates--Conveyance of Loans" and "--Conveyance of Subsequent Loans and
Pre-Funding Account" herein. Current Reports on Form 8-K will be filed
following the purchase of Additional Loans and Subsequent Loans by the Trust
and following the termination of the Funding Period, which latter report will
include the same type of information regarding such Subsequent Loans as are
included in this Prospectus Supplement with respect to the Initial Loans.
S-23
<PAGE>
STRUCTURE OF THE TRANSACTION
On or about , 1998 (the "Closing Date"), the Company will establish
the Trust pursuant to a Pooling and Servicing Agreement to be dated as of
, 1998 (the "Agreement"), between the Company, as Seller and Servicer, and
the Trustee.
The Class A-1 ARM, Class A-1, Class A-2, Class A-3, Class A-4, Class A-5 IO,
Class M-1, Class M-2 and Class B Certificates (the "Certificates"), will be
issued by the Trust, the corpus of which will consist primarily of the Loans,
including all rights to receive payments due on such Loans after (i) ,
1998 (or the date of origination thereof, if later) for each Loan other than
the Subsequent Loans and (ii) for each Subsequent Loan, the date on which such
Loan is purchased by the Trust (the "Cut-off Date"), liens on the related real
estate and amounts held for the Trust in the Certificate Account (as defined
below).
Payments and recoveries in respect of principal and interest on the Loans
will be paid into a separate trust account maintained at an Eligible
Institution (initially U.S. Bank National Association, Minneapolis, Minnesota)
in the name of the Trust (the "Certificate Account"), no later than one
Business Day after receipt. Payments on deposit in the Certificate Account and
constituting the Amount Available will be applied on the fifteenth day of each
month (or, if such day is not a Business Day, the next succeeding Business
Day) (each a "Payment Date") to make the distributions to the
Certificateholders as of the immediately preceding Record Date as described
under "Description of the Certificates--Distribution on Certificates" herein
and to pay certain monthly fees to the Servicer as compensation for its
servicing of the Loans (the "Monthly Servicing Fee").
The Servicer will be obligated to advance for each Payment Date any
scheduled payments on the Loans that were due but not received during the
prior Due Period ("Advances"). The Servicer will be entitled to reimbursement
of an Advance from funds available therefor in the Certificate Account. The
Servicer will not be required to make any Advance to the extent that it does
not expect to recoup the Advance from subsequent funds available therefor in
the Certificate Account. If the Servicer fails to make any Advance required
under the Agreement, the Trustee is obligated (subject to certain conditions)
to make such Advance.
Following the transfer of the Loans from the Company to the Trust, the
obligations of the Company are limited to (a) its obligations as Servicer to
service the Loans, (b) certain representations and warranties in the Agreement
as described under "Description of the Certificates--Conveyance of Loans"
herein and (c) certain indemnities. The Company is obligated under the
Agreement to repurchase at the Repurchase Price (as defined herein), or, at
its option, to substitute another loan for, any Loan on the first Payment Date
which is more than 90 days after the Company becomes aware, or the Company
receives written notice from the Trustee, of any breach of any such
representation and warranty in the Agreement that materially adversely affects
the Certificateholders' interest in such Loan if such breach has not been
cured prior to such date. The Agreement also provides that the Company has
certain obligations to repurchase Loans and to indemnify the Trustee and
Certificateholders with respect to certain other matters.
USE OF PROCEEDS
The Company will use the net proceeds received from the sale of the
Certificates for working capital and general corporate purposes, including
building a portfolio of home equity loans, providing warehouse financing for
the purchase of loans and other costs of maintaining such loans until they are
pooled and sold to other investors.
S-24
<PAGE>
THE LOANS
FIXED-RATE LOANS
The Loan Pool includes Fixed-Rate Loans (meaning all Loans other than the
Adjustable Rate Loans, described separately below). This Prospectus Supplement
contains information regarding the Initial Fixed-Rate Loans, which will
represent approximately % of all Fixed-Rate Loans, and which consist of
closed-end home equity loans originated through , 1998. The information
for each Initial Fixed-Rate Loan is as of the Cut-off Date for such Loan.
Under the Agreement, the Trust may purchase Additional Fixed-Rate Loans on the
Closing Date and may purchase Subsequent Fixed-Rate Loans for a period of up
to 90 days thereafter. See "Description of the Certificates--Conveyance of
Subsequent Loans and Pre-Funding Account" below.
The Initial Fixed-Rate Loans have an aggregate principal balance of
$ . Each Fixed-Rate Loan is a closed-end home equity loan
originated by the Company or by a Company-approved correspondent lender and
purchased by the Company. Each Fixed-Rate Loan is secured by a lien on the
related real estate.
The Company will make certain representations and warranties in the
Agreement, including that (a) each Fixed-Rate Loan is fully amortizing and
provides for level monthly payments over the term of such loan, computed on
the simple interest method (except for the Balloon Loans and the step-up rate
Loans), (b) each Initial Fixed-Rate Loan has its last scheduled payment due no
later than 2028, and (c) each Fixed-Rate Loan is secured by a lien on the
related real estate. The Fixed-Rate Loans will be originated or acquired by
the Company in the ordinary course of the Company's business. A detailed
listing of the Initial Fixed-Rate Loans is appended to the Agreement.
See "Description of the Certificates" herein and in the Prospectus. Each of
the Initial Fixed-Rate Loans has a Loan Rate of at least % per annum and
not more than % and the weighted average of the Loan Rates of the Initial
Fixed-Rate Loans as of the Cut-off Date is %. As of the Cut-off Date, the
Initial Fixed-Rate Loans had remaining maturities of at least months but
not more than months and original maturities of at least months but not
more than months. The Initial Fixed-Rate Loans had a weighted average term
to scheduled maturity, as of origination, of months, and a weighted
average term to scheduled maturity, as of the Cut-off Date, of months. The
average principal balance per Initial Fixed-Rate Loan as of the Cut-off Date
was $ and the principal balances on the Initial Fixed-Rate Loans as
of the Cut-off Date ranged from $ to $ . The Balloon
Loans included in the Initial Fixed-Rate Loans consisted of closed-end
home equity loans and have a principal balance as of the Cut-off Date of
$ . The weighted average of the Loan Rates of such Balloon Loans
as of the Cut-off Date was %, and such Balloon Loans had a weighted
average term to scheduled maturity, as of origination, of months, and a
weighted average term to scheduled maturity, as of the Cut-off Date, of
months. The Initial Fixed-Rate Loans arise from loans relating to real
property located in states and the District of Columbia. By principal
balance as of the Cut-off Date, approximately % of the Initial Fixed-Rate
Loans were secured by real property located in , % in , % in
, % in and % in . No other state represented % or more of
the Cut-off Date Pool Principal Balance of the Initial Fixed-Rate Loans.
S-25
<PAGE>
Set forth below is a description of certain additional characteristics of the
Initial Fixed-Rate Loans.
GEOGRAPHICAL DISTRIBUTION OF MORTGAGED PROPERTIES--INITIAL FIXED-RATE LOANS
<TABLE>
<CAPTION>
% OF INITIAL % OF INITIAL
FIXED-RATE LOANS FIXED-RATE LOANS
NUMBER OF BY NUMBER OF AGGREGATE PRINCIPAL BY OUTSTANDING
LOANS AS OF LOANS AS BALANCE OUTSTANDING PRINCIPAL BALANCE
CUT-OFF DATE OF CUT-OFF DATE AS OF CUT-OFF DATE AS OF CUT-OFF DATE
------------ ----------------- ------------------- ------------------
<S> <C> <C> <C> <C>
Alabama................. % $ %
Arizona.................
Arkansas................
California..............
Colorado................
Connecticut.............
Delaware................
District of Columbia....
Florida.................
Georgia.................
Idaho...................
Illinois................
Indiana.................
Iowa....................
Kansas..................
Kentucky................
Louisiana...............
Maine...................
Maryland................
Massachusetts...........
Michigan................
Minnesota...............
Mississippi.............
Missouri................
Montana.................
Nebraska................
Nevada..................
New Hampshire...........
New Jersey..............
New Mexico..............
New York................
North Carolina..........
North Dakota............
Ohio....................
Oklahoma................
Oregon..................
Pennsylvania............
Rhode Island............
South Carolina..........
South Dakota............
Tennessee...............
Texas...................
Utah....................
Vermont.................
Virginia................
Washington..............
West Virginia...........
Wisconsin...............
Wyoming.................
----- ------ --------------- ------
Total............... 100.00% $ 100.00%
===== ====== =============== ======
</TABLE>
S-26
<PAGE>
YEARS OF ORIGINATION--INITIAL FIXED-RATE LOANS
<TABLE>
<CAPTION>
% OF INITIAL FIXED-
RATE LOANS BY
AGGREGATE PRINCIPAL OUTSTANDING PRINCIPAL
NUMBER OF LOANS BALANCE OUTSTANDING BALANCE AS OF
YEAR OF ORIGINATION AS OF CUT-OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
- ------------------- ------------------ ------------------- ---------------------
<S> <C> <C> <C>
1995.................... $ %
1996....................
1997....................
1998....................
----- --------------- ------
Total............... $ 100.00%
===== =============== ======
</TABLE>
DISTRIBUTION OF ORIGINAL LOAN AMOUNTS--INITIAL FIXED-RATE LOANS
<TABLE>
<CAPTION>
% OF INITIAL FIXED-
RATE LOANS BY
AGGREGATE PRINCIPAL OUTSTANDING PRINCIPAL
ORIGINAL LOAN NUMBER OF LOANS BALANCE OUTSTANDING BALANCE AS OF
AMOUNT (IN DOLLARS) AS OF CUT-OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
------------------- ------------------ ------------------- ---------------------
<S> <C> <C> <C>
Less than$ 10,000....... $ %
$ 10,000 to $ 19,999....
$ 20,000 to $ 29,999....
$ 30,000 to $ 39,999....
$ 40,000 to $ 49,999....
$ 50,000 to $ 59,999....
$ 60,000 to $ 69,999....
$ 70,000 to $ 79,999....
$ 80,000 to $ 89,999....
$ 90,000 to $ 99,999....
$100,000 to $109,999....
$110,000 to $119,999....
$120,000 to $129,999....
$130,000 to $139,999....
$140,000 to $149,999....
$150,000 to $159,999....
$160,000 to $169,999....
$170,000 to $179,999....
$180,000 to $189,999....
$190,000 to $199,999....
$200,000 to $249,999....
$250,000 to $299,999....
Over $299,999.........
----- --------------- ------
Total............... $ 100.00%
===== =============== ======
</TABLE>
S-27
<PAGE>
LOAN RATES--INITIAL FIXED-RATE LOANS
<TABLE>
<CAPTION>
% OF INITIAL FIXED-RATE
LOANS BY
AGGREGATE PRINCIPAL OUTSTANDING PRINCIPAL
NUMBER OF LOANS BALANCE OUTSTANDING BALANCE AS OF
RANGE OF LOANS BY LOAN RATE AS OF CUT-OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
- --------------------------- ------------------ ------------------- -----------------------
<S> <C> <C> <C>
Less than 9.01%............ $ %
9.01 to 10.00%............
10.01 to 11.00%............
11.01 to 12.00%............
12.01 to 13.00%............
13.01 to 14.00%............
14.01 to 15.00%............
15.01 to 16.00%............
16.01 to 17.00%............
Over 17.00%................
---- --------------- ------
Total.................. $ 100.00%
==== =============== ======
</TABLE>
REMAINING MONTHS TO MATURITY--INITIAL FIXED-RATE LOANS
<TABLE>
<CAPTION>
% OF INITIAL FIXED-RATE
LOANS BY
MONTHS REMAINING TO AGGREGATE PRINCIPAL OUTSTANDING PRINCIPAL
SCHEDULED MATURITY NUMBER OF LOANS BALANCE OUTSTANDING BALANCE AS OF
AS OF CUT-OFF DATE AS OF CUT-OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
------------------- ------------------ ------------------- -----------------------
<S> <C> <C> <C>
Fewer than 181.......... $ %
181 to 195..............
196 to 210..............
211 to 225..............
226 to 240..............
241 to 255..............
256 to 270..............
271 to 285..............
286 to 300..............
301 to 315..............
316 to 330..............
331 to 345..............
346 to 360..............
----- --------------- ------
Total............... $ 100.00%
===== =============== ======
</TABLE>
LIEN POSITION--INITIAL FIXED-RATE LOANS
<TABLE>
<CAPTION>
% OF INITIAL
FIXED-RATE % OF INITIAL FIXED-RATE
LOANS BY LOANS BY
NUMBER OF AGGREGATE PRINCIPAL OUTSTANDING PRINCIPAL
NUMBER OF LOANS LOANS AS OF BALANCE OUTSTANDING BALANCE AS OF
AS OF CUT-OFF DATE CUT-OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
------------------ ------------ ------------------- -----------------------
<S> <C> <C> <C> <C>
First................... % $ %
Second..................
Third...................
----- ------ --------------- ------
Total............... 100.00% $ 100.00%
===== ====== =============== ======
</TABLE>
S-28
<PAGE>
LOAN-TO-VALUE RATIO--INITIAL FIXED-RATE LOANS
<TABLE>
<CAPTION>
% OF INITIAL FIXED-RATE
LOANS BY
AGGREGATE PRINCIPAL OUTSTANDING PRINCIPAL
NUMBER OF LOANS BALANCE OUTSTANDING BALANCE AS OF
LOAN-TO-VALUE RATIO AS OF CUT-OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
- ------------------- ------------------ ------------------- -----------------------
<S> <C> <C> <C>
Less than 10.01%........ $ %
10.01 to 20.00%.........
20.01 to 30.00%.........
30.01 to 40.00%.........
40.01 to 50.00%.........
50.01 to 60.00%.........
60.01 to 70.00%.........
70.01 to 80.00%.........
80.01 to 90.00%.........
Over 90.00%.............
----- --------------- ------
Total............... $ 100.00%
===== =============== ======
</TABLE>
ADJUSTABLE RATE LOANS
The Loan Pool includes Adjustable Rate Loans. This Prospectus Supplement
contains information regarding the Initial Adjustable Rate Loans, which will
represent approximately % of all Adjustable Rate Loans, and which consist of
closed-end loans originated through , 1998. The information for each
Initial Adjustable Rate Loan is as of the Cut-off Date for such Loan. Under
the Agreement, the Trust may purchase Additional Adjustable Rate Loans on the
Closing Date and may purchase Subsequent Adjustable Rate Loans for a period of
up to 90 days thereafter. See "Description of the Certificates--Conveyance of
Subsequent Loans and Pre-Funding Account" below.
The Initial Adjustable Rate Loans have an aggregate principal balance of
$ . Each Adjustable Rate Loan is a closed-end loan originated by
the Company or by a Company-approved correspondent lender and purchased by the
Company. Each Adjustable Rate Loan is secured by a lien on the related real
estate.
The Initial Adjustable Rate Loans have Loan Rates subject to annual or
semiannual adjustment after an initial period of up to months on the day of
the month specified in the Adjustable Rate Loan (each such date, an
"Adjustment Date"), to equal the sum of (i) the Six-Month LIBOR Index (as
defined below) and (ii) a fixed percentage amount specified in the related
Adjustable Rate Loan (the "Gross Margin"). The Loan Rates will not increase on
any Adjustment Date by more than % per annum. All of the Initial Adjustable
Rate Loans further provide that the Loan Rate will in no event be more than
the fixed percentage set forth in the Adjustable Rate Loan (such rate, the
"Maximum Loan Rate"). Each Initial Adjustable Rate Loan provides that in no
event will the Loan Rate be less than a specified lifetime interest rate floor
(such rate, the "Minimum Loan Rate"). Effective with the first payment due on
an Initial Adjustable Rate Loan after each related Adjustment Date, the
monthly payment will be adjusted to an amount which will fully amortize the
outstanding principal balance of such Adjustable Rate Loan over its remaining
term, and pay interest at the Loan Rate as so adjusted. All of the Initial
Adjustable Rate Loans were originated with a Loan Rate less than the sum of
(i) the Six-Month LIBOR Index at the time the initial Loan Rate was
established and (ii) the Gross Margin. The Six-Month LIBOR Index is a per
annum rate equal to the average of interbank offered rates for six-month U.S.
dollar-denominated deposits in the London market based on quotations of major
banks, as published in The Wall Street Journal and as most recently available
as of the date specified in the related Adjustable Rate Loan.
The Company will make certain representations and warranties in the
Agreement, including that (a) each Adjustable Rate Loan is fully amortizing
and provides for monthly payments, except, in the case of a Balloon Loan, for
the final monthly payment, over the term of such loan, computed on the simple
interest method, (b) each Initial Adjustable Rate Loan has its last scheduled
payment due no later than 2028, and (c) each Adjustable Rate Loan is
secured by a lien on the related real estate. The Adjustable Rate Loans will
be
S-29
<PAGE>
originated or acquired by the Company in the ordinary course of the Company's
business. A detailed listing of the Initial Adjustable Rate Loans is appended
to the Agreement. See "Description of the Certificates" herein and in the
Prospectus. As of the Cut-off Date, the Initial Adjustable Rate Loans had a
Minimum Loan Rate of %, a Maximum Loan Rate of % and a weighted
average Loan Rate of %. As of the Cut-off Date, the weighted average
Maximum Loan Rate of the Initial Adjustable Rate Loans was %, with
Maximum Loan Rates that range from % to %. As of the Cut-Off Date,
the Initial Adjustable Rate Loans had a weighted average gross margin of %
and gross margins ranging from % to %. As of the Cut-off Date, the
Initial Adjustable Rate Loans had remaining maturities of at least 301 months
but not more than months and original maturities of at least months
but not more than months. The Initial Adjustable Rate Loans had a weighted
average term to scheduled maturity, as of origination, of months, and a
weighted average term to scheduled maturity, as of the Cut-off Date, of
months. The average principal balance per Initial Adjustable Rate Loan as of
the Cut-off Date was $ and the principal balances on the Initial
Adjustable Rate Loans as of the Cut-off Date ranged from $ to
$ . The Initial Adjustable Rate Loans arise from loans relating to
real property located in states and the District of Columbia. By principal
balance as of the Cut-off Date, approximately % of the Initial Adjustable
Rate Loans were secured by real property located in California, % in
Washington, and % in Illinois. No other state represented % or more of
the Cut-off Date Pool Principal Balance of the Initial Adjustable Rate Loans.
S-30
<PAGE>
Set forth below is a description of certain additional characteristics of the
Initial Adjustable Rate Loans.
GEOGRAPHICAL DISTRIBUTION OF MORTGAGED PROPERTIES--INITIAL ADJUSTABLE RATE
LOANS
<TABLE>
<CAPTION>
% OF INITIAL
% OF INITIAL ADJUSTABLE
ADJUSTABLE RATE LOANS
RATE LOANS AGGREGATE PRINCIPAL BY OUTSTANDING
BY NUMBER OF BALANCE PRINCIPAL
NUMBER OF LOANS LOANS AS OUTSTANDING AS OF BALANCE AS OF
AS OF CUT-OFF DATE OF CUT-OFF DATE CUT-OFF DATE CUT-OFF DATE
------------------ --------------- ------------------- --------------
<S> <C> <C> <C> <C>
Alabama................. % $ %
Arizona.................
California..............
Colorado................
Connecticut.............
Delaware................
District of Columbia....
Florida.................
Georgia.................
Hawaii..................
Idaho...................
Illinois................
Indiana.................
Iowa....................
Kansas..................
Kentucky................
Louisiana...............
Maine...................
Maryland................
Massachusetts...........
Michigan................
Minnesota...............
Mississippi.............
Missouri................
Nebraska................
Nevada..................
New Hampshire...........
New Jersey..............
New Mexico..............
New York................
North Carolina..........
Ohio....................
Oklahoma................
Oregon..................
Pennsylvania............
Rhode Island............
South Carolina..........
Tennessee...............
Texas...................
Utah....................
Virginia................
Washington..............
West Virginia...........
Wisconsin...............
Wyoming.................
--- ------ -------------- ------
Total............... 100.00% $ 100.00%
=== ====== ============== ======
</TABLE>
S-31
<PAGE>
YEARS OF ORIGINATION--INITIAL ADJUSTABLE RATE LOANS
<TABLE>
<CAPTION>
% OF INITIAL
ADJUSTABLE RATE
LOANS BY
AGGREGATE PRINCIPAL OUTSTANDING PRINCIPAL
NUMBER OF LOANS BALANCE OUTSTANDING BALANCE AS OF
YEAR OF ORIGINATION AS OF CUT-OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
- ------------------- ------------------ ------------------- ---------------------
<S> <C> <C> <C>
1993.................... $ %
1994....................
1995....................
1996....................
1997....................
1998....................
--- -------------- -----
Total............... $ 100%
=== ============== =====
</TABLE>
DISTRIBUTION OF ORIGINAL LOAN AMOUNTS--INITIAL ADJUSTABLE RATE LOANS
<TABLE>
<CAPTION>
% OF INITIAL
ADJUSTABLE RATE
LOANS BY
AGGREGATE PRINCIPAL OUTSTANDING PRINCIPAL
ORIGINAL LOAN AMOUNT NUMBER OF LOANS BALANCE OUTSTANDING BALANCE AS OF
(IN DOLLARS) AS OF CUT-OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
-------------------- ------------------ ------------------- ---------------------
<S> <C> <C> <C>
Less than$ 20,000....... $ %
$ 20,000 to $ 29,999....
$ 30,000 to $ 39,999....
$ 40,000 to $ 49,999....
$ 50,000 to $ 59,999....
$ 60,000 to $ 69,999....
$ 70,000 to $ 79,999....
$ 80,000 to $ 89,999....
$ 90,000 to $ 99,999....
$100,000 to $109,999....
$110,000 to $119,999....
$120,000 to $129,999....
$130,000 to $139,999....
$140,000 to $149,999....
$150,000 to $159,999....
$160,000 to $169,999....
$170,000 to $179,999....
$180,000 to $189,999....
$190,000 to $199,999....
$200,000 to $249,999....
$250,000 to $299,999....
Over$299,999............
--- -------------- ------
Total............... $ 100.00%
=== ============== ======
</TABLE>
S-32
<PAGE>
CURRENT LOAN RATES--INITIAL ADJUSTABLE RATE LOANS
<TABLE>
<CAPTION>
% OF INITIAL
AGGREGATE PRINCIPAL ADJUSTABLE RATE LOANS BY
RANGE OF LOANS BY NUMBER OF LOANS BALANCE OUTSTANDING OUTSTANDING PRINCIPAL
LOAN RATE AS OF CUT-OFF DATE AS OF CUT-OFF DATE BALANCE AS OF CUT-OFF DATE
----------------- ------------------ ------------------- --------------------------
<S> <C> <C> <C>
Less than 9.01%......... $ %
9.01 to 10.00%
10.01 to 11.00%.........
11.01 to 12.00%.........
12.01 to 13.00%.........
--- -------------- ------
Total............... $ 100.00%
=== ============== ======
</TABLE>
REMAINING MONTHS TO MATURITY--INITIAL ADJUSTABLE RATE LOANS
<TABLE>
<CAPTION>
% OF INITIAL
MONTHS REMAINING TO AGGREGATE PRINCIPAL ADJUSTABLE RATE LOANS BY
SCHEDULED MATURITY NUMBER OF LOANS BALANCE OUTSTANDING OUTSTANDING PRINCIPAL
AS OF CUT-OFF DATE AS OF CUT-OFF DATE AS OF CUT-OFF DATE BALANCE AS OF CUT-OFF DATE
------------------- ------------------ ------------------- --------------------------
<S> <C> <C> <C>
300 to 315.............. $ %
316 to 330..............
331 to 345..............
346 to 360..............
--- -------------- ------
Total............... $ 100.00%
=== ============== ======
</TABLE>
LIEN POSITION--INITIAL ADJUSTABLE RATE LOANS
<TABLE>
<CAPTION>
% OF INITIAL
ADJUSTABLE RATE
LOANS BY % OF INITIAL
NUMBER OF LOANS AGGREGATE PRINCIPAL ADJUSTABLE RATE LOANS BY
NUMBER OF LOANS AS OF CUT-OFF BALANCE OUTSTANDING OUTSTANDING PRINCIPAL
AS OF CUT-OFF DATE DATE AS OF CUT-OFF DATE BALANCE AS OF CUT-OFF DATE
------------------ --------------- ------------------- --------------------------
<S> <C> <C> <C> <C>
First................... 100.00% $ 100.00%
--- ------ -------------- ------
Total............... 100.00% $ 100.00%
=== ====== ============== ======
</TABLE>
LOAN-TO-VALUE RATIO--INITIAL ADJUSTABLE RATE LOANS
<TABLE>
<CAPTION>
% OF INITIAL
AGGREGATE PRINCIPAL ADJUSTABLE RATE LOANS BY
NUMBER OF LOANS BALANCE OUTSTANDING OUTSTANDING PRINCIPAL
LOAN-TO-VALUE RATIO AS OF CUT-OFF DATE AS OF CUT-OFF DATE BALANCE AS OF CUT-OFF DATE
- ------------------- ------------------ ------------------- --------------------------
<S> <C> <C> <C>
Less than 20.01%........ $ %
20.01 to 30.00%.........
30.01 to 40.00%.........
40.01 to 50.00%.........
50.01 to 60.00%.........
60.01 to 70.00%.........
70.01 to 80.00%.........
80.01 to 90.00%.........
Over 90.00%.............
--- -------------- ------
Total............... $ 100.00%
=== ============== ======
</TABLE>
S-33
<PAGE>
MONTH OF NEXT RATE ADJUSTMENT--INITIAL ADJUSTABLE RATE LOANS
<TABLE>
<CAPTION>
% OF INITIAL
AGGREGATE PRINCIPAL ADJUSTABLE RATE LOANS
NUMBER OF LOANS BALANCE OUTSTANDING BY OUTSTANDING PRINCIPAL
MONTH OF NEXT RATE ADJUSTMENT AS OF CUT-OFF DATE AS OF CUT-OFF DATE BALANCE AS OF CUT-OFF DATE
- ----------------------------- ------------------ ------------------- --------------------------
<S> <C> <C> <C>
January 1998................
February 1998...............
March 1998..................
April 1998..................
May 1998....................
June 1998...................
November 1998...............
February 1999...............
March 1999..................
April 1999..................
May 1999....................
June 1999...................
July 1999...................
August 1999.................
September 1999..............
October 1999................
November 1999...............
December 1999...............
January 2000................
August 2000.................
October 2000................
November 2000...............
January 2002................
--- -------------- ------
Total................... $ 100.00%
=== ============== ======
</TABLE>
S-34
<PAGE>
DISTRIBUTION OF GROSS MARGIN--INITIAL ADJUSTABLE RATE LOANS
<TABLE>
<CAPTION>
% OF INITIAL
AGGREGATE PRINCIPAL ADJUSTABLE RATE LOANS
NUMBER OF LOANS BALANCE OUTSTANDING BY OUTSTANDING PRINCIPAL
GROSS MARGIN AS OF CUT-OFF DATE AS OF CUT-OFF DATE BALANCE AS OF CUT-OFF DATE
- ------------ ------------------ ------------------- --------------------------
<S> <C> <C> <C>
Less Than 3.750%........ $ %
3.750 to 3.999%.........
4.000 to 4.249%.........
4.250 to 4.499%.........
4.500 to 4.749%.........
4.750 to 4.999%.........
5.000 to 5.249%.........
5.250 to 5.499%.........
5.500 to 5.749%.........
5.750 to 5.999%.........
6.000 to 6.249%.........
6.250 to 6.499%.........
6.500 to 6.749%.........
6.750 to 6.999%.........
7.000 to 7.249%.........
7.250 to 7.499%.........
7.500 to 7.749%.........
7.750 to 7.999%.........
8.000 to 8.249%.........
8.250 to 8.499%.........
8.500 to 8.749%.........
8.750 to 8.999%.........
9.000 to 9.249%.........
--- -------------- ------
Total............... $ 100.00%
=== ============== ======
</TABLE>
S-35
<PAGE>
MAXIMUM LOAN RATES--INITIAL ADJUSTABLE RATE LOANS
<TABLE>
<CAPTION>
% OF INITIAL
ADJUSTABLE RATE LOANS
NUMBER OF LOANS AGGREGATE PRINCIPAL BY OUTSTANDING PRINCIPAL
AS OF CUT-OFF BALANCE OUTSTANDING BALANCE AS OF
MAXIMUM LOAN RATES DATE AS OF CUT-OFF DATE CUT-OFF DATE
- ------------------ --------------- ------------------- ------------------------
<S> <C> <C> <C>
Less Than 13.990%....... $ %
13.990 to 14.249%.......
14.250 to 14.499%.......
14.500 to 14.749%.......
14.750 to 14.999%.......
15.000 to 15.249%.......
15.250 to 15.499%.......
15.500 to 15.749%.......
15.750 to 15.999%.......
16.000 to 16.249%.......
16.250 to 16.499%.......
16.500 to 16.749%.......
16.750 to 16.999%.......
17.000 to 17.249%.......
17.250 to 17.499%.......
17.500 to 17.749%.......
17.750 to 17.999%.......
18.000 to 18.249%.......
18.250 to 18.499%.......
18.500 to 18.749%.......
18.750 to 18.999%.......
19.000 to 19.249%.......
19.250 to 19.499%.......
19.500 to 19.749%.......
19.750 to 19.999%.......
Over 19.999%............
--- -------------- ------
Total............... $ 100.00%
=== ============== ======
</TABLE>
S-36
<PAGE>
MINIMUM LOAN RATES--INITIAL ADJUSTABLE RATE LOANS
<TABLE>
<CAPTION>
% OF
INITIAL
ADJUSTABLE RATE
NUMBER OF LOANS
LOANS AGGREGATE PRINCIPAL BY OUTSTANDING PRINCIPAL
AS OF CUT- BALANCE OUTSTANDING BALANCE AS OF
MINIMUM LOAN RATES OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
- ------------------ ---------- ------------------- ------------------------
<S> <C> <C> <C>
Less than 7.250%...... $ %
7.250 to 7.499%......
7.500 to 7.749%......
7.750 to 7.999%......
8.000 to 8.249%......
8.250 to 8.499%......
8.500 to 8.749%......
8.750 to 8.999%......
9.000 to 9.249%......
9.250 to 9.499%......
9.500 to 9.749%......
9.750 to 9.999%......
10.000 to 10.249%......
10.250 to 10.499%......
10.500 to 10.749%......
10.750 to 10.999%......
11.000 to 11.249%......
11.250 to 11.499%......
11.500 to 11.749%......
11.750 to 11.999%......
12.000 to 12.249%......
12.250 to 12.499%......
12.500 to 12.749%......
12.750 to 12.999%......
13.000 to 13.249%......
--- -------------- ------
Total................ $ 100.00%
=== ============== ======
</TABLE>
DELINQUENCY, LOAN DEFAULT AND LOSS INFORMATION
The following table sets forth information relating to the Company's
delinquency experience with respect to all home equity loans serviced by the
Company. Not all such home equity loans are of the type to be included in the
Loan Pool and thus the information presented is not necessarily indicative of
the Company's delinquency experience with respect to home equity loans similar
to the Loans. In addition, the Company began originating, purchasing and
servicing home equity loans in January 1996, and thus has no significant
experience with respect to the performance of such loans. Moreover, because
all such home equity loans have been recently originated, it is likely that
this experience is not indicative of the delinquency experience to be expected
from a more seasoned portfolio.
S-37
<PAGE>
DELINQUENCY EXPERIENCE--LOANS
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------
1997 1996
------- -------
<S> <C> <C>
Number of Loans Outstanding(1)................................ 65,355 17,731
Number of Loans Delinquent(2)(3)
30-59 Days.................................................. 1,141 504
60-89 Days.................................................. 283 94
90 Days or More............................................. 411 52
------- -------
Total Loans Delinquent........................................ 1,835 650
Delinquencies as a Percent of Loans Outstanding(4)............ 2.81% 3.67%
</TABLE>
- --------
(1) Excludes defaulted loans not yet liquidated.
(2) A loan is considered delinquent by the Company if any payment of $25 or
more is past-due 30 days or more.
(3) The period of delinquency is based on the number of days that payments are
contractually past-due (assuming 30-day months). Consequently, a loan due
on the first day of a month is not 30 days delinquent until the first day
of the next month. The information for December 31, 1996 does not include
as delinquent the home equity loans of obligors who have entered
bankruptcy proceedings, provided that such obligors are current under
their bankruptcy payment plan.
(4) By number of loans.
Because of the Company's limited historical experience with respect to the
performance of home equity loans, no information has been included herein with
respect to the Company's loan loss or liquidation experience with respect to
home equity loans.
S-38
<PAGE>
YIELD AND PREPAYMENT CONSIDERATIONS
The yield to maturity of any Certificate will depend on the price paid by
the Certificateholder and will be sensitive to the rate and timing of
principal payments (including prepayments, repurchases, defaults and
liquidations) on the Loans, which may fluctuate significantly from time to
time. The Loans generally may be prepaid in full or in part at any time.
Higher than expected "Principal Prepayments" (payments received from
Obligors, other than regular payments of principal, which are applied upon
receipt or, in the case of partial prepayments, upon the next scheduled
payment date for such Loan, to reduce the outstanding principal balance on the
Loans) will increase the yield on Certificates purchased at a price less than
the undivided ownership interest in the aggregate principal balance of the
Loans represented by such Certificates and will decrease the yield on
Certificates purchased at a price greater than the undivided ownership
interest in the aggregate principal balance of the Loans represented by such
Certificates. The Company has no significant experience with respect to the
rate of Principal Prepayments on home equity loans. Because the Loans have
scheduled due dates throughout the calendar month, prepayments on the Loans
would affect the amount of funds available to make distributions on the
Certificates on any Payment Date only if a substantial portion of the Loans
prepaid prior to their respective due dates in the preceding month (thus
paying less than 30 days' interest for that month) while very few Loans
prepaid after their respective due dates in the preceding month. In addition,
liquidations of Defaulted Loans or the Servicer's exercise of its option to
repurchase the entire remaining pool of Loans (see "Description of the
Certificates--Repurchase Option" herein) will affect the timing of principal
distributions on the Certificates.
Unless the Certificate Principal Balances of the Class A-1, A-2 and A-3
Certificates have been reduced to zero, the Class A-4 Certificates will not
receive any portion of principal payments prior to the Payment Date occurring
in 2001 and thereafter will receive a disproportionately small or large
portion of principal payments. Consequently, the Class A-4 Certificates are
potentially subject to greater variation in weighted average life and may
fluctuate more in market value as a result of changes in market interest rates
or market yields, as compared to the other Class A Certificates.
Because distributions to the Class A-5 IO Certificateholders will consist
entirely of interest, the yield to maturity of the Class A-5 IO Certificates
may be sensitive to the repurchase, prepayment and default experience of the
Loans, and prospective investors should consider the risk that they might not
fully recover their initial investment. The Notional Principal Amount of the
Class A-5 IO Certificates is $ (or the Class A Principal Balance on
a Payment Date, if less) for the first 36 Payment Dates, and thereafter, zero.
Consequently, the yield on the Class A-5 IO Certificates will be more stable
than if the Notional Principal Amount were determined by reference to a single
class of Class A Certificates, and the yield to maturity of the Class A-5 IO
Certificates will be negatively affected only at high rates of prepayment.
The Class A Certificates (other than the Class A-5 IO Certificates) will be
prepaid in part on the first Payment Date after the Funding Period in the
event that any Pre-Funded Amount remains in the Pre-Funding Account on such
Payment Date after the purchase by the Trust of the Subsequent Loans. Any
amounts remaining which had been allocated to the purchase of Subsequent
Adjustable Rate Loans will be paid to the Class A-1 ARM Certificateholders and
any amounts remaining which had been allocated to the purchase of Subsequent
Fixed-Rate Loans will be paid on a pro rata basis to the Class A-1, Class A-2,
Class A-3 and Class A-4 Certificateholders. The Company believes that the
principal amount of Subsequent Loans to be purchased by the Trust will require
the application of substantially all of the Pre-Funded Amount. It is unlikely,
however, that the aggregate principal amount of Subsequent Loans purchased by
the Trust will be identical to the Pre-Funded Amount, and that consequently,
Class A Certificateholders will receive some prepayment of principal.
Prepayments on mortgage loans and other consumer installment obligations are
commonly measured relative to a prepayment standard or model. The Constant
Prepayment Rate ("CPR") model assumes that the outstanding principal balance
of a pool of loans prepays each month at a specified constant annual rate. The
Certificates were priced using a prepayment assumption of, with respect to the
Fixed-Rate Loans, % of the applicable Prepayment Assumption (as described
below), and with respect to the Adjustable Rate Loans, % of CPR. There can
be no assurance that the Loans will prepay at the applicable rate, and it is
unlikely that prepayments or liquidations of the Loans in either Sub-Pool will
occur at any constant rate.
S-39
<PAGE>
The amount of interest to which the Certificateholders of any Class are
entitled on any Payment Date will be the product of the related Pass-Through
Rate and (in the absence of any liquidation loss principal amount adjustment)
the Principal Balance of such Class, or in the case of the Class A-5 IO
Certificates, the Notional Principal Amount, immediately following the
preceding Payment Date. Interest on each Class of Certificates, other than the
Class A-1 ARM Certificates, will be computed on the basis of a 360-day year of
twelve 30-day months. Interest on the Class A-1 ARM Certificates will be
computed on the basis of actual days elapsed in a 360-day year.
Certificateholders will receive payments in respect of principal on each
Payment Date to the extent that funds available in the Certificate Account are
sufficient therefor, in the priority described under "Description of the
Certificates--Distributions on Certificates." As required by applicable state
laws, interest paid by Obligors on the Loans is computed according to the
simple interest method.
The final scheduled payment date on the Initial Loan with the latest
maturity is in 2028.
WEIGHTED AVERAGE LIFE OF THE CERTIFICATES
The following information is given solely to illustrate the effect of
prepayments of the related Loans on the weighted average life of each Class of
Certificates under the stated assumptions and is not a prediction of the
prepayment rate that might actually be experienced by the Loans.
Weighted average life refers to the average amount of time from the date of
issuance of a security until each dollar of principal of such security will be
repaid to the investor. The weighted average life of the Certificates will be
influenced by the rate at which principal on the related Loans is paid.
Principal payments on Loans may be in the form of scheduled amortization or
prepayments (for this purpose, the term "prepayment" includes repayments and
liquidations due to default or other dispositions of the Loans).
The rate of principal payments on pools of home equity loans is influenced
by a variety of economic, geographic, social and other factors, including the
level of interest rates and the rate at which homeowners sell their homes or
default on their loans. Other factors affecting prepayment of Loans include
changes in obligors' housing needs, job transfers, unemployment and obligors'
net equity in their homes. In the case of home equity loans secured by real
estate, in general, if prevailing interest rates fall significantly below the
interest rates on such loans, the loans are likely to be subject to higher
prepayment rates than if prevailing interest rates remained at or above the
rates borne by such loans. Conversely, if prevailing interest rates rise above
the interest rates on such home equity loans, the rate of prepayment would be
expected to decrease.
The percentages and weighted average lives in the following tables were
determined assuming that: (i) scheduled interest and principal payments on the
Loans are received in a timely manner and prepayments are made at the
indicated percentages of the model as described below set forth in the table;
(ii) the Servicer exercises its option to repurchase the Loans, as described
under "Description of the Certificates--Repurchase Option;" (iii) the
aggregate principal balance of the Initial Loans as of the Cut-off Date is
$ and such Loans have the characteristics set forth under "The
Loans--Fixed-Rate Loans" and "The Loans--Adjustable Rate Loans;" (iv) the
Initial Fixed-Rate Loans will, as of the Cut-off Date, be grouped into seven
pools having the additional characteristics set forth below under "Assumed
Initial Fixed-Rate Loan Characteristics" and the Additional and Subsequent
Fixed-Rate Loans will, as of the Cut-off Date, be grouped into pools having
the additional characteristics set forth below under "Assumed Additional and
Subsequent Fixed-Rate Loan Characteristics;" (v) the Adjustable Rate Loans
will, as of the Cut-off Date, be grouped into seven pools having the
additional characteristics set forth below under "Assumed Adjustable Rate Loan
Characteristics"; (vi) each Class of the Certificates (other than the Class A-
5 IO Certificates) has an Original Principal Balance as shown on the cover
page of this Prospectus Supplement; (vii) the rate for one-month LIBOR is
% and the rate for six-month LIBOR is %, (viii) the Subsequent Loans
will have their first scheduled payment date in or 1998; (ix) no
interest shortfalls will arise in connection with prepayments in full of the
Loans; (x) no delinquencies or losses are experienced on the Loans;
(xi) distributions are made on the Certificates on the 15th day of each month,
commencing in 1998; and (xii) the Certificates are issued on , 1998.
No representation is made that the Loans will not experience delinquencies or
losses.
S-40
<PAGE>
Prepayments on home equity loans are commonly measured relative to a
prepayment standard or model. Two different models (each a "Prepayment
Assumption") are used in this Prospectus Supplement, one for the Adjustable
Rate Loans and the other for the Fixed-Rate Loans. Reference in this
Prospectus Supplement to a "Prepayment Assumption" shall refer to the
appropriate model, depending upon whether the reference is with respect to the
Adjustable Rate Loans or the Fixed-Rate Loans.
The percentages and weighted average life information for the Class A-1 ARM
Certificates in the following table are based on a CPR model that assumes that
the outstanding principal balance of the Adjustable Rate Loans will prepay at
the indicated percentages of CPR set forth in the table.
The Prepayment Assumption used for the Fixed-Rate Loans represents an
assumed rate of prepayment each month relative to the then outstanding
principal balance of a pool of home equity loans for the life of such home
equity loans. The "100% Prepayment Assumption" assumes a constant prepayment
of 4% per annum of the then outstanding principal balance of such loans in the
first month of the life of such loans and an additional 1.45% (precisely,
16/11%) per annum in each month thereafter until the twelfth month. Beginning
in the twelfth month and in each month thereafter during the life of such
loans, the 100% Prepayment Assumption assumes a constant prepayment rate of
20% per annum each month.
It is not likely that the Loans will prepay at any constant percentage of
the Prepayment Assumption or of the CPR to maturity or that all of the Loans
will prepay at the same rate.
Investors are urged to make their investment decisions on a basis that
includes their determination as to anticipated prepayment rates under a
variety of the assumptions discussed herein.
PREPAYMENT SCENARIOS
<TABLE>
<CAPTION>
SCENARIO I SCENARIO II SCENARIO III SCENARIO IV SCENARIO V
---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Adjustable Rate Loans
(1)....................
Fixed-Rate Loans (2)....
</TABLE>
- --------
(1) As a CPR percentage.
(2) As a percentage of the Prepayment Assumption.
ASSUMED INITIAL FIXED-RATE LOAN CHARACTERISTICS
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED BALLOON LOAN
WEIGHTED AVERAGE AVERAGE WEIGHTED
CUT-OFF DATE AVERAGE REMAINING TERM ORIGINAL TERM AVERAGE
POOL PRINCIPAL LOAN TO MATURITY TO MATURITY AMORTIZATION
POOL BALANCE RATE (MONTHS) (MONTHS) TERM
- ---- -------------- -------- -------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
1. .......... $ %
2. ..........
3. ..........
4. ..........
5. ..........
6. ..........
7. ..........
</TABLE>
S-41
<PAGE>
ASSUMED ADDITIONAL AND SUBSEQUENT FIXED-RATE LOAN CHARACTERISTICS
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED BALLOON LOAN
WEIGHTED AVERAGE AVERAGE WEIGHTED
CUT-OFF DATE AVERAGE REMAINING TERM ORIGINAL TERM AVERAGE
POOL PRINCIPAL LOAN TO MATURITY TO MATURITY AMORTIZATION
POOL BALANCE RATE (MONTHS) (MONTHS) TERM
- ---- -------------- -------- -------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
1. ......... $ %
2. .........
3. .........
4. .........
5. .........
6. .........
7. .........
8. .........
9. .........
10. .........
11. .........
12. .........
13. .........
14. .........
</TABLE>
ASSUMED ADJUSTABLE RATE LOAN CHARACTERISTICS
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
AVERAGE AVERAGE
WEIGHTED REMAINING ORIGINAL WEIGHTED
CUT-OFF DATE AVERAGE TERM TO TERM TO AVERAGE MONTH(S) INITIAL
POOL PRINCIPAL LOAN MATURITY MATURITY GROSS LIFE LIFE PERIODIC TO RATE PERIODIC
POOL BALANCE RATE (MONTHS) (MONTHS) MARGIN CAP FLOOR CAP CHANGE CAP
- ---- -------------- -------- --------- -------- -------- ------ ------ -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. ..................... $ % % % % %
2. .....................
3. .....................
4. .....................
5. .....................
6. .....................
7. .....................
</TABLE>
S-42
<PAGE>
Based on the foregoing assumptions, the following tables indicated the
projected weighted average lives of each Class of Certificates, and set forth
the percentages of the Original Principal Balance of each Class that would be
outstanding after each of the dates shown, at the indicated percentages of the
applicable Prepayment Assumption.
PERCENTAGE OF THE ORIGINAL PRINCIPAL BALANCE OF THE CLASS A-1 ARM
CERTIFICATES AT THE RESPECTIVE PERCENTAGES OF THE
CPR SET FORTH BELOW:
<TABLE>
<CAPTION>
SCENARIO I SCENARIO II SCENARIO III SCENARIO IV SCENARIO V
---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Initial Percentage...... % % % % %
, 1999........
, 2000........
, 2001........
, 2002........
, 2003........
, 2004........
, 2005........
, 2006........
, 2007........
, 2008........
, 2009........
Weighted Average Life
(1) (years)............
</TABLE>
- --------
(1) The weighted average life of a Class A-1 ARM Certificate is determined by
(i) multiplying the amount of cash distributions in reduction of the
principal balance of such Certificate by the number of years from the date
of issuance of such Class A-1 ARM Certificate to the stated Payment Date,
(ii) adding the results, and (iii) dividing the sum by the initial
principal balance of such Class A-1 ARM Certificate.
PERCENTAGE OF THE ORIGINAL PRINCIPAL BALANCE OF THE CLASS A-1
CERTIFICATES AT THE RESPECTIVE PERCENTAGES OF THE
PREPAYMENT ASSUMPTION SET FORTH BELOW:
<TABLE>
<CAPTION>
SCENARIO I SCENARIO II SCENARIO III SCENARIO IV SCENARIO V
---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Initial Percentage...... % % % % %
, 1999........
, 2000........
, 2001........
Weighted Average Life
(1) (years)............
</TABLE>
- --------
(1) The weighted average life of a Class A-1 Certificate is determined by (i)
multiplying the amount of cash distributions in reduction of the principal
balance of such Certificate by the number of years from the date of
issuance of such Class A-1 Certificate to the stated Payment Date, (ii)
adding the results, and (iii) dividing the sum by the initial principal
balance of such Class A-1 Certificate.
S-43
<PAGE>
PERCENTAGE OF THE ORIGINAL PRINCIPAL BALANCE OF THE CLASS A-2 CERTIFICATES AT
THE RESPECTIVE PERCENTAGES OF THE PREPAYMENT ASSUMPTION SET FORTH BELOW:
<TABLE>
<CAPTION>
SCENARIO I SCENARIO II SCENARIO III SCENARIO IV SCENARIO V
---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Initial Percentage...... % % % % %
, 1999........
, 2000........
,2001.........
, 2002........
, 2003........
, 2004........
Weighted Average Life
(1) (years)............
</TABLE>
- --------
(1) The weighted average life of a Class A-2 Certificate is determined by (i)
multiplying the amount of cash distributions in reduction of the principal
balance of such Certificate by the number of years from the date of
issuance of such Class A-2 Certificate to the stated Payment Date, (ii)
adding the results, and (iii) dividing the sum by the initial principal
balance of such Class A-2 Certificate.
PERCENTAGE OF THE ORIGINAL PRINCIPAL BALANCE OF THE CLASS A-3 CERTIFICATES AT
THE RESPECTIVE PERCENTAGES OF THE PREPAYMENT ASSUMPTION SET FORTH BELOW:
<TABLE>
<CAPTION>
DATE SCENARIO I SCENARIO II SCENARIO III SCENARIO IV SCENARIO V
- ---- ---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Initial Percentage...... % % % % %
, 1999........
, 2000........
, 2001........
, 2002........
, 2003........
, 2004........
, 2005........
, 2006........
, 2007........
, 2008........
Weighted Average Life
(1) (years)............
</TABLE>
- --------
*less than 1%.
(1) The weighted average life of a Class A-3 Certificate is determined by (i)
multiplying the amount of cash distributions in reduction of the principal
balance of such Certificate by the number of years from the date of
issuance of such Class A-3 Certificate to the stated Payment Date, (ii)
adding the results, and (iii) dividing the sum by the initial principal
balance of such Class A-3 Certificate.
S-44
<PAGE>
PERCENTAGE OF THE ORIGINAL PRINCIPAL BALANCE OF THE CLASS A-4 CERTIFICATES AT
THE RESPECTIVE PERCENTAGES OF THE PREPAYMENT ASSUMPTION SET FORTH BELOW:
<TABLE>
<CAPTION>
DATE SCENARIO I SCENARIO II SCENARIO III SCENARIO IV SCENARIO V
- ---- ---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Initial Percentage...... % % % % %
, 1999........
, 2000........
, 2001........
, 2002........
, 2003........
, 2004........
, 2005........
, 2006........
, 2007........
, 2008........
Weighted Average Life
(1) (years)............
</TABLE>
- --------
(1) The weighted average life of a Class A-4 Certificate is determined by (i)
multiplying the amount of cash distributions in reduction of the principal
balance of such Certificate by the number of years from the date of
issuance of such Class A-4 Certificate to the stated Payment Date, (ii)
adding the results, and (iii) dividing the sum by the initial principal
balance of such Class A-4 Certificate.
PERCENTAGE OF THE ORIGINAL PRINCIPAL BALANCE OF THE CLASS M-1
CERTIFICATES AT THE RESPECTIVE PERCENTAGES OF THE
PREPAYMENT ASSUMPTION SET FORTH BELOW:
<TABLE>
<CAPTION>
DATE SCENARIO I SCENARIO II SCENARIO III SCENARIO IV SCENARIO V
- ---- ---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Initial Percentage...... % % % % %
, 1999........
, 2000........
, 2001........
, 2002........
, 2003........
, 2004........
, 2005........
, 2006........
, 2007........
, 2008........
, 2009........
, 2010........
Weighted Average Life
(1) (years)............
</TABLE>
- --------
(1) The weighted average life of a Class M-1 Certificate is determined by (i)
multiplying the amount of cash distributions in reduction of the principal
balance of such Certificate by the number of years from the date of
issuance of such Class M-1 Certificate to the stated Payment Date, (ii)
adding the results, and (iii) dividing the sum by the initial principal
balance of such Class M-1 Certificate.
S-45
<PAGE>
PERCENTAGE OF THE ORIGINAL PRINCIPAL BALANCE OF THE CLASS M-2 CERTIFICATES AT
THE RESPECTIVE PERCENTAGES OF THE PREPAYMENT ASSUMPTION SET FORTH BELOW:
<TABLE>
<CAPTION>
DATE SCENARIO I SCENARIO II SCENARIO III SCENARIO IV SCENARIO V
- ---- ---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Initial Percentage...... % % % % %
, 1999........
, 2000........
, 2001........
, 2002........
, 2003........
, 2004........
, 2005........
, 2006........
, 2007........
, 2008........
, 2009........
, 2010........
Weighted Average Life
(1) (years)............
</TABLE>
- --------
(1) The weighted average life of a Class M-2 Certificate is determined by (i)
multiplying the amount of cash distributions in reduction of the principal
balance of such Certificate by the number of years from the date of
issuance of such Class M-2 Certificate to the stated Payment Date, (ii)
adding the results, and (iii) dividing the sum by the initial principal
balance of such Class M-2 Certificate.
PERCENTAGE OF THE ORIGINAL PRINCIPAL BALANCE OF THE CLASS B
CERTIFICATES AT THE RESPECTIVE PERCENTAGES OF THE
PREPAYMENT ASSUMPTION SET FORTH BELOW:
<TABLE>
<CAPTION>
DATE SCENARIO I SCENARIO II SCENARIO III SCENARIO IV SCENARIO V
- ---- ---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Initial Percentage...... % % % % %
, 1999........
, 2000........
, 2001........
, 2002........
, 2003........
, 2004........
, 2005........
, 2006........
, 2007........
Weighted Average Life
(1) (years)............
</TABLE>
- --------
(1) The weighted average life of a Class B Certificate is determined by (i)
multiplying the amount of cash distributions in reduction of the principal
balance of such Certificate by the number of years from the date of
issuance of such Class B Certificate to the stated Payment Date, (ii)
adding the results, and (iii) dividing the sum by the initial principal
balance of such Class B Certificate.
S-46
<PAGE>
GREEN TREE FINANCIAL CORPORATION
GENERAL
The following information supplements, and to the extent inconsistent
therewith supersedes, the information in the Prospectus under the heading
"Green Tree Financial Corporation."
The Company is a Delaware corporation which, as of December 31, 1997, had
stockholders' equity of approximately $1,330,759,044. 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 (651) 293-3400).
The Company's quarterly and annual reports, which are incorporated by
reference in this Prospectus Supplement and in the Prospectus, are available
from the Company upon written request made to the Company.
RATIO OF EARNINGS TO FIXED CHARGES FOR THE COMPANY
Set forth below are the Company's ratios of earnings to fixed charges for
the past five years. For the purposes of compiling these ratios, earnings
consist of earnings before income taxes plus fixed charges. Fixed charges
consist of interest expense and the interest portion of rent expense.
<TABLE>
<CAPTION>
MONTHS
YEAR ENDED DECEMBER 31, ENDED
------------------------ ----------------------
1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Ratio of Earnings to Fixed
Charges...................... 4.81 7.98 7.90 5.44 4.04
</TABLE>
RECENT DEVELOPMENTS
On June 30, 1998, Green Tree became a wholly owned subsidiary of Conseco,
Inc., pursuant to a Merger Agreement announced on April 7, 1998. Green Tree
will continue to operate from its existing headquarters in St. Paul,
Minnesota, and its 200 local offices throughout the country. Lawrence M. Coss,
Green Tree's Chairman and Chief Executive Officer, has agreed to continue to
manage Green Tree's business for at least one year. Headquartered in Carmel,
Indiana, Conseco is among the nation's leading providers of supplemental
health insurance, retirement annuities and universal life insurance.
On July 6, 1998, Conseco announced a second-quarter charge of $498 million,
net of income taxes, related to the acquisition of Green Tree. The charges are
directly related to (1) $148 million in merger-related costs, and (2) a $350
million non-cash supplemental reserve against the valuation of Green Tree's
interest-only securities and servicing rights.
Green Tree has been served with various lawsuits in the United States
District Court for the District of Minnesota. These lawsuits were filed by
certain stockholders of Green Tree as purported class actions on behalf of
persons or entities who purchased common stock of Green Tree during the
alleged class periods. In addition to Green Tree, certain current and former
officers and directors of Green Tree are named as defendants in one or more of
the lawsuits. Green Tree and the other defendants intend to seek consolidation
of each of the lawsuits in the United States District Court for the District
of Minnesota. Plaintiffs in the lawsuits assert claims under Sections 10(b)
and 20(a) of the Securities Exchange Act of 1934. In each case, plaintiffs
allege that Green Tree and the other defendants violated federal securities
laws by, among other things, making false and misleading statements about the
current state and future prospects of Green Tree (particularly with respect to
prepayment assumptions and performance of certain of Green Tree's loan
portfolios) which allegedly rendered Green Tree's financial statements false
and misleading. Green Tree believes that the lawsuits are without merit and
intends to defend such lawsuits vigorously.
S-47
<PAGE>
DESCRIPTION OF THE CERTIFICATES
The following information supplements, and to the extent inconsistent
therewith supersedes, the information in the Prospectus under "Description of
the Certificates."
The Certificates will be issued pursuant to the Agreement between the
Company, as Seller and Servicer, and the Trustee. A copy of the execution form
of the Agreement will be filed in a Current Report on Form 8-K with the
Securities and Exchange Commission after the initial issuance of the
Certificates. The following summary describes the material provisions of the
Agreement, reference to which is hereby made for a complete recital of its
terms.
GENERAL
The Certificates will be issued in fully registered, certificated form only
in minimum denominations of $1,000 or any integral multiple in excess thereof.
The Certificates initially will be represented by certificates registered in
the name of Cede as the nominee of DTC, and will only be available in the form
of book-entries on the records of DTC and participating members thereof. See
"Description of the Certificates--Registration of the Certificates" herein.
The Trust consists primarily of the Loans and the rights, benefits,
obligations and proceeds arising therefrom or in connection therewith,
including liens on the related real estate and amounts held in the Certificate
Account.
Distributions on the Certificates will be made by the Paying Agent (which
shall initially be the Trustee) on each Payment Date to persons in whose names
the Certificates are registered as of the Business Day immediately preceding
such Payment Date (the "Record Date"). See "Description of the Certificates--
Registration of the Certificates" herein. The first Payment Date for the
Certificates will be in 1998. Payments will be made by check mailed to
such Certificateholder at the address appearing on the Certificate Register
(except that a Certificateholder who holds an aggregate Percentage Interest of
at least 5% of a Class of Certificates may request payment in respect of its
Percentage Interest in such Class by wire transfer). Final payments will be
made only upon tender of the Certificates to the Trustee for cancellation.
CONVEYANCE OF LOANS
On the Closing Date, the Company will establish the Trust and transfer,
assign, set over and otherwise convey to the Trust all right, title and
interest of the Company in the Initial and Additional Loans, including all
principal and interest received on or with respect to such Loans (other than
receipts of principal and interest due on such Loans before the Cut-off Date).
The Agreement permits the Trust to purchase up to approximately $
aggregate principal balance of Subsequent Loans on or within 90 days after the
Closing Date on one or more closing dates (each a "Subsequent Transfer Date").
See "--Conveyance of Subsequent Loans and Pre-Funding Account" herein.
On behalf of the Trust, as the issuer of the Certificates offered hereby,
the Trustee, concurrently with each conveyance, will execute and deliver the
Certificates to or upon the order of the Company. The Loans will be described
on a list delivered to the Trustee and certified by a duly authorized officer
of the Company. 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. The list will be attached as an
exhibit to the Agreement and will be available for inspection by any
Certificateholder at the principal office of the Company. Prior to the
conveyance of the Loans to the Trust, the Company will have completed a review
of all the Loan files, confirming the accuracy of each item on the list of
Loans delivered to the Trustee. Any Loan discovered not to agree with such
list in a manner that is materially adverse to the interests of the
Certificateholders will be repurchased by the Company, or, if the discrepancy
relates to the unpaid principal balance of a Loan, the Company may deposit
cash in the Certificate Account in an amount sufficient to offset such
discrepancy.
The Trustee will maintain possession of the Loans and any other documents
contained in the Loan files. Uniform Commercial Code financing statements will
be filed in Minnesota, reflecting the conveyance and assignment of the Loans
to the Trustee, and the Company's accounting records and computer systems will
also reflect such conveyance and assignment.
[Name of Company Counsel], counsel to the Company, will render an opinion to
the Trustee that the transfer of the Loans from the Company to the Trust
would, in the event the Company became a debtor under
S-48
<PAGE>
the United States Bankruptcy Code, be treated as a true sale and not as a
pledge to secure borrowings. If, however, the transfer of the Loans from the
Company to the Trust were treated as a pledge to secure borrowings by the
Company, the distribution of proceeds of the Loans to the Trust might be
subject to the automatic stay provisions of the United States Bankruptcy Code,
which would delay the distribution of such proceeds for an uncertain period of
time. In addition, a bankruptcy trustee would have the power to sell the Loans
if the proceeds of such sale could satisfy the amount of the debt deemed owed
by the Company, or the bankruptcy trustee could substitute other collateral in
lieu of the Loans to secure such debt, or such debt could be subject to
adjustment by the bankruptcy trustee if the Company were to file for
reorganization under Chapter 11 of the United States Bankruptcy Code.
The Company will make certain representations and warranties in the
Agreement with respect to each Loan, including that: (a) for each Loan other
than the Subsequent Loans, as of the applicable Cut-off Date, the most recent
scheduled payment was made or was not delinquent more than 59 days; (b) for
each Subsequent Loan, as of the respective Subsequent Cut-off Date, the most
recent scheduled payment was made or was not delinquent more than 59 days; (c)
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; (d) 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); (e) no Loan is subject to any right of rescission, set-off,
counterclaim or defense; (f) each Loan was originated by a home equity lender
in the ordinary course of its business or was originated by the Company
directly; (g) 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; (h) each Loan
complies with all requirements of law; (i) no Loan has been satisfied,
subordinated to a lower lien ranking than its original position (if any) or
rescinded; (j) each Loan creates a valid and perfected lien on the related
real estate; (k) all parties to each Loan had full legal capacity to execute
such Loan; (l) 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; (m) 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 clauses (a) and (b) 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; (n) each Loan is a fully-
amortizing loan and provides for level monthly payments based on its
applicable Loan Rate, except, in the case of a Balloon Loan, for the final
monthly payment, over the term of such Loan; (o) 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; (p) the
description of each Loan set forth in the list delivered to the Trustee is
true and correct; (q) there is only one original of each Loan; (r) each Loan
was originated or purchased in accordance with the Company's then-current
underwriting guidelines; and (s) each Loan is a "qualified mortgage" under
section 860G(a)(3) of the Internal Revenue Code of 1986, as amended.
The Company will also make certain representations and warranties with
respect to the Loans in the aggregate, including that (i) each Loan (other
than the Adjustable Rate Loans) has a contractual rate of interest of at least
7.70%; (ii) no Loan had a remaining term to maturity at origination of more
than 360 months; (iii) no more than 1% of the Loans, by principal balance as
of the Cut-off Date, were secured by properties located in an area with the
same zip code; (iv) no more than 5.0% of the Loans, by principal balance as of
the Cut-off Date, were originated by any one lender; and (v) no adverse
selection procedures were employed in selecting the Loans from the Company's
portfolio. The Company will make certain additional representations and
warranties with respect to the Subsequent Loans. See "--Conveyance of
Subsequent Loans and Pre-Funding Account" herein.
Under the terms of the Agreement, and subject to the Company's option to
effect a substitution as described in the next paragraph, the Company has
agreed to repurchase, at the Repurchase Price, any Loan that is materially and
adversely affected by a breach of a representation and warranty with respect
to such Loan made in the Agreement if such breach has not been cured within 90
days of the day it was or should have been discovered by the Servicer or the
Trustee. The "Repurchase Price," with respect to any Loan to be so repurchased
or with respect to a Liquidated Loan, means the outstanding principal balance
of such Loan (without giving effect to any
S-49
<PAGE>
Advances made by the Servicer or the Trustee), plus interest on such Loan at
the Pass-Through Rate (which will be the weighted average of the Pass-Through
Rates of the related Classes of Certificates) from the end of the Due Period
with respect to which the Obligor last made a scheduled payment (without
giving effect to any Advances made by the Servicer or the Trustee) through the
date of such repurchase or liquidation. This repurchase obligation constitutes
the sole remedy available to the Trust and the Certificateholders for a breach
of a representation or warranty under the Agreement with respect to the Loans
(but not with respect to any other breach by the Company of its obligations
under the Agreement).
In lieu of repurchasing a Loan as specified in the preceding paragraph,
during the two-year period following the Closing Date, the Company may, at its
option, substitute an Eligible Substitute Loan (as defined below) for the Loan
that it is otherwise obligated to repurchase (referred to herein as the
"Replaced Loan"). An Eligible Substitute Loan is a Loan that satisfies, as of
the date of its substitution, the representations and warranties specified in
Article III of the Agreement, has a Scheduled Principal Balance that is not
greater than the Scheduled Principal Balance of the Replaced Loan, has a Loan
Rate that is at least equal to the Loan Rate of the Replaced Loan and has a
remaining term to scheduled maturity that is not greater than the remaining
term to scheduled maturity of the Replaced Loan. The Company will be required
to deposit in the Certificate Account cash in the amount, if any, by which the
Scheduled Principal Balance of the Replaced Loan exceeds the Scheduled
Principal Balance of the Loan being substituted. Such deposit will be deemed
to be a Partial Principal Prepayment.
Pursuant to the Agreement, the Servicer will service and administer the
Loans conveyed and assigned to the Trustee as more fully set forth below.
CONVEYANCE OF SUBSEQUENT LOANS AND PRE-FUNDING ACCOUNT
An account (the "Pre-Funding Account") will be established by the Trustee
and funded by the Company with up to approximately $ (the "Pre-Funded
Amount") on the Closing Date to provide the Trust with sufficient funds to
purchase Subsequent Loans. The Pre-Funding Account will be used to purchase
Subsequent Loans during the period from the Closing Date until the earliest of
(i) the date on which the amount on deposit in the Pre-Funding Account is less
than $ , (ii) days after the Closing Date or (iii) the date on which
an Event of Termination occurs under the Agreement (the "Funding Period"). The
Pre-Funded Amount will be reduced during the Funding Period by the amount used
to purchase Subsequent Loans in accordance with the Agreement.
Under the Agreement, the Trust will be obligated to purchase Subsequent
Loans from the Company during the Funding Period, subject to the availability
thereof. In connection with the purchase of Subsequent Loans on such dates of
transfer (the "Subsequent Transfer Dates"), the Trust will be required to pay
to the Company from amounts on deposit in the Pre-Funding Account a cash
purchase price of % of the principal balance thereof. The Company will
designate the Subsequent Transfer Date as the cut-off date (the "Subsequent
Cut-off Date") with respect to the related Subsequent Loans purchased on such
date. The amount paid from the Pre-Funding Account on each Subsequent Transfer
Date will not include accrued interest on the related Subsequent Loans.
Following each Subsequent Transfer Date, the aggregate principal balance of
the Subsequent Loans will increase by an amount equal to the aggregate
principal balance of the Loans so purchased and the amount in the Pre-Funding
Account will decrease accordingly.
Any Pre-Funded Amount remaining after the end of the Funding Period will be
applied on the next Payment Date to prepay principal on the Class A
Certificates (other than the Class A-5 IO Certificates). Any amounts remaining
which had been allocated to the purchase of Subsequent Adjustable Rate Loans
will be paid to the Class A-1 ARM Certificateholders and any amounts remaining
which had been allocated to the purchase of Subsequent Fixed-Rate Loans will
be paid on a pro rata basis to the Class A-1, Class A-2, Class A-3 and
Class A-4 Certificateholders. Although no assurance can be given, the Company
anticipates that the principal amount of the related Subsequent Loans
purchased by the Trust will require the application of substantially all of
the related Pre-Funded Amount (as defined herein) and that there should be no
material amount of principal prepaid to the Class A Certificateholders from
the Pre-Funding Account. However, it is unlikely that the Company will be able
to deliver Subsequent Loans with an aggregate principal balance identical to
the remaining Pre-Funded Amount.
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<PAGE>
Any conveyance of Subsequent Loans on a Subsequent Transfer Date is subject
to certain conditions including, but not limited to: (a) each Subsequent Loan
must satisfy the representations and warranties specified in the related
subsequent transfer instrument and the Agreement; (b) the Company may not
select Subsequent Loans in a manner that it believes is adverse to the
interests of the Certificateholders; (c) as of the respective Subsequent Cut-
off Date the Subsequent Loans must satisfy the following criteria: (i) no
Subsequent Loan may be more than 59 days contractually delinquent as of the
related Subsequent Cut-off Date; (ii) the remaining stated term to maturity of
each Subsequent Loan may not exceed 360 months; (iii) each Subsequent Loan
must have been underwritten in accordance with the Company's standard
underwriting criteria; (iv) no Subsequent Loan may have a loan-to-value ratio
greater than 100%; (v) as a result of the purchase of the Subsequent Loans,
the Class A Certificates will not receive from S&P or Fitch a lower credit
rating than the rating assigned at the initial issuance of such Certificates;
and (vi) an independent accountant will provide a letter stating whether or
not the characteristics of the Subsequent Loans conform to the characteristics
described herein.
PAYMENTS ON LOANS
The Servicer, on behalf of the Trust, will establish and maintain a
Certificate Account in an "Eligible Account" (as defined below) at a
depository institution (initially [Name of Depository Institution], Minnesota)
with trust powers organized under the laws of the United States or any state,
the deposits of which are insured to the full extent permitted by law by the
Federal Deposit Insurance Corporation (the "FDIC"), whose short-term deposits
have been rated A-1 by S&P and F-1 by Fitch (if rated by Fitch) or whose
unsecured long-term debt has been rated in one of the two highest rating
categories by S&P and Fitch (if rated by Fitch), and which is subject to
supervision and examination by federal or state authorities (an "Eligible
Institution"). "Eligible Account" means, at any time, an account which is any
of the following: (i) an account maintained with an Eligible Institution; (ii)
an account or accounts the deposits in which are fully insured by either the
Bank Insurance Fund or the Savings Association Insurance Fund of the FDIC;
(iii) a segregated trust account maintained with the corporate trust
department of a federal or state chartered depository institution or trust
company with trust powers and acting in its fiduciary capacity for the benefit
of the Trustee, which depository institution or trust company has capital and
surplus of not less than $50,000,000; or (iv) an account that will not cause
S&P or Fitch to downgrade or withdraw its then-current rating assigned to the
Certificates, as evidenced in writing by S&P and Fitch. The Servicer may
authorize the Trustee to invest the funds in the Certificate Account in
Eligible Investments (as defined in the Agreement) that will mature not later
than the Business Day preceding the applicable monthly Payment Date. Such
Eligible Investments include, among other investments, obligations of the
United States or of any agency thereof backed by the full faith and credit of
the United States, federal funds, certificates of deposit, time deposits and
bankers acceptances sold by eligible commercial banks; any other demand or
time deposit or certificate of deposit fully insured by the FDIC; investments
in certain money-market funds; certain repurchase agreements of United States
government securities with eligible commercial banks; securities bearing
interest or sold at a discount issued by a corporation which has a credit
rating of at least "AA" from S&P and Fitch (if rated by Fitch) not in excess
of 10% of amounts in the Certificate Account at the time of such investment;
and commercial paper assigned a rating of at least A-1+ by S&P and at least F-
1+ by Fitch (if rated by Fitch). Any losses on such investments will be
deducted from other investment earnings or from other funds in the Certificate
Account.
All receipts by the Servicer of payments with respect to the Loans,
including Principal Prepayments and advance payments by Obligors not
constituting Principal Prepayments ("Advance Payments"), shall be paid into
the Certificate Account no later than one Business Day following receipt
thereof, except amounts received as extension fees or assumption fees not
allocated to regular installments due on Loans, which are retained by the
Servicer as part of its servicing fees and are not paid into the Certificate
Account and except for certain proceeds from Liquidated Loans which are used
to reimburse the Servicer for customary out-of-pocket liquidation expenses.
See "Description of the Certificates--Servicing Compensation and Payment of
Expenses" herein. In addition, all payments under FHA Insurance received by
the Servicer, any Advances by the Servicer or the Trustee as described under
"Description of the Certificates--Advances," and amounts paid by the Company
for Loans repurchased, or upon substitution for a Loan otherwise required to
be repurchased, as a result of breach of
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<PAGE>
warranties under the Agreement, as described under "Description of the
Certificates--Conveyance of Loans," shall be paid into the Certificate
Account.
On the second Business Day preceding each Payment Date (the "Determination
Date"), the Servicer will determine the Amount Available in the Certificate
Account and the amount of funds necessary to make all payments to be made on
the next Payment Date from the Certificate Account. Not later than one
Business Day after the Determination Date, the Company will deposit in the
Certificate Account the Repurchase Price of any Loans required to be
repurchased on such Payment Date, or any amounts required to be deposited upon
substitution for any Loan otherwise required to be repurchased on such
Purchase Date, as a result of a breach of representations and warranties under
the Agreement.
On each Payment Date the Trustee will withdraw the Amount Available from the
Certificate Account and make the following payments, in the following order of
priority:
(a) if neither the Company nor any wholly owned subsidiary of the Company
is the Servicer, to pay the Monthly Servicing Fee with respect to the Loans
to the Servicer;
(b) to pay interest and principal on the Certificates, in the manner and
the order of priority described below;
(c) if the Company or any wholly owned subsidiary of the Company is the
Servicer, to pay the Monthly Servicing Fee to the Servicer with respect to
the Loans;
(d) to reimburse the Servicer or the Trustee, as applicable, for any
unreimbursed Advances with respect to the Loans made in respect of current
or prior Payment Dates;
(e) to reimburse the holder of the Class C Certificates for expenses
incurred by and reimbursable to it with respect to taxes or charges imposed
upon the Trust as a REMIC or otherwise; and
(f) to pay any remaining amounts to the holder of the Class C
Certificates.
The Scheduled Principal Balance of a Loan with respect to any Payment Date
is its principal balance as of the scheduled payment date (the "Due Date") in
the calendar month preceding such Payment Date as specified in its
amortization schedule, after giving effect to any previous partial Principal
Prepayments and to the scheduled payment due on such Due Date, but without
giving effect to any delinquency in payment or adjustments due to bankruptcy
or similar proceedings. The Pool Scheduled Principal Balance as of any Payment
Date is the aggregate of the Scheduled Principal Balances of Loans comprising
the Loan Pool that were outstanding during the preceding Due Period. A
Liquidated Loan is a defaulted Loan as to which all amounts that the Servicer
expects to recover on account of such Loan have been received.
DISTRIBUTIONS ON CERTIFICATES
On each Payment Date, distributions on the Certificates in respect of the
Amount Available will be made first to the holders of the Class A
Certificates, then to the holders of the Class M-1 Certificates, then to the
holders of the Class M-2 Certificates and then to the holders of the Class B
Certificates, as described below. Distributions of interest and principal on
the Certificates will be made primarily from amounts available in respect of
the Loans.
Distributions of interest and principal to holders of a Class of Class A
Certificates will be made on each Payment Date, to the extent that the Amount
Available in the Certificate Account is sufficient therefor, in an amount
equal to the sum of (i) their respective Percentage Interests of the amount of
interest calculated as described under "Class A Interest" below, (ii) with
respect to the Class A-1 ARM Certificates, their respective Percentage
Interests of the Class A-1 ARM Formula Principal Distribution Amount and (iii)
with respect to each other Class of A Certificates (other than the Class A-5
IO Certificates), their respective Percentage Interests, distributed to each
Class of Class A Certificates in the order of priority described under "Class
A Principal" below, of the Senior Percentage of the Formula Principal
Distribution Amount, calculated as described under "Class A Principal" below.
Distributions on the Class A Certificates will be applied first to the payment
of
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<PAGE>
interest and then to the payment of principal. The Class A Distribution Amount
for any Payment Date is intended to be equal to the sum (referred to as the
"Class A Formula Distribution Amount") of (i) the amount of interest
calculated as set forth under "Class A Interest" below, (ii) the Class A-1 ARM
Formula Principal Distribution Amount and (iii) the Senior Percentage of the
Formula Principal Distribution Amount, provided that, if the Class A Formula
Distribution Amount exceeds the Amount Available in the Certificate Account on
such Payment Date, then the Class A Distribution Amount shall instead equal
the Amount Available and the amount of such deficiency will be carried forward
and added to the amount the Class A Certificateholders will be entitled to
receive on the next Payment Date.
Distributions of interest and principal to holders of Class M-1 Certificates
will be made on each Payment Date in an amount equal to their respective
Percentage Interests multiplied by the Class M-1 Distribution Amount.
Distributions on the Class M-1 Certificates will be applied first to the
payment of interest and then to the payment of principal. The Class M-1
Distribution Amount for any Payment Date is intended to be equal to the sum
(referred to as the "Class M-1 Formula Distribution Amount") of (i) the amount
of interest calculated as set forth under "Class M-1 Interest" below and (ii)
after the Class A Principal Balance has been reduced to zero and until the
Class M-1 Principal Balance has been reduced to zero, the Senior Percentage of
the Formula Principal Distribution Amount. If the Amount Available in the
Certificate Account available for distribution to the Class M-1
Certificateholders (after giving effect to any distribution made to Class A
Certificateholders on such Payment Date) (the "Class M-1 Remaining Amount
Available") is less than the Class M-1 Formula Distribution Amount, then the
Class M-1 Distribution Amount will equal the Class M-1 Remaining Amount
Available and the amount of such deficiency will be carried forward and added
to the amount such holders will be entitled to receive on the next Payment
Date.
Distributions of interest and principal to holders of Class M-2 Certificates
will be made on each Payment Date in an amount equal to their respective
Percentage Interests multiplied by the Class M-2 Distribution Amount.
Distributions on the Class M-2 Certificates will be applied first to the
payment of interest and then to the payment of principal. The Class M-2
Distribution Amount for any Payment Date is intended to be equal to the sum
(referred to as the "Class M-2 Formula Distribution Amount") of (i) the amount
of interest calculated as set forth under "Class M-2 Interest" below and (ii)
after the Class M-1 Principal Balance has been reduced to zero and until the
Class M-2 Principal Balance has been reduced to zero, the Senior Percentage of
the Formula Principal Distribution Amount. If the Amount Available in the
Certificate Account available for distribution to the Class M-2
Certificateholders (after giving effect to any distribution made to Class A
Certificateholders and the Class M-1 Certificateholders on such Payment Date)
(the "Class M-2 Remaining Amount Available") is less than the Class M-2
Formula Distribution Amount, then the Class M-2 Distribution Amount will equal
the Class M-2 Remaining Amount Available and the amount of such deficiency
will be carried forward and added to the amount such holders will be entitled
to receive on the next Payment Date.
Distributions of interest and principal to holders of Class B Certificates
will be made on each Payment Date in an amount equal to their respective
Percentage Interests multiplied by the Class B Distribution Amount.
Distributions on the Class B Certificates will be applied first to the payment
of interest and then to the payment of principal. The Class B Distribution
Amount for any Payment Date is intended to be equal to the sum (referred to as
the "Class B Formula Distribution Amount") of (i) the amount of interest
calculated as set forth under "Class B Interest" below and (ii) until the
Class B Principal Balance has been reduced to zero, an amount of principal
equal to the Class B Percentage of the Formula Principal Distribution Amount.
If the Amount Available in the Certificate Account available for distribution
to the Class B Certificateholders (after giving effect to any distribution
made to Class A Certificateholders, Class M-1 Certificateholders and Class M-2
Certificateholders on such Payment Date) (the "Class B Remaining Amount
Available") is less than the Class B Formula Distribution Amount, then the
Class B Distribution Amount will equal the Class B Remaining Amount Available
and the amount of such deficiency will be carried forward and added to the
amount such holders will be entitled to receive on the next Payment Date.
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<PAGE>
On each Payment Date the Amount Available will be distributed to Class A
Certificateholders, then Class M Certificateholders and then Class B
Certificateholders in the amounts and order of priority set forth below:
Class A Interest
One month's interest will be paid concurrently to the holders of each Class
of Class A Certificates on each Payment Date, to the extent of the Amount
Available in the Certificate Account on such date, at the related Pass-Through
Rate on the then outstanding Principal Balance of each Class of Class A
Certificates, or in the case of the Class A-5 IO Certificates, on the Notional
Principal Amount. Interest on each Class of Class A Certificates will accrue
from the Closing Date, or from the most recent Payment Date on which interest
has been paid, to but excluding the following Payment Date. Interest on each
Class of Class A Certificates, other than the Class A-1 ARM Certificates, will
be computed on the basis of a 360-day year of twelve 30-day months. Interest
on the Class A-1 ARM Certificates will be computed on the basis of actual days
elapsed in a 360-day year.
The Pass-Through Rate for the Class A-1 ARM Certificates for any Payment
Date will equal the lesser of (i) one-month LIBOR plus the applicable Pass-
Through Margin, (ii) the applicable Available Funds Pass-Through Rate or (iii)
%. The Pass-Through Margin will equal % per annum through the Payment
Date on which the Principal Balance of the Loans is 10% or more of the
Principal Balance of the Loans as of the Cut-Off Date, and % per annum on
each Payment Date on which the Principal Balance of the Loans is less than %
of the Principal Balance of the Loans as of the Cut-Off Date. The Available
Funds Pass-Through Rate for any Payment Date is the rate per annum equal to
the weighted average of the Expense Adjusted Loan Rates on the then
outstanding Adjustable Rate Loans. The Expense Adjusted Loan Rate on any
Adjustable Rate Home Equity Loan is equal to the then applicable Loan Rate
thereon, minus the Expense Fee Rate. The Expense Fee Rate is % per annum.
One-month LIBOR with respect to any monthly interest period will equal the
offered rate for United States dollar deposits for one month that appears on
Telerate Page 3750 as of 11:00 A.M., London time, on the second LIBOR business
day prior to such monthly interest period. For a description of the method
used to calculate one-month LIBOR, see "Description of the Certificates--
Calculation of One-Month LIBOR."
The Pass-Through Rates for the Class A-1, Class A-2, Class A-3, Class A-4
and Class A-5 IO Certificates are set forth on the cover of this Prospectus
Supplement.
The Principal Balance of any Class of Class A Certificates (other than the
Class A-5 IO Certificates) as of any Payment Date is the Original Principal
Balance of such Class less all amounts previously distributed to holders of
such Class on account of principal. The Class A Principal Balance as of any
Payment Date is the sum of the Class A-1 ARM Principal Balance, the Class A-1
Principal Balance, the Class A-2 Principal Balance, the Class A-3 Principal
Balance and the Class A-4 Principal Balance.
Interest will be calculated on the Class A-5 IO Certificates on each Payment
Date based on the Notional Principal Amount, which for the first Payment
Dates is equal to $ (or the Class A Principal Balance for such
Payment Date, if less), and will thereafter equal zero. The Notional Principal
Amount provides a basis for calculating interest payments only, and does not
represent the right to receive any distributions of principal.
In the event that, on a particular Payment Date, the Amount Available in the
Certificate Account is not sufficient to make a full distribution of interest
to the holders of each Class of Class A Certificates, the amount of interest
to be distributed in respect of the Class A Certificates will be allocated
among each Class thereof (and within a Class among the Certificates of such
Class) pro rata in accordance with their respective entitlements to interest,
and the amount of the shortfall will be carried forward and added to the
amount such holders will be entitled to receive on the next Payment Date. Such
a shortfall could occur, for example, if delinquencies or losses realized on
the Loans were exceptionally high and were concentrated in a particular month.
Any such amount so carried forward will bear interest at the applicable Pass-
Through Rate for each Class of Class A Certificates, to the extent permitted
by law.
Class A Principal
Holders of a Class of Class A Certificates (other than the Class A-5 IO
Certificates) will be entitled to receive payments of principal on each
Payment Date in the order of priority set forth below and to the extent of
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<PAGE>
the Amount Available in the Certificate Account after payment of all interest
payable on each Class of Class A Certificates. Holders of the Class A-1 ARM
Certificates will be entitled to receive, as payments of principal, an amount
equal to the Class A-1 ARM Formula Principal Distribution Amount. The "Class
A-1 ARM Formula Principal Distribution Amount" on or before the Payment Date
on which the Class A-1 ARM Certificates have been paid in full will generally
be equal to the lesser of (A) the Class A-1 ARM Principal Balance or (B) the
sum of the following: (i) all scheduled payments of principal due on each
outstanding Adjustable Rate Loan during the related Due Period; (ii) the
Scheduled Principal Balance of each Adjustable Rate Loan which, during the
related Due Period, was purchased by the Company pursuant to the Agreement on
account of certain breaches of its representations and warranties; (iii) the
Scheduled Principal Balance of each Adjustable Rate Loan that became a
Liquidated Loan during the related Due Period; (iv) all partial Principal
Prepayments applied and Principal Prepayments in Full received on each
Adjustable Rate Loan during the related Due Period; and (v) on any Payment
Date which is on or after the Payment Date on which the Class A-1, A-2, A-3
and Class A-4 Certificates have been paid in full, (a) the Senior Percentage
times (x) the sum of the amounts described in clauses (i) through (vi) of
clause (A) of the definition of the Formula Principal Distribution Amount less
(y) the sum of the amounts described in clauses (i) through (iv) of clause (B)
of the definition of the Class A-1 ARM Formula Principal Distribution Amount
less (b) the amount, if any, distributed in payment of principal on the
Class A-1, A-2, A-3 and A-4 Certificates on such Payment Date.
The Class A-5 IO Certificates are interest-only Certificates and are not
entitled to receive distributions of principal.
Holders of the Class A Certificates (other than the Class A-1 ARM
Certificates and the Class A-5 IO Certificates) will be entitled to receive,
as payments of principal, an amount equal to the Senior Percentage of the
Formula Principal Distribution Amount. The Formula Principal Distribution
Amount is (A) the sum of (i) all scheduled payments of principal due on each
outstanding Loan during the related Due Period, (ii) the Scheduled Principal
Balance of each Loan which, during such Due Period, was purchased by the
Company pursuant to the Agreement on account of certain breaches of its
representations and warranties, (iii) all partial Principal Prepayments
applied and all Principal Prepayments in Full received during such Due Period
in respect of the Loans, (iv) the Scheduled Principal Balance of each Loan
that became a Liquidated Loan during such Due Period, (v) any amount described
in clauses (i) through (iv) above that was not previously distributed because
of an insufficient amount of funds available in the Certificate Account, and
(vi) the Extra Principal Distribution Amount (as described below), minus (B)
the Class A-1 ARM Formula Principal Distribution Amount. When the Principal
Balance of a Class of Class A Certificates is reduced to zero, no further
distributions of principal will be made to the holders of such Class.
The Extra Principal Distribution Amount is the lesser of (i) the Monthly
Excess Cashflow and (ii) $ less the sum of all prior distributions of
the Extra Principal Distribution Amount. The Monthly Excess Cashflow is, for
any Payment Date, the Amount Available less the sum of (a) the interest
payable on the Certificates; (b) the sum of the amounts described in clauses
(i) through (v) of clause (A) of the Formula Principal Distribution Amount;
(c) the Monthly Servicing Fee to be paid to the Servicer; (d) unreimbursed
Advances to the Trustee or the Servicer, as applicable, with respect to the
Loans made in respect of the current or prior Payment Dates; and (e) expenses
of the holder of the Class C Certificates incurred by and reimbursable to it
with respect to taxes or charges imposed upon the Trust as a REMIC or
otherwise.
The Senior Percentage will equal 100% on each Payment Date on which the
Class B Principal Distribution Test (as described below) is not satisfied. On
each Payment Date on which Class B Principal Distribution Test has been
satisfied, the Senior Percentage will equal a fraction, expressed as a
percentage, the numerator of which is the sum of the Class A Principal Balance
(excluding the Class A-1 ARM Principal Balance) and the Class M Principal
Balance for such Payment Date, and the denominator of which is the Pool
Scheduled Principal Balance of the Fixed-Rate Loans for the immediately
preceding Payment Date.
The Senior Percentage of the Formula Principal Distribution Amount will be
distributed, to the extent of the Amount Available after payment of interest
on each Class of Class A Certificates, as follows: (i) that portion,
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if any, of the Senior Percentage of the Formula Principal Distribution Amount
equal to the Class A-4 Lockout Pro Rata Distribution Amount will be
distributed to the Class A-4 Certificateholders; and (ii) the remainder of the
Senior Percentage of the Formula Principal Distribution Amount will be
distributed in the following order: first, to the Class A-1 Certificateholders
until the Class A-1 Principal Balance has been reduced to zero, then to the
Class A-2 Certificateholders until the Class A-2 Principal Balance has been
reduced to zero, then to the Class A-3 Certificateholders until the Class A-3
Principal Balance has been reduced to zero. After the Class A-3 Principal
Balance has been reduced to zero, Holders of the Class A-4 Certificates will
be entitled to receive the entire Senior Percentage of the Formula Principal
Distribution Amount up to the amount necessary to reduce the Class A-4
Principal Balance to zero, to the extent the remaining Amount Available is
sufficient therefor.
The Class A-4 Lockout Pro Rata Distribution Amount," as to any Payment Date,
is an amount equal to the lesser of:
(a) the product of (1) the Class A-4 Lockout Percentage, and (2) the
product of (A) a fraction, the numerator of which is the Class A-4
Principal Balance immediately preceding such Payment Date and the
denominator of which is the Class A Principal Balance less the Class A-1
ARM Principal Balance immediately preceding such Payment Date, and (B) the
Senior Percentage of the Formula Principal Distribution Amount for such
Payment Date, and
(b) the Class A-4 Principal Balance immediately preceding such Payment
Date.
The "Class A-4 Lockout Percentage," as to any Payment Date occurring during
the periods set forth below, is the percentage designated as such as follows:
<TABLE>
<CAPTION>
CLASS A-4
PERIOD (DATES INCLUSIVE) LOCKOUT PERCENTAGE
------------------------ ------------------
<S> <C>
1998 through 2001.......................... %
2001 through 2003.......................... %
2003 through 2004.......................... %
2004 through 2005.......................... %
2005 and thereafter................................. %
</TABLE>
On any Payment Date as to which there is a Class A Liquidation Loss
Principal Amount (which is the amount, if any, by which the Pool Scheduled
Principal Balance plus the Pre-Funded Amount is less than the Class A
Principal Balance), the remaining Amount Available will be distributed pro
rata to each Class of Class A Certificates (other than the Class A-5 IO
Certificates) based on the Class Principal Balance of each Class (but in no
event will such amount exceed the Class Principal Balance of any such Class).
If, as to any Payment Date, the Amount Available remaining after
distribution of interest on the Class A Certificates is less than the sum of
the Senior Percentage of the Formula Principal Distribution Amount and the
Class A-1 ARM Formula Principal Distribution Amount, the amounts to be
distributed to the Class A Certificateholders (including the Class A-1 ARM
Certificateholders but excluding the Class A-5 IO Certificates) will be
allocated pro rata based upon the respective portions of the Amount Available
that would have been distributed to the Class A Certificateholders, as
described above, had the remaining Amount Available been sufficient therefor.
As hereinafter described, all losses on Liquidated Loans will be absorbed
first by the Class C Certificates, then by the Monthly Servicing Fee otherwise
payable to the Servicer (so long as the Company or any wholly owned subsidiary
of the Company is the Servicer) with respect to the Loans, then by the Class B
Certificates, then by the Class M-2 Certificates and then by the Class M-1
Certificates. If the Amount Available on any Payment Date is less than the
Class A Distribution Amount, the Amount Available will be applied first to the
payment of interest on the Class A Certificates and then to the payment of
principal to the Classes of Class A Certificates then entitled thereto.
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<PAGE>
Class M-1 Interest
Interest will be paid to the Class M-1 Certificateholders on each Payment
Date, to the extent of the Class M-1 Remaining Amount Available, if any, in an
amount (the "Class M-1 Interest Payment Amount") equal to the product of (a)
the Class M-1 Pass-Through Rate and (b) the then outstanding Class M-1
Principal Balance less the Class M-1 Liquidation Loss Principal Amount, if
any. The "Class M-1 Liquidation Loss Principal Amount" as of any Payment Date
will equal the excess, if any, of the Aggregate Liquidation Loss Principal
Amount over the aggregate of the Principal Balances of the Class M-2
Certificates and the Class B Certificates (but in no event greater than the
Class M-1 Principal Balance). The "Aggregate Liquidation Loss Principal
Amount" as of any Payment Date will equal the excess, if any, of (i) the
aggregate Principal Balance of the Certificates as of the preceding Payment
Date (after giving effect to distributions of principal thereon) over (ii) the
Pool Scheduled Principal Balance for such preceding Payment Date plus the Pre-
Funded Amount for such preceding Payment Date. Interest on the outstanding
Class M-1 Principal Balance will accrue from the Closing Date, or from the
most recent Payment Date on which interest has been paid, to but excluding the
following Payment Date, and will be computed on the basis of a 360-day year of
twelve 30-day months. The Class M-1 Principal Balance is the Original Class M-
1 Principal Balance less the sum of all amounts previously distributed to
Class M-1 Certificateholders on account of principal. In the event that, on a
particular Payment Date, the Class M-1 Remaining Amount Available, plus other
funds in the Certificate Account available therefor, is not sufficient to make
a full distribution of the Class M-1 Interest Payment Amount to the Class M-1
Certificateholders, the amount of such interest to be distributed in respect
of the Class M-1 Certificates will be allocated among the Class M-1
Certificates pro rata in accordance with their respective entitlements to
interest, and any remaining deficiency will be carried forward and added to
the amount such holders will be entitled to receive on the next Payment Date.
Interest will accrue on the Class M-1 Liquidation Loss Principal Amount, if
any, and will be payable on the current or succeeding Payment Dates to the
extent of the Amount Available remaining after payment of the Class A
Distribution Amount, the Class M-1 Distribution Amount, the Class M-2
Distribution Amount and the Class B Distribution Amount. Any interest amounts
carried forward will bear interest at the Class M-1 Pass-Through Rate, to the
extent permitted by law.
The Class M-1 Pass-Through Rate is set forth on the cover of this Prospectus
Supplement, and will be computed on the basis of a 360-day year of twelve 30-
day months.
Class M-1 Principal
On each Payment Date after the Class A Principal Balance has been reduced to
zero, Class M-1 Certificateholders will be entitled to receive, as payments of
principal, the Senior Percentage of the Formula Principal Distribution Amount
(as described under "Class A Principal" above) to the extent of the Class M-1
Remaining Amount Available in the Certificate Account on such date, after
payment of all interest payable on the Class M-1 Certificates (other than in
respect of Class M-1 Liquidation Loss Principal Amounts), until the Class M-1
Principal Balance has been reduced to zero. On each Payment Date on which the
Class B Principal Distribution Test is satisfied, payments of principal will
be made to Class B Certificateholders, even if Class M-1 Certificateholders
are not yet entitled to receive payments of principal because the Class A
Principal Balance has not been reduced to zero.
Class M-2 Interest
Interest will be paid to the Class M-2 Certificateholders on each Payment
Date, to the extent of the Class M-2 Remaining Amount Available, if any, in an
amount (the "Class M-2 Interest Payment Amount") equal to the product of (a)
the Class M-2 Pass-Through Rate and (b) the then outstanding Class M-2
Principal Balance less the Class M-2 Liquidation Loss Principal Amount, if
any. The "Class M-2 Liquidation Loss Principal Amount" as of any Payment Date
will equal the excess, if any, of the Aggregate Liquidation Loss Principal
Amount over the Principal Balance of the Class B Certificates (but in no event
greater than the Class M-2 Principal Balance). Interest on the outstanding
Class M-2 Principal Balance will accrue from the Closing Date, or from the
most recent Payment Date on which interest has been paid, to but excluding the
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following Payment Date, and will be computed on the basis of a 360-day year of
twelve 30-day months. The Class M-2 Principal Balance is the Original Class M-
2 Principal Balance less the sum of all amounts previously distributed to
Class M-2 Certificateholders on account of principal. In the event that, on a
particular Payment Date, the Class M-2 Remaining Amount Available, plus other
funds in the Certificate Account available therefor, is not sufficient to make
a full distribution of the Class M-2 Interest Payment Amount to the Class M-2
Certificateholders, the amount of such interest to be distributed in respect
to the Class M-2 Certificates will be allocated among the Class M-2
Certificates pro rata in accordance with their respective entitlements to
interest, and any remaining deficiency will be carried forward and added to
the amount such holders will be entitled to receive on the next Payment Date.
Interest will accrue on the Class M-2 Liquidation Loss Principal Amount, if
any, and will be payable on the current or succeeding Payment Dates to the
extent of the Amount Available remaining after payment in full of the Class A
Distribution Amount, the Class M-1 Distribution Amount, the Class M-2
Distribution Amount, the Class B Distribution Amount and interest accrued and
unpaid on the Class M-1 Liquidation Loss Principal Amount. Any interest
amounts carried forward will bear interest at the Class M-2 Pass-Through Rate,
to the extent permitted by law.
The Class M-2 Pass-Through Rate is set forth on the cover of this Prospectus
Supplement, and will be computed on the basis of a 360-day year of twelve 30-
day months.
Class M-2 Principal
On each Payment Date after the Class A Principal Balance and the Class M-1
Principal Balance have been reduced to zero, Class M-2 Certificateholders will
be entitled to receive, as payments of principal, the Senior Percentage of the
Formula Principal Distribution Amount (as described under "Class A Principal"
above) to the extent of the Class M-2 Remaining Amount Available in the
Certificate Account on such date, after payment of all interest payable on the
Class M-2 Certificates (other than in respect of Class M-2 Liquidation Loss
Principal Amounts), until the Class M-2 Principal Balance has been reduced to
zero. On each Payment Date on which the Class B Principal Distribution Test is
satisfied, payments of principal will be made to Class B Certificateholders,
even if Class M-2 Certificateholders are not yet entitled to receive payments
of principal because the Class A Principal Balance and Class M-1 Principal
Balance have not been reduced to zero.
Class B Interest
Interest will be paid to the Class B Certificateholders on each Payment
Date, to the extent of the Class B Remaining Amount Available, if any, in an
amount (the "Class B Interest Payment Amount") equal to the product of (a) the
Class B Pass-Through Rate and (b) the then outstanding Class B Principal
Balance less the Class B Liquidation Loss Principal Amount, if any. The "Class
B Liquidation Loss Principal Amount" as of any Payment Date will equal the
Aggregate Liquidation Loss Principal Amount (but in no event greater than the
Class B Principal Balance). Interest on the outstanding Class B Principal
Balance will accrue from the Closing Date, or from the most recent Payment
Date on which interest has been paid, to but excluding the following Payment
Date, and will be computed on the basis of a 360-day year of twelve 30-day
months. The Class B Principal Balance is the Original Class B Principal
Balance less the sum of all amounts previously distributed to Class B
Certificateholders on account of principal. In the event that, on a particular
Payment Date, the Class B Remaining Amount Available, plus other funds in the
Certificate Account available therefor, is not sufficient to make a full
distribution of the Class B Interest Payment Amount to the Class B
Certificateholders, the amount of such interest to be distributed in respect
of the Class B Certificates will be allocated among the Class B Certificates
pro rata in accordance with their respective entitlements to interest, and any
remaining deficiency will be carried forward and added to the amount such
holders will be entitled to receive on the next Payment Date. Interest will
accrue on the Class B Liquidation Loss Principal Amount, if any, and will be
payable on the current or succeeding Payment Dates to the extent of the Amount
Available remaining after payment in full of the Class A Distribution Amount,
the Class M-1 Distribution Amount, the Class M-2 Distribution Amount, the
Class B Distribution Amount and interest accrued and unpaid on the Class M-1
Liquidation Loss Principal Amount and Class M-2 Liquidation Loss Principal
Amount. Any interest amounts carried forward will bear interest at the Class B
Pass-Through Rate, to the extent permitted by law.
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The Class B Pass-Through Rate is set forth on the cover of this Prospectus
Supplement, and will be computed on the basis of a 360-day year of twelve 30-
day months.
Class B Principal
Payments of principal on the Class B Certificates will not be made unless
the Class B Principal Distribution Test is satisfied. The Class B Principal
Distribution Test will be deemed to be satisfied on a Payment Date if either
(a) the Class A Principal Balance and the Class M Principal Balance have each
been reduced to zero or (b) each of the following conditions is met (i) the
average sixty-day delinquency ratio as of the Payment Date and the prior two
Payment Dates must not exceed %; (ii) the average thirty-day delinquency
ratio as of the Payment Date and the prior two Payment Dates must not exceed
%; (iii) the cumulative realized losses as of the Payment Date must not
exceed %; (iv) the current realized losses as of the Payment Date must not
exceed %; (v) the Payment Date is on or after 2001; and (vi) the sum
of the Class B Principal Balance and all prior distributions of the Extra
Principal Distribution Amount, divided by the Pool Scheduled Principal Balance
as of the immediately preceding Payment Date must be equal to or greater than
%.
On each Payment Date on which the Class B Distribution Test is satisfied,
the Class B Percentage of the Formula Principal Distribution Amount will be
paid to the Class B Certificateholders to the extent of the Class B Remaining
Amount Available after payment of interest on the Class B Certificates. Class
B Certificateholders will be entitled to receive payments of principal until
the Class B Principal Balance has been reduced to zero.
The Class B Percentage for any Payment Date will be equal to 100% minus the
Senior Percentage. The Class B Percentage for each Payment Date, if any, after
the Class A Principal Balance and the Class M Principal Balance have been
reduced to zero, will be equal to 100%.
CALCULATION OF ONE-MONTH LIBOR
"LIBOR" ("London Interbank Offered Rate") with respect to any monthly
interest period will be established by the calculation agent appointed by the
Trust (the "Calculation Agent") and will equal the offered rate for United
States dollar deposits for one month that appears on Telerate Page 3750 as of
11:00 A.M., London time, on the second LIBOR Business Day prior to such
monthly interest period (a "LIBOR Determination Date"). "Telerate Page 3750"
means the display page so designated on the Dow Jones Telerate Service (or
such other page as may replace that page on that service, or such other
service as may be designated by the Calculation Agent as the information
vendor, for the purpose of displaying London interbank offered rates of major
banks). If such rate appears on Telerate Page 3750, LIBOR will be such rate.
"LIBOR Business Day" as used herein means a day that is both a business day
and a day on which banking institutions in the City of London, England are not
required or authorized by law to be closed. If on any LIBOR Determination Date
the offered rate does not appear on Telerate Page 3750, the Calculation Agent
will request each of the reference banks (which shall be major banks that are
engaged in transactions in the London interbank market selected by the
Calculation Agent) to provide the Calculation Agent with its offered quotation
for United States dollar deposits for one month to prime banks in the London
interbank market as of 11:00 A.M., London time, on such date. If at least two
reference banks provide the Calculation Agent with such offered quotations,
LIBOR on such date will be the arithmetic mean, rounded upward, if necessary,
to the nearest 1/100,000 of 1% (.0000001), with five one-millionths of a
percentage point rounded upward, of all such quotations. If on such date fewer
than two of the reference banks provide the Calculation Agent with such
offered quotations, LIBOR on such date will be the arithmetic mean, rounded
upward, if necessary, to the nearest 1/100,000 of 1% (.0000001), with five
one-millionths of a percentage point rounded upward, of the offered per annum
rates that one or more leading banks in the City of New York selected by the
Calculation Agent are quoting as of 11:00 A.M., New York City time, on such
date to leading European banks for United States dollar deposits for one
month; provided, however, that if such banks are not quoting as described
above, LIBOR for such date will be LIBOR applicable to the monthly interest
period immediately preceding such monthly interest period. Notwithstanding the
foregoing, however, LIBOR for a Payment Date shall not be based on LIBOR for
the prior Payment Date for three consecutive Payment Dates. If, under the
priorities described above, LIBOR for a Payment Date would be based on LIBOR
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for the previous Payment Date for the second consecutive Payment Date, the
Calculation Agent shall select an alternative comparable index (over which the
Calculation Agent has no control) used for determining one-month Eurodollar
lending rates that is calculated and published (or otherwise made available)
by an independent third party. The "Calculation Agent" will initially be the
Trustee.
SUBORDINATION OF CLASS M CERTIFICATES AND CLASS B CERTIFICATES
The rights of the holders of the Class M Certificates and the Class B
Certificates to receive distributions with respect to the Loans, as well as
any other amounts constituting Amount Available, will be subordinated to such
rights of the Class A Certificateholders. This subordination is intended to
enhance the likelihood of regular receipt by the holders of the Class A
Certificates of the full amount of their scheduled monthly payments of
principal and interest and to afford such holders protection against losses on
Liquidated Loans. The protection afforded to the Class A Certificateholders by
means of the subordination feature will be accomplished by the preferential
right of the Class A Certificateholders to receive, prior to any distribution
being made on a Payment Date in respect of the Class M Certificates and the
Class B Certificates, the amount of principal and interest due them on each
Payment Date out of the Amount Available on deposit on such date in the
Certificate Account and by the right of the Class A Certificateholders to
receive future distributions on the Loans that would otherwise be payable to
the holders of Class M Certificates and Class B Certificates. On each Payment
Date the Class M-1 Certificateholders will be entitled to receive only amounts
described above under "Class M-1 Interest" and "Class M-1 Principal," the
Class M-2 Certificateholders will be entitled to receive only amounts
described under "Class M-2 Interest" and "Class M-2 Principal" and the Class B
Certificateholders will be entitled to receive only amounts described above
under "Class B Interest" and "Class B Principal."
In addition, the rights of the holders of the Class M-2 Certificates and
Class B Certificates to receive distributions with respect to the Loans, as
well as any other amounts constituting Amount Available, will be subordinate
to such rights of the Class M-1 Certificateholders. This subordination is
intended to enhance the likelihood of regular receipt by the holders of the
Class M-1 Certificates of the full amount of their scheduled monthly payments
of principal and interest and to afford such holders protection against losses
on Liquidated Loans. The protection afforded to the Class M-1
Certificateholders by means of the subordination feature will be accomplished
by the preferential right of the Class M-1 Certificateholders to receive,
prior to any distribution being made on a Payment Date in respect of the Class
M-2 Certificates and the Class B Certificates, the amount of principal and
interest due them on each Payment Date out of the Class M-1 Remaining Amount
Available on deposit on such date in the Certificate Account and by the right
of the Class M-1 Certificateholders to receive future distributions on the
Loans that would otherwise be payable to the holders of Class M-2 Certificates
and Class B Certificates.
In addition, the rights of the holders of the Class B Certificates to
receive distributions with respect to the Loans, as well as any other amounts
constituting Amount Available, will be subordinate to such rights of the Class
M-2 Certificateholders. This subordination is intended to enhance the
likelihood of regular receipt by the holders of the Class M-2 Certificates of
the full amount of their scheduled monthly payments of principal and interest
and to afford such holders protection against losses on Liquidated Loans. The
protection afforded to the Class M-2 Certificateholders by means of the
subordination feature will be accomplished by the preferential right of the
Class M-2 Certificateholders to receive, prior to any distribution being made
on a Payment Date in respect of the Class B Certificates, the amount of
principal and interest due them on each Payment Date out of the Class M-2
Remaining Amount Available on deposit on such date in the Certificate Account
and by the right of the Class M-2 Certificateholders to receive future
distributions of the Loans that would otherwise be payable to the holders of
Class B Certificates.
As described above, prior to the time that the Class A Principal Balance is
reduced to zero, the distribution of principal to the Class A
Certificateholders is intended to include (i) the Senior Percentage of the
Scheduled Principal Balance of each Loan (other than the Adjustable Rate
Loans) that became a Liquidated Loan during the preceding Due Period and (ii)
the Scheduled Principal Balance of each Adjustable Rate Loan that became a
Liquidated Loan during the preceding Due Period. If the Liquidation Proceeds,
net of related Liquidation
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Expenses, from such Liquidated Loans are less than the Scheduled Principal
Balance of such Liquidated Loans plus accrued and unpaid interest thereon, the
deficiency will, in effect, be absorbed by the Class M, the Class B and the
Class C Certificateholders and the Company, since a portion of the Amount
Available equal to such deficiency and otherwise distributable to them will be
paid to the Certificateholders. Likewise, to the extent the Class M-1
Certificateholders or the Class M-2 Certificateholders are entitled to receive
distributions of principal, similar deficiencies could result for each Class
of Certificates with a lower payment priority. If the Amount Available is not
sufficient to cover the amounts distributable to the Class A or Class M
Certificateholders on a particular Payment Date, then the Senior Percentage on
future Payment Dates may be increased and the Class B Percentage on future
Payment Dates may be reduced as a result of such deficiency. But for the
effect of the relative subordination of the related Monthly Servicing Fee
payable to the Servicer (so long as the Company or any wholly owned subsidiary
of the Company is the Servicer) with respect to the Loans and amounts
otherwise distributable to the Class M-2, Class B and Class C
Certificateholders, the Class M-1 Certificateholders will absorb all losses on
each Liquidated Loan in the amount by which its Liquidation Proceeds, net of
the related Liquidation Expenses, are less than its unpaid principal balance
plus accrued and unpaid interest thereon less the related Monthly Servicing
Fee. But for the effect of the relative subordination of the related Monthly
Servicing Fee payable to the Servicer (so long as the Company or any wholly
owned subsidiary of the Company is the Servicer) with respect to the Loans and
amounts otherwise distributable to the Class B and Class C Certificateholders
on each Payment Date, the Class M-2 Certificateholders will absorb all losses
on each Liquidated Loan in the amount by which its Liquidation Proceeds, net
of the related Liquidation Expenses, are less than its unpaid principal
balance plus accrued and unpaid interest thereon less the related Monthly
Servicing Fee. But for the effect of the relative subordination of the related
Monthly Servicing Fee payable to the Servicer (so long as the Company or any
wholly owned subsidiary of the Company is the Servicer) with respect to the
Loans and amounts otherwise distributable to the Class C Certificateholders,
the Class B Certificateholders will absorb all losses on each Liquidated Loan
in the amount by which its Liquidation Proceeds, net of the related
Liquidation Expenses, are less than its unpaid principal balance plus accrued
and unpaid interest thereon less the related Monthly Servicing Fee.
ADVANCES
To the extent that collections on a Loan in any Due Period are less than the
scheduled payment due thereon, the Servicer will be obligated to make an
advance of the uncollected portion of such scheduled payment. The Servicer
will be obligated to advance a Delinquent Payment on a Loan only to the extent
that the Servicer, in its sole discretion, expects to recoup such Advance from
subsequent funds available therefor in the Certificate Account.
If the Servicer fails to make an Advance required under the Agreement, the
Trustee will be obligated to deposit the amount of such Advance in the
Certificate Account on the Payment Date. The Trustee will not, however, be
obligated to deposit any such amount if (i) the Trustee does not expect to
recoup such Advance from subsequent funds available therefor in the
Certificate Account, or (ii) the Trustee determines that it is not legally
able to make such Advance.
REPORTS TO CERTIFICATEHOLDERS
The Servicer will furnish to the Trustee, and the Trustee will include with
each distribution to a Class A Certificateholder, a statement in respect of
the related Payment Date setting forth, among other things:
(a) the amount of such distribution to holders of each Class of Class A
Certificates allocable to interest (separately identifying any unpaid
interest shortfall included);
(b) the amount of such distribution to holders of each Class of Class A
Certificates allocable to principal (separately identifying (1) the
aggregate amount of any Principal Prepayments included and (2) that portion
of any such distribution to Class A-4 Certificateholders constituting the
Class A-4 Lockout Pro Rata Distribution Amount);
(c) the amount, if any, by which the Class A Formula Distribution Amount
exceeds the Class A Distribution Amount for such Payment Date;
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(d) the Principal Balance of each Class of Class A Certificates and the
Notional Principal Amount for the Class A-5 IO Certificates after giving
effect to the distribution of principal on such Payment Date;
(e) the Senior Percentage and The Class A-4 Lockout Percentage for such
Payment Date;
(f) the Pool Scheduled Principal Balance of for such Payment Date;
(g) the Pool Factor (a percentage derived from a fraction the numerator
of which is the sum of the Class A Principal Balance, the Class M Principal
Balance and the Class B Principal Balance and the denominator of which is
the Cut-off Date Pool Principal Balance of [ ]); and
(h) the number and aggregate principal balance of Loans delinquent (i)
30-59 days and (ii) 60 or more days.
Information furnished pursuant to clauses (a) through (d) will be expressed as
dollar amounts for a Class A Certificate with a 1% Percentage Interest or per
$1,000 denomination of Class A Certificate.
In addition, within a reasonable period of time after the end of each
calendar year, the Servicer will furnish a report to each Class A
Certificateholder of record at any time during such calendar year as to the
aggregate of amounts reported pursuant to (a) and (b) above for such calendar
year.
The Servicer will furnish to the Trustee, and the Trustee will include with
each distribution to a Class M-1 Certificateholder, a statement in respect of
the related Payment Date setting forth, among other things:
(a) the amount of such distribution to holders of the Class M-1
Certificates allocable to interest (separately identifying any unpaid
interest shortfall included);
(b) the amount of such distribution to holders of the Class M-1
Certificates allocable to principal (separately identifying the aggregate
amount of any Principal Prepayments included;
(c) the amount, if any, by which the Class M-1 Formula Distribution
Amount exceeds the Class M-1 Remaining Amount Available for such Payment
Date;
(d) the Principal Balance of the Class M-1 Certificates after giving
effect to the distribution of principal on such Payment Date;
(e) any unpaid interest on any Class M-1 Liquidation Loss Principal
Amounts, after giving effect to payments of such interest on such Payment
Date;
(f) the Senior Percentage for such Payment Date;
(g) the Pool Scheduled Principal Balance for such Payment Date;
(h) the Pool Factor; and
(i) the number and aggregate principal balance of Loans delinquent (i)
30-59 days and (ii) 60 or more days.
Information furnished pursuant to clauses (a) through (d) will be expressed as
dollar amounts for a Class M-1 Certificate with a 1% Percentage Interest or
per $1,000 denomination of Class M-1 Certificate.
In addition, within a reasonable period of time after the end of each
calendar year, the Servicer will furnish a report to each Class M-1
Certificateholder of record at any time during such calendar year as to the
aggregate of amounts reported pursuant to (a) and (b) above for such calendar
year.
The Servicer will furnish to the Trustee, and the Trustee will include with
each distribution to a Class M-2 Certificateholder, a statement in respect of
the related Payment Date setting forth, among other things:
(a) the amount of such distribution to holders of the Class M-2
Certificates allocable to interest (separately identifying any unpaid
interest shortfall included);
(b) the amount of such distribution to holders of the Class M-2
Certificates allocable to principal (separately identifying the aggregate
amount of any Principal Prepayments included);
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(c) the amount, if any, by which the Class M-2 Formula Distribution
Amount exceeds the Class M-2 Remaining Amount Available for such Payment
Date;
(d) the Principal Balance of the Class M-2 Certificates after giving
effect to the distribution of principal on such Payment Date;
(e) any unpaid interest on any Class M-2 Liquidation Loss Principal
Amounts, after giving effect to payments of such interest on such Payment
Date;
(f) the Senior Percentage for such Payment Date;
(g) the Pool Scheduled Principal Balance of for such Payment Date;
(h) the Pool Factor; and
(i) the number and aggregate principal balance of Loans delinquent (i)
30-59 days and (ii) 60 or more days.
Information furnished pursuant to clauses (a) through (d) will be expressed as
dollar amounts for a Class M-2 Certificate with a 1% Percentage Interest or
per $1,000 denomination of Class M-2 Certificate.
In addition, within a reasonable period of time after the end of each
calendar year, the Servicer will furnish a report to each Class M-2
Certificateholder of record at any time during such calendar year as to the
aggregate of amounts reported pursuant to (a) and (b) above for such calendar
year.
The Servicer will furnish to the Trustee, and the Trustee will include with
each distribution to a Class B Certificateholder, a statement in respect of
the related Payment Date setting forth, among other things:
(a) the amount of such distribution to holders of the Class B
Certificates allocable to interest (separately identifying any unpaid
interest shortfall included);
(b) the amount of such distribution to holders of the Class B
Certificates allocable to principal (separately identifying the aggregate
amount of any Principal Prepayments included);
(c) the amount, if any, by which the Class B Formula Distribution Amount
exceeds the Class B Remaining Amount Available for such Payment Date;
(d) the Principal Balance of the Class B Certificates after giving effect
to the distribution of principal on such Payment Date;
(e) any unpaid interest on any Class B Liquidation Loss Principal
Amounts, after giving effect to payments of such interest on such Payment
Date;
(f) the Class B Percentage for such Payment Date;
(g) the Pool Scheduled Principal Balance for such Payment Date;
(h) the Pool Factor; and
(i) the number and aggregate principal balance of Loans delinquent (i)
30-59 days and (ii) 60 or more days.
Information furnished pursuant to clauses (a) through (d) will be expressed as
dollar amounts for a Class B Certificate with a 1% Percentage Interest or per
$1,000 denomination of Class B Certificate.
REPURCHASE OPTION
The Agreement provides that at any time that the Pool Scheduled Principal
Balance of the Loan Pool is less than 10% of the Cut-off Date Pool Principal
Balance of the Loan Pool, the Servicer will have the option to repurchase, on
30 days' prior written notice to the Trustee, all outstanding Loans (other
than any Loan as to which title to the underlying property has been assigned)
at a price sufficient to pay the Aggregate Certificate Principal Balance plus
the Monthly Interest due on all Certificates on the Payment Date occurring in
the month following the date of repurchase. Such price will be distributed on
such Payment Date.
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COLLECTION AND OTHER SERVICING PROCEDURES
The Servicer will manage, administer, service and make collections on the
Loans, exercising the degree of skill and care consistent with the highest
degree of skill and care that the Servicer exercises with respect to similar
contracts (including manufactured housing contracts) serviced by the Servicer.
The Servicer will not be required to cause to be maintained, or otherwise
monitor the maintenance of, hazard insurance on the improved properties. The
Company does, however, as a matter of its own policy, monitor proof of hazard
insurance coverage (other than flood insurance) and require that it be named
as an additional loss payee on all first lien secured contracts and generally
on junior lien secured contracts with amounts financed of over $ .
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The Servicer will receive a Monthly Servicing Fee for each Due Period (paid
on the next succeeding Payment Date) for servicing the Loans equal to one-
twelfth of the product of .75% and the remaining Pool Scheduled Principal
Balance plus the related Pre-Funded Amount (if any).
The Monthly Servicing Fee provides compensation for customary third-party
servicing activities to be performed by the Servicer for the Trust, for
additional administrative services performed by the Servicer on behalf of the
Trust and for expenses paid by the Servicer on behalf of the Trust. The
Servicer is also entitled to reimbursement out of the liquidation proceeds of
a Liquidated Loan for customary out-of-pocket liquidation expenses incurred by
it.
Customary servicing activities include collecting and recording payments,
communicating with Obligors, investigating payment delinquencies, providing
billing and tax records to Obligors and maintaining internal records with
respect to each Loan. Administrative services performed by the Servicer on
behalf of the Trust include selecting and packaging the Loans, calculating
distributions to Certificateholders and providing related data processing and
reporting services for Certificateholders and on behalf of the Trustee.
Expenses incurred in connection with servicing of the Loans and paid by the
Company from its servicing fees include payment of fees and expenses of
accountants, payments of all fees and expenses incurred in connection with the
enforcement of Loans or foreclosure on collateral relating thereto, payment of
Trustee's fees, and payment of expenses incurred in connection with
distributions and reports to Certificateholders.
EVIDENCE AS TO COMPLIANCE
The Agreement provides for delivery to the Trustee of a monthly report by
the Servicer no later than one Business Day following the Determination Date,
setting forth the information described under "Description of the
Certificates--Reports to Certificateholders." Each report to the Trustee will
be accompanied by a statement from an appropriate officer of the Servicer
certifying the accuracy of such report and stating that the Servicer has not
defaulted in the performance of its obligations under the Agreement. On or
before 1 of each year, beginning in 1998, the Servicer will deliver to the
Trustee a report of [Name of Accountant], or another nationally recognized
accounting firm, stating that such firm has examined certain documents and
records relating to the servicing of loans serviced by the Servicer and
stating that, on the basis of such examination, such servicing has been
conducted in compliance with the Agreement, except for any exceptions set
forth in such report.
The Agreement provides that the Servicer shall furnish to the Trustee such
reasonably pertinent underlying data as can be generated by the Servicer's
existing data processing system without undue modification or expense.
The Agreement provides that a Certificateholder holding Certificates
representing at least 5% of the Aggregate Certificate Principal Balance will
have the same rights of inspection as the Trustee and may upon written request
to the Servicer receive copies of all reports provided to the Trustee.
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TRANSFERABILITY
The Certificates are subject to certain restrictions on transfer to or for
the benefit of employee benefit plans, trusts or accounts subject to ERISA and
described in Section 4975 of the Code. See "ERISA Considerations" herein and
in the Prospectus.
CERTAIN MATTERS RELATING TO THE COMPANY
The Agreement provides that the Company may not resign from its obligations
and duties as Servicer thereunder, except upon a determination that the
Company's performance of such duties is no longer permissible under the
Agreement or applicable law, and prohibits the Company from extending credit
to any Certificateholder for the purchase of a Certificate, purchasing
Certificates in any agency or trustee capacity or lending money to the Trust.
The Company can be removed as Servicer only pursuant to an Event of
Termination as discussed below.
EVENTS OF TERMINATION
An Event of Termination under the Agreement will occur if (a) the Servicer
fails to make any payment or deposit required under the Agreement (including
an Advance) and such failure continues for four Business Days; (b) the
Servicer fails to observe or perform in any material respect any other
covenant or agreement in the Agreement which continues unremedied for thirty
days; (c) the Servicer conveys, assigns or delegates its duties or rights
under the Agreement, except as specifically permitted under the Agreement, or
attempts to make such a conveyance, assignment or delegation; (d) a court
having jurisdiction in the premises enters a decree or order for relief in
respect of the Servicer in an involuntary case under any applicable
bankruptcy, insolvency or other similar law now or hereafter in effect, or
appoints a receiver, liquidator, assignee, custodian, trustee, or sequestrator
(or similar official) of the Servicer, as the case may be, or enters a decree
or order for any substantial liquidation of its affairs; (e) the Servicer
commences a voluntary case under any applicable bankruptcy, insolvency or
similar law, or consents to the entry of an order for relief in an involuntary
case under any such law, or consents to the appointment of or taking
possession by a receiver, liquidator, assignee, trustee, custodian or its
creditors, or fails to, or admits in writing its inability to, pay its debts
as they become due, or takes any corporate action in furtherance of the
foregoing; (f) the Servicer fails to be an Eligible Servicer; or (g) the
Servicer's seller-servicer loan with GNMA is terminated. The Servicer will be
required under the Agreement to give the Trustee and the Certificateholders
notice of an Event of Termination promptly upon the occurrence of such event.
RIGHTS UPON AN EVENT OF TERMINATION
If an Event of Termination has occurred and is continuing, either the
Trustee or holders of Certificates representing 25% or more of the Aggregate
Certificate Principal Balance may terminate all of the Servicer's management,
administrative, servicing and collection functions under the Agreement. Upon
such termination, the Trustee or its designee will succeed to all the
responsibilities, duties and liabilities of the Company as Servicer under the
Agreement and will be entitled to similar compensation arrangements; provided,
however, that neither the Trustee nor any successor Servicer will assume any
accrued obligation of the prior servicer or any obligation of the Company to
repurchase Loans for breach of representations and warranties, and the Trustee
will not be liable for any acts or omissions of the Servicer occurring prior
to a transfer of the Servicer's servicing and related functions or for any
breach by the Servicer of any of its representations and warranties contained
in the Agreement or any related document or agreement. Notwithstanding such
termination, the Servicer shall be entitled to payment of certain amounts
payable to it prior to such termination, for services rendered prior to such
termination. No such termination will affect in any manner the Company's
obligation to repurchase certain Loans for breaches of warranties under the
Agreement. In the event that the Trustee is unwilling or unable so to act, it
may appoint, or petition a court of competent jurisdiction for the appointment
of, an Eligible Servicer to act as successor to the Servicer under the
Agreement. The Trustee and such successor may agree upon the servicing
compensation to be paid (after receiving comparable bids from other Eligible
Servicers), which may not be
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greater than the Monthly Servicing Fee payable to the Company as Servicer
under the Agreement without the consent of all of the Certificateholders.
TERMINATION OF THE AGREEMENT
The Agreement will terminate (after distribution of all principal and
interest then due to Certificateholders) on the earlier of (a) the Payment
Date on which the Pool Scheduled Principal Balance of the Loan Pool is reduced
to zero; or (b) the Payment Date occurring in the month following the
Servicer's repurchase of the Loans as described under "Description of the
Certificates--Repurchase Option." However, the Company's representations,
warranties and indemnities will survive any termination of the Agreement.
AMENDMENT; WAIVER
The Agreement may be amended by agreement of the Trustee, the Servicer and
the Company at any time without the consent of the Certificateholders to cure
any ambiguity, to correct or supplement any provision which may be
inconsistent with any other provision or to add other provisions not
inconsistent with the Agreement, upon receipt of an opinion of counsel to the
Servicer that such amendment will not adversely affect in any material respect
the interests of any Certificateholder.
The Agreement may also be amended from time to time by the Trustee, the
Servicer and the Company with the consent of holders of Certificates
representing 66 2/3% or more of the Aggregate Certificate Principal Balance,
and holders of Certificates representing 51% or more of the Aggregate
Certificate Principal Balance may vote to waive any Event of Termination,
provided that no such amendment or waiver shall (a) reduce in any manner the
amount of, or delay the timing of, collections of payments on Loans or
distributions which are required to be made on any Certificate, or (b) reduce
the aggregate amount of Certificates required for any amendment of the
Agreement, without unanimous consent of the Certificateholders.
The Trustee is required under the Agreement to furnish Certificateholders
with notice promptly upon execution of any amendment to the Agreement.
INDEMNIFICATION
The Agreement provides that the Company will defend and indemnify the Trust,
the Trustee (including any agent of the Trustee) and the Certificateholders
against any and all costs, expenses, losses, damages, claims and liabilities,
including reasonable fees and expenses of counsel and expenses of litigation
(a) arising out of or resulting from the use or ownership by the Company or
any affiliate thereof of any real estate securing a Loan, (b) for any taxes
which may at any time be asserted with respect to, and as of the date of, the
conveyance of the Loans to the Trust (but not including any federal, state or
other tax arising out of the creation of the Trust and the issuance of the
Certificates), and (c) with respect to certain other tax matters.
The Agreement also provides that the Servicer will defend and indemnify the
Trust, the Trustee and the Certificateholders (which indemnification will
survive any removal of the Servicer) against any and all costs, expenses,
losses, damages, claims and liabilities, including reasonable fees and
expenses of counsel and expenses of litigation, in respect of any action taken
by the Company as Servicer with respect to any Loan.
DUTIES AND IMMUNITIES OF THE TRUSTEE
The Trustee will make no representations as to the validity or sufficiency
of the Agreement, the Certificates or any Loan, Loan file or related
documents, and will not be accountable for the use or application by the
Company of any funds paid to the Company in consideration of the conveyance of
the Loans, or deposited into the Certificate Account by the Servicer. If no
Event of Termination has occurred, the Trustee will be required to perform
only those duties specifically required of it under the Agreement. However,
upon receipt of the various certificates, reports or other instruments
required to be furnished to it, the Trustee will be required to examine them
to determine whether they conform as to form to the requirements of the
Agreement.
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Under the Agreement the Servicer will agree (a) to pay to the Trustee from
time to time reasonable compensation for all services rendered by it
thereunder (which compensation shall not be limited by any provision of law in
regard to the compensation of a trustee of an express trust); (b) to reimburse
the Trustee upon its request for all reasonable expenses, disbursements and
advances incurred or made by the Trustee in accordance with any provision of
the Agreement (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 its negligence or bad faith;
and (c) to indemnify the Trustee for, and to hold it harmless against, any
loss, liability or expense incurred without negligence or bad faith on its
part, arising out of or in connection with the acceptance or administration of
the Trust and its duties thereunder, including the costs and expenses of
defending itself against any claim or liability in connection with the
exercise or performance of any of its powers or duties thereunder.
The Trustee is not obligated to expend or risk its own funds or otherwise
incur financial liability in the performance of its duties under the Agreement
if there is a reasonable ground for believing that the repayment of such funds
or adequate indemnity against such risk or liability is not reasonably
assured.
The Agreement also provides that the Trustee will maintain at its expense in
Minneapolis or St. Paul, Minnesota, an office or agency where Certificates may
be surrendered for registration of transfer or exchange and where notices and
demands to or upon the Trustee and the certificate registrar and transfer
agent in respect of the Certificates pursuant to the Agreement may be served.
On the date hereof the Trustee's office for such purposes is located at 180
East Fifth Street, St. Paul, Minnesota 55101. The Trustee will promptly give
written notice to the Company, the Servicer and the Certificateholders of any
change thereof.
THE TRUSTEE
[Name of Trustee] has its corporate trust offices at [Address of Trustee].
The Trustee may resign from its duties under the Agreement at any time, in
which event the Servicer will be obligated to appoint a successor Trustee. The
Servicer may also remove the Trustee if the Trustee ceases to be eligible to
continue as such under the Agreement or if the Trustee becomes insolvent. In
such circumstances, the Servicer will also be obligated to appoint a successor
Trustee. Any resignation or removal of the Trustee and appointment of a
successor Trustee will not become effective until acceptance of the
appointment by the successor Trustee.
REGISTRATION OF THE CERTIFICATES
The Certificates initially will be represented by certificates registered in
the name of Cede & Co., the nominee of The Depository Trust Company ("DTC").
The interests of beneficial owners of the Certificates will be represented by
book entries on the records of the participating members of DTC. Definitive
Certificates will be available only under the limited circumstances described
herein. Holders of the Certificates may hold through DTC (in the United
States), CEDEL or Euroclear (as defined herein) (in Europe) if they are
participants of such systems, or indirectly through organizations that are
participants in such systems.
CEDEL and Euroclear will hold omnibus positions in the Certificates on
behalf of the CEDEL Participants and the Euroclear Participants, respectively,
through customers' securities accounts in CEDEL's and Euroclear's names on the
books of their respective depositaries (collectively, the "Depositaries"),
which in turn will hold such positions in customers' securities accounts in
the Depositaries' names on the books of DTC.
DTC is a limited-purpose trust company organized under the laws of the State
of New York, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the New York Uniform Commercial Code, and a "clearing
agency" registered pursuant to the provisions of Section 17A of the Exchange
Act. DTC accepts securities for deposit from its participating organizations
("Participants") and
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facilitates the clearance and settlement of securities transactions between
Participants in such securities through electronic book-entry changes in
accounts of Participants, thereby eliminating the need for physical movement
of certificates. Participants include securities brokers and dealers, banks
and trust companies and clearing corporations and may include certain other
organizations. Indirect access to the DTC system is also available to others
such as banks, brokers, dealers and trust companies that clear through or
maintain a custodial relationship with a Participant, either directly or
indirectly ("indirect participants").
The beneficial owners of Certificates ("Certificate Owners") who are not
Participants but desire to purchase, sell or otherwise transfer ownership of
the Certificates may do so only through Participants (unless and until
Definitive Certificates, as defined below, are issued). In addition,
Certificate Owners will receive all distributions of principal of, and
interest on, the Certificates from the Trustee through DTC and Participants.
Certificate Owners will not receive or be entitled to receive certificates
representing their respective interests in the Certificates, except under the
limited circumstances described below.
Unless and until Definitive Certificates (as defined below) are issued, it
is anticipated that the only "Certificateholder" of the Certificates will be
Cede & Co., as nominee of DTC. Certificate Owners will not be recognized by
the Trustee as Certificateholders as that term is used in the Agreement.
Certificate Owners are only permitted to exercise the rights of
Certificateholders indirectly through Participants and DTC.
While Certificates are outstanding (except under the circumstances described
below), under the rules, regulations and procedures creating and affecting DTC
and its operations (the "Rules"), DTC is required to make book-entry transfers
among Participants on whose behalf it acts with respect to the Certificates
and is required to receive and transmit distributions of principal of, and
interest on, the Certificates. Participants with whom Certificate Owners have
accounts with respect to Certificates are similarly required to make book-
entry transfers and receive and transmit such distributions on behalf of their
respective Certificate Owners. Accordingly, although Certificate Owners will
not possess certificates, the Rules provide a mechanism by which Certificate
Owners will receive distributions and will be able to transfer their
interests.
Certificates will be issued in registered form to Certificate Owners, or
their nominees, rather than to DTC (such Certificates being referred to herein
as "Definitive Certificates"), only if (i) DTC or the Company advise the
Trustee in writing that DTC is no longer willing or able to discharge properly
its responsibilities as nominee and depository with respect to the
Certificates and the Company or the Trustee is unable to locate a qualified
successor or (ii) the Company at its sole option advises the Trustee in
writing that it elects to terminate the book-entry system through DTC. Upon
issuance of Definitive Certificates to Certificate Owners, such Certificates
will be transferable directly (and not exclusively on a book-entry basis) and
registered holders will deal directly with the Trustee with respect to
transfers, notices and distributions.
DTC has advised the Company that, unless and until Definitive Certificates
are issued, DTC will take any action permitted to be taken by a
Certificateholder under the Agreement only at the direction of one or more
Participants to whose DTC accounts the Certificates are credited. DTC has
advised the Company that DTC will take such action with respect to any
fractional interest of the Certificates only at the direction of and on behalf
of such Participants beneficially owning a corresponding fractional interest
of the Certificates. DTC may take actions, at the direction of the
Participants, with respect to some Certificates which conflict with actions
taken with respect to other Certificates.
Issuance of Certificates in book-entry form rather than as physical
certificates may adversely affect the liquidity of the Certificates in the
secondary market and the ability of Certificate Owners to pledge them. In
addition, since distributions on the Certificates will be made by the Trustee
to DTC and DTC will credit such distributions to the accounts of its
Participants, with the Participants further crediting such distributions to
the accounts of indirect participants or Certificate Owners, Certificate
Owners may experience delays in the receipt of such distributions.
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Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
Participants or Euroclear Participants, on the other, will be effected in DTC
in accordance with DTC rules on behalf of the relevant European international
clearing system by its Depositary; however, such cross-market transactions
will require delivery of instructions to the relevant European international
clearing system by the counterparty in such system in accordance with its
rules and procedures and within its established deadlines (European time). The
relevant European international clearing system will, if the transaction meets
its settlement requirements, deliver instructions to its Depositary to take
action to effect final settlement on its behalf by delivering or receiving
securities in DTC, and making or receiving payment in accordance with normal
procedures for same-day funds settlement applicable to DTC. CEDEL Participants
and Euroclear Participants may not deliver instructions directly to the
Depositaries.
Because of time-zone differences, credits of securities in CEDEL or
Euroclear as a result of a transaction with a Participant will be made during
the subsequent securities settlement processing, dated the business day
following the DTC settlement date, and such credits or any transactions in
such securities settled during such processing will be reported to the
relevant CEDEL Participant or Euroclear Participant on such business day. Cash
received in CEDEL or Euroclear as a result of sales of securities by or
through a CEDEL Participant or a Euroclear Participant to a Participant will
be received with value on the DTC settlement date but will be available in the
relevant CEDEL or Euroclear cash account only as of the business day following
settlement in DTC.
CEDEL is incorporated under the laws of Luxembourg as a professional
depository. CEDEL holds securities for its participating organizations ("CEDEL
Participants") and facilitates the clearance and settlement of securities
transactions between CEDEL Participants through electronic book-entry changes
in accounts of CEDEL Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in CEDEL in any of 28
currencies, including United States dollars. CEDEL provides to its CEDEL
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. CEDEL interfaces with domestic markets in several
countries. As a professional depository, CEDEL is subject to regulation by the
Luxembourg Monetary Institute. CEDEL Participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations and may include the Underwriters. Indirect access to CEDEL is
also available to others, such as banks, brokers, dealers and trust companies
that clear through or maintain a custodial relationship with a CEDEL
Participant, either directly or indirectly.
The Euroclear System was created in 1968 to hold securities for participants
of the Euroclear System ("Euroclear Participants") and to clear and settle
transactions between Euroclear Participants through simultaneous electronic
book-entry delivery against payment, thereby eliminating the need for physical
movement of certificates and any risk from lack of simultaneous transfers of
securities and cash. Transactions may now be settled in Euroclear in any of 32
currencies, including United States dollars. The Euroclear System includes
various other services, including securities lending and borrowing, and
interfaces with domestic markets in several countries generally similar to the
arrangements for cross-market transfers with DTC described in Annex I hereto.
The Euroclear System is operated by Morgan Guaranty Trust Company of New York,
Brussels, Belgium office (the "Euroclear Operator" or "Euroclear"), under loan
with Euroclear Clearance System, S.C., a Belgian cooperative corporation (the
"Cooperative"). All operations are conducted by the Euroclear Operator, and
all Euroclear securities clearance accounts and Euroclear cash accounts are
accounts with the Euroclear Operator, not the Cooperative. The Cooperative
establishes policy for the Euroclear System on behalf of Euroclear
Participants. Euroclear Participants include banks (including central banks),
securities brokers and dealers and other professional financial intermediaries
and may include the Underwriters. Indirect access to the Euroclear System is
also available to other firms that clear through or maintain a custodial
relationship with a Euroclear Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it
is regulated and examined by the Board of Governors of the Federal Reserve
System and the New York State Banking Department, as well as the Belgian
Banking Commission.
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Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian
law (collectively, the "Terms and Conditions"). The Terms and Conditions
govern transfers of securities and cash within the Euroclear System,
withdrawal of securities and cash from the Euroclear System, and receipts of
payments with respect to securities in the Euroclear System. All securities in
the Euroclear System are held on a fungible basis without attribution of
specific certificates to specific securities clearance accounts. The Euroclear
Operator acts under the Terms and Conditions only on behalf of Euroclear
Participants and has no record of or relationship with persons holding through
Euroclear Participants.
Distributions with respect to Certificates held through CEDEL or Euroclear
will be credited to the cash accounts of CEDEL Participants or Euroclear
Participants in accordance with the relevant system's rules and procedures, to
the extent received by its Depositary. Such distributions will be subject to
tax reporting in accordance with relevant United States tax laws and
regulations. See "Certain Federal Income Tax Consequences" in the Prospectus
and "Global Clearance, Settlement and Tax Documentation Procedures" in Annex I
to this Prospectus Supplement.
Although DTC, CEDEL and Euroclear have agreed to the foregoing procedures in
order to facilitate transfers of Certificates among participants of DTC, CEDEL
and Euroclear, they are under no obligation to perform or continue to perform
such procedures and such procedures may be discontinued at any time.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Upon the issuance of the Certificates, [Company Counsel], counsel to the
Company, will deliver its opinion that, assuming that two separate elections
are made to treat segregated portions of the assets of the Trust as REMICs
(respectively, the "Master REMIC" and the "Subsidiary REMIC"), and further
assuming ongoing compliance with the terms of the Agreement, the Master REMIC
and the Subsidiary REMIC will each qualify as a REMIC, the Subsidiary REMIC
Regular Interests, which are not being offered hereunder, will be treated as
"regular interests" in the Subsidiary REMIC, and each Class of Certificates
will be treated as "regular interests" in the Master REMIC for federal income
tax purposes. The Class C Subsidiary Certificate, which is not being offered
hereby, will constitute the sole class of "residual interests" in the
Subsidiary REMIC, and the Class C Master Certificate, which is not being
offered hereby, will constitute the sole class of "residual interests" in the
Master REMIC.
Other than the Class A-5 IO Certificates, the Certificates will not be
issued with original issue discount for federal income tax purposes. Although
the tax treatment is not entirely certain, the Class A-5 IO Certificates will
be treated as having been issued with original issue discount for federal
income tax purposes equal to the excess of all expected payments of interest
on such Certificates over their issue price. The prepayment assumption that
will be used to determine the rate of accrual of original issue discount,
market discount and premium, if any, will be based on the assumption that the
Loans will prepay at a rate equal to % of the applicable Prepayment
Assumption as to the Fixed-Rate Loans and % CPR as to the Adjustable Rate
Loans. Although unclear, a holder of a Class A-5 IO Certificate may be
entitled to deduct a loss to the extent that its remaining basis exceeds the
maximum amount of future payments to which such Certificateholder would be
entitled if there were no further prepayments of the Loans.
Certificates held by financial institutions, thrift institutions taxed as
domestic building and loan associations and real estate investment trusts will
represent interests in "loans secured by an interest in real property" and
"real estate assets" for purposes of Sections 7701(a)(19)(C) and 856(c)(4)(A)
of the Code, respectively, in the same proportion that the assets in the
Master REMIC consist of qualifying assets under such sections. Furthermore,
interest paid with respect to Certificates held by a real estate investment
trust will be considered to be "interest on obligations secured by mortgages
on real property or on interests in real property" for purposes of Section
856(c)(3) of the Code to the extent that such Certificates are treated as
"real estate assets" under Section 856(c)(4)(A) of the Code.
For further information regarding federal income tax consequences of
investing in the Certificates, see "Certain Federal Income Tax Consequences--
REMIC Series" in the Prospectus.
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ERISA CONSIDERATIONS
The following information supplements, and to the extent inconsistent
therewith supersedes, the information in the Prospectus under "ERISA
Considerations."
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
imposes certain restrictions on employee benefit plans that are subject to
ERISA ("Plans") and on persons who are fiduciaries with respect to such Plans.
Employee benefit plans that are governmental plans (as defined in section
3(32) of ERISA) and certain church plans (as defined in Section 3(33) of
ERISA) are not subject to ERISA requirements. Accordingly, assets of such
plans may be invested in the Class A Certificates without regard to the ERISA
restrictions described above, subject to applicable provisions of other
federal and state laws. However, any such governmental or church plan which is
qualified under section 401(a) of the Code and exempt from taxation under
section 501(a) of the Code is subject to the prohibited transaction rules set
forth in section 503 of the Code.
The U.S. Department of Labor ("DOL") has granted administrative exemptions
to Salomon Brothers Inc (Prohibited Transaction Exemption 89-89, as amended;
Exemption Application No. D-6446, 54 Fed. Reg. 42,589 (1989)), to Credit
Suisse First Boston (Prohibited Transaction Exemption 89-90; Exemption
Application No.
D-6555, 54 Fed. Reg. 42,597 (1989)) and to Lehman Brothers Inc. (Prohibited
Transaction Exemption No. 91-14, 56 Fed. Reg. 7413 (1991))(the "Exemptions")
from certain of the prohibited transaction rules of ERISA and the Code with
respect to the initial purchase, the holding and the subsequent resale by
Plans of certificates representing interests in asset-backed pass-through
trusts that consist of certain receivables, loans and other obligations that
meet the conditions and requirements of the Exemptions. The receivables
covered by the Exemptions include home equity loans such as the Loans. The
Exemptions will apply to the acquisition, holding, and resale of the Class A
Certificates by a Plan, provided that specified conditions (certain of which
are described below) are met.
Among the conditions which must be satisfied for the Exemptions to apply to
the Class A Certificates are the following:
(1) The acquisition of the Class A Certificates by a Plan is on terms
(including the price for the Class A Certificates) that are at least as
favorable to the Plan as they would be in an arm's-length transaction with
an unrelated party;
(2) The rights and interests evidenced by the Class A Certificates
acquired by the Plan are not subordinated to the rights and interests
evidenced by other certificates of the Trust;
(3) The Class A Certificates acquired by the Plan have received a rating
at the time of such acquisition that is in one of the three highest generic
rating categories from either S&P, Fitch, Duff & Phelps Credit Rating Co.
or Moody's Investors Service, Inc. (the "Exemptions Rating Agencies");
(4) The Trustee is not an affiliate of any other member of the Restricted
Group (as defined below);
(5) The sum of all payments made to the Underwriters in connection with
the distribution of the Class A Certificates represents not more than
reasonable compensation for underwriting the Class A Certificates, as
applicable. The sum of all payments made to and retained by the Company
pursuant to the sale of the Loans to the Trust represents not more than the
fair market value of such Loans. The sum of all payments made to and
retained by the Servicer represents not more than reasonable compensation
for the Servicer's services under the Agreement and reimbursement of the
Servicer's reasonable expenses in connection therewith; and
(6) The Plan investing in the Class A Certificates is an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D of the Securities
and Exchange Commission under the Securities Act of 1933.
Moreover, the Exemptions would provide relief from certain self-
dealing/conflict of interest prohibited transactions only if, among other
requirements, (i) in the case of the acquisition of Class A Certificates in
connection with the initial issuance, at least fifty percent (50%) of the
Class A Certificates, as applicable, are acquired by persons independent of
the Restricted Group, (ii) the Plan's investment in Class A Certificates does
not exceed twenty-five percent (25%) of all of the Class A Certificates, as
applicable, outstanding at the time of
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the acquisition and (iii) immediately after the acquisition, no more than
twenty-five percent (25%) of the assets of the Plan are invested in
certificates representing an interest in one or more trusts containing assets
sold or serviced by the same entity. The Exemptions do not apply to Plans
sponsored by the Company, the Underwriters, the Trustee, the Servicer, any
obligor with respect to Loans included in the Trust constituting more than
five percent (5%) of the aggregate unamortized principal balance of the assets
in the Trust or any affiliate of such parties (the "Restricted Group").
On July 21, 1997, the DOL published in the Federal Register an amendment to
the Exemptions, which extends exemptive relief to certain mortgage-backed and
asset-backed securities transactions using pre-funding accounts for trusts
issuing pass-through certificates. With respect to the Loan Pool, the
amendment will generally allow related Loans supporting payments to related
Certificateholders, and having a value equal to no more than 25% of the total
principal amount of the related Certificates, to be transferred to the Trust
during the Pre-Funding Period, instead of requiring that all such Loans be
either identified or transferred on or before the Closing Date. In general,
the relief applies to the purchase, sale and holding of Certificates which
otherwise qualify for the Exemptions, provided that the following general
conditions are met:
(1) the ratio of the amount allocated to the Pre-Funding Account to the
total principal amount of the Certificates being offered must be less than
or equal to 25%;
(2) all Subsequent Loans transferred to the Loan Pool after the Closing
Date must meet the same terms and conditions for eligibility as the Initial
Loans, which terms and conditions have been approved by one of the
Exemptions Rating Agencies;
(3) the transfer of the Subsequent Loans to the Trust during the Pre-
Funding Period must not result in the Certificates to be covered by the
Exemptions receiving a lower credit rating from an Exemptions Rating Agency
upon termination of the Pre-Funding Period than the rating that was
obtained at the time of the initial issuance of the Certificates by the
Trust;
(4) solely as a result of the use of pre-funding, the weighted average
annual percentage interest rate (the "Average Interest Rate") for the Loan
Pool at the end of the Pre-Funding Period must not be more than 100 basis
points lower than the Average Interest Rate for the Initial Loans;
(5) for transactions occurring on or after May 23, 1997, either:
(i) the characteristics of the Subsequent Loans must be monitored by
an insurer or other credit support provider which is independent of the
Company; or
(ii) an independent accountant retained by the Company must provide
the Company with a letter (with copies provided to the Exemptions
Rating Agency rating the Certificates, the Underwriter and the Trustee)
stating whether or not the characteristics of the Subsequent Loans
conform to the characteristics described in the Prospectus or
Prospectus Supplement and/or Agreement. In preparing such letter, the
independent accountant must use the same type of procedures as were
applicable to the Initial Loans;
(6) the Funding Period must end no later than three months or 90 days
after the Closing Date or earlier in certain circumstances if the related
Pre-Funding Account falls below the minimum level specified in the
Agreement or an event of default occurs;
(7) amounts transferred to any Pre-Funding Account and any capitalized
interest account used in connection with the pre-funding may be invested
only in cash or in investments which are permitted by the Exemptions Rating
Agencies rating the Certificates, and such investment must be described in
the Agreement and must:
(i) be direct obligations of, or obligations fully guaranteed as to
timely payment of principal and interest by, the United States or any
agency or instrumentality thereof (provided that such obligations are
backed by the full faith and credit of the United States); or
(ii) have been rated (or the obligor has been rated) in one of the
three highest generic rating categories by one of the Exemptions Rating
Agencies;
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(8) the Prospectus or Prospectus Supplement must describe the duration of
the Funding Period;
(9) the Trustee (or any agent with which the Trustee contracts to provide
trust services) must be a substantial financial institution or trust
company experienced in trust activities and familiar with its duties,
responsibilities and liabilities as a fiduciary under ERISA. The Trustee,
as legal owner of the Trust, must enforce all the rights created in favor
of Certificateholders of the Trust, including employee benefit plans
subject to ERISA.
In its prefatory comments to the amendment as proposed by DOL (62 Fed. Reg.
28502), the DOL stated its interpretive position that a transaction which
satisfied the conditions of the Exemptions, but did not satisfy the conditions
of the amendment as proposed, could nevertheless qualify for exemptive relief
if it included a pre-funding account that was used only to acquire assets that
are specifically identified by the sponsor or originator as of the closing
date, but transferred to the trust after the closing date for administrative
or other reasons. Although the Pre-Funding Account may not satisfy the
conditions of the amendment in that the Pre-Funding Account may exceed 25% of
the total principal amount of the related Certificates, funds in the Pre-
Funding Account in excess of such 25% threshold will be used by the Trust
solely to purchase Subsequent Home Equity Loans in accordance with the
Agreement from a fixed pool of loans that will have been specifically
identified prior to the Closing Date. It is expected that all of the loans in
such fixed pool, except for those which are determined not to meet the
criteria for purchase set forth in the Agreement, will be acquired using the
Pre-Funding Account. Accordingly, the Company believes that the existence of
the Pre-Funding Account should not cause the Exemptions to be inapplicable.
The Company believes that the Exemptions will apply to the acquisition and
holding of Class A Certificates sold by the Underwriters and by Plans and that
all conditions of the Exemptions other than those within the control of the
investors have been met. In addition, as of the date hereof, no obligor with
respect to Loans included in the Trust constitutes more than 5% of the
aggregate unamortized principal balance of the assets of the Trust. Any Plan
fiduciary who proposes to cause a Plan to purchase Class A Certificates should
consult with its own counsel with respect to the potential consequences under
ERISA and the Code of the Plan's acquisition and ownership of the Class A
Certificates. Assets of a Plan or individual retirement account should not be
invested in the Class A Certificates unless it is clear that the assets of the
Trust will not be plan assets or unless it is clear that the Exemptions or a
prohibited transaction class exemption will apply and exempt all potential
prohibited transactions. See "ERISA Considerations" in the Prospectus.
In addition to the Exemptions, some or all of the transactions involving the
purchase, holding and resale of Certificates that might otherwise constitute
prohibited transactions under ERISA or the Code might qualify for relief from
the prohibited transaction rules and related taxes and penalties under certain
class exemptions granted by the DOL, including Prohibited Transaction Class
Exemption ("PTCE") 83-1, which exempts certain transactions involving employee
benefit plans and mortgage pool investment trusts, PTCE 86-128, which exempts
certain transactions involving employee benefit plans and certain broker-
dealers, PTCE 90-1, which exempts certain transactions involving employee
benefit plans and insurance company pooled separate accounts, and PTCE 91-38,
which exempts certain transactions involving employee benefit plans and bank
collective investment funds. There also may be other exemptions applicable to
a particular transaction involving the Trust. A Plan that intends to acquire
any class of the Certificates should consult with its own counsel regarding
whether such investment would cause a prohibited transaction to occur and
whether the terms and conditions of an applicable class exemption may be
satisfied.
The three administrative exemptions referred to herein as the Exemptions are
included in the "underwriter exemptions" listed in PTCE 95-60. Consequently,
the exemption provided by PTCE 95-60 may apply to the acquisition and holding
of the Certificates by an insurance company general account in which an
employee benefit plan has an interest. The Small Business Job Protection Act
of 1996 (the "1996 Act") became effective on August 20, 1996. The 1996 Act
amends ERISA to require the DOL to issue regulations to clarify,
retroactively, the application of ERISA and the prohibited transaction
provisions of the Code to insurance company general accounts. Any insurance
company which proposes to purchase any Certificates for its general
S-74
<PAGE>
account should consult with its own counsel with respect to the potential
consequences under ERISA and the Code of the insurance company's acquisition
and ownership of any of the Certificates. Assets of an insurance company
general account in which an employee benefit plan has an interest should not
be invested in any of the Certificates unless it is clear that PTCE 95-60, the
1996 Act or other exemptive relief will apply and exempt all potential
prohibited transactions. See "ERISA Considerations" in the Prospectus.
No transfer of any Class of Certificates other than the Class A Certificates
will be permitted to be made to a Plan unless such Plan, at its expense,
delivers to the Trustee and the Company an opinion of counsel (in form
satisfactory to the Trustee and the Company) to the effect that the purchase
or holding of any other Class of Certificates by such Plan will not result in
the assets of the Trust being deemed to be "plan assets" and subject to the
prohibited transaction provisions of ERISA and the Code and will not subject
the Trustee, the Company or the Servicer to any obligation or liability in
addition to those undertaken in the Agreement. Unless such opinion is
delivered, each person acquiring such a Certificate will be deemed to
represent to the Trustee, the Company and the Servicer that such person is
neither a Plan, nor acting on behalf of a Plan, subject to ERISA or to Section
4975 of the Code.
S-75
<PAGE>
UNDERWRITING
The Underwriters have agreed, subject to the terms and conditions of the
Underwriting Agreement, to purchase from the Company the respective principal
amounts of the Certificates set forth opposite their names below.
<TABLE>
<CAPTION>
PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL
AMOUNT OF AMOUNT OF AMOUNT OF AMOUNT OF AMOUNT OF
CLASS A-1 ARM CLASS A-1 CLASS A-2 CLASS A-3 CLASS A-4
UNDERWRITER CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES
----------- ------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
................. $ $ $ $ $
..
.................
---------- ------------ ----------- ----------- -----------
Totals............................. $ $ $ $ $
========== ============ =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
PERCENTAGE PRINCIPAL PRINCIPAL PRINCIPAL
INTEREST OF AMOUNT OF AMOUNT OF AMOUNT OF
CLASS A-5 IO CLASS M-1 CLASS M-2 CLASS B
UNDERWRITER CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES
----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
.................... % $ $ $
..
....................
--- ---------- ----------- ----------
Totals................................ % $ $ $
=== ========== =========== ==========
</TABLE>
In the Underwriting Agreement, the Underwriters have agreed, subject to the
terms and conditions set forth therein, to purchase all of the Certificates
offered hereby if any such Certificates are purchased. In the event of a
default by the Underwriters, the Underwriting Agreement provides that, in
certain circumstances, the Underwriting Agreement may be terminated.
The Company has been advised by the Underwriters that they propose initially
to offer the Certificates to the public at the respective offering prices set
forth on the cover page of this Prospectus Supplement and to certain dealers
at such price less a concession not in excess of the respective amounts set
forth in the table below (expressed as a percentage of the relative
Certificate Principal Balance). The Underwriters may allow and such dealers
may reallow a discount not in excess of the respective amounts set forth in
the table below to certain other dealers.
<TABLE>
<CAPTION>
SELLING REALLOWANCE
CLASS CONCESSION DISCOUNT
----- ---------- -----------
<S> <C> <C>
A-1 ARM............................. % %
A-1................................. % %
A-2................................. % %
A-3................................. % %
A-4................................. % %
A-5 IO.............................. % %
M-1................................. % %
M-2................................. % %
B-1................................. % %
</TABLE>
In general, purchases of a security for the purpose of stabilization could
cause the price of the security to be higher than it might be in the absence
of such purchases.
Neither the Company nor any of the Underwriters makes any representations or
prediction as to the direction or magnitude of any effect that the
transactions described above may have on the prices of the Certificates. In
addition, neither the Company nor any of the Underwriters makes any
representation that the Underwriters will engage in such transactions or that
such transactions, once commenced, will not be discontinued without notice.
S-76
<PAGE>
Until the distribution of the Certificates is completed, rules of the
Commission may limit the ability of the Underwriters and certain selling group
members to bid for and purchase the Certificates. As an exception to these
rules, the Underwriters are permitted to engage in certain transactions that
stabilize the price of the Certificates. Such transactions consist of bids or
purchases for the purposes of pagging, fixing or maintaining the price of the
Certificates.
Each Underwriter has represented, warranted and agreed that (i) it has not
offered or sold and, prior to the expiration of the period of six months from
the Closing Date, will not offer or sell any Certificates to persons in the
United Kingdom except to persons whose ordinary activities involve them in
acquiring, holding, managing or disposing of investments (as principal or
agent) for the purposes of their businesses or otherwise in circumstances
which have not resulted and will not result in an offer to the public in the
United Kingdom within the meaning of the Public Offers of Securities
Regulations 1995; (ii) it has complied and will comply with all applicable
provisions of the Financial Services Act 1986 with respect to anything done by
it in relation to the Certificates in, from or otherwise involving the United
Kingdom; and (iii) it has only issued or passed on and will only issue or pass
on in the United Kingdom any document received by it in connection with the
issue of the Certificates to a person who is of a kind described in Article
11(3) of the Financial Services Act 1986 (Investment Advertisements)
(Exemptions) Order 1995 (as amended) or is a person to whom such document may
otherwise lawfully be issued or passed on.
The Underwriting Agreement provides that the Company will indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended, or contribute to payments the Underwriters
may be required to make in respect thereof.
The Company has agreed that for a period of 30 days from the date of this
Prospectus Supplement it will not offer or sell publicly any other home
improvement loan or home equity loan pass-through certificates without the
consent of the Underwriters.
LEGAL MATTERS
Certain legal matters relating to the issuance of the Certificates will be
passed upon for the Company and the Trust by [Company Counsel], and for the
Underwriters by [Name of Underwriter Counsel]. The material federal income tax
consequences of the Certificates will be passed upon for the Company by
[Company Counsel].
S-77
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the Certificates will be available
only in book-entry form (the "Global Certificates"). Investors in the Global
Certificates may hold such Global Certificates through any of DTC, CEDEL or
Euroclear. The Global Certificates will be tradeable as home market
instruments in both the European and U.S. domestic markets. Initial settlement
and all secondary trades will settle in same-day funds.
Secondary market trading between investors holding Global Certificates
through CEDEL and Euroclear will be conducted in the ordinary way in
accordance with their normal rules and operating procedures and in accordance
with conventional eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Certificates
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations.
Secondary cross-market trading between CEDEL or Euroclear and DTC
Participants holding Certificates will be effected on a delivery-against-
payment basis through the respective Depositaries of CEDEL and Euroclear (in
such capacity) and DTC Participants.
Non-U.S. holders (as described below) of Global Certificates will be subject
to U.S. withholding taxes unless such holders meet certain requirements and
deliver appropriate U.S. tax documents to the securities clearing
organizations or their participants.
INITIAL SETTLEMENT
All Global Certificates will be held in book-entry form by DTC in the name
of Cede & Co. as nominee of DTC. Investors' interests in the Global
Certificates will be represented through financial institutions acting on
their behalf as direct and indirect Participants in DTC. As a result, CEDEL
and Euroclear will hold positions on behalf of their participants through
their respective Depositaries, which in turn will hold such positions in
accounts as DTC Participants.
Investors electing to hold their Global Certificates through DTC will follow
the settlement practices applicable to United States corporate debt
obligations. Investors securities custody accounts will be credited with their
holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Certificates through CEDEL or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Certificates will be credited to
the securities custody accounts on the settlement date against payments in
same-day funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired
value date.
Trading between DTC Participants. Secondary market trading between DTC
Participants will be settled using the procedures applicable to book-entry
securities in same-day funds.
Trading between CEDEL or Euroclear Participants. Secondary market trading
between CEDEL Participants or Euroclear Participants will be settled using the
procedures applicable to conventional eurobonds in same-day funds.
A-1
<PAGE>
Trading between DTC seller and CEDEL or Euroclear purchaser. When Global
Certificates are to be transferred from the account of a DTC Participant to
the account of a CEDEL Participant or a Euroclear Participant, the purchaser
will send instructions to CEDEL or Euroclear through a CEDEL Participant or
Euroclear Participant at least one business day prior to settlement. CEDEL or
Euroclear, as applicable, will instruct its Depositary to receive the Global
Certificates against payment. Payment will include interest accrued on the
Global Certificates from and including the last coupon payment date to and
excluding the settlement date. Payment will then be made by such Depositary to
the DTC Participant's account against delivery of the Global Certificates.
After settlement has been completed, the Global Certificates will be credited
to the applicable clearing system and by the clearing system, in accordance
with its usual procedures, to the CEDEL Participant's or Euroclear
Participant's account. The Global Certificates credit will appear the next day
(European time) and the cash debit will be back-valued to, and the interest on
the Global Certificates will accrue from, the value date (which would be the
preceding day when settlement occurred in New York). If settlement is not
completed on the intended value date (i.e., the trade fails), the CEDEL or
Euroclear cash debit will be valued instead as of the actual settlement date.
CEDEL Participants and Euroclear Participants will need to make available to
the respective clearing systems the funds necessary to process same-day funds
settlement. The most direct means of doing so is to pre-position funds for
settlement, either from cash on hand or existing lines of credit, as they
would for any settlement occurring within CEDEL or Euroclear. Under this
approach, they may take on credit exposure to CEDEL or Euroclear until the
Global Certificates are credited to their accounts one day later.
As an alternative, if CEDEL or Euroclear has extended a line of credit to
them, CEDEL Participants or Euroclear Participants can elect not to pre-
position funds and allow that credit line to be drawn upon the finance
settlement. Under this procedure, CEDEL Participants or Euroclear Participants
purchasing Global Certificates would incur overdraft charges for one day,
assuming they cleared the overdraft when the Global Certificates were credited
to their accounts. However, interest on the Global Certificates would accrue
from the value date. Therefore, in many cases the investment income on the
Global Certificates earned during that one-day period may substantially reduce
or offset the amount of such overdraft charges, although this result will
depend on each CEDEL Participant's or Euroclear Participant's particular cost
of funds.
Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for sending Global Certificates
to the respective Depositary for the benefit of CEDEL Participants or
Euroclear Participants. The sale proceeds will be available to the DTC seller
on the settlement date. Thus, to the DTC Participant a cross-market
transaction will settle no differently than a trade between two DTC
Participants.
Trading between CEDEL or Euroclear seller and DTC purchaser. Due to time
zone differences in their favor, CEDEL Participants and Euroclear Participants
may employ their customary procedures for transactions in which Global
Certificates are to be transferred by the respective clearing systems, through
their respective Depositaries, to a DTC Participant. The seller will send
instructions to CEDEL or Euroclear through a CEDEL Participant or Euroclear
Participant at least one business day prior to settlement. In these cases,
CEDEL or Euroclear will instruct their respective Depositaries, as
appropriate, to deliver the Certificates to the DTC Participant's account
against payment. Payment will include interest accrued on the Global
Certificates from and including the last coupon payment date to and excluding
the settlement date. The payment will then be reflected in the account of the
CEDEL Participant or Euroclear Participant the following day, and receipt of
the cash proceeds in the CEDEL Participant's or Euroclear Participant's
account would be back-valued to the value date (which would be the preceding
day, when settlement occurred in New York). Should the CEDEL Participant or
Euroclear Participant have a line of credit with its clearing system and elect
to be in debit in anticipation of receipts of the sale proceeds in its
account, the bank-valuation will extinguish any overdraft charges incurred
over that one-day period. If settlement is not completed on the intended value
date (i.e., the trade fails), receipt of the cash proceeds in the CEDEL
Participant's or Euroclear Participant's account would instead be valued as of
the actual settlement date. Finally, day traders that use CEDEL or Euroclear
and that purchase Global Certificates from DTC Participants for delivery to
CEDEL Participants or Euroclear Participants should note that
A-2
<PAGE>
these trades would automatically fail on the sale side unless affirmative
action were taken. At least three techniques should be readily available to
eliminate this potential problem:
(a) borrowing through CEDEL or Euroclear for one day (until the purchase
side of the day trade is reflected in their CEDEL or Euroclear accounts) in
accordance with the clearing system's customary procedures;
(b) borrowing the Global Certificates in the U.S. from a DTC Participant
no later than one day prior to settlement, which would give the Global
Certificates sufficient time to be reflected in their CEDEL or Euroclear
account in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade so
that the value date for the purchase from the DTC Participant is at least
one day prior to the value date for the sale to the CEDEL Participant or
Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Certificates holding securities through CEDEL
or Euroclear (or through DTC if the holder has an address outside the U.S.)
will be subject to the 30% U.S. withholding tax that generally applies to
payments of interest (including original issue discount) on registered debt
issued by U.S. Persons, unless (i) each clearing system, bank or other
financial institution that holds customers' securities in the ordinary course
of its trade or business in the chain of intermediaries between such
beneficial owner and the U.S. entity required to withhold tax complies with
applicable certification requirements and (ii) such beneficial owner takes one
of the following steps to obtain an exemption or reduced tax rate:
Exemption of non-U.S. Persons (Form W-8). Beneficial owners of
Certificates that are non-U.S. Persons generally can obtain a complete
exemption from the withholding tax by filing a signed Form W-8 (Certificate
of Foreign Status) and a certificate under penalties of perjury (the "Tax
Certificate") that such beneficial owner is (i) not a controlled foreign
corporation (within the meaning of Section 957(a) of the Code) that is
related (within the meaning of Section 846(d)(4) of the Code) to the Trust
or the Transferor and (ii) not a 10% shareholder (within the meaning of
Section 871(h)(3)(B) of the Code) of the Trust or the Transferor. If the
information shown on Form W-8 or the Tax Certificate changes, a new Form W-
8 or Tax Certificate, as the case may be, must be filed within 30 days of
such change.
Exemption for non-U.S. Persons with effectively connected income (Form
4224). A non-U.S. Person, including a non-U.S. corporation or bank with a
U.S. branch, for which the interest income is effectively connected with
its conduct of a trade or business in the United States can obtain an
exemption from the withholding tax by filing Form 4224 (Exemption from
Withholding of Tax on Income Effectively Connected with the Conduct of a
Trade or Business in the United States).
Exemption or reduced rate for non-U.S. Persons resident in treaty
countries (Form 1001). Non-U.S. Persons that are beneficial owners of
Certificates residing in a country that has a tax treaty with the United
States can obtain an exemption or reduced tax rate (depending on the treaty
terms) by filing Form 1001 (Ownership, Exemption or Reduced Rate
Certificate). If the treaty provides only for a reduced rate, withholding
tax will be imposed at that rate unless the filer alternatively files Form
W-8. Form 1001 may be filed by the beneficial owner of Certificates or such
owner's agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The beneficial owner of a
Global Certificate or, in the case of a Form 1001 or a Form 4224 filer,
such owner's agent, files by submitting the appropriate form to the person
through whom it holds the security (the clearing agency, in the case of
persons holding directly on the books of the clearing agency). Form W-8 and
Form 1001 are effective for three calendar years and Form 4224 is effective
for one calendar year.
A-3
<PAGE>
The term "U.S. Person" means (i) a citizen or resident of the United States,
(ii) a corporation or partnership organized in or under the laws of the United
States or any political subdivision thereof (except, in the case of a
partnership, to the extent provided in regulations), (iii) an estate or trust
the income of which is includible in gross income for United States tax
purposes, regardless of its source or (iv) a trust other than a foreign trust
within the meaning of Section 7701 (1)(31) of the Code. 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 1
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. This summary does
not deal with all aspects of U.S. federal income tax withholding that may be
relevant to foreign holders of the Global Certificates. Investors are advised
to consult their own tax advisors for specific tax advice concerning their
holding and disposing of the Global Certificates.
A-4
<PAGE>
BASE PROSPECTUS NO. 1
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 October 9, 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, 1997, and the Company's Quarterly Reports on Form 10-Q for the
quarters ended March 31, 1998 and June 30, 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
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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.
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<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-
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<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 Except as otherwise set forth in the related
Prepayments)................ Prospectus Supple-ment, principal on each Loan,
including any principal prepayments, will be
passed through on each Payment Date. See "Matu-
rity and Prepayment Considerations" and "De-
scription of the Certificates."
Optional Termination......... Unless otherwise specified in the related Pro-
spectus Supplement, each of the Company or the
Servicer may at its option repurchase all Loans
relating to a Series of Certificates remaining
outstanding at such time under the circum-
stances specified in such Prospectus Supple-
ment. Unless otherwise provided in the related
Prospectus Supplement, the repurchase price
will equal the principal amount of such Loans
plus accrued and unpaid interest thereon. See
"Description of the Certificates--Termination
of the Agreement."
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<PAGE>
Global Certificates.......... If so specified in the related Prospectus Sup-
plement, the Certificates of a Series, or of
one or more Classes within a Series, will be
issuable in the form of one or more global cer-
tificates (each, a "Global Certificate") to be
held by a depositary (each, a "Depositary") on
behalf of the beneficial owners of the Certifi-
cates, as described herein under "Description
of the Certificates--Global Certificates." The
description of the Certificates in this Pro-
spectus assumes that the Certificates of a Se-
ries will not be issued in the form of Global
Certificates. If some or all of the Certifi-
cates of a Series are issued in the form of one
or more Global Certificates, the term "Global
Certificateholder," as used herein, will refer
to such beneficial owners of such Certificates,
and the rights of such Certificateholders will
be limited as described herein under "Descrip-
tion of the Certificates--Global Certificates."
Representations and
Warranties of the Company...
As a condition to the Company's conveyance of
any Loan Pool to the Trust Fund, the Company
will be required to make certain representa-
tions and warranties in the related Agreement
regarding the Loans. Under the terms of the
Agreement, if the Company becomes aware of a
breach of any such representation or warranty
that materially adversely affects the Trust
Fund's interest in any Loan or receives written
notice of such a breach from the Trustee or the
Servicer, then the Company will be obligated
either to cure such breach or to repurchase or,
if so provided in the related Prospectus Sup-
plement, substitute for the affected Loan, in
each case under the conditions further de-
scribed herein and in the Prospectus Supple-
ment. See "Description of the Certificates--
Conveyance of Loans."
Federal Income Tax 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 consequences under the Code described
herein and in such Prospectus Supplement. If so
specified in the applicable Prospectus Supple-
ment, a Class of Certificates offered hereby
may represent interests in a "two-tier" REMIC,
but all interests in the first and second tier
REMIC will be created under the same Agreement.
See "Certain Federal Income Tax Consequences--
REMIC Series."
If a REMIC Election is not made with respect to
a Series of Certificates, the Trust Fund repre-
sented by such Certificates may be treated as a
grantor trust for federal income tax purposes
and not as an association taxable as a corpora-
tion. In such event, each Certificateholder
will be treated as the owner of an undivided
pro rata interest in income and corpus attrib-
utable to the related
7
<PAGE>
Loan Pool and any other assets held by the
Trust Fund and will be considered the equitable
owner of an undivided interest in the Loans in-
cluded in such Loan Pool. If a REMIC Election
is not made with respect to a Series of Certif-
icates and the Trust Fund represented by such
Certificates will not be treated as a grantor
trust, the federal income tax consequences of
ownership of such Certificates will be de-
scribed in the related Prospectus Supplement.
See "Certain Federal Income Tax Consequences--
Non-REMIC Series."
ERISA Considerations......... A fiduciary of any employee benefit plan subject
to the Employee Retirement Income Security Act
of 1974, as amended ("ERISA"), or the Code,
should review carefully with its legal advisors
whether the purchase or holding of Certificates
could give rise to a transaction prohibited or
otherwise impermissible under ERISA or the
Code. See "ERISA Considerations."
Legal Investment............. Unless otherwise indicated in the applicable
Prospectus Supplement, the Certificates will
not constitute "mortgage related securities"
under the Secondary Mortgage Market Enhancement
Act of 1984, as amended. See "Legal Invest-
ment."
Ratings...................... It is a condition precedent to the issuance of
any Class of Certificates sold under this Pro-
spectus that they be rated in one of the four
highest rating categories (within which there
may be sub-categories or gradations indicating
relative standing) of at least one nationally
recognized statistical rating organization. A
security rating is not a recommendation to buy,
sell or hold securities and may be subject to
revision or withdrawal at any time by the as-
signing rating agency. See "Ratings."
8
<PAGE>
RISK FACTORS
Prospective investors in Certificates should consider, among other things,
the following factors in connection with the purchase of the Certificates:
1. Limited Obligations. Except as otherwise specified in the related
Prospectus Supplement, the Certificates of a Series will not represent an
interest in or obligation of the Company. The Certificates of any Series
will not be insured or guaranteed by any governmental agency or
instrumentality, any Underwriter or its affiliates, the Servicer or (except
as otherwise specified in the related Prospectus Supplement) any other
party.
2. Junior Mortgage Liens; Value of Mortgaged Property. The Company
expects that a substantial number of the liens on the improved real estate
securing the Loans in a given Loan Pool will be junior to other liens on
such real estate. The rights of the Trust Fund (and therefore the
Certificateholders of the related Series), as beneficiary under a
conventional junior deed of trust or as mortgagee under a conventional
junior mortgage, are subordinate to those of the mortgagee or beneficiary
under the senior mortgage or deed of trust, including the prior rights of
the senior mortgagee or beneficiary to cause the property securing the Loan
to be sold upon default of the mortgagor or trustor, thereby extinguishing
the junior mortgagee's or junior beneficiary's lien unless the Servicer on
behalf of the Trust Fund asserts its subordinate interest in the property
in foreclosure litigation and, possibly, satisfies the defaulted senior
loan or loans. See "Certain Legal Aspects of the Loans--Repurchase
Obligations."
A substantial portion of the Loans included in a Loan Pool are expected
to have loan-to-value ratios of 90% or more, based on the aggregate of the
outstanding principal balances of all senior mortgages or deeds of trust
and of the Loan on the one hand, and the value of the home, on the other.
See "Green Tree Financial Corporation--Loan Origination." An overall
decline in the residential real estate market, the general condition of a
property securing a Loan or other factors could adversely affect the value
of the property securing a Loan such that the remaining balance of such
Loan, together with that of any senior liens on the related property, could
equal or exceed the value of the property.
3. Limited Liquidity. There can be no assurance that a secondary market
will develop for the Certificates of any Series, or, if it does develop,
that it will provide the holders of any of the Certificates with liquidity
of investment or that if such a secondary market develops that it will
continue to exist for the term of any Series of Certificates.
4. Non-recordation of Mortgage Assignments. Because of the expense and
administrative inconvenience involved, the Company will not record the
assignment to the Trustee of the mortgage or deed of trust securing any
Loan. In some states, in the absence of such recordation, the assignment to
the related Trustee of the mortgage or deed of trust securing a Loan may
not be effective against creditors of or purchasers from the Company or a
trustee in bankruptcy of the Company.
5. Certain Matters Relating to Insolvency. The Company intends that each
transfer of Loans to the related Trust Fund constitute a sale, rather than
a pledge of the Loans to secure indebtedness of the Company. However, if
the Company were to become a debtor under the federal bankruptcy code, it
is possible that a creditor or trustee in bankruptcy of the Company or the
Company as debtor-in-possession may argue that the sale of the Loans by the
Company was a pledge of the Loans rather than a sale. This position, if
presented to or accepted by a court, could result in a delay in or
reduction of distributions to the Certificateholders.
THE TRUST FUND
GENERAL
Each Trust Fund will include (i) a Loan Pool, (ii) the amounts held from
time to time in a trust account (the "Certificate Account") maintained by the
Trustee pursuant to the Agreement, (iii) any letter of credit, guarantee,
surety bond, insurance policy, cash reserve fund or other credit enhancement
securing payment of
9
<PAGE>
all or part of a Series of Certificates, and (iv) such other property as may
be specified in the related Prospectus Supplement.
Each Certificate will evidence the interest specified in the related
Prospectus Supplement in one Trust Fund, containing one Loan Pool comprised of
Loans having the aggregate principal balance as of the specified day of the
month of the creation of the pool (the "Cut-off Date") specified in the
related Prospectus Supplement. Holders of Certificates of a Series will have
interests only in such Loan Pool and will have no interest in the Loan Pool
created with respect to any other Series of Certificates. If so specified in
the related Prospectus Supplement, the Trust Fund may include a Pre-Funding
Account which would be used to purchase additional Loans ("Subsequent Loans")
from the Company during the Pre-Funding Period specified in the related
Prospectus Supplement. The related Prospectus Supplement will specify the
conditions that must be satisfied prior to any transfer of Subsequent Loans,
including the requisite characteristics of the Subsequent Loans.
Except as otherwise specified in the related Prospectus Supplement, all of
the Loans will have been originated by the Company in the ordinary course of
its business. Specific information respecting the Loans included in each Trust
Fund will be provided in the related Prospectus Supplement and, to the extent
not contained in the related Prospectus Supplement, in a report on Form 8-K to
be filed with the Commission within fifteen days after the initial issuance of
the Certificates. A copy of the Agreement with respect to each Series of
Certificates will be attached to the Form 8-K and will be available for
inspection at the corporate trust office of the Trustee specified in the
related Prospectus Supplement. A schedule of the Loans relating to such Series
will be attached to the Agreement delivered to the Trustee upon delivery of
the Certificates.
Whenever in this Prospectus terms such as "Loan Pool," "Trust Fund,"
"Agreement" or "Pass-Through Rate" are used, those terms respectively apply,
unless the context otherwise indicates, to one specific Loan Pool and Trust
Fund, each Agreement and each Pass-Through Rate applicable to the related
Class of Certificates.
THE LOAN POOLS
Except as otherwise specified in the related Prospectus Supplement, the Loan
Pool will consist of closed-end home equity loans (the "Loans"), originated by
the Company on an individual basis in the ordinary course of business. All
Loans will be secured by the related real estate. Except as otherwise
specified in the related Prospectus Supplement, the Loans will be fully
amortizing and will bear interest at a fixed or variable annual percentage
rate (the "Loan Rate").
For each Series of Certificates, the Company will assign the Loans
constituting the Loan Pool to the trustee named in the related Prospectus
Supplement (the "Trustee"). The Company, as Servicer (in such capacity
referred to herein as the "Servicer", which term shall include any successor
to the Company in such capacity under the applicable Agreement), will service
the Loans pursuant to the Agreement. See "Description of the Certificates--
Servicing." Unless otherwise specified in the related Prospectus Supplement,
the Loan documents will be held by the Trustee or a custodian on its behalf.
Each Loan Pool will be composed of Loans bearing interest at the Loan Rates
specified in the Prospectus Supplement. Unless otherwise stated in the related
Prospectus Supplement, each registered holder of a Certificate will be
entitled to receive periodic distributions, which will be monthly unless
otherwise specified in the related Prospectus Supplement, of all or a portion
of principal on the underlying Loans or interest on the principal balance of
such Certificate (or on some other principal balance unrelated to that of such
Certificate) at the Pass-Through Rate, or both.
10
<PAGE>
The related Prospectus Supplement will specify for the Loans contained in
the related Loan Pool, among other things, the range of the dates of
origination of the Loans; the range of the Loan Rates and the weighted average
Loan Rate; the minimum and maximum outstanding principal balances and the
average outstanding principal balance as of the Cut-off Date; the aggregate
principal balance of the Loans included in the Loan Pool as of the Cut-off
Date; the weighted average and range of scheduled terms to maturity as of
origination and as of the Cut-off Date; the range of original maturities of
the Loans and the last maturity date of any Loan; and the geographic location
of improved real estate securing the Loans. If the Trust Fund includes a Pre-
Funding Account, the related Prospectus Supplement will specify the conditions
that must be satisfied prior to any transfer of Subsequent Loans, including
the requisite characteristics of the Subsequent Loans.
The Company will make representations and warranties as to the types and
geographical distribution of the Loans included in a Loan Pool and as to the
accuracy in all material respects of certain information furnished to the
Trustee in respect of each such Loan. Upon a breach of any representation or
warranty that materially and adversely affects the interests of the
Certificateholders in a Loan, the Company will be obligated to cure the breach
in all material respects, or to repurchase or substitute for the Loan as
described below. This repurchase obligation constitutes the sole remedy
available to the Certificateholders or the Trustee for a breach of
representation or warranty by the Company. See "Description of the
Certificates--Conveyance of Loans."
USE OF PROCEEDS
Unless otherwise specified in the related Prospectus Supplement,
substantially all of the net proceeds to be received from the sale of each
Series of Certificates will be used by the Company for general corporate
purposes, including the origination or acquisition of additional home equity
loans, costs of carrying such loans until sale of the related certificates and
to pay other expenses connected with pooling the Loans and issuing the
Certificates.
GREEN TREE FINANCIAL CORPORATION
GENERAL
The Company is a Delaware corporation which, as of December 31, 1997, had
stockholders' equity of approximately $1,332,000,000. 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 (651) 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 $3,116,054,406
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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<PAGE>
be subject to the automatic stay provisions of the United States Bankruptcy
Code, which would delay the distribution of such proceeds for an uncertain
period of time. In addition, a bankruptcy trustee would have the power to sell
the Loans if the proceeds of such sale could satisfy the amount of the debt
deemed owed by the Company, or the bankruptcy trustee could substitute other
collateral in lieu of the Loans to secure such debt, or such debt could be
subject to adjustment by the bankruptcy trustee if the Company were to file
for reorganization under Chapter 11 of the United States Bankruptcy Code.
Except as otherwise specified in the related Prospectus Supplement, the
Company will make certain representations and warranties in the Agreement with
respect to each Loan as of the related Closing Date, including that: (a) as of
the Cut-off Date the most recent scheduled payment was made or was not
delinquent more than 59 days; (b) no provision of a Loan has been waived,
altered or modified in any respect, except by instruments or documents
included in the Loan file and reflected on the list of Loans delivered to the
Trustee; (c) each Loan is a legal, valid and binding obligation of the Obligor
and is enforceable in accordance with its terms (except as may be limited by
laws affecting creditors rights generally); (d) no Loan is subject to any
right of rescission, set-off, counterclaim or defense; (e) each Loan was
originated by a home equity lender in the ordinary course of such lender's
business and assigned to the Company or was originated by the Company
directly; (f) no Loan was originated in or is subject to the laws of any
jurisdiction whose laws would make the transfer of the Loan or an interest
therein pursuant to the Agreement or the Certificates unlawful; (g) each Loan
complies with all requirements of law; (h) no Loan has been satisfied,
subordinated to a lower lien ranking than its original position (if any) or
rescinded; (i) each Loan creates a valid and perfected lien on the related
improved real estate; (j) all parties to each Loan had full legal capacity to
execute such Loan; (k) no Loan has been sold, conveyed and assigned or pledged
to any other person and the Company has good and marketable title to each Loan
free and clear of any encumbrance, equity, loan, pledge, charge, claim or
security interest, and is the sole owner and has full right to transfer such
Loan to the Trustee; (l) as of the Cut-off Date there was no default, breach,
violation or event permitting acceleration under any Loan (except for payment
delinquencies permitted by clause (a) above), no event that with notice and
the expiration of any grace or cure period would constitute a default, breach,
violation or event permitting acceleration under such Loan, and the Company
has not waived any of the foregoing; (m) each Loan is a fully-amortizing loan
with a fixed rate of interest and provides for level payments over the term of
such Loan; (n) each Loan contains customary and enforceable provisions such as
to render the rights and remedies of the holder thereof adequate for
realization against the collateral; (o) the description of each Loan set forth
in the list delivered to the Trustee is true and correct; (p) there is only
one original of each Loan; and (q) each Loan was originated or purchased in
accordance with the Company's then-current underwriting guidelines.
Under the terms of the Agreement, if the Company becomes aware of a breach
of any such representation or warranty that materially adversely affects the
Trust Fund's interest in any Loan or receives written notice of such a breach
from the Trustee or the Servicer, then the Company will be obligated either to
cure such breach or to repurchase or, if so provided in the related Prospectus
Supplement, substitute for the affected Loan, in each case under the
conditions further described herein and in the Prospectus Supplement. This
repurchase obligation will constitute the sole remedy available to the Trust
Fund and the Certificateholders for a breach of a representation or warranty
under the Agreement with respect to the Loans (but not with respect to any
other breach by the Company of its obligations under the Agreement). If a
prohibited transaction tax under the REMIC provisions of the Code is incurred
in connection with such repurchase, distributions otherwise payable to
Residual Certificateholders will be applied to pay such tax. The Company will
be required to pay the amount of such tax that is not funded out of such
distributions.
The "Repurchase Price" of a Loan at any time means the outstanding principal
amount of such Loan (without giving effect to any Advances made by the
Servicer or the Trustee), plus interest at the applicable Pass-Through Rate on
such Loan from the end of the Due Period with respect to which the Obligor
last made a payment (without giving effect to any Advances made by the
Servicer or the Trustee) through the end of the immediately preceding Due
Period.
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PAYMENTS ON LOANS
Each Certificate Account will be a trust account established by the Servicer
as to each Series of Certificates in the name of the Trustee (i) with a
depository institution, the long-term unsecured debt obligations of which at
the time of any deposit therein are rated within the two highest rating
categories, or such other rating category as will not adversely affect the
ratings assigned to the Certificates, by each rating agency rating the
Certificates of such Series, (ii) with the trust department of a national
bank, (iii) in an account or accounts the deposits in which are fully insured
by the FDIC, (iv) in an account or accounts the deposits in which are insured
by the FDIC (to the limits established by the FDIC), the uninsured deposits in
which are otherwise secured such that, as evidenced by an opinion of counsel,
the Certificateholders have a claim with respect to the funds in the
Certificate Account or a perfected first priority security interest against
any collateral securing such funds that is superior to the claims of any other
depositors or general creditors of the depository institution with which the
Certificate Account is maintained or (v) otherwise acceptable to the rating
agency without reduction or withdrawal of the rating assigned to the relevant
Certificates. The collateral eligible to secure amounts in the Certificate
Account is limited to United States government securities and certain other
high-quality investments specified in the applicable Agreement ("Eligible
Investments"). A Certificate Account may be maintained as an interest-bearing
account, or the funds held therein may be invested pending each succeeding
Payment Date in Eligible Investments.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer will deposit in the Certificate Account on a daily basis all proceeds
and collections received or made by it with respect to the related Loans
subsequent to the Cut-off Date (including scheduled payments of principal and
interest due after the Cut-off Date but received by the Servicer on or before
the Cut-off Date), including:
(i) all Obligor payments on account of principal, including principal
prepayments, on the Loans;
(ii) all Obligor payments on account of interest on the Loans;
(iii) all amounts received and retained in connection with the
liquidation of defaulted Loans, net of liquidation expenses ("Net
Liquidation Proceeds");
(iv) any Advances made as described under "Advances" below and certain
other amounts required under the Agreement to be deposited in the
Certificate Account;
(v) all amounts received from any credit enhancement provided with
respect to a Series of Certificates; and
(vi) all proceeds of any Loan or property acquired in respect thereof
repurchased by the Servicer or the Company, as described under "Conveyance
of Loans" above or under "Repurchase Option" below.
DISTRIBUTIONS ON CERTIFICATES
Except as otherwise provided in the related Prospectus Supplement, on each
Payment Date for a Series of Certificates, the Trustee will withdraw from the
applicable Certificate Account and distribute to the Certificateholders of
such Series of record on the preceding Record Date an amount equal to, in the
aggregate, the "Amount Available" for such Payment Date. Unless otherwise
specified in the applicable Prospectus Supplement, the "Amount Available" for
a Payment Date is an amount equal to the aggregate of all amounts on deposit
in the Certificate Account as of the seventh Business Day following the end of
the related Due Period, or such other date as may be specified in the related
Prospectus Supplement (the "Determination Date") except: (i) all payments on
the Loans that were due on or before the Cut-off Date; (ii) all payments or
collections received after the Due Period preceding the month in which the
Payment Date occurs; (iii) all scheduled payments of principal and interest
due on a date or dates subsequent to the Due Period preceding the
Determination Date; (iv) amounts representing reimbursement for Advances, such
reimbursement being limited, if so specified in the related Prospectus
Supplement, to amounts received on particular Loans as late collections of
principal or interest as to which the Servicer has made an unreimbursed
Advance; and (v) amounts representing reimbursement for any unpaid Servicing
Fee. In the case of a Series of Certificates which includes only one Class,
the Amount
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Available for each Payment Date will be distributed pro rata to the holders of
such Certificates. In the case of any other Series of Certificates, the Amount
Available for each Payment Date will be allocated and distributed to holders
of the Certificates of such Series pursuant to the method and in the order of
priority specified in the applicable Prospectus Supplement. The amount of
principal and interest specified in the related Prospectus Supplement to be
distributed to Certificateholders is referred to herein as the "Certificate
Distribution Amount."
Within the time specified in the Agreement and described in the related
Prospectus Supplement, the Servicer will furnish a statement to the Trustee
setting forth the amount to be distributed on the related Payment Date on
account of principal and interest, stated separately, and a statement setting
forth certain information with respect to the Loans.
ADVANCES
Unless otherwise specified in the related Prospectus Supplement, to the
extent that collections on a Loan in any Due Period are less than the
scheduled payment due thereon, the Servicer will be obligated to make an
advance of the uncollected portion of such scheduled payment. The Servicer
will be obligated to advance a delinquent payment on a Loan only to the extent
that the Servicer, in its sole discretion, expects to recoup such Advance from
subsequent collections on the Loan or from liquidation proceeds thereof. The
Servicer will deposit any Advances in the Certificate Account no later than
one Business Day before the following Payment Date. The Servicer will be
entitled to recoup its advances on a Loan from subsequent payments by or on
behalf of the Obligor and from liquidation proceeds (including foreclosure
resale proceeds), if any, of the Loan, and will release its right to
reimbursements in conjunction with the purchase of the Loan by the Company for
breach of representations and warranties. If the Servicer determines in good
faith that an amount previously advanced will not ultimately be recoverable
from payments by or on behalf of the Obligor or from liquidation proceeds
(including foreclosure resale proceeds), if any, of the Loan (an
"Uncollectible Advance"), the Servicer will be entitled to reimbursement from
payments on other Loans or from other funds available therefor.
Unless otherwise specified in the related Prospectus Supplement, if the
Servicer fails to make an Advance required under the Agreement, the Trustee
will be obligated to deposit the amount of such Advance in the Certificate
Account on the Payment Date. The Trustee will not, however, be obligated to
deposit any such amount if (i) the Trustee does not expect to recoup such
Advance from subsequent collections on the Loan or from liquidation proceeds
thereof, if any, or (ii) the Trustee determines that it is not legally able to
make such Advance.
EXAMPLE OF DISTRIBUTIONS
The following is an example of the flow of funds as it would relate to a
hypothetical Series of Certificates issued, and with a Cut-off Date occurring,
in March 1996 (all weekdays are assumed to be business days):
<TABLE>
<S> <C> <C>
March 1......................................... (1) Cut-off Date.
March 1-31...................................... (2) Due Period. Servicer
receives scheduled payments
on the Loans and any
principal prepayments made
by Obligors and applicable
interest thereon.
March 29........................................ (3) Record Date.
April 9......................................... (4) Determination Date.
Distribution amount
determined.
April 15........................................ (5) Payment Date.
</TABLE>
Succeeding months follow the pattern of (2) through (5). The flow of funds
with respect to any Series of Certificates may differ from the above example,
as specified in the related Prospectus Supplement.
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(1) The initial principal balance of the Loan Pool will be the aggregate
principal balance of the Loans at the close of business on the Cut-off
Date, after deducting principal payments due on or before such date,
which, together with corresponding interest payments, are not part of the
Loan Pool and will not be passed through to Certificateholders.
(2) Scheduled payments and principal prepayments may be received at any time
during this period and will be deposited in the Certificate Account by the
Servicer for distribution to Certificateholders. When a Loan is prepaid in
full, interest on the amount prepaid is collected from the Obligor only to
the date of payment.
(3) Distributions on April 15 will be made to Certificateholders of record at
the close of business on the last Business Day of March, being the month
immediately preceding the month of distribution.
(4) On April 9 (the seventh Business Day following the end of the prior Due
Period), the Servicer will determine the amounts of principal and interest
which will be passed through on April 15. In addition, the Servicer may
advance funds to cover any delinquencies, in which event the distribution
to Certificateholders on April 15 will include the full amounts of
principal and interest due during March. The Servicer will also calculate
any changes in the relative interests evidenced by the Senior Certificates
and the Subordinated Certificates in the Trust Fund.
(5) On April 15, the amounts determined on April 9 will be distributed to
Certificateholders.
INDEMNIFICATION
The Agreement requires the Company to defend and indemnify the Trust Fund,
the Trustee (including any agent of the Trustee) and the Certificateholders
(which indemnification will survive any removal of the Servicer as servicer of
the Loans) against any and all costs, expenses, losses, damages, claims and
liabilities, including reasonable fees and expenses of counsel and expenses of
litigation (a) arising out of or resulting from the use or ownership by the
Company or the Servicer or any affiliate thereof of any real estate related to
a Loan and (b) for any taxes which may at any time be asserted with respect
to, and as of the date of, the conveyance of the Loans to the Trust Fund (but
not including any federal, state or other tax arising out of the creation of
the Trust Fund and the issuance of the Certificates).
The Agreement also requires the Servicer, in connection with its duties as
servicer of the Loans, to defend and indemnify the Trust Fund, the Trustee and
the Certificateholders (which indemnification will survive any removal of the
Servicer as servicer of the Loans) against any and all costs, expenses,
losses, damages, claims and liabilities, including reasonable fees and
expenses of counsel and expenses of litigation, in respect of any action taken
by the Servicer with respect to any Loan while it was the Servicer.
SERVICING
Pursuant to the Agreement, the Servicer will service and administer the
Loans assigned to the Trustee as more fully set forth below. The Servicer will
perform diligently all services and duties specified in each Agreement, in the
same manner as prudent lending institutions of mortgage loans of the same type
as the Loans in those jurisdictions where the related real properties are
located or as otherwise specified in the Agreement. The duties to be performed
by the Servicer will include collection and remittance of principal and
interest payments, collection of insurance claims and, if necessary,
foreclosure of Loans.
The Servicer will make reasonable efforts to collect all payments called for
under the Loans and, consistent with the Agreement, will follow such
collection procedures with respect to the Loans as it follows with respect to
mortgage loans serviced by it that are comparable to the Loans.
Evidence as to Compliance. Unless otherwise specified in the related
Prospectus Supplement, each Agreement will require the Servicer to deliver to
the Trustee a monthly report prior to each Payment Date, setting forth certain
information regarding the Loan Pool and the Certificates of such Series as is
specified in
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the related Prospectus Supplement. Each such report to the Trustee will be
accompanied by a statement from an appropriate officer of the Servicer
certifying the accuracy of such report and stating that the Servicer has not
defaulted in the performance of its obligations under the Agreement. On or
before May 1 of each year, the Servicer will deliver to the Trustee a report
of a nationally recognized accounting firm stating that such firm has examined
certain documents and records relating to the servicing of home equity loans
serviced by the Servicer under pooling and servicing agreements similar to the
Agreement and stating that, on the basis of such procedures, such servicing
has been conducted in compliance with the Agreement, except for any exceptions
set forth in such report.
Certain Matters Regarding the Servicer. The Servicer may not resign from its
obligations and duties under an Agreement except upon a determination that its
duties thereunder are no longer permissible under applicable law. No such
resignation will become effective until the Trustee or a successor servicer
has assumed the Servicer's obligations and duties under such Agreement. The
Servicer can only be removed as servicer upon the occurrence of an Event of
Termination as discussed below.
The Servicer shall keep in force throughout the term of the Agreement (i) a
policy or policies of insurance covering errors and omissions for failure to
maintain insurance as required by the Agreement, and (ii) a fidelity bond.
Such policy or policies and such fidelity bond shall be in such form and
amount as is generally customary among persons which service a portfolio of
home equity loans having an aggregate principal amount of $10 million or more
and which are generally regarded as servicers acceptable to institutional
investors.
Servicing Compensation and Payment of Expenses. For its servicing of the
Loans, the Servicer will receive servicing fees ("Servicing Fees") which
include a Monthly Servicing Fee (which the Company may assign) for each Due
Period (paid on the next succeeding Payment Date) equal to 1/12th of the
product of the annual servicing fee rate described in the applicable
Prospectus Supplement and the Pool Scheduled Principal Balance for such
Payment Date. As long as the Company is the Servicer, the Trustee will pay the
Company its Monthly Servicing Fee from any monies remaining after the
Certificateholders have received all payments of principal and interest for
such Payment Date.
The Monthly Servicing Fee provides compensation for customary third-party
servicing activities to be performed by the Servicer for the Trust Fund, for
additional administrative services performed by the Servicer on behalf of the
Trust Fund and for expenses paid by the Servicer on behalf of the Trust Fund.
Customary servicing activities include collecting and recording payments,
communicating with Obligors, investigating payment delinquencies, providing
billing and tax records to Obligors and maintaining internal records with
respect to each Loan. Administrative services performed by the Servicer on
behalf of the Trust Fund include selecting and packaging the Loans,
calculating distributions to Certificateholders and providing related data
processing and reporting services for Certificateholders and on behalf of the
Trustee. Expenses incurred in connection with servicing of the Loans and paid
by the Company from its Monthly Servicing Fees include payment of fees and
expenses of accountants, payments of all fees and expenses incurred in
connection with the enforcement of Loans or foreclosure on collateral relating
thereto, payment of Trustee's fees, and payment of expenses incurred in
connection with distributions and reports to Certificateholders, except that
the Servicer shall be reimbursed out of the liquidation proceeds of a
liquidated Loan for customary out-of-pocket liquidation expenses incurred by
it.
Events of Termination. Except as otherwise specified in the related
Prospectus Supplement, Events of Termination under each Agreement will occur
if (a) the Servicer fails to make any payment or deposit required under the
Agreement (including an Advance) and such failure continues for four business
days; (b) the Servicer fails to observe or perform in any material respect any
other covenant or agreement in the Agreement which continues unremedied for
thirty days; (c) the Servicer conveys, assigns or delegates its duties or
rights under the Agreement, except as specifically permitted under the
Agreement, or attempts to make such a conveyance, assignment or delegation;
(d) a court having jurisdiction in the premises enters a decree or order for
relief in
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respect of the Servicer in an involuntary case under any applicable
bankruptcy, insolvency or other similar law now or hereafter in effect, or
appoints a receiver, liquidator, assignee, custodian, trustee, or sequestrator
(or similar official) of the Servicer, as the case may be, or enters a decree
or order for any substantial liquidation of its affairs; (e) the Servicer
commences a voluntary case under any applicable bankruptcy, insolvency or
similar law, or consents to the entry of an order for relief in an involuntary
case under any such law, or consents to the appointment of or taking
possession by a receiver, liquidator, assignee, trustee, custodian or its
creditors, or fails to, or admits in writing its inability to, pay its debts
as they become due, or takes any corporate action in furtherance of the
foregoing; (f) the Servicer fails to be an Eligible Servicer; or (g) if the
Company is the Servicer, the Company's servicing rights under its master
seller-servicer contract with GNMA are terminated. The Servicer will be
required under the Agreement to give the Trustee and the Certificateholders
notice of an Event of Termination promptly upon the occurrence of such event.
Rights Upon Event of Termination. Except as otherwise specified in the
related Prospectus Supplement, so long as an Event of Termination remains
unremedied, the Trustee may, and at the written direction of
Certificateholders representing 25% or more of the Aggregate Certificate
Principal Balance of a Series shall, terminate all of the rights and
obligations of the Servicer under the related Agreement and in and to the
Loans, and the proceeds thereof, whereupon (subject to applicable law
regarding the Trustee's ability to make advances) the Trustee or a successor
Servicer under the Agreement will succeed to all the responsibilities, duties
and liabilities of the Servicer under the Agreement and will be entitled to
similar compensation arrangements; provided, however, that neither the Trustee
nor any successor Servicer will assume any obligation of the Company to
repurchase Loans for breaches of representations or warranties, and the
Trustee and such successor Servicer will not be liable for any acts or
omissions of the prior Servicer occurring prior to a transfer of the
Servicer's servicing and related functions or for any breach by such Servicer
of any of its obligations contained in the Agreement. Notwithstanding such
termination, the Servicer shall be entitled to payment of certain amounts
payable to it prior to such termination, for services rendered prior to such
termination. No such termination will affect in any manner the Company's
obligation to repurchase certain Loans for breaches of representations or
warranties under the Agreement. In the event that the Trustee would be
obligated to succeed the Servicer but is unwilling or unable so to act, it may
appoint, or petition to a court of competent jurisdiction for the appointment
of, a Servicer. Pending such appointment, the Trustee is obligated to act in
such capacity. The Trustee and such successor may agree upon the servicing
compensation to be paid, which in no event may be greater than the
compensation to the Servicer under the Agreement.
The Trustee will be under no obligation to take any action or to institute,
conduct or defend any litigation under the Agreement at the request, order or
direction of any of the Holders of Certificates, unless such
Certificateholders have offered to the Trustee reasonable security or
indemnity against the costs, expenses and liabilities which the Trustee may
incur.
REPORTS TO CERTIFICATEHOLDERS
The Trustee will forward to each Certificateholder on each Payment Date, or
as soon thereafter as is practicable, as specified in the related Prospectus
Supplement, a statement setting forth, among other things:
(a) the amount of such distribution which constitutes Monthly Principal,
specifying the amounts constituting scheduled payments by Obligors,
principal prepayments on the Loans, and other payments with respect to the
Loans;
(b) the amount of such distribution which constitutes Monthly Interest;
(c) the remaining Principal Balance represented by such
Certificateholder's interest;
(d) the amount of fees payable out of the Trust Fund;
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(e) the Pool Factor (a percentage derived from a fraction the numerator
of which is the remaining Principal Balance of the Certificates and the
denominator of which is the Initial Principal Amount of the Certificates)
immediately before and immediately after such Payment Date;
(f) the number and aggregate principal balance of Loans delinquent (i)
31-59 days, (ii) 60-89 and (iii) 90 or more days;
(g) the number of Loans liquidated during the Due Period ending
immediately before such Payment Date;
(h) such customary factual information as is necessary to enable
Certificateholders to prepare their tax returns; and
(i) such other customary factual information available to the Servicer
without unreasonable expense as is necessary to enable Certificateholders
to comply with regulatory requirements.
REPURCHASE OPTION
Unless otherwise specified in the related Prospectus Supplement, each
Agreement will provide that on any Payment Date on which the Pool Scheduled
Principal Balance is less than 10% of the Cut-Off Date Pool Principal Balance,
the Company or the Servicer will have the option to repurchase, on 30 days'
prior written notice to the Trustee, all outstanding Loans in the related Loan
Pool at a price equal to the greatest of (i) the principal balance of the
Loans on the prior Payment Date plus 30 days' accrued interest thereon at the
applicable Pass-Through Rate and any delinquent payments of interest thereon,
plus the fair market value (as determined by the Servicer) of any acquired
properties, (ii) the fair market value of all of the assets of the Trust Fund,
and (iii) an amount equal to the Aggregate Certificate Principal Balance of
the related Certificates plus interest on such Certificates payable on and
prior to the Payment Date occurring in the month following such repurchase
(less amounts on deposit in the Certificate Account and available to pay such
principal and interest). Such price will be paid on the Payment Date on which
such purchase occurs to the Certificateholders of record on the last Business
Day of the immediately preceding Due Period in immediately available funds
against the Trustee's delivery of the Loans and any acquired properties to the
Servicer. The distribution of such purchase price to Certificateholders will
be in lieu of any other distribution to be made on such Payment Date with
respect to the related Loans.
AMENDMENT
Unless otherwise specified in the related Prospectus Supplement, the
Agreement may be amended by the Company, the Servicer and the Trustee without
the consent of the Certificateholders, (i) to cure any ambiguity, (ii) to
correct or supplement any provision therein that may be inconsistent with any
other provision therein, (iii) if an election has been made with respect to a
particular Series of Certificates to treat the Trust Fund as a real estate
mortgage investment conduit ("REMIC") within the meaning of Section 860D(a) of
the Code, to maintain the REMIC status of the Trust Fund and to avoid the
imposition of certain taxes on the REMIC or (iv) to make any other provisions
with respect to matters or questions arising under such Agreement that are not
inconsistent with the provisions thereof, provided that such action will not
adversely affect in any material respect the interests of the
Certificateholders of the related Series. Unless otherwise specified in the
related Prospectus Supplement, the Agreement may also be amended by the
Company, the Servicer and the Trustee with the consent of the
Certificateholders (other than holders of Residual Certificates) representing
66 2/3% or more of the Aggregate Certificate Principal Balance of a Series for
the purpose of adding any provisions to or changing in any manner or
eliminating any of the provisions of such Agreement or of modifying in any
manner the rights of the Certificateholders; provided, however, that no such
amendment that reduces in any manner the amount of, or delays the timing of,
any payment received on or with respect to Loans which are required to be
distributed on any Certificate may be effective without the consent of the
Holders of each such Certificate.
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TERMINATION OF THE AGREEMENT
The obligations created by each Agreement will terminate (after distribution
of all Monthly Principal and Monthly Interest then due to Certificateholders)
on the earlier of (a) the Payment Date next succeeding the later of the final
payment or other liquidation of the last Loan or the disposition of all
property acquired upon foreclosure of any Loan; or (b) the Payment Date on
which the Company or the Servicer repurchases the Loans as described under
"Description of the Certificates--Repurchase Option." However, the Company's
representations, warranties and indemnities will survive any termination of
the Agreement.
THE TRUSTEE
The Prospectus Supplement for a Series of Certificates will specify the
Trustee under the related Agreement. The Trustee may have customary commercial
banking relationships with the Company or its affiliates and the Servicer or
its affiliates.
The Trustee may resign at any time, in which event the Company will be
obligated to appoint a successor Trustee. The Company may also remove the
Trustee if the Trustee ceases to be eligible to continue as such under the
Agreement or if the Trustee becomes insolvent. Any resignation or removal of
the Trustee and appointment of a successor Trustee will not become effective
until acceptance of the appointment by the successor Trustee.
The Trustee will make no representation as to the validity or sufficiency of
the Agreement, the Certificates or any Loan, Loan file or related documents,
and will not be accountable for the use or application by the Company of any
funds paid to the Company, as seller, in consideration of the conveyance of
the Loans, or deposited into or withdrawn from the Certificate Account by the
Servicer. If no Event of Termination has occurred, the Trustee will be
required to perform only those duties specifically required of it under the
Agreement. However, upon receipt of the various certificates, reports or other
instruments required to be furnished to it, the Trustee will be required to
examine them to determine whether they conform as to form to the requirements
of the Agreement. Whether or not an Event of Termination has occurred, the
Trustee is not required to expend or risk its own funds or otherwise incur any
financial liability in the performance of its duties or the exercise of its
powers if it has reasonable grounds to believe that repayment of such funds or
adequate indemnity against such risk or liability is not reasonably assured to
it.
Under the Agreement, the Servicer agrees to pay to the Trustee on each
Payment Date (a) reasonable compensation for all services rendered by it
thereunder (which compensation shall not be limited by any provision of law in
regard to the compensation of a trustee of an express trust) and (b)
reimbursement for all reasonable expenses, disbursements and advances incurred
or made by the Trustee in accordance with any provision of the Agreement
(including reasonable compensation and the expenses and disbursements of its
agents and counsel), except any such expense, disbursement or advance as may
be attributable to the Trustee's negligence or bad faith. The Company has
agreed to indemnify the Trustee for, and to hold it harmless against, any
loss, liability or expense incurred without negligence or bad faith on its
part, arising out of or in connection with the acceptance or administration of
the Trust Fund and the Trustee's duties thereunder, including the costs and
expenses of defending itself against any claim or liability in connection with
the exercise or performance of any of the Trustee's powers or duties
thereunder.
CERTAIN LEGAL ASPECTS OF THE LOANS; REPURCHASE OBLIGATIONS
As a result of the Company's conveyance and assignment of a pool of Loans to
a Trust Fund, the Certificateholders of such Series, as the beneficial owners
of the Trust Fund, will succeed collectively to all of the rights thereunder
(including the right to receive payment on the Loans). The following
discussion contains summaries of certain legal aspects of home equity loans
secured by residential properties which are general in nature. Because such
legal aspects are governed by applicable state law (which laws may differ
substantially),
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the summaries do not purport to be complete nor to reflect the laws of any
particular state, nor to encompass the laws of all states in which the real
estate securing the Loans may be situated or which may govern any Loan. The
summaries are qualified in their entirety by reference to the applicable
federal and state laws governing the Loans.
MORTGAGES AND DEEDS OF TRUST
The Loans will be secured by either mortgages, deeds of trust, security
deeds or deeds to secure debt depending upon the prevailing practice in the
state in which the underlying property is located, and may have first, second
or third priority. In some states, a mortgage creates a lien upon the real
property encumbered by the mortgage or deed of trust. In other states, the
mortgage conveys legal title to the property to the mortgagee subject to a
condition subsequent, i.e., the payment of the indebtedness secured thereby.
There are two parties to a mortgage: the mortgagor, who is the borrower, and
the mortgagee, who is the lender. In a mortgage state, the mortgagor delivers
to the mortgagee a note or retail installment contract evidencing the loan and
the mortgage. Although a deed of trust is similar to a mortgage, a deed of
trust has three parties: the borrower, or trustor, the lender as beneficiary,
and a third-party grantee called the trustee. Under a deed of trust, the
borrower grants the property, irrevocably until the debt is paid, in trust,
generally with a power of sale, to the trustee to secure repayment of the
loan. The trustee's authority under a deed of trust and the mortgagee's
authority under a mortgage are governed by applicable state law, the express
provisions of the deed of trust or mortgage, and, in some cases with respect
to deeds of trust, the directions of the beneficiary. Some states use a
security deed or deed to secure debt which is similar to a deed of trust
except that it has only two parties: a grantor (similar to a mortgagor) and a
grantee (similar to a mortgagee). Mortgages, deeds of trust and deeds to
secure debt are not prior to liens for real estate taxes and assessments and
other charges imposed under governmental police powers. Priority between
mortgages, deeds of trust and deeds to secure debt and other encumbrances
depends on their terms, the knowledge of the parties to such instrument in
some cases and generally on the order of recordation of the mortgage, deed of
trust or the deed to secure debt in the appropriate recording office.
SUBORDINATE MORTGAGES; RIGHTS OF SENIOR MORTGAGEES OR BENEFICIARIES
A substantial number of the mortgages, security deeds, deeds to secure debt
and deeds of trust securing the Loans in any Loan Pool are expected to be
second or third mortgages or deeds of trust which are junior to mortgages or
deeds of trust held by other lenders or institutional investors. The rights of
the related Trust Fund (and therefore the Certificateholders), as beneficiary
under a junior deed of trust or as mortgagee under a junior mortgage, are
subordinate to those of the mortgagee or beneficiary under the senior mortgage
or deed of trust, including the prior rights of the senior mortgagee or
beneficiary to receive hazard insurance and condemnation proceeds and to cause
the property securing the Loan to be sold upon default of the mortgagor or
trustor under the senior mortgage or deed of trust, thereby extinguishing the
junior mortgagee's or junior beneficiary's lien unless the Servicer on behalf
of the Trust Fund asserts its subordinate interest in the property in
foreclosure
litigation and, possibly, satisfies the defaulted senior loan or loans. As
discussed more fully below, a junior mortgagee or beneficiary may satisfy a
defaulted senior loan in full, or in some states may cure such default and
bring the senior loan current, in either event usually adding the amounts
expended to the balance due on the junior loan. Although the Company generally
does not cure defaults under a senior mortgage or deed of trust, it is the
Company's standard practice to protect its interest by attending any
foreclosure sale and bidding for property only if it is in the Company's best
interests to do so.
The standard form of the mortgage or deed of trust used by most
institutional lenders, like that of the Company, confers on the mortgagee or
beneficiary the right both to receive all proceeds collected under any hazard
insurance policy and all awards made in connection with any condemnation
proceedings, and to apply such proceeds and awards to any indebtedness secured
by the mortgage or deed of trust, in such order as the mortgagee or
beneficiary may determine. Thus, in the event improvements on the property are
damaged or destroyed by fire or other casualty, or in the event the property
is taken by condemnation, the mortgagee or beneficiary under the underlying
first mortgage or deed of trust will have the prior right to collect any
insurance
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proceeds payable under a hazard insurance policy and any award of damages in
connection with the condemnation and to apply the same to the indebtedness
secured by the first mortgage or deed of trust. Proceeds in excess of the
amount of first mortgage indebtedness, in most cases, may be applied to the
indebtedness of a junior mortgage or deed of trust.
The form of mortgage or deed of trust used by institutional lenders may
contain a "future advance" clause, which provides, in essence, that additional
amounts advanced to or on behalf of the mortgagor or trustor by the mortgagee
or beneficiary are to be secured by the mortgage or deed of trust. The
priority of any advance made under the clause depends, in some states, on
whether the advance was an "obligatory" or "optional" advance. If the
mortgagee or beneficiary is obligated to advance the additional amounts, the
advance is entitled to receive the same priority as amounts initially advanced
under the mortgage or deed of trust, notwithstanding the fact that there may
be junior mortgages or deeds of trust and other liens which intervene between
the date of recording of the mortgage or deed of trust and the date of the
future advance, and, in some states, notwithstanding that the senior mortgagee
or beneficiary had actual knowledge of such intervening junior mortgages or
deeds of trust and other liens at the time of the advance. Where the mortgagee
or beneficiary is not obligated to advance additional amounts or, in some
states, has actual knowledge of the intervening junior mortgages or deeds of
trust and other liens, the advance will be subordinate to such intervening
junior mortgages or deeds of trust and other liens. Priority of advances under
the clause rests, in some states, on state statutes giving priority to all
advances made under the loan agreement to a "credit limit" amount stated in
the recorded mortgage.
Another provision typically found in the form of the mortgage or deed of
trust used by most institutional lenders obligates the mortgagor or trustor to
pay before delinquency all taxes and assessments on the property and, when
due, all encumbrances, charges and liens on the property which appear prior to
the mortgage or deed of trust, to provide and maintain fire insurance on the
property, to maintain and repair the property and not to commit or permit any
waste thereof, and to appear in and defend any action or proceeding purporting
to affect the property or the rights of the mortgagee or beneficiary under the
mortgage or deed of trust. Upon a failure of the mortgagor or trustor to
perform any of these obligations, the mortgagee or beneficiary is given the
right under the mortgage or deed of trust to perform the obligation itself, at
its election, with the mortgagor or trustor agreeing to reimburse the
mortgagee or beneficiary for any sums expended by the mortgagee or beneficiary
on behalf of the mortgagor or trustor. All sums so expended by a senior
mortgagee or beneficiary generally become part of the indebtedness secured by
the senior mortgage or deed of trust.
SUBORDINATE FINANCING
Where the borrower encumbers the mortgaged property with one or more junior
liens, the senior lender is subjected to additional risk. First, the borrower
may have difficulty servicing and repaying multiple loans. Second, acts of the
senior lender which prejudice the junior lender or impair the junior lender's
security may create a superior equity in favor of the junior lender. For
example, if the borrower and the senior lender agree to
an increase in the principal amount of or the interest rate payable on the
senior loan, the senior lender may lose its priority to the extent any
existing junior lender is harmed or the borrower is additionally burdened.
Third, if the borrower defaults on the senior loan and/or any junior loan or
loans, the existence of junior loans and actions taken by junior lenders can
impair the security available to the senior lender and can interfere with or
delay the taking of action by the senior lender. The bankruptcy of a junior
lender may operate to stay foreclosure or similar proceedings by the senior
lender.
FORECLOSURE
Foreclosure is a legal procedure that allows the mortgagor to recover its
mortgage debt by enforcing its rights and available remedies under the
mortgage, deed of trust, deed to secure debt or security deed. Foreclosure of
a mortgage is generally accomplished by judicial action. A foreclosure action
is regulated by statutes and rules and subject throughout to the court's
equitable powers. Generally, a mortgagor is bound by the terms of the mortgage
note and the mortgage as made and cannot be relieved from its own default.
However, since a foreclosure action is equitable in nature and is addressed to
a court of equity, the court may relieve a mortgagor
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of a default and deny the mortgagee foreclosure on proof that the mortgagor's
default was neither willful nor in bad faith and that the mortgagee's action
was such as to establish a waiver, or fraud, bad faith, oppressive or
unconscionable conduct as to warrant a court of equity to refuse affirmative
relief to the mortgagee. Under certain circumstances a court of equity may
relieve the mortgagor from an entirely technical default where such default
was not willful. Generally, the action is initiated by the service of legal
pleadings upon all parties having an interest of record in the real property.
Delays in completion of the foreclosure occasionally may result from
difficulties in locating necessary parties defendant. When the mortgagee's
right to foreclosure is contested, the legal proceedings necessary to resolve
the issue can be time-consuming. After the completion of a judicial
foreclosure proceeding, the court may issue a judgment of foreclosure and
appoint a referee or other officer to conduct the sale of the property. In
some states, mortgages may also be foreclosed by advertisement, pursuant to a
power of sale provided in the mortgage. Foreclosure of a mortgage by
advertisement is essentially similar to foreclosure of a deed of trust by non-
judicial power of sale.
Foreclosure of a deed of trust or a deed to secure debt is generally
accomplished by a non-judicial trustee's sale under a specific provision in
the deed of trust, security deed or deed to secure debt that authorizes the
trustee to sell the property upon any default by the borrower under the terms
of the note, deed of trust, security deed or deed to secure debt. In certain
states, such foreclosure also may be accomplished by judicial action in the
manner provided for foreclosure of mortgages. In some states, prior to a sale,
the trustee must record a notice of default and send a copy to the borrower
trustor and to any person who has recorded a request for a copy of a notice of
default and notice of sale. In addition, prior to such sale, the trustee must
provide notice in some states to any other individual having an interest of
record in the real property, including any junior lienholders. Certain states
require that a notice of sale be posted in a public place and, in most states,
published for a specified period of time in one or more newspapers in a
specified manner prior to the date of trustee's sale. In addition, some state
laws require that a copy of the notice of sale be posted on the property and
sent to all parties having an interest of record in the property.
In some states, the borrower trustor has the right to reinstate the loan at
any time following default until shortly before the trustee's sale. In
general, the borrower, or any other person having a junior encumbrance on the
real estate, may, during a reinstatement period, cure the default by paying
the entire amount in arrears plus the costs and expenses incurred in enforcing
the obligation. Certain state laws control the amount of foreclosure expenses
and costs, including attorney's fees, which may be recovered by a lender.
In the case of foreclosure under either a mortgage or a deed of trust, the
sale by the referee or other designated officer, or by the trustee, is
generally a public sale. However, because of the difficulty a potential third
party buyer at the sale might have in determining the exact status of title
and because the physical condition of the property may have deteriorated
during the foreclosure proceedings, it is not common for a third party to
purchase the property at the foreclosure sale. In some states, there is a
statutory minimum purchase price which
the lender may offer for the property. Thereafter, subject to the right of the
borrower in some states to remain in possession during the redemption period,
the lender will assume the burdens of ownership, including obtaining hazard
insurance, paying taxes and making such repairs at its own expense as are
necessary to render the property suitable for sale. The lender commonly will
obtain the services of a real estate broker and pay the broker a commission in
connection with the sale of the property. Depending upon market conditions,
the ultimate proceeds of the sale of the property may not equal the lender's
investment in the property. Any loss resulting from such sale may be reduced
by the receipt of mortgage insurance proceeds, if any.
A second or third mortgagee (junior mortgagee) may not foreclose on the
property securing a second or first mortgage (senior mortgages) unless it
forecloses subject to the senior mortgages, in which case it must either pay
the entire amount due on the senior mortgages prior to or at the time of the
foreclosure sale or make payments on the senior mortgages in the event the
mortgagor is in default thereunder, in either event adding the amounts
expended to the balance due on the junior loan, and may be subrogated to the
rights of the senior mortgagees. In addition, in the event that the
foreclosure by a junior mortgagee triggers the enforcement of a "due-on-sale"
clause in a senior mortgage, the junior mortgagee may be required to pay the
full amount of the
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senior mortgages to the senior mortgagees. Accordingly, with respect to those
Loans which are second or third mortgage loans, if the lender purchases the
property, the lender's title will be subject to all senior liens and claims
and certain governmental liens.
The proceeds received by the referee or trustee from the sale are applied
first to the costs, fees, and expenses of sale and then in satisfaction of the
indebtedness secured by the mortgage or deed of trust under which the sale was
conducted. Any remaining proceeds are generally payable to the holders of
junior mortgages or deeds of trust and other liens and claims in order of
their priority, whether or not the borrower is in default. Any additional
proceeds are generally payable to the mortgagor or trustor. The payment of the
proceeds to the holders of junior mortgages may occur in the foreclosure
action of the senior mortgagee or may require the institution of separate
legal proceeding.
Some states impose prohibitions or limitations on remedies available to the
mortgagee, including the right to recover the debt from the mortgagor. See "--
Anti-Deficiency Legislation and Other Limitations on Lenders" herein.
In certain jurisdictions, real property transfer or recording taxes or fees
may be imposed on the related Trust Fund with respect to its acquisition (by
foreclosure or otherwise) and disposition of real property securing a Loan,
and any such taxes or fees imposed may reduce liquidation proceeds with
respect to such property, as well as distributions payable to the
Certificateholders.
SECOND OR THIRD MORTGAGES
The Loans may be secured by second or third mortgages or deeds of trust,
which are junior to first or second mortgages or deeds of trust held by other
lenders. The rights of the Certificateholders as the holders of a junior deed
of trust, junior mortgage, or junior security deed are subordinate in lien and
in payment to those of the holder of the senior mortgage, deed of trust, or
security deed including the prior rights of the senior mortgagee or
beneficiary to receive and apply hazard insurance and condemnation proceeds
and, upon default of the mortgagor under the senior mortgage or deed of trust,
to cause a foreclosure on the property. Upon completion of the foreclosure
proceedings by the holder of the senior mortgage or the sale pursuant to the
senior deed of trust, the junior mortgagee's or junior beneficiary's lien will
be extinguished unless the junior lienholder satisfies the defaulted senior
loan or asserts its subordinate interest in a property in foreclosure
proceedings. Such extinguishment will eliminate access to the collateral for
the Loan. See "--Foreclosure" herein.
Furthermore, the terms of the junior mortgage, deed of trust, deed to secure
debt or security deed are subordinate to the terms of the senior mortgage,
deed of trust, deed to secure debt or security deed. In the event of a
conflict between the terms of the senior mortgage, deed of trust, deed to
secure debt or security deed and the
junior mortgage, deed of trust, deed to secure debt or security deed, the
terms of the senior mortgage, deed of trust, deed to secure debt or security
deed will govern generally. Upon a failure of the mortgagor or trustor to
perform any of its obligations, the senior mortgagee or beneficiary, subject
to the terms of the senior mortgage, deed of trust, deed to secure debt or
security deed may have the right to perform the obligation itself. Generally,
all sums so expended by the mortgagee or beneficiary become part of the
indebtedness secured by the mortgage, deed of trust, deed to secure debt or
security deed. To the extent a first mortgagee expends such sums, such sums
will generally have priority over all sums due under a junior mortgage, deed
of trust, deed to secure debt or security deed.
RIGHTS OF REDEMPTION
The purposes of a foreclosure action are to enable the mortgagee to realize
upon its security and to bar the mortgagor, and all persons who have an
interest in the property which is subordinate to the foreclosing mortgagee,
from their "equity of redemption." The doctrine of equity of redemption
provides that, until the property covered by a mortgage has been sold in
accordance with a properly conducted foreclosure and foreclosure sale, those
having an interest which is subordinate to that of the foreclosing mortgagee
have an equity
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of redemption and may redeem the property by paying the entire debt with
interest. In addition, in some states, when a foreclosure action has been
commenced, the redeeming party must pay certain costs of such action. Those
having an equity of redemption must generally be made parties and duly
summoned to the foreclosure action in order for their equity of redemption to
be barred.
In some states, after sale pursuant to a deed of trust or foreclosure of a
mortgage, the borrower and certain foreclosed junior lienors are given a
statutory period in which to redeem the property from the foreclosure sale. In
certain other states, this right of redemption applies only to sale following
judicial foreclosure, and not to sale pursuant to a non-judicial power of
sale. In most states where the right of redemption is available, statutory
redemption may occur upon payment of the foreclosure purchase price, accrued
interest and expenses of foreclosure. In other states, redemption may be
authorized if the former borrower pays only a portion of the sums due. In some
states, the right to redeem is an equitable right. The equity of redemption,
which is a non-statutory right that must be exercised prior to foreclosure
sale, should be distinguished from statutory rights of redemption. The effect
of a right of redemption is to diminish the ability of the lender to sell the
foreclosed property. The exercise of a right of redemption would defeat the
title of any purchaser at a foreclosure sale, or of any purchaser from the
lender subsequent to judicial foreclosure or sale under a deed of trust.
Consequently, the practical effect of the redemption right is to force the
lender to maintain the property and pay the expenses of ownership until the
redemption period has run. In some states, there is no right to redeem
property after a trustee's sale under a deed of trust.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states have imposed statutory restrictions that limit the remedies
of a beneficiary under a deed of trust or a mortgagee under a mortgage. In
some states, statutes limit the right of the beneficiary or mortgagee to
obtain a deficiency judgment against the borrower following foreclosure or
sale under a deed of trust. A deficiency judgment is a personal judgment
against the borrower equal in most cases to the difference between the amount
due to the lender and the net amount realized upon the public sale.
Some state statutes may require the beneficiary or mortgagee to exhaust the
security afforded under a deed of trust or mortgage by foreclosure in an
attempt to satisfy the full debt before bringing a personal action against the
borrower. In certain other states, the lender has the option of bringing a
personal action against the borrower on the debt without first exhausting such
security; however, in some of these states, the lender, following judgment on
such personal action, may be deemed to have elected a remedy and may be
precluded from exercising remedies with respect to the security. Consequently,
the practical effect of the election requirement, when applicable, is that
lenders will usually proceed first against the security rather than bringing a
personal action against the borrower.
Other statutory provisions may limit any deficiency judgment against the
borrower following a foreclosure sale to the excess of the outstanding debt
over the fair market value of the property at the time of such sale. The
purpose of these statutes is to prevent a beneficiary or a mortgagee from
obtaining a large deficiency judgment against the former borrower as a result
of low or no bids at the foreclosure sale.
In some states, exceptions to the anti-deficiency statutes are provided for
in certain instances where the value of the lender's security has been
impaired by acts or omissions of the borrower, for example, in the event of
waste of the property.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the federal bankruptcy laws,
the federal Soldiers' and Sailors' Civil Relief Act of 1940 and state laws
affording relief to debtors, may interfere with or affect the ability of a
secured mortgage lender to realize upon its security and/or enforce a
deficiency judgment. For example, in a Chapter 13 proceeding, the holder may
not be able to obtain a lift of the automatic stay to foreclose if the
borrower has equity and the home is necessary to the bankruptcy
reorganization. Generally, with respect to the federal bankruptcy law, the
filing of a petition acts as a stay against virtually all actions against the
debtor, including the enforcement of remedies of collection of a
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debt and, often, no interest or principal payments are made during bankruptcy
proceedings. A bankruptcy court may also grant the debtor a reasonable time to
cure a payment default with respect to a mortgage loan on a debtor's residence
by paying arrearages and reinstate the original mortgage loan payment schedule
even though the lender accelerated the mortgage loan and final judgment of
foreclosure had been entered in state court (provided no sale of the property
had yet occurred) prior to the filing of the debtor's Chapter 13 petition.
Some courts with federal bankruptcy jurisdiction have approved plans, based on
the particular facts of the reorganization case, that effected the curing of a
mortgage loan default by paying arrearages over a number of years. In the case
of a mortgage loan not secured by the debtor's principal residence, courts
with federal bankruptcy jurisdiction may also reduce the monthly payments due
under such mortgage loan, change the rate of interest and alter the mortgage
loan repayment schedule.
The Code provides priority to certain federal tax liens over the lien of the
mortgage or deed of trust. The Bankruptcy Code also provides priority to
certain tax liens over the lien of the mortgage or deed of trust. The laws of
some states provide priority to certain state tax liens over the lien of the
mortgage or deed of trust. Numerous federal and some state consumer protection
laws impose substantive requirements upon mortgage lenders in connection with
the origination, servicing and the enforcement of mortgage loans. These laws
include the federal Truth in Lending Act, Real Estate Settlement Procedures
Act, Equal Credit Opportunity Act, Fair Credit Billing Act, Fair Credit
Reporting Act, state licensing requirements, and related statutes and
regulations. These federal laws and state laws impose specific statutory
liabilities upon lenders who originate or service mortgage loans and who fail
to comply with the provisions of the law. In some cases, this liability may
affect assignees of the mortgage loans.
CONSUMER PROTECTION LAWS WITH RESPECT TO LOANS
Numerous Federal and state consumer protection laws impose substantial
requirements upon creditors involved in consumer finance. These laws include
the Federal Truth-in-Lending Act, Regulation "Z", the Equal Credit Opportunity
Act, Regulation "B", the Fair Credit Reporting Act, and related statutes. The
Home Ownership and Equity Protection Act of 1994 (the "Home Protection Act"),
which became effective on October 1, 1995, adds provisions to Regulation Z
which impose additional disclosure and other requirements on creditors
involved in non-purchase money mortgage loans with high interest rates or high
up-front fees and charges. It is possible that some Loans included in a Loan
Pool may be subject to such provisions. The Home Protection Act applies to
mortgage loans originated on or after the effective date of such regulations.
These laws can impose specific statutory liabilities upon creditors who fail
to comply with their provisions and may affect the enforceability of the
contract.
Courts have imposed general equitable principles upon repossession and
litigation involving deficiency balances. These equitable principles are
generally designed to relieve a consumer from the legal consequences of a
default.
In several cases, consumers have asserted that the remedies provided secured
parties under the UCC and related laws violate the due process protections
provided under the 14th Amendment to the Constitution of the United States.
For the most part, courts have upheld the notice provisions of the UCC and
related laws as reasonable or have found that the repossession and resale by
the creditor does not involve sufficient state action to afford constitutional
protection to consumers.
The so-called "Holder-in-Due-Course" rule of the Federal Trade Commission is
intended to defeat the ability of the transferor of a consumer credit contract
which is the seller of goods which gave rise to the transaction (and certain
related lenders and assignees) to transfer such contract free of notice of
claims by the debtor thereunder. The effect of this rule is to subject the
assignee of such a contract to all claims and defenses which the debtor could
assert against the seller of goods, such as a home improvement contractor.
Liability under this rule is limited to amounts paid under a Loan; however,
the Obligor also may be able to assert the rule to set off remaining amounts
due as a defense against a claim brought by the Trust Fund against such
Obligor. The Home Protection Act provides that assignees of certain high-
interest, non-purchase money mortgage loans
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(which may include some Loans) are subject to all claims and defenses that the
debtor could assert against the original creditor, unless the assignee
demonstrates that a reasonable person in the exercise of ordinary due
diligence could not have determined that the mortgage loan was subject to the
provisions of the Home Protection Act.
ENFORCEABILITY OF CERTAIN PROVISIONS
The standard forms of note, mortgage and deed of trust generally contain
provisions obligating the borrower to pay a late charge if payments are not
timely made. In certain states there are or may be specific limitations upon
late charges which a lender may collect from a borrower for delinquent
payments. Under the Agreement, late charges (to the extent permitted by law
and not waived by the Company) will be retained by the Company as additional
servicing compensation.
The standard forms of note, mortgage and deed of trust also include a debt-
acceleration clause, which permits the lender to accelerate the debt upon a
monetary default of the borrower, after the applicable cure period. Courts
will generally enforce clauses providing for acceleration in the event of a
material payment default. However, courts, exercising equity jurisdiction, may
refuse to allow a lender to foreclose a mortgage or deed of trust when an
acceleration of the indebtedness would be inequitable or unjust and the
circumstances would render the acceleration unconscionable.
Courts have imposed general equitable principles upon foreclosure. These
equitable principles are generally designed to relieve the borrower from the
legal effect of defaults under the loan documents. Examples of judicial
remedies that may be fashioned include judicial requirements that the lender
undertake affirmative actions to determine the causes for the borrower's
default and the likelihood that the borrower will be able to reinstate the
loan. In some cases, courts have required lenders to reinstate loans or recast
payment schedules to accommodate borrowers who are suffering from temporary
financial disability. In some cases, courts have limited the right of lenders
to foreclose if the default under the mortgage instrument is not monetary,
such as the borrower failing to adequately maintain the property or the
borrower executing a junior mortgage or deed of trust affecting the property.
In other cases, some courts have been faced with the issue whether federal or
state constitutional provisions reflecting due process concerns for adequate
notice require that borrowers under mortgages or the deeds of trust receive
notices in addition to statutorily-prescribed minimum requirements. For the
most part, these cases have upheld the notice provisions as being reasonable
or have found that the sale by a trustee under a deed of trust or under a
mortgage having a power of sale does not involve sufficient state action to
afford constitutional protection to the borrower.
"DUE-ON-SALE" CLAUSES
All of the Loan documents will contain due-on-sale clauses unless the
Prospectus Supplement indicates otherwise. These clauses permit the Servicer
to accelerate the maturity of the loan on notice, which is usually 30 days, if
the borrower sells, transfers or conveys the property without the prior
consent of the mortgagee. In recent years, court decisions and legislative
actions placed substantial restrictions on the right of lenders to enforce
such clauses in many states. However, effective October 15, 1982, Congress
enacted the Garn-St Germain Depository Institutions Act of 1982 (the "Garn-St.
Germain Act"), which, after a three-year grace period, preempts state laws
which prohibit the enforcement of due-on-sale clauses by providing, among
other matters, that "due-on-sale" clauses in certain loans (including the
Loans) made after the effective date of the Garn-St. Germain Act are
enforceable within certain limitations as set forth in the Garn-St. Germain
Act and the regulations promulgated thereunder.
By virtue of the Garn-St. Germain Act, the Servicer generally may be
permitted to accelerate any Loan which contains a "due-on-sale" clause upon
transfer of an interest in the mortgaged property. This ability to accelerate
will not apply to certain types of transfers, including (i) the granting of a
leasehold interest which has a term of three years or less and which does not
contain an option to purchase, (ii) a transfer to a relative resulting from
the death of a mortgagor or trustor, or a transfer where the spouse or
child(ren) becomes an owner of the
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mortgaged property in each case where the transferee(s) will occupy the
mortgaged property, (iii) a transfer resulting from a decree of dissolution of
marriage, legal separation agreement or from an incidental property settlement
agreement by which the spouse becomes an owner of the mortgaged property, (iv)
the creation of a lien or other encumbrance subordinate to the lender's
security instrument which does not relate to a transfer of rights of occupancy
in the mortgaged property (provided that such lien or encumbrance is not
created pursuant to a contract for deed), (v) a transfer by devise, descent or
operation of law on the death of a joint tenant or tenant by the entirety, and
(vi) other transfers as set forth in the Garn-St. Germain Act and the
regulations thereunder. As a result, a lesser number of Loans which contain
"due-on-sale" clauses may extend to full maturity than earlier experience
would indicate with respect to single-family mortgage loans. The extent of the
effect of the Garn-St. Germain Act on the average lives and delinquency rates
of the Loans, however, cannot be predicted.
The inability to enforce a due-on-sale clause may result in Loans bearing an
interest rate below the current market rate being assumed by a new home buyer
rather than being paid off, which may have an impact upon the average life of
the Loans and the number of Loans which may be outstanding until maturity.
ENVIRONMENTAL LEGISLATION
Under the federal Comprehensive Environmental Response, Compensation and
Liability Act, as amended ("CERCLA"), and under state law in certain states, a
secured party which takes a deed-in-lieu of foreclosure, purchases a mortgaged
property at a foreclosure sale, or operates a mortgaged property may become
liable in certain circumstances for the costs of cleaning up hazardous
substances regardless of whether they have contaminated the property. CERCLA
imposes strict, as well as joint and several, liability on several classes of
potentially responsible parties, including current owners and operators of the
property who did not cause or contribute to the contamination. Furthermore,
liability under CERCLA is not limited to the original or unamortized principal
balance of a loan or to the value of the property securing a loan. Lenders may
be held liable under CERCLA as owners or operators unless they qualify for the
secured creditor exemption to CERCLA. This exemption exempts from the
definition of owners and operators those who, without participating in the
management of a facility, hold indicia of ownership primarily to protect a
security interest in the facility. What constitutes sufficient participation
in the management of a property securing a loan or the business of a borrower
to render the exemption unavailable to a lender has been a matter of
interpretation by the courts. CERCLA has been interpreted to impose liability
on a secured party, even absent foreclosure, where the party participated in
the financial management of the borrower's business to a degree indicating a
capacity to influence waste disposal decisions. However, court interpretations
of the secured creditor exemption have been inconsistent. In addition, when
lenders foreclose and thereupon become owners of collateral property, courts
are inconsistent as to whether such ownership renders the secured creditor
exemption unavailable. Other federal and state laws in certain circumstances
may impose liability on a secured party which takes a deed-in-lieu of
foreclosure, purchases a mortgaged property at a foreclosure sale, or operates
a mortgaged property on which contaminants other than CERCLA hazardous
substances are present, including petroleum, agricultural chemicals, hazardous
wastes, asbestos, radon, and lead-based paint. Such cleanup costs may be
substantial. It is possible that such cleanup costs could become a liability
of a Trust Fund and reduce the amounts otherwise distributable to the holders
of the related Series of Certificates in certain circumstances if such cleanup
costs were incurred. Moreover, certain states by statute impose a lien for any
cleanup costs incurred by such state on the property that is the subject of
such cleanup costs (an "environmental lien"). All subsequent liens on such
property generally are subordinated to such an environmental lien and, in some
states, even prior recorded liens are subordinated to environmental liens. In
the latter states, the security interest of the Trustee in a related parcel of
real property that is subject to such an environmental lien could be adversely
affected.
Traditionally, many residential mortgage lenders have not taken steps to
evaluate whether contaminants are present with respect to any mortgaged
property prior to the origination of the mortgage loan or prior to foreclosure
or accepting a deed-in-lieu of foreclosure. Accordingly, the Company has not
made and will not make such evaluations prior to the origination of the Loans.
Neither the Company nor any replacement Servicer will be required by any
Agreement to undertake any such evaluations prior to foreclosure or accepting
a deed-in-
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lieu of foreclosure. The Company does not make any representations or
warranties or assume any liability with respect to the absence or effect of
contaminants on any related real property or any casualty resulting from the
presence or effect of contaminants. However, the Company will not foreclose on
related real property or accept a deed-in-lieu of foreclosure if it knows or
reasonably believes that there are material contaminated conditions on such
property. A failure so to foreclose may reduce the amounts otherwise available
to Certificateholders of the related Series.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT
Application of the Soldiers' and Sailors' Civil Relief Act of 1940, as
amended (the "Relief Act"), would adversely affect, for an indeterminate
period of time, the ability of the Servicer to collect full amounts of
interest on certain of the Loans. Any shortfall in interest collections
resulting from the application of the Relief Act or similar legislation, which
would not be recoverable from the related Loans, would result in a reduction
of the amounts distributable to the Certificateholders. In addition, the
Relief Act imposes limitations that would impair the ability of the Servicer
to foreclose on an affected mortgage, deed of trust, deed to secured debt or
security deed during the mortgagor's period of active duty status, and, under
certain circumstances, during an additional three month period thereafter.
Thus, in the event that the Relief Act or similar legislation applies to any
Loan which goes into default, there may be delays in payment on the
Certificates in connection therewith. Any other interest shortfalls, deferrals
or forgiveness of payments on the Loans resulting from similar legislation or
regulations may result in delays in payments or losses to Certificateholders.
REPURCHASE OBLIGATIONS
The Company will represent and warrant under each Agreement that each Loan
complies with all requirements of law. Accordingly, if any Obligor has a claim
against the related Trust Fund for violation of any law and such claim
materially adversely affects the Trust Fund's interest in a Loan, such
violation would constitute a breach of a representation and warranty under the
Agreement and would create an obligation to repurchase such Loan unless the
breach is cured. See "Description of the Certificates--Conveyance of Loans."
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
imposes certain fiduciary and prohibited transaction restrictions on employee
pension and welfare benefit plans subject to ERISA ("ERISA Plans"). Section
4975 of the Code imposes similar prohibited transaction restrictions on tax-
qualified retirement plans described in Section 401(a) of the Code ("Qualified
Retirement Plans") and on Individual Retirement Accounts ("IRAs") described in
Section 408 of the Code (collectively, "Tax-Favored Plans").
Certain employee benefit plans, such as governmental plans (as defined in
Section 3(32) of ERISA), are not subject to the ERISA requirements discussed
herein. Accordingly, assets of such plans may be invested in Certificates
without regard to the ERISA considerations described below, subject to the
provisions of applicable federal and state law. Any such plan that is a
Qualified Retirement Plan and exempt from taxation under Sections 401(a) and
501(a) of the Code, however, is subject to the prohibited transaction rules
set forth in Section 503 of the Code.
In addition to imposing general fiduciary requirements, including those of
investment prudence and diversification and the requirement that a Plan's
investment be made in accordance with the documents governing the Plan,
Section 406 of ERISA and Section 4975 of the Code prohibit a broad range of
transactions involving "plan assets" of ERISA Plans and Tax-Favored Plans
(collectively, "Plans") and persons ("Parties in Interest" under ERISA or
"Disqualified Persons" under the Code) who have certain specified
relationships to the Plans, unless a statutory or administrative exemption is
available. Certain Parties in Interest (or Disqualified Persons) that
participate in a prohibited transaction may be subject to a penalty (or an
excise tax) imposed pursuant to Section 502(i) of ERISA or Section 4975 of the
Code, unless a statutory or administrative exemption is available.
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PLAN ASSET REGULATIONS
Certain transactions involving the Trust Fund might be deemed to constitute
prohibited transactions under ERISA and the Code with respect to a Plan that
purchased Certificates, if assets of the Trust Fund were deemed to be assets
of the Plan. An investment of Plan Assets (as defined below) in Certificates
may cause the underlying assets included in the Trust to be deemed "plan
assets" of such Plan. The U.S. Department of Labor (the "DOL") has promulgated
regulations at 29 C.F.R. section 2510.3-101 (the "DOL Regulations") concerning
whether or not a Plan's assets would be deemed to include an interest in the
underlying assets of an entity (such as the Trust Fund), for purposes of
applying the general fiduciary responsibility provisions of ERISA and the
prohibited transaction provisions of ERISA and the Code, when a Plan acquires
an "equity interest" (such as a Certificate) in such entity. Because of the
factual nature of certain of the rules set forth in the DOL Regulations, Plan
Assets either may be deemed to include an interest in the assets of the Trust
Fund or may be deemed merely to include its interest in the Certificates.
Therefore, neither Plans nor such entities should acquire or hold Certificates
in reliance upon the availability of any exception under the DOL Regulations.
For purposes of this Section the term "Plan Assets" or assets of a Plan has
the meaning specified in the DOL Regulations and includes an undivided
interest in the underlying assets of certain entities in which a Plan invests.
The prohibited transaction provisions of Section 406 of ERISA and Section 4975
of the Code may apply to the Trust Fund and
cause the Company, the Trust Fund, the Trustee, any successor, or certain
affiliates thereof, to be considered or become Parties in Interest or
Disqualified Persons with respect to an investing Plan (or of a Plan holding
an interest in such an entity). If so, the acquisition or holding of
Certificates by or on behalf of the investing Plan could also give rise to a
prohibited transaction under ERISA and the Code, unless some statutory or
administrative exemption is available. Certificates acquired by a Plan would
be assets of that Plan. Under the DOL Regulations, the Trust Fund, including
the assets held in the Trust Fund, may also be deemed to be assets of each
Plan that acquires Certificates. Special caution should be exercised before
Plan Assets are used to acquire a Certificate in such circumstances,
especially if, with respect to such assets, the Company, the Trust Fund, the
Trustee, any successor or an affiliate thereof either (i) has investment
discretion with respect to the investment of Plan Assets; or (ii) has
authority or responsibility to give (or regularly gives) investment advice
with respect to Plan Assets for a fee pursuant to an agreement or
understanding that such advice will serve as a primary basis for investment
decisions with respect to such assets.
Any person who has discretionary authority or control respecting the
management or disposition of Plan Assets and any person who provides
investment advice with respect to such assets for a fee (in the manner
described above), is a fiduciary of the investing Plan. If the assets of the
Trust Fund were to constitute Plan Assets then any party exercising management
or discretionary control regarding those assets may be deemed to be a Plan
"fiduciary," and thus subject to the fiduciary requirements of ERISA and the
prohibited transaction provisions of ERISA and Section 4975 of the Code with
respect to any investing Plan. In addition, if the assets of the Trust Fund
were to constitute Plan Assets, then the acquisition or holding of
Certificates by, on behalf of or with Plan Assets, as well as the operation of
the Trust Fund, may constitute or involve a prohibited transaction under ERISA
and the Code.
No purchases of Certificates by, on behalf of or with Plan Assets of any
Plan will be registered unless the transferee, at its expense, delivers to the
Trustee, the Servicer and the Company an opinion of counsel (satisfactory to
the Trustee, the Servicer and the Company) that the purchase and holding of a
Certificate by, on behalf of, or with Plan Assets of such Plan is permissible
under applicable law, will not result in the assets of the Trust Fund being
deemed to be Plan Assets and subject to the prohibited transaction provisions
of ERISA and the Code and will not subject the Trustee, the Trust Fund, the
Company or the Servicer to any obligation or liability in addition to those
undertaken in the Agreement. Unless such opinion is delivered, each person
acquiring a Certificate will be deemed to represent to the Trustee, the
Company and the Servicer that such person is neither a Plan, nor acting on
behalf of a Plan, nor purchasing with Plan Assets of any Plan.
CONSULTATION WITH COUNSEL
Any fiduciary or other Plan investor that proposes to acquire or hold
Certificates on behalf of or with Plan Assets of any Plan should consult with
its counsel with respect to the potential applicability of the fiduciary
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responsibility provisions of ERISA and the prohibited transaction provisions
of ERISA and the Code to the proposed investment and the availability of any
prohibited transaction exemption, as well as other issues and their potential
consequences.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following is a general discussion of certain federal income tax
consequences relating to the purchase, ownership, and disposition of the
Certificates. The discussion is based upon laws, regulations, rulings, and
decisions now in effect, including Treasury Regulations issued on December 23,
1992, and generally effective for REMICs with startup days on or after
November 12, 1991 (the "REMIC Regulations"), all of which are subject to
change (which change may be retroactive) or possibly differing
interpretations. The discussion does not purport to deal with federal income
tax consequences applicable to all categories of investors, some of which may
be subject to special rules. Investors should consult their own tax advisors
to determine the federal, state, local, and any other tax consequences of the
purchase, ownership, and disposition of the Certificates.
Many aspects of the federal tax treatment of the purchase, ownership, and
disposition of the Certificates will depend upon whether an election is made
to treat the Trust Fund or a segregated portion thereof evidenced by a
particular Series or sub-series of Certificates as a REMIC within the meaning
of Section 860D(a) of the Internal Revenue Code of 1986, as amended (the
"Code"). The Prospectus Supplement for each series will indicate whether or
not an election to be treated as a REMIC has been or will be made with respect
thereto. The following discussion deals first with Series with respect to
which a REMIC Election is made and then with Series with respect to which a
REMIC Election is not made.
REMIC SERIES
With respect to each Series of Certificates for which a REMIC Election is
made, at the initial issuance of the Certificates in such Series the counsel
to the Company identified in the applicable Prospectus Supplement will have
advised the Company that in its opinion, assuming ongoing compliance with the
applicable Agreement, the Trust Fund will qualify as a REMIC and the
Certificates in such a Series ("REMIC Certificates") will be treated either as
regular interests in the REMIC within the meaning of Section 860G(a)(1) of the
Code ("Regular Certificates") or as residual interests in the REMIC within the
meaning of Section 860G(a)(2) of the Code ("Residual Certificates").
Qualification as a REMIC. Qualification as a REMIC involves ongoing
compliance with certain requirements and the following discussion assumes that
such requirements will be satisfied by the Trust Fund so long as there are any
REMIC Certificates outstanding. Substantially all of the assets of the REMIC
must consist of "qualified mortgages" and "permitted investments" as of the
close of the third month beginning after the day on which the REMIC issues all
of its regular and residual interests (the "Startup Day") and at all times
thereafter. The term "qualified mortgage" means any obligation (including a
participation or certificate of beneficial ownership in such obligation) which
is principally secured by an interest in real property that is transferred to
the REMIC on the Startup Day in exchange for regular or residual interests in
the REMIC or is purchased by the REMIC within the three-month period beginning
on the Startup Day pursuant to a fixed price contract in effect on the Startup
Day. The REMIC Regulations provide that a Loan is principally secured by an
interest in real property if the fair market value of the real property
securing the Loan is at least equal to either (i) 80% of the issue price
(generally, the principal balance) of the Loan at the time it was originated
or (ii) 80% of the adjusted issue price (the then-outstanding principal
balance, with certain adjustments) of the Loan at the time it is contributed
to a REMIC. The fair market value of the underlying real property is to be
determined after taking into account other liens encumbering that real
property. Alternatively, a Loan is principally secured by an interest in real
property if substantially all of the proceeds of the Loan were used to acquire
or to improve or protect an interest in real property that, at the origination
date, is the only security for the Loan (other than the
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personal liability of the obligor). A qualified mortgage also includes a
qualified replacement mortgage that is used to replace any qualified mortgage
within three months of the Startup Day or to replace a defective mortgage
within two years of the Startup Day.
"Permitted investments" consist of (a) temporary investments of cash
received under qualified mortgages before distribution to holders of interests
in the REMIC ("cash-flow investments"), (b) amounts, such as a Reserve Fund,
if any, reasonably required to provide for full payment of expenses of the
REMIC, the principal and interest due on regular or residual interests in the
event of defaults on qualified mortgages, lower than expected returns on cash-
flow investments, prepayment interest shortfalls or certain other
contingencies ("qualified reserve assets"), and (c) certain property acquired
as a result of foreclosure of defaulted qualified mortgages ("foreclosure
property"). A reserve fund will not be qualified if more than 30% of the gross
income from the assets in the reserve fund is derived from the sale or other
disposition of property held for three months or less, unless such sale is
necessary to prevent a default in payment of principal or interest on Regular
Certificates. In accordance with Section 860G(a)(7) of the Code, a reserve
fund must be "promptly and appropriately" reduced as payments on contracts are
received. Foreclosure property will be a permitted investment only to the
extent that such property is not held for more than two years.
The Code requires that in order to qualify as a REMIC an entity must make
reasonable arrangements designed to ensure that certain specified entities,
generally including governmental entities or other entities that are exempt
from United States tax, including the tax on unrelated business income
("Disqualified Organizations"), not hold residual interests in the REMIC.
Consequently, it is expected that in the case of any Trust Fund for which a
REMIC Election is made the transfer, sale, or other disposition of a Residual
Certificate to a Disqualified Organization will be prohibited and the ability
of a Residual Certificate to be transferred will be conditioned on the
Trustee's receipt of a certificate or other document representing that the
proposed transferee is not a Disqualified Organization. The transferor of a
Residual Certificate must not, as of the time of the transfer, have actual
knowledge that such representation is false. The Code further requires that
reasonable arrangements must be made to enable a REMIC to provide the Internal
Revenue Service (the "Service") and certain other parties, including
transferors of residual interests in a REMIC, with the information needed to
compute the tax imposed by Section 860E(e)(1) of the Code if, in spite of the
steps taken to prevent Disqualified Organizations from holding residual
interests, such an organization does, in fact, acquire a residual interest.
See "REMIC Series--Restrictions on Transfer of Residual Certificates" below.
If the Trust Fund fails to comply with one or more of the ongoing
requirements for qualification as a REMIC, the Trust Fund will not be treated
as a REMIC for the year during which such failure occurs and thereafter unless
the Service determines, in its discretion, that such failure was inadvertent
(in which case, the Service may require any adjustments which it deems
appropriate). If the ownership interests in the assets of the Trust Fund
consist of multiple classes, failure to treat the Trust Fund as a REMIC may
cause the Trust Fund to be treated as an association taxable as a corporation.
Such treatment could result in income of the Trust Fund being subject to
corporate tax in the hands of the Trust Fund and in a reduced amount being
available for distribution to Certificateholders as a result of the payment of
such taxes.
Two-Tier REMIC Structures. For certain series of Certificates, two separate
elections may be made to treat segregated portions of the assets of a single
Trust Fund as REMICs for federal income tax purposes (respectively, the
"Subsidiary REMIC" and the "Master REMIC"). Upon the issuance of any such
series of Certificates, Counsel will have advised the Company, as described
above, that at the initial issuance of the Certificates, the Subsidiary REMIC
and the Master REMIC will each qualify as a REMIC for federal income tax
purposes, and that the Certificates in such a series will be treated either as
Regular Certificates or Residual Certificates of the appropriate REMIC. Only
REMIC Certificates issued by the Master REMIC will be offered hereunder.
Solely for the purpose of determining whether such Regular Certificates will
constitute qualifying real estate or real property assets for certain
categories of financial institutions or real estate investment trusts as
described below, both REMICs in a two-tier REMIC structure will be treated as
one. See the discussion below under "REMIC Series--Taxation of Regular
Interests."
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Taxation of Regular Interests. Regular Certificates will be treated as new
debt instruments issued by the REMIC on the Startup Day. If a Regular
Certificate represents an interest in a REMIC that consists of a specified
portion of the interest payments on the REMIC's qualified mortgages, the
stated principal amount with respect to that Regular Certificate may be zero.
Such a specified portion may consist of a fixed number of basis points, a
fixed percentage of interest or a qualified variable rate on some or all of
the qualified mortgages. Stated interest on a Regular Certificate will be
taxable as ordinary income. Holders of Regular Certificates that would
otherwise report income under a cash method of accounting will be required to
report income with respect to such Regular Certificates under the accrual
method. Under Temporary Treasury Regulations, if a Trust Fund, with respect to
which a REMIC Election is made, is considered to be a "single-class REMIC," a
portion of the REMIC's servicing fees, administrative and other non-interest
expenses, including assumption fees and late payment charges retained by the
Company, will be allocated as a separate item of gross income and as a
separate item of expense to those Regular Certificateholders that are "pass-
through interest holders." Generally, a single-class REMIC is defined as a
REMIC that would be treated as a fixed investment trust under applicable law
but for its qualification as a REMIC, or a REMIC that is substantially similar
to an investment trust but is structured with the principal purpose of
avoiding this allocation requirement imposed by the Temporary Treasury
Regulations. Generally, a pass-through interest holder refers to individuals,
trusts and estates, certain other pass-through
entities beneficially owned by one or more individuals, trusts or estates, and
regulated investment companies. Such an individual, estate, trust or pass-
through entity that holds a Regular Certificate in such a REMIC will be
allowed to deduct the foregoing separate item of expense under Section 212 of
the Code only to the extent that, in the aggregate and combined with certain
other itemized deductions, it exceeds 2% of the adjusted gross income of the
holder. In addition, Section 68 of the Code provides that the amount of
itemized deductions (including those provided for in Section 212 of the Code)
otherwise allowable for the taxable year for an individual whose adjusted
gross income exceeds a threshold amount specified in the Code ($124,500 for
1998, in the case of a joint return) will be reduced by the lesser of (i) 3%
of the excess of adjusted gross income over the specified threshold amount or
(ii) 80% of the amount of itemized deductions otherwise allowable for such
taxable year. Furthermore, in determining the alternative minimum taxable
income of such an individual, trust, estate or pass-through entity that is a
holder of a Regular Certificate in such a REMIC, no deduction will be allowed
for such holder's allocable portion of the foregoing expenses, even though an
amount equal to the total of such expenses will be included in such holder's
gross income for alternative minimum tax purposes. Unless otherwise stated in
the related Prospectus Supplement, the foregoing expenses will not be
allocated to holders of a Regular Certificate in a REMIC. If the foregoing
limitations apply, certain holders of Regular Certificates in "single-class
REMICs" may not be entitled to deduct all or any part of the foregoing
expenses. Accordingly, Regular Certificates in such a "single class-REMIC" may
not be appropriate investments for individuals, trusts, estates or pass-
through entities beneficially owned by one or more individuals, trusts or
estates. Such prospective investors should carefully consult with their own
tax advisors prior to making an investment in any such Regular Certificates.
Tax Status of REMIC Certificates. In general, (i) Regular Certificates held
by a thrift institution taxed as a "domestic building and loan association"
within the meaning of Section 7701(a)(19) of the Code will constitute "a
regular ... interest in a REMIC" within the meaning of Section
7701(a)(19)(C)(xi) of the Code; and (ii) Regular Certificates held by a real
estate investment trust will constitute "real estate assets" within the
meaning of Section 856(c)(5)(A) of the Code and interest thereon will be
considered "interest on obligations secured by mortgages on real property"
within the meaning of Section 856(c)(3)(B) of the Code. If less than 95% of
the average adjusted basis of the assets comprising the REMIC are assets
qualifying under any of the foregoing Sections of the Code (including assets
described in Section 7701(a)(19)(C) of the Code), then the Regular
Certificates will be qualifying assets only to the extent that the assets
comprising the REMIC are qualifying assets. Furthermore, interest paid with
respect to Certificates held by a real estate investment trust will be
considered "interest on obligations secured by mortgages on real property or
on interests in real property" within the meaning of Section 856(c)(3)(B) of
the Code to the same extent that the Certificates themselves are treated as
real estate assets. Regular Certificates held by a regulated investment
company or a real estate investment trust will not constitute "Government
securities" within the meaning of Sections 851(b)(4)(A)(i) and 856(c)(5)(A) of
the Code, respectively. In addition, the REMIC Regulations provide that
payments on Loans
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held and reinvested pending distribution to Certificateholders will be
considered to be "real estate assets" within the meaning of Section
856(c)(5)(A) of the Code. Entities affected by the foregoing provisions of the
Code that are considering the purchase of Certificates should consult their
own tax advisors regarding these provisions.
Original Issue Discount. Regular Certificates may be issued with "original
issue discount." Rules governing original issue discount are set forth in
Sections 1271-1273 and 1275 of the Code and the Treasury Regulations issued
thereunder in January 1994 (the "OID Regulations"). The discussion herein is
based in part on the OID Regulations, which generally apply to debt
instruments issued on or after April 4, 1994, but which generally may be
relied upon for debt instruments issued after December 21, 1992. Moreover,
although the rules relating to original issue discount contained in the Code
were modified by the Tax Reform Act of 1986 specifically to address the tax
treatment of securities, such as the Regular Certificates, on which principal
is required to be prepaid based on prepayments of the underlying assets,
regulations under that legislation have not yet been issued. Nonetheless, the
Code requires that a prepayment assumption be used with respect to the
underlying assets of a REMIC in computing the accrual of original issue
discount on Regular Certificates, and that regular adjustments be made in the
amount and the rate of accrual to reflect differences between the actual
prepayment rate and the prepayment assumption. Although regulations have not
been issued concerning the use of a prepayment assumption, the legislative
history associated with the Tax Reform Act of 1986 indicates that such
regulations are to provide that the prepayment assumption used with respect to
a Regular Certificate must be the same as that used in pricing the initial
offering of such Regular Certificate. The prepayment assumption (the
"Prepayment Assumption") used in reporting original issue discount for each
series of Regular Certificates will be consistent with this standard and will
be disclosed in the related Prospectus Supplement. However, no representation
is made hereby nor can there be any assurance that the underlying assets of a
REMIC will in fact prepay at a rate conforming to the prepayment assumption or
at any other rate. Certificateholders also should be aware that the OID
Regulations do not address certain issues relevant to, or are not applicable
to, prepayable securities such as the Regular Certificates.
In general, in the hands of the original holder of a Regular Certificate,
original issue discount, if any, is the difference between the "stated
redemption price at maturity" of the Regular Certificate and its "issue
price." The original issue discount with respect to a Regular Certificate will
be considered to be zero if it is less than .25% of the Regular Certificate's
stated redemption price at maturity multiplied by the number of complete years
from the date of issue of such Regular Certificate to its maturity date. The
OID Regulations, however, provide a special de minimis rule to apply to
obligations such as the Regular Certificates that have more than one principal
payment or that have interest payments that are not qualified stated interest
as defined in the OID Regulations, payable before maturity ("installment
obligations"). Under the special rule, original issue discount on an
installment obligation is generally considered to be zero if it is less than
.25% of the principal amount of the obligation multiplied by the weighted
average maturity of the obligation as defined in the OID Regulations. Because
of the possibility of prepayments, it is not clear whether or how the de
minimis rules will apply to the Regular Certificates. As described above, it
appears that the Prepayment Assumption will be required to be used in
determining the weighted average maturity of the Regular Certificates. In the
absence of authority to the contrary, the Company expects to apply the de
minimis rule applicable to installment obligations by using the Prepayment
Assumption.
Generally, the original holder of a Regular Certificate that includes a de
minimis amount of original issue discount (other than de minimis original
issue discount attributable to a so-called "teaser" interest rate or initial
interest rate holiday) includes that original issue discount in income as
principal payments are made. The amount includable in income with respect to
each principal payment equals a pro rata portion of the entire amount of de
minimis original issue discount with respect to that Regular Certificate. Any
de minimis amount of original issue discount includable in income by a holder
of a Regular Certificate is generally treated as a capital gain if the Regular
Certificate is a capital asset in the hands of the holder thereof. Pursuant to
the OID Regulations, a holder of a Regular Certificate that uses the accrual
method of tax accounting or that acquired such Regular Certificate on or after
April 4, 1994, may, however, elect to include in gross income all interest
that accrues on a Regular Certificate, including any de minimis original issue
discount and market discount, by using the constant yield method described
below with respect to original issue discount.
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The stated redemption price at maturity of a Regular Certificate generally
will be equal to the sum of all payments, whether denominated as principal or
interest, to be made with respect thereto other than "qualified stated
interest." Pursuant to the OID Regulations, qualified stated interest is
stated interest that is unconditionally payable at least annually at a single
fixed rate of interest (or, under certain circumstances, a variable rate tied
to an objective index) during the entire term of the Regular Certificate
(including short periods). Under the OID Regulations, interest is considered
unconditionally payable only if late payment or nonpayment is expected to be
penalized or reasonable remedies exist to compel payment. It is possible that
interest payable on Regular Certificates may not be considered to be
unconditionally payable under the OID Regulations because Regular
Certificateholders may not have default remedies ordinarily available to
holders of debt instruments or because no penalties are imposed as a result of
any failure to make interest payments on the Regular Certificates. Until
further guidance is issued, however, the REMIC will treat the interest on
Regular Certificates as unconditionally payable under the OID Regulations. In
addition, under the OID Regulations, certain variable interest rates payable
on Regular Certificates, including rates based upon the weighted average
interest rate of a Loan Pool, may not be treated as qualified stated interest.
In such case, the OID Regulations would treat interest under such rates as
contingent interest which generally must be included in income by the Regular
Certificateholder when the interest becomes fixed, as opposed to when it
accrues. Until further guidance is issued concerning the treatment of such
interest payable on Regular Certificates, the REMIC will treat such interest
as being payable at a variable rate tied to a single objective index of market
rates. Prospective investors should consult their tax advisors regarding the
treatment of such interest under the OID Regulations. In the absence of
authority to the contrary and if otherwise appropriate, the Company expects to
determine the stated redemption price at maturity of a Regular Certificate by
assuming that the anticipated rate of prepayment for all Loans will occur in
such a manner that the initial Pass-Through Rate for a Certificate will not
change. Accordingly, interest at the initial Pass-Through Rate will constitute
qualified stated interest payments for purposes of applying the original issue
discount provisions of the Code. In general, the issue price of a Regular
Certificate is the first price at which a substantial amount of the Regular
Certificates of such class are sold for money to the public (excluding bond
houses, brokers or similar persons or organizations acting in the capacity of
underwriters, placement agents or wholesalers). If a portion of the initial
offering price of a Regular Certificate is allocable to interest that has
accrued prior to its date of issue, the issue price of such a Regular
Certificate generally includes that pre-issuance accrued interest.
If the Regular Certificates are determined to be issued with original issue
discount, a holder of a Regular Certificate must generally include the
original issue discount in ordinary gross income for federal income tax
purposes as it accrues in advance of the receipt of any cash attributable to
such income. The amount of original issue discount, if any, required to be
included in a Regular Certificateholder's ordinary gross income for federal
income tax purposes in any taxable year will be computed in accordance with
Section 1272(a) of the Code and the OID Regulations. Under such Section and
the OID Regulations, original issue discount accrues on a daily basis under a
constant yield method that takes into account the compounding of interest. The
amount of original issue discount to be included in income by a holder of a
debt instrument, such as a Regular Certificate, under which principal payments
may be subject to acceleration because of prepayments of other debt
obligations securing such instruments, is computed by taking into account the
Prepayment Assumption.
The amount of original issue discount includable in income by a holder of a
Regular Certificate is the sum of the "daily portions" of the original issue
discount for each day during the taxable year on which the holder held the
Regular Certificate. The daily portions of original issue discount are
determined by allocating to each day in any accrual period a pro rata portion
of the excess, if any, of the sum of (i) the present value of all remaining
payments to be made on the Regular Certificate as of the close of the accrual
period and (ii) the payments during the accrual period of amounts included in
the stated redemption price of the Regular Certificate over the adjusted issue
price of the Regular Certificate at the beginning of the accrual period.
Generally, the accrual period for the Regular Certificates corresponds to the
intervals at which amounts are paid or compounded with respect to such Regular
Certificate, beginning with their date of issuance and ending with the
maturity date. The "adjusted issue price" of a Regular Certificate at the
beginning of any accrual period is the sum of the issue price and accrued
original issue discount for each prior accrual period reduced by the
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amount of payments other than payments of qualified stated interest made
during each prior accrual period. The Code requires the present value of the
remaining payments to be determined on the bases of (a) the original yield to
maturity (determined on the basis of compounding at the close of each accrual
period and properly adjusted for the length of the accrual period), (b)
events, including actual prepayments, which have occurred before the close of
the accrual period, and (c) the assumption that the remaining payments will be
made in accordance with the original Prepayment Assumption. The effect of this
method is to increase the portions of original issue discount that a Regular
Certificateholder must include in income to take into account prepayments with
respect to the Loans held by the Trust Fund that occur at a rate that exceeds
the Prepayment Assumption and to decrease (but not below zero for any period)
the portions of original issue discount that a Regular Certificateholder must
include in income to take into account prepayments with respect to the Loans
that occur at a rate that is slower than the Prepayment Assumption. Although
original issue discount will be reported
to Regular Certificateholders based on the Prepayment Assumption, no
representation is made to Regular Certificateholders that the Loans will be
prepaid at that rate or at any other rate.
A subsequent purchaser of a Regular Certificate will also be required to
include in such purchaser's ordinary gross income for federal income tax
purposes the original issue discount, if any, accruing with respect to such
Regular Certificate, unless the price paid equals or exceeds the Regular
Certificate's remaining stated redemption price. If the price paid exceeds the
Regular Certificate's adjusted issue price, but does not equal or exceed the
remaining stated redemption price of the Regular Certificate, the amount of
original issue discount to be accrued will be reduced in accordance with a
formula set forth in Section 1272(a)(7)(B) of the Code. Under this provision,
the daily portions of original issue discount which must be included in gross
income will be reduced by an amount equal to such daily portion multiplied by
the fraction obtained by dividing (i) the excess of the purchase price
therefor over the Regular Certificate's adjusted issue price by (ii) the
aggregate original issue discount remaining to be accrued with respect to such
Regular Certificate.
The Company believes that the holder of a Regular Certificate determined to
be issued with more than de minimis original issue discount will be required
to include the original issue discount in ordinary gross income for federal
income tax purposes computed in the manner described above. However, the OID
Regulations either do not address or are subject to varying interpretations
with respect to several issues concerning the computation of original issue
discount for obligations such as the Regular Certificates.
Adjustable Rate Regular Certificates. Regular Certificates may bear interest
at an adjustable rate. Under the OID Regulations, if an adjustable rate
Regular Certificate provides for qualified stated interest payments computed
on the basis of certain qualified floating rates or objective rates, then any
original issue discount on such a Regular Certificate may be computed and
accrued under the same methodology that applies to Regular Certificates paying
qualified stated interest at a fixed rate. See the discussion above under
"REMIC Series-- Original Issue Discount." If adjustable rate Regular
Certificates are issued, the related Prospectus Supplement will describe the
manner in which the original issue discount rules may be applied with respect
thereto and the method to be used in preparing information returns to the
holders of such adjustable rate Regular Certificates and to the Service.
For purposes of applying the original issue discount provisions of the Code,
all or a portion of the interest payable with respect to adjustable rate
Regular Certificate may not be treated as qualified stated interest in certain
circumstances, including the following: (i) if the adjustable rate of interest
is subject to one or more minimum or maximum rate floors or ceilings which are
not fixed throughout the term of the Regular Certificate and which are
reasonably expected as of the issue date to cause the rate in certain accrual
periods to be significantly higher or lower than the overall expected return
on the Regular Certificate determined without such floor or ceiling; (ii) if
it is reasonably expected that the average value of the adjustable rate during
the first half of the term of the Regular Certificate will be either
significantly less than or significantly greater than the average value of the
rate during the final half of the term of the Regular Certificate; or (iii) if
interest is not payable in all circumstances. In these situations, as well as
others, it is unclear under the OID Regulations whether such interest payments
constitute qualified stated interest payments, or must be treated as part of a
Regular Certificate's stated redemption price at maturity resulting in
original issue discount.
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Market Discount. Regular Certificates, whether or not issued with original
issue discount, will be subject to the market discount rules of the Code. A
purchaser of a Regular Certificate who purchases the Regular Certificate at a
market discount (i.e., a discount from its adjusted issue price as described
above) will be required to recognize accrued market discount as ordinary
income as payments of principal are received on such Regular Certificate or
upon the sale or exchange of the Regular Certificate. In general, the holder
of a Regular Certificate may elect to treat market discount as accruing either
(i) under a constant yield method that is similar to the method for the
accrual of original issue discount or (ii) under a ratable accrual method
(pursuant to which the market discount is treated as accruing in equal daily
installments during the period the Regular Certificate is held by the
purchaser), in each case computed taking into account the Prepayment
Assumption. Because the regulations referred to above have not been issued, it
is not possible to predict what effect, if any, such regulations, when issued,
might have on the tax treatment of a Regular Certificate purchased at a
discount in the secondary market.
The Code provides that the market discount in respect of a Regular
Certificate will be considered to be zero if the amount allocable to the
Regular Certificate is less than 0.25% of the Regular Certificate's stated
redemption price at maturity multiplied by the number of complete years
remaining to its maturity after the holder acquired the obligation. If market
discount is treated as de minimis under this rule, the actual discount would
be allocated among a portion of each scheduled distribution representing the
stated redemption price of such Regular Certificate and that portion of the
discount allocable to such distribution would be reported as income when such
distribution occurs or is due.
The Code further provides that any principal payment with respect to a
Regular Certificate acquired with market discount or any gain on disposition
of such a Regular Certificate shall be treated as ordinary income to the
extent it does not exceed the accrued market discount at the time of such
payment. The amount of accrued market discount for purposes of determining the
amount of ordinary income to be recognized with respect to subsequent payments
on such a Regular Certificate is to be reduced by the amount previously
treated as ordinary income.
In general, limitations imposed by the Code that are intended to match
deductions with the taxation of income will require a holder of a Regular
Certificate having market discount to defer a portion of the interest
deductions attributable to any indebtedness incurred or continued to purchase
or carry such Regular Certificate. Alternatively, a holder of a Regular
Certificate may elect to include market discount in gross income as it accrues
and, if he makes such an election, is exempt from this rule. The adjusted
basis of a Regular Certificate subject to such election will be increased to
reflect market discount included in gross income, thereby reducing any gain or
increasing any loss on a sale or taxable disposition.
Amortizable Premium. A holder of a Regular Certificate who holds the Regular
Certificate as a capital asset and who purchased the Regular Certificate at a
cost greater than its stated redemption price at maturity will be considered
to have purchased the Regular Certificate at a premium. In general, the
Regular Certificateholder may elect to deduct the amortizable bond premium as
it accrues under a constant yield method. A Regular Certificateholder's tax
basis in the Regular Certificate will be reduced by the amount of the
amortizable bond premium deducted. It appears that the Prepayment Assumption
should be taken into account in determining the term of a Regular Certificate
for this purpose. Amortizable bond premium with respect to a Regular
Certificate will be treated as an offset to interest income on such Regular
Certificate, and a Certificateholder's deduction for amortizable bond premium
will be limited in each year to the amount of interest income derived with
respect to such Regular Certificate for such year. Any election to deduct
amortizable bond premium will apply to all debt instruments (other than
instruments the interest on which is excludable from gross income) held by the
Certificateholder at the beginning of the first taxable year to which the
election applies or thereafter acquired, and may be revoked only with the
consent of the Service. Bond premium on a Regular Certificate held by a
Certificateholder who does not elect to deduct the premium will decrease the
gain or increase the loss otherwise recognized on the disposition of the
Regular Certificate. Certificateholders who pay a premium for a Regular
Certificate should consult their tax advisors concerning such an election and
rules for determining the method for amortizing bond premium.
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Realized Losses. Holders of a Regular Certificate acquired in connection
with a trade or business should be allowed to deduct as ordinary losses any
losses sustained during a taxable year in which the Regular Certificates
become wholly or partially worthless as a result of one or more realized
losses on the underlying assets of the REMIC. However, it appears that a
noncorporate holder of a Regular Certificate that does not acquire such
certificate in connection with a trade or business may not be entitled to
deduct such a loss until such holder's certificate becomes wholly worthless,
which may not occur until its outstanding principal balance has been reduced
to zero. Any such loss may be characterized as a short-term capital loss.
At present, the law is unclear with respect to the timing and character of
any loss which may be realized by a holder of a Regular Certificate. Such a
holder may be required to accrue interest and original issue discount with
respect to such Regular Certificate without giving effect to any defaults or
deficiencies on the underlying assets of the REMIC until such holder can
establish that such losses will not be recoverable under any circumstances. As
a result, the holder of a Regular Certificate may be required to report
taxable income in excess of the amount of economic income actually accruing to
the benefit of such holder in a particular period. It is expected, however,
that the holder of such a Regular Certificate would eventually recognize a
loss or reduction in income attributable to such income when such loss is, in
fact, realized for federal income tax purposes.
Gain or Loss on Disposition. If a Regular Certificate is sold, the seller
will recognize gain or loss equal to the difference between the amount
realized from the sale and the seller's adjusted basis in such Regular
Certificate. The adjusted basis generally will equal the cost of such Regular
Certificate to the seller, increased by any original issue discount included
in the seller's ordinary gross income with respect to such Regular Certificate
and reduced (but not below zero) by any payments on the Regular Certificate
previously received or accrued by the seller (other than qualified stated
interest payments) and any amortizable premium. Except as discussed below or
with respect to market discount, any gain or loss recognized upon a sale,
exchange, retirement, or other taxable disposition of a Regular Certificate
will be capital gain if the Regular Certificate is held as a capital asset.
Gain from the disposition of a Regular Certificate that might otherwise be
capital gain, including any gain attributable to de minimis original issue
discount or market discount, will be treated as ordinary income to the extent
of the excess, if any, of (i) the amount that would have been includable in
the holder's income if the yield on such Regular Certificate had equaled 110%
of the applicable federal rate determined as of the beginning of such holder's
holding period, over (ii) the amount of ordinary income actually recognized by
the holder with respect to such Regular Certificate.
Taxation of Residual Interests. Generally, the "daily portions" of the
taxable income or net loss of a REMIC will be includable as ordinary income or
loss in determining the taxable income of holders of Residual Certificates
("Residual Holders"), and will not be taxed separately to the REMIC. The daily
portions are determined by allocating the REMIC's taxable income or net loss
for each calendar quarter ratably to each day in such quarter and by
allocating such daily portion among the Residual Holders in proportion to
their respective holdings of Residual Certificates in the REMIC on such day.
REMIC taxable income is generally determined in the same manner as the
taxable income of an individual using the accrual method of accounting except
that (i) the limitation on deductibility of investment interest expense and
expenses for the production of income do not apply, (ii) all bad loans will be
deductible as business bad debts, and (iii) the limitation on the
deductibility of interest and expenses related to tax-exempt income will
apply. REMIC taxable income generally means a REMIC's gross income, including
interest, original issue discount income, and market discount income, if any,
on the Loans, plus any cancellation of indebtedness income due to realized
losses with respect to Regular Certificates and income on reinvestment of cash
flows and reserve assets, minus deductions, including interest and original
issue discount expense on the Regular Certificates, bad debt losses with
respect to the underlying assets of a REMIC, servicing fees on the Loans,
other administrative expenses of a REMIC, and amortization of premium, if any,
with respect to the Loans.
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The taxable income recognized by a Residual Holder in any taxable year will
be affected by, among other factors, the relationship between the timing of
interest, original issue discount or market discount income, or amortization
of premium with respect to the Loans, on the one hand, and the timing of
deductions for interest (including original issue discount) on the Regular
Certificates, on the other hand. In the event that an interest in the Loans is
acquired by a REMIC at a discount, and one or more of such Loans is prepaid,
the Residual Holder may recognize taxable income without being entitled to
receive a corresponding cash distribution because
(i) the prepayment may be used in whole or in part to make distributions on
Regular Certificates, and (ii) the discount on the Loans which is includable
in a REMIC's income may exceed its deduction with respect to the distributions
on those Regular Certificates. When there is more than one class of Regular
Certificates that receive payments sequentially (i.e., a fast-pay, slow-pay
structure), this mismatching of income and deductions is particularly likely
to occur in the early years following issuance of the Regular Certificates,
when distributions are being made in respect of earlier classes of Regular
Certificates to the extent that such classes are not issued with substantial
discount. If taxable income attributable to such a mismatching is realized, in
general, losses would be allowed in later years as distributions on the later
classes of Regular Certificates are made. Taxable income may also be greater
in earlier years than in later years as a result of the fact that interest
expense deductions, expressed as a percentage of the outstanding principal
amount of Regular Certificates, may increase over time as distributions are
made on the lower yielding classes of Regular Certificates, whereas interest
income with respect to any given Loan will remain constant over time as a
percentage of the outstanding principal amount of that loan (assuming it bears
interest at a fixed rate). Consequently, Residual Holders must have sufficient
other sources of cash to pay any federal, state, or local income taxes due as
a result of such mismatching, or such holders must have unrelated deductions
against which to offset such income, subject to the discussion of "excess
inclusions" below under "REMIC Series--Limitations on Offset or Exemption of
REMIC Income." The mismatching of income and deductions described in this
paragraph, if present with respect to a series of Certificates, may have a
significant adverse effect upon the Residual Holder's after-tax rate of
return.
The amount of any net loss of a REMIC that may be taken into account by the
Residual Holder is limited to the adjusted basis of the Residual Certificate
as of the close of the quarter (or time of disposition of the Residual
Certificate if earlier), determined without taking into account the net loss
for the quarter. The initial adjusted basis of a purchaser of a Residual
Certificate is the amount paid for such Residual Certificate. Such adjusted
basis will be increased by the amount of taxable income of the REMIC
reportable by the Residual Holder and decreased (but not below zero) by the
amount of loss of the REMIC reportable by the Residual Holder. A cash
distribution from the REMIC also will reduce such adjusted basis (but not
below zero). Any loss that is disallowed on account of this limitation may be
carried over indefinitely by the Residual Holder for whom such loss was
disallowed and may be used by such Residual Holder only to offset any income
generated by the same REMIC.
If a Residual Certificate has a negative value, it is not clear whether its
issue price would be considered to be zero or such negative amount for
purposes of determining the REMIC's basis in its assets. The REMIC Regulations
imply that residual interests cannot have a negative basis or a negative issue
price. However, the preamble to the REMIC Regulations indicates that, while
existing tax rules do not accommodate such concepts, the Service is
considering the tax treatment of these types of residual interests, including
the proper tax treatment of a payment made by the transferor of such a
residual interest to induce the transferee to acquire that interest. Absent
regulations or administrative guidance to the contrary, the Company does not
intend to treat a class of Residual Certificates as having a value of less
than zero for purposes of determining the basis of the related REMIC in its
assets.
Further, to the extent that the initial adjusted basis of a Residual Holder
(other than an original holder) in the Residual Certificate is in excess of
the corresponding portion of the REMIC's basis in the Loans, the Residual
Holder will not recover such excess basis until termination of the REMIC
unless Treasury Regulations yet to be issued provide for periodic adjustments
to the REMIC income otherwise reportable by such holder.
Treatment of Certain Items of REMIC Income and Expense. Generally, a REMIC's
deductions for original issue discount will be determined in the same manner,
and subject to the same uncertainties, as original issue
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discount income on Regular Certificates as described above under "REMIC
Series--Original Issue Discount" and "--Adjustable Rate Regular Certificates,"
without regard to the de minimis rule described therein.
The REMIC will have market discount income in respect of the Loans if, in
general, the basis of the REMIC in such Loans is exceeded by their unpaid
principal balances. The REMIC's basis in such Loans is generally the fair
market value of the Loans immediately after the transfer thereof to the REMIC
(which will equal the aggregate issue prices of the REMIC Certificates which
are sold to investors and the estimated fair market value of any classes of
Certificates which are retained). In respect of the Loans that have market
discount to which Code Section 1276 applies, the accrued portion of such
market discount would be recognized currently as an item of ordinary income.
Market discount income generally should accrue in the manner described above
under "REMIC Series--Market Discount."
Generally, if the basis of a REMIC in the Loans exceeds the unpaid principal
balances thereof, the REMIC will be considered to have acquired such Loans at
a premium equal to the amount of such excess. As stated above, the REMIC's
basis in the Loans is the fair market value of the Loans immediately after the
transfer thereof to the REMIC. Generally, a REMIC that holds a Loan as a
capital asset will elect to amortize premium on the Loans under a constant
interest method. See the discussion under "REMIC Series--Amortizable Premium."
Limitations on Offset or Exemption of REMIC Income. A portion (or all) of
the REMIC taxable income includable in determining the federal income tax
liability of a Residual Holder will be subject to special treatment. That
portion, referred to as the "excess inclusion," is equal to the excess of
REMIC taxable income for the calendar quarter allocable to a Residual
Certificate over the daily accruals for such quarterly period of (i) 120% of
the long-term applicable Federal rate that would have applied to the Residual
Certificate (if it were a debt instrument) on the Startup Day under Section
1274(d) of the Code, multiplied by (ii) the adjusted issue price of such
Residual Certificate at the beginning of such quarterly period. For this
purpose, the adjusted issue price of a Residual Certificate at the beginning
of a quarter is the issue price of the Residual Certificate, plus the amount
of such daily accruals of REMIC income described in this paragraph for all
prior quarters, decreased by any distributions made with respect to such
Residual Certificate prior to the beginning of such quarterly period.
The portion of a Residual Holder's REMIC taxable income consisting of the
excess inclusions will be subject to federal income tax in all events and may
not be offset by other deductions on such Residual Holder's tax return,
including net operating loss carry forwards. Further, if the Residual Holder
is an organization subject to the tax on unrelated business income imposed by
Section 511 of the Code, the Residual Holder's excess inclusions will be
treated as unrelated business taxable income of such Residual Holder for
purposes of Section 511. In addition, if the Residual Holder is not a U.S.
person, such Residual Holder's excess inclusions generally would be ineligible
for exemption from or reduction in the rate of United States withholding tax.
Finally, if a real estate investment trust or regulated investment company
owns a Residual Certificate, a portion (allocated under Treasury Regulations
yet to be issued) of dividends paid by such real estate investment trust or
regulated investment company could not be offset by net operating losses of
its shareholders and would constitute unrelated business taxable income for
tax-exempt shareholders.
Furthermore, for purposes of the alternative minimum tax, (i) excess
inclusions will not be permitted to be offset by the alternative tax net
operating loss deduction and (ii) alternative minimum taxable income may not
be less than the taxpayer's excess inclusions. The latter rule has the effect
of preventing nonrefundable tax credits from reducing the taxpayer's income
tax to an amount lower than the tentative minimum tax on excess inclusions.
Restrictions on Transfer of Residual Certificates. As described above under
"REMIC Series--Qualification as a REMIC," an interest in a Residual
Certificate may not be transferred to a Disqualified Organization. If any
legal or beneficial interest in a Residual Certificate is, nonetheless,
transferred to a Disqualified Organization, a tax would be imposed in an
amount equal to the product of (i) the present value of the total anticipated
excess inclusions with respect to such Residual Certificate for periods after
the transfer, and (ii) the highest marginal
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federal income tax rate applicable to corporations. The anticipated excess
inclusions are based on actual prepayment experience to the date of the
transfer and projected payments based on the Prepayment Assumption. The
present value rate equals the applicable federal rate under Section 1274(d) of
the Code as of the date of the transfer for a term ending on the close of the
last quarter in which excess inclusions are expected to accrue. Such rate is
applied to the anticipated excess inclusions from the end of the remaining
calendar quarters in which they arise to the date of the transfer. Such a tax
generally would be imposed on the transferor of the Residual Certificate,
except that where such transfer is through an agent (including a broker,
nominee, or other middleman) for a Disqualified Organization, the tax would
instead be imposed on such agent. However, a transferor of a Residual
Certificate would in no event be liable for such tax with respect to a
transfer if the transferee furnishes to the transferor an affidavit, under
penalties of perjury, that the transferee is not a Disqualified Organization
and, as of the time of the transfer, the transferor does not have actual
knowledge that such affidavit is false. The tax also may be waived by the
Treasury Department if the Disqualified Organization promptly disposes of the
residual interest and the transferor pays such amount of tax as the Treasury
Department may require (presumably, a corporate tax on the excess inclusion
for the period the residual interest is actually held by the Disqualified
Organization).
In addition, if a "Pass-Through Entity" (as defined below) has excess
inclusion income with respect to a Residual Certificate during a taxable year
and a Disqualified Organization is the record holder of an equity interest in
such entity, then a tax is imposed on such entity equal to the product of (i)
the amount of excess inclusions on the Residual Certificate that are allocable
to the interest in the Pass-Through Entity during the period such interest is
held by such Disqualified Organization, and (ii) the highest marginal federal
income tax rate imposed on corporations. Such tax would be deductible from the
ordinary gross income of the Pass-Through Entity for the taxable year. The
Pass-Through Entity would not be liable for such tax if it has received an
affidavit from such record holder that it is not a Disqualified Organization
and, during the period such person is the record holder of the Residual
Certificate, the Pass-Through Entity does not have actual knowledge that such
affidavit is false.
For these purposes, a "Pass-Through Entity" means any regulated investment
company, real estate investment trust, common trust fund, partnership, trust
or estate and certain corporations operating on a cooperative basis. Except as
may be provided in Treasury Regulations, any person holding an interest in a
Pass-Through Entity as a nominee for another will, with respect to such
interest, be treated as a Pass-Through Entity.
Noneconomic Residual Interests. The REMIC Regulations would disregard
certain transfers of Residual Certificates, in which case the transferor would
continue to be treated as the owner of the Residual Certificates and thus
would continue to be subject to tax on its allocable portion of the net income
of the REMIC. Under the REMIC Regulations, a transfer of a "noneconomic
residual interest" (as defined below) to a Residual Holder is disregarded for
all federal income tax purposes if a significant purpose of the transfer is to
enable the transferor to impede the assessment or collection of tax. A
residual interest in a REMIC (including a residual interest with a positive
value at issuance) is a "noneconomic residual interest" unless, at the time of
transfer, (i) the present value of the expected future distributions on the
residual interest at least equals the product of the present value of the
anticipated excess inclusions and the highest corporate income tax rate in
effect for the year in which the transfer occurs, and (ii) the transferor
reasonably expects that the transferee will receive distributions from the
REMIC at or after the time at which taxes accrue on the anticipated excess
inclusions in an amount sufficient to satisfy the accrued taxes. The
anticipated excess inclusions and the present value rate are determined in the
same manner as set forth above. The REMIC Regulations explain that a
significant purpose to impede the assessment or collection of tax exists if
the transferor, at the time of the transfer, either knew or should have known
that the transferee would be unwilling or unable to pay taxes due on its share
of the taxable income of the REMIC. A safe harbor is provided if (i) the
transferor conducted, at the time of the transfer, a reasonable investigation
of the financial condition of the transferee and found that the transferee
historically had paid its debts as they came due and found no significant
evidence to indicate that the transferee would not continue to pay its debts
as they came due in the future, and (ii) the transferee represents to the
transferor that it understands that, as the holder of a non-economic residual
interest, the transferee may incur tax liabilities in excess of any cash flows
generated by
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the interest and that the transferee intends to pay taxes associated with
holding the residual interest as they become due. The Agreement with respect
to each series of REMIC Certificates will require the transferee of a Residual
Certificate to certify to the statements in clause (ii) of the preceding
sentence as part of the affidavit described above under "Restrictions on
Transfer of Residual Certificates."
Mark-to-Market Rules. On December 24, 1996, the Service released final
regulations (the "Mark-to-Market Regulations") relating to the requirement
that a securities dealer mark to market securities held for sale to customers.
This mark-to-market requirement applies to all securities owned by a dealer,
except to the extent that the dealer has specifically identified a security as
held for investment. The Mark-to-Market Regulations provide that for purposes
of this mark-to-market requirement, a Residual Certificate acquired on or
after January 4, 1995 is not treated as a security and thus may not be marked
to market. Prospective purchasers of a Residual Certificate should consult
their tax advisors regarding the possible application of the mark-to-market
requirement to Residual Certificates.
Sale or Exchange of a Residual Certificate. Upon the sale or exchange of a
Residual Certificate, the Residual Holder will recognize gain or loss equal to
the excess, if any, of the amount realized over the adjusted basis as
described above of such Residual Holder in such Residual Certificate at the
time of the sale or exchange. In addition to reporting the taxable income of
the REMIC, a Residual Holder will have taxable income to the extent that any
cash distribution to him from the REMIC exceeds such adjusted basis on that
Distribution Date. Such income will be treated as gain from the sale or
exchange of the Residual Certificate. It is possible that the termination of
the REMIC may be treated as a sale or exchange of a Residual Holder's Residual
Certificate, in which case, if the Residual Holder has an adjusted basis in
his Residual Certificate remaining when his interest in the REMIC terminates,
and if he holds such Residual Certificate as a capital asset, then he will
recognize a capital loss at that time in the amount of such remaining adjusted
basis.
Except as provided in Treasury Regulations, the wash sale rules of Code
Section 1091 will apply to dispositions of Residual Certificates where the
seller of the Residual Certificate, during the period beginning six months
before the sale or disposition of the Residual Certificate and ending six
months after such sale or disposition, acquires (or enters into any other
transaction that results in the application of Code Section 1091) any residual
interest in any REMIC or any interest in a "taxable mortgage pool" that is
economically comparable to a Residual Certificate.
Certain Other Taxes on the REMIC. The REMIC provisions of the Code impose a
100% tax on any net income derived by a REMIC from certain prohibited
transactions. Such transactions are: (i) any disposition of a qualified
mortgage, other than pursuant to the substitution of a qualified replacement
mortgage for a qualified mortgage (or the repurchase in lieu of substitution
of a defective obligation), a disposition incident to the foreclosure,
default, or imminent default of a mortgage, the bankruptcy or insolvency of
the REMIC, or a qualified liquidation of the REMIC; (ii) the receipt of income
from assets other than qualified mortgages and permitted investments; (iii)
the receipt of compensation for services; and (iv) the receipt of gain from
the dispositions of cash flow investments. The REMIC Regulations provide that
the modification of the terms of a Loan occasioned by default or a reasonably
foreseeable default of the Loan, the assumption of the Loan, the waiver of a
due-on-sale clause or the conversion of an interest rate by an Obligor
pursuant to the terms of a convertible adjustable-rate Loan will not be
treated as a disposition of the Loan. In the event that a REMIC holds
Convertible ARM Loans which are convertible at the option of the Obligor into
fixed-rate, fully amortizing, level payment Loans, a sale of such Loans by the
REMIC pursuant to a purchase agreement or other contract with the Company or
other party, if and when the Obligor elects to so convert the terms of the
Loan, will not result in a prohibited transaction for the REMIC. The Code also
imposes a 100% tax on contributions to a REMIC made after the Startup Day,
unless such contributions are payments made to facilitate a cleanup call or a
qualified liquidation of the REMIC, payments in the nature of a guaranty,
contributions during the three-month period beginning on the Startup Day or
contributions to a qualified reserve fund of the REMIC by a holder of a
residual interest in the REMIC. The Code also imposes a tax on a REMIC at the
highest corporate rate on certain net income from foreclosure property that
the REMIC derives from the management, sale, or disposition of any real
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property, or any personal property incident thereto, acquired by the REMIC in
connection with the default or imminent default of a loan. Generally, it is
not anticipated that a REMIC will incur a significant amount of such taxes or
any material amount of state or local income or franchise taxes. However, if
any such taxes are imposed on a REMIC they will be paid by the Company or the
Trustee, if due to the breach of the Company's or the Trustee's obligations,
as the case may be, under the related Pooling and Servicing Agreement or in
other cases, such taxes shall be borne by the related Trust Fund resulting in
a reduction in amounts otherwise payable to holders of the related Regular or
Residual Certificates.
Liquidation of the REMIC. A REMIC may liquidate without the imposition of
entity-level tax only in a "qualified liquidation." A liquidation is
considered qualified if a REMIC adopts a plan of complete liquidation (which
may be accomplished by designating in the REMIC's final tax return a date on
which such adoption is deemed to occur) and sells all of its assets (other
than cash) within the ninety-day period beginning on the date of the adoption
of the plan of liquidation, provided that it distributes to holders of Regular
or Residual Certificates, on or before the last day of the ninety-day
liquidation period, all the proceeds of the liquidation (including all cash),
less amounts retained to meet claims.
Taxation of Certain Foreign Investors. For purposes of this discussion, a
"Foreign Holder" is a Certificateholder who holds a Regular Certificate and
who is not (i) a citizen or resident of the United States, (ii) a corporation,
partnership, or other entity organized in or under the laws of the United
States or a political subdivision thereof, (iii) an estate the income of which
is includible in gross income for United States tax purposes regardless of its
source, or (iv) a trust if (A) a court within the United States is able to
exercise primary supervision over the administration of the trust and (B) one
or more United States trustees have authority to control all substantial
decisions of the trust. Unless the interest on a Regular Certificate is
effectively connected with the conduct by the Foreign Holder of a trade or
business within the United States, the Foreign Holder is not subject to
federal income or withholding tax on interest (or original issue discount, if
any) on a Regular Certificate (subject to possible backup withholding of tax,
discussed below). To qualify for this tax exemption, the Foreign Holder will
be required to provide periodically a statement signed under penalties of
perjury certifying that the Foreign Holder meets the requirements for
treatment as a Foreign Holder and providing the Foreign Holder's name and
address. The statement, which may be made on a Form W-8 or substantially
similar substitute form, generally must be provided in the year a payment
occurs or in either of the two preceding years. The statement must be
provided, either directly or through clearing organization or financial
institution intermediaries, to the person that otherwise would withhold tax.
This exemption may not apply to a Foreign Holder that owns both Regular
Certificates and Residual Certificates. If the interest on a Regular
Certificate is effectively connected with the conduct by a Foreign Holder of a
trade or business within the United States, then the Foreign Holder will be
subject to tax at regular graduated rates. In addition, the foregoing rules
will not apply to exempt a U.S. shareholder of a controlled foreign
corporation from taxation on such U.S. shareholder's allocable portion of the
interest income received by such controlled foreign corporation. Foreign
Holders should consult their own tax advisors regarding the specific tax
consequences of their owning a Regular Certificate.
Any gain recognized by a Foreign Holder upon a sale, retirement or other
taxable disposition of a Regular Certificate generally will not be subject to
United States federal income tax unless either (i) the Foreign Holder is a
nonresident alien individual who holds the Regular Certificate as a capital
asset and who is present in the United States for 183 days or more in the
taxable year of the disposition and either the gain is attributable to an
office or other fixed place of business maintained in the U.S. by the
individual or the individual has a "tax home" in the United States, or (ii)
the gain is effectively connected with the conduct by the Foreign Holder of a
trade or business within the United States.
It appears that a Regular Certificate will not be included in the estate of
a Foreign Holder and will not be subject to United States estate taxes.
However, Foreign Holders should consult their own tax advisors regarding
estate tax consequences.
Unless otherwise stated in the related Prospectus Supplement, transfers of
Residual Certificates to Foreign Holders will be prohibited by the related
Agreement.
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Backup Withholding. Under certain circumstances, a REMIC Certificateholder
may be subject to "backup withholding" at a 31% rate. Backup withholding may
apply to a REMIC Certificateholder who is a United States person if the
holder, among other circumstances, fails to furnish his Social Security number
or other taxpayer identification number to the Trustee. Backup withholding may
apply, under certain circumstances, to a REMIC Certificateholder who is a
foreign person if the REMIC Certificateholder fails to provide the Trustee or
the REMIC Certificateholder's securities broker with the statement necessary
to establish the exemption from federal income and withholding tax on interest
on the REMIC Certificate. Backup withholding, however, does not apply to
payments on a Certificate made to certain exempt recipients, such as
corporations and tax-exempt organizations, and to certain foreign persons.
REMIC Certificateholders should consult their tax advisors for additional
information concerning the potential application of backup withholding to
payments received by them with respect to a Certificate.
Reporting Requirements and Tax Administration. The Company will report
annually to the Service, holders of record of the Regular Certificates that
are not excepted from the reporting requirements and, to the extent required
by the Code, other interested parties, information with respect to the
interest paid or accrued on the Regular Certificates, original issue discount,
if any, accruing on the Regular Certificates and information necessary to
compute the accrual of any market discount or the amortization of any premium
on the Regular Certificates.
The Treasury Department has issued temporary regulations concerning certain
aspects of REMIC tax administration. Under those regulations, a Residual
Certificateholder must be designated as the REMIC's "tax matters person." The
tax matters person, generally, has responsibility for overseeing and providing
notice to the other Residual Certificateholders of certain administrative and
judicial proceedings regarding the REMIC's tax affairs. Unless otherwise
indicated in the related Prospectus Supplement, the Company will be designated
as tax matters person for each REMIC, and in conjunction with the Trustee will
act as the agent of the Residual Certificateholders in the preparation and
filing of the REMIC's federal and state income tax and other information
returns.
NON-REMIC SERIES
Tax Status of the Trust Fund. In the case of a Trust Fund evidenced by a
series of Certificates, or a segregated portion thereof, with respect to which
a REMIC Election is not made ("Non-REMIC Certificates"), Counsel will, unless
otherwise specified in the related Prospectus Supplement, have advised the
Company that, in their opinion, each Loan Pool and the arrangement to be
administered by the Company under which the Trustee will hold and the Company
will be obligated to service the Loans and pursuant to which Non-REMIC
Certificates will be issued to Non-REMIC Certificateholders will not be
classified as an association taxable as a corporation or a "taxable mortgage
pool", within the meaning of Code Section 7701(i), but rather will be
classified as a grantor trust under Subpart E, Part I of Subchapter J of the
Code. In such event, each Non-REMIC Certificateholder will be treated as the
owner of a pro rata undivided interest in the ordinary income and corpus
portions of the trust attributable to the Loan Pool in which its Certificate
evidences an ownership interest and will be considered the equitable owner of
a pro rata undivided interest in each of the Loans included therein. The
following discussion assumes the Trust Fund will be so classified as a grantor
trust.
Tax Status of Non-REMIC Certificates. In general, (i) Certificates held by a
"domestic building and loan association" within the meaning of Section
7701(a)(19) of the Code may be considered to represent "loans secured by an
interest in real property" within the meaning of Section 7701(a)(19)(C)(v) of
the Code; and (ii) Certificates held by a real estate investment trust may
constitute "real estate assets" within the meaning of Section 856(c)(5)(A) of
the Code and interest thereon may be considered "interest on obligations
secured by mortgages on real property" within the meaning of Section
856(c)(3)(B) of the Code. See the discussions of such Code provisions above
under "REMIC Series Tax Status of REMIC Certificates." Investors should review
the related Prospectus Supplement for a discussion of the treatment of Non-
REMIC Certificates and Loans under these Code sections and should, in
addition, consult with their own tax advisors with respect to these matters.
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Tax Treatment of Non-REMIC Certificates. Subject to the discussion below of
the "stripped bond" rules of the Code, Non-REMIC Certificateholders will be
required to report on their federal income tax returns, and in a manner
consistent with their respective methods of accounting, their pro rata share
of the entire income arising from the Loans comprising such Loan Pool,
including interest, market or original issue discount, if any, prepayment
fees, assumption fees, and late payment charges received by the Company, and
any gain upon disposition of such Loans. (For purposes of this discussion, the
term "disposition," when used with respect to the Loans, includes scheduled or
prepaid collections with respect to the Loans, as well as the sale or exchange
of a Non-REMIC Certificate.) Subject to the discussion below of certain
limitations on itemized deductions, Non-REMIC Certificateholders will be
entitled under Section 162 or 212 of the Code to deduct their pro rata share
of related servicing fees, administrative and other non-interest expenses,
including assumption fees and late payment charges retained by the Company. An
individual, an estate, or a trust that holds a Non-REMIC Certificate either
directly or through a pass-through entity will be allowed to deduct such
expenses under Section 212 of the Code only to the extent that, in the
aggregate and combined with certain other itemized deductions, they exceed 2%
of the adjusted gross income of the holder. In addition, Section 68 of the
Code provides that the amount of itemized deductions (including those provided
for in Section 212 of the Code) otherwise allowable for the taxable year for
an individual whose adjusted gross income exceeds a threshold amount specified
in the Code ($121,200 for 1997, in the case of a joint return) will be reduced
by the lesser of (i) 3% of the excess of adjusted gross income over the
specified threshold amount or (ii) 80% of the amount of itemized deductions
otherwise allowable for such taxable year. Furthermore, in determining the
alternative minimum taxable income of an individual, trust, estate or pass-
through entity that is a holder of a Non-REMIC Certificate, no deduction will
be allowed for such holder's allocable portion of the foregoing expenses, even
though an amount equal to the total of such expenses will be included in such
holder's gross income for alternative minimum tax purposes. To the extent that
a Non-REMIC Certificateholder is not permitted to deduct servicing fees
allocable to a Non-REMIC Certificate, the taxable income of the Non-REMIC
Certificateholder attributable to that Non-REMIC Certificate will exceed the
net cash distributions related to such income. Non-REMIC Certificateholders
may deduct any loss on disposition of the Loans to the extent permitted under
the Code.
To the extent that any of the Loans comprising a Loan Pool were originated
on or after March 2, 1984 and under circumstances giving rise to original
issue discount, Certificateholders will be required to report annually an
amount of additional interest income attributable to such discount in such
Loans prior to receipt of cash related to such discount. See the discussion
above under "REMIC Series--Original Issue Discount." Similarly, Code
provisions concerning market discount and amortizable premium will apply to
the Loans comprising a Loan Pool to the extent that the loans were originated
after July 18, 1984 and September 27, 1985, respectively. See the discussions
above under "REMIC Series--Market Discount" and "REMIC Series--Amortizable
Premium." However, it is unclear whether a prepayment assumption should be
used in accruing or amortizing any such discount or premium.
Stripped Non-REMIC Certificates. Certain classes of Non-REMIC Certificates
may be subject to the stripped bond rules of Section 1286 of the Code and for
purposes of this discussion will be referred to as "Stripped Certificates." In
general, a Stripped Certificate will be subject to the stripped bond rules
where there has been a separation of ownership of the right to receive some or
all of the principal payments on a Loan from ownership of the right to receive
some or all of the related interest payments. Non-REMIC Certificates will
constitute Stripped Certificates and will be subject to these rules under
various circumstances, including the following: (i) if any servicing
compensation is deemed to exceed a reasonable amount; (ii) if the Company or
any other party retains a Retained Yield with respect to the Loans comprising
a Loan Pool; (iii) if two or more classes of Non-REMIC Certificates are issued
representing the right to non-pro rata percentages of the interest or
principal payments on the Loans; or (iv) if Non-REMIC Certificates are issued
which represent the right to interest only payments or principal only
payments.
Although not entirely clear, each Stripped Certificate should be considered
to be a single debt instrument issued on the day it is purchased for purposes
of calculating any original issue discount. Original issue discount with
respect to a Stripped Certificate, if any, must be included in ordinary gross
income for federal income tax
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purposes as it accrues in accordance with the constant-yield method that takes
into account the compounding of interest and such accrual of income may be in
advance of the receipt of any cash attributable to such income. See "REMIC
Series--Original Issue Discount" above. For purposes of applying the original
issue discount provisions of the Code, the issue price of a Stripped
Certificate will be the purchase price paid by each holder thereof and the
stated redemption price at maturity may include the aggregate amount of all
payments to be made with respect to the Stripped Certificate whether or not
denominated as interest. The amount of original issue discount with respect to
a Stripped Certificate may be treated as zero under the original issue
discount de minimis rules described above. A purchaser of a Stripped
Certificate will be required to account for any discount on the certificate as
market discount rather than original issue discount if either (i) the amount
of original issue discount with respect to the certificate was treated as zero
under the original issue discount de minimis rule when the certificate was
stripped or (ii) no more than 100 basis points (including any amount of
servicing in excess of reasonable servicing) is stripped off of the Loans. See
"REMIC Series--Market Discount" above.
Although the OID Regulations suggest that a prepayment assumption is not to
be used in computing the yield on the underlying assets of a Trust Fund with
respect to which a REMIC election is not made, the Code appears to require
that such a prepayment assumption be used in computing yield with respect to
Stripped Certificates. In the absence of authority to the contrary, the
Company intends to base information reports and returns to the Service and the
holders of Stripped Certificates taking into account an appropriate prepayment
assumption. Holders of Stripped Certificates should refer to the related
Prospectus Supplement to determine whether and in what manner the original
issue discount rules will apply thereto.
When an investor purchases more than one class of Stripped Certificates it
is currently unclear whether for federal income tax purposes such classes of
Stripped Certificates should be treated separately or aggregated for purposes
of applying the original issue discount rules described above.
It is possible that the Service may take a contrary position with respect to
some or all of the foregoing tax consequences. For example, a holder of a
Stripped Certificate may be treated as the owner of (i) as many stripped bonds
or stripped coupons as there are scheduled payments of principal and/or
interest on each Loan or (ii) a separate installment obligation for each Loan
representing the Stripped Certificate's pro rata share of principal and/or
interest payments to be made with respect thereto. As a result of these
possible alternative characterizations, investors should consult their own tax
advisors regarding the proper treatment of Stripped Certificates for federal
income tax purposes.
The servicing compensation to be received by the Company and the fee for
credit enhancement, if any, may be questioned by the Service with respect to
certain Certificates or Loans as exceeding a reasonable fee for the services
being performed in exchange therefor, and a portion of such servicing
compensation could be recharacterized as an ownership interest retained by the
Company or other party in a portion of the interest payments to be made
pursuant to the Loans. In this event, a Certificate might be treated as a
Stripped Certificate subject to the stripped bond rules of Section 1286 of the
Code and the original issue discount provisions rather than to the market
discount and premium rules.
Gain or Loss on Disposition. Upon sale or exchange of a Non-REMIC
Certificate, a Non-REMIC Certificateholder will recognize gain or loss equal
to the difference between the amount realized in the sale and its aggregate
adjusted basis in the Loans represented by the Non-REMIC Certificate.
Generally, the aggregate adjusted basis will equal the Non-REMIC
Certificateholder's cost for the Non-REMIC Certificate increased by the amount
of any previously reported income or gain with respect to the Non-REMIC
Certificate and decreased by the amount of any losses previously reported with
respect to the Non-REMIC Certificate and the amount of any distributions
received thereon. Except as provided above with respect to the original issue
discount and market discount rules, any such gain or loss would be capital
gain or loss if the Non-REMIC Certificate was held as a capital asset.
Tax Treatment of Certain Foreign Investors. Generally, interest or original
issue discount paid to or accruing for the benefit of a Non-REMIC
Certificateholder who is a Foreign Holder (as defined above under "REMIC
50
<PAGE>
Series--Taxation of Certain Foreign Investors") will be treated as "portfolio
interest" and therefore will be exempt from the 30% withholding tax. Such Non-
REMIC Certificateholder will be entitled to receive interest payments and
original issue discount on the Non-REMIC Certificates free of United States
federal income tax, but only to the extent the Loans were originated after
July 18, 1984 and provided that such Non-REMIC Certificateholder periodically
provides the Trustee (or other person who would otherwise be required to
withhold tax) with a statement certifying under penalty of perjury that such
Non-REMIC Certificateholder is not a United States person and providing the
name and address of such Non-REMIC Certificateholder. For additional
information concerning interest or original issue discount paid by the Company
to a Foreign Holder and the treatment of a sale or exchange of a Non-REMIC
Certificate by a Foreign Holder, which will generally have the same tax
consequences as the sale of a Regular Certificate, see the discussion above
under "REMIC Series--Taxation of Certain Foreign Investors."
Tax Administration and Reporting. The Company will furnish to each Non-REMIC
Certificateholder with each distribution a statement setting forth the amount
of such distribution allocable to principal and to interest. In addition, the
Company will furnish, within a reasonable time after the end of each calendar
year, to each Non-REMIC Certificateholder who was a Certificateholder at any
time during such year, information regarding the amount of servicing
compensation received by the Company and any sub-servicer and such other
customary factual information as the Company deems necessary or desirable to
enable Certificateholders to prepare their tax returns. Reports will be made
annually to the Service and to holders of record that are not excepted from
the reporting requirements regarding information as may be required with
respect to interest and original issue discount, if any, with respect to the
Non-REMIC Certificates.
OTHER TAX CONSEQUENCES
No advice has been received as to local income, franchise, personal
property, or other taxation in any state or locality, or as to the tax effect
of ownership of Certificates in any state or locality. Certificateholders are
advised to consult their own tax advisors with respect to any state or local
income, franchise, personal property, or other tax consequences arising out of
their ownership of Certificates.
LEGAL INVESTMENT CONSIDERATIONS
Unless otherwise indicated in the applicable Prospectus Supplement, any
Certificates offered hereby are not expected to constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA") because there will be a substantial number of Loans that are
secured by liens on real estate that are not first liens, as required by
SMMEA. Accordingly, many institutions with legal authority to invest in
"mortgage related securities" may not be legally authorized to invest in the
Certificates.
The Federal Financial Institutions Examination Council, The Federal Deposit
Insurance Corporation, the Office of Thrift Supervision, the Office of the
Comptroller of the Currency and the National Credit Union Administration have
proposed or adopted guidelines regarding investment in various types of
mortgage-backed securities. In addition, certain state regulators have taken
positions that may prohibit regulated institutions subject to their
jurisdiction from holding securities representing residual interests,
including securities previously purchased. There may be other restrictions on
the ability of certain investors, including depository institutions, either to
purchase Certificates or to purchase Certificates representing more than a
specified percentage of the investor's assets. Investors should consult their
own legal advisors in determining whether and to what extent the Certificates
constitute legal investments for such investors.
RATINGS
It is a condition precedent to the issuance of any Class of Certificates
sold under this Prospectus that they be rated by at least one nationally
recognized statistical rating organization in one of its four highest rating
51
<PAGE>
categories (within which there may be sub-categories or gradations indicating
relative standing). A security rating is not a recommendation to buy, sell or
hold securities and may be subject to revision or withdrawal at any time by
the assigning rating agency. The security rating of any Series of Certificates
should be evaluated independently of similar security ratings assigned to
other kinds of securities.
UNDERWRITING
The Company may sell Certificates of each Series to or through underwriters
(the "Underwriters") by a negotiated firm commitment underwriting and public
reoffering by the Underwriters, and also may sell and place Certificates
directly to other purchasers or through agents. The Company intends that
Certificates will be offered through such various methods from time to time
and that offerings may be made concurrently through more than one of these
methods or that an offering of a particular Series of Certificates may be made
through a combination of such methods.
The distribution of the Certificates may be effected from time to time in
one or more transactions at a fixed price or prices, which may be changed, or
at market prices prevailing at the time of sale, at prices related to such
prevailing market prices or at negotiated prices.
If so specified in the Prospectus Supplement relating to a Series of
Certificates, the Company or any affiliate thereof may purchase some or all of
one or more Classes of Certificates of such Series from the Underwriter or
Underwriters at a price specified in such Prospectus Supplement. Such
purchaser may thereafter from time to time offer and sell, pursuant to this
Prospectus, some or all of such Certificates so purchased directly, through
one or more Underwriters to be designated at the time of the offering of such
Certificates or through broker-dealers acting as agent and/or principal. Such
offering may be restricted in the manner specified in such Prospectus
Supplement. Such transactions may be effected at market prices prevailing at
the time of sale, at negotiated prices or at fixed prices.
In connection with the sale of the Certificates, Underwriters may receive
compensation from the Company or from purchasers of Certificates for whom they
may act as agents in the form of discounts, concessions or commissions.
Underwriters may sell the Certificates of a Series to or through dealers and
such dealers may receive compensation in the form of discounts, concessions or
commissions from the Underwriters and/or commissions from the purchasers for
whom they may act as agents. Underwriters, dealers and agents that participate
in the distribution of the Certificates of a Series may be deemed to be
Underwriters, and any discounts or commissions received by them from the
Company and any profit on the resale of the Certificates by them may be deemed
to be underwriting discounts and commissions, under the Securities Act of
1933, as amended (the "Securities Act"). Any such Underwriters or agents will
be identified, and any such compensation received from the Company will be
described, in the Prospectus Supplement.
Under agreements which may be entered into by the Company, Underwriters and
agents who participate in the distribution of the Certificates may be entitled
to indemnification by the Company against certain liabilities, including
liabilities under the Securities Act.
If so indicated in the Prospectus Supplement, the Company will authorize
Underwriters or other persons acting as the Company's agents to solicit offers
by certain institutions to purchase the Certificates from the Company pursuant
to contracts providing for payment and delivery on a future date. Institutions
with which such contracts may be made include commercial and savings banks,
insurance companies, pension funds, investment companies, educational
charitable institutions and others, but in all cases such institutions must be
approved by the Company. The obligation of any purchaser under any such
contract will be subject to the condition that the purchaser of the offered
Certificates shall not at the time of delivery be prohibited under the laws of
the jurisdiction to which such purchaser is subject from purchasing such
Certificates. The Underwriters and such other agents will not have
responsibility in respect of the validity or performance of such contracts.
52
<PAGE>
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, 1997
and 1996 and for each of the years in the three-year period ended December 31,
1997 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>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS SUP-
PLEMENT AND THE PROSPECTUS IN CONNECTION WITH THE OFFERING COVERED BY THIS PRO-
SPECTUS SUPPLEMENT. IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRIT-
ERS. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTITUTE AN OFFER
TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE CERTIFICATES IN ANY JURIS-
DICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND THE PRO-
SPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN
IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS OR IN THE AFFAIRS OF THE TRUST SINCE
THE DATE HEREOF.
-------
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary of the Terms of the Certificates................................... S-4
Risk Factors............................................................... S-23
Structure of the Transaction............................................... S-24
Use of Proceeds............................................................ S-24
The Loans.................................................................. S-25
Yield and Prepayment Considerations........................................ S-39
Green Tree Financial Corporation........................................... S-47
Description of the Certificates............................................ S-48
Certain Federal Income Tax Consequences.................................... S-71
ERISA Considerations....................................................... S-72
Underwriting............................................................... S-76
Legal Matters.............................................................. S-77
Annex I.................................................................... A-1
</TABLE>
PROSPECTUS
<TABLE>
<S> <C>
Reports to Certificateholders............................................... 2
Available Information....................................................... 2
Additional Information...................................................... 2
Incorporation of Certain Documents by Reference............................. 2
Summary of Terms............................................................ 4
Risk Factors................................................................ 9
The Trust Fund.............................................................. 9
Use of Proceeds............................................................. 11
Green Tree Financial Corporation............................................ 11
Yield Considerations........................................................ 12
Maturity and Prepayment Considerations...................................... 12
Description of the Certificates............................................. 13
Description of FHA Insurance................................................ 13
Certain Legal Aspects of the Contracts; Repurchase Obligations.............. 24
ERISA Considerations........................................................ 33
Certain Federal Income Tax Consequences..................................... 35
Legal Investment Considerations............................................. 51
Ratings..................................................................... 51
Underwriting................................................................ 52
Legal Matters............................................................... 53
Experts..................................................................... 53
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
$ (APPROXIMATE)
LOGO
SELLER AND SERVICER
CERTIFICATES FOR HOME EQUITY LOANS
SERIES 1998-
$ (APPROX.) CLASS A-1 ARM
$ (APPROX.) % CLASS A-1
$ (APPROX.) % CLASS A-2
$ (APPROX.) % CLASS A-3
$ (APPROX.) % CLASS A-4
% CLASS A-5 IO
$ (APPROX.) % CLASS M-1
$ (APPROX.) % CLASS M-2
$ (APPROX.) % CLASS B-1
-------
PROSPECTUS SUPPLEMENT
, 1998
-------
[UNDERWRITER]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+THIS PRELIMINARY PROSPECTUS SUPPLEMENT AND THE INFORMATION CONTAINED HEREIN +
+ARE SUBJECT TO COMPLETION OR AMENDMENT AND PROSPECTIVE PURCHASERS ARE +
+REFERRED TO THE RELATED FINAL PROSPECTUS SUPPLEMENT FOR DEFINITIVE +
+INFORMATION ON ANY MATTER CONTAINED HEREIN. THIS PRELIMINARY PROSPECTUS +
+SUPPLEMENT 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 +
+JURISDICTION IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL +
+PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH +
+JURISDICTION. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS SUPPLEMENT PROSPECTUS SUPPLEMENT
(To Prospectus dated , 1998) TO BASE NO. 2
LOGO
$ (APPROXIMATE)
GREEN TREE FINANCIAL CORPORATION
(SELLER AND SERVICER)
GREEN TREE HOME EQUITY LOAN TRUST 1998-
$ (APPROXIMATE) FLOATING RATE ASSET-BACKED NOTES, CLASS A-1
$ (APPROXIMATE) % ASSET-BACKED NOTES, CLASS A-2
$ (APPROXIMATE) % ASSET-BACKED NOTES, CLASS A-3
$ (APPROXIMATE) % ASSET-BACKED NOTES, CLASS A-4
$ (APPROXIMATE) % ASSET-BACKED CERTIFICATES
----------
Green Tree Home Equity Loan Trust 1998- (the "Trust") will be governed
pursuant to a Trust Agreement, to be dated as of , 1998 (the "Trust
Agreement"), among Green Tree Financial Corporation ("Green Tree"), Green Tree
Second GP Inc. (the "General Partner"), a wholly owned subsidiary of Green
Tree, and [Owner Trustee], as Owner Trustee. The Trust will issue a class of
floating rate Asset-Backed Notes, designated as the Class A-1 Notes, and three
classes of fixed rate Asset-Backed Notes, designated as the Class A-2, Class A-
3 and Class A-4 Notes, respectively, pursuant to an Indenture, to be dated as
of , 1998 (the "Indenture"), between the Trust and [Indenture Trustee], as
Indenture Trustee. The Class A-1 Notes, Class A-2 Notes, Class A-3 Notes and
Class A-4 Notes are referred to herein as the "Notes." The Trust will also
issue Asset-Backed Certificates (the "Certificates" and, together with the
Notes, the "Securities").
The Trust Property will include, among other things, a pool of closed end
home equity loans (the "Home Equity Contracts"), including the right to receive
payments due on the Home Equity Contracts on or after the "Cutoff Date" (as
defined herein). Most of the Home Equity Contracts are secured by a subordinate
lien on the related real estate.
(Continued on following page)
FOR A DISCUSSION OF CERTAIN FACTORS WHICH SHOULD BE CONSIDERED BY PROSPECTIVE
PURCHASERS OF THE SECURITIES, SEE "RISK FACTORS" ON PAGE S- HEREIN AND ON
PAGE IN THE ACCOMPANYING PROSPECTUS.
----------
THE NOTES REPRESENT OBLIGATIONS OF, AND THE
CERTIFICATES REPRESENT INTERESTS IN, THE TRUST
ONLY AND DO NOT REPRESENT OBLIGATIONS OF OR
INTERESTS IN GREEN TREE, THE GENERAL
PARTNER, THE UNDERWRITER OR ANY OF THEIR
RESPECTIVE AFFILIATES, EXCEPT TO THE
LIMITED EXTENT DESCRIBED 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 SUPPLEMENT OR THE
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Price to Underwriting Proceeds to
Public(1) Discount Green Tree(1)(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Class A-1 Note..................... % % %
- --------------------------------------------------------------------------------
Per Class A-2 Note..................... % % %
- --------------------------------------------------------------------------------
Per Class A-3 Note..................... % % %
- --------------------------------------------------------------------------------
Per Class A-4 Note..................... % % %
- --------------------------------------------------------------------------------
Per Certificate........................ % % %
- --------------------------------------------------------------------------------
Total.................................. $ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Plus accrued interest, if any, from and including , 1998.
(2) Before deducting estimated expenses of $ payable by Green Tree.
----------
The Securities are offered hereby by the Underwriter named below, subject to
receipt and acceptance by the Underwriter and its right to reject any order in
whole or in part. It is expected that delivery of the Securities will be made
on or about August , 1998 (the "Closing Date").
----------
[UNDERWRITERS]
The date of the Prospectus Supplement is , 1998.
<PAGE>
(Continued from preceding page)
The Trust Property will also include an assignment of Green Tree's security
interests in the mortgages securing the Home Equity Contracts and certain
other property, as more fully described herein. The Home Equity Contracts are
also referred to herein as the "Contracts". Green Tree will also act as
Servicer of the Contracts. Terms used and not otherwise defined herein have
the meanings ascribed thereto in the Prospectus dated , 1998 attached
hereto (the "Prospectus").
Principal and interest on the Notes are payable on the 15th day of each
month (or, if the 15th day is not a business day, the next business day
thereafter) (a "Distribution Date"), beginning in 1998. The rights of the
holders of the Class A-2, Class A-3 and Class A-4 Notes and the Certificates
to receive distributions on each Distribution Date will be subordinated to
such rights of the Class A-1 Noteholders; such rights of the holders of the
Class A-3 and Class A-4 Notes and the Certificates will be subordinated to
such rights of the Class A-2 Noteholders; such rights of the holders of the
Class A-4 Notes and the Certificates will be subordinated to such rights of
the Class A-3 Noteholders; and such rights of the Certificateholders will be
subordinated to such rights of the Class A-4 Noteholders.
The Certificates will represent fractional undivided interests in the Trust.
Interest will be distributed to the Certificateholders on each Distribution
Date as set forth herein. No distributions of principal on the Certificates
will be payable until all of the Notes have been paid in full. The
Certificateholders will have the benefit of a Limited Guaranty of Green Tree
to protect against losses that would otherwise be absorbed by the
Certificates. To the extent that available funds in the Collection Account are
insufficient to distribute to the holders of the Certificates the
Certificateholders' Distributable Amount (as described herein), Green Tree
will be obligated to make a payment under the Limited Guaranty equal to the
amount of such deficiency.
The Securities initially will be represented by certificates registered in
the name of Cede & Co., the nominee of The Depository Trust Company ("DTC").
The interests of beneficial owners of the Securities will be represented by
book entries on the records of the participating members of DTC. Definitive
Securities will be available only under the limited circumstances described
herein. Holders of the Securities may hold through DTC (in the United States)
or, solely in the case of the Notes, through CEDEL or Euroclear (as defined
herein) (in Europe) if they are participants of such systems, or indirectly
through organizations that are participants in such systems. The Certificates
may not be held, directly or indirectly, through CEDEL or Euroclear.
The Certificates may not be offered or sold in the United Kingdom. The Notes
may not be offered or sold in the United Kingdom by means of any document
except in circumstances which do not constitute an offer to the public within
the meaning of the Public Offers of Securities Regulations 1995. All
applicable provisions of the Financial Services Act of 1986 must be complied
with in connection with anything done in relation to the Notes in, from or
otherwise involving the United Kingdom. See "Underwriting."
There currently is no secondary market for the Securities. The Underwriter
expects, but is not obligated, to make a market in the Securities. There is no
assurance that any such market will develop or continue.
---------------
THIS PROSPECTUS SUPPLEMENT DOES NOT CONTAIN COMPLETE INFORMATION ABOUT THE
OFFERING OF THE SECURITIES. ADDITIONAL INFORMATION IS CONTAINED IN THE
PROSPECTUS AND PROSPECTIVE INVESTORS ARE URGED TO READ BOTH THIS PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS IN FULL. SALES OF THE SECURITIES MAY NOT BE
CONSUMMATED UNLESS THE PURCHASER HAS RECEIVED BOTH THIS PROSPECTUS SUPPLEMENT
AND THE PROSPECTUS.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE SECURITIES
OFFERED HEREBY. SUCH TRANSACTIONS MAY INCLUDE STABILIZING AND THE PURCHASE OF
SECURITIES TO COVER SYNDICATE SHORT POSITIONS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
REPORTS TO SECURITYHOLDERS
Unless and until Definitive Securities are issued, unaudited monthly and
annual reports, containing information concerning the Trust and prepared by
the Servicer, will be sent on behalf of the Trust to the Indenture Trustee,
the Owner Trustee, and Cede & Co., as registered holder of the Securities and
the nominee of DTC. See "Description of the Trust Documents and Indenture--
Statements to Securityholders," herein and "Certain Information Regarding the
Securities--Book-Entry Registration" and "--Reports to Securityholders" in the
accompanying Prospectus. Security Owners may receive such reports, upon
written request, together with a certification that they are Security Owners
and payment of reproduction and postage expenses associated with the
distribution of such reports, from the Indenture Trustee at [address.] Such
reports will not constitute financial statements prepared in accordance with
generally accepted accounting principles. The Servicer, on behalf of the
Trust, will file with the Securities and Exchange Commission (the
"Commission") periodic reports concerning the 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, in
accordance with the Exchange Act and the rules and regulations of the
Commission thereunder, Green Tree expects that the Trust's obligation to file
such reports will be terminated following the end of 1998.
S-2
<PAGE>
SUMMARY OF TERMS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus Supplement and in
the accompanying Prospectus. Capitalized terms used herein and not otherwise
defined herein shall have the respective meanings ascribed to such terms
elsewhere in this Prospectus Supplement or the accompanying Prospectus.
Issuer........................ Green Tree Home Equity Loan Trust 1998- (the
"Trust"), a Delaware business trust governed
pursuant to a Trust Agreement, to be dated as
of , (the "Trust Agreement"), among
Green Tree Second GP Inc. (the "General
Partner"), Green Tree Financial Corporation
("Green Tree") and [Owner Trustee], as Owner
Trustee (the "Owner Trustee").
Seller and Servicer........... Green Tree Financial Corporation. See "Green
Tree Financial Corporation" herein and in the
accompanying Prospectus.
Indenture Trustee............. [Indenture Trustee/Address] (the "Indenture
Trustee"). See "The Notes--The Indenture
Trustee" in the accompanying Prospectus.
Owner Trustee................. [Owner Trustee], not in its individual capacity
but solely as Owner Trustee under the Trust
Agreement. See "Description of the Trust
Documents--The Trustee" in the accompanying
Prospectus.
The Notes..................... The Trust will issue a class of floating rate
Asset-Backed Notes, designated as the Class A-1
Notes, and three classes of fixed rate Asset-
Backed Notes, designated as the Class A-2,
Class A-3 and Class A-4 Notes, respectively.
The Class A-1 Notes, Class A-2 Notes, Class A-3
Notes and Class A-4 Notes are referred to
herein as the "Notes." The rights of the
holders of each Class of Notes to receive
distributions will be subordinated to the
rights of the holders of each Class of Notes
with a prior numeric designation, in the manner
and to the extent described herein. The Notes
will be issued pursuant to an Indenture, to be
dated as of , (the "Indenture"),
between the Trust and the Indenture Trustee.
The Notes will be offered for purchase in
denominations of $1,000 and integral multiples
thereof in book-entry form only. See "Certain
Information Regarding the Securities--Book-
Entry Registration" in the accompanying
Prospectus.
The Notes will be secured by the assets of the
Trust pursuant to the Indenture.
Original Class A-1 Principal $ (Approximate. Subject to a permitted
Balance....................... variance of plus or minus 5%).
Original Class A-2 Principal $ (Approximate. Subject to a permitted
Balance....................... variance of plus or minus 5%).
Original Class A-3 Principal $ (Approximate. Subject to a permitted
Balance....................... variance of plus or minus 5%).
S-3
<PAGE>
$ (Approximate. Subject to a permitted
Original Class A-4 Principal variance of plus or minus 5%).
Balance.......................
The Certificates.............. The Trust will issue Asset-Backed Certificates
(the "Certificates") representing fractional
undivided interests in the Trust. The rights of
the holders of the Certificates (the
"Certificateholders") to receive distributions
will be subordinated to the rights of the
holders of the Notes (the "Noteholders") in the
manner and to the extent described herein. The
Certificates will be issued pursuant to the
Trust Agreement. The Certificates will be
offered for purchase in denominations of $1,000
and integral multiples thereof in book-entry
form only. See "Certain Information Regarding
the Securities--Book-Entry Registration" in the
accompanying Prospectus.
Original Certificate $ (Approximate. Subject to a permitted
Principal Balance............. variance of plus or minus 5%).
Distribution Date............. The 15th day of each month (or if such 15th day
is not a Business Day, the next Business Day
thereafter) commencing in 1998. A "Business
Day" is a day on which banking institutions in
[Indenture Trustee address] or in New York
City, New York, are not required or authorized
by law to be closed.
Record Date................... The Business Day immediately preceding the
related Distribution Date.
Trust Property................ Each Note will represent an obligation of, and
each Certificate will represent a fractional
undivided interest in, the Trust. The Trust's
assets (the "Trust Property") will include,
among other things, a pool (the "Contract
Pool") of closed-end home equity loans (the
"Home Equity Contracts") (such contracts are
also referred to herein as the "Contracts"),
and all rights to receive payments due thereon
on or after the Cutoff Date. The Trust Property
will also include an assignment of Green Tree's
security interests in the mortgages securing
the Home Equity Contracts and of the right to
receive proceeds from claims on certain
insurance policies covering the real estate
securing the Home Equity Contracts or the
Obligors (as defined herein); the Collection
Account, the Spread Account, the Reserve
Account and the Pre-Funding Account, including
all investments therein, all income from the
investment of funds therein and all proceeds
thereof; certain other rights under the Sale
and Servicing Agreement to be dated as of ,
(the "Sale and Servicing Agreement"),
between Green Tree and the Trust; and certain
rights under the Interest Rate Cap Agreement
(as defined herein). The Contracts will be
transferred by Green Tree to the Trust pursuant
to the Sale and Servicing Agreement, and Green
Tree will be obligated to repurchase Contracts
(each, a "Purchased Contract") upon the
occurrence of certain breaches of
representations and warranties thereunder. On
the Closing Date, Green Tree will deposit an
amount in an account (the "Pre-
S-4
<PAGE>
Funding Account") to provide the Trust with
sufficient funds to purchase the Subsequent
Contracts. Pursuant to the Indenture, the Trust
Property will be pledged to the Indenture
Trustee on behalf of the Noteholders. See "The
Trust" herein.
Home Equity Contracts......... The Home Equity Contracts were originated or
purchased by Green Tree in the ordinary course
of business. As of the Cutoff Date, the Home
Equity Contracts had a weighted average annual
percentage rate of % and a weighted
average remaining maturity of approximately
months. As of the Cutoff Date, no Home Equity
Contract had a scheduled maturity prior to
and no Home Equity Contract was more
than 30 days past due. The final scheduled
payment date on the Home Equity Contract with
the latest maturity occurs in . The Home
Equity Contracts are generally prepayable at
any time without penalty to the Obligor. See
"The Contract Pool" herein and "The Contracts"
in the accompanying Prospectus.
Cutoff Date................... The "Cutoff Date" will be (i) , 1998 (or
the date of origination, if later), with
respect to all Home Equity Contracts that had a
first scheduled payment due prior to , 1998,
and (ii) , 1998 with respect to those Home
Equity Contracts that had a first scheduled
payment due in 1998.
Terms of the Notes............ The principal terms of the Notes will be as
described below:
A. Distributions........... Noteholders will be entitled to receive on each
Distribution Date, to the extent that the
Amount Available in the Collection Account is
sufficient therefor, the Noteholders'
Distributable Amount, as defined under
"Description of the Trust Documents and
Indenture." Distributions on the Notes will be
made first to the Class A-1 Noteholders, then
to the Class A-2 Noteholders, then to the Class
A-3 Noteholders, and then to the Class A-4
Noteholders, in the manner described below.
The "Amount Available" on each Distribution
Date generally includes payments on the
Contracts due and received during the preceding
month, prepayments and other unscheduled
collections received during the preceding
month, any amounts deposited in respect of
Purchased Contracts, any Interest Rate Cap
Payment, any Guaranty Payment, and all earnings
from the investment of funds in the Collection
Account.
The outstanding principal amount of each Class
of Notes, to the extent not previously paid,
will be payable on the Distribution Date
occurring in (the "Final Scheduled
Distribution Date").
B. Interest Rates.......... Class A-1 Notes : one-month LIBOR (as defined
below) for the monthly interest period plus
0. % (the "Class A-1 Rate").
Class A-2 Notes : % per annum (the "Class A-
2 Rate").
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Class A-3 Notes : % per annum (the "Class A-
3 Rate").
Class A-4 Notes : % per annum (the "Class A-
4 Rate").
Interest on the Class A-2 Notes, Class A-3
Notes and Class A-4 Notes will be calculated on
the basis of a 360-day year consisting of
twelve 30-day months.
Interest on the Class A-1 Notes will be
calculated on the basis of the actual number of
days in the monthly interest period divided by
360.
"LIBOR" ("London Interbank Offered Rate") with
respect to any monthly interest period will be
established by the calculation agent appointed
by the Trust (the "Calculation Agent") and will
equal the offered rate for United States dollar
deposits for one month that appears on Telerate
Page 3750 as of 11:00 A.M., London time, on the
second LIBOR Business Day prior to such monthly
interest period (a "LIBOR Determination Date").
"Telerate Page 3750" means the display page so
designated on the Dow Jones Telerate Service
(or such other page as may replace that page on
that service, or such other service as may be
designated by the Calculation Agent as the
information vendor, for the purpose of
displaying London interbank offered rates of
major banks). If such rate appears on Telerate
Page 3750, LIBOR will be such rate. "LIBOR
Business Day" as used herein means a day that
is both a Business Day and a day on which
banking institutions in the City of London,
England are not required or authorized by law
to be closed. If on any LIBOR Determination
Date the offered rate does not appear on
Telerate Page 3750, the Calculation Agent will
request each of the reference banks (which
shall be major banks that are engaged in
transactions in the London interbank market
selected by the Calculation Agent) to provide
the Calculation Agent with its offered
quotation for United States dollar deposits for
one month to prime banks in the London
interbank market as of 11:00 A.M., London time,
on such date. If at least two reference banks
provide the Calculation Agent with such offered
quotations, LIBOR on such date will be the
arithmetic mean, rounded 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 New York City
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,
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<PAGE>
LIBOR for such date will be LIBOR applicable to
the monthly interest period immediately
preceding such monthly interest period. The
"Calculation Agent" will initially be the
Indenture Trustee.
The interest rates for the various classes of
Notes are referred to collectively herein as
the "Interest Rates."
C. Class A-1 Interest...... Interest on the outstanding Class A-1 Principal
Balance will accrue from , 1998, or from
the most recent Distribution Date, to but
excluding the following Distribution Date, at
the Class A-1 Rate for such monthly interest
period. The "Class A-1 Principal Balance" as of
any Distribution Date will be the Original
Class A-1 Principal Balance minus all amounts
previously distributed to the Class A-1
Noteholders in respect of principal.
Interest will be paid on the Class A-1 Notes to
the extent of funds available on such
Distribution Date. In the event the funds
available are not sufficient to make a full
distribution of interest on the Class A-1
Notes, the funds available will be applied pro
rata to the Class A-1 Notes based on the amount
payable to such Class and the amount of the
shortfall will be carried forward and added to
the amount of interest payable on the next
Distribution Date. Any amount so carried
forward will bear interest at the Class A-1
Rate, to the extent legally permissible. See
"Description of the Notes."
D. Class A-1 Principal..... Class A-1 Noteholders will be entitled to
receive on each Distribution Date as payment of
principal, to the extent of funds available
after payment of all interest then payable on
the Class A-1 Notes, an amount equal to the sum
of % (approximate) of the Formula
Principal Distribution Amount for such
Distribution Date plus the Unpaid Class A-1
Principal Shortfall, if any, for such
Distribution Date. In the event the funds
available are not sufficient to make a full
distribution of principal on the Class A-1
Notes, the funds available will be applied pro
rata to the Class A-1 Notes based on the amount
payable to such Class.
The "Formula Principal Distribution Amount"
with respect to any Distribution Date (but
subject to the last sentence of this
definition) will generally be equal to the sum
of the following amounts with respect to the
related Monthly Period, in each case computed
in accordance with the method specified in each
Home Equity Contract: (i) all scheduled
payments of principal due on each outstanding
Home Equity Contract during the related Monthly
Period, (ii) all Partial Principal Prepayments
applied and all Principal Prepayments in Full
received during the related Monthly Period in
respect of each Home Equity Contract, (iii) the
Scheduled Principal Balance of each Home Equity
Contract that became a Liquidated Contract
during the related Monthly Period, (iv) the
Scheduled Principal Balance of each Home Equity
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<PAGE>
Contract which, during the related Monthly
Period, was purchased by Green Tree as a result
of a breach of a representation or warranty or
by the Servicer as a result of an uncured
breach of a covenant under the Sale and
Servicing Agreement, and (v) with respect to
the Distribution Date in 1998, any
remaining amounts on deposit in the Pre-Funding
Account. The Formula Principal Distribution
Amount for the Distribution Date in 2029
will be the sum of the Note Principal Balance
and the Certificate Principal Balance.
A "Monthly Period" with respect to a
Distribution Date is the calendar month
immediately preceding the month in which such
Distribution Date occurs. The "Scheduled
Principal Balance" of a Contract for any
Monthly Period is its principal balance as
specified in its amortization schedule, after
giving effect to any previous Partial Principal
Prepayments and to the scheduled payment due on
its scheduled payment date (the "Due Date") in
that month, but without giving effect to any
adjustments due to bankruptcy or similar
proceedings. A "Liquidated Contract" means any
defaulted Contract as to which the Servicer has
determined that all amounts which it expects to
recover from or on account of such Contract
through the date of disposition of the related
real property have been recovered or any
defaulted Contract in respect of which the
related real property has been realized upon
and disposed of and the proceeds of such
disposition have been received. See
"Description of the Trust Documents and
Indenture--Distributions."
E. Class A-2 Interest...... Interest on the outstanding Class A-2 Principal
Balance will accrue from , 1998, or from
the most recent Distribution Date, to but
excluding the following Distribution Date, at
the Class A-2 Rate for such monthly interest
period. The "Class A-2 Principal Balance" as of
any Distribution Date will be the Original
Class A-2 Principal Balance minus all amounts
previously distributed to the Class A-2
Noteholders in respect of principal and minus
any unreimbursed liquidation losses absorbed by
the Class A-2 Notes.
Interest will be paid on the Class A-2 Notes to
the extent of funds available on each
Distribution Date, after payment of all
interest and principal then payable on the
Class A-1 Notes. In the event such funds
available are not sufficient to make a full
distribution of interest on the Class A-2
Notes, the amount of the shortfall will be
carried forward and added to the amount of
interest payable on the next Distribution Date.
Any amount so carried forward will bear
interest at the Class A-2 Rate, to the extent
legally permissible. See "Description of the
Notes."
F. Class A-2 Principal..... Class A-2 Noteholders will be entitled to
receive on each Distribution Date as payment of
principal, to the extent of funds available
after payment of all interest and principal
then payable
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<PAGE>
on the Class A-1 Notes and after payment of all
interest then payable on the Class A-2 Notes,
the sum of % (approximate) of the Formula
Principal Distribution Amount for such
Distribution Date plus the Unpaid Class A-2
Principal Shortfall, if any, from prior
Distribution Dates.
G. Class A-3 Interest...... Interest on the outstanding Class A-3 Principal
Balance will accrue from , 1998, or from
the most recent Distribution Date, to but
excluding the following Distribution Date, at
the Class A-3 Rate for such monthly interest
period. The "Class A-3 Principal Balance" as of
any Distribution Date will be the Original
Class A-3 Principal Balance minus all amounts
previously distributed to the Class A-3
Noteholders in respect of principal and minus
any unreimbursed liquidation losses absorbed by
the Class A-3 Notes.
Interest will be paid on the Class A-3 Notes to
the extent of funds available on such
Distribution Date, after payment of all
interest and principal then payable on the
Class A-2 Notes. In the event such funds
available are not sufficient to make a full
distribution of interest on the Class A-3
Notes, the amount of the shortfall will be
carried forward and added to the amount of
interest payable on the next Distribution Date.
Any amount so carried forward will bear
interest at the Class A-3 Rate, to the extent
legally permissible. See "Description of the
Notes."
H. Class A-3 Principal..... Class A-3 Noteholders will be entitled to
receive on each Distribution Date as payment of
principal, to the extent of funds available
after payment of all interest and principal
then payable on the Class A-2 Notes and after
payment of all interest then payable on the
Class A-3 Notes, the sum of % (approximate)
of the Formula Principal Distribution Amount
for such Distribution Date plus the Unpaid
Class A-3 Principal Shortfall, if any, from
prior Distribution Dates.
I. Class A-4 Interest...... Interest on the outstanding Class A-4 Principal
Balance will accrue from , 1998, or from
the most recent Distribution Date, to but
excluding the following Distribution Date, at
the Class A-4 Rate for such monthly interest
period. The "Class A-4 Principal Balance" as of
any Distribution Date will be the Original
Class A-4 Principal Balance minus all amounts
previously distributed to the Class A-4
Noteholders in respect of principal and minus
any unreimbursed liquidation losses absorbed by
the Class A-4 Notes.
Interest will be paid on the Class A-4 Notes to
the extent of funds available on each
Distribution Date, after payment of all
interest and principal then payable on the
Class A-3 Notes. In the event such funds
available are not sufficient to make a full
distribution of interest on the Class A-4
Notes, the amount of the shortfall will be
carried forward and added to the amount of
interest payable on the next Distribution Date.
Any amount so carried
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<PAGE>
forward will bear interest at the Class A-4
Rate, to the extent legally permissible. See
"Description of the Notes."
J. Class A-4 Principal..... Class A-4 Noteholders will be entitled to
receive on each Distribution Date as payment of
principal, to the extent of funds available
after payment of all interest and principal
then payable on the Class A-3 Notes and after
payment of all interest then payable on the
Class A-4 Notes, the sum of % (approximate)
of the Formula Principal Distribution Amount
for such Distribution Date plus the Unpaid
Class A-4 Principal Shortfall, if any, from
prior Distribution Dates.
K. Optional Redemption..... The Notes will be redeemed in whole, but not in
part, on any Distribution Date on which Green
Tree exercises its option to purchase the
Contracts, which, subject to certain provisions
in the Sale and Servicing Agreement, can occur
after the Pool Scheduled Principal Balance
declines to 10% or less of the Cutoff Date Pool
Principal Balance, at a redemption price equal
to the unpaid principal amount of the Notes
plus accrued and unpaid interest thereon. The
"Pool Scheduled Principal Balance" is the
aggregate Scheduled Principal Balance of all
outstanding Contracts during a Monthly Period.
See "Description of the Notes--Optional
Redemption."
L. Mandatory Prepayments... The Class A-1, Class A-2, Class A-3 and Class
A-4 Notes will be prepaid in part on the first
Distribution Date after the Pre-Funding Period
(in no event later than , 1998) to the
extent of any Pre-Funded Amount remaining in
the Pre-Funding Account on such Distribution
Date. Green Tree believes that substantially
all of the Pre-Funded Amount will be used to
acquire Subsequent Contracts. It is unlikely,
however, that the aggregate principal amount of
Subsequent Contracts purchased by the Trust
will be identical to the Pre-Funded Amount, and
that consequently, Class A-1, Class A-2, Class
A-3 and Class A-4 Noteholders will receive some
prepayment of principal. See "Yield and
Prepayment Considerations."
Interest Rate Cap Class A-1 Noteholders will have the benefit of
Agreement..................... an Interest Rate Cap Agreement, dated as of
, 1998 (the "Interest Rate Cap
Agreement"), between the Trust and (the
"Counterparty"), a company. Pursuant to
the Interest Rate Cap Agreement, the
Counterparty will make a payment (the "Interest
Rate Cap Payment") to the Trust on each
Distribution Date to the extent that the Class
A-1 Rate exceeds 10%, in an amount equal to the
amount obtained by multiplying the Class A-1
Principal Balance by the product of (i) the
maximum of (x) the excess of the Class A-1 Rate
over 10% or (y) 0% and (ii) the number of days
in the monthly interest period divided by 360.
See "Description of the Notes--Interest Rate
Cap Agreement" and "Description of the
Counterparty."
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<PAGE>
Spread Account................ Class A-2, Class A-3 and Class A-4 Noteholders
will have the benefit of a separate sub-account
for each Class contained in an account (the
"Spread Account") to be held by the Indenture
Trustee. On any Distribution Date, if the funds
in the Note Distribution Account (after making
all distributions on each Class of Notes with a
prior numeric designation) is insufficient to
distribute all interest then payable on the
Class A-2, Class A-3 or Class A-4 Notes, the
Indenture Trustee will withdraw the amount of
the deficiency from the applicable sub-account
(or the amount on deposit in the applicable
sub-account, if less) and deposit such amount
in the Note Distribution Account for
distribution to the applicable Class.
On the Closing Date, the amount on deposit in
the Class A-2, Class A-3 and Class A-4 sub-
accounts will be zero. On each Distribution
Date, the Indenture Trustee will deposit all
funds remaining in the Collection Account,
after distribution of all interest and
principal then payable on the Notes and all
interest then payable on the Certificates,
first to the Class A-2 sub-account, then to the
Class A-3 sub-account and then to the Class A-4
sub-account, until the amount on deposit in
such sub-accounts equals $ and $ ,
respectively (subject to reduction as provided
in, and to the other terms and conditions
contained in, the Sale and Servicing
Agreement). If any sub-account is drawn upon,
it will be replenished to the extent provided
in the Sale and Servicing Agreement and the
Indenture. The Spread Account will be included
in the Trust Property. See "Description of the
Notes--The Spread Account."
Reserve Account............... Noteholders will have the benefit of an account
(the "Reserve Account") to be held by the
Indenture Trustee. On any Distribution Date, if
the funds in the Note Distribution Account
(after making all distributions on each Class
of Notes with a prior numeric designation) are
insufficient to make full payment in respect of
interest or principal payable on a Class of
Notes (after making appropriate draws upon the
Spread Account), the Indenture Trustee will
withdraw the amount of the deficiency from the
Reserve Account (or the amount on deposit in
the Reserve Account, if less) and deposit such
amount in the Note Distribution Account for
distribution to the applicable Class.
On the Closing Date, the amount on deposit in
the Reserve Account will be zero. On each
Distribution Date, the Indenture Trustee will
deposit all funds remaining in the Collection
Account, after distribution of all interest and
principal then payable on the Notes, all
interest then payable on the Certificates and
all deposits in the Spread Account, until the
amount on deposit in the Reserve Account equals
% of the Pool Scheduled Principal Balance
(subject to reduction as provided in, and to
other terms and conditions contained in, the
Sale and Servicing Agreement). If the Reserve
Account is drawn upon, it
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<PAGE>
will be replenished to the extent provided in
the Sale and Servicing Agreement and the
Indenture. The Reserve Account will be included
in the Trust Property. See "Description of the
Notes--The Reserve Account."
Terms of the Certificates..... The principal terms of the Certificates will be
as described below:
A. Distributions............. Certificateholders will be entitled to receive
on each Distribution Date commencing in
1998, to the extent the Amount Available in the
Collection Account including the Guaranty
Payment described below is sufficient therefor,
the Certificateholders' Distributable Amount,
as defined under "Description of the Trust
Documents and Indenture."
The outstanding principal amount of the
Certificates, to the extent not previously
paid, will be payable on the Final Scheduled
Distribution Date.
B. Pass-Through Rate......... % per annum (the "Pass-Through Rate")
payable monthly at one-twelfth of the annual
rate, calculated on the basis of a 360-day year
consisting of twelve 30-day months.
C. Interest.................. On each Distribution Date, the Owner Trustee
will distribute to the Certificateholders, to
the extent the Amount Available in the
Collection Account including the Guaranty
Payment described below is sufficient therefor,
accrued interest at the Pass-Through Rate on
the outstanding Certificate Principal Balance.
Interest in respect of a Distribution Date will
accrue from , 1998, or from the most
recent Distribution Date to but excluding the
following Distribution Date. The "Certificate
Principal Balance" as of any Distribution Date
will be the Original Certificate Principal
Balance minus all amounts previously
distributed to the Certificateholders in
respect of principal and minus any unreimbursed
liquidation losses absorbed by the
Certificates.
Interest will be paid on the Certificates to
the extent of funds available on each
Distribution Date, after payment of all
interest and principal then payable on the
Notes. In the event such funds available are
not sufficient to make a full distribution of
interest on the Certificates, the amount of the
shortfall will be carried forward and added to
the amount of interest payable on the next
Distribution Date. Any amount so carried
forward will bear interest at the Pass-Through
Rate, to the extent legally permissible. See
"Description of the Certificates."
D. Principal................. No distributions of principal on the
Certificates will be payable until all of the
Notes have been paid in full. On each
Distribution Date commencing on the
Distribution Date on which the Notes are paid
in full, principal on the Certificates will be
payable in an amount equal to the Formula
Principal Distribution Amount for such
Distribution Date (less, on the Distribution
Date on which the Notes are paid in full, the
portion thereof payable on the
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<PAGE>
Notes), plus the Unpaid Certificate Principal
Shortfall, if any, from prior Distribution
Dates.
E. Limited Guaranty.......... In order to mitigate the effect of the
subordination of the Certificates and the
effect of liquidation losses on the Contracts,
the Certificateholders are entitled to receive
on each Distribution Date an amount equal to
the Guaranty Payment, if any, under Green
Tree's Limited Guaranty. The "Guaranty Payment"
for any Distribution Date will equal the
difference, if any, between the
Certificateholders' Distributable Amount and
the remaining funds available in the Collection
Account after payment of all interest and
principal on the Notes and the deposit in any
sub-account of the Spread Account or the
Reserve Account of any amounts previously
withdrawn therefrom and not previously
replenished. The "Certificateholders'
Distributable Amount" equals the unpaid and
accrued interest on the Certificates, plus on
each Distribution Date commencing on the
Distribution Date on which the Notes are paid
in full, principal in an amount equal to the
Formula Principal Distribution Amount for such
Distribution Date (less, on the Distribution
Date on which the Notes are paid in full, the
portion thereof payable on the Notes), plus any
Unpaid Certificate Principal Shortfall for such
Distribution Date, and plus any unreimbursed
Certificate Principal Liquidation Loss.
The Limited Guaranty will be an unsecured
general obligation of Green Tree and will not
be supported by any letter of credit or other
enhancement arrangement. The ratings assigned
to the Certificates may be affected by the
ratings of Green Tree's debt securities. Green
Tree's senior debt securities were recently
downgraded by Standard & Poor's Ratings
Services, a division of The McGraw-Hill
Companies, Inc. ("S&P") from "A-" to "BBB+" and
by Fitch IBCA Inc. ("Fitch") from "A" to "A-",
which has been reflected in the ratings
assigned to the Certificates. See "Summary of
Terms--Ratings."
F. Optional Prepayment....... If Green Tree or the Servicer exercises its
option to purchase the Contracts, which,
subject to certain provisions in the Sale and
Servicing Agreement, can occur after the Pool
Scheduled Principal Balance declines to 10% or
less of the Cutoff Date Pool Principal Balance,
the Certificateholders will receive an amount
in respect of the Certificates equal to the
principal amount, together with accrued
interest at the Pass-Through Rate and the
Certificates will be retired. See "Description
of the Certificates--Optional Prepayment."
Collection Account; Priority Except under certain conditions described
of Payments................... herein or as otherwise acceptable to S&P and
Fitch, the Servicer will be required to remit
payments received with respect to the Contracts
within one Business Day of receipt thereof to
an account in the name of the Indenture Trustee
(the "Collection Account"). On each
Distribution Date, the Servicer will instruct
the Indenture Trustee to withdraw funds on
deposit in the Collection Account and to
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<PAGE>
apply such funds on such Distribution Date as
follows (in the priority indicated): (i) if
Green Tree is not the Servicer, the monthly
servicing fee, together with any unpaid
servicing fees from prior Distribution Dates,
(ii) reimbursement of any advances made that
were recovered during the prior Monthly Period,
(iii) the Noteholders' Interest Distributable
Amount, the Noteholders' Principal
Distributable Amount and any amounts previously
withdrawn from any sub-account of the Spread
Account or the Reserve Account and not
previously replenished, (iv) the
Certificateholders' Interest Distributable
Amount and, after the Notes have been paid in
full, the Certificateholders' Principal
Distributable Amount, (v) amounts necessary to
fully fund the Class A-2, Class A-3 and Class
A-4 sub-accounts of the Spread Account, (vi)
the amount necessary to fully fund the Reserve
Account and (vii) any remaining amount to Green
Tree as the monthly servicing and guaranty fee
(the "Monthly Servicing and Guaranty Fee").
Pre-Funding Account........... On the Closing Date, Green Tree will deposit an
amount (as reduced from time-to-time, the "Pre-
Funded Amount") in the Pre-Funding Account to
provide the Trust with sufficient funds to
purchase the Subsequent Contracts. The Pre-
Funded Amount will initially equal the
difference between $ and the aggregate
principal balance as of the Cutoff Date of the
Initial Contracts and Additional Contracts. The
Pre-Funding Account will be included in the
Trust Property. Any reimbursement income earned
on amounts on deposit in the Pre-Funding
Account will be taxable to Green Tree. See
"Yield and Prepayment Considerations" and
"Description of the Trust Documents and
Indenture--Accounts" herein.
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 associa-
tion (or a publicly traded partnership) taxable
as a corporation, and neither the Trust nor any
portion of the Trust will constitute a taxable
mortgage pool 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 Cer-
tificate, will agree to treat the Trust as a
partnership in which the Certificateholders are
partners for federal income tax purposes. Al-
ternative characterizations of the Trust and
the Certificates are possible, but would not
result in materially adverse tax consequences
to Certificateholders. See "Certain Federal and
State Income Tax Consequences" herein and "Cer-
tain Federal Income Tax Consequences" and "Cer-
tain State Income Tax Consequences" in the ac-
companying Prospectus.
ERISA Considerations.......... If the Notes are considered to be indebtedness
without substantial equity features under a
regulation issued by the United States
Department of Labor, the acquisition or holding
of Notes by or
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<PAGE>
on behalf of a Benefit Plan will not cause the
assets of the Trust to become plan assets,
thereby generally preventing the application of
certain prohibited transaction rules of the
Employee Retirement Income Security Act of
1974, as amended, and the Internal Revenue Code
of 1986, as amended, that otherwise would
possibly be applicable. Green Tree believes
that the Notes should be treated as
indebtedness without substantial equity
features for purposes of such regulation.
The Certificates may not be acquired by, or on
the behalf of, any employee benefit plan,
individual retirement account or Keogh Plan
subject to either Title I of the Employee
Retirement Income Security Act of 1974, as
amended, or the Internal Revenue Code of 1986,
as amended. See "ERISA Considerations" herein
and in the accompanying Prospectus.
Ratings....................... It is a condition to the issuance of the
Securities that:
the Class A-1 Notes be rated "AAA" by S&P and
"AAA" by Fitch;
the Class A-2 Notes be rated at least "AA" by
S&P and at least "AA" by Fitch;
the Class A-3 Notes be rated at least "A" by
S&P and at least "A" by Fitch;
the Class A-4 Notes be rated at least "BBB" by
S&P and at least "BBB" by Fitch; and
the Certificates be rated at least "BBB+" by
S&P and at least "A-" by Fitch.
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 a
Rating Agency. The rating of the Certificates
will be based in part on an assessment of Green
Tree's ability to make payments under the
Limited Guaranty. Any reduction in S&P's or
Fitch's ratings of Green Tree's debt securities
may result in a similar reduction in the
ratings of the Certificates. Green Tree's
senior debt securities were recently downgraded
by S&P from "A-" to "BBB+" and by Fitch from
"A" to "A-".
Green Tree has not requested a rating of the
Securities from any rating agencies other than
S&P and Fitch. There can be no assurance as to
whether any other rating agency will rate the
Securities or, if one does, what rating would
be assigned by such rating agency.
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<PAGE>
RISK FACTORS
Prospective holders of the Securities should consider, in addition to the
factors described under "Risk Factors" in the Prospectus, the following
factors in connection with the purchase of the Securities:
SUBORDINATION OF CLASS A-2, CLASS A-3 AND CLASS A-4 NOTES AND CERTIFICATES;
LIMITED ASSETS
Distributions of interest and principal on each Class of Notes will be
subordinated to the rights of the holders of each Class of Notes with a prior
numeric designation to receive prior payment of interest and principal.
Distributions of interest and principal on the Certificates will be
subordinated in priority of payment to interest and principal due on the
Notes. Certificateholders, however, will not receive any distributions of
principal until the Distribution Date on which the outstanding principal
amounts of all of the Notes have been paid in full.
Holders of the Notes and the Certificates must primarily rely for repayment
upon payments on the Contracts. The Trust will not have, nor is it permitted
or expected to have, any significant assets or sources of funds other than the
Contracts, the Spread Account, the Reserve Account, the Interest Rate Cap
Payments and, for payment of losses absorbed by the Certificates, the Limited
Guaranty of Green Tree.
DELINQUENCY, LOAN LOSS AND REPOSSESSION EXPERIENCE
Green Tree has limited underwriting and servicing experience with the type
of home equity loans represented by the Home Equity Contracts included in the
Trust, and does not have separate delinquency and net loss experience with
respect to this type of home equity loan. Green Tree does not believe that its
delinquency and net loss expereience with respect to other types of home
equity loans would be indicative of the performance of the Home Equity
Contracts included in the Trust.
ADEQUACY OF REAL ESTATE SECURING HOME EQUITY CONTRACTS
As of the Cutoff Date, the weighted average loan-to-value ratio for the Home
Equity Contracts was approximately %, and approximately % of the
Cutoff Date Principal Balance represented Home Equity Contracts which were
either unsecured or secured by subordinate liens on the related real estate.
Consequently, the real estate securing a Home Equity Contract is not likely to
provide adequate security in the event it becomes necessary to realize upon
the collateral. Even assuming that the real estate securing a Home Equity
Contract provides adequate security, substantial delays could be encountered
in connection with the liquidation of such Home Equity Contract that would
result in current shortfalls in distributions to the holders of the
Certificates to the extent described herein. In addition, liquidation expenses
relating to any Liquidated Home Equity Contract (such as legal fees, real
estate taxes and maintenance and preservation expenses) will reduce the
liquidation proceeds otherwise available for payment to the holders of the
Certificates. In the event that any real estate securing a Home Equity
Contract fails to provide adequate security, any losses in connection with
such Home Equity Contract will be borne by the holders of the Certificates to
the extent described herein.
GEOGRAPHIC CONCENTRATION OF INITIAL CONTRACTS
As of the Cutoff Date, the Obligors on approximately % of the Contracts
(based on principal balance and billing address of the Obligor) were located
in [ ]. See "The Contract Pool." Accordingly, adverse economic conditions
or other factors particularly affecting this state could adversely affect the
delinquency, loan loss or repossession experience of the Trust with respect to
the Contracts.
S-16
<PAGE>
THE TRUST
The following information supplements and, to the extent inconsistent
therewith, supersedes the information contained in the accompanying Prospectus.
Prospective Securityholders should consider, in addition to the information
below, the information under "The Trusts" in the accompanying Prospectus.
GENERAL
Green Tree Home Equity Loan Trust 1998- is a business trust formed under the
laws of the State of Delaware pursuant to the Trust Agreement for the
transactions described in this Prospectus Supplement. After its formation, the
Trust will not engage in any activity other than (i) acquiring, holding and
managing the Contracts and the other assets of the Trust and proceeds
therefrom, (ii) issuing the Notes and the Certificates, (iii) making payments
on the Notes and the Certificates and (iv) engaging in other activities that
are necessary, suitable or convenient to accomplish the foregoing or are
incidental thereto or connected therewith.
The Trust will initially be capitalized with equity equal to $
(approximate) from the sale of the Certificates to third party investors that
are expected to be unaffiliated with Green Tree or its affiliates. The equity
of the Trust, together with the proceeds of the initial sale of the Notes, will
be used by the Trust to purchase the Contracts from Green Tree pursuant to the
Sale and Servicing Agreement.
The Trust's principal offices are in Wilmington, Delaware, at the address
listed below under "--The Owner Trustee."
CAPITALIZATION OF THE TRUST
The following table illustrates the capitalization of the Trust as of the
Cutoff Date, as if the issuance and sale of the Notes and Certificates had
taken place on such date:
<TABLE>
<S> <C>
Class A-1 Notes.............................................. $
Class A-2 Notes..............................................
Class A-3 Notes..............................................
Class A-4 Notes..............................................
Certificates.................................................
------------
Total...................................................... $
============
</TABLE>
THE OWNER TRUSTEE
[Name of Owner Trustee] is the Owner Trustee under the Trust Agreement.
[Owner Trustee] is a Delaware banking corporation and its principal offices are
located at , , Delaware . The Owner Trustee will
perform limited administrative functions under the Trust Agreement, including
making distributions from the Certificate Distribution Account. The Owner
Trustee's liability in connection with the issuance and sale of the
Certificates and the Notes is limited solely to the express obligations of the
Owner Trustee as set forth in the Trust Agreement.
THE TRUST PROPERTY
The Trust Property will include, among other things, (i) the Contracts; (ii)
all rights to receive payments due thereon on or after the Cutoff Date
(excluding certain insurance premiums, late fees and other servicing charges);
(iii) such amounts as from time to time may be held in the Collection Account,
the Spread Account, the Reserve Account, the Pre-Funding Account and certain
other accounts established and maintained by the Servicer pursuant to the Sale
and Servicing Agreement, as described below (including all investments in the
Collection Account, the Spread Account, the Reserve Account and such other
accounts and all income from the
S-17
<PAGE>
investment of funds therein and all proceeds thereof); (iv) an assignment of
the mortgages on the real estate securing the related Home Equity Contracts;
and (v) certain other rights under the Trust Documents. See "The Contracts" and
"Description of the Trust Documents--Collections" in the accompanying
Prospectus.
Each Certificate will represent a fractional undivided interest in the Trust
Property. Pursuant to the Indenture the Trust will grant a security interest in
the Trust Property in favor of the Indenture Trustee on behalf of the
Noteholders. Any proceeds of such security interest in the Trust Property would
be distributed according to the Indenture, as described below under
"Description of the Trust Documents and Indenture--Distributions."
[Indenture Trustee] or a custodian on its behalf will hold each original
Contract, as well as copies of documents and instruments relating to such
Contract and evidencing the mortgage, if any, on the related real property (the
"Contract Files"). In order to protect the Trust's ownership interest in the
Contracts, Green Tree will file a UCC-1 financing statement in Minnesota and
Delaware to give notice of the Trust's ownership of the Contracts and the
related Trust Property.
S-18
<PAGE>
THE CONTRACT POOL
GENERAL
This Prospectus Supplement contains information regarding the Initial
Contracts, which were originated through and will be transferred to
the Trust on the Closing Date. The information for each Contract is as of the
Cutoff Date for such Contract. The Contracts had an aggregate principal balance
as of the Cutoff Date of $ . The Sale and Servicing Agreement provides that
the Initial Contracts will be purchased by the Trust on the Closing Date and
that the Subsequent Contracts will be purchased by the Trust from time to time
during the Pre-Funding Period.
All of the Contracts will be purchased by Green Tree from dealers and
correspondent lenders who regularly originate and sell such contracts to Green
Tree, or will be originated by Green Tree directly. Substantially all of the
Home Equity Contracts have loan-to-value ratios equal to or greater than 125%.
A significant portion of the Home Equity Contracts were purchased by Green Tree
from an independent financing company. Green Tree believes that the
underwriting standards employed by such independent financing company are
similar to the standards used by Green Tree.
CERTAIN OTHER CHARACTERISTICS
The Contracts (i) had a remaining maturity, as of the Cutoff Date, of at
least months, but not more than months, (ii) had an original maturity of
at least months, but not more than months, (iii) had an original
principal balance of at least $ and not more than $ , (iv) had a
remaining principal balance as of the Cutoff Date of at least $ and not
more than .
The Home Equity Contracts have a principal balance as of the Cutoff Date of
approximately $ (the "Cutoff Date Principal Balance"). The Home Equity
Contracts were originated between and . A significant portion of the
Home Equity Contracts were purchased by Green Tree from an independent
financing company. Green Tree believes that the underwriting standards employed
by such independent financing company are similar to the standards used by
Green Tree.
S-19
<PAGE>
GEOGRAPHIC CONCENTRATION OF HOME EQUITY CONTRACTS
<TABLE>
<CAPTION>
NUMBER OF
CONTRACTS AS OF PERCENT OF NUMBER PRINCIPAL BALANCE PERCENT OF CUTOFF DATE
STATE (1) CUTOFF DATE OF CONTRACTS AS OF CUTOFF DATE PRINCIPAL BALANCE
--------- --------------- ----------------- ----------------- ----------------------
<S> <C> <C> <C> <C>
Alabama................. % $ %
Arizona.................
Arkansas................
California..............
Colorado................
Connecticut.............
Delaware................
District of Columbia....
Florida.................
Georgia.................
Idaho...................
Illinois................
Indiana.................
Iowa....................
Kansas..................
Kentucky................
Louisiana...............
Maine...................
Maryland................
Massachusetts...........
Michigan................
Minnesota...............
Mississippi.............
Missouri................
Montana.................
Nebraska................
Nevada..................
New Hampshire...........
New Jersey..............
New Mexico..............
New York................
North Carolina..........
North Dakota............
Ohio....................
Oklahoma................
Oregon..................
Pennsylvania............
Rhode Island............
South Carolina..........
South Dakota............
Tennessee...............
Texas...................
Utah....................
Vermont.................
Virginia................
Washington..............
West Virginia...........
Wisconsin...............
Wyoming.................
----- ------ --------------- ------
Total................. 100.00% $ 100.00%
===== ====== =============== ======
</TABLE>
- --------
(1) Based on the address of the Obligor set forth in Green Tree's records.
S-20
<PAGE>
DISTRIBUTION OF ORIGINAL CONTRACT AMOUNTS OF HOME EQUITY CONTRACTS
<TABLE>
<CAPTION>
AGGREGATE
PRINCIPAL % OF
BALANCE CONTRACT POOL
NUMBER OF OUTSTANDING BY OUTSTANDING
CONTRACTS AS OF CUTOFF PRINCIPAL BALANCE
ORIGINAL CONTRACT AMOUNT AS OF CUTOFF DATE DATE AS OF CUTOFF DATE
------------------------ ----------------- --------------- -----------------
<S> <C> <C> <C>
Less than $10,000......... $ %
Between $10,000 and
$19,999..................
Between $20,000 and
$29,999..................
Between $30,000 and
$39,999..................
Between $40,000 and
$49,999..................
Between $50,000 and
$59,999..................
Between $60,000 and
$69,999..................
Between $70,000 and
$79,999..................
Between $80,000 and
$89,999..................
Between $90,000 and
$99,999..................
Between $100,000 and
$109,999.................
Between $110,000 and
$119,999.................
Between $120,000 and
$129,999.................
Between $130,000 and
$139,999.................
Between $140,000 and
$149,999.................
Between $150,000 and
$159,999.................
Between $160,000 and
$169,999.................
Between $170,000 and
$179,999.................
Between $180,000 and
$189,999.................
Between $190,000 and
$199,999.................
Between $200,000 and
$249,999.................
Between $250,000 and
$299,999.................
Over $300,000.............
----- --------------- ------
Total................... $ 100.00%
===== =============== ======
</TABLE>
YEAR OF ORIGINATION OF HOME EQUITY CONTRACTS
<TABLE>
<CAPTION>
% OF
AGGREGATE CONTRACT POOL
NUMBER OF PRINCIPAL BALANCE BY OUTSTANDING
YEAR OF CONTRACTS OUTSTANDING PRINCIPAL BALANCE
OIGINATIONR AS OF CUTOFF DATE AS OF CUTOFF DATE AS OF CUTOFF DATE
- ----------- ----------------- ----------------- -----------------
<S> <C> <C> <C>
1989.................... $ %
1990....................
1991....................
1992....................
1993....................
1994....................
1995....................
1996....................
1997....................
------ ------------- ------
Total................. $ 100.00%
====== ============= ======
</TABLE>
S-21
<PAGE>
LIEN POSITION OF HOME EQUITY CONTRACTS
<TABLE>
<CAPTION>
%
% OF CONTRACT POOL BY
NUMBER OF AGGREGATE PRINCIPAL OUTSTANDING PRINCIPAL
NUMBER OF CONTRACTS CONTRACTS AS OF BALANCE OUTSTANDING BALANCE AS OF
AS OF CUTOFF DATE CUTOFF DATE AS OF CUTOFF DATE CUTOFF DATE
------------------- --------------- ------------------- ---------------------
<S> <C> <C> <C> <C>
First................... % $ %
Second..................
Third...................
----- ------ ------------- ------
Total............... 100.00% $ 100.00%
===== ====== ============= ======
</TABLE>
HOME EQUITY CONTRACT RATES
<TABLE>
<CAPTION>
AGGREGATE PRINCIPAL % OF CONTRACT POOL BY
NUMBER OF CONTRACTS BALANCE OUTSTANDING OUTSTANDING PRINCIPAL
CONTRACT RATE AS OF CUTOFF DATE AS OF CUTOFF DATE BALANCE AS OF CUTOFF DATE
------------- ------------------- ------------------- -------------------------
<S> <C> <C> <C>
Less than 9.00%......... $ %
9.01% to 10.00%........
10.01% to 11.00%........
11.01% to 12.00%........
12.01% to 13.00%........
13.01% to 14.00%........
14.01% to 15.00%........
15.01% to 16.00%........
16.01% to 17.00%........
Over 17.00%.............
----- ------------- ------
Total................. $ 100.00%
===== ============= ======
</TABLE>
S-22
<PAGE>
REMAINING MONTHS TO MATURITY OF HOME EQUITY CONTRACTS
<TABLE>
<CAPTION>
AGGREGATE PRINCIPAL % OF CONTRACT POOL BY
NUMBER OF CONTRACTS BALANCE OUTSTANDING OUTSTANDING PRINCIPAL
REMAINING MONTHS TO MATURITY AS OF CUTOFF DATE AS OF CUTOFF DATE BALANCE AS OF CUTOFF DATE
- ---------------------------- ------------------- ------------------- -------------------------
<S> <C> <C> <C>
Fewer than 31............. $ %
31 to 60................
61 to 90................
91 to 120................
121 to 150................
151 to 180................
181 to 210................
211 to 240................
241-270...................
271-300...................
301-330...................
331-360...................
----- ------------- ------
Total................... $ 100.00%
===== ============= ======
</TABLE>
LIEN POSITION OF HOME EQUITY CONTRACTS
<TABLE>
<CAPTION>
% OF
NUMBER OF HOME EQUITY
CONTRACTS CONTRACTS % OF
AS OF AS OF AGGREGATE PRINCIPAL CUTOFF DATE
CUT-OFF CUT- BALANCE OUTSTANDING PRINCIPAL
LIEN POSITION DATE OFF DATE AS OF CUT-OFF DATE BALANCE
------------- --------- ----------- ------------------- -----------
<S> <C> <C> <C> <C>
First..................... % $ %
Second....................
Third.....................
Fourth....................
----- ------ ------------- ------
Total................... 100.00% $ 100.00%
===== ====== ============= ======
</TABLE>
S-23
<PAGE>
GREEN TREE FINANCIAL CORPORATION
The following information supplements the information in the Prospectus under
the heading "Green Tree Financial Corporation." No delinquency, loan loss or
liquidation information has been included with respect to home equity loans,
because Green Tree has only limited historical experience with respect to the
performance of such loans, and does not currently compile separate delinquency,
loan loss and liquidation information on home equity loans with high loan-to-
value ratios such as the Home Equity Contracts.
RECENT DEVELOPMENTS
On June 30, 1998, Green Tree became a wholly owned subsidiary of Conseco,
Inc., pursuant to a Merger Agreement announced on April 7, 1998. Green Tree
will continue to operate from its existing headquarters in St. Paul, Minnesota,
and its 200 local offices throughout the country. Lawrence M. Coss, Green
Tree's Chairman and Chief Executive Officer, has agreed to continue to manage
Green Tree's business for at least one year. Headquartered in Carmel, Indiana,
Conseco is among the nation's leading providers of supplemental health
insurance, retirement annuities and universal life insurance.
On July 6, 1998, Conseco announced a second-quarter charge of $498 million,
net of income taxes, related to the acquisition of Green Tree. The charges are
directly related to (1) $148 million in merger-related costs, and (2) a $350
million non-cash supplemental reserve against the valuation of Green Tree's
interest-only securities and servicing rights.
The Company has been served with various lawsuits in the United States
District Court for the District of Minnesota. These lawsuits were filed by
certain stockholders of the Company as purported class actions on behalf of
persons or entities who purchased common stock of the Company during the
alleged class periods. In addition to the Company, certain current and former
officers and directors of the Company are named as defendants in one or more of
the lawsuits. The Company and the other defendants intend to seek consolidation
of each of the lawsuits in the United States District Court for the District of
Minnesota. Plaintiffs in the lawsuits assert claims under Sections 10(b) and
20(a) of the Securities Exchange Act of 1934. In each case, plaintiffs allege
that the Company and the other defendants violated federal securities laws by,
among other things, making false and misleading statements about the current
state and future prospects of the Company (particularly with respect to
prepayment assumptions and performance of certain of the Company's loan
portfolios) which allegedly rendered the Company's financial statements false
and misleading. The Company believes that the lawsuits are without merit and
intends to defend such lawsuits vigorously.
S-24
<PAGE>
YIELD AND PREPAYMENT CONSIDERATIONS
The following information supplements the information in the Prospectus under
the heading "Yield and Prepayment Considerations."
The Servicer and Green Tree each has the option to purchase from the Trust
all remaining Contracts, and thereby effect early redemption of the Notes and
early retirement of the Certificates, on any Distribution Date when the Pool
Scheduled Principal Balance is 10% or less of the Cutoff Date Pool Principal
Balance. See "Description of the Trust Documents--Termination" in the
Prospectus.
The Class A-1, Class A-2, Class A-3 and Class A-4 Notes will be prepaid in
part on the first Distribution Date after the Pre-Funding Period (in no event
later than , 1998) to the extent of any Pre-Funded Amount remaining in the
Pre-Funding Account on such Distribution Date. Green Tree believes that
substantially all of the Pre-Funded Amount will be used to acquire the
Subsequent Contracts. It is unlikely, however, that the aggregate principal
amount of Subsequent Contracts purchased by the Trust will be identical to the
Pre-Funded Amount, and that consequently, Class A-1, Class A-2, Class A-3 and
Class A-4 Noteholders will receive a prepayment of principal, in accordance
with their applicable percentage of the Formula Principal Distribution Amount.
Principal prepayments on the Home Equity Contracts will result in
accelerating principal payments on the Notes. The rate of principal payments on
pools of home equity loans is influenced by a variety of economic, geographic,
social and other factors, including the level of interest rates and the rate at
which homeowners sell their homes or default on their loans. Other factors
affecting prepayment of home equity loans and home improvement contacts include
changes in obligors' housing needs, job transfers, unemployment and obligors'
net equity in their homes. Since home equity loans are not generally viewed by
borrowers as permanent financing, the Home Equity Contracts may experience a
higher rate of prepayments than traditional mortgage loans. In addition, if
prevailing interest rates fall significantly below the interest rates on such
loans, the loans are likely to be subject to higher prepayment rates than if
prevailing interest rates remain at or above the rates borne by such loans.
Conversely, if prevailing interest rates rise above the interest rates on such
loans, the rate of prepayment would be expected to decrease.
Green Tree has no significant experience with respect to the rate of
principal prepayments on home equity loans. In addition, liquidations of
defaulted Contracts or the exercise by Green Tree or the Servicer of the option
to purchase the remaining pool of Contracts will affect the timing of principal
distributions on the Securities.
WEIGHTED AVERAGE LIFE OF THE NOTES AND THE CERTIFICATES
The following information is given solely to illustrate the effect of
prepayments on the Contracts on the weighted average life of the Notes and the
Certificates under the stated assumptions and is not a prediction of the
prepayment rate that might actually be experienced by the Contracts.
Weighted average life refers to the average amount of time from the date of
issuance of a security until each dollar of principal of such security will be
repaid to the investor. The weighted average life of the Notes and the
Certificates will be influenced by the rate at which principal on the Contracts
is paid. Principal payments on the Contracts may be in the form of scheduled
amortization or prepayments (including, for this purpose, liquidations due to
default).
The Base Case prepayment model is Green Tree management's best estimate of
the prepayment rates that may be experienced on the Contracts. Because Green
Tree began originating and servicing home equity loans only recently, such
estimate is based in part on industry experience with similar loans and
contracts rather than Green Tree's experience. There can be no assurance that
the Contracts will experience prepayments at such projected rates or in the
manner assumed by the prepayment model used for that type of Contract, or that
the Contracts in the aggregate will experience prepayments similar to the
overall prepayment rate or in the manner projected in the Base Case.
S-25
<PAGE>
The model used in this Prospectus Supplement is the Constant Prepayment Rate
("CPR"). The CPR represents an assumed constant rate of prepayment each month,
expressed as a per annum percentage of the outstanding principal balance of the
Home Equity Contracts. The Base Case Prepayment Rate used with respect to the
Home Equity Contracts included in the Trust, for purposes of the following
tables, was % CPR.
As used in the following tables, the columns headed %, %, %, % and
% assume that prepayments on the Contracts are made at Base Case Prepayment
Rates of %, %, %, % and %, respectively. For example, % Base
Case Prepayment Rate and % Base Case Prepayment Rate mean that Home Equity
Contracts have been assumed to have a prepayment rate equal to % CPR and
% CPR, respectively. CPR DOES NOT PURPORT TO BE AN HISTORICAL DESCRIPTION
OF PREPAYMENT EXPERIENCE OR A PREDICTION OF THE ANTICIPATED RATE OF PREPAYMENT
OF ANY POOL OF CONTRACTS, INCLUDING THE CONTRACTS.
[PREPAYMENT TABLES HERE]
S-26
<PAGE>
DESCRIPTION OF THE NOTES
The following information supplements and, to the extent inconsistent
therewith, supersedes the information contained in the accompanying Prospectus.
Prospective Noteholders should consider, in addition to the information below,
the information in the accompanying Prospectus under "The Notes," "Certain
Information Regarding the Securities," and "Description of the Trust
Documents."
GENERAL
The Notes will be issued pursuant to the terms of the Indenture, a form of
which has been filed as an exhibit to the Registration Statement. A copy of the
Indenture, as executed, will be filed with the Commission following the
issuance of the Securities. The following summary describes certain terms of
the Notes and the Indenture. The summary does not purport to be complete and is
subject to, and is qualified in its entirety by reference to, all the
provisions of the Notes and the Indenture. The following summary supplements
the description of the general terms and provisions of the Notes of any given
series and the related Indenture set forth in the accompanying Prospectus, to
which description reference is hereby made. [Indenture Trustee], a national
banking association headquartered in [ ], will be the Indenture Trustee.
DISTRIBUTIONS
Noteholders will be entitled to receive on each Distribution Date commencing
in 1998, to the extent that funds available are sufficient therefor, the
Noteholders' Distributable Amount. Distributions on the Notes will be made from
funds available first to the holders of the Class A-1 Notes, then to the
holders of the Class A-2 Notes, then to the holders of the Class A-3 Notes and
then to the holders of the Class A-4 Notes, in the manner and order of priority
described below.
CLASS A-1 INTEREST
Interest on the outstanding Class A-1 Principal Balance will accrue from
, , or from the most recent Distribution Date, to but excluding the
following Distribution Date, at the Class A-1 Rate for such monthly interest
period. The "Class A-1 Principal Balance" as of any Distribution Date will be
the Original Class A-1 Principal Balance minus all amounts previously
distributed to the Class A-1 Noteholders in respect of principal.
Interest will be paid on the Class A-1 Notes to the extent of funds available
on such Distribution Date. In the event the funds available are not sufficient
to make a full distribution of interest on the Class A-1 Notes, the funds
available will be applied pro rata to the Class A-1 Notes based on the amount
payable to such Class and the amount of the shortfall will be carried forward
and added to the amount of interest payable on the next Distribution Date. Any
amount so carried forward will bear interest at the Class A-1 Rate, to the
extent legally permissible.
CLASS A-1 PRINCIPAL
To the extent of funds available after payment of all interest payable on the
Class A-1 Notes, the Class A-1 Noteholders will be entitled to receive on each
Distribution Date as payment of principal equal to the sum of %
(approximate) of the Formula Principal Distribution Amount for such
Distribution Date plus the Unpaid Class A-1 Principal Shortfall, if any, for
such Distribution Date. In the event the funds available are not sufficient to
make a full distribution of principal on the Class A-1 Notes, the funds
available will be applied pro rata to the Class A-1 Notes based on the amount
payable to such Class.
The "Formula Principal Distribution Amount" with respect to any Distribution
Date (but subject to the last sentence of this definition) will generally be
equal to the sum of the following amounts with respect to the related Monthly
Period, in each case computed in accordance with the method specified in each
Home Equity Contract: (i) all scheduled payments of principal due on each
outstanding Home Equity Contract during the related Monthly
S-27
<PAGE>
Period, (ii) all Partial Principal Prepayments applied and all Principal
Prepayments in Full received during the related Monthly Period in respect of
each Home Equity Contract, (iii) the Scheduled Principal Balance of each Home
Equity Contract that became a Liquidated Contract during the related Monthly
Period, (iv) the Scheduled Principal Balance of each Home Equity Contract
which, during the related Monthly Period, was purchased by Green Tree as a
result of a breach of a representation as warranty or by the Servicer as a
result of an uncured breach of a covenant under the Sale and Servicing
Agreement, and (v) with respect to the Distribution Date in 1998, any
remaining amounts on deposit in the Pre-Funding Account. The Formula Principal
Distribution Amount for the Distribution Date in , will be the sum of the
Note Principal Balance and the Certificate Principal Balance. A "Liquidated
Contract" means any defaulted Contract as to which the Servicer has determined
that all amounts which it expects to recover from or on account of such
Contract through the date of disposition of the related real property have been
recovered or any defaulted Contract in respect of which the related real
property has been realized upon and disposed of and the proceeds of such
disposition have been received. The "Unpaid Class A-1 Principal Shortfall" for
any Distribution Date will equal any amount required to be paid in respect of
principal on the Class A-1 Notes on any prior Distribution Date but not paid on
any intervening Distribution Date.
CLASS A-2 INTEREST
Interest on the outstanding Class A-2 Principal Balance will accrue from ,
, or from the most recent Distribution Date, to but excluding the following
Distribution Date, at the Class A-2 Rate for such monthly interest period. The
"Class A-2 Principal Balance" as of any Distribution Date will be the Original
Class A-2 Principal Balance minus all amounts previously distributed to the
Class A-2 Noteholders in respect of principal, and minus any unreimbursed Class
A-2 Principal Liquidation Loss (described below under "--Losses on Liquidated
Contracts").
Interest will be paid on the Class A-2 Notes to the extent of funds available
on such Distribution Date, after payment of all interest and principal then
payable on the Class A-1 Notes. In the event such remaining funds available are
not sufficient to make a full distribution of interest on the Class A-2 Notes,
the amount of the shortfall will be carried forward and added to the amount of
interest payable on the next Distribution Date. Any amount so carried forward
will bear interest at the Class A-2 Rate, to the extent legally permissible.
CLASS A-2 PRINCIPAL
Class A-2 Noteholders will be entitled to receive on each Distribution Date
as payment of principal, to the extent of funds available after payment of all
interest and principal payable on the Class A-1 Notes and after payment of all
interest payable on the Class A-2 Notes, the sum of % (approximate) of the
Formula Principal Distribution Amount for such Distribution Date, plus any
Unpaid Class A-2 Principal Shortfall (as defined below) for such Distribution
Date.
The "Unpaid Class A-2 Principal Shortfall" for any Distribution Date will
equal any amount required to be paid in respect of principal on the Class A-2
Notes on any prior Distribution Date but not paid on any intervening
Distribution Date, less any unreimbursed Class A-2 Principal Liquidation Loss.
CLASS A-3 INTEREST
Interest on the outstanding Class A-3 Principal Balance will accrue from
, , or from the most recent Distribution Date, to but excluding the
following Distribution Date, at the Class A-3 Rate for such monthly interest
period. The "Class A-3 Principal Balance" as of any Distribution Date will be
the Original Class A-3 Principal Balance minus all amounts previously
distributed to the Class A-3 Noteholders in respect of principal, and minus any
unreimbursed Class A-3 Principal Liquidation Loss (described below under "--
Losses on Liquidated Contracts").
S-28
<PAGE>
Interest will be paid on the Class A-3 Notes to the extent of funds available
on such Distribution Date, after payment of all interest and principal then
payable on the Class A-2 Notes. In the event such remaining funds available are
not sufficient to make a full distribution of interest on the Class A-3 Notes,
the amount of the shortfall will be carried forward and added to the amount of
interest payable on the next Distribution Date. Any amount so carried forward
will bear interest at the Class A-3 Rate, to the extent legally permissible.
CLASS A-3 PRINCIPAL
Class A-3 Noteholders will be entitled to receive on each Distribution Date
as payment of principal, to the extent of funds available after payment of all
interest and principal payable on the Class A-2 Notes and after payment of all
interest payable on the Class A-3 Notes, the sum of % (approximate) of the
Formula Principal Distribution Amount for such Distribution Date, plus any
Unpaid Class A-3 Principal Shortfall (as defined below) for such Distribution
Date.
The "Unpaid Class A-3 Principal Shortfall" for any Distribution Date will
equal any amount required to be paid in respect of principal on the Class A-3
Notes on any prior Distribution Date but not paid on any intervening
Distribution Date, less any unreimbursed Class A-3 Principal Liquidation Loss.
CLASS A-4 INTEREST
Interest on the outstanding Class A-4 Principal Balance will accrue from
, , or from the most recent Distribution Date, to but excluding the
following Distribution Date, at the Class A-4 Rate for such monthly interest
period. The "Class A-4 Principal Balance" as of any Distribution Date will be
the Original Class A-4 Principal Balance minus all amounts previously
distributed to the Class A-4 Noteholders in respect of principal, and minus any
unreimbursed Class A-4 Principal Liquidation Loss (described below under "--
Losses on Liquidated Contracts").
Interest will be paid on the Class A-4 Notes to the extent of funds available
on such Distribution Date, after payment of all interest and principal then
payable on the Class A-3 Notes. In the event such remaining funds available are
not sufficient to make a full distribution of interest on the Class A-4 Notes,
the amount of the shortfall will be carried forward and added to the amount of
interest payable on the next Distribution Date. Any amount so carried forward
will bear interest at the Class A-4 Rate, to the extent legally permissible.
CLASS A-4 PRINCIPAL
Class A-4 Noteholders will be entitled to receive on each Distribution Date
as payment of principal, to the extent of funds available after payment of all
interest and principal payable on the Class A-3 Notes and after payment of all
interest payable on the Class A-4 Notes, the sum of % (approximate) of the
Formula Principal Distribution Amount for such Distribution Date, plus any
Unpaid Class A-4 Principal Shortfall (as defined below) for such Distribution
Date.
The "Unpaid Class A-4 Principal Shortfall" for any Distribution Date will
equal any amount required to be paid in respect of principal on the Class A-4
Notes on any prior Distribution Date but not paid on any intervening
Distribution Date, less any unreimbursed Class A-4 Principal Liquidation Loss.
OPTIONAL REDEMPTION
The Notes will be redeemed in whole, but not in part, on any Distribution
Date on which Green Tree exercises its option to purchase the Contracts. Green
Tree may purchase the Contracts when the Pool Scheduled Principal Balance has
declined to 10% or less of the Cutoff Date Pool Principal Balance, as described
in the accompanying Prospectus under "Description of the Trust Documents--
Termination." The "Pool Scheduled Principal Balance" is the aggregate Scheduled
Principal Balance of all outstanding Contracts during a Monthly
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Period. Such redemption will effect early retirement of the Notes. The
redemption price will be equal to the unpaid principal amount of the Notes
redeemed plus accrued and unpaid interest thereon.
MANDATORY PREPAYMENTS
The Class A-1, Class A-2, Class A-3 and Class A-4 Notes will be prepaid in
part on the first Distribution Date after the Pre-Funding Period (in no event
later than , 1998) to the extent of any Pre-Funded Amount remaining in the
Pre-Funding Account on such Distribution Date. Green Tree believes that
substantially all of the Pre-Funded Amount will be used to acquire the
Subsequent Contracts. It is unlikely, however, that the aggregate principal
amount of Subsequent Contracts purchased by the Trust will be identical to the
Pre-Funded Amount, and that consequently, Class A-1, Class A-2, Class A-3 and
Class A-4 Noteholders will receive a prepayment of principal, in accordance
with their applicable percentage of the Formula Principal Distribution Amount.
THE INTEREST RATE CAP AGREEMENT
Class A-1 Noteholders will have the benefit of the Interest Rate Cap
Agreement between the Trust and the Counterparty. Pursuant to the Interest Rate
Cap Agreement, the Counterparty will make a payment (the "Interest Rate Cap
Payment") to the Trust on each Distribution Date to the extent that the Class
A-1 Rate exceeds 10%, in an amount equal to the amount obtained by multiplying
the Class A-1 Principal Balance by the product of (i) the maximum of (x) the
excess of the Class A-1 Rate over 10% or (y) 0% and (ii) the number of days in
the monthly interest period divided by 360. Payments received by the Indenture
Trustee pursuant to the Interest Rate Cap Agreement will be deposited in the
Collection Account. See "Description of the Counterparty."
THE SPREAD ACCOUNT
Class A-2, Class A-3 and Class A-4 Noteholders will have the benefit of a
separate sub-account for each Class contained in the Spread Account to be held
by the Indenture Trustee. On any Distribution Date, if the funds in the Note
Distribution Account (after making all distributions on each Class of Notes
with a prior numeric designation) is insufficient to distribute all interest
then payable on the Class A-2, Class A-3 or Class A-4 Notes, the Indenture
Trustee will withdraw the amount of the deficiency from the applicable sub-
account (or the amount on deposit in the applicable sub-account, if less) and
deposit such amount in the Note Distribution Account for distribution to the
applicable Class. On any Distribution Date, the amount of funds in the Spread
Account will not be available to cover a shortfall in principal distributable
on any Class of Notes, but would only be available to cover a shortfall in
interest distributable on the Class A-2, Class A-3 and Class A-4 Notes.
On the Closing Date, the amount on deposit in the Class A-2, Class A-3 and
Class A-4 sub-accounts will be zero. On each Distribution Date, the Indenture
Trustee will deposit all funds remaining in the Collection Account, after
distribution of all interest and principal then payable on the Notes and all
interest then payable on the Certificates, first to the Class A-2 sub-account,
then to the Class A-3 sub-account and then to the Class A-4 sub-account, until
the amount on deposit in such sub-accounts equals $ , $ and $ ,
respectively (subject to reduction as provided in, and to the other terms and
conditions contained in, the Sale and Servicing Agreement). If any sub-account
is drawn upon, it will be replenished to the extent provided in the Sale and
Servicing Agreement and the Indenture. The Spread Account is included in the
Trust Property. Any amount remaining in the Spread Account upon termination of
the Trust will be distributed to Green Tree.
THE RESERVE ACCOUNT
Noteholders will have the benefit of the Reserve Account to be held by the
Indenture Trustee. On any Distribution Date, if the funds in the Note
Distribution Account (after making all distributions on each Class of Notes
with a prior numeric designation) are insufficient to make full payment in
respect of interest or principal payable on a Class of Notes (after making
appropriate draws upon the Spread Account), the Indenture Trustee will withdraw
the amount of the deficiency from the Reserve Account (or the amount on deposit
in the Reserve
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Account, if less) and deposit such amount in the Note Distribution Account for
distribution to the applicable Class.
On the Closing Date, the amount on deposit in the Reserve Account will be
zero. On each Distribution Date, the Indenture Trustee will deposit all funds
remaining in the Collection Account, after distribution of all interest and
principal then payable on the Notes, all interest then payable on the
Certificates and all deposits in the Spread Account, until the amount on
deposit in the Reserve Account equals 1.5% of the Pool Scheduled Principal
Balance (subject to reduction as provided in, and to other terms and conditions
contained in, the Sale and Servicing Agreement). If the Reserve Account is
drawn upon, it will be replenished to the extent provided in the Sale and
Servicing Agreement and the Indenture. The Reserve Account is included in the
Trust Property. Any amount remaining in the Reserve Account upon termination of
the Trust will be distributed to Green Tree.
LOSSES ON LIQUIDATED CONTRACTS
As described above, the distribution of principal to each Class of Notes is
intended to equal the applicable percentage of the Formula Principal
Distribution Amount. On each Distribution Date, each such amount includes the
Scheduled Principal Balance of each Contract that became a Liquidated Contract
during the Monthly Period related to such Distribution Date. If the Net
Liquidation Proceeds from such Liquidated Contract are less than the Scheduled
Principal Balance of such Liquidated Contract, the deficiency will, in effect,
be absorbed first by the Monthly Servicing and Guaranty Fee otherwise payable
to Green Tree, then by the Certificateholders (although Green Tree will be
obligated to make a Guaranty Payment equal to any shortfall in the distribution
to the Certificateholders), and then by each Class of Notes in inverse numeric
order (although funds on deposit in the Reserve Account will be available to
pay any shortfall in the distribution of interest and principal to any Class of
Notes).
If the funds available for any Distribution Date, after making all required
distributions of interest and principal to more senior Classes of Notes, are
insufficient to make a full distribution of interest and/or principal to a
Class of Notes or the Certificates, such deficiency will be carried forward and
added to the amount to be distributed to such Class of Notes or the
Certificates on the following Distribution Date.
If the Pool Scheduled Principal Balance for any Distribution Date is less
than the sum of the aggregate outstanding principal balance of the Notes and
the Certificate Principal Balance after giving effect to all distributions of
principal on such Distribution Date, then the Certificate Principal Balance
will be reduced by the amount of such deficiency (a "Certificate Principal
Liquidation Loss"). Green Tree will be obligated to pay the amount of any such
Certificate Principal Liquidation Loss under the Limited Guaranty. If Green
Tree should fail to pay such amount, however, the amount distributable on the
Certificates on future Distribution Dates would include interest on any such
Certificate Principal Liquidation Loss at the Pass-Through Rate (and, to the
extent legally permissible, interest on any unpaid interest at the Pass-Through
Rate) accrued from the date such Certificate Principal Liquidation Loss was
incurred, and the amount of such Certificate Principal Liquidation Loss.
Similarly, if the Certificate Principal Balance were reduced to zero (which
would be caused only by Certificate Principal Liquidation Losses, whether or
not Green Tree makes any required payments under the Limited Guaranty) and the
Pool Scheduled Principal Balance on any Distribution Date were less than the
aggregate outstanding principal balance of the Notes after giving effect to
distributions of principal on such Distribution Date, then the Class A-4
Principal Balance would be reduced by the amount of such deficiency (a "Class
A-4 Principal Liquidation Loss"). The funds on deposit in the Reserve Account
will be available to pay the amount of any such Class A-4 Principal Liquidation
Loss. If the funds available in the Reserve Account are insufficient to pay
such amount, however, the amount distributable on the Class A-4 Notes on future
Distribution Dates would include interest on any such Class A-4 Principal
Liquidation Loss at the Class A-4 Rate (and, to the extent legally permissible,
interest on such unpaid interest at the Class A-4 Rate) accrued from the date
such Class A-4 Principal Liquidation Loss was incurred, and the amount of such
Class A-4 Principal Liquidation Loss. Each more senior Class of Notes would
similarly be subject to reduction in its outstanding principal balance if the
aggregate outstanding principal balance of all more junior Classes of Notes
were reduced to zero and the
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Pool Scheduled Principal Balance were less than the aggregate outstanding
principal balance of the Notes, and would similarly be entitled on future
Distribution Dates to receive interest on any such Principal Liquidation Loss
at the applicable Interest Rate, and the amount of such Principal Liquidation
Loss. The applicable percentage of the Formula Principal Distribution Amount
distributable to each Class of Notes on each Distribution Date will not be
affected by any Principal Liquidation Loss experienced by a Class of Notes.
Accordingly, even if a Class of Notes has experienced a Principal Liquidation
Loss, such Class will continue to be entitled to receive its applicable
percentage of the Formula Principal Distribution Amount (or, if the Amount
Available in the Collection Account is insufficient to make such distribution,
such Class will be entitled to receive the amount of such deficiency on
subsequent Distribution Dates as an Unpaid Principal Shortfall).
BOOK-ENTRY REGISTRATION
Holders of the Notes or the Certificates may hold through DTC (in the United
States) or, solely in the case of the Notes, CEDEL or Euroclear (in Europe) if
they are participants of such systems, or indirectly through organizations that
are participants in such systems. The Certificates may not be held, directly or
indirectly, through CEDEL or Euroclear.
Cede & Co., as nominee for DTC, will hold the Notes and the Certificates.
CEDEL and Euroclear will hold omnibus positions in the Notes on behalf of the
CEDEL Participants and the Euroclear Participants, respectively, through
customers' securities accounts in CEDEL's and Euroclear's names on the books of
their respective depositaries (collectively, the "Depositaries"), which in turn
will hold such positions in customers' securities accounts in the Depositaries'
names on the books of DTC.
Transfers between DTC's participating organizations (the "Participants") will
occur in accordance with DTC rules. Transfers between CEDEL Participants and
Euroclear Participants will occur in the ordinary way in accordance with their
applicable rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly through
DTC, on the one hand, and directly or indirectly through CEDEL Participants or
Euroclear Participants, on the other, will be effected in DTC in accordance
with DTC rules on behalf of the relevant European international clearing system
by its Depositary; however, such cross-market transactions will require
delivery of instructions to the relevant European international clearing system
by the counterparty in such system in accordance with its rules and procedures
and within its established deadlines (European time). The relevant European
international clearing system will, if the transaction meets its settlement
requirements, deliver instructions to its Depositary to take action to effect
final settlement on its behalf by delivering or receiving securities in DTC,
and making or receiving payment in accordance with normal procedures for same-
day funds settlement applicable to DTC. CEDEL Participants and Euroclear
Participants may not deliver instructions directly to the Depositaries.
Because of time-zone differences, credits of securities in CEDEL or Euroclear
as a result of a transaction with a Participant will be made during the
subsequent securities settlement processing, dated the business day following
the DTC settlement date, and such credits or any transactions in such
securities settled during such processing will be reported to the relevant
CEDEL Participant or Euroclear Participant on such business day. Cash received
in CEDEL or Euroclear as a result of sales of securities by or through a CEDEL
Participant or a Euroclear Participant to a Participant will be received with
value on the DTC settlement date but will be available in the relevant CEDEL or
Euroclear cash account only as of the business day following settlement in DTC.
For a description of transfers between persons holding directly or indirectly
through DTC, see "Certain Information Regarding the Securities--Book-Entry
Registration" in the Prospectus.
Cedel Bank, societe anonyme ("CEDEL") is incorporated under the laws of
Luxembourg as a professional depository. CEDEL holds securities for its
participating organizations ("CEDEL Participants") and facilitates the
clearance and settlement of securities transactions between CEDEL Participants
through electronic book-entry changes in accounts of CEDEL Participants,
thereby eliminating the need for physical movement of
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certificates. Transactions may be settled in CEDEL in any of 28 currencies,
including United States dollars. CEDEL provides to its CEDEL Participants,
among other things, services for safekeeping, administration, clearance and
settlement of internationally traded securities and securities lending and
borrowing. CEDEL interfaces with domestic markets in several countries. As a
professional depository, CEDEL is subject to regulation by the Luxembourg
Monetary Institute. CEDEL Participants are recognized financial institutions
around the world, including underwriters, securities brokers and dealers,
banks, trust companies, clearing corporations and certain other organizations
and may include the Underwriters. Indirect access to CEDEL is also available to
others, such as banks, brokers, dealers and trust companies that clear through
or maintain a custodial relationship with a CEDEL Participant, either directly
or indirectly.
The Euroclear System was created in 1968 to hold securities for participants
of the Euroclear System ("Euroclear Participants") and to clear and settle
transactions between Euroclear Participants through simultaneous electronic
book-entry delivery against payment, thereby eliminating the need for physical
movement of certificates and any risk from lack of simultaneous transfers of
securities and cash. Transactions may now be settled in Euroclear in any of 32
currencies, including United States dollars. The Euroclear System includes
various other services, including securities lending and borrowing, and
interfaces with domestic markets in several countries generally similar to the
arrangements for cross-market transfers with DTC described in Annex I hereto.
The Euroclear System is operated by Morgan Guaranty Trust Company of New York,
Brussels, Belgium office (the "Euroclear Operator" or "Euroclear"), under
contract with Euroclear Clearance System, S.C., a Belgian cooperative
corporation (the "Cooperative"). All operations are conducted by the Euroclear
Operator, and all Euroclear securities clearance accounts and Euroclear cash
accounts are accounts with the Euroclear Operator, not the Cooperative. The
Cooperative establishes policy for the Euroclear System on behalf of Euroclear
Participants. Euroclear Participants include banks (including central banks),
securities brokers and dealers and other professional financial intermediaries
and may include the Underwriters. Indirect access to the Euroclear System is
also available to other firms that clear through or maintain a custodial
relationship with a Euroclear Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it
is regulated and examined by the Board of Governors of the Federal Reserve
System and the New York State Banking Department, as well as the Belgian
Banking Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian law
(collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within the Euroclear System, withdrawal of
securities and cash from the Euroclear System, and receipts of payments with
respect to securities in the Euroclear System. All securities in the Euroclear
System are held on a fungible basis without attribution of specific
certificates to specific securities clearance accounts. The Euroclear Operator
acts under the Terms and Conditions only on behalf of Euroclear Participants
and has no record of or relationship with persons holding through Euroclear
Participants.
Distributions with respect to Notes held through CEDEL or Euroclear will be
credited to the cash accounts of CEDEL Participants or Euroclear Participants
in accordance with the relevant system's rules and procedures, to the extent
received by its Depositary. Such distributions will be subject to tax reporting
in accordance with relevant United States tax laws and regulations. See
"Certain Federal Income Tax Consequences" in the Prospectus and "Global
Clearance, Settlement and Tax Documentation Procedures" in Annex I to this
Prospectus Supplement. CEDEL or the Euroclear Operator, as the case may be,
will take any other action permitted to be taken by a Noteholder under the
Indenture on behalf of a CEDEL Participant or Euroclear Participant only in
accordance with its relevant rules and procedures and subject to its
Depositary's ability to effect such actions on its behalf through DTC.
Although DTC, CEDEL and Euroclear have agreed to the foregoing procedures in
order to facilitate transfers of Notes among participants of DTC, CEDEL and
Euroclear, they are under no obligation to perform or continue to perform such
procedures and such procedures may be discontinued at any time.
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DESCRIPTION OF THE COUNTERPARTY
[insert description of counterparty, if any]
The description of the Counterparty set out above has been provided by the
Counterparty. The Counterparty has not, however, been involved in the
preparation of, and does not accept responsibility for, this Prospectus
Supplement as a whole.
DESCRIPTION OF THE CERTIFICATES
The following information supplements the information contained in the
accompanying Prospectus. Prospective Certificateholders should consider, in
addition to the information below, the information in the accompanying
Prospectus under "The Certificates," "Certain Information Regarding the
Securities," and "Description of the Trust Documents."
GENERAL
The Certificates will be issued pursuant to the terms of the Trust Agreement,
a form of which has been filed as an exhibit to the Registration Statement. A
copy of the Trust Agreement, as executed, will be filed with the Commission
following the issuance of the Securities. The following summary describes
certain terms of the Certificates and the Trust Agreement. The summary does not
purport to be complete and is subject to, and qualified in its entirety by
reference to, all the provisions of the Certificates and the Trust Agreement.
The following summary supplements, and to the extent inconsistent therewith
replaces, the description of the general terms and provisions of the
Certificates of any given series and the related Trust Agreement set forth in
the Prospectus, to which description reference is hereby made.
DISTRIBUTIONS
Certificateholders will be entitled to receive on each Distribution Date
commencing in 1998, to the extent that funds available together with the
Guaranty Payment described below are sufficient therefor, the
Certificateholders' Distributable Amount.
INTEREST
On each Distribution Date, the Owner Trustee will distribute pro rata to
Certificateholders accrued interest at the Pass-Through Rate on the outstanding
Certificate Principal Balance. Interest in respect of a Distribution Date will
accrue from , 1998, or from the most recent Distribution Date to but
excluding the following Distribution Date. The "Certificate Principal Balance"
as of any Distribution Date will be the Original Certificate Principal Balance,
reduced by all amounts allocable to principal previously distributed to
Certificateholders minus any unreimbursed Certificate Principal Liquidation
Loss (described below under "--Losses on Liquidated Contracts").
Interest will be paid on the Certificates to the extent of funds available on
such Distribution Date, after payment of all interest and principal then
payable on the Notes and any amounts previously withdrawn from any
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sub-account of the Spread Account or the Reserve Account and not previously
replenished. In the event such funds available are not sufficient to make a
full distribution of interest on the Certificates, the amount of the shortfall
will be carried forward and added to the amount of interest payable on the next
Distribution Date. Any amount so carried forward will bear interest at the
Pass-Through Rate, to the extent legally permissible. See "Description of the
Certificates."
PRINCIPAL
No distributions of principal on the Certificates will be payable until all
of the Notes have been paid in full. On each Distribution Date commencing on
the Distribution Date on which the Notes are paid in full, principal on the
Certificates will be payable in an amount equal to the Formula Principal
Distribution Amount for such Distribution Date (less, on the Distribution Date
on which the Notes are paid in full, the portion thereof payable on the Notes),
plus the Unpaid Certificate Principal Shortfall, if any, from prior
Distribution Dates.
The "Unpaid Certificate Principal Shortfall" for any Distribution Date will
equal any amount required to be paid in respect of principal on the
Certificates on any prior Distribution Date but not paid on any intervening
Distribution Date, less any unreimbursed Certificate Principal Liquidation
Loss.
OPTIONAL PREPAYMENT
If Green Tree exercises its option to purchase the Contracts when the Pool
Scheduled Principal Balance declines to 10% or less of the Cutoff Date Pool
Principal Balance, Certificateholders will receive an amount in respect of the
Certificates equal to the outstanding principal amount together with accrued
interest at the Pass-Through Rate, which distribution will effect early
retirement of the Certificates. See "Description of the Trust Documents--
Termination" in the accompanying Prospectus.
LIMITED GUARANTY
In order to mitigate the effect of the subordination of the Certificates and
the effect of liquidation losses and delinquencies on the Contracts, the
Certificateholders are entitled to receive on each Distribution Date the amount
equal to the Guaranty Payment, if any, under Green Tree's Limited Guaranty. The
Guaranty Payment for any Distribution Date will equal the difference, if any,
between the Certificateholders' Distributable Amount and the remaining funds
available in the Collection Account after payment of all interest and principal
on the Notes and the deposit in any sub-account of the Spread Account or the
Reserve Account of any amounts previously withdrawn therefrom and not
previously replenished. The "Certificateholders' Distributable Amount" equals
the unpaid and accrued interest on the Certificates, plus on each Distribution
Date commencing on the Distribution Date on which the Notes are paid in full,
principal in an amount equal to the Formula Principal Distribution Amount for
such Distribution Date (less, on the Distribution Date on which the Notes are
paid in full, the portion thereof payable on the Notes), plus any Unpaid
Certificate Principal Shortfall for such Distribution Date, and plus any
unreimbursed Certificate Principal Liquidation Loss.
The Limited Guaranty will be an unsecured general obligation of Green Tree
and will not be supported by any letter of credit or other enhancement
arrangement. The ratings assigned to the Certificates may be affected by the
ratings of Green Tree's debt securities. Green Tree's senior debt securities
were recently downgraded by S&P from "A-" to "BBB+" and by Fitch from "A" to
"A-", which has been reflected in the ratings assigned to the Certificates. See
"Summary of Terms--Ratings."
The Limited Guaranty will not benefit in any way, or result in any payment
to, the Class A-1, Class A-2, Class A-3 or Class A-4 Noteholders.
As compensation for servicing the Contracts and providing the Limited
Guaranty, Green Tree will be entitled to receive the Monthly Servicing and
Guaranty Fee on each Distribution Date, which will be equal to
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the Amount Available remaining after payment of the Certificateholders'
Distributable Amount and any deposits into the Spread Account or the Reserve
Account required on that Distribution Date.
TRANSFERS OF CERTIFICATES
Certificateholders, other than individuals or entities holding Certificates
through a broker who reports sales of securities on Form 1099-B, are required
under the Trust Agreement to notify the Owner Trustee of any transfer of their
Certificates in a taxable sale or exchange within 30 days of such transfer.
LOSSES ON LIQUIDATED CONTRACTS
As described above, the distribution of principal to the Certificates is
intended to equal the Class A-1:HE Formula Principal Distribution Amount. Such
amount includes the Scheduled Principal Balance of each Contract that became a
Liquidated Contract during the Monthly Period preceding such Distribution Date.
If the Net Liquidation Proceeds from such Liquidated Contract are less than the
Scheduled Principal Balance of such Liquidated Contract, the deficiency will,
in effect, be absorbed first by the Monthly Servicing and Guaranty Fee
otherwise payable to Green Tree and the General Partner Fee payable to the
General Partner and then by the Certificateholders (although Green Tree will be
obligated to make a Guaranty Payment equal to any shortfall in the distribution
to the Certificateholders).
If the funds available for any Distribution Date, after making all required
distributions of interest and principal to the Notes, are insufficient to make
a full distribution of interest and/or principal to the Certificates, such
deficiency will be carried forward and added to the amount to be distributed to
the Certificates on the following Distribution Date.
If the Pool Scheduled Principal Balance for any Distribution Date is less
than the sum of the aggregate outstanding Principal Balance of the Notes and
the Certificate Principal Balance after giving effect to all distributions of
principal on such Distribution Date, then the Certificate Principal Balance
will be reduced by the amount of such deficiency (a "Certificate Principal
Liquidation Loss"). Green Tree will be obligated to pay the amount of any such
Certificate Principal Liquidation Loss under the Limited Guaranty. If Green
Tree should fail to pay such amount, however, the amount distributable on the
Certificates on future Distribution Dates would include interest on any such
Certificate Principal Liquidation Loss at the Pass-Through Rate (and, to the
extent legally permissible, interest on any unpaid interest at the Pass-Through
Rate) accrued from the date such Certificate Principal Liquidation Loss was
incurred, and the amount of such Certificate Principal Liquidation Loss.
DESCRIPTION OF THE TRUST DOCUMENTS AND INDENTURE
The following summary describes certain terms of the Sale and Servicing
Agreement and the Trust Agreement (together, the "Trust Documents") and the
Indenture. Forms of the Trust Documents and Indenture, as executed, have been
filed as exhibits to the Registration Statement. A copy of each of the Trust
Documents and Indenture will be filed with the Commission following the
issuance of the Securities. The summary does not purport to be complete and is
subject to, and qualified in its entirety by reference to, all the provisions
of the Trust Documents and Indenture. The following summary supplements, the
description of the general terms and provisions of the Trust Documents and
Indenture (as such terms are used in the accompanying Prospectus) set forth in
the accompanying Prospectus, to which description reference is hereby made.
ACCOUNTS
The Servicer will establish and maintain one or more accounts, in the name of
the Indenture Trustee on behalf of the Noteholders and the Certificateholders,
into which all payments made on or with respect to the Contracts will be
deposited (the "Collection Account"). The Servicer will establish and maintain
the Spread
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Account, which will include sub-accounts for the Class A-2, Class A-3 and Class
A-4 Noteholders, in the name of the Indenture Trustee on behalf of the
Noteholders, in which amounts will be deposited to cover shortfalls in interest
distributable on the Class A-2, Class A-3 and Class A-4 Notes. In addition, the
Servicer will establish and maintain the Reserve Account in the name of the
Indenture Trustee on behalf of the Noteholders, in which amounts will be
deposited to cover shortfalls in interest or principal distributable on the
Notes. The Servicer will establish and maintain an account, in the name of the
Indenture Trustee on behalf of the Noteholders, in which amounts released from
the Collection Account, the Spread Account and the Reserve Account for
distribution to Noteholders will be deposited and from which all distributions
to Noteholders will be made (the "Note Distribution Account"). The Servicer
will also establish and maintain an account, in the name of the Owner Trustee
on behalf of the Certificateholders, in which amounts released from the
Collection Account for distribution to Certificateholders will be deposited and
from which all distributions to Certificateholders will be made (the
"Certificate Distribution Account"). See "Description of the Trust Documents--
Collections" in the accompanying Prospectus.
An account (the "Pre-Funding Account") will be established by the Indenture
Trustee and funded by Green Tree on the Closing Date to provide the Trust with
sufficient funds to purchase Subsequent Contracts. The amount deposited in the
Pre-Funding Account (as reduced from time-to-time, the "Pre-Funded Amount")
will initially equal the difference between $ and the aggregate principal
balance as of the Cutoff Date of the Initial Contracts and Additional
Contracts. The Pre-Funding Account will be used to purchase Subsequent
Contracts during the period from the Closing Date until the earliest of (i) the
date on which the amount on deposit in the Pre-Funding Account is less than
$10,000, (ii) , 1998 or (iii) the date on which an Event of Termination
occurs under the Sale and Servicing Agreement (the "Pre-Funding Period"). The
Pre-Funded Amount will be reduced during the Pre-Funding Period by the amount
used to purchase Subsequent Contracts in accordance with the Sale and Servicing
Agreement.
Under the Sale and Servicing Agreement, following the initial issuance of the
Securities, the Trust will be obligated to purchase Subsequent Contracts from
Green Tree during the Pre-Funding Period, subject to the availability thereof.
Each Subsequent Contract will have been underwritten in accordance with Green
Tree's standard underwriting criteria. Subsequent Contracts will be transferred
to the Trust pursuant to subsequent transfer instruments between Green Tree and
the Trust. In connection with the purchase of Subsequent Contracts on such
dates of transfer (the "Subsequent Transfer Dates"), the Trust will be required
to pay to Green Tree from amounts on deposit in the Pre-Funding Account a cash
purchase price of 100% of the principal balance thereof. Green Tree will
designate the Subsequent Transfer Date as the Cutoff Date with respect to the
related Subsequent Contracts purchased on such date. The amount paid from the
Pre-Funding Account on each Subsequent Transfer Date will not include accrued
interest on the related Subsequent Contracts. Following each Subsequent
Transfer Date, the aggregate principal balance of the Subsequent Contracts in
the Trust will increase by an amount equal to the aggregate principal balance
of the Contracts so purchased and the amount in the Pre-Funding Account will
decrease accordingly. Any Pre-Funded Amount remaining after the purchase of
Subsequent Contracts will be applied on the first Distribution Date on or after
the last day of the Pre-Funding Period to prepay principal on the Class A-1
Class A-2, Class A-3 and Class A-4 Notes.
Any conveyance of Subsequent Contracts on a Subsequent Transfer Date is
subject to certain conditions including, but not limited to: (a) each
Subsequent Contract must satisfy the representations and warranties specified
in the related subsequent transfer instrument and the Sale and Servicing
Agreement; (b) Green Tree will not select Subsequent Contracts in a manner that
it believes is adverse to the interests of the Securityholders; (c) as of its
respective Cutoff Date, each Subsequent Contract will satisfy the following
criteria: (i) no Subsequent Contract may be more than 59 days contractually
delinquent; (ii) the remaining stated term to maturity of each Subsequent
Contract will not exceed 240 months; (iii) each Subsequent Contract will be
underwritten in accordance with Green Tree's standard underwriting criteria;
and (iv) no Subsequent Contract will have a loan-to-value ratio greater than
100%.
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DISTRIBUTIONS
On each Distribution Date, the Servicer shall instruct the Indenture Trustee
to distribute from the Collection Account the Amount Available in the following
order of priority:
1. If Green Tree or an affiliate is no longer the Servicer, then to the
Servicer, the Servicing Fee for the related Monthly Period.
2. To the Servicer, reimbursement for advances made with respect to
delinquent payments that were recovered during the prior Monthly Period.
3. To the Note Distribution Account, the Noteholders' Distributable
Amount and any amounts previously withdrawn from any sub-account of the
Spread Account or the Reserve Account and not previously replenished.
4. To the Certificate Distribution Account, the Certificateholders'
Interest Distributable Amount and, after the Notes have been paid in full,
the Certificateholders' Principal Distributable Amount.
5. To the Indenture Trustee for deposit in the Spread Account, to fund
the initial amounts required in the Class A-2, Class A-3 and Class A-4 sub-
accounts.
6. To the Indenture Trustee for deposit in the Reserve Account, to fund
the initial amount required therein.
7. To Green Tree, the Monthly Servicing and Guaranty Fee.
On each Distribution Date, the Indenture Trustee will distribute all amounts
on deposit in the Note Distribution Account in the following order of priority:
(i) to the Class A-1 Noteholders, interest, principal, interest and
principal shortfalls from prior payment periods;
(ii) to the Class A-2 Noteholders, interest, principal, interest and
principal shortfalls from prior payment periods, and interest and principal
in respect of Principal Liquidation Losses;
(iii) to the Class A-2 sub-account of the Spread Account to the extent
amounts have previously been withdrawn therefrom to pay interest on the
Class A-2 Notes and have not previously been replenished;
(iv) to the Class A-3 Noteholders, interest, principal, interest and
principal shortfalls from prior payment periods, and interest and principal
in respect of Principal Liquidation Losses;
(v) to the Class A-3 sub-account of the Spread Account to the extent
amounts have previously been withdrawn therefrom to pay interest on the
Class A-3 Notes and have not previously been replenished;
(vi) to the Class A-4 Noteholders, interest, principal, interest and
principal shortfalls from prior payment periods, and interest and principal
in respect of Principal Liquidation Losses;
(vii) to the Class A-4 sub-account of the Spread Account to the extent
amounts have previously been withdrawn therefrom to pay interest on the
Class A-4 Notes and have not previously been replenished; and
(viii) to the Reserve Account to the extent amounts have previously been
withdrawn therefrom to pay interest or principal on any Class of Notes and
have not previously been replenished.
On each Distribution Date, the Owner Trustee or its Paying Agent will
distribute all amounts on deposit in the Certificate Distribution Account to
the Certificateholders.
For the purposes hereof, the following terms shall have the following
meanings:
"Amount Available" with respect to any Distribution Date, means generally the
sum of payments on the Contracts due and received during the preceding month,
prepayments and other unscheduled collections received during the preceding
month, any amounts deposited in respect of Purchased Contracts, any Interest
Rate Cap Payment, any Guaranty Payment, and all earnings from the investment of
funds in the Collection Account.
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<PAGE>
The "Formula Principal Distribution Amount" with respect to any Distribution
Date (but subject to the last sentence of this definition) will generally be
equal to the sum of the following amounts with respect to the related Monthly
Period, in each case computed in accordance with the method specified in each
Home Equity Contract: (i) all scheduled payments of principal due on each
outstanding Home Equity Contract during the related Monthly Period, (ii) all
Partial Principal Prepayments applied and all Principal Prepayments in Full
received during the related Monthly Period in respect of each Home Equity
Contract, (iii) the Scheduled Principal Balance of each Home Equity Contract
that became a Liquidated Contract during the related Monthly Period, (iv) the
Scheduled Principal Balance of each Home Equity Contract which, during the
related Monthly Period, was purchased by Green Tree as a result of a breach of
a representation or warranty or by the Servicer as a result of an uncured
breach of a covenant under the Sale and Servicing Agreement, and (v) with
respect to the Distribution Date in 1998, any remaining amounts on deposit
in the Pre-Funding Account. The Formula Principal Distribution Amount for the
Distribution Date in 2029, will be the sum of the Note Principal Balance
and the Certificate Principal Balance.
"Liquidated Contract" means any defaulted Contract as to which the Servicer
has determined that all amounts which it expects to recover from or on account
of such Contract through the date of disposition of the related real property
have been recovered; provided that any defaulted Contract in respect of which
the related real property has been realized upon and disposed of and proceeds
of such disposition have been received shall be deemed to be a Liquidated
Contract.
"Purchased Contract" means a Contract (i) that Green Tree has become
obligated to repurchase (or, under certain circumstances, has elected to
repurchase) as a result of an uncured breach by Green Tree of a representation
or warranty made by Green Tree with respect to such Contract or (ii) that the
Servicer has become obligated to repurchase (or, under certain circumstances,
has elected to repurchase) as a result of an uncured breach of the covenants
made by it with respect to such Contract.
"Noteholders' Distributable Amount" means, with respect to any Distribution
Date, the sum of the Noteholders' Interest Distributable Amount and the
Noteholders' Principal Distributable Amount.
"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, interest accrued for the related monthly interest period
on each Class of Notes at the respective Interest Rate for such Class on (i)
the outstanding Principal Balance of the Notes of such Class and (ii) the
aggregate unreimbursed Principal Liquidation Losses of such Class on each prior
Distribution Date, in each case after giving effect to all payments of
principal to the Noteholders of such Class on the immediately preceding
Distribution Date.
"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 (after giving
effect to any Principal Liquidation Losses imposed on such junior Classes and
Certificates) exceeds the Pool Scheduled Principal Balance, after giving effect
to all distributions of principal on such Distribution Date.
"Principal Balance" means, with respect to any Determination Date and any
Class of Notes, the Original Principal Balance of such Class minus all amounts
previously distributed in respect of principal of such Class and minus any
unreimbursed Principal Liquidation Losses of such Class.
"Noteholders' Interest Carryover Shortfall" means, with respect to any
Distribution Date, the excess of the Noteholders' Monthly Interest
Distributable Amount for the preceding Distribution Date and any outstanding
Noteholders' Interest Carryover Shortfall on such preceding Distribution Date,
over the amount in respect of
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<PAGE>
interest that is actually deposited in the Note Distribution Account on such
preceding Distribution Date, plus interest on the amount of interest due but
not paid to Noteholders on the preceding Distribution Date, to the extent
permitted by law, at the respective Interest Rate for each Class of Notes for
the applicable monthly interest period.
"Noteholder's 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,
however, that the Noteholders' Principal Distributable Amount shall not exceed
the outstanding principal balance of the Notes, and provided further, that the
Noteholders' Principal Distributable Amount on the Final Scheduled Distribution
Date shall not 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 outstanding
principal balances (including all unreimbursed Principal Liquidation Losses) of
all Classes of Notes to zero.
"Noteholders' Monthly Principal Distributable Amount" means, with respect to
any Distribution Date, the Noteholders' Percentage of the Formula Principal
Distribution Amount plus the aggregate unreimbursed Principal Liquidation
Losses of each Class of Notes.
"Noteholders' Percentage" means, 100% until and including the Distribution
Date on which the aggregate Principal Balance of the Notes are paid in full and
0% thereafter.
"Noteholders' Unpaid Principal Shortfall" means, as of the close of any
Distribution Date, the excess of the Noteholders' Monthly Principal
Distributable Amount and any outstanding Noteholders' Unpaid Principal
Shortfall from the preceding Distribution Date over the amount in respect of
principal that is actually deposited in the Note Distribution Account on such
Distribution Date.
"Certificateholders' Distributable Amount" means, with respect to any
Distribution Date, the sum of the Certificateholders' Interest Distributable
Amount and the Certificateholders' Principal Distributable Amount.
"Certificateholders' Interest Distributable Amount" means, with respect to
any Distribution Date, the sum of the Certificateholders' Monthly Interest
Distributable Amount for such Distribution Date and the Certificateholders'
Interest Carryover Shortfall for such Distribution Date.
"Certificateholders' Monthly Interest Distributable Amount" means, with
respect to any Distribution Date, interest accrued at the Pass-Through Rate on
(i) the Certificate Principal Balance and (ii) the aggregate unreimbursed
Certificate Principal Liquidation Losses on each prior Distribution Date, in
each case after giving effect to all payments of principal to the
Certificateholders on the immediately preceding Distribution Date.
"Certificate Principal Liquidation Loss" means, with respect to any
Distribution Date, the amount by which the aggregate Principal Balance of the
Notes and the Certificate Principal Balance exceeds the Pool Scheduled
Principal Balance, after giving effect to all distributions of principal on
such Distribution Date.
"Certificate Principal Balance" equals, initially, $ (approximate) and,
thereafter, equals the Original Certificate Principal Balance, reduced by all
amounts allocable to principal previously distributed to Certificateholders
minus any unreimbursed Certificate Principal Liquidation Losses.
"Certificateholders' Interest Carryover Shortfall" means, with respect to any
Distribution Date, the excess of the Certificateholders' Monthly Interest
Distributable Amount for the preceding Distribution Date and any outstanding
Certificateholders' Interest Carryover Shortfall on such preceding Distribution
Date, over the amount in respect of interest at the Pass-Through Rate that is
actually deposited in the Certificate Distribution Account on such preceding
Distribution Date, plus interest on such excess, to the extent permitted by
law, at the Pass-Through Rate from such preceding Distribution Date to but
excluding the current Distribution Date.
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<PAGE>
"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 Certificateholders'
Unpaid Principal Shortfall as of the close of the preceding Distribution Date;
provided, however, that the Certificateholders' Principal Distributable Amount
shall not exceed the Certificate Principal Balance plus any unreimbursed
Certificate Principal Liquidation Losses. In addition, 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 unreimbursed
Certificate Principal Liquidation Losses.
"Certificateholders' Monthly Principal Distributable Amount" means, with
respect to any Distribution Date prior to the Distribution Date on which the
Notes are paid in full, zero; and with respect to any Distribution Date
commencing on the Distribution Date on which the Notes are paid in full, the
Formula Principal Distribution Amount (less, on the Distribution Date on which
the Notes are paid in full, the portion thereof payable on the Notes).
"Certificateholders' Unpaid Principal Shortfall" means, as of the close of
any Distribution Date, the excess of the Certificateholders' Monthly Principal
Distributable Amount and any outstanding Certificateholders' Unpaid Principal
Shortfall from the preceding Distribution Date, over the amount in respect of
principal that is actually deposited in the Certificate Distribution Account.
STATEMENTS TO SECURITYHOLDERS
On or prior to each Distribution Date, the Servicer will prepare and provide
to the Indenture Trustee a statement to be delivered to the Noteholders and to
the Owner Trustee a statement to be delivered to the Certificateholders 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. Each such statement to be delivered to Noteholders will
include the following information as to the Notes, and 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:
(i) the amount of the distribution allocable to interest on or with
respect to each Class of Notes and to the Certificates;
(ii) the amount of the distribution allocable to principal on or with
respect to each Class of Notes and to the Certificates;
(iii) the aggregate outstanding principal balance and the Note Pool
Factor for the Notes and the Certificate Principal Balance and the
Certificate Pool Factor for the Certificates after giving effect to all
payments reported under (ii) above on such date;
(iv) the Noteholders' Interest Shortfall, the Noteholders' Principal
Shortfall, the Certificateholders' Interest Shortfall and the
Certificateholders' Principal Shortfall, if any, and the change in such
amounts from the preceding statement;
(v) the amount, if any, of Principal Liquidation Losses, aggregate
unreimbursed Principal Liquidation Losses since the Closing Date and the
amount of the distribution allocable to such losses for the Notes and
Certificates;
(vi) the amount, if any, deposited or withdrawn from each sub-account of
the Spread Account and the amount on deposit in each sub-account of the
Spread Account after giving effect to all withdrawals and deposits on such
Distribution Date;
(vii) the amount, if any, deposited or withdrawn from the Reserve Account
and the amount on deposit in the Reserve Account after giving effect to all
withdrawals and deposits on such Distribution Date;
(viii) the amount, if any, of the Interest Rate Cap Payment and the
Guaranty Payment;
(ix) the amount of the Monthly Servicing and Guaranty Fee paid to the
Servicer;
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<PAGE>
(x) the number and aggregate principal balances of delinquent Contracts,
the number of Products repossessed and repossessed and remaining in
inventory, the number of foreclosures and the number of Contracts that
became Liquidated Contracts with respect to the immediately preceding
Monthly Period; and
(xi) 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.
Each amount set forth pursuant to subclauses (i) through (vi) with respect to
Certificates or Notes will be expressed as a dollar amount per $1,000 of the
initial principal amount of the Notes or the initial Certificate Principal
Balance, as applicable.
Unless and until Definitive Notes or Definitive Certificates are issued, such
reports will be sent on behalf of the Trust to Cede & Co., as registered holder
of the Notes and the Certificates and the nominee of DTC. Note Owners and
Certificate Owners may receive copies of such reports upon written request,
together with a certification that they are Note Owners or Certificate Owners,
as the case may be, and payment of any expenses associated with the
distribution of such reports, from the Indenture Trustee or Owner Trustee. See
"Reports to Securityholders" herein and "Reports to Securityholders" and
"Certain Information Regarding the Securities" in the accompanying Prospectus.
Within the required period of time after the end of each calendar year, the
Indenture Trustee and the Owner Trustee, as applicable, will furnish to each
person who at any time during such calendar year was a Noteholder or
Certificateholder, a statement as to the aggregate amounts of interest and
principal paid to such Noteholder or Certificateholder, information regarding
the amount of servicing compensation received by the Servicer and such other
information as Green Tree deems necessary to enable such Noteholder or
Certificateholder to prepare its tax returns. See "Certain Federal Income Tax
Consequences" herein.
ADMINISTRATOR
Green Tree Financial Servicing Corporation, a Delaware corporation (the
"Administrator"), will provide the notices and perform other administrative
obligations required by the Indenture and the Trust Agreement. The
Administrator, a subsidiary of Green Tree, will enter into an Administration
Agreement with the Trust and the Indenture Trustee relating to its duties and
obligations as Administrator.
CERTAIN FEDERAL AND STATE INCOME TAX CONSEQUENCES
The following is a general discussion of certain federal and state income tax
consequences relating to the purchase, ownership, and disposition of the Notes
and the Certificates. 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. For additional
information regarding federal and state income tax consequences, see "Certain
Federal Income Tax Consequences--Owner Trust Series" and "Certain State Income
Tax Consequences" in the Prospectus.
Prospective investors should consult their own tax advisors to determine the
federal, state, local and other tax consequences of the purchase, ownership and
disposition of the Notes and the Certificates. Prospective investors should
note that no rulings have been or will be sought from the Internal Revenue
Service (the "IRS") with respect to any of the federal income tax consequences
discussed herein or in the accompanying Prospectus, and no assurance can be
given that the IRS will not take contrary positions. Moreover, there are no
cases or IRS rulings on transactions similar to those described herein with
respect to the Trust, involving both debt and equity interests issued by a
trust with terms similar to those of the Notes and the Certificates.
Prospective investors are urged to consult their own tax advisors in
determining the federal, state, local, foreign and any other tax consequences
to them of the purchase, ownership and disposition of the Securities.
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In the opinion of [Dorsey & Whitney LLP], 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 and neither the Trust nor any portion of the Trust will constitute
a taxable mortgage pool taxable as a corporation. Each Certificateholder, by
the acceptance of a Certificate, agrees to treat the Trust as a partnership in
which the Certificateholders are partners for federal income tax purposes. The
Notes will not be issued with original issue discount ("OID"). The Class A-1
Notes provide for stated interest at a floating rate based on LIBOR. Under
Treasury regulations, stated interest payable at a variable rate is not treated
as OID or contingent interest if the variable rate is a qualified floating rate
or a qualified objective rate. The stated interest on the Class A-1 Notes
represents interest payable at a qualified floating rate and will be taxable to
holders of such Notes as interest and not as OID or contingent interest. The
Class A-2, Class A-3 and Class A-4 Notes will not be issued with OID or
contingent interest because interest will be payable at a single fixed rate at
least annually.
ERISA CONSIDERATIONS
Section 406 of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), and or Section 4975 of the Code, prohibit a pension, profit-
sharing or other employee benefit plan, as well as individual retirement
accounts and certain types of Keogh Plans (each a "Benefit Plan") from engaging
in certain transactions with persons that are "parties in interest" under ERISA
or "disqualified persons" under the Code with respect to such Benefit Plan. A
violation of these "prohibited transaction" rules may result in an excise tax
or other penalties and liabilities under ERISA and the Code for such persons.
Title I of ERISA also requires that fiduciaries of a Benefit Plan subject to
ERISA make investments that are prudent, diversified (except if prudent not to
do so) and in accordance with governing plan documents.
Certain transactions involving the purchase, holding or transfer of the
Securities might be deemed to constitute prohibited transactions under ERISA
and the Code if assets of the Trust were deemed to be assets of a Benefit Plan.
Under a regulation issued by the United States Department of Labor (the "Plan
Assets Regulation"), the assets of the Trust would be treated as plan assets of
a Benefit Plan for the purposes of ERISA and the Code only if the Benefit Plan
acquires an "Equity Interest" in the Trust and none of the exceptions contained
in the Plan Assets Regulation is 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. Green Tree believes that the Notes should be
treated as indebtedness without substantial equity features for purposes of the
Plan Assets Regulation. However, without regard to whether the Notes are
treated as an Equity Interest for such purposes, the acquisition or holding of
Notes by or on behalf of a Benefit Plan could be considered to give rise to a
prohibited transaction if the Trust, the Owner Trustee or the Indenture
Trustee, the owner of collateral, or any of their respective affiliates is or
becomes a party in interest or a disqualified person with respect to such
Benefit Plan. In such case, certain exemptions from the prohibited transaction
rules could be applicable depending on the type and circumstances of the plan
fiduciary making the decision to acquire a Note. Included among these
exemptions are: Prohibited Transaction Class Exemption ("PTCE") 90-1, regarding
investments by insurance company pooled separate accounts; PTCE 91-38 regarding
investments by bank collective investment funds; and PTCE 84-14, regarding
transactions effected by "qualified professional asset managers."
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 I
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. By its acceptance of a Certificate, each
Certificateholder will be deemed to have represented and warranted that it is
not subject to the foregoing limitation. In this regard, purchasers that are
insurance companies should consult with their counsel with respect to the
United States Supreme Court case interpreting the fiduciary responsibility
rules of ERISA, John Hancock Mutual Life Insurance Co. v. Harris Trust and
Savings Bank (decided December 13, 1993). In John Hancock, the Supreme Court
ruled that assets held in an insurance company's general account may be deemed
to be "plan assets" for ERISA purposes under certain circumstances. Prospective
purchasers
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should determine whether the decision affects their ability to make purchases
of the Certificates. In particular, such an insurance company should consider
the exemptive relief granted by the Department of Labor for transactions
involving insurance company general accounts in Prohibited Transactions
Exemption 95-60, 60 Fed. Reg. 35925 (July 12, 1995). The Small Business Job
Protection Act of 1996 (the "1996 Act") became effective on August 20, 1996.
The 1996 Act amends ERISA to require the Department of Labor to issue
regulations to clarify, retroactively, the application of ERISA and the
prohibited transaction provisions of the Code to insurance company general
accounts. For additional information regarding treatment of the Certificates
under ERISA, see "ERISA Considerations" in the Prospectus.
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. Such plans may, however, be subject to
the provisions of other applicable federal and state laws, including, for any
such governmental or church plan qualified under Section 401(a) of the Code and
exempt from taxation under Section 501(a) of the Code, the prohibited
transaction rules set forth in Section 503 of the Code.
A plan fiduciary considering the purchase of Notes 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.
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UNDERWRITING
[Underwriters] (the "Underwriter") has agreed, subject to the terms and
conditions of the Underwriting Agreement, to purchase from Green Tree the
respective principal amounts of Notes and Certificates set forth below:
<TABLE>
<CAPTION>
CLASS A-1: CLASS A-2 CLASS A-3 CLASS A-4
NOTES NOTES NOTES NOTES CERTIFICATES
----------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
$ $ $ $ $
</TABLE>
The Underwriting Agreement provides that the Underwriter is obligated to
purchase all of the Notes and Certificates offered hereby, if any of such Notes
and Certificates are purchased.
Green Tree has been advised by the Underwriter that it proposes initially to
offer the Notes and Certificates to the public at the public offering prices
set forth on the cover page of this Prospectus Supplement and to certain
dealers at such price less a concession not in excess of % of the Class A-1
Principal Balance, % of the Class A-2 Principal Balance, % of the Class
A-3 Principal Balance, % of the Class A-4 Principal Balance and % of the
Certificate Principal Balance, and that the Underwriter and such dealers may
reallow a discount of not in excess of % of the Class A-1 Principal
Balance, % of the Class A-2 Principal Balance, % of the Class A-3
Principal Balance, % of the Class A-4 Principal Balance and % of the
Certificate Principal Balance, to other dealers. The public offering price and
the concession and discount to dealers may be changed by the Underwriter after
the initial public offering of the Notes and Certificates offered hereby.
Until the distribution of the Securities is completed, rules of the
Commission may limit the ability of the Underwriter and certain selling group
members to bid for and purchase the Securities. As an exception to these rules,
the Underwriter is permitted to engage in certain transactions that stabilize
the price of the Securities. Such transactions consist of bids or purchases for
the purpose of pegging, fixing or maintaining the price of the Securities.
If the Underwriter creates a short position in the Securities in connection
with the offering, i.e., if they sell more securities than are set forth on the
cover page of this Prospectus Supplement, the Underwriter may reduce that short
position by purchasing Securities in the open market.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases.
Neither Green Tree nor the Underwriter makes any representation or prediction
as to the direction or magnitude of any effect that the transactions described
above may have on the prices of the Securities. In addition, neither Green Tree
nor the Underwriter makes any representation that the Underwriter will engage
in such transactions or that such transactions, once commenced, will not be
discontinued without notice.
The Underwriter has represented, warranted and agreed that (i) it has not
offered or sold and, prior to the expiration of the period of six months from
the Closing Date, will not offer or sell any Securities to persons in the
United Kingdom except to persons whose ordinary activities involve them in
acquiring, holding, managing or disposing of investments (as principal or
agent) for the purposes of their businesses or otherwise in circumstances which
have not resulted and will not result in an offer to the public in the United
Kingdom within the meaning of the Public Offers of Securities Regulations 1995;
(ii) it has complied and will comply with all applicable provisions of the
Financial Services Act 1986 with respect to anything done by it in relation to
the Securities in, from or otherwise involving the United Kingdom; and (iii) it
has only issued or passed on and will only issue or pass on in the United
Kingdom any document received by it in connection with the issue of the
Securities to a person who is of a kind described in Article 11(3) of the
Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1995
(as amended) or is a person to whom such document may otherwise lawfully be
issued or passed on.
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The Notes have not been and will not be registered under the Securities and
Exchange Law of Japan (the "Securities and Exchange Law") and the Underwriter
has agreed that it will not offer or sell any of the Notes, directly or
indirectly, in Japan or to, or for the benefit of, any resident of Japan (which
term as used herein means any person resident in Japan, including any
corporation or other entity organized under the laws of Japan), except pursuant
to an exemption from the registration requirements of, and otherwise in
compliance with, the Securities and Exchange Law and any other applicable laws,
regulations and ministerial guidelines of Japan.
Green Tree has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended.
Green Tree does not intend to apply for listing of the Notes and Certificates
on a national securities exchange, but has been advised by the Underwriter that
the Underwriter currently intends to make a market in the Securities, as
permitted by applicable laws and regulations. The Underwriter is not obligated,
however, to make a market in the Securities and any such market may be
discontinued at any time at the sole discretion of the Underwriter.
Accordingly, no assurance can be given as to the liquidity of, or trading
markets for, the Securities.
LEGAL MATTERS
Certain matters with respect to the legality of the Notes and Certificates
and with respect to the federal and Minnesota income tax matters discussed
under "Certain Federal and State Income Tax Consequences" will be passed upon
for Green Tree by , Minnesota. The validity of the Notes
and Certificates will be passed upon for the Underwriter by , New
York, New York.
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ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the Notes will be available only in
book-entry form (the "Global Notes"). Investors in the Global Notes may hold
such Global Notes through any of DTC, CEDEL or Euroclear. The Global
Securities will be tradeable as home market instruments in both the European
and U.S. domestic markets. Initial settlement and all secondary trades will
settle in same-day funds.
Secondary market trading between investors holding Global Notes through
CEDEL and Euroclear will be conducted in the ordinary way in accordance with
their normal rules and operating procedures and in accordance with
conventional eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Notes through DTC
will be conducted according to the rules and procedures applicable to U.S.
corporate debt obligations.
Secondary cross-market trading between CEDEL or Euroclear and DTC
Participants holding Notes will be effected on a delivery-against-payment
basis through the respective Depositaries of CEDEL and Euroclear (in such
capacity) and DTC Participants.
Non-U.S. holders (as described below) of Global Notes will be subject to
U.S. withholding taxes unless such holders meet certain requirements and
deliver appropriate U.S. tax documents to the securities clearing
organizations or their participants.
INITIAL SETTLEMENT
All Global Notes will be held in book-entry form by DTC in the name of Cede
& Co. as nominee of DTC. Investors' interests in the Global Notes will be
represented through financial institutions acting on their behalf as direct
and indirect Participants in DTC. As a result, CEDEL and Euroclear will hold
positions on behalf of their participants through their respective
Depositaries, which in turn will hold such positions in accounts as DTC
Participants.
Investors electing to hold their Global Notes through DTC will follow the
settlement practices applicable to United States corporate debt obligations.
Investors securities custody accounts will be credited with their holdings
against payment in same-day funds on the settlement date.
Investors electing to hold their Global Notes through CEDEL or Euroclear
accounts will follow the settlement procedures applicable to conventional
eurobonds, except that there will be no temporary global security and no
"lock-up" or restricted period. Global Notes will be credited to the
securities custody accounts on the settlement date against payments in same-
day funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired
value date.
Trading between DTC Participants. Secondary market trading between DTC
Participants will be settled using the procedures applicable to book-entry
securities in same-day funds.
Trading between CEDEL and/or Euroclear Participants. Secondary market
trading between CEDEL Participants or Euroclear Participants will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
Trading between DTC seller and CEDEL or Euroclear purchaser. When Global
Notes are to be transferred from the account of a DTC Participant to the
account of a CEDEL Participant or a Euroclear Participant, the
A-1
<PAGE>
purchaser will send instructions to CEDEL or Euroclear through a CEDEL
Participant or Euroclear Participant at least one business day prior to
settlement. CEDEL or Euroclear, as applicable, will instruct its Depositary to
receive the Global Notes against payment. Payment will include interest
accrued on the Global Notes from and including the last coupon payment date to
and excluding the settlement date. Payment will then be made by such
Depositary to the DTC Participant's account against delivery of the Global
Notes. After settlement has been completed, the Global Notes will be credited
to the applicable clearing system and by the clearing system, in accordance
with its usual procedures, to the CEDEL Participant's or Euroclear
Participant's account. The Global Notes credit will appear the next day
(European time) and the cash debit will be back-valued to, and the interest on
the Global Notes will accrue from, the value date (which would be the
preceding day when settlement occurred in New York). If settlement is not
completed on the intended value date (i.e., the trade fails), the CEDEL or
Euroclear cash debit will be valued instead as of the actual settlement date.
CEDEL Participants and Euroclear Participants will need to make available to
the respective clearing systems the funds necessary to process same-day funds
settlement. The most direct means of doing so is to pre-position funds for
settlement, either from cash on hand or existing lines of credit, as they
would for any settlement occurring within CEDEL or Euroclear. Under this
approach, they may take on credit exposure to CEDEL or Euroclear until the
Global Securities are credited to their accounts one day later.
As an alternative, if CEDEL or Euroclear has extended a line of credit to
them, CEDEL Participants or Euroclear Participants can elect not to pre-
position funds and allow that credit line to be drawn upon the finance
settlement. Under this procedure, CEDEL Participants or Euroclear Participants
purchasing Global Notes would incur overdraft charges for one day, assuming
they cleared the overdraft when the Global Notes were credited to their
accounts. However, interest on the Global Notes would accrue from the value
date. Therefore, in many cases the investment income on the Global Notes
earned during that one-day period may substantially reduce or offset the
amount of such overdraft charges, although this result will depend on each
CEDEL Participant's or Euroclear Participant's particular cost of funds.
Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for sending Global Notes to the
respective Depositary for the benefit of CEDEL Participants or Euroclear
Participants. The sale proceeds will be available to the DTC seller on the
settlement date. Thus, to the DTC Participant a cross-market transaction will
settle no differently than a trade between two DTC Participants.
Trading between CEDEL or Euroclear seller and DTC purchaser. Due to time
zone differences in their favor, CEDEL Participants and Euroclear Participants
may employ their customary procedures for transactions in which Global Notes
are to be transferred by the respective clearing systems, through their
respective Depositaries, to a DTC Participant. The seller will send
instructions to CEDEL or Euroclear through a CEDEL Participant or Euroclear
Participant at least one business day prior to settlement. In these cases,
CEDEL or Euroclear will instruct their respective Depositaries, as
appropriate, to deliver the Notes to the DTC Participant's account against
payment. Payment will include interest accrued on the Global Notes from and
including the last coupon payment date to and excluding the settlement date.
The payment will then be reflected in the account of the CEDEL Participant or
Euroclear Participant the following day, and receipt of the cash proceeds in
the CEDEL Participant's or Euroclear Participant's account would be back-
valued to the value date (which would be the preceding day, when settlement
occurred in New York). Should the CEDEL Participant or Euroclear Participant
have a line of credit with its clearing system and elect to be in debit in
anticipation of receipt of the sale proceeds in its account, the bank-
valuation will extinguish any overdraft charges incurred over that one-day
period. If settlement is not completed on the intended value date (i.e., the
trade fails), receipt of the cash proceeds in the CEDEL Participant's or
Euroclear Participant's account would instead be valued as of the actual
settlement date. Finally, day traders that use CEDEL or Euroclear and that
purchase Global Notes from DTC Participants for delivery to CEDEL Participants
or Euroclear Participants should note that these trades would automatically
fail on the sale side unless affirmative action were taken. At least three
techniques should be readily available to eliminate this potential problem:
A-2
<PAGE>
(a) borrowing through CEDEL or Euroclear for one day (until the purchase
side of the day trade is reflected in their CEDEL or Euroclear accounts) in
accordance with the clearing system's customary procedures;
(b) borrowing the Global Notes in the U.S. from a DTC Participant no
later than one day prior to settlement, which would give the Global Notes
sufficient time to be reflected in their CEDEL or Euroclear account in
order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade so
that the value date for the purchase from the DTC Participant is at least
one day prior to the value date for the sale to the CEDEL Participant or
Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Notes holding securities through CEDEL or
Euroclear (or through DTC if the holder has an address outside the U.S.) will
be subject to the 30% U.S. withholding tax that generally applies to payments
of interest (including original issue discount) on registered debt issued by
U.S. Persons, unless (i) each clearing system, bank or other financial
institution that holds customers' securities in the ordinary course of its
trade or business in the chain of intermediaries between such beneficial owner
and the U.S. entity required to withhold tax complies with applicable
certification requirements and (ii) such beneficial owner takes one of the
following steps to obtain an exemption or reduced tax rate:
Exemption of non-U.S. Persons (Form W-8). Beneficial owners of Notes that
are non-U.S. Persons generally can obtain a complete exemption from the
withholding tax by filing a signed Form W-8 (Certificate of Foreign Status)
and a certificate under penalties of perjury (the "Tax Certificate") that
such beneficial owner is (i) not a controlled foreign corporation (within
the meaning of Section 957(a) of the Code) that is related (within the
meaning of Section 864(d)(4) of the Code) to the Trust or the Transferor
and (ii) not a 10 percent shareholder (within the meaning of Section
871(h)(3)(B) of the Code) of the Trust or the Transferor. If the
information shown on Form W-8 or the Tax Certificate changes, a new Form W-
8 or Tax Certificate, as the case may be, must be filed within 30 days of
such change.
Exemption for non-U.S. Person with effectively connected income (Form
4224). A non-U.S. Person, including a non-U.S. corporation or bank with a
U.S. branch, for which the interest income is effectively connected with
its conduct of a trade or business in the United States can obtain an
exemption from the withholding tax by filing Form 4224 (Exemption from
Withholding of Tax on Income Effectively Connected with the Conduct of a
Trade or Business in the United States).
Exemption or reduced rate for non-U.S. Persons resident in treaty
countries (Form 1001). Non-U.S. Persons that are beneficial owners of Notes
residing in a country that has a tax treaty with the United States can
obtain an exemption or reduced tax rate (depending on the treaty terms) by
filing Form 1001 (Ownership, Exemption or Reduced Rate Certificate). If the
treaty provides only for a reduced rate, withholding tax will be imposed at
that rate unless the filer alternatively files Form W-8. Form 1001 may be
filed by the beneficial owner of Notes or such owner's agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The beneficial owner of a
Global Security or, in the case of a Form 1001 or a Form 4224 filer, such
owner's agent, files by submitting the appropriate form to the person
through whom it holds the security (the clearing agency, in the case of
persons holding directly on the books of the clearing agency). Form W-8 and
Form 1001 are effective for three calendar years and Form 4224 is effective
for one calendar year.
The term "U.S. Person" means (i) a citizen or resident of the United States,
(ii) a corporation or partnership organized in or under the laws of the United
States or any political subdivision thereof, or (iii) an estate or trust the
income of which is includible in gross income for United States tax purposes,
regardless of its source. This summary does not deal with all aspects of U.S.
federal income tax withholding that may be relevant to foreign holders of the
Global Notes. Investors are advised to consult their own tax advisors for
specific tax advice concerning their holding and disposing of the Global
Notes.
A-3
<PAGE>
PROSPECTUS
BASE PROSPECTUS NO. 2
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 OCTOBER 9, 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,
1997, the Company's Quarterly Reports on Form 10-Q for the quarters ended
March 31, 1998 and June 30, 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 $1,332,000,000. 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, 1997,
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 $3,116,054,406 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, MONTHS ENDED
------------------------ ----------------------
1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Ratio of Earnings to Fixed
Charges....................... 4.81 7.98 7.90 5.44 3.94
</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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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 ($124,500 in 1998, 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
57
<PAGE>
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, 1997
and 1996 and for each of the years in the three-year period ended December 31,
1997, 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>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION
NOT CONTAINED IN THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS, AND ANY INFOR-
MATION OR REPRESENTATION NOT CONTAINED HEREIN OR THEREIN MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY GREEN TREE OR ANY UNDERWRITER. THIS PROSPEC-
TUS SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTITUTE AN OFFER OF ANY SECURITIES
OTHER THAN THE REGISTERED SECURITIES TO WHICH THE PROSPECTUS SUPPLEMENT RE-
LATES OR AN OFFER TO ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER WOULD
BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND THE PRO-
SPECTUS NOR ANY SALES MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF GREEN TREE OR
THE TRUST SINCE THE DATE HEREOF.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
PROSPECTUS SUPPLEMENT
<S> <C>
Reports to Securityholders................................................. S-2
Summary of Terms........................................................... S-3
Risk Factors............................................................... S-16
The Trust.................................................................. S-17
The Trust Property......................................................... S-17
The Contract Pool.......................................................... S-19
Green Tree Financial Corporation........................................... S-24
Yield and Prepayment Considerations........................................ S-25
Description of the Notes................................................... S-27
Description of the Counterparty............................................ S-34
Description of the Certificates............................................ S-34
Description of the Trust Documents and Indenture........................... S-36
Certain Federal and State Income Tax Consequences.......................... S-42
ERISA Considerations....................................................... S-43
Underwriting............................................................... S-45
Legal Matters.............................................................. S-46
Annex I.................................................................... A-1
PROSPECTUS
Available Information...................................................... 3
Reports to Securityholders................................................. 3
Incorporation of Certain Documents by Reference............................ 3
Prospectus Summary......................................................... 4
Risk Factors............................................................... 15
The Trusts................................................................. 17
Green Tree Financial Corporation........................................... 18
Yield Considerations....................................................... 20
Maturity and Prepayment Considerations..................................... 20
Pool Factor................................................................ 21
Use of Proceeds............................................................ 21
The Notes.................................................................. 21
The Certificates........................................................... 26
Certain Information Regarding the Securities............................... 27
Description of the Trust Documents......................................... 30
Certain Legal Aspects of the Contracts; Repurchase Obligations............. 40
Certain Federal Income Tax Consequences.................................... 49
Certain State Income Tax Consequences...................................... 56
ERISA Considerations....................................................... 56
Legal Investment Considerations............................................ 57
Ratings.................................................................... 57
Underwriting............................................................... 57
Legal Matters.............................................................. 58
Experts.................................................................... 59
</TABLE>
---------------
FOR 90 DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT ALL DEALERS EFFECT-
ING TRANSACTIONS IN THE SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DIS-
TRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE
OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS SUPPLEMENT AND A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
$ (APPROXIMATE)
LOGO
SELLER AND SERVICER
GREEN TREE HOME EQUITY
LOAN TRUST 1998-
$ (APPROXIMATE) % ASSET-BACKED NOTES, CLASS A-1:HE
$ (APPROXIMATE) FLOATING RATE ASSET-BACKED NOTES, CLASS A-1
$ (APPROXIMATE) % ASSET-BACKED NOTES, CLASS A-2
$ (APPROXIMATE) % ASSET-BACKED NOTES, CLASS A-3
$ (APPROXIMATE) % ASSET-BACKED NOTES, CLASS A-4
$ (APPROXIMATE) % ASSET-BACKED CERTIFICATES
-----------------
PROSPECTUS SUPPLEMENT
-----------------
[UNDERWRITERS]
, 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+THIS PRELIMINARY PROSPECTUS SUPPLEMENT AND THE INFORMATION CONTAINED HEREIN +
+ARE SUBJECT TO COMPLETION OR AMENDMENT AND PROSPECTIVE PURCHASERS ARE +
+REFERRED TO THE RELATED FINAL PROSPECTUS SUPPLEMENT FOR DEFINITIVE +
+INFORMATION ON ANY MATTER CONTAINED HEREIN. THIS PRELIMINARY PROSPECTUS +
+SUPPLEMENT 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 +
+JURISDICTION IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL +
+PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH +
+JURISDICTION. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Prospectus Supplement PROSPECTUS SUPPLEMENT
(To Prospectus dated ) TO BASE NO. 3
$ (Approximate)
LOGO
SELLER AND SERVICER
CERTIFICATES FOR HOME IMPROVEMENT AND HOME EQUITY LOANS
SERIES 199
$ (APPROX.) % CLASS HI: A-1
$ $ (APPROX.) % CLASS HE: A-6
(APPROX.) CLASS
HE: A-1 ARM
$ (APPROX.) % CLASS HI: A-2
$ (APPROX.) % CLASS HE: A-7
IO
$ (APPROX.) % CLASS HI: A-3
$ $ (APPROX.) % CLASS HE: M-1
(APPROX.) %
CLASS HE: A-1
$ (APPROX.) % CLASS HI: M-1
$ (APPROX.) % CLASS HE: M-2
$ (APPROX.) % CLASS HI: M-2
$ (APPROX.) % CLASS HE: B-1
$ (APPROX.) % CLASS HI: B-1
$ $ (APPROX.) % CLASS HE: B-2
(APPROX.) %
CLASS HE: A-2
$ (APPROX.) % CLASS HI: B-2
-----------
$
(APPROX.) %
CLASS HE: A-3
(PRINCIPAL AND INTEREST PAYABLE ON THE 15TH DAY OF EACH MONTH BEGINNING IN
1998)
$
(APPROX.) %
CLASS HE: A-4
The Certificates for Home Improvement and Home Equity Loans, Series 199 ,
offered hereby (the "Certificates") will be comprised of 19 Classes, designated
as 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 Certificates (the "Sub-Pool
$
(APPROX.) %
CLASS HE: A-5
-----------
(Continued on next page)
PROSPECTIVE INVESTORS SHOULD CONSIDER THE INFORMATION SET FORTH UNDER "RISK
FACTORS" ON PAGE S- OF THIS PROSPECTUS SUPPLEMENT AND PAGE OF THE
ACCOMPANYING PROSPECTUS.
THE CERTIFICATES REPRESENT INTERESTS IN THE TRUST AND DO NOT REPRESENT
INTERESTS IN OR OBLIGATIONS OF THE COMPANY, EXCEPT TO THE LIMITED EXTENT
DESCRIBED HEREIN AND IN THE PROSPECTUS. THE CERTIFICATES DO NOT REPRESENT
OBLIGATIONS OF, AND WILL NOT BE INSURED OR GUARANTEED BY, FHA OR ANY
OTHER GOVERNMENTAL AGENCY OR INSTRUMENTALITY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW
YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THIS OFFERING. ANY
REPRESENTATION TO THE
CONTRARY IS UNLAWFUL.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Price to Underwriting Proceeds to
Public(2) Discount Company(2)(3)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Class HI: A-1 Certificate.............. % % %
- --------------------------------------------------------------------------------
Per Class HI: A-2 Certificate.............. % % %
- --------------------------------------------------------------------------------
Per Class HI: A-3 Certificate.............. % % %
- --------------------------------------------------------------------------------
Per Class HI: M-1 Certificate.............. % % %
- --------------------------------------------------------------------------------
Per Class HI: M-2 Certificate.............. % % %
- --------------------------------------------------------------------------------
Per Class HI: B-1 Certificate.............. % % %
- --------------------------------------------------------------------------------
Per Class HI: B-2 Certificate.............. % % %
- --------------------------------------------------------------------------------
Per Class HE: A-1 ARM Certificate.......... % % %
- --------------------------------------------------------------------------------
Per Class HE: A-1 Certificate.............. % % %
- --------------------------------------------------------------------------------
Per Class HE: A-2 Certificate.............. % % %
- --------------------------------------------------------------------------------
Per Class HE: A-3 Certificate.............. % % %
- --------------------------------------------------------------------------------
Per Class HE: A-4 Certificate.............. % % %
- --------------------------------------------------------------------------------
Per Class HE: A-5 Certificate.............. % % %
- --------------------------------------------------------------------------------
Per Class HE: A-6 Certificate.............. % % %
- --------------------------------------------------------------------------------
Per Class HE: A-7 IO Certificate........... % % %
- --------------------------------------------------------------------------------
Per Class HE: M-1 Certificate.............. % % %
- --------------------------------------------------------------------------------
Per Class HE: M-2 Certificate.............. % % %
- --------------------------------------------------------------------------------
Per Class HE: B-1 Certificate.............. % % %
- --------------------------------------------------------------------------------
Per Class HE: B-2 Certificate.............. % % %
- --------------------------------------------------------------------------------
Total...................................... $ $ $
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
(1) Interest will be based on a notional principal amount which will equal
$ (or the Class HE: A Principal Balance for such Payment Date, if
less), for the first 36 Payment Dates, and will thereafter, equal zero.
(2) Plus accrued interest, if any, from and including .
(3) Before deducting expenses, estimated to be $ .
-----------
The Certificates are offered subject to prior sale, when, as and if issued by
the Trust and accepted by the Underwriters and subject to their right to reject
orders in whole or in part. It is expected that delivery of the Certificates
will be made in book-entry form only through the Same Day Funds Settlement
system of The Depository Trust Company on or about (the actual
such date being hereinafter referred to as the "Closing Date").
-----------
Underwriters of the Certificates (other than the Class HE: A-7 IO Certificates)
[UNDERWRITERS]
-----------
Underwriter of the Class HE: A-7 IO Certificates
[UNDERWRITER]
-----------
, 1998.
<PAGE>
(Continued from previous page)
HI Certificates"), and as 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, Class HE: A-7 IO,
Class HE: M-1, Class HE: M-2, Class HE: B-1 and Class HE: B-2 Certificates
(the "Sub-Pool HE Certificates"), respectively. The Certificates will be
issued by, and evidence beneficial ownership interests in, Home Improvement
and Home Equity Loan Trust 1997-E (the "Trust"). The Trust will be created by
Green Tree Financial Corporation (the "Company") pursuant to a Pooling and
Servicing Agreement, dated as of , 1997 (the "Agreement") between
the Company and [Trustee] as Trustee (the "Trustee"). The Trust property will
consist primarily of a pool (the "Contract Pool") consisting of two sub-pools
(each a "Sub-Pool"), one of which ("Sub-Pool HI") is comprised of home
improvement contracts and promissory notes (the "Home Improvement Contracts"),
and the other of which ("Sub-Pool HE") is comprised of closed-end home equity
loans (the "Home Equity Contracts," and, together with the Home Improvement
Contracts, the "Contracts"), including the right to receive payments due on
the Contracts after the "Cut-off Date" (which will be (i) with respect to the
Home Equity Contracts, , 1997 (or the date of origination thereof, if
later) for each Home Equity Contract other than the Subsequent Home Equity
Contracts (as defined herein), and for each Subsequent Home Equity Contract,
the date on which such Contract is purchased by the Trust; and (ii) with
respect to the Home Improvement Contracts, , 1997 for each Home
Improvement Contract (other than Subsequent Home Improvement Contracts (as
defined herein)) that has a scheduled payment due in 1997; ,
1998, for each Home Improvement Contract (other than Subsequent Home
Improvement Contracts (as defined herein)) that has a first scheduled payment
due in 1998 or thereafter; and for each Subsequent Home Improvement
Contract, the date on which the Subsequent Home Improvement Contract is
purchased by the Trust), together with liens on the related real estate and
amounts held for the Trust in the Certificate Account and, during the Funding
Period, in the Sub-Pool HI Pre-Funding Account and the Sub-Pool HE Pre-Funding
Account (each as defined herein). Sub-Pool HE includes adjustable-rate closed-
end home equity loans subject to interest rate adjustments after an initial
period of up to 36 months (the "Adjustable Rate Home Equity Contracts"; all
Home Equity Contracts other than the Adjustable Rate Home Equity Contracts are
referred to herein as the "Fixed Rate Home Equity Contracts"). Each of the
Contracts is secured by a lien on the related real estate. Substantially all
of the Home Improvement Contracts are secured by a subordinate lien on the
related real estate.
The Agreement provides for a pre-funding account (the "Sub-Pool HE Pre-
Funding Account") to provide the Trust with sufficient funds to purchase
additional Home Equity Contracts (the "Subsequent Home Equity Contracts") for
up to 60 days after the Closing Date, and for a pre-funding account (the "Sub-
Pool HI Pre-Funding Account") to provide the Trust with sufficient funds to
purchase additional Home Improvement Contracts (the "Subsequent Home
Improvement Contracts") for up to 60 days after the Closing Date.
Distributions of interest and principal on the Sub-Pool HI Certificates will
be made primarily from amounts available in respect of the Home Improvement
Contracts comprising Sub-Pool HI, while distributions of principal and
interest on the Sub-Pool HE Certificates will be made primarily from amounts
available in respect of the Home Equity Contracts comprising Sub-Pool HE.
Under certain circumstances as described herein, amounts available in respect
of the Contracts in one Sub-Pool may be available to make distributions to the
holders of Certificates relating to the other Sub-Pool. The rights of the
holders of the Class HI: M-1, Class HI: M-2, Class HI: B-1 and Class HI: B-2
Certificates to receive distributions on each Payment Date will be
subordinated to such rights of the holders of the Class HI: A-1, Class HI: A-2
and Class HI: A-3 Certificates and, in addition, to such rights of the holders
of the Class HI: M-1 Certificates (in the case of the Class HI: M-2, Class HI:
B-1 and Class HI: B-2 Certificates), of the Class HI: M-2 Certificates (in the
case of the Class HI: B-1 and Class HI: B-2 Certificates) and of the Class HI:
B-1 Certificates (in the case of the Class HI: B-2 Certificates), all to the
extent described herein. Likewise, the rights of the holders of the Class HE:
M-1, Class HE: M-2, Class HE: B-1 and Class HE: B-2 Certificates to receive
distributions on each Payment Date will be subordinated to such rights of the
holders of 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
and, in addition, to such rights of the holders of the Class HE: M-1
Certificates (in the case of the Class HE: M-2, Class HE: B-1 and Class HE: B-
2 Certificates), of the Class HE: M-2 Certificates (in the case of the Class
HE: B-1 and Class HE: B-2 Certificates)
S-2
<PAGE>
and of the Class HE: B-1 Certificates (in the case of the Class HE: B-2
Certificates), all to the extent described herein.
The Class HI: B-2 and Class HE: B-2 Certificateholders will each have the
benefit of a limited guaranty of the Company (the "Class HI: B-2 Limited
Guaranty" and the "Class HE: B-2 Limited Guaranty," respectively) to protect
against losses that would otherwise be borne by such Certificateholders. To
the extent that funds in the Certificate Account and available for
distribution are insufficient to distribute to the holders of the Class HI: B-
2 Certificates the Class HI: B-2 Formula Distribution Amount, or in the event
that there is a Class HI: B-2 Liquidation Loss Principal Amount for any
Payment Date (each as described herein), the Company will be obligated to make
a Class HI: B-2 Guaranty Payment in respect thereof (as described herein). See
"Description of the Class HI: B-2 Limited Guaranty" herein. Likewise, to the
extent that funds in the Certificate Account and available for distribution
are insufficient to distribute to the holders of the Class HE: B-2
Certificates the Class HE: B-2 Formula Distribution Amount, or in the event
that there is a Class HE: B-2 Liquidation Loss Principal Amount for any
Payment Date (each as described herein), the Company will be obligated to make
a Class HE: B-2 Guaranty Payment in respect thereof (as described herein). See
"Description of the Class HE: B-2 Limited Guaranty" herein.
Principal and interest with respect to the Certificates are distributable on
the fifteenth day of each month or, if such fifteenth day is not a Business
Day, the first Business Day thereafter, beginning in 1998. The
entitlement of Certificateholders (other than Class HE: A-7 IO
Certificateholders) to such distributions of principal from available funds
includes not only actual payments and recoveries of principal but also
scheduled payments of principal due on each outstanding Contract during the
calendar month preceding the month in which the related Payment Date occurs
(the "Due Period"), provided, however, that the "Due Period" for the initial
Payment Date with respect to the Sub-Pool HE Certificates includes both
1997 and 1997, and principal distributions on the Sub-Pool
HE Certificates on such initial Payment Date will therefore comprise two
months of scheduled (and unscheduled) payments on certain of the Home Equity
Contracts. The Company will act as servicer (in such capacity, the "Servicer")
of the Contracts. The final scheduled Payment Date of the Sub-Pool HI
Certificates is in 2028. The final scheduled Payment Date of the Sub-
Pool HE Certificates is in 2029. See "Description of the Certificates"
herein and in the Prospectus.
Elections will be made to treat the Trust as comprising two separate real
estate mortgage investment conduits (the "Master REMIC" and "Subsidiary
REMIC") for federal income tax purposes. As described more fully herein, the
Certificates will constitute "regular interests" in the Master REMIC. See
"Certain Federal Income Tax Consequences" herein and in the Prospectus.
There is currently no secondary market for the Certificates offered hereby,
and there is no assurance that any such market will develop or, if it does
develop, that it will continue. List of [Underwriters] (the "Underwriters")
expect, but are not obligated, to make a market in the Certificates.
All dollar amounts in this Prospectus Supplement and the Prospectus are
expressed in United States dollars.
The Certificates initially will be represented by certificates registered in
the name of Cede & Co., the nominee of The Depository Trust Company ("DTC").
The interests of beneficial owners of the Certificates will be represented by
book entries on the records of the participating members of DTC. Definitive
Certificates will be available only under the limited circumstances described
herein. Holders of the Certificates may hold through DTC (in the United
States), CEDEL or Euroclear (as defined herein) (in Europe) if they are
participants of such systems, or indirectly through organizations that are
participants in such systems.
No prospectus in respect of the Certificates has been or will be prepared
and filed in the United Kingdom pursuant to the United Kingdom Public Offers
of Securities Regulations 1995. Accordingly, the Certificates being offered
hereby may not be offered or sold or re-offered or re-sold to persons in the
United Kingdom except to persons whose ordinary activities involve them in
acquiring, holding, managing and disposing of investments (as
S-3
<PAGE>
principal or agent) for the purpose of their businesses, or otherwise in
circumstances that will not constitute or result in an offer to the public in
the United Kingdom within the meaning of the United Kingdom Public Offers of
Securities Regulation 1995. Neither this Prospectus Supplement nor the
Prospectus nor any other document inviting applications or offers to purchase
Certificates or offering Certificates for purchase may be passed to any person
in the United Kingdom who does not fall within article 11(3) of the Financial
Services Act 1986 (Investment Advisements) (Exemptions) Order 1996 or who is
not otherwise a person to whom the document may lawfully be issued or passed.
Certain persons participating in this offering may engage in transactions
that stabilize, maintain, or otherwise affect the price of the Certificates
offered hereby. Such transactions may include stabilizing and the purchase of
Certificates to cover syndicate short positions. For a description of these
activities, see "Underwriting" herein.
For 90 days after the date of this Prospectus Supplement, all dealers
effecting transactions in the Certificates, whether or not participating in
this distribution, may be required to deliver a Prospectus. This delivery
requirement is in addition to the obligation of dealers to deliver a
Prospectus Supplement and a Prospectus when acting as underwriters and with
respect to their unsold allotments or subscriptions. Upon receipt of a request
by an investor, or his or her representative, within the period during which
there is a Prospectus delivery obligation, the Company or the Underwriters
will transmit or cause to be transmitted promptly, without charge, and in
addition to any such delivery requirements, a paper copy of a Prospectus
Supplement and a Prospectus, or a Prospectus Supplement and a Prospectus
encoded in an electronic format.
The Certificates offered hereby constitute Classes of a Series of
Certificates for Home Improvement and Home Equity Loans being offered by the
Company from time to time pursuant to the Prospectus. This Prospectus
Supplement does not contain complete information about the offering of the
Certificates. Additional information is contained in the Prospectus and
purchasers are urged to read both this Prospectus Supplement and the
Prospectus in full. Sales of the Certificates may not be consummated unless
the purchaser has received both this Prospectus Supplement and the Prospectus.
To the extent that any statements in this Prospectus Supplement conflict with
statements contained in the Prospectus, the statements in this Prospectus
Supplement shall control.
S-4
<PAGE>
SUMMARY OF THE TERMS OF THE CERTIFICATES
This summary is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus Supplement and in the
accompanying Prospectus. Capitalized terms used herein and not otherwise
defined herein shall have the respective meanings assigned them in the
Prospectus and in Article I of the Agreement, a copy of which is available upon
request made to the Company.
Securities Offered............ Certificates for Home Improvement and Home Eq-
uity Loans, Series 1997-E (the "Certifi-
cates"), comprised of 19 Classes designated as
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 Certificates (the "Sub-Pool
HI Certificates"), and as 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, Class HE: A-7 IO, Class HE: M-1, Class
HE: M-2, Class HE: B-1 and Class HE: B-2 Cer-
tificates (the "Sub-Pool HE Certificates"),
respectively. The Class HE: A-1 ARM Certifi-
cates are floating-rate and the Certificates
of each of the other Classes are fixed-rate.
The Certificates will be issued by, and evi-
dence beneficial ownership interests in, Home
Improvement and Home Equity Loan Trust 1997-E
(the "Trust"), the property of which consists
primarily of the Contracts, and all rights,
benefits, obligations and proceeds arising
therefrom or in connection therewith, includ-
ing liens on the related real estate, and the
Class HI: B-2 Limited Guaranty and the Class
HE: B-2 Limited Guaranty for the benefit of
the Class HI: B-2 and Class HE: B-2
Certificateholders, respectively.
Trustee....................... [Trustee] [ , Minnesota.]
Seller and Servicer........... Green Tree Financial Corporation.
Payment Date.................. The fifteenth day of each month or, if such day
is not a Business Day, the next succeeding
Business Day, commencing in 1998.
Cut-off Date.................. , 1998 (or the date of origination of the
Home Equity Contract, if later) for each Home
Equity Contract other than the Subsequent Home
Equity Contracts, and for each Subsequent Home
Equity Contract, the date on which the Subse-
quent Home Equity Contract is purchased by the
Trust.
, 1997 with respect to all Home Im-
provement Contracts (other than Subsequent
Home Improvement Contracts) that have a sched-
uled payment due in 1997; ,
1998, with respect to all Home Improvement
Contracts (other than Subsequent Home Improve-
ment Contracts) that have a first scheduled
payment due in 1998 or thereafter; and
for each Subsequent Home Improvement Contract,
the date on which the Subsequent Home Improve-
ment Contract is purchased by the Trust.
Record Date................... The Business Day immediately preceding the re-
lated Payment Date.
Original Sub-Pool HI
Certificate Principal
Balance......................
$ (approximate).
S-5
<PAGE>
Original Class HI: A-1
Principal Balance........
$ (approximate).
Original Class HI: A-2
Principal Balance........
$ (approximate).
Original Class HI: A-3
Principal Balance........
$ (approximate).
Original Class HI: M-1
Principal Balance........
$ (approximate).
Original Class HI: M-2
Principal Balance........
$ (approximate).
Original Class HI: B-1
Principal Balance........
$ (approximate).
Original Class HI: B-2
Principal Balance........
$ (approximate).
Original Sub-Pool HE
Certificate Principal
Balance.................. $ (approximate).
Original Class HE: A-1
ARM Principal Balance....
$ (approximate).
Original Class HE: A-1
Principal Balance........
$ (approximate).
Original Class HE: A-2
Principal Balance........
$ (approximate).
Original Class HE: A-3
Principal Balance........
$ (approximate).
Original Class HE: A-4
Principal Balance........
$ (approximate).
Original Class HE: A-5
Principal Balance........
$ (approximate).
Original Class HE: A-6
Principal Balance........
$ (approximate).
Original Class HE: A-7 IO
Principal Balance........
$0. Interest will be calculated on the Class
HE: A-7 IO Certificates on each Payment Date
based on a "Notional Principal Amount" which
will, for the first 36 Payment Dates, equal
$ (or the Class HE: A Principal Bal-
ance for such Payment Date, if less) and will
thereafter equal zero. The Notional Principal
Amount provides a basis for calculating inter-
est payments only, and does not represent the
right to receive any distribution in respect
of principal.
Original Class HE: M-1
Principal Balance........
$ (approximate).
Original Class HE: M-2
Principal Balance........
$ (approximate).
Original Class HE: B-1
Principal Balance........
$ (approximate).
S-6
<PAGE>
Original Class HE: B-2
Principal Balance........
$ (approximate).
Class HI: A-1 Pass-Through % per annum.
Rate.........................
Class HI: A-2 Pass-Through % per annum.
Rate.........................
Class HI: A-3 Pass-Through % per annum.
Rate.........................
Class HI: M-1 Pass-Through % per annum.
Rate.........................
Class HI: M-2 Pass-Through % per annum.
Rate.........................
Class HI: B-1 Pass-Through % per annum.
Rate.........................
Class HI: B-2 Pass-Through % per annum, subject to a maximum rate
Rate......................... equal to the weighted average of the Contract
Rates on the Home Improvement Contracts.
Class HE: A-1 ARM Pass- A floating rate equal to the lesser of one-
Through Rate................. month LIBOR plus the Pass-Through Margin or
the Available Funds Pass-Through Rate, but in
no case more than %. The Pass-Through Margin
will equal 0.25% per annum on each Payment
Date on which the Pool Scheduled Principal
Balance of the Contract Pool is 10% or more of
the Cut-off Date Pool Principal Balance of the
Contract Pool, and 0.50% per annum on each
Payment Date on which the Pool Scheduled Prin-
cipal Balance of the Contract Pool is less
than 10% of the Cut-off Date Pool Principal
Balance of the Contract Pool. The Available
Funds Pass-Through Rate for any Payment Date
will be a rate per annum equal to the weighted
average of the Expense Adjusted Contract Rates
on the then outstanding Adjustable Rate Con-
tracts. The Expense Adjusted Contract Rate on
any Adjustable Rate Contract is equal to the
then applicable Mortgage Rate thereon, minus
the Expense Fee Rate. The Expense Fee Rate is
0.75%. One-month LIBOR with respect to any
monthly interest period will equal the offered
rate for United States dollar deposits for one
month that appears on Telerate Page 3750 as of
11:00 A.M., London time, on the second LIBOR
business day prior to such monthly interest
period. For a description of the method used
to calculate one-month LIBOR, see "Description
of the Certificates--Calculation of One-Month
LIBOR."
Class HE: A-1 Pass-Through % per annum.
Rate.........................
Class HE: A-2 Pass-Through % per annum.
Rate.........................
Class HE: A-3 Pass-Through % per annum.
Rate.........................
Class HE: A-4 Pass-Through % per annum.
Rate.........................
Class HE: A-5 Pass-Through % per annum.
Rate.........................
Class HE: A-6 Pass-Through % per annum.
Rate.........................
Class HE: A-7 IO Pass-Through % per annum.
Rate.........................
Class HE: M-1 Pass-Through % per annum.
Rate.........................
Class HE: M-2 Pass-Through % per annum.
Rate.........................
S-7
<PAGE>
Class HE: B-1 Pass-Through % per annum.
Rate.........................
Class HE: B-2 Pass-Through % per annum, subject to a maximum rate
Rate......................... equal to the weighted average of the Contract
Rates on the Fixed-Rate Home Equity Contracts.
Description of Certificates... The Class HI: A-1, Class HI: A-2 and Class HI:
A-3 Certificates (the "Class HI: A Certifi-
cates") and 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 (the "Class HE: A Cer-
tificates") are Senior Certificates and the
Class HI: M-1 and Class HI: M-2 Certificates
(the "Class HI: M Certificates"), the Class
HE: M-1 and Class HE: M-2 Certificates (the
"Class HE: M Certificates"), the Class HI: B-1
and Class HI: B-2 Certificates (the "Class HI:
B Certificates") and the Class HE: B-1 and
Class HE: B-2 Certificates (the "Class HE: B
Certificates") are Subordinated Certificates,
all as described herein, and are issued by,
and payable solely from the property of, the
Trust. The undivided percentage interest of
the holder of any Certificate in the distribu-
tions to be made to the related Class (the
"Percentage Interest") will be equal to the
percentage obtained by dividing the denomina-
tion specified on such Certificate by the
Original Principal Balance of such Class. The
"Principal Balance" of a Class of Certificates
as of any Payment Date is the Original Princi-
pal Balance of such Class of Certificates less
all amounts previously distributed to such
Class on account of principal.
Distributions on Sub-Pool HI
Certificates................
On each Payment Date, distributions on the Sub-
Pool HI Certificates will be made first to the
holders of the Class HI: A Certificates, then
to the holders of the Class HI: M Certificates,
and then to the holders of the Class HI: B Cer-
tificates, in the manner described below. Dis-
tributions of interest and principal on the
Sub-Pool HI Certificates will be made primarily
from amounts available in respect of the Home
Improvement Contracts comprising Sub-Pool HI,
although, under certain circumstances as de-
scribed herein, amounts available in respect of
the Home Equity Contracts in Sub-Pool HE may be
available to make such distributions.
Distributions of interest and principal to the
holders of a Class of Class HI: A Certificates
will be made, to the extent that the Sub-Pool
HI Amount Available (as defined herein) in the
Certificate Account is sufficient therefor, in
an amount equal to the sum of (i) their respec-
tive Percentage Interests of the amount of in-
terest calculated as described below under "A.
Class HI: A Interest" and (ii) their respective
Percentage Interests of the Sub-Pool HI Senior
Percentage of the Sub-Pool HI Formula Principal
Distribution Amount (each as defined below) for
the related Payment Date, in the order of pri-
ority described below under "B. Class HI: A
Principal." Distributions of interest and prin-
cipal to the Class HI: M-1 Certificateholders
will be made
S-8
<PAGE>
in an amount equal to their respective Percent-
age Interests multiplied by the Class HI: M-1
Distribution Amount (as described below). Dis-
tributions of interest and principal to the
Class HI: M-2 Certificateholders will be made
in an amount equal to their respective Percent-
age Interests multiplied by the Class HI: M-2
Distribution Amount (as described below). Dis-
tributions of interest and principal to the
Class HI: B-1 Certificateholders will be made
in an amount equal to their respective Percent-
age Interests multiplied by the Class HI: B-1
Distribution Amount (as described below). Dis-
tributions of interest and principal to the
Class HI: B-2 Certificateholders will be made
in an amount equal to their respective Percent-
age Interests of the Class HI: B-2 Distribution
Amount and any Class HI: B-2 Guaranty Payment
(each as described below). The rights of the
Class HI: M and Class HI: B Certificateholders
to receive distributions in respect of the Sub-
Pool HI Amount Available are subordinated to
the rights of the Class HI: A Certificate-
holders; the rights of the Class HI: M-2 and
Class HI: B Certificateholders to receive such
distributions are subordinated to the rights of
the Class HI: A Certificateholders and the
Class HI: M-1 Certificateholders; the rights of
the Class HI: B Certificateholders to receive
such distributions are subordinated to the
rights of the Class HI: A and Class HI: M
Certificateholders; and the rights of the Class
HI: B-2 Certificateholders to receive such dis-
tributions are subordinated to the rights of
the Class HI: A, Class HI: M and Class HI: B-1
Certificateholders. Distributions will be made
on each Payment Date commencing in 1998 to
holders of record on the related Record Date,
except that the final distribution in respect
of the Sub-Pool HI Certificates will only be
made upon presentation and surrender of the
Sub-Pool HI Certificates at the office or
agency appointed by the Trustee for that pur-
pose in Minneapolis or St. Paul, Minnesota.
The "Class HI: M-1 Distribution Amount" for any
Payment Date is intended to be equal to the
"Class HI: M-1 Formula Distribution Amount,"
which equals the sum of (i) the amount of in-
terest calculated as described under "C. Class
HI: M-1 Interest" below and (ii) an amount of
principal calculated as described under "D.
Class HI: M-1 Principal" below. The "Class HI:
M-1 Distribution Amount" for any Payment Date
will equal the lesser of (i) the Class HI: M-1
Formula Distribution Amount for such Payment
Date or (ii) the Sub-Pool HI Amount Available
in the Certificate Account available for dis-
tribution to the Class HI: M-1
Certificateholders (after giving effect to the
distribution made to Class HI: A Certificate-
holders) on such Payment Date (the "Class HI:
M-1 Remaining Amount Available").
The "Class HI: M-2 Distribution Amount" for any
Payment Date is intended to be equal to the
"Class HI: M-2 Formula Distribution Amount,"
which equals the sum of (i) the amount of in-
terest calculated as described under "E. Class
HI: M-2 Interest"
S-9
<PAGE>
below and (ii) an amount of principal calcu-
lated as described under "F. Class HI: M-2
Principal" below. The "Class HI: M-2 Distribu-
tion Amount" for any Payment Date will equal
the lesser of (i) the Class HI: M-2 Formula
Distribution Amount for such Payment Date or
(ii) the Sub-Pool HI Amount Available in the
Certificate Account available for distribution
to the Class HI: M-2 Certificateholders (after
giving effect to the distribution made to Class
HI: A and Class HI: M-1 Certificateholders) on
such Payment Date (the "Class HI: M-2 Remaining
Amount Available").
The "Class HI: B-1 Distribution Amount" for any
Payment Date is intended to be equal to the
"Class HI: B-1 Formula Distribution Amount,"
which equals the sum of (i) the amount of in-
terest calculated as described under "G. Class
HI: B-1 Interest" below and (ii) an amount of
principal calculated as described under "H.
Class HI: B-1 Principal" below. The "Class HI:
B-1 Distribution Amount" for any Payment Date
will equal the lesser of (i) the Class HI: B-1
Formula Distribution Amount for such Payment
Date or (ii) the Sub-Pool HI Amount Available
in the Certificate Account available for dis-
tribution to the Class HI: B-1
Certificateholders (after giving effect to the
distribution made to Class HI: A and Class HI:
M Certificateholders) on such Payment Date (the
"Class HI: B-1 Remaining Amount Available").
The "Class HI: B-2 Distribution Amount" for any
Payment Date is intended to be equal to the
"Class HI: B-2 Formula Distribution Amount,"
which equals the sum of (i) the amount of in-
terest calculated as described under "I. Class
HI: B-2 Interest" below and (ii) the amount of
principal calculated as described in the first
paragraph under "J. Class HI: B-2 Principal"
below. The "Class HI: B-2 Distribution Amount"
for any Payment Date will equal the lesser of
(i) the Class HI: B-2 Formula Distribution
Amount for such Payment Date or (ii) the Sub-
Pool HI Amount Available in the Certificate Ac-
count available for distribution to the Class
HI: B-2 Certificateholders (after giving effect
to the distribution made to Class HI: A, Class
HI: M and Class HI: B-1 Certificateholders) on
such Payment Date (the "Class HI: B-2 Remaining
Amount Available").
See "Description of the Certificates" for a de-
tailed description of the amounts on deposit in
the Certificate Account that will constitute
the Sub-Pool HI Amount Available on each Pay-
ment Date. The Sub-Pool HI Amount Available
will consist primarily of payments made on or
in respect of the Home Improvement Contracts
comprising Sub-Pool HI and will include amounts
otherwise payable to the Class HI: M
Certificateholders, to the Class HI: B Certifi-
cateholders, to the Servicer (so long as the
Company or any wholly owned subsidiary of the
Company is the Servicer) as the Monthly Servic-
ing Fee with respect to the
S-10
<PAGE>
Home Improvement Contracts, to the Company as
the Class HI: B-2 Guaranty Fee, and to the
Class C Certificateholders. The Class HI: M-1
Remaining Amount Available will include amounts
otherwise payable to the holders of the Class
HI: M-2 Certificates, to the Class HI: B
Certificates, to the Servicer (so long as the
Company or any wholly owned subsidiary of the
Company is the Servicer) as the Monthly Servic-
ing Fee with respect to the Home Improvement
Contracts, to the Company as the Class HI: B-2
Guaranty Fee, and to the Class C Certificate-
holders. The Class HI: M-2 Remaining Amount
Available will include amounts otherwise pay-
able to the holders of the Class HI: B Certifi-
cates, to the Servicer (so long as the Company
or any wholly owned subsidiary of the Company
is the Servicer) as the Monthly Servicing Fee
with respect to the Home Improvement Contracts,
to the Company as the Class HI: B-2 Guaranty
Fee, and to the Class C Certificateholders. The
Class HI: B-1 Remaining Amount Available will
include amounts otherwise payable to the Class
HI: B-2 Certificateholders, to the Servicer (so
long as the Company or any wholly owned subsid-
iary of the Company is the Servicer) as the
Monthly Servicing Fee with respect to the Home
Improvement Contracts, to the Company as the
Class HI: B-2 Guaranty Fee, and to the Class C
Certificateholders. The Class HI: B-2 Remaining
Amount Available will include amounts otherwise
payable to the Servicer (so long as the Company
or any wholly owned subsidiary of the Company
is the Servicer) as the Monthly Servicing Fee
with respect to the Home Improvement Contracts,
to the Company as the Class HI: B-2 Guaranty
Fee, and to the Class C Certificateholders.
The Class HI: A Principal Balance as of any Pay-
ment Date is the sum of the Class HI: A-1 Prin-
cipal Balance, the Class HI: A-2 Principal Bal-
ance and the Class HI: A-3 Principal Balance.
The Class HI: M Principal Balance as of any
Payment Date is the sum of the Class HI: M-1
Principal Balance and the Class HI: M-2 Princi-
pal Balance. The Class HI: B Principal Balance
as of any Payment Date is the sum of the Class
HI: B-1 Principal Balance and the Class HI: B-2
Principal Balance.
A portion of the interest otherwise payable on a
Payment Date to the Class HI: M and Class HI: B
Certificateholders will be subordinated to
other amounts payable to Sub-Pool HI
Certificateholders on that Payment Date if on
the preceding Payment Date the Principal Bal-
ance of the Home Improvement Contracts compris-
ing Sub-Pool HI is less than the sum of the
Class HI: A, Class HI: M and Class HI: B Prin-
cipal Balances, as further described below in
the sections describing interest payable on the
Class HI: M and Class HI: B Certificates.
A. Class HI: A Interest...... Interest on the outstanding Principal Balance of
each Class of Class HI: A Certificates will ac-
crue from , 1998,
S-11
<PAGE>
or from the most recent Payment Date on which
interest has been paid, to but excluding the
following Payment Date, and will be computed on
the basis of a 360-day year of twelve 30-day
months.
Interest will be paid concurrently on each Class
of Class HI: A Certificates on each Payment
Date, to the extent of the Sub-Pool HI Amount
Available for such date in the Certificate Ac-
count, at the related Pass-Through Rate on the
then outstanding Class HI: A-1 Principal Bal-
ance, Class HI: A-2 Principal Balance and Class
HI: A-3 Principal Balance.
In the event that, on a particular Payment Date,
the Sub-Pool HI Amount Available in the Certif-
icate Account is not sufficient to make a full
distribution of interest to the holders of out-
standing Class HI: A Certificates, the amount
of interest to be distributed in respect of the
Class HI: A Certificates will be allocated
among each Class thereof (and within a Class
among the Certificates of such Class) pro rata
in accordance with their respective entitle-
ments to interest, and the amount of the
shortfall will be carried forward and added to
the amount such holders will be entitled to re-
ceive on the next Payment Date. Any such amount
so carried forward will bear interest at the
related Pass-Through Rate, to the extent le-
gally permissible. See "Description of the Cer-
tificates--Distributions on Sub-Pool HI Certif-
icates--Class HI: A Interest."
B. Class HI: A Principal..... Holders of a Class of Class HI: A Certificates
will be entitled to receive on each Payment
Date as payments of principal, in the order of
priority set forth below and to the extent of
the Sub-Pool HI Amount Available in the Certif-
icate Account after payment of all interest
payable on each Class of Class HI: A Certifi-
cates, the Sub-Pool HI Senior Percentage of the
sum (such sum being hereinafter referred to as
the "Sub-Pool HI Formula Principal Distribution
Amount") of (i) all scheduled payments of prin-
cipal due on each outstanding Home Improvement
Contract during the related Due Period, (ii)
the Scheduled Principal Balance of each Home
Improvement Contract which, during such Due Pe-
riod, was purchased by the Company pursuant to
the Agreement on account of certain breaches of
its representations and warranties, (iii) all
partial Principal Prepayments applied and all
Principal Prepayments in Full received during
such Due Period in respect of Home Improvement
Contracts, (iv) the Scheduled Principal Balance
of each Home Improvement Contract that became a
Liquidated Contract during such Due Period, and
(v) any amount described in clauses (i) through
(iv) above that was not previously distributed
because of an insufficient amount of funds
available in the Certificate Account if (a) the
Payment Date occurs on or after the Payment
Date on which the Class HI: B-2 Principal Bal-
ance has been reduced to zero, or (b)
S-12
<PAGE>
such amount was not covered by a Class HI: B-2
Guaranty Pay- ment and corresponding reduction
in the Class HI: B-2 Principal Balance. When
the Principal Balance of a Class of Class HI: A
Certificates is reduced to zero, no further
distributions of principal will be made to the
holders of such Class.
The Sub-Pool HI Senior Percentage for any Pay-
ment Date prior to the Class HI: B Cross-over
Date (as described below), and for any Payment
Date on or after the Class HI: B Cross-over
Date on which each Class HI: B Principal Dis-
tribution Test (as described below) has not
been satisfied, will equal 100%. On each Pay-
ment Date on or after the Class HI: B Cross-
over Date, if each Class HI: B Principal Dis-
tribution Test has been satisfied on such Pay-
ment Date, the Sub-Pool HI Senior Percentage
will equal a fraction, expressed as a percent-
age, the numerator of which is the sum of the
Class HI: A Principal Balance and the Class HI:
M Principal Balance for such Payment Date and
the denominator of which is the Pool Scheduled
Principal Balance of Sub-Pool HI for the imme-
diately preceding Payment Date.
The Scheduled Principal Balance of a Contract
with respect to any Payment Date is its princi-
pal balance as of the scheduled payment date
(the "Due Date") in the Due Period, after giv-
ing effect to any previous partial Principal
Prepayments applied and to the scheduled pay-
ment due on such Due Date, and after giving ef-
fect to any adjustments due to bankruptcy or
similar proceedings. The Pool Scheduled Princi-
pal Balance, with respect to the Contract Pool
or a given Sub-Pool as of any Payment Date, is
the aggregate of the Scheduled Principal Bal-
ances of Contracts comprising the Contract Pool
or such Sub-Pool, as the case may be, that were
outstanding during the preceding Due Period. A
Liquidated Contract is a defaulted Contract as
to which all amounts that the Servicer expects
to recover on account of such Contract have
been received.
The Sub-Pool HI Senior Percentage of the Sub-
Pool HI Formula Principal Distribution Amount
will be distributed, to the extent of the Sub-
Pool HI Amount Available after payment of in-
terest on each Class of Class HI: A Certifi-
cates, first, to the Class HI: A-1
Certificateholders until the Class HI: A-1
Principal Balance has been reduced to zero,
then to the Class HI: A-2 Certificateholders
until the Class HI: A-2 Principal Balance has
been reduced to zero, and then to the Class HI:
A-3 Certificateholders until the Class HI: A-3
Principal Balance has been reduced to zero.
Notwithstanding the foregoing, on any Payment
Date as to which there is a Class HI: A Liqui-
dation Loss Principal Amount (which is the
amount, if any, by which 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), the remaining
Sub-Pool HI Amount Available will be distrib-
uted pro rata to each Class
S-13
<PAGE>
of Class HI: A Certificates based on the Class
Principal Balance of each Class (but in no
event will such amount exceed the Class Princi-
pal Balance of any such Class).
C. Class HI: M-1 Interest.... Interest on the outstanding Class HI: M-1 Prin-
cipal Balance will accrue from ,
1998, or from the most recent Payment Date on
which interest has been paid, to but excluding
the following Payment Date, and will be com-
puted on the basis of a 360-day year of twelve
30-day months.
To the extent of the Class HI: M-1 Remaining
Amount Available, if any, for a Payment Date
after payment of the Class HI: A Distribution
Amount for such date, interest will be paid to
the Class HI: M-1 Certificateholders on such
Payment Date in an amount (the "Class HI: M-1
Interest Payment Amount") equal to the product
of (a) the Class HI: M-1 Pass-Through Rate and
(b) the then outstanding Class HI: M-1 Princi-
pal Balance less the Class HI: M-1 Liquidation
Loss Principal Amount, if any. The "Class HI:
M-1 Liquidation Loss Principal Amount" as of
any Payment Date will equal the excess, if any,
of the Sub-Pool HI Aggregate Liquidation Loss
Principal Amount over the aggregate of the
Principal Balances of the Class HI: M-2 Certif-
icates, the Class HI: B-1 Certificates and the
Class HI: B-2 Certificates. The "Sub-Pool HI
Aggregate Liquidation Loss Principal Amount" as
of any Payment Date will equal the excess, if
any, of (i) the sum of the Class HI: A Princi-
pal Balance, the Class HI: M Principal Balance
and the Class HI: B Principal Balance as of the
preceding Payment Date (after giving effect to
distributions of principal thereon) over (ii)
the Pool Scheduled Principal Balance of Sub-
Pool HI plus the Sub-Pool HI Pre-Funded Amount
for such preceding Payment Date.
In the event that, on a particular Payment Date,
the Class HI: M-1 Remaining Amount Available,
plus other funds in the Certificate Account
available therefor, are not sufficient to make
a full distribution of the Class HI: M-1 Inter-
est Payment Amount, the amount of interest to
be distributed in respect of the Class HI: M-1
Certificates will be allocated among the Class
HI: M-1 Certificates pro rata in accordance
with their respective entitlements to interest,
and the amount of the deficiency will be car-
ried forward as an amount that the Class HI: M-
1 Certificateholders are entitled to receive on
the next Payment Date. Any amount so carried
forward will, to the extent legally permissi-
ble, bear interest at the Class HI: M-1 Pass-
Through Rate. See "Description of the Certifi-
cates--Distributions on Sub-Pool HI Certifi-
cates--Class HI: M-1 Interest."
D. Class HI: M-1 Principal... Payments of principal on the Class HI: M-1 Cer-
tificates will not commence until the Class HI:
A Principal Balance has been reduced to zero.
On each Payment Date on or after the date on
which the Class HI: A Principal Balance has
been reduced to
S-14
<PAGE>
zero, holders of Class HI: M-1 Certificates
will be entitled to receive the Sub-Pool HI Se-
nior Percentage of the Sub-Pool HI Formula
Principal Distribution Amount, until the Class
HI: M-1 Principal Balance has been reduced to
zero.
E. Class HI: M-2 Interest.... Interest on the outstanding Class HI: M-2 Prin-
cipal Balance will accrue from ,
1998, or from the most recent Payment Date on
which interest has been paid, to but excluding
the following Payment Date, and will be com-
puted on the basis of a 360-day year of twelve
30-day months.
To the extent of the Class HI: M-2 Remaining
Amount Available, if any, for a Payment Date
after payment of the Class HI: A Distribution
Amount and the Class HI: M-1 Distribution
Amount for such date, interest will be paid to
the Class HI: M-2 Certificateholders on such
Payment Date in an amount (the "Class HI: M-2
Interest Payment Amount") equal to the product
of (a) the Class HI: M-2 Pass-Through Rate and
(b) the then outstanding Class HI: M-2 Princi-
pal Balance less the Class HI: M-2 Liquidation
Loss Principal Amount, if any. The "Class HI:
M-2 Liquidation Loss Principal Amount" as of
any Payment Date will equal the excess, if any,
of the Sub-Pool HI Aggregate Liquidation Loss
Principal Amount over the Class HI: B Principal
Balance.
In the event that, on a particular Payment Date,
the Class HI: M-2 Remaining Amount Available,
plus other funds in the Certificate Account
available therefor, are not sufficient to make
a full distribution of the Class HI: M-2 Inter-
est Payment Amount, the amount of interest to
be distributed in respect of the Class HI: M-2
Certificates will be allocated among the Class
HI: M-2 Certificates pro rata in accordance
with their respective entitlements to interest,
and the amount of the deficiency will be car-
ried forward as an amount that the Class HI: M-
2 Certificateholders are entitled to receive on
the next Payment Date. Any amount so carried
forward will, to the extent legally permissi-
ble, bear interest at the Class HI: M-2 Pass-
Through Rate. See "Description of the Certifi-
cates--Distributions on Sub-Pool HI Certifi-
cates--Class HI: M-2 Interest."
F. Class HI: M-2 Principal... Payments of principal on the Class HI: M-2 Cer-
tificates will not commence until the Class HI:
A Principal Balance and the Class HI: M-1 Prin-
cipal Balance have been reduced to zero. On
each Payment Date on or after the date on which
the Class HI: A Principal Balance and the Class
HI: M-1 Principal Balance have been reduced to
zero, holders of Class HI: M-2 Certificates
will be entitled to receive the Sub-Pool HI Se-
nior Percentage of the Sub-Pool HI Formula
Principal Distribution Amount, until the Class
HI: M-2 Principal Balance has been reduced to
zero.
G. Class HI: B-1 Interest.... Interest on the outstanding Class HI: B-1 Prin-
cipal Balance will accrue from ,
1998, or from the most recent Pay-
S-15
<PAGE>
ment Date on which interest has been paid, to
but excluding the following Payment Date, and
will be computed on the basis of a 360-day year
of twelve 30-day months.
To the extent of the Class HI: B-1 Remaining
Amount Available, if any, for a Payment Date
after payment of the Class HI: A Distribution
Amount, the Class HI: M-1 Distribution Amount
and the Class HI: M-2 Distribution Amount for
such date, interest will be paid to the Class
HI: B-1 Certificateholders on such Payment Date
in an amount (the "Class HI: B-1 Interest Pay-
ment Amount") equal to the product of (a) the
Class HI: B-1 Pass-Through Rate and (b) the
then outstanding Class HI: B-1 Principal Bal-
ance less the Class HI: B-1 Liquidation Loss
Principal Amount, if any. The "Class HI: B-1
Liquidation Loss Principal Amount" as of any
Payment Date will equal the excess, if any, of
the Sub-Pool HI Aggregate Liquidation Loss
Principal Amount over the Class HI: B-2 Princi-
pal Balance.
In the event that, on a particular Payment Date,
the Class HI: B-1 Remaining Amount Available,
plus other funds in the Certificate Account
available therefor, are not sufficient to make
a full distribution of the Class HI: B-1 Inter-
est Payment Amount, the amount of interest to
be distributed in respect of the Class HI: B-1
Certificates will be allocated among the Class
HI: B-1 Certificates pro rata in accordance
with their respective entitlements to interest,
and the amount of the deficiency will be car-
ried forward as an amount that the Class HI: B-
1 Certificateholders are entitled to receive on
the next Payment Date. Any amount so carried
forward will, to the extent legally permissi-
ble, bear interest at the Class HI: B-1 Pass-
Through Rate. See "Description of the Certifi-
cates--Distributions on Sub-Pool HI Certifi-
cates--Class HI: B-1 Interest."
H. Class HI: B-1 Principal... Payments of principal on the Class HI: B-1 Cer-
tificates will not commence until the Class HI:
B Cross-over Date, and will be made on that
Payment Date and each Payment Date thereafter
only if each Class HI: B Principal Distribution
Test is satisfied on such Payment Date (unless
the Class HI: A Principal Balance and the Class
HI: M Principal Balance have been reduced to
zero). The Class HI: B Cross-over Date will be
the earlier of (A) the Payment Date on which
the Class HI: M-2 Principal Balance is reduced
to zero and (B) the first Payment Date on or
after the Payment Date in 2001 on which
the fraction, expressed as a percentage, the
numerator of which is the Class HI: B Principal
Balance as of such Payment Date and the denomi-
nator of which is the Pool Scheduled Principal
Balance of Sub-Pool HI as of the immediately
preceding Payment Date, is equal to or greater
than 14%. The Class HI: B Principal Distribu-
tion Tests on each Payment Date relate to
losses and delinquencies on the Home Improve-
ment Contracts, and are described under "De-
scription of the Certificates--Distributions on
Sub-Pool HI Certificates--Class HI: B-1
Principal."
S-16
<PAGE>
On each Payment Date on or after the Class HI: B
Cross-over Date, the Class HI: B Percentage of
the Sub-Pool HI Formula Principal Distribution
Amount will be paid to the Class HI: B-1
Certificateholders to the extent of the Class
HI: B-1 Remaining Amount Available after pay-
ment of interest on the Class HI: B-1 Certifi-
cates, until the Class HI: B-1 Principal Bal-
ance has been reduced to zero.
The Class HI: B Percentage for any Payment Date
will be equal to 100% minus the Sub-Pool HI Se-
nior Percentage. The Class HI: B Percentage for
each Payment Date, if any, after the Class HI:
A Principal Balance and the Class HI: M Princi-
pal Balance have been reduced to zero will be
equal to 100%.
I. Class HI: B-2 Interest.... Interest on the outstanding Class HI: B-2 Prin-
cipal Balance will accrue from ,
1998, or from the most recent Payment Date on
which interest has been paid, to but excluding
the following Payment Date, and will be com-
puted on the basis of a 360-day year of twelve
30-day months.
To the extent of (i) the Class HI: B-2 Remaining
Amount Available, if any, for a Payment Date
after payment of the Class HI: A Distribution
Amount, the Class HI: M-1 Distribution Amount,
the Class HI: M-2 Distribution Amount and the
Class HI: B-1 Distribution Amount for such
date, and (ii) the Class HI: B-2 Guaranty Pay-
ment, if any, for such date, interest will be
paid to the Class HI: B-2 Certificateholders on
such Payment Date in an amount (the "Class HI:
B-2 Interest Payment Amount") equal to the
product of (a) the Class HI: B-2 Pass-Through
Rate and (b) the then outstanding Class HI: B-2
Principal Balance less the Class HI: B-2 Liqui-
dation Loss Principal Amount, if any. The
"Class HI: B-2 Liquidation Loss Principal
Amount" as of any Payment Date will equal the
lesser of the Sub-Pool HI Aggregate Liquidation
Loss Principal Amount and the Class HI: B-2
Principal Balance.
In the event that, on a particular Payment Date,
the Class HI: B-2 Remaining Amount Available in
the Certificate Account plus any amounts actu-
ally paid under the Class HI: B-2 Limited Guar-
anty are not sufficient to make a full distri-
bution of the Class HI: B-2 Interest Payment
Amount, the amount of interest to be distrib-
uted in respect of the Class HI: B-2 Certifi-
cates will be allocated among the HI: B-2 Cer-
tificates pro rata in accordance with their re-
spective entitlements to interest, and the
amount of the deficiency will be carried for-
ward as an amount that the Class HI: B-2
Certificateholders are entitled to receive on
the next Payment Date. Any amount so carried
forward will, to the extent legally permissi-
ble, bear interest at the Class HI: B-2 Pass-
Through Rate. See "Description of the Certifi-
cates--Distributions on Sub-Pool HI Certifi-
cates--Class HI: B-2 Interest."
S-17
<PAGE>
J. Class HI: B-2 Principal... Except for payments of the Class HI: B-2 Liqui-
dation Loss Principal Amount, payments of prin-
cipal on the Class HI: B-2 Certificates will
not commence until the Payment Date on which
the Class HI: B-1 Principal Balance has been
reduced to zero (the "Class HI: B-1 Cross-over
Date"), and will be made on that Payment Date
and each Payment Date thereafter only if each
Class HI: B Principal Distribution Test is sat-
isfied on such Payment Date (unless the Class
HI: A Principal Balance and the Class HI: M
Principal Balance have been reduced to zero).
On any such Payment Date, the Class HI: B Per-
centage of the Sub-Pool HI Formula Principal
Distribution Amount will be distributed, to the
extent of the Class HI: B-2 Remaining Amount
Available and any amounts actually paid under
the Class HI: B-2 Limited Guaranty after pay-
ment of interest on the Class HI:B-2 Certifi-
cates, to the Class HI: B-2 Certificateholders
until the Class HI: B-2 Principal Balance has
been reduced to zero. See "Description of the
Certificates--Distributions on Sub-Pool HI Cer-
tificates--Class HI: B-2 Principal."
On each Payment Date, the Class HI: B-2
Certificateholders will be entitled to receive,
pursuant to the Class HI: B-2 Limited Guaranty,
the Class HI: B-2 Liquidation Loss Principal
Amount until the Class HI: B-2 Principal Bal-
ance has been reduced to zero.
Distributions on Sub-Pool HE
Certificates................
On each Payment Date, distributions on the Sub-
Pool HE Certificates will be made first to the
holders of the Class HE: A Certificates, then
to the holders of the Class HE: M Certificates,
and then to the holders of the Class HE: B Cer-
tificates, in the manner described below. Dis-
tributions of interest and principal on the
Sub-Pool HE Certificates will be made primarily
from amounts available in respect of the Home
Equity Contracts comprising Sub-Pool HE, al-
though, under certain circumstances as de-
scribed herein, amounts available in respect of
the Home Improvement Contracts in Sub-Pool HI
may be available to make such distributions.
Distributions of interest and principal to the
holders of a Class of Class HE: A Certificates
will be made, to the extent that the Sub-Pool
HE Amount Available (as defined herein) in the
Certificate Account is sufficient therefor, in
an amount equal to the sum of (i) their respec-
tive Percentage Interests of the amount of in-
terest calculated as described below under "A.
Class HE: A Interest", (ii) with respect to the
Class HE: A-1 ARM Certificates, their respec-
tive Percentage Interests of the Class HE: A-1
ARM Formula Principal Distribution Amount (as
defined below) and (iii) with respect to each
other Class of Class HE: A Certificates (other
than the Class HE: A-7 IO Certificates), their
respective Percentage Interests of the Sub-Pool
HE Senior Percentage of the Sub-Pool HE Formula
Principal Distribution
S-18
<PAGE>
Amount (each as defined below) for the related
Payment Date, in the order of priority de-
scribed below under "B. Class HE: A Principal."
Distributions of interest and principal to the
Class HE: M-1 Certificateholders will be made
in an amount equal to their respective Percent-
age Interests multiplied by the Class HE: M-1
Distribution Amount (as described below). Dis-
tributions of interest and principal to the
Class HE: M-2 Certificateholders will be made
in an amount equal to their respective Percent-
age Interests multiplied by the Class HE: M-2
Distribution Amount (as described below). Dis-
tributions of interest and principal to the
Class HE: B-1 Certificateholders will be made
in an amount equal to their respective Percent-
age Interests multiplied by the Class HE: B-1
Distribution Amount (as described below). Dis-
tributions of interest and principal to the
Class HE: B-2 Certificateholders will be made
in an amount equal to their respective Percent-
age Interests of the Class HE: B-2 Distribution
Amount and any Class HE: B-2 Guaranty Payment
(each as described below). The rights of the
Class HE: M and Class HE: B Certificateholders
to receive distributions in respect of the Sub-
Pool HE Amount Available are subordinated to
the rights of the Class HE: A Certificate-
holders; the rights of the Class HE: M-2 and
Class HE: B Certificateholders to receive such
distributions are subordinated to the rights of
the Class HE: A Certificateholders and the
Class HE: M-1 Certificateholders; the rights of
the Class HE: B Certificateholders to receive
such distributions are subordinated to the
rights of the Class HE: A and Class HE: M
Certificateholders; and the rights of the Class
HE: B-2 Certificateholders to receive such dis-
tributions are subordinated to the rights of
the Class HE: A, Class HE: M and Class HE: B-1
Certificateholders. Distributions will be made
on each Payment Date commencing in 1998
to holders of record on the related Record
Date, except that the final distribution in re-
spect of the Sub-Pool HE Certificates will only
be made upon presentation and surrender of the
Sub-Pool HE Certificates at the office or
agency appointed by the Trustee for that pur-
pose in Minneapolis or St. Paul, Minnesota.
The "Class HE: M-1 Distribution Amount" for any
Payment Date is intended to be equal to the
"Class HE: M-1 Formula Distribution Amount,"
which equals the sum of (i) the amount of in-
terest calculated as described under "C. Class
HE: M-1 Interest" below and (ii) an amount of
principal calculated as described under "D.
Class HE: M-1 Principal" below. The "Class HE:
M-1 Distribution Amount" for any Payment Date
will equal the lesser of (i) the Class HE: M-1
Formula Distribution Amount for such Payment
Date or (ii) the Sub-Pool HE Amount Available
in the Certificate Account available for dis-
tribution to the Class HE: M-1
Certificateholders (after giving effect to the
distribution made to Class HE: A
Certificateholders) on such Payment Date (the
"Class HE: M-1 Remaining Amount Available").
S-19
<PAGE>
The "Class HE: M-2 Distribution Amount" for any
Payment Date is intended to be equal to the
"Class HE: M-2 Formula Distribution Amount,"
which equals the sum of (i) the amount of in-
terest calculated as described under "E. Class
HE: M-2 Interest" below and (ii) an amount of
principal calculated as described under "F.
Class HE: M-2 Principal" below. The "Class HE:
M-2 Distribution Amount" for any Payment Date
will equal the lesser of (i) the Class HE: M-2
Formula Distribution Amount for such Payment
Date or (ii) the Sub-Pool HE Amount Available
in the Certificate Account available for dis-
tribution to the Class HE: M-2 Certificate-
holders (after giving effect to the distribu-
tion made to Class HE: A and Class HE: M-1
Certificateholders) on such Payment Date (the
"Class HE: M-2 Remaining Amount Available").
The "Class HE: B-1 Distribution Amount" for any
Payment Date is intended to be equal to the
"Class HE: B-1 Formula Distribution Amount,"
which equals the sum of (i) the amount of in-
terest calculated as described under "G. Class
HE: B-1 Interest" below and (ii) an amount of
principal calculated as described under "H.
Class HE: B-1 Principal" below. The "Class HE:
B-1 Distribution Amount" for any Payment Date
will equal the lesser of (i) the Class HE: B-1
Formula Distribution Amount for such Payment
Date or (ii) the Sub-Pool HE Amount Available
in the Certificate Account available for dis-
tribution to the Class HE: B-1
Certificateholders (after giving effect to the
distribution made to Class HE: A and Class HE:
M Certificateholders) on such Payment Date (the
"Class HE: B-1 Remaining Amount Available").
The "Class HE: B-2 Distribution Amount" for any
Payment Date is intended to be equal to the
"Class HE: B-2 Formula Distribution Amount,"
which equals the sum of (i) the amount of in-
terest calculated as described under "I. Class
HE: B-2 Interest" below and (ii) the amount of
principal calculated as described in the first
paragraph under "J. Class HE: B-2 Principal"
below. The "Class HE: B-2 Distribution Amount"
for any Payment Date will equal the lesser of
(i) the Class HE: B-2 Formula Distribution
Amount for such Payment Date or (ii) the Sub-
Pool HE Amount Available in the Certificate Ac-
count available for distribution to the Class
HE: B-2 Certificateholders (after giving effect
to the distribution made to Class HE: A, Class
HE: M and Class HE: B-1 Certificateholders) on
such Payment Date (the "Class HE: B-2 Remaining
Amount Available").
See "Description of the Certificates" for a de-
tailed description of the amounts on deposit in
the Certificate Account that will constitute
the Sub-Pool HE Amount Available on each Pay-
ment Date. The Sub-Pool HE Amount Available
will consist primarily of payments made on or
in respect of the Home Equity Contracts com-
prising Sub-Pool HE and will include amounts
other-
S-20
<PAGE>
wise payable to the Servicer (so long as the
Company or any wholly owned subsidiary of the
Company is the Servicer) as the related Monthly
Servicing Fee with respect to the Home Equity
Contracts, to the Company as the Class HE: B-2
Guaranty Fee, and to the Class C
Certificateholders. The Class HE: M-1 Remaining
Amount Available will include amounts otherwise
payable to the holders of the Class HE: M-2
Certificates, to the Class HE: B Certificates,
to the Servicer (so long as the Company or any
wholly owned subsidiary of the Company is the
Servicer) as the related Monthly Servicing Fee
with respect to the Home Equity Contracts, to
the Company as the Class HE: B-2 Guaranty Fee,
and to the Class C Certificateholders. The
Class HE: M-2 Remaining Amount Available will
include amounts otherwise payable to the hold-
ers of the Class HE: B Certificates, to the
Servicer (so long as the Company or any wholly
owned subsidiary of the Company is the
Servicer) as the related Monthly Servicing Fee
with respect to the Home Equity Contracts, to
the Company as the Class HE: B-2 Guaranty Fee,
and to the Class C Certificateholders. The
Class HE: B-1 Remaining Amount Available will
include amounts otherwise payable to the Class
HE: B-2 Certificateholders, to the Servicer (so
long as the Company or any wholly owned subsid-
iary of the Company is the Servicer) as the re-
lated Monthly Servicing Fee with respect to the
Home Equity Contracts, to the Company as the
Class HE: B-2 Guaranty Fee, and to the Class C
Certificateholders. The Class HE: B-2 Remaining
Amount Available will include amounts otherwise
payable to the Servicer (so long as the Company
or any wholly owned subsidiary of the Company
is the Servicer) as the related Monthly Servic-
ing Fee with respect to the Home Equity Con-
tracts, to the Company as the Class HE: B-2
Guaranty Fee, and to the Class C
Certificateholders.
The "Class HE: A Principal Balance" as of any
Payment Date is the sum of the Class HE: A-1
ARM Principal Balance, 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 Princi-
pal Balance. The Class HE: M Principal Balance
as of any Payment Date is the sum of the Class
HE: M-1 Principal Balance and the Class HE: M-2
Principal Balance. The Class HE: B Principal
Balance as of any Payment Date is the sum of
the Class HE: B-1 Principal Balance and the
Class HE: B-2 Principal Balance.
A portion of the interest otherwise payable on a
Payment Date to the Class HE: M and Class HE: B
Certificateholders will be subordinated to
other amounts payable to Sub-Pool HE
Certificateholders on that Payment Date if on
the preceding Payment Date the Principal Bal-
ance of the Home Equity Contracts
S-21
<PAGE>
comprising Sub-Pool HE is less than the sum of
the Class HE: A, Class HE: M and Class HE: B
Principal Balances, as further described below
in the sections describing interest payable on
the Class HE: M and Class HE: B Certificates.
A. Class HE: A Interest...... Interest on the outstanding Principal Balance of
each Class of Class HE: A Certificates will ac-
crue from , 1998, or from the most
recent Payment Date on which interest has been
paid, to but excluding the following Payment
Date. Interest on each Class of HE: A Certifi-
cates, other than the Class HE: A-1 ARM Certif-
icates, will be computed on the basis of a 360-
day year of twelve 30-day months. Interest on
the Class HE: A-l ARM Certificates will be com-
puted on the basis of actual days elapsed in a
360-day year.
Interest will be paid concurrently on each Class
of Class HE: A Certificates on each Payment
Date, to the extent of the Sub-Pool HE Amount
Available for such date in the Certificate Ac-
count, at the related Pass-Through Rate on the
then outstanding Class HE: A-1 ARM Principal
Balance, Class HE: A-1 Principal Balance, Class
HE: A-2 Principal Balance, Class HE: A-3 Prin-
cipal Balance, Class HE: A-4 Principal Balance,
Class HE: A-5 Principal Balance, Class HE: A-6
Principal Balance and Class HE: A-7 IO Notional
Principal Amount.
In the event that, on a particular Payment Date,
the Sub-Pool HE Amount Available in the Certif-
icate Account is not sufficient to make a full
distribution of interest to the holders of out-
standing Class HE: A Certificates, the amount
of interest to be distributed in respect of the
Class HE: A Certificates will be allocated
among each Class thereof (and within a Class
among the Certificates of such Class) pro rata
in accordance with their respective entitle-
ments to interest, and the amount of the
shortfall will be carried forward and added to
the amount such holders will be entitled to re-
ceive on the next Payment Date. Any such amount
so carried forward will bear interest at the
related Pass-Through Rate, to the extent le-
gally permissible. See "Description of the Cer-
tificates--Distributions on Sub-Pool HE Certif-
icates--Class HE: A Interest."
B. Class HE: A Principal..... Holders of a Class of Class HE: A Certificates
(other than the Class HE: A-7 IO Certificates)
will be entitled to receive payments of princi-
pal on each Payment Date in the order of prior-
ity set forth below and to the extent of the
Sub-Pool HE Amount Available in the Certificate
Account after payment of all interest payable
on each Class of Class HE: A Certificates.
Holders of the Class HE: A-1 ARM Certificates
will be entitled to receive, as payments of
principal, an amount equal to the Class HE: A-1
ARM Formula Principal Distribution Amount. The
"Class HE: A-1 ARM Formula Principal Distribu-
tion Amount" on or before the Payment Date on
which the Class HE: A-1 ARM Certificates
S-22
<PAGE>
have been paid in full will generally be equal
to the lesser of (A) the Class HE: A-1 ARM
Principal Balance or (B) the sum of the follow-
ing: (i) all scheduled payments of principal
due on each outstanding Adjustable Rate Con-
tract during the related Due Period; (ii) the
Scheduled Principal Balance of each Adjustable
Rate Contract which, during the related Due Pe-
riod, was purchased by the Company pursuant to
the Agreement on account of certain breaches of
its representations and warranties; (iii) the
Scheduled Principal Balance of each Adjustable
Rate Contract that became a Liquidated Contract
during the related Due Period; (iv) all partial
Principal Prepayments applied and Principal
Prepayments in Full received on each Adjustable
Rate Contract during the related Due Period;
and (v) on any Payment Date which is on or af-
ter the Payment Date on which the Class HE: A-
1, A-2, A-3, A-4, A-5 and A-6 Certificates have
been paid in full, (a) the Sub-Pool HE Senior
Percentage times (x) the sum of the amounts de-
scribed in clauses (i) through (v) of the defi-
nition of the Sub-Pool HE Formula Principal
Distribution Amount less (y) the sum of the
amounts described in clauses (i) through (iv)
of the definition of the Sub-Pool HE: A-1 ARM
Formula Principal Distribution Amount less (b)
the amount, if any, distributed in payment of
principal on the Class HE: A-1, A-2, A-3, A-4,
A-5 and A-6 Certificates on such Payment Date.
The Class HE: A-7 IO Certificates are interest-
only Certificates and are not entitled to re-
ceive distributions of principal.
Holders of the Class HE: A Certificates (other
than the Class HE: A-1 ARM Certificates and the
Class HE: A-7 IO Certificates) will be entitled
to receive, as payments of principal, an amount
equal to the Sub-Pool HE Senior Percentage of
the Sub-Pool HE Formula Principal Distribution
Amount. The Sub-Pool HE Formula Principal Dis-
tribution Amount is (A) the sum of (i) all
scheduled payments of principal due on each
outstanding Home Equity Contract during the re-
lated Due Period, (ii) the Scheduled Principal
Balance of each Home Equity Contract which,
during the related Due Period, was purchased by
the Company pursuant to the Agreement on ac-
count of certain breaches of its representa-
tions and warranties, (iii) all partial Princi-
pal Prepayments applied and all Principal Pre-
payments in Full received during the related
Due Period in respect of Home Equity Contracts,
(iv) the Scheduled Principal Balance of each
Home Equity Contract that became a Liquidated
Contract during the related Due Period and (v)
any amount described in clauses (i) through
(iv) above that was not previously distributed
because of an insufficient amount of funds
available in the Certificate Account if (a) the
Payment Date occurs on or after the Payment
Date on which the Class HE: B-2 Principal Bal-
ance has been reduced to zero, or (b) such
amount was not covered by a Class HE: B-2 Guar-
anty Payment and corresponding reduction in the
S-23
<PAGE>
Class HE: B-2 Principal Balance, minus (B) the
Class HE: A-1 ARM Formula Principal Distribu-
tion Amount. When the Principal Balance of a
Class of Class HE: A Certificates is reduced to
zero, no further distributions of principal
will be made to the holders of such Class.
The Sub-Pool HE Senior Percentage for any Pay-
ment Date prior to the Class HE: B Cross-over
Date (as described below), and for any Payment
Date on or after the Class HE: B Cross-over
Date on which any Class HE: B Principal Distri-
bution Test (as described below) has not been
satisfied, will equal 100%. On each Payment
Date on or after the Class HE: B Cross-over
Date, if each Class HE: B Principal Distribu-
tion Test has been satisfied on such Payment
Date, the Sub-Pool HE Senior Percentage will
equal 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 for such Payment Date
and the denominator of which is the Pool Sched-
uled Principal Balance of the Home Equity Con-
tracts other than the Adjustable Rate Contracts
for the immediately preceding Payment Date.
The Sub-Pool HE Senior Percentage of the Sub-
Pool HE Formula Principal Distribution Amount
will be distributed, to the extent of the Sub-
Pool HE Amount Available after payment of in-
terest on each Class of Class HE: A Certifi-
cates, as follows: (i) that portion, if any, of
the Sub-Pool HE Senior Percentage of the Sub-
Pool HE Formula Principal Distribution Amount
equal to the Class HE: A-6 Lockout Pro Rata
Distribution Amount will be distributed to the
Class HE: A-6 Certificateholders; and (ii) the
remainder of the Sub-Pool HE Senior Percentage
of the Sub-Pool HE Formula Principal Distribu-
tion Amount will be distributed in the follow-
ing order: first, to the Class HE: A-1
Certificateholders until the Class HE: A-1
Principal Balance has been reduced to zero,
then to the Class HE: A-2 Certificateholders
until the Class HE: A-2 Principal Balance has
been reduced to zero, then to the Class HE: A-3
Certificateholders until the Class HE: A-3
Principal Balance has been reduced to zero,
then to the Class HE: A-4 Certificateholders
until the Class HE: A-4 Principal Balance has
been reduced to zero and then to the Class HE:
A-5 Certificateholders until the Class HE: A-5
Principal Balance has been reduced to zero. Af-
ter the Class HE: A-5 Principal Balance has
been reduced to zero, Holders of the Class HE:
A-6 Certificates will be entitled to receive
the entire Sub-Pool HE Senior Percentage of the
Sub-Pool HE Formula Principal Distribution
Amount, up to the amount necessary to reduce
the Class HE: A-6 Principal Balance to zero, to
the extent the remaining Sub-Pool HE Amount
Available is sufficient therefor.
S-24
<PAGE>
The "Class HE: A-6 Lockout Pro Rata Distribution
Amount," as to any Payment Date, is an amount
equal to the lesser of:
(a) the product of (1) the Class 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 Payment Date and the denomi-
nator of which is the Class HE: A Principal
Balance less the Class HE: A-1 ARM Principal
Balance immediately preceding such Payment
Date, and (B) the Sub-Pool HE Senior Per-
centage of the Sub-Pool HE Formula Principal
Distribution Amount for such Payment Date,
and
(b) the Class HE: A-6 Principal Balance immedi-
ately preceding such Payment Date.
The "Class HE: A-6 Lockout Percentage," as to
any Payment Date occurring during the periods
set forth below, is the percentage designated
as such as follows:
<TABLE>
<CAPTION>
CLASS HE: A-6
PERIOD (DATES INCLUSIVE) LOCKOUT PERCENTAGE
------------------------ ------------------
<S> <C>
1998 through 2000....... 0%
2001 through 2002....... 20%
2003 through 2003....... 80%
2004 through 2004....... 100%
2005 and thereafter.............. 300%
</TABLE>
On any Payment Date as to which there is a Class
HE: A Liquidation Loss Principal Amount (which
is the amount, if any, by which the Pool Sched-
uled Principal Balance of Sub-Pool HE plus the
Pre-Funded Amount is less than the Class HE: A
Principal Balance), the remaining Sub-Pool HE
Amount Available will be distributed pro rata
to each Class of Class HE: A Certificates based
on the Class Principal Balance of each Class
(but in no event will such amount exceed the
Class Principal Balance of any such Class).
If, as to any Payment Date, the remaining Sub-
Pool HE Amount Available remaining after dis-
tributions of interest on the Class HE: A Cer-
tificates is less than the sum of the Sub-Pool
HE Senior Percentage of the Sub-Pool HE Formula
Principal Distribution Amount and the Class HE:
A-1 ARM Formula Principal Distribution Amount,
the amounts to be distributed to the Class HE-A
Certificateholders (including the Class HE: A-1
ARM Certificateholders) will be allocated pro
rata based upon the respective portions of the
Sub-Pool HE Amount Available that would have
been distributed to the Class HE: A
Certificateholders, as described above, had the
remaining Sub-Pool HE Amount Available been
sufficient therefor.
C. Class HE: M-1 Interest.... Interest on the outstanding Class HE: M-1 Prin-
cipal Balance will accrue from ,
1998, or from the most recent Payment Date on
which interest has been paid, to but excluding
the
S-25
<PAGE>
following Payment Date, and will be computed on
the basis of a 360-day year of twelve 30-day
months.
To the extent of the Class HE: M-1 Remaining
Amount Available, if any, for a Payment Date
after payment of the Class HE: A Distribution
Amount for such date, interest will be paid to
the Class HE: M-1 Certificateholders on such
Payment Date in an amount (the "Class HE: M-1
Interest Payment Amount") equal to the product
of (a) the Class HE: M-1 Pass-Through Rate and
(b) the then outstanding Class HE: M-1 Princi-
pal Balance less the Class HE: M-1 Liquidation
Loss Principal Amount, if any. The "Class HE:
M-1 Liquidation Loss Principal Amount" as of
any Payment Date will equal the excess, if any,
of the Sub-Pool HE Aggregate Liquidation Loss
Principal Amount over the aggregate of the
Principal Balances of the Class HE: M-2 Certif-
icates, the Class HE: B-1 Certificates and the
Class HE: B-2 Certificates. The "Sub-Pool HE
Aggregate Liquidation Loss Principal Amount" as
of any Payment Date will equal the excess, if
any, of (i) the sum of the Class HE: A Princi-
pal Balance, the Class HE: M Principal Balance
and the Class HE: B Principal Balance as of the
preceding Payment Date (after giving effect to
distributions of principal thereon) over (ii)
sum of the Pool Scheduled Principal Balance of
Sub-Pool HE plus the Sub-Pool HE Pre-Funded
Amount for such preceding Payment Date.
In the event that, on a particular Payment Date,
the Class HE: M-1 Remaining Amount Available,
plus other funds in the Certificate Account
available therefor, are not sufficient to make
a full distribution of the Class HE: M-1 Inter-
est Payment Amount, the amount of interest to
be distributed in respect of the Class HE: M-1
Certificates will be allocated among the Class
HE: M-1 Certificates pro rata in accordance
with their respective entitlements to interest,
and the amount of the deficiency will be car-
ried forward as an amount that the Class HE: M-
1 Certificateholders are entitled to receive on
the next Payment Date. Any amount so carried
forward will, to the extent legally permissi-
ble, bear interest at the Class HE: M-1 Pass-
Through Rate. See "Description of the Certifi-
cates--Distributions on Sub-Pool HE Certifi-
cates--Class HE: M-1 Interest."
D. Class HE: M-1 Principal... Payments of principal on the Class HE: M-1 Cer-
tificates will not commence until the Class HE:
A Principal Balance has been reduced to zero.
On each Payment Date on or after the date on
which the Class HE: A Principal Balance has
been reduced to zero, holders of Class HE: M-1
Certificates will be entitled to receive the
Sub-Pool HE Senior Percentage of the Sub-Pool
HE Formula Principal Distribution Amount, until
the Class HE: M-1 Principal Balance has been
reduced to zero.
E. Class HE: M-2 Interest.... Interest on the outstanding Class HE: M-2 Prin-
cipal Balance will accrue from ,
1998, or from the most recent Payment Date on
which interest has been paid, to but excluding
the
S-26
<PAGE>
following Payment Date, and will be computed on
the basis of a 360-day year of twelve 30-day
months.
To the extent of the Class HE: M-2 Remaining
Amount Available, if any, for a Payment Date
after payment of the Class HE: A Distribution
Amount and the Class HE: M-1 Distribution
Amount for such date, interest will be paid to
the Class HE: M-2 Certificateholders on such
Payment Date in an amount (the "Class HE: M-2
Interest Payment Amount") equal to the product
of (a) the Class HE: M-2 Pass-Through Rate and
(b) the then outstanding Class HE: M-2 Princi-
pal Balance less the Class HE: M-2 Liquidation
Loss Principal Amount, if any. The "Class HE:
M-2 Liquidation Loss Principal Amount" as of
any Payment Date will equal the excess, if any,
of the Sub-Pool HE Aggregate Liquidation Loss
Principal Amount over the Class HE: B Principal
Balance.
In the event that, on a particular Payment Date,
the Class HE: M-2 Remaining Amount Available,
plus other funds in the Certificate Account
available therefor, are not sufficient to make
a full distribution of the Class HE: M-2 Inter-
est Payment Amount, the amount of interest to
be distributed in respect of the Class HE: M-2
Certificates will be allocated among the Class
HE: M-2 Certificates pro rata in accordance
with their respective entitlements to interest,
and the amount of the deficiency will be car-
ried forward as an amount that the Class HE: M-
2 Certificateholders are entitled to receive on
the next Payment Date. Any amount so carried
forward will, to the extent legally permissi-
ble, bear interest at the Class HE: M-2 Pass-
Through Rate. See "Description of the Certifi-
cates--Distributions on Sub-Pool HE Certifi-
cates--Class HE: M-2 Interest."
F. Class HE: M-2 Principal... Payments of principal on the Class HE: M-2 Cer-
tificates will not commence until the Class HE:
A Principal Balance and the Class HE: M-1 Prin-
cipal Balance have been reduced to zero. On
each Payment Date on or after the date on which
the Class HE: A Principal Balance and the Class
HE: M-1 Principal Balance have been reduced to
zero, holders of Class HE: M-2 Certificates
will be entitled to receive the Sub-Pool HE Se-
nior Percentage of the Sub-Pool HE Formula
Principal Distribution Amount, until the Class
HE: M-2 Principal Balance has been reduced to
zero.
G. Class HE: B-1 Interest.... Interest on the outstanding Class HE: B-1 Prin-
cipal Balance will accrue from ,
1998, or from the most recent Payment Date on
which interest has been paid, to but excluding
the following Payment Date, and will be com-
puted on the basis of a 360-day year of twelve
30-day months.
To the extent of the Class HE: B-1 Remaining
Amount Available, if any, for a Payment Date
after payment of the Class HE: A Distribution
Amount, the Class HE: M-1 Distribution Amount
and the Class HE: M-2 Distribution Amount for
such date, in-
S-27
<PAGE>
terest will be paid to the Class HE: B-1
Certificateholders on such Payment Date in an
amount (the "Class HE: B-1 Interest Payment
Amount") equal to the product of (a) the Class
HE: B-1 Pass-Through Rate and (b) the then out-
standing Class HE: B-1 Principal Balance less
the Class HE: B-1 Liquidation Loss Principal
Amount, if any. The "Class HE: B-1 Liquidation
Loss Principal Amount" as of any Payment Date
will equal the excess, if any, of the Sub-Pool
HE Aggregate Liquidation Loss Principal Amount
over the Class HE: B-2 Principal Balance.
In the event that, on a particular Payment Date,
the Class HE: B-1 Remaining Amount Available,
plus other funds in the Certificate Account
available therefor, are not sufficient to make
a full distribution of the Class HE: B-1 Inter-
est Payment Amount, the amount of interest to
be distributed in respect of the Class HE: B-1
Certificates will be allocated among the Class
HE: B-1 Certificates pro rata in accordance
with their respective entitlements to interest,
and the amount of the deficiency will be car-
ried forward as an amount that the Class HE: B-
1 Certificateholders are entitled to receive on
the next Payment Date. Any amount so carried
forward will, to the extent legally permissi-
ble, bear interest at the Class HE: B-1 Pass-
Through Rate. See "Description of the Certifi-
cates--Distributions on Sub-Pool HE Certifi-
cates--Class HE: B-1 Interest."
H. Class HE: B-1 Principal... Payments of principal on the Class HE: B-1 Cer-
tificates will not commence until the Class HE:
B Cross-over Date, and will be made on that
Payment Date and each Payment Date thereafter
only if each Class HE: B Principal Distribution
Test is satisfied on such Payment Date (unless
the Class HE: A Principal Balance and the Class
HE: M Principal Balance have been reduced to
zero). The Class HE: B Cross-over Date will be
the earlier of (A) the Payment Date on which
the Class HE: M-2 Principal Balance is reduced
to zero and (B) the first Payment Date on or
after the Payment Date in 2001 on which
the fraction, expressed as a percentage, the
numerator of which is the Class HE: B Principal
Balance as of such Payment Date and the denomi-
nator of which is the Pool Scheduled Principal
Balance of Sub-Pool HE as of the immediately
preceding Payment Date, is equal to or greater
than %. The Class HE: B Principal Distribu-
tion Tests on each Payment Date relate to
losses and delinquencies on the Home Equity
Contracts, and are described under "Description
of the Certificates--Distributions on Sub-Pool
HE Certificates--Class HE: B-1 Principal."
On each Payment Date on or after the Class HE: B
Cross-over Date, the Class HE: B Percentage of
the Sub-Pool HE Formula Principal Distribution
Amount will be paid to the Class HE: B-1
Certificateholders to the extent of the Class
HE: B-1 Remaining Amount Available after pay-
ment of interest on the Class HE: B-1 Certifi-
cates, until the Class HE: B-1 Principal Bal-
ance has been reduced to zero.
S-28
<PAGE>
The Class HE: B Percentage for any Payment Date
will be equal to 100% minus the Sub-Pool HE Se-
nior Percentage. The Class HE: B Percentage for
each Payment Date, if any, after the Class HE:
A Principal Balance and the Class HE: M Princi-
pal Balance have been reduced to zero will be
equal to 100%.
I. Class HE: B-2 Interest.... Interest on the outstanding Class HE: B-2 Prin-
cipal Balance will accrue from ,
1998, or from the most recent Payment Date on
which interest has been paid, to but excluding
the following Payment Date, and will be com-
puted on the basis of a 360-day year of twelve
30-day months.
To the extent of (i) the Class HE: B-2 Remaining
Amount Available, if any, for a Payment Date
after payment of the Class HE: A Distribution
Amount, the Class HE: M-1 Distribution Amount,
the Class HE: M-2 Distribution Amount and the
Class HE: B-1 Distribution Amount for such
date, and (ii) the Class HE: B-2 Guaranty Pay-
ment, if any, for such date, interest will be
paid to the Class HE: B-2 Certificateholders on
such Payment Date in an amount (the "Class HE:
B-2 Interest Payment Amount") equal to the
product of (a) the Class HE: B-2 Pass-Through
Rate and (b) the then outstanding Class HE: B-2
Principal Balance less the Class HE: B-2 Liqui-
dation Loss Principal Amount, if any. The
"Class HE: B-2 Liquidation Loss Principal
Amount" as of any Payment Date will equal the
lesser of the Sub-Pool HE Aggregate Liquidation
Loss Principal Amount and the Class HE: B-2
Principal Balance.
In the event that, on a particular Payment Date,
the Class HE: B-2 Remaining Amount Available in
the Certificate Account plus any amounts actu-
ally paid under the Class HE: B-2 Limited Guar-
anty are not sufficient to make a full distri-
bution of the Class HE: B-2 Interest Payment
Amount, the amount of interest to be distrib-
uted in respect of the Class HE: B-2 Certifi-
cates will be allocated among the Class HE: B-2
Certificates pro rata in accordance with their
respective entitlements to interest, and the
amount of the deficiency will be carried for-
ward as an amount that the Class HE: B-2
Certificateholders are entitled to receive on
the next Payment Date. Any amount so carried
forward will, to the extent legally permissi-
ble, bear interest at the Class HE: B-2 Pass-
Through Rate. See "Description of the Certifi-
cates-- Distributions on Sub-Pool HE Certifi-
cates--Class HE: B-2 Interest."
J. Class HE: B-2 Principal... Except for payments of the Class HE: B-2 Liqui-
dation Loss Principal Amount, payments of prin-
cipal on the Class HE: B-2 Certificates will
not commence until the Payment Date on which
the Class HE: B-1 Principal Balance has been
reduced to zero (the "Class HE: B-1 Cross-over
Date"), and will be made on that Payment Date
and each Payment Date thereafter only if each
Class HE: B Principal Distribution Test is sat-
isfied on such Payment Date (unless the Class
HE: A Principal Balance and the
S-29
<PAGE>
Class HE: M Principal Balance have been reduced
to zero). On any such Payment Date, the Class
HE: B Percentage of the Sub-Pool HE Formula
Principal Distribution Amount will be distrib-
uted, to the extent of the Class HE: B-2 Re-
maining Amount Available and any amounts actu-
ally paid under the Class HE: B-2 Limited Guar-
anty after payment of interest on the Class HE:
B-2 Certificates, to the Class HE: B-2
Certificateholders until the Class HE: B-2
Principal Balance has been reduced to zero. See
"Description of the Certificates--Distributions
on Sub-Pool HE Certificates--Class HE: B-2
Principal."
On each Payment Date, the Class HE: B-2
Certificateholders will be entitled to receive,
pursuant to the Class HE: B-2 Limited Guaranty,
the Class HE: B-2 Liquidation Loss Principal
Amount until the Class HE: B-2 Principal Bal-
ance has been reduced to zero.
Subordination of Class HI: M
and Class HI: B
Certificates................
The rights of the holders of the Class HI: M
Certificates and Class HI: B Certificates to
receive distributions with respect to the Home
Improvement Contracts comprising Sub-Pool HI,
as well as any other amounts constituting the
Sub-Pool HI Amount Available, will be subordi-
nated, to the extent described herein, to such
rights of the holders of the Class HI: A Cer-
tificates. This subordination is intended to
enhance the likelihood of regular receipt by
the holders of the Class HI: A Certificates of
the full amount of their scheduled monthly pay-
ments of interest and principal and to afford
such holders protection against losses on Liq-
uidated Home Improvement Contracts.
The protection afforded to the holders of the
Class HI: A Certificates by means of the subor-
dination of the Class HI: M and Class HI: B
Certificates will be accomplished by the pref-
erential right of the Class HI: A
Certificateholders to receive, prior to any
distribution being made on a Payment Date in
respect of the Class HI: M and Class HI: B Cer-
tificates, the amounts of interest and princi-
pal due them on each Payment Date out of the
Sub-Pool HI Amount Available on such date in
the Certificate Account and, if necessary, by
the right of such Class HI: A Certificate-
holders to receive future distributions of Sub-
Pool HI Amounts Available that would otherwise
be payable to the holders of the Class HI: M
and Class HI: B Certificates.
In addition, the rights of the holders of the
Class HI: M-2 Certificates and Class HI: B Cer-
tificates to receive distributions with respect
to the Home Improvement Contracts, as well as
any other amounts constituting Sub-Pool HI
Amount Available, will be subordinated, to the
extent described herein, to such rights of the
holders of the Class HI: M-1 Certificates. This
subordination is intended to enhance the like-
lihood of regular receipt by the holders of the
Class HI: M-1 Certificates of the full amount
of their scheduled monthly payments of interest
and principal and
S-30
<PAGE>
to afford such holders protection against
losses on Liquidated Home Improvement Con-
tracts.
The protection afforded to the holders of the
Class HI: M-1 Certificates by means of the sub-
ordination of the Class HI: M-2 and Class HI: B
Certificates will be accomplished by the pref-
erential right of the Class HI: M-1
Certificateholders to receive, prior to any
distribution being made on a Payment Date in
respect of the Class HI: M-2 and Class HI: B
Certificates, the amounts of interest and prin-
cipal due them on each Payment Date out of the
Class HI: M-1 Remaining Amount Available on
such date in the Certificate Account and, if
necessary, by the right of such Class HI: M-1
Certificateholders to receive future distribu-
tions of Class HI: M-1 Remaining Amounts Avail-
able that would otherwise be payable to the
holders of the Class HI: M-2 and Class HI: B
Certificates.
In addition, the rights of the holders of the
Class HI: B Certificates to receive distribu-
tions with respect to the Home Improvement Con-
tracts, as well as any other amounts constitut-
ing Sub-Pool HI Amount Available, will be sub-
ordinated, to the extent described herein, to
such rights of the holders of the Class HI: M-2
Certificates. This subordination is intended to
enhance the likelihood of regular receipt by
the holders of the Class HI: M-2 Certificates
of the full amount of their scheduled monthly
payments of interest and principal and to af-
ford such holders protection against losses on
Liquidated Home Improvement Contracts.
The protection afforded to the holders of the
Class HI: M-2 Certificates by means of the sub-
ordination of the Class HI: B Certificates will
be accomplished by the preferential right of
the Class HI: M-2 Certificateholders to receive
prior to any distribution being made on a Pay-
ment Date in respect of the Class HI: B Certif-
icates, the amounts of interest and principal
due them on each Payment Date out of the Class
HI: M-2 Remaining Amount Available on such date
in the Certificate Account and, if necessary,
by the right of such Class HI: M-2
Certificateholders to receive future distribu-
tions of Class HI: M-2 Remaining Amounts Avail-
able that would otherwise be payable to the
holders of the Class HI: B Certificates.
In addition, the rights of the holders of the
Class HI: B-2 Certificates to receive distribu-
tions with respect to the Home Improvement Con-
tracts, as well as any other amounts constitut-
ing Sub-Pool HI Amount Available, will be sub-
ordinated, to the extent described herein, to
such rights of the holders of the Class HI: B-1
Certificates. This subordination is intended to
enhance the likelihood of regular receipt by
the holders of the Class HI: B-1 Certificates
of the full amount of their scheduled monthly
payments of interest and principal and to af-
ford such holders protection against losses on
Liquidated Home Improvement Contracts.
S-31
<PAGE>
The protection afforded to the holders of the
Class HI: B-1 Certificates by means of the sub-
ordination of the Class HI: B-2 Certificates
will be accomplished by the preferential right
of the Class HI: B-1 Certificateholders to re-
ceive prior to any distribution being made on a
Payment Date in respect of the Class HI: B-2
Certificates, the amounts of interest and prin-
cipal due them on each Payment Date out of the
Class HI: B-1 Remaining Amount Available on
such date in the Certificate Account and, if
necessary, by the right of such Class HI: B-1
Certificateholders to receive future distribu-
tions of Class HI: B-1 Remaining Amounts Avail-
able that would otherwise be payable to the
holders of the Class HI: B-2 Certificates.
If a Class HI: B-2 Guaranty Payment is required
for any Payment Date and the Company fails to
pay such amount pursuant to the Class HI: B-2
Limited Guaranty, the Class HI: B-2
Certificateholders may incur losses on their
investment in the Class HI: B-2 Certificates to
the extent such losses are not made up from fu-
ture payments on the Home Improvement Con-
tracts. See "Description of the Certificates--
Subordination of Class HI: M Certificates and
Class HI: B Certificates."
Losses on Liquidated Home
Improvement Contracts.......
As described above, the distribution of princi-
pal to the Class HI: A Certificateholders is
intended to include the Sub-Pool HI Senior Per-
centage of the Scheduled Principal Balance of
each Home Improvement Contract that became a
Liquidated Contract during the preceding Due
Period. If the Net Liquidation Proceeds from
such Liquidated Contract are less than the
Scheduled Principal Balance of such Liquidated
Contract plus accrued and unpaid interest
thereon, the deficiency will, in effect, be ab-
sorbed by the Class C Certificateholders, then
the Class HI: B-2 Guaranty Fee otherwise pay-
able to the Company, then the Monthly Servicing
Fee otherwise payable to the Servicer (so long
as the Company or any wholly owned subsidiary
of the Company is the Servicer) with respect to
the Home Improvement Contracts, then the Class
HI: B-2 Certificateholders, then the Class HI:
B-1 Certificateholders, then the Class HI: M-2
Certificateholders and then the Class HI: M-1
Certificateholders, since a portion of the Sub-
Pool HI Amount Available equal to such defi-
ciency and otherwise distributable to them will
be paid to the Class HI: A Certificateholders.
Likewise, to the extent the Class HI: M-1
Certificateholders or the Class HI: M-2
Certificateholders are entitled to receive dis-
tributions of principal, similar deficiencies
could result for each Class of Certificates
with a lower payment priority.
If the Sub-Pool HI Amount Available is not suf-
ficient to cover the entire amount distributa-
ble to the Class HI: A Certificateholders, the
Class HI: M-1 Certificateholders or the Class
HI: M-2 Certificateholders on a particular Pay-
ment Date, then the Sub-
S-32
<PAGE>
Pool HI Senior Percentage on future Payment
Dates may be increased and the Class HI: B Per-
centage on future Payment Dates may be reduced
as a result of such deficiency.
But for the effect of the subordination of the
Class HI: M-2, Class HI: B and Class C Certifi-
cates, the Class HI: B-2 Guaranty Fee otherwise
payable to the Company and the related Monthly
Servicing Fee otherwise payable to the Servicer
(so long as the Company or any wholly owned
subsidiary of the Company is the Servicer) with
respect to the Home Improvement Contracts, the
Class HI: M-1 Certificateholders will absorb
all losses on each Liquidated Home Improvement
Contract in the amount by which its Net Liqui-
dation Proceeds are less than its unpaid prin-
cipal balance plus accrued and unpaid interest
thereon less the related Monthly Servicing Fee.
See "Description of the Certificates--Subordi-
nation of Class HI: M Certificates and Class
HI: B Certificates."
But for the effect of the subordination of the
Class HI: B and Class C Certificates, the Class
HI: B-2 Guaranty Fee otherwise payable to the
Company and the related Monthly Servicing Fee
otherwise payable to the Servicer (so long as
the Company or any wholly owned subsidiary of
the Company is the Servicer) with respect to
the Home Improvement Contracts, the Class HI:
M-2 Certificateholders will absorb all losses
on each Liquidated Home Improvement Contract in
the amount by which its Net Liquidation Pro-
ceeds are less than its unpaid principal bal-
ance plus accrued and unpaid interest thereon
less the related Monthly Servicing Fee. See
"Description of the Certificates--Subordination
of Class HI: M Certificates and Class HI: B
Certificates."
But for the effect of the subordination of the
Class HI: B-2 and Class C Certificates, the
Class HI: B-2 Guaranty Fee otherwise payable to
the Company and the related Monthly Servicing
Fee otherwise payable to the Servicer (so long
as the Company or any wholly owned subsidiary
of the Company is the Servicer) with respect to
the Home Improvement Contracts, the Class HI:
B-1 Certificateholders will absorb all losses
on each Liquidated Home Improvement Contract in
the amount by which its Net Liquidation Pro-
ceeds are less than its unpaid principal bal-
ance plus accrued and unpaid interest thereon
less the related Monthly Servicing Fee. See
"Description of the Certificates-- Subordina-
tion of Class HI: M Certificates and Class HI:
B Certificates."
But for the payments under the Class HI: B-2
Limited Guaranty described below and the subor-
dination of the Class C Certificates, the Class
HI: B-2 Guaranty Fee otherwise payable to the
Company and the related Monthly Servicing Fee
otherwise payable to the Servicer (so long as
the Company or any wholly owned subsidiary of
the Company is the Servicer) with respect
S-33
<PAGE>
to the Home Improvement Contracts, the Class
HI: B-2 Certificateholders will absorb all
losses on each Liquidated Home Improvement Con-
tract in the amount by which its Net Liquida-
tion Proceeds are less than its unpaid princi-
pal balance plus accrued and unpaid interest
thereon less the related Monthly Servicing Fee.
See "Description of the Certificates--Subordi-
nation of Class HI: M Certificates and Class
HI: B Certificates."
Class HI: B-2 Limited In order to mitigate the effect of the subordi-
Guaranty..................... nation of the Class HI: B-2 Certificates and
liquidation losses and delinquencies on the
Home Improvement Contracts comprising Sub-Pool
HI, the Class HI: B-2 Certificateholders are
entitled to receive on each Payment Date an
amount equal to the Class HI: B-2 Guaranty Pay-
ment, if any, under the Class HI: B-2 Limited
Guaranty of the Company. Prior to the Class HI:
B-1 Cross-over Date, and on any Payment Date on
or after the Class HI: B-1 Cross-over Date on
which any Class HI: B Principal Distribution
Test is not satisfied (unless the Class HI: A
Principal Balance and the Class HI: M Principal
Balance have been reduced to zero), the Class
HI: B-2 Guaranty Payment will equal the amount,
if any, by which (a) the sum of (i) the Class
HI: B-2 Formula Distribution Amount (which will
be equal to accrued and unpaid interest on the
Class HI: B-2 Certificates) for such Payment
Date and (ii) the Class HI: B-2 Liquidation
Loss Principal Amount, if any, for such Payment
Date, exceeds (b) the Class HI: B-2 Distribu-
tion Amount for such Payment Date. On each Pay-
ment Date on or after the Class HI: B-1 Cross-
over Date on which each Class HI: B Principal
Distribution Test is satisfied (or on which the
Class HI: A Principal Balance and the Class HI:
M Principal Balance have been reduced to zero),
the Class HI: B-2 Guaranty Payment will equal
the amount, if any, by which (a) the sum of (i)
the Class HI: B-2 Formula Distribution Amount
(which will include both interest and princi-
pal) for such Payment Date and (ii) the Class
HI: B-2 Liquidation Loss Principal Amount, if
any, exceeds (b) the Class HI: B-2 Distribution
Amount for such Payment Date.
The Class HI: B-2 Limited Guaranty will be an
unsecured general obligation of the Company and
will not be supported by any letter of credit
or other credit enhancement arrangement. The
ratings assigned to the Class HI: B-2 Certifi-
cates may be affected by the ratings of the
Company's debt securities. The Company's senior
debt securities were recently downgraded by S&P
from "A-" to "BBB+" and by Fitch from "A" to
"A-", which has been reflected in the ratings
assigned to the Class HI: B-2 Certificates. See
"Summary of the Terms of the Certificates--
Rating."
Subordination of Class HE: M
and Class HE: B
Certificates................
The rights of the holders of the Class HE: M
Certificates and Class HE: B Certificates to
receive distributions with respect to the
S-34
<PAGE>
Home Equity Contracts comprising Sub-Pool HE,
as well as any other amounts constituting Sub-
Pool HE Amount Available, will be subordinated,
to the extent described herein, to such rights
of the holders of the Class HE: A Certificates.
This subordination is intended to enhance the
likelihood of regular receipt by the holders of
the Class HE: A Certificates of the full amount
of their scheduled monthly payments of interest
and principal and to afford such holders pro-
tection against losses on Liquidated Home Eq-
uity Contracts.
The protection afforded to the holders of the
Class HE: A Certificates by means of the subor-
dination of the Class HE: M and Class HE: B
Certificates will be accomplished by the pref-
erential right of the Class HE: A
Certificateholders to receive, prior to any
distribution being made on a Payment Date in
respect of the Class HE: M and Class HE: B Cer-
tificates, the amounts of interest and princi-
pal due them on each Payment Date out of the
Sub-Pool HE Amount Available on such date in
the Certificate Account and, if necessary, by
the right of such Class HE: A Certificate-
holders to receive future distributions of Sub-
Pool HE Amounts Available that would otherwise
be payable to the holders of the Class HE: M
and Class HE: B Certificates.
In addition, the rights of the holders of the
Class HE: M-2 Certificates and Class HE: B Cer-
tificates to receive distributions with respect
to the Home Equity Contracts, as well as any
other amounts constituting Sub-Pool HE Amount
Available, will be subordinated, to the extent
described herein, to such rights of the holders
of the Class HE: M-1 Certificates. This subor-
dination is intended to enhance the likelihood
of regular receipt by the holders of the Class
HE: M-1 Certificates of the full amount of
their scheduled monthly payments of interest
and principal and to afford such holders pro-
tection against losses on Liquidated Home Eq-
uity Contracts.
The protection afforded to the holders of the
Class HE: M-1 Certificates by means of the sub-
ordination of the Class HE: M-2 and Class HE: B
Certificates will be accomplished by the pref-
erential right of the Class HE: M-1
Certificateholders to receive, prior to any
distribution being made on a Payment Date in
respect of the Class HE: M-2 and Class HE: B
Certificates, the amounts of interest and prin-
cipal due them on each Payment Date out of the
Class HE: M-1 Remaining Amount Available on
such date in the Certificate Account and, if
necessary, by the right of such Class HE: M-1
Certificateholders to receive future distribu-
tions of Class HE: M-1 Remaining Amounts Avail-
able that would otherwise be payable to the
holders of the Class HE: M-2 and Class HE: B
Certificates.
In addition, the rights of the holders of the
Class HE: B Certificates to receive distribu-
tions with respect to the Home EquityContracts,
as well as any other amounts constituting Sub-
Pool
S-35
<PAGE>
HE Amount Available, will be subordinated, to
the extent described herein, to such rights of
the holders of the Class HE: M-2 Certificates.
This subordination is intended to enhance the
likelihood of regular receipt by the holders of
the Class HE: M-2 Certificates of the full
amount of their scheduled monthly payments of
interest and principal and to afford such hold-
ers protection against losses on Liquidated
Home Equity Contracts.
The protection afforded to the holders of the
Class HE: M-2 Certificates by means of the sub-
ordination of the Class HE: B Certificates will
be accomplished by the preferential right of
the Class HE: M-2 Certificateholders to receive
prior to any distribution being made on a Pay-
ment Date in respect of the Class HE: B Certif-
icates, the amounts of interest and principal
due them on each Payment Date out of the Class
HE: M-2 Remaining Amount Available on such date
in the Certificate Account and, if necessary,
by the right of such Class HE: M-2
Certificateholders to receive future distribu-
tions of Class HE: M-2 Remaining Amounts Avail-
able that would otherwise be payable to the
holders of the Class HE: B Certificates.
In addition, the rights of the holders of the
Class HE: B-2 Certificates to receive distribu-
tions with respect to the Home Equity Con-
tracts, as well as any other amounts constitut-
ing Sub-Pool HE Amount Available, will be sub-
ordinated, to the extent described herein, to
such rights of the holders of the Class HE: B-1
Certificates. This subordination is intended to
enhance the likelihood of regular receipt by
the holders of the Class HE: B-1 Certificates
of the full amount of their scheduled monthly
payments of interest and principal and to af-
ford such holders protection against losses on
Liquidated Home Equity Contracts.
The protection afforded to the holders of the
Class HE: B-1 Certificates by means of the sub-
ordination of the Class HE: B-2 Certificates
will be accomplished by the preferential right
of the Class HE: B-1 Certificateholders to re-
ceive prior to any distribution being made on a
Payment Date in respect of the Class HE: B-2
Certificates, the amounts of interest and prin-
cipal due them on each Payment Date out of the
Class HE: B-1 Remaining Amount Available on
such date in the Certificate Account and, if
necessary, by the right of such Class HE: B-1
Certificateholders to receive future distribu-
tions of Class HE: B-1 Remaining Amounts Avail-
able that would otherwise be payable to the
holders of the Class HE: B-2 Certificates.
If a Class HE: B-2 Guaranty Payment is required
for any Payment Date and the Company fails to
pay such amount pursuant to the Class HE: B-2
Limited Guaranty, the Class HE: B-2
Certificateholders may incur losses on their
investment in the Class HE: B-2 Certificates to
the extent such losses are not made up from fu-
ture payments on the Home Equity Contracts. See
S-36
<PAGE>
"Description of the Certificates--Subordination
of Class HE: M Certificates and Class HE: B
Certificates."
Losses on Liquidated Home
Equity Contracts............
As described above, the distribution of princi-
pal to the Class HE: A Certificateholders is
intended to include the Sub-Pool HE Senior Per-
centage of the Scheduled Principal Balance of
each Home Equity Contract (other than the Ad-
justable Rate Contracts) that became a Liqui-
dated Contract during the preceding Due Period
and the Scheduled Principal Balance of each Ad-
justable Rate Contract that became a Liquidated
Contract during the preceding Due Period. If
the Net Liquidation Proceeds from such Liqui-
dated Contracts are less than the Scheduled
Principal Balance of such Liquidated Contracts
plus accrued and unpaid interest thereon, the
deficiency will, in effect, be absorbed by the
Class C Certificateholder, then the Class HE:
B-2 Guaranty Fee otherwise payable to the Com-
pany, then the related Monthly Servicing Fee
otherwise payable to the Servicer (so long as
the Company or any wholly owned subsidiary of
the Company is the Servicer) with respect to
the Home Equity Contracts, then the Class HE:
B-2 Certificateholders, then the Class HE: B-1
Certificateholders, then the Class HE: M-2
Certificateholders and then the Class HE: M-1
Certificateholders, since a portion of the Sub-
Pool HE Amount Available equal to such defi-
ciency and otherwise distributable to them will
be paid to the Class HE: A Certificateholders.
Likewise, to the extent the Class HE: M-1
Certificateholders or the Class HE: M-2
Certificateholders are entitled to receive dis-
tributions of principal, similar deficiencies
could result for each Class of Certificates
with a lower payment priority.
If the Sub-Pool HE Amount Available is not suf-
ficient to cover the entire amount distributa-
ble to the Class HE: A Certificateholders, the
Class HE: M-1 Certificateholders or the Class
HE: M-2 Certificateholders on a particular Pay-
ment Date, then the Sub-Pool HE Senior Percent-
age on future Payment Dates may be increased
and the Class HE: B Percentage on future Pay-
ment Dates may be reduced as a result of such
deficiency.
But for the effect of the subordination of the
Class HE: M-2, Class HE: B and Class C Certifi-
cates, the Class HE: B-2 Guaranty Fee otherwise
payable to the Company and the related Monthly
Servicing Fee otherwise payable to the Servicer
(so long as the Company or any wholly owned
subsidiary of the Company is the Servicer) with
respect to the Home Equity Contracts, the
Class HE: M-1 Certificateholders will absorb
all losses on each Liquidated Home Equity Con-
tract in the amount by which its Net Liquida-
tion Proceeds are less than its unpaid princi-
pal balance plus accrued and unpaid interest
thereon less the related Monthly Servicing Fee.
See "Description of the Certificates--Subordi-
nation of Class HE: M Certificates and Class
HE: B Certificates."
S-37
<PAGE>
But for the effect of the subordination of the
Class HE: B and Class C Certificates, the Class
HE: B-2 Guaranty Fee otherwise payable to the
Company and the related Monthly Servicing Fee
otherwise payable to the Servicer (so long as
the Company or any wholly owned subsidiary of
the Company is the Servicer) with respect to
the Home Equity Contracts, the Class HE: M-2
Certificateholders will absorb all losses on
each Liquidated Home Equity Contract in the
amount by which its Net Liquidation Proceeds
are less than its unpaid principal balance plus
accrued and unpaid interest thereon less the
related Monthly Servicing Fee. See "Description
of the Certificates--Subordination of Class HE:
M Certificates and Class HE: B Certificates."
But for the effect of the subordination of the
Class HE: B-2 and Class C Certificates, the
Class HE: B-2 Guaranty Fee otherwise payable to
the Company and the related Monthly Servicing
Fee otherwise payable to the Servicer (so long
as the Company or any wholly owned subsidiary
of the Company is the Servicer) with respect to
the Home Equity Contracts, the Class HE: B-1
Certificateholders will absorb all losses on
each Liquidated Home Equity Contract in the
amount by which its Net Liquidation Proceeds
are less than its unpaid principal balance plus
accrued and unpaid interest thereon less the
related Monthly Servicing Fee. See "Description
of the Certificates--Subordination of Class HE:
M Certificates and Class HE: B Certificates."
But for the payments under the Class HE: B-2
Limited Guaranty described below and the subor-
dination of the Class C Certificate, the Class
HE: B-2 Guaranty Fee otherwise payable to the
Company and the related Monthly Servicing Fee
otherwise payable to the Servicer (so long as
the Company or any wholly owned subsidiary of
the Company is the Servicer) with respect to
the Home Equity Contracts, the Class HE: B-2
Certificateholders will absorb all losses on
each Liquidated Home Equity Contract in the
amount by which its Net Liquidation Proceeds
are less than its unpaid principal balance plus
accrued and unpaid interest thereon less the
related Monthly Servicing Fee. See "Description
of the Certificates--Subordination of Class HE:
M Certificates and Class HE: B Certificates."
Class HE: B-2 Limited In order to mitigate the effect of the subordi-
Guaranty.................... nation of the Class HE: B-2 Certificates and
liquidation losses and delinquencies on the
Home Equity Contracts comprising Sub-Pool HE,
the Class HE: B-2 Certificateholders are enti-
tled to receive on each Payment Date an amount
equal to the Class HE: B-2 Guaranty Payment, if
any, under the Class HE: B-2 Limited Guaranty
of the Company. Prior to the Class HE: B-1
Cross-over Date, and on any Payment Date on or
after the Class HE: B-1 Cross-over Date on
which any Class HE: B Principal Distribution
Test is not satisfied (unless the Class HE: A
Principal Balance and the Class HE: M Principal
Balance have been reduced to zero), the Class
S-38
<PAGE>
HE: B-2 Guaranty Payment will equal the amount,
if any, by which (a) the sum of (i) the Class
HE: B-2 Formula Distribution Amount (which will
be equal to accrued and unpaid interest on the
Class HE: B-2 Certificates) for such Payment
Date and (ii) the Class HE: B-2 Liquidation
Loss Principal Amount, if any, for such Payment
Date, exceeds (b) the Class HE: B-2 Distribu-
tion Amount for such Payment Date. On each Pay-
ment Date on or after the Class HE: B-1 Cross-
over Date on which each Class HE: B Principal
Distribution Test is satisfied (or on which the
Class HE: A Principal Balance and the Class HE:
M Principal Balance have been reduced to zero),
the Class HE: B-2 Guaranty Payment will equal
the amount, if any, by which (a) the sum of (i)
the Class HE: B-2 Formula Distribution Amount
(which will include both interest and princi-
pal) for such Payment Date and (ii) the Class
HE: B-2 Liquidation Loss Principal Amount, if
any, exceeds (b) the Class HE: B-2 Distribution
Amount for such Payment Date.
The Class HE: B-2 Limited Guaranty will be an
unsecured general obligation of the Company and
will not be supported by any letter of credit
or other credit enhancement arrangement. The
ratings assigned to the Class HE: B-2 Certifi-
cates may be affected by the ratings of the
Company's debt securities. The Company's senior
debt securities were recently downgraded by S&P
from "A-" to "BBB+" and by Fitch from "A" to
"A-", which has been reflected in the ratings
assigned to the Class HE: B-2 Certificates. See
"Summary of the Terms of the Certificates--
Rating."
Registration of The Certificates initially will each be repre-
Certificates................ sented by one or more certificates registered
in the name of Cede & Co. ("Cede") as the nomi-
nee of The Depository Trust Company ("DTC"),
and will only be available in the form of book-
entries on the records of DTC and participating
members thereof. Holders of the Class HE: A-1
ARM Certificates may elect to hold their Cer-
tificate interests in Europe through Cedel
Bank, societe anonyme ("CEDEL") or the
Euroclear System ("Euroclear"). Certificates
will otherwise be issued in definitive form
only under the limited circumstances described
herein. All references herein to the rights of
"holders" or "Certificateholders" shall reflect
the rights of beneficial owners as they may in-
directly exercise such rights through DTC and
participating members thereof, except as other-
wise specified herein. See "Description of the
Certificates--Registration of the Certificates"
herein.
Home Improvement Contracts... Sub-Pool HI consists of conventional and FHA-in-
sured home improvement contracts and promissory
notes, including any and all rights to receive
payments due thereunder on and after the Cut-
off Date. This Prospectus Supplement contains
information regarding certain Home Improvement
Contracts, which will represent approximately
% of the Sub-Pool HI (the "Initial
S-39
<PAGE>
Home Improvement Contracts"). The Agreement
provides that additional Home Improvement Con-
tracts (the "Subsequent Home Improvement Con-
tracts"), which will represent approximately
% of Sub-Pool HI, will be purchased by the
Trust up to 60 days after the Closing Date. The
obligations of the Obligor under each Home Im-
provement Contract are secured by the related
real estate. The Initial Home Improvement Con-
tracts include conventional and FHA-
insured Home Improvement Contracts. The Initial
Home Improvement Contracts arise from loans re-
lating to the improvement of real estate lo-
cated in 49 states and the District of
Columbia. The contractual annual percentage
rate of interest (the "Contract Rate") on the
Initial Home Improvement Contracts as of the
Cut-off Date ranges from % to % with a
weighted average of %. The Initial Home Im-
provement Contracts had a weighted average term
to scheduled maturity, as of origination, of
211 months, and a weighted average term to
scheduled maturity, as of the Cut-off Date, of
209 months. The final scheduled payment date on
the Initial Home Improvement Contract with the
latest scheduled maturity is in 2027.
See "The Contracts--Home Improvement Contracts"
herein.
Sub-Pool HI Pre-Funding On the Closing Date, the Company will pay to the
Account..................... Trustee approximately $ (as re-
duced from time to time, the "Sub-Pool HI Pre-
Funded Amount") for deposit in the Sub-Pool HI
Pre-Funding Account to provide the Trust with
sufficient funds to purchase the Subsequent
Home Improvement Contracts. In no event will
the Sub-Pool HI Pre-Funded Amount, less the ag-
gregate principal balance of Subsequent Home
Improvement Contracts specifically identified
for purchase by the Trust as of the Closing
Date, represent more than % of the Original
Sub-Pool HI Certificate Principal Balance. The
Sub-Pool HI Pre-Funded Amount will be reduced
during the Funding Period (as defined herein)
by the amount used to purchase the Subsequent
Home Improvement Contracts. See "Description of
the Certificates--Conveyance of Subsequent Home
Improvement Contracts and Sub-Pool HI Pre-Fund-
ing Account."
The Class HI: A-1 Certificates will be prepaid
in part on the first Payment Date after the
Funding Period in the event that any amount re-
mains on deposit in the Sub-Pool HI Pre-Funding
Account on such Payment Date after the purchase
by the Trust of the related Subsequent Home Im-
provement Contracts. Although no assurance can
be given, the Company anticipates that the
principal amount of the related Subsequent Home
Improvement Contracts purchased by the Trust
will require the application of substantially
all of the Sub-Pool HI Pre-Funded Amount and
that there should be no material amount of
principal prepaid to the Class HI: A-1
Certificateholders from the Sub-Pool HI Pre-
Funding Account. However, it is unlikely that
the Company will
S-40
<PAGE>
be able to deliver Subsequent Home Improvement
Contracts with an aggregate principal balance
identical to the Sub-Pool HI Pre-Funded Amount.
See "Yield and Prepayment Considerations"
herein.
FHA Insurance................ Approximately % of the Initial Home Improve-
ment Contracts, by principal balance as of the
Cut-off Date, are insured by FHA against Obli-
gor defaults pursuant to Title I of the Na-
tional Housing Act ("FHA Insurance"). None of
the Home Equity Contracts are insured by FHA.
See "Description of FHA Insurance" in the Pro-
spectus.
Home Equity Contracts (other
than the Adjustable Rate
Contracts)..................
Sub-Pool HE includes Fixed-Rate Home Equity Con-
tracts (meaning all Home Equity Contracts other
than the Adjustable Rate Home Equity Con-
tracts). This Prospectus Supplement contains
information regarding certain Fixed-Rate Home
Equity Contracts, which will represent approxi-
mately % of all Fixed-Rate Home Equity Con-
tracts (the "Initial Fixed-Rate Home Equity
Contracts"). The Agreement provides that addi-
tional Fixed-Rate Home Equity Contracts (the
"Subsequent Fixed-Rate Home Equity Contracts")
will be purchased by the Trust up to 60 days
after the Closing Date. The Initial Fixed-Rate
Home Equity Contracts included in Sub-Pool HE
consist of closed-end home equity loans
(of which are Balloon Loans), including
any and all rights to receive payments due
thereunder on and after the Cut-off Date. The
obligations of the Obligor under each Fixed-
Rate Home Equity Contract are secured by the
related real estate. The Initial Fixed-Rate
Home Equity Contracts arise from loans relating
to real estate located in 48 states and the
District of Columbia. The Contract Rate on the
Initial Fixed-Rate Home Equity Contracts as of
the Cut-off Date ranges from % to %
with a weighted average of %. The Initial
Fixed-Rate Home Equity Contracts had a weighted
average term to scheduled maturity, as of orig-
ination, of months, and a weighted average
term to scheduled maturity, as of the Cut-off
Date, of months. The weighted average Con-
tract Rate on the Balloon Loans is %. The
Balloon Loans had a weighted average term to
scheduled maturity, as of origination, of
months, and a weighted average term to sched-
uled maturity, as of the Cut-off Date, of
months. The final scheduled payment date on the
Initial Fixed-Rate Home Equity Contract with
the latest scheduled maturity is in
2027. See "The Contracts--Home Equity Con-
tracts" herein.
Adjustable Rate Home Equity Sub-Pool HE includes Adjustable Rate Home Equity
Contracts................... Contracts. This Prospectus Supplement contains
information regarding certain Adjustable Rate
Home Equity Contracts, which will represent ap-
proximately % of all Adjustable Rate Home Eq-
uity Contracts (the "Initial Adjustable Rate
Home Equity Contracts"). The Agreement provides
that Adjustable Rate Home Equity Contracts (the
"Subsequent Adjustable Rate Home Equity Con-
tracts") will
S-41
<PAGE>
be purchased by the Trust up to 60 days after
the Closing Date. The Initial Adjustable Rate
Home Equity Contracts consist of closed-end
home equity loans including any and all rights
to receive payments due thereunder on and after
the Cut-off Date. The Initial Adjustable Rate
Home Equity Contracts accrue interest at a
fixed rate for up to 36 months and thereafter,
the interest rate adjusts annually or
semiannually to equal the sum of the Six-Month
LIBOR Index and the Gross Margin specified in
the related Contract. The obligations of the
Obligor under each Adjustable Rate Home Equity
Contract are secured by the related real es-
tate. The Initial Adjustable Rate Home Equity
Contracts arise from loans relating to real es-
tate located in 45 states and the District of
Columbia. The Contract Rate on the Initial Ad-
justable Rate Home Equity Contracts as of the
Cut-off Date ranges from % to % with a
weighted average of %. The Initial Adjustable
Rate Home Equity Contracts had a weighted aver-
age term to scheduled maturity, as of origina-
tion, of months, and a weighted average
term to scheduled maturity, as of the Cut-off
Date, of months. The final scheduled pay-
ment date on the Initial Adjustable Rate Home
Equity Contract with the latest scheduled matu-
rity is in 2027. See "The Contracts--
Adjustable Rate Home Equity Contracts" herein.
Sub-Pool HE Pre-Funding On the Closing Date, the Company will pay to the
Account..................... Trustee approximately $ (as re-
duced from time to time, the "Sub-Pool HE Pre-
Funded Amount") for deposit in the Sub-Pool HE
Pre-Funding Account to provide the Trust with
sufficient funds to purchase the Subsequent
Home Equity Contracts. In no event will the
Sub-Pool HE Pre-Funded Amount, less the aggre-
gate principal balance of subsequent Home Eq-
uity Contracts specifically identified for pur-
chase by the Trust as of the Closing Date, rep-
resent more than 25% of the Original Sub-Pool
HE Certificate Principal Balance. The Sub-Pool
HE Pre-Funded Amount will be reduced during the
Funding Period (as defined herein) by the
amount used to purchase the Subsequent Home Eq-
uity Contracts. See "Description of the Cer-
tificates--Conveyance of Subsequent Home Equity
Contracts and Sub-Pool HE Pre-Funding Account."
The Class HE: A Certificates will be prepaid in
part on the first Payment Date after the Fund-
ing Period in the event that any amount remains
on deposit in the Sub-Pool HE Pre-Funding Ac-
count on such Payment Date after the purchase
by the Trust of the related Subsequent Home Eq-
uity Contracts. Any amounts remaining which had
been allocated to the purchase of Subsequent
Adjustable Rate Home Equity Contracts will be
paid to the Class HE: A-1 ARM
Certificateholders and any amounts remaining
which had been allocated to the purchase of
Subsequent Fixed-Rate Home Equity Contracts
will be paid to the Class HE: A-1
Certificateholders.
S-42
<PAGE>
Although no assurance can be given, the Company
anticipates that the principal amount of the
related Subsequent Home Equity Contracts pur-
chased by the Trust will require the applica-
tion of substantially all of the related Pre-
Funded Amount and that there should be no mate-
rial amount of principal prepaid to the Class
HE: A-1 ARM Certificateholders and the Class
HE: A-1 Certificateholders from the Sub-Pool HE
Pre-Funding Account. However, it is unlikely
that the Company will be able to deliver Subse-
quent Home Equity Contracts with an aggregate
principal balance identical to the related Pre-
Funded Amount. See "Yield and Prepayment Con-
siderations" herein.
Advances..................... The Servicer is obligated to make Advances each
month of any scheduled payments on the Con-
tracts that were due but not received during
the prior Due Period. The Servicer will be en-
titled to reimbursement of an Advance from
funds available therefor in the Certificate Ac-
count. The Servicer will be obligated to make
an Advance only to the extent that it deter-
mines that such Advance will be recoverable
from subsequent funds available therefor in the
Certificate Account. If the Servicer fails to
make any Advance required under the Agreement,
the Trustee will be obligated (subject to cer-
tain conditions) to make such Advance. See "De-
scription of the Certificates--Advances" herein
and in the Prospectus.
Repurchase or Substitution The Company has agreed to repurchase any Con-
Obligations................. tract in which the Trust's or the
Certificateholders' interest is materially and
adversely affected by a breach of a representa-
tion and warranty with respect to such Contract
made in the Agreement if such breach has not
been cured within 90 days of the day it was or
should have been discovered by the Servicer or
the Trustee. In lieu of repurchasing a Con-
tract, during the two-year period following the
Closing Date, the Company may, at its option,
substitute another contract for the Contract
that it is otherwise obligated to repurchase.
See "Description of the Certificates--Convey-
ance of Contracts" herein and in the Prospec-
tus.
Repurchase Option............ The Servicer will have the option to repurchase
all of the outstanding Contracts on any Payment
Date on which the Pool Scheduled Principal Bal-
ance of the Contract Pool is less than 10% of
the Cut-off Date Pool Principal Balance of the
Contract Pool. See "Description of the Certifi-
cates--Repurchase Option" herein and in the
Prospectus.
Monthly Servicing Fee........ The Servicer will be entitled to monthly compen-
sation for servicing the Contracts comprising
each Sub-Pool equal to 1/12 of the product of
.75% and the Pool Scheduled Principal Balance
of such Sub-Pool plus the related Pre-Funded
Amount (each a "Monthly Servicing Fee"). See
"Description of the Certificates--Servicing
Compensation and Payment of Expenses" and""--
Rights upon an Event of Termination" herein.
S-43
<PAGE>
Tax Status................... In the opinion of counsel to the Company, the
Trust created by the Agreement will consist of
two segregated asset pools (respectively, the
"Master REMIC" and the "Subsidiary REMIC") and
for federal income tax purposes, each will be
treated as a separate real estate mortgage in-
vestment conduit ("REMIC"). Each Class of Sub-
Pool HI Certificates and Sub-Pool HE Certifi-
cates will constitute "regular interests" in
the Master REMIC and generally will be treated
as debt instruments of the Trust for federal
income tax purposes with payment terms equiva-
lent to the terms of such Certificates. The
Class C Master Certificate and the Class C Sub-
sidiary Certificate, which are not being of-
fered hereby, will constitute the "residual in-
terests" in the Master REMIC and the Subsidiary
REMIC, respectively. The holders of Certifi-
cates will be required to include in income in-
terest on such Certificates (including any
original issue discount) in accordance with the
accrual method of accounting. The Class HE: A-7
IO Certificates will be considered to have been
issued with original issue discount. See "Cer-
tain Federal Income Tax Consequences" herein
and in the Prospectus.
ERISA Considerations......... Subject to the conditions described herein, the
Class HI: A-1, Class HI: A-2, Class HI: A-3,
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
may be purchased by employee benefit plans that
are subject to the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"). No
transfer of any other Certificates will be per-
mitted to be made to any employee benefit plan
subject to ERISA or to the Internal Revenue
Code of 1986, as amended (the "Code"), unless
the opinion of counsel described under "ERISA
Considerations" herein and in the Prospectus is
delivered to the Trustee. See "ERISA Considera-
tions" herein and in the Prospectus.
Rating....................... It is a condition precedent to the issuance of
the Certificates that the Class HI: A-1, Class
HI: A-2 and Class HI: A-3 Certificates each be
rated at least ["AAA"] by Standard & Poor's
Rating Services, a division of The McGraw-Hill
Companies, Inc. ("S&P") and ["AAA"] by Fitch
I.B.C.A. Inc. ("Fitch"). It is a condition pre-
cedent to the issuance of the Class HI: M-1
Certificates that they be rated at least ["AA"]
by S&P and ["AA"] by Fitch. It is a condition
precedent to the issuance of the Class HI: M-2
Certificates that they be rated at least ["A"]
by S&P and ["A"] by Fitch. It is a condition
precedent to the issuance of the Class HI: B-1
Certificates that they be rated at least
["BBB"] by S&P and ["BBB"] by Fitch. It is a
condition precedent to the issuance of the
Class HI: B-2 Certificates that they be rated
at least ["BBB+"] by S&P and ["A-"] by Fitch.
It is a condition precedent to the issuance of
the Certificates that the Class HE: A-1 ARM,
Class HE: A-1, Class HE: A-2, Class
S-44
<PAGE>
HE: A-3, Class HE: A-4, Class HE: A-5 and Class
HE: A-6 Certificates each be rated at least
["AAA"] by S&P and ["AAA"] by Fitch. It is a
condition precedent to the issuance of the
Class HE: A-7 IO Certificates that they be
rated at least ["AAAr"] by S&P and ["AAA"] by
Fitch. It is a condition precedent to the issu-
ance of the Class HE: M-1 Certificates that
they be rated at least ["AA"] by S&P and ["AA"]
by Fitch. It is a condition precedent to the
issuance of the Class HE: M-2 Certificates that
they be rated at least ["A"] by S&P and ["A"]
by Fitch. It is a condition precedent to the
issuance of the Class HE: B-1 Certificates that
they be rated at least ["BBB"] by S&P and
["BBB"] by Fitch. It is a condition precedent
to the issuance of the Class HE: B-2 Certifi-
cates that they be rated at least ["BBB+"] by
S&P and ["A-"] by Fitch.
The rating of each Class of Certificates by S&P
addresses the likelihood of timely receipt of
interest and ultimate receipt of principal. The
rating of each Class of Certificates by Fitch
addresses the likelihood of the receipt by
Certificateholders of all distributions to
which such Certificateholders are entitled. The
ratings of the Class HI: B-2 and Class HE: B-2
Certificates are based in part on an assessment
of the Company's ability to make payments under
the Class HI: B-2 Limited Guaranty and Class
HE: B-2 Limited Guaranty, respectively. Any re-
duction in S&P's or Fitch's rating of the
Company's debt securities may result in a simi-
lar reduction in the rating of the Class HI: B-
2 and Class HE: B-2 Certificates. The Company's
senior debt securities were recently downgraded
by S&P from ["A"] to ["BBB+"] and by Fitch from
["A"] to ["A-."] A security rating is not a
recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at
any time by the assigning rating agency. See
"Ratings" in the Prospectus.
The Company has not requested a rating of the
Certificates from any rating agencies other
than S&P and Fitch. There can be no assurance
as to whether any other rating agency will rate
the Certificates or, if one does, what rating
would be assigned by such rating agency.
Legal Investment The Certificates will not constitute "mortgage
Considerations.............. related securities" for purposes of the Second-
ary Mortgage Market Enhancement Act of 1984
("SMMEA") because there are a substantial num-
ber of Contracts that are secured by liens on
real estate that are not first liens, as re-
quired by SMMEA. Accordingly, many institutions
with legal authority to invest in "mortgage re-
lated securities" may not be legally authorized
to invest in the Certificates. Investors should
consult with their own legal advisors to deter-
mine whether and to what extent the Certifi-
cates constitute legal investments for them.
S-45
<PAGE>
RISK FACTORS
Prospective Certificateholders should consider, in addition to the factors
described under "Risk Factors" in the Prospectus, the following factors in
connection with the purchase of the Certificates:
Limited Historical Data With Respect to Home Improvement Loans. The Company
began purchasing and servicing FHA-insured home improvement contracts in April
1989, and conventional home improvement contracts in September 1992, and thus
has limited historical experience with respect to the performance, including
the rate of prepayments, of home improvement loans. Accordingly, the Company's
delinquency experience and loan loss and liquidation experience set forth
under "The Contracts--Home Improvement Contracts" herein may not be indicative
of the performance of the Home Improvement Contracts comprising Sub-Pool HI.
Limited Historical Data With Respect to Home Equity Loans. The Company began
originating, purchasing and servicing home equity loans in January 1996, and
thus has no significant historical experience with respect to the performance,
including the rate of prepayments, of such loans. Accordingly, no information
has been included herein with respect to the Company's loan loss or
liquidation experience for home equity loans, inasmuch as such information as
is available would likely not be indicative of the performance of the Home
Equity Contracts comprising Sub-Pool HE.
Balloon Loans. A substantial number of the Home Equity Contracts provide for
the payment of the unamortized principal balance of the loan in a single
payment at the maturity of the loan that is greater than the preceding monthly
payment (the "Balloon Loans"). All of the Balloon Loans provide for equal
monthly payments, consisting of principal and interest, based on a stated
amortization schedule, and a single payment of the remaining principal balance
of the Balloon Loan at the end of a specified period following origination.
The remainder of the Home Equity Contracts provide for a schedule of
substantially equal payments that are, if timely paid, sufficient to amortize
fully the principal balance of the loan on or before its maturity date.
Because borrowers under Balloon Loans are required to make a relatively large
single payment upon maturity, it is possible that the default risk associated
with Balloon Loans is greater than that associated with fully-amortizing Home
Equity Contracts.
Certain Truth-In-Lending Considerations. It is likely that some Contracts
included in the Contract Pool will be subject to the Home Ownership and Equity
Protection Act of 1994 (the "Home Protection Act"). The Home Protection Act
adds certain additional provisions to Regulation Z, the implementing
regulation of the Federal Truth-In-Lending Act. These provisions impose
additional disclosure and other requirements on creditors with respect to non-
purchase money mortgage loans with high interest rates or high up-front fees
and charges. In general, mortgage loans within the purview of the Home
Protection Act have annual percentage rates over 10% greater than the yield on
Treasury Securities of comparable maturity and/or fees and points which exceed
the greater of 8% of the total loan amount or $400. These provisions can
impose specific statutory liabilities upon creditors who fail to comply with
their provisions and may affect the enforceability of the related loans. In
addition, any assignee of the creditor would generally be subject to all
claims and defenses that the consumer could assert against the creditor,
including, without limitation, the right to rescind the mortgage loan. The
Company will represent and warrant in the Agreement that each of the Contracts
was originated in compliance with all applicable laws, including the Truth-In-
Lending Act, as amended. If any Contract is found to be in breach of such
representation and warranty, the Company will be required by the Agreement to
repurchase such Contract at a price equal to the principal amount thereof plus
accrued interest thereon. The amount of such purchase price will be treated as
a Principal Prepayment in Full of the related Contract. In lieu of purchasing
a Contract, the Company may under certain circumstances substitute another
contract.
Variations in Contract Characteristics. The Subsequent Home Improvement
Contracts and Subsequent Home Equity Contracts will have characteristics that
differ somewhat from the Initial Home Improvement Contracts and the Initial
Home Equity Contracts described herein. However, each of such subsequent
Contracts must satisfy the eligibility criteria described under "Description
of the Certificates--Conveyance of Contracts," "--Conveyance of Subsequent
Home Improvement Contracts and Sub-Pool HI Pre-Funding Account," and "--
Conveyance of Subsequent Home Equity Contracts and Sub-Pool HE Pre-Funding
Account" herein. Current Reports on Form 8-K will be filed following each
purchase of Subsequent Contracts by the Trust and following the termination of
the Funding Period, which latter report will include the same type of
information regarding such subsequent Contracts as are included in this
Prospectus Supplement with respect to the Initial Home Improvement Contracts
and the Initial Home Equity Contracts.
S-46
<PAGE>
STRUCTURE OF THE TRANSACTION
On or about , 1997 (the "Closing Date"), the Company will
establish the Trust pursuant to a Pooling and Servicing Agreement to be dated
as of , 1997 (the "Agreement"), between the Company, as Seller and
Servicer, and the Trustee.
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 Certificates (the "Sub-Pool HI
Certificates"), and 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, Class HE: A-7 IO, Class
HE: M-1, Class HE: M-2, Class HE: B-1 and Class HE: B-2 Certificates (the
"Sub-Pool HE Certificates"), will be issued by the Trust, the corpus of which
will consist primarily of the Contracts, including all rights to receive
payments due on such Contracts after (i) , 1997 (or the date of
origination thereof, if later) for each Home Equity Contract other than the
Subsequent Home Equity Contracts; (ii) , 1997 with respect to all
Home Improvement Contracts (other than Subsequent Home Improvement Contracts)
that have a scheduled payment due in 1997, or , 1998 with
respect to all Home Improvement Contracts (other than Subsequent Home
Improvement Contracts) that have a first scheduled payment due in 1998
or thereafter; and (iii) for each Subsequent Home Equity Contract or
Subsequent Home Improvement Contract, the date on which such Contract is
purchased by the Trust (the "Cut-off Date"), all rights under FHA Insurance
with respect to the FHA-insured Home Improvement Contracts, liens on the
related real estate, amounts held for the Trust in the Certificate Account (as
defined below), the Class HI: B-2 Limited Guaranty of the Company for the
benefit of the Class HI: B-2 Certificates, as described in "Description of the
Class HI: B-2 Limited Guaranty" herein, and the Class HE: B-2 Limited Guaranty
of the Company for the benefit of the Class HE: B-2 Certificates, as described
in "Description of the Class HE: B-2 Limited Guaranty" herein. Sub-Pool HI and
Sub-Pool HE will each be deemed to be a separate sub-trust within the Trust.
Payments and recoveries in respect of principal and interest on the
Contracts will be paid into a separate trust account maintained at an Eligible
Institution (initially [Trust Account] Minnesota) in the name of the Trust
(the "Certificate Account"), no later than one Business Day after receipt.
Payments on deposit in the Certificate Account and constituting Sub-Pool HI
Amount Available or Sub-Pool HE Amount Available will be applied on the
fifteenth day of each month (or, if such day is not a Business Day, the next
succeeding Business Day) (each a "Payment Date") to make the distributions to
the Certificateholders as of the immediately preceding Record Date as
described under "Description of the Certificates--Distributions on Sub-Pool HI
Certificates" and "--Distribution on Sub-Pool HE Certificates" herein and to
pay certain monthly fees to the Servicer as compensation for its servicing of
the Contracts (the "Monthly Servicing Fee") and to pay certain monthly fees to
the Company as compensation for providing the Class HI: B-2 Limited Guaranty
and the Class HE: B-2 Limited Guaranty (the "Class HI: B-2 Guaranty Fee" and
the "Class HE: B-2 Guaranty Fee," respectively).
The Servicer will be obligated to advance for each Payment Date any
scheduled payments on the Contracts that were due but not received during the
prior Due Period ("Advances"). The Servicer will be entitled to reimbursement
of an Advance from funds available therefor in the Certificate Account. The
Servicer will not be required to make any Advance to the extent that it does
not expect to recoup the Advance from subsequent funds available therefor in
the Certificate Account. If the Servicer fails to make any Advance required
under the Agreement, the Trustee is obligated (subject to certain conditions)
to make such Advance.
Following the transfer of the Contracts from the Company to the Trust, the
obligations of the Company are limited to (a) its obligations as Servicer to
service the Contracts, (b) certain representations and warranties in the
Agreement as described under "Description of the Certificates--Conveyance of
Contracts" herein, (c) certain indemnities, (d) the Class HI: B-2 Limited
Guaranty and (e) the Class HE: B-2 Limited Guaranty. The Company is obligated
under the Agreement to repurchase at the Repurchase Price (as defined herein),
or, at its option, to substitute another contract for, any Contract on the
first Payment Date which is more than 90 days after the Company becomes aware,
or the Company receives written notice from the Trustee, of any breach of any
such representation and warranty in the Agreement that materially adversely
affects the Certificateholders' interest in such Contract if such breach has
not been cured prior to such date. The Agreement also provides that the
Company has certain obligations to repurchase Contracts and to indemnify the
Trustee and Certificateholders with respect to certain other matters.
S-47
<PAGE>
USE OF PROCEEDS
The Company will use the net proceeds received from the sale of the
Certificates for working capital and general corporate purposes, including
building a portfolio of home improvement contracts and home equity loans,
providing warehouse financing for the purchase of contracts and loans and
other costs of maintaining such contracts and loans until they are pooled and
sold to other investors.
THE CONTRACTS
HOME IMPROVEMENT CONTRACTS
This Prospectus Supplement contains information about the Initial Home
Improvement Contracts, which consist of a sub-pool of home improvement
contracts and promissory notes originated through , 1998. The
information for each Initial Home Improvement Contract, which collectively
represent approximately % of Sub-Pool HI, is as of the Cut-off Date for such
Contract. The Agreement provides that additional Home Improvement Contracts
(the "Subsequent Home Improvement Contracts") will be purchased by the Trust
up to days after the Closing Date, See "Description of the Certificates--
Conveyance of Subsequent Home Improvement Contracts and Sub-Pool HI Pre-
Funding Account" below.
The Initial Home Improvement Contracts have an aggregate principal balance
as of the Cut-off Date of $ . Each Home Improvement Contract is a
home improvement contract originated by a Company-approved home improvement
contractor and purchased by the Company, or a home improvement promissory note
originated by the Company directly. Each Home Improvement Contract is secured
by a lien on the related real estate. Each Home Improvement Contract finances
improvements to a one- to four-family residential property, an owner-occupied
condominium or town house or a manufactured home which either qualifies as
real estate under state law or is located in a Company-approved park.
The Company will make certain representations and warranties in the
Agreement, including that (a) each Home Improvement Contract is fully
amortizing with a fixed contractual rate of interest and provides for level
monthly payments over the term of such loan, computed on the simple interest
method, (b) each Home Improvement Contract has its last scheduled payment due
no later than 2027, (c) 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, and (d) each Home
Improvement Contract is secured by a lien (which is typically a subordinate
lien) on the related real estate. The Home Improvement Contracts will be
originated or acquired by the Company in the ordinary course of the Company's
business. A detailed listing of the Home Improvement Contracts is appended to
the Agreement. See "Description of the Certificates" herein and in the
Prospectus. Approximately % of the Initial Home Improvement Contracts, by
principal balance as of the Cut-off Date, are insured by FHA to the extent
described in "Description of FHA Insurance" in the Prospectus. Each of the
Initial Home Improvement Contracts has a Contract Rate of at least % per
annum and not more than % and the weighted average of the Contract Rates
of the Initial Home Improvement Contracts as of the Cut-off Date is %. As
of the Cut-off Date, the Initial Home Improvement Contracts had remaining
maturities of at least months but not more than months and original
maturities of at least months but not more than months. The Initial
Home Improvement Contracts had a weighted average term to scheduled maturity,
as of origination, of months, and a weighted average term to scheduled
maturity, as of the Cut-off Date, of months. The average principal balance
per Original Home Improvement Contract as of the Cut-off Date was $
and the principal balances on the Initial Home Improvement Contracts as of the
Cut-off Date ranged from $ to $ . The Initial Home Improvement
Contracts arise from loans relating to real property located in 49 states and
the District of Columbia. By principal balance as of the Cut-off Date,
approximately % of the Initial Home Improvement Contracts financed
improvements to real estate located in California, % in New York, % in
Florida, % in Michigan, % in Arizona, % in New Jersey and % in
Pennsylvania. No other state represented % or more of the Cut-off Date Pool
Principal Balance of the Initial Home Improvement Contracts. Substantially
none of the Initial Home Improvement Contracts provide for recourse to the
originating contractor in the event of a default by the Obligor.
S-48
<PAGE>
Set forth below is a description of certain additional characteristics of
the Initial Home Improvement Contracts.
GEOGRAPHICAL DISTRIBUTION OF MORTGAGED PROPERTIES--INITIAL HOME IMPROVEMENT
CONTRACTS
<TABLE>
<CAPTION>
% OF
INITIAL
% OF SUB-POOL
INITIAL HI BY
SUB-POOL HI BY AGGREGATE PRINCIPAL OUTSTANDING
NUMBER OF NUMBER OF BALANCE PRINCIPAL
CONTRACTS AS OF CONTRACTS AS OUTSTANDING AS OF BALANCE AS OF
CUT-OFF DATE OF CUT-OFF DATE CUT-OFF DATE CUT-OFF DATE
--------------- --------------- ------------------- -------------
<S> <C> <C> <C> <C>
Alabama................. $
Alaska..................
Arizona.................
Arkansas................
California..............
Colorado................
Connecticut.............
Delaware................
District of Columbia....
Florida.................
Georgia.................
Idaho...................
Illinois................
Indiana.................
Iowa....................
Kansas..................
Kentucky................
Louisiana...............
Maine...................
Maryland................
Massachusetts...........
Michigan................
Minnesota...............
Mississippi.............
Missouri................
Montana.................
Nebraska................
Nevada..................
New Hampshire...........
New Jersey..............
New Mexico..............
New York................
North Carolina..........
North Dakota............
Ohio....................
Oklahoma................
Oregon..................
Pennsylvania............
Rhode Island............
South Carolina..........
South Dakota............
Tennessee...............
Texas...................
Utah....................
Vermont.................
Virginia................
Washington..............
West Virginia...........
Wisconsin...............
Wyoming.................
------ ------- ---------- ------
Total............... 100.00% $ 100.00%
====== ======= ========== ======
</TABLE>
S-49
<PAGE>
YEARS OF ORIGINATION--INITIAL HOME IMPROVEMENT CONTRACTS
<TABLE>
<CAPTION>
% OF INITIAL
NUMBER OF SUB-POOL HI BY
CONTRACTS AGGREGATE PRINCIPAL OUTSTANDING PRINCIPAL
AS OF CUT- BALANCE OUTSTANDING BALANCE AS OF
YEAR OF ORIGINATION OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
- ------------------- ---------- ------------------- ---------------------
<S> <C> <C> <C>
1990...................... $
1991......................
1992......................
1993......................
1994......................
1995......................
1996......................
1997......................
----- ----------- ------
Total................. $ 100.00%
===== =========== ======
</TABLE>
DISTRIBUTION OF ORIGINAL CONTRACT AMOUNTS--INITIAL HOME IMPROVEMENT CONTRACTS
<TABLE>
<CAPTION>
% OF INITIAL
NUMBER OF SUB-POOL HIBY
CONTRACTS AGGREGATE PRINCIPAL OUTSTANDING PRINCIPAL
ORIGINAL HOME IMPROVEMENT AS OF CUT- BALANCE OUTSTANDING BALANCE AS OF
CONTRACT AMOUNT (IN DOLLARS) OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
- ---------------------------- ---------- ------------------- ---------------------
<S> <C> <C> <C>
Less than$ 10,000............
Between$ 10,000--$ 19,999....
Between$ 20,000--$ 29,999....
Between$ 30,000--$ 39,999....
Between$ 40,000--$ 49,999....
Between$ 50,000--$ 59,999....
Between$ 60,000--$ 69,999....
Between$ 70,000--$ 79,999....
Between$ 80,000--$ 89,999....
Between$ 90,000--$ 99,999....
Between$100,000--$109,999....
Between$110,000--$119,999....
Between$120,000--$129,999....
Between$130,000--$139,999....
Between$140,000--$149,999....
Between$150,000--$159,999....
Between$160,000--$169,999....
Between$170,000--$179,999....
Between$180,000--$189,999....
Between$190,000--$199,999....
Over $200,000..............
--- ------------- ------
Total.................... $ 100.00%
=== ============= ======
</TABLE>
CONTRACT RATES--INITIAL HOME IMPROVEMENT CONTRACTS
<TABLE>
<CAPTION>
% OF INITIAL
NUMBER OF SUB-POOL HI BY
CONTRACTS AGGREGATE PRINCIPAL OUTSTANDING PRINCIPAL
RANGE OF HOME IMPROVEMENT AS OF CUT- BALANCE OUTSTANDING BALANCE AS OF
CONTRACTS BY CONTRACT RATE OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
-------------------------- ---------- ------------------- ---------------------
<S> <C> <C> <C>
From 0.0000%-- 8.00000%... $
From 8.00001%-- 9.00000%...
From 9.00001%--10.00000%...
From 10.00001%--11.00000%...
From 11.00001%--12.00000%...
From 12.00001%--13.00000%...
From 13.00001%--14.00000%...
From 14.00001%--15.00000%...
From 15.00001%--16.00000%...
From 16.00001%--17.00000%...
Over17.00001%...............
----- ------------- ------
Total................... $ 100.00%
===== ============= ======
</TABLE>
S-50
<PAGE>
REMAINING MONTHS TO MATURITY--INITIAL HOME IMPROVEMENT CONTRACTS
<TABLE>
<CAPTION>
% OF
INITIAL
NUMBER OF SUB-POOL HI BY
MONTHS REMAINING TO CONTRACTS AGGREGATE PRINCIPAL OUTSTANDING PRINCIPAL
SCHEDULED MATURITY AS OF CUT- BALANCE OUTSTANDING BALANCE AS OF
AS OF CUT-OFF DATE OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
------------------- ---------- ------------------- ---------------------
<S> <C> <C> <C>
Less than 31.............. $
31-60.....................
61-90.....................
91-120....................
121-150...................
151-180...................
181-210...................
211-240...................
241-270...................
271-300...................
301-330...................
331-360...................
----- ------------- ------
Total................. $ 100.00%
===== ============= ======
</TABLE>
LIEN POSITION--INITIAL HOME IMPROVEMENT CONTRACTS
<TABLE>
<CAPTION>
% OF INITIAL % OF INITIAL
NUMBER OF SUB-POOL HI BY SUB-POOL HI BY
CONTRACTS NUMBER OF AGGREGATE PRINCIPAL OUTSTANDING PRINCIPAL
AS OF CUT- CONTRACTS AS OF BALANCE OUTSTANDING BALANCE AS OF
OFF DATE CUT-OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
---------- --------------- ------------------- ---------------------
<S> <C> <C> <C> <C>
First................... $
Second..................
Third...................
Fourth..................
----- ------ ------------- ------
Total............... 100.00% $ 100.00%
===== ====== ============= ======
</TABLE>
DELINQUENCY, LOAN DEFAULT AND LOSS INFORMATION
The following tables set forth the delinquency experience for the periods
indicated of the portfolios of conventional and FHA-insured secured home
improvement loans serviced by the Company (other than Home Improvement
Contracts already in foreclosure).
DELINQUENCY EXPERIENCE--CONVENTIONAL HOME IMPROVEMENT CONTRACTS
<TABLE>
<CAPTION>
AT DECEMBER 31,
AT , ----------------------------
1998 1997 1996 1995 1994
------------ ---- ------ ------ ------
<S> <C> <C> <C> <C> <C>
Number of Contracts
Outstanding(1).................... 74,021 56,028 29,788
Number of Contracts
Delinquent(2)(3)
30-59 Days....................... 656 394 57
60-89 Days....................... 241 109 10
90 Days or More.................. 279 126 15
---- ---- ------ ------ ------
Total Contracts Delinquent......... 1,176 629 82
Delinquencies as a Percent of
Contracts Outstanding(4).......... % % 1.59% 1.12% .28%
</TABLE>
- --------
(1) Excludes defaulted contracts not yet liquidated.
(2) A contract is considered delinquent by the Company if any payment of $25
or more is past-due 30 days or more.
(3) The period of delinquency is based on the number of days that payments are
contractually past-due (assuming 30-day months). Consequently, a contract
due on the first day of a month is not 30 days delinquent until the first
day of the next month. The information for December 31, 1996 does not
include as
S-51
<PAGE>
delinquent the home improvement contracts of obligors who have entered
bankruptcy proceedings, provided that such obligors are current under their
bankruptcy payment plan.
(4) By number of contracts.
DELINQUENCY EXPERIENCE--FHA-INSURED HOME IMPROVEMENT CONTRACTS
<TABLE>
<CAPTION>
AT AT DECEMBER 31,
------------------------------------
1998 1997 1996 1995 1994 1993
--------- ---- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Number of Contracts
Outstanding(1)............... 22,001 25,925 26,885 29,787
Number of Contracts
Delinquent(2)(3)
30-59 Days.................. 459 462 237 262
60-89 Days.................. 123 121 95 87
90 Days or More............. 198 183 146 164
---- ---- ------ ------ ------ ------
Total Contracts Delinquent.... 780 766 478 513
Delinquencies as a Percent of
Contracts Outstanding(4)..... % % 3.55% 2.95% 1.78% 1.72%
</TABLE>
- --------
(1) Excludes defaulted contracts not yet liquidated.
(2) A contract is considered delinquent by the Company if any payment of $25
or more is past-due 30 days or more.
(3) The period of delinquency is based on the number of days that payments are
contractually past-due (assuming 30-day months). Consequently, a contract
due on the first day of a month is not 30 days delinquent until the first
day of the next month. The information for December 31, 1996 does not
include as delinquent the home improvement contracts of obligors who have
entered bankruptcy proceedings, provided that such obligors are current
under their bankruptcy payment plan.
(4) By number of contracts.
The following tables set forth the loan default and loss experience for the
periods indicated of the portfolios of conventional and FHA-insured secured
home improvement loans serviced by the Company.
LOAN DEFAULT AND LOSS EXPERIENCE--CONVENTIONAL HOME IMPROVEMENT CONTRACTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
TWELVE MONTHS
AT ENDED DECEMBER 31,
--------------------------------------
1998 1997 1996 1995 1994
--------- ------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
Principal Balance of
Contracts Serviced(1)...... $ $ $1,147,111 $824,419 $418,055
Contract Defaults(2)........ 1.25% .53% .12%
Net Losses:
Dollars(3)................ $ 11,072 $ 3,424 $ 285
Percentage(4)............. % % .97% .42% .07%
</TABLE>
- --------
(1) As of period end. Includes defaulted contracts not yet liquidated.
(2) As a percentage of the total number of contracts being serviced as of
period end. The Company considers a contract defaulted when the Company
has commenced foreclosure or enforcement proceedings or the contract is
180 days delinquent.
(3) Does not include any estimated losses for defaulted contracts not yet
liquidated.
(4) As a percentage of the principal amount of contracts being serviced as of
period end.
S-52
<PAGE>
LOAN DEFAULT AND LOSS EXPERIENCE--FHA-INSURED HOME IMPROVEMENT CONTRACTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
TWELVE MONTHS
AT ENDED DECEMBER 31,
----------------------------------------------
1998 1997 1996 1995 1994 1993
--------- ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Principal Balance of
Contracts Serviced(1).. $ $ $161,438 $191,364 $199,286 $235,908
Contract Defaults(2).... 2.90% 1.81% 1.88% 1.86%
Net Losses:
Dollars(3)............ $ 574 $ 291 $ 623 $ 737
Percentage(4)......... % % .36% .15% .31% .31%
</TABLE>
- --------
(1) As of period end. Includes defaulted contracts not yet liquidated.
(2) As a percentage of the total number of contracts being serviced as of
period end. The Company considers a contract defaulted when the Company
has submitted a claim to FHA, the Company has commenced foreclosure or
enforcement proceedings, or the contract is 180 days delinquent.
(3) Does not include any estimated losses for defaulted contracts not yet
liquidated. Includes unpaid interest to the date of FHA claim submission
and all expenses of liquidation, and reflects proceeds of FHA Insurance
claims paid.
(4) As a percentage of the principal amount of contracts being serviced as of
period end.
The Company's management is not aware of any trends or anomalies which have
adversely affected the delinquency, loan default and loss experience of its
portfolio of home improvement contracts.
The data presented in the foregoing tables are for illustrative purposes
only and there is no assurance that the delinquency, loan default and loss
experience of the Home Improvement Contracts will be similar to that set forth
above. Moreover, because the Company began originating and purchasing FHA-
insured home improvement contracts in April 1989, and secured conventional
home improvement contracts in September 1992, it is possible that the
Company's portfolio is not yet sufficiently seasoned to show the delinquencies
and losses that would be experienced if such data were collected over a longer
period of time. The delinquency, loan default and loss experience of home
improvement loans may be adversely affected by a downturn in regional or local
economic conditions. Regional and local economic conditions are often
volatile, and no predictions can be made regarding future economic conditions
in any particular area.
FIXED-RATE HOME EQUITY CONTRACTS
Sub-Pool HE includes Fixed-Rate Home Equity Contracts (meaning all Home
Equity Contracts other than the Adjustable Rate Home Equity Contracts,
described separately below). This Prospectus Supplement contains information
regarding certain Fixed-Rate Home Equity Contracts, which will represent
approximately % of all Fixed-Rate Home Equity Contracts, and which consist
of closed-end home equity loans originated through , 1997 (the
"Initial Fixed-Rate Home Equity Contracts"). The information for each Initial
Fixed-Rate Home Equity Contract is as of the Cut-off Date for such Contract.
The Agreement provides that additional Fixed-Rate Home Equity Contracts (the
"Subsequent Fixed-Rate Home Equity Contracts"), will be purchased by the Trust
up to days after the Closing Date. See "Description of the Certificates--
Conveyance of Subsequent Home Equity Contracts and Sub-Pool HE Pre-Funding
Account" below.
The Initial Fixed-Rate Home Equity Contracts have an aggregate principal
balance of $ . Each Fixed-Rate Home Equity Contract is a closed-
end home equity loan originated by the Company or by a Company-approved
correspondent lender and purchased by the Company. Each Fixed-Rate Home Equity
Contract is secured by a lien on the related real estate.
A total of $ , or % by aggregate principal amount, of the
Initial Fixed-Rate Home Equity Contracts are step-up rate Contracts. The
Contract Rate of a step-up rate Contract steps up on a particular date
S-53
<PAGE>
from its initial Contract Rate. Of such step-up rate Contracts, all are still
bearing interest at their initial Contract Rate (the period during which such
Contracts bear interest at their initial Contract Rate being referred to
herein as the "Low Rate Period"). During the Low Rate Period, the total amount
and the principal portion of each scheduled payment is determined on a basis
that would cause the Contract to be fully amortized over its term if the
Contract were to bear interest during its entire term at its initial Contract
Rate and were to have level payments over its entire term. The total amount
and principal portion of each scheduled payment due after the end of the
applicable Low Rate Period is determined on a basis that would cause the
Contract (which would then be bearing interest at a stepped-up rate) to be
fully amortized over its remaining term on a level-payment basis. The Low Rate
Periods for the step-up rate Initial Fixed-Rate Home Equity Contracts will end
no earlier than 1998 and no later than 1998. The Contract Rates
for such step-up rate Initial Fixed-Rate Home Equity Contracts will increase
by %. The increases in scheduled payments for all step-up rate Contracts
range from $ to $ per month. The statistical information concerning
the Initial Home Equity Contracts which is set forth below, to the extent it
relates to the Contract Rates of the step-up rate Contracts, takes into
account only their Contract Rates as of the Cut-Off Date.
The Company will make certain representations and warranties in the
Agreement, including that (a) each Fixed-Rate Home Equity Contract is fully
amortizing and provides for level monthly payments over the term of such loan,
computed on the simple interest method (except for the Balloon Loans and the
step-up rate Home Equity Contracts), (b) each Initial Fixed-Rate Home Equity
Contract has its last scheduled payment due no later than 2027, and
(c) each Fixed-Rate Home Equity Contract is secured by a lien on the related
real estate. The Fixed-Rate Home Equity Contracts will be originated or
acquired by the Company in the ordinary course of the Company's business. A
detailed listing of the Initial Fixed-Rate Home Equity Contracts is appended
to the Agreement. See "Description of the Certificates" herein and in the
Prospectus. Each of the Initial Fixed-Rate Home Equity Contracts has a
Contract Rate of at least % per annum and not more than 19.99% and the
weighted average of the Contract Rates of the Initial Fixed-Rate Home Equity
Contracts as of the Cut-off Date is %. As of the Cut-off Date, the
Initial Fixed-Rate Home Equity Contracts had remaining maturities of at least
months but not more than months and original maturities of at least
months but not more than months. The Initial Fixed-Rate Home Equity
Contracts had a weighted average term to scheduled maturity, as of
origination, of months, and a weighted average term to scheduled maturity,
as of the Cut-off Date, of months. The average principal balance per
Initial Fixed-Rate Home Equity Contract as of the Cut-off Date was $
and the principal balances on the Initial Fixed-Rate Home Equity Contracts as
of the Cut-off Date ranged from $ to $ . The Balloon Loans
included in the Initial Fixed-Rate Home Equity Contracts consisted of
closed-end home equity loans and have a principal balance as of the Cut-off
Date of $ . The weighted average of the Contract Rates of such
Balloon Loans as of the Cut-off Date was %, and such Balloon Loans had a
weighted average term to scheduled maturity, as of origination, of months,
and a weighted average term to scheduled maturity, as of the Cut-off Date, of
months. The Initial Fixed-Rate Home Equity Contracts arise from loans
relating to real property located in states and the District of Columbia.
By principal balance as of the Cut-off Date, approximately % of the
Initial Fixed-Rate Home Equity Contracts were secured by real property located
in , % in , % in , % in , % in
, % in , % in and % in . No other state
represented % or more of the Cut-off Date Pool Principal Balance of the
Initial Fixed-Rate Home Equity Contracts.
S-54
<PAGE>
Set forth below is a description of certain additional characteristics of
the Initial Fixed-Rate Home Equity Contracts.
GEOGRAPHICAL DISTRIBUTION OF MORTGAGED PROPERTIES--INITIAL FIXED-RATE HOME
EQUITY CONTRACTS
<TABLE>
<CAPTION>
% OF INITIAL
% OF INITIAL FIXED-RATE
FIXED-RATE HOME EQUITY
HOME EQUITY CONTRACTS BY
CONTRACTS AGGREGATE PRINCIPAL OUTSTANING
NUMBER OF BY NUMBER OF BALANCE PRINCIPAL
CONTRACTS AS OF CONTRACTS AS OUTSTANDING AS OF BALANCE AS OF
CUT-OFF DATE OF CUT-OFF DATE CUT-OFF DATE CUT-OFF DATE
--------------- --------------- ------------------- -------------
<S> <C> <C> <C> <C>
Alabama................. % $ %
Arizona.................
Arkansas................
California..............
Colorado................
Connecticut.............
Delaware................
District of Columbia....
Florida.................
Georgia.................
Idaho...................
Illinois................
Indiana.................
Iowa....................
Kansas..................
Kentucky................
Louisiana...............
Maine...................
Maryland................
Massachusetts...........
Michigan................
Minnesota...............
Mississippi.............
Missouri................
Montana.................
Nebraska................
Nevada..................
New Hampshire...........
New Jersey..............
New Mexico..............
New York................
North Carolina..........
North Dakota............
Ohio....................
Oklahoma................
Oregon..................
Pennsylvania............
Rhode Island............
South Carolina..........
South Dakota............
Tennessee...............
Texas...................
Utah....................
Vermont.................
Virginia................
Washington..............
West Virginia...........
Wisconsin...............
Wyoming.................
----- ------ ------------- ------
Total............... 100.00% $ 100.00%
===== ====== ============= ======
</TABLE>
S-55
<PAGE>
YEARS OF ORIGINATION--INITIAL FIXED-RATE HOME EQUITY CONTRACTS
<TABLE>
<CAPTION>
% OF INITIAL FIXED-RATE
NUMBER OF HOME EQUITY CONTRACTS BY
CONTRACTS AGGREGATE PRINCIPAL OUTSTANDING PRINCIPAL
AS OF CUT- BALANCE OUTSTANDING BALANCE AS OF
YEAR OF ORIGINATION OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
- ------------------- ---------- ------------------- ------------------------
<S> <C> <C> <C>
1968................... $
1975...................
1976...................
1977...................
1978...................
1983...................
1986...................
1989...................
1994...................
1995...................
1996...................
1997...................
---- -------------- ------
Total.............. $ 100.00%
==== ============== ======
</TABLE>
- --------
[*Indicates an amount greater than zero but less than .005% of the aggregate
principal balance of the Initial Fixed-Rate Home Equity Contracts as of the
Cut-off Date.]
DISTRIBUTION OF ORIGINAL CONTRACT AMOUNTS--INITIAL FIXED-RATE HOME EQUITY
CONTRACTS
<TABLE>
<CAPTION>
% OF INITIAL FIXED-RATE
NUMBER OF HOME EQUITY CONTRACTS BY
CONTRACTS AGGREGATE PRINCIPAL OUTSTANDING PRINCIPAL
ORIGINAL CONTRACT AS OF CUT- BALANCE OUTSTANDING BALANCE AS OF
AMOUNT (IN DOLLARS) OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
------------------- ---------- ------------------- ------------------------
<S> <C> <C> <C>
Less than$ 9,999....... $ %
Between$ 9,999--
$ 19,999...............
Between$ 19,999--
$ 29,999...............
Between$ 29,999--
$ 39,999...............
Between$ 39,999--
$ 49,999...............
Between$ 49,999--
$ 59,999...............
Between$ 59,999--
$ 69,999...............
Between$ 69,999--
$ 79,999...............
Between$ 79,999--
$ 89,999...............
Between$ 89,999--
$ 99,999...............
Between$ 99,999--
$109,999...............
Between$109,999--
$119,999...............
Between$119,999--
$129,999...............
Between$129,999--
$139,999...............
Between$139,999--
$149,999...............
Between$149,999--
$159,999...............
Between$159,999--
$169,999...............
Between$169,999--
$179,999...............
Between$179,999--
$189,999...............
Between$189,999--
$199,999...............
Between$199,999--
$249,999...............
Between$249,999--
$299,999...............
Over $300,000.........
----- -------------- ------
Total............... $ 100.00%
===== ============== ======
</TABLE>
S-56
<PAGE>
CONTRACT RATES--INITIAL FIXED-RATE HOME EQUITY CONTRACTS
<TABLE>
<CAPTION>
% OF INITIAL FIXED-RATE
NUMBER OF HOME EQUITY CONTRACTS BY
CONTRACTS AGGREGATE PRINCIPAL OUTSTANDING PRINCIPAL
RANGE OF HOME EQUITY AS OF CUT- BALANCE OUTSTANDING BALANCE AS OF
CONTRACTS BY CONTRACT RATE OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
- -------------------------- ---------- ------------------- ------------------------
<S> <C> <C> <C>
From 0.00%-- 9.00%....... $ %
From 9.01%--10.00%.......
From 10.01%--11.00%.......
From 11.01%--12.00%.......
From 12.01%--13.00%.......
From 13.01%--14.00%.......
From 14.01%--15.00%.......
From 15.01%--16.00%.......
From 16.01%--17.00%.......
Over 17.01%...............
----- ------------- ------
Total................. $ 100.00%
===== ============= ======
</TABLE>
REMAINING MONTHS TO MATURITY--INITIAL FIXED-RATE HOME EQUITY CONTRACTS
<TABLE>
<CAPTION>
% OF INITIAL FIXED-RATE
NUMBER OF HOME EQUITY CONTRACTS BY
MONTHS REMAINING TO CONTRACTS AGGREGATE PRINCIPAL OUTSTANDING PRINCIPAL
SCHEDULED MATURITY AS OF CUT- BALANCE OUTSTANDING BALANCE AS OF
AS OF CUT-OFF DATE OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
------------------- ---------- ------------------- ------------------------
<S> <C> <C> <C>
Less than 181.......... $ %
181-195................
196-210................
211-225................
226-240................
241-255................
256-270................
271-285................
286-300................
301-315................
316-330................
331-345................
346-360................
----- -------------- ------
Total.............. $ 100.00%
===== ============== ======
</TABLE>
LIEN POSITION--INITIAL FIXED-RATE HOME EQUITY CONTRACTS
<TABLE>
<CAPTION>
% OF INITIAL
FIXED-RATE
HOME EQUITY % OF INITIAL FIXED-RATE
NUMBER OF CONTRACTS BY HOME EQUITY CONTRACTS BY
CONTRACTS NUMBER OF AGGREGATE PRINCIPAL OUTSTANDING PRINCIPAL
AS OF CUT- CONTRACTS AS OF BALANCE OUTSTANDING BALANCE AS OF
OFF DATE CUT-OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
---------- --------------- ------------------- ------------------------
<S> <C> <C> <C> <C>
First................... % $ %
Second..................
Third...................
----- ------ -------------- ------
Total............... 100.00% $ 100.00%
===== ====== ============== ======
</TABLE>
S-57
<PAGE>
LOAN-TO-VALUE RATIO--INITIAL FIXED-RATE HOME EQUITY CONTRACTS
<TABLE>
<CAPTION>
% OF INITIAL FIXED-RATE
NUMBER OF HOME EQUITY CONTRACTS BY
CONTRACTS AGGREGATE PRINCIPAL OUTSTANDING PRINCIPAL
AS OF CUT- BALANCE OUTSTANDING BALANCE AS OF
LOAN-TO-VALUE RATIO OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
- ------------------- ---------- ------------------- ------------------------
<S> <C> <C> <C>
From 0.00%-10.00%...... $ %
From 10.01%-20.00%.....
From 20.01%-30.00%.....
From 30.01%-40.00%.....
From 40.01%-50.00%.....
From 50.01%-60.00%.....
From 60.01%-70.00%.....
From 70.01%-80.00%.....
From 80.01%-90.00%.....
Over 90.01%............
----- ------------- ------
Total.............. $ 100.00%
===== ============= ======
</TABLE>
ADJUSTABLE RATE HOME EQUITY CONTRACTS
Sub-Pool HE includes Adjustable Rate Home Equity Contracts. This Prospectus
Supplement contains information regarding certain Adjustable Rate Home Equity
Contracts, which will represent approximately % of all Adjustable Rate Home
Equity Contracts, and which consist of closed-end home equity loans originated
through , 1998 (the "Initial Adjustable Rate Home Equity
Contracts"). The information for each Initial Adjustable Rate Home Equity
Contract is as of the Cut-off Date for such Contract. The Agreement also
provides that additional Adjustable Rate Home Equity Contracts (the
"Subsequent Adjustable Rate Home Equity Contracts"), will be purchased by the
Trust up to days after the Closing Date. See "Description of the
Certificates--Conveyance of Subsequent Home Equity Contracts and Sub-Pool HE
Pre-Funding Account" below.
The Initial Adjustable Rate Home Equity Contracts have an aggregate
principal balance of $ . Each Adjustable Rate Home Equity Contract
is a closed-end home equity loan originated by the Company or by a Company-
approved correspondent lender and purchased by the Company. Each Adjustable
Rate Home Equity Contract is secured by a lien on the related real estate.
The Initial Adjustable Rate Home Equity Contracts have Contract Rates
subject to annual or semiannual adjustment after an initial period of up to 36
months on the day of the month specified in the Adjustable Rate Home Equity
Contract (each such date, an "Adjustment Date"), to equal the sum of (i) the
Six-Month LIBOR Index (as defined below) and (ii) a fixed percentage amount
specified in the related Adjustable Rate Home Equity Contract (the "Gross
Margin"). The Contract Rates will not increase on any Adjustment Date by more
than % per annum. All of the Initial Adjustable Rate Home Equity Contracts
further provide that the Contract Rate will in no event be more than the fixed
percentage set forth in the Adjustable Rate Home Equity Contract (such rate,
the "Maximum Contract Rate"). Each Initial Adjustable Rate Home Equity
Contract provides that in no event will the Contract Rate be less than the
initial Contract Rate (such rate, the "Minimum Contract Rate"). Effective with
the first payment due on an Initial Adjustable Rate Home Equity Contract after
each related Adjustment Date, the monthly payment will be adjusted to an
amount which will fully amortize the outstanding principal balance of such
Adjustable Rate Home Equity Contract over its remaining term, and pay interest
at the Contract Rate as so adjusted. All of the Initial Adjustable Rate Home
Equity Contracts were originated with a Contract Rate less than the sum of (i)
the Six-Month LIBOR Index at the time the initial Contract Rate was
established and (ii) the Gross Margin. The Six-Month LIBOR Index is a per
annum rate equal to the average of interbank offered rates for six-month U.S.
dollar-denominated deposits in the London market based on quotations of major
banks, as published in The Wall Street Journal and as most recently available
as of the date specified in the related Adjustable Rate Home Equity Contract.
S-58
<PAGE>
The Company will make certain representations and warranties in the
Agreement, including that (a) each Adjustable Rate Home Equity Contract is
fully amortizing and provides for monthly payments, except, in the case of a
Balloon Loan, for the final monthly payment, over the term of such loan,
computed on the simple interest method, (b) each Initial Adjustable Rate Home
Equity Contract has its last scheduled payment due no later than
2027, and (c) each Adjustable Rate Home Equity Contract is secured by a lien
on the related real estate. The Adjustable Rate Home Equity Contracts will be
originated or acquired by the Company in the ordinary course of the Company's
business. A detailed listing of the Initial Adjustable Rate Home Equity
Contracts is appended to the Agreement. See "Description of the Certificates"
herein and in the Prospectus. As of the Cut-off Date, the Initial Adjustable
Rate Home Equity Contracts had a Minimum Contract Rate of %, a Maximum
Contract Rate of % and a weighted average Contract Rate of %. As of
the Cut-off Date, the weighted average Maximum Contract Rate of the Initial
Adjustable Rate Home Equity Contracts was %, with Maximum Contract Rates
that range from % to % As of the Cut-Off Date, the Initial Adjustable
Rate Home Equity Contracts had a weighted average gross margin of % and
gross margins ranging from % to %. As of the Cut-off Date, the
Initial Adjustable Rate Home Equity Contracts had remaining maturities of at
least months but not more than months and original maturities of at
least months but not more than months. The Initial Adjustable Rate
Home Equity Contracts had a weighted average term to scheduled maturity, as of
origination, of months, and a weighted average term to scheduled maturity,
as of the Cut-off Date, of months. The average principal balance per
Initial Adjustable Rate Home Equity Contract as of the Cut-off Date was
$ and the principal balances on the Initial Adjustable Rate Home
Equity Contracts as of the Cut-off Date ranged from $ to $ .
The Initial Adjustable Rate Home Equity Contracts arise from loans relating to
real property located in 45 states and the District of Columbia. By principal
balance as of the Cut-off Date, approximately % of the Initial Adjustable
Rate Home Equity Contracts were secured by real property located in
, % in , % in , % in and %
in . No other state represented % or more of the Cut-off Date Pool
Principal Balance of the Initial Adjustable Rate Home Equity Contracts.
S-59
<PAGE>
Set forth below is a description of certain additional characteristics of the
Initial Adjustable Rate Home Equity Contracts.
GEOGRAPHICAL DISTRIBUTION OF MORTGAGED PROPERTIES--INITIAL ADJUSTABLE RATE HOME
EQUITY CONTRACTS
<TABLE>
<CAPTION>
% OF INITIAL
% OF INITIAL ADJUSTABLE
ADJUSTABLE RATE HOME
RATE HOME EQUITY CONTRACTS
EQUITY CONTRACTS AGGREGATE PRINCIPAL BY OUTSTANDING
NUMBER OF BY NUMBER OF BALANCE PRINCIPAL
CONTRACTS AS OF CONTRACTS AS OUTSTANDING AS OF BALANCE AS OF
CUT-OFF DATE OF CUT-OFF DATE CUT-OFF DATE CUT-OFF DATE
--------------- ----------------- ------------------- -----------------
<S> <C> <C> <C> <C>
Alabama................. % $ %
Arizona.................
Arkansas................
California..............
Colorado................
Connecticut.............
Delaware................
District of Columbia....
Florida.................
Georgia.................
Idaho...................
Illinois................
Indiana.................
Iowa....................
Kansas..................
Kentucky................
Louisiana...............
Maine...................
Maryland................
Massachusetts...........
Michigan................
Minnesota...............
Missouri................
Mississippi.............
Nebraska................
Nevada..................
New Hampshire...........
New Jersey..............
New Mexico..............
New York................
North Carolina..........
North Dakota............
Ohio....................
Oklahoma................
Oregon..................
Pennsylvania............
Rhode Island............
South Carolina..........
Tennessee...............
Texas...................
Utah....................
Vermont.................
Virginia................
Washington..............
West Virginia...........
Wisconsin...............
--- ------ ------------- ------
Total............... 100.00% $ 100.00%
=== ====== ============= ======
</TABLE>
S-60
<PAGE>
YEARS OF ORIGINATION--INITIAL ADJUSTABLE RATE HOME EQUITY CONTRACTS
<TABLE>
<CAPTION>
% OF INITIAL
ADJUSTABLE RATE
HOME EQUITY
NUMBER OF CONTRACTS BY
CONTRACTS AGGREGATE PRINCIPAL OUTSTANDING PRINCIPAL
AS OF CUT- BALANCE OUTSTANDING BALANCE AS OF
YEAR OF ORIGINATION OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
- ------------------- ---------- ------------------- ---------------------
<S> <C> <C> <C>
1997...................... $ 100%
--- ------------- ---
Total................. $ 100%
=== ============= ===
</TABLE>
DISTRIBUTION OF ORIGINAL CONTRACT AMOUNTS--INITIAL ADJUSTABLE RATE HOME EQUITY
CONTRACTS
<TABLE>
<CAPTION>
% OF INITIAL
ADJUSTABLE RATE
HOME EQUITY
NUMBER OF CONTRACTS BY
CONTRACTS AGGREGATE PRINCIPAL OUTSTANDING PRINCIPAL
ORIGINAL CONTRACT AMOUNT AS OF CUT- BALANCE OUTSTANDING BALANCE AS OF
(IN DOLLARS) OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
------------------------ ---------- ------------------- ---------------------
<S> <C> <C> <C>
Less than$ 19,999......... $ %
Between$ 19,999--
$ 29,999.................
Between$ 29,999--
$ 39,999.................
Between$ 39,999--
$ 49,999.................
Between$ 49,999--
$ 59,999.................
Between$ 59,999--
$ 69,999.................
Between$ 69,999--
$ 79,999.................
Between$ 79,999--
$ 89,999.................
Between$ 89,999--
$ 99,999.................
Between$ 99,999--
$109,999.................
Between$109,999--
$119,999.................
Between$119,999--
$129,999.................
Between$129,999--
$139,999.................
Between$139,999--
$149,999.................
Between$149,999--
$159,999.................
Between$159,999--
$169,999.................
Between$169,999--
$179,999.................
Between$179,999--
$189,999.................
Between$189,999--
$199,999.................
Between$199,999--
$249,999.................
Between$249,999--
$299,999.................
Over$300,000..............
--- ------------- ------
Total................. $ 100.00%
=== ============= ======
</TABLE>
S-61
<PAGE>
CURRENT CONTRACT RATES--INITIAL ADJUSTABLE RATE HOME EQUITY CONTRACTS
<TABLE>
<CAPTION>
% OF
INITIAL
ADJUSTABLE RATE
HOME EQUITY
NUMBER OF CONTRACTS BY
CONTRACTS AGGREGATE PRINCIPAL OUTSTANDING PRINCIPAL
RANGE OF CONTRACTS BY AS OF CUT- BALANCE OUTSTANDING BALANCE AS OF
CONTRACT RATE OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
---------------------- ---------- ------------------- ---------------------
<S> <C> <C> <C>
From 0.00%-- 9.00%....... $ %
From 9.01%--10.00%.......
From 10.01%--11.00%.......
From 11.01%--12.00%.......
From 12.01%--13.00%.......
From 13.01%--14.00%.......
Over 14.01%...............
--- ------------- ------
Total................. $ 100.00%
=== ============= ======
</TABLE>
REMAINING MONTHS TO MATURITY--INITIAL ADJUSTABLE RATE HOME EQUITY CONTRACTS
<TABLE>
<CAPTION>
% OF
INITIAL
ADJUSTABLE RATE HOME
NUMBER OF EQUITY CONTRACTS BY
MONTHS REMAINING TO CONTRACTS AGGREGATE PRINCIPAL OUTSTANDING PRINCIPAL
SCHEDULED MATURITY AS OF CUT- BALANCE OUTSTANDING BALANCE AS OF
AS OF CUT-OFF DATE OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
------------------- ---------- ------------------- ---------------------
<S> <C> <C> <C>
Less than 345............. $ 0.00%
345-360...................
--- ------------ ------
Total................. 100.00%
=== ============ ======
</TABLE>
LIEN POSITION--INITIAL ADJUSTABLE RATE HOME EQUITY CONTRACTS
<TABLE>
<CAPTION>
% OF
INITIAL
ADJUSTABLE
RATE HOME % OF
EQUITY INITIAL
CONTRACTS BY ADJUSTABLE RATE HOME
NUMBER OF SUB-POOL HE BY EQUITY CONTRACTS BY
CONTRACTS NUMBER OF AGGREGATE PRINCIPAL OUTSTANDING PRINCIPAL
AS OF CUT- CONTRACTS AS OF BALANCE OUTSTANDING BALANCE AS OF
OFF DATE CUT-OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
---------- --------------- ------------------- ---------------------
<S> <C> <C> <C> <C>
First................... 100.00% $ 100.00%
--- ------ ------------- ------
Total............... 100.00% $ 100.00%
=== ====== ============= ======
</TABLE>
S-62
<PAGE>
LOAN-TO-VALUE RATIO--INITIAL ADJUSTABLE RATE HOME EQUITY CONTRACTS
<TABLE>
<CAPTION>
% OF
INITIAL
ADJUSTABLE RATE HOME
NUMBER OF EQUITY CONTRACTS BY
CONTRACTS AGGREGATE PRINCIPAL OUTSTANDING PRINCIPAL
AS OF CUT- BALANCE OUTSTANDING BALANCE AS OF
LOAN-TO-VALUE RATIO OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
- ------------------- ---------- ------------------- ---------------------
<S> <C> <C> <C>
Less than 30.00%.......... $ %
From 30.01% to 40.00%.....
From 40.01% to 50.00%.....
From 50.01% to 60.00%.....
From 60.01% to 70.00%.....
From 70.01% to 80.00%.....
From 80.01% to 90.00%.....
Over 90.00%...............
--- ------------- ------
Total................. $ 100.00%
=== ============= ======
</TABLE>
MONTH OF NEXT RATE ADJUSTMENT--INITIAL ADJUSTABLE RATE HOME EQUITY CONTRACTS
<TABLE>
<CAPTION>
% OF
INITIAL
ADJUSTABLE RATE
NUMBER OF HOME EQUITY CONTRACTS
CONTRACTS AGGREGATE PRINCIPAL BY OUTSTANDING PRINCIPAL
AS OF CUT- BALANCE OUTSTANDING BALANCE AS OF
MONTH OF NEXT RATE ADJUSTMENT OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
- ----------------------------- ---------- ------------------- ------------------------
<S> <C> <C> <C>
December 1997............... $ %
January 1998................
February 1998...............
March 1998..................
April 1998..................
May 1998....................
September 1998..............
March 1999..................
April 1999..................
May 1999....................
June 1999...................
July 1999...................
August 1999.................
September 1999..............
October 1999................
November 1999...............
April 2000..................
July 2000...................
August 2000.................
September 2000..............
--- ------------- ------
Total................... $ 100.00%
=== ============= ======
</TABLE>
S-63
<PAGE>
DISTRIBUTION OF GROSS MARGIN--INITIAL ADJUSTABLE RATE HOME EQUITY CONTRACTS
<TABLE>
<CAPTION>
% OF
INITIAL
ADJUSTABLE RATE
NUMBER OF HOME EQUITY CONTRACTS
CONTRACTS AGGREGATE PRINCIPAL BY OUTSTANDING PRINCIPAL
AS OF CUT- BALANCE OUTSTANDING BALANCE AS OF
GROSS MARGIN OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
- ------------ ---------- ------------------- ------------------------
<S> <C> <C> <C>
Less than 3.999%....... $ %
4.000 to 4.249%........
4.250 to 4.499%........
4.500 to 4.749%........
4.750 to 4.999%........
5.000 to 5.249%........
5.250 to 5.499%........
5.500 to 5.749%........
5.750 to 5.999%........
6.000 to 6.249%........
6.250 to 6.499%........
6.500 to 6.749%........
6.750 to 6.999%........
7.000 to 7.249%........
7.250 to 7.499%........
7.500 to 7.749%........
7.750 to 7.999%........
8.000 to 8.249%........
8.250 to 8.499%........
8.500 to 8.749%........
8.750 to 8.999%........
9.000 to 9.249%........
9.250 to 9.499%........
9.500 to 9.749%........
Over 9.749%............
--- ------------- ------
Total.............. $ 100.00%
=== ============= ======
</TABLE>
S-64
<PAGE>
MAXIMUM CONTRACT RATES--INITIAL ADJUSTABLE RATE HOME EQUITY CONTRACTS
<TABLE>
<CAPTION>
% OF
INITIAL
ADJUSTABLE RATE
NUMBER OF HOME EQUITY CONTRACTS
CONTRACTS AGGREGATE PRINCIPAL BY OUTSTANDING PRINCIPAL
AS OF CUT- BALANCE OUTSTANDING BALANCE AS OF
MAXIMUM CONTRACT RATES OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
- ---------------------- ---------- ------------------- ------------------------
<S> <C> <C> <C>
Less than 14.000%...... $ %
14.000 to 14.249%......
14.250 to 14.499%......
14.500 to 14.749%......
14.750 to 14.999%......
15.000 to 15.249%......
15.250 to 15.499%......
15.500 to 15.749%......
15.750 to 15.999%......
16.000 to 16.249%......
16.250 to 16.499%......
16.500 to 16.749%......
16.750 to 16.999%......
17.000 to 17.249%......
17.250 to 17.499%......
17.500 to 17.749%......
17.750 to 17.999%......
18.000 to 18.249%......
18.250 to 18.499%......
18.500 to 18.749%......
18.750 to 18.999%......
19.000 to 19.249%......
19.250 to 19.499%......
19.500 to 19.749%......
19.750 to 19.999%......
Over 19.999%...........
--- ------------- ------
Total.............. $ 100.00%
=== ============= ======
</TABLE>
S-65
<PAGE>
MINIMUM CONTRACT RATES--INITIAL ADJUSTABLE RATE HOME EQUITY CONTRACTS
<TABLE>
<CAPTION>
% OF
INITIAL
ADJUSTABLE RATE
NUMBER OF HOME EQUITY CONTRACTS
CONTRACTS AGGREGATE PRINCIPAL BY OUTSTANDING PRINCIPAL
AS OF CUT- BALANCE OUTSTANDING BALANCE AS OF
MINIMUM CONTRACT RATES OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
- ---------------------- ---------- ------------------- ------------------------
<S> <C> <C> <C>
Less than 7.250%...... $ %
7.250 to 7.499%......
7.500 to 7.749%......
7.750 to 7.999%......
8.000 to 8.249%......
8.250 to 8.499%......
8.500 to 8.749%......
8.750 to 8.999%......
9.000 to 9.249%......
9.250 to 9.499%......
9.500 to 9.749%......
9.750 to 9.999%......
10.000 to 10.249%......
10.250 to 10.499%......
10.500 to 10.749%......
10.750 to 10.999%......
11.000 to 11.249%......
11.250 to 11.499%......
11.500 to 11.749%......
11.750 to 11.999%......
12.000 to 12.249%......
12.250 to 12.499%......
12.500 to 12.749%......
12.750 to 12.999%......
13.000 to 13.249%......
13.250 to 13.499%......
13.500 to 13.749%......
13.750 to 13.999%......
Over 13.99%............
--- ------------- ------
Total................ $ 100.00%
=== ============= ======
</TABLE>
DELINQUENCY, LOAN DEFAULT AND LOSS INFORMATION
The following table sets forth information relating to the Company's
delinquency experience with respect to all home equity loans serviced by the
Company. Not all such home equity loans are of the type to be included in Sub-
Pool HE, and thus the information presented is not necessarily indicative of
the Company's delinquency experience with respect to home equity loans similar
to the Home Equity Contracts comprising Sub-Pool HE. In addition, the Company
began originating, purchasing and servicing home equity loans in January 1996,
and thus has no significant experience with respect to the performance of such
loans. Moreover, because all such home equity loans have been recently
originated, it is likely that this experience is not indicative of the
delinquency experience to be expected from a more seasoned portfolio.
S-66
<PAGE>
DELINQUENCY EXPERIENCE--HOME EQUITY CONTRACTS
<TABLE>
<CAPTION>
AT , AT , AT DECEMBER 31,
1998 1997 1996
---------- ---------- ---------------
<S> <C> <C> <C>
Number of Contracts Outstanding(1)...... 17,731
Number of Contracts Delinquent(2)(3)
30-59 Days............................ 504
60-89 Days............................ 94
90 Days or More....................... 52
------ ------ ------
Total Contracts Delinquent.............. 650
Delinquencies as a Percent of Contracts
Outstanding(4)......................... % % 3.67%
</TABLE>
- --------
(1) Excludes defaulted contracts not yet liquidated.
(2) A contract is considered delinquent by the Company if any payment of $25
or more is past-due 30 days or more.
(3) The period of delinquency is based on the number of days that payments are
contractually past-due (assuming 30-day months). Consequently, a contract
due on the first day of a month is not 30 days delinquent until the first
day of the next month. The information for December 31, 1996 does not
include as delinquent the home equity contracts of obligors who have
entered bankruptcy proceedings, provided that such obligors are current
under their bankruptcy payment plan.
(4) By number of contracts.
Because of the Company's limited historical experience with respect to the
performance of home equity loans, no information has been included herein with
respect to the Company's loan loss or liquidation experience with respect to
home equity loans.
S-67
<PAGE>
YIELD AND PREPAYMENT CONSIDERATIONS
The yield on any Certificate will depend on the price paid by the
Certificateholder, the timing of principal payments, and the timing and amount
of any liquidation losses on the related Contracts.
Higher than expected "Principal Prepayments" (payments received from
Obligors, other than regular payments of principal, which are applied upon
receipt or, in the case of partial prepayments, upon the next scheduled
payment date for such Contract, to reduce the outstanding principal balance on
the Contracts) will increase the yield on Certificates purchased at a price
less than the undivided ownership interest in the aggregate principal balance
of the Contracts represented by such Certificates and will decrease the yield
on Certificates purchased at a price greater than the undivided ownership
interest in the aggregate principal balance of the Contracts represented by
such Certificates. 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, 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 the preceding month (thus paying less than 30 days' interest for that
month) while very few Contracts prepaid after their respective due dates in
the preceding month. In addition, liquidations of Defaulted Contracts or the
Servicer's exercise of its option to repurchase the entire remaining pool of
Contracts (see "Description of the Certificates--Repurchase Option" herein)
will affect the timing of principal distributions on the Certificates.
The Class HI: A-1 Certificates will be prepaid in part on the first Payment
Date after the Funding Period in the event that any Pre-Funded Amount remains
in the Sub-Pool HI Pre-Funding Account on such Payment Date after the purchase
by the Trust of the Subsequent Home Improvement Contracts. The Class HE: A-1
ARM Certificates and the Class HE: A-1 Certificates will be prepaid in part on
the first Payment Date after the Funding Period in the event that any Pre-
Funded Amount remains in the Sub-Pool HE: Pre-Funding Account on such Payment
Date after the purchase by the Trust of the Subsequent Home Equity Contracts.
Any amounts remaining which had been allocated to the purchase of Subsequent
Adjustable Rate Home Equity Contracts will be paid to the Class HE: A-1 ARM
Certificateholders and any amounts remaining which had been allocated to the
purchase of Subsequent Fixed-Rate Home Equity Contracts will be paid to the
Class HE: A-1 Certificateholders. The Company believes that the principal
amount of Subsequent Home Improvement Contracts and Subsequent Home Equity
Contracts to be purchased by the Trust will require the application of
substantially all of the Pre-Funded Amount. It is unlikely, however, that the
aggregate principal amount of Subsequent Home Improvement Contracts and
Subsequent Home Equity Contracts purchased by the Trust will be identical to
the Pre-Funded Amount, and that consequently, Class HI: A-1
Certificateholders, Class HE: A-1 ARM Certificateholders and Class HE: A-1
Certificateholders will receive some prepayment of principal.
Prepayments on mortgage loans and other consumer installment obligations are
commonly measured relative to a prepayment standard or model. The Constant
Prepayment Rate ("CPR") model assumes that the outstanding principal balance
of a pool of loans prepays each month at a specified constant annual rate. The
Sub-Pool HI Certificates were priced using a prepayment assumption of % CPR
and the Sub-Pool HE Certificates were priced using a prepayment assumption of,
with respect to the Fixed-Rate Contracts, % of the applicable Prepayment
Assumption (as described below), and with respect to the Adjustable Rate
Contracts, % CPR. There can be no assurance that the Contracts comprising
each Sub-Pool will prepay at the applicable rate, and it is unlikely that
prepayments or liquidations of the Contracts in either Sub-Pool will occur at
any constant rate.
The amount of interest to which the Certificateholders of any Class are
entitled on any Payment Date will be the product of the related Pass-Through
Rate and (in the absence of any liquidation loss principal amount adjustment)
the Principal Balance of such Class, or in the case of the Class HE: A-7 IO
Certificates, the Notional Principal Amount, immediately following the
preceding Payment Date. Interest on each Class of Certificates, other than the
Class HE: A-1 ARM Certificates, will be computed on the basis of a 360-day
year of twelve 30-
S-68
<PAGE>
day months. Interest on the Class HE: A-1 ARM Certificates will be computed on
the basis of actual days elapsed in a 360-day year. Certificateholders will
receive payments in respect of principal on each Payment Date to the extent
that funds available in the Certificate Account are sufficient therefor, in
the priority described under "Description of the Certificates--Distributions
on Sub-Pool HI Certificates" and "--Distributions on Sub-Pool HE
Certificates," as applicable. As required by applicable state laws, interest
paid by Obligors on the Contracts is computed according to the simple interest
method.
The final scheduled payment date on the Home Improvement Contract with the
latest maturity is in 2027. The final scheduled payment date on the Home
Equity Contract with the latest maturity is in 2027.
WEIGHTED AVERAGE LIFE OF THE CERTIFICATES
The following information is given solely to illustrate the effect of
prepayments of the related Contracts on the weighted average life of each
Class of Certificates under the stated assumptions and is not a prediction of
the prepayment rate that might actually be experienced by the Contracts in
either Sub-Pool.
Weighted average life refers to the average amount of time from the date of
issuance of a security until each dollar of principal of such security will be
repaid to the investor. The weighted average life of the Certificates will be
influenced by the rate at which principal on the related Contracts is paid.
Principal payments on Contracts may be in the form of scheduled amortization
or prepayments (for this purpose, the term "prepayment" includes repayments
and liquidations due to default or other dispositions of the Contracts).
The rate of principal payments on pools of home improvement contracts and
home equity loans is influenced by a variety of economic, geographic, social
and other factors, including the level of interest rates and the rate at which
homeowners sell their homes or default on their contracts or loans. Other
factors affecting prepayment of Contracts include changes in obligors' housing
needs, job transfers, unemployment and obligors' net equity in their homes. In
the case of home improvement contracts and home equity loans secured by real
estate, in general, if prevailing interest rates fall significantly below the
interest rates on such contracts or loans, the contracts or loans are likely
to be subject to higher prepayment rates than if prevailing interest rates
remained at or above the rates borne by such contracts or loans. Conversely,
if prevailing interest rates rise above the interest rates on such home
improvement contracts or home equity loans, the rate of prepayment would be
expected to decrease.
Sub-Pool HI Certificates
The percentages and weighted average lives in the following tables were
determined assuming that: (i) scheduled interest and principal payments on the
Home Improvement Contracts are received in a timely manner and prepayments are
made at the indicated percentages of the CPR set forth in the table; (ii) the
Servicer exercises its option to repurchase the Contracts, as described under
"Description of the Certificates--Repurchase Option;" (iii) the aggregate
principal balance of the Initial Home Improvement Contracts as of the Cut-off
Date is $ and such Contracts have the characteristics set forth under
"The Contracts--Home Improvement Contracts;" (iv) the Home Improvement
Contracts will, as of the Cut-off Date, be grouped into four pools having the
additional characteristics set forth below under "Assumed Initial Home
Improvement Contract Characteristics" and "Assumed Subsequent Home Improvement
Contracts;" (v) each Class of the Sub-Pool HI Certificates has an Original
Principal Balance as shown on the cover page of this Prospectus Supplement;
(vi) the Subsequent Home Improvement Contracts will have the characteristics
set forth in the table below and have their first scheduled payment date in
1998; (vii) no interest shortfalls will arise in connection with
prepayments in full of the Home Improvement Contracts; (viii) no delinquencies
or losses are experienced on the Home Improvement Contracts; (ix)
distributions are made on the Sub-Pool HI Certificates on the 15th day of each
month, commencing in 1998; and (x) the Sub-Pool HI Certificates are issued
on , 1998. No representation is made that the Home Improvement Contracts
will not experience delinquencies or losses.
S-69
<PAGE>
PREPAYMENT SCENARIOS
<TABLE>
<CAPTION>
SCENARIO I SCENARIO II SCENARIO III SCENARIO IV SCENARIOV
---------- ----------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C>
Home Improvement
Contracts (1)..........
Adjustable Rate Home
Equity Contracts (2)...
Fixed-Rate Home Equity
Contracts (3)..........
</TABLE>
- --------
(1) As a conditional prepayment rate ("CPR") percentage.
(2) As a CPR percentage.
(3) As a percentage of the Prepayment Assumption.
ASSUMED INITIAL HOME IMPROVEMENT CONTRACT CHARACTERISTICS
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
CUT-OFF WEIGHTED AVERAGE AVERAGE
DATE POOL AVERAGE REMAINING TERM ORIGINAL TERM
PRINCIPAL CONTRACT TO MATURITY TO MATURITY
POOL BALANCE RATE (MONTHS) (MONTHS)
- ---- ---------- -------- -------------- -------------
<S> <C> <C> <C> <C>
1. ............................ $ %
2. ............................
3. ............................
4. ............................
5. ............................
</TABLE>
It is not likely that the Home Improvement Contracts will prepay at any
constant percentage of the CPR to maturity or that all of the Home Improvement
Contracts will prepay at the same rate.
Investors are urged to make their investment decisions on a basis that
includes their determination as to anticipated prepayment rates under a
variety of the assumptions discussed herein.
ASSUMED SUBSEQUENT HOME IMPROVEMENT CONTRACT CHARACTERISTICS
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
CUT-OFF WEIGHTED AVERAGE AVERAGE
DATE POOL AVERAGE REMAINING TERM ORIGINAL TERM
PRINCIPAL LOAN TO MATURITY TO MATURITY
POOL BALANCE RATE (MONTHS) (MONTHS)
- ---- ----------- -------- -------------- -------------
<S> <C> <C> <C> <C>
1. ........................... $ %
2. ...........................
3. ...........................
4. ...........................
5. ...........................
</TABLE>
Based on the foregoing assumptions, the following tables indicate the
projected weighted average lives of each Class of Sub-Pool HI Certificates,
and set forth the percentages of the original Principal Balance of each Class
that would be outstanding after each of the dates shown, at the indicated
percentages of the CPR.
PERCENTAGE OF THE ORIGINAL PRINCIPAL BALANCE OF THE CLASS HI: A-1
CERTIFICATES AT THE RESPECTIVE PERCENTAGES OF THE
CPR SET FORTH BELOW:
<TABLE>
<CAPTION>
DATE SCENARIO I SCENARIO II SCENARIO III SCENARIO IV SCENARIOV
- ---- ---------- ----------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C>
Initial Percentage...... % % % % %
, 1998..............
, 1999..............
, 2000..............
, 2001..............
Weighted Average Life
(1) (years)............
</TABLE>
- --------
(1) The weighted average life of a Class HI: A-1 Certificate is determined by
(i) multiplying the amount of cash distributions in reduction of the
principal balance of such Certificate by the number of years from the date
of issuance of such Class HI: A-1 Certificate to the stated Payment Date,
(ii) adding the results, and (iii) dividing the sum by the initial
principal balance of such Class HI: A-1 Certificate.
S-70
<PAGE>
PERCENTAGE OF THE ORIGINAL PRINCIPAL BALANCE OF THE CLASS HI: A-2 CERTIFICATES
AT THE RESPECTIVE PERCENTAGES OF THE CPR SET FORTH BELOW:
<TABLE>
<CAPTION>
DATE SCENARIO I SCENARIO II SCENARIO III SCENARIO IV SCENARIO V
- ---- ---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Initial Percentage...... % % % % %
, 1998..............
, 1999..............
, 2000..............
, 2001..............
, 2002..............
, 2003..............
Weighted Average Life
(1) (years)............
</TABLE>
- --------
(1) The weighted average life of a Class HI: A-2 Certificate is determined by
(i) multiplying the amount of cash distributions in reduction of the
principal balance of such Certificate by the number of years from the date
of issuance of such Class HI: A-2 Certificate to the stated Payment Date,
(ii) adding the results, and (iii) dividing the sum by the initial
principal balance of such Class HI: A-2 Certificate.
PERCENTAGE OF THE ORIGINAL PRINCIPAL BALANCE OF THE CLASS HI: A-3 CERTIFICATES
AT THE RESPECTIVE PERCENTAGES OF THE CPR SET FORTH BELOW:
<TABLE>
<CAPTION>
DATE SCENARIO I SCENARIO II SCENARIO III SCENARIO IV SCENARIO V
- ---- ---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Initial Percentage...... % % % % %
, 1998..............
, 1999..............
, 2000..............
, 2001..............
, 2002..............
, 2003..............
, 2004..............
, 2005..............
, 2006..............
, 2007..............
, 2008..............
, 2009..............
Weighted Average Life
(1) (years)............
</TABLE>
- --------
(1) The weighted average life of a Class HI: A-3 Certificate is determined by
(i) multiplying the amount of cash distributions in reduction of the
principal balance of such Certificate by the number of years from the date
of issuance of such Class HI: A-3 Certificate to the stated Payment Date,
(ii) adding the results, and (iii) dividing the sum by the initial
principal balance of such Class HI: A-3 Certificate.
S-71
<PAGE>
PERCENTAGE OF THE ORIGINAL PRINCIPAL BALANCE OF THE CLASS HI: M-1
CERTIFICATES AT THE RESPECTIVE PERCENTAGES OF THE
CPR SET FORTH BELOW:
<TABLE>
<CAPTION>
DATE SCENARIO I SCENARIO II SCENARIO III SCENARIO IV SCENARIO V
- ---- ---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Initial Percentage...... % % % % %
, 1998..............
, 1999..............
, 2000..............
, 2001..............
, 2002..............
, 2003..............
, 2004..............
, 2005..............
, 2006..............
, 2007..............
, 2008..............
, 2009..............
, 2010..............
Weighted Average Life
(1) (years)............
</TABLE>
- --------
(1) The weighted average life of a Class HI: M-1 Certificate is determined by
(i) multiplying the amount of cash distributions in reduction of the
principal balance of such Certificate by the number of years from the date
of issuance of such Class HI: M-1 Certificate to the stated Payment Date,
(ii) adding the results, and (iii) dividing the sum by the initial
principal balance of such Class HI: M-1 Certificate.
PERCENTAGE OF THE ORIGINAL PRINCIPAL BALANCE OF THE CLASS HI: M-2 CERTIFICATES
AT THE RESPECTIVE PERCENTAGES OF THE CPR SET FORTH BELOW:
<TABLE>
<CAPTION>
DATE SCENARIO I SCENARIO II SCENARIO III SCENARIO IV SCENARIO V
- ---- ---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Initial Percentage...... % % % % %
, 1998..............
, 1999..............
, 2000..............
, 2001..............
, 2002..............
, 2003..............
, 2004..............
, 2005..............
, 2006..............
, 2007..............
, 2008..............
, 2009..............
, 2010..............
Weighted Average Life
(1) (years)............
</TABLE>
- --------
(1) The weighted average life of a Class HI: M-2 Certificate is determined by
(i) multiplying the amount of cash distributions in reduction of the
principal balance of such Certificate by the number of years from the date
of issuance of such Class HI: M-2 Certificate to the stated Payment Date,
(ii) adding the results, and (iii) dividing the sum by the initial
principal balance of such Class HI: M-2 Certificate.
S-72
<PAGE>
PERCENTAGE OF THE ORIGINAL PRINCIPAL BALANCE OF THE CLASS HI: B-1
CERTIFICATES AT THE RESPECTIVE PERCENTAGES OF THE
CPR SET FORTH BELOW:
<TABLE>
<CAPTION>
DATE SCENARIO I SCENARIO II SCENARIO III SCENARIO IV SCENARIO V
- ---- ---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Initial Percentage...... % % % % %
15, 1998............
15, 1999............
15, 2000............
15, 2001............
15, 2002............
15, 2003............
15, 2004............
15, 2005............
15, 2006............
15, 2007............
15, 2008............
15, 2009............
Weighted Average Life
(1) (years)............
</TABLE>
- --------
(1) The weighted average life of a Class HI: B-1 Certificate is determined by
(i) multiplying the amount of cash distributions in reduction of the
principal balance of such Certificate by the number of years from the date
of issuance of such Class HI: B-1 Certificate to the stated Payment Date,
(ii) adding the results, and (iii) dividing the sum by the initial
principal balance of such Class HI: B-1 Certificate.
PERCENTAGE OF THE ORIGINAL PRINCIPAL BALANCE OF THE CLASS HI: B-2
CERTIFICATES AT THE RESPECTIVE PERCENTAGES OF THE
CPR SET FORTH BELOW:
<TABLE>
<CAPTION>
DATE SCENARIO I SCENARIO II SCENARIO III SCENARIO IV SCENARIO V
- ---- ---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Initial Percentage...... % % % % %
15, 1998............
15, 1999............
15, 2000............
15, 2001............
15, 2002............
15, 2003............
15, 2004............
15, 2005............
15, 2006............
15, 2007............
15, 2008............
15, 2009............
15, 2010............
Weighted Average Life
(1) (years)............
</TABLE>
- --------
(1) The weighted average life of a Class HI: B-2 Certificate is determined by
(i) multiplying the amount of cash distributions in reduction of the
principal balance of such Certificate by the number of years from the date
of issuance of such Class HI: B-2 Certificate to the stated Payment Date,
(ii) adding the results, and (iii) dividing the sum by the initial
principal balance of such Class HI: B-2 Certificate.
S-73
<PAGE>
Sub-Pool HE Certificates
The percentages and weighted average lives in the following tables were
determined assuming that: (i) scheduled interest and principal payments on the
Home Equity Contracts are received in a timely manner and prepayments are made
at the indicated percentages of the model as described below set forth in the
table; (ii) the Servicer exercises its option to repurchase the Contracts, as
described under "Description of the Certificates--Repurchase Option;" (iii)
the aggregate principal balance of the Initial Home Equity Contracts as of the
Cut-off Date is $ and such Contracts have the characteristics set forth
under "The Contracts--Home Equity Contracts" and "The Contracts--Adjustable
Rate Home Equity Contracts;" (iv) the Home Equity Contracts (other than the
Adjustable Rate Home Equity Contracts) will, as of the Cut-off Date, be
grouped into 16 pools having the additional characteristics set forth below
under "Initial Fixed-Rate Home Equity Contract Characteristic" and "Assumed
Subsequent Fixed-Rate Home Equity Contract Characteristics;" (v) the
Adjustable Rate Home Equity Contracts will, as of the Cut-off Date, be grouped
into pools having the additional characteristics set forth below under
"Initial Adjustable Rate Home Equity Contract Characteristics" and "Assumed
Subsequent Adjustable Rate Home Equity Contract Characteristics;" (vi) each
Class of the Sub-Pool HE Certificates (other than the Class HE: A-7 IO
Certificates) has an Original Principal Balance as shown on the cover page of
this Prospectus Supplement; (vii) the rate for one-month LIBOR is % and the
rate for six-month LIBOR is %, (viii) the Subsequent Home Equity Contracts
will have the characteristics set forth in the tables below and have their
first scheduled payment date in 1997; (ix) no interest shortfalls will
arise in connection with prepayments in full of the Home Equity Contracts; (x)
no delinquencies or losses are experienced on the Home Equity Contracts;
(xi) distributions are made on the Sub-Pool HE Certificates on the th day of
each month, commencing in 1998; and (xii) the Sub-Pool HE Certificates are
issued on , 1997. No representation is made that the Home Equity
Contracts will not experience delinquencies or losses.
Prepayments on home equity loans are commonly measured relative to a
prepayment standard or model. Two different models (each a "Prepayment
Assumption") are used in this Prospectus Supplement with respect to the
Adjustable Rate Home Equity Contracts, on the one hand, and the Fixed-Rate
Home Equity Contracts, on the other. Reference in this Prospectus Supplement
to a "Prepayment Assumption" shall refer to the appropriate model, depending
upon whether the reference is with respect to the Adjustable Rate Home Equity
Contracts or the Fixed-Rate Home Equity Contracts.
The percentages and weighted average life information for the Class HE: A-1
ARM Certificates in the following table are based on a CPR model that assumes
that the outstanding principal balance of the Adjustable Rate Contracts will
prepay at the indicated percentages of CPR set forth in the table.
The Prepayment Assumption used in this Prospectus Supplement with respect to
the Fixed-Rate Home Equity Contracts represents an assumed rate of prepayment
each month relative to the then outstanding principal balance of a pool of
home equity loans for the life of such home equity loans. The " % Prepayment
Assumption" assumes a constant prepayment of % per annum of the then
outstanding principal balance of such loans in the first month of the life of
such loans and an additional % (precisely, ) per annum in each month
thereafter until the twelfth month. Beginning in the twelfth month and in each
month thereafter during the life of such loans, the % Prepayment Assumption
assumes a constant prepayment rate of % per annum each month.
It is not likely that the Home Equity Contracts will prepay at any constant
percentage of the Prepayment Assumption or of the CPR to maturity or that all
of the Home Equity Contracts will prepay at the same rate.
Investors are urged to make their investment decisions on a basis that
includes their determination as to anticipated prepayment rates under a
variety of the assumptions discussed herein.
S-74
<PAGE>
PREPAYMENT SCENARIOS
<TABLE>
<CAPTION>
SCENARIO I SCENARIO II SCENARIO III SCENARIO IV SCENARIO V
---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Home Improvement
Contracts (1)..........
Adjustable Rate Home
Equity Contracts (2)...
Fixed-Rate Home Equity
Contracts (3)..........
</TABLE>
- --------
(1) As a conditional prepayment rate ("CPR") percentage.
(2) As a CPR percentage.
(3) As a percentage of the Prepayment Assumption.
ASSUMED INITIAL FIXED-RATE HOME EQUITY CONTRACT CHARACTERISTICS
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED BALLOON LOAN
CUT-OFF DATE WEIGHTED AVERAGE AVERAGE WEIGHTED
POOL AVERAGE REMAINING TERM ORIGINAL TERM AVERAGE
PRINCIPAL CONTRACT TO MATURITY TO MATURITY AMORTIZATION
POOL BALANCE RATE (MONTHS) (MONTHS) TERM
- ---- ------------ -------- -------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
1. ............ $ %
2. ............
3. ............
4. ............
5. ............
6. ............
7. ............
8. ............
ASSUMED SUBSEQUENT FIXED-RATE HOME EQUITY CONTRACT CHARACTERISTICS
<CAPTION>
WEIGHTED WEIGHTED BALLOON LOAN
CUT-OFF DATE WEIGHTED AVERAGE AVERAGE WEIGHTED
POOL AVERAGE REMAINING TERM ORIGINAL TERM AVERAGE
PRINCIPAL CONTRACT TO MATURITY TO MATURITY AMORTIZATION
POOL BALANCE RATE (MONTHS) (MONTHS) TERM
- ---- ------------ -------- -------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
1. ............ $ %
2. ............
3. ............
4. ............
5. ............
6. ............
7. ............
8. ............
</TABLE>
ASSUMED INITIAL ADJUSTABLE RATE HOME EQUITY CONTRACT CHARACTERISTICS
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
AVERAGE AVERAGE
CUT-OFF WEIGHTED REMAINING ORIGINAL WEIGHTED
DATE POOL AVERAGE TERM TO TERM TO AVERAGE MONTH(S) INITIAL
PRINCIPAL CONTRACT MATURITY MATURITY GROSS LIFE LIFE PERIODIC TO RATE PERIODIC
POOL BALANCE RATE (MONTHS) (MONTHS) MARGIN CAP FLOOR CAP CHANGE CAP
- ---- ----------- -------- --------- -------- -------- ---- ----- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. ..................... $ % % % % %
2. .....................
3. .....................
4. .....................
5. .....................
6. .....................
7. .....................
8. .....................
</TABLE>
S-75
<PAGE>
ASSUMED SUBSEQUENT ADJUSTABLE RATE HOME EQUITY CONTRACT CHARACTERISTICS
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
AVERAGE AVERAGE
CUT-OFF WEIGHTED REMAINING ORIGINAL WEIGHTED
DATE POOL AVERAGE TERM TO TERM TO AVERAGE MONTH(S) INITIAL
PRINCIPAL CONTRACT MATURITY MATURITY GROSS LIFE LIFE PERIODIC TO RATE PERIODIC
POOL BALANCE RATE (MONTHS) (MONTHS) MARGIN CAP FLOOR CAP CHANGE CAP
- ---- --------- -------- --------- -------- -------- ---- ----- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. ..................... $ % % % % %
2. .....................
3. .....................
4. .....................
5. .....................
6. .....................
7. .....................
8. .....................
</TABLE>
Based on the foregoing assumptions, the following tables indicate the
projected weighted average lives of each Class of Sub-Pool HE Certificates,
and set forth the percentages of the Original Principal Balance of each Class
that would be outstanding after each of the dates shown, at the indicated
percentages of the applicable Prepayment Assumption.
PERCENTAGE OF THE ORIGINAL PRINCIPAL BALANCE OF THE CLASS HE: A-1 ARM
CERTIFICATES AT THE RESPECTIVE PERCENTAGES OF THE
CPR SET FORTH BELOW:
<TABLE>
<CAPTION>
SCENARIO I SCENARIO II SCENARIO III SCENARIO IV SCENARIO V
---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Initial Percentage...... % % % % %
, 1998..............
, 1999..............
, 2000..............
, 2001..............
, 2002..............
, 2003..............
, 2004..............
, 2005..............
, 2006..............
, 2007..............
, 2008..............
, 2009..............
Weighted Average Life
(1) (years)............
</TABLE>
- --------
(1) The weighted average life of a Class HE: A-1 ARM Certificate is determined
by (i) multiplying the amount of cash distributions in reduction of the
principal balance of such Certificate by the number of years from the date
of issuance of such Class HE: A-1 ARM Certificate to the stated Payment
Date, (ii) adding the results, and (iii) dividing the sum by the initial
principal balance of such Class HE: A-1 ARM Certificate.
S-76
<PAGE>
PERCENTAGE OF THE ORIGINAL PRINCIPAL BALANCE OF THE CLASS HE: A-1
CERTIFICATES AT THE RESPECTIVE PERCENTAGES OF THE
PREPAYMENT ASSUMPTION SET FORTH BELOW:
<TABLE>
<CAPTION>
SCENARIO I SCENARIO II SCENARIO III SCENARIO IV SCENARIO V
---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Initial Percentage...... % % % % %
, 1998..............
, 1999..............
, 2000..............
Weighted Average Life
(1) (years)............
</TABLE>
- --------
(1) The weighted average life of a Class HE: A-1 Certificate is determined by
(i) multiplying the amount of cash distributions in reduction of the
principal balance of such Certificate by the number of years from the date
of issuance of such Class HE: A-1 Certificate to the stated Payment Date,
(ii) adding the results, and (iii) dividing the sum by the initial
principal balance of such Class HE: A-1 Certificate.
PERCENTAGE OF THE ORIGINAL PRINCIPAL BALANCE OF THE CLASS HE: A-2 CERTIFICATES
AT THE RESPECTIVE PERCENTAGES OF THE PREPAYMENT ASSUMPTION SET FORTH BELOW:
<TABLE>
<CAPTION>
SCENARIO I SCENARIO II SCENARIO III SCENARIO IV SCENARIO V
---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Initial Percentage...... % % % % %
, 1998..............
, 1999..............
, 2000..............
, 2001..............
, 2002..............
, 2003..............
Average Life (1)
(years)................
</TABLE>
- --------
(1) The weighted average life of a Class HE: A-2 Certificate is determined by
(i) multiplying the amount of cash distributions in reduction of the
principal balance of such Certificate by the number of years from the date
of issuance of such Class HE: A-2 Certificate to the stated Payment Date,
(ii) adding the results, and (iii) dividing the sum by the initial
principal balance of such Class HE: A-2 Certificate.
S-77
<PAGE>
PERCENTAGE OF THE ORIGINAL PRINCIPAL BALANCE OF THE CLASS HE: A-3 CERTIFICATES
AT THE RESPECTIVE PERCENTAGES OF THE PREPAYMENT ASSUMPTION SET FORTH BELOW:
<TABLE>
<CAPTION>
DATE SCENARIO I SCENARIO II SCENARIO III SCENARIO IV SCENARIO V
- ---- ---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Initial Percentage...... % % % % %
, 1998..............
, 1999..............
, 2000..............
, 2001..............
, 2002..............
, 2003..............
, 2004..............
, 2005..............
, 2006..............
, 2007..............
Weighted Average Life
(1) (years)............
</TABLE>
- --------
(1) The weighted average life of a Class HE: A-3 Certificate is determined by
(i) multiplying the amount of cash distributions in reduction of the
principal balance of such Certificate by the number of years from the date
of issuance of such Class HE: A-3 Certificate to the stated Payment Date,
(ii) adding the results, and (iii) dividing the sum by the initial
principal balance of such Class HE: A-3 Certificate.
PERCENTAGE OF THE ORIGINAL PRINCIPAL BALANCE OF THE CLASS HE: A-4 CERTIFICATES
AT THE RESPECTIVE PERCENTAGES OF THE PREPAYMENT ASSUMPTION SET FORTH BELOW:
<TABLE>
<CAPTION>
DATE SCENARIO I SCENARIO II SCENARIO III SCENARIO IV SCENARIO V
- ---- ---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Initial Percentage...... % % % % %
, 1998..............
, 1999..............
, 2000..............
, 2001..............
, 2002..............
, 2003..............
, 2004..............
, 2005..............
, 2006..............
, 2007..............
Weighted Average Life
(1) (years)............
</TABLE>
- --------
(1) The weighted average life of a Class HE: A-4 Certificate is determined by
(i) multiplying the amount of cash distributions in reduction of the
principal balance of such Certificate by the number of years from the date
of issuance of such Class HE: A-4 Certificate to the stated Payment Date,
(ii) adding the results, and (iii) dividing the sum by the initial
principal balance of such Class HE: A-4 Certificate.
S-78
<PAGE>
PERCENTAGE OF THE ORIGINAL PRINCIPAL BALANCE OF THE CLASS HE: A-5 CERTIFICATES
AT THE RESPECTIVE PERCENTAGES OF THE PREPAYMENT ASSUMPTION SET FORTH BELOW:
<TABLE>
<CAPTION>
DATE SCENARIO I SCENARIO II SCENARIO III SCENARIO IV SCENARIO V
- ---- ---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Initial Percentage...... % % % % %
, 1998..............
, 1999..............
, 2000..............
, 2001..............
, 2002..............
, 2003..............
, 2004..............
, 2005..............
, 2006..............
, 2007..............
, 2008..............
Weighted Average Life
(1) (years)............
</TABLE>
- --------
(1) The weighted average life of a Class HE: A-5 Certificate is determined by
(i) multiplying the amount of cash distributions in reduction of the
principal balance of such Certificate by the number of years from the date
of issuance of such Class HE: A-5 Certificate to the stated Payment Date,
(ii) adding the results, and (iii) dividing the sum by the initial
principal balance of such Class HE: A-5 Certificate.
PERCENTAGE OF THE ORIGINAL PRINCIPAL BALANCE OF THE CLASS HE: A-6
CERTIFICATES AT THE RESPECTIVE PERCENTAGES OF THE
PREPAYMENT ASSUMPTION SET FORTH BELOW:
<TABLE>
<CAPTION>
DATE SCENARIO I SCENARIO II SCENARIO III SCENARIO IV SCENARIO V
- ---- ---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Initial Percentage...... % % % % %
, 1998..............
, 1999..............
, 2000..............
, 2001..............
, 2002..............
, 2003..............
, 2004..............
, 2005..............
, 2006..............
, 2007..............
, 2008..............
Weighted Average Life
(1) (years)............
</TABLE>
- --------
* Indicates an amount greater than zero but less than .5% of the Original
Class HE: A-6 Principal Balance.
(1) The weighted average life of a Class HE: A-6 Certificate is determined by
(i) multiplying the amount of cash distributions in reduction of the
principal balance of such Certificate by the number of years from the date
of issuance of such Class HE: A-6 Certificate to the stated Payment Date,
(ii) adding the results, and (iii) dividing the sum by the initial
principal balance of such Class HE: A-6 Certificate.
S-79
<PAGE>
PERCENTAGE OF THE ORIGINAL PRINCIPAL BALANCE OF THE CLASS HE: M-1
CERTIFICATES AT THE RESPECTIVE PERCENTAGES OF THE
PREPAYMENT ASSUMPTION SET FORTH BELOW:
<TABLE>
<CAPTION>
DATE SCENARIO I SCENARIO II SCENARIO III SCENARIO IV SCENARIO V
- ---- ---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Initial Percentage...... % % % % %
, 1998..............
, 1999..............
, 2000..............
, 2001..............
, 2002..............
, 2003..............
, 2004..............
, 2005..............
, 2006..............
, 2007..............
, 2008..............
, 2009..............
, 2010..............
Weighted Average Life
(1) (years)............
</TABLE>
- --------
(1) The weighted average life of a Class HE: M-1 Certificate is determined by
(i) multiplying the amount of cash distributions in reduction of the
principal balance of such Certificate by the number of years from the date
of issuance of such Class HE: M-1 Certificate to the stated Payment Date,
(ii) adding the results, and (iii) dividing the sum by the initial
principal balance of such Class HE: M-1 Certificate.
PERCENTAGE OF THE ORIGINAL PRINCIPAL BALANCE OF THE CLASS HE: M-2 CERTIFICATES
AT THE RESPECTIVE PERCENTAGES OF THE PREPAYMENT ASSUMPTION SET FORTH BELOW:
<TABLE>
<CAPTION>
DATE SCENARIO I SCENARIO II SCENARIO III SCENARIO IV SCENARIO V
- ---- ---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Initial Percentage...... % % % % %
, 1998..............
, 1999..............
, 2000..............
, 2001..............
, 2002..............
, 2003..............
, 2004..............
, 2005..............
, 2006..............
, 2007..............
, 2008..............
, 2009..............
, 2010..............
Weighted Average Life
(1) (years)............
</TABLE>
- --------
(1) The weighted average life of a Class HE: M-2 Certificate is determined by
(i) multiplying the amount of cash distributions in reduction of the
principal balance of such Certificate by the number of years from the date
of issuance of such Class HE: M-2 Certificate to the stated Payment Date,
(ii) adding the results, and (iii) dividing the sum by the initial
principal balance of such Class HE: M-2 Certificate.
S-80
<PAGE>
PERCENTAGE OF THE ORIGINAL PRINCIPAL BALANCE OF THE CLASS HE: B-1
CERTIFICATES AT THE RESPECTIVE PERCENTAGES OF THE
PREPAYMENT ASSUMPTION SET FORTH BELOW:
<TABLE>
<CAPTION>
DATE SCENARIO I SCENARIO II SCENARIO III SCENARIO IV SCENARIO V
- ---- ---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Initial Percentage...... % % % % %
, 1998..............
, 1999..............
, 2000..............
, 2001..............
, 2002..............
, 2003..............
, 2004..............
, 2005..............
, 2006..............
, 2007..............
, 2008..............
Weighted Average Life
(1) (years)............
</TABLE>
- --------
(1) The weighted average life of a Class HE: B-1 Certificate is determined by
(i) multiplying the amount of cash distributions in reduction of the
principal balance of such Certificate by the number of years from the date
of issuance of such Class HE: B-1 Certificate to the stated Payment Date,
(ii) adding the results, and (iii) dividing the sum by the initial
principal balance of such Class HE: B-1 Certificate.
PERCENTAGE OF THE ORIGINAL PRINCIPAL BALANCE OF THE CLASS HE: B-2
CERTIFICATES AT THE RESPECTIVE PERCENTAGES OF THE
PREPAYMENT ASSUMPTION SET FORTH BELOW:
<TABLE>
<CAPTION>
DATE SCENARIO I SCENARIO II SCENARIO III SCENARIO IV SCENARIO V
- ---- ---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Initial Percentage...... % % % % %
, 1998..............
, 1999..............
, 2000..............
, 2001..............
, 2002..............
, 2003..............
, 2004..............
, 2005..............
, 2006..............
, 2007..............
, 2008..............
, 2009..............
, 2010..............
Weighted Average Life
(1) (years)............
</TABLE>
- --------
(1) The weighted average life of a Class HE: B-2 Certificate is determined by
(i) multiplying the amount of cash distributions in reduction of the
principal balance of such Certificate by the number of years from the date
of issuance of such Class HE: B-2 Certificate to the stated Payment Date,
(ii) adding the results, and (iii) dividing the sum by the initial
principal balance of such Class HE: B-2 Certificate.
S-81
<PAGE>
GREEN TREE FINANCIAL CORPORATION
GENERAL
The following information supplements, and to the extent inconsistent
therewith supersedes, the information in the Prospectus under the heading
"Green Tree Financial Corporation."
The Company is a Delaware corporation which, as of December 31, 1997, had
stockholders' equity of approximately $1,332,000,000. 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 (651) 293-3400). The Company's quarterly and annual
reports, which are incorporated by reference in this Prospectus Supplement and
in the Prospectus, are available from the Company upon written request made to
the Company.
RATIO OF EARNINGS TO FIXED CHARGES FOR THE COMPANY
Set forth below are the Company's ratios of earnings to fixed charges for
the past five years ending December 31, 1997. 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>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------ ----------------
1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Ratio of Earnings to Fixed
Charges.................... 4.81 7.98 7.90 5.44 3.94 3.06
</TABLE>
RECENT DEVELOPMENTS
On June 30, 1998, Green Tree became a wholly owned subsidiary of Conseco,
Inc., pursuant to a Merger Agreement announced on April 7, 1998. Green Tree
will continue to operate from its existing headquarters in St. Paul,
Minnesota, and its 200 local offices throughout the country. Lawrence M. Coss,
Green Tree's Chairman and Chief Executive Officer, has agreed to continue to
manage Green Tree's business for at least one year. Headquartered in Carmel,
Indiana, Conseco is among the nation's leading providers of supplemental
health insurance, retirement annuities and universal life insurance.
On July 6, 1998, Conseco announced a second-quarter charge of $498 million,
net of income taxes, related to the acquisition of Green Tree. The charges are
directly related to (1) $148 million in merger-related costs, and (2) a $350
million non-cash supplemental reserve against the valuation of Green Tree's
interest-only securities and servicing rights.
Green Tree has been served with various lawsuits in the United States
District Court for the District of Minnesota. These lawsuits were filed by
certain stockholders of Green Tree as purported class actions on behalf of
persons or entities who purchased common stock of Green Tree during the
alleged class periods. In addition to Green Tree, certain current and former
officers and directors of Green Tree are named as defendants in one or more of
the lawsuits. Green Tree and the other defendants intend to seek consolidation
of each of the lawsuits in the United States District Court for the District
of Minnesota. Plaintiffs in the lawsuits assert claims under Sections 10(b)
and 20(a) of the Securities Exchange Act of 1934. In each case, plaintiffs
allege that Green Tree and the other defendants violated federal securities
laws by, among other things, making false and misleading statements about the
current state and future prospects of Green Tree (particularly with respect to
prepayment assumptions and performance of certain of Green Tree's loan
portfolios) which allegedly rendered Green Tree's financial statements false
and misleading. Green Tree believes that the lawsuits are without merit and
intends to defend such lawsuits vigorously.
S-82
<PAGE>
DESCRIPTION OF THE CERTIFICATES
The following information supplements, and to the extent inconsistent
therewith supersedes, the information in the Prospectus under "Description of
the Certificates."
The Certificates will be issued pursuant to the Agreement between the
Company, as Seller and Servicer, and the Trustee. A copy of the execution form
of the Agreement will be filed in a Current Report on Form 8-K with the
Securities and Exchange Commission after the initial issuance of the
Certificates. The following summary describes the material provisions of the
Agreement, reference to which is hereby made for a complete recital of its
terms.
GENERAL
The Certificates will be issued in fully registered, certificated form only
in minimum denominations of $1,000 or any integral multiple in excess thereof.
The Certificates initially will be represented by certificates registered in
the name of Cede as the nominee of DTC, and will only be available in the form
of book-entries on the records of DTC and participating members thereof. See
"Description of the Certificates--Registration of the Certificates" herein.
The Trust consists primarily of the Contracts and the rights, benefits,
obligations and proceeds arising therefrom or in connection therewith,
including liens on the related real estate, rights under applicable FHA
Insurance for FHA-insured Home Improvement Contracts, amounts held in the
Certificate Account and the Class HI: B-2 Limited Guaranty and the Class HE:
B-2 Limited Guaranty of the Company for the benefit of the Class HI: B-2
Certificateholders and the Class HE: B-2 Certificateholders, respectively.
Distributions on the Certificates will be made by the Paying Agent (which
shall initially be the Trustee) on each Payment Date to persons in whose names
the Certificates are registered as of the Business Day immediately preceding
such Payment Date (the "Record Date"). See "Description of the Certificates--
Registration of the Certificates" herein. The first Payment Date for the
Certificates will be in 1998. Payments will be made by check mailed to
such Certificateholder at the address appearing on the Certificate Register
(except that a Certificateholder who holds an aggregate Percentage Interest of
at least 5% of a Class of Certificates may request payment in respect of its
Percentage Interest in such Class by wire transfer). Final payments will be
made only upon tender of the Certificates to the Trustee for cancellation.
CONVEYANCE OF CONTRACTS
On the Closing Date, the Company will establish the Trust and transfer,
assign, set over and otherwise convey to the Trust all right, title and
interest of the Company in the Initial Home Improvement Contracts and the
Initial Home Equity Contracts, including all principal and interest received
on or with respect to such Contracts (other than receipts of principal and
interest due on such Contracts before the Cut-off Date). The Agreement permits
the Trust to purchase approximately $ aggregate principal balance of
Subsequent Home Improvement Contracts and approximately $ aggregate
principal balance of Subsequent Home Equity Contracts within days after the
Closing Date on one or more closing dates (each a "Subsequent Transfer Date").
See "Conveyance of Subsequent Home Improvement Contracts and Sub-Pool HI Pre-
Funding Account" and "--Conveyance of Subsequent Home Equity Contracts and
Sub-Pool HE Pre-Funding Account" herein.
On behalf of the Trust, as the issuer of the Certificates offered hereby,
the Trustee, concurrently with each conveyance, will execute and deliver the
Certificates to or upon the order of the Company. The Contracts are described
on a list delivered to the Trustee and certified by a duly authorized officer
of the Company. Such list includes the amount of monthly payments due on each
Contract as of the date of issuance of the Certificates, the Contract Rate on
each Contract and the maturity date of each Contract. The list will be
attached as an exhibit to the Agreement and will be available for inspection
by any Certificateholder at the principal office of the Company. Prior to the
conveyance of the Contracts to the Trust, the Company will have completed a
review of all the Contract files, confirming the accuracy of each item on the
list of Contracts delivered to the Trustee. Any
S-83
<PAGE>
Contract discovered not to agree with such list in a manner that is materially
adverse to the interests of the Certificateholders will be repurchased by the
Company, or, if the discrepancy relates to the unpaid principal balance of a
Contract, the Company may deposit cash in the Certificate Account in an amount
sufficient to offset such discrepancy.
The Trustee will maintain possession of the Contracts and any other
documents contained in the Contract files. Uniform Commercial Code financing
statements will be filed in Minnesota, reflecting the conveyance and
assignment of the Contracts to the Trustee, and the Company's accounting
records and computer systems will also reflect such conveyance and assignment.
[Company Counsel], counsel to the Company, will render an opinion to the
Trustee that the transfer of the Contracts from the Company to the Trust
would, in the event the Company became a debtor under the United States
Bankruptcy Code, be treated as a true sale and not as a pledge to secure
borrowings. If, however, the transfer of the Contracts from the Company to the
Trust were treated as a pledge to secure borrowings by the Company, the
distribution of proceeds of the Contracts to the Trust might be subject to the
automatic stay provisions of the United States Bankruptcy Code, which would
delay the distribution of such proceeds for an uncertain period of time. In
addition, a bankruptcy trustee would have the power to sell the Contracts if
the proceeds of such sale could satisfy the amount of the debt deemed owed by
the Company, or the bankruptcy trustee could substitute other collateral in
lieu of the Contracts to secure such debt, or such debt could be subject to
adjustment by the bankruptcy trustee if the Company were to file for
reorganization under Chapter 11 of the United States Bankruptcy Code.
The Company will make certain representations and warranties in the
Agreement with respect to each Contract, including that: (a) for each Contract
other than the Subsequent Home Improvement Contracts and the Subsequent Home
Equity Contracts, as of the applicable Cut-off Date, the most recent scheduled
payment was made or was not delinquent more than days; (b) for each
Subsequent Home Improvement Contract and each Subsequent Home Equity Contract,
as of the respective Subsequent Cut-off Date, the most recent scheduled
payment was made or was not delinquent more than days; (c) 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; (d) 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); (e) no Contract is subject to any right of rescission, set-off,
counterclaim or defense; (f) each Contract (if an 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; (g) each
Contract was originated by a home improvement contractor or home equity lender
in the ordinary course of its business or was originated by the Company
directly; (h) 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; (i) each
Contract complies with all requirements of law; (j) no Contract has been
satisfied, subordinated to a lower lien ranking than its original position (if
any) or rescinded; (k) each Contract creates a valid and perfected lien on the
related real estate; (l) all parties to each Contract had full legal capacity
to execute such Contract; (m) 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; (n) 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 clauses (a) and (b)
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; (o) each Contract is a fully-amortizing loan and provides for level
monthly payments based on its applicable Contract Rate, except, in the case of
a Balloon Loan, for the final monthly payment, over the term of such Contract;
(p) 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; (q) the description of each Contract set forth in the
list delivered to the Trustee is true and correct; (r) there is only one
original of each Contract; (s) each Contract
S-84
<PAGE>
was originated or purchased in accordance with the Company's then-current
underwriting guidelines; and (t) each Contract is a "qualified mortgage" under
section 860G(a)(3) of the Internal Revenue Code of 1986, as amended.
The Company will also make certain representations and warranties with
respect to the Home Improvement Contracts in the aggregate, including that (i)
each Home Improvement Contract has a contractual rate of interest of at least
7.5%; (ii) no Home Improvement Contract had a remaining term to maturity at
origination of more than 360 months; (iii) no more than 1% of the Home
Improvement Contracts, by principal balance as of the Cut-off Date, were
secured by properties located in an area with the same zip code; (iv) no more
than 5% of the Home Improvement Contracts, by principal balance as of the Cut-
off Date, were originated by any one contractor or lender; and (v) no adverse
selection procedures were employed in selecting the Home Improvement Contracts
from the Company's portfolio. The Company will make certain additional
representations and warranties with respect to the Subsequent Home Improvement
Contracts. See "--Conveyance of Subsequent Home Improvement Contracts and Sub-
Pool HI Pre-Funding Account" herein.
The Company will also make certain representations and warranties with
respect to the Home Equity Contracts in the aggregate, including that (i) each
Home Equity Contract (other than the Adjustable Rate Home Equity Contracts)
has a contractual rate of interest of at least %; (ii) no Home Equity
Contract had a remaining term to maturity at origination of more than
months; (iii) no more than 1% of the Home Equity Contracts, by principal
balance as of the Cut-off Date, were secured by properties located in an area
with the same zip code; (iv) no more than % of the Home Equity Contracts,
by principal balance as of the Cut-off Date, were originated by any one
lender; and (v) no adverse selection procedures were employed in selecting the
Home Equity Contracts from the Company's portfolio. The Company will make
certain additional representations and warranties with respect to the
Subsequent Home Equity Contracts. See "--Conveyance of Subsequent Home Equity
Contracts and Sub-Pool HE Pre-Funding Account" herein.
Under the terms of the Agreement, and subject to the Company's option to
effect a substitution as described in the next paragraph, the Company has
agreed to repurchase, at the Repurchase Price, any Contract that is materially
and adversely affected by a breach of a representation and warranty with
respect to such Contract made in the Agreement if such breach has not been
cured within 90 days of the day it was or should have been discovered by the
Servicer or the Trustee. The "Repurchase Price," with respect to any Contract
to be so repurchased or with respect to a Liquidated Contract, means the
outstanding principal balance of such Contract (without giving effect to any
Advances made by the Servicer or the Trustee), plus interest on such Contract
at the Pass-Through Rate (which will be the weighted average of the Pass-
Through Rates of the related Classes of Certificates) from the end of the Due
Period with respect to which the Obligor last made a scheduled payment
(without giving effect to any Advances made by the Servicer or the Trustee)
through the date of such repurchase or liquidation. This repurchase obligation
constitutes the sole remedy available to the Trust and the Certificateholders
for a breach of a representation or warranty under the Agreement with respect
to the Contracts (but not with respect to any other breach by the Company of
its obligations under the Agreement).
In lieu of repurchasing a Contract as specified in the preceding paragraph,
during the two-year period following the Closing Date, the Company may, at its
option, substitute an Eligible Substitute Contract (as defined below) for the
Contract that it is otherwise obligated to repurchase (referred to herein as
the "Replaced Contract"). An Eligible Substitute Contract is a Contract that
satisfies, as of the date of its substitution, the representations and
warranties specified in Article III of the Agreement, has a Scheduled
Principal Balance that is not greater than the Scheduled Principal Balance of
the Replaced Contract, has a Contract Rate that is at least equal to the
Contract Rate of the Replaced Contract and has a remaining term to scheduled
maturity that is not greater than the remaining term to scheduled maturity of
the Replaced Contract. The Company will be required to deposit in the
Certificate Account cash in the amount, if any, by which the Scheduled
Principal Balance of the Replaced Contract exceeds the Scheduled Principal
Balance of the Contract being substituted. Such deposit will be deemed to be a
Partial Principal Prepayment.
Pursuant to the Agreement, the Servicer will service and administer the
Contracts conveyed and assigned to the Trustee as more fully set forth below.
S-85
<PAGE>
CONVEYANCE OF SUBSEQUENT HOME IMPROVEMENT CONTRACTS AND SUB-POOL HI PRE-
FUNDING ACCOUNT
An account (the "Sub-Pool HI Pre-Funding Account") will be established by
the Trustee and funded by the Company with approximately $ (the "Sub-
Pool HI Pre-Funded Amount") on the Closing Date to provide the Trust with
sufficient funds to purchase Subsequent Home Improvement Contracts. In no
event will the Sub-Pool HI Pre-Funded Amount, less the aggregate principal
balance of Subsequent Home Improvement Contracts specifically identified for
purchase by the Trust as of the Closing Date, represent more than % of the
Original Sub-Pool HI Certificate Principal Balance. The Sub-Pool HI Pre-
Funding Account will be used to purchase Subsequent Home Improvement Contracts
during the period from the Closing Date until the earliest of (i) the date on
which the amount on deposit in the Sub-Pool HI Pre-Funding Account is less
than $ , (ii) days after the Closing Date or (iii) the date on which
an Event of Termination occurs under the Agreement (the "Funding Period"). The
Sub-Pool HI Pre-Funded Amount will be reduced during the Funding Period by the
amount used to purchase Subsequent Home Improvement Contracts in accordance
with the Agreement.
Under the Agreement following the initial issuance of the Certificates, the
Trust will be obligated to purchase Subsequent Home Improvement Contracts from
the Company during the Funding Period, subject to the availability thereof. In
connection with the purchase of Subsequent Home Improvement Contracts on such
dates of transfer (the "Subsequent Transfer Dates"), the Trust will be
required to pay to the Company from amounts on deposit in the Sub-Pool HI Pre-
Funding Account a cash purchase price of 100% of the principal balance
thereof. The Company will designate the Subsequent Transfer Date as the cut-
off date (the "Subsequent Cut-off Date") with respect to the related
Subsequent Home Improvement Contracts purchased on such date. The amount paid
from the Sub-Pool HI Pre-Funding Account on each Subsequent Transfer Date will
not include accrued interest on the related Subsequent Home Improvement
Contracts. Following each Subsequent Transfer Date, the aggregate principal
balance of the Subsequent Home Improvement Contracts in Sub-Pool HI will
increase by an amount equal to the aggregate principal balance of the Home
Improvement Contracts so purchased and the amount in the Sub-Pool HI Pre-
Funding Account will decrease accordingly.
Any Sub-Pool HI Pre-Funded Amount remaining after the end of the Funding
Period will be applied on the next Payment Date to prepay principal on the
Class HI: A-1 Certificates. Although no assurance can be given, the Company
anticipates that the principal amount of the related Subsequent Home
Improvement Contracts purchased by the Trust will require the application of
substantially all of the Sub-Pool HI Pre-Funded Amount and that there should
be no material amount of principal prepaid to the Class HI: A-1
Certificateholders from the Sub-Pool HI Pre-Funding Account. However, it is
unlikely that the Company will be able to deliver Subsequent Home Improvement
Contracts with an aggregate principal balance identical to the remaining Pre-
Funded Amount.
Any conveyance of Subsequent Home Improvement Contracts on a Subsequent
Transfer Date is subject to certain conditions including, but not limited to:
(a) each Subsequent Home Improvement Contract must satisfy the representations
and warranties specified in the related subsequent transfer instrument and the
Agreement; (b) the Company may not select Subsequent Home Improvement
Contracts in a manner that it believes is adverse to the interests of the
Certificateholders; (c) as of the respective Subsequent Cut-off Date the
Subsequent Home Improvement Contracts must satisfy the following criteria: (i)
no Subsequent Home Improvement Contract may be more than 59 days contractually
delinquent as of the related Subsequent Cut-off Date; (ii) the remaining
stated term to maturity of each Subsequent Home Improvement Contract may not
exceed 360 months; (iii) each Subsequent Home Improvement Contract must have
been underwritten in accordance with the Company's standard underwriting
criteria; (iv) no Subsequent Home Improvement Contract may have a loan-to-
value ratio greater than 100%; (v) as a result of the purchase of the
Subsequent Home Improvement Contracts, neither the Class HI: A Certificates
nor the Class HE: A Certificates will receive from S&P or Fitch a lower credit
rating than the rating assigned at the initial issuance of such Certificates;
and (vi) an independent accountant will provide a letter stating whether or
not the characteristics of the Subsequent Home Improvement Contracts conform
to the characteristics described herein.
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CONVEYANCE OF SUBSEQUENT HOME EQUITY CONTRACTS AND SUB-POOL HE PRE-FUNDING
ACCOUNT
An account (the "Sub-Pool HE Pre-Funding Account") will be established by
the Trustee and funded by the Company with approximately $ (the "Sub-
Pool HE Pre-Funded Amount") on the Closing Date to provide the Trust with
sufficient funds to purchase Subsequent Home Equity Contracts. In no event
will the Sub-Pool HE Pre-Funded Amount, less the aggregate principal balance
of Subsequent Home Equity Contracts specifically identified for purchase by
the Trust as of the Closing Date, represent more than % of the Original Sub-
Pool HE Certificate Principal Balance. The Sub-Pool HE Pre-Funding Account
will be used to purchase Subsequent Home Equity Contracts during the period
from the Closing Date until the earliest of (i) the date on which the amount
on deposit in the Sub-Pool HE Pre-Funding Account is less than $ , (ii)
days after the Closing Date or (iii) the date on which an Event of Termination
occurs under the Agreement (the "Funding Period"). The Pre-Funded Amount will
be reduced during the Funding Period by the amount used to purchase Subsequent
Home Equity Contracts in accordance with the Agreement.
Under the Agreement following the initial issuance of the Certificates, the
Trust will be obligated to purchase Subsequent Home Equity Contracts from the
Company during the Funding Period, subject to the availability thereof. In
connection with the purchase of Subsequent Home Equity Contracts on such dates
of transfer (the "Subsequent Transfer Dates"), the Trust will be required to
pay to the Company from amounts on deposit in the Sub-Pool HE Pre-Funding
Account a cash purchase price of % of the principal balance thereof. The
Company will designate the Subsequent Transfer Date as the cut-off date (the
"Subsequent Cut-off Date") with respect to the related Subsequent Home Equity
Contracts purchased on such date. The amount paid from the Sub-Pool HE Pre-
Funding Account on each Subsequent Transfer Date will not include accrued
interest on the related Subsequent Home Equity Contracts. Following each
Subsequent Transfer Date, the aggregate principal balance of the Subsequent
Home Equity Contracts in Sub-Pool HE will increase by an amount equal to the
aggregate principal balance of the Home Equity Contracts so purchased and the
amount in the Sub-Pool HE Pre-Funding Account will decrease accordingly.
Any Sub-Pool HE Pre-Funded Amount remaining after the end of the Funding
Period will be applied on the next Payment Date to prepay principal on the
Class HE: A-1 ARM Certificates and the Class HE: A-1 Certificates. Any amounts
remaining which had been allocated to the purchase of Subsequent Adjustable
Rate Home Equity Contracts will be paid to the Class HE: A-1 ARM
Certificateholders and any amounts remaining which had been allocated to the
purchase of Subsequent Fixed-Rate Home Equity Contracts will be paid to the
Class HE: A-1 Certificateholders. Although no assurance can be given, the
Company anticipates that the principal amount of the related Subsequent Home
Equity Contracts purchased by the Trust will require the application of
substantially all of the related Pre-Funded Amount (as defined herein) and
that there should be no material amount of principal prepaid to the Class HE:
A-1 ARM Certificateholders or the Class HE: A-1 Certificateholders from the
Sub-Pool HE Pre-Funding Account. However, it is unlikely that the Company will
be able to deliver Subsequent Home Equity Contracts with an aggregate
principal balance identical to the remaining Sub-Pool HE Pre-Funded Amount.
Any conveyance of Subsequent Home Equity Contracts on a Subsequent Transfer
Date is subject to certain conditions including, but not limited to: (a) each
Subsequent Home Equity Contract must satisfy the representations and
warranties specified in the related subsequent transfer instrument and the
Agreement; (b) the Company may not select Subsequent Home Equity Contracts in
a manner that it believes is adverse to the interests of the
Certificateholders; (c) as of the respective Subsequent Cut-off Date the
Subsequent Home Equity Contracts must satisfy the following criteria: (i) no
Subsequent Home Equity Contract may be more than 59 days contractually
delinquent as of the related Subsequent Cut-off Date; (ii) the remaining
stated term to maturity of each Subsequent Home Equity Contract may not exceed
months; (iii) each Subsequent Home Equity Contract must have been
underwritten in accordance with the Company's standard underwriting criteria;
(iv) no Subsequent Home Equity Contract may have a loan-to-value ratio greater
than 100%; (v) as a result of the purchase of the Subsequent Home Equity
Contracts, neither the Class HI: A Certificates nor the Class HE: A
Certificates will receive from S&P or Fitch a lower credit rating than the
rating assigned at the initial issuance of
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such Certificates; and (vi) an independent accountant will provide a letter
stating whether or not the characteristics of the Subsequent Home Equity
Contracts conform to the characteristics described herein.
PAYMENTS ON CONTRACTS
The Servicer, on behalf of the Trust, will establish and maintain a
Certificate Account in an "Eligible Account" (as defined below) at a
depository institution (initially [Depository Institution], [ ,
Minnesota]) with trust powers organized under the laws of the United States or
any state, the deposits of which are insured to the full extent permitted by
law by the Federal Deposit Insurance Corporation (the "FDIC"), whose short-
term deposits have been rated A-1 by S&P and F-1 by Fitch (if rated by Fitch)
or whose unsecured long-term debt has been rated in one of the two highest
rating categories by S&P and Fitch (if rated by Fitch), and which is subject
to supervision and examination by federal or state authorities (an "Eligible
Institution"). "Eligible Account" means, at any time, an account which is any
of the following: (i) an account maintained with an Eligible Institution; (ii)
an account or accounts the deposits in which are fully insured by either the
Bank Insurance Fund or the Savings Association Insurance Fund of the FDIC;
(iii) a segregated trust account maintained with the corporate trust
department of a federal or state chartered depository institution or trust
company with trust powers and acting in its fiduciary capacity for the benefit
of the Trustee, which depository institution or trust company has capital and
surplus of not less than $50,000,000; or (iv) an account that will not cause
S&P or Fitch to downgrade or withdraw its then-current rating assigned to the
Certificates, as evidenced in writing by S&P and Fitch. The Servicer may
authorize the Trustee to invest the funds in the Certificate Account in
Eligible Investments (as defined in the Agreement) that will mature not later
than the Business Day preceding the applicable monthly Payment Date. Such
Eligible Investments include, among other investments, obligations of the
United States or of any agency thereof backed by the full faith and credit of
the United States, federal funds, certificates of deposit, time deposits and
bankers acceptances sold by eligible commercial banks; any other demand or
time deposit or certificate of deposit fully insured by the FDIC; investments
in certain money-market funds; certain repurchase agreements of United States
government securities with eligible commercial banks; securities bearing
interest or sold at a discount issued by a corporation which has a credit
rating of at least "AA" from S&P and Fitch (if rated by Fitch) not in excess
of 10% of amounts in the Certificate Account at the time of such investment;
and commercial paper assigned a rating of at least A-1+ by S&P and at least F-
1+ by Fitch (if rated by Fitch). Any losses on such investments will be
deducted from other investment earnings or from other funds in the Certificate
Account.
All receipts by the Servicer of payments with respect to the Contracts,
including Principal Prepayments and advance payments by Obligors not
constituting Principal Prepayments ("Advance Payments"), shall be paid into
the Certificate Account no later than one Business Day following receipt
thereof, except amounts received as extension fees or assumption fees not
allocated to regular installments due on Contracts, which are retained by the
Servicer as part of its servicing fees and are not paid into the Certificate
Account and except for certain proceeds from Liquidated Contracts which are
used to reimburse the Servicer for customary out-of-pocket liquidation
expenses. See "Description of the Certificates--Servicing Compensation and
Payment of Expenses" herein. In addition, all payments under FHA Insurance
received by the Servicer, any Advances by the Servicer or the Trustee as
described under "Description of the Certificates--Advances," and amounts paid
by the Company for Contracts repurchased, or upon substitution for a Contract
otherwise required to be repurchased, as a result of breach of warranties
under the Agreement, as described under "Description of the Certificates--
Conveyance of Contracts," shall be paid into the Certificate Account.
On the second Business Day preceding each Payment Date (the "Determination
Date"), the Servicer will determine the Sub-Pool HI Amount Available and the
Sub-Pool HE Amount Available in the Certificate Account and the amount of
funds necessary to make all payments to be made on the next Payment Date from
the Certificate Account. Not later than one Business Day after the
Determination Date, the Company will deposit in the Certificate Account the
Repurchase Price of any Contracts required to be repurchased on such Payment
Date, or any amounts required to be deposited upon substitution for any
Contract otherwise required to be repurchased on such Purchase Date, as a
result of a breach of representations and warranties under the Agreement.
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On each Payment Date the Trustee will withdraw the Sub-Pool HI Amount
Available (which will consist primarily of amounts received in respect of the
Home Improvement Contracts, but will also include that portion of the Sub-Pool
HE Amount Available in excess of the amounts necessary to make the payments
described in clauses (a) through (d) of the succeeding paragraph) from the
Certificate Account and make the following payments, in the following order of
priority:
(i) if neither the Company nor any wholly owned subsidiary of the Company
is the Servicer, to pay the Monthly Servicing Fee with respect to the Home
Improvement Contracts to the Servicer;
(ii) to pay interest and principal on the Sub-Pool HI Certificates, in
the manner and the order of priority described below;
(iii) if the Company or any wholly owned subsidiary of the Company is the
Servicer, to pay the Monthly Servicing Fee to the Servicer with respect to
the Home Improvement Contracts;
(iv) to reimburse the Trustee or any successor Servicer for any payments
of FHA Insurance premiums with respect to the Home Improvement Contracts
not paid by the Company, as Servicer, and for which the Trustee or such
successor Servicer has not been reimbursed by the Company;
(v) to reimburse the Servicer or the Trustee, as applicable, for any
unreimbursed Advances with respect to the Home Improvement Contracts made
in respect of current or prior Payment Dates;
(vi) to reimburse the holder of the Class C Certificate for expenses
incurred by and reimbursable to it with respect to taxes or charges imposed
upon the Trust as a REMIC or otherwise;
(vii) to reimburse the Company for any prior unreimbursed Class HI: B-2
Guaranty Payments;
(viii) to pay the Class HI: B-2 Guaranty Fee to the Company; and
(ix) to pay any remaining amounts to the holder of the Class C
Certificate.
On each Payment Date the Trustee will withdraw the Sub-Pool HE Amount
Available (which will consist primarily of amounts received in respect of the
Home Equity Contracts, but will also include that portion of the Sub-Pool HI
Amount Available in excess of the amounts necessary to make the payments
described in clauses (i) through (v) of the preceding paragraph) from the
Certificate Account and make the following payments, in the following order of
priority:
(a) if neither the Company nor any wholly owned subsidiary of the Company
is the Servicer, to pay the Monthly Servicing Fee with respect to the Home
Equity Contracts to the Servicer;
(b) to pay interest and principal on the Sub-Pool HE Certificates, in the
manner and the order of priority described below;
(c) if the Company or any wholly owned subsidiary of the Company is the
Servicer, to pay the Monthly Servicing Fee to the Servicer with respect to
the Home Equity Contracts;
(d) to reimburse the Servicer or the Trustee, as applicable, for any
unreimbursed Advances with respect to the Home Equity Contracts made in
respect of current or prior Payment Dates;
(e) to reimburse the holder of the Class C Certificate for expenses
incurred by and reimbursable to it with respect to taxes or charges imposed
upon the Trust as a REMIC or otherwise;
(f) to reimburse the Company for any prior unreimbursed Class HE: B-2
Guaranty Payments;
(g) to pay the Class HE: B-2 Guaranty Fee to the Company; and
(h) to pay any remaining amounts to the holder of the Class C
Certificate.
The Scheduled Principal Balance of a Contract with respect to any Payment
Date is its principal balance as of the scheduled payment date (the "Due
Date") in the calendar month preceding such Payment Date as specified in its
amortization schedule, after giving effect to any previous partial Principal
Prepayments and to the scheduled payment due on such Due Date, but without
giving effect to any delinquency in payment or adjustments due to bankruptcy
or similar proceedings. The Pool Scheduled Principal Balance, with respect to
the Contract Pool or a given Sub-Pool, as of any Payment Date, is the
aggregate of the Scheduled Principal Balances
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of Contracts comprising the Contract Pool or such Sub-Pool, as the case may
be, that were outstanding during the preceding Due Period. A Liquidated
Contract is a defaulted Contract as to which all amounts that the Servicer
expects to recover on account of such Contract have been received.
DISTRIBUTIONS ON SUB-POOL HI CERTIFICATES
On each Payment Date, distributions on the Sub-Pool HI Certificates in
respect of the Sub-Pool HI Amount Available will be made first to the holders
of the Class HI: A Certificates, then to the holders of the Class HI: M-1
Certificates, then to the holders of the Class HI: M-2 Certificates, then to
the holders of the Class HI: B-1 Certificates and then to the holders of the
Class HI: B-2 Certificates, as described below. Distributions of interest and
principal on the Sub-Pool HI Certificates will be made primarily from amounts
available in respect of the Home Improvement Contracts comprising Sub-Pool HI.
However, under certain circumstances as described under "Description of the
Certificates--Payments on Contracts," amounts available in respect of the Home
Equity Contracts in Sub-Pool HE may be available to make distributions to the
holders of Sub-Pool HI Certificates.
Distributions of interest and principal to holders of a Class of Class HI: A
Certificates will be made on each Payment Date, to the extent that the Sub-
Pool HI Amount Available in the Certificate Account is sufficient therefor, in
an amount equal to the sum of (i) their respective Percentage Interests of the
amount of interest calculated as described under "Class HI: A Interest" below
and (ii) their respective Percentage Interests, distributed to each Class of
Class HI: A Certificates in the order of priority described under "Class HI: A
Principal" below, of the Sub-Pool HI Senior Percentage of the Sub-Pool HI
Formula Principal Distribution Amount, calculated as described under "Class
HI: A Principal" below. Distributions on the Class HI: A Certificates will be
applied first to the payment of interest and then to the payment of principal.
The Class HI: A Distribution Amount for any Payment Date is intended to be
equal to the sum (referred to as the "Class HI: A Formula Distribution
Amount") of (i) the amount of interest calculated as set forth under "Class
HI: A Interest" below and (ii) the Sub-Pool HI Senior Percentage of the Sub-
Pool HI Formula Principal Distribution Amount, provided that, if the Class HI:
A Formula Distribution Amount exceeds the Sub-Pool HI Amount Available in the
Certificate Account on such Payment Date, then the Class HI: A Distribution
Amount shall instead equal the Sub-Pool HI Amount Available and the amount of
such deficiency will be carried forward and added to the amount the Class HI:
A Certificateholders will be entitled to receive on the next Payment Date.
Distributions of interest and principal to holders of Class HI: M-1
Certificates will be made on each Payment Date in an amount equal to their
respective Percentage Interests multiplied by the Class HI: M-1 Distribution
Amount. Distributions on the Class HI: M-1 Certificates will be applied first
to the payment of interest and then to the payment of principal. The Class HI:
M-1 Distribution Amount for any Payment Date is intended to be equal to the
sum (referred to as the "Class HI: M-1 Formula Distribution Amount") of (i)
the amount of interest calculated as set forth under "Class HI: M-1 Interest"
below and (ii) after the Class HI: A Principal Balance has been reduced to
zero and until the Class HI: M-1 Principal Balance has been reduced to zero,
the Sub-Pool HI Senior Percentage of the Sub-Pool HI Formula Principal
Distribution Amount. If the Sub-Pool HI Amount Available in the Certificate
Account available for distribution to the Class HI: M-1 Certificateholders
(after giving effect to any distribution made to Class HI: A
Certificateholders on such Payment Date) (the "Class HI: M-1 Remaining Amount
Available") is less than the Class HI: M-1 Formula Distribution Amount, then
the Class HI: M-1 Distribution Amount will equal the Class HI: M-1 Remaining
Amount Available and the amount of such deficiency will be carried forward and
added to the amount such holders will be entitled to receive on the next
Payment Date.
Distributions of interest and principal to holders of Class HI: M-2
Certificates will be made on each Payment Date in an amount equal to their
respective Percentage Interests multiplied by the Class HI: M-2 Distribution
Amount. Distributions on the Class HI: M-2 Certificates will be applied first
to the payment of interest and then to the payment of principal. The Class HI:
M-2 Distribution Amount for any Payment Date is intended to be equal to the
sum (referred to as the "Class HI: M-2 Formula Distribution Amount") of (i)
the amount of interest calculated as set forth under "Class HI: M-2 Interest"
below and (ii) after the Class HI: M-1 Principal Balance
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has been reduced to zero and until the Class HI: M-2 Principal Balance has
been reduced to zero, the Sub-Pool HI Senior Percentage of the Sub-Pool HI
Formula Principal Distribution Amount. If the Sub-Pool HI Amount Available in
the Certificate Account available for distribution to the Class HI: M-2
Certificateholders (after giving effect to any distribution made to Class HI:
A Certificateholders and the Class HI: M-1 Certificateholders on such Payment
Date) (the "Class HI: M-2 Remaining Amount Available") is less than the Class
HI: M-2 Formula Distribution Amount, then the Class HI: M-2 Distribution
Amount will equal the Class HI: M-2 Remaining Amount Available and the amount
of such deficiency will be carried forward and added to the amount such
holders will be entitled to receive on the next Payment Date.
Distributions of interest and principal to holders of Class HI: B-1
Certificates will be made on each Payment Date in an amount equal to their
respective Percentage Interests multiplied by the Class HI: B-1 Distribution
Amount. Distributions on the Class HI: B-1 Certificates will be applied first
to the payment of interest and then to the payment of principal. The Class HI:
B-1 Distribution Amount for any Payment Date is intended to be equal to the
sum (referred to as the "Class HI: B-1 Formula Distribution Amount") of (i)
the amount of interest calculated as set forth under "Class HI: B-1 Interest"
below and (ii) until the Class HI: B-1 Principal Balance has been reduced to
zero, an amount of principal equal to the Class HI: B Percentage of the Sub-
Pool HI Formula Principal Distribution Amount. If the Sub-Pool HI Amount
Available in the Certificate Account available for distribution to the Class
HI: B-1 Certificateholders (after giving effect to any distribution made to
Class HI: A Certificateholders, Class HI: M-1 Certificateholders and Class HI:
M-2 Certificateholders on such Payment Date) (the "Class HI: B-1 Remaining
Amount Available") is less than the Class HI: B-1 Formula Distribution Amount,
then the Class HI: B-1 Distribution Amount will equal the Class HI: B-1
Remaining Amount Available and the amount of such deficiency will be carried
forward and added to the amount such holders will be entitled to receive on
the next Payment Date.
Distributions of interest and principal to holders of the Class HI: B-2
Certificates will be made on each Payment Date in an amount equal to their
respective Percentage Interests of the Class HI: B-2 Distribution Amount and
any Class HI: B-2 Guaranty Payment. The Class HI: B-2 Distribution Amount for
any Payment Date is intended to be equal to the sum (referred to as the "Class
HI: B-2 Formula Distribution Amount") of (i) the amount of interest calculated
as set forth under "Class HI: B-2 Interest" below and (ii) after the Class HI:
B-1 Principal Balance has been reduced to zero and until the Class HI: B-2
Principal Balance has been reduced to zero, the Class HI: B Percentage of the
Sub-Pool HI Formula Principal Distribution Amount. Distributions on the Class
HI: B-2 Certificates will be applied first to the payment of interest and then
to the payment of principal. If the Sub-Pool HI Amount Available in the
Certificate Account available for distribution to the Class HI: B-2
Certificateholders (after giving effect to distributions made to Class HI: A
Certificateholders, Class HI: M Certificateholders and Class HI: B-1
Certificateholders on such Payment Date) (the "Class HI: B-2 Remaining Amount
Available") is not sufficient to make a full distribution of the Class HI: B-2
Formula Distribution Amount to the Class HI: B-2 Certificateholders, then the
Class HI: B-2 Distribution Amount will equal the Class HI: B-2 Remaining
Amount Available and the Company will be obligated to make a Class HI: B-2
Guaranty Payment into the Certificate Account in respect thereof pursuant to
the Class HI: B-2 Limited Guaranty.
On each Payment Date the Sub-Pool HI Amount Available will be distributed to
Class HI: A Certificateholders, then Class HI: M Certificateholders and then
Class HI: B Certificateholders in the amounts and order of priority set forth
below:
Class HI: A Interest
One month's interest (computed on the basis of a 360-day year of twelve 30-
day months) will be paid concurrently to the holders of each Class of Class
HI: A Certificates on each Payment Date, to the extent of the Sub-Pool HI
Amount Available in the Certificate Account on such date, at the related Pass-
Through Rate on the then outstanding Principal Balance of each Class of Class
HI: A Certificates. Interest on each Class of Class HI: A Certificates will
accrue from the Closing Date, or from the most recent Payment Date on which
interest has been paid, to but excluding the following Payment Date.
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The Pass-Through Rates for the Class HI: A-1, Class HI: A-2 and Class HI: A-
3 Certificates are set forth on the cover of this Prospectus Supplement, and
in each case will be computed on the basis of a 360-day year of twelve 30-day
months.
The Principal Balance of any Class of Class HI: A Certificates as of any
Payment Date is the Original Principal Balance of such Class less all amounts
previously distributed to holders of such Class on account of principal. The
Class HI: A Principal Balance as of any Payment Date is 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.
In the event that, on a particular Payment Date, the Sub-Pool HI Amount
Available in the Certificate Account is not sufficient to make a full
distribution of interest to the holders of each Class of Class HI: A
Certificates, the amount of interest to be distributed in respect of the Class
HI: A Certificates will be allocated among each Class thereof (and within a
Class among the Certificates of such Class) pro rata in accordance with their
respective entitlements to interest, and the amount of the shortfall will be
carried forward and added to the amount such holders will be entitled to
receive on the next Payment Date. Such a shortfall could occur, for example,
if delinquencies or losses realized on the Home Improvement Contracts were
exceptionally high and were concentrated in a particular month. Any such
amount so carried forward will bear interest at the applicable Pass-Through
Rate for each Class of Class HI: A Certificates, to the extent permitted by
law.
Class HI: A Principal
Holders of a Class of Class HI: A Certificates will be entitled to receive
on each Payment Date as payments of principal, in the order of priority set
forth below and to the extent of the Sub-Pool HI Amount Available in the
Certificate Account on such date after payment of interest on each Class of
Class HI: A Certificates, the Sub-Pool HI Senior Percentage of the sum (such
sum being referred to hereinafter as the "Sub-Pool HI Formula Principal
Distribution Amount") of (i) all scheduled payments of principal due on each
outstanding Home Improvement Contract during the related Due Period, (ii) the
Scheduled Principal Balance of each Home Improvement Contract which, during
the related Due Period, was purchased by the Company pursuant to the Agreement
on account of certain breaches of its representations and warranties, (iii)
all partial Principal Prepayments applied and all Principal Prepayments in
Full received during the related Due Period in respect of Home Improvement
Contracts, (iv) the Scheduled Principal Balance of each Home Improvement
Contract that became a Liquidated Contract during the related Due Period, and
(v) any amount described in clauses (i) through (iv) above that was not
previously distributed because of an insufficient amount of funds available in
the Certificate Account if (a) the Payment Date occurs on or after the Payment
Date on which the Class HI: B-2 Principal Balance has been reduced to zero, or
(b) such amount was not covered by a Class HI: B-2 Guaranty Payment and
corresponding reduction in the Class HI: B-2 Principal Balance. When the
Principal Balance of a Class of Class HI: A Certificates is reduced to zero,
no further distributions of principal will be made to the holders of such
Class.
The Sub-Pool HI Senior Percentage for any Payment Date prior to the Class
HI: B Cross-over Date, and for any Payment Date on or after the Class HI: B
Cross-over Date on which any Class HI: B Principal Distribution Test is not
satisfied (each as described under "Class HI: B-1 Principal" below), will be
100%, and for any Payment Date on or after the Class HI: B Cross-over Date on
which each Class HI: B Principal Distribution Test is satisfied will equal 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
Payment Date and the denominator of which is the Pool Scheduled Principal
Balance of Sub-Pool HI as of the immediately preceding Payment Date.
The Sub-Pool HI Senior Percentage of the Sub-Pool HI Formula Principal
Distribution Amount will be distributed, to the extent of the Sub-Pool HI
Amount Available after payment of interest on each Class of Class HI: A
Certificates, first to the Class HI: A-1 Certificateholders until the Class
HI: A-1 Principal Balance has been reduced to zero, then to the Class HI: A-2
Certificateholders until the Class HI: A-2 Principal Balance has been reduced
to zero and then to the Class HI: A-3 Certificateholders until the Class HI:
A-3 Principal Balance has been reduced to zero. Notwithstanding the foregoing,
on any Payment Date as to which there is a Class HI:
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A Liquidation Loss Principal Amount (which is the amount, if any, by which 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), the remaining
Sub-Pool HI Amount Available will be distributed pro rata to each Class of
Class HI: A Certificates based on the Class Principal Balance of each Class
(but in no event will such amount exceed the Class Principal Balance of any
such Class).
As hereinafter described, all losses on Liquidated Home Improvement
Contracts will be absorbed first by the Class C Certificates, then by the
Class HI: B-2 Guaranty Fee otherwise payable to the Company, then by the
related Monthly Servicing Fee otherwise payable to the Servicer (so long as
the Company or any wholly owned subsidiary of the Company is the Servicer)
with respect to the Home Improvement Contracts, then by the Class HI: B-2
Certificates, then by the Class HI: B-1 Certificates, then by the Class HI: M-
2 Certificates and then by the Class HI: M-1 Certificates. If the Sub-Pool HI
Amount Available on any Payment Date is less than the Class HI: A Distribution
Amount, the Sub-Pool HI Amount Available will be applied first to the payment
of interest on the Class HI: A Certificates and then to the payment of
principal to the Class of Class HI: A Certificates then entitled thereto.
Class HI: M-1 Interest
Interest will be paid to the Class HI: M-1 Certificateholders on each
Payment Date, to the extent of the Class HI: M-1 Remaining Amount Available,
if any, in an amount (the "Class HI: M-1 Interest Payment Amount") equal to
the product of (a) the Class HI: M-1 Pass-Through Rate and (b) the then
outstanding Class HI: M-1 Principal Balance less the Class HI: M-1 Liquidation
Loss Principal Amount, if any. The "Class HI: M-1 Liquidation Loss Principal
Amount" as of any Payment Date will equal the excess, if any, of the Sub-Pool
HI Aggregate Liquidation Loss Principal Amount over the aggregate of the
Principal Balances of the Class HI: M-2 Certificates, the Class HI: B-1
Certificates and the Class HI: B-2 Certificates (but in no event greater than
the Class HI: M-1 Principal Balance). The "Sub-Pool HI Aggregate Liquidation
Loss Principal Amount" as of any Payment Date will equal the excess, if any,
of (i) the aggregate Principal Balance of the Sub-Pool HI Certificates as of
the preceding Payment Date (after giving effect to distributions of principal
thereon) over (ii) the Pool Scheduled Principal Balance of Sub-Pool HI plus
the Sub-Pool HI Pre-Funded Amount for such preceding Payment Date. Interest on
the outstanding Class HI: M-1 Principal Balance will accrue from the Closing
Date, or from the most recent Payment Date on which interest has been paid, to
but excluding the following Payment Date, and will be computed on the basis of
a 360-day year of twelve 30-day months. The Class HI: M-1 Principal Balance is
the Original Class HI: M-1 Principal Balance less the sum of all amounts
previously distributed to Class HI: M-1 Certificateholders on account of
principal. In the event that, on a particular Payment Date, the Class HI: M-1
Remaining Amount Available, plus other funds in the Certificate Account
available therefor, is not sufficient to make a full distribution of the Class
HI: M-1 Interest Payment Amount to the Class HI: M-1 Certificateholders, the
amount of such interest to be distributed in respect of the Class HI: M-1
Certificates will be allocated among the Class HI: M-1 Certificates pro rata
in accordance with their respective entitlements to interest, and any
remaining deficiency will be carried forward and added to the amount such
holders will be entitled to receive on the next Payment Date. Interest will
accrue on the Class HI: M-1 Liquidation Loss Principal Amount, if any, and
will be payable on the current or succeeding Payment Dates to the extent of
the Sub-Pool HI Amount Available remaining after payment of the Class HI: A
Distribution Amount, the Class HI: M-1 Distribution Amount, the Class HI: M-2
Distribution Amount, the Class HI: B-1 Distribution Amount and the Class HI:
B-2 Distribution Amount. Any interest amounts carried forward will bear
interest at the Class HI: M-1 Pass-Through Rate, to the extent permitted by
law.
The Class HI: M-1 Pass-Through Rate is set forth on the cover of this
Prospectus Supplement, and will be computed on the basis of a 360-day year of
twelve 30-day months.
Class HI: M-1 Principal
On each Payment Date after the Class HI: A Principal Balance has been
reduced to zero, Class HI: M-1 Certificateholders will be entitled to receive,
as payments of principal, the Sub-Pool HI Senior Percentage of the
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Sub-Pool HI Formula Principal Distribution Amount (as described under "Class
HI: A Principal" above) to the extent of the Class HI: M-1 Remaining Amount
Available in the Certificate Account on such date, after payment of all
interest payable on the Class HI: M-1 Certificates (other than in respect of
Class HI: M-1 Liquidation Loss Principal Amounts), until the Class HI: M-1
Principal Balance has been reduced to zero. On each Payment Date on or after
the Class HI: B Cross-over Date on which each Class HI: B Principal
Distribution Test is satisfied, payments of principal will be made to Class
HI: B-1 or Class HI: B-2 Certificateholders, even if Class HI: M-1
Certificateholders are not yet entitled to receive payments of principal
because the Class HI: A Principal Balance has not been reduced to zero.
Class HI: M-2 Interest
Interest will be paid to the Class HI: M-2 Certificateholders on each
Payment Date, to the extent of the Class HI: M-2 Remaining Amount Available,
if any, in an amount (the "Class HI: M-2 Interest Payment Amount") equal to
the product of (a) the Class HI: M-2 Pass-Through Rate and (b) the then
outstanding Class HI: M-2 Principal Balance less the Class HI: M-2 Liquidation
Loss Principal Amount, if any. The "Class HI: M-2 Liquidation Loss Principal
Amount" as of any Payment Date will equal the excess, if any, of the Sub-Pool
HI Aggregate Liquidation Loss Principal Amount over the aggregate of the
Principal Balances of the Class HI: B-1 Certificates and the Class HI: B-2
Certificates (but in no event greater than the Class HI: M-2 Principal
Balance). Interest on the outstanding Class HI: M-2 Principal Balance will
accrue from the Closing Date, or from the most recent Payment Date on which
interest has been paid, to but excluding the following Payment Date, and will
be computed on the basis of a 360-day year of twelve 30-day months. The Class
HI: M-2 Principal Balance is the Original Class HI: M-2 Principal Balance less
the sum of all amounts previously distributed to Class HI: M-2
Certificateholders on account of principal. In the event that, on a particular
Payment Date, the Class HI: M-2 Remaining Amount Available, plus other funds
in the Certificate Account available therefor, is not sufficient to make a
full distribution of the Class HI: M-2 Interest Payment Amount to the Class
HI: M-2 Certificateholders, the amount of such interest to be distributed in
respect to the Class HI: M-2 Certificates will be allocated among the Class
HI: M-2 Certificates pro rata in accordance with their respective entitlements
to interest, and any remaining deficiency will be carried forward and added to
the amount such holders will be entitled to receive on the next Payment Date.
Interest will accrue on the Class HI: M-2 Liquidation Loss Principal Amount,
if any, and will be payable on the current or succeeding Payment Dates to the
extent of the Sub-Pool HI Amount Available remaining after payment in full of
the Class HI: A Distribution Amount, the Class HI: M-1 Distribution Amount,
the Class HI: M-2 Distribution Amount, the Class HI: B-1 Distribution Amount,
the Class HI: B-2 Distribution Amount and interest accrued and unpaid on the
Class HI: M-1 Liquidation Loss Principal Amount. Any interest amounts carried
forward will bear interest at the Class HI: M-2 Pass-Through Rate, to the
extent permitted by law.
The Class HI: M-2 Pass-Through Rate is set forth on the cover of this
Prospectus Supplement, and will be computed on the basis of a 360-day year of
twelve 30-day months.
Class HI: M-2 Principal
On each Payment Date after the Class HI: A Principal Balance and the Class
HI: M-1 Principal Balance have been reduced to zero, Class HI: M-2
Certificateholders will be entitled to receive, as payments of principal, the
Sub-Pool HI Senior Percentage of the Sub-Pool HI Formula Principal
Distribution Amount (as described under "Class HI: A Principal" above) to the
extent of the Class HI: M-2 Remaining Amount Available in the Certificate
Account on such date, after payment of all interest payable on the Class HI:
M-2 Certificates (other than in respect of Class HI: M-2 Liquidation Loss
Principal Amounts), until the Class HI: M-2 Principal Balance has been reduced
to zero. On each Payment Date on or after the Class HI: B Cross-over Date on
which each Class HI: B Principal Distribution Test is satisfied, payments of
principal will be made to Class HI: B-1 or Class HI: B-2 Certificateholders,
even if Class HI: M-2 Certificateholders are not yet entitled to receive
payments of principal because the Class HI: A Principal Balance and Class HI:
M-1 Principal Balance have not been reduced to zero.
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Class HI: B-1 Interest
Interest will be paid to the Class HI: B-1 Certificateholders on each
Payment Date, to the extent of the Class HI: B-1 Remaining Amount Available,
if any, in an amount (the "Class HI: B-1 Interest Payment Amount") equal to
the product of (a) the Class HI: B-1 Pass-Through Rate and (b) the then
outstanding Class HI: B-1 Principal Balance less the Class HI: B-1 Liquidation
Loss Principal Amount, if any. The "Class HI: B-1 Liquidation Loss Principal
Amount" as of any Payment Date will equal the excess, if any, of the Sub-Pool
HI Aggregate Liquidation Loss Principal Amount over the Class HI: B-2
Principal Balance (but in no event greater than the Class HI: B-1 Principal
Balance). Interest on the outstanding Class HI: B-1 Principal Balance will
accrue from the Closing Date, or from the most recent Payment Date on which
interest has been paid, to but excluding the following Payment Date, and will
be computed on the basis of a 360-day year of twelve 30-day months. The Class
HI: B-1 Principal Balance is the Original Class HI: B-1 Principal Balance less
the sum of all amounts previously distributed to Class HI: B-1
Certificateholders on account of principal. In the event that, on a particular
Payment Date, the Class HI: B-1 Remaining Amount Available, plus other funds
in the Certificate Account available therefor, is not sufficient to make a
full distribution of the Class HI: B-1 Interest Payment Amount to the Class
HI: B-1 Certificateholders, the amount of such interest to be distributed in
respect of the Class HI: B-1 Certificates will be allocated among the Class
HI: B-1 Certificates pro rata in accordance with their respective entitlements
to interest, and any remaining deficiency will be carried forward and added to
the amount such holders will be entitled to receive on the next Payment Date.
Interest will accrue on the Class HI: B-1 Liquidation Loss Principal Amount,
if any, and will be payable on the current or succeeding Payment Dates to the
extent of the Sub-Pool HI Amount Available remaining after payment in full of
the Class HI: A Distribution Amount, the Class HI: M-1 Distribution Amount,
the Class HI: M-2 Distribution Amount, the Class HI: B-1 Distribution Amount,
the Class HI: B-2 Distribution Amount and interest accrued and unpaid on the
Class HI: M-1 Liquidation Loss Principal Amount and Class HI: M-2 Liquidation
Loss Principal Amount. Any interest amounts carried forward will bear interest
at the Class HI: B-1 Pass-Through Rate, to the extent permitted by law.
The Class HI: B-1 Pass-Through Rate is set forth on the cover of this
Prospectus Supplement, and will be computed on the basis of a 360-day year of
twelve 30-day months.
Class HI: B-1 Principal
Prior to the Class HI: B Cross-over Date, there will be no distributions of
principal on the Class HI: B-1 Certificates. The Class HI: B Cross-over Date
will be the earlier of (A) the Payment Date on which the Class HI: M-2
Principal Balance is reduced to zero, and (B) the first Payment Date on or
after the Payment Date in 2001 on which the fraction, expressed as a
percentage, the numerator of which is the Class HI: B Principal Balance as of
such Payment Date and the denominator of which is the Pool Scheduled Principal
Balance of Sub-Pool HI as of the immediately preceding Payment Date, is equal
to or greater than %.
On each Payment Date on or after the Class HI: B Cross-over Date and prior
to the Payment Date on which the Class HI: A Principal Balance and the Class
HI: M Principal Balance have been reduced to zero, holders of Class HI: B
Certificates will be entitled to distributions of principal only if each of
the following tests (each a "Class HI: B Principal Distribution Test") is
satisfied on such Payment Date: (i) the average of the Sub-Pool HI Sixty-Day
Delinquency Ratio (as defined in the Agreement) as of such Payment Date and
the prior two Payment Dates must not exceed %; (ii) the average of the Sub-
Pool HI Thirty-Day Delinquency Ratio (as defined in the Agreement) as of such
Payment Date and the prior two Payment Dates must not exceed %; (iii) the
Sub-Pool HI Cumulative Realized Loss Ratio (as defined in the Agreement) as of
such Payment Date must not exceed %; (iv) the Sub-Pool HI Current Realized
Loss Ratio (as defined in the Agreement) as of such Payment Date must not
exceed %; and (v) the Class HI: B Principal Balance divided by the Pool
Scheduled Principal Balance of Sub-Pool HI as of the immediately preceding
Payment Date must be equal to or greater than %.
On each Payment Date on or after the Class HI: B Cross-over Date, if each
Class HI: B Principal Distribution Test is satisfied on such Payment Date,
Class HI: B-1 Certificateholders will be entitled to receive,
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as payments of principal, the Class HI: B Percentage of the Sub-Pool HI
Formula Principal Distribution Amount to the extent of the Class HI: B-1
Remaining Amount Available in the Certificate Account on such date after
payment of all interest payable on the Class HI: B-1 Certificates (other than
in respect of Class HI: B-1 Liquidation Loss Principal Amounts), until the
Class HI: B-1 Principal Balance has been reduced to zero. The Class HI: B-2
Certificateholders will not be entitled to any distributions of principal from
the Class HI: B-1 Remaining Amount Available until the Class HI: B-1 Principal
Balance has been reduced to zero.
The Class HI: B Percentage for any Payment Date will be equal to % minus
the Sub-Pool HI Senior Percentage. The Class HI: B Percentage for each Payment
Date, if any, after the Class HI: A Principal Balance and the Class HI: M
Principal Balance have been reduced to zero will be equal to %.
Class HI: B-2 Interest
Interest will be paid to the Class HI: B-2 Certificateholders on each
Payment Date, to the extent of (i) the Class HI: B-2 Remaining Amount
Available, if any and (ii) the amount, if any, paid pursuant to the Class HI:
B-2 Limited Guaranty, in an amount (the "Class HI: B-2 Interest Payment
Amount") equal to the product of (a) the Class HI: B-2 Pass-Through Rate and
(b) the then outstanding Class HI: B-2 Principal Balance less the Class HI: B-
2 Liquidation Loss Principal Amount, if any. The "Class HI: B-2 Liquidation
Loss Principal Amount" as of any Payment Date will equal the Sub-Pool HI
Aggregate Liquidation Loss Principal Amount (but in no event greater than the
Class HI: B-2 Principal Balance). Interest on the outstanding Class HI: B-2
Principal Balance will accrue from the Closing Date, or from the most recent
Payment Date on which interest has been paid, to but excluding the following
Payment Date, and will be computed on the basis of a 360-day year of twelve
30-day months. The Class HI: B-2 Principal Balance is the Original Class HI:
B-2 Principal Balance less the sum of all amounts previously distributed to
Class HI: B-2 Certificateholders on account of principal. In the event that,
on a particular Payment Date, the Class HI: B-2 Remaining Amount Available in
the Certificate Account is not sufficient to make a full distribution of the
Class HI: B-2 Interest Payment Amount to the Class HI: B-2 Certificateholders
and the Company fails to pay such amount under the Class HI: B-2 Limited
Guaranty, the amount of such interest to be distributed in respect of the
Class HI: B-2 Certificates will be allocated among the Class HI: B-2
Certificates pro rata in accordance with their respective entitlements to
interest, and the amount of such deficiency will be carried forward and added
to the amount such holders will be entitled to receive on the next Payment
Date. Interest will accrue in respect of the Class HI: B-2 Liquidation Loss
Principal Amount, if any, and will be payable on the current or succeeding
Payment Dates to the extent of the Sub-Pool HI Amount Available remaining
after payment in full of the Class HI: A Distribution Amount, the Class HI: M-
1 Distribution Amount, the Class HI: M-2 Distribution Amount, the Class HI: B-
1 Distribution Amount, the Class HI: B-2 Distribution Amount and interest
accrued and unpaid on the Class HI: M-1 Liquidation Loss Principal Amount, the
Class HI: M-2 Liquidation Loss Principal Amount and the Class HI: B-1
Liquidation Loss Principal Amount. Any interest amounts carried forward will
bear interest at the Class HI: B-2 Pass-Through Rate, to the extent permitted
by law.
The Class HI: B-2 Pass-Through Rate is set forth on the cover of this
Prospectus Supplement, and will be computed on the basis of a 360-day year of
twelve 30-day months.
Class HI: B-2 Principal
Except for distributions of any amounts representing a Class HI: B-2
Liquidation Loss Principal Amount (as described below), payments of principal
on the Class HI: B-2 Certificates will not commence until the Payment Date on
which the Class HI: B-1 Principal Balance has been reduced to zero (the "Class
HI: B-1 Cross-over Date"), and will be made on that Payment Date and each
Payment Date thereafter only if each Class HI: B Principal Distribution Test
is satisfied on such Payment Date (unless the Class HI: A Principal Balance
and the Class HI: M Principal Balance have been reduced to zero). On any such
Payment Date, the Class HI: B Percentage of the Sub-Pool HI Formula Principal
Distribution Amount will be distributed, to the extent of the Class HI: B-2
Remaining Amount Available and any amounts actually paid under the Class HI:
B-2 Limited Guaranty after payment of interest on the Class HI: B-2
Certificates (other than in respect of any Class HI: B-2
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Liquidation Loss Principal Amounts), to the Class HI: B-2 Certificateholders
until the Class HI: B-2 Principal Balance has been reduced to zero.
On each Payment Date, the Class HI: B-2 Certificateholders will be entitled
to receive pursuant to the Class HI: B-2 Limited Guaranty the Class HI: B-2
Liquidation Loss Principal Amount, if any.
DISTRIBUTIONS ON SUB-POOL HE CERTIFICATES
On each Payment Date, distributions on the Sub-Pool HE Certificates in
respect of the Sub-Pool HE Amount Available will be made first to the holders
of the Class HE: A Certificates, then to the holders of the Class HE: M-1
Certificates, then to the holders of the Class HE: M-2 Certificates, then to
the holders of the Class HE: B-1 Certificates and then to the holders of the
Class HE: B-2 Certificates, as described below. Distributions of interest and
principal on the Sub-Pool HE Certificates will be made primarily from amounts
available in respect of the Home Equity Contracts comprising Sub-Pool HE.
However, under certain circumstances as described under "Description of the
Certificates--Payments on Contracts," amounts available in respect of the Home
Improvement Contracts in Sub-Pool HI may be available to make distributions to
the holders of Sub-Pool HE Certificates.
Distributions of interest and principal to holders of a Class of Class HE: A
Certificates will be made on each Payment Date, to the extent that the Sub-
Pool HE Amount Available in the Certificate Account is sufficient therefor, in
an amount equal to the sum of (i) their respective Percentage Interests of the
amount of interest calculated as described under "Class HE: A Interest" below,
(ii) with respect to the Class HE: A-1 ARM Certificates, their respective
Percentage Interests of the Class HE: A-1 ARM Formula Principal Distribution
Amount and (iii) with respect to each other Class of HE: A Certificates (other
than the Class HE: A-7 IO Certificates), their respective Percentage
Interests, distributed to each Class of Class HE: A Certificates in the order
of priority described under "Class HE: A Principal" below, of the Sub-Pool HE
Senior Percentage of the Sub-Pool HE Formula Principal Distribution Amount,
calculated as described under "Class HE: A Principal" below. Distributions on
the Class HE: A Certificates will be applied first to the payment of interest
and then to the payment of principal. The Class HE: A Distribution Amount for
any Payment Date is intended to be equal to the sum (referred to as the "Class
HE: A Formula Distribution Amount") of (i) the amount of interest calculated
as set forth under "Class HE: A Interest" below, (ii) the Class HE: A-1 ARM
Formula Principal Distribution Amount and (iii) the Sub-Pool HE Senior
Percentage of the Sub-Pool HE Formula Principal Distribution Amount, provided
that, if the Class HE: A Formula Distribution Amount exceeds the Sub-Pool HE
Amount Available in the Certificate Account on such Payment Date, then the
Class HE: A Distribution Amount shall instead equal the Sub-Pool HE Amount
Available and the amount of such deficiency will be carried forward and added
to the amount the Class HE: A Certificateholders will be entitled to receive
on the next Payment Date.
Distributions of interest and principal to holders of Class HE: M-1
Certificates will be made on each Payment Date in an amount equal to their
respective Percentage Interests multiplied by the Class HE: M-1 Distribution
Amount. Distributions on the Class HE: M-1 Certificates will be applied first
to the payment of interest and then to the payment of principal. The Class HE:
M-1 Distribution Amount for any Payment Date is intended to be equal to the
sum (referred to as the "Class HE: M-1 Formula Distribution Amount") of (i)
the amount of interest calculated as set forth under "Class HE: M-1 Interest"
below and (ii) after the Class HE: A Principal Balance has been reduced to
zero and until the Class HE: M-1 Principal Balance has been reduced to zero,
the Sub-Pool HE Senior Percentage of the Sub-Pool HE Formula Principal
Distribution Amount. If the Sub-Pool HE Amount Available in the Certificate
Account available for distribution to the Class HE: M-1 Certificateholders
(after giving effect to any distribution made to Class HE: A
Certificateholders on such Payment Date) (the "Class HE: M-1 Remaining Amount
Available") is less than the Class HE: M-1 Formula Distribution Amount, then
the Class HE: M-1 Distribution Amount will equal the Class HE: M-1 Remaining
Amount Available and the amount of such deficiency will be carried forward and
added to the amount such holders will be entitled to receive on the next
Payment Date.
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Distributions of interest and principal to holders of Class HE: M-2
Certificates will be made on each Payment Date in an amount equal to their
respective Percentage Interests multiplied by the Class HE: M-2 Distribution
Amount. Distributions on the Class HE: M-2 Certificates will be applied first
to the payment of interest and then to the payment of principal. The Class HE:
M-2 Distribution Amount for any Payment Date is intended to be equal to the
sum (referred to as the "Class HE: M-2 Formula Distribution Amount") of (i)
the amount of interest calculated as set forth under "Class HE: M-2 Interest"
below and (ii) after the Class HE: M-1 Principal Balance has been reduced to
zero and until the Class HE: M-2 Principal Balance has been reduced to zero,
the Sub-Pool HE Senior Percentage of the Sub-Pool HE Formula Principal
Distribution Amount. If the Sub-Pool HE Amount Available in the Certificate
Account available for distribution to the Class HE: M-2 Certificateholders
(after giving effect to any distribution made to Class A HE:
Certificateholders and the Class HE: M-1 Certificateholders on such Payment
Date) (the "Class HE: M-2 Remaining Amount Available") is less than the Class
HE: M-2 Formula Distribution Amount, then the Class HE: M-2 Distribution
Amount will equal the Class HE: M-2 Remaining Amount Available and the amount
of such deficiency will be carried forward and added to the amount such
holders will be entitled to receive on the next Payment Date.
Distributions of interest and principal to holders of Class HE: B-1
Certificates will be made on each Payment Date in an amount equal to their
respective Percentage Interests multiplied by the Class HE: B-1 Distribution
Amount. Distributions on the Class HE: B-1 Certificates will be applied first
to the payment of interest and then to the payment of principal. The Class HE:
B-1 Distribution Amount for any Payment Date is intended to be equal to the
sum (referred to as the "Class HE: B-1 Formula Distribution Amount") of (i)
the amount of interest calculated as set forth under "Class HE: B-1 Interest"
below and (ii) until the Class HE: B-1 Principal Balance has been reduced to
zero, an amount of principal equal to the Class HE: B Percentage of the Sub-
Pool HE Formula Principal Distribution Amount. If the Sub-Pool HE Amount
Available in the Certificate Account available for distribution to the Class
HE: B-1 Certificateholders (after giving effect to any distribution made to
Class HE: A Certificateholders, Class HE: M-1 Certificateholders and Class HE:
M-2 Certificateholders on such Payment Date) (the "Class HE: B-1 Remaining
Amount Available") is less than the Class HE: B-1 Formula Distribution Amount,
then the Class HE: B-1 Distribution Amount will equal the Class HE: B-1
Remaining Amount Available and the amount of such deficiency will be carried
forward and added to the amount such holders will be entitled to receive on
the next Payment Date.
Distributions of interest and principal to holders of the Class HE: B-2
Certificates will be made on each Payment Date in an amount equal to their
respective Percentage Interests of the Class HE: B-2 Distribution Amount and
any Class HE: B-2 Guaranty Payment. The Class HE: B-2 Distribution Amount for
any Payment Date is intended to be equal to the sum (referred to as the "Class
HE: B-2 Formula Distribution Amount") of (i) the amount of interest calculated
as set forth under "Class HE: B-2 Interest" below and (ii) after the Class HE:
B-1 Principal Balance has been reduced to zero and until the Class HE: B-2
Principal Balance has been reduced to zero, the Class HE: B Percentage of the
Sub-Pool HE Formula Principal Distribution Amount. Distributions on the Class
HE: B-2 Certificates will be applied first to the payment of interest and then
to the payment of principal. If the Sub-Pool HE Amount Available in the
Certificate Account available for distribution to the Class HE: B-2
Certificateholders (after giving effect to distributions made to Class HE: A
Certificateholders, Class HE: M Certificateholders and Class HE: B-1
Certificateholders on such Payment Date) (the "Class HE: B-2 Remaining Amount
Available") is not sufficient to make a full distribution of the Class HE: B-2
Formula Distribution Amount to the Class HE: B-2 Certificateholders, then the
Class HE: B-2 Distribution Amount will equal the Class HE: B-2 Remaining
Amount Available and the Company will be obligated to make a Class HE: B-2
Guaranty Payment into the Certificate Account in respect thereof pursuant to
the Class HE: B-2 Limited Guaranty.
On each Payment Date the Sub-Pool HE Amount Available will be distributed to
Class HE: A Certificateholders, then Class HE: M Certificateholders and then
Class HE: B Certificateholders in the amounts and order of priority set forth
below:
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Class HE: A Interest
One month's interest will be paid concurrently to the holders of each Class
of Class HE: A Certificates on each Payment Date, to the extent of the Sub-
Pool HE Amount Available in the Certificate Account on such date, at the
related Pass-Through Rate on the then outstanding Principal Balance of each
Class of Class HE: A Certificates, or in the case of the Class HE: A-7 IO
Certificates, on the Notional Principal Amount. Interest on each Class of
Class HE: A Certificates will accrue from the Closing Date, or from the most
recent Payment Date on which interest has been paid, to but excluding the
following Payment Date. Interest on each Class of HE: A Certificates, other
than the Class HE: A-1 ARM Certificates, will be computed on the basis of a
360-day year of twelve 30-day months. Interest on the Class HE: A-1 ARM
Certificates will be computed on the basis of actual days elapsed in a 360-day
year.
The Class HE: A-1 ARM Pass-Through Rate is a floating rate equal to the
lesser of one-month LIBOR plus the Pass-Through Margin or the Available Funds
Pass-Through Rate, but in no case more than %. The Pass-Through Margin will
equal 0. % per annum on each Payment Date on which the Pool Scheduled
Principal Balance of the Contract Pool is % or more of the Cut-off Date Pool
Principal Balance of the Contract Pool, and 0. % per annum on each Payment
Date on which the Pool Scheduled Principal Balance of the Contract Pool is
less than % of the Cut-off Date Pool Principal Balance of the Contract Pool.
The Available Funds Pass-Through Rate for any Payment Date will be a rate per
annum equal to the weighted average of the Expense Adjusted Contract Rates on
the then outstanding Adjustable Rate Home Equity Contracts. The Expense
Adjusted Contract Rate on any Adjustable Rate Home Equity Contract is equal to
the then applicable Mortgage Rate thereon, minus the Expense Fee Rate. The
Expense Fee Rate is %. One-month LIBOR with respect to any monthly interest
period will equal the offered rate for United States dollar deposits for one
month that appears on Telerate Page 3750 as of 11:00 A.M., London time, on the
second LIBOR business day prior to such monthly interest period. For a
description of the method used to calculate one-month LIBOR, see "Description
of the Certificates--Calculation of One-Month LIBOR."
The Pass-Through Rates for the Class 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
are set forth on the cover of this Prospectus Supplement.
The Principal Balance of any Class of Class HE: A Certificates (other than
the Class HE: A-7 IO Certificates) as of any Payment Date is the Original
Principal Balance of such Class less all amounts previously distributed to
holders of such Class on account of principal. The Class HE: A Principal
Balance as of any Payment Date is 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.
Interest will be calculated on the Class HE: A-7 IO Certificates on each
Payment Date based on the Notional Principal Amount, which for the first 36
Payment Dates is equal to $ (or the Class HE: A Principal Balance for
such Payment Date, if less), and will thereafter equal zero. The Notional
Principal Amount provides a basis for calculating interest payments only, and
does not represent the right to receive any distributions of principal.
In the event that, on a particular Payment Date, the Sub-Pool HE Amount
Available in the Certificate Account is not sufficient to make a full
distribution of interest to the holders of each Class of Class HE: A
Certificates, the amount of interest to be distributed in respect of the Class
HE: A Certificates will be allocated among each Class thereof (and within a
Class among the Certificates of such Class) pro rata in accordance with their
respective entitlements to interest, and the amount of the shortfall will be
carried forward and added to the amount such holders will be entitled to
receive on the next Payment Date. Such a shortfall could occur, for example,
if delinquencies or losses realized on the Home Equity Contracts were
exceptionally high and were concentrated in a particular month. Any such
amount so carried forward will bear interest at the applicable Pass-Through
Rate for each Class of Class HE: A Certificates, to the extent permitted by
law.
S-99
<PAGE>
Class HE: A Principal
Holders of a Class of Class HE: A Certificates (other than the Class HE: A-7
IO Certificates) will be entitled to receive payments of principal on each
Payment Date in the order of priority set forth below and to the extent of the
Sub-Pool HE Amount Available in the Certificate Account after payment of all
interest payable on each Class of Class HE: A Certificates. Holders of the
Class HE: A-1 ARM Certificates will be entitled to receive, as payments of
principal, an amount equal to the Class HE: A-1 ARM Formula Principal
Distribution Amount. The "Class HE: A-1 ARM Formula Principal Distribution
Amount" on or before the Payment Date on which the Class HE: A-1 ARM
Certificates have been paid in full will generally be equal to the lesser of
(A) the Class HE: A-1 ARM Principal Balance or (B) the sum of the following:
(i) all scheduled payments of principal due on each outstanding Adjustable
Rate Home Equity Contract during the related Due Period; (ii) all partial
Principal Prepayments and Principal Prepayments in Full received on each
Adjustable Rate Home Equity Contract during the related Due Period; (iii) the
scheduled principal balance of each Adjustable Rate Home Equity Contract that
became a Liquidated Contract during the related Due Period; (iv) the scheduled
principal balance of each Adjustable Rate Home Equity Contract purchased by
the Company during the related Due Period pursuant to the Pooling and
Servicing Agreement; and (v) on any Payment Date which is on or after the
Payment Date on which the Class HE: A-1, A-2, A-3, A-4, A-5 and A-6
Certificates have been paid in full, (a) the Sub-Pool HE Senior Percentage
times (x) the sum of the amounts described in clauses (i) through (v) of the
definition of the Sub-Pool HE Formula Principal Distribution Amount less (y)
the sum of the amounts described in clauses (i) through (iv) of the definition
of the Sub-Pool HE: A-1 ARM Formula Principal Distribution Amount less (b) the
amount, if any, distributed in payment of principal on the Class HE: A-1, A-2,
A-3, A-4, A-5 and A-6 Certificates on such Payment Date.
The Class HE: A-7 IO Certificates are interest-only Certificates and are not
entitled to receive distributions of principal.
Holders of the Class HE: A Certificates (other than the Class HE: A-1 ARM
Certificates and the Class HE: A-7 IO Certificates) will be entitled to
receive, as payments of principal, an amount equal to the Sub-Pool HE Senior
Percentage of the Sub-Pool HE Formula Principal Distribution Amount. The Sub-
Pool HE Formula Principal Distribution Amount is the sum of (i) all scheduled
payments of principal due on each outstanding Home Equity Contract during the
related Due Period, (ii) the Scheduled Principal Balance of each Home Equity
Contract which, during such Due Period, was purchased by the Company pursuant
to the Agreement on account of certain breaches of its representations and
warranties, (iii) all partial Principal Prepayments applied and all Principal
Prepayments in Full received during such Due Period in respect of Home Equity
Contracts, (iv) the Scheduled Principal Balance of each Home Equity Contract
that became a Liquidated Contract during such Due Period and (v) any amount
described in clauses (i) through (iv) above that was not previously
distributed because of an insufficient amount of funds available in the
Certificate Account if (a) the Payment Date occurs on or after the Payment
Date on which the Class HE: B-2 Principal Balance has been reduced to zero, or
(b) such amount was not covered by a Class HE: B-2 Guaranty Payment and
corresponding reduction in the Class HE: B-2 Principal Balance, minus (vi) the
Class HE: A-1 ARM Formula Principal Distribution Amount. When the Principal
Balance of a Class of Class HE: A Certificates is reduced to zero, no further
distributions of principal will be made to the holders of such Class.
The Sub-Pool HE Senior Percentage for any Payment Date prior to the Class
HE: B Cross-over Date, and for any Payment Date on or after the Class HE: B
Cross-over Date on which any Class HE: B Principal Distribution Test is not
satisfied (each as described under "Class HE: B-1 Principal" below), will be
100%, and for any Payment Date on or after the Class HE: B Cross-over Date on
which each Class HE: B Principal Distribution Test is satisfied will equal 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 Payment Date and the
denominator of which is the Pool Scheduled Principal Balance of the Home
Equity Contracts (other than the Adjustable Rate Home Equity Contracts) as of
the immediately preceding Payment Date.
S-100
<PAGE>
The Sub-Pool HE Senior Percentage of the Sub-Pool HE Formula Principal
Distribution Amount will be distributed, to the extent of the Sub-Pool HE
Amount Available after payment of interest on each Class of Class HE: A
Certificates other than the Class HE: A-7 IO Certificates, as follows: (i)
that portion, if any, of the Sub-Pool HE Senior Percentage of the Sub-Pool HE
Formula Principal Distribution Amount equal to the Class HE: A-6 Lockout Pro
Rata Distribution Amount will be distributed to the Class HE: A-6
Certificateholders; and (ii) the remainder of the Sub-Pool HE Senior
Percentage of the Sub-Pool HE Formula Principal Distribution Amount will be
distributed in the following order: first to the Class HE: A-1
Certificateholders until the Class HE: A-1 Principal Balance has been reduced
to zero, then to the Class HE: A-2 Certificateholders until the Class HE: A-2
Principal Balance has been reduced to zero, then to the Class HE: A-3
Certificateholders until the Class HE: A-3 Principal Balance has been reduced
to zero, then to the Class HE: A-4 Certificateholders until the Class HE: A-4
Principal Balance has been reduced to zero, and then to the Class HE: A-5
Certificateholders until the Class HE: A-5 Principal Balance has been reduced
to zero. After the Class HE: A-5 Principal Balance has been reduced to zero,
Holders of the Class HE: A-6 Certificates will be entitled to receive the
entire Sub-Pool HE Senior Percentage of the Sub-Pool HE Formula Principal
Distribution Amount, up to the amount necessary to reduce the Class HE: A-6
Principal Balance to zero, to the extent the remaining Sub-Pool HE Amount
Available is sufficient therefor.
The "Class HE: A-6 Lockout Pro Rata Distribution Amount," as to any Payment
Date, is an amount equal to the lesser of:
(a) the product of (1) the Class 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 Payment 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 Payment Date, and
(B) the Sub-Pool HE Senior Percentage of the Sub-Pool HE Formula Principal
Distribution Amount for such Payment Date, and
(b) the Class HE: A-6 Principal Balance immediately preceding such
Payment Date.
The "Class HE: A-6 Lockout Percentage," as to any Payment Date occurring
during the periods set forth below, is the percentage designated as such as
follows:
<TABLE>
<CAPTION>
PERIOD (DATES INCLUSIVE) CLASS HE: A-6 LOCKOUT PERCENTAGE
------------------------ --------------------------------
<S> <C>
1998 through 2000................ %
2001 through 2002................ %
2003 through 2003................ %
2004 through 2004................ %
2005 and thereafter................... %
</TABLE>
On any Payment Date as to which there is a Class HE: A Liquidation Loss
Principal Amount (which is the amount, if any, by which 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), the remaining Sub-Pool HE Amount
Available will be distributed pro rata to each Class of Class HE: A
Certificates (other than the Class HE: A-7 IO Certificates) based on the Class
Principal Balance of each Class (but in no event will such amount exceed the
Class Principal Balance of any such Class).
If, as to any Payment Date, the remaining Sub-Pool HE Amount Available is
less than the sum of the Sub-Pool HE Senior Percentage of the Sub-Pool HE
Formula Principal Distribution Amount and the Class HE: A-1 ARM Formula
Principal Distribution Amount, the amounts to be distributed to the Class HE-A
Certificateholders (including the Class HE:A-1 ARM Certificateholders but
excluding the Class HE: A-7 IO Certificates) will be allocated pro rata based
upon the respective portions of the Sub-Pool HE Amount Available that would
have been distributed to the Class HE:A Certificateholders, as described
above, had the remaining Sub-Pool HE Amount Available been sufficient
therefor.
S-101
<PAGE>
As hereinafter described, all losses on Liquidated Home Equity Contracts
will be absorbed first by the Class C Certificate, then by the Class HE: B-2
Guaranty Fee otherwise payable to the Company, then by the Monthly Servicing
Fee otherwise payable to the Servicer (so long as the Company or any wholly
owned subsidiary of the Company is the Servicer) with respect to the Home
Equity Contracts, then by the Class HE: B-2 Certificates, then by the Class
HE: B-1 Certificates, then by the Class HE: M-2 Certificates and then by the
Class HE: M-1 Certificates. If the Sub-Pool HE Amount Available on any Payment
Date is less than the Class HE: A Distribution Amount, the Sub-Pool HE Amount
Available will be applied first to the payment of interest on the Class HE: A
Certificates and then to the payment of principal to the Class of Class HE: A
Certificates then entitled thereto.
Class HE: M-1 Interest
Interest will be paid to the Class HE: M-1 Certificateholders on each
Payment Date, to the extent of the Class HE: M-1 Remaining Amount Available,
if any, in an amount (the "Class HE: M-1 Interest Payment Amount") equal to
the product of (a) the Class HE: M-1 Pass-Through Rate and (b) the then
outstanding Class HE: M-1 Principal Balance less the Class HE: M-1 Liquidation
Loss Principal Amount, if any. The "Class HE: M-1 Liquidation Loss Principal
Amount" as of any Payment Date will equal the excess, if any, of the Sub-Pool
HE Aggregate Liquidation Loss Principal Amount over the aggregate of the
Principal Balances of the Class HE: M-2 Certificates, the Class HE: B-1
Certificates and the Class HE: B-2 Certificates (but in no event greater than
the Class HE: M-1 Principal Balance). The "Sub-Pool HE Aggregate Liquidation
Loss Principal Amount" as of any Payment Date will equal the excess, if any,
of (i) the aggregate Principal Balance of the Sub-Pool HE Certificates as of
the preceding Payment Date (after giving effect to distributions of principal
thereon) over (ii) the Pool Scheduled Principal Balance of Sub-Pool HE for
such preceding Payment Date plus the Sub-Pool HE Pre-Funded Amount for such
preceding Payment Date. Interest on the outstanding Class HE: M-1 Principal
Balance will accrue from the Closing Date, or from the most recent Payment
Date on which interest has been paid, to but excluding the following Payment
Date, and will be computed on the basis of a 360-day year of twelve 30-day
months. The Class HE: M-1 Principal Balance is the Original Class HE: M-1
Principal Balance less the sum of all amounts previously distributed to Class
HE: M-1 Certificateholders on account of principal. In the event that, on a
particular Payment Date, the Class HE: M-1 Remaining Amount Available, plus
other funds in the Certificate Account available therefor, is not sufficient
to make a full distribution of the Class HE: M-1 Interest Payment Amount to
the Class HE: M-1 Certificateholders, the amount of such interest to be
distributed in respect of the Class HE: M-1 Certificates will be allocated
among the Class HE: M-1 Certificates pro rata in accordance with their
respective entitlements to interest, and any remaining deficiency will be
carried forward and added to the amount such holders will be entitled to
receive on the next Payment Date. Interest will accrue on the Class HE: M-1
Liquidation Loss Principal Amount, if any, and will be payable on the current
or succeeding Payment Dates to the extent of the Sub-Pool HE Amount Available
remaining after payment of the Class HE: A Distribution Amount, the Class HE:
M-1 Distribution Amount, the Class HE: M-2 Distribution Amount, the Class HE:
B-1 Distribution Amount and the Class HE: B-2 Distribution Amount. Any
interest amounts carried forward will bear interest at the Class HE: M-1 Pass-
Through Rate, to the extent permitted by law.
The Class HE: M-1 Pass-Through Rate is set forth on the cover of this
Prospectus Supplement, and will be computed on the basis of a 360-day year of
twelve 30-day months.
Class HE: M-1 Principal
On each Payment Date after the Class HE: A Principal Balance has been
reduced to zero, Class HE: M-1 Certificateholders will be entitled to receive,
as payments of principal, the Sub-Pool HE Senior Percentage of the Sub-Pool HE
Formula Principal Distribution Amount (as described under "Class HE: A
Principal" above) to the extent of the Class HE: M-1 Remaining Amount
Available in the Certificate Account on such date, after payment of all
interest payable on the Class HE: M-1 Certificates (other than in respect of
Class HE: M-1 Liquidation Loss Principal Amounts), until the Class HE: M-1
Principal Balance has been reduced to zero. On each Payment Date on or after
the Class HE: B Cross-over Date on which each Class HE: B Principal
S-102
<PAGE>
Distribution Test is satisfied, payments of principal will be made to Class
HE: B-1 or Class HE: B-2 Certificateholders, even if Class HE: M-1
Certificateholders are not yet entitled to receive payments of principal
because the Class HE: A Principal Balance has not been reduced to zero.
Class HE: M-2 Interest
Interest will be paid to the Class HE: M-2 Certificateholders on each
Payment Date, to the extent of the Class HE: M-2 Remaining Amount Available,
if any, in an amount (the "Class HE: M-2 Interest Payment Amount") equal to
the product of (a) the Class HE: M-2 Pass-Through Rate and (b) the then
outstanding Class HE: M-2 Principal Balance less the Class HE: M-2 Liquidation
Loss Principal Amount, if any. The "Class HE: M-2 Liquidation Loss Principal
Amount" as of any Payment Date will equal the excess, if any, of the Sub-Pool
HE Aggregate Liquidation Loss Principal Amount over the aggregate of the
Principal Balances of the Class HE: B-1 Certificates and the HE: Class B-2
Certificates (but in no event greater than the Class HE: M-2 Principal
Balance). Interest on the outstanding Class HE: M-2 Principal Balance will
accrue from the Closing Date, or from the most recent Payment Date on which
interest has been paid, to but excluding the following Payment Date, and will
be computed on the basis of a 360-day year of twelve 30-day months. The Class
HE: M-2 Principal Balance is the Original Class HE: M-2 Principal Balance less
the sum of all amounts previously distributed to Class HE: M-2
Certificateholders on account of principal. In the event that, on a particular
Payment Date, the Class HE: M-2 Remaining Amount Available, plus other funds
in the Certificate Account available therefor, is not sufficient to make a
full distribution of the Class HE: M-2 Interest Payment Amount to the Class
HE: M-2 Certificateholders, the amount of such interest to be distributed in
respect to the Class HE: M-2 Certificates will be allocated among the Class
HE: M-2 Certificates pro rata in accordance with their respective entitlements
to interest, and any remaining deficiency will be carried forward and added to
the amount such holders will be entitled to receive on the next Payment Date.
Interest will accrue on the Class HE: M-2 Liquidation Loss Principal Amount,
if any, and will be payable on the current or succeeding Payment Dates to the
extent of the Sub-Pool HE Amount Available remaining after payment in full of
the Class HE: A Distribution Amount, the Class HE: M-1 Distribution Amount,
the Class HE: M-2 Distribution Amount, the Class HE: B-1 Distribution Amount,
the Class HE: B-2 Distribution Amount and interest accrued and unpaid on the
Class HE: M-1 Liquidation Loss Principal Amount. Any interest amounts carried
forward will bear interest at the Class HE: M-2 Pass-Through Rate, to the
extent permitted by law.
The Class HE: M-2 Pass-Through Rate is set forth on the cover of this
Prospectus Supplement, and will be computed on the basis of a 360-day year of
twelve 30-day months.
Class HE: M-2 Principal
On each Payment Date after the Class HE: A Principal Balance and the Class
HE: M-1 Principal Balance have been reduced to zero, Class HE: M-2
Certificateholders will be entitled to receive, as payments of principal, the
Sub-Pool HE Senior Percentage of the Sub-Pool HE Formula Principal
Distribution Amount (as described under "Class HE: A Principal" above) to the
extent of the Class HE: M-2 Remaining Amount Available in the Certificate
Account on such date, after payment of all interest payable on the Class HE:
M-2 Certificates (other than in respect of Class HE: M-2 Liquidation Loss
Principal Amounts), until the Class HE: M-2 Principal Balance has been reduced
to zero. On each Payment Date on or after the Class HE: B Cross-over Date on
which each Class HE: B Principal Distribution Test is satisfied, payments of
principal will be made to Class HE: B-1 or Class HE: B-2 Certificateholders,
even if Class HE: M-2 Certificateholders are not yet entitled to receive
payments of principal because the Class HE: A Principal Balance and Class HE:
M-1 Principal Balance have not been reduced to zero.
Class HE: B-1 Interest
Interest will be paid to the Class HE: B-1 Certificateholders on each
Payment Date, to the extent of the Class HE: B-1 Remaining Amount Available,
if any, in an amount (the "Class HE: B-1 Interest Payment Amount") equal to
the product of (a) the Class HE: B-1 Pass-Through Rate and (b) the then
outstanding Class
S-103
<PAGE>
HE: B-1 Principal Balance less the Class HE: B-1 Liquidation Loss Principal
Amount, if any. The "Class HE: B-1 Liquidation Loss Principal Amount" as of
any Payment Date will equal the excess, if any, of the Sub-Pool HE Aggregate
Liquidation Loss Principal Amount over the Class HE: B-2 Principal Balance
(but in no event greater than the Class HE: B-1 Principal Balance). Interest
on the outstanding Class HE: B-1 Principal Balance will accrue from the
Closing Date, or from the most recent Payment Date on which interest has been
paid, to but excluding the following Payment Date, and will be computed on the
basis of a 360-day year of twelve 30-day months. The Class HE: B-1 Principal
Balance is the Original Class HE: B-1 Principal Balance less the sum of all
amounts previously distributed to Class HE: B-1 Certificateholders on account
of principal. In the event that, on a particular Payment Date, the Class HE:
B-1 Remaining Amount Available, plus other funds in the Certificate Account
available therefor, is not sufficient to make a full distribution of the Class
HE: B-1 Interest Payment Amount to the Class HE: B-1 Certificateholders, the
amount of such interest to be distributed in respect of the Class HE: B-1
Certificates will be allocated among the Class HE: B-1 Certificates pro rata
in accordance with their respective entitlements to interest, and any
remaining deficiency will be carried forward and added to the amount such
holders will be entitled to receive on the next Payment Date. Interest will
accrue on the Class HE: B-1 Liquidation Loss Principal Amount, if any, and
will be payable on the current or succeeding Payment Dates to the extent of
the Sub-Pool HE Amount Available remaining after payment in full of the Class
HE: A Distribution Amount, the Class HE: M-1 Distribution Amount, the Class
HE: M-2 Distribution Amount, the Class HE: B-1 Distribution Amount, the Class
HE: B-2 Distribution Amount and interest accrued and unpaid on the Class HE:
M-1 Liquidation Loss Principal Amount and Class HE: M-2 Liquidation Loss
Principal Amount. Any interest amounts carried forward will bear interest at
the Class B-1 Pass-Through Rate, to the extent permitted by law.
The Class HE: B-1 Pass-Through Rate is set forth on the cover of this
Prospectus Supplement, and will be computed on the basis of a 360-day year of
twelve 30-day months.
Class HE: B-1 Principal
Prior to the Class HE: B Cross-over Date, there will be no distributions of
principal on the Class HE: B-1 Certificates. The Class HE: B Cross-over Date
will be the earlier of (A) the Payment Date on which the Class HE: M-2
Principal Balance is reduced to zero, and (B) the first Payment Date on or
after the Payment Date in 2001 on which the fraction, expressed as a
percentage, the numerator of which is the Class HE: B Principal Balance as of
such Payment Date and the denominator of which is the Pool Scheduled Principal
Balance of Sub-Pool HE as of the immediately preceding Payment Date, is equal
to or greater than %.
On each Payment Date on or after the Class HE: B Cross-over Date and prior
to the Payment Date on which the Class HE: A Principal Balance and the Class
HE: M Principal Balance have been reduced to zero, holders of Class HE: B
Certificates will be entitled to distributions of principal only if each of
the following tests (each a "Class HE: B Principal Distribution Test") is
satisfied on such Payment Date: (i) the average of the Sub-Pool HE Sixty-Day
Delinquency Ratio (as defined in the Agreement) as of such Payment Date and
the prior two Payment Dates must not exceed %; (ii) the average of the Sub-
Pool HE Thirty-Day Delinquency Ratio (as defined in the Agreement) as of such
Payment Date and the prior two Payment Dates must not exceed %; (iii) the
Sub-Pool HE Cumulative Realized Loss Ratio (as defined in the Agreement) as of
such Payment Date must not exceed %; (iv) the Sub-Pool HE Current Realized
Loss Ratio (as defined in the Agreement) as of such Payment Date must not
exceed %; and (v) the Class HE: B Principal Balance divided by the Pool
Scheduled Principal Balance of Sub-Pool HE as of the immediately preceding
Payment Date must be equal to or greater than %.
On each Payment Date on or after the Class HE: B Cross-over Date, if each
Class HE: B Principal Distribution Test is satisfied on such Payment Date,
Class HE: B-1 Certificateholders will be entitled to receive, as payments of
principal, the Class HE: B Percentage of the Sub-Pool HE Formula Principal
Distribution Amount to the extent of the Class HE: B-1 Remaining Amount
Available in the Certificate Account on such date after payment of all
interest payable on the Class HE: B-1 Certificates (other than in respect of
Class HE: B-1 Liquidation Loss Principal Amounts), until the Class HE: B-1
Principal Balance has been reduced to zero. The
S-104
<PAGE>
Class HE: B-2 Certificateholders will not be entitled to any distributions of
principal from the Class HE: B-1 Remaining Amount Available until the Class
HE: B-1 Principal Balance has been reduced to zero.
The Class HE: B Percentage for any Payment Date will be equal to 100% minus
the Sub-Pool HE Senior Percentage. The Class HE: B Percentage for each Payment
Date, if any, after the Class HE: A Principal Balance and the Class HE: M
Principal Balance have been reduced to zero will be equal to 100%.
Class HE: B-2 Interest
Interest will be paid to the Class HE: B-2 Certificateholders on each
Payment Date, to the extent of (i) the Class HE: B-2 Remaining Amount
Available, if any and (ii) the amount, if any, paid pursuant to the Class HE:
B-2 Limited Guaranty, in an amount (the "Class HE: B-2 Interest Payment
Amount") equal to the product of (a) the Class HE: B-2 Pass-Through Rate and
(b) the then outstanding Class HE: B-2 Principal Balance less the Class HE: B-
2 Liquidation Loss Principal Amount, if any. The "Class HE: B-2 Liquidation
Loss Principal Amount" as of any Payment Date will equal the Sub-Pool HE
Aggregate Liquidation Loss Principal Amount (but in no event greater than the
Class HE: B-2 Principal Balance). Interest on the outstanding Class HE: B-2
Principal Balance will accrue from the Closing Date, or from the most recent
Payment Date on which interest has been paid, to but excluding the following
Payment Date, and will be computed on the basis of a 360-day year of twelve
30-day months. The Class HE: B-2 Principal Balance is the Original Class HE:
B-2 Principal Balance less the sum of all amounts previously distributed to
Class HE: B-2 Certificateholders on account of principal. In the event that,
on a particular Payment Date, the Class HE: B-2 Remaining Amount Available in
the Certificate Account is not sufficient to make a full distribution of the
Class HE: B-2 Interest Payment Amount to the Class HE: B-2 Certificateholders
and the Company fails to pay such amount under the Class HE: B-2 Limited
Guaranty, the amount of such interest to be distributed in respect of the
Class HE: B-2 Certificates will be allocated among the Class HE: B-2
Certificates pro rata in accordance with their respective entitlements to
interest, and the amount of such deficiency will be carried forward and added
to the amount such holders will be entitled to receive on the next Payment
Date. Interest will accrue in respect of the Class HE: B-2 Liquidation Loss
Principal Amount, if any, and will be payable on the current or succeeding
Payment Dates to the extent of the Sub-Pool HE Amount Available remaining
after payment in full of the Class HE: A Distribution Amount, the Class HE: M-
1 Distribution Amount, the Class HE: M-2 Distribution Amount, the Class HE: B-
1 Distribution Amount, the Class HE: B-2 Distribution Amount and interest
accrued and unpaid on the Class HE: M-1 Liquidation Loss Principal Amount, the
Class HE: M-2 Liquidation Loss Principal Amount and the Class HE: B-1
Liquidation Loss Principal Amount. Any interest amounts carried forward will
bear interest at the Class HE: B-2 Pass-Through Rate, to the extent permitted
by law.
The Class HE: B-2 Pass-Through Rate is set forth on the cover of this
Prospectus Supplement, and will be computed on the basis of a 360-day year of
twelve 30-day months.
Class HE: B-2 Principal
Except for distributions of any amounts representing a Class HE: B-2
Liquidation Loss Principal Amount (as described below), payments of principal
on the Class HE: B-2 Certificates will not commence until the Payment Date on
which the Class HE: B-1 Principal Balance has been reduced to zero (the "Class
HE: B-1 Cross-over Date"), and will be made on that Payment Date and each
Payment Date thereafter only if each Class HE: B Principal Distribution Test
is satisfied on such Payment Date (unless the Class HE: A Principal Balance
and the Class HE: M Principal Balance have been reduced to zero). On any such
Payment Date, the Class HE: B Percentage of the Sub-Pool HE Formula Principal
Distribution Amount will be distributed, to the extent of the Class HE: B-2
Remaining Amount Available and any amounts actually paid under the Class HE:
B-2 Limited Guaranty after payment of interest on the Class HE: B-2
Certificates (other than in respect of Class HE: B-2 Liquidation Loss
Principal Amounts), to the Class HE: B-2 Certificateholders until the Class
HE: B-2 Principal Balance has been reduced to zero.
S-105
<PAGE>
On each Payment Date, the Class HE: B-2 Certificateholders will be entitled
to receive pursuant to the Class HE: B-2 Limited Guaranty the Class HE: B-2
Liquidation Loss Principal Amount, if any.
CALCULATION OF ONE-MONTH LIBOR
"LIBOR" ("London Interbank Offered Rate") with respect to any monthly
interest period will be established by the calculation agent appointed by the
Trust (the "Calculation Agent") and will equal the offered rate for United
States dollar deposits for one month that appears on Telerate Page 3750 as of
11:00 A.M., London time, on the second LIBOR Business Day prior to such
monthly interest period (a "LIBOR Determination Date"). "Telerate Page 3750"
means the display page so designated on the Dow Jones Telerate Service (or
such other page as may replace that page on that service, or such other
service as may be designated by the Calculation Agent as the information
vendor, for the purpose of displaying London interbank offered rates of major
banks). If such rate appears on Telerate Page 3750, LIBOR will be such rate.
"LIBOR Business Day" as used herein means a day that is both a business day
and a day on which banking institutions in the City of London, England are not
required or authorized by law to be closed. If on any LIBOR Determination Date
the offered rate does not appear on Telerate Page 3750, the Calculation Agent
will request each of the reference banks (which shall be major banks that are
engaged in transactions in the London interbank market selected by the
Calculation Agent) to provide the Calculation Agent with its offered quotation
for United States dollar deposits for one month to prime banks in the London
interbank market as of 11:00 A.M., London time, on such date. If at least two
reference banks provide the Calculation Agent with such offered quotations,
LIBOR on such date will be the arithmetic mean, rounded upward, if necessary,
to the nearest 1/100,000 of 1% (.0000001), with five one-millionths of a
percentage point rounded upward, of all such quotations. If on such date fewer
than two of the reference banks provide the Calculation Agent with such
offered quotations, LIBOR on such date will be the arithmetic mean, rounded
upward, if necessary, to the nearest 1/100,000 of 1% (.0000001), with five
one-millionths of a percentage point rounded upward, of the offered per annum
rates that one or more leading banks in the City of New York selected by the
Calculation Agent are quoting as of 11:00 A.M., New York City time, on such
date to leading European banks for United States dollar deposits for one
month; provided, however, that if such banks are not quoting as described
above, LIBOR for such date will be LIBOR applicable to the monthly interest
period immediately preceding such monthly interest period. Notwithstanding the
foregoing, however, LIBOR for a Payment Date shall not be based on LIBOR for
the prior Payment Date for three consecutive Payment Dates. If, under the
priorities described above, LIBOR for a Payment Date would be based on LIBOR
for the previous Payment Date for the second consecutive Payment Date, the
Calculation Agent shall select an alternative comparable index (over which the
Calculation Agent has no control) used for determining one-month Eurodollar
lending rates that is calculated and published (or otherwise made available)
by an independent third party. The "Calculation Agent" will initially be the
Trustee.
SUBORDINATION OF CLASS HI: M CERTIFICATES AND CLASS HI: B CERTIFICATES
The rights of the holders of the Class HI: M Certificates and the Class HI:
B Certificates to receive distributions with respect to the Home Improvement
Contracts comprising Sub-Pool HI, as well as any other amounts constituting
Sub-Pool HI Amount Available, will be subordinated to such rights of the Class
HI: A Certificateholders. This subordination is intended to enhance the
likelihood of regular receipt by the holders of the Class HI: A Certificates
of the full amount of their scheduled monthly payments of principal and
interest and to afford such holders protection against losses on Liquidated
Home Improvement Contracts. The protection afforded to the Class HI: A
Certificateholders by means of the subordination feature will be accomplished
by the preferential right of the Class HI: A Certificateholders to receive,
prior to any distribution being made on a Payment Date in respect of the Class
HI: M Certificates and the Class HI: B Certificates, the amount of principal
and interest due them on each Payment Date out of the Sub-Pool HI: Amount
Available on deposit on such date in the Certificate Account and by the right
of the Class HI: A Certificateholders to receive future distributions on the
Home Improvement Contracts that would otherwise be payable to the holders of
Class HI: M Certificates and Class HI: B Certificates. On each Payment Date
the Class HI: M-1 Certificateholders will be entitled to receive only amounts
described above under "Class HI: M-1 Interest" and "Class HI: M-1 Principal,"
the Class
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HI: M-2 Certificateholders will be entitled to receive only amounts described
under "Class HI: M-2 Interest" and "Class HI: M-2 Principal," the Class HI: B-
1 Certificateholders will be entitled to receive only amounts described above
under "Class HI: B-1 Interest" and "Class HI: B-1 Principal," and the Class
HI: B-2 Certificateholders will be entitled to receive only amounts described
above under "Class HI: B-2 Interest" and "Class HI: B-2 Principal."
In addition, the rights of the holders of the Class HI: M-2 Certificates and
Class HI: B Certificates to receive distributions with respect to the Home
Improvement Contracts, as well as any other amounts constituting Sub-Pool HI
Amount Available, will be subordinate to such rights of the Class HI: M-1
Certificateholders. This subordination is intended to enhance the likelihood
of regular receipt by the holders of the Class HI: M-1 Certificates of the
full amount of their scheduled monthly payments of principal and interest and
to afford such holders protection against losses on Liquidated Home
Improvement Contracts. The protection afforded to the Class HI: M-1
Certificateholders by means of the subordination feature will be accomplished
by the preferential right of the Class HI: M-1 Certificateholders to receive,
prior to any distribution being made on a Payment Date in respect of the Class
HI: M-2 Certificates and the Class HI: B Certificates, the amount of principal
and interest due them on each Payment Date out of the Class HI: M-1 Remaining
Amount Available on deposit on such date in the Certificate Account and by the
right of the Class HI: M-1 Certificateholders to receive future distributions
on the Home Improvement Contracts that would otherwise be payable to the
holders of Class HI: M-2 Certificates and Class HI: B Certificates.
In addition, the rights of the holders of the Class HI: B-1 Certificates and
the Class HI: B-2 Certificates to receive distributions with respect to the
Home Improvement Contracts, as well as any other amounts constituting Sub-Pool
HI Amount Available, will be subordinate to such rights of the Class HI: M-2
Certificateholders. This subordination is intended to enhance the likelihood
of regular receipt by the holders of the Class HI: M-2 Certificates of the
full amount of their scheduled monthly payments of principal and interest and
to afford such holders protection against losses on Liquidated Home
Improvement Contracts. The protection afforded to the Class HI: M-2
Certificateholders by means of the subordination feature will be accomplished
by the preferential right of the Class HI: M-2 Certificateholders to receive,
prior to any distribution being made on a Payment Date in respect of the Class
HI: B Certificates, the amount of principal and interest due them on each
Payment Date out of the Class HI: M-2 Remaining Amount Available on deposit on
such date in the Certificate Account and by the right of the Class HI: M-2
Certificateholders to receive future distributions of the Home Improvement
Contracts that would otherwise be payable to the holders of Class HI: B
Certificates.
In addition, the rights of the holders of the Class HI: B-2 Certificates to
receive distributions with respect to the Home Improvement Contracts, as well
as any other amounts constituting Sub-Pool HI Amount Available, will be
subordinate to such rights of the Class HI: B-1 Certificateholders. This
subordination is intended to enhance the likelihood of regular receipt by the
holders of the Class HI: B-1 Certificates of the full amount of their
scheduled monthly payments of principal and interest and to afford such
holders protection against losses on Liquidated Home Improvement Contracts.
The protection afforded to the Class HI: B-1 Certificateholders by means of
the subordination feature will be accomplished by the preferential right of
the Class HI: B-1 Certificateholders to receive, prior to any distribution
being made on a Payment Date in respect of the Class HI: B-2 Certificates, the
amount of principal and interest due them on each Payment Date out of the
Class HI: B-1 Remaining Amount Available on deposit on such date in the
Certificate Account and by the right of the Class HI: B-1 Certificateholders
to receive future distributions on the Home Improvement Contracts that would
otherwise be payable to the holders of Class HI: B-2 Certificates.
As described above, prior to the time that the Class HI: A Principal Balance
is reduced to zero, the distribution of principal to the Class HI: A
Certificateholders is intended to include the Sub-Pool HI Senior Percentage of
the Scheduled Principal Balance of each Home Improvement Contract that became
a Liquidated Home Improvement Contract during the preceding Due Period. If the
Liquidation Proceeds, net of related Liquidation Expenses, from such
Liquidated Home Improvement Contract are less than its Scheduled Principal
Balance plus accrued and unpaid interest thereon, the deficiency will, in
effect, be absorbed by the Class HI: M, the Class HI: B and the Class C
Certificateholders and the Company, since a portion of the Sub-Pool HI Amount
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Available equal to such deficiency and otherwise distributable to them will be
paid to the Sub-Pool Class HI Certificateholders. Likewise, to the extent the
Class HI: M-1 Certificateholders or the Class HI: M-2 Certificateholders are
entitled to receive distributions of principal, similar deficiencies could
result for each Class of Certificates with a lower payment priority. If the
Sub-Pool HI Amount Available is not sufficient to cover the amounts
distributable to the Class HI: A or Class HI: M Certificateholders on a
particular Payment Date, then the Sub-Pool HI Senior Percentage on future
Payment Dates may be increased and the Class HI: B Percentage on future
Payment Dates may be reduced as a result of such deficiency. But for the
effect of the relative subordination of the Class HI: B-2 Guaranty Fee
otherwise payable to the Company, the related Monthly Servicing Fee payable to
the Servicer (so long as the Company or any wholly owned subsidiary of the
Company is the Servicer) with respect to the Home Improvement Contracts and
amounts otherwise distributable to the Class HI: M-2, Class HI: B and Class C
Certificateholders, the Class HI: M-1 Certificateholders will absorb all
losses on each Liquidated Home Improvement Contract in the amount by which its
Liquidation Proceeds, net of the related Liquidation Expenses, are less than
its unpaid principal balance plus accrued and unpaid interest thereon less the
related Monthly Servicing Fee. But for the effect of the relative
subordination of the Class HI: B-2 Guaranty Fee otherwise payable to the
Company, the related Monthly Servicing Fee payable to the Servicer (so long as
the Company or any wholly owned subsidiary of the Company is the Servicer)
with respect to the Home Improvement Contracts and amounts otherwise
distributable to the Class HI: B and Class C Certificateholders on each
Payment Date, the Class HI: M-2 Certificateholders will absorb all losses on
each Liquidated Home Improvement Contract in the amount by which its
Liquidation Proceeds, net of the related Liquidation Expenses, are less than
its unpaid principal balance plus accrued and unpaid interest thereon less the
related Monthly Servicing Fee. But for the effect of the relative
subordination of the Class HI: B-2 Guaranty Fee otherwise payable to the
Company, the related Monthly Servicing Fee payable to the Servicer (so long as
the Company or any wholly owned subsidiary of the Company is the Servicer)
with respect to the Home Improvement Contracts and amounts otherwise
distributable to the Class HI: B-2 and Class C Certificateholders, the Class
HI: B-1 Certificateholders will absorb all losses on each Liquidated Home
Improvement Contract in the amount by which its Liquidation Proceeds, net of
the related Liquidation Expenses, are less than its unpaid principal balance
plus accrued and unpaid interest thereon less the related Monthly Servicing
Fee. But for the effect of the relative subordination of the Class HI: B-2
Guaranty Fee otherwise payable to the Company, the related Monthly Servicing
Fee payable to the Servicer (so long as the Company or any wholly owned
subsidiary of the Company is the Servicer) with respect to the Home
Improvement Contracts and amounts otherwise distributable to the Class C
Certificateholder on each Payment Date, and amounts paid under the Class HI:
B-2 Limited Guaranty as described below, the Class HI: B-2 Certificateholders
will absorb all losses on each Liquidated Home Improvement Contract in the
amount by which its Liquidation Proceeds, net of the related Liquidation
Expenses, are less than its unpaid principal balance plus accrued and unpaid
interest thereon less the related Monthly Servicing Fee. Class HI: B-2
Certificateholders, however, will be entitled to receive Class HI: B-2
Guaranty Payments. If the Company fails to make a payment required under the
Class HI: B-2 Limited Guaranty, the Class HI: B-2 Certificateholders will
incur a loss on their investment in the Class HI: B-2 Certificates.
SUBORDINATION OF CLASS HE: M CERTIFICATES AND CLASS HE: B CERTIFICATES
The rights of the holders of the Class HE: M Certificates and the Class HE:
B Certificates to receive distributions with respect to the Home Equity
Contracts comprising Sub-Pool HE, as well as any other amounts constituting
Sub-Pool HE Amount Available, will be subordinated to such rights of the Class
HE: A Certificateholders. This subordination is intended to enhance the
likelihood of regular receipt by the holders of the Class HE: A Certificates
of the full amount of their scheduled monthly payments of principal and
interest and to afford such holders protection against losses on Liquidated
Home Equity Contracts. The protection afforded to the Class HE: A
Certificateholders by means of the subordination feature will be accomplished
by the preferential right of the Class HE: A Certificateholders to receive,
prior to any distribution being made on a Payment Date in respect of the Class
HE: M Certificates and the Class HE: B Certificates, the amount of principal
and interest due them on each Payment Date out of the Sub-Pool HE Amount
Available on deposit on such date in the Certificate Account and by the right
of the Class HE: A Certificateholders to receive future distributions
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on the Home Equity Contracts that would otherwise be payable to the holders of
Class HE: M Certificates and Class HE: B Certificates. On each Payment Date
the Class HE: M-1 Certificateholders will be entitled to receive only amounts
described above under "Class HE: M-1 Interest" and "Class HE: M-1 Principal,"
the Class HE: M-2 Certificateholders will be entitled to receive only amounts
described under "Class HE: M-2 Interest" and "Class HE: M-2 Principal," the
Class HE: B-1 Certificateholders will be entitled to receive only amounts
described above under "Class HE: B-1 Interest" and "Class HE: B-1 Principal,"
and the Class HE: B-2 Certificateholders will be entitled to receive only
amounts described above under "Class HE: B-2 Interest" and "Class HE: B-2
Principal."
In addition, the rights of the holders of the Class HE: M-2 Certificates and
Class HE: B Certificates to receive distributions with respect to the Home
Equity Contracts, as well as any other amounts constituting Sub-Pool HE Amount
Available, will be subordinate to such rights of the Class HE: M-1
Certificateholders. This subordination is intended to enhance the likelihood
of regular receipt by the holders of the Class HE: M-1 Certificates of the
full amount of their scheduled monthly payments of principal and interest and
to afford such holders protection against losses on Liquidated Home Equity
Contracts. The protection afforded to the Class HE: M-1 Certificateholders by
means of the subordination feature will be accomplished by the preferential
right of the Class HE: M-1 Certificateholders to receive, prior to any
distribution being made on a Payment Date in respect of the Class HE: M-2
Certificates and the Class HE: B Certificates, the amount of principal and
interest due them on each Payment Date out of the Class HE: M-1 Remaining
Amount Available on deposit on such date in the Certificate Account and by the
right of the Class HE: M-1 Certificateholders to receive future distributions
on the Home Equity Contracts that would otherwise be payable to the holders of
Class HE: M-2 Certificates and Class HE: B Certificates.
In addition, the rights of the holders of the Class HE: B-1 Certificates and
the Class HE: B-2 Certificates to receive distributions with respect to the
Home Equity Contracts, as well as any other amounts constituting Sub-Pool HE
Amount Available, will be subordinate to such rights of the Class HE: M-2
Certificateholders. This subordination is intended to enhance the likelihood
of regular receipt by the holders of the Class HE: M-2 Certificates of the
full amount of their scheduled monthly payments of principal and interest and
to afford such holders protection against losses on Liquidated Home Equity
Contracts. The protection afforded to the Class HE: M-2 Certificateholders by
means of the subordination feature will be accomplished by the preferential
right of the Class HE: M-2 Certificateholders to receive, prior to any
distribution being made on a Payment Date in respect of the Class HE: B
Certificates, the amount of principal and interest due them on each Payment
Date out of the Class HE: M-2 Remaining Amount Available on deposit on such
date in the Certificate Account and by the right of the Class HE: M-2
Certificateholders to receive future distributions of the Home Equity
Contracts that would otherwise be payable to the holders of Class HE: B
Certificates.
In addition, the rights of the holders of the Class HE: B-2 Certificates to
receive distributions with respect to the Home Equity Contracts, as well as
any other amounts constituting Sub-Pool HE Amount Available, will be
subordinate to such rights of the Class HE: B-1 Certificateholders. This
subordination is intended to enhance the likelihood of regular receipt by the
holders of the Class HE: B-1 Certificates of the full amount of their
scheduled monthly payments of principal and interest and to afford such
holders protection against losses on Liquidated Home Equity Contracts. The
protection afforded to the Class HE: B-1 Certificateholders by means of the
subordination feature will be accomplished by the preferential right of the
Class HE: B-1 Certificateholders to receive, prior to any distribution being
made on a Payment Date in respect of the Class HE: B-2 Certificates, the
amount of principal and interest due them on each Payment Date out of the
Class HE: B-1 Remaining Amount Available on deposit on such date in the
Certificate Account and by the right of the Class HE: B-1 Certificateholders
to receive future distributions on the Home Equity Contracts that would
otherwise be payable to the holders of Class HE: B-2 Certificates.
As described above, prior to the time that the Class HE: A Principal Balance
is reduced to zero, the distribution of principal to the Class HE: A
Certificateholders is intended to include (i) the Sub-Pool HE Senior
Percentage of the Scheduled Principal Balance of each Home Equity Contract
(other than the Adjustable Rate Contracts) that became a Liquidated Contract
during the preceding Due Period and (ii) the Scheduled Principal
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Balance of each Adjustable Rate Contract that became a Liquidated Contract
during the preceding Due Period. If the Liquidation Proceeds, net of related
Liquidation Expenses, from such Liquidated Home Equity Contracts are less than
the Scheduled Principal Balance of such Liquidated Contracts plus accrued and
unpaid interest thereon, the deficiency will, in effect, be absorbed by the
Class HE: M, the Class HE: B and the Class C Certificateholders and the
Company, since a portion of the Sub-Pool HE Amount Available equal to such
deficiency and otherwise distributable to them will be paid to the Sub-Pool
Class HE Certificateholders. Likewise, to the extent the Class HE: M-1
Certificateholders or the Class HE: M-2 Certificateholders are entitled to
receive distributions of principal, similar deficiencies could result for each
Class of Certificates with a lower payment priority. If the Sub-Pool HE Amount
Available is not sufficient to cover the amounts distributable to the Class
HE: A or Class HE: M Certificateholders on a particular Payment Date, then the
Sub-Pool HE Senior Percentage on future Payment Dates may be increased and the
Class HE: B Percentage on future Payment Dates may be reduced as a result of
such deficiency. But for the effect of the relative subordination of the Class
HE: B-2 Guaranty Fee otherwise payable to the Company, the related Monthly
Servicing Fee payable to the Servicer (so long as the Company or any wholly
owned subsidiary of the Company is the Servicer) with respect to the Home
Equity Contracts and amounts otherwise distributable to the Class HE: M-2,
Class HE: B and Class C Certificateholders, the Class HE: M-1
Certificateholders will absorb all losses on each Liquidated Home Equity
Contract in the amount by which its Liquidation Proceeds, net of the related
Liquidation Expenses, are less than its unpaid principal balance plus accrued
and unpaid interest thereon less the related Monthly Servicing Fee. But for
the effect of the relative subordination of the Class HE: B-2 Guaranty Fee
otherwise payable to the Company, the related Monthly Servicing Fee payable to
the Servicer (so long as the Company or any wholly owned subsidiary of the
Company is the Servicer) with respect to the Home Equity Contracts and amounts
otherwise distributable to the Class HE: B and Class C Certificateholders on
each Payment Date, the Class HE: M-2 Certificateholders will absorb all losses
on each Liquidated Home Equity Contract in the amount by which its Liquidation
Proceeds, net of the related Liquidation Expenses, are less than its unpaid
principal balance plus accrued and unpaid interest thereon less the related
Monthly Servicing Fee. But for the effect of the relative subordination of the
Class HE: B-2 Guaranty Fee otherwise payable to the Company, the related
Monthly Servicing Fee payable to the Servicer (so long as the Company or any
wholly owned subsidiary of the Company is the Servicer) with respect to the
Home Equity Contracts and amounts otherwise distributable to the Class HE: B-2
and Class C Certificateholders, the Class HE: B-1 Certificateholders will
absorb all losses on each Liquidated Home Equity Contract in the amount by
which its Liquidation Proceeds, net of the related Liquidation Expenses, are
less than its unpaid principal balance plus accrued and unpaid interest
thereon less the related Monthly Servicing Fee. But for the effect of the
relative subordination of the Class HE: B-2 Guaranty Fee otherwise payable to
the Company, the related Monthly Servicing Fee payable to the Servicer (so
long as the Company or any wholly owned subsidiary of the Company is the
Servicer) with respect to the Home Equity Contracts and amounts otherwise
distributable to the Class C Certificateholder on each Payment Date, and
amounts paid under the Class HE: B-2 Limited Guaranty as described below, the
Class HE: B-2 Certificateholders will absorb all losses on each Liquidated
Home Equity Contract in the amount by which its Liquidation Proceeds, net of
the related Liquidation Expenses, are less than its unpaid principal balance
plus accrued and unpaid interest thereon less the related Monthly Servicing
Fee. Class HE: B-2 Certificateholders, however, will be entitled to receive
Class HE: B-2 Guaranty Payments. If the Company fails to make a payment
required under the Class HE: B-2 Limited Guaranty, the Class HE: B-2
Certificateholders will incur a loss on their investment in the Class HE: B-2
Certificates.
ADVANCES
To the extent that collections on a Contract in any Due Period are less than
the scheduled payment due thereon, the Servicer will be obligated to make an
advance of the uncollected portion of such scheduled payment. The Servicer
will be obligated to advance a Delinquent Payment on a Contract only to the
extent that the Servicer, in its sole discretion, expects to recoup such
Advance from subsequent funds available therefor in the Certificate Account.
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If the Servicer fails to make an Advance required under the Agreement, the
Trustee will be obligated to deposit the amount of such Advance in the
Certificate Account on the Payment Date. The Trustee will not, however, be
obligated to deposit any such amount if (i) the Trustee does not expect to
recoup such Advance from subsequent funds available therefor in the
Certificate Account, or (ii) the Trustee determines that it is not legally
able to make such Advance.
REPORTS TO CERTIFICATEHOLDERS
The Servicer will furnish to the Trustee, and the Trustee will include with
each distribution to a Class HI: A Certificateholder, a statement in respect
of the related Payment Date setting forth, among other things:
(a) the amount of such distribution to holders of each Class of Class HI:
A Certificates allocable to interest (separately identifying any unpaid
interest shortfall included);
(b) the amount of such distribution to holders of each Class of Class HI:
A Certificates allocable to principal (separately identifying the aggregate
amount of any Principal Prepayments included);
(c) the amount, if any, by which the Class HI: A Formula Distribution
Amount exceeds the Class HI: A Distribution Amount for such Payment Date;
(d) the Principal Balance of each Class of Class HI: A Certificates after
giving effect to the distribution of principal on such Payment Date;
(e) the Sub-Pool HI Senior Percentage for such Payment Date;
(f) the Pool Scheduled Principal Balance of Sub-Pool HI for such Payment
Date;
(g) the Sub-Pool HI Pool Factor (a percentage derived from a fraction the
numerator of which is the sum of the Class HI: A Principal Balance, the
Class HI: M Principal Balance and the Class HI: B Principal Balance and the
denominator of which is the Cut-off Date Pool Principal Balance of Sub-Pool
HI); and
(h) the number and aggregate principal balance of Home Improvement
Contracts delinquent (i) 30-59 days and (ii) 60 or more days.
Information furnished pursuant to clauses (a) through (d) will be expressed as
dollar amounts for a Class HI: A Certificate with a 1% Percentage Interest or
per $1,000 denomination of Class HI: A Certificate.
In addition, within a reasonable period of time after the end of each
calendar year, the Servicer will furnish a report to each Class HI: A
Certificateholder of record at any time during such calendar year as to the
aggregate of amounts reported pursuant to (a) and (b) above for such calendar
year.
The Servicer will furnish to the Trustee, and the Trustee will include with
each distribution to a Class HI: M-1 Certificateholder, a statement in respect
of the related Payment Date setting forth, among other things:
(a) the amount of such distribution to holders of the Class HI: M-1
Certificates allocable to interest (separately identifying any unpaid
interest shortfall included);
(b) the amount of such distribution to holders of the Class HI: M-1
Certificates allocable to principal (separately identifying the aggregate
amount of any Principal Prepayments included);
(c) the amount, if any, by which the Class HI: M-1 Formula Distribution
Amount exceeds the Class HI: M-1 Remaining Amount Available for such
Payment Date;
(d) the Principal Balance of the Class HI: M-1 Certificates after giving
effect to the distribution of principal on such Payment Date;
(e) any unpaid interest on any Class HI: M-1 Liquidation Loss Principal
Amounts, after giving effect to payments of such interest on such Payment
Date;
(f) the Sub-Pool HI Senior Percentage for such Payment Date;
(g) the Pool Scheduled Principal Balance of Sub-Pool HI for such Payment
Date;
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(h) the Pool Factor; and
(i) the number and aggregate principal balance of Home Improvement
Contracts delinquent (i) 30-59 days and (ii) 60 or more days.
Information furnished pursuant to clauses (a) through (d) will be expressed as
dollar amounts for a Class HI: M-1 Certificate with a 1% Percentage Interest
or per $1,000 denomination of Class HI: M-1 Certificate.
In addition, within a reasonable period of time after the end of each
calendar year, the Servicer will furnish a report to each Class HI: M-1
Certificateholder of record at any time during such calendar year as to the
aggregate of amounts reported pursuant to (a) and (b) above for such calendar
year.
The Servicer will furnish to the Trustee, and the Trustee will include with
each distribution to a Class HI: M-2 Certificateholder, a statement in respect
of the related Payment Date setting forth, among other things:
(a) the amount of such distribution to holders of the Class HI: M-2
Certificates allocable to interest (separately identifying any unpaid
interest shortfall included);
(b) the amount of such distribution to holders of the Class HI: M-2
Certificates allocable to principal (separately identifying the aggregate
amount of any Principal Prepayments included);
(c) the amount, if any, by which the Class HI: M-2 Formula Distribution
Amount exceeds the Class HI: M-2 Remaining Amount Available for such
Payment Date;
(d) the Principal Balance of the Class HI: M-2 Certificates after giving
effect to the distribution of principal on such Payment Date;
(e) any unpaid interest on any Class HI: M-2 Liquidation Loss Principal
Amounts, after giving effect to payments of such interest on such Payment
Date;
(f) the Sub-Pool HI Senior Percentage for such Payment Date;
(g) the Pool Scheduled Principal Balance of Sub-Pool HI for such Payment
Date;
(h) the Sub-Pool HI Pool Factor; and
(i) the number and aggregate principal balance of Home Improvement
Contracts delinquent (i) 30-59 days and (ii) 60 or more days.
Information furnished pursuant to clauses (a) through (d) will be expressed as
dollar amounts for a Class HI: M-2 Certificate with a 1% Percentage Interest
or per $1,000 denomination of Class HI: M-2 Certificate.
In addition, within a reasonable period of time after the end of each
calendar year, the Servicer will furnish a report to each Class HI: M-2
Certificateholder of record at any time during such calendar year as to the
aggregate of amounts reported pursuant to (a) and (b) above for such calendar
year.
The Servicer will furnish to the Trustee, and the Trustee will include with
each distribution to a Class HI: B-1 Certificateholder, a statement in respect
of the related Payment Date setting forth, among other things:
(a) the amount of such distribution to holders of the Class HI: B-1
Certificates allocable to interest (separately identifying any unpaid
interest shortfall included);
(b) the amount of such distribution to holders of the Class HI: B-1
Certificates allocable to principal (separately identifying the aggregate
amount of any Principal Prepayments included);
(c) the amount, if any, by which the Class HI: B-1 Formula Distribution
Amount exceeds the Class HI: B-1 Remaining Amount Available for such
Payment Date;
(d) the Principal Balance of the Class HI: B-1 Certificates after giving
effect to the distribution of principal on such Payment Date;
(e) any unpaid interest on any Class HI: B-1 Liquidation Loss Principal
Amounts, after giving effect to payments of such interest on such Payment
Date;
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(f) the Class HI: B Percentage for such Payment Date;
(g) the Pool Scheduled Principal Balance of Sub-Pool HI for such Payment
Date;
(h) the Sub-Pool HI Pool Factor; and
(i) the number and aggregate principal balance of Sub-Pool HI delinquent
(i) 30-59 days and (ii) 60 or more days.
Information furnished pursuant to clauses (a) through (d) will be expressed as
dollar amounts for a Class HI: B-1 Certificate with a 1% Percentage Interest
or per $1,000 denomination of Class HI: B-1 Certificate.
In addition, within a reasonable period of time after the end of each
calendar year, the Servicer will furnish a report to each Class HI: B-1
Certificateholder of record at any time during such calendar year as to the
aggregate of amounts reported pursuant to (a) and (b) above for such calendar
year.
The Servicer will furnish to the Trustee, and the Trustee will include with
each distribution to a Class HI: B-2 Certificateholder, a statement in respect
of the related Payment Date setting forth, among other things:
(a) the amount of such distribution to holders of Class HI: B-2
Certificates allocable to interest;
(b) 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);
(c) 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, exceeds the Class HI: B-2 Distribution Amount for such
Payment Date;
(d) the Class HI: B-2 Liquidation Loss Principal Amount, if any, for such
Payment Date;
(e) any unpaid interest on any Class HI: B-2 Liquidation Loss Principal
Amounts, after giving effect to payments of such interest on such Payment
Date;
(f) the Class HI: B-2 Guaranty Payment, if any, for such Payment Date;
(g) the Class HI: B-2 Principal Balance after giving effect to the
distribution of principal on such Payment Date;
(h) the Class HI: B Percentage for such Payment Date;
(i) the Pool Scheduled Principal Balance of Sub-Pool HI for such Payment
Date;
(j) the Sub-Pool HI Pool Factor; and
(k) the number and aggregate principal balance of Home Improvement
Contracts delinquent (i) 30-59 days and (ii) 60 or more days.
Information furnished pursuant to clauses (a) through (c) will be expressed as
dollar amounts for a Class HI: B-2 Certificate with a 1% Percentage Interest
or per $1,000 denomination of Class HI: B-2 Certificate.
In addition, within a reasonable period of time after the end of each
calendar year, the Servicer will furnish a report to each Class HI: B-2
Certificateholder of record at any time during such calendar year as to the
aggregate amounts reported pursuant to (a) and (b) above for such calendar
year.
The Servicer will furnish to the Trustee, and the Trustee will include with
each distribution to a Class HE: A Certificateholder, a statement in respect
of the related Payment Date setting forth, among other things:
(a) the amount of such distribution to holders of each Class of Class HE:
A Certificates allocable to interest (separately identifying any unpaid
interest shortfall included);
(b) the amount of such distribution to holders of each Class of Class HE:
A Certificates allocable to principal (separately identifying (1) the
aggregate amount of any Principal Prepayments included) and (2) that
portion of any such distribution to Class HE: A-6 Certificateholders
constituting the Class HE: A-6 Lockout Pro Rata Distribution);
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(c) the amount, if any, by which the Class HE: A Formula Distribution
Amount exceeds the Class HE: A Distribution Amount for such Payment Date;
(d) the Principal Balance of each Class of Class HE: A Certificates and
the Notional Principal Amount for the Class HE: A-7 IO Certificates after
giving effect to the distribution of principal on such Payment Date;
(e) the Sub-Pool HE Senior Percentage and the Class HE: A-6 Lockout
Percentage for such Payment Date;
(f) the Pool Scheduled Principal Balance of Sub-Pool HE for such Payment
Date;
(g) the Sub-Pool HE Pool Factor (a percentage derived from a fraction the
numerator of which is the sum of the Class HE: A Principal Balance, the
Class HE: M Principal Balance and the Class HE: B Principal Balance and the
denominator of which is the Cut-off Date Pool Principal Balance of Sub-Pool
HE); and
(h) the number and aggregate principal balance of Home Equity Contracts
delinquent (i) 30-59 days and (ii) 60 or more days.
Information furnished pursuant to clauses (a) through (d) will be expressed as
dollar amounts for a Class HE: A Certificate with a 1% Percentage Interest or
per $1,000 denomination of Class HE: A Certificate.
In addition, within a reasonable period of time after the end of each
calendar year, the Servicer will furnish a report to each Class HE: A
Certificateholder of record at any time during such calendar year as to the
aggregate of amounts reported pursuant to (a) and (b) above for such calendar
year.
The Servicer will furnish to the Trustee, and the Trustee will include with
each distribution to a Class HE: M-1 Certificateholder, a statement in respect
of the related Payment Date setting forth, among other things:
(a) the amount of such distribution to holders of the Class HE: M-1
Certificates allocable to interest (separately identifying any unpaid
interest shortfall included);
(b) the amount of such distribution to holders of the Class HE: M-1
Certificates allocable to principal (separately identifying the aggregate
amount of any Principal Prepayments included;
(c) the amount, if any, by which the Class HE: M-1 Formula Distribution
Amount exceeds the Class HE: M-1 Remaining Amount Available for such
Payment Date;
(d) the Principal Balance of the Class HE: M-1 Certificates after giving
effect to the distribution of principal on such Payment Date;
(e) any unpaid interest on any Class HE: M-1 Liquidation Loss Principal
Amounts, after giving effect to payments of such interest on such Payment
Date;
(f) the Sub-Pool HE Senior Percentage for such Payment Date;
(g) the Pool Scheduled Principal Balance of Sub-Pool HE for such Payment
Date;
(h) the Sub-Pool HE Pool Factor; and
(i) the number and aggregate principal balance of Home Equity Contracts
delinquent (i) 30-59 days and (ii) 60 or more days.
Information furnished pursuant to clauses (a) through (d) will be expressed as
dollar amounts for a Class HE: M-1 Certificate with a 1% Percentage Interest
or per $1,000 denomination of Class HE: M-1 Certificate.
In addition, within a reasonable period of time after the end of each
calendar year, the Servicer will furnish a report to each Class HE: M-1
Certificateholder of record at any time during such calendar year as to the
aggregate of amounts reported pursuant to (a) and (b) above for such calendar
year.
The Servicer will furnish to the Trustee, and the Trustee will include with
each distribution to a Class HE: M-2 Certificateholder, a statement in respect
of the related Payment Date setting forth, among other things:
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(a) the amount of such distribution to holders of the Class HE: M-2
Certificates allocable to interest (separately identifying any unpaid
interest shortfall included);
(b) the amount of such distribution to holders of the Class HE: M-2
Certificates allocable to principal (separately identifying the aggregate
amount of any Principal Prepayments included);
(c) the amount, if any, by which the Class HE: M-2 Formula Distribution
Amount exceeds the Class HE: M-2 Remaining Amount Available for such
Payment Date;
(d) the Principal Balance of the Class HE: M-2 Certificates after giving
effect to the distribution of principal on such Payment Date;
(e) any unpaid interest on any Class HE: M-2 Liquidation Loss Principal
Amounts, after giving effect to payments of such interest on such Payment
Date;
(f) the Sub-Pool HE Senior Percentage for such Payment Date;
(g) the Pool Scheduled Principal Balance of Sub-Pool HE for such Payment
Date;
(h) the Sub-Pool HE Pool Factor; and
(i) the number and aggregate principal balance of Home Equity Contracts
delinquent (i) 30-59 days and (ii) 60 or more days.
Information furnished pursuant to clauses (a) through (d) will be expressed as
dollar amounts for a Class HE: M-2 Certificate with a 1% Percentage Interest
or per $1,000 denomination of Class HE: M-2 Certificate.
In addition, within a reasonable period of time after the end of each
calendar year, the Servicer will furnish a report to each Class HE: M-2
Certificateholder of record at any time during such calendar year as to the
aggregate of amounts reported pursuant to (a) and (b) above for such calendar
year.
The Servicer will furnish to the Trustee, and the Trustee will include with
each distribution to a Class HE: B-1 Certificateholder, a statement in respect
of the related Payment Date setting forth, among other things:
(a) the amount of such distribution to holders of the Class HE: B-1
Certificates allocable to interest (separately identifying any unpaid
interest shortfall included);
(b) the amount of such distribution to holders of the Class HE: B-1
Certificates allocable to principal (separately identifying the aggregate
amount of any Principal Prepayments included);
(c) the amount, if any, by which the Class HE: B-1 Formula Distribution
Amount exceeds the Class HE: B-1 Remaining Amount Available for such
Payment Date;
(d) the Principal Balance of the Class HE: B-1 Certificates after giving
effect to the distribution of principal on such Payment Date;
(e) any unpaid interest on any Class HE: B-1 Liquidation Loss Principal
Amounts, after giving effect to payments of such interest on such Payment
Date;
(f) the Class HE: B Percentage for such Payment Date;
(g) the Pool Scheduled Principal Balance of Sub-Pool HE for such Payment
Date;
(h) the Sub-Pool HE Pool Factor; and
(i) the number and aggregate principal balance of Home Equity Contracts
delinquent (i) 30-59 days and (ii) 60 or more days.
Information furnished pursuant to clauses (a) through (d) will be expressed as
dollar amounts for a Class HE: B-1 Certificate with a 1% Percentage Interest
or per $1,000 denomination of Class HE: B-1 Certificate.
In addition, within a reasonable period of time after the end of each
calendar year, the Servicer will furnish a report to each Class HE: B-1
Certificateholder of record at any time during such calendar year as to the
aggregate of amounts reported pursuant to (a) and (b) above for such calendar
year.
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The Servicer will furnish to the Trustee, and the Trustee will include with
each distribution to a Class HE: B-2 Certificateholder, a statement in respect
of the related Payment Date setting forth, among other things:
(a) the amount of such distribution to holders of Class HE: B-2
Certificates allocable to interest;
(b) 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);
(c) 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, exceeds the Class HE: B-2 Distribution Amount for such
Payment Date;
(d) the Class HE: B-2 Liquidation Loss Principal Amount, if any, for such
Payment Date;
(e) any unpaid interest on any Class HE: B-2 Liquidation Loss Principal
Amounts, after giving effect to payments of such interest on such Payment
Date;
(f) the Class HE: B-2 Guaranty Payment, if any, for such Payment Date;
(g) the Class HE: B-2 Principal Balance after giving effect to the
distribution of principal on such Payment Date;
(h) the Class HE: B Percentage for such Payment Date;
(i) the Pool Scheduled Principal Balance of Sub-Pool HE for such Payment
Date;
(j) the Sub-Pool HE Pool Factor; and
(k) the number and aggregate principal balance of Home Equity Contracts
delinquent (i) 30-59 days and (ii) 60 or more days.
Information furnished pursuant to clauses (a) through (c) will be expressed as
dollar amounts for a Class HE: B-2 Certificate with a 1% Percentage Interest
or per $1,000 denomination of Class HE: B-2 Certificate.
In addition, within a reasonable period of time after the end of each
calendar year, the Servicer will furnish a report to each Class HE: B-2
Certificateholder of record at any time during such calendar year as to the
aggregate amounts reported pursuant to (a) and (b) above for such calendar
year.
REPURCHASE OPTION
The Agreement provides that at any time that the Pool Scheduled Principal
Balance of the Contract Pool is less than 10% of the Cut-off Date Pool
Principal Balance of the Contract Pool, the Servicer will have the option to
repurchase, on 30 days' prior written notice to the Trustee, all outstanding
Contracts (other than any Contract as to which title to the underlying
property has been assigned) at a price sufficient to pay the Aggregate
Certificate Principal Balance plus the Monthly Interest due on all
Certificates on the Payment Date occurring in the month following the date of
repurchase. Such price will be distributed on such Payment Date.
COLLECTION AND OTHER SERVICING PROCEDURES
The Servicer will manage, administer, service and make collections on the
Contracts, exercising the degree of skill and care required by FHA and
otherwise consistent with the highest degree of skill and care that the
Servicer exercises with respect to similar contracts (including manufactured
housing contracts) serviced by the Servicer. The Servicer will not be required
to cause to be maintained, or otherwise monitor the maintenance of, hazard
insurance on the improved properties, but is required under FHA regulations to
monitor and ensure the maintenance of flood insurance on properties securing
FHA-insured Home Improvement Contracts located in federally designated special
flood hazard areas. The Company does, however, as a matter of its own policy,
monitor proof of hazard insurance coverage (other than flood insurance) and
require that it be named as an additional loss payee on all first lien secured
contracts and generally on junior lien secured contracts with amounts financed
of over $ .
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SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The Servicer will receive a Monthly Servicing Fee for each Due Period (paid
on the next succeeding Payment Date) for servicing the Contracts comprising
each Sub-Pool equal to one-twelfth of the product of .75% and the remaining
Pool Scheduled Principal Balance of the Contracts in such Sub-Pool plus the
related Pre-Funded Amount (if any).
The Monthly Servicing Fee provides compensation for customary third-party
servicing activities to be performed by the Servicer for the Trust, for
additional administrative services performed by the Servicer on behalf of the
Trust and for expenses paid by the Servicer on behalf of the Trust. The
Servicer is also entitled to reimbursement out of the liquidation proceeds of
a Liquidated Contract (including FHA Insurance proceeds) for customary out-of-
pocket liquidation expenses incurred by it.
Customary servicing activities include collecting and recording payments,
communicating with Obligors, investigating payment delinquencies, providing
billing and tax records to Obligors and maintaining internal records with
respect to each Contract. Administrative services performed by the Servicer on
behalf of the Trust include selecting and packaging the Contracts, calculating
distributions to Certificateholders and providing related data processing and
reporting services for Certificateholders and on behalf of the Trustee.
Expenses incurred in connection with servicing of the Contracts and paid by
the Company from its servicing fees include payment of FHA Insurance premiums,
payment of fees and expenses of accountants, payments of all fees and expenses
incurred in connection with the enforcement of Contracts 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.
EVIDENCE AS TO COMPLIANCE
The Agreement provides for delivery to the Trustee of a monthly report by
the Servicer no later than one Business Day following the Determination Date,
setting forth the information described under "Description of the
Certificates--Reports to Certificateholders." Each report to the Trustee will
be accompanied by a statement from an appropriate officer of the Servicer
certifying the accuracy of such report and stating that the Servicer has not
defaulted in the performance of its obligations under the Agreement. On or
before of each year, beginning in 1998, the Servicer will deliver to the
Trustee a report of [Accountant] or another nationally recognized accounting
firm, stating that such firm has examined certain documents and records
relating to the servicing of loans serviced by the Servicer and stating that,
on the basis of such examination, such servicing has been conducted in
compliance with the Agreement, except for any exceptions set forth in such
report.
The Agreement provides that the Servicer shall furnish to the Trustee such
reasonably pertinent underlying data as can be generated by the Servicer's
existing data processing system without undue modification or expense.
The Agreement provides that a Certificateholder holding Certificates
representing at least 5% of the Aggregate Certificate Principal Balance will
have the same rights of inspection as the Trustee and may upon written request
to the Servicer receive copies of all reports provided to the Trustee.
TRANSFERABILITY
The Certificates are subject to certain restrictions on transfer to or for
the benefit of employee benefit plans, trusts or accounts subject to ERISA and
described in Section 4975 of the Code. See "ERISA Considerations" herein and
in the Prospectus.
CERTAIN MATTERS RELATING TO THE COMPANY
The Agreement provides that the Company may not resign from its obligations
and duties as Servicer thereunder, except upon a determination that the
Company's performance of such duties is no longer permissible
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under the Agreement or applicable law, and prohibits the Company from
extending credit to any Certificateholder for the purchase of a Certificate,
purchasing Certificates in any agency or trustee capacity or lending money to
the Trust. The Company can be removed as Servicer only pursuant to an Event of
Termination as discussed below.
EVENTS OF TERMINATION
An Event of Termination under the Agreement will occur if (a) the Servicer
fails to make any payment or deposit required under the Agreement (including
an Advance) and such failure continues for four Business Days; (b) the
Servicer fails to observe or perform in any material respect any other
covenant or agreement in the Agreement which continues unremedied for thirty
days; (c) the Servicer conveys, assigns or delegates its duties or rights
under the Agreement, except as specifically permitted under the Agreement, or
attempts to make such a conveyance, assignment or delegation; (d) a court
having jurisdiction in the premises enters a decree or order for relief in
respect of the Servicer in an involuntary case under any applicable
bankruptcy, insolvency or other similar law now or hereafter in effect, or
appoints a receiver, liquidator, assignee, custodian, trustee, or sequestrator
(or similar official) of the Servicer, as the case may be, or enters a decree
or order for any substantial liquidation of its affairs; (e) the Servicer
commences a voluntary case under any applicable bankruptcy, insolvency or
similar law, or consents to the entry of an order for relief in an involuntary
case under any such law, or consents to the appointment of or taking
possession by a receiver, liquidator, assignee, trustee, custodian or its
creditors, or fails to, or admits in writing its inability to, pay its debts
as they become due, or takes any corporate action in furtherance of the
foregoing; (f) the Servicer fails to be an Eligible Servicer; or (g) the
Servicer's seller-servicer contract with GNMA is terminated. The Servicer will
be required under the Agreement to give the Trustee and the Certificateholders
notice of an Event of Termination promptly upon the occurrence of such event.
RIGHTS UPON AN EVENT OF TERMINATION
If an Event of Termination has occurred and is continuing, either the
Trustee or holders of Certificates representing 25% or more of the Aggregate
Certificate Principal Balance may terminate all of the Servicer's management,
administrative, servicing and collection functions under the Agreement. Upon
such termination, the Trustee or its designee will succeed to all the
responsibilities, duties and liabilities of the Company as Servicer under the
Agreement and will be entitled to similar compensation arrangements; provided,
however, that neither the Trustee nor any successor Servicer will assume any
accrued obligation of the prior servicer or any obligation of the Company to
repurchase Contracts for breach of representations and warranties, and the
Trustee will not be liable for any acts or omissions of the Servicer occurring
prior to a transfer of the Servicer's servicing and related functions or for
any breach by the Servicer of any of its representations and warranties
contained in the Agreement or any related document or agreement. In addition,
the Trustee will notify FHA of the Servicer's termination as Servicer of the
FHA-insured Home Improvement Contracts and will request that the portion of
the Servicer'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" in the Prospectus. Notwithstanding such
termination, the Servicer shall be entitled to payment of certain amounts
payable to it prior to such termination, for services rendered prior to such
termination. No such termination will affect in any manner the Company's
obligation to repurchase certain Contracts for breaches of warranties under
the Agreement. In the event that the Trustee is unwilling or unable so to act,
it may appoint, or petition a court of competent jurisdiction for the
appointment of, an Eligible Servicer to act as successor to the Servicer under
the Agreement. The Trustee and such successor may agree upon the servicing
compensation to be paid (after receiving comparable bids from other Eligible
Servicers), which may not be greater than the Monthly Servicing Fee payable to
the Company as Servicer under the Agreement without the consent of all of the
Certificateholders.
TERMINATION OF THE AGREEMENT
The Agreement will terminate (after distribution of all principal and
interest then due to Certificateholders) on the earlier of (a) the Payment
Date on which the Pool Scheduled Principal Balance of the Contract Pool is
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reduced to zero; or (b) the Payment Date occurring in the month following the
Servicer's repurchase of the Contracts as described under "Description of the
Certificates--Repurchase Option." However, the Company's representations,
warranties and indemnities will survive any termination of the Agreement.
AMENDMENT; WAIVER
The Agreement may be amended by agreement of the Trustee, the Servicer and
the Company at any time without the consent of the Certificateholders to cure
any ambiguity, to correct or supplement any provision which may be
inconsistent with any other provision or to add other provisions not
inconsistent with the Agreement, upon receipt of an opinion of counsel to the
Servicer that such amendment will not adversely affect in any material respect
the interests of any Certificateholder.
The Agreement may also be amended by agreement of the Trustee, the Servicer
and the Company at any time without the consent of the Certificateholders to
effect the transfer of FHA Insurance reserves to another entity in compliance
with revisions to FHA regulations, provided that prior to any such amendment
S&P and Fitch shall have confirmed that the ratings of the Certificates will
not be lowered or withdrawn following such amendment.
The Agreement may also be amended from time to time by the Trustee, the
Servicer and the Company with the consent of holders of Certificates
representing 66 2/3% or more of the Aggregate Certificate Principal Balance,
and holders of Certificates representing 51% or more of the Aggregate
Certificate Principal Balance may vote to waive any Event of Termination,
provided that no such amendment or waiver shall (a) reduce in any manner the
amount of, or delay the timing of, collections of payments on Contracts or
distributions which are required to be made on any Certificate, or (b) reduce
the aggregate amount of Certificates required for any amendment of the
Agreement, without unanimous consent of the Certificateholders.
The Trustee is required under the Agreement to furnish Certificateholders
with notice promptly upon execution of any amendment to the Agreement.
INDEMNIFICATION
The Agreement provides that the Company will defend and indemnify the Trust,
the Trustee (including any agent of the Trustee) and the Certificateholders
against any and all costs, expenses, losses, damages, claims and liabilities,
including reasonable fees and expenses of counsel and expenses of litigation
(a) arising out of or resulting from the use or ownership by the Company or
any affiliate thereof of any real estate securing a Contract, (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 (but not including any
federal, state or other tax arising out of the creation of the Trust and the
issuance of the Certificates), and (c) with respect to certain other tax
matters.
The Agreement also provides that the Servicer will defend and indemnify the
Trust, the Trustee and the Certificateholders (which indemnification will
survive any removal of the Servicer) against any and all costs, expenses,
losses, damages, claims and liabilities, including reasonable fees and
expenses of counsel and expenses of litigation, in respect of any action taken
by the Company as Servicer with respect to any Contract.
DUTIES AND IMMUNITIES OF THE TRUSTEE
The Trustee will make no representations as to the validity or sufficiency
of the Agreement, the Certificates or any Contract, Contract file or related
documents, and will not be accountable for the use or application by the
Company of any funds paid to the Company in consideration of the conveyance of
the Contracts, or deposited into the Certificate Account by the Servicer. If
no Event of Termination has occurred, the Trustee will be required to perform
only those duties specifically required of it under the Agreement. However,
upon receipt of the various certificates, reports or other instruments
required to be furnished to it, the Trustee will be required to examine them
to determine whether they conform as to form to the requirements of the
Agreement.
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Under the Agreement the Servicer will agree (a) to pay to the Trustee from
time to time reasonable compensation for all services rendered by it
thereunder (which compensation shall not be limited by any provision of law in
regard to the compensation of a trustee of an express trust); (b) to reimburse
the Trustee upon its request for all reasonable expenses, disbursements and
advances incurred or made by the Trustee in accordance with any provision of
the Agreement (including FHA Insurance premiums not paid by the Servicer and
reasonable compensation and the expenses and disbursements of its agents and
counsel), except any such expense, disbursement or advance as may be
attributable to its negligence or bad faith; and (c) to indemnify the Trustee
for, and to hold it harmless against, any loss, liability or expense incurred
without negligence or bad faith on its part, arising out of or in connection
with the acceptance or administration of the Trust and its duties thereunder,
including the costs and expenses of defending itself against any claim or
liability in connection with the exercise or performance of any of its powers
or duties thereunder.
The Trustee is not obligated to expend or risk its own funds or otherwise
incur financial liability in the performance of its duties under the Agreement
if there is a reasonable ground for believing that the repayment of such funds
or adequate indemnity against such risk or liability is not reasonably
assured.
The Agreement also provides that the Trustee will maintain at its expense in
Minneapolis or St. Paul, Minnesota, an office or agency where Certificates may
be surrendered for registration of transfer or exchange and where notices and
demands to or upon the Trustee and the certificate registrar and transfer
agent in respect of the Certificates pursuant to the Agreement may be served.
On the date hereof the Trustee's office for such purposes is located at 180
East Fifth Street, St. Paul, Minnesota 55101. The Trustee will promptly give
written notice to the Company, the Servicer and the Certificateholders of any
change thereof.
THE TRUSTEE
[Trustee] has its corporate trust offices at [Address of Trustee].
The Trustee may resign from its duties under the Agreement at any time, in
which event the Servicer will be obligated to appoint a successor Trustee. The
Servicer may also remove the Trustee if the Trustee ceases to be eligible to
continue as such under the Agreement or if the Trustee becomes insolvent. In
such circumstances, the Servicer will also be obligated to appoint a successor
Trustee. Any resignation or removal of the Trustee and appointment of a
successor Trustee will not become effective until acceptance of the
appointment by the successor Trustee. Any successor Trustee must be an FHA
Title I approved lender.
REGISTRATION OF THE CERTIFICATES
The Certificates initially will be represented by certificates registered in
the name of Cede & Co., the nominee of The Depository Trust Company ("DTC").
The interests of beneficial owners of the Certificates will be represented by
book entries on the records of the participating members of DTC. Definitive
Certificates will be available only under the limited circumstances described
herein. Holders of the Certificates may hold through DTC (in the United
States), CEDEL or Euroclear (as defined herein) (in Europe) if they are
participants of such systems, or indirectly through organizations that are
participants in such systems.
CEDEL and Euroclear will hold omnibus positions in the Certificates on
behalf of the CEDEL Participants and the Euroclear Participants, respectively,
through customers' securities accounts in CEDEL's and Euroclear's names on the
books of their respective depositaries (collectively, the "Depositaries"),
which in turn will hold such positions in customers' securities accounts in
the Depositaries' names on the books of DTC.
DTC is a limited-purpose trust company organized under the laws of the State
of New York, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the New York Uniform Commercial Code, and a "clearing
agency" registered pursuant to the provisions of Section 17A of the Exchange
Act. DTC accepts securities for deposit from its participating organizations
("Participants") and facilitates the clearance and settlement of securities
transactions between Participants in such securities through
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electronic book-entry changes in accounts of Participants, thereby eliminating
the need for physical movement of certificates. Participants include
securities brokers and dealers, banks and trust companies and clearing
corporations and may include certain other organizations. Indirect access to
the DTC system is also available to others such as banks, brokers, dealers and
trust companies that clear through or maintain a custodial relationship with a
Participant, either directly or indirectly ("indirect participants").
The beneficial owners of Certificates ("Certificate Owners") who are not
Participants but desire to purchase, sell or otherwise transfer ownership of
the Certificates may do so only through Participants (unless and until
Definitive Certificates, as defined below, are issued). In addition,
Certificate Owners will receive all distributions of principal of, and
interest on, the Certificates from the Trustee through DTC and Participants.
Certificate Owners will not receive or be entitled to receive certificates
representing their respective interests in the Certificates, except under the
limited circumstances described below.
Unless and until Definitive Certificates (as defined below) are issued, it
is anticipated that the only "Certificateholder" of the Certificates will be
Cede & Co., as nominee of DTC. Certificate Owners will not be recognized by
the Trustee as Certificateholders as that term is used in the Agreement.
Certificate Owners are only permitted to exercise the rights of
Certificateholders indirectly through Participants and DTC.
While Certificates are outstanding (except under the circumstances described
below), under the rules, regulations and procedures creating and affecting DTC
and its operations (the "Rules"), DTC is required to make book-entry transfers
among Participants on whose behalf it acts with respect to the Certificates
and is required to receive and transmit distributions of principal of, and
interest on, the Certificates. Participants with whom Certificate Owners have
accounts with respect to Certificates are similarly required to make book-
entry transfers and receive and transmit such distributions on behalf of their
respective Certificate Owners. Accordingly, although Certificate Owners will
not possess certificates, the Rules provide a mechanism by which Certificate
Owners will receive distributions and will be able to transfer their
interests.
Certificates will be issued in registered form to Certificate Owners, or
their nominees, rather than to DTC (such Certificates being referred to herein
as "Definitive Certificates"), only if (i) DTC or the Company advise the
Trustee in writing that DTC is no longer willing or able to discharge properly
its responsibilities as nominee and depository with respect to the
Certificates and the Company or the Trustee is unable to locate a qualified
successor or (ii) the Company at its sole option advises the Trustee in
writing that it elects to terminate the book-entry system through DTC. Upon
issuance of Definitive Certificates to Certificate Owners, such Certificates
will be transferable directly (and not exclusively on a book-entry basis) and
registered holders will deal directly with the Trustee with respect to
transfers, notices and distributions.
DTC has advised the Company that, unless and until Definitive Certificates
are issued, DTC will take any action permitted to be taken by a
Certificateholder under the Agreement only at the direction of one or more
Participants to whose DTC accounts the Certificates are credited. DTC has
advised the Company that DTC will take such action with respect to any
fractional interest of the Certificates only at the direction of and on behalf
of such Participants beneficially owning a corresponding fractional interest
of the Certificates. DTC may take actions, at the direction of the
Participants, with respect to some Certificates which conflict with actions
taken with respect to other Certificates.
Issuance of Certificates in book-entry form rather than as physical
certificates may adversely affect the liquidity of the Certificates in the
secondary market and the ability of Certificate Owners to pledge them. In
addition, since distributions on the Certificates will be made by the Trustee
to DTC and DTC will credit such distributions to the accounts of its
Participants, with the Participants further crediting such distributions to
the accounts of indirect participants or Certificate Owners, Certificate
Owners may experience delays in the receipt of such distributions.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
Participants or Euroclear Participants, on the other, will be effected in DTC
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in accordance with DTC rules on behalf of the relevant European international
clearing system by its Depositary; however, such cross-market transactions
will require delivery of instructions to the relevant European international
clearing system by the counterparty in such system in accordance with its
rules and procedures and within its established deadlines (European time). The
relevant European international clearing system will, if the transaction meets
its settlement requirements, deliver instructions to its Depositary to take
action to effect final settlement on its behalf by delivering or receiving
securities in DTC, and making or receiving payment in accordance with normal
procedures for same-day funds settlement applicable to DTC. CEDEL Participants
and Euroclear Participants may not deliver instructions directly to the
Depositaries.
Because of time-zone differences, credits of securities in CEDEL or
Euroclear as a result of a transaction with a Participant will be made during
the subsequent securities settlement processing, dated the business day
following the DTC settlement date, and such credits or any transactions in
such securities settled during such processing will be reported to the
relevant CEDEL Participant or Euroclear Participant on such business day. Cash
received in CEDEL or Euroclear as a result of sales of securities by or
through a CEDEL Participant or a Euroclear Participant to a Participant will
be received with value on the DTC settlement date but will be available in the
relevant CEDEL or Euroclear cash account only as of the business day following
settlement in DTC.
CEDEL is incorporated under the laws of Luxembourg as a professional
depository. CEDEL holds securities for its participating organizations ("CEDEL
Participants") and facilitates the clearance and settlement of securities
transactions between CEDEL Participants through electronic book-entry changes
in accounts of CEDEL Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in CEDEL in any of 28
currencies, including United States dollars. CEDEL provides to its CEDEL
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. CEDEL interfaces with domestic markets in several
countries. As a professional depository, CEDEL is subject to regulation by the
Luxembourg Monetary Institute. CEDEL Participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations and may include the Underwriters. Indirect access to CEDEL is
also available to others, such as banks, brokers, dealers and trust companies
that clear through or maintain a custodial relationship with a CEDEL
Participant, either directly or indirectly.
The Euroclear System was created in 1968 to hold securities for participants
of the Euroclear System ("Euroclear Participants") and to clear and settle
transactions between Euroclear Participants through simultaneous electronic
book-entry delivery against payment, thereby eliminating the need for physical
movement of certificates and any risk from lack of simultaneous transfers of
securities and cash. Transactions may now be settled in Euroclear in any of 32
currencies, including United States dollars. The Euroclear System includes
various other services, including securities lending and borrowing, and
interfaces with domestic markets in several countries generally similar to the
arrangements for cross-market transfers with DTC described in Annex I hereto.
The Euroclear System is operated by Morgan Guaranty Trust Company of New York,
Brussels, Belgium office (the "Euroclear Operator" or "Euroclear"), under
contract with Euroclear Clearance System, S.C., a Belgian cooperative
corporation (the "Cooperative"). All operations are conducted by the Euroclear
Operator, and all Euroclear securities clearance accounts and Euroclear cash
accounts are accounts with the Euroclear Operator, not the Cooperative. The
Cooperative establishes policy for the Euroclear System on behalf of Euroclear
Participants. Euroclear Participants include banks (including central banks),
securities brokers and dealers and other professional financial intermediaries
and may include the Underwriters. Indirect access to the Euroclear System is
also available to other firms that clear through or maintain a custodial
relationship with a Euroclear Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it
is regulated and examined by the Board of Governors of the Federal Reserve
System and the New York State Banking Department, as well as the Belgian
Banking Commission.
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Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian
law (collectively, the "Terms and Conditions"). The Terms and Conditions
govern transfers of securities and cash within the Euroclear System,
withdrawal of securities and cash from the Euroclear System, and receipts of
payments with respect to securities in the Euroclear System. All securities in
the Euroclear System are held on a fungible basis without attribution of
specific certificates to specific securities clearance accounts. The Euroclear
Operator acts under the Terms and Conditions only on behalf of Euroclear
Participants and has no record of or relationship with persons holding through
Euroclear Participants.
Distributions with respect to Certificates held through CEDEL or Euroclear
will be credited to the cash accounts of CEDEL Participants or Euroclear
Participants in accordance with the relevant system's rules and procedures, to
the extent received by its Depositary. Such distributions will be subject to
tax reporting in accordance with relevant United States tax laws and
regulations. See "Certain Federal Income Tax Consequences" in the Prospectus
and "Global Clearance, Settlement and Tax Documentation Procedures" in Annex I
to this Prospectus Supplement.
Although DTC, CEDEL and Euroclear have agreed to the foregoing procedures in
order to facilitate transfers of Certificates among participants of DTC, CEDEL
and Euroclear, they are under no obligation to perform or continue to perform
such procedures and such procedures may be discontinued at any time.
DESCRIPTION OF THE CLASS HI: B-2 LIMITED GUARANTY
In order to mitigate the effect of the subordination of the Class HI: B-2
Certificates and liquidation losses and delinquencies on the Home Improvement
Contracts, the Company will provide a guaranty (the "Class HI: B-2 Limited
Guaranty") against losses that would otherwise be borne by the Class HI: B-2
Certificates. Each payment required to be made under the Class HI: B-2 Limited
Guaranty is referred to as a "Class HI: B-2 Guaranty Payment." Prior to the
Sub-Pool HI Cross-over Date, and on any Payment Date on or after the Class HI:
B-1 Cross-over Date on which a Class HI: B Principal Distribution Test is not
satisfied, the Class HI: B-2 Guaranty Payment will equal the amount, if any,
by which (i) the sum of (a) the Class HI: B-2 Formula Distribution Amount for
such Payment Date (which will be equal to accrued and unpaid interest on the
Class HI: B-2 Certificates) and (b) the Class HI: B-2 Liquidation Loss
Principal Amount, if any, for such Payment Date exceeds (ii) the Class HI: B-2
Distribution Amount for such Payment Date. The Class HI: B-2 Liquidation Loss
Principal Amount for any Payment Date equals the amount, if any, by which the
sum of the Class HI: A Principal Balance, the Class HI: M Principal Balance
and the Class HI: B Principal Balance for such Payment Date exceeds the Pool
Scheduled Principal Balance of Sub-Pool HI for such Payment Date (but in no
event greater than the Class HI: B-2 Principal Balance). The Class HI: B-2
Liquidation Loss Principal Amount is, in substance, the amount of
delinquencies and losses experienced on the Home Improvement Contracts during
the related Due Period that was not absorbed by the Class C Certificate and
the related Monthly Servicing Fee otherwise payable to the Company (so long as
the Company or any wholly owned subsidiary of the Company is the Servicer)
with respect to the Home Improvement Contracts. On each Payment Date on or
after the Class HI: B-1 Cross-over Date, if each Class HI: B Principal
Distribution Test is satisfied on such Payment Date (or the Class HI: A
Principal Balance and the Class HI: M Principal Balance have been reduced to
zero), the Class HI: B-2 Guaranty Payment will equal the amount, if any, by
which (a) the sum of (i) the Class HI: B-2 Formula Distribution Amount for
such Payment Date (which will include both interest and principal) and (ii)
the Class HI: B-2 Principal Liquidation Loss Amount, if any, for such Payment
Date exceeds (b) the Class HI: B-2 Distribution Amount for such Payment Date.
The Class HI: B-2 Limited Guaranty will be an unsecured general obligation
of the Company and will not be supported by any letter of credit or other
credit enhancement arrangement. The Class HI: B-2 Limited Guaranty will not
benefit in any way, or result in any payment to, the Class HI: A-1, Class HI:
A-2, Class HI: A-3, Class HI: M-1, Class HI: M-2 or Class HI: B-1
Certificateholders.
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As compensation for providing the Class HI: B-2 Limited Guaranty, the
Company will be entitled to receive a Class HI: B-2 Guaranty Fee on each
Payment Date equal to the lesser of (a) the Sub-Pool HI Amount Available less
the Class HI: A Distribution Amount, the Class HI: M-1 Distribution Amount,
the Class HI: M-2 Distribution Amount, the Class HI: B-1 Distribution Amount,
the Class HI: B-2 Distribution Amount, the Monthly Servicing Fee and certain
other amounts required to be paid to the Servicer, the Trustee, the Class C
Certificateholder and the Company (see "Description of the Certificates--
Payments on Contracts"), and (b) an amount equal to 1/12th of the product of
3% and the Pool Scheduled Principal Balance of Sub-Pool HI plus the Sub-Pool
HI Pre-Funded Amount for the immediately preceding Payment Date.
DESCRIPTION OF THE CLASS HE: B-2 LIMITED GUARANTY
In order to mitigate the effect of the subordination of the Class HE: B-2
Certificates and liquidation losses and delinquencies on the Home Equity
Contracts, the Company will provide a guaranty (the "Class HE: B-2 Limited
Guaranty") against losses that would otherwise be borne by the Class HE: B-2
Certificates. Each payment required to be made under the Class HE: B-2 Limited
Guaranty is referred to as a "Class HE: B-2 Guaranty Payment." Prior to the
Class HE: B-1 Cross-over Date, and on any Payment Date on or after the Class
HE: B-1 Cross-over Date on which a Class HE: B Principal Distribution Test is
not satisfied, the Class B-2 Guaranty Payment will equal the amount, if any,
by which (i) the sum of (a) the Class HE: B-2 Formula Distribution Amount for
such Payment Date (which will be equal to accrued and unpaid interest on the
Class HE: B-2 Certificates) and (b) the Class HE: B-2 Liquidation Loss
Principal Amount, if any, for such Payment Date exceeds (ii) the Class HE: B-2
Distribution Amount for such Payment Date. The Class HE: B-2 Liquidation Loss
Principal Amount for any Payment Date equals the amount, if any, by which the
sum of the Class HE: A Principal Balance, the Class HE: M Principal Balance
and the Class HE: B Principal Balance for such Payment Date exceeds the Pool
Scheduled Principal Balance of Sub-Pool HE for such Payment Date (but in no
event greater than the Class HE: B-2 Principal Balance). The Class HE: B-2
Liquidation Loss Principal Amount is, in substance, the amount of
delinquencies and losses experienced on the Home Equity Contracts during the
related Due Period that was not absorbed by the Class C Certificate and the
related Monthly Servicing Fee otherwise payable to the Company (so long as the
Company or any wholly owned subsidiary of the Company is the Servicer) with
respect to the Home Equity Contracts. On each Payment Date on or after the
Class HE: B-1 Cross-over Date, if each Class HE: B Principal Distribution Test
is satisfied on such Payment Date (or the Class HE: A Principal Balance and
the Class HE: M Principal Balance have been reduced to zero), the Class HE: B-
2 Guaranty Payment will equal the amount, if any, by which (a) the sum of (i)
the Class HE: B-2 Formula Distribution Amount for such Payment Date (which
will include both interest and principal) and (ii) the Class HE: B-2 Principal
Liquidation Loss Amount, if any, for such Payment Date exceeds (b) the Class
HE: B-2 Distribution Amount for such Payment Date.
The Class HE: B-2 Limited Guaranty will be an unsecured general obligation
of the Company and will not be supported by any letter of credit or other
credit enhancement arrangement. The Class HE: B-2 Limited Guaranty will not
benefit in any way, or result in any payment to, 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, Class HE: A-7 IO, Class HE: M-1, Class HE: M-2 or Class HE: B-1
Certificateholders.
As compensation for providing the Class HE: B-2 Limited Guaranty, the
Company will be entitled to receive a Class HE: B-2 Guaranty Fee on each
Payment Date equal to the lesser of (a) the Sub-Pool HE Amount Available less
the Class HE: A Distribution Amount, the Class HE: M-1 Distribution Amount,
the Class HE: M-2 Distribution Amount, the Class HE B-1 Distribution Amount,
the Class HE B-2 Distribution Amount, the Monthly Servicing Fee and certain
other amounts required to be paid to the Servicer, the Trustee, the Class C
Certificateholder and the Company (see "Description of the Certificates--
Payments on Contracts"), and (b) an amount equal to 1/12th of the product of
3% and the Pool Scheduled Principal Balance of Sub-Pool HE plus the Sub-Pool
HE Pre-Funded Amount for the immediately preceding Payment Date.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Upon the issuance of the Certificates, [Counsel to the Company], counsel to
the Company, will deliver its opinion that, assuming that two separate
elections are made to treat segregated portions of the assets of the Trust as
REMICs (respectively, the "Master REMIC" and the "Subsidiary REMIC"), and
further assuming ongoing compliance with the terms of the Agreement, the
Master REMIC and the Subsidiary REMIC will each qualify as a REMIC, the
Subsidiary REMIC Regular Interests, which are not being offered hereunder,
will be treated as "regular interests" in the Subsidiary REMIC, and each Class
of Sub-Pool HI Certificates and Sub-Pool HE Certificates will be treated as
"regular interests" in the Master REMIC for federal income tax purposes. The
Class C Subsidiary Certificate, which is not being offered hereby, will
constitute the sole class of "residual interests" in the Subsidiary REMIC, and
the Class C Master Certificate, which is not being offered hereby, will
constitute the sole class of "residual interests" in the Master REMIC.
Other than the Class HE: A-7 IO Certificates, it is not anticipated that any
of the Certificates will be issued with original issue discount for federal
income tax purposes. The prepayment assumption that will be used to determine
the rate of accrual of original issue discount, market discount and premium,
if any, will be based on the assumption that the Contracts will prepay at a
rate equal to % CPR as to the Home Improvement Contracts comprising Sub-Pool
HI and % of the applicable Prepayment Assumption as to the Fixed-Rate Home
Equity Contracts included in Sub-Pool HE and % CPR as to the Adjustable Rate
Contracts included in Sub-Pool HE.
Although the tax treatment is not entirely certain, the Class HE: A-7 IO
Certificates will be treated as having been issued with original issue
discount for federal income tax purposes equal to the excess of all expected
payments of interest on such Certificates over their issue price. Although
unclear, a holder of a Class HE: A-7 IO Certificate may be entitled to deduct
a loss to the extent that its remaining basis exceeds the maximum amount of
future payments to which such Certificateholder would be entitled if there
were no further prepayments of the Home Equity Contracts.
Certificates held by financial institutions, thrift institutions taxed as
domestic building and loan associations and real estate investment trusts will
represent interests in "loans secured by an interest in real property" and
"real estate assets" for purposes of Sections 7701(a)(19)(C) and 856(c)(5) of
the Code, respectively, in the same proportion that the assets in the Master
REMIC consist of qualifying assets under such sections. Furthermore, interest
paid with respect to Certificates held by a real estate investment trust will
be considered to be "interest on obligations secured by mortgages on real
property or on interests in real property" for purposes of Section 856(c)(3)
of the Code to the extent that such Certificates are treated as "real estate
assets" under Section 856(c) of the Code.
For further information regarding federal income tax consequences of
investing in the Certificates, see "Certain Federal Income Tax Consequences--
REMIC Series" in the Prospectus.
ERISA CONSIDERATIONS
The following information supplements, and to the extent inconsistent
therewith supersedes, the information in the Prospectus under "ERISA
Considerations."
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
imposes certain restrictions on employee benefit plans that are subject to
ERISA ("Plans") and on persons who are fiduciaries with respect to such Plans.
Employee benefit plans that are governmental plans (as defined in section
3(32) of ERISA) and certain church plans (as defined in Section 3(33) of
ERISA) are not subject to ERISA requirements. Accordingly, assets of such
plans may be invested in the Class HI: A Certificates and the Class HE: A
Certificates without regard to the ERISA restrictions described above, subject
to applicable provisions of other federal and state laws. However, any such
governmental or church plan which is qualified under section 401(a)
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of the Code and exempt from taxation under section 501(a) of the Code is
subject to the prohibited transaction rules set forth in section 503 of the
Code.
The U.S. Department of Labor ("DOL") has granted administrative exemptions
to Lehman Brothers Inc. (Prohibited Transaction Exemption No. 91-14, 56 Fed.
Reg. 7413 (1991)), to Merrill Lynch, Pierce, Fenner & Smith Incorporated
(Prohibited Transaction Exemption 90-29; Exemption Application No. D-8012, 55
Fed. Reg. 21459 (1990)), and to Salomon Brothers Inc (Prohibited Transaction
Exemption 89-89, as amended; Exemption Application No. D-6446, 54 Fed. Reg.
42,589 (1989)), (the "Exemptions") from certain of the prohibited transaction
rules of ERISA and the Code with respect to the initial purchase, the holding
and the subsequent resale by Plans of certificates representing interests in
asset-backed pass-through trusts that consist of certain receivables, loans
and other obligations that meet the conditions and requirements of the
Exemptions. The receivables covered by the Exemptions include home improvement
contracts and home equity loans such as the Contracts. The Exemptions will
apply to the acquisition, holding, and resale of the Class HI: A Certificates
and the Class HE: A Certificates by a Plan, provided that specified conditions
(certain of which are described below) are met.
Among the conditions which must be satisfied for the Exemptions to apply to
the Class HI: A Certificates and the Class HE: A Certificates are the
following:
(1) The acquisition of the Class HI: A Certificates or Class HE: A
Certificates by a Plan is on terms (including the price for the Class HI: A
Certificates or Class HE: A Certificates) that are at least as favorable to
the Plan as they would be in an arm's-length transaction with an unrelated
party;
(2) The rights and interests evidenced by the Class HI: A Certificates or
Class HE: A Certificates acquired by the Plan are not subordinated to the
rights and interests evidenced by other certificates of the Trust;
(3) The Class HI: A Certificates or Class HE: A Certificates acquired by
the Plan have received a rating at the time of such acquisition that is in
one of the three highest generic rating categories from either S&P, Fitch,
Duff & Phelps Credit Rating Co. or Moody's Investors Service, Inc. (the
"Exemptions Rating Agencies");
(4) The Trustee is not an affiliate of any other member of the Restricted
Group (as defined below);
(5) The sum of all payments made to the Underwriters in connection with
the distribution of the Class HI: A Certificates or Class HE: A
Certificates represents not more than reasonable compensation for
underwriting the Class HI: A Certificates or Class HE: A Certificates, as
applicable. The sum of all payments made to and retained by the Company
pursuant to the sale of the Contracts to the Trust represents not more than
the fair market value of such Contracts. The sum of all payments made to
and retained by the Servicer represents not more than reasonable
compensation for the Servicer's services under the Agreement and
reimbursement of the Servicer's reasonable expenses in connection
therewith; and
(6) The Plan investing in the Class HI: A Certificates or Class HE: A
Certificates is an "accredited investor" as defined in Rule 501(a)(1) of
Regulation D of the Securities and Exchange Commission under the Securities
Act of 1933.
Moreover, the Exemptions would provide relief from certain self-
dealing/conflict of interest prohibited transactions only if, among other
requirements, (i) in the case of the acquisition of Class HI: A Certificates
or Class HE: A Certificates in connection with the initial issuance, at least
fifty percent (50%) of the Class HI: A Certificates or Class HE: A
Certificates, as applicable, are acquired by persons independent of the
Restricted Group, (ii) the Plan's investment in Class HI: A Certificates or
Class HE: A Certificates does not exceed twenty-five percent (25%) of all of
the Class HI: A Certificates or Class HE: A Certificates, as applicable,
outstanding at the time of the acquisition and (iii) immediately after the
acquisition, no more than twenty-five percent (25%) of the assets of the Plan
are invested in certificates representing an interest in one or more trusts
containing assets sold or serviced by the same entity. The Exemptions do not
apply to Plans sponsored by the Company, the Underwriters, the Trustee, the
Servicer, any obligor with respect to Contracts included in the Trust
constituting
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more than five percent (5%) of the aggregate unamortized principal balance of
the assets in the Trust or any affiliate of such parties (the "Restricted
Group").
On July 21, 1997, the DOL published in the Federal Register an amendment to
the Exemptions, which extends exemptive relief to certain mortgage-backed and
asset-backed securities transactions using pre-funding accounts for trusts
issuing pass-through certificates. With respect to each Sub-Pool, the
amendment will generally allow related Contracts supporting payments to
related Certificateholders, and having a value equal to no more than 25% of
the total principal amount of the related Certificates, to be transferred to
the Trust during the Pre-Funding Period, instead of requiring that all such
Contracts be either identified or transferred on or before the Closing Date.
In general, the relief applies to the purchase, sale and holding of
Certificates which otherwise qualify for the Exemptions, provided that the
following general conditions are met:
(1) the ratio of the amount allocated to the related Pre-Funding Account
to the total principal amount of the related Certificates being offered
must be less than or equal to 25%;
(2) all Subsequent Home Equity Contracts and Subsequent Home Improvement
Contracts transferred to the related Sub-Pool after the Closing Date must
meet the same terms and conditions for eligibility as the Initial Home
Equity Contracts or Initial Home Improvement Contracts, as the case may be,
which terms and conditions have been approved by one of the Exemptions
Rating Agencies;
(3) the transfer of the Subsequent Home Equity Contracts and Subsequent
Home Improvement Contracts to the Trust during the Pre-Funding Period must
not result in the Certificates to be covered by the Exemptions receiving a
lower credit rating from an Exemptions Rating Agency upon termination of
the Pre-Funding Period than the rating that was obtained at the time of the
initial issuance of the Certificates by the Trust;
(4) solely as a result of the use of pre-funding, the weighted average
annual percentage interest rate (the "Average Interest Rate") for each of
Sub-Pool HE and Sub-Pool HI at the end of the Pre-Funding Period must not
be more than 100 basis points lower than the Average Interest Rate for the
Initial Home Equity Contracts and the Initial Home Improvement Contracts,
respectively;
(5) for transactions occurring on or after May 23, 1997, either:
(i) the characteristics of the Subsequent Home Equity Contracts and
Subsequent Home Improvement Contracts must be monitored by an insurer
or other credit support provider which is independent of the Company;
or
(ii) an independent accountant retained by the Company must provide
the Company with a letter (with copies provided to the Exemptions
Rating Agency rating the Certificates, the Underwriter and the Trustee)
stating whether or not the characteristics of the Subsequent Home
Equity Contracts conform to the characteristics described in the
Prospectus or Prospectus Supplement and/or Agreement. In preparing such
letter, the independent accountant must use the same type of procedures
as were applicable to the Initial Home Equity Contracts and the Initial
Home Improvement Contracts, respectively;
(6) the Funding Period must end no later than three months or 90 days
after the Closing Date or earlier in certain circumstances if the related
Pre-Funding Account falls below the minimum level specified in the
Agreement or an event of default occurs;
(7) amounts transferred to any Pre-Funding Account and any capitalized
interest account used in connection with the pre-funding may be invested
only in cash or in investments which are permitted by the Exemptions Rating
Agencies rating the Certificates, and such investment must be described in
the Agreement and must:
(i) be direct obligations of, or obligations fully guaranteed as to
timely payment of principal and interest by, the United States or any
agency or instrumentality thereof (provided that such obligations are
backed by the full faith and credit of the United States); or
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(ii) have been rated (or the obligor has been rated) in one of the
three highest generic rating categories by one of the Exemptions Rating
Agencies;
(8) the Prospectus or Prospectus Supplement must describe the duration of
the Funding Period;
(9) the Trustee (or any agent with which the Trustee contracts to provide
trust services) must be a substantial financial institution or trust
company experienced in trust activities and familiar with its duties,
responsibilities and liabilities as a fiduciary under ERISA. The Trustee,
as legal owner of the Trust, must enforce all the rights created in favor
of Certificateholders of the Trust, including employee benefit plans
subject to ERISA.
In its prefatory comments to the amendment as proposed by DOL (62 Fed. Reg.
28502), the DOL stated its interpretive position that a transaction which
satisfied the conditions of the Exemptions, but did not satisfy the conditions
of the amendment as proposed, could nevertheless qualify for exemptive relief
if it included a pre-funding account that was used only to acquire assets that
are specifically identified by the sponsor or originator as of the closing
date, but transferred to the trust after the closing date for administrative
or other reasons. Although the Pre-Funding Accounts may not satisfy the
conditions of the amendment in that each Pre-Funding Account may exceed 25% of
the total principal amount of the related Certificates, funds in the Pre-
Funding Accounts in excess of such 25% threshold will be used by the Trust
solely to purchase Subsequent Home Equity Loans or Subsequent Home Improvement
Loans, as applicable, in accordance with the Agreement from a fixed pool of
loans that will have been specifically identified prior to the Closing Date.
It is expected that all of the loans in such fixed pool, except for those
which are determined not to meet the criteria for purchase set forth in the
Agreement, will be acquired using the related Pre-Funded Account. Accordingly,
the Company believes that the existence of the Pre-Funding Accounts should not
cause the Exemptions to be inapplicable.
The Company believes that the Exemptions will apply to the acquisition and
holding of Class HI: A Certificates or Class HE: A Certificates sold by the
Underwriters and by Plans and that all conditions of the Exemptions other than
those within the control of the investors have been met. In addition, as of
the date hereof, no obligor with respect to Contracts included in the Trust
constitutes more than 5% of the aggregate unamortized principal balance of the
assets of the Trust. Any Plan fiduciary who proposes to cause a Plan to
purchase Class HI: A Certificates or Class HE: A Certificates should consult
with its own counsel with respect to the potential consequences under ERISA
and the Code of the Plan's acquisition and ownership of the Class HI: A
Certificates and Class HE: A Certificates. Assets of a Plan or individual
retirement account should not be invested in the Class HI: A Certificates and
Class HE: A Certificates unless it is clear that the assets of the Trust will
not be plan assets or unless it is clear that the Exemptions or a prohibited
transaction class exemption will apply and exempt all potential prohibited
transactions. See "ERISA Considerations" in the Prospectus.
In addition to the Exemptions, some or all of the transactions involving the
purchase, holding and resale of Certificates that might otherwise constitute
prohibited transactions under ERISA or the Code might qualify for relief from
the prohibited transaction rules and related taxes and penalties under certain
class exemptions granted by the DOL, including Prohibited Transaction Class
Exemption ("PTCE") 83-1, which exempts certain transactions involving employee
benefit plans and mortgage pool investment trusts, PTCE 86-128, which exempts
certain transactions involving employee benefit plans and certain broker-
dealers, PTCE 90-1, which exempts certain transactions involving employee
benefit plans and insurance company pooled separate accounts, and PTCE 91-38,
which exempts certain transactions involving employee benefit plans and bank
collective investment funds. There also may be other exemptions applicable to
a particular transaction involving the Trust. A Plan that intends to acquire
any class of the Certificates should consult with its own counsel regarding
whether such investment would cause a prohibited transaction to occur and
whether the terms and conditions of an applicable class exemption may be
satisfied.
The three administrative exemptions referred to herein as the Exemptions are
included in the "underwriter exemptions" listed in PTE 95-60. Consequently,
the exemption provided by PTE 95-60 may apply to the acquisition and holding
of the Certificates by an insurance company general account in which an
employee benefit plan has an interest. The Small Business Job Protection Act
of 1996 (the "1996 Act") became effective
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on August 20, 1996. The 1996 Act amends ERISA to require the DOL to issue
regulations to clarify, retroactively, the application of ERISA and the
prohibited transaction provisions of the Code to insurance company general
accounts. Any insurance company which proposes to purchase any Certificates
for its general account should consult with its own counsel with respect to
the potential consequences under ERISA and the Code of the insurance company's
acquisition and ownership of any of the Certificates. Assets of an insurance
company general account in which an employee benefit plan has an interest
should not be invested in any of the Certificates unless it is clear that PTE
95-60, the 1996 Act or other exemptive relief will apply and exempt all
potential prohibited transactions. See "ERISA Considerations" in the
Prospectus.
No transfer of any Class of Certificates other than the Class HI: A
Certificates and the Class HE: A Certificates will be permitted to be made to
a Plan unless such Plan, at its expense, delivers to the Trustee and the
Company an opinion of counsel (in form satisfactory to the Trustee and the
Company) to the effect that the purchase or holding of any other Class of
Certificates by such Plan will not result in the assets of the Trust being
deemed to be "plan assets" and subject to the prohibited transaction
provisions of ERISA and the Code and will not subject the Trustee, the Company
or the Servicer to any obligation or liability in addition to those undertaken
in the Agreement. Unless such opinion is delivered, each person acquiring such
a Certificate will be deemed to represent to the Trustee, the Company and the
Servicer that such person is neither a Plan, nor acting on behalf of a Plan,
subject to ERISA or to Section 4975 of the Code.
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UNDERWRITING
The Underwriters have agreed, subject to the terms and conditions of the
Underwriting Agreement, to purchase from the Company the respective principal
amounts of the Certificates set forth opposite their names below.
<TABLE>
<CAPTION>
PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL
AMOUNT OF AMOUNT OF AMOUNT OF AMOUNT OF AMOUNT OF AMOUNT OF AMOUNT OF
CLASS CLASS CLASS CLASS CLASS CLASS CLASS
HI: A-1 HI: A-2 HI: A-3 HI: M-1 HI: M-2 H1:B-1 H1:B-2
UNDERWRITER CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES
----------- ------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
....... $ $ $ $ $ $ $
.. $ $ $ $ $ $ $
........ $ $ $ $ $ $ $
--------- --------- --------- ---------- --------- --------- ---------
Totals.................... $ $ $ $ $ $ $
========= ========= ========= ========== ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL
AMOUNT OF AMOUNT OF AMOUNT OF AMOUNT OF AMOUNT OF AMOUNT OF
CLASS CLASS CLASS CLASS CLASS CLASS
HE: A-1 ARM HE: A-1 HE: A-2 HE: A-3 HI: A-4 HE: A-5
UNDERWRITER CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES
----------- ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
.................... $ $ $ $ $ $
.. $ $ $ $ $ $
..................... $ $ $ $ $ $
---------- ----------- ---------- ---------- --------- ---------
Totals................................. $ $ $ $ $ $
========== =========== ========== ========== ========= =========
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL PERCENTAGE PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL
AMOUNT OF INTEREST OF AMOUNT OF AMOUNT OF AMOUNT OF AMOUNT OF
CLASS CLASS CLASS CLASS CLASS CLASS
HE: A-6 HE: A-7 IO HE: M-1 HE: M-2 HE: B-1 HE: B-2
UNDERWRITER CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES
----------- ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
......... $ % $ $ $ $
.. $ % $ $ $ $
.......... $ % $ $ $ $
---------- --- ---------- ---------- ---------- ---------
Totals...................... $ 100% $ $ $ $
========== === ========== ========== ========== =========
</TABLE>
In the Underwriting Agreement, the Underwriters have agreed, subject to the
terms and conditions set forth therein, to purchase all of the Certificates
offered hereby if any such Certificates are purchased. In the event of a
default by the Underwriters, the Underwriting Agreement provides that, in
certain circumstances, the Underwriting Agreement may be terminated.
The Company has been advised by the Underwriters that they propose initially
to offer the Certificates to the public at the respective offering prices set
forth on the cover page of this Prospectus Supplement and to certain dealers
at such price less a concession not in excess of the respective amounts set
forth in the table below (expressed as a percentage of the relative
Certificate Principal Balance). The Underwriters may allow and such dealers
may reallow a discount not in excess of the respective amounts set forth in
the table below to certain other dealers.
<TABLE>
<CAPTION>
SELLING REALLOWANCE
CLASS CONCESSION DISCOUNT
----- ---------- -----------
<S> <C> <C>
HI:A-1.............................. % %
HI:A-2.............................. % %
HI:A-3.............................. % %
HI:M-1.............................. % %
HI:M-2.............................. % %
HI:B-1.............................. % %
HI:B-2.............................. % %
HE:A-1 ARM.......................... % %
</TABLE>
S-130
<PAGE>
<TABLE>
<CAPTION>
SELLING REALLOWANCE
CLASS CONCESSION DISCOUNT
----- ---------- -----------
<S> <C> <C>
HE:A-1.............................. % %
HE:A-2.............................. % %
HE:A-3.............................. % %
HE:A-4.............................. % %
HE:A-5.............................. % %
HE:A-6.............................. % %
HE:A-7 IO........................... % %
HE:M-1.............................. % %
HE:M-2.............................. % %
HE:B-1.............................. % %
HE:B-2.............................. % %
</TABLE>
In general, purchases of a security for the purpose of stabilization could
cause the price of the security to be higher than it might be in the absence
of such purchases.
Neither the Company nor any of the Underwriters makes any representations or
prediction as to the direction or magnitude of any effect that the
transactions described above may have on the prices of the Certificates. In
addition, neither the Company nor any of the Underwriters makes any
representation that the Underwriters will engage in such transactions or that
such transactions, once commenced, will not be discontinued without notice.
Until the distribution of the Certificates is completed, rules of the
Commission may limit the ability of the Underwriters and certain selling group
members to bid for and purchase the Certificates. As an exception to these
rules, the Underwriters are permitted to engage in certain transactions that
stabilize the price of the Certificates. Such transactions consist of bids or
purchases for the purposes of pagging, fixing or maintaining the price of the
Certificates.
Each Underwriter has represented, warranted and agreed that (i) it has not
offered or sold and, prior to the expiration of the period of six months from
the Closing Date, will not offer or sell any Certificates to persons in the
United Kingdom except to persons whose ordinary activities involve them in
acquiring, holding, managing or disposing of investments (as principal or
agent) for the purposes of their businesses or otherwise in circumstances
which have not resulted and will not result in an offer to the public in the
United Kingdom within the meaning of the Public Offers of Securities
Regulations 1995; (ii) it has complied and will comply with all applicable
provisions of the Financial Services Act 1986 with respect to anything done by
it in relation to the Certificates in, from or otherwise involving the United
Kingdom; and (iii) it has only issued or passed on and will only issue or pass
on in the United Kingdom any document received by it in connection with the
issue of the Certificates to a person who is of a kind described in Article
11(3) of the Financial Services Act 1986 (Investment Advertisements)
(Exemptions) Order 1995 (as amended) or is a person to whom such document may
otherwise lawfully be issued or passed on.
The Underwriting Agreement provides that the Company will indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended, or contribute to payments the Underwriters
may be required to make in respect thereof.
The Company has agreed that for a period of 30 days from the date of this
Prospectus Supplement it will not offer or sell publicly any other home
improvement contract or home equity loan pass-through certificates without the
consent of the Underwriters.
S-131
<PAGE>
LEGAL MATTERS
Certain legal matters relating to the issuance of the Certificates will be
passed upon for the Company and the Trust by [Company Counsel], ,
, and for the Underwriters by [Underwriter Counsel]. The material
federal income tax consequences of the Certificates will be passed upon for
the Company by [Company Counsel].
S-132
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the Certificates will be available
only in book-entry form (the "Global Certificates"). Investors in the Global
Certificates may hold such Global Certificates through any of DTC, CEDEL or
Euroclear. The Global Certificates will be tradeable as home market
instruments in both the European and U.S. domestic markets. Initial settlement
and all secondary trades will settle in same-day funds.
Secondary market trading between investors holding Global Certificates
through CEDEL and Euroclear will be conducted in the ordinary way in
accordance with their normal rules and operating procedures and in accordance
with conventional eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Certificates
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations.
Secondary cross-market trading between CEDEL or Euroclear and DTC
Participants holding Certificates will be effected on a delivery-against-
payment basis through the respective Depositaries of CEDEL and Euroclear (in
such capacity) and DTC Participants.
Non-U.S. holders (as described below) of Global Certificates will be subject
to U.S. withholding taxes unless such holders meet certain requirements and
deliver appropriate U.S. tax documents to the securities clearing
organizations or their participants.
INITIAL SETTLEMENT
All Global Certificates will be held in book-entry form by DTC in the name
of Cede & Co. as nominee of DTC. Investors' interests in the Global
Certificates will be represented through financial institutions acting on
their behalf as direct and indirect Participants in DTC. As a result, CEDEL
and Euroclear will hold positions on behalf of their participants through
their respective Depositaries, which in turn will hold such positions in
accounts as DTC Participants.
Investors electing to hold their Global Certificates through DTC will follow
the settlement practices applicable to United States corporate debt
obligations. Investors securities custody accounts will be credited with their
holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Certificates through CEDEL or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Certificates will be credited to
the securities custody accounts on the settlement date against payments in
same-day funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired
value date.
Trading between DTC Participants. Secondary market trading between DTC
Participants will be settled using the procedures applicable to book-entry
securities in same-day funds.
Trading between CEDEL or Euroclear Participants. Secondary market trading
between CEDEL Participants or Euroclear Participants will be settled using the
procedures applicable to conventional eurobonds in same-day funds.
A-1
<PAGE>
Trading between DTC seller and CEDEL or Euroclear purchaser. When Global
Certificates are to be transferred from the account of a DTC Participant to
the account of a CEDEL Participant or a Euroclear Participant, the purchaser
will send instructions to CEDEL or Euroclear through a CEDEL Participant or
Euroclear Participant at least one business day prior to settlement. CEDEL or
Euroclear, as applicable, will instruct its Depositary to receive the Global
Certificates against payment. Payment will include interest accrued on the
Global Certificates from and including the last coupon payment date to and
excluding the settlement date. Payment will then be made by such Depositary to
the DTC Participant's account against delivery of the Global Certificates.
After settlement has been completed, the Global Certificates will be credited
to the applicable clearing system and by the clearing system, in accordance
with its usual procedures, to the CEDEL Participant's or Euroclear
Participant's account. The Global Certificates credit will appear the next day
(European time) and the cash debit will be back-valued to, and the interest on
the Global Certificates will accrue from, the value date (which would be the
preceding day when settlement occurred in New York). If settlement is not
completed on the intended value date (i.e., the trade fails), the CEDEL or
Euroclear cash debit will be valued instead as of the actual settlement date.
CEDEL Participants and Euroclear Participants will need to make available to
the respective clearing systems the funds necessary to process same-day funds
settlement. The most direct means of doing so is to pre-position funds for
settlement, either from cash on hand or existing lines of credit, as they
would for any settlement occurring within CEDEL or Euroclear. Under this
approach, they may take on credit exposure to CEDEL or Euroclear until the
Global Certificates are credited to their accounts one day later.
As an alternative, if CEDEL or Euroclear has extended a line of credit to
them, CEDEL Participants or Euroclear Participants can elect not to pre-
position funds and allow that credit line to be drawn upon the finance
settlement. Under this procedure, CEDEL Participants or Euroclear Participants
purchasing Global Certificates would incur overdraft charges for one day,
assuming they cleared the overdraft when the Global Certificates were credited
to their accounts. However, interest on the Global Certificates would accrue
from the value date. Therefore, in many cases the investment income on the
Global Certificates earned during that one-day period may substantially reduce
or offset the amount of such overdraft charges, although this result will
depend on each CEDEL Participant's or Euroclear Participant's particular cost
of funds.
Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for sending Global Certificates
to the respective Depositary for the benefit of CEDEL Participants or
Euroclear Participants. The sale proceeds will be available to the DTC seller
on the settlement date. Thus, to the DTC Participant a cross-market
transaction will settle no differently than a trade between two DTC
Participants.
Trading between CEDEL or Euroclear seller and DTC purchaser. Due to time
zone differences in their favor, CEDEL Participants and Euroclear Participants
may employ their customary procedures for transactions in which Global
Certificates are to be transferred by the respective clearing systems, through
their respective Depositaries, to a DTC Participant. The seller will send
instructions to CEDEL or Euroclear through a CEDEL Participant or Euroclear
Participant at least one business day prior to settlement. In these cases,
CEDEL or Euroclear will instruct their respective Depositaries, as
appropriate, to deliver the Certificates to the DTC Participant's account
against payment. Payment will include interest accrued on the Global
Certificates from and including the last coupon payment date to and excluding
the settlement date. The payment will then be reflected in the account of the
CEDEL Participant or Euroclear Participant the following day, and receipt of
the cash proceeds in the CEDEL Participant's or Euroclear Participant's
account would be back-valued to the value date (which would be the preceding
day, when settlement occurred in New York). Should the CEDEL Participant or
Euroclear Participant have a line of credit with its clearing system and elect
to be in debit in anticipation of receipts of the sale proceeds in its
account, the bank-valuation will extinguish any overdraft charges incurred
over that one-day period. If settlement is not completed on the intended value
date (i.e., the trade fails), receipt of the cash proceeds in the CEDEL
Participant's or Euroclear Participant's account would instead be valued as of
the actual settlement date. Finally, day traders that use CEDEL or Euroclear
and that purchase Global Certificates from DTC Participants for delivery to
CEDEL Participants or Euroclear Participants should note that
A-2
<PAGE>
these trades would automatically fail on the sale side unless affirmative
action were taken. At least three techniques should be readily available to
eliminate this potential problem:
(a) borrowing through CEDEL or Euroclear for one day (until the purchase
side of the day trade is reflected in their CEDEL or Euroclear accounts) in
accordance with the clearing system's customary procedures;
(b) borrowing the Global Certificates in the U.S. from a DTC Participant
no later than one day prior to settlement, which would give the Global
Certificates sufficient time to be reflected in their CEDEL or Euroclear
account in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade so
that the value date for the purchase from the DTC Participant is at least
one day prior to the value date for the sale to the CEDEL Participant or
Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Certificates holding securities through CEDEL
or Euroclear (or through DTC if the holder has an address outside the U.S.)
will be subject to the 30% U.S. withholding tax that generally applies to
payments of interest (including original issue discount) on registered debt
issued by U.S. Persons, unless (i) each clearing system, bank or other
financial institution that holds customers' securities in the ordinary course
of its trade or business in the chain of intermediaries between such
beneficial owner and the U.S. entity required to withhold tax complies with
applicable certification requirements and (ii) such beneficial owner takes one
of the following steps to obtain an exemption or reduced tax rate:
Exemption of non-U.S. Persons (Form W-8). Beneficial owners of
Certificates that are non-U.S. Persons generally can obtain a complete
exemption from the withholding tax by filing a signed Form W-8 (Certificate
of Foreign Status) and a certificate under penalties of perjury (the "Tax
Certificate") that such beneficial owner is (i) not a controlled foreign
corporation (within the meaning of Section 957(a) of the Code) that is
related (within the meaning of Section 846(d)(4) of the Code) to the Trust
or the Transferor and (ii) not a 10% shareholder (within the meaning of
Section 871(h)(3)(B) of the Code) of the Trust or the Transferor. If the
information shown on Form W-8 or the Tax Certificate changes, a new Form W-
8 or Tax Certificate, as the case may be, must be filed within 30 days of
such change.
Exemption for non-U.S. Persons with effectively connected income (Form
4224). A non-U.S. Person, including a non-U.S. corporation or bank with a
U.S. branch, for which the interest income is effectively connected with
its conduct of a trade or business in the United States can obtain an
exemption from the withholding tax by filing Form 4224 (Exemption from
Withholding of Tax on Income Effectively Connected with the Conduct of a
Trade or Business in the United States).
Exemption or reduced rate for non-U.S. Persons resident in treaty
countries (Form 1001). Non-U.S. Persons that are beneficial owners of
Certificates residing in a country that has a tax treaty with the United
States can obtain an exemption or reduced tax rate (depending on the treaty
terms) by filing Form 1001 (Ownership, Exemption or Reduced Rate
Certificate). If the treaty provides only for a reduced rate, withholding
tax will be imposed at that rate unless the filer alternatively files Form
W-8. Form 1001 may be filed by the beneficial owner of Certificates or such
owner's agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The beneficial owner of a
Global Certificate or, in the case of a Form 1001 or a Form 4224 filer,
such owner's agent, files by submitting the appropriate form to the person
through whom it holds the security (the clearing agency, in the case of
persons holding directly on the books of the clearing agency). Form W-8 and
Form 1001 are effective for three calendar years and Form 4224 is effective
for one calendar year.
A-3
<PAGE>
The term "U.S. Person" means (i) a citizen or resident of the United States,
(ii) a corporation or partnership organized in or under the laws of the United
States or any political subdivision thereof (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 other than a foreign trust within the
meaning of Section 7701 (1)(31) of the Code. 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 1 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. This summary does not deal with
all aspects of U.S. federal income tax withholding that may be relevant to
foreign holders of the Global Certificates. Investors are advised to consult
their own tax advisors for specific tax advice concerning their holding and
disposing of the Global Certificates.
A-4
<PAGE>
BASE PROSPECTUS NO. 3
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 October 9, 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, 1997, and Quarterly Reports for the quarters ended March 31,
1998, and June 30, 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 The Certificates of each Series may be issued in
Certificates................ 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 $86,950,000, 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 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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<PAGE>
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 $1,332,000,000. 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.
12
<PAGE>
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 $3,116,054,406 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 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.
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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 $86,950,000. These insurance reserves were available to
cover losses on approximately $883,889,000 of FHA-insured manufactured housing
contracts and approximately $128,145,000 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 ($124,500 for
1998, 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)(4)(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)(4)(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)(4)(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, a
corporate tax on the excess inclusion for the period the residual interest is
actually held by the Disqualified Organization).
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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 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 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 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
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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 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
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<PAGE>
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 persons 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.
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
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<PAGE>
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)(4)(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
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<PAGE>
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 ($124,500 for 1998, 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 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
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<PAGE>
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. 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 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
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<PAGE>
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 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.
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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, 1997
and 1996 and for each of the years in the three-year period ended December 31,
1997, 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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NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS SUP-
PLEMENT AND THE PROSPECTUS IN CONNECTION WITH THE OFFERING COVERED BY THIS
PROSPECTUS SUPPLEMENT. IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDER-
WRITERS. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTITUTE AN
OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE CERTIFICATES IN ANY
JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OF-
FER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND
THE PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE AN IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET
FORTH IN THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS OR IN THE AFFAIRS OF
THE TRUST SINCE THE DATE HEREOF.
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Table of Contents
Prospectus Supplement
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Summary of the Terms of the Certificates.................................. S-5
Risk Factors.............................................................. S-46
Structure of the Transaction.............................................. S-47
Use of Proceeds........................................................... S-48
The Contracts............................................................. S-48
Yield and Prepayment Considerations....................................... S-68
Green Tree Financial Corporation.......................................... S-82
Description of the Certificates........................................... S-83
Description of the Class HI: B-2 Limited Guaranty......................... S-123
Description of the Class HE: B-2 Limited Guaranty......................... S-124
Certain Federal Income Tax Consequences................................... S-125
ERISA Considerations...................................................... S-125
Underwriting.............................................................. S-130
Legal Matters............................................................. S-132
Annex I................................................................... A-1
</TABLE>
Prospectus
<TABLE>
<S> <C>
Reports to Certificateholders............................................... 2
Available Information....................................................... 2
Additional Information...................................................... 2
Incorporation of Certain Documents by Reference............................. 2
Summary of Terms............................................................ 4
Risk Factors................................................................ 9
The Trust Fund.............................................................. 10
Use of Proceeds............................................................. 12
Green Tree Financial Corporation............................................ 12
Yield Considerations........................................................ 14
Maturity and Prepayment Considerations...................................... 14
Description of the Certificates............................................. 15
Description of FHA Insurance................................................ 26
Certain Legal Aspects of the Contracts; Repurchase Obligations.............. 28
ERISA Considerations........................................................ 37
Certain Federal Income Tax Consequences..................................... 38
Legal Investment Considerations............................................. 55
Ratings..................................................................... 56
Underwriting................................................................ 56
Legal Matters............................................................... 57
Experts..................................................................... 57
</TABLE>
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$ (APPROXIMATE)
LOGO
SELLER AND SERVICER
CERTIFICATES FOR HOME IMPROVEMENT ANDHOME EQUITY LOANS
SERIES 1997-
$ (APPROXIMATE) % CLASS HI: A-1
$ (APPROXIMATE) % CLASS HI: A-2
$ (APPROXIMATE) % CLASS HI: A-3
$ (APPROXIMATE) % CLASS HI: M-1
$ (APPROXIMATE) % CLASS HI: M-2
$ (APPROXIMATE) % CLASS HI: B-1
$ (APPROXIMATE) % CLASS HI: B-2
$ (APPROXIMATE) CLASS HE: A-1 ARM
$ (APPROXIMATE) % CLASS HE: A-1
$ (APPROXIMATE) % CLASS HE: A-2
$ (APPROXIMATE) % CLASS HE: A-3
$ (APPROXIMATE) % CLASS HE: A-4
$ (APPROXIMATE) % CLASS HE: A-5
$ (APPROXIMATE) % CLASS HE: A-6
% CLASS HE: A-7 IO
$ (APPROXIMATE) % CLASS HE: M-1
$ (APPROXIMATE) % CLASS HE: M-2
$ (APPROXIMATE) % CLASS HE: B-1
$ (APPROXIMATE) % CLASS HE: B-2
---------------
PROSPECTUS SUPPLEMENT
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[UNDERWRITER]
, 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+THIS PRELIMINARY PROSPECTUS SUPPLEMENT AND THE INFORMATION CONTAINED HEREIN +
+ARE SUBJECT TO COMPLETION OR AMENDMENT AND PROSPECTIVE PURCHASERS ARE +
+REFERRED TO THE RELATED FINAL PROSPECTUS SUPPLEMENT FOR DEFINITIVE +
+INFORMATION ON ANY MATTER CONTAINED HEREIN. THIS PRELIMINARY PROSPECTUS +
+SUPPLEMENT 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 +
+JURISDICTION IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL +
+PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH +
+JURISDICTION. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS SUPPLEMENT PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED , 1998) TO BASE NO. 4
$ (APPROXIMATE)
LOGO
SELLER AND SERVICER
CERTIFICATES FOR HOME IMPROVEMENT LOANS
SERIES 1998-
<TABLE>
<S> <C>
$ (APPROXIMATE) % CLASS
A-1 $ (APPROXIMATE) % CLASS M-2
$ (APPROXIMATE) % CLASS
A-2 $ (APPROXIMATE) % CLASS B-1
$ (APPROXIMATE) % CLASS
A-3 $ (APPROXIMATE) % CLASS B-2
$ (APPROXIMATE) % CLASS
M-1
</TABLE>
(PRINCIPAL AND INTEREST PAYABLE ON THE 15TH DAY OF EACH MONTH BEGINNING IN
1998)
----------
The Certificates for Home Improvement Loans, Series 1998- offered hereby
(the "Certificates") will be comprised of seven Classes, designated as the
Class A-1, Class A-2, Class A-3, Class M-1, Class M-2, Class B-1 and Class B-2
Certificates, respectively. The Certificates will be issued by, and evidence
beneficial ownership interests in, Home Improvement Loan Trust 1998- (the
"Trust"). The Trust will be created by Green Tree Financial Corporation (the
"Company") pursuant to a Pooling and Servicing Agreement, dated as of
(the "Agreement") between the Company and [Trustee], as Trustee (the
"Trustee"). The Trust property will consist primarily of a pool of home
improvement
(Continued on next page)
-----------
PROSPECTIVE INVESTORS SHOULD CONSIDER THE INFORMATION SET FORTH UNDER "RISK
FACTORS" ON PAGE S- OF THIS PROSPECTUS SUPPLEMENT AND PAGE OF THE
ACCOMPANYING PROSPECTUS.
-----------
THE CERTIFICATES REPRESENT INTERESTS IN THE TRUST AND DO NOT REPRESENT
INTERESTS IN OR OBLIGATIONS OF THE COMPANY, EXCEPT TO THE LIMITED EXTENT
DESCRIBED HEREIN AND IN THE PROSPECTUS. THE CERTIFICATES DO NOT
REPRESENT OBLIGATIONS OF, AND WILL NOT BE INSURED OR GUARANTEED BY,
FHA OR ANY OTHER GOVERNMENTAL AGENCY OR INSTRUMENTALITY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS
UNLAWFUL.
-----------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC(1) DISCOUNT COMPANY(1)(2)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Class A-1 Certificate........................ % % %
- ------------------------------------------------------------------------------------------------------
Per Class A-2 Certificate........................ % % %
- ------------------------------------------------------------------------------------------------------
Per Class A-3 Certificate........................ % % %
- ------------------------------------------------------------------------------------------------------
Per Class M-1 Certificate........................ % % %
- ------------------------------------------------------------------------------------------------------
Per Class M-2 Certificate........................ % % %
- ------------------------------------------------------------------------------------------------------
Per Class B-1 Certificate........................ % % %
- ------------------------------------------------------------------------------------------------------
Per Class B-2 Certificate........................ % % %
- ------------------------------------------------------------------------------------------------------
Total............................................ $ $ $
- ------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
(1) Plus accrued interest from and including , 1998.
(2) Before deducting expenses, estimated to be $ .
The Certificates are offered subject to prior sale, when, as and if issued by
the Trust and accepted by the Underwriter and subject to its right to reject
orders in whole or in part. It is expected that delivery of the Certificates
will be made in book-entry form only through the Same Day Funds Settlement
system of The Depository Trust Company on or about , 1998 (the actual
such date being hereinafter referred to as the "Closing Date").
-----------
[UNDERWRITERS]
-----------
The date of the Prospectus Supplement is , 1998.
<PAGE>
(Continued from previous page)
contracts and promissory notes (the "Contracts"), including the right to
receive payments due on the Contracts on and after , 1998 (or the date
of origination thereof, if later) (the "Cut-off Date"), liens on the related
real estate and amounts held for the Trust in the Certificate Account. Each of
the Contracts is secured by a lien (substantially all of which are subordinate
liens) on the related improved real estate. The rights of the holders of the
Class M-1, Class M-2, Class B-1 and Class B-2 Certificates to receive
distributions on each Payment Date will be subordinated to such rights of the
holders of the Class A-1, Class A-2 and Class A-3 Certificates and, in
addition, to such rights of the holders of the Class M-1 Certificates (in the
case of the Class M-2, Class B-1 and Class B-2 Certificates), of the Class M-2
Certificates (in the case of the Class B-1 and Class B-2 Certificates) and of
the Class B-1 Certificates (in the case of the Class B-2 Certificates), all to
the extent described herein.
The Class B-2 Certificateholders will have the benefit of a limited guaranty
of the Company (the "Class B-2 Limited Guaranty") to protect against losses
that would otherwise be borne by the Class B-2 Certificateholders. To the
extent that funds in the Certificate Account are insufficient to distribute to
the holders of the Class B-2 Certificates the Class B-2 Formula Distribution
Amount or in the event that there is a Class B-2 Principal Liquidation Loss
Amount for any Payment Date (each as described herein), the Company will be
obligated to make a Class B-2 Guaranty Payment in respect thereof (as
described herein). See "Description of the Class B-2 Limited Guaranty" herein.
Principal and interest with respect to the Certificates are distributable on
the fifteenth day of each month or, if such fifteenth day is not a business
day, the first Business Day thereafter, beginning in 1998. The Company
will act as servicer (in such capacity, the "Servicer") of the Contracts. The
final scheduled Payment Date of the Certificates is in . See
"Description of the Certificates" herein and in the Prospectus.
An election will be made to treat the Trust as a real estate mortgage
investment conduit ("REMIC") for federal income tax purposes. As described
more fully herein, the Certificates will constitute "regular interests" in the
REMIC and the Class C Certificate, which is not being offered hereby, will
constitute the "residual interest" in the REMIC. See "Certain Federal Income
Tax Consequences" herein and in the Prospectus.
There is currently no secondary market for the Certificates offered hereby,
and there is no assurance that any such market will develop or, if it does
develop, that it will continue. [Underwriter] (the "Underwriter") expects, but
is not obligated, to make a market in the Certificates.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CERTIFICATES
OFFERED HEREBY AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
Until , 1998, all dealers effecting transactions in the Certificates,
whether or not participating in this distribution, may be required to deliver
a Prospectus. This delivery requirement is in addition to the obligation of
dealers to deliver a Prospectus Supplement and a Prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
Upon receipt of a request by an investor, or his or her representative, within
the period during which there is a Prospectus delivery obligation, the Company
or the Underwriter will transmit or cause to be transmitted promptly, without
charge, and in addition to any such delivery requirements, a paper copy of a
Prospectus Supplement and a Prospectus, or a Prospectus Supplement and a
Prospectus encoded in an electronic format.
The Certificates offered hereby constitute Classes of a Series of
Certificates for Home Improvement Loans being offered by the Company from time
to time pursuant to the Prospectus. This Prospectus Supplement does not
contain complete information about the offering of the Certificates.
Additional information is contained in the Prospectus and purchasers are urged
to read both this Prospectus Supplement and the Prospectus in full. Sales of
the Certificates may not be consummated unless the purchaser has received both
this Prospectus Supplement and the Prospectus. To the extent that any
statements in this Prospectus Supplement conflict with statements contained in
the Prospectus, the statements in this Prospectus Supplement shall control.
S-2
<PAGE>
SUMMARY OF THE TERMS OF THE CERTIFICATES
This summary is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus Supplement and in the
accompanying Prospectus. Capitalized terms used herein and not otherwise
defined herein shall have the respective meanings assigned them in the
Prospectus and in Article I of the Agreement, a copy of which is available upon
request made to the Company.
Securities Offered............ Certificates for Home Improvement Loans, Series
1998- (the "Certificates"), comprised of
seven Classes designated as the Class A-1,
Class A-2, Class A-3, Class M-1, Class M-2,
Class B-1 and Class B-2 Certificates,
respectively. The Certificates will be issued
by, and evidence beneficial ownership
interests in, Home Improvement Loan Trust
1998- (the "Trust"), the property of which
consists primarily of the Contracts, having an
aggregate principal balance as of the Cut-off
Date (the "Cut-off Date Pool Principal
Balance") of $ , and all rights,
benefits, obligations and proceeds arising
therefrom or in connection therewith,
including liens on the related improved real
estate, and the Class B-2 Limited Guaranty for
the benefit of the Class B-2
Certificateholders.
Trustee....................... [Trustee]
Seller and Servicer........... Green Tree Financial Corporation.
Payment Date.................. The fifteenth day of each month or, if such day
is not a Business Day, the next succeeding
Business Day, commencing in 1998.
Cut-off Date.................. , 1998 (or the date of origination of the
Contract, if later).
Record Date................... The Business Day immediately preceding the
related Payment Date.
Original Series 1998- $ (approximate).
Principal Balance............
Original Class A-1
Principal Balance........
$ (approximate).
Original Class A-2
Principal Balance........
$ (approximate).
Original Class A-3
Principal Balance........
$ (approximate).
Original Class M-1
Principal Balance........
$ (approximate).
Original Class M-2
Principal Balance........
$ (approximate).
Original Class B-1
Principal Balance........
$ (approximate).
Original Class B-2
Principal Balance........
$ (approximate).
S-3
<PAGE>
Class A-1 Pass-Through Rate... % per annum.
Class A-2 Pass-Through Rate... % per annum.
Class A-3 Pass-Through Rate... % per annum.
Class M-1 Pass-Through Rate... % per annum.
Class M-2 Pass-Through Rate... % per annum.
Class B-1 Pass-Through Rate... % per annum.
Class B-2 Pass-Through Rate... % per annum.
Description of Certificates... The Class A-1, Class A-2 and Class A-3
(collectively, the "Class A Certificates") are
Senior Certificates and the Class M-1 and
Class M-2 Certificates (collectively, the
"Class M Certificates") and Class B-1 and
Class B-2 Certificates (collectively, the
"Class B Certificates") are Subordinated
Certificates, all as described herein, and are
issued by, and payable solely from the
property of, the Trust. The undivided
percentage interest of the holder of any
Certificate in the distributions to be made to
the related Class (the "Percentage Interest")
will be equal to the percentage obtained by
dividing the denomination specified on such
Certificate by the original principal balance
of such Class.
Distributions................ On each Payment Date, distributions on the Cer-
tificates will be made first to the holders of
the Class A Certificates, then to the holders
of the Class M Certificates, and then to the
holders of the Class B Certificates, in the
manner described below.
Distributions of interest and principal to the
holders of a Class of Class A Certificates will
be made, to the extent that the Amount Avail-
able in the Certificate Account is sufficient
therefor, in an amount equal to the sum of (i)
their respective Percentage Interests of the
amount of interest calculated as described be-
low under "A. Class A Interest" and (ii) their
respective Percentage Interests of the Senior
Percentage of the Formula Principal Distribu-
tion Amount (each as defined below) for the re-
lated Payment Date, in the order of priority
described below under "B. Class A Principal."
Distributions of interest and principal to the
Class M-1 Certificateholders will be made in an
amount equal to their respective Percentage In-
terests multiplied by the Class M-1 Distribu-
tion Amount (as described below). Distributions
of interest and principal to the Class M-2
Certificateholders will be made in an amount
equal to their respective Percentage Interests
multiplied by the Class M-2 Distribution Amount
(as described below). Distributions of interest
and principal to the Class B-1
Certificateholders will be made in an amount
equal to their respective Percentage Interests
multiplied by the Class B-1 Distribution Amount
(as described below). Distributions of interest
and principal to the Class B-2
Certificateholders will be made in an amount
equal to their respective Percentage Interests
of the
S-4
<PAGE>
Class B-2 Distribution Amount and any Class B-2
Guaranty Payment (each as described below). The
rights of the Class M and Class B
Certificateholders to receive distributions in
respect of the Amount Available are subordi-
nated to the rights of the Class A Certificate-
holders, the rights of the Class M-2 and Class
B Certificateholders to receive such distribu-
tions are subordinated to the rights of the
Class A Certificateholders and the Class M-1
Certificateholders, the rights of the Class B
Certificateholders to receive such distribu-
tions are subordinated to the rights of the
Class M Certificateholders, and the rights of
the Class B-2 Certificateholders to receive
such distributions are subordinated to the
rights of the Class B-1 Certificateholders.
Distributions will be made on each Payment Date
commencing in 1998 to holders of record on
the related Record Date, except that the final
distribution in respect of the Certificates
will only be made upon presentation and surren-
der of the Certificates at the office or agency
appointed by the Trustee for that purpose in
Minneapolis or St. Paul, Minnesota.
The "Class M-1 Distribution Amount" for any Pay-
ment Date is intended to be equal to the "Class
M-1 Formula Distribution Amount," which equals
the sum of (i) the amount of interest calcu-
lated as described under "C. Class M-1 Inter-
est" below and (ii) an amount of principal cal-
culated as described under "D. Class M-1 Prin-
cipal" below. The "Class M-1 Distribution
Amount" for any Payment Date will equal the
lesser of (i) the Class M-1 Formula Distribu-
tion Amount for such Payment Date or (ii) the
Amount Available in the Certificate Account
available for distribution to the Class M-1
Certificateholders (after giving effect to the
distribution made to Class A Certificate-
holders) on such Payment Date (the "Class M-1
Remaining Amount Available").
The "Class M-2 Distribution Amount" for any Pay-
ment Date is intended to be equal to the "Class
M-2 Formula Distribution Amount," which equals
the sum of (i) the amount of interest calcu-
lated as described under "E. Class M-2 Inter-
est" below and (ii) an amount of principal cal-
culated as described under "F. Class M-2 Prin-
cipal" below. The "Class M-2 Distribution
Amount" for any Payment Date will equal the
lesser of (i) the Class M-2 Formula Distribu-
tion Amount for such Payment Date or (ii) the
Amount Available in the Certificate Account
available for distribution to the Class M-2
Certificateholders (after giving effect to the
distribution made to Class A and Class M-1
Certificateholders) on such Payment Date (the
"Class M-2 Remaining Amount Available").
The "Class B-1 Distribution Amount" for any Pay-
ment Date is intended to be equal to the "Class
B-1 Formula Distribution Amount," which equals
the sum of (i) the amount of interest
S-5
<PAGE>
calculated as described under "G. Class B-1 In-
terest" below and (ii) an amount of principal
calculated as described under "H. Class B-1
Principal" below. The "Class B-1 Distribution
Amount" for any Payment Date will equal the
lesser of (i) the Class B-1 Formula Distribu-
tion Amount for such Payment Date or (ii) the
Amount Available in the Certificate Account
available for distribution to the Class B-1
Certificateholders (after giving effect to the
distribution made to Class A and Class M
Certificateholders) on such Payment Date (the
"Class B-1 Remaining Amount Available").
The "Class B-2 Distribution Amount" for any Pay-
ment Date is intended to be equal to the "Class
B-2 Formula Distribution Amount," which equals
the sum of (i) the amount of interest calcu-
lated as described under "I. Class B-2 Inter-
est" below and (ii) the amount of principal
calculated as described in the first paragraph
under "J. Class B-2 Principal" below. The
"Class B-2 Distribution Amount" for any Payment
Date will equal the lesser of (i) the Class B-2
Formula Distribution Amount for such Payment
Date or (ii) the Amount Available in the Cer-
tificate Account available for distribution to
the Class B-2 Certificateholders (after giving
effect to the distribution made to Class A,
Class M and Class B-1 Certificateholders) on
such Payment Date (the "Class B-2 Remaining
Amount Available").
See "Description of the Certificates" for a de-
tailed description of the amounts on deposit in
the Certificate Account that will constitute
the Amount Available on each Payment Date. The
Amount Available will include amounts otherwise
payable to the Class M Certificateholders, to
the Class B Certificateholders, to the Servicer
(so long as the Company or any wholly owned
subsidiary of the Company is the Servicer) as
the Monthly Servicing Fee, and to the Class C
Certificateholder. The Class M-1 Remaining
Amount Available will include amounts otherwise
payable to the holders of the Class M-2 Certif-
icates, to the Class B Certificates, to the
Servicer (so long as the Company or any wholly
owned subsidiary of the Company is the
Servicer) as the Monthly Servicing Fee, and to
the Class C Certificateholder. The Class M-2
Remaining Amount Available will include amounts
otherwise payable to the holders of the Class B
Certificates, to the Servicer (so long as the
Company or any wholly owned subsidiary of the
Company is the Servicer) as the Monthly Servic-
ing Fee, and to the Class C Certificateholder.
The Class B-1 Remaining Amount Available will
include amounts otherwise payable to the Class
B-2 Certificateholders, to the Servicer (so
long as the Company or any wholly owned subsid-
iary of the Company is the Servicer) as the
Monthly Servicing Fee, and to the Class C
Certificateholder. The Class B-2 Remaining
Amount Available will include amounts otherwise
payable to the Servicer (so long as the Company
or any wholly
S-6
<PAGE>
owned subsidiary of the Company is the
Servicer) as the Monthly Servicing Fee, and to
the Class C Certificateholder.
The "Principal Balance" of a Class of Certifi-
cates as of any Payment Date is the Original
Principal Balance of such Class of Certificates
less all amounts previously distributed to such
Class on account of principal. The Class A
Principal Balance as of any Payment Date is the
sum of the Class A-1 Principal Balance, the
Class A-2 Principal Balance and the Class A-3
Principal Balance. The Class M Principal Bal-
ance as of any Payment Date is the sum of the
Class M-1 Principal Balance and the Class M-2
Principal Balance. The Class B Principal Bal-
ance as of any Payment Date is the sum of the
Class B-1 Principal Balance and the Class B-2
Principal Balance.
A portion of the interest otherwise payable on a
Payment Date to the Class M and Class B
Certificateholders will be subordinated to
other amounts payable to Certificateholders on
that Payment Date if on the preceding Payment
Date the Principal Balance of the Contracts is
less than the Class A, Class M and Class B
Principal Balances, as further described below
in the sections describing interest payable on
the Class M and Class B Certificates.
A. Class A Interest.......... Interest on the outstanding Principal Balance of
each Class of Class A Certificates will accrue
from , 1998, or from the most recent Pay-
ment Date on which interest has been paid, to
but excluding the following Payment Date, and
will be computed on the basis of a 360-day year
of twelve 30-day months.
Interest will be paid concurrently on each Class
of Class A Certificates on each Payment Date,
to the extent of the Amount Available for such
date in the Certificate Account, at the related
Pass-Through Rate on the then outstanding Class
A-1 Principal Balance, Class A-2 Principal Bal-
ance and Class A-3 Principal Balance.
In the event that, on a particular Payment Date,
the Amount Available in the Certificate Account
is not sufficient to make a full distribution
of interest to the holders of outstanding Class
A Certificates, the amount of interest to be
distributed in respect of the Class A Certifi-
cates will be allocated among each Class
thereof (and within a Class among the Certifi-
cates of such Class) pro rata in accordance
with their respective entitlements to interest,
and the amount of the shortfall will be carried
forward and added to the amount such holders
will be entitled to receive on the next Payment
Date. Any such amount so carried forward will
bear interest at the related Pass-Through Rate,
to the extent legally permissible. See "De-
scription of the Certificates."
S-7
<PAGE>
B. Class A Principal......... Holders of a Class of Class A Certificates will
be entitled to receive on each Payment Date as
payments of principal, in the order of priority
set forth below and to the extent of the Amount
Available in the Certificate Account after pay-
ment of all interest payable on each Class of
Class A Certificates, the Senior Percentage of
the sum (such sum being hereinafter referred to
as the "Formula Principal Distribution Amount")
of (i) all scheduled payments of principal due
on each outstanding Contract during the month
preceding the month in which the Payment Date
occurs, (ii) the Scheduled Principal Balance
(as defined below) of each Contract which, dur-
ing the month preceding the month of such Pay-
ment Date, was purchased by the Company pursu-
ant to the Agreement on account of certain
breaches of its representations and warranties,
(iii) all partial Principal Prepayments applied
and all Principal Prepayments in Full received
during such preceding month, (iv) the Scheduled
Principal Balance of each Contract that became
a Liquidated Contract during such preceding
month, and (v) any amount described in clauses
(i) through (iv) above that was not previously
distributed because of an insufficient amount
of funds available in the Certificate Account
if (a) the Payment Date occurs on or after the
Payment Date on which the Class B-2 Principal
Balance has been reduced to zero, or (b) such
amount was not covered by a Class B-2 Guaranty
Payment and corresponding reduction in the
Class B-2 Principal Balance. When the Principal
Balance of a Class of Class A Certificates is
reduced to zero, no further distributions of
principal will be made to the holders of such
Class.
The Senior Percentage for any Payment Date prior
to the Class B Cross-over Date (as described
below), and for any Payment Date on or after
the Class B Cross-over Date (but on or prior to
the Fifth Cross-over Date, as described below)
on which each Class B Principal Distribution
Test (as described below) has not been satis-
fied, will equal 100%. On each Payment Date on
or after the Class B Cross-over Date (but on or
prior to the Fifth Cross-over Date), if each
Class B Principal Distribution Test has been
satisfied on such Payment Date, the Senior Per-
centage will equal a fraction, expressed as a
percentage, the numerator of which is the sum
of the Class A Principal Balance and the Class
M Principal Balance for such Payment Date and
the denominator of which is the Pool Scheduled
Principal Balance for the immediately preceding
Payment Date. On any Payment Date after the
Fifth Cross-over Date, the Senior Percentage
will be zero.
The Scheduled Principal Balance of a Contract
with respect to any Payment Date is its princi-
pal balance as of the scheduled payment date
(the "Due Date") in the calendar month preced-
ing such Payment Date (the "Due Period") as
specified in its amortization schedule, after
giving effect to any previous par-
S-8
<PAGE>
tial Principal Prepayments and to the scheduled
payment due on such Due Date, but without giv-
ing effect to any delinquency in payment or ad-
justments due to bankruptcy or similar proceed-
ings. The Pool Scheduled Principal Balance, as
of any Payment Date, is the aggregate of the
Scheduled Principal Balances of Contracts that
were outstanding during the preceding Due Peri-
od. A Liquidated Contract is a defaulted Con-
tract as to which all amounts that the Servicer
expects to recover on account of such Contract
have been received.
The Senior Percentage of the Formula Principal
Distribution Amount will be distributed, to the
extent of the Amount Available after payment of
interest on each Class of Class A Certificates,
first, to the Class A-1 Certificateholders un-
til the Class A-1 Principal Balance has been
reduced to zero, then to the Class A-2
Certificateholders until the Class A-2 Princi-
pal Balance has been reduced to zero, and then
to the Class A-3 Certificateholders until the
Class A-3 Principal Balance has been reduced to
zero.
C. Class M-1 Interest........ Interest on the outstanding Class M-1 Principal
Balance will accrue from , 1998, or from
the most recent Payment Date on which interest
has been paid, to but excluding the following
Payment Date, and will be computed on the basis
of a 360-day year of twelve 30-day months.
To the extent of the Class M-1 Remaining Amount
Available, if any, for a Payment Date after
payment of the Class A Distribution Amount for
such date, interest will be paid to the Class
M-1 Certificateholders on such Payment Date in
an amount (the "Class M-1 Interest Payment
Amount") equal to the product of (a) the Class
M-1 Pass-Through Rate and (b) the then out-
standing Class M-1 Principal Balance less the
Class M-1 Principal Shortfall Amount, if any.
The "Class M-1 Principal Shortfall Amount" as
of any Payment Date will equal the excess, if
any, of the Aggregate Principal Shortfall
Amount over the aggregate of the Principal Bal-
ances of the Class M-2 Certificates, the Class
B-1 Certificates and the Class B-2 Certifi-
cates. The "Aggregate Principal Shortfall
Amount" as of any Payment Date will equal the
excess, if any, of (i) the sum of the Class A
Principal Balance, the Class M Principal Bal-
ance and the Class B Principal Balance as of
the preceding Payment Date (after giving effect
to distributions of principal thereon) over
(ii) the Pool Scheduled Principal Balance for
such preceding Payment Date.
In the event that, on a particular Payment Date,
the Class M-1 Remaining Amount Available, plus
other funds in the Certificate Account avail-
able therefor, are not sufficient to make a
full distribution of the Class M-1 Interest
Payment Amount, the amount of interest to be
distributed in respect of the Class M-1 Certif-
icates will be allocated among the Certificates
of
S-9
<PAGE>
such Class pro rata in accordance with their
respective entitlements to interest, and the
amount of the deficiency will be carried for-
ward as an amount that the Class M-1
Certificateholders are entitled to receive on
the next Payment Date. Any amount so carried
forward will, to the extent legally permissi-
ble, bear interest at the Class M-1 Pass-
Through Rate. See "Description of the Certifi-
cates--Class M-1 Interest."
D. Class M-1 Principal....... Payments of principal on the Class M-1 Certifi-
cates will not commence until the Class A Prin-
cipal Balance has been reduced to zero. On each
Payment Date on or after the date on which the
Class A Principal Balance has been reduced to
zero, holders of Class M-1 Certificates will be
entitled to receive the Senior Percentage of
the Formula Principal Distribution Amount, un-
til the Class M-1 Principal Balance has been
reduced to zero.
E. Class M-2 Interest........ Interest on the outstanding Class M-2 Principal
Balance will accrue from , 1998, or from
the most recent Payment Date on which interest
has been paid, to but excluding the following
Payment Date, and will be computed on the basis
of a 360-day year of twelve 30-day months.
To the extent of the Class M-2 Remaining Amount
Available, if any, for a Payment Date after
payment of the Class A Distribution Amount and
the Class M-1 Distribution Amount for such
date, interest will be paid to the Class M-2
Certificateholders on such Payment Date in an
amount (the "Class M-2 Interest Payment
Amount") equal to the product of (a) the Class
M-2 Pass-Through Rate and (b) the then out-
standing Class M-2 Principal Balance less the
Class M-2 Principal Shortfall Amount, if any.
The "Class M-2 Principal Shortfall Amount" as
of any Payment Date will equal the excess, if
any, of the Aggregate Principal Shortfall
Amount over the Class B Principal Balance.
In the event that, on a particular Payment Date,
the Class M-2 Remaining Amount Available, plus
other funds in the Certificate Account avail-
able therefor, are not sufficient to make a
full distribution of the Class M-2 Interest
Payment Amount, the amount of interest to be
distributed in respect of the Class M-2 Certif-
icates will be allocated among the Certificates
of such Class pro rata in accordance with their
respective entitlements to interest, and the
amount of the deficiency will be carried for-
ward as an amount that the Class M-2
Certificateholders are entitled to receive on
the next Payment Date. Any amount so carried
forward will, to the extent legally permissi-
ble, bear interest at the Class M-2 Pass-
Through Rate. See "Description of the Certifi-
cates--Class M-2 Interest."
S-10
<PAGE>
F. Class M-2 Principal....... Payments of principal on the Class M-2 Certifi-
cates will not commence until the Class A Prin-
cipal Balance and the Class M-1 Principal Bal-
ance have been reduced to zero. On each Payment
Date on or after the date on which the Class A
Principal Balance and the Class M-1 Principal
Balance has been reduced to zero, holders of
Class M-2 Certificates will be entitled to re-
ceive the Senior Percentage of the Formula
Principal Distribution Amount, until the Class
M-2 Principal Balance has been reduced to zero.
G. Class B-1 Interest........ Interest on the outstanding Class B-1 Principal
Balance will accrue from , 1998, or from
the most recent Payment Date on which interest
has been paid, to but excluding the following
Payment Date, and will be computed on the basis
of 360-day year of twelve 30-day months.
To the extent of the Class B-1 Remaining Amount
Available, if any, for a Payment Date after
payment of the Class A Distribution Amount, the
Class M-1 Distribution Amount and the Class M-2
Distribution Amount for such date, interest
will be paid to the Class B-1
Certificateholders on such Payment Date in an
amount (the "Class B-1 Interest Payment
Amount") equal to the product of (a) the Class
B-1 Pass-Through Rate and (b) the then out-
standing Class B-1 Principal Balance less the
Class B-1 Principal Shortfall Amount, if any.
The "Class B-1 Principal Shortfall Amount" as
of any Payment Date will equal the excess, if
any, of the Aggregate Principal Shortfall
Amount over the Class B-2 Principal Balance.
In the event that, on a particular Payment Date,
the Class B-1 Remaining Amount Available, plus
other funds in the Certificate Account avail-
able therefor, are not sufficient to make a
full distribution of the Class B-1 Interest
Payment Amount, the amount of interest to be
distributed in respect of the Class B-1 Certif-
icates will be allocated among the Certificates
of such Class pro rata in accordance with their
respective entitlements to interest, and the
amount of the deficiency will be carried for-
ward as an amount that the Class B-1
Certificateholders are entitled to receive on
the next Payment Date. Any amount so carried
forward will, to the extent legally permissi-
ble, bear interest at the Class B-1 Pass-
Through Rate. See "Description of the Certifi-
cates--Class B-1 Interest."
H. Class B-1 Principal....... Payments of principal on the Class B-1 Certifi-
cates will not commence until the Class B
Cross-over Date, and will be made on that Pay-
ment Date and each Payment Date thereafter only
if each Class B Principal Distribution Test is
satisfied on such Payment Date (unless the
Class A Principal Balance and the Class M Prin-
cipal Balance have been reduced to zero). The
Class B Cross-over Date will be the earlier of
(A) the Payment Date on which the Class M-2
Principal Balance is reduced to
S-11
<PAGE>
zero (the "Fifth Cross-over Date") and (B) the
first Payment Date on or after the Payment Date
in on which the fraction, expressed as a
percentage, the numerator of which is the Class
B Principal Balance as of such Payment Date and
the denominator of which is the Pool Scheduled
Principal Balance as of the immediately preced-
ing Payment Date, is equal to or greater than
%. The Class B Principal Distribution Tests
on each Payment Date relate to losses and de-
linquencies on the Contracts, and are described
under "Description of the Certificates--Class
B-1 Principal."
On each Payment Date on or after the Class B
Cross-over Date, the Class B Percentage of the
Formula Principal Distribution Amount will be
paid to the Class B-1 Certificateholders to the
extent of the Class B-1 Remaining Amount Avail-
able after payment of interest on the Class B-1
Certificates, until the Class B-1 Principal
Balance has been reduced to zero.
The Class B Percentage for any Payment Date will
be equal to 100% minus the Senior Percentage.
The Class B Percentage for each Payment Date,
if any, after the Class A Principal Balance and
the Class M Principal Balance have been reduced
to zero will be equal to 100%.
I. Class B-2 Interest........ Interest on the outstanding Class B-2 Principal
Balance will accrue from , 1998, or from
the most recent Payment Date on which interest
has been paid, to but excluding the following
Payment Date, and will be computed on the basis
of a 360-day year of twelve 30-day months.
To the extent of (i) the Class B-2 Remaining
Amount Available, if any, for a Payment Date
after payment of the Class A Distribution
Amount, the Class M-1 Distribution Amount, the
Class M-2 Distribution Amount and the Class B-1
Distribution Amount for such date, and (ii) the
Class B-2 Guaranty Payment, if any, for such
date, interest will be paid to the Class B-2
Certificateholders on such Payment Date in an
amount (the "Class B-2 Interest Payment
Amount") equal to the product of (a) the Class
B-2 Pass-Through Rate and (b) the then out-
standing Class B-2 Principal Balance less the
Class B-2 Principal Shortfall Amount, if any.
The "Class B-2 Principal Shortfall Amount" as
of any Payment Date will equal the Aggregate
Principal Shortfall Amount.
In the event that, on a particular Payment Date,
the Class B-2 Remaining Amount Available in the
Certificate Account plus any amounts actually
paid under the Class B-2 Limited Guaranty are
not sufficient to make a full distribution of
the Class B-2 Interest Payment Amount, the
amount of interest to be distributed in respect
of the Class B-2 Certificates will be allocated
among the Certificates of such Class pro rata
in accordance with their respective entitle-
ments to interest, and the
S-12
<PAGE>
amount of the deficiency will be carried for-
ward as an amount that the Class B-2 Certifi-
cateholders are entitled to receive on the next
Payment Date. Any amount so carried forward
will, to the extent legally permissible, bear
interest at the Class B-2 Pass-Through Rate.
See "Description of the Certificates--Class B-2
Interest."
J. Class B-2 Principal....... Except for payments of the Class B-2 Principal
Liquidation Loss Amount (as described below),
payments of principal on the Class B-2 Certifi-
cates will not commence until the Payment Date
on which the Class B-1 Principal Balance has
been reduced to zero (the "Seventh Cross-over
Date"), and will be made on that Payment Date
and each Payment Date thereafter only if each
Class B Principal Distribution Test is satis-
fied on such Payment Date (unless the Class A
Principal Balance and the Class M Principal
Balance have been reduced to zero). On any such
Payment Date, the Class B Percentage of the
Formula Principal Distribution Amount will be
distributed, to the extent of the Class B-2 Re-
maining Amount Available and any amounts actu-
ally paid under the Class B-2 Limited Guaranty
after payment of interest on the Class B-2 Cer-
tificates, to the Class B-2 Certificateholders
until the Class B-2 Principal Balance has been
reduced to zero. See "Description of the Cer-
tificates--Class B-2 Principal."
On each Payment Date, the Class B-2
Certificateholders will be entitled to receive,
pursuant to the Class B-2 Limited Guaranty, the
Class B-2 Principal Liquidation Loss Amount un-
til the Class B-2 Principal Balance has been
reduced to zero. The "Class B-2 Principal Liq-
uidation Loss Amount" for any Payment Date will
equal the amount, if any, by which the sum of
the Class A Principal Balance, the Class M
Principal Balance and the Class B Principal
Balance for such Payment Date exceeds the Pool
Scheduled Principal Balance for such Payment
Date (after giving effect to all distributions
of principal on such Payment Date). The Class
B-2 Principal Liquidation Loss Amount repre-
sents future principal payments on the Con-
tracts that, because of the subordination of
the Class B-2 Certificates and liquidation
losses on the Contracts, will not be paid to
the Class B-2 Certificateholders.
Subordination of Class M and
Class B Certificates........
The rights of the holders of the Class M Certif-
icates and Class B Certificates to receive dis-
tributions with respect to the Contracts in the
Trust will be subordinated, to the extent de-
scribed herein, to such rights of the holders
of the Class A Certificates. This subordination
is intended to enhance the likelihood of regu-
lar receipt by the holders of the Class A Cer-
tificates of the full amount of their scheduled
monthly payments of interest and principal and
to afford such holders protection against
losses on Liquidated Contracts.
S-13
<PAGE>
The protection afforded to the holders of the
Class A Certificates by means of the subordina-
tion of the Class M and Class B Certificates
will be accomplished by the preferential right
of the Class A Certificateholders to receive,
prior to any distribution being made on a Pay-
ment Date in respect of the Class M and Class B
Certificates, the amounts of interest and prin-
cipal due them on each Payment Date out of the
Amount Available on such date in the Certifi-
cate Account and, if necessary, by the right of
such Class A Certificateholders to receive fu-
ture distributions of Amounts Available that
would otherwise be payable to the holders of
the Class M and Class B Certificates.
In addition, the rights of the holders of the
Class M-2 Certificates and Class B Certificates
to receive distributions with respect to the
Contracts will be subordinated, to the extent
described herein, to such rights of the holders
of the Class M-1 Certificates. This subordina-
tion is intended to enhance the likelihood of
regular receipt by the holders of the Class M-1
Certificates of the full amount of their sched-
uled monthly payments of interest and principal
and to afford such holders protection against
losses on Liquidated Contracts.
The protection afforded to the holders of the
Class M-1 Certificates by means of the subordi-
nation of the Class M-2 and Class B Certifi-
cates will be accomplished by the preferential
right of the Class M-1 Certificateholders to
receive, prior to any distribution being made
on a Payment Date in respect of the Class M-2
and Class B Certificates, the amounts of inter-
est and principal due them on each Payment Date
out of the Class M-1 Remaining Amount Available
on such date in the Certificate Account and, if
necessary, by the right of such Class M-1
Certificateholders to receive future distribu-
tions of Class M-1 Remaining Amounts Available
that would otherwise be payable to the holders
of the Class M-2 and Class B Certificates.
In addition, the rights of the holders of the
Class B Certificates to receive distributions
with respect to the Contracts will be subordi-
nated, to the extent described herein, to such
rights of the holders of the Class M-2 Certifi-
cates. This subordination is intended to en-
hance the likelihood of regular receipt by the
holders of the Class M-2 Certificates of the
full amount of their scheduled monthly payments
of interest and principal and to afford such
holders protection against losses on Liquidated
Contracts.
The protection afforded to the holders of the
Class M-2 Certificates by means of the subordi-
nation of the Class B Certificates will be ac-
complished by the preferential right of the
Class M-2 Certificateholders to receive prior
to any distribution being made on a Payment
Date in respect of the Class B Certificates,
the amounts of interest and principal due them
on each Pay-
S-14
<PAGE>
ment Date out of the Class M-2 Remaining Amount
Available on such date in the Certificate Ac-
count and, if necessary, by the right of such
Class M-2 Certificateholders to receive future
distributions of Class M-2 Remaining Amounts
Available that would otherwise be payable to
the holders of the Class B Certificates.
In addition, the rights of the holders of the
Class B-2 Certificates to receive distributions
with respect to the Contracts will be subordi-
nated, to the extent described herein, to such
rights of the holders of the Class B-1 Certifi-
cates. This subordination is intended to en-
hance the likelihood of regular receipt by the
holders of the Class B-1 Certificates of the
full amount of their scheduled monthly payments
of interest and principal and to afford such
holders protection against losses on Liquidated
Contracts.
The protection afforded to the holders of the
Class B-1 Certificates by means of the subordi-
nation of the Class B-2 Certificates will be
accomplished by the preferential right of the
Class B-1 Certificateholders to receive prior
to any distribution being made on a Payment
Date in respect of the Class B-2 Certificates,
the amounts of interest and principal due them
on each Payment Date out of the Class B-1 Re-
maining Amount Available on such date in the
Certificate Account and, if necessary, by the
right of such Class B-1 Certificateholders to
receive future distributions of Class B-1 Re-
maining Amounts Available that would otherwise
be payable to the holders of the Class B-2 Cer-
tificates.
If a Class B-2 Guaranty Payment is required for
any Payment Date and the Company fails to pay
such amount pursuant to the Class B-2 Limited
Guaranty, the Class B-2 Certificateholders may
incur losses on their investment in the Class
B-2 Certificates to the extent such losses are
not made up from future payments on the Con-
tracts. See "Description of the Certificates--
Subordination of Class M Certificates and Class
B Certificates."
Losses on Liquidated As described above, the distribution of princi-
Contracts................... pal to the Class A Certificateholders is in-
tended to include the Senior Percentage of the
Scheduled Principal Balance of each Contract
that became a Liquidated Contract during the
preceding Due Period. If the Net Liquidation
Proceeds from such Liquidated Contract are less
than the Scheduled Principal Balance of such
Liquidated Contract plus accrued and unpaid in-
terest thereon, the deficiency will, in effect,
be absorbed by the Class C Certificateholder,
then the Monthly Servicing Fee otherwise pay-
able to the Servicer (so long as the Company or
any wholly owned subsidiary of the Company is
the Servicer), then the Class B-2
Certificateholders, then the Class B-1
Certificateholders, then the Class M-2 Certifi-
cateholders and then the Class M-1
Certificateholders, since a portion of the
Amount Available equal to such deficiency and
otherwise distributable to them will be paid to
the Class A
S-15
<PAGE>
Certificateholders. Likewise, to the extent the
Class M-1 Certificateholders or the Class M-2
Certificateholders are entitled to receive dis-
tributions of principal, similar deficiencies
could result for each Class of Certificates
with a lower payment priority.
If the Amount Available is not sufficient to
cover the entire amount distributable to the
Class A Certificateholders, the Class M-1
Certificateholders or the Class M-2 Certifi-
cateholders on a particular Payment Date, then
the Senior Percentage on future Payment Dates
may be increased and the Class B Percentage on
future Payment Dates may be reduced as a result
of such deficiency.
But for the effect of the subordination of the
Class M-2, Class B and Class C Certificates and
the Monthly Servicing Fee otherwise payable to
the Servicer (so long as the Company or any
wholly owned subsidiary of the Company is the
Servicer), the Class M-1 Certificateholders
will absorb all losses on each Liquidated Con-
tract in the amount by which its Net Liquida-
tion Proceeds are less than its unpaid princi-
pal balance plus accrued and unpaid interest
thereon less the Monthly Servicing Fee. See
"Description of the Certificates--Subordination
of Class M Certificates and Class B Certifi-
cates."
But for the effect of the subordination of the
Class B and Class C Certificates and the
Monthly Servicing Fee otherwise payable to the
Servicer (so long as the Company or any wholly
owned subsidiary of the Company is the
Servicer), the Class M-2 Certificateholders
will absorb all losses on each Liquidated Con-
tract in the amount by which its Net Liquida-
tion Proceeds are less than its unpaid princi-
pal balance plus accrued and unpaid interest
thereon less the Monthly Servicing Fee. See
"Description of the Certificates--Subordination
of Class M Certificates and Class B Certifi-
cates."
But for the effect of the subordination of the
Class B-2 and Class C Certificates and the
Monthly Servicing Fee otherwise payable to the
Servicer (so long as the Company or any wholly
owned subsidiary of the Company is the
Servicer), the Class B-1 Certificateholders
will absorb all losses on each Liquidated Con-
tract in the amount by which its Net Liquida-
tion Proceeds are less than its unpaid princi-
pal balance plus accrued and unpaid interest
thereon less the related Monthly Servicing Fee.
See "Description of the Certificates--Subordi-
nation of Class M Certificates and Class B Cer-
tificates" and "Yield and Prepayment Considera-
tions."
But for the payments under the Class B-2 Limited
Guaranty described below and the subordination
of the Class C Certifi-
S-16
<PAGE>
cate and the Monthly Servicing Fee otherwise
payable to the Servicer (so long as the Company
or any wholly owned subsidiary of the Company
is the Servicer), the Class B-2
Certificateholders will absorb all losses on
each Liquidated Contract in the amount by which
its Net Liquidation Proceeds are less than its
unpaid principal balance plus accrued and un-
paid interest thereon less the related Monthly
Servicing Fee. See "Description of the Certifi-
cates--Subordination of Class M Certificates
and Class B Certificates."
Class B-2 Limited Guaranty.... In order to mitigate the effect of the subordi-
nation of the Class B-2 Certificates and liqui-
dation losses and delinquencies on the Con-
tracts, the Class B-2 Certificateholders are
entitled to receive on each Payment Date an
amount equal to the Class B-2 Guaranty Payment,
if any, under the Class B-2 Limited Guaranty of
the Company. Prior to the Sixth Cross-over
Date, and on any Payment Date on or after the
Sixth Cross-over Date on which any Class B
Principal Distribution Test is not satisfied
(unless the Class A Principal Balance and the
Class M Principal Balance have been reduced to
zero), the Class B-2 Guaranty Payment will
equal the amount, if any, by which (a) the sum
of (i) the Class B-2 Formula Distribution
Amount (which will be equal to accrued and un-
paid interest on the Class B-2 Certificates)
for such Payment Date and (ii) the Class B-2
Principal Liquidation Loss Amount, if any, for
such Payment Date, exceeds (b) the Class B-2
Distribution Amount for such Payment Date. On
each Payment Date on or after the Sixth Cross-
over Date on which each Class B Principal Dis-
tribution Test is satisfied (or on which the
Class A Principal Balance and the Class M Prin-
cipal Balance have been reduced to zero), the
Class B-2 Guaranty Payment will equal the
amount, if any, by which (a) the sum of (i) the
Class B-2 Formula Distribution Amount (which
will include both interest and principal) for
such Payment Date and (ii) the Class B-2 Prin-
cipal Liquidation Loss Amount, if any, exceeds
(b) the Class B-2 Distribution Amount for such
Payment Date.
The Class B-2 Limited Guaranty will be an
unsecured general obligation of the Company
and will not be supported by any letter of
credit or other credit enhancement
arrangement.
Registration of The Certificates initially will each be
Certificates................. represented by one or more certificates
registered in the name of Cede & Co. ("Cede")
as the nominee of The Depository Trust Company
("DTC"), and will only be available in the
form of book-entries on the records of DTC and
participating members thereof. Certificates
will otherwise be issued in definitive form
only under the limited circumstances described
herein. All references herein to the rights of
"holders" or "Certificateholders" shall
reflect the rights of beneficial owners as
they may indirectly exercise such rights
through
S-17
<PAGE>
DTC and participating members thereof, except
as otherwise specified herein. See
"Description of the Certificates--Registration
of the Certificates" herein.
Contracts..................... The Contracts consist of conventional and
FHA-insured home improvement contracts
and promissory notes (the "Contracts"),
including any and all rights to receive
payments due thereunder on and after the Cut-
off Date. The obligations of the Obligor under
each Contract are secured by the related real
estate and such Contracts constitute "Secured
Contracts" as described in the Prospectus. The
Contracts arise from loans relating to the
improvement of real estate located in
states and the District of Columbia. The
contractual annual percentage rate of interest
(the "Contract Rate") on the Contracts as of
the Cut-off Date ranges from % to %
with a weighted average of %. The
Contracts had a weighted average term to
scheduled maturity, as of origination, of
months, and a weighted average term to
scheduled maturity, as of the Cut-off Date, of
months. The final scheduled payment date
on the Contract with the latest scheduled
maturity is in . See "The Contracts"
herein.
FHA Insurance................. Approximately % of the Contracts, by
principal balance as of the Cut-off Date, are
insured by FHA against Obligor defaults
pursuant to Title I of the National Housing
Act ("FHA Insurance"). See "Description of FHA
Insurance" in the Prospectus.
Advances...................... The Servicer is obligated to make Advances each
month of any scheduled payments on the
Contracts that were due but not received
during the prior Due Period. The Servicer will
be entitled to reimbursement of an Advance
from funds available therefor in the
Certificate Account. The Servicer will be
obligated to make an Advance only to the
extent that it determines that such Advance
will be recoverable from subsequent funds
available therefor in the Certificate Account.
If the Servicer fails to make any Advance
required under the Agreement, the Trustee will
be obligated (subject to certain conditions)
to make such Advance. See "Description of the
Certificates--Advances" herein and in the
Prospectus.
Repurchases by the Company.... The Company has agreed to repurchase any
Contract in which the Trust's or the
Certificateholders' interest is materially and
adversely affected by a breach of a
representation and warranty with respect to
such Contract made in the Agreement if such
breach has not been cured within 90 days of
the day it was or should have been discovered
by the Servicer or the Trustee. See
"Description of the Certificates--Conveyance
of Contracts" herein and in the Prospectus.
S-18
<PAGE>
Repurchase Option............. The Servicer will have the option to repurchase
all of the outstanding Contracts on any
Payment Date on which the Pool Scheduled
Principal Balance is less than 10% of the Cut-
off Date Pool Principal Balance. See
"Description of the Certificates--Repurchase
Option" herein and in the Prospectus.
Monthly Servicing Fee......... The Servicer will be entitled to monthly
compensation for servicing the Contracts equal
to 1/12 of the product of .75% and the Pool
Scheduled Principal Balance (the "Monthly
Servicing Fee"). See "Description of the
Certificates--Servicing Compensation and
Payment of Expenses" and "Rights upon an Event
of Termination" herein.
Tax Status.................... In the opinion of counsel to the Company, for
federal income tax purposes, the Trust will be
treated as a real estate mortgage investment
conduit ("REMIC"). The Class A-1, Class A-2,
Class A-3, Class M-1, Class M-2, Class B-1 and
Class B-2 Certificates will constitute
"regular interests" in such REMIC and
generally will be treated as debt instruments
of the Trust for federal income tax purposes
with payment terms equivalent to the terms of
such Certificates. The Class C Certificate,
which is not being offered hereby, will
constitute the "residual interest" in the
REMIC. The holders of Certificates will be
required to include in income interest on such
Certificates (including any original issue
discount) in accordance with the accrual
method of accounting. See "Certain Federal
Income Tax Consequences" herein and in the
Prospectus.
ERISA Considerations.......... Subject to the conditions described herein, the
Class A-1, Class A-2 and Class A-3
Certificates may be purchased by employee
benefit plans that are subject to the Employee
Retirement Income Security Act of 1974, as
amended ("ERISA"). No transfer of any other
Certificates will be permitted to be made to
any employee benefit plan subject to ERISA or
to the Internal Revenue Code of 1986, as
amended (the "Code"), unless the opinion of
counsel described under "ERISA Considerations"
herein and in the Prospectus is delivered to
the Trustee. See "ERISA Considerations" herein
and in the Prospectus.
Rating........................ It is a condition precedent to the issuance of
the Certificates that the Class A-1, Class A-2
and Class A-3 Certificates each be assigned a
rating of not lower than ["Aaa"] by Moody's
Investors Service, Inc. ("Moody's") and not
lower than ["AAA"] by Standard & Poor's Rating
Services, a division of The McGraw-Hill
Companies, Inc. ("S&P"), the Class M-1
Certificates be assigned a rating not lower
than ["Aa2"] by Moody's and not lower than
["AA"] by S&P, the Class M-2 Certificates be
assigned a rating not lower than ["A2"] by
Moody's and not lower than ["A"] by S&P, the
Class B-1 Certificates be assigned a rating
not lower than ["Baa2"] by
S-19
<PAGE>
Moody's and not lower than ["BBB"] by S&P and
the Class [B-2] Certificates be assigned a
rating not lower than ["Baa1"] by Moody's and
not lower than ["A-"] by S&P. The rating of
each Class of Certificates by Moody's
addresses the likelihood of the receipt by
Certificateholders of all distributions to
which such Certificateholders are entitled.
The rating of each Class of Certificates by
S&P addresses the likelihood of timely receipt
of interest and ultimate receipt of principal.
The ratings of the Class B-2 Certificates are
based in part on an assessment of the
Company's ability to make payments under the
Class B-2 Limited Guaranty. Any reduction in
Moody's or S&P's rating of the Company's debt
securities may result in a similar reduction
in the rating of the Class B-2 Certificates. A
security rating is not a recommendation to
buy, sell or hold securities and may be
subject to revision or withdrawal at any time
by the assigning rating agency. See "Ratings"
in the Prospectus.
Repurchase Option............. The Company has not requested a rating of the
Certificates from any rating agencies other
than Moody's and S&P. There can be no
assurance as to whether any other rating
agency will rate the Certificates or, if one
does, what rating would be assigned by such
rating agency.
Legal Investment The Certificates will not constitute "mortgage
Considerations............... related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA") because there are 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. Investors should consult with
their own legal advisors to determine whether
and to what extent the Certificates constitute
legal investments for them.
S-20
<PAGE>
RISK FACTORS
Prospective Certificateholders should consider, in addition to the factors
described under "Risk Factors" in the Prospectus, the following factors in
connection with the purchase of the Certificates:
Limited Historical Data With Respect to Home Improvement Loans. The Company
began purchasing and servicing FHA-insured home improvement contracts in April
1989, and conventional home improvement contracts in September 1992, and thus
has limited historical experience with respect to the performance, including
the rate of prepayments of home improvement loans. Accordingly, the Company's
delinquency experience and loan loss and liquidation experience set forth
under "The Contracts" herein may not be indicative of the performance of the
Contracts.
STRUCTURE OF THE TRANSACTION
On or about , 1998 (the "Closing Date"), the Company will establish
the Trust pursuant to a Pooling and Servicing Agreement to be dated as of
, 1998 (the "Agreement"), between the Company, as Seller and Servicer, and
the Trustee.
The Class A-1, Class A-2, Class A-3, Class M-1, Class M-2, Class B-1 and
Class B-2 Certificates will be issued by the Trust, the corpus of which will
consist primarily of the Contracts, including all rights to receive payments
due on such Contracts on and after , 1998 (or the date of origination
thereof, if later) (the "Cut-off Date"), all rights under FHA Insurance with
respect to the FHA-insured Contracts, liens on the related real estate,
amounts held for the Trust in the Certificate Account (as defined below), and
the Class B-2 Limited Guaranty of the Company for the benefit of the Class B-2
Certificates, as described in "Description of the Class B-2 Limited Guaranty"
herein.
Payments and recoveries in respect of principal and interest on the
Contracts will be paid into a separate trust account maintained at an Eligible
Institution (initially [Trustee], Minneapolis, Minnesota) in the name of the
Trust (the "Certificate Account"), no later than one Business Day after
receipt. Payments deposited in the Certificate Account in respect of each Due
Period will be applied on the fifteenth day of the next month (or, if such day
is not a Business Day, the next succeeding Business Day) (each a "Payment
Date") to make the distributions to the Certificateholders as of the
immediately preceding Record Date as described under "Description of the
Certificates--Distributions on the Certificates" herein and to pay certain
monthly fees to the Servicer as compensation for its servicing of the
Contracts (the "Monthly Servicing Fee").
The Servicer will be obligated to advance any scheduled payments on the
Contracts that were due but not received during the prior Due Period
("Advances"). The Servicer will be entitled to reimbursement of an Advance
from funds available therefor in the Certificate Account. The Servicer will
not be required to make any Advance to the extent that it does not expect to
recoup the Advance from subsequent funds available therefor in the Certificate
Account. If the Servicer fails to make any Advance required under the
Agreement, the Trustee is obligated (subject to certain conditions) to make
such Advance.
Following the transfer of the Contracts from the Company to the Trust, the
obligations of the Company are limited to (a) its obligations as Servicer to
service the Contracts, (b) certain representations and warranties in the
Agreement as described under "Description of the Certificates--Conveyance of
Contracts" herein, (c) certain indemnities, and (d) the Class B-2 Limited
Guaranty. The Company is obligated under the Agreement to repurchase at the
Repurchase Price (as defined herein) any Contract on the first Payment Date
which is more than 90 days after the Company becomes aware, or the Company
receives written notice from the Trustee, of any breach of any such
representation and warranty in the Agreement that materially adversely affects
the Certificateholders' interest in such Contract if such breach has not been
cured prior to such date. The Agreement also provides that the Company has
certain obligations to repurchase Contracts and to indemnify the Trustee and
Certificateholders with respect to certain other matters.
S-21
<PAGE>
USE OF PROCEEDS
The Company will use the net proceeds received from the sale of the
Certificates for working capital and general corporate purposes, including
building a portfolio of home improvement contracts and promissory notes,
providing warehouse financing for the purchase of contracts and other costs of
maintaining such contracts until they are pooled and sold to other investors.
THE CONTRACTS
Each Contract is a home improvement contract originated by a Company-
approved home improvement contractor and purchased by the Company, or a home
improvement promissory note originated by the Company directly. Each Contract
finances improvements to a one- to four-family residential property, an owner-
occupied condominium or town house or a manufactured home which either
qualifies as real estate under state law or is located in a Company-approved
park. Each Contract is secured by a lien on the related real estate.
The Company will make certain representations and warranties in the
Agreement, including that (a) each Contract is fully amortizing with a fixed
contractual rate of interest and provides for level monthly payments over the
term of such loan, computed on the simple interest method, (b) each Contract
has its last scheduled payment due no later than , (c) each FHA-
insured Contract was originated in accordance with applicable FHA regulations
and is insured, without set-off, surcharge or defense, by FHA Insurance, and
(d) each Contract is secured by a lien (which is typically a subordinate lien)
on the related real estate. The Contracts were originated or acquired by the
Company in the ordinary course of the Company's business. A detailed listing
of the Contracts is appended to the Agreement. See "Description of the
Certificates" herein and in the Prospectus. Approximately % of the
Contracts, by principal balance as of the Cut-off Date, are insured by FHA to
the extent described in "Description of FHA Insurance" in the Prospectus. Each
of the Contracts has a Contract Rate of at least % per annum and not more
than % and the weighted average of the Contract Rates of the Contracts as
of the Cut-off Date is %. As of the Cut-off Date, the Contracts had
remaining maturities of at least months but not more than months and
original maturities of at least 24 months but not more than 360 months. The
Contracts had a weighted average term to scheduled maturity, as of
origination, of months, and a weighted average term to scheduled maturity,
as of the Cut-off Date, of months. The average principal balance per Contract
as of the Cut-off Date was $ and the principal balances on the
Contracts as of the Cut-off Date ranged from $ to $ . The
Contracts arise from loans relating to real property located in states and
the District of Columbia. By principal balance as of the Cut-off Date,
approximately % of the Contracts financed improvements to real estate
located in California, % in New York, % in Florida, % in New
Jersey, % in Pennsylvania and % in Texas. No other state represented
% or more of the Cut-off Date Pool Principal Balance. Substantially none of
the Contracts provide for recourse to the originating contractor in the event
of a default by the Obligor.
S-22
<PAGE>
Set forth below is a description of certain additional characteristics of the
Contracts.
GEOGRAPHICAL DISTRIBUTION OF IMPROVED REAL ESTATE
<TABLE>
<CAPTION>
% OF
% OF CONTRACT POOL BY
CONTRACT POOL BY AGGREGATE PRINCIPAL OUTSTANDING
NUMBER OF NUMBER OF BALANCE PRINCIPAL
CONTRACTS AS OF CONTRACTS AS OUTSTANDING AS OF BALANCE AS OF
CUT-OFF DATE OF CUT-OFF DATE CUT-OFF DATE CUT-OFF DATE
--------------- ---------------- ------------------- ----------------
<S> <C> <C> <C> <C>
Alabama................. % $ %
Arizona.................
Arkansas................
California..............
Colorado................
Connecticut.............
Delaware................
District of Columbia....
Florida.................
Georgia.................
Idaho...................
Illinois................
Indiana.................
Iowa....................
Kansas..................
Kentucky................
Louisiana...............
Maine...................
Maryland................
Massachusetts...........
Michigan................
Minnesota...............
Mississippi.............
Missouri................
Montana.................
Nebraska................
Nevada..................
New Hampshire...........
New Jersey..............
New Mexico..............
New York................
North Carolina..........
North Dakota............
Ohio....................
Oklahoma................
Oregon..................
Pennsylvania............
Rhode Island............
South Carolina..........
South Dakota............
Tennessee...............
Texas...................
Utah....................
Vermont.................
Virginia................
Washington..............
West Virginia...........
Wisconsin...............
Wyoming.................
---- ------ -------------- ------
Total............... 100.00% $ 100.00%
==== ====== ============== ======
</TABLE>
S-23
<PAGE>
YEARS OF ORIGINATION OF CONTRACTS
<TABLE>
<CAPTION>
% OF
NUMBER OF CONTRACT POOL BY
CONTRACTS AGGREGATE PRINCIPAL OUTSTANDING PRINCIPAL
AS OF CUT- BALANCE OUTSTANDING BALANCE AS OF
YEAR OF ORIGINATION OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
- ------------------- ---------- ------------------- ---------------------
<S> <C> <C> <C>
...................... $ %
......................
......................
----- -------------- ------
Total................. $ 100.00%
===== ============== ======
</TABLE>
DISTRIBUTION OF ORIGINAL CONTRACT AMOUNTS
<TABLE>
<CAPTION>
% OF
NUMBER OF CONTRACT POOL BY
CONTRACTS AGGREGATE PRINCIPAL OUTSTANDING PRINCIPAL
ORIGINAL CONTRACT AS OF CUT- BALANCE OUTSTANDING BALANCE AS OF
AMOUNT (IN DOLLARS) OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
- ------------------- ---------- ------------------- ---------------------
<S> <C> <C> <C>
Less than $ 10,000........ $ %
Between$ 10,000--
$ 19,999.................
Between$ 20,000--
$ 29,999.................
Between$ 30,000--
$ 39,999.................
Between$ 40,000--
$ 49,999.................
Between$ 50,000--
$ 59,999.................
Between$ 60,000--
$ 69,999.................
Between$ 70,000--
$ 79,999.................
Between$ 80,000--
$ 89,999.................
Between$ 90,000--
$ 99,999.................
Between$100,000--
$109,999.................
Over $110,000.........
----- -------------- ------
Total................. $ 100.00%
===== ============== ======
</TABLE>
CONTRACT RATES
<TABLE>
<CAPTION>
% OF
NUMBER OF CONTRACT POOL BY
CONTRACTS AGGREGATE PRINCIPAL OUTSTANDING PRINCIPAL
RANGE OF CONTRACTS BY AS OF CUT- BALANCE OUTSTANDING BALANCE AS OF
CONTRACT RATE OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
--------------------- ---------- ------------------- ---------------------
<S> <C> <C> <C>
From 0.00000%--
9.00000%................ $ %
From 9.00001%--
10.00000%................
From 10.00001%--
11.00000%................
From 11.00001%--
12.00000%................
From 12.00001%--
13.00000%................
From 13.00001%--
14.00000%................
From 14.00001%--
15.00000%................
From 15.00001%--
16.00000%................
----- -------------- ------
Total................. $ 100.00%
===== ============== ======
</TABLE>
S-24
<PAGE>
REMAINING MONTHS TO MATURITY
<TABLE>
<CAPTION>
% OF
NUMBER OF CONTRACT POOL BY
MONTHS REMAINING TO CONTRACTS AGGREGATE PRINCIPAL OUTSTANDING PRINCIPAL
SCHEDULED MATURITY AS OF CUT- BALANCE OUTSTANDING BALANCE AS OF
AS OF CUT-OFF DATE OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
------------------- ---------- ------------------- ---------------------
<S> <C> <C> <C>
Less than 31.............. $ %
31-60.....................
61-90.....................
91-120....................
121-150...................
151-180...................
181-210...................
211-240...................
241-270...................
271-300...................
301-330...................
331-360...................
----- -------------- ------
Total................. $ 100.00%
===== ============== ======
</TABLE>
LIEN POSITION OF CONTRACTS
<TABLE>
<CAPTION>
% OF % OF
NUMBER OF CONTRACT POOL BY CONTRACT POOL BY
CONTRACTS NUMBER OF AGGREGATE PRINCIPAL OUTSTANDING PRINCIPAL
AS OF CUT- CONTRACTS AS OF BALANCE OUTSTANDING BALANCE AS OF
OFF DATE CUT-OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
---------- ---------------- ------------------- ---------------------
<S> <C> <C> <C> <C>
First................... % $ %
Second..................
Third...................
Fourth..................
----- ------- -------------- -------
Total............... 100.00% $ 100.00%
===== ======= ============== =======
</TABLE>
DELINQUENCY, LOAN DEFAULT AND LOSS INFORMATION
The following tables set forth the delinquency experience for the periods
indicated of the portfolios of conventional and FHA-insured secured home
improvement loans serviced by the Company (other than Contracts already in
repossession).
DELINQUENCY EXPERIENCE--CONVENTIONAL CONTRACTS
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------
1995 1994 1993
------ ------ -----
<S> <C> <C> <C>
Number of Contracts Out-
standing(1)................ 56,028 29,788 3,893
Number of Contracts Delin-
quent(2)(3)
30-59 Days................ 394 57 5
60-89 Days................ 109 10 1
90 Days or More........... 126 15 0
------ ------ -----
Total Contracts Delinquent.. 629 82 6
Delinquencies as a Percent
of Contracts
Outstanding(4)............. 1.12% .28% .15%
</TABLE>
- --------
(1) Excludes defaulted contracts not yet liquidated.
(2) A contract is considered delinquent by the Company if any payment of $25
or more is past-due 30 days or more.
S-25
<PAGE>
(3) The period of delinquency is based on the number of days that payments are
contractually past-due (assuming 30-day months). Consequently, a contract
due on the first day of a month is not 30 days delinquent until the first
day of the next month.
(4) By number of contracts.
DELINQUENCY EXPERIENCE--FHA INSURED CONTRACTS
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------------------------
1997 1996 1995 1994 1993 1992 1991
----- ----- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Number of Contracts
Outstanding(1)......... 25,925 26,885 29,787 25,698 21,337
Number of Contracts
Delinquent(2)(3)
30-59 Days............ 462 237 262 355 228
60-89 Days............ 121 95 87 98 84
90 Days or More....... 183 146 164 207 164
----- ----- ------ ------ ------ ------ ------
Total Contracts
Delinquent............. 766 478 513 660 476
Delinquencies as a
Percent of Contracts
Outstanding(4)......... % % 2.95% 1.78% 1.72% 2.57% 2.23%
</TABLE>
- --------
(1) Excludes defaulted contracts not yet liquidated.
(2) A contract is considered delinquent by the Company if any payment of $25
or more is past-due 30 days or more.
(3) The period of delinquency is based on the number of days that payments are
contractually past-due (assuming 30-day months). Consequently, a contract
due on the first day of a month is not 30 days delinquent until the first
day of the next month.
(4) By number of contracts.
The following tables set forth the loan loss and repossession experience for
the periods indicated of the portfolios of conventional and FHA-insured
secured home improvement loans serviced by the Company (other than Contracts
already in repossession).
LOAN DEFAULT AND LOSS EXPERIENCE--CONVENTIONAL CONTRACTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
TWELVE MONTHS
ENDED DECEMBER 31,
---------------------------------------------
1997 1996 1995 1994 1993
------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Principal Balance of Contracts
Serviced(1)................... $ $ $824,419 $418,055 $59,281
Contract Defaults(2)........... % % .53% .12% .05%
Net Losses:
Dollars(3)................... $ $ $ 3,424 $ 285 $ 0
Percentage(4)................ % % .42% .07% .00%
</TABLE>
- --------
(1) As of period end. Includes defaulted contracts not yet liquidated.
(2) As a percentage of the total number of contracts being serviced as of
period end. The Company considers a contract defaulted when the Company
has commenced foreclosure or enforcement proceedings or the contract is
180 days delinquent.
(3) Does not include any estimated losses for defaulted contracts not yet
liquidated.
(4) As a percentage of the principal amount of contracts being serviced as of
period end.
S-26
<PAGE>
LOAN DEFAULT AND LOSS EXPERIENCE--FHA INSURED CONTRACTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
TWELVE MONTHS
ENDED DECEMBER 31,
------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Principal Balance of
Contracts Serviced(1).. $ $ $191,364 $199,286 $235,908 $206,062 $174,146
Contract Defaults(2).... % % 1.81% 1.88% 1.86% 1.87% 1.09%
Net Losses:
Dollars(3)............ $ $ $ 291 $ 623 $ 737 $ 768 $ 305
Percentage(4)......... % % .15% .31% .31% .37% .18%
</TABLE>
- --------
(1) As of period end. Includes defaulted contracts not yet liquidated.
(2) As a percentage of the total number of contracts being serviced as of
period end. The Company considers a contract defaulted when the Company
has submitted a claim to FHA, the Company has commenced foreclosure or
enforcement proceedings, or the contract is 180 days delinquent.
(3) Does not include any estimated losses for defaulted contracts not yet
liquidated. Includes unpaid interest to the date of FHA claim submission
and all expenses of liquidation, and reflects proceeds of FHA Insurance
claims paid.
(4) As a percentage of the principal amount of contracts being serviced as of
period end.
The Company's management is not aware of any trends or anomalies which have
adversely affected the delinquency, loan default and loss experience of its
portfolio of home improvement contracts.
The data presented in the foregoing tables are for illustrative purposes
only and there is no assurance that the delinquency, loan default and loss
experience of the Contracts will be similar to that set forth above. Moreover,
because the Company began originating and purchasing FHA-insured home
improvement contracts in , and secured conventional home improvement
contracts in , it is likely that the Company's portfolio is not yet
sufficiently seasoned to show the delinquencies and losses that would be
experienced if such data were collected over a longer period of time. The
delinquency, loan default and loss experience of home improvement loans may be
adversely affected by a downturn in regional or local economic conditions.
Regional and local economic conditions are often volatile, and no predictions
can be made regarding future economic conditions in any particular area.
YIELD AND PREPAYMENT CONSIDERATIONS
The yield on any Certificate will depend on the price paid by the
Certificateholder, the timing of principal payments, and the timing and amount
of any liquidation losses on the Contracts.
Higher than expected "Principal Prepayments" (payments received from
Obligors, other than regular payments of principal, which are applied upon
receipt or, in the case of partial prepayments, upon the next scheduled
payment date for such Contract, to reduce the outstanding principal balance on
the Contracts) will increase the yield on Certificates purchased at a price
less than the undivided ownership interest in the aggregate principal balance
of the Contracts represented by such Certificates and will decrease the yield
on Certificates purchased at a price greater than the undivided ownership
interest in the aggregate principal balance of the Contracts represented by
such Certificates. 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
all Principal Prepayments are passed through to Certificateholders on the
Payment Date following the Due Period in which such Principal Prepayment
occurred, prepayments on the Contracts would affect the amount of funds
available to make distributions on the Certificates on any Payment Date only
if a substantial portion of the Contracts prepaid prior to their respective
due dates in a
S-27
<PAGE>
particular month (thus paying less than 30 days' interest for that Due Period)
while very few Contracts prepaid after their respective due dates in that
month. In addition, liquidations of Defaulted Contracts or the Servicer's
exercise of its option to repurchase the entire remaining pool of Contracts
(see "Description of the Certificates--Repurchase Option" herein) will affect
the timing of principal distributions on the Certificates. Prepayments on
mortgage loans and other consumer installment obligations are commonly
measured relative to a prepayment standard or model. The Constant Prepayment
Rate ("CPR") model assumes that the outstanding principal balance of a pool of
loans prepays each month at a specified constant annual rate. The Certificates
were priced using a prepayment assumption of % CPR. There can be no
assurance that the Contracts will prepay at such rate, and it is unlikely that
prepayments or liquidations of the Contracts will occur at any constant rate.
The amount of interest to which the Certificateholders of any Class are
entitled on any Payment Date will be the product of the related Pass-Through
Rate and the Principal Balance of such Class immediately following the
preceding Payment Date, based on a 360-day year consisting of 12 months of 30
days each. Certificateholders will receive payments in respect of principal on
each Payment Date to the extent that funds available in the Certificate
Account are sufficient therefor, in the priority described under "Description
of the Certificates--Distributions on the Certificates." As required by
applicable state laws, interest paid by Obligors on the Contracts is computed
according to the simple interest method. Principal and interest payable on the
Certificates will be computed according to the actuarial method.
The final scheduled payment date on the Contract with the latest maturity is
in .
WEIGHTED AVERAGE LIFE OF THE CERTIFICATES
The following information is given solely to illustrate the effect of
prepayments of the Contracts on the weighted average life of each Class of
Certificates under the stated assumptions and is not a prediction of the
prepayment rate that might actually be experienced by the Contracts.
Weighted average life refers to the average amount of time from the date of
issuance of a security until each dollar of principal of such security will be
repaid to the investor. The weighted average life of the Certificates will be
influenced by the rate at which principal on the Contracts is paid. Principal
payments on Contracts may be in the form of scheduled amortization or
prepayments (for this purpose, the term "prepayment" includes repayments and
liquidations due to default or other dispositions of the Contracts).
Prepayments on Contracts may be measured by a prepayment standard or model.
The model used in this Prospectus Supplement, the Constant Prepayment Rate
model, is described above.
As used in the following tables, "0% CPR" assumes that none of the Contracts
are prepaid before maturity, " % CPR" assumes the Contracts will prepay at a
CPR of %, and so forth.
There is no assurance, however, that prepayment of the Contracts will
conform to any level of the CPR, and no representation is made that the
Contracts will prepay at the prepayment rates shown or any other prepayment
rate. The rate of principal payments on pools of home improvement contracts is
influenced by a variety of economic, geographic, social and other factors,
including the level of interest rates and the rate at which homeowners sell
their homes or default on their contracts. Other factors affecting prepayment
of contracts include changes in obligors' housing needs, job transfers,
unemployment and obligors' net equity in their homes. In the case of home
improvement contracts secured by real estate, in general, if prevailing
interest rates fall significantly below the interest rates on such home
improvement contracts, the home improvement contracts are likely to be subject
to higher prepayment rates than if prevailing interest rates remained at or
above the rates borne by such home improvement contracts. Conversely, if
prevailing interest rates rise above the interest rates on such home
improvement contracts, the rate of prepayment would be expected to decrease.
The percentages and weighted average lives in the following tables were
determined assuming that: (i) scheduled interest and principal payments on the
Contracts are received in a timely manner and prepayments
S-28
<PAGE>
are made at the indicated percentages of the CPR set forth in the table; (ii)
the Servicer exercises its option to repurchase the Contracts, as described
under "Description of the Certificates--Repurchase Option"; (iii) the
Contracts will, as of the Cut-off Date, be grouped into four pools having the
additional characteristics set forth below under "Assumed Contract
Characteristics;" (iv) the Class A-1 Certificates have an Original Class A-1
Principal Balance of $ and a Class A-1 Pass-Through Rate of %,
the Class A-2 Certificates have an Original Class A-2 Principal Balance of
$ and a Class A-2 Pass-Through Rate of %, the Class A-3
Certificates have an Original Class A-3 Principal Balance of $ and a
Class A-3 Pass-Through Rate of %, the Class M-1 Certificates have an
Original Class M-1 Principal Balance of $ and a Class M-1 Pass-
Through Rate of %, the Class M-2 Certificates have an Original Class M-2
Principal Balance of $ and a Class M-2 Pass-Through Rate of %,
the Class B-1 Certificates have an Original Class B-1 Principal Balance of
$ and a Class B-1 Pass-Through Rate of % and the Class B-2
Certificates have an Original Class B-2 Principal Balance of $ and a
Class B-2 Pass-Through Rate of %; (v) no interest shortfalls will arise in
connection with prepayments in full of the Contracts; (vi) no delinquencies or
losses are experienced on the Contracts; (vii) distributions are made on the
Certificates on the 15th day of each month, commencing in ; and (viii)
the Certificates are issued on , . No representation is made that
the Contracts will not experience delinquencies or losses.
ASSUMED CONTRACT CHARACTERISTICS
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
CUT-OFF WEIGHTED AVERAGE AVERAGE
DATE POOL AVERAGE REMAINING TERM ORIGINAL TERM
PRINCIPAL CONTRACT TO MATURITY TO MATURITY
POOL BALANCE RATE (MONTHS) (MONTHS)
- ---- ----------- -------- -------------- -------------
<S> <C> <C> <C> <C>
1............................. $ %
2.............................
3.............................
4.............................
</TABLE>
It is not likely that the Contracts will prepay at any constant percentage
of the CPR to maturity or that all of the Contracts will prepay at the same
rate.
Investors are urged to make their investment decisions on a basis that
includes their determination as to anticipated prepayment rates under a
variety of the assumptions discussed herein.
Based on the foregoing assumptions, the following tables indicate the
projected weighted average lives of each Class of Certificates, and set forth
the percentages of the original Principal Balance of each Class that would be
outstanding after each of the dates shown, at the indicated percentages of the
CPR.
PERCENTAGE OF THE ORIGINAL PRINCIPAL BALANCE OF THE CLASS A-1
CERTIFICATES AT THE RESPECTIVE PERCENTAGES OF THE
CPR SET FORTH BELOW:
<TABLE>
<CAPTION>
DATE % % % % %
- ---- --- --- --- --- ---
<S> <C> <C> <C> <C> <C>
Initial Percentage..................................... 100% 100% 100% 100% 100%
March 15, 1997.........................................
March 15, 1998.........................................
March 15, 1999.........................................
Weighted Average Life (1) (years)......................
</TABLE>
- --------
(1) The weighted average life of a Class A-1 Certificate is determined by (i)
multiplying the amount of cash distributions in reduction of the principal
balance of such Certificate by the number of years from the date of
issuance of such Class A-1 Certificate to the stated Payment Date, (ii)
adding the results, and (iii) dividing the sum by the initial principal
balance of such Class A-1 Certificate.
S-29
<PAGE>
PERCENTAGE OF THE ORIGINAL PRINCIPAL BALANCE OF THE CLASS A-2 CERTIFICATES AT
THE RESPECTIVE PERCENTAGES OF THE CPR SET FORTH BELOW:
<TABLE>
<CAPTION>
DATE % % % % %
- ---- --- --- --- --- ---
<S> <C> <C> <C> <C> <C>
Initial Percentage..................................... 100% 100% 100% 100% 100%
.................................................
.................................................
.................................................
.................................................
.................................................
.................................................
Weighted Average Life (1) (years)......................
</TABLE>
- --------
(1) The weighted average life of a Class A-2 Certificate is determined by (i)
multiplying the amount of cash distributions in reduction of the principal
balance of such Certificate by the number of years from the date of
issuance of such Class A-2 Certificate to the stated Payment Date, (ii)
adding the results, and (iii) dividing the sum by the initial principal
balance of such Class A-2 Certificate.
PERCENTAGE OF THE ORIGINAL PRINCIPAL BALANCE OF THE CLASS A-3 CERTIFICATES AT
THE RESPECTIVE PERCENTAGES OF THE CPR SET FORTH BELOW:
<TABLE>
<CAPTION>
DATE % % % % %
- ---- --- --- --- --- ---
<S> <C> <C> <C> <C> <C>
Initial Percentage..................................... 100% 100% 100% 100% 100%
.................................................
.................................................
.................................................
.................................................
.................................................
.................................................
.................................................
.................................................
.................................................
Weighted Average Life (1) (years)......................
</TABLE>
- --------
(1) The weighted average life of a Class A-3 Certificate is determined by (i)
multiplying the amount of cash distributions in reduction of the principal
balance of such Certificate by the number of years from the date of
issuance of such Class A-3 Certificate to the stated Payment Date, (ii)
adding the results, and (iii) dividing the sum by the initial principal
balance of such Class A-3 Certificate.
S-30
<PAGE>
PERCENTAGE OF THE ORIGINAL PRINCIPAL BALANCE OF THE CLASS M-1
CERTIFICATES AT THE RESPECTIVE PERCENTAGES OF THE
CPR SET FORTH BELOW:
<TABLE>
<CAPTION>
DATE % % % % %
- ---- --- --- --- --- ---
<S> <C> <C> <C> <C> <C>
Initial Percentage..................................... 100% 100% 100% 100% 100%
...................................................
...................................................
...................................................
...................................................
...................................................
...................................................
...................................................
...................................................
...................................................
...................................................
...................................................
...................................................
Weighted Average Life (1) (years)......................
</TABLE>
- --------
(1) The weighted average life of a Class M-1 Certificate is determined by (i)
multiplying the amount of cash distributions in reduction of the principal
balance of such Certificate by the number of years from the date of
issuance of such Class M-1 Certificate to the stated Payment Date, (ii)
adding the results, and (iii) dividing the sum by the initial principal
balance of such Class M-1 Certificate.
PERCENTAGE OF THE ORIGINAL PRINCIPAL BALANCE OF THE CLASS M-2 CERTIFICATES AT
THE RESPECTIVE PERCENTAGES OF THE CPR SET FORTH BELOW:
<TABLE>
<CAPTION>
DATE % % % % %
- ---- --- --- --- --- ---
<S> <C> <C> <C> <C> <C>
Initial Percentage..................................... 100% 100% 100% 100% 100%
...................................................
...................................................
...................................................
...................................................
...................................................
...................................................
...................................................
...................................................
...................................................
...................................................
...................................................
...................................................
Weighted Average Life (1) (years)......................
</TABLE>
- --------
(1) The weighted average life of a Class M-2 Certificate is determined by (i)
multiplying the amount of cash distributions in reduction of the principal
balance of such Certificate by the number of years from the date of
issuance of such Class M-2 Certificate to the stated Payment Date, (ii)
adding the results, and (iii) dividing the sum by the initial principal
balance of such Class M-2 Certificate.
S-31
<PAGE>
PERCENTAGE OF THE ORIGINAL PRINCIPAL BALANCE OF THE CLASS B-1
CERTIFICATES AT THE RESPECTIVE PERCENTAGES OF THE
CPR SET FORTH BELOW:
<TABLE>
<CAPTION>
DATE % % % % %
- ---- --- --- --- --- ---
<S> <C> <C> <C> <C> <C>
Initial Percentage..................................... 100% 100% 100% 100% 100%
...................................................
...................................................
...................................................
...................................................
...................................................
...................................................
...................................................
...................................................
Weighted Average Life (1) (years)......................
</TABLE>
- --------
(1) The weighted average life of a Class B-1 Certificate is determined by (i)
multiplying the amount of cash distributions in reduction of the principal
balance of such Certificate by the number of years from the date of
issuance of such Class B-1 Certificate to the stated Payment Date, (ii)
adding the results, and (iii) dividing the sum by the initial principal
balance of such Class B-1 Certificate.
PERCENTAGE OF THE ORIGINAL PRINCIPAL BALANCE OF THE CLASS B-2
CERTIFICATES AT THE RESPECTIVE PERCENTAGES OF THE
CPR SET FORTH BELOW:
<TABLE>
<CAPTION>
DATE % % % % %
- ---- --- --- --- --- ---
<S> <C> <C> <C> <C> <C>
Initial Percentage..................................... 100% 100% 100% 100% 100%
...................................................
...................................................
...................................................
...................................................
...................................................
...................................................
...................................................
...................................................
...................................................
...................................................
...................................................
...................................................
Weighted Average Life (1) (years)......................
</TABLE>
- --------
(1) The weighted average life of a Class B-2 Certificate is determined by (i)
multiplying the amount of cash distributions in reduction of the principal
balance of such Certificate by the number of years from the date of
issuance of such Class B-2 Certificate to the stated Payment Date, (ii)
adding the results, and (iii) dividing the sum by the initial principal
balance of such Class B-2 Certificate.
S-32
<PAGE>
GREEN TREE FINANCIAL CORPORATION
GENERAL
The following information supplements, and to the extent inconsistent
therewith supersedes, the information in the Prospectus under the heading
"Green Tree Financial Corporation."
The Company is a Delaware corporation which, as of December 31, 1997, had
stockholders' equity of approximately $1,332,000,000. 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 (651) 293-3400). The Company's quarterly and annual
reports, which are incorporated by reference in this Prospectus Supplement and
in the Prospectus, are available from the Company upon written request made to
the Company.
RATIO OF EARNINGS TO FIXED CHARGES FOR THE COMPANY
Set forth below are the Company's ratios of earnings to fixed charges for
the past five years ending December 31, 1997. 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, MONTHS ENDED ,
------------------------ -------------------
1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Ratio of Earnings to Fixed
Charges.................... 4.81 7.98 7.90 5.44 3.94
</TABLE>
RECENT DEVELOPMENTS
On June 30, 1998, Green Tree became a wholly owned subsidiary of Conseco,
Inc., pursuant to a Merger Agreement announced on April 7, 1998. Green Tree
will continue to operate from its existing headquarters in St. Paul,
Minnesota, and its 200 local offices throughout the country. Lawrence M. Coss,
Green Tree's Chairman and Chief Executive Officer, has agreed to continue to
manage Green Tree's business for at least one year. Headquartered in Carmel,
Indiana, Conseco is among the nation's leading providers of supplemental
health insurance, retirement annuities and universal life insurance.
On July 6, 1998, Conseco announced a second-quarter charge of $498 million,
net of income taxes, related to the acquisition of Green Tree. The charges are
directly related to (1) $148 million in merger-related costs, and (2) a $350
million non-cash supplemental reserve against the valuation of Green Tree's
interest-only securities and servicing rights.
Green Tree has been served with various lawsuits in the United States
District Court for the District of Minnesota. These lawsuits were filed by
certain stockholders of Green Tree as purported class actions on behalf of
persons or entities who purchased common stock of Green Tree during the
alleged class periods. In addition to Green Tree, certain current and former
officers and directors of Green Tree are named as defendants in one or more of
the lawsuits. Green Tree and the other defendants intend to seek consolidation
of each of the lawsuits in assumptions and performance of certain of Green
Tree's loan portfolios) which allegedly rendered Green Tree's financial
statements false and misleading. Green Tree believes that the lawsuits are
without merit and intends to defend such lawsuits vigorously.
S-33
<PAGE>
DESCRIPTION OF THE CERTIFICATES
The following information supplements, and to the extent inconsistent
therewith supersedes, the information in the Prospectus under "Description of
the Certificates."
The Certificates will be issued pursuant to the Agreement between the
Company, as Seller and Servicer, and the Trustee. A copy of the execution form
of the Agreement will be filed in a Current Report on Form 8-K with the
Securities and Exchange Commission after the initial issuance of the
Certificates. The following summary describes the material provisions of the
Agreement, reference to which is hereby made for a complete recital of its
terms.
GENERAL
The Certificates will be issued in fully registered, certificated form only
in minimum denominations of $1,000 or any integral multiple in excess thereof.
The Certificates initially will be represented by certificates registered in
the name of Cede as the nominee of DTC, and will only be available in the form
of book-entries on the records of DTC and participating members thereof. See
"Description of the Certificates--Registration of the Certificates" herein.
The Trust consists primarily of the Contracts and the rights, benefits,
obligations and proceeds arising therefrom or in connection therewith,
including liens on the related real estate, rights under applicable FHA
Insurance for FHA-insured Home Improvement Contracts, amounts held in the
Certificate Account and the Class HI: B-2 Limited Guaranty and the Class HE:
B-2 Limited Guaranty of the Company for the benefit of the Class HI: B-2
Certificateholders and the Class HE: B-2 Certificateholders, respectively.
Distributions on the Certificates will be made by the Paying Agent (which
shall initially be the Trustee) on each Payment Date to persons in whose names
the Certificates are registered as of the Business Day immediately preceding
such Payment Date (the "Record Date"). See "Description of the Certificates--
Registration of the Certificates" herein. The first Payment Date for the
Certificates will be in 1998. Payments will be made by check mailed to
such Certificateholder at the address appearing on the Certificate Register
(except that a Certificateholder who holds an aggregate Percentage Interest of
at least 5% of a Class of Certificates may request payment in respect of its
Percentage Interest in such Class by wire transfer). Final payments will be
made only upon tender of the Certificates to the Trustee for cancellation.
CONVEYANCE OF CONTRACTS
On the Closing Date, the Company will establish the Trust and transfer,
assign, set over and otherwise convey to the Trust all right, title and
interest of the Company in the Contracts, including all principal and interest
received on or with respect to such Contracts (other than receipts of
principal and interest due on such Contracts before the Cut-off Date). On
behalf of the Trust, as the issuer of the Certificates offered hereby, the
Trustee, concurrently with such conveyance, will execute and deliver the
Certificates to or upon the order of the Company. The Contracts are described
on a list delivered to the Trustee and certified by a duly authorized officer
of the Company. Such list includes the amount of monthly payments due on each
Contract as of the date of issuance of the Certificates, the Contract Rate on
each Contract and the maturity date of each Contract. The list will be
attached as an exhibit to the Agreement and will be available for inspection
by any Certificateholder at the principal office of the Company. Prior to the
conveyance of the Contracts to the Trust, the Company's internal audit
department will have completed a review of all the Contract files, confirming
the accuracy of each item on the list of Contracts delivered to the Trustee.
Any Contract discovered not to agree with such list in a manner that is
materially adverse to the interests of the Certificateholders will be
repurchased by the Company, or, if the discrepancy relates to the unpaid
principal balance of a Contract, the Company may deposit cash in the
Certificate Account in an amount sufficient to offset such discrepancy.
The Trustee will maintain possession of the Contracts and any other
documents contained in the Contract files. Uniform Commercial Code financing
statements will be filed in Minnesota, reflecting the conveyance and
assignment of the Contracts to the Trustee, and the Company's accounting
records and computer systems will also reflect such conveyance and assignment.
S-34
<PAGE>
[Dorsey & Whitney LLP], counsel to the Company, will render an opinion to
the Trustee that the transfer of the Contracts from the Company to the Trust
would, in the event the Company became a debtor under the United States
Bankruptcy Code, be treated as a true sale and not as a pledge to secure
borrowings. If, however, the transfer of the Contracts from the Company to the
Trust were treated as a pledge to secure borrowings by the Company, the
distribution of proceeds of the Contracts to the Trust might be subject to the
automatic stay provisions of the United States Bankruptcy Code, which would
delay the distribution of such proceeds for an uncertain period of time. In
addition, a bankruptcy trustee would have the power to sell the Contracts if
the proceeds of such sale could satisfy the amount of the debt deemed owed by
the Company, or the bankruptcy trustee could substitute other collateral in
lieu of the Contracts to secure such debt, or such debt could be subject to
adjustment by the bankruptcy trustee if the Company were to file for
reorganization under Chapter 11 of the United States Bankruptcy Code.
The Company will make certain representations and warranties in the
Agreement with respect to each Contract, including that: (a) as of the Cut-off
Date the most recent scheduled payment was made or was not delinquent more
than 59 days; (b) no provision of a Contract has been waived, altered or
modified in any respect, except by instruments or documents included in the
Contract file and reflected on the list of Contracts delivered to the Trustee;
(c) each Contract is a legal, valid and binding obligation of the Obligor and
is enforceable in accordance with its terms (except as may be limited by laws
affecting creditors' rights generally); (d) no Contract is subject to any
right of rescission, set-off, counterclaim or defense; (e) each Contract (if
an FHA-insured Contract) was originated in accordance with applicable FHA
regulations and is insured, without set-off, surcharge or defense, by FHA
Insurance; (f) each Contract was originated by a home improvement contractor
in the ordinary course of such contractor's business or was originated by the
Company directly; (g) no Contract was originated in or is subject to the laws
of any jurisdiction whose laws would make the transfer of the Contract or an
interest therein pursuant to the Agreement or the Certificates unlawful; (h)
each Contract complies with all requirements of law; (i) no Contract has been
satisfied, 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 monthly 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.
The Company will also make certain representations and warranties with
respect to the Contracts in the aggregate, including that (i) the Cut-off Date
Pool Principal Balance equals at least the Original Series 1998- Principal
Balance, and each Contract has a contractual rate of interest of at least
%; (ii) no Contract had a remaining term to maturity at origination of
more than months; (iii) no more than % of the Contracts, by principal
balance as of the Cut-off Date, were secured by properties located in an area
with the same zip code; (iv) no more than % of the Contracts, by principal
balance as of the Cut-off Date, were originated by any one contractor; and (v)
no adverse selection procedures were employed in selecting the Contracts from
the Company's portfolio.
Under the terms of the Agreement, the Company has agreed to repurchase, at
the Repurchase Price, any Contract that is materially and adversely affected
by a breach of a representation and warranty with respect to such Contract
made in the Agreement if such breach has not been cured within 90 days of the
day it was or
S-35
<PAGE>
should have been discovered by the Servicer or the Trustee. This repurchase
obligation constitutes the sole remedy available to the Trust and the
Certificateholders for a breach of a representation or warranty under the
Agreement with respect to the Contracts (but not with respect to any other
breach by the Company of its obligations under the Agreement).
The "Repurchase Price," with respect to any Contract to be so repurchased or
with respect to a Liquidated Contract, means the outstanding principal balance
of such Contract (without giving effect to any Advances made by the Servicer
or the Trustee), plus interest at the Pass-Through Rate (which will be the
weighted average of the Class A-1, Class A-2, Class A-3, Class M-1, Class M-2,
Class B-1 and Class B-2 Pass-Through Rates) on such Contract from the end of
the Due Period with respect to which the Obligor last made a scheduled payment
(without giving effect to any Advances made by the Servicer or the Trustee)
through the date of such repurchase or liquidation.
Pursuant to the Agreement, the Servicer will service and administer the
Contracts conveyed and assigned to the Trustee as more fully set forth below.
PAYMENTS ON CONTRACTS
The Servicer, on behalf of the Trust, will establish and maintain a
Certificate Account in an "Eligible Account" (as defined below) at a
depository institution (initially [Trustee], , Minnesota) with trust powers
organized under the laws of the United States or any state, the deposits of
which are insured to the full extent permitted by law by the Federal Deposit
Insurance Corporation (the "FDIC"), whose short-term deposits have been rated
P-1 by Moody's and A-1 by S&P or whose unsecured long-term debt has been rated
in one of the two highest rating categories by Moody's and S&P, and which is
subject to supervision and examination by federal or state authorities (an
"Eligible Institution"). "Eligible Account" means, at any time, an account
which is any of the following: (i) an account maintained with an Eligible
Institution; (ii) an account or accounts the deposits in which are fully
insured by either the Bank Insurance Fund or the Savings Association Insurance
Fund of the FDIC; (iii) a segregated trust account maintained with the
corporate trust department of a federal or state chartered depository
institution or trust company with trust powers and acting in its fiduciary
capacity for the benefit of the Trustee, which depository institution or trust
company has capital and surplus of not less than $50,000,000; or (iv) an
account that will not cause Moody's or S&P to downgrade or withdraw its then-
current rating assigned to the Certificates, as evidenced in writing by
Moody's and S&P. The Servicer may authorize the Trustee to invest the funds in
the Certificate Account in Eligible Investments (as defined in the Agreement)
that will mature not later than the Business Day preceding the applicable
monthly Payment Date. Such Eligible Investments include, among other
investments, obligations of the United States or of any agency thereof backed
by the full faith and credit of the United States, federal funds, certificates
of deposit, time deposits and bankers acceptances sold by eligible commercial
banks; any other demand or time deposit or certificate of deposit fully
insured by the FDIC; investments in certain money-market funds; certain
repurchase agreements of United States government securities with eligible
commercial banks; securities bearing interest or sold at a discount issued by
a corporation which has a credit rating of at least "Aa2" from Moody's and at
least "AA" from S&P not in excess of 10% of amounts in the Certificate Account
at the time of such investment; and commercial paper assigned a rating of at
least P-1 by Moody's and at least A-1+ by S&P. Any losses on such investments
will be deducted from other investment earnings or from other funds in the
Certificate Account.
All receipts by the Servicer of payments with respect to the Contracts,
including Principal Prepayments and advance payments by Obligors not
constituting Principal Prepayments ("Advance Payments"), shall be paid into
the Certificate Account no later than one Business Day following receipt
thereof, except amounts received as extension fees or assumption fees not
allocated to regular installments due on Contracts, which are retained by the
Servicer as part of its servicing fees and are not paid into the Certificate
Account and except for certain proceeds from Liquidated Contracts which are
used to reimburse the Servicer for customary out-of-pocket liquidation
expenses. See "Description of the Certificates--Servicing Compensation and
Payment of Expenses" herein. In addition, all payments under FHA Insurance
received by the Servicer, any Advances by the Servicer
S-36
<PAGE>
or the Trustee as described under "Description of the Certificates--Advances,"
and amounts paid by the Company for Contracts repurchased as a result of
breach of warranties under the Agreement as described under "Description of
the Certificates--Conveyance of Contracts," shall be paid into the Certificate
Account.
On the seventh Business Day of each month (the "Determination Date"), the
Servicer will determine the Amount Available in the Certificate Account and
the amount of funds necessary to make all payments to be made on the next
Payment Date from the Certificate Account. Not later than one Business Day
after the Determination Date, the Company will deposit in the Certificate
Account the Repurchase Price of any Contracts required to be repurchased on
such Payment Date as a result of a breach of representations and warranties.
On each Payment Date the Trustee will withdraw the Amount Available from the
Certificate Account and make the following payments, in the following order of
priority:
(i) if neither the Company nor any wholly owned subsidiary of the Company
is the Servicer, to pay the Monthly Servicing Fee to the Servicer;
(ii) to pay interest and principal on the Certificates, in the manner and
the order of priority described below;
(iii) if the Company or any wholly owned subsidiary of the Company is the
Servicer, to pay the Monthly Servicing Fee to the Servicer;
(iv) to reimburse the Trustee or any successor Servicer for any payments
of FHA Insurance premiums not paid by the Company, as Servicer, and for
which the Trustee or such successor Servicer has not been reimbursed by the
Company;
(v) to reimburse the Servicer or the Trustee, as applicable, for any
unreimbursed Advances made in respect of current or prior Payment Dates;
(vi) to reimburse the holder of the Class C Certificate for expenses
incurred by and reimbursable to it with respect to taxes or charges imposed
upon the Trust as a REMIC or otherwise;
(vii) to reimburse the Company for any prior unreimbursed Class B-2
Guaranty Payments; and
(viii) to pay any remaining amounts to the holder of the Class C
Certificate.
DISTRIBUTIONS
On each Payment Date, distributions on the Certificates in respect of the
Amount Available will be made first to the holders of the Class A
Certificates, then to the holders of the Class M-1 Certificates, then to the
holders of the Class M-2 Certificates, then to the holders of the Class B-1
Certificates and then to the holders of the Class B-2 Certificates, as
described below.
Distributions of interest and principal to holders of a Class of Class A
Certificates will be made on each Payment Date, to the extent that the Amount
Available in the Certificate Account is sufficient therefor, in an amount
equal to the sum of (i) their respective Percentage Interests of the amount of
interest calculated as described under "Class A Interest" below and (ii) their
respective Percentage Interests, distributed to each Class of Class A
Certificates in the order of priority described under "Class A Principal"
below, of the Senior Percentage of the Formula Principal Distribution Amount,
calculated as described under "Class A Principal" below. Distributions on the
Class A Certificates will be applied first to the payment of interest and then
to the payment of principal. The Class A Distribution Amount for any Payment
Date is intended to be equal to the sum (referred to as the "Class A Formula
Distribution Amount") of (i) the amount of interest calculated as set forth
under "Class A Interest" below and (ii) the Senior Percentage of the Formula
Principal Distribution Amount, provided that, if the Class A Formula
Distribution Amount exceeds the Amount Available in the Certificate Account on
such Payment Date, then the Class A Distribution Amount shall instead equal
the Amount Available and the amount of such deficiency will be carried forward
and added to the amount the Class A Certificateholders will be entitled to
receive on the next Payment Date.
S-37
<PAGE>
Distributions of interest and principal to holders of Class M-1 Certificates
will be made on each Payment Date in an amount equal to their respective
Percentage Interests multiplied by the Class M-1 Distribution Amount.
Distributions on the Class M-1 Certificates will be applied first to the
payment of interest and then to the payment of principal. The Class M-1
Distribution Amount for any Payment Date is intended to be equal to the sum
(referred to as the "Class M-1 Formula Distribution Amount") of (i) the amount
of interest calculated as set forth under "Class M-1 Interest" below and (ii)
after the Class A Principal Balance has been reduced to zero and until the
Class M-1 Principal Balance has been reduced to zero, the Senior Percentage of
the Formula Principal Distribution Amount. If the Amount Available in the
Certificate Account available for distribution to the Class M-1
Certificateholders (after giving effect to any distribution made to Class A
Certificateholders on such Payment Date) (the "Class M-1 Remaining Amount
Available") is less than the Class M-1 Formula Distribution Amount, then the
Class M-1 Distribution Amount will equal the Class M-1 Remaining Amount
Available and the amount of such deficiency will be carried forward and added
to the amount such holders will be entitled to receive on the next Payment
Date.
Distributions of interest and principal to holders of Class M-2 Certificates
will be made on each Payment Date in an amount equal to their respective
Percentage Interests multiplied by the Class M-2 Distribution Amount.
Distributions on the Class M-2 Certificates will be applied first to the
payment of interest and then to the payment of principal. The Class M-2
Distribution Amount for any Payment Date is intended to be equal to the sum
(referred to as the "Class M-2 Formula Distribution Amount") of (i) the amount
of interest calculated as set forth under "Class M-2 Interest" below and (ii)
after the Class M-1 Principal Balance has been reduced to zero and until the
Class M-2 Principal Balance has been reduced to zero, the Senior Percentage of
the Formula Principal Distribution Amount. If the Amount Available in the
Certificate Account available for distribution to the Class M-2
Certificateholders (after giving effect to any distribution made to Class A
Certificateholders and the Class M-1 Certificateholders on such Payment Date)
(the "Class M-2 Remaining Amount Available") is less than the Class M-2
Formula Distribution Amount, then the Class M-2 Distribution Amount will equal
the Class M-2 Remaining Amount Available and the amount of such deficiency
will be carried forward and added to the amount such holders will be entitled
to receive on the next Payment Date.
Distributions of interest and principal to holders of Class B-1 Certificates
will be made on each Payment Date in an amount equal to their respective
Percentage Interests multiplied by the Class B-1 Distribution Amount.
Distributions on the Class B-1 Certificates will be applied first to the
payment of interest and then to the payment of principal. The Class B-1
Distribution Amount for any Payment Date is intended to be equal to the sum
(referred to as the "Class B-1 Formula Distribution Amount") of (i) the amount
of interest calculated as set forth under "Class B-1 Interest" below and (ii)
until the Class B-1 Principal Balance has been reduced to zero, an amount of
principal equal to the Class B Percentage of the Formula Principal
Distribution Amount. If the Amount Available in the Certificate Account
available for distribution to the Class B-1 Certificateholders (after giving
effect to any distribution made to Class A Certificateholders, Class M-1
Certificateholders and Class M-2 Certificateholders on such Payment Date) (the
"Class B-1 Remaining Amount Available") is less than the Class B-1 Formula
Distribution Amount, then the Class B-1 Distribution Amount will equal the
Class B-1 Remaining Amount Available and the amount of such deficiency will be
carried forward and added to the amount such holders will be entitled to
receive on the next Payment Date.
Distributions of interest and principal to holders of the Class B-2
Certificates will be made on each Payment Date in an amount equal to their
respective Percentage Interests of the Class B-2 Distribution Amount and any
Class B-2 Guaranty Payment. The Class B-2 Distribution Amount for any Payment
Date is intended to be equal to the sum (referred to as the "Class B-2 Formula
Distribution Amount") of (i) the amount of interest calculated as set forth
under "Class B-2 Interest" below and (ii) after the Class B-1 Principal
Balance has been reduced to zero and until the Class B-2 Principal Balance has
been reduced to zero, the Class B Percentage of the Formula Principal
Distribution Amount. Distributions on the Class B-2 Certificates will be
applied first to the payment of interest and then to the payment of principal.
If the Amount Available in the Certificate Account available for distribution
to the Class B-2 Certificateholders (after giving effect to distributions made
to Class A Certificateholders, Class M Certificateholders and Class B-1
Certificateholders on such Payment Date) (the
S-38
<PAGE>
"Class B-2 Remaining Amount Available") is not sufficient to make a full
distribution of the Class B-2 Formula Distribution Amount to the Class B-2
Certificateholders, then the Class B-2 Distribution Amount will equal the
Class B-2 Remaining Amount Available and the Company will be obligated to make
a Class B-2 Guaranty Payment into the Certificate Account in respect thereof
pursuant to the Class B-2 Limited Guaranty.
On each Payment Date the Amount Available will be distributed to Class A
Certificateholders, then Class M Certificateholders and then Class B
Certificateholders in the amounts and order of priority set forth below:
CLASS A INTEREST
One month's interest (computed on the basis of a 360-day year of twelve 30-
day months) will be paid concurrently to the holders of each Class of Class A
Certificates on each Payment Date, to the extent of the Amount Available in
the Certificate Account on such date, at the related Pass-Through Rate on the
then outstanding Principal Balance of each Class of Class A Certificates.
Interest on each Class of Class A Certificates will accrue from , 1998,
or from the most recent Payment Date on which interest has been paid, to but
excluding the following Payment Date.
The Pass-Through Rates for the Class A-1, Class A-2 and Class A-3
Certificates are set forth on the cover of this Prospectus Supplement, and in
each case will be computed on the basis of a 360-day year of twelve 30-day
months.
The Principal Balance of any Class of Class A Certificates as of any Payment
Date is the Original Principal Balance of such Class less all amounts
previously distributed to holders of such Class on account of principal. The
Class A Principal Balance as of any Payment Date is the sum of the Class A-1
Principal Balance, the Class A-2 Principal Balance and the Class A-3 Principal
Balance.
In the event that, on a particular Payment Date, the Amount Available in the
Certificate Account is not sufficient to make a full distribution of interest
to the holders of each Class of Class A Certificates, the amount of interest
to be distributed in respect of the Class A Certificates will be allocated
among each Class thereof (and within a Class among the Certificates of such
Class) pro rata in accordance with their respective entitlements to interest,
and the amount of the shortfall will be carried forward and added to the
amount such holders will be entitled to receive on the next Payment Date. Such
a shortfall could occur, for example, if delinquencies or losses realized on
the Contracts were exceptionally high and were concentrated in a particular
month. Any such amount so carried forward will bear interest at the applicable
Pass-Through Rate for each Class of Class A Certificates, to the extent
permitted by law.
CLASS A PRINCIPAL
Holders of a Class of Class A Certificates will be entitled to receive on
each Payment Date as payments of principal, in the order of priority set forth
below and to the extent of the Amount Available in the Certificate Account on
such date after payment of interest on each Class of Class A Certificates, the
Senior Percentage of the sum (such sum being referred to hereinafter as the
"Formula Principal Distribution Amount") of (i) all scheduled payments of
principal due on each outstanding Contract during the month preceding the
month in which the Payment Date occurs, (ii) the Scheduled Principal Balance
of each Contract which, during the month preceding the month of such Payment
Date, was purchased by the Company pursuant to the Agreement on account of
certain breaches of its representations and warranties, (iii) all partial
Principal Prepayments applied and all Principal Prepayments in Full received
during such preceding month, (iv) the Scheduled Principal Balance of each
Contract that became a Liquidated Contract during such preceding month, and
(v) any amount described in clauses (i) through (iv) above that was not
previously distributed because of an insufficient amount of funds available in
the Certificate Account if (a) the Payment Date occurs on or after the Payment
Date on which the Class B-2 Principal Balance has been reduced to zero, or (b)
such amount was not covered by a Class B-2 Guaranty Payment and corresponding
reduction in the Class B-2 Principal Balance. When the Principal Balance of a
Class of Class A Certificates is reduced to zero, no further distributions of
principal will be made to the holders of such Class.
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<PAGE>
The Senior Percentage for any Payment Date prior to the Class B Cross-over
Date, and for any Payment Date on or after the Class B Cross-over Date on
which any Class B Principal Distribution Test is not satisfied (each as
described under "Class B-1 Principal" below), will be 100%, and for any
Payment Date on or after the Class B Cross-over Date on which each Class B
Principal Distribution Test is satisfied will equal a fraction, expressed as a
percentage, the numerator of which is the sum of the Class A Principal Balance
and the Class M Principal Balance as of such Payment Date and the denominator
of which is the Pool Scheduled Principal Balance as of the immediately
preceding Payment Date. The Scheduled Principal Balance of a Contract with
respect to any Payment Date is its principal balance as of the scheduled
payment date (the "Due Date") in the calendar month preceding such Payment
Date (the "Due Period") as specified in its amortization schedule, after
giving effect to any previous partial Principal Prepayments and to the
scheduled payment due on such Due Date, but without giving effect to any
delinquency in payment or adjustments due to bankruptcy or similar
proceedings. The Pool Scheduled Principal Balance, as of any Payment Date, is
the aggregate of the Scheduled Principal Balances of Contracts that were
outstanding during the preceding Due Period. A Liquidated Contract is a
defaulted Contract as to which all amounts that the Servicer expects to
recover on account of such Contract have been received.
The Senior Percentage of the Formula Principal Distribution Amount will be
distributed, to the extent of the Amount Available after payment of interest
on each Class of Class A Certificates, first to the Class A-1
Certificateholders until the Class A-1 Principal Balance has been reduced to
zero, then to the Class A-2 Certificateholders until the Class A-2 Principal
Balance has been reduced to zero and then to the Class A-3 Certificateholders
until the Class A-3 Principal Balance has been reduced to zero.
As hereinafter described, all losses on Liquidated Contracts will be
absorbed first by the Class C Certificate, then by the Monthly Servicing Fee
otherwise payable to the Servicer (so long as the Company or any wholly owned
subsidiary of the Company is the Servicer), then by the Class B-2
Certificates, then by the Class B-1 Certificates, then by the Class M-2
Certificates and then by the Class M-1 Certificates. If the Amount Available
on any Payment Date is less than the Class A Distribution Amount, the Amount
Available will be applied first to the payment of interest on the Class A
Certificates and then to the payment of principal to the Class of Class A
Certificates then entitled thereto.
CLASS M-1 INTEREST
Interest will be paid to the Class M-1 Certificateholders on each Payment
Date, to the extent of the Class M-1 Remaining Amount Available, if any, in an
amount (the "Class M-1 Interest Payment Amount") equal to the product of (a)
the Class M-1 Pass-Through Rate and (b) the then outstanding Class M-1
Principal Balance less the Class M-1 Principal Shortfall Amount, if any. The
"Class M-1 Principal Shortfall Amount" as of any Payment Date will equal the
excess, if any, of the Aggregate Principal Shortfall Amount over the aggregate
of the Principal Balances of the Class M-2 Certificates, the Class B-1
Certificates and the Class B-2 Certificates. The "Aggregate Principal
Shortfall Amount" as of any Payment Date will equal the excess, if any, of (i)
the aggregate Principal Balance of the Certificates as of the preceding
Payment Date (after giving effect to distributions of principal thereon) over
(ii) the Pool Scheduled Principal Balance for such preceding Payment Date.
Interest on the outstanding Class M-1 Principal Balance will accrue from
, 1998, or from the most recent Payment Date on which interest has been
paid, to but excluding the following Payment Date, and will be computed on the
basis of a 360-day year of twelve 30-day months. The Class M-1 Principal
Balance is the Original Class M-1 Principal Balance less the sum of all
amounts previously distributed to Class M-1 Certificateholders on account of
principal. In the event that, on a particular Payment Date, the Class M-1
Remaining Amount Available, plus other funds in the Certificate Account
available therefor, is not sufficient to make a full distribution of the Class
M-1 Interest Payment Amount to the Class M-1 Certificateholders, the amount of
such interest to be distributed in respect of the Class M-1 Certificates will
be allocated among the Certificates of such Class pro rata in accordance with
their respective entitlements to interest, and any remaining deficiency will
be carried forward and added to the amount such holders will be entitled to
receive on the next Payment Date. Interest will accrue on the Class M-1
Principal Shortfall Amount, if any, and will be payable on succeeding Payment
Dates to the extent of the Amount Available remaining after payment of the
Class A
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Distribution Amount, the Class M-1 Distribution Amount, the Class M-2
Distribution Amount, the Class B-1 Distribution Amount and the Class B-2
Distribution Amount. Any interest amounts carried forward will bear interest
at the Class M-1 Pass-Through Rate, to the extent permitted by law.
The Class M-1 Pass-Through Rate is set forth on the cover of this Prospectus
Supplement, and will be computed on the basis of a 360-day year of twelve 30-
day months.
CLASS M-1 PRINCIPAL
On each Payment Date after the Class A Principal Balance has been reduced to
zero, Class M-1 Certificateholders will be entitled to receive, as payments of
principal, the Senior Percentage (as described under "Class A Principal"
above) of the Formula Principal Distribution Amount to the extent of the Class
M-1 Remaining Amount Available in the Certificate Account on such date, after
payment of all interest payable on the Class M-1 Certificates, until the Class
M-1 Principal Balance has been reduced to zero. On each Payment Date on or
after the Class B Cross-over Date on which each Class B Principal Distribution
Test is satisfied, payments of principal will be made to Class B-1 or Class B-
2 Certificateholders, even if Class M-1 Certificateholders are not yet
entitled to receive payments of principal because the Class A Principal
Balance has not been reduced to zero.
CLASS M-2 INTEREST
Interest will be paid to the Class M-2 Certificateholders on each Payment
Date, to the extent of the Class M-2 Remaining Amount Available, if any, in an
amount (the "Class M-2 Interest Payment Amount") equal to the product of (a)
the Class M-2 Pass-Through Rate and (b) the then outstanding Class M-2
Principal Balance less the Class M-2 Principal Shortfall Amount, if any. The
"Class M-2 Principal Shortfall Amount" as of any Payment Date will equal the
excess, if any, of the Aggregate Principal Shortfall Amount over the aggregate
of the Principal Balances of the Class B-1 Certificates and the Class B-2
Certificates. Interest on the outstanding Class M-2 Principal Balance will
accrue from , 1998, or from the most recent Payment Date on which
interest has been paid, to but excluding the following Payment Date, and will
be computed on the basis of a 360-day year of twelve 30-day months. The Class
M-2 Principal Balance is the Original Class M-2 Principal Balance less the sum
of all amounts previously distributed to Class M-2 Certificateholders on
account of principal. In the event that, on a particular Payment Date, the
Class M-2 Remaining Amount Available, plus other funds in the Certificate
Account available therefor, is not sufficient to make a full distribution of
the Class M-2 Interest Payment Amount to the Class M-2 Certificateholders, the
amount of such interest to be distributed in respect to the Class M-2
Certificates will be allocated among the Certificates of such Class pro rata
in accordance with their respective entitlements to interest, and any
remaining deficiency will be carried forward and added to the amount such
holders will be entitled to receive on the next Payment Date. Interest will
accrue on the Class M-2 Principal Shortfall Amount, if any, and will be
payable on succeeding Payment Dates to the extent of the Amount Available
remaining after payment in full of the Class A Distribution Amount, the Class
M-1 Distribution Amount, the Class M-2 Distribution Amount, the Class B-1
Distribution Amount, the Class B-2 Distribution Amount and interest accrued
and unpaid on the Class M-1 Principal Shortfall Amount. Any interest amounts
carried forward will bear interest at the Class M-2 Pass-Through Rate, to the
extent permitted by law.
The Class M-2 Pass-Through Rate is set forth on the cover of this Prospectus
Supplement, and will be computed on the basis of a 360-day year of twelve 30-
day months.
CLASS M-2 PRINCIPAL
On each Payment Date after the Class A Principal Balance and the Class M-1
Principal Balance have been reduced to zero, Class M-2 Certificateholders will
be entitled to receive, as payments of principal, the Senior Percentage (as
described under "Class A Principal" above) of the Formula Principal
Distribution Amount to the extent of the Class M-2 Remaining Amount Available
in the Certificate Account on such date, after payment of all interest payable
on the Class M-2 Certificates, until the Class M-2 Principal Balance has been
reduced to zero. On each Payment Date on or after the Class B Cross-over Date
on which each Class B Principal Distribution Test is
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<PAGE>
satisfied, payments of principal will be made to Class B-1 or Class B-2
Certificateholders, even if Class M-2 Certificateholders are not yet entitled
to receive payments of principal because the Class A Principal Balance and
Class M-1 Principal Balance have not been reduced to zero.
CLASS B-1 INTEREST
Interest will be paid to the Class B-1 Certificateholders on each Payment
Date, to the extent of the Class B-1 Remaining Amount Available, if any, in an
amount (the "Class B-1 Interest Payment Amount") equal to the product of (a)
the Class B-1 Pass-Through Rate and (b) the then outstanding Class B-1
Principal Balance less the Class B-1 Principal Shortfall Amount, if any. The
"Class B-1 Principal Shortfall Amount" as of any Payment Date will equal the
excess, if any, of the Aggregate Principal Shortfall Amount over the Class B-2
Principal Balance. Interest on the outstanding Class B-1 Principal Balance
will accrue from , 1998, or from the most recent Payment Date on which
interest has been paid, to but excluding the following Payment Date, and will
be computed on the basis of a 360-day year of twelve 30-day months. The Class
B-1 Principal Balance is the Original Class B-1 Principal Balance less the sum
of all amounts previously distributed to Class B-1 Certificateholders on
account of principal. In the event that, on a particular Payment Date, the
Class B-1 Remaining Amount Available, plus other funds in the Certificate
Account available therefor, is not sufficient to make a full distribution of
the Class B-1 Interest Payment Amount to the Class B-1 Certificateholders, the
amount of such interest to be distributed in respect of the Class B-1
Certificates will be allocated among the Certificates of such Class pro rata
in accordance with their respective entitlements to interest, and any
remaining deficiency will be carried forward and added to the amount such
holders will be entitled to receive on the next Payment Date. Interest will
accrue on the Class B-1 Principal Shortfall Amount, if any, and will be
payable on succeeding Payment Dates to the extent of the Amount Available
remaining after payment in full of the Class A Distribution Amount, the Class
M-1 Distribution Amount, the Class M-2 Distribution Amount, the Class B-1
Distribution Amount, the Class B-2 Distribution Amount and interest accrued
and unpaid on the Class M-1 Principal Shortfall Amount and Class M-2 Principal
Shortfall Amount. Any interest amounts carried forward will bear interest at
the Class B-1 Pass-Through Rate, to the extent permitted by law.
The Class B-1 Pass-Through Rate is set forth on the cover of this Prospectus
Supplement, and will be computed on the basis of a 360-day year of twelve 30-
day months.
CLASS B-1 PRINCIPAL
Prior to the Class B Cross-over Date, there will be no distributions of
principal on the Class B-1 Certificates. The Class B Cross-over Date will be
the earlier of (A) the Payment Date on which the Class M-2 Principal Balance
is reduced to zero (the "Fifth Cross-over Date"), and (B) the first Payment
Date on or after the Payment Date in on which the fraction, expressed
as a percentage, the numerator of which is the Class B Principal Balance as of
such Payment Date and the denominator of which is the Pool Scheduled Principal
Balance as of the immediately preceding Payment Date, is equal to or greater
than %.
On each Payment Date on or after the Class B Cross-over Date and prior to
the Payment Date on which the Class A Principal Balance and the Class M
Principal Balance have been reduced to zero, holders of Class B Certificates
will be entitled to distributions of principal only if each of the following
tests (each a "Class B Principal Distribution Test") is satisfied on such
Payment Date: (i) the Average Sixty-Day Delinquency Ratio (as defined in the
Agreement) as of such Payment Date must not exceed %; (ii) the Average
Thirty-Day Delinquency Ratio (as defined in the Agreement) as of such Payment
Date must not exceed %; (iii) the Cumulative Realized Losses (as defined in
the Agreement) as of such Payment Date must not exceed a certain specified
percentage of the Cut-off Date Pool Principal Balance, depending on the year
in which such Payment Date occurs; (iv) the Current Realized Loss Ratio (as
defined in the Agreement) as of such Payment Date must not exceed 2.5%; and
(v) the Class B Principal Balance divided by the Pool Scheduled Principal
Balance as of the immediately preceding Payment Date must be equal to or
greater than %.
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On each Payment Date on or after the Class B Cross-over Date, if each Class
B Principal Distribution Test is satisfied on such Payment Date, Class B-1
Certificateholders will be entitled to receive, as payments of principal, the
Class B Percentage of the Formula Principal Distribution Amount to the extent
of the Class B-1 Remaining Amount Available in the Certificate Account on such
date after payment of all interest payable on the Class B-1 Certificates,
until the Class B-1 Principal Balance has been reduced to zero. The Class B-2
Certificateholders will not be entitled to any distributions of principal from
the Class B-1 Remaining Amount Available until the Class B-1 Principal Balance
has been reduced to zero. The Class B Percentage for any Payment Date will be
equal to 100% minus the Senior Percentage. The Class B Percentage for each
Payment Date, if any, after the Class A Principal Balance and the Class M
Principal Balance have been reduced to zero will be equal to 100%.
CLASS B-2 INTEREST
Interest will be paid to the Class B-2 Certificateholders on each Payment
Date, to the extent of (i) the Class B-2 Remaining Amount Available, if any
and (ii) the amount, if any, paid pursuant to the Class B-2 Limited Guarantee,
in an amount (the "Class B-2 Interest Payment Amount") equal to the product of
(a) the Class B-2 Pass-Through Rate and (b) the then outstanding Class B-2
Principal Balance less the Class B-2 Principal Shortfall Amount, if any. The
"Class B-2 Principal Shortfall Amount" as of any Payment Date will equal the
Aggregate Principal Shortfall Amount. Interest on the outstanding Class B-2
Principal Balance will accrue from , 1998, or from the most recent
Payment Date on which interest has been paid, to but excluding the following
Payment Date, and will be computed on the basis of a 360-day year of twelve
30-day months. The Class B-2 Principal Balance is the Original Class B-2
Principal Balance less the sum of all amounts previously distributed to Class
B-2 Certificateholders on account of principal. In the event that, on a
particular Payment Date, the Class B-2 Remaining Amount Available in the
Certificate Account is not sufficient to make a full distribution of the Class
B-2 Interest Payment Amount to the Class B-2 Certificateholders and the
Company fails to pay such amount under the Class B-2 Limited Guaranty, the
amount of such interest to be distributed in respect of the Class B-2
Certificates will be allocated among the Certificates of such Class pro rata
in accordance with their respective entitlements to interest, and the amount
of such deficiency will be carried forward and added to the amount such
holders will be entitled to receive on the next Payment Date. Interest will
accrue in respect of the Class B-2 Principal Shortfall Amount, if any, and
will be payable on succeeding Payment Dates to the extent of the Amount
Available remaining after payment in full of the Class A Distribution Amount,
the Class M-1 Distribution Amount, the Class M-2 Distribution Amount, the
Class B-1 Distribution Amount, the Class B-2 Distribution Amount and interest
accrued and unpaid on the Class M-1 Principal Shortfall Amount, the Class M-2
Principal Shortfall Amount and the Class B-1 Principal Shortfall Amount. Any
interest amounts carried forward will bear interest at the Class B-2 Pass-
Through Rate, to the extent permitted by law.
The Class B-2 Pass-Through Rate is set forth on the cover of this Prospectus
Supplement, and will be computed on the basis of a 360-day year of twelve 30-
day months.
CLASS B-2 PRINCIPAL
Except for distributions of any amounts representing a Class B-2 Principal
Liquidation Loss Amount (as described below), payments of principal on the
Class B-2 Certificates will not commence until the Payment Date on which the
Class B-1 Principal Balance has been reduced to zero (the "Sixth Cross-over
Date"), and will be made on that Payment Date and each Payment Date thereafter
only if each Class B Principal Distribution Test is satisfied on such Payment
Date (unless the Class A Principal Balance and the Class M Principal Balance
have been reduced to zero). On any such Payment Date, the Class B Percentage
of the Formula Principal Distribution Amount will be distributed, to the
extent of the Class B-2 Remaining Amount Available and any amounts actually
paid under the Class B-2 Limited Guaranty after payment of interest on the
Class B-2 Certificates, to the Class B-2 Certificateholders until the Class B-
2 Principal Balance has been reduced to zero.
On each Payment Date, the Class B-2 Certificateholders will be entitled to
receive pursuant to the Class B-2 Limited Guaranty the amount (the "Class B-2
Principal Liquidation Loss Amount"), if any, by which the sum
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<PAGE>
Class A Certificateholders to receive future distributions on the Contracts
that would otherwise be payable to the holders of Class M Certificates and
Class B Certificates. On each Payment Date the Class M-1 Certificateholders
will be entitled to receive only amounts described above under "Class M-1
Interest" and "Class M-1 Principal," the Class M-2 Certificateholders will be
entitled to receive only amounts described under "Class M-2 Interest" and
"Class M-2 Principal," the Class B-1 Certificateholders will be entitled to
receive only amounts described above under "Class B-1 Interest" and "Class B-1
Principal," and the Class B-2 Certificateholders will be entitled to receive
only amounts described above under "Class B-2 Interest" and "Class B-2
Principal."
In addition, the rights of the holders of the Class M-2 Certificates and
Class B Certificates to receive distributions with respect to the Contracts
will be subordinate to such rights of the Class M-1 Certificateholders. This
subordination is intended to enhance the likelihood of regular receipt by the
holders of the Class M-1 Certificates of the full amount of their scheduled
monthly payments of principal and interest and to afford such holders
protection against losses on Liquidated Contracts. The protection afforded to
the Class M-1 Certificateholders by means of the subordination feature will be
accomplished by the preferential right of the Class M-1 Certificateholders to
receive, prior to any distribution being made on a Payment Date in respect of
the Class M-2 Certificates and the Class B Certificates, the amount of
principal and interest due them on each Payment Date out of the Class M-1
Remaining Amount Available on deposit on such date in the Certificate Account
and by the right of the Class M-1 Certificateholders to receive future
distributions on the Contracts that would otherwise be payable to the holders
of Class M-2 Certificates and Class B Certificates.
In addition, the rights of the holders of the Class B-1 Certificates and the
Class B-2 Certificates to receive distributions with respect to the Contracts
will be subordinate to such rights of the Class M-2 Certificateholders. This
subordination is intended to enhance the likelihood of regular receipt by the
holders of the Class M-2 Certificates of the full amount of their scheduled
monthly payments of principal and interest and to afford such holders
protection against losses on Liquidated Contracts. The protection afforded to
the Class M-2 Certificateholders by means of the subordination feature will be
accomplished by the preferential right of the Class M-2 Certificateholders to
receive, prior to any distribution being made on a Payment Date in respect of
the Class B Certificates, the amount of principal and interest due them on
each Payment Date out of the Class M-2 Remaining Amount Available on deposit
on such date in the Certificate Account and by the right of the Class M-2
Certificateholders to receive future distributions of the Contracts that would
otherwise be payable to the holders of Class B Certificates.
In addition, the rights of the holders of the Class B-2 Certificates to
receive distributions with respect to the Contracts will be subordinate to
such rights of the Class B-1 Certificateholders. This subordination is
intended to enhance the likelihood of regular receipt by the holders of the
Class B-1 Certificates of the full amount of their scheduled monthly payments
of principal and interest and to afford such holders protection against losses
on Liquidated Contracts. The protection afforded to the Class B-1
Certificateholders by means of the subordination feature will be accomplished
by the preferential right of the Class B-1 Certificateholders to receive,
prior to any distribution being made on a Payment Date in respect of the Class
B-2 Certificates, the amount of principal and interest due them on each
Payment Date out of the Class B-1 Remaining Amount Available on deposit on
such date in the Certificate Account and by the right of the Class B-1
Certificateholders to receive future distributions on the Contracts that would
otherwise be payable to the holders of Class B-2 Certificates.
As described above, prior to the time that the Class A Principal Balance is
reduced to zero, the distribution of principal to the Class A
Certificateholders is intended to include the Senior Percentage of the
Scheduled Principal Balance of each Contract that became a Liquidated Contract
during the preceding Due Period. If the Liquidation Proceeds, net of related
Liquidation Expenses, from such Liquidated Contract are less than its
Scheduled Principal Balance plus accrued and unpaid interest thereon, the
deficiency will, in effect, be absorbed by the Class M, the Class B and the
Class C Certificateholders and the Company, since a portion of the Amount
Available equal to such deficiency and otherwise distributable to them will be
paid to the Class A or Class M Certificateholders. Likewise, to the extent the
Class M-1 Certificateholders or the Class M-2 Certificateholders are entitled
to receive distributions of principal, similar deficiencies could result for
each Class of Certificates
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with a lower payment priority. If the Amount Available is not sufficient to
cover the amounts distributable to the Class A or Class M Certificateholders
on a particular Payment Date, then the Senior Percentage on future Payment
Dates may be increased and the Class B Percentage on future Payment Dates may
be reduced as a result of such deficiency. But for the effect of the relative
subordination of the Monthly Servicing Fee payable to the Servicer (so long as
the Company or any wholly owned subsidiary of the Company is the Servicer) and
amounts otherwise distributable to the Class M-2, Class B and Class C
Certificateholders, the Class M-1 Certificateholders will absorb all losses on
each Liquidated Contract in the amount by which its Liquidation Proceeds, net
of the related Liquidation Expenses, are less than its unpaid principal
balance plus accrued and unpaid interest thereon less the Monthly Servicing
Fee. But for the effect of the relative subordination of the Monthly Servicing
Fee payable to the Servicer (so long as the Company or any wholly owned
subsidiary of the Company is the Servicer) and amounts otherwise distributable
to the Class B and Class C Certificateholders on each Payment Date, the Class
M-2 Certificateholders will absorb all losses on each Liquidated Contract in
the amount by which its Liquidation Proceeds, net of the related Liquidation
Expenses, are less than its unpaid principal balance plus accrued and unpaid
interest thereon less the Monthly Servicing Fee. But for the effect of the
relative subordination of the Monthly Servicing Fee payable to the Servicer
(so long as the Company or any wholly owned subsidiary of the Company is the
Servicer) and amounts otherwise distributable to the Class B-2 and Class C
Certificateholders, the Class B-1 Certificateholders will absorb all losses on
each Liquidated Contract in the amount by which its Liquidation Proceeds, net
of the related Liquidation Expenses, are less than its unpaid principal
balance plus accrued and unpaid interest thereon less the Monthly Servicing
Fee. But for the effect of the relative subordination of the Monthly Servicing
Fee payable to the Servicer (so long as the Company or any wholly owned
subsidiary of the Company is the Servicer) and amounts otherwise distributable
to the Class C Certificateholder on each Payment Date, and amounts paid under
the Class B-2 Limited Guaranty as described below, the Class B-2
Certificateholders will absorb all losses on each Liquidated Contract in the
amount by which its Liquidation Proceeds, net of the related Liquidation
Expenses, are less than its unpaid principal balance plus accrued and unpaid
interest thereon less the Monthly Servicing Fee. Class B-2 Certificateholders,
however, will be entitled to receive Class B-2 Guaranty Payments. If the
Company fails to make a payment required under the Class B-2 Limited Guaranty,
the Class B-2 Certificateholders will incur a loss on their investment in the
Class B-2 Certificates.
ADVANCES
To the extent that collections on a Contract in any Due Period are less than
the scheduled payment due thereon, the Servicer will be obligated to make an
advance of the uncollected portion of such scheduled payment. The Servicer
will be obligated to advance a Delinquent Payment on a Contract only to the
extent that the Servicer, in its sole discretion, expects to recoup such
Advance from subsequent funds available therefor in the Certificate Account.
If the Servicer fails to make an Advance required under the Agreement, the
Trustee will be obligated to deposit the amount of such Advance in the
Certificate Account on the Payment Date. The Trustee will not, however, be
obligated to deposit any such amount if (i) the Trustee does not expect to
recoup such Advance from subsequent funds available therefor in the
Certificate Account, or (ii) the Trustee determines that it is not legally
able to make such Advance.
REPORTS TO CERTIFICATEHOLDERS
The Servicer will furnish to the Trustee, and the Trustee will include with
each distribution to a Class A Certificateholder, a statement in respect of
the related Payment Date setting forth, among other things:
(a) the amount of such distribution to holders of each Class of Class A
Certificates allocable to interest (separately identifying any unpaid
interest shortfall included);
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(b) the amount of such distribution to holders of each Class of Class A
Certificates allocable to principal (separately identifying the aggregate
amount of any Principal Prepayments included);
(c) the amount, if any, by which the Class A Formula Distribution Amount
exceeds the Class A Distribution Amount for such Payment Date;
(d) the Principal Balance of each Class of Class A Certificates after
giving effect to the distribution of principal on such Payment Date;
(e) the Senior Percentage for such Payment Date;
(f) the Pool Scheduled Principal Balance of the Contracts for such
Payment Date;
(g) the Pool Factor (a percentage derived from a fraction the numerator
of which is the sum of the Class A Principal Balance, the Class M Principal
Balance and the Class B Principal Balance and the denominator of which is
the Cut-off Date Pool Principal Balance); and
(h) the number and aggregate principal balance of Contracts delinquent
(i) 30-59 days and (ii) 60 or more days.
Information furnished pursuant to clauses (a) through (d) will be expressed
as dollar amounts for a Class A Certificate with a 1% Percentage Interest or
per $1,000 denomination of Class A Certificate.
In addition, within a reasonable period of time after the end of each
calendar year, the Servicer will furnish a report to each Class A
Certificateholder of record at any time during such calendar year as to the
aggregate of amounts reported pursuant to (a) and (b) above for such calendar
year.
The Servicer will furnish to the Trustee, and the Trustee will include with
each distribution to a Class M-1 Certificateholder, a statement in respect of
the related Payment Date setting forth, among other things:
(a) the amount of such distribution to holders of the Class M-1
Certificates allocable to interest (separately identifying any unpaid
interest shortfall included);
(b) the amount of such distribution to holders of the Class M-1
Certificates allocable to principal (separately identifying the aggregate
amount of any Principal Prepayments included);
(c) the amount, if any, by which the Class M-1 Formula Distribution
Amount exceeds the Class M-1 Remaining Amount Available for such Payment
Date;
(d) the Principal Balance of the Class M-1 Certificates after giving
effect to the distribution of principal on such Payment Date;
(e) the Class M-1 unpaid interest shortfall on principal shortfalls,
after giving effect to payments of such interest shortfalls on such Payment
Date;
(f) the Senior Percentage for such Payment Date;
(g) the Pool Scheduled Principal Balance of the Contracts for such
Payment Date;
(h) the Pool Factor; and
(i) the number and aggregate principal balance of Contracts delinquent
(i) 30-59 days and (ii) 60 or more days.
Information furnished pursuant to clauses (a) through (d) will be expressed as
dollar amounts for a Class M-1 Certificate with a 1% Percentage Interest or
per $1,000 denomination of Class M-1 Certificate.
In addition, within a reasonable period of time after the end of each
calendar year, the Servicer will furnish a report to each Class M-1
Certificateholder of record at any time during such calendar year as to the
aggregate of amounts reported pursuant to (a) and (b) above for such calendar
year.
The Servicer will furnish to the Trustee, and the Trustee will include with
each distribution to a Class M-2 Certificateholder, a statement in respect of
the related Payment Date setting forth, among other things:
(a) the amount of such distribution to holders of the Class M-2
Certificates allocable to interest (separately identifying any unpaid
interest shortfall included);
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<PAGE>
(b) the amount of such distribution to holders of the Class M-2
Certificates allocable to principal (separately identifying the aggregate
amount of any Principal Prepayments included);
(c) the amount, if any, by which the Class M-2 Formula Distribution
Amount exceeds the Class M-2 Remaining Amount Available for such Payment
Date;
(d) the Principal Balance of the Class M-2 Certificates after giving
effect to the distribution of principal on such Payment Date;
(e) the Class M-2 unpaid interest shortfall on principal shortfalls,
after giving effect to payments of such interest shortfalls on such Payment
Date;
(f) the Senior Percentage for such Payment Date;
(g) the Pool Scheduled Principal Balance of the Contracts for such
Payment Date;
(h) the Pool Factor; and
(i) the number and aggregate principal balance of Contracts delinquent
(i) 30-59 days and (ii) 60 or more days.
Information furnished pursuant to clauses (a) through (d) will be expressed as
dollar amounts for a Class M-2 Certificate with a 1% Percentage Interest or
per $1,000 denomination of Class M-1 Certificate.
In addition, within a reasonable period of time after the end of each
calendar year, the Servicer will furnish a report to each Class M-2
Certificateholder of record at any time during such calendar year as to the
aggregate of amounts reported pursuant to (a) and (b) above for such calendar
year.
The Servicer will furnish to the Trustee, and the Trustee will include with
each distribution to a Class B-1 Certificateholder, a statement in respect of
the related Payment Date setting forth, among other things:
(a) the amount of such distribution to holders of the Class B-1
Certificates allocable to interest (separately identifying any unpaid
interest shortfall included);
(b) the amount of such distribution to holders of the Class B-1
Certificates allocable to principal (separately identifying the aggregate
amount of any Principal Prepayments included);
(c) the amount, if any, by which the Class B-1 Formula Distribution
Amount exceeds the Class B-1 Remaining Amount Available for such Payment
Date;
(d) the Principal Balance of the Class B-1 Certificates after giving
effect to the distribution of principal on such Payment Date;
(e) the Class B-1 unpaid interest shortfall on principal shortfalls,
after giving effect to payments of such interest shortfalls on such Payment
Date;
(f) the Class B Percentage for such Payment Date;
(g) the Pool Scheduled Principal Balance of the Contracts for such
Payment Date;
(h) the Pool Factor; and
(i) the number and aggregate principal balance of Contracts delinquent
(i) 30-59 days and (ii) 60 or more days.
Information furnished pursuant to clauses (a) through (d) will be expressed as
dollar amounts for a Class B-1 Certificate with a 1% Percentage Interest or
per $1,000 denomination of Class B-1 Certificate.
In addition, within a reasonable period of time after the end of each
calendar year, the Servicer will furnish a report to each Class B-1
Certificateholder of record at any time during such calendar year as to the
aggregate of amounts reported pursuant to (a) and (b) above for such calendar
year.
The Servicer will furnish to the Trustee, and the Trustee will include with
each distribution to a Class B-2 Certificateholder, a statement in respect of
the related Payment Date setting forth, among other things:
(a) the amount of such distribution to holders of Class B-2 Certificates
allocable to interest;
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(b) the amount of such distribution to holders of Class B-2 Certificates
allocable to principal (separately identifying the aggregate amount of any
Principal Prepayments included);
(c) the amount, if any, by which the sum of the Class B-2 Formula
Distribution Amount and the Class B-2 Principal Liquidation Loss Amount, if
any, exceeds the Class B-2 Distribution Amount for such Payment Date;
(d) the Class B-2 Liquidation Loss Amount, if any, for such Payment Date;
(e) the Class B-2 unpaid interest shortfall on principal shortfalls,
after giving effect to payments of such interest shortfalls on such Payment
Date;
(f) the Class B-2 Guarantee Payment, if any, for such Payment Date;
(g) the Class B-2 Principal Balance after giving effect to the
distribution of principal on such Payment Date;
(h) the Class B Percentage for such Payment Date;
(i) the Pool Scheduled Principal Balance of the Contracts for such
Payment Date;
(j) the Pool Factor; and
(k) the number and aggregate principal balance of Contracts delinquent
(i) 30-59 days and (ii) 60 or more days.
Information furnished pursuant to clauses (a) through (c) will be expressed as
dollar amounts for a Class B-2 Certificate with a 1% Percentage Interest or
per $1,000 denomination of Class B-2 Certificate.
In addition, within a reasonable period of time after the end of each
calendar year, the Servicer will furnish a report to each Class B-2
Certificateholder of record at any time during such calendar year as to the
aggregate amounts reported pursuant to (a) and (b) above for such calendar
year.
REPURCHASE OPTION
The Agreement provides that at any time that the Pool Scheduled Principal
Balance is less than 10% of the Cut-off Date Pool Principal Balance, the
Servicer will have the option to repurchase, on 30 days' prior written notice
to the Trustee, all outstanding Contracts (other than any Contract as to which
title to the underlying property has been assigned) at a price sufficient to
pay the Aggregate Certificate Principal Balance plus the Monthly Interest due
on all Certificates on the Payment Date occurring in the month following the
date of repurchase. Such price will be distributed on such Payment Date.
COLLECTION AND OTHER SERVICING PROCEDURES
The Servicer will manage, administer, service and make collections on the
Contracts, exercising the degree of skill and care required by FHA and
otherwise consistent with the highest degree of skill and care that the
Servicer exercises with respect to similar contracts (including manufactured
housing contracts) serviced by the Servicer. The Servicer will not be required
to cause to be maintained, or otherwise monitor the maintenance of, hazard
insurance on the improved properties, but is required under FHA regulations to
monitor and ensure the maintenance of flood insurance on properties securing
FHA-insured Contracts located in federally designated special flood hazard
areas. The Company does, however, as a matter of its own policy, monitor proof
of hazard insurance coverage (other than flood insurance) and require that it
be named as an additional loss payee on all first lien secured contracts and
generally on junior lien secured contracts with amounts financed of over
$ .
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The Servicer will receive a Monthly Servicing Fee for each Due Period (paid
on the next succeeding Payment Date) equal to one-twelfth of the product of
.75% and the remaining Pool Scheduled Principal Balance of the Contracts.
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The Monthly Servicing Fee provides compensation for customary third-party
servicing activities to be performed by the Servicer for the Trust, for
additional administrative services performed by the Servicer on behalf of the
Trust and for expenses paid by the Servicer on behalf of the Trust. The
Servicer is also entitled to reimbursement out of the liquidation proceeds of
a Liquidated Contract (including FHA Insurance proceeds) for customary out-of-
pocket liquidation expenses incurred by it.
Customary servicing activities include collecting and recording payments,
communicating with Obligors, investigating payment delinquencies, providing
billing and tax records to Obligors and maintaining internal records with
respect to each Contract. Administrative services performed by the Servicer on
behalf of the Trust include selecting and packaging the Contracts, calculating
distributions to Certificateholders and providing related data processing and
reporting services for Certificateholders and on behalf of the Trustee.
Expenses incurred in connection with servicing of the Contracts and paid by
the Company from its servicing fees include payment of FHA Insurance premiums,
payment of fees and expenses of accountants, payments of all fees and expenses
incurred in connection with the enforcement of Contracts 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.
EVIDENCE AS TO COMPLIANCE
The Agreement provides for delivery to the Trustee of a monthly report by
the Servicer no later than one Business Day following the Determination Date,
setting forth the information described under "Description of the
Certificates--Reports to Certificateholders." Each report to the Trustee will
be accompanied by a statement from an appropriate officer of the Servicer
certifying the accuracy of such report and stating that the Servicer has not
defaulted in the performance of its obligations under the Agreement. On or
before of each year, beginning in 1998, the Servicer will deliver
to the Trustee a report of [Accountant], or another 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 and stating that, on the basis of such examination, such
servicing has been conducted in compliance with the Agreement, except for any
exceptions set forth in such report.
The Agreement provides that the Servicer shall furnish to the Trustee such
reasonably pertinent underlying data as can be generated by the Servicer's
existing data processing system without undue modification or expense.
The Agreement provides that a Certificateholder holding Certificates
representing at least 5% of the Aggregate Certificate Principal Balance will
have the same rights of inspection as the Trustee and may upon written request
to the Servicer receive copies of all reports provided to the Trustee.
TRANSFERABILITY
The Certificates are subject to certain restrictions on transfer to or for
the benefit of employee benefit plans, trusts or accounts subject to ERISA and
described in Section 4975 of the Code. See "ERISA Considerations" herein and
in the Prospectus.
CERTAIN MATTERS RELATING TO THE COMPANY
The Agreement provides that the Company may not resign from its obligations
and duties as Servicer thereunder, except upon a determination that the
Company's performance of such duties is no longer permissible under the
Agreement or applicable law, and prohibits the Company from extending credit
to any Certificateholder for the purchase of a Certificate, purchasing
Certificates in any agency or trustee capacity or lending money to the Trust.
The Company can be removed as Servicer only pursuant to an Event of
Termination as discussed below.
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EVENTS OF TERMINATION
An Event of Termination under the Agreement will occur if (a) the Servicer
fails to make any payment or deposit required under the Agreement (including
an Advance) and such failure continues for four Business Days; (b) the
Servicer fails to observe or perform in any material respect any other
covenant or agreement in the Agreement which continues unremedied for thirty
days; (c) the Servicer conveys, assigns or delegates its duties or rights
under the Agreement, except as specifically permitted under the Agreement, or
attempts to make such a conveyance, assignment or delegation; (d) a court
having jurisdiction in the premises enters a decree or order for relief in
respect of the Servicer in an involuntary case under any applicable
bankruptcy, insolvency or other similar law now or hereafter in effect, or
appoints a receiver, liquidator, assignee, custodian, trustee, or sequestrator
(or similar official) of the Servicer, as the case may be, or enters a decree
or order for any substantial liquidation of its affairs; (e) the Servicer
commences a voluntary case under any applicable bankruptcy, insolvency or
similar law, or consents to the entry of an order for relief in an involuntary
case under any such law, or consents to the appointment of or taking
possession by a receiver, liquidator, assignee, trustee, custodian or its
creditors, or fails to, or admits in writing its inability to, pay its debts
as they become due, or takes any corporate action in furtherance of the
foregoing; (f) the Servicer fails to be an Eligible Servicer; or (g) the
Servicer's seller-servicer contract with GNMA is terminated. The Servicer will
be required under the Agreement to give the Trustee and the Certificateholders
notice of an Event of Termination promptly upon the occurrence of such event.
RIGHTS UPON AN EVENT OF TERMINATION
If an Event of Termination has occurred and is continuing, either the
Trustee or holders of Certificates representing 25% or more of the Aggregate
Certificate Principal Balance may terminate all of the Servicer's management,
administrative, servicing and collection functions under the Agreement. Upon
such termination, the Trustee or its designee will succeed to all the
responsibilities, duties and liabilities of the Company as Servicer under the
Agreement and will be entitled to similar compensation arrangements; provided,
however, that neither the Trustee nor any successor Servicer will assume any
accrued obligation of the prior servicer or any obligation of the Company to
repurchase Contracts for breach of representations and warranties, and the
Trustee will not be liable for any acts or omissions of the Servicer occurring
prior to a transfer of the Servicer's servicing and related functions or for
any breach by the Servicer of any of its representations and warranties
contained in the Agreement or any related document or agreement. In addition,
the Trustee will notify FHA of the Servicer's termination as Servicer of the
FHA-insured Contracts and will request that the portion of the Servicer's FHA
Insurance reserves allocable to the FHA-insured Contracts be transferred to
the Trustee or a successor Servicer. See "Description of FHA Insurance" in the
Prospectus. Notwithstanding such termination, the Servicer shall be entitled
to payment of certain amounts payable to it prior to such termination, for
services rendered prior to such termination. No such termination will affect
in any manner the Company's obligation to repurchase certain Contracts for
breaches of warranties under the Agreement. In the event that the Trustee is
unwilling or unable so to act, it may appoint, or petition a court of
competent jurisdiction for the appointment of, an Eligible Servicer to act as
successor to the Servicer under the Agreement. The Trustee and such successor
may agree upon the servicing compensation to be paid (after receiving
comparable bids from other Eligible Servicers), which may not be greater than
the Monthly Servicing Fee payable to the Company as Servicer under the
Agreement without the consent of all of the Certificateholders.
TERMINATION OF THE AGREEMENT
The Agreement will terminate (after distribution of all principal and
interest then due to Certificateholders) on the earlier of (a) the Payment
Date on which the Pool Scheduled Principal Balance is reduced to zero; or (b)
the Payment Date occurring in the month following the Servicer's repurchase of
the Contracts as described under "Description of the Certificates--Repurchase
Option." However, the Company's representations, warranties and indemnities
will survive any termination of the Agreement.
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AMENDMENT; WAIVER
The Agreement may be amended by agreement of the Trustee, the Servicer and
the Company at any time without the consent of the Certificateholders to cure
any ambiguity, to correct or supplement any provision which may be
inconsistent with any other provision or to add other provisions not
inconsistent with the Agreement, upon receipt of an opinion of counsel to the
Servicer that such amendment will not adversely affect in any material respect
the interests of any Certificateholder.
The Agreement may also be amended by agreement of the Trustee, the Servicer
and the Company at any time without the consent of the Certificateholders to
effect the transfer of FHA Insurance reserves to another entity in compliance
with revisions to FHA regulations, provided that prior to any such amendment
Moody's and S&P shall have confirmed that the ratings of the Certificates will
not be lowered or withdrawn following such amendment.
The Agreement may also be amended from time to time by the Trustee, the
Servicer and the Company with the consent of holders of Certificates
representing 66 2/3% or more of the Aggregate Certificate Principal Balance,
and holders of Certificates representing 51% or more of the Aggregate
Certificate Principal Balance may vote to waive any Event of Termination,
provided that no such amendment or waiver shall (a) reduce in any manner the
amount of, or delay the timing of, collections of payments on Contracts or
distributions which are required to be made on any Certificate, or (b) reduce
the aggregate amount of Certificates required for any amendment of the
Agreement, without unanimous consent of the Certificateholders.
The Trustee is required under the Agreement to furnish Certificateholders
with notice promptly upon execution of any amendment to the Agreement.
INDEMNIFICATION
The Agreement provides that the Company will defend and indemnify the Trust,
the Trustee (including any agent of the Trustee) and the Certificateholders
against any and all costs, expenses, losses, damages, claims and liabilities,
including reasonable fees and expenses of counsel and expenses of litigation
(a) arising out of or resulting from the use or ownership by the Company or
any affiliate thereof of any real estate securing a Contract, (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 (but not including any
federal, state or other tax arising out of the creation of the Trust and the
issuance of the Certificates), and (c) with respect to certain other tax
matters.
The Agreement also provides that the Servicer will defend and indemnify the
Trust, the Trustee and the Certificateholders (which indemnification will
survive any removal of the Servicer) against any and all costs, expenses,
losses, damages, claims and liabilities, including reasonable fees and
expenses of counsel and expenses of litigation, in respect of any action taken
by the Company as Servicer with respect to any Contract.
DUTIES AND IMMUNITIES OF THE TRUSTEE
The Trustee will make no representations as to the validity or sufficiency
of the Agreement, the Certificates or any Contract, Contract file or related
documents, and will not be accountable for the use or application by the
Company of any funds paid to the Company in consideration of the conveyance of
the Contracts, or deposited into the Certificate Account by the Servicer. If
no Event of Termination has occurred, the Trustee will be required to perform
only those duties specifically required of it under the Agreement. However,
upon receipt of the various certificates, reports or other instruments
required to be furnished to it, the Trustee will be required to examine them
to determine whether they conform as to form to the requirements of the
Agreement.
Under the Agreement the Servicer will agree (a) to pay to the Trustee from
time to time reasonable compensation for all services rendered by it
thereunder (which compensation shall not be limited by any
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provision of law in regard to the compensation of a trustee of an express
trust); (b) to reimburse the Trustee upon its request for all reasonable
expenses, disbursements and advances incurred or made by the Trustee in
accordance with any provision of the Agreement (including FHA Insurance
premiums not paid by the Servicer and reasonable compensation and the expenses
and disbursements of its agents and counsel), except any such expense,
disbursement or advance as may be attributable to its negligence or bad faith;
and (c) to indemnify the Trustee for, and to hold it harmless against, any
loss, liability or expense incurred without negligence or bad faith on its
part, arising out of or in connection with the acceptance or administration of
the Trust and its duties thereunder, including the costs and expenses of
defending itself against any claim or liability in connection with the
exercise or performance of any of its powers or duties thereunder.
The Trustee is not obligated to expend or risk its own funds or otherwise
incur financial liability in the performance of its duties under the Agreement
if there is a reasonable ground for believing that the repayment of such funds
or adequate indemnity against such risk or liability is not reasonably
assured.
The Agreement also provides that the Trustee will maintain at its expense in
Minneapolis or St. Paul, Minnesota, an office or agency where Certificates may
be surrendered for registration of transfer or exchange and where notices and
demands to or upon the Trustee and the certificate registrar and transfer
agent in respect of the Certificates pursuant to the Agreement may be served.
On the date hereof the Trustee's office for such purposes is located at 180
East Fifth Street, St. Paul, Minnesota 55101. The Trustee will promptly give
written notice to the Company, the Servicer and the Certificateholders of any
change thereof.
THE TRUSTEE
[Trustee] has its corporate trust offices at , Minnesota .
The Trustee may resign from its duties under the Agreement at any time, in
which event the Servicer will be obligated to appoint a successor Trustee. The
Servicer may also remove the Trustee if the Trustee ceases to be eligible to
continue as such under the Agreement or if the Trustee becomes insolvent. In
such circumstances, the Servicer will also be obligated to appoint a successor
Trustee. Any resignation or removal of the Trustee and appointment of a
successor Trustee will not become effective until acceptance of the
appointment by the successor Trustee. Any successor Trustee must be an FHA
Title I approved lender.
REGISTRATION OF THE CERTIFICATES
The Certificates initially will be registered in the name of Cede & Co., the
nominee of DTC. The Certificates may be held by investors only through the
book-entry facilities of DTC. DTC is a limited-purpose trust company organized
under the laws of the State of New York, a member of the Federal Reserve
System, a "clearing corporation" within the meaning of the New York Uniform
Commercial Code, and a "clearing agency" registered pursuant to the provisions
of Section 17A of the Exchange Act. DTC accepts securities for deposit from
its participating organizations ("Participants") and facilitates the clearance
and settlement of securities transactions between Participants in such
securities through electronic book-entry changes in accounts of Participants,
thereby eliminating the need for physical movement of certificates.
Participants include securities brokers and dealers, banks and trust companies
and clearing corporations and may include certain other organizations.
Indirect access to the DTC system is also available to others such as banks,
brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a Participant, either directly or indirectly
("indirect participants").
The beneficial owners of Certificates ("Certificate Owners") who are not
Participants but desire to purchase, sell or otherwise transfer ownership of
the Certificates may do so only through Participants (unless and until
Definitive Certificates, as defined below, are issued). In addition,
Certificate Owners will receive all distributions of principal of, and
interest on, the Certificates from the Trustee through DTC and Participants.
Certificate Owners will not receive or be entitled to receive certificates
representing their respective interests in the Certificates, except under the
limited circumstances described below.
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Unless and until Definitive Certificates (as defined below) are issued, it
is anticipated that the only "Certificateholder" of the Certificates will be
Cede & Co., as nominee of DTC. Certificate Owners will not be recognized by
the Trustee as Certificateholders as that term is used in the Agreement.
Certificate Owners are only permitted to exercise the rights of
Certificateholders indirectly through Participants and DTC.
While Certificates are outstanding (except under the circumstances described
below), under the rules, regulations and procedures creating and affecting DTC
and its operations (the "Rules"), DTC is required to make book-entry transfers
among Participants on whose behalf it acts with respect to the Certificates
and is required to receive and transmit distributions of principal of, and
interest on, the Certificates. Participants with whom Certificate Owners have
accounts with respect to Certificates are similarly required to make book-
entry transfers and receive and transmit such distributions on behalf of their
respective Certificate Owners. Accordingly, although Certificate Owners will
not possess certificates, the Rules provide a mechanism by which Certificate
Owners will receive distributions and will be able to transfer their
interests.
Certificates will be issued in registered form to Certificate Owners, or
their nominees, rather than to DTC (such Certificates being referred to herein
as "Definitive Certificates"), only if (i) DTC or the Company advise the
Trustee in writing that DTC is no longer willing or able to discharge properly
its responsibilities as nominee and depository with respect to the
Certificates and the Company or the Trustee is unable to locate a qualified
successor or (ii) the Company at its sole option advises the Trustee in
writing that it elects to terminate the book-entry system through DTC. Upon
issuance of Definitive Certificates to Certificate Owners, such Certificates
will be transferable directly (and not exclusively on a book-entry basis) and
registered holders will deal directly with the Trustee with respect to
transfers, notices and distributions.
DTC has advised the Company that, unless and until Definitive Certificates
are issued, DTC will take any action permitted to be taken by a
Certificateholder under the Agreement only at the direction of one or more
Participants to whose DTC accounts the Certificates are credited. DTC has
advised the Company that DTC will take such action with respect to any
fractional interest of the Certificates only at the direction of and on behalf
of such Participants beneficially owning a corresponding fractional interest
of the Certificates. DTC may take actions, at the direction of the
Participants, with respect to some Certificates which conflict with actions
taken with respect to other Certificates.
Issuance of Certificates in book-entry form rather than as physical
certificates may adversely affect the liquidity of the Certificates in the
secondary market and the ability of Certificate Owners to pledge them. In
addition, since distributions on the Certificates will be made by the Trustee
to DTC and DTC will credit such distributions to the accounts of its
Participants, with the Participants further crediting such distributions to
the accounts of indirect participants or Certificate Owners, Certificate
Owners may experience delays in the receipt of such distributions.
DESCRIPTION OF THE CLASS B-2 LIMITED GUARANTY
In order to mitigate the effect of the subordination of the Class B-2
Certificates and liquidation losses and delinquencies on the Contracts, the
Company will provide a guaranty (the "Class B-2 Limited Guaranty") against
losses that would otherwise be borne by the Class B-2 Certificates. Each
payment required to be made under the Class B-2 Limited Guaranty is referred
to as a "Class B-2 Guaranty Payment." Prior to the Sixth Cross-over Date, and
on any Payment Date on or after the Sixth Cross-over Date on which a Class B
Principal Distribution Test is not satisfied, the Class B-2 Guaranty Payment
will equal the amount, if any, by which (i) the sum of (a) the Class B-2
Formula Distribution Amount for such Payment Date (which will be equal to
accrued and unpaid interest on the Class B-2 Certificates) and (b) the Class
B-2 Principal Liquidation Loss Amount, if any, for such Payment Date exceeds
(ii) the Class B-2 Distribution Amount for such Payment Date. The Class B-2
Principal Liquidation Loss Amount for any Payment Date equals the amount, if
any, by which the sum of the Class A Principal Balance, the Class M Principal
Balance and the Class B Principal Balance for such Payment Date exceeds the
Pool Scheduled Principal Balance for such Payment Date. The Class B-2
Principal
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Liquidation Loss Amount is, in substance, the amount of delinquencies and
losses experienced on the Contracts during the related Due Period that was not
absorbed by the Class C Certificate and the Monthly Servicing Fee otherwise
payable to the Company (so long as the Company or any wholly owned subsidiary
of the Company is the Servicer). On each Payment Date on or after the Sixth
Cross-over Date, if each Class B Principal Distribution Test is satisfied on
such Payment Date (or the Class A Principal Balance and the Class M Principal
Balance have been reduced to zero), the Class B-2 Guaranty Payment will equal
the amount, if any, by which (a) the sum of (i) the Class B-2 Formula
Distribution Amount for such Payment Date (which will include both interest
and principal) and (ii) the Class B-2 Principal Liquidation Loss Amount, if
any, for such Payment Date exceeds (b) the Class B-2 Distribution Amount for
such Payment Date.
The Class B-2 Limited Guaranty will be an unsecured general obligation of
the Company and will not be supported by any letter of credit or other credit
enhancement arrangement. The Class B-2 Limited Guaranty will not benefit in
any way, or result in any payment to, the Class A-1, Class A-2, Class A-3,
Class M-1, Class M-2 or Class B-1 Certificateholders.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
[Dorsey & Whitney LLP], counsel to the Company, will deliver its opinion
that, assuming ongoing compliance with the terms of the Agreement, upon the
issuance of the Certificates, the Trust will qualify as a REMIC for federal
income tax purposes. The Class A-1, Class A-2, Class A-3, Class M-1, Class M-
2, Class B-1 and Class B-2 Certificates will constitute "regular interests" in
the REMIC. The Class C Certificate, which is not being offered hereunder, will
constitute the sole class of "residual interests" in the REMIC.
It is not anticipated that any of the Certificates will be issued with
original issue discount for federal income tax purposes. The prepayment
assumption that will be used to determine the rate of accrual of market
discount and premium, if any, will be based on the assumption that the
Contracts will prepay at a rate equal to % CPR.
Certificates held by financial institutions, thrift institutions taxed as
domestic building and loan associations and real estate investment trusts will
represent interests in "qualifying real property loans," "loans secured by an
interest in real property" and "real estate assets" for purposes of Sections
593(d), 7701(a)(19)(C) or 856(c)(5) of the Code, respectively. Furthermore,
interest paid with respect to Certificates held by a real estate investment
trust will be considered to be "interest on obligations secured by mortgages
on real property or on interests in real property" for purposes of Section
856(c)(3) of the Code.
For further information regarding federal income tax consequences of
investing in the Certificates, see "Certain Federal Income Tax Consequences--
REMIC Series" in the Prospectus.
ERISA CONSIDERATIONS
The following information supplements, and to the extent inconsistent
therewith supersedes, the information in the Prospectus under "ERISA
Considerations."
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
imposes certain restrictions on employee benefit plans that are subject to
ERISA ("Plans") and on persons who are fiduciaries with respect to such Plans.
Employee benefit plans that are governmental plans (as defined in section
3(32) of ERISA) and certain church plans (as defined in Section 3(33) of
ERISA) are not subject to ERISA requirements. Accordingly, assets of such
plans may be invested in the Class A-1, Class A-2 and Class A-3
Certificates without regard to the ERISA restrictions described above, subject
to applicable provisions of other federal and state laws. However, any such
governmental or church plan which is qualified under section 401(a) of the
Code and exempt from taxation under section 501(a) of the Code is subject to
the prohibited transaction rules set forth in section 503 of the Code.
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The U.S. Department of Labor ("DOL") has granted an administrative exemption
to [underwriter] [cite exemption] (the "Exemption") from certain of the
prohibited transaction rules of ERISA and the Code with respect to the initial
purchase, the holding and the subsequent resale by Plans of certificates
representing interests in asset-backed pass-through trusts that consist of
certain receivables, loans and other obligations that meet the conditions and
requirements of the Exemption. The receivables covered by the Exemption
include home improvement contracts such as the Contracts. The Exemption will
apply to the acquisition, holding, and resale of the Class A-1, Class A-2 and
Class A-3 Certificates by a Plan, provided that specified conditions (certain
of which are described below) are met.
Among the conditions which must be satisfied for the Exemption to apply to
the Class A-1, Class A-2 and Class A-3 Certificates are the following:
(1) The acquisition of the Class A-1, Class A-2 or Class A-3 Certificates
by a Plan is on terms (including the price for the Class A-1, Class A-2 or
Class A-3 Certificates) that are at least as favorable to the Plan as they
would be in an arm's-length transaction with an unrelated party;
(2) The rights and interests evidenced by the Class A-1, Class A-2 or
Class A-3 Certificates acquired by the Plan are not subordinated to the
rights and interests evidenced by other certificates of the Trust;
(3) The Class A-1, Class A-2 or Class A-3 Certificates acquired by the
Plan have received a rating at the time of such acquisition that is in one
of the three highest generic rating categories from either S&P, Moody's,
Duff & Phelps Credit Rating Co. or Fitch Investors Service, Inc.;
(4) The Trustee is not an affiliate of any member of the Restricted Group
(as defined below);
(5) The sum of all payments made to the Underwriter in connection with
the distribution of the Class A-1, Class A-2 or Class A-3 Certificates
represents not more than reasonable compensation for underwriting the Class
A-1, Class A-2 or Class A-3 Certificates, as applicable. The sum of all
payments made to and retained by the Company pursuant to the sale of the
Contracts to the Trust represents not more than the fair market value of
such Contracts. The sum of all payments made to and retained by the
Servicer represents not more than reasonable compensation for the
Servicer's services under the Agreement and reimbursement of the Servicer's
reasonable expenses in connection therewith; and
(6) The Plan investing in the Class A-1, Class A-2 or Class A-3
Certificates is an "accredited investor" as defined in Rule 501(a)(1) of
Regulation D of the Securities and Exchange Commission under the Securities
Act of 1933.
Moreover, the Exemption would provide relief from certain self-
dealing/conflict of interest prohibited transactions only if, among other
requirements, (i) in the case of the acquisition of Class A-1, Class A-2 or
Class A-3 Certificates in connection with the initial issuance, at least fifty
percent (50%) of the Class A-1, Class A-2 or Class A-3 Certificates, as
applicable, are acquired by persons independent of the Restricted Group, (ii)
the Plan's investment in Class A-1, Class A-2 or Class A-3 Certificates does
not exceed twenty-five percent (25%) of all of the Class A-1, Class A-2 or
Class A-3 Certificates, as applicable, outstanding at the time of the
acquisition and (iii) immediately after the acquisition, no more than twenty-
five percent (25%) of the assets of the Plan are invested in certificates
representing an interest in one or more trusts containing assets sold or
serviced by the same entity. The Exemption does not apply to Plans sponsored
by the Company, the Underwriter, the Trustee, the Servicer, any obligor with
respect to Contracts included in the Trust constituting more than five percent
(5%) of the aggregate unamortized principal balance of the assets in the Trust
or any affiliate of such parties (the "Restricted Group").
The Company believes that the Exemption will apply to the acquisition and
holding of Class A-1, Class A-2 and Class A-3 Certificates sold by the
Underwriter and by Plans and that all conditions of the Exemption other than
those within the control of the investors have been met. In addition, as of
the date hereof, no obligor with respect to Contracts included in the Trust
constitutes more than five percent (5%) of the aggregate unamortized principal
balance of the assets of the Trust. Any Plan fiduciary who proposes to cause a
Plan to purchase Class A-1, Class A-2 or Class A-3 Certificates should consult
with its own counsel with respect to the potential
S-55
<PAGE>
consequences under ERISA and the Code of the Plan's acquisition and ownership
of the Class A-1, Class A-2 or Class A-3 Certificates. Assets of a Plan or
individual retirement account should not be invested in the Class A-1, Class
A-2 or Class A-3 Certificates unless it is clear that the assets of the Trust
will not be plan assets or unless it is clear that the Exemption or a
prohibited transaction class exemption will apply and exempt all potential
prohibited transactions. See "ERISA Considerations" in the Prospectus.
No transfer of any other Class of Certificates will be permitted to be made
to a Plan unless such Plan, at its expense, delivers to the Trustee and the
Company an opinion of counsel (in form satisfactory to the Trustee and the
Company) to the effect that the purchase or holding of any other Class of
Certificates by such Plan will not result in the assets of the Trust being
deemed to be "plan assets" and subject to the prohibited transaction
provisions of ERISA and the Code and will not subject the Trustee, the Company
or the Servicer to any obligation or liability in addition to those undertaken
in the Agreement. Unless such opinion is delivered, each person acquiring such
a Certificate will be deemed to represent to the Trustee, the Company and the
Servicer that such person is neither a Plan, nor acting on behalf of a Plan,
subject to ERISA or to Section 4975 of the Code.
UNDERWRITING
The Underwriter has agreed, subject to the terms and conditions of the
Underwriting Agreement, to purchase the Certificates at the prices set forth
on the cover page of this Prospectus Supplement.
In the Underwriting Agreement, the Underwriter has agreed, subject to the
terms and conditions set forth therein, to purchase all of the Certificates
offered hereby if any such Certificates are purchased. In the event of a
default by the Underwriter, the Underwriting Agreement provides that, in
certain circumstances, the Underwriting Agreement may be terminated.
The Underwriter proposes to offer the Certificates in part directly to
purchasers at the initial public offering prices set forth on the cover page
of this Prospectus Supplement and in part to certain securities dealers at
such prices less concessions not to exceed % of the Original Class A-1
Principal Balance, % of the Original Class A-2 Principal Balance, % of
the Original Class A-3 Principal Balance, % of the Original Class M-1
Principal Balance, % of the Original Class M-2 Principal Balance, % of the
Original Class B-1 Principal Balance, or % of the Original Class B-2
Principal Balance, as applicable. The Underwriter may allow, and such dealers
may reallow, concessions not to exceed % of Original Class A-1 Principal
Balance, % of the Original Class A-2 Principal Balance, % of Original
Class A-3 Principal Balance, % of the Original Class M-1 Principal Balance,
% of the Original Class M-2 Principal Balance, % of the Original Class
B-1 Principal Balance, or % of the Original Class B-2 Principal Balance, as
applicable, to certain brokers and dealers. After the Certificates are
released for sale to the public, the offering price and other selling terms
may be varied by the Underwriter.
The Underwriting Agreement provides that the Company will indemnify the
Underwriter against certain liabilities, including liabilities under the
Securities Act of 1933, as amended, or contribute to payments the Underwriter
may be required to make in respect thereof.
The Company has agreed that for a period of 30 days from the date of this
Prospectus Supplement it will not offer or sell publicly any other home
improvement contract pass-through certificates without the consent of the
Underwriter.
LEGAL MATTERS
Certain legal matters relating to the issuance of the Certificates will be
passed upon for the Company and the Trust by [Dorsey & Whitney LLP,]
Minneapolis, Minnesota, and for the Underwriter by [Thacher Proffitt & Wood,
New York, New York]. The material federal income tax consequences of the
Certificates will be passed upon for the Company by[Dorsey & Whitney LLP].
S-56
<PAGE>
PROSPECTUS
BASE PROSPECTUS NO. 4
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 October 9, 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, 1997, and the Company's quarterly reports on Form 10-Q for the
quarters ended March 31, 1998 and June 30, 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 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."
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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 $86,950,000, 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 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 $1,332,000,000. 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 $3,116,054,406 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 $86,950,000. These insurance reserves were available to
cover losses on approximately $883,889,000 of FHA-insured manufactured housing
contracts and approximately $128,145,000 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 ($124,500 for 1998, 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, 1997
and 1996 and for each of the years in the three-year period ended December 31,
1997 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>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS SUPPLE-
MENT AND THE PROSPECTUS IN CONNECTION WITH THE OFFERING COVERED BY THIS PRO-
SPECTUS SUPPLEMENT. IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITER.
THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTITUTE AN OFFER TO
SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE CERTIFICATES IN ANY JURISDIC-
TION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR SO-
LICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND THE PROSPEC-
TUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IM-
PLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS OR IN THE AFFAIRS OF THE TRUST SINCE
THE DATE HEREOF.
-----------------
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary of the Terms of the Certificates................................... S-3
Risk Factors............................................................... S-21
Structure of the Transaction............................................... S-21
Use of Proceeds............................................................ S-22
The Contracts.............................................................. S-22
Yield and Prepayment Considerations........................................ S-27
Green Tree Financial Corporation........................................... S-33
Description of the Certificates............................................ S-34
Description of the Class B-2 Limited Guaranty.............................. S-53
Certain Federal Income Tax Consequences.................................... S-54
ERISA Considerations....................................................... S-54
Underwriting............................................................... S-56
Legal Matters.............................................................. S-56
PROSPECTUS
Reports to Certificateholders.............................................. 2
Available Information...................................................... 2
Additional Information..................................................... 2
Incorporation of Certain Documents by Reference............................ 2
Summary of Terms........................................................... 4
Risk Factors............................................................... 9
The Trust Fund............................................................. 10
Use of Proceeds............................................................ 12
Green Tree Financial Corporation........................................... 12
Yield Considerations....................................................... 14
Maturity and Prepayment Considerations..................................... 14
Description of the Certificates............................................ 15
Description of FHA Insurance............................................... 26
Certain Legal Aspects of the Contracts; Repurchase Obligations............. 28
ERISA Considerations....................................................... 37
Certain Federal Income Tax Consequences.................................... 38
Legal Investment Considerations............................................ 55
Ratings.................................................................... 55
Underwriting............................................................... 56
Legal Matters.............................................................. 57
Experts.................................................................... 57
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
$ (APPROXIMATE)
LOGO
SELLER AND SERVICER
CERTIFICATES FOR HOME IMPROVEMENT LOANS
SERIES 1998-
$ (APPROXIMATE) % CLASS A-1
$ (APPROXIMATE) % CLASS A-2
$ (APPROXIMATE) % CLASS A-3
$ (APPROXIMATE) % CLASS M-1
$ (APPROXIMATE) % CLASS M-2
$ (APPROXIMATE) % CLASS B-1
$ (APPROXIMATE) % CLASS B-2
-----------------
PROSPECTUS SUPPLEMENT
-----------------
[UNDERWRITERS]
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+THIS PRELIMINARY PROSPECTUS SUPPLEMENT AND THE INFORMATION CONTAINED HEREIN +
+ARE SUBJECT TO COMPLETION OR AMENDMENT AND PROSPECTIVE PURCHASERS ARE +
+REFERRED TO THE RELATED FINAL PROSPECTUS SUPPLEMENT FOR DEFINITIVE +
+INFORMATION ON ANY MATTER CONTAINED HEREIN. THIS PRELIMINARY PROSPECTUS +
+SUPPLEMENT 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 +
+JURISDICTION IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL +
+PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH +
+JURISDICTION. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS SUPPLEMENT PROSPECTUS SUPPLEMENT TO BASE NO. 5
(To Prospectus dated , 1998)
LOGO
$ (APPROXIMATE)
GREEN TREE FINANCIAL CORPORATION
(SELLER AND SERVICER)
GREEN TREE HOME IMPROVEMENT AND HOME EQUITY LOAN TRUST 1998-
$ (APPROXIMATE) FLOATING RATE ASSET-BACKED NOTES, CLASS A-1
$ (APPROXIMATE) % ASSET-BACKED NOTES, CLASS A-2
$ (APPROXIMATE) % ASSET-BACKED NOTES, CLASS A-3
$ (APPROXIMATE) % ASSET-BACKED NOTES, CLASS A-4
$ (APPROXIMATE) % ASSET-BACKED CERTIFICATES
----------
Green Tree Home Equity Loan Trust 1998- (the "Trust") will be governed
pursuant to a Trust Agreement, to be dated as of , 1998 (the "Trust
Agreement"), among Green Tree Financial Corporation ("Green Tree"), Green Tree
Second GP Inc. (the "General Partner"), a wholly owned subsidiary of Green
Tree, and [Owner Trustee], as Owner Trustee. The Trust will issue a class of
floating rate Asset-Backed Notes, designated as the Class A-1 Notes, and three
classes of fixed rate Asset-Backed Notes, designated as the Class A-2, Class A-
3 and Class A-4 Notes, respectively, pursuant to an Indenture, to be dated as
of , 1998 (the "Indenture"), between the Trust and [Indenture Trustee],
as Indenture Trustee. The Class A-1 Notes, Class A-2 Notes, Class A-3 Notes and
Class A-4 Notes are referred to herein as the "Notes." The Trust will also
issue Asset-Backed Certificates (the "Certificates" and, together with the
Notes, the "Securities").
The Trust Property will include, among other things, a pool of closed-end
home equity loans (the "Home Equity Contracts") and retail installment sales
contracts and promissory notes financing home improvements ("the Home
Improvement Contracts" and, together with the Home Equity Contracts, the
"Contracts"), including the right to receive payments due on the Home Equity
and Home Improvement Contracts on or after the "Cutoff Date" (as defined
herein). Most of the Contracts are secured by a subordinate lien on the related
real estate, and
(Continued on following page)
FOR A DISCUSSION OF CERTAIN FACTORS WHICH SHOULD BE CONSIDERED BY PROSPECTIVE
PURCHASERS OF THE SECURITIES, SEE "RISK FACTORS" ON PAGE S- HEREIN AND ON
PAGE IN THE ACCOMPANYING PROSPECTUS.
----------
THE NOTES REPRESENT OBLIGATIONS OF, AND THE
CERTIFICATES REPRESENT INTERESTS IN, THE TRUST
ONLY AND DO NOT REPRESENT OBLIGATIONS OF OR
INTERESTS IN GREEN TREE, THE GENERAL
PARTNER, THE UNDERWRITER OR ANY OF THEIR
RESPECTIVE AFFILIATES, EXCEPT TO THE
LIMITED EXTENT DESCRIBED 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 SUPPLEMENT OR THE
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Price to Underwriting Proceeds to
Public(1) Discount Green Tree(1)(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Class A-1 Note..................... % % %
- --------------------------------------------------------------------------------
Per Class A-2 Note..................... % % %
- --------------------------------------------------------------------------------
Per Class A-3 Note..................... % % %
- --------------------------------------------------------------------------------
Per Class A-4 Note..................... % % %
- --------------------------------------------------------------------------------
Per Certificate........................ % % %
- --------------------------------------------------------------------------------
Total.................................. $ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Plus accrued interest, if any, from and including , 1998.
(2) Before deducting estimated expenses of $ payable by Green Tree.
----------
The Securities are offered hereby by the Underwriter named below, subject to
receipt and acceptance by the Underwriter and its right to reject any order in
whole or in part. It is expected that delivery of the Securities will be made
on or about August , 1998 (the "Closing Date").
----------
[UNDERWRITERS]
The date of the Prospectus Supplement is , 1998.
<PAGE>
(Continued from preceding page)
certain of the Home Improvement Contracts are unsecured.The Trust Property
will also include an assignment of Green Tree's security interests in the
mortgages securing the Home Equity Contracts and certain Home Improvement
Contracts and certain other property, as more fully described herein. Green
Tree will also act as Servicer of the Contracts. Terms used and not otherwise
defined herein have the meanings ascribed thereto in the Prospectus dated
, 1998 attached hereto (the "Prospectus").
Principal and interest on the Notes are payable on the 15th day of each
month (or, if the 15th day is not a business day, the next business day
thereafter) (a "Distribution Date"), beginning in 1998. The rights of the
holders of the Class A-2, Class A-3 and Class A-4 Notes and the Certificates
to receive distributions on each Distribution Date will be subordinated to
such rights of the Class A-1 Noteholders; such rights of the holders of the
Class A-3 and Class A-4 Notes and the Certificates will be subordinated to
such rights of the Class A-2 Noteholders; such rights of the holders of the
Class A-4 Notes and the Certificates will be subordinated to such rights of
the Class A-3 Noteholders; and such rights of the Certificateholders will be
subordinated to such rights of the Class A-4 Noteholders.
The Certificates will represent fractional undivided interests in the Trust.
Interest will be distributed to the Certificateholders on each Distribution
Date as set forth herein. No distributions of principal on the Certificates
will be payable until all of the Notes have been paid in full. The
Certificateholders will have the benefit of a Limited Guaranty of Green Tree
to protect against losses that would otherwise be absorbed by the
Certificates. To the extent that available funds in the Collection Account are
insufficient to distribute to the holders of the Certificates the
Certificateholders' Distributable Amount (as described herein), Green Tree
will be obligated to make a payment under the Limited Guaranty equal to the
amount of such deficiency.
The Securities initially will be represented by certificates registered in
the name of Cede & Co., the nominee of The Depository Trust Company ("DTC").
The interests of beneficial owners of the Securities will be represented by
book entries on the records of the participating members of DTC. Definitive
Securities will be available only under the limited circumstances described
herein. Holders of the Securities may hold through DTC (in the United States)
or, solely in the case of the Notes, through CEDEL or Euroclear (as defined
herein) (in Europe) if they are participants of such systems, or indirectly
through organizations that are participants in such systems. The Certificates
may not be held, directly or indirectly, through CEDEL or Euroclear.
The Certificates may not be offered or sold in the United Kingdom. The Notes
may not be offered or sold in the United Kingdom by means of any document
except in circumstances which do not constitute an offer to the public within
the meaning of the Public Offers of Securities Regulations 1995. All
applicable provisions of the Financial Services Act of 1986 must be complied
with in connection with anything done in relation to the Notes in, from or
otherwise involving the United Kingdom. See "Underwriting."
There currently is no secondary market for the Securities. The Underwriter
expects, but is not obligated, to make a market in the Securities. There is no
assurance that any such market will develop or continue.
---------------
THIS PROSPECTUS SUPPLEMENT DOES NOT CONTAIN COMPLETE INFORMATION ABOUT THE
OFFERING OF THE SECURITIES. ADDITIONAL INFORMATION IS CONTAINED IN THE
PROSPECTUS AND PROSPECTIVE INVESTORS ARE URGED TO READ BOTH THIS PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS IN FULL. SALES OF THE SECURITIES MAY NOT BE
CONSUMMATED UNLESS THE PURCHASER HAS RECEIVED BOTH THIS PROSPECTUS SUPPLEMENT
AND THE PROSPECTUS.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE SECURITIES
OFFERED HEREBY. SUCH TRANSACTIONS MAY INCLUDE STABILIZING AND THE PURCHASE OF
SECURITIES TO COVER SYNDICATE SHORT POSITIONS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
REPORTS TO SECURITYHOLDERS
Unless and until Definitive Securities are issued, unaudited monthly and
annual reports, containing information concerning the Trust and prepared by
the Servicer, will be sent on behalf of the Trust to the Indenture Trustee,
the Owner Trustee, and Cede & Co., as registered holder of the Securities and
the nominee of DTC. See "Description of the Trust Documents and Indenture--
Statements to Securityholders," herein and "Certain Information Regarding the
Securities--Book-Entry Registration" and "--Reports to Securityholders" in the
accompanying Prospectus. Security Owners may receive such reports, upon
written request, together with a certification that they are Security Owners
and payment of reproduction and postage expenses associated with the
distribution of such reports, from the Indenture Trustee at [address]. Such
reports will not constitute financial statements prepared in accordance with
generally accepted accounting principles. The Servicer, on behalf of the
Trust, will file with the Securities and Exchange Commission (the
"Commission") periodic reports concerning the 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, in
accordance with the Exchange Act and the rules and regulations of the
Commission thereunder, Green Tree expects that the Trust's obligation to file
such reports will be terminated following the end of 1997.
S-2
<PAGE>
SUMMARY OF TERMS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus Supplement and in
the accompanying Prospectus. Capitalized terms used herein and not otherwise
defined herein shall have the respective meanings ascribed to such terms
elsewhere in this Prospectus Supplement or the accompanying Prospectus.
Issuer........................ Green Tree Home Equity Loan Trust 1998- (the
"Trust"), a Delaware business trust governed
pursuant to a Trust Agreement, to be dated as
of (the "Trust Agreement"),
among Green Tree Second GP Inc. (the "General
Partner"), Green Tree Financial Corporation
("Green Tree") and [Owner Trustee], as Owner
Trustee (the "Owner Trustee").
Seller and Servicer........... Green Tree Financial Corporation. See "Green
Tree Financial Corporation" herein and in the
accompanying Prospectus.
Indenture Trustee............. [Indenture Trustee/Address] (the "Indenture
Trustee"). See "The Notes--The Indenture
Trustee" in the accompanying Prospectus.
Owner Trustee................. [Owner Trustee], not in its individual capacity
but solely as Owner Trustee under the Trust
Agreement. See "Description of the Trust
Documents--The Trustee" in the accompanying
Prospectus.
The Notes..................... The Trust will issue a class of floating rate
Asset-Backed Notes, designated as the Class A-1
Notes, and three classes of fixed rate Asset-
Backed Notes, designated as the Class A-2,
Class A-3 and Class A-4 Notes, respectively.
The Class A-1 Notes, Class A-2 Notes, Class A-3
Notes and Class A-4 Notes are referred to
herein as the "Notes." The rights of the
holders of each Class of Notes to receive
distributions will be subordinated to the
rights of the holders of each Class of Notes
with a prior numeric designation, in the manner
and to the extent described herein. The Notes
will be issued pursuant to an Indenture, to be
dated as of , (the "Indenture"),
between the Trust and the Indenture Trustee.
The Notes will be offered for purchase in
denominations of $1,000 and integral multiples
thereof in book-entry form only. See "Certain
Information Regarding the Securities--Book-
Entry Registration" in the accompanying
Prospectus.
The Notes will be secured by the assets of the
Trust pursuant to the Indenture.
Original Class A-1 Principal $ (Approximate. Subject to a permitted
Balance....................... variance of plus or minus 5%).
Original Class A-2 Principal $ (Approximate. Subject to a permitted
Balance....................... variance of plus or minus 5%).
Original Class A-3 Principal $ (Approximate. Subject to a permitted
Balance....................... variance of plus or minus 5%).
S-3
<PAGE>
Original Class A-4 Principal $ (Approximate. Subject to a permitted
Balance....................... variance of plus or minus 5%).
The Certificates.............. The Trust will issue Asset-Backed Certificates
(the "Certificates") representing fractional
undivided interests in the Trust. The rights of
the holders of the Certificates (the
"Certificateholders") to receive distributions
will be subordinated to the rights of the
holders of the Notes (the "Noteholders") in the
manner and to the extent described herein. The
Certificates will be issued pursuant to the
Trust Agreement. The Certificates will be
offered for purchase in denominations of $1,000
and integral multiples thereof in book-entry
form only. See "Certain Information Regarding
the Securities--Book-Entry Registration" in the
accompanying Prospectus.
Original Certificate $ (Approximate. Subject to a permitted
Principal Balance............. variance of plus or minus 5%).
Distribution Date............. The 15th day of each month (or if such 15th day
is not a Business Day, the next Business Day
thereafter) commencing in 1998. A
"Business Day" is a day on which banking
institutions in , or in New York
City, New York, are not required or authorized
by law to be closed.
Record Date................... The Business Day immediately preceding the
related Distribution Date.
Trust Property................ Each Note will represent an obligation of, and
each Certificate will represent a fractional
undivided interest in, the Trust. The Trust's
assets (the "Trust Property") will include,
among other things, a pool (the "Contract
Pool") of retail installment sales contracts
and promissory notes financing home
improvements (the "Home Improvement
Contracts"), and closed-end home equity loans
(the "Home Equity Contracts") (collectively
referred to herein as the "Contracts"), and all
rights to receive payments due thereon on or
after the Cutoff Date. The Trust Property will
also include an assignment of Green Tree's
security interests in the mortgages securing
the Home Equity Contracts and certain Home
Improvement Contracts and of the right to
receive proceeds from claims on certain
insurance policies covering the real estate
securing the Home Equity Contracts and certain
Home Improvement Contracts or the Obligors (as
defined herein); the Collection Account, the
Spread Account, the Reserve Account and the
Pre-Funding Account, including all investments
therein, all income from the investment of
funds therein and all proceeds thereof; certain
other rights under the Sale and Servicing
Agreement to be dated as of , (the
"Sale and Servicing Agreement"), between Green
Tree and the Trust; and certain rights under
the Interest Rate Cap Agreement (as defined
herein). The Contracts will be transferred by
Green Tree to the Trust pursuant to the Sale
and Servicing Agreement,
S-4
<PAGE>
and Green Tree will be obligated to repurchase
Contracts (each, a "Purchased Contract") upon
the occurrence of certain breaches of
representations and warranties thereunder. On
the Closing Date, Green Tree will deposit an
amount in an account (the "Pre-Funding
Account") to provide the Trust with sufficient
funds to purchase the Subsequent Contracts.
Pursuant to the Indenture, the Trust Property
will be pledged to the Indenture Trustee on
behalf of the Noteholders. See "The Trust"
herein.
Contracts..................... The Contracts were originated or purchased by
Green Tree in the ordinary course of business.
As of the Cutoff Date, the Contracts had a
weighted average annual percentage rate of
% and a weighted average remaining
maturity of approximately months. As of the
Cutoff Date, no Contract had a scheduled
maturity prior to and no Contract was
more than 30 days past due. The final scheduled
payment date on the Contract with the latest
maturity occurs in . The Contracts are
generally prepayable at any time without
penalty to the Obligor. See "The Contract Pool"
herein and "The Contracts" in the accompanying
Prospectus.
Cutoff Date................... The "Cutoff Date" will be (i) , 1998 (or
the date of origination, if later), with
respect to all Contracts that had a first
scheduled payment due prior to , 1998, and
(ii) , 1998 with respect to those Contracts
that had a first scheduled payment due in
1998.
Terms of the Notes............ The principal terms of the Notes will be as
described below:
A. Distributions........... Noteholders will be entitled to receive on each
Distribution Date, to the extent that the
Amount Available in the Collection Account is
sufficient therefor, the Noteholders'
Distributable Amount, as defined under
"Description of the Trust Documents and
Indenture." Distributions on the Notes will be
made first to the Class A-1 Noteholders, then
to the Class A-2 Noteholders, then to the Class
A-3 Noteholders, and then to the Class A-4
Noteholders, in the manner described below.
The "Amount Available" on each Distribution
Date generally includes payments on the
Contracts due and received during the preceding
month, prepayments and other unscheduled
collections received during the preceding
month, any amounts deposited in respect of
Purchased Contracts, any Interest Rate Cap
Payment, any Guaranty Payment, and all earnings
from the investment of funds in the Collection
Account.
The outstanding principal amount of each Class
of Notes, to the extent not previously paid,
will be payable on the Distribution Date
occurring in (the "Final Scheduled
Distribution Date").
S-5
<PAGE>
B. Interest Rates.......... Class A-1 Notes : one-month LIBOR (as defined
below) for the monthly interest period plus
% (the "Class A-1 Rate").
Class A-2 Notes : % per annum (the "Class A-
2 Rate").
Class A-3 Notes : % per annum (the "Class A-
3 Rate").
Class A-4 Notes : % per annum (the "Class A-
4 Rate").
Interest on the Class A-2 Notes, Class A-3
Notes and Class A-4 Notes will be calculated on
the basis of a 360-day year consisting of
twelve 30-day months.
Interest on the Class A-1 Notes will be
calculated on the basis of the actual number of
days in the monthly interest period divided by
360.
"LIBOR" ("London Interbank Offered Rate") with
respect to any monthly interest period will be
established by the calculation agent appointed
by the Trust (the "Calculation Agent") and will
equal the offered rate for United States dollar
deposits for one month that appears on Telerate
Page 3750 as of 11:00 A.M., London time, on the
second LIBOR Business Day prior to such monthly
interest period (a "LIBOR Determination Date").
"Telerate Page 3750" means the display page so
designated on the Dow Jones Telerate Service
(or such other page as may replace that page on
that service, or such other service as may be
designated by the Calculation Agent as the
information vendor, for the purpose of
displaying London interbank offered rates of
major banks). If such rate appears on Telerate
Page 3750, LIBOR will be such rate. "LIBOR
Business Day" as used herein means a day that
is both a Business Day and a day on which
banking institutions in the City of London,
England are not required or authorized by law
to be closed. If on any LIBOR Determination
Date the offered rate does not appear on
Telerate Page 3750, the Calculation Agent will
request each of the reference banks (which
shall be major banks that are engaged in
transactions in the London interbank market
selected by the Calculation Agent) to provide
the Calculation Agent with its offered
quotation for United States dollar deposits for
one month to prime banks in the London
interbank market as of 11:00 A.M., London time,
on such date. If at least two reference banks
provide the Calculation Agent with such offered
quotations, LIBOR on such date will be the
arithmetic mean, rounded 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 New York
S-6
<PAGE>
City selected by the Calculation Agent are
quoting as of 11:00 A.M., New York City time,
on such date to leading European banks for
United States dollar deposits for one month;
provided, however, that if such banks are not
quoting as described above, LIBOR for such date
will be LIBOR applicable to the monthly
interest period immediately preceding such
monthly interest period. The "Calculation
Agent" will initially be the Indenture Trustee.
The interest rates for the various classes of
Notes are referred to collectively herein as
the "Interest Rates."
C. Class A-1:HE/HI
Interest and Class A-1
Interest.................
Interest on the outstanding Class A-1 Principal
Balance will accrue from , 1998, or from
the most recent Distribution Date, to but
excluding the following Distribution Date, at
the Class A-1 Rate for such monthly interest
period. The "Class A-1 Principal Balance" as of
any Distribution Date will be the Original
Class A-1 Principal Balance minus all amounts
previously distributed to the Class A-1
Noteholders in respect of principal.
Interest will be paid on the Class A-1 Notes to
the extent of funds available on such
Distribution Date. In the event the funds
available are not sufficient to make a full
distribution of interest on the Class A-1
Notes, the funds available will be applied pro
rata to the Class A-1 Notes based on the amount
payable to such Class and the amount of the
shortfall will be carried forward and added to
the amount of interest payable on the next
Distribution Date. Any amount so carried
forward will bear interest at the Class A-1
Rate, to the extent legally permissible. See
"Description of the Notes."
D. Class A-1 Principal..... Class A-1 Noteholders will be entitled to
receive on each Distribution Date as payment of
principal, to the extent of funds available
after payment of all interest then payable on
the Class A-1 Notes, an amount equal to the sum
of % (approximate) of the Formula
Principal Distribution Amount for such
Distribution Date plus the Unpaid Class A-1
Principal Shortfall, if any, for such
Distribution Date. In the event the funds
available are not sufficient to make a full
distribution of principal on the Class A-1
Notes, the funds available will be applied pro
rata to the Class A-1 Notes based on the amount
payable to such Class.
The "Formula Principal Distribution Amount"
with respect to any Distribution Date (but
subject to the last sentence of this
definition) will generally be equal to the sum
of the following amounts with respect to the
related Monthly Period, in each case computed
in accordance with the method specified in each
Contract: (i) all scheduled payments of
principal due on each outstanding Contract
during the related Monthly Period, (ii) all
Partial Principal Prepayments applied and all
Principal Prepayments in Full received during
the related Monthly Period
S-7
<PAGE>
in respect of each Contract, (iii) the
Scheduled Principal Balance of each Contract
that became a Liquidated Contract during the
related Monthly Period, (iv) the Scheduled
Principal Balance of each Contract which,
during the related Monthly Period, was
purchased by Green Tree as a result of a breach
of a representation or warranty or by the
Servicer as a result of an uncured breach of a
covenant under the Sale and Servicing
Agreement, and (v) with respect to the
Distribution Date in 1998, any remaining
amounts on deposit in the Pre-Funding Account.
The Formula Principal Distribution Amount for
the Distribution Date in will be the sum
of the Note Principal Balance and the
Certificate Principal Balance. A "Monthly
Period" with respect to a Distribution Date is
the calendar month immediately preceding the
month in which such Distribution Date occurs.
The "Scheduled Principal Balance" of a Contract
for any Monthly Period is its principal balance
as specified in its amortization schedule,
after giving effect to any previous Partial
Principal Prepayments and to the scheduled
payment due on its scheduled payment date (the
"Due Date") in that month, but without giving
effect to any adjustments due to bankruptcy or
similar proceedings. A "Liquidated Contract"
means any defaulted Contract as to which the
Servicer has determined that all amounts which
it expects to recover from or on account of
such Contract through the date of disposition
of the related Product or real property have
been recovered or any defaulted Contract in
respect of which the related Product or real
property has been realized upon and disposed of
and the proceeds of such disposition have been
received. See "Description of the Trust
Documents and Indenture--Distributions."
E. Class A-2 Interest...... Interest on the outstanding Class A-2 Principal
Balance will accrue from , 1998, or from
the most recent Distribution Date, to but
excluding the following Distribution Date, at
the Class A-2 Rate for such monthly interest
period. The "Class A-2 Principal Balance" as of
any Distribution Date will be the Original
Class A-2 Principal Balance minus all amounts
previously distributed to the Class A-2
Noteholders in respect of principal and minus
any unreimbursed liquidation losses absorbed by
the Class A-2 Notes.
Interest will be paid on the Class A-2 Notes to
the extent of funds available on each
Distribution Date, after payment of all
interest and principal then payable on the
Class A-1 Notes. In the event such funds
available are not sufficient to make a full
distribution of interest on the Class A-2
Notes, the amount of the shortfall will be
carried forward and added to the amount of
interest payable on the next Distribution Date.
Any amount so carried forward will bear
interest at the Class A-2 Rate, to the extent
legally permissible. See "Description of the
Notes."
S-8
<PAGE>
Class A-2 Noteholders will be entitled to
F. Class A-2 Principal..... receive on each Distribution Date as payment of
principal, to the extent of funds available
after payment of all interest and principal
then payable on the Class A-1 Notes and after
payment of all interest then payable on the
Class A-2 Notes, the sum of %
(approximate) of the Formula Principal
Distribution Amount for such Distribution Date
plus the Unpaid Class A-2 Principal Shortfall,
if any, from prior Distribution Dates.
G. Class A-3 Interest...... Interest on the outstanding Class A-3 Principal
Balance will accrue from , 1998, or from
the most recent Distribution Date, to but
excluding the following Distribution Date, at
the Class A-3 Rate for such monthly interest
period. The "Class A-3 Principal Balance" as of
any Distribution Date will be the Original
Class A-3 Principal Balance minus all amounts
previously distributed to the Class A-3
Noteholders in respect of principal and minus
any unreimbursed liquidation losses absorbed by
the Class A-3 Notes.
Interest will be paid on the Class A-3 Notes to
the extent of funds available on such
Distribution Date, after payment of all
interest and principal then payable on the
Class A-2 Notes. In the event such funds
available are not sufficient to make a full
distribution of interest on the Class A-3
Notes, the amount of the shortfall will be
carried forward and added to the amount of
interest payable on the next Distribution Date.
Any amount so carried forward will bear
interest at the Class A-3 Rate, to the extent
legally permissible. See "Description of the
Notes."
H. Class A-3 Principal..... Class A-3 Noteholders will be entitled to
receive on each Distribution Date as payment of
principal, to the extent of funds available
after payment of all interest and principal
then payable on the Class A-2 Notes and after
payment of all interest then payable on the
Class A-3 Notes, the sum of % (approximate)
of the Formula Principal Distribution Amount
for such Distribution Date plus the Unpaid
Class A-3 Principal Shortfall, if any, from
prior Distribution Dates.
I. Class A-4 Interest...... Interest on the outstanding Class A-4 Principal
Balance will accrue from , 1998, or from
the most recent Distribution Date, to but
excluding the following Distribution Date, at
the Class A-4 Rate for such monthly interest
period. The "Class A-4 Principal Balance" as of
any Distribution Date will be the Original
Class A-4 Principal Balance minus all amounts
previously distributed to the Class A-4
Noteholders in respect of principal and minus
any unreimbursed liquidation losses absorbed by
the Class A-4 Notes.
Interest will be paid on the Class A-4 Notes to
the extent of funds available on each
Distribution Date, after payment of all
interest and principal then payable on the
Class A-3 Notes. In the event such funds
available are not sufficient to make a full
distribution
S-9
<PAGE>
of interest on the Class A-4 Notes, the amount
of the shortfall will be carried forward and
added to the amount of interest payable on the
next Distribution Date. Any amount so carried
forward will bear interest at the Class A-4
Rate, to the extent legally permissible. See
"Description of the Notes."
J. Class A-4 Principal..... Class A-4 Noteholders will be entitled to
receive on each Distribution Date as payment of
principal, to the extent of funds available
after payment of all interest and principal
then payable on the Class A-3 Notes and after
payment of all interest then payable on the
Class A-4 Notes, the sum of % (approximate)
of the Formula Principal Distribution Amount
for such Distribution Date plus the Unpaid
Class A-4 Principal Shortfall, if any, from
prior Distribution Dates.
K. Optional Redemption..... The Notes will be redeemed in whole, but not in
part, on any Distribution Date on which Green
Tree exercises its option to purchase the
Contracts, which, subject to certain provisions
in the Sale and Servicing Agreement, can occur
after the Pool Scheduled Principal Balance
declines to 10% or less of the Cutoff Date Pool
Principal Balance, at a redemption price equal
to the unpaid principal amount of the Notes
plus accrued and unpaid interest thereon. The
"Pool Scheduled Principal Balance" is the
aggregate Scheduled Principal Balance of all
outstanding Contracts during a Monthly Period.
See "Description of the Notes--Optional
Redemption."
L. Mandatory Prepayments... The Class A-1, Class A-2, Class A-3 and Class
A-4 Notes will be prepaid in part on the first
Distribution Date after the Pre-Funding Period
(in no event later than , 1998) to the
extent of any Pre-Funded Amount remaining in
the Pre-Funding Account on such Distribution
Date. Green Tree believes that substantially
all of the Pre-Funded Amount will be used to
acquire Subsequent Contracts. It is unlikely,
however, that the aggregate principal amount of
Subsequent Contracts purchased by the Trust
will be identical to the Pre-Funded Amount, and
that consequently, Class A-1, Class A-2, Class
A-3 and Class A-4 Noteholders will receive some
prepayment of principal. See "Yield and
Prepayment Considerations."
Interest Rate Cap Class A-1 Noteholders will have the benefit of
Agreement..................... an Interest Rate Cap Agreement, dated as of
, 1998 (the "Interest Rate Cap
Agreement"), between the Trust and
(the "Counterparty"), a
. Pursuant to the Interest
Rate Cap Agreement, the Counterparty will make
a payment (the "Interest Rate Cap Payment") to
the Trust on each Distribution Date to the
extent that the Class A-1 Rate exceeds %, in
an amount equal to the amount obtained by
multiplying the Class A-1 Principal Balance by
the product of (i) the maximum of (x) the
excess of the Class A-1 Rate over % or (y) 0%
and (ii) the number of days in the monthly
interest period
S-10
<PAGE>
divided by 360. See "Description of the Notes--
Interest Rate Cap Agreement" and "Description
of the Counterparty."
Spread Account................ Class A-2, Class A-3 and Class A-4 Noteholders
will have the benefit of a separate sub-account
for each Class contained in an account (the
"Spread Account") to be held by the Indenture
Trustee. On any Distribution Date, if the funds
in the Note Distribution Account (after making
all distributions on each Class of Notes with a
prior numeric designation) is insufficient to
distribute all interest then payable on the
Class A-2, Class A-3 or Class A-4 Notes, the
Indenture Trustee will withdraw the amount of
the deficiency from the applicable sub-account
(or the amount on deposit in the applicable
sub-account, if less) and deposit such amount
in the Note Distribution Account for
distribution to the applicable Class.
On the Closing Date, the amount on deposit in
the Class A-2, Class A-3 and Class A-4 sub-
accounts will be zero. On each Distribution
Date, the Indenture Trustee will deposit all
funds remaining in the Collection Account,
after distribution of all interest and
principal then payable on the Notes and all
interest then payable on the Certificates,
first to the Class A-2 sub-account, then to the
Class A-3 sub-account and then to the Class A-4
sub-account, until the amount on deposit in
such sub-accounts equals $ and $ ,
respectively (subject to reduction as provided
in, and to the other terms and conditions
contained in, the Sale and Servicing
Agreement). If any sub-account is drawn upon,
it will be replenished to the extent provided
in the Sale and Servicing Agreement and the
Indenture. The Spread Account will be included
in the Trust Property. See "Description of the
Notes--The Spread Account."
Reserve Account............... Noteholders will have the benefit of an account
(the "Reserve Account") to be held by the
Indenture Trustee. On any Distribution Date, if
the funds in the Note Distribution Account
(after making all distributions on each Class
of Notes with a prior numeric designation) are
insufficient to make full payment in respect of
interest or principal payable on a Class of
Notes (after making appropriate draws upon the
Spread Account), the Indenture Trustee will
withdraw the amount of the deficiency from the
Reserve Account (or the amount on deposit in
the Reserve Account, if less) and deposit such
amount in the Note Distribution Account for
distribution to the applicable Class.
On the Closing Date, the amount on deposit in
the Reserve Account will be zero. On each
Distribution Date, the Indenture Trustee will
deposit all funds remaining in the Collection
Account, after distribution of all interest and
principal then payable on the Notes, all
interest then payable on the Certificates and
all deposits in the Spread Account, until the
amount on deposit in the Reserve Account equals
% of the Pool Scheduled Principal Balance
(subject to reduction as provided in,
S-11
<PAGE>
and to other terms and conditions contained in,
the Sale and Servicing Agreement). If the
Reserve Account is drawn upon, it will be
replenished to the extent provided in the Sale
and Servicing Agreement and the Indenture. The
Reserve Account will be included in the Trust
Property. See "Description of the Notes--The
Reserve Account."
Terms of the Certificates..... The principal terms of the Certificates will be
as described below:
A. Distributions............. Certificateholders will be entitled to receive
on each Distribution Date commencing in
1998, to the extent the Amount
Available in the Collection Account including
the Guaranty Payment described below is
sufficient therefor, the Certificateholders'
Distributable Amount, as defined under
"Description of the Trust Documents and
Indenture."
The outstanding principal amount of the
Certificates, to the extent not previously
paid, will be payable on the Final Scheduled
Distribution Date.
B. Pass-Through Rate......... % per annum (the "Pass-Through Rate")
payable monthly at one-twelfth of the annual
rate, calculated on the basis of a 360-day year
consisting of twelve 30-day months.
C. Interest.................. On each Distribution Date, the Owner Trustee
will distribute to the Certificateholders, to
the extent the Amount Available in the
Collection Account including the Guaranty
Payment described below is sufficient therefor,
accrued interest at the Pass-Through Rate on
the outstanding Certificate Principal Balance.
Interest in respect of a Distribution Date will
accrue from , 1998, or from the most
recent Distribution Date to but excluding the
following Distribution Date. The "Certificate
Principal Balance" as of any Distribution Date
will be the Original Certificate Principal
Balance minus all amounts previously
distributed to the Certificateholders in
respect of principal and minus any unreimbursed
liquidation losses absorbed by the
Certificates.
Interest will be paid on the Certificates to
the extent of funds available on each
Distribution Date, after payment of all
interest and principal then payable on the
Notes. In the event such funds available are
not sufficient to make a full distribution of
interest on the Certificates, the amount of the
shortfall will be carried forward and added to
the amount of interest payable on the next
Distribution Date. Any amount so carried
forward will bear interest at the Pass-Through
Rate, to the extent legally permissible. See
"Description of the Certificates."
D. Principal................. No distributions of principal on the
Certificates will be payable until all of the
Notes have been paid in full. On each
Distribution Date commencing on the
Distribution Date on which the Notes are paid
in full, principal on the Certificates will be
payable in an amount equal to the Formula
Principal Distribution Amount for
S-12
<PAGE>
such Distribution Date (less, on the
Distribution Date on which the Notes are paid
in full, the portion thereof payable on the
Notes), plus the Unpaid Certificate Principal
Shortfall, if any, from prior Distribution
Dates.
E. Limited Guaranty.......... In order to mitigate the effect of the
subordination of the Certificates and the
effect of liquidation losses on the Contracts,
the Certificateholders are entitled to receive
on each Distribution Date an amount equal to
the Guaranty Payment, if any, under Green
Tree's Limited Guaranty. The "Guaranty Payment"
for any Distribution Date will equal the
difference, if any, between the
Certificateholders' Distributable Amount and
the remaining funds available in the Collection
Account after payment of all interest and
principal on the Notes and the deposit in any
sub-account of the Spread Account or the
Reserve Account of any amounts previously
withdrawn therefrom and not previously
replenished. The "Certificateholders'
Distributable Amount" equals the unpaid and
accrued interest on the Certificates, plus on
each Distribution Date commencing on the
Distribution Date on which the Notes are paid
in full, principal in an amount equal to the
Formula Principal Distribution Amount for such
Distribution Date (less, on the Distribution
Date on which the Notes are paid in full, the
portion thereof payable on the Notes), plus any
Unpaid Certificate Principal Shortfall for such
Distribution Date, and plus any unreimbursed
Certificate Principal Liquidation Loss.
The Limited Guaranty will be an unsecured
general obligation of Green Tree and will not
be supported by any letter of credit or other
enhancement arrangement. The ratings assigned
to the Certificates may be affected by the
ratings of Green Tree's debt securities. Green
Tree's senior debt securities were recently
downgraded by Standard & Poor's Ratings
Services, a division of The McGraw-Hill
Companies, Inc. ("S&P") from "A-" to "BBB+" and
by Fitch IBCA Inc. ("Fitch") from "A" to "A-",
which has been reflected in the ratings
assigned to the Certificates. See "Summary of
Terms--Ratings."
F. Optional Prepayment....... If Green Tree or the Servicer exercises its
option to purchase the Contracts, which,
subject to certain provisions in the Sale and
Servicing Agreement, can occur after the Pool
Scheduled Principal Balance declines to 10% or
less of the Cutoff Date Pool Principal Balance,
the Certificateholders will receive an amount
in respect of the Certificates equal to the
principal amount, together with accrued
interest at the Pass-Through Rate and the
Certificates will be retired. See "Description
of the Certificates--Optional Prepayment."
Collection Account; Priority Except under certain conditions described
of Payments................... herein or as otherwise acceptable to S&P and
Fitch, the Servicer will be required to remit
payments received with respect to the Contracts
within one Business Day of receipt thereof to
an account in the name of the Indenture Trustee
(the "Collection Account"). On each
S-13
<PAGE>
Distribution Date, the Servicer will instruct
the Indenture Trustee to withdraw funds on
deposit in the Collection Account and to apply
such funds on such Distribution Date as follows
(in the priority indicated): (i) if Green Tree
is not the Servicer, the monthly servicing fee,
together with any unpaid servicing fees from
prior Distribution Dates, (ii) reimbursement of
any advances made that were recovered during
the prior Monthly Period, (iii) the
Noteholders' Interest Distributable Amount, the
Noteholders' Principal Distributable Amount and
any amounts previously withdrawn from any sub-
account of the Spread Account or the Reserve
Account and not previously replenished, (iv)
the Certificateholders' Interest Distributable
Amount and, after the Notes have been paid in
full, the Certificateholders' Principal
Distributable Amount, (v) amounts necessary to
fully fund the Class A-2, Class A-3 and Class
A-4 sub-accounts of the Spread Account, (vi)
the amount necessary to fully fund the Reserve
Account and (vii) any remaining amount to Green
Tree as the monthly servicing and guaranty fee
(the "Monthly Servicing and Guaranty Fee").
Pre-Funding Account........... On the Closing Date, Green Tree will deposit an
amount (as reduced from time-to-time, the "Pre-
Funded Amount") in the Pre-Funding Account to
provide the Trust with sufficient funds to
purchase the Subsequent Contracts. The Pre-
Funded Amount will initially equal the
difference between $ and the aggregate
principal balance as of the Cutoff Date of the
Initial Contracts and Additional Contracts. The
Pre-Funding Account will be included in the
Trust Property. Any reimbursement income earned
on amounts on deposit in the Pre-Funding
Account will be taxable to Green Tree. See
"Yield and Prepayment Considerations" and
"Description of the Trust Documents and
Indenture--Accounts" herein.
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 associa-
tion (or a publicly traded partnership) taxable
as a corporation, and neither the Trust nor any
portion of the Trust will constitute a taxable
mortgage pool 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 Cer-
tificate, will agree to treat the Trust as a
partnership in which the Certificateholders are
partners for federal income tax purposes. Al-
ternative characterizations of the Trust and
the Certificates are possible, but would not
result in materially adverse tax consequences
to Certificateholders. See "Certain Federal and
State Income Tax Consequences" herein and "Cer-
tain Federal Income Tax Consequences" and "Cer-
tain State Income Tax Consequences" in the ac-
companying Prospectus.
S-14
<PAGE>
ERISA Considerations.......... If the Notes are considered to be indebtedness
without substantial equity features under a
regulation issued by the United States
Department of Labor, the acquisition or holding
of Notes by or on behalf of a Benefit Plan will
not cause the assets of the Trust to become
plan assets, thereby generally preventing the
application of certain prohibited transaction
rules of the Employee Retirement Income
Security Act of 1974, as amended, and the
Internal Revenue Code of 1986, as amended, that
otherwise would possibly be applicable. Green
Tree believes that the Notes should be treated
as indebtedness without substantial equity
features for purposes of such regulation.
The Certificates may not be acquired by, or on
the behalf of, any employee benefit plan,
individual retirement account or Keogh Plan
subject to either Title I of the Employee
Retirement Income Security Act of 1974, as
amended, or the Internal Revenue Code of 1986,
as amended. See "ERISA Considerations" herein
and in the accompanying Prospectus.
Ratings....................... It is a condition to the issuance of the
Securities that:
the Class A-1 Notes be rated "AAA" by S&P and
"AAA" by Fitch;
the Class A-2 Notes be rated at least "AA" by
S&P and at least "AA" by Fitch;
the Class A-3 Notes be rated at least "A" by
S&P and at least "A" by Fitch;
the Class A-4 Notes be rated at least "BBB" by
S&P and at least "BBB" by Fitch; and
the Certificates be rated at least "BBB+" by
S&P and at least "A-" by Fitch.
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 a
Rating Agency. The rating of the Certificates
will be based in part on an assessment of Green
Tree's ability to make payments under the
Limited Guaranty. Any reduction in S&P's or
Fitch's ratings of Green Tree's debt securities
may result in a similar reduction in the
ratings of the Certificates. Green Tree's
senior debt securities were recently downgraded
by S&P from "A-" to "BBB+" and by Fitch from
"A" to "A-".
Green Tree has not requested a rating of the
Securities from any rating agencies other than
S&P and Fitch. There can be no assurance as to
whether any other rating agency will rate the
Securities or, if one does, what rating would
be assigned by such rating agency.
S-15
<PAGE>
RISK FACTORS
Prospective holders of the Securities should consider, in addition to the
factors described under "Risk Factors" in the Prospectus, the following
factors in connection with the purchase of the Securities:
SUBORDINATION OF CLASS A-2, CLASS A-3 AND CLASS A-4 NOTES AND CERTIFICATES;
LIMITED ASSETS
Distributions of interest and principal on each Class of Notes will be
subordinated to the rights of the holders of each Class of Notes with a prior
numeric designation to receive prior payment of interest and principal.
Distributions of interest and principal on the Certificates will be
subordinated in priority of payment to interest and principal due on the
Notes. Certificateholders, however, will not receive any distributions of
principal until the Distribution Date on which the outstanding principal
amounts of all of the Notes have been paid in full.
Holders of the Notes and the Certificates must primarily rely for repayment
upon payments on the Contracts. The Trust will not have, nor is it permitted
or expected to have, any significant assets or sources of funds other than the
Contracts, the Spread Account, the Reserve Account, the Interest Rate Cap
Payments and, for payment of losses absorbed by the Certificates, the Limited
Guaranty of Green Tree.
DELINQUENCY, LOAN LOSS AND REPOSSESSION EXPERIENCE
Green Tree began originating home improvement contracts in , but has
less extensive underwriting and servicing experience with home equity loans.
Although Green Tree has calculated and presented herein its delinquency and
net loss experience with respect to its servicing portfolio of home
improvement contracts (but not the home equity loans), there can be no
assurance that the information presented will reflect actual experience with
respect to the Contracts. In addition, there can be no assurance that the
future delinquency, loan loss or repossession experience of the Trust with
respect to the Contracts will be better or worse than that set forth herein
with respect to Green Tree's servicing portfolio. See "The Contract Pool--
Delinquency, Loan Loss and Repossession Information."
ADEQUACY OF REAL ESTATE SECURING HOME EQUITY AND HOME IMPROVEMENT CONTRACTS
As of the Cutoff Date, the weighted average loan-to-value ratio for the Home
Equity Contracts was approximately %, and approximately % of the
Cutoff Date Principal Balance represented Contracts which were
either unsecured or secured by subordinate liens on the related real estate.
Consequently, the real estate securing a Contract is not likely to provide
adequate security in the event it becomes necessary to realize upon the
collateral. Even assuming that the real estate securing a Contract provides
adequate security, substantial delays could be encountered in connection with
the liquidation of such Contract that would result in current shortfalls in
distributions to the holders of the Certificates to the extent
described herein. In addition, liquidation expenses relating to any Liquidated
Contract (such as legal fees, real estate taxes and maintenance and
preservation expenses) will reduce the liquidation proceeds otherwise
available for payment to the holders of the Securities. In the event that any
real estate securing a Contract fails to provide adequate security, any losses
in connection with such Contract will be borne by the holders of the
Securities to the extent described herein.
GEOGRAPHIC CONCENTRATION OF INITIAL CONTRACTS
As of the Cutoff Date, the Obligors on approximately % of the Contracts
(based on principal balance and billing address of the Obligor) were located
in [ ]. See "The Contract Pool." Accordingly, adverse economic
conditions or other factors particularly affecting this state could adversely
affect the delinquency, loan loss or repossession experience of the Trust with
respect to the Contracts.
S-16
<PAGE>
THE TRUST
The following information supplements and, to the extent inconsistent
therewith, supersedes the information contained in the accompanying
Prospectus. Prospective Securityholders should consider, in addition to the
information below, the information under "The Trusts" in the accompanying
Prospectus.
GENERAL
Green Tree Home Equity Loan Trust 1998- is a business trust formed under
the laws of the State of Delaware pursuant to the Trust Agreement for the
transactions described in this Prospectus Supplement. After its formation, the
Trust will not engage in any activity other than (i) acquiring, holding and
managing the Contracts and the other assets of the Trust and proceeds
therefrom, (ii) issuing the Notes and the Certificates, (iii) making payments
on the Notes and the Certificates and (iv) engaging in other activities that
are necessary, suitable or convenient to accomplish the foregoing or are
incidental thereto or connected therewith.
The Trust will initially be capitalized with equity equal to $
(approximate) from the sale of the Certificates to third party investors that
are expected to be unaffiliated with Green Tree or its affiliates. The equity
of the Trust, together with the proceeds of the initial sale of the Notes,
will be used by the Trust to purchase the Contracts from Green Tree pursuant
to the Sale and Servicing Agreement.
The Trust's principal offices are in Wilmington, Delaware, at the address
listed below under "--The Owner Trustee."
CAPITALIZATION OF THE TRUST
The following table illustrates the capitalization of the Trust as of the
Cutoff Date, as if the issuance and sale of the Notes and Certificates had
taken place on such date:
<TABLE>
<S> <C>
Class A-1 Notes.............................................. $
Class A-2 Notes..............................................
Class A-3 Notes..............................................
Class A-4 Notes..............................................
Certificates.................................................
------------
Total...................................................... $
============
</TABLE>
THE OWNER TRUSTEE
[Name of Owner Trustee] is the Owner Trustee under the Trust Agreement.
[Owner Trustee] is a Delaware banking corporation and its principal offices
are located at [ ] Delaware [ ]. The Owner
Trustee will perform limited administrative functions under the Trust
Agreement, including making distributions from the Certificate Distribution
Account. The Owner Trustee's liability in connection with the issuance and
sale of the Certificates and the Notes is limited solely to the express
obligations of the Owner Trustee as set forth in the Trust Agreement.
S-17
<PAGE>
THE TRUST PROPERTY
The Trust Property will include, among other things, (i) the Contracts; (ii)
all rights to receive payments due thereon on or after the Cutoff Date
(excluding certain insurance premiums, late fees and other servicing charges);
(iii) such amounts as from time to time may be held in the Collection Account,
the Spread Account, the Reserve Account, the Pre-Funding Account and certain
other accounts established and maintained by the Servicer pursuant to the Sale
and Servicing Agreement, as described below (including all investments in the
Collection Account, the Spread Account, the Reserve Account and such other
accounts and all income from the investment of funds therein and all proceeds
thereof); (iv) an assignment of the mortgages on the real estate securing the
related Home Equity Contracts and certain Home Improvement Contracts; and (v)
certain other rights under the Trust Documents. See "The Contracts" and
"Description of the Trust Documents--Collections" in the accompanying
Prospectus.
Each Certificate will represent a fractional undivided interest in the Trust
Property. Pursuant to the Indenture the Trust will grant a security interest
in the Trust Property in favor of the Indenture Trustee on behalf of the
Noteholders. Any proceeds of such security interest in the Trust Property
would be distributed according to the Indenture, as described below under
"Description of the Trust Documents and Indenture--Distributions."
[Indenture Trustee] or custodian on its behalf will hold each original
Contract, as well as copies of documents and instruments relating to such
Contract and evidencing the lien on the real property, if any, securing such
Contract (the "Contract Files"). In order to protect the Trust's ownership
interest in the Contracts, Green Tree will file a UCC-1 financing statement in
Minnesota and Delaware to give notice of the Trust's ownership of the
Contracts and the related Trust Property.
S-18
<PAGE>
THE CONTRACT POOL
GENERAL
This Prospectus Supplement contains information regarding the Initial
Contracts, which were originated through and will be transferred to
the Trust on the Closing Date. The information for each Contract is as of the
Cutoff Date for such Contract. The Contracts had an aggregate principal balance
as of the Cutoff Date of $ . The Sale and Servicing Agreement provides that
the Initial Contracts will be purchased by the Trust on the Closing Date, and
that the Subsequent Contracts will be purchased by the Trust from time to time
during the Pre-Funding Period.
All of the Contracts will be purchased by Green Tree from dealers, home
improvement contractors and correspondent lenders who regularly originate and
sell such contracts to Green Tree, or will be originated by Green Tree
directly. The Home Equity Contracts constitute approximately % of the
total pool of Initial Contracts by aggregate outstanding principal balance as
of the Cutoff Date. Substantially all of the Home Equity Contracts have loan-
to-value ratios equal to or greater than 125%. A significant portion of the
Home Equity Contracts were purchased by Green Tree from an independent
financing company. Green Tree believes that the underwriting standards employed
by such independent financing company are similar to the standards used by
Green Tree.
CERTAIN OTHER CHARACTERISTICS
The Initial Contracts (i) had a remaining maturity, as of the Cutoff Date, of
at least months, but not more than months, (ii) had an original maturity
of at least months, but not more than months, (iii) had an original
principal balance of at least $ and not more than $ , (iv) had a
remaining principal balance as of the Cutoff Date of at least $ and not
more than .
The Initial Contracts have an aggregate principal balance as of the Cutoff
Date of approximately $ . The Initial Contracts were originated
between and . A significant portion of the Initial
Contracts were purchased by Green Tree from an independent financing company.
Green Tree believes that the underwriting standards employed by such
independent financing company are similar to the standards used by Green Tree.
CHARACTERISTICS OF INITIAL CONTRACTS
<TABLE>
<CAPTION>
WEIGHTED
% OF POOL AVERAGE WEIGHTED
SCHEDULED SCHEDULED AVERAGE WEIGHTED ORIGINAL AVERAGE
NUMBER OF % OF INITIAL PRINCIPAL PRINCIPAL PRINCIPAL AVERAGE SCHEDULED REMAINING
ASSET TYPE CONTRACTS CONTRACT POOL BALANCE BALANCE BALANCE RATE TERM TERM (1)
- ------------------------ --------- ------------- ------------- --------- --------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Home Equity............. % $ % $ %
Unsecured Home
Improvement............ % % %
Debt Consolidation Home
Improvement............ % % %
----- ------- ------------- ------- ------- ------ --- ---
Total ................ 100.00% $ 100.00% $ %
===== ======= ============= ======= ======= ====== === ===
</TABLE>
- --------
(1) Based on scheduled payments due after the Cutoff Date and assuming no
prepayments on the Contracts.
S-19
<PAGE>
GEOGRAPHIC CONCENTRATION OF INITIAL CONTRACTS
<TABLE>
<CAPTION>
NUMBER OF
CONTRACTS AS OF PERCENT OF NUMBER PRINCIPAL BALANCE PERCENT OF CUTOFF DATE
STATE (1) CUTOFF DATE OF CONTRACTS AS OF CUTOFF DATE PRINCIPAL BALANCE
--------- --------------- ----------------- ----------------- ----------------------
<S> <C> <C> <C> <C>
Alabama................. % $ %
Arizona.................
Arkansas................
California..............
Colorado................
Connecticut.............
Delaware................
District of Columbia....
Florida.................
Georgia.................
Idaho...................
Illinois................
Indiana.................
Iowa....................
Kansas..................
Kentucky................
Louisiana...............
Maine...................
Maryland................
Massachusetts...........
Michigan................
Minnesota...............
Mississippi.............
Missouri................
Montana.................
Nebraska................
Nevada..................
New Hampshire...........
New Jersey..............
New Mexico..............
New York................
North Carolina..........
North Dakota............
Ohio....................
Oklahoma................
Oregon..................
Pennsylvania............
Rhode Island............
South Carolina..........
South Dakota............
Tennessee...............
Texas...................
Utah....................
Vermont.................
Virginia................
Washington..............
West Virginia...........
Wisconsin...............
Wyoming.................
----- ------ --------------- ------
Total................. 100.00% $ 100.00%
===== ====== =============== ======
</TABLE>
- --------
(1) Based on the address of the Obligor set forth in Green Tree's records.
S-20
<PAGE>
DISTRIBUTION OF ORIGINAL CONTRACT AMOUNTS OF INITIAL CONTRACTS
<TABLE>
<CAPTION>
AGGREGATE
PRINCIPAL % OF
BALANCE CONTRACT POOL
NUMBER OF OUTSTANDING BY OUTSTANDING
CONTRACTS AS OF CUTOFF PRINCIPAL BALANCE
ORIGINAL CONTRACT AMOUNT AS OF CUTOFF DATE DATE AS OF CUTOFF DATE
------------------------ ----------------- --------------- -----------------
<S> <C> <C> <C>
Less than $10,000......... $ %
Between $10,000 and
$19,999..................
Between $20,000 and
$29,999..................
Between $30,000 and
$39,999..................
Between $40,000 and
$49,999..................
Between $50,000 and
$59,999..................
Between $60,000 and
$69,999..................
Between $70,000 and
$79,999..................
Between $80,000 and
$89,999..................
Between $90,000 and
$99,999..................
Between $100,000 and
$109,999.................
Between $110,000 and
$119,999.................
Between $120,000 and
$129,999.................
Between $130,000 and
$139,999.................
Between $140,000 and
$149,999.................
Between $150,000 and
$159,999.................
Between $160,000 and
$169,999.................
Between $170,000 and
$179,999.................
Between $180,000 and
$189,999.................
Between $190,000 and
$199,999.................
Between $200,000 and
$249,999.................
Between $250,000 and
$299,999.................
Over $300,000.............
----- --------------- ------
Total................... $ 100.00%
===== =============== ======
</TABLE>
YEAR OF ORIGINATION OF INITIAL CONTRACTS
<TABLE>
<CAPTION>
% OF
AGGREGATE CONTRACT POOL
NUMBER OF PRINCIPAL BALANCE BY OUTSTANDING
YEAR OF CONTRACTS OUTSTANDING PRINCIPAL BALANCE
OIGINATIONR AS OF CUTOFF DATE AS OF CUTOFF DATE AS OF CUTOFF DATE
- ----------- ----------------- ----------------- -----------------
<S> <C> <C> <C>
1989.................... $ %
1990....................
1991....................
1992....................
1993....................
1994....................
1995....................
1996....................
1997....................
------ ------------- ------
Total................. $ 100.00%
====== ============= ======
</TABLE>
S-21
<PAGE>
LIEN POSITION OF CONTRACTS
<TABLE>
<CAPTION>
%
% OF CONTRACT POOL BY
NUMBER OF AGGREGATE PRINCIPAL OUTSTANDING PRINCIPAL
NUMBER OF CONTRACTS CONTRACTS AS OF BALANCE OUTSTANDING BALANCE AS OF
AS OF CUTOFF DATE CUTOFF DATE AS OF CUTOFF DATE CUTOFF DATE
------------------- --------------- ------------------- ---------------------
<S> <C> <C> <C> <C>
First................... % $ %
Second..................
Third...................
----- ------ ------------- ------
Total............... 100.00% $ 100.00%
===== ====== ============= ======
</TABLE>
CONTRACT RATES
<TABLE>
<CAPTION>
AGGREGATE PRINCIPAL % OF CONTRACT POOL BY
NUMBER OF CONTRACTS BALANCE OUTSTANDING OUTSTANDING PRINCIPAL
CONTRACT RATE AS OF CUTOFF DATE AS OF CUTOFF DATE BALANCE AS OF CUTOFF DATE
------------- ------------------- ------------------- -------------------------
<S> <C> <C> <C>
Less than 9.00%......... $ %
9.01% to 10.00%........
10.01% to 11.00%........
11.01% to 12.00%........
12.01% to 13.00%........
13.01% to 14.00%........
14.01% to 15.00%........
15.01% to 16.00%........
16.01% to 17.00%........
Over 17.00%.............
----- ------------- ------
Total................. $ 100.00%
===== ============= ======
</TABLE>
S-22
<PAGE>
REMAINING MONTHS TO MATURITY OF INITIAL CONTRACTS
<TABLE>
<CAPTION>
AGGREGATE PRINCIPAL % OF CONTRACT POOL BY
NUMBER OF CONTRACTS BALANCE OUTSTANDING OUTSTANDING PRINCIPAL
REMAINING MONTHS TO MATURITY AS OF CUTOFF DATE AS OF CUTOFF DATE BALANCE AS OF CUTOFF DATE
- ---------------------------- ------------------- ------------------- -------------------------
<S> <C> <C> <C>
Fewer than 31............. $ %
31 to 60................
61 to 90................
91 to 120................
121 to 150................
151 to 180................
181 to 210................
211 to 240................
241-270...................
271-300...................
301-330...................
331-360...................
----- ------------- ------
Total................... $ 100.00%
===== ============= ======
</TABLE>
LIEN POSITION OF INITIAL CONTRACTS
<TABLE>
<CAPTION>
% OF
NUMBER OF INITIAL % OF
CONTRACTS CONTRACTS CONTRACT
AS OF AS OF AGGREGATE PRINCIPAL POOL
CUT-OFF CUT- BALANCE OUTSTANDING PRINCIPAL
LIEN POSITION DATE OFF DATE AS OF CUT-OFF DATE BALANCE
------------- --------- ----------- ------------------- ---------
<S> <C> <C> <C> <C>
First....................... % $ %
Second......................
Third.......................
Fourth......................
----- ------ ------------- ------
Total..................... 100.00% $ 100.00%
===== ====== ============= ======
</TABLE>
- --------
(1) Excludes unsecured Home Improvement Contracts.
S-23
<PAGE>
GREEN TREE FINANCIAL CORPORATION
The following information supplements the information in the Prospectus under
the heading "Green Tree Financial Corporation." No delinquency, loan loss or
liquidation information has been included with respect to home equity loans,
because Green Tree has only limited historical experience with respect to the
performance of such loans, and does not currently compile separate delinquency,
loan loss and liquidation information on home equity loans with high loan-to-
value ratios such as the Home Equity Contracts.
DELINQUENCY, LOAN LOSS AND REPOSSESSION INFORMATION FOR THE HOME IMPROVEMENT
CONTRACTS
The following tables set forth information relating to Green Tree's
delinquency, loan loss and repossession information for each period indicated
with respect to all unsecured home improvement contracts and all debt-
consolidation home improvement contracts it has purchased and continues to
service. Green Tree does not have meangingful delinquency, loan loss or
repossession information with respect to home equity loans similar to the Home
Equity Contracts.
DELINQUENCY EXPERIENCE--UNSECURED AND DEBT CONSOLIDATION HOME IMPROVEMENT
CONTRACTS
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------
1994 1995 1996 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Number of Contracts Outstanding (1)............. 10,397 18,411 25,104 25,077
Number of Contracts Delinquent (2)
30-59 Days.................................... 50 115 198 221
60-89 Days.................................... 18 44 68 90
90 Days or More............................... 4 14 38 140
------ ------ ------ ------
Total Contracts Delinquent...................... 72 173 304 451
====== ====== ====== ======
Delinquencies as a Percentage of Contracts
Outstanding (3)................................ 0.69% 0.94% 1.21% 1.80%
</TABLE>
- --------
(1) Excludes contracts already in repossession.
(2) The period of delinquency is based on the number of days payments are
contractually past due (assuming 30-day months). Consequently, a contract
due on the first day of a month is not 30 days delinquent until the first
day of the next month.
(3) By number of contracts.
S-24
<PAGE>
LOAN LOSS/REPOSSESSION EXPERIENCE--UNSECURED AND DEBT CONSOLIDATION HOME
IMPROVEMENT CONTRACTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1994 1995 1996 1997
------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Number of Contracts Serviced (1)..... 10,412 18,412 25,145 25,117
Principal Balance of Contracts (1)... $59,329 $97,544 $122,372 $113,405
Contract Liquidations:
Units.............................. 93 254 519 603
Percentage (2)..................... 0.89% 1.38% 2.06% 2.40%
Net Losses:
Dollars (3)........................ $ 578 $ 1,710 $ 2,863 $ 3,056
Percentage (4)..................... 0.97% 1.75% 2.34% 2.69%
</TABLE>
- --------
(1) As of period end. Includes contracts already in repossession.
(2) As a percentage of the total number of contracts being serviced as of
period end.
(3) The calculation of net loss includes unpaid interest to the date of
repossession and all expenses of repossession and liquidation.
(4) As a percentage of the principal balance of contracts being serviced as of
period end.
There can be no assurance that the delinquency, loan loss and repossession
experience of the Trust with respect to the Home Improvement Contracts will be
better than, worse than or comparable to the experience set forth above. See
"Risk Factors--Delinquency, Loan Loss and Repossession Experience" herein.
There can be no assurance that the delinquency, loan loss or repossession
experience of the Trust with respect to the unsecured Home Improvement
Contracts will be better than, worse than or comparable to the experience set
forth above. See "Risk Factors--Delinquency, Loan Loss and Repossession
Experience" herein.
DELINQUENCY INFORMATION FOR SECURED HOME IMPROVEMENT CONTRACTS
The following tables set forth information relating to Green Tree's
delinquency, loan loss and repossession experience for each period indicated
with respect to all secured home improvement contracts serviced by Green Tree.
Because of the rapid growth of Green Tree's portfolio of secured Home
Improvement Contracts, the experience shown in more recent periods may not be
indicative of the experience to be expected of a more seasoned portfolio.
DELINQUENCY EXPERIENCE--SECURED HOME IMPROVEMENT CONTRACTS
<TABLE>
<CAPTION>
AT DECEMBER 31, AS OF
------------------------------
1994 1995 1996 1997 1998
------ ------ ------ ------ ---------
<S> <C> <C> <C> <C> <C>
Number of Contracts Outstanding
(1)................................ 56,673 81,953 96,022
Number of Contracts Delinquent
(2)(3)
30-59 Days........................ 294 856 1,115
60-89 Days........................ 105 230 364
90 Days or More................... 161 309 477
Total Contracts Delinquent.......... 560 1,395 1,956
Delinquencies as a Percent of
Contracts Outstanding (4).......... 0.99% 1.70% 2.04% % %
</TABLE>
- --------
(1) Excludes defaulted contracts not yet liquidated.
(2) A contract is considered delinquent by Green Tree if any payment of $25 or
more is past-due 30 days or more.
(3) The period of delinquency is based on the number of days that payments are
contractually past-due (assuming 30-day months). Consequently, a contract
due on the first day of a month is not 30 days delinquent until the first
day of the next month.
(4) By number of contracts.
S-25
<PAGE>
LOAN LOSS/REPOSSESSION EXPERIENCE--SECURED HOME IMPROVEMENT CONTRACTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AT DECEMBER 31, AS OF
------------------------------------------
1994 1995 1996 1997 1998
-------- ---------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C>
Number of Contracts
Serviced (1)........... 56,710 109,030 96,230
Principal Balance of
Contracts (1).......... $617,341 $1,015,783 $1,308,549 $ $
Contract Liquidations:
Units................. 541 766 1,564
Percentage (2)........ 0.95% 0.70% 1.63% % %
Net Losses:
Dollars (3)........... $ 908 $ 3,715 $ 11,646 $ $
Percentage (4)........ 0.15% 0.37% 0.89% % %
</TABLE>
- --------
(1) As of period end. Includes contracts already in repossession.
(2) As a percentage of the total number of contracts being serviced as of
period end.
(3) The calculation of net loss includes unpaid interest to the date of
repossession and all expenses of repossession and liquidation.
(4) As a percentage of the principal balance of contracts being serviced as of
period end.
There can be no assurance that the delinquency, loan loss and repossession
experience of the Trust with respect to the Home Improvement Contracts will be
better than, worse than or comparable to the experience set forth above. See
"Risk Factors--Delinquency, Loan Loss and Repossession Experience" herein.
RECENT DEVELOPMENTS
On June 30, 1998, Green Tree became a wholly owned subsidiary of Conseco,
Inc., pursuant to a Merger Agreement announced on April 7, 1998. Green Tree
will continue to operate from its existing headquarters in St. Paul,
Minnesota, and its 200 local offices throughout the country. Lawrence M. Coss,
Green Tree's Chairman and Chief Executive Officer, has agreed to continue to
manage Green Tree's business for at least one year. Headquartered in Carmel,
Indiana, Conseco is among the nation's leading providers of supplemental
health insurance, retirement annuities and universal life insurance.
On July 6, 1998, Conseco announced a second-quarter charge of $498 million,
net of income taxes, related to the acquisition of Green Tree. The charges are
directly related to (1) $148 million in merger-related costs, and (2) a $350
million non-cash supplemental reserve against the valuation of Green Tree's
interest-only securities and servicing rights.
The Company has been served with various lawsuits in the United States
District Court for the District of Minnesota. These lawsuits were filed by
certain stockholders of the Company as purported class actions on behalf of
persons or entities who purchased common stock of the Company during the
alleged class periods. In addition to the Company, certain current and former
officers and directors of the Company are named as defendants in one or more
of the lawsuits. The Company and the other defendants intend to seek
consolidation of each of the lawsuits in the United States District Court for
the District of Minnesota. Plaintiffs in the lawsuits assert claims under
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. In each case,
plaintiffs allege that the Company and the other defendants violated federal
securities laws by, among other things, making false and misleading statements
about the current state and future prospects of the Company (particularly with
respect to prepayment assumptions and performance of certain of the Company's
loan portfolios) which allegedly rendered the Company's financial statements
false and misleading. The Company believes that the lawsuits are without merit
and intends to defend such lawsuits vigorously.
S-26
<PAGE>
YIELD AND PREPAYMENT CONSIDERATIONS
The following information supplements the information in the Prospectus under
the heading "Yield and Prepayment Considerations."
The Servicer and Green Tree each has the option to purchase from the Trust
all remaining Contracts, and thereby effect early redemption of the Notes and
early retirement of the Certificates, on any Distribution Date when the Pool
Scheduled Principal Balance is 10% or less of the Cutoff Date Pool Principal
Balance. See "Description of the Trust Documents--Termination" in the
Prospectus.
The Class A-1, Class A-2, Class A-3 and Class A-4 Notes will be prepaid in
part on the first Distribution Date after the Pre-Funding Period (in no event
later than , 1998) to the extent of any Pre-Funded Amount remaining in the
Pre-Funding Account on such Distribution Date. Green Tree believes that
substantially all of the Pre-Funded Amount will be used to acquire the
Subsequent Contracts. It is unlikely, however, that the aggregate principal
amount of Subsequent Contracts purchased by the Trust will be identical to the
Pre-Funded Amount, and that consequently, Class A-1, Class A-2, Class A-3 and
Class A-4 Noteholders will receive a prepayment of principal, in accordance
with their applicable percentage of the Formula Principal Distribution Amount.
Principal prepayments on the Contracts will result in accelerating principal
payments on the Notes. The rate of principal payments on pools of home equity
loans and home improvement contracts is influenced by a variety of economic,
geographic, social and other factors, including the level of interest rates and
the rate at which homeowners sell their homes or default on their loans. Other
factors affecting prepayment of home equity loans and home improvement contacts
include changes in obligors' housing needs, job transfers, unemployment and
obligors' net equity in their homes. Since home equity loans and home
improvement contracts are not generally viewed by borrowers as permanent
financing, the Contracts may experience a higher rate of prepayments than
traditional mortgage loans. In addition, if prevailing interest rates fall
significantly below the interest rates on such loans, the loans are likely to
be subject to higher prepayment rates than if prevailing interest rates remain
at or above the rates borne by such loans. Conversely, if prevailing interest
rates rise above the interest rates on such loans, the rate of prepayment would
be expected to decrease.
Green Tree has no significant experience with respect to the rate of
principal prepayments on home equity loans and home improvement contracts. In
addition, liquidations of defaulted Contracts or the exercise by Green Tree or
the Servicer of the option to purchase the remaining pool of Contracts will
affect the timing of principal distributions on the Securities.
WEIGHTED AVERAGE LIFE OF THE NOTES AND THE CERTIFICATES
The following information is given solely to illustrate the effect of
prepayments on the Contracts on the weighted average life of the Notes and the
Certificates under the stated assumptions and is not a prediction of the
prepayment rate that might actually be experienced by the Contracts.
Weighted average life refers to the average amount of time from the date of
issuance of a security until each dollar of principal of such security will be
repaid to the investor. The weighted average life of the Notes and the
Certificates will be influenced by the rate at which principal on the Contracts
is paid. Principal payments on the Contracts may be in the form of scheduled
amortization or prepayments (including, for this purpose, liquidations due to
default).
The Base Case prepayment model is Green Tree management's best estimate of
the prepayment rates that may be experienced on the Contracts. Because Green
Tree began originating and servicing home equity loans, home improvement
contracts and contracts for many of the Products only recently, such estimate
is based in part on industry experience with similar loans and contracts rather
than Green Tree's experience. There can be no assurance that the Contracts will
experience prepayments at such projected rates or in the manner assumed by
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<PAGE>
the prepayment model used for that type of Contract, or that the Contracts in
the aggregate will experience prepayments similar to the overall prepayment
rate or in the manner projected in the Base Case.
<TABLE>
<CAPTION>
BASE CASE
PRODUCT PREPAYMENT RATE
------- ---------------
<S> <C>
Home Equity............................................... % CPR
Home Improvement (unsecured).............................. % CPR
Home Improvement (secured)................................ % CPR
</TABLE>
The model used in this Prospectus Supplement is the Constant Prepayment Rate
("CPR"). The CPR represents an assumed constant rate of prepayment each month,
expressed as a per annum percentage of the outstanding principal balance of the
Contracts.
As used in the following tables, the columns headed 80%, 90%, 100%, 110% and
120% assume that prepayments on the Contracts are made at Base Case Prepayment
Rates of 80%, 90%, 100%, 110% and 120%, respectively. For example, 80% Base
Case Prepayment Rate and 120% Base Case Prepayment Rate mean that Home Equity
Contracts have been assumed to have a prepayment rate equal to % CPR and
% CPR, respectively; Home Improvement Contracts (unsecured) have been
assumed to have a prepayment rate equal to % CPR and % CPR, respectively;
and Home Improvement Contracts (secured) have been assumed to have a prepayment
rate equal to % CPR and % CPR, respectively. CPR DOES NOT PURPORT TO BE
AN HISTORICAL DESCRIPTION OF PREPAYMENT EXPERIENCE OR A PREDICTION OF THE
ANTICIPATED RATE OF PREPAYMENT OF ANY POOL OF CONTRACTS, INCLUDING THE
CONTRACTS.
[prepayment table]
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<PAGE>
DESCRIPTION OF THE NOTES
The following information supplements and, to the extent inconsistent
therewith, supersedes the information contained in the accompanying Prospectus.
Prospective Noteholders should consider, in addition to the information below,
the information in the accompanying Prospectus under "The Notes," "Certain
Information Regarding the Securities," and "Description of the Trust
Documents."
GENERAL
The Notes will be issued pursuant to the terms of the Indenture, a form of
which has been filed as an exhibit to the Registration Statement. A copy of the
Indenture, as executed, will be filed with the Commission following the
issuance of the Securities. The following summary describes certain terms of
the Notes and the Indenture. The summary does not purport to be complete and is
subject to, and is qualified in its entirety by reference to, all the
provisions of the Notes and the Indenture. The following summary supplements
the description of the general terms and provisions of the Notes of any given
series and the related Indenture set forth in the accompanying Prospectus, to
which description reference is hereby made. [Name of Indenture Trustee], a
national banking association headquartered in [ , ], will be the
Indenture Trustee.
DISTRIBUTIONS
Noteholders will be entitled to receive on each Distribution Date commencing
in , to the extent that funds available are sufficient therefor, the
Noteholders' Distributable Amount. Distributions on the Notes will be made from
funds available first to the holders of the Class A-1 Notes, then to the
holders of the Class A-2 Notes, then to the holders of the Class A-3 Notes and
then to the holders of the Class A-4 Notes, in the manner and order of priority
described below.
CLASS A-1 INTEREST
Interest on the outstanding Class A-1 Principal Balance will accrue from
, or from the most recent Distribution Date, to but excluding the
following Distribution Date, at the Class A-1 Rate for such monthly interest
period. The "Class A-1 Principal Balance" as of any Distribution Date will be
the Original Class A-1 Principal Balance minus all amounts previously
distributed to the Class A-1 Noteholders in respect of principal.
Interest will be paid on the Class A-1 Notes to the extent of funds available
on such Distribution Date. In the event the funds available are not sufficient
to make a full distribution of interest on the Class A-1 Notes, the amount of
the shortfall will be carried forward and added to the amount of interest
payable on the next Distribution Date. Any amount so carried forward will bear
interest at the Class A-1 Rate, to the extent legally permissible.
CLASS A-1 PRINCIPAL
To the extent of funds available after payment of all interest payable on the
Class A-1 Notes the Class A-1 Noteholders will be entitled to receive on each
Distribution Date as payment of principal, an amount equal to the sum of %
(approximate) of the Formula Principal Distribution Amount for such
Distribution Date plus the Unpaid Class A-1 Principal Shortfall, if any, for
such Distribution Date. In the event the funds available are not sufficient to
make a full distribution of principal on the Class A-1 Notes, the funds
available will be applied pro rata to the Class A-1 Notes based on the amount
payable to such Class.
The "Formula Principal Distribution Amount" with respect to any Distribution
Date (but subject to the last sentence of this definition) will generally be
equal to the sum of the following amounts with respect to the related Monthly
Period, in each case computed in accordance with the method specified in each
Contract: (i) all scheduled payments of principal due on each outstanding
Contract during the related Monthly Period, (ii) all Partial Principal
Prepayments applied and all Principal Prepayments in Full received during the
related Monthly Period in respect
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<PAGE>
of each Contract, (iii) the Scheduled Principal Balance of each Contract that
became a Liquidated Contract during the related Monthly Period, (iv) the
Scheduled Principal Balance of each Contract which, during the related Monthly
Period, was purchased by Green Tree as a result of a breach of a
representation as warranty or by the Servicer as a result of an uncured breach
of a covenant under the Sale and Servicing Agreement, and (v) with respect to
the Distribution Date in 1998, any remaining amounts on deposit in the
Pre-Funding Account. The Formula Principal Distribution Amount for the
Distribution Date in , will be the sum of the Note Principal Balance and
the Certificate Principal Balance. A "Liquidated Contract" means any defaulted
Contract as to which the Servicer has determined that all amounts which it
expects to recover from or on account of such Contract through the date of
disposition of the related Product or real property have been recovered or any
defaulted Contract in respect of which the related Product or real property
has been realized upon and disposed of and the proceeds of such disposition
have been received. The "Unpaid Class A-1 Principal Shortfall" for any
Distribution Date will equal any amount required to be paid in respect of
principal on the Class A-1 Notes on any prior Distribution Date but not paid
on any intervening Distribution Date.
CLASS A-2 INTEREST
Interest on the outstanding Class A-2 Principal Balance will accrue from
, or from the most recent Distribution Date, to but excluding
the following Distribution Date, at the Class A-2 Rate for such monthly
interest period. The "Class A-2 Principal Balance" as of any Distribution Date
will be the Original Class A-2 Principal Balance minus all amounts previously
distributed to the Class A-2 Noteholders in respect of principal, and minus
any unreimbursed Class A-2 Principal Liquidation Loss (described below under
"--Losses on Liquidated Contracts").
Interest will be paid on the Class A-2 Notes to the extent of funds
available on such Distribution Date, after payment of all interest and
principal then payable on the Class A-1 Notes. In the event such remaining
funds available are not sufficient to make a full distribution of interest on
the Class A-2 Notes, the amount of the shortfall will be carried forward and
added to the amount of interest payable on the next Distribution Date. Any
amount so carried forward will bear interest at the Class A-2 Rate, to the
extent legally permissible.
CLASS A-2 PRINCIPAL
Class A-2 Noteholders will be entitled to receive on each Distribution Date
as payment of principal, to the extent of funds available after payment of all
interest and principal payable on the Class A-1 Notes and after payment of all
interest payable on the Class A-2 Notes, the sum of % (approximate) of
the Formula Principal Distribution Amount for such Distribution Date, plus any
Unpaid Class A-2 Principal Shortfall (as defined below) for such Distribution
Date.
The "Unpaid Class A-2 Principal Shortfall" for any Distribution Date will
equal any amount required to be paid in respect of principal on the Class A-2
Notes on any prior Distribution Date but not paid on any intervening
Distribution Date, less any unreimbursed Class A-2 Principal Liquidation Loss.
CLASS A-3 INTEREST
Interest on the outstanding Class A-3 Principal Balance will accrue from
, or from the most recent Distribution Date, to but excluding
the following Distribution Date, at the Class A-3 Rate for such monthly
interest period. The "Class A-3 Principal Balance" as of any Distribution Date
will be the Original Class A-3 Principal Balance minus all amounts previously
distributed to the Class A-3 Noteholders in respect of principal, and minus
any unreimbursed Class A-3 Principal Liquidation Loss (described below under
"--Losses on Liquidated Contracts").
Interest will be paid on the Class A-3 Notes to the extent of funds
available on such Distribution Date, after payment of all interest and
principal then payable on the Class A-2 Notes. In the event such remaining
funds
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<PAGE>
available are not sufficient to make a full distribution of interest on the
Class A-3 Notes, the amount of the shortfall will be carried forward and added
to the amount of interest payable on the next Distribution Date. Any amount so
carried forward will bear interest at the Class A-3 Rate, to the extent legally
permissible.
CLASS A-3 PRINCIPAL
Class A-3 Noteholders will be entitled to receive on each Distribution Date
as payment of principal, to the extent of funds available after payment of all
interest and principal payable on the Class A-2 Notes and after payment of all
interest payable on the Class A-3 Notes, the sum of % (approximate) of the
Formula Principal Distribution Amount for such Distribution Date, plus any
Unpaid Class A-3 Principal Shortfall (as defined below) for such Distribution
Date.
The "Unpaid Class A-3 Principal Shortfall" for any Distribution Date will
equal any amount required to be paid in respect of principal on the Class A-3
Notes on any prior Distribution Date but not paid on any intervening
Distribution Date, less any unreimbursed Class A-3 Principal Liquidation Loss.
CLASS A-4 INTEREST
Interest on the outstanding Class A-4 Principal Balance will accrue from
, or from the most recent Distribution Date, to but excluding
the following Distribution Date, at the Class A-4 Rate for such monthly
interest period. The "Class A-4 Principal Balance" as of any Distribution Date
will be the Original Class A-4 Principal Balance minus all amounts previously
distributed to the Class A-4 Noteholders in respect of principal, and minus any
unreimbursed Class A-4 Principal Liquidation Loss (described below under "--
Losses on Liquidated Contracts").
Interest will be paid on the Class A-4 Notes to the extent of funds available
on such Distribution Date, after payment of all interest and principal then
payable on the Class A-3 Notes. In the event such remaining funds available are
not sufficient to make a full distribution of interest on the Class A-4 Notes,
the amount of the shortfall will be carried forward and added to the amount of
interest payable on the next Distribution Date. Any amount so carried forward
will bear interest at the Class A-4 Rate, to the extent legally permissible.
CLASS A-4 PRINCIPAL
Class A-4 Noteholders will be entitled to receive on each Distribution Date
as payment of principal, to the extent of funds available after payment of all
interest and principal payable on the Class A-3 Notes and after payment of all
interest payable on the Class A-4 Notes, the sum of % (approximate) of the
Formula Principal Distribution Amount for such Distribution Date, plus any
Unpaid Class A-4 Principal Shortfall (as defined below) for such Distribution
Date.
The "Unpaid Class A-4 Principal Shortfall" for any Distribution Date will
equal any amount required to be paid in respect of principal on the Class A-4
Notes on any prior Distribution Date but not paid on any intervening
Distribution Date, less any unreimbursed Class A-4 Principal Liquidation Loss.
OPTIONAL REDEMPTION
The Notes will be redeemed in whole, but not in part, on any Distribution
Date on which Green Tree exercises its option to purchase the Contracts. Green
Tree may purchase the Contracts when the Pool Scheduled Principal Balance has
declined to 10% or less of the Cutoff Date Pool Principal Balance, as described
in the accompanying Prospectus under "Description of the Trust Documents--
Termination." The "Pool Scheduled Principal Balance" is the aggregate Scheduled
Principal Balance of all outstanding Contracts during a Monthly Period. Such
redemption will effect early retirement of the Notes. The redemption price will
be equal to the unpaid principal amount of the Notes redeemed plus accrued and
unpaid interest thereon.
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<PAGE>
MANDATORY PREPAYMENTS
The Class A-1, Class A-2, Class A-3 and Class A-4 Notes will be prepaid in
part on the first Distribution Date after the Pre-Funding Period (in no event
later than , 1998) to the extent of any Pre-Funded Amount remaining in
the Pre-Funding Account on such Distribution Date. Green Tree believes that
substantially all of the Pre-Funded Amount will be used to acquire the
Subsequent Contracts. It is unlikely, however, that the aggregate principal
amount of Subsequent Contracts purchased by the Trust will be identical to the
Pre-Funded Amount, and that consequently, Class A-1, Class A-2, Class A-3 and
Class A-4 Noteholders will receive a prepayment of principal, in accordance
with their applicable percentage of the Formula Principal Distribution Amount.
THE INTEREST RATE CAP AGREEMENT
Class A-1 Noteholders will have the benefit of the Interest Rate Cap
Agreement between the Trust and the Counterparty. Pursuant to the Interest Rate
Cap Agreement, the Counterparty will make a payment (the "Interest Rate Cap
Payment") to the Trust on each Distribution Date to the extent that the Class
A-1 Rate exceeds %, in an amount equal to the amount obtained by multiplying
the Class A-1 Principal Balance by the product of (i) the maximum of (x) the
excess of the Class A-1 Rate over % or (y) 0% and (ii) the number of days in
the monthly interest period divided by 360. Payments received by the Indenture
Trustee pursuant to the Interest Rate Cap Agreement will be deposited in the
Collection Account. See "Description of the Counterparty."
THE SPREAD ACCOUNT
Class A-2, Class A-3 and Class A-4 Noteholders will have the benefit of a
separate sub-account for each Class contained in the Spread Account to be held
by the Indenture Trustee. On any Distribution Date, if the funds in the Note
Distribution Account (after making all distributions on each Class of Notes
with a prior numeric designation) is insufficient to distribute all interest
then payable on the Class A-2, Class A-3 or Class A-4 Notes, the Indenture
Trustee will withdraw the amount of the deficiency from the applicable sub-
account (or the amount on deposit in the applicable sub-account, if less) and
deposit such amount in the Note Distribution Account for distribution to the
applicable Class. On any Distribution Date, the amount of funds in the Spread
Account will not be available to cover a shortfall in principal distributable
on any Class of Notes, but would only be available to cover a shortfall in
interest distributable on the Class A-2, Class A-3 and Class A-4 Notes.
On the Closing Date, the amount on deposit in the Class A-2, Class A-3 and
Class A-4 sub-accounts will be zero. On each Distribution Date, the Indenture
Trustee will deposit all funds remaining in the Collection Account, after
distribution of all interest and principal then payable on the Notes and all
interest then payable on the Certificates, first to the Class A-2 sub-account,
then to the Class A-3 sub-account and then to the Class A-4 sub-account, until
the amount on deposit in such sub-accounts equals $ , $ and
$ , respectively (subject to reduction as provided in, and to the other
terms and conditions contained in, the Sale and Servicing Agreement). If any
sub-account is drawn upon, it will be replenished to the extent provided in the
Sale and Servicing Agreement and the Indenture. The Spread Account is included
in the Trust Property. Any amount remaining in the Spread Account upon
termination of the Trust will be distributed to Green Tree.
THE RESERVE ACCOUNT
Noteholders will have the benefit of the Reserve Account to be held by the
Indenture Trustee. On any Distribution Date, if the funds in the Note
Distribution Account (after making all distributions on each Class of Notes
with a prior numeric designation) are insufficient to make full payment in
respect of interest or principal payable on a Class of Notes (after making
appropriate draws upon the Spread Account), the Indenture Trustee will withdraw
the amount of the deficiency from the Reserve Account (or the amount on deposit
in the Reserve Account, if less) and deposit such amount in the Note
Distribution Account for distribution to the applicable Class.
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<PAGE>
On the Closing Date, the amount on deposit in the Reserve Account will be
zero. On each Distribution Date, the Indenture Trustee will deposit all funds
remaining in the Collection Account, after distribution of all interest and
principal then payable on the Notes, all interest then payable on the
Certificates and all deposits in the Spread Account, until the amount on
deposit in the Reserve Account equals % of the Pool Scheduled Principal
Balance (subject to reduction as provided in, and to other terms and conditions
contained in, the Sale and Servicing Agreement). If the Reserve Account is
drawn upon, it will be replenished to the extent provided in the Sale and
Servicing Agreement and the Indenture. The Reserve Account is included in the
Trust Property. Any amount remaining in the Reserve Account upon termination of
the Trust will be distributed to Green Tree.
LOSSES ON LIQUIDATED CONTRACTS
As described above, the distribution of principal to each Class of Notes is
intended to equal the applicable percentage of the Formula Principal
Distribution Amount. On each Distribution Date, each such amount includes the
Scheduled Principal Balance of each Contract that became a Liquidated Contract
during the Monthly Period related to such Distribution Date. If the Net
Liquidation Proceeds from such Liquidated Contract are less than the Scheduled
Principal Balance of such Liquidated Contract, the deficiency will, in effect,
be absorbed first by the Monthly Servicing and Guaranty Fee otherwise payable
to Green Tree, then by the Certificateholders (although Green Tree will be
obligated to make a Guaranty Payment equal to any shortfall in the distribution
to the Certificateholders), and then by each Class of Notes in inverse numeric
order (although funds on deposit in the Reserve Account will be available to
pay any shortfall in the distribution of interest and principal to any Class of
Notes).
If the funds available for any Distribution Date, after making all required
distributions of interest and principal to more senior Classes of Notes, are
insufficient to make a full distribution of interest and/or principal to a
Class of Notes or the Certificates, such deficiency will be carried forward and
added to the amount to be distributed to such Class of Notes or the
Certificates on the following Distribution Date.
If the Pool Scheduled Principal Balance for any Distribution Date is less
than the sum of the aggregate outstanding principal balance of the Notes and
the Certificate Principal Balance after giving effect to all distributions of
principal on such Distribution Date, then the Certificate Principal Balance
will be reduced by the amount of such deficiency (a "Certificate Principal
Liquidation Loss"). Green Tree will be obligated to pay the amount of any such
Certificate Principal Liquidation Loss under the Limited Guaranty. If Green
Tree should fail to pay such amount, however, the amount distributable on the
Certificates on future Distribution Dates would include interest on any such
Certificate Principal Liquidation Loss at the Pass-Through Rate (and, to the
extent legally permissible, interest on any unpaid interest at the Pass-Through
Rate) accrued from the date such Certificate Principal Liquidation Loss was
incurred, and the amount of such Certificate Principal Liquidation Loss.
Similarly, if the Certificate Principal Balance were reduced to zero (which
would be caused only by Certificate Principal Liquidation Losses, whether or
not Green Tree makes any required payments under the Limited Guaranty) and the
Pool Scheduled Principal Balance on any Distribution Date were less than the
aggregate outstanding principal balance of the Notes after giving effect to
distributions of principal on such Distribution Date, then the Class A-4
Principal Balance would be reduced by the amount of such deficiency (a "Class
A-4 Principal Liquidation Loss"). The funds on deposit in the Reserve Account
will be available to pay the amount of any such Class A-4 Principal Liquidation
Loss. If the funds available in the Reserve Account are insufficient to pay
such amount, however, the amount distributable on the Class A-4 Notes on future
Distribution Dates would include interest on any such Class A-4 Principal
Liquidation Loss at the Class A-4 Rate (and, to the extent legally permissible,
interest on such unpaid interest at the Class A-4 Rate) accrued from the date
such Class A-4 Principal Liquidation Loss was incurred, and the amount of such
Class A-4 Principal Liquidation Loss. Each more senior Class of Notes would
similarly be subject to reduction in its outstanding principal balance if the
aggregate outstanding principal balance of all more junior Classes of Notes
were reduced to zero and the Pool Scheduled Principal Balance were less than
the aggregate outstanding principal balance of the Notes, and would similarly
be entitled on future Distribution Dates to receive interest on any such
Principal Liquidation Loss at the applicable Interest Rate, and the amount of
such Principal Liquidation Loss. The applicable
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percentage of the Formula Principal Distribution Amount distributable to each
Class of Notes on each Distribution Date will not be affected by any Principal
Liquidation Loss experienced by a Class of Notes. Accordingly, even if a Class
of Notes has experienced a Principal Liquidation Loss, such Class will continue
to be entitled to receive its applicable percentage of the Formula Principal
Distribution Amount (or, if the Amount Available in the Collection Account is
insufficient to make such distribution, such Class will be entitled to receive
the amount of such deficiency on subsequent Distribution Dates as an Unpaid
Principal Shortfall).
BOOK-ENTRY REGISTRATION
Holders of the Notes or the Certificates may hold through DTC (in the United
States) or, solely in the case of the Notes, CEDEL or Euroclear (in Europe) if
they are participants of such systems, or indirectly through organizations that
are participants in such systems. The Certificates may not be held, directly or
indirectly, through CEDEL or Euroclear.
Cede & Co., as nominee for DTC, will hold the Notes and the Certificates.
CEDEL and Euroclear will hold omnibus positions in the Notes on behalf of the
CEDEL Participants and the Euroclear Participants, respectively, through
customers' securities accounts in CEDEL's and Euroclear's names on the books of
their respective depositaries (collectively, the "Depositaries"), which in turn
will hold such positions in customers' securities accounts in the Depositaries'
names on the books of DTC.
Transfers between DTC's participating organizations (the "Participants") will
occur in accordance with DTC rules. Transfers between CEDEL Participants and
Euroclear Participants will occur in the ordinary way in accordance with their
applicable rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly through
DTC, on the one hand, and directly or indirectly through CEDEL Participants or
Euroclear Participants, on the other, will be effected in DTC in accordance
with DTC rules on behalf of the relevant European international clearing system
by its Depositary; however, such cross-market transactions will require
delivery of instructions to the relevant European international clearing system
by the counterparty in such system in accordance with its rules and procedures
and within its established deadlines (European time). The relevant European
international clearing system will, if the transaction meets its settlement
requirements, deliver instructions to its Depositary to take action to effect
final settlement on its behalf by delivering or receiving securities in DTC,
and making or receiving payment in accordance with normal procedures for same-
day funds settlement applicable to DTC. CEDEL Participants and Euroclear
Participants may not deliver instructions directly to the Depositaries.
Because of time-zone differences, credits of securities in CEDEL or Euroclear
as a result of a transaction with a Participant will be made during the
subsequent securities settlement processing, dated the business day following
the DTC settlement date, and such credits or any transactions in such
securities settled during such processing will be reported to the relevant
CEDEL Participant or Euroclear Participant on such business day. Cash received
in CEDEL or Euroclear as a result of sales of securities by or through a CEDEL
Participant or a Euroclear Participant to a Participant will be received with
value on the DTC settlement date but will be available in the relevant CEDEL or
Euroclear cash account only as of the business day following settlement in DTC.
For a description of transfers between persons holding directly or indirectly
through DTC, see "Certain Information Regarding the Securities--Book-Entry
Registration" in the Prospectus.
Cedel Bank, societe anonyme ("CEDEL") is incorporated under the laws of
Luxembourg as a professional depository. CEDEL holds securities for its
participating organizations ("CEDEL Participants") and facilitates the
clearance and settlement of securities transactions between CEDEL Participants
through electronic book-entry changes in accounts of CEDEL Participants,
thereby eliminating the need for physical movement of certificates.
Transactions may be settled in CEDEL in any of 28 currencies, including United
States dollars. CEDEL provides to its CEDEL Participants, among other things,
services for safekeeping, administration, clearance and settlement of
internationally traded securities and securities lending and borrowing. CEDEL
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interfaces with domestic markets in several countries. As a professional
depository, CEDEL is subject to regulation by the Luxembourg Monetary
Institute. CEDEL Participants are recognized financial institutions around the
world, including underwriters, securities brokers and dealers, banks, trust
companies, clearing corporations and certain other organizations and may
include the Underwriters. Indirect access to CEDEL is also available to others,
such as banks, brokers, dealers and trust companies that clear through or
maintain a custodial relationship with a CEDEL Participant, either directly or
indirectly.
The Euroclear System was created in 1968 to hold securities for participants
of the Euroclear System ("Euroclear Participants") and to clear and settle
transactions between Euroclear Participants through simultaneous electronic
book-entry delivery against payment, thereby eliminating the need for physical
movement of certificates and any risk from lack of simultaneous transfers of
securities and cash. Transactions may now be settled in Euroclear in any of 32
currencies, including United States dollars. The Euroclear System includes
various other services, including securities lending and borrowing, and
interfaces with domestic markets in several countries generally similar to the
arrangements for cross-market transfers with DTC described in Annex I hereto.
The Euroclear System is operated by Morgan Guaranty Trust Company of New York,
Brussels, Belgium office (the "Euroclear Operator" or "Euroclear"), under
contract with Euroclear Clearance System, S.C., a Belgian cooperative
corporation (the "Cooperative"). All operations are conducted by the Euroclear
Operator, and all Euroclear securities clearance accounts and Euroclear cash
accounts are accounts with the Euroclear Operator, not the Cooperative. The
Cooperative establishes policy for the Euroclear System on behalf of Euroclear
Participants. Euroclear Participants include banks (including central banks),
securities brokers and dealers and other professional financial intermediaries
and may include the Underwriters. Indirect access to the Euroclear System is
also available to other firms that clear through or maintain a custodial
relationship with a Euroclear Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it
is regulated and examined by the Board of Governors of the Federal Reserve
System and the New York State Banking Department, as well as the Belgian
Banking Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian law
(collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within the Euroclear System, withdrawal of
securities and cash from the Euroclear System, and receipts of payments with
respect to securities in the Euroclear System. All securities in the Euroclear
System are held on a fungible basis without attribution of specific
certificates to specific securities clearance accounts. The Euroclear Operator
acts under the Terms and Conditions only on behalf of Euroclear Participants
and has no record of or relationship with persons holding through Euroclear
Participants.
Distributions with respect to Notes held through CEDEL or Euroclear will be
credited to the cash accounts of CEDEL Participants or Euroclear Participants
in accordance with the relevant system's rules and procedures, to the extent
received by its Depositary. Such distributions will be subject to tax reporting
in accordance with relevant United States tax laws and regulations. See
"Certain Federal Income Tax Consequences" in the Prospectus and "Global
Clearance, Settlement and Tax Documentation Procedures" in Annex I to this
Prospectus Supplement. CEDEL or the Euroclear Operator, as the case may be,
will take any other action permitted to be taken by a Noteholder under the
Indenture on behalf of a CEDEL Participant or Euroclear Participant only in
accordance with its relevant rules and procedures and subject to its
Depositary's ability to effect such actions on its behalf through DTC.
Although DTC, CEDEL and Euroclear have agreed to the foregoing procedures in
order to facilitate transfers of Notes among participants of DTC, CEDEL and
Euroclear, they are under no obligation to perform or continue to perform such
procedures and such procedures may be discontinued at any time.
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<PAGE>
DESCRIPTION OF THE COUNTERPARTY
[insert description of counterparty]
The description of the Counterparty set out above has been provided by the
Counterparty. The Counterparty has not, however, been involved in the
preparation of, and does not accept responsibility for, this Prospectus
Supplement as a whole.
DESCRIPTION OF THE CERTIFICATES
The following information supplements the information contained in the
accompanying Prospectus. Prospective Certificateholders should consider, in
addition to the information below, the information in the accompanying
Prospectus under "The Certificates," "Certain Information Regarding the
Securities," and "Description of the Trust Documents."
GENERAL
The Certificates will be issued pursuant to the terms of the Trust Agreement,
a form of which has been filed as an exhibit to the Registration Statement. A
copy of the Trust Agreement, as executed, will be filed with the Commission
following the issuance of the Securities. The following summary describes
certain terms of the Certificates and the Trust Agreement. The summary does not
purport to be complete and is subject to, and qualified in its entirety by
reference to, all the provisions of the Certificates and the Trust Agreement.
The following summary supplements, and to the extent inconsistent therewith
replaces, the description of the general terms and provisions of the
Certificates of any given series and the related Trust Agreement set forth in
the Prospectus, to which description reference is hereby made.
DISTRIBUTIONS
Certificateholders will be entitled to receive on each Distribution Date
commencing in 1998, to the extent that funds available together with
the Guaranty Payment described below are sufficient therefor, the
Certificateholders' Distributable Amount.
INTEREST
On each Distribution Date, the Owner Trustee will distribute pro rata to
Certificateholders accrued interest at the Pass-Through Rate on the outstanding
Certificate Principal Balance. Interest in respect of a Distribution Date will
accrue from , 1998, or from the most recent Distribution Date to but
excluding the following Distribution Date. The "Certificate Principal Balance"
as of any Distribution Date will be the Original Certificate Principal Balance,
reduced by all amounts allocable to principal previously distributed to
Certificateholders minus any unreimbursed Certificate Principal Liquidation
Loss (described below under "--Losses on Liquidated Contracts").
Interest will be paid on the Certificates to the extent of funds available on
such Distribution Date, after payment of all interest and principal then
payable on the Notes and any amounts previously withdrawn from any
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sub-account of the Spread Account or the Reserve Account and not previously
replenished. In the event such funds available are not sufficient to make a
full distribution of interest on the Certificates, the amount of the shortfall
will be carried forward and added to the amount of interest payable on the next
Distribution Date. Any amount so carried forward will bear interest at the
Pass-Through Rate, to the extent legally permissible. See "Description of the
Certificates."
PRINCIPAL
No distributions of principal on the Certificates will be payable until all
of the Notes have been paid in full. On each Distribution Date commencing on
the Distribution Date on which the Notes are paid in full, principal on the
Certificates will be payable in an amount equal to the Class A-1:HE/HI Formula
Principal Distribution Amount for such Distribution Date (less, on the
Distribution Date on which the Notes are paid in full, the portion thereof
payable on the Notes), plus the Unpaid Certificate Principal Shortfall, if any,
from prior Distribution Dates.
The "Unpaid Certificate Principal Shortfall" for any Distribution Date will
equal any amount required to be paid in respect of principal on the
Certificates on any prior Distribution Date but not paid on any intervening
Distribution Date, less any unreimbursed Certificate Principal Liquidation
Loss.
OPTIONAL PREPAYMENT
If Green Tree exercises its option to purchase the Contracts when the Pool
Scheduled Principal Balance declines to 10% or less of the Cutoff Date Pool
Principal Balance, Certificateholders will receive an amount in respect of the
Certificates equal to the outstanding principal amount together with accrued
interest at the Pass-Through Rate, which distribution will effect early
retirement of the Certificates. See "Description of the Trust Documents--
Termination" in the accompanying Prospectus.
LIMITED GUARANTY
In order to mitigate the effect of the subordination of the Certificates and
the effect of liquidation losses and delinquencies on the Contracts, the
Certificateholders are entitled to receive on each Distribution Date the amount
equal to the Guaranty Payment, if any, under Green Tree's Limited Guaranty. The
Guaranty Payment for any Distribution Date will equal the difference, if any,
between the Certificateholders' Distributable Amount and the remaining funds
available in the Collection Account after payment of all interest and principal
on the Notes and the deposit in any sub-account of the Spread Account or the
Reserve Account of any amounts previously withdrawn therefrom and not
previously replenished. The "Certificateholders' Distributable Amount" equals
the unpaid and accrued interest on the Certificates, plus on each Distribution
Date commencing on the Distribution Date on which the Notes are paid in full,
principal in an amount equal to the Formula Principal Distribution Amount for
such Distribution Date (less, on the Distribution Date on which the Notes are
paid in full, the portion thereof payable on the Notes), plus any Unpaid
Certificate Principal Shortfall for such Distribution Date, and plus any
unreimbursed Certificate Principal Liquidation Loss.
The Limited Guaranty will be an unsecured general obligation of Green Tree
and will not be supported by any letter of credit or other enhancement
arrangement. The ratings assigned to the Certificates may be affected by the
ratings of Green Tree's debt securities. Green Tree's senior debt securities
were recently downgraded by S&P from "A-" to "BBB+" and by Fitch from "A" to
"A-", which has been reflected in the ratings assigned to the Certificates. See
"Summary of Terms--Ratings."
The Limited Guaranty will not benefit in any way, or result in any payment
to, the Class A-1, Class A-2, Class A-3 or Class A-4 Noteholders.
As compensation for servicing the Contracts and providing the Limited
Guaranty, Green Tree will be entitled to receive the Monthly Servicing and
Guaranty Fee on each Distribution Date, which will be equal to
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the Amount Available remaining after payment of the Certificateholders'
Distributable Amount and any deposits into the Spread Account or the Reserve
Account required on that Distribution Date.
TRANSFERS OF CERTIFICATES
Certificateholders, other than individuals or entities holding Certificates
through a broker who reports sales of securities on Form 1099-B, are required
under the Trust Agreement to notify the Owner Trustee of any transfer of their
Certificates in a taxable sale or exchange within 30 days of such transfer.
LOSSES ON LIQUIDATED CONTRACTS
As described above, the distribution of principal to the Certificates is
intended to equal the Formula Principal Distribution Amount. Such amount
includes the Scheduled Principal Balance of each Contract that became a
Liquidated Contract during the Monthly Period preceding such Distribution Date.
If the Net Liquidation Proceeds from such Liquidated Contract are less than the
Scheduled Principal Balance of such Liquidated Contract, the deficiency will,
in effect, be absorbed first by the Monthly Servicing and Guaranty Fee
otherwise payable to Green Tree and then by the Certificateholders (although
Green Tree will be obligated to make a Guaranty Payment equal to any shortfall
in the distribution to the Certificateholders).
If the funds available for any Distribution Date, after making all required
distributions of interest and principal to the Notes, are insufficient to make
a full distribution of interest and/or principal to the Certificates, such
deficiency will be carried forward and added to the amount to be distributed to
the Certificates on the following Distribution Date.
If the Pool Scheduled Principal Balance for any Distribution Date is less
than the sum of the aggregate outstanding Principal Balance of the Notes and
the Certificate Principal Balance after giving effect to all distributions of
principal on such Distribution Date, then the Certificate Principal Balance
will be reduced by the amount of such deficiency (a "Certificate Principal
Liquidation Loss"). Green Tree will be obligated to pay the amount of any such
Certificate Principal Liquidation Loss under the Limited Guaranty. If Green
Tree should fail to pay such amount, however, the amount distributable on the
Certificates on future Distribution Dates would include interest on any such
Certificate Principal Liquidation Loss at the Pass-Through Rate (and, to the
extent legally permissible, interest on any unpaid interest at the Pass-Through
Rate) accrued from the date such Certificate Principal Liquidation Loss was
incurred, and the amount of such Certificate Principal Liquidation Loss.
DESCRIPTION OF THE TRUST DOCUMENTS AND INDENTURE
The following summary describes certain terms of the Sale and Servicing
Agreement and the Trust Agreement (together, the "Trust Documents") and the
Indenture. Forms of the Trust Documents and Indenture, as executed, have been
filed as exhibits to the Registration Statement. A copy of each of the Trust
Documents and Indenture will be filed with the Commission following the
issuance of the Securities. The summary does not purport to be complete and is
subject to, and qualified in its entirety by reference to, all the provisions
of the Trust Documents and Indenture. The following summary supplements, the
description of the general terms and provisions of the Trust Documents and
Indenture (as such terms are used in the accompanying Prospectus) set forth in
the accompanying Prospectus, to which description reference is hereby made.
ACCOUNTS
The Servicer will establish and maintain one or more accounts, in the name of
the Indenture Trustee on behalf of the Noteholders and the Certificateholders,
into which all payments made on or with respect to the Contracts will be
deposited (the "Collection Account"). The Servicer will establish and maintain
the Spread Account, which will include sub-accounts for the Class A-2, Class A-
3 and Class A-4 Noteholders, in the name
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of the Indenture Trustee on behalf of the Noteholders, in which amounts will be
deposited to cover shortfalls in interest distributable on the Class A-2, Class
A-3 and Class A-4 Notes. In addition, the Servicer will establish and maintain
the Reserve Account in the name of the Indenture Trustee on behalf of the
Noteholders, in which amounts will be deposited to cover shortfalls in interest
or principal distributable on the Notes. The Servicer will establish and
maintain an account, in the name of the Indenture Trustee on behalf of the
Noteholders, in which amounts released from the Collection Account, the Spread
Account and the Reserve Account for distribution to Noteholders will be
deposited and from which all distributions to Noteholders will be made (the
"Note Distribution Account"). The Servicer will also establish and maintain an
account, in the name of the Owner Trustee on behalf of the Certificateholders,
in which amounts released from the Collection Account for distribution to
Certificateholders will be deposited and from which all distributions to
Certificateholders will be made (the "Certificate Distribution Account"). See
"Description of the Trust Documents--Collections" in the accompanying
Prospectus.
An account (the "Pre-Funding Account") will be established by the Indenture
Trustee and funded by Green Tree on the Closing Date to provide the Trust with
sufficient funds to purchase Subsequent Contracts. The amount deposited in the
Pre-Funding Account (as reduced from time-to-time, the "Pre-Funded Amount")
will initially equal the difference between $ and the aggregate
principal balance as of the Cutoff Date of the Initial Contracts and Additional
Contracts. The Pre-Funding Account will be used to purchase Subsequent
Contracts during the period from the Closing Date until the earliest of (i) the
date on which the amount on deposit in the Pre-Funding Account is less than
$10,000, (ii) or (iii) the date on which an Event of Termination occurs
under the Sale and Servicing Agreement (the "Pre-Funding Period"). The Pre-
Funded Amount will be reduced during the Pre-Funding Period by the amount used
to purchase Subsequent Contracts in accordance with the Sale and Servicing
Agreement.
Under the Sale and Servicing Agreement, following the initial issuance of the
Securities, the Trust will be obligated to purchase Subsequent Contracts from
Green Tree during the Pre-Funding Period, subject to the availability thereof.
Each Subsequent Contract will have been underwritten in accordance with Green
Tree's standard underwriting criteria. Subsequent Contracts will be transferred
to the Trust pursuant to subsequent transfer instruments between Green Tree and
the Trust. In connection with the purchase of Subsequent Contracts on such
dates of transfer (the "Subsequent Transfer Dates"), the Trust will be required
to pay to Green Tree from amounts on deposit in the Pre-Funding Account a cash
purchase price of 100% of the principal balance thereof. Green Tree will
designate the Subsequent Transfer Date as the Cutoff Date with respect to the
related Subsequent Contracts purchased on such date. The amount paid from the
Pre-Funding Account on each Subsequent Transfer Date will not include accrued
interest on the related Subsequent Contracts. Following each Subsequent
Transfer Date, the aggregate principal balance of the Subsequent Contracts in
the Trust will increase by an amount equal to the aggregate principal balance
of the Contracts so purchased and the amount in the Pre-Funding Account will
decrease accordingly. Any Pre-Funded Amount remaining after the purchase of
Subsequent Contracts will be applied on the first Distribution Date on or after
the last day of the Pre-Funding Period to prepay principal on the Class A-1
Class A-2, Class A-3 and Class A-4 Notes.
Any conveyance of Subsequent Contracts on a Subsequent Transfer Date is
subject to certain conditions including, but not limited to: (a) each
Subsequent Contract must satisfy the representations and warranties specified
in the related subsequent transfer instrument and the Sale and Servicing
Agreement; (b) Green Tree will not select Subsequent Contracts in a manner that
it believes is adverse to the interests of the Securityholders; (c) as of its
respective Cutoff Date, each Subsequent Contract will satisfy the following
criteria: (i) no Subsequent Contract may be more than 59 days contractually
delinquent; (ii) the remaining stated term to maturity of each Subsequent
Contract will not exceed 240 months; (iii) each Subsequent Contract will be
underwritten in accordance with Green Tree's standard underwriting criteria;
and (iv) no Subsequent Contract will have a loan-to-value ratio greater than
100%.
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DISTRIBUTIONS
On each Distribution Date, the Servicer shall instruct the Indenture Trustee
to distribute from the Collection Account the Amount Available in the following
order of priority:
1. If Green Tree or an affiliate is no longer the Servicer, then to the
Servicer, the Servicing Fee for the related Monthly Period.
2. To the Servicer, reimbursement for advances made with respect to
delinquent payments that were recovered during the prior Monthly Period.
3. To the Note Distribution Account, the Noteholders' Distributable
Amount and any amounts previously withdrawn from any sub-account of the
Spread Account or the Reserve Account and not previously replenished.
4. To the Certificate Distribution Account, the Certificateholders'
Interest Distributable Amount and, after the Notes have been paid in full,
the Certificateholders' Principal Distributable Amount.
5. To the Indenture Trustee for deposit in the Spread Account, to fund
the initial amounts required in the Class A-2, Class A-3 and Class A-4 sub-
accounts.
6. To the Indenture Trustee for deposit in the Reserve Account, to fund
the initial amount required therein.
7. To Green Tree, the Monthly Servicing and Guaranty Fee.
On each Distribution Date, the Indenture Trustee will distribute all amounts
on deposit in the Note Distribution Account in the following order of priority:
(i) to the Class A-1 Noteholders, interest, principal, interest and
principal shortfalls from prior payment periods;
(ii) to the Class A-2 Noteholders, interest, principal, interest and
principal shortfalls from prior payment periods, and interest and principal
in respect of Principal Liquidation Losses;
(iii) to the Class A-2 sub-account of the Spread Account to the extent
amounts have previously been withdrawn therefrom to pay interest on the
Class A-2 Notes and have not previously been replenished;
(iv) to the Class A-3 Noteholders, interest, principal, interest and
principal shortfalls from prior payment periods, and interest and principal
in respect of Principal Liquidation Losses;
(v) to the Class A-3 sub-account of the Spread Account to the extent
amounts have previously been withdrawn therefrom to pay interest on the
Class A-3 Notes and have not previously been replenished;
(vi) to the Class A-4 Noteholders, interest, principal, interest and
principal shortfalls from prior payment periods, and interest and principal
in respect of Principal Liquidation Losses;
(vii) to the Class A-4 sub-account of the Spread Account to the extent
amounts have previously been withdrawn therefrom to pay interest on the
Class A-4 Notes and have not previously been replenished; and
(viii) to the Reserve Account to the extent amounts have previously been
withdrawn therefrom to pay interest or principal on any Class of Notes and
have not previously been replenished.
On each Distribution Date, the Owner Trustee or its Paying Agent will
distribute all amounts on deposit in the Certificate Distribution Account to
the Certificateholders.
For the purposes hereof, the following terms shall have the following
meanings:
"Amount Available" with respect to any Distribution Date, means generally the
sum of payments on the Contracts due and received during the preceding month,
prepayments and other unscheduled collections received during the preceding
month, any amounts deposited in respect of Purchased Contracts, any Interest
Rate Cap Payment, any Guaranty Payment, and all earnings from the investment of
funds in the Collection Account.
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The "Formula Principal Distribution Amount" with respect to any Distribution
Date (but subject to the last sentence of this definition) will generally be
equal to the sum of the following amounts with respect to the related Monthly
Period, in each case computed in accordance with the method specified in each
Contract: (i) all scheduled payments of principal due on each outstanding
Contract during the related Monthly Period, (ii) all Partial Principal
Prepayments applied and all Principal Prepayments in Full received during the
related Monthly Period in respect of each Contract, (iii) the Scheduled
Principal Balance of each Contract that became a Liquidated Contract during the
related Monthly Period, (iv) the Scheduled Principal Balance of each Contract
which, during the related Monthly Period, was purchased by Green Tree as a
result of a breach of a representation or warranty or by the Servicer as a
result of an uncured breach of a covenant under the Sale and Servicing
Agreement, and (v) with respect to the Distribution Date in 1998, any
remaining amounts on deposit in the Pre-Funding Account. The Formula Principal
Distribution Amount for the Distribution Date in 2029, will be the sum of
the Note Principal Balance and the Certificate Principal Balance.
"Liquidated Contract" means any defaulted Contract as to which the Servicer
has determined that all amounts which it expects to recover from or on account
of such Contract through the date of disposition of the related real property
have been recovered; provided that any defaulted Contract in respect of which
the related Product or real property has been realized upon and disposed of and
proceeds of such disposition have been received shall be deemed to be a
Liquidated Contract.
"Purchased Contract" means a Contract (i) that Green Tree has become
obligated to repurchase (or, under certain circumstances, has elected to
repurchase) as a result of an uncured breach by Green Tree of a representation
or warranty made by Green Tree with respect to such Contract or (ii) that the
Servicer has become obligated to repurchase (or, under certain circumstances,
has elected to repurchase) as a result of an uncured breach of the covenants
made by it with respect to such Contract.
"Noteholders' Distributable Amount" means, with respect to any Distribution
Date, the sum of the Noteholders' Interest Distributable Amount and the
Noteholders' Principal Distributable Amount.
"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, interest accrued for the related monthly interest period
on each Class of Notes at the respective Interest Rate for such Class on (i)
the outstanding Principal Balance of the Notes of such Class and (ii) the
aggregate unreimbursed Principal Liquidation Losses of such Class on each prior
Distribution Date, in each case after giving effect to all payments of
principal to the Noteholders of such Class on the immediately preceding
Distribution Date.
"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 (after giving
effect to any Principal Liquidation Losses imposed on such junior Classes and
Certificates) exceeds the Pool Scheduled Principal Balance, after giving effect
to all distributions of principal on such Distribution Date.
"Principal Balance" means, with respect to any Determination Date and any
Class of Notes, the Original Principal Balance of such Class minus all amounts
previously distributed in respect of principal of such Class and minus any
unreimbursed Principal Liquidation Losses of such Class.
"Noteholders' Interest Carryover Shortfall" means, with respect to any
Distribution Date, the excess of the Noteholders' Monthly Interest
Distributable Amount for the preceding Distribution Date and any outstanding
Noteholders' Interest Carryover Shortfall on such preceding Distribution Date,
over the amount in respect of interest that is actually deposited in the Note
Distribution Account on such preceding Distribution Date, plus
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interest on the amount of interest due but not paid to Noteholders on the
preceding Distribution Date, to the extent permitted by law, at the respective
Interest Rate for each Class of Notes for the applicable monthly interest
period.
"Noteholder's 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,
however, that the Noteholders' Principal Distributable Amount shall not exceed
the outstanding principal balance of the Notes, and provided further, that the
Noteholders' Principal Distributable Amount on the Final Scheduled Distribution
Date shall not 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 outstanding
principal balances (including all unreimbursed Principal Liquidation Losses) of
all Classes of Notes to zero.
"Noteholders' Monthly Principal Distributable Amount" means, with respect to
any Distribution Date, the Noteholders' Percentage of the Formula Principal
Distribution Amount plus the aggregate unreimbursed Principal Liquidation
Losses of each Class of Notes.
"Noteholders' Percentage" means, 100% until and including the Distribution
Date on which the aggregate Principal Balance of the Notes are paid in full and
0% thereafter.
"Noteholders' Unpaid Principal Shortfall" means, as of the close of any
Distribution Date, the excess of the Noteholders' Monthly Principal
Distributable Amount and any outstanding Noteholders' Unpaid Principal
Shortfall from the preceding Distribution Date over the amount in respect of
principal that is actually deposited in the Note Distribution Account on such
Distribution Date.
"Certificateholders' Distributable Amount" means, with respect to any
Distribution Date, the sum of the Certificateholders' Interest Distributable
Amount and the Certificateholders' Principal Distributable Amount.
"Certificateholders' Interest Distributable Amount" means, with respect to
any Distribution Date, the sum of the Certificateholders' Monthly Interest
Distributable Amount for such Distribution Date and the Certificateholders'
Interest Carryover Shortfall for such Distribution Date.
"Certificateholders' Monthly Interest Distributable Amount" means, with
respect to any Distribution Date, interest accrued at the Pass-Through Rate on
(i) the Certificate Principal Balance and (ii) the aggregate unreimbursed
Certificate Principal Liquidation Losses on each prior Distribution Date, in
each case after giving effect to all payments of principal to the
Certificateholders on the immediately preceding Distribution Date.
"Certificate Principal Liquidation Loss" means, with respect to any
Distribution Date, the amount by which the aggregate Principal Balance of the
Notes and the Certificate Principal Balance exceeds the Pool Scheduled
Principal Balance, after giving effect to all distributions of principal on
such Distribution Date.
"Certificate Principal Balance" equals, initially, $ (approximate) and,
thereafter, equals the Original Certificate Principal Balance, reduced by all
amounts allocable to principal previously distributed to Certificateholders
minus any unreimbursed Certificate Principal Liquidation Losses.
"Certificateholders' Interest Carryover Shortfall" means, with respect to any
Distribution Date, the excess of the Certificateholders' Monthly Interest
Distributable Amount for the preceding Distribution Date and any outstanding
Certificateholders' Interest Carryover Shortfall on such preceding Distribution
Date, over the amount in respect of interest at the Pass-Through Rate that is
actually deposited in the Certificate Distribution Account on such preceding
Distribution Date, plus interest on such excess, to the extent permitted by
law, at the Pass-Through Rate from such preceding Distribution Date to but
excluding the current Distribution Date.
"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
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Certificateholders' Unpaid Principal Shortfall as of the close of the preceding
Distribution Date; provided, however, that the Certificateholders' Principal
Distributable Amount shall not exceed the Certificate Principal Balance plus
any unreimbursed Certificate Principal Liquidation Losses. In addition, 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
unreimbursed Certificate Principal Liquidation Losses.
"Certificateholders' Monthly Principal Distributable Amount" means, with
respect to any Distribution Date prior to the Distribution Date on which the
Notes are paid in full, zero; and with respect to any Distribution Date
commencing on the Distribution Date on which the Notes are paid in full, the
Class A-1:HE/HI Formula Principal Distribution Amount (less, on the
Distribution Date on which the Notes are paid in full, the portion thereof
payable on the Notes).
"Certificateholders' Unpaid Principal Shortfall" means, as of the close of
any Distribution Date, the excess of the Certificateholders' Monthly Principal
Distributable Amount and any outstanding Certificateholders' Unpaid Principal
Shortfall from the preceding Distribution Date, over the amount in respect of
principal that is actually deposited in the Certificate Distribution Account.
STATEMENTS TO SECURITYHOLDERS
On or prior to each Distribution Date, the Servicer will prepare and provide
to the Indenture Trustee a statement to be delivered to the Noteholders and to
the Owner Trustee a statement to be delivered to the Certificateholders 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. Each such statement to be delivered to Noteholders will
include the following information as to the Notes, and 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:
(i) the amount of the distribution allocable to interest on or with
respect to each Class of Notes and to the Certificates;
(ii) the amount of the distribution allocable to principal on or with
respect to each Class of Notes and to the Certificates;
(iii) the aggregate outstanding principal balance and the Note Pool
Factor for the Notes and the Certificate Principal Balance and the
Certificate Pool Factor for the Certificates after giving effect to all
payments reported under (ii) above on such date;
(iv) the Noteholders' Interest Shortfall, the Noteholders' Principal
Shortfall, the Certificateholders' Interest Shortfall and the
Certificateholders' Principal Shortfall, if any, and the change in such
amounts from the preceding statement;
(v) the amount, if any, of Principal Liquidation Losses, aggregate
unreimbursed Principal Liquidation Losses since the Closing Date and the
amount of the distribution allocable to such losses for the Notes and
Certificates;
(vi) the amount, if any, deposited or withdrawn from each sub-account of
the Spread Account and the amount on deposit in each sub-account of the
Spread Account after giving effect to all withdrawals and deposits on such
Distribution Date;
(vii) the amount, if any, deposited or withdrawn from the Reserve Account
and the amount on deposit in the Reserve Account after giving effect to all
withdrawals and deposits on such Distribution Date;
(viii) the amount, if any, of the Interest Rate Cap Payment and the
Guaranty Payment;
(ix) the amount of the Monthly Servicing and Guaranty Fee paid to the
Servicer;
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(x) the number and aggregate principal balances of delinquent Contracts,
the number of Products repossessed and repossessed and remaining in
inventory, the number of foreclosures and the number of Contracts that
became Liquidated Contracts with respect to the immediately preceding
Monthly Period; and
(xi) 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.
Each amount set forth pursuant to subclauses (i) through (vi) with respect to
Certificates or Notes will be expressed as a dollar amount per $1,000 of the
initial principal amount of the Notes or the initial Certificate Principal
Balance, as applicable.
Unless and until Definitive Notes or Definitive Certificates are issued, such
reports will be sent on behalf of the Trust to Cede & Co., as registered holder
of the Notes and the Certificates and the nominee of DTC. Note Owners and
Certificate Owners may receive copies of such reports upon written request,
together with a certification that they are Note Owners or Certificate Owners,
as the case may be, and payment of any expenses associated with the
distribution of such reports, from the Indenture Trustee or Owner Trustee. See
"Reports to Securityholders" herein and "Reports to Securityholders" and
"Certain Information Regarding the Securities" in the accompanying Prospectus.
Within the required period of time after the end of each calendar year, the
Indenture Trustee and the Owner Trustee, as applicable, will furnish to each
person who at any time during such calendar year was a Noteholder or
Certificateholder, a statement as to the aggregate amounts of interest and
principal paid to such Noteholder or Certificateholder, information regarding
the amount of servicing compensation received by the Servicer and such other
information as Green Tree deems necessary to enable such Noteholder or
Certificateholder to prepare its tax returns. See "Certain Federal Income Tax
Consequences" herein.
ADMINISTRATOR
Green Tree Financial Servicing Corporation, a Delaware corporation (the
"Administrator"), will provide the notices and perform other administrative
obligations required by the Indenture and the Trust Agreement. The
Administrator, a subsidiary of Green Tree, will enter into an Administration
Agreement with the Trust and the Indenture Trustee relating to its duties and
obligations as Administrator.
CERTAIN FEDERAL AND STATE INCOME TAX CONSEQUENCES
The following is a general discussion of certain federal and state income tax
consequences relating to the purchase, ownership, and disposition of the Notes
and the Certificates. 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. For additional
information regarding federal and state income tax consequences, see "Certain
Federal Income Tax Consequences--Owner Trust Series" and "Certain State Income
Tax Consequences" in the Prospectus.
Prospective investors should consult their own tax advisors to determine the
federal, state, local and other tax consequences of the purchase, ownership and
disposition of the Notes and the Certificates. Prospective investors should
note that no rulings have been or will be sought from the Internal Revenue
Service (the "IRS") with respect to any of the federal income tax consequences
discussed herein or in the accompanying Prospectus, and no assurance can be
given that the IRS will not take contrary positions. Moreover, there are no
cases or IRS rulings on transactions similar to those described herein with
respect to the Trust, involving both debt and equity interests issued by a
trust with terms similar to those of the Notes and the Certificates.
Prospective investors are urged to consult their own tax advisors in
determining the federal, state, local, foreign and any other tax consequences
to them of the purchase, ownership and disposition of the Securities.
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In the opinion of [Dorsey & Whitney LLP,] 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 and neither the Trust nor any portion of the Trust will constitute
a taxable mortgage pool taxable as a corporation. Each Certificateholder, by
the acceptance of a Certificate, agrees to treat the Trust as a partnership in
which the Certificateholders are partners for federal income tax purposes. The
Notes will not be issued with original issue discount ("OID"). The Class A-1
Notes provide for stated interest at a floating rate based on LIBOR. Under
Treasury regulations, stated interest payable at a variable rate is not treated
as OID or contingent interest if the variable rate is a qualified floating rate
or a qualified objective rate. The stated interest on the Class A-1 Notes
represents interest payable at a qualified floating rate and will be taxable to
holders of such Notes as interest and not as OID or contingent interest. The
Class A-2, Class A-3 and Class A-4 Notes will not be issued with OID or
contingent interest because interest will be payable at a single fixed rate at
least annually.
ERISA CONSIDERATIONS
Section 406 of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), and or Section 4975 of the Code, prohibit a pension, profit-
sharing or other employee benefit plan, as well as individual retirement
accounts and certain types of Keogh Plans (each a "Benefit Plan") from engaging
in certain transactions with persons that are "parties in interest" under ERISA
or "disqualified persons" under the Code with respect to such Benefit Plan. A
violation of these "prohibited transaction" rules may result in an excise tax
or other penalties and liabilities under ERISA and the Code for such persons.
Title I of ERISA also requires that fiduciaries of a Benefit Plan subject to
ERISA make investments that are prudent, diversified (except if prudent not to
do so) and in accordance with governing plan documents.
Certain transactions involving the purchase, holding or transfer of the
Securities might be deemed to constitute prohibited transactions under ERISA
and the Code if assets of the Trust were deemed to be assets of a Benefit Plan.
Under a regulation issued by the United States Department of Labor (the "Plan
Assets Regulation"), the assets of the Trust would be treated as plan assets of
a Benefit Plan for the purposes of ERISA and the Code only if the Benefit Plan
acquires an "Equity Interest" in the Trust and none of the exceptions contained
in the Plan Assets Regulation is 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. Green Tree believes that the Notes should be
treated as indebtedness without substantial equity features for purposes of the
Plan Assets Regulation. However, without regard to whether the Notes are
treated as an Equity Interest for such purposes, the acquisition or holding of
Notes by or on behalf of a Benefit Plan could be considered to give rise to a
prohibited transaction if the Trust, the Owner Trustee or the Indenture
Trustee, the owner of collateral, or any of their respective affiliates is or
becomes a party in interest or a disqualified person with respect to such
Benefit Plan. In such case, certain exemptions from the prohibited transaction
rules could be applicable depending on the type and circumstances of the plan
fiduciary making the decision to acquire a Note. Included among these
exemptions are: Prohibited Transaction Class Exemption ("PTCE") 90-1, regarding
investments by insurance company pooled separate accounts; PTCE 91-38 regarding
investments by bank collective investment funds; and PTCE 84-14, regarding
transactions effected by "qualified professional asset managers."
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 I
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. By its acceptance of a Certificate, each
Certificateholder will be deemed to have represented and warranted that it is
not subject to the foregoing limitation. In this regard, purchasers that are
insurance companies should consult with their counsel with respect to the
United States Supreme Court case interpreting the fiduciary responsibility
rules of ERISA, John Hancock Mutual Life Insurance Co. v. Harris Trust and
Savings Bank (decided December 13, 1993). In John Hancock, the Supreme Court
ruled that assets held in an insurance company's general account may be deemed
to be "plan assets" for ERISA purposes under certain circumstances. Prospective
purchasers
S-45
<PAGE>
should determine whether the decision affects their ability to make purchases
of the Certificates. In particular, such an insurance company should consider
the exemptive relief granted by the Department of Labor for transactions
involving insurance company general accounts in Prohibited Transactions
Exemption 95-60, 60 Fed. Reg. 35925 (July 12, 1995). The Small Business Job
Protection Act of 1996 (the "1996 Act") became effective on August 20, 1996.
The 1996 Act amends ERISA to require the Department of Labor to issue
regulations to clarify, retroactively, the application of ERISA and the
prohibited transaction provisions of the Code to insurance company general
accounts. For additional information regarding treatment of the Certificates
under ERISA, see "ERISA Considerations" in the Prospectus.
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. Such plans may, however, be subject to
the provisions of other applicable federal and state laws, including, for any
such governmental or church plan qualified under Section 401(a) of the Code and
exempt from taxation under Section 501(a) of the Code, the prohibited
transaction rules set forth in Section 503 of the Code.
A plan fiduciary considering the purchase of Notes 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.
S-46
<PAGE>
UNDERWRITING
[Underwriters] (the "Underwriter") has agreed, subject to the terms and
conditions of the Underwriting Agreement, to purchase from Green Tree the
respective principal amounts of Notes and Certificates set forth below:
<TABLE>
<CAPTION>
CLASS A-1 CLASS A-2 CLASS A-3 CLASS A-4
NOTES NOTES NOTES NOTES CERTIFICATES
----------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
$ $ $ $ $
</TABLE>
The Underwriting Agreement provides that the Underwriter is obligated to
purchase all of the Notes and Certificates offered hereby, if any of such Notes
and Certificates are purchased.
Green Tree has been advised by the Underwriter that it proposes initially to
offer the Notes and Certificates to the public at the public offering prices
set forth on the cover page of this Prospectus Supplement and to certain
dealers at such price less a concession not in excess of % of the Class A-1
Principal Balance, % of the Class A-2 Principal Balance, % of the Class
A-3 Principal Balance, % of the Class A-4 Principal Balance and % of the
Certificate Principal Balance, and that the Underwriter and such dealers may
reallow a discount of not in excess of % of the Class A-1 Principal
Balance, % of the Class A-2 Principal Balance, % of the Class A-3
Principal Balance, % of the Class A-4 Principal Balance and % of the
Certificate Principal Balance, to other dealers. The public offering price and
the concession and discount to dealers may be changed by the Underwriter after
the initial public offering of the Notes and Certificates offered hereby.
Until the distribution of the Securities is completed, rules of the
Commission may limit the ability of the Underwriter and certain selling group
members to bid for and purchase the Securities. As an exception to these rules,
the Underwriter is permitted to engage in certain transactions that stabilize
the price of the Securities. Such transactions consist of bids or purchases for
the purpose of pegging, fixing or maintaining the price of the Securities.
If the Underwriter creates a short position in the Securities in connection
with the offering, i.e., if they sell more securities than are set forth on the
cover page of this Prospectus Supplement, the Underwriter may reduce that short
position by purchasing Securities in the open market.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases.
Neither Green Tree nor the Underwriter makes any representation or prediction
as to the direction or magnitude of any effect that the transactions described
above may have on the prices of the Securities. In addition, neither Green Tree
nor the Underwriter makes any representation that the Underwriter will engage
in such transactions or that such transactions, once commenced, will not be
discontinued without notice.
The Underwriter has represented, warranted and agreed that (i) it has not
offered or sold and, prior to the expiration of the period of six months from
the Closing Date, will not offer or sell any Securities to persons in the
United Kingdom except to persons whose ordinary activities involve them in
acquiring, holding, managing or disposing of investments (as principal or
agent) for the purposes of their businesses or otherwise in circumstances which
have not resulted and will not result in an offer to the public in the United
Kingdom within the meaning of the Public Offers of Securities Regulations 1995;
(ii) it has complied and will comply with all applicable provisions of the
Financial Services Act 1986 with respect to anything done by it in relation to
the Securities in, from or otherwise involving the United Kingdom; and (iii) it
has only issued or passed on and will only issue or pass on in the United
Kingdom any document received by it in connection with the issue of the
Securities to a person who is of a kind described in Article 11(3) of the
Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1995
(as amended) or is a person to whom such document may otherwise lawfully be
issued or passed on.
S-47
<PAGE>
The Notes have not been and will not be registered under the Securities and
Exchange Law of Japan (the "Securities and Exchange Law") and the Underwriter
has agreed that it will not offer or sell any of the Notes, directly or
indirectly, in Japan or to, or for the benefit of, any resident of Japan (which
term as used herein means any person resident in Japan, including any
corporation or other entity organized under the laws of Japan), except pursuant
to an exemption from the registration requirements of, and otherwise in
compliance with, the Securities and Exchange Law and any other applicable laws,
regulations and ministerial guidelines of Japan.
Green Tree has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended.
Green Tree does not intend to apply for listing of the Notes and Certificates
on a national securities exchange, but has been advised by the Underwriter that
the Underwriter currently intends to make a market in the Securities, as
permitted by applicable laws and regulations. The Underwriter is not obligated,
however, to make a market in the Securities and any such market may be
discontinued at any time at the sole discretion of the Underwriter.
Accordingly, no assurance can be given as to the liquidity of, or trading
markets for, the Securities.
LEGAL MATTERS
Certain matters with respect to the legality of the Notes and Certificates
and with respect to the federal and Minnesota income tax matters discussed
under "Certain Federal and State Income Tax Consequences" will be passed upon
for Green Tree by [ ] Minnesota. The
validity of the Notes and Certificates will be passed upon for the Underwriter
by [ ] New York, New York.
S-48
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the Notes will be available only in
book-entry form (the "Global Notes"). Investors in the Global Notes may hold
such Global Notes through any of DTC, CEDEL or Euroclear. The Global
Securities will be tradeable as home market instruments in both the European
and U.S. domestic markets. Initial settlement and all secondary trades will
settle in same-day funds.
Secondary market trading between investors holding Global Notes through
CEDEL and Euroclear will be conducted in the ordinary way in accordance with
their normal rules and operating procedures and in accordance with
conventional eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Notes through DTC
will be conducted according to the rules and procedures applicable to U.S.
corporate debt obligations.
Secondary cross-market trading between CEDEL or Euroclear and DTC
Participants holding Notes will be effected on a delivery-against-payment
basis through the respective Depositaries of CEDEL and Euroclear (in such
capacity) and DTC Participants.
Non-U.S. holders (as described below) of Global Notes will be subject to
U.S. withholding taxes unless such holders meet certain requirements and
deliver appropriate U.S. tax documents to the securities clearing
organizations or their participants.
INITIAL SETTLEMENT
All Global Notes will be held in book-entry form by DTC in the name of Cede
& Co. as nominee of DTC. Investors' interests in the Global Notes will be
represented through financial institutions acting on their behalf as direct
and indirect Participants in DTC. As a result, CEDEL and Euroclear will hold
positions on behalf of their participants through their respective
Depositaries, which in turn will hold such positions in accounts as DTC
Participants.
Investors electing to hold their Global Notes through DTC will follow the
settlement practices applicable to United States corporate debt obligations.
Investors securities custody accounts will be credited with their holdings
against payment in same-day funds on the settlement date.
Investors electing to hold their Global Notes through CEDEL or Euroclear
accounts will follow the settlement procedures applicable to conventional
eurobonds, except that there will be no temporary global security and no
"lock-up" or restricted period. Global Notes will be credited to the
securities custody accounts on the settlement date against payments in same-
day funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired
value date.
Trading between DTC Participants. Secondary market trading between DTC
Participants will be settled using the procedures applicable to book-entry
securities in same-day funds.
Trading between CEDEL and/or Euroclear Participants. Secondary market
trading between CEDEL Participants or Euroclear Participants will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
Trading between DTC seller and CEDEL or Euroclear purchaser. When Global
Notes are to be transferred from the account of a DTC Participant to the
account of a CEDEL Participant or a Euroclear Participant, the
A-1
<PAGE>
purchaser will send instructions to CEDEL or Euroclear through a CEDEL
Participant or Euroclear Participant at least one business day prior to
settlement. CEDEL or Euroclear, as applicable, will instruct its Depositary to
receive the Global Notes against payment. Payment will include interest
accrued on the Global Notes from and including the last coupon payment date to
and excluding the settlement date. Payment will then be made by such
Depositary to the DTC Participant's account against delivery of the Global
Notes. After settlement has been completed, the Global Notes will be credited
to the applicable clearing system and by the clearing system, in accordance
with its usual procedures, to the CEDEL Participant's or Euroclear
Participant's account. The Global Notes credit will appear the next day
(European time) and the cash debit will be back-valued to, and the interest on
the Global Notes will accrue from, the value date (which would be the
preceding day when settlement occurred in New York). If settlement is not
completed on the intended value date (i.e., the trade fails), the CEDEL or
Euroclear cash debit will be valued instead as of the actual settlement date.
CEDEL Participants and Euroclear Participants will need to make available to
the respective clearing systems the funds necessary to process same-day funds
settlement. The most direct means of doing so is to pre-position funds for
settlement, either from cash on hand or existing lines of credit, as they
would for any settlement occurring within CEDEL or Euroclear. Under this
approach, they may take on credit exposure to CEDEL or Euroclear until the
Global Securities are credited to their accounts one day later.
As an alternative, if CEDEL or Euroclear has extended a line of credit to
them, CEDEL Participants or Euroclear Participants can elect not to pre-
position funds and allow that credit line to be drawn upon the finance
settlement. Under this procedure, CEDEL Participants or Euroclear Participants
purchasing Global Notes would incur overdraft charges for one day, assuming
they cleared the overdraft when the Global Notes were credited to their
accounts. However, interest on the Global Notes would accrue from the value
date. Therefore, in many cases the investment income on the Global Notes
earned during that one-day period may substantially reduce or offset the
amount of such overdraft charges, although this result will depend on each
CEDEL Participant's or Euroclear Participant's particular cost of funds.
Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for sending Global Notes to the
respective Depositary for the benefit of CEDEL Participants or Euroclear
Participants. The sale proceeds will be available to the DTC seller on the
settlement date. Thus, to the DTC Participant a cross-market transaction will
settle no differently than a trade between two DTC Participants.
Trading between CEDEL or Euroclear seller and DTC purchaser. Due to time
zone differences in their favor, CEDEL Participants and Euroclear Participants
may employ their customary procedures for transactions in which Global Notes
are to be transferred by the respective clearing systems, through their
respective Depositaries, to a DTC Participant. The seller will send
instructions to CEDEL or Euroclear through a CEDEL Participant or Euroclear
Participant at least one business day prior to settlement. In these cases,
CEDEL or Euroclear will instruct their respective Depositaries, as
appropriate, to deliver the Notes to the DTC Participant's account against
payment. Payment will include interest accrued on the Global Notes from and
including the last coupon payment date to and excluding the settlement date.
The payment will then be reflected in the account of the CEDEL Participant or
Euroclear Participant the following day, and receipt of the cash proceeds in
the CEDEL Participant's or Euroclear Participant's account would be back-
valued to the value date (which would be the preceding day, when settlement
occurred in New York). Should the CEDEL Participant or Euroclear Participant
have a line of credit with its clearing system and elect to be in debit in
anticipation of receipt of the sale proceeds in its account, the bank-
valuation will extinguish any overdraft charges incurred over that one-day
period. If settlement is not completed on the intended value date (i.e., the
trade fails), receipt of the cash proceeds in the CEDEL Participant's or
Euroclear Participant's account would instead be valued as of the actual
settlement date. Finally, day traders that use CEDEL or Euroclear and that
purchase Global Notes from DTC Participants for delivery to CEDEL Participants
or Euroclear Participants should note that these trades would automatically
fail on the sale side unless affirmative action were taken. At least three
techniques should be readily available to eliminate this potential problem:
A-2
<PAGE>
(a) borrowing through CEDEL or Euroclear for one day (until the purchase
side of the day trade is reflected in their CEDEL or Euroclear accounts) in
accordance with the clearing system's customary procedures;
(b) borrowing the Global Notes in the U.S. from a DTC Participant no
later than one day prior to settlement, which would give the Global Notes
sufficient time to be reflected in their CEDEL or Euroclear account in
order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade so
that the value date for the purchase from the DTC Participant is at least
one day prior to the value date for the sale to the CEDEL Participant or
Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Notes holding securities through CEDEL or
Euroclear (or through DTC if the holder has an address outside the U.S.) will
be subject to the 30% U.S. withholding tax that generally applies to payments
of interest (including original issue discount) on registered debt issued by
U.S. Persons, unless (i) each clearing system, bank or other financial
institution that holds customers' securities in the ordinary course of its
trade or business in the chain of intermediaries between such beneficial owner
and the U.S. entity required to withhold tax complies with applicable
certification requirements and (ii) such beneficial owner takes one of the
following steps to obtain an exemption or reduced tax rate:
Exemption of non-U.S. Persons (Form W-8). Beneficial owners of Notes that
are non-U.S. Persons generally can obtain a complete exemption from the
withholding tax by filing a signed Form W-8 (Certificate of Foreign Status)
and a certificate under penalties of perjury (the "Tax Certificate") that
such beneficial owner is (i) not a controlled foreign corporation (within
the meaning of Section 957(a) of the Code) that is related (within the
meaning of Section 864(d)(4) of the Code) to the Trust or the Transferor
and (ii) not a 10 percent shareholder (within the meaning of Section
871(h)(3)(B) of the Code) of the Trust or the Transferor. If the
information shown on Form W-8 or the Tax Certificate changes, a new Form W-
8 or Tax Certificate, as the case may be, must be filed within 30 days of
such change.
Exemption for non-U.S. Person with effectively connected income (Form
4224). A non-U.S. Person, including a non-U.S. corporation or bank with a
U.S. branch, for which the interest income is effectively connected with
its conduct of a trade or business in the United States can obtain an
exemption from the withholding tax by filing Form 4224 (Exemption from
Withholding of Tax on Income Effectively Connected with the Conduct of a
Trade or Business in the United States).
Exemption or reduced rate for non-U.S. Persons resident in treaty
countries (Form 1001). Non-U.S. Persons that are beneficial owners of Notes
residing in a country that has a tax treaty with the United States can
obtain an exemption or reduced tax rate (depending on the treaty terms) by
filing Form 1001 (Ownership, Exemption or Reduced Rate Certificate). If the
treaty provides only for a reduced rate, withholding tax will be imposed at
that rate unless the filer alternatively files Form W-8. Form 1001 may be
filed by the beneficial owner of Notes or such owner's agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The beneficial owner of a
Global Security or, in the case of a Form 1001 or a Form 4224 filer, such
owner's agent, files by submitting the appropriate form to the person
through whom it holds the security (the clearing agency, in the case of
persons holding directly on the books of the clearing agency). Form W-8 and
Form 1001 are effective for three calendar years and Form 4224 is effective
for one calendar year.
The term "U.S. Person" means (i) a citizen or resident of the United States,
(ii) a corporation or partnership organized in or under the laws of the United
States or any political subdivision thereof, or (iii) an estate or trust the
income of which is includible in gross income for United States tax purposes,
regardless of its source. This summary does not deal with all aspects of U.S.
federal income tax withholding that may be relevant to foreign holders of the
Global Notes. Investors are advised to consult their own tax advisors for
specific tax advice concerning their holding and disposing of the Global
Notes.
A-3
<PAGE>
PROSPECTUS
BASE PROSPECTUS NO. 5
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 OCTOBER 9, 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,
1997, and the Company's quarterly reports on Form 10-Q for the quarters ended
March 31, 1998 and June 30, 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.
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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.
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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").
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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
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in the related Prospectus Supplement. See
"Certain Information Regarding the
Securities--Book-Entry Registration."
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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
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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."
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The Certificates of a Series will not be
guaranteed or insured by any government
agency or, unless otherwise
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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 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."
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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
$86,950,000, 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 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 $1,332,000,000. 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 (651) 293-3400).
Green Tree's Annual Report on Form 10-K for the year ended December 31, 1997,
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, 1997, Green Tree had
approximately $3,116,054,406 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,
------------------------
MONTHS
ENDED
1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---------
<S> <C> <C> <C> <C> <C> <C>
Ratio of Earnings to Fixed Charges........... 4.81 7.98 7.90 5.44 3.94
</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 $86,950,000. These insurance reserves were available to cover
losses on approximately $883,889,000 of FHA-insured manufactured housing
contracts and approximately $128,145,000 of FHA-insured home improvement
loans, including the FHA-insured Contracts that may be owned by a Trust Fund.
If an Event of Termination (as defined under "Description of the 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 ($124,500 in 1998, 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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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, 1997
and 1996 and for each of the years in the three-year period ended December 31,
1997, 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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NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION
NOT CONTAINED IN THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS, AND ANY INFOR-
MATION OR REPRESENTATION NOT CONTAINED HEREIN OR THEREIN MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY GREEN TREE OR ANY UNDERWRITER. THIS PROSPEC-
TUS SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTITUTE AN OFFER OF ANY SECURITIES
OTHER THAN THE REGISTERED SECURITIES TO WHICH THE PROSPECTUS SUPPLEMENT RE-
LATES OR AN OFFER TO ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER WOULD
BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND THE PRO-
SPECTUS NOR ANY SALES MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF GREEN TREE OR
THE TRUST SINCE THE DATE HEREOF.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
PROSPECTUS SUPPLEMENT
<S> <C>
Reports to Securityholders................................................. S-2
Summary of Terms........................................................... S-3
Risk Factors............................................................... S-16
The Trust.................................................................. S-17
The Trust Property......................................................... S-18
The Contract Pool.......................................................... S-19
Green Tree Financial Corporation........................................... S-24
Yield and Prepayment Considerations........................................ S-27
Description of the Notes................................................... S-29
Description of the Counterparty............................................ S-36
Description of the Certificates............................................ S-36
Description of the Trust Documents and Indenture........................... S-38
Certain Federal and State Income Tax Consequences.......................... S-44
ERISA Considerations....................................................... S-45
Underwriting............................................................... S-47
Legal Matters.............................................................. S-48
Annex I.................................................................... A-1
PROSPECTUS
Available Information...................................................... 3
Reports to Securityholders................................................. 3
Incorporation of Certain Documents by Reference............................ 3
Prospectus Summary......................................................... 4
Risk Factors............................................................... 15
The Trusts................................................................. 17
Green Tree Financial Corporation........................................... 19
Yield Considerations....................................................... 21
Maturity and Prepayment Considerations..................................... 21
Pool Factor................................................................ 22
Use of Proceeds............................................................ 23
The Notes.................................................................. 23
The Certificates........................................................... 27
Certain Information Regarding the Securities............................... 29
Description of the Trust Documents......................................... 32
Description of FHA Insurance............................................... 42
Certain Legal Aspects of the Contracts..................................... 43
Certain Federal Income Tax Consequences.................................... 52
Certain State Income Tax Consequences...................................... 59
ERISA Considerations....................................................... 59
Legal Investment Considerations............................................ 60
Ratings.................................................................... 60
Underwriting............................................................... 60
Legal Matters.............................................................. 62
Experts.................................................................... 62
</TABLE>
---------------
FOR 90 DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT ALL DEALERS EFFECT-
ING TRANSACTIONS IN THE SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DIS-
TRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE
OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS SUPPLEMENT AND A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
$ (APPROXIMATE)
LOGO
SELLER AND SERVICER
GREEN TREE HOME IMPROVEMENT AND HOME EQUITY
LOAN TRUST 1998-
$ (APPROXIMATE) % ASSET-BACKED NOTES, CLASS A-1:HE/HI
$ (APPROXIMATE) FLOATING RATE ASSET-BACKED NOTES, CLASS A-1
$ (APPROXIMATE) % ASSET-BACKED NOTES, CLASS A-2
$ (APPROXIMATE) % ASSET-BACKED NOTES, CLASS A-3
$ (APPROXIMATE) % ASSET-BACKED NOTES, CLASS A-4
$ (APPROXIMATE) % ASSET-BACKED CERTIFICATES
-----------------
PROSPECTUS SUPPLEMENT
-----------------
[UNDERWRITERS]
, 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+THIS PRELIMINARY PROSPECTUS SUPPLEMENT AND THE INFORMATION CONTAINED HEREIN +
+ARE SUBJECT TO COMPLETION OR AMENDMENT AND PROSPECTIVE PURCHASERS ARE +
+REFERRED TO THE RELATED FINAL PROSPECTUS SUPPLEMENT FOR DEFINITIVE +
+INFORMATION ON ANY MATTER CONTAINED HEREIN. THIS PRELIMINARY PROSPECTUS +
+SUPPLEMENT 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 +
+JURISDICTION IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL +
+PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH +
+JURISDICTION. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS SUPPLEMENT PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED , 1998) TO BASE NO. 6
$ (APPROXIMATE)
LOGO
SELLER AND SERVICER
CERTIFICATES FOR HOME IMPROVEMENT LOANS
SERIES 1998-
% PASS-THROUGH RATE
(PRINCIPAL AND INTEREST PAYABLE ON THE 15TH DAY OF EACH MONTH BEGINNING IN
1998)
------------
The Certificates for Home Improvement Loans, Series 1998- offered hereby
(the "Certificates") will be issued by, and evidence beneficial ownership
interests in, Home Improvement Loan Trust 1998- (the "Trust"). The Trust will
be created by Green Tree Financial Corporation (the "Company") pursuant to a
Pooling and Servicing Agreement, dated as of , 1998 (the "Agreement")
between the Company and, as Trustee (the "Trustee"). The Trust property will
consist primarily of a pool of home improvement contracts and promissory notes
(the "Contracts"), including the right to receive payments due on the Contracts
on and after (or the date of origination thereof, if later) (the "Cut-
off Date"), and amounts held for the Trust in the Certificate Account. The
Contracts are not secured by any mortgage or other lien on the related improved
real estate.
The Certificateholders will have the benefit of a limited guaranty of the
Company (the "Limited Guaranty") to protect against losses that would otherwise
be borne by the Certificateholders, subject to the limit of the Guaranty Amount
(as described herein). To the extent that funds in the Certificate Account are
insufficient to distribute to the holders of the Certificates the Formula
Distribution Amount (as described herein), the Company will be obligated
(subject to the limit of the Guaranty Amount) to pay the Guaranty Payment (as
described herein). The Guaranty Amount initially equals $ and will be
reduced thereafter as described herein. See "Description of the Limited
Guaranty" herein.
Principal and interest with respect to the Certificates are distributable on
the fifteenth day of each month or, if such fifteenth day is not a business
day, the first business day thereafter, beginning in 1998. The Company will
act as servicer (in such capacity, the "Servicer") of the Contracts. The final
scheduled Payment Date of the Certificates is in . See "Description of
the Certificates" herein and in the Prospectus.
(Continued on next page)
------------
PROSPECTIVE INVESTORS SHOULD CONSIDER THE INFORMATION SET FORTH UNDER "RISK
FACTORS" ON PAGE S-8 OF THIS PROSPECTUS SUPPLEMENT AND PAGE 9 OF THE
ACCOMPANYING PROSPECTUS.
THE CERTIFICATES REPRESENT INTERESTS IN THE TRUST AND DO NOT REPRESENT
INTERESTS IN OR OBLIGATIONS OF THE COMPANY, EXCEPT TO THE LIMITED EXTENT
DESCRIBED HEREIN AND IN THE PROSPECTUS. THE CERTIFICATES DO NOT
REPRESENT OBLIGATIONS OF, AND WILL NOT BE INSURED OR GUARANTEED BY,
ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR
ENDORSED THE MERITS OF THIS OFFERING. ANY REPRESENTATION
TO THE CONTRARY IS UNLAWFUL.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO PUBLIC(1) DISCOUNT COMPANY(1)(2)
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Certificate........................... % % %
- -----------------------------------------------------------------------------------------
Total..................................... $ $ $
- -----------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
(1) Plus accrued interest from and including , 199 .
(2) Before deducting expenses, estimated to be $170,000.
------------
The Certificates are offered subject to prior sale, when, as and if issued by
the Trust and accepted by the Underwriter and subject to its right to reject
orders in whole or in part. It is expected that delivery of the Certificates
will be made in book-entry form only through the Same Day Funds Settlement
system of The Depository Trust Company on or about , 1998 (the actual
such date being hereinafter referred to as the "Closing Date").
------------
[UNDERWRITERS]
------------
The date of the Prospectus Supplement is , 1998
<PAGE>
(Continued from previous page)
There is currently no secondary market for the Certificates offered hereby,
and there is no assurance that any such market will develop or, if it does
develop, that it will continue. [Underwriters] (the "Underwriters") expect,
but are not obligated, to make a market in the Certificates.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CERTIFICATES
OFFERED HEREBY AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
For 90 days after the date of this Prospectus Supplement, all dealers
effecting transactions in the Certificates, whether or not participating in
this distribution, may be required to deliver a Prospectus. This delivery
requirement is in addition to the obligation of dealers to deliver a
Prospectus Supplement and a Prospectus when acting as underwriters and with
respect to their unsold allotments or subscriptions. Upon receipt of a request
by an investor, or his or her representative, within the period during which
there is a Prospectus delivery obligation, the Company or the Underwriters
will transmit or cause to be transmitted promptly, without charge, and in
addition to any such delivery requirements, a paper copy of a Prospectus
Supplement and a Prospectus, or a Prospectus Supplement and a Prospectus
encoded in an electronic format.
The Certificates offered hereby constitute a separate Series of Certificates
for Home Improvement Loans being offered by the Company from time to time
pursuant to the Prospectus. This Prospectus Supplement does not contain
complete information about the offering of the Certificates. Additional
information is contained in the Prospectus and purchasers are urged to read
both this Prospectus Supplement and the Prospectus in full. Sales of the
Certificates may not be consummated unless the purchaser has received both
this Prospectus Supplement and the Prospectus. To the extent that any
statements in this Prospectus Supplement conflict with statements contained in
the Prospectus, the statements in this Prospectus Supplement shall control.
S-2
<PAGE>
SUMMARY OF THE TERMS OF THE CERTIFICATES
This summary is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus Supplement and in the
accompanying Prospectus. Capitalized terms used herein and not otherwise
defined herein shall have the respective meanings assigned them in the
Prospectus and in Article I of the Agreement, a copy of which is available upon
request made to the Company.
Securities Offered............ Certificates for Home Improvement Loans, Series
1998- (the "Certificates"). The Certificates
will be issued by, and evidence beneficial
ownership interests in, Home Improvement Loan
Trust 1998- (the "Trust"), the property of
which consists primarily of the Contracts,
having an aggregate principal balance as of
the Cut-off Date (the "Cut-off Date Pool
Principal Balance") of $ , and all
rights, benefits, obligations and proceeds
arising therefrom or in connection therewith.
Trustee....................... [Trustee], [ , Minnesota].
Seller and Servicer........... Green Tree Financial Corporation.
Payment Date.................. The fifteenth day of each month or, if such day
is not a Business Day, the next succeeding
Business Day, commencing in 1998.
Cut-off Date.................. , 1998 (or the date of origination of the
Contract, if later).
Record Date................... The Business Day immediately preceding the
related Payment Date.
Original Series 1998-
Certificate Principal
Balance......................
$ (approximate).
Pass-Through Rate............. % per annum.
Description of Certificates... The Certificates are issued in a single Class
by, and are payable solely from the property
of, the Trust. The undivided percentage
interest of the holder of any Certificate in
the distributions to be made in respect of the
Certificates (the "Percentage Interest") will
be equal to the percentage obtained by
dividing the denomination specified on such
Certificate by the Original Series 1998-
Certificate Principal Balance.
Distributions................. Holders of the Certificates will be entitled to
receive on each Payment Date, to the extent
that the Amount Available in the Certificate
Account (together with the Guaranty Payment,
as described below) is sufficient therefor,
distributions allocable to interest and
principal, as described herein. Distributions
will be made on each Payment Date to holders
of record of the Certificates on the related
Record Date, except that the final
distribution in respect of the Certificates
will be made only upon presentation and
surrender of the Certificates at the office or
agency appointed by the Trustee for that
purpose in Minneapolis or St. Paul, Minnesota.
The Amount Available for the Trust on each
Payment Date generally includes payments on
the Contracts due during the previous calendar
month (the "Due Period")
S-3
<PAGE>
and received on or prior to the Determination
Date, prepayments and other unscheduled
collections received on the Contracts during
such Due Period, any Advances (as defined
herein) made by the Servicer or the Trustee
with respect to such Due Period and any
amounts paid by the Company to repurchase a
Contract due to a breach of representation or
warranty.
Distributions on the
Certificates
Interest.................. Interest on the Certificates will be payable on
each Payment Date in an amount equal to one
month's interest at the Pass-Through Rate on
the Aggregate Certificate Principal Balance
(as defined below) immediately prior to such
Payment Date; provided that, in the case of
the first Payment Date, such interest will be
payable only for the period from the Closing
Date to but excluding , 1998. The
"Aggregate Certificate Principal Balance" with
respect to any Payment Date will equal the
Original Series 1998- Certificate Principal
Balance minus all distributions previously
made in respect of principal on the
Certificates. Accrued interest will be
computed on the basis of a 360-day year of
twelve 30-day months.
In the event that, on a particular Payment
Date, the Amount Available in the Certificate
Account, together with any Guaranty Payment,
is not sufficient to make a full distribution
of interest to the Certificateholders, the
amount of interest to be distributed in
respect of the Certificates will be allocated
among the outstanding Certificates pro rata in
accordance with their respective entitlements
to interest, and the amount of the shortfall
will be carried forward and added to the
amount such holders will be entitled to
receive on the next Payment Date. Any such
amount so carried forward will bear interest
at the Pass-Through Rate, to the extent
legally permissible. See "Description of the
Certificates."
Principal................. On each Payment Date, the Certificateholders
will be entitled to receive as distributions
of principal, to the extent of the Amount
Available in the Certificate Account after
payment of all interest payable on the
Certificates, an amount equal to the sum (such
sum being hereinafter referred to as the
"Monthly Principal") of (a) the amount of
regular principal payments on Contracts paid
or applied during the prior Due Period; (b)
the amount of Principal Prepayments received
on Contracts during the prior Due Period; (c)
the principal portion of all payments on
Contracts that were Delinquent Payments as of
the end of the prior Due Period; (d) the
unpaid principal balance of all Contracts that
became Liquidated Contracts with respect to
the prior Due Period; (e) the principal
portion of the Repurchase Price paid by the
Company to repurchase Contracts for breach of
representations and warranties with respect to
the prior Due Period, as described in this
Summary under "Repurchases by
S-4
<PAGE>
the Company;" (f) the amount of any reduction
in the principal amount deemed owed on any
Contract as a result of the Obligor's
bankruptcy; and (g) any principal amount
described in clauses (a) through (f) above
that was not previously distributed because of
an insufficient amount of funds available in
the Certificate Account and the Company either
was not obligated to or failed to pay such
amount under the Limited Guaranty.
Limited Guaranty.............. In order to mitigate the effect of liquidation
losses and delinquencies on the Contracts, the
Certificateholders are entitled to receive on
each Payment Date (subject to the limit of the
Guaranty Amount) the amount equal to the
Guaranty Payment, if any, under the Limited
Guaranty of the Company. The Guaranty Payment
for any Payment Date will equal the amount, if
any, by which the Formula Distribution Amount
(equal to one month's interest at the Pass-
Through Rate on the Aggregate Certificate
Principal Balance plus the Monthly Principal
for such Payment Date) exceeds the Amount
Available in the Certificate Account for such
Payment Date.
The "Guaranty Amount" initially equals $ .
Thereafter, on any Payment Date, the Guaranty
Amount will equal the lesser of (i) $
minus all Guaranty Payments previously made by
the Company, or (ii) the Aggregate Certificate
Principal Balance on such Payment Date plus
three months of interest at the Pass-Through
Rate on the Aggregate Certificate Principal
Balance as of such Payment Date.
The Limited Guaranty will be an unsecured
general obligation of the Company and will not
be supported by any letter of credit or other
credit enhancement arrangement.
Registration of The Certificates initially will each be
Certificates................. represented by one or more certificates
registered in the name of Cede & Co. ("Cede")
as the nominee of The Depository Trust Company
("DTC"), and will only be available in the
form of book-entries on the records of DTC and
participating members thereof. Certificates
will otherwise be issued in definitive form
only under the limited circumstances described
herein. All references herein to the rights of
"holders" or "Certificateholders" shall
reflect the rights of beneficial owners as
they may indirectly exercise such rights
through DTC and participating members thereof,
except as otherwise specified herein. See
"Description of the Certificates--Registration
of the Certificates" herein.
Contracts..................... The Contracts consist of conventional and
FHA-insured home improvement contracts and
promissory notes (the "Contracts"), including
any and all rights to receive payments due
thereunder on and after the Cut-off Date. The
obligations of the Obligor under each Contract
are unsecured and such Contracts constitute
"Unsecured Contracts" as described in the
Prospectus. The Contracts arise from loans
S-5
<PAGE>
relating to the improvement of real estate
located in states and the District of
Columbia. The contractual annual percentage
rate of interest (the "Contract Rate") on the
Contracts as of the Cut-off Date ranges from
% to % with a weighted average of
%. The Contracts had a weighted average
term to scheduled maturity, as of origination,
of months, and a weighted average term to
scheduled maturity, as of the Cut-off Date, of
months. The final scheduled payment date on
the Contract with the latest scheduled
maturity is in . See "The Contracts"
herein.
FHA Insurance................. Approximately % of the Contracts by
principal balance as of the Cut-Off Date are
insured by FHA against Obligor defaults
pursuant to Title I of the National Housing
Act ("FHA Insurance"). See "Description of FHA
Insurance" in the Prospectus.
Advances...................... The Servicer is obligated to make Advances each
month of any scheduled payments on the
Contracts that were due but not received
during the prior Due Period. The Servicer will
be entitled to reimbursement of an Advance
from subsequent funds available therefor in
the Certificate Account. The Servicer will be
obligated to make an Advance only to the
extent that it determines that such Advance
will be recoverable from subsequent funds
available therefor in the Certificate Account.
If the Servicer fails to make any Advance
required under the Agreement, the Trustee will
be obligated (subject to certain conditions)
to make such Advance. See "Description of the
Certificates--Advances" herein and in the
Prospectus.
Repurchase or Substitution The Company has agreed to repurchase any
Obligations.................. Contract in which the Trust's or the
Certificateholders' interest is materially and
adversely affected by a breach of a
representation and warranty with respect to
such Contract made in the Agreement if such
breach has not been cured within 90 days of
the day it was or should have been discovered
by the Servicer or the Trustee. In lieu of
repurchasing a Contract, during the 120 day
period following the Closing Date, the Company
may, at its option, substitute another
contract for the Contract that it is otherwise
obligated to repurchase. See "Description of
the Certificates--Conveyance of Contracts"
herein and in the Prospectus.
Repurchase Option............. The Servicer will have the option to repurchase
all of the outstanding Contracts on any
Payment Date on which the Pool Scheduled
Principal Balance is less than 10% of the Cut-
off Date Pool Principal Balance. See
"Description of the Certificates--Repurchase
Option" herein and in the Prospectus.
Monthly Servicing Fee......... The Servicer will be entitled to monthly
compensation for servicing the Contracts equal
to 1/12 of the product of .75% and the Pool
Scheduled Principal Balance (the "Monthly
Servicing Fee"). See "Description of the
Certificates--Servicing Compensation and
Payment of Expenses" and "Rights upon an Event
of Termination" herein.
S-6
<PAGE>
Tax Status.................... In the opinion of counsel to the Company, the
Trust will be classified as a grantor trust
for federal income tax purposes and not as an
association which is taxable as a corporation.
Each Certificateholder will be treated for
such purposes as the owner of an undivided
interest in the Contracts. Accordingly, each
such Certificateholder must report on its
federal income tax return its share of the
income from the Contracts and, subject to
limitations on deductions by individuals,
estates and trusts, may deduct its share of
the reasonable fees paid by the Trust,
determined in accordance with such
Certificateholder's tax accounting method. See
"Certain Federal Income Tax Consequences"
herein and in the Prospectus.
ERISA Considerations.......... No transfer of any Certificates will be
permitted to be made to any employee benefit
plan subject to the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), or
to the Internal Revenue Code of 1986, as
amended (the "Code"), unless the opinion of
counsel described under "ERISA Considerations"
herein and in the Prospectus is delivered to
the Trustee. See "ERISA Considerations" herein
and in the Prospectus.
Rating........................ It is a condition precedent to the issuance of
the Certificates that the Certificates be
assigned a rating not lower than [A-] by
Standard & Poor's Ratings Services, a division
of The McGraw-Hill Companies, Inc. ("S&P") and
["A"] by Fitch Investors Service, L.P.
("Fitch"). S&P's rating of the Certificates
addresses the likelihood of timely receipt of
interest and ultimate receipt of principal.
The rating of the Certificates is based in
part on an assessment of the Company's ability
to make payments under the Limited Guaranty.
Fitch's rating of the Certificates addresses
the likelihood of the receipt by
Certificateholders of all distributions to
which such Certificateholders are entitled.
Any reduction in S&P's or Fitch's rating of
the Company's debt securities may result in a
similar reduction in the rating of the
Certificates. A security rating is not a
recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal
at any time by the assigning rating agency.
See "Ratings" in the Prospectus.
The Company has not requested a rating of the
Certificates from any rating agencies other
than S&P and Fitch. There can be no assurance
as to whether any other rating agency will
rate the Certificates or, if one does, what
rating would be assigned by such rating
agency.
Legal Investment The Certificates will not constitute "mortgage
Considerations............... related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA") because the Contracts are not
secured by liens on real estate, as required
by SMMEA. Accordingly, many institutions with
legal authority to invest in "mortgage related
securities" may not be legally authorized to
invest in the Certificates. Investors should
consult with their own legal advisors in
determining whether and to what extent the
Certificates constitute legal investments for
them.
S-7
<PAGE>
RISK FACTORS
Prospective Certificateholders should consider, in addition to the factors
described under "Risk Factors" in the Prospectus, the following factors in
connection with the purchase of the Certificates:
Limited Historical Data With Respect to Home Improvement Loans. The Company
began purchasing and servicing FHA-insured home improvement contracts in April
1989, and conventional home improvement contracts in September 1992, and thus
has limited historical experience with respect to the performance, including
the rate of prepayments of home improvement loans. Accordingly, the Company's
delinquency experience and loan loss and liquidation experience set forth
under "The Contracts" herein may not be indicative of the performance of the
Contracts.
Delinquency and Loan Default Rates on Unsecured Home Improvement Loans.
Based on the Company's experience to date, home improvement loans that are not
secured by any lien on the improved real estate have experienced, and are
expected to continue to experience, a higher rate of delinquency and loan
default as compared with the Company's servicing portfolio of FHA-insured and
other secured home improvement loans. Based on the Company's experience to
date, contract defaults on unsecured home improvement contracts typically
result in chargeoffs that equal or exceed 100% of the outstanding principal
balance of the contract.
STRUCTURE OF THE TRANSACTION
On or about , 1998 (the "Closing Date"), the Company will establish
the Trust pursuant to a Pooling and Servicing Agreement to be dated as of
, 1998 (the "Agreement"), between the Company, as Seller and Servicer,
and the Trustee.
The Certificates will be issued by the Trust, the corpus of which will
consist primarily of the Contracts, including all rights to receive payments
due on the Contracts on and after , 1998 (or the date of origination
thereof, if later) (the "Cut-off Date"), all rights under FHA Insurance with
respect to the FHA-insured Contracts, amounts held for the Trust in the
Certificate Account (as defined below), and the Limited Guaranty of the
Company described in "Description of the Limited Guaranty" herein.
Payments and recoveries in respect of principal and interest on the
Contracts will be paid into a separate trust account maintained at an Eligible
Institution (initially [Trustee], , Minnesota) in the name of the Trust
(the "Certificate Account"), no later than one Business Day after receipt.
Payments deposited in the Certificate Account in respect of each Due Period
will be applied on the fifteenth day of the next month (or, if such day is not
a business day, the next succeeding business day) (each a "Payment Date") to
make the distributions to the Certificateholders as of the immediately
preceding Record Date as described under "Description of the Certificates--
Distributions on the Certificates" herein, and to pay certain monthly fees to
the Servicer as compensation for its servicing of the Contracts (the "Monthly
Servicing Fee") and to pay any remaining amounts in the Certificate Account to
the Company as compensation for providing the Limited Guaranty (the "Guaranty
Fee").
The Servicer will be obligated to advance any scheduled payments on the
Contracts that were due but not received during the prior Due Period
("Advances"). The Servicer will be entitled to reimbursement of an Advance
from payments on or liquidation proceeds of the related Contract and then from
other funds in the Certificate Account. The Servicer will not be required to
make any Advance to the extent that it does not expect to recoup the Advance
from subsequent collections on the Contract or from liquidation proceeds
thereof. If the Servicer fails to make any Advance required under the
Agreement, the Trustee is obligated (subject to certain conditions) to make
such Advance.
Following the transfer of the Contracts from the Company to the Trust, the
obligations of the Company are limited to (a) its obligations as Servicer to
service the Contracts, (b) certain representations and warranties in the
Agreement as described under "Description of the Certificates--Conveyance of
Contracts" herein, (c) certain indemnities, and (d) the Limited Guaranty. The
Company is obligated under the Agreement to repurchase at the Repurchase Price
(as defined herein), or, at its option, to substitute another contract for,
any Contract on the first Payment Date which is more than 90 days after the
Company becomes aware, or the Company receives written notice from the
Trustee, of any breach of any such representation and warranty in the
Agreement that materially adversely affects the Certificateholders' interest
in such Contract if such breach has not been cured prior to such date. The
Agreement also provides that the Company has certain obligations to repurchase
Contracts and to indemnify the Trustee and Certificateholders with respect to
certain other matters.
S-8
<PAGE>
USE OF PROCEEDS
The Company will use the net proceeds received from the sale of the
Certificates for working capital and general corporate purposes, including
building a portfolio of home improvement contracts and promissory notes,
providing warehouse financing for the purchase of contracts and other costs of
maintaining such contracts until they are pooled and sold to other investors.
THE CONTRACTS
Each Contract is a home improvement contract originated by a Company-
approved home improvement contractor and purchased by the Company, or a home
improvement promissory note originated by the Company directly. Each Contract
finances improvements to a one- to four-family residential property, an owner-
occupied condominium or town house or a manufactured home which either
qualifies as real estate under state law or is located in a Company-approved
park. The Contracts are not secured by any mortgage or other lien on or
security interest in the related improved real estate or any other real or
personal property.
The Company will make certain representations and warranties in the
Agreement, including that (a) each Contract is fully amortizing with a fixed
contractual rate of interest and provides for level payments over the term of
such loan, computed on the simple interest method, (b) each Contract has its
last scheduled payment due no later than and (c) each FHA-insured
Contract was originated in accordance with applicable FHA regulations and is
insured, without set-off, surcharge or defense, by FHA Insurance. The
Contracts were originated or acquired by the Company in the ordinary course of
the Company's business. A detailed listing of the Contracts is appended to the
Agreement. See "Description of the Certificates" herein and in the Prospectus.
Each of the Contracts has a Contract Rate of at least % per annum and not
more than % and the weighted average of the Contract Rates of the
Contracts as of the Cut-off Date is %. As of the Cut-off Date, the
Contracts had remaining maturities of at least months but not more than
months and original maturities of at least 24 months but not more than
months. The Contracts had a weighted average term to scheduled maturity, as of
origination, of months, and a weighted average term to scheduled maturity,
as of the Cut-off Date, of months. The average principal balance per
Contract as of the Cut-off Date was $ and the principal balances on the
Contracts as of the Cut-off Date ranged from $ to $ . The Contracts
arise from loans relating to real property located in states and the
District of Columbia. By principal balance as of the Cut-off Date,
approximately % of the Contracts financed improvements to real estate
located in California. No other state represented % or more of the Cut-off
Date Pool Principal Balance. Substantially none of the Contracts provide for
recourse to the originating contractor in the event of a default by the
Obligor.
S-9
<PAGE>
Set forth below is a description of certain additional characteristics of the
Contracts.
GEOGRAPHICAL DISTRIBUTION OF IMPROVED REAL ESTATE
<TABLE>
<CAPTION>
% OF
CONTRACT POOL BY
% OF CONTRACT POOL BY AGGREGATE PRINCIPAL OUTSTANDING
NUMBER OF NUMBER OF BALANCE PRINCIPAL
CONTRACTS AS OF CONTRACTS AS OUTSTANDING AS OF BALANCE AS OF
CUT-OFF DATE OF CUT-OFF DATE CUT-OFF DATE CUT-OFF DATE
--------------- --------------------- ------------------- ----------------
<S> <C> <C> <C> <C>
Alabama................. % $ %
Alaska..................
Arizona.................
Arkansas................
California..............
Colorado................
Connecticut.............
Delaware................
District of Columbia....
Florida.................
Georgia.................
Idaho...................
Illinois................
Indiana.................
Iowa....................
Kansas..................
Kentucky................
Louisiana...............
Maine...................
Maryland................
Massachusetts...........
Michigan................
Minnesota...............
Mississippi.............
Missouri................
Montana.................
Nebraska................
Nevada..................
New Hampshire...........
New Jersey..............
New Mexico..............
New York................
North Carolina..........
North Dakota............
Ohio....................
Oklahoma................
Oregon..................
Pennsylvania............
Rhode Island............
South Carolina..........
South Dakota............
Tennessee...............
Texas...................
Utah....................
Vermont.................
Virginia................
Washington..............
West Virginia...........
Wisconsin...............
Wyoming.................
----- ------- ------------ ------
Total............... 100.00% $ 100.00%
===== ======= ============ ======
</TABLE>
S-10
<PAGE>
YEARS OF ORIGINATION OF CONTRACTS
<TABLE>
<CAPTION>
% OF
CONTRACT POOL BY
AGGREGATE PRINCIPAL OUTSTANDING PRINCIPAL
NUMBER OF CONTRACTS BALANCE OUTSTANDING BALANCE AS OF
YEAR OF ORIGINATION AS OF CUT-OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
------------------- -------------------- ------------------- ----------------------
<S> <C> <C> <C>
.................... $ %
....................
....................
------ ------------ ------
Total............... $ 100.00%
====== ============ ======
DISTRIBUTION OF ORIGINAL CONTRACT AMOUNTS
<CAPTION>
% OF
CONTRACT POOL BY
AGGREGATE PRINCIPAL OUTSTANDING PRINCIPAL
ORIGINAL CONTRACT NUMBER OF CONTRACTS BALANCE OUTSTANDING BALANCE AS OF
AMOUNT (IN DOLLARS) AS OF CUT-OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
------------------- -------------------- ------------------- ----------------------
<S> <C> <C> <C>
Less than $10,000....... $ %
$10,000-$19,999.........
------ ------------ ------
Total............... $ 100.00%
====== ============ ======
CONTRACT RATES
<CAPTION>
% OF
CONTRACT POOL BY
AGGREGATE PRINCIPAL OUTSTANDING PRINCIPAL
RANGE OF CONTRACTS NUMBER OF CONTRACTS BALANCE OUTSTANDING BALANCE AS OF
BY CONTRACT RATE AS OF CUT-OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
- ------------------ -------------------- ------------------- ----------------------
<S> <C> <C> <C>
9.00001%-10.00000%..... $ %
10.00001%-11.00000%.....
11.00001%-12.00000%.....
12.00001%-13.00000%.....
13.00001%-14.00000%.....
14.00001%-15.00000%.....
15.00001%-16.00000%.....
16.00001%-17.00000%.....
Over 17.00000%..........
------ ------------ ------
Total............... $ 100.00%
====== ============ ======
REMAINING MONTHS TO MATURITY
<CAPTION>
% OF
CONTRACT POOL BY
MONTHS REMAINING TO AGGREGATE PRINCIPAL OUTSTANDING PRINCIPAL
SCHEDULED MATURITY NUMBER OF CONTRACTS BALANCE OUTSTANDING BALANCE AS OF
AS OF CUT-OFF DATE AS OF CUT-OFF DATE AS OF CUT-OFF DATE CUT-OFF DATE
------------------- -------------------- ------------------- ----------------------
<S> <C> <C> <C>
Less than 31............ $ %
31 to 60................
61 to 90................
91 to 120...............
121 to 150..............
151 to 180..............
181 to 210..............
211 to 240..............
------ ------------ ------
Total............... $ 100.00%
====== ============ ======
</TABLE>
S-11
<PAGE>
DELINQUENCY, LOAN DEFAULT AND LOSS INFORMATION
The following table sets forth the delinquency experience for the periods
indicated of the portfolio of unsecured home improvement loans serviced by the
Company (other than Contracts already in liquidation).
DELINQUENCY EXPERIENCE
<TABLE>
<CAPTION>
AT DECEMBER 31,
AT , ------------------
1997 1996 1995
------- ---- ---- ------
<S> <C> <C> <C> <C>
Number of Contracts Outstanding(1)................ 18,411
Number of Contracts Delinquent(2)(3)
30-59 Days...................................... 115
60-89 Days...................................... 44
90 Days or More................................. 14
---- ---- ---- ------
Total Contracts Delinquent........................ 173
Delinquencies as a Percent of Contracts Outstand-
ing(4)........................................... % % % .94%
</TABLE>
- --------
(1) Excludes defaulted contracts not yet liquidated.
(2) A contract is considered delinquent by the Company if any payment of $25
or more is past-due 30 days or more.
(3) The period of delinquency is based on the number of days that payments are
contractually past due (assuming 30-day months). Consequently, a contract
due on the first day of a month is not 30 days delinquent until the first
day of the next month.
(4) By number of contracts.
The following table sets forth the loan default and loss experience for the
periods indicated of the portfolio of unsecured home improvement loans
serviced by the Company.
LOAN DEFAULT AND LOSS EXPERIENCE
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
TWELVE MONTHS
MONTHS ENDED DECEMBER 31,
ENDED , ----------------------------------
1998 1997 1996 1995
---------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Principal Balance of Contracts
Serviced(1).................... $ $ $ $97,544
Contract Defaults(2)............ % % % 1.38%
Net Losses:
Dollars(3).................... $ $ $ $ 1,710
Percentage(4)................. % % % 1.75%
</TABLE>
- --------
(1) As of period end. Includes defaulted contracts not yet liquidated.
(2) As a percentage of the total number of contracts being serviced as of
period end. The Company considers a contract defaulted when the Company
has submitted a claim to FHA (in the case of FHA-insured contracts), the
Company has commenced foreclosure or enforcement proceedings, or the
contract is 180 days delinquent.
(3) Does not include any estimated losses for defaulted contracts not yet
liquidated. The calculation of net loss on FHA-insured contracts includes
unpaid interest to the date of FHA claim submission and all expenses of
liquidation, and reflects proceeds of FHA Insurance claims paid.
(4) As a percentage of the principal amount of contracts being serviced as of
period end.
The Company's management is not aware of any trends or anomalies which have
adversely affected the delinquency, loan default and loss experience of its
portfolio of home improvement contracts.
S-12
<PAGE>
The data presented in the foregoing tables are for illustrative purposes
only and there is no assurance that the delinquency, loan default and loss
experience of the Contracts will be similar to that set forth above. Moreover,
because the Company began originating and purchasing unsecured home
improvement contracts in September 1992, it is likely that the Company's
portfolio is not yet sufficiently seasoned to show the delinquencies and
losses that would be experienced if such data were collected over a longer
period of time. The delinquency, loan default and loss experience of home
improvement loans may be adversely affected by a downturn in regional or local
economic conditions. Regional and local economic conditions are often
volatile, and no predictions can be made regarding future economic conditions
in any particular area.
YIELD AND PREPAYMENT CONSIDERATIONS
The yield on any Certificate will depend on the price paid by the
Certificateholder, the timing of principal payments, and the timing and amount
of any liquidation losses on the Contracts.
Higher than expected "Principal Prepayments" (payments received from
Obligors, other than regular payments of principal, which are applied upon
receipt or, in the case of partial prepayments, upon the next scheduled
payment date for such Contract, to reduce the outstanding principal balance on
the Contracts) will increase the yield on Certificates purchased at a price
less than the undivided ownership interest in the aggregate principal balance
of the Contracts represented by such Certificates and will decrease the yield
on Certificates purchased at a price greater than the undivided ownership
interest in the aggregate principal balance of the Contracts represented by
such Certificates. Because the Contracts have scheduled due dates throughout
the calendar month, and because all Principal Prepayments are passed through
to Certificateholders on the Payment Date following the Due Period in which
such Principal Prepayment occurred, prepayments on the Contracts would affect
the amount of funds available to make distributions on the Certificates on any
Payment Date only if a substantial portion of the Contracts prepaid prior to
their respective due dates in a particular month (thus paying less than 30
days' interest for that Due Period) while very few Contracts prepaid after
their respective due dates in that month. In addition, liquidations of
Defaulted Contracts or the Servicer's exercise of its option to repurchase the
entire remaining pool of Contracts (see "Description of the Certificates--
Repurchase Option" herein) will affect the timing of principal distributions
on the Certificates. Prepayments on mortgage loans and other consumer
installment obligations are commonly measured relative to a prepayment
standard or model. The Constant Prepayment Rate ("CPR") model assumes that the
outstanding principal balance of a pool of loans prepays each month at a
specified constant annual rate. The Certificates were priced using a
prepayment assumption of % CPR. There can be no assurance that the Contracts
will prepay at such rate, and it is unlikely that prepayments or liquidations
of the Contracts will occur at any constant rate.
The amount of interest to which the Certificateholders are entitled on any
Payment Date will be the product of the Pass-Through Rate and the Aggregate
Certificate Principal Balance immediately following the preceding Payment
Date, based on a 360-day year consisting of 12 months of 30 days each.
Certificateholders will receive payments in respect of principal on each
Payment Date to the extent that funds available in the Certificate Account are
sufficient therefor, in the priority described under "Description of the
Certificates--Distributions on the Certificates." As required by applicable
state laws, interest paid by Obligors on the Contracts is computed according
to the simple interest method. Principal and interest payable on the
Certificates will be computed according to the actuarial method.
The final scheduled payment date on the Contract with the latest maturity is
in .
WEIGHTED AVERAGE LIFE OF THE CERTIFICATES
The following information is given solely to illustrate the effect of
prepayments of the Contracts on the weighted average life of the Certificates
under the stated assumptions and is not a prediction of the prepayment rate
that might actually be experienced by the Contracts.
S-13
<PAGE>
Weighted average life refers to the average amount of time from the date of
issuance of a security until each dollar of principal of such security will be
repaid to the investor. The weighted average life of the Certificates will be
influenced by the rate at which principal on the Contracts is paid. Principal
payments on Contracts may be in the form of scheduled amortization or
prepayments (for this purpose, the term "prepayment" includes repayments and
liquidations due to default or other dispositions of the Contracts).
Prepayments on Contracts may be measured by a prepayment standard or model.
The model used in this Prospectus Supplement, the Constant Prepayment Rate
model, is described above.
As used in the following table, "0% CPR" assumes that none of the Contracts
are prepaid before maturity, " % CPR" assumes the Contracts will prepay at a
CPR of %, and so forth.
There is no assurance, however, that prepayment of the Contracts will
conform to any level of the CPR, and no representation is made that the
Contracts will prepay at the prepayment rates shown or any other prepayment
rate. The rate of principal payments on pools of home improvement contracts is
influenced by a variety of economic, geographic, social and other factors,
including the level of interest rates and the rate at which homeowners sell
their homes or default on their contracts. Other factors affecting prepayment
of contracts include changes in obligors' housing needs, job transfers,
unemployment and obligors' net equity in their homes. In the case of home
improvement contracts secured by real estate, in general, if prevailing
interest rates fall significantly below the interest rates on such home
improvement contracts, the home improvement contracts are likely to be subject
to higher prepayment rates than if prevailing interest rates remained at or
above the rates borne by such home improvement contracts. Conversely, if
prevailing interest rates rise above the interest rates on such home
improvement contracts, the rate of prepayment would be expected to decrease.
The percentages and weighted average lives in the following table were
determined assuming that: (i) scheduled interest and principal payments on the
Contracts are received in a timely manner and prepayments are made at the
indicated percentages of the CPR set forth in the table; (ii) the Servicer
exercises its option to repurchase the Contracts, as described under
"Description of the Certificates--Repurchase Option"; (iii) the Contracts
will, as of the Cut-off Date, be grouped into four pools having the additional
characteristics set forth below under "Assumed Contract Characteristics"; (iv)
the Certificates have an Original Series 1998- Certificate Principal Balance
of $ and a Pass-Through Rate of %; (v) no interest shortfalls will
arise in connection with prepayments in full of the Contracts; (vi) no
delinquencies or losses are experienced on the Contracts; (vii) distributions
are made on the Certificates on the 15th day of each month, commencing in
1998; and (viii) the Certificates are issued on , 1998. No
representation is made that the Contracts will not experience delinquencies or
losses.
ASSUMED CONTRACT CHARACTERISTICS
<TABLE>
<CAPTION>
CUT-OFF DATE WEIGHTED AVERAGE WEIGHTED AVERAGE
POOL REMAINING TERM ORIGINAL TERM
PRINCIPAL WEIGHTED AVERAGE TO MATURITY TO MATURITY
POOL BALANCE CONTRACT RATE (MONTHS) (MONTHS)
---- ------------ ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
1.............. $ %
2..............
3..............
4..............
</TABLE>
It is not likely that the Contracts will prepay at any constant percentage
of the CPR to maturity or that all of the Contracts will prepay at the same
rate.
Investors are urged to make their investment decisions on a basis that
includes their determination as to anticipated prepayment rates under a
variety of the assumptions discussed herein.
S-14
<PAGE>
Based on the foregoing assumptions, the following table indicates the
projected weighted average life of the Certificates and sets forth the
percentages of the Original Series 1996-E Certificate Principal Balance that
would be outstanding after each of the dates shown, at the indicated
percentages of the CPR.
PERCENTAGE OF THE ORIGINAL SERIES 1996-E CERTIFICATE PRINCIPAL BALANCE AT
THERESPECTIVE PERCENTAGES OF THE CPR SET FORTH BELOW:
<TABLE>
<CAPTION>
DATE 10% 15% 20% 25% 30%
- ---- --- --- --- --- ---
<S> <C> <C> <C> <C> <C>
Initial Percentage..................................... 100% 100% 100% 100% 100%
...............................................
...............................................
...............................................
...............................................
...............................................
...............................................
...............................................
...............................................
Weighted Average Life (1) (years)......................
</TABLE>
- --------
(1) The weighted average life of a Certificate is determined by (i)
multiplying the amount of cash distributions in reduction of the principal
balance of such Certificate by the number of years from the date of
issuance of such Certificate to the stated Payment Date, (ii) adding the
results, and (iii) dividing the sum by the initial principal balance of
such Certificate.
S-15
<PAGE>
GREEN TREE FINANCIAL CORPORATION
GENERAL
The following information supplements, and to the extent inconsistent
therewith supersedes, the information in the Prospectus under the heading
"Green Tree Financial Corporation."
The Company is a Delaware corporation which, as of December 31, 1997, had
stockholders' equity of approximately $1,332,000,000. 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 (651) 293-3400). The Company's quarterly and annual
reports, which are incorporated by reference in this Prospectus Supplement and
in the Prospectus, are available from the Company upon written request made to
the Company.
RATIO OF EARNINGS TO FIXED CHARGES FOR THE COMPANY
Set forth below are the Company's ratios of earnings to fixed charges for
the past five years ending December 31, 1997. 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, MONTHS ENDED ,
------------------------ ----------------------
1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Ratio of Earnings to Fixed
Charges.................... 4.81 7.98 7.90 5.44 3.94 3.06
</TABLE>
RECENT DEVELOPMENTS
On June 30, 1998, Green Tree became a wholly owned subsidiary of Conseco,
Inc., pursuant to a Merger Agreement announced on April 7, 1998. Green Tree
will continue to operate from its existing headquarters in St. Paul,
Minnesota, and its 200 local offices throughout the country. Lawrence M. Coss,
Green Tree's Chairman and Chief Executive Officer, has agreed to continue to
manage Green Tree's business for at least one year. Headquartered in Carmel,
Indiana, Conseco is among the nation's leading providers of supplemental
health insurance, retirement annuities and universal life insurance.
On July 6, 1998, Conseco announced a second-quarter charge of $498 million,
net of income taxes, related to the acquisition of Green Tree. The charges are
directly related to (1) $148 million in merger-related costs, and (2) a $350
million non-cash supplemental reserve against the valuation of Green Tree's
interest-only securities and servicing rights.
Green Tree has been served with various lawsuits in the United States
District Court for the District of Minnesota. These lawsuits were filed by
certain stockholders of Green Tree as purported class actions on behalf of
persons or entities who purchased common stock of Green Tree during the
alleged class periods. In addition to Green Tree, certain current and former
officers and directors of Green Tree are named as defendants in one or more of
the lawsuits. Green Tree and the other defendants intend to seek consolidation
of each of the lawsuits in the United States District Court for the District
of Minnesota. Plaintiffs in the lawsuits assert claims under Sections 10(b)
and 20(a) of the Securities Exchange Act of 1934. In each case, plaintiffs
allege that Green Tree
S-16
<PAGE>
and the other defendants violated federal securities laws by, among other
things, making false and misleading statements about the current state and
future prospects of Green Tree (particularly with respect to prepayment
assumptions and performance of certain of Green Tree's loan portfolios) which
allegedly rendered Green Tree's financial statements false and misleading.
Green Tree believes that the lawsuits are without merit and intends to defend
such lawsuits vigorously.
DESCRIPTION OF THE CERTIFICATES
The following information supplements, and to the extent inconsistent
therewith supersedes, the information in the Prospectus under "Description of
the Certificates."
The Certificates will be issued pursuant to the Agreement between the
Company, as Seller and Servicer, and the Trustee. A copy of the execution form
of the Agreement will be filed in a Current Report on Form 8-K with the
Securities and Exchange Commission after the initial issuance of the
Certificates. The following summary describes the material provisions of the
Agreement, reference to which is hereby made for a complete recital of its
terms.
GENERAL
The Certificates will be issued in fully registered, certificated form only
in denominations of $1,000 or any integral multiple in excess thereof, except
for one Certificate with a denomination representing the remainder of the
Original Principal Balance. The Certificates initially will be represented by
one or more certificates registered in the name of Cede & Co. as the nominee
of DTC, and will only be available in the form of book-entries on the records
of DTC and participating members thereof. See "Description of the
Certificates--Registration of the Certificates" herein. The Trust consists
primarily of the Contracts and the rights, benefits, obligations and proceeds
arising therefrom or in connection therewith, all rights under FHA Insurance
with respect to the FHA-insured Contracts, amounts held in the Certificate
Account and the Limited Guaranty of the Company.
Distributions on the Certificates will be made by the Paying Agent (which
shall initially be the Trustee) on each Payment Date to persons in whose names
the Certificates are registered as of the Business Day immediately preceding
such Payment Date (the "Record Date"). See "Description of the Certificates--
Registration of the Certificates" herein. The first Payment Date for the
Certificates will be in 1998. Payments will be made by check mailed to
such Certificateholder at the address appearing on the Certificate Register
(except that a Certificateholder who holds an aggregate Percentage Interest of
at least 5% of the Trust may request payment by wire transfer). Final payments
will be made only upon tender of the Certificates to the Trustee for
cancellation.
CONVEYANCE OF CONTRACTS
On the Closing Date, the Company will establish the Trust and transfer,
assign, set over and otherwise convey to the Trust all right, title and
interest of the Company in the Contracts, including all principal and interest
received on or with respect to such Contracts (other than receipts of
principal and interest due on such Contracts before the Cut-off Date). On
behalf of the Trust, as the issuer of the Certificates offered hereby, the
Trustee, concurrently with such conveyance, will execute and deliver the
Certificates to or upon the order of the Company. The Contracts are described
on a list delivered to the Trustee and certified by a duly authorized officer
of the Company. Such list includes the amount of monthly payments due on each
Contract as of the date of issuance of the Certificates, the Contract Rate on
each Contract and the maturity date of each Contract. The list will be
attached as an exhibit to the Agreement and will be available for inspection
by any Certificateholder at the principal office of the Company. Prior to the
conveyance of the Contracts to the Trust, the Company's internal audit
department will have completed a review of all the Contract files, confirming
the accuracy of each item on the list of Contracts delivered to the Trustee.
Any Contract discovered not to agree with such list in a manner that is
materially adverse to the interests of the Certificateholders will be
repurchased by the Company, or, if the
S-17
<PAGE>
discrepancy relates to the unpaid principal balance of a Contract, the Company
may deposit cash in the Certificate Account in an amount sufficient to offset
such discrepancy.
The Trustee will maintain possession of the Contracts and any other
documents contained in the Contract files. Uniform Commercial Code financing
statements will be filed in Minnesota, reflecting the conveyance and
assignment of the Contracts to the Trustee, and the Company's accounting
records and computer systems will also reflect such conveyance and assignment.
[Dorsey & Whitney LLP], counsel to the Company, will render an opinion to
the Trustee that the transfer of the Contracts from the Company to the Trust
would, in the event the Company became a debtor under the United States
Bankruptcy Code, be treated as a true sale and not as a pledge to secure
borrowings. If, however, the transfer of the Contracts from the Company to the
Trust were treated as a pledge to secure borrowings by the Company, the
distribution of proceeds of the Contracts to the Trust might be subject to the
automatic stay provisions of the United States Bankruptcy Code, which would
delay the distribution of such proceeds for an uncertain period of time. In
addition, a bankruptcy trustee would have the power to sell the Contracts if
the proceeds of such sale could satisfy the amount of the debt deemed owed by
the Company, or the bankruptcy trustee could substitute other collateral in
lieu of the Contracts to secure such debt, or such debt could be subject to
adjustment by the bankruptcy trustee if the Company were to file for
reorganization under Chapter 11 of the United States Bankruptcy Code.
The Company will make certain representations and warranties in the
Agreement with respect to each Contract, including that: (a) as of the Cut-off
Date the most recent scheduled payment was made or was not delinquent more
than 59 days; (b) no provision of a Contract has been waived, altered or
modified in any respect, except by instruments or documents included in the
Contract file and reflected on the list of Contracts delivered to the Trustee;
(c) each Contract is a legal, valid and binding obligation of the Obligor and
is enforceable in accordance with its terms (except as may be limited by laws
affecting creditors' rights generally); (d) no Contract is subject to any
right of rescission, set-off, counterclaim or defense; (e) each Contract (if
an FHA-insured contract) was originated in accordance with applicable FHA
regulations and is insured, without set-off, surcharge or defense, by FHA
Insurance; (f) each Contract was originated by a home improvement contractor
in the ordinary course of such contractor's business or was originated by the
Company directly; (g) no Contract was originated in or is subject to the laws
of any jurisdiction whose laws would make the transfer of the Contract or an
interest therein pursuant to the Agreement or the Certificates unlawful; (h)
each Contract complies with all requirements of law; (i) no Contract has been
satisfied or rescinded; (j) all parties to each Contract had full legal
capacity to execute such Contract; (k) no Contract has been sold, conveyed and
assigned or pledged to any other person and the Company has good and
marketable title to each Contract free and clear of any encumbrance, equity,
loan, pledge, charge, claim or security interest, and is the sole owner and
has full right to transfer such Contract to the Trustee; (l) as of the Cut-off
Date there was no default, breach, violation or event permitting acceleration
under any Contract (except for payment delinquencies permitted by clause (a)
above), no event that with notice and the expiration of any grace or cure
period would constitute a default, breach, violation or event permitting
acceleration under such Contract, and the Company has not waived any of the
foregoing; (m) each Contract is a fully-amortizing loan with a fixed rate of
interest and provides for level monthly payments over the term of such
Contract; (n) the description of each Contract set forth in the list delivered
to the Trustee is true and correct; (o) there is only one original of each
Contract; and (p) each Contract was originated or purchased in accordance with
the Company's then-current underwriting guidelines.
The Company will also make certain representations and warranties with
respect to the Contracts in the aggregate, including that (i) the Cut-off Date
Pool Principal Balance equals at least the Original Series 1998- Certificate
Principal Balance, and each Contract has a contractual rate of interest of at
least %; (ii) no Contract had a remaining term to maturity at origination
of more than months; (iii) no more than % of the Contracts, by principal
balance as of the Cut-off Date, related to properties located in an area with
the same zip code; and (iv) no adverse selection procedures were employed in
selecting the Contracts from the Company's portfolio.
S-18
<PAGE>
Under the terms of the Agreement, and subject to the Company's option to
effect a substitution as described in the next paragraph, the Company has
agreed to repurchase, at the Repurchase Price, any Contract that is materially
and adversely affected by a breach of a representation and warranty with
respect to such Contract made in the Agreement if such breach has not been
cured within 90 days of the day it was or should have been discovered by the
Servicer or the Trustee. The "Repurchase Price," with respect to any Contract
to be so repurchased or with respect to a Liquidated Contract, means the
outstanding principal balance of such Contract (without giving effect to any
Advances made by the Servicer or the Trustee), plus interest on such Contract
at the Pass-Through Rate from the end of the Due Period with respect to which
the Obligor last made a payment (without giving effect to any Advances made by
the Servicer or the Trustee) through the date of such repurchase or
liquidation. This repurchase obligation constitutes the sole remedy available
to the Trust and the Certificateholders for a breach of a representation or
warranty under the Agreement with respect to the Contracts (but not with
respect to any other breach by the Company of its obligations under the
Agreement).
In lieu of purchasing a Contract as specified in the preceding paragraph,
during the 120 day period following the Closing Date, the Company may, at its
option, substitute an Eligible Substitute Contract (as defined below) for the
Contract that it is otherwise obligated to repurchase (referred to herein as
the "Replaced Contract"). An Eligible Substitute Contract is a Contract that
satisfies, as of the date of its substitution, the representations and
warranties specified in Article III of the Agreement, has a Scheduled
Principal Balance that is not greater than the Scheduled Principal Balance of
the Replaced Contract, has a Contract Rate that is at least equal to the
Contract Rate of the Replaced Contract and has a remaining term to scheduled
maturity that is not greater than the remaining term to scheduled maturity of
the Replaced Contract. The Company will be required to deposit in the
Certificate Account cash in the amount, if any, by which the Scheduled
Principal Balance of the Replaced Contract exceeds the Scheduled Principal
Balance of the Contract being substituted. Such deposit will be deemed to be a
Partial Principal Prepayment.
Pursuant to the Agreement, the Servicer will service and administer the
Contracts conveyed and assigned to the Trustee as more fully set forth below.
PAYMENTS ON CONTRACTS
The Servicer, on behalf of the Trust, will establish and maintain a
Certificate Account in an "Eligible Account" (as defined below) at a
depository institution (initially [Trustee], , Minnesota) with trust
powers organized under the laws of the United States or any state, the
deposits of which are insured to the full extent permitted by law by the
Federal Deposit Insurance Corpora-tion (the "FDIC"), whose short-term deposits
have been rated A-1 by S&P and F-1 by Fitch (if rated by Fitch) or whose
unsecured long-term debt has been rated in one of the two highest rating
categories by S&P and Fitch, and which is subject to supervision and
examination by federal or state authorities (an "Eligible Institution").
"Eligible Account" means, at any time, an account which is any of the
following: (i) an account maintained with an Eligible Institution; (ii) an
account or accounts the deposits in which are fully insured by either the Bank
Insurance Fund or the Savings Association Insurance Fund of the FDIC; (iii) a
segregated trust account maintained with the corporate trust department of a
federal or state chartered depository institution or trust company with trust
powers and acting in its fiduciary capacity for the benefit of the Trustee,
which depository institution or trust company has capital and surplus of not
less than $ ; or (iv) an account that will not cause S&P or Fitch to
downgrade or withdraw its then-current rating assigned to the Certificates, as
evidenced in writing by S&P and Fitch. The Servicer may authorize the Trustee
to invest the funds in the Certificate Account in Eligible Investments (as
defined in the Agreement) that will mature not later than the business day
preceding the applicable monthly Payment Date. Such Eligible Investments
include, among other investments, obligations of the United States or of any
agency thereof backed by the full faith and credit of the United States,
federal funds, certificates of deposit, time deposits and bankers acceptances
sold by eligible commercial banks; any other demand or time deposit or
certificate of deposit fully insured by the FDIC; investments in certain
money-market funds; certain repurchase agreements of United States government
securities with eligible commercial banks; securities bearing interest or sold
at a discount issued by a corporation which has a credit rating of at least
"AA" from S&P and Fitch (if rated by Fitch) not in excess of 10% of amounts in
the Certificate Account at the time of such investment; and commercial
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paper assigned a rating of at least A-1+ by S&P and F-1+ by Fitch (if rated by
Fitch). Any losses on such investments will be deducted from other investment
earnings or from other funds in the Certificate Account.
All receipts by the Servicer of payments with respect to the Contracts,
including Principal Prepayments and advance payments by Obligors not
constituting Principal Prepayments ("Advance Payments"), shall be paid into
the Certificate Account no later than one business day following receipt
thereof, except amounts received as extension fees or assumption fees not
allocated to regular installments due on Contracts, which are retained by the
Servicer as part of its servicing fees and are not paid into the Certificate
Account and except for certain proceeds from Liquidated Contracts which are
used to reimburse the Servicer for customary out-of-pocket liquidation
expenses. See "Description of the Certificates--Servicing Compensation and
Payment of Expenses" herein. In addition, all payments under FHA Insurance
received by the Servicer, any Advances by the Servicer or the Trustee as
described under "Description of the Certificates--Advances," amounts paid by
the Company for Contracts repurchased as a result of breach of warranties
under the Agreement, and amounts required to be deposited upon substitution of
a Contract because of breach of warranties under the Agreement, as described
under "Description of the Certificates--Conveyance of Contracts," shall be
paid into the Certificate Account.
On the seventh Business Day of each month (the "Determination Date"), the
Servicer will determine the Amount Available in the Certificate Account and
the amount of funds necessary to make all payments to be made on the next
Payment Date from the Certificate Account. Not later than one Business Day
after the Determination Date, the Company will deposit in the Certificate
Account the Repurchase Price of any Contracts required to be repurchased on
such Payment Date and any amounts required to be deposited therein due to the
substitution of a Contract, as a result of a breach of representations and
warranties.
DISTRIBUTIONS
Holders of the Certificates will be entitled to receive on the Payment Date,
to the extent that the Amount Available (together with any Guaranty Payment,
as described below) in the Certificate Account is sufficient therefor,
distributions allocable to interest and principal, as described herein.
Distributions will be made on each Payment Date to holders of record of the
Certificates on the related Record Date, except that the final distribution in
respect of the Certificates will be made only upon presentation and surrender
of the Certificates at the office or agency appointed by the Trustee for that
purpose in Minneapolis or St. Paul, Minnesota. The Amount Available on each
Payment Date generally includes scheduled payments on the Contracts due during
the previous calendar month (the "Due Period") and received on or prior to the
related Determination Date, prepayments and other unscheduled collections
received on the Contracts during such Due Period, any Advances (as defined
herein) made by the Servicer or the Trustee with respect to such Due Period
and any amounts paid by the Company to repurchase a Contract due to a breach
of representation or warranty.
DISTRIBUTIONS ON THE CERTIFICATES
Interest. Interest on the Certificates will be payable on each Payment Date
in an amount (such amount being hereinafter referred to as the "Monthly
Interest") equal to one month's interest at the Pass-Through Rate on the
Aggregate Certificate Principal Balance immediately prior to such Payment
Date; provided that, in the case of the first Payment Date, such interest will
be payable only for the period from the Closing Date to but excluding ,
1998. The "Aggregate Certificate Principal Balance" with respect to any
Payment Date will equal the Original Series 1998- Certificate Principal
Balance minus all distributions previously made in respect of principal on the
Certificates. Accrued interest will be computed on the basis of a 360-day year
of twelve 30-day months.
In the event that, on a particular Payment Date, the Amount Available in the
Certificate Account, together with any Guaranty Payment, is not sufficient to
make a full distribution of interest to the Certificateholders, the amount of
interest to be distributed in respect of the Certificates will be allocated
among the outstanding Certificates pro rata in accordance with their
respective entitlements to interest, and the amount of the shortfall will be
carried forward and added to the amount such holders will be entitled to
receive on the next Payment
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Date. Any such amount so carried forward will bear interest at the Pass-
Through Rate, to the extent legally permissible.
Principal. On each Payment Date, the Certificateholders will be entitled to
receive as distributions of principal, to the extent of the Amount Available
in the Certificate Account after payment of all interest payable on the
Certificates, an amount equal to the sum (such sum being hereinafter referred
to as the "Monthly Principal") of (a) the amount of regular principal payments
on the Contracts paid or applied during the prior Due Period; (b) the amount
of Principal Prepayments received on the Contracts during the prior Due
Period; (c) the principal portion of all payments on Contracts that were
Delinquent Payments with respect to the prior Due Period; (d) the unpaid
principal balance of all Contracts that became Liquidated Contracts during the
prior Due Period; (e) the principal portion of the Repurchase Price paid by
the Company to repurchase Contracts for breach of representations and
warranties during the prior Due Period, as described below under "Repurchases
by the Company"; (f) the amount of any reduction in the principal amount
deemed owed on any Contract as a result of the Obligor's bankruptcy; and (g)
any principal amount described in clauses (a) through (f) above that was not
previously distributed because of an insufficient amount of funds available in
the Certificate Account and the Company either was not obligated to or failed
to pay such amount under the Limited Guaranty.
On each Payment Date the Trustee will withdraw the Amount Available from the
Certificate Account and make the following payments, in the following order of
priority:
(i) if neither the Company nor any wholly owned subsidiary of the Company
is the Servicer, to pay the Monthly Servicing Fee to the Servicer;
(ii) to pay interest on the Certificates;
(iii) to pay principal on the Certificates;
(iv) if the Company or any wholly owned subsidiary of the Company is the
Servicer, to pay the Monthly Servicing Fee to the Servicer;
(v) to reimburse the Servicer or the Trustee, as applicable, for any
unreimbursed Advances made in respect of current or prior Payment Dates;
and
(vi) to pay the remainder, if any, of the Amount Available to the Company
as the fee for providing the Limited Guaranty.
ADVANCES
To the extent that collections on a Contract in any Due Period are less than
the scheduled payment due thereon, the Servicer will be obligated to make an
advance of the uncollected portion of such scheduled payment. The Servicer
will be obligated to advance a Delinquent Payment on a Contract only to the
extent that the Servicer, in its sole discretion, expects to recoup such
Advance from subsequent funds available therefor in the Certificate Account.
If the Servicer fails to make an Advance required under the Agreement, the
Trustee will be obligated to deposit the amount of such Advance in the
Certificate Account on the Payment Date. The Trustee will not, however, be
obligated to deposit any such amount if (i) the Trustee does not expect to
recoup such Advance from subsequent funds available therefor in the
Certificate Account, or (ii) the Trustee determines that it is not legally
able to make such Advance.
REPORTS TO CERTIFICATEHOLDERS
The Servicer will include with each distribution to a Certificateholder a
statement as of such Payment Date setting forth, with respect to the
Certificates and Trust:
(a) the amount of interest being paid to Certificateholders;
(b) the amount of Monthly Principal, specifying the amounts constituting
scheduled payments by Obligors, Principal Prepayments on the Contracts, and
other payments with respect to the Contracts;
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(c) the amount of principal being distributed to Certificateholders;
(d) the Aggregate Certificate Principal Balance;
(e) the amount of fees paid out of the Trust;
(f) the Pool Factor (a percentage derived from a fraction the numerator
of which is the remaining Aggregate Certificate Principal Balance and the
denominator of which is the Original Series 1998- Certificate Principal
Balance) immediately before and immediately after such Payment Date;
(g) the amount of any Guaranty Payment being distributed on such Payment
Date;
(h) the remaining Guaranty Amount (after giving effect to the
distribution on such Payment Date);
(i) the number and aggregate principal balance of Contracts delinquent
(i) 31-59 days, (ii) 60-89 and (iii) 90 or more days;
(j) the number of Contracts liquidated during the Due Period ending
immediately before such Payment Date;
(k) such customary factual information as is necessary to enable
Certificateholders to prepare their tax returns; and
(l) such other customary factual information available to the Servicer
without unreasonable expense as is necessary to enable Certificateholders
to comply with regulatory requirements.
REPURCHASE OPTION
The Agreement provides that at any time that the Pool Scheduled Principal
Balance is less than 10% of the Cut-off Date Pool Principal Balance, the
Servicer will have the option to repurchase, on 30 days' prior written notice
to the Trustee, all outstanding Contracts at a price sufficient to pay the
Aggregate Certificate Principal Balance plus the Monthly Interest due on all
Certificates on the Payment Date occurring in the month following the date of
repurchase. Such price will be distributed on such Payment Date.
The "Scheduled Principal Balance" of a Contract for any month is its
principal balance as specified in its amortization schedule, after giving
effect to any previous Partial Principal Prepayments and to the scheduled
payment due on its scheduled payment date (the "Due Date") in that month, but
without giving effect to any adjustments due to bankruptcy or similar
proceedings. The "Pool Scheduled Principal Balance" with respect to any
Payment Date is the aggregate of the Scheduled Principal Balances of the
Contracts outstanding at the end of the prior calendar month.
COLLECTION AND OTHER SERVICING PROCEDURES
The Servicer will manage, administer, service and make collections on the
Contracts, exercising the degree of skill and care required by the FHA and
otherwise consistent with the highest degree of skill and care that the
Servicer exercises with respect to similar contracts (including manufactured
housing contracts) serviced by the Servicer. The Servicer will not be required
to cause to be maintained, or otherwise monitor the maintenance of, hazard
insurance on the improved properties.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The Servicer will receive a Monthly Servicing Fee for each Due Period (paid
on the next succeeding Payment Date) equal to one-twelfth of the product of
.75% and the remaining Pool Scheduled Principal Balance of the Contracts.
The Monthly Servicing Fee provides compensation for customary third-party
servicing activities to be performed by the Servicer for the Trust, for
additional administrative services performed by the Servicer on behalf of the
Trust and for expenses paid by the Servicer on behalf of the Trust. The
Servicer is also entitled to
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reimbursement out of the liquidation proceeds of a Liquidated Contract
(including FHA Insurance proceeds) for customary out-of-pocket liquidation
expenses incurred by it.
Customary servicing activities include collecting and recording payments,
communicating with Obligors, investigating payment delinquencies, providing
billing and tax records to Obligors and maintaining internal records with
respect to each Contract. Administrative services performed by the Servicer on
behalf of the Trust include selecting and packaging the Contracts, calculating
distributions to Certificateholders and providing related data processing and
reporting services for Certificateholders and on behalf of the Trustee.
Expenses incurred in connection with servicing of the Contracts and paid by
the Servicer from its servicing fees include payment of FHA Insurance
premiums, payment of fees and expenses of accountants, payments of all fees
and expenses incurred in connection with the enforcement of Contracts
(including submission of FHA Insurance claims, if applicable), payment of
Trustee's fees, and payment of expenses incurred in connection with
distributions and reports to Certificateholders.
EVIDENCE AS TO COMPLIANCE
The Agreement provides for delivery to the Trustee of a monthly report by
the Servicer no later than one Business Day following the Determination Date,
setting forth the information described under "Description of the
Certificates--Reports to Certificateholders." Each report to the Trustee will
be accompanied by a statement from an appropriate officer of the Servicer
certifying the accuracy of such report and stating that the Servicer has not
defaulted in the performance of its obligations under the Agreement. On or
before of each year, beginning in , the Servicer will deliver to the
Trustee a report of [Accountant], or another nationally recognized accounting
firm, stating that such firm has examined certain documents and records
relating to the servicing of loans serviced by the Servicer and stating that,
on the basis of such examination, such servicing has been conducted in
compliance with the Agreement, except for any exceptions set forth in such
report.
The Agreement provides that the Servicer shall furnish to the Trustee such
reasonably pertinent underlying data as can be generated by the Servicer's
existing data processing system without undue modification or expense.
The Agreement provides that a Certificateholder holding Certificates
representing at least 5% of the interests in the Trust will have the same
rights of inspection as the Trustee and may upon written request to the
Servicer receive copies of all reports provided to the Trustee.
TRANSFERABILITY
The Certificates are subject to certain restrictions on transfer to or for
the benefit of employee benefit plans, trusts or accounts subject to ERISA and
described in Section 4975 of the Code. See "ERISA Considerations" herein and
in the Prospectus.
CERTAIN MATTERS RELATING TO THE COMPANY
The Agreement provides that the Company may not resign from its obligations
and duties as Servicer thereunder, except upon a determination that the
Company's performance of such duties is no longer permissible under the
Agreement or applicable law, and prohibits the Company from extending credit
to any Certificateholder for the purchase of a Certificate, purchasing
Certificates in any agency or trustee capacity or lending money to the Trust.
The Company can be removed as Servicer only pursuant to an Event of
Termination as discussed below.
EVENTS OF TERMINATION
An Event of Termination under the Agreement will occur if (a) the Servicer
fails to make any payment or deposit required under the Agreement (including
an Advance) and such failure continues for four Business Days; (b) the
Servicer fails to observe or perform in any material respect any other
covenant or agreement in the
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Agreement which continues unremedied for thirty days; (c) the Servicer
conveys, assigns or delegates its duties or rights under the Agreement, except
as specifically permitted under the Agreement, or attempts to make such a
conveyance, assignment or delegation; (d) a court having jurisdiction in the
premises enters a decree or order for relief in respect of the Servicer in an
involuntary case under any applicable bankruptcy, insolvency or other similar
law now or hereafter in effect, or appoints a receiver, liquidator, assignee,
custodian, trustee, or sequestrator (or similar official) of the Servicer, as
the case may be, or enters a decree or order for any substantial liquidation
of its affairs; (e) the Servicer commences a voluntary case under any
applicable bankruptcy, insolvency or similar law, or consents to the entry of
an order for relief in an involuntary case under any such law, or consents to
the appointment of or taking possession by a receiver, liquidator, assignee,
trustee, custodian or its creditors, or fails to, or admits in writing its
inability to, pay its debts as they become due, or takes any corporate action
in furtherance of the foregoing; (f) the Servicer fails to be an Eligible
Servicer; or (g) the Servicer's seller-servicer contract with GNMA is
terminated. The Servicer will be required under the Agreement to give the
Trustee and the Certificateholders notice of an Event of Termination promptly
upon the occurrence of such event.
RIGHTS UPON AN EVENT OF TERMINATION
If an Event of Termination has occurred and is continuing, either the
Trustee or holders of Certificates representing 25% or more of the Trust may
terminate all of the Servicer's management, administrative, servicing and
collection functions under the Agreement. Upon such termination, the Trustee
or its designee will succeed to all the responsibilities, duties and
liabilities of the Company as Servicer under the Agreement and will be
entitled to similar compensation arrangements; provided, however, that neither
the Trustee nor any successor Servicer will assume any accrued obligation of
the prior servicer or any obligation of the Company to repurchase Contracts
for breach of representations and warranties, and the Trustee will not be
liable for any acts or omissions of the Servicer occurring prior to a transfer
of the Servicer's servicing and related functions or for any breach by the
Servicer of any of its representations and warranties contained in the
Agreement or any related document or agreement. In addition, the Trustee will
notify FHA of the Servicer's termination as Servicer of the FHA-insured
Contracts and will request that the portion of the Servicer's FHA Insurance
reserves allocable to the FHA-insured Contracts be transferred to the Trustee
or a successor Servicer. See "Description of FHA Insurance" in the Prospectus.
Notwithstanding such termination, the Servicer shall be entitled to payment of
certain amounts payable to it prior to such termination, for services rendered
prior to such termination. No such termination of the Company as Servicer will
affect in any manner the Company's obligation to repurchase certain Contracts
for breaches of warranties under the Agreement. In the event that the Trustee
is unwilling or unable so to act, it may appoint, or petition a court of
competent jurisdiction for the appointment of, an Eligible Servicer to act as
successor to the Servicer under the Agreement. The Trustee and such successor
may agree upon the servicing compensation to be paid (after receiving
comparable bids from other Eligible Servicers), which may not be greater than
the Monthly Servicing Fee payable to the Company under the Agreement without
the consent of all of the Certificateholders.
TERMINATION OF THE AGREEMENT
The Agreement will terminate (after distribution of all principal and
interest then due to Certificateholders) on the earlier of (a) the Payment
Date on which the Aggregate Certificate Principal Balance is reduced to zero;
or (b) the Payment Date occurring in the month following the Servicer's
repurchase of the Contracts as described under "Description of the
Certificates--Repurchase Option." However, the Company's representations,
warranties and indemnities will survive any termination of the Agreement.
AMENDMENT; WAIVER
The Agreement may be amended by agreement of the Trustee, the Servicer and
the Company at any time without the consent of the Certificateholders to cure
any ambiguity, to correct or supplement any provision which may be
inconsistent with any other provision or to add other provisions not
inconsistent with the Agreement,
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upon receipt of an opinion of counsel to the Servicer that such amendment will
not adversely affect in any material respect the interests of any
Certificateholder.
The Agreement may also be amended by agreement of the Trustee, the Servicer
and the Company at any time without the consent of the Certificateholders to
effect the transfer of FHA Insurance reserves to another entity in compliance
with revisions to FHA regulations, provided that prior to any such amendment
S&P and Fitch shall have confirmed that the ratings of the Certificates will
not be lowered or withdrawn following such amendment.
The Agreement may also be amended from time to time by the Trustee, the
Servicer and the Company with the consent of holders of Certificates
representing 66 2/3% or more of the Trust, the Servicer and holders of
Certificates representing 51% or more of the Trust may vote to waive any Event
of Termination, provided that no such amendment or waiver shall (a) reduce in
any manner the amount of, or delay the timing of, collections of payments on
Contracts or distributions which are required to be made on any Certificate,
or (b) reduce the aggregate amount of Certificates required for any amendment
of the Agreement, without unanimous consent of the Certificateholders.
The Trustee is required under the Agreement to furnish Certificateholders
with notice promptly upon execution of any amendment to the Agreement.
INDEMNIFICATION
The Agreement provides that the Company will defend and indemnify the Trust,
the Trustee (including any agent of the Trustee) and the Certificateholders
against any and all costs, expenses, losses, damages, claims and liabilities,
including reasonable fees and expenses of counsel and expenses of litigation
(a) for any taxes which may at any time be asserted with respect to, and as of
the date of, the conveyance of the Contracts to the Trust (but not including
any federal, state or other tax arising out of the creation of the Trust and
the issuance of the Certificates), and (b) with respect to certain other tax
matters.
The Agreement also provides that the Servicer will defend and indemnify the
Trust, the Trustee and the Certificateholders (which indemnification will
survive any removal of the Servicer) against any and all costs, expenses,
losses, damages, claims and liabilities, including reasonable fees and
expenses of counsel and expenses of litigation, in respect of any action taken
by the Company as Servicer with respect to any Contract.
DUTIES AND IMMUNITIES OF THE TRUSTEE
The Trustee will make no representations as to the validity or sufficiency
of the Agreement, the Certificates or any Contract, Contract file or related
documents, and will not be accountable for the use or application by the
Company of any funds paid to the Company in consideration of the conveyance of
the Contracts, or deposited into the Certificate Account by the Servicer. If
no Event of Termination has occurred, the Trustee will be required to perform
only those duties specifically required of it under the Agreement. However,
upon receipt of the various certificates, reports or other instruments
required to be furnished to it, the Trustee will be required to examine them
to determine whether they conform as to form to the requirements of the
Agreement.
Under the Agreement the Servicer will agree (a) to pay to the Trustee from
time to time reasonable compensation for all services rendered by it
thereunder (which compensation shall not be limited by any provision of law in
regard to the compensation of a trustee of an express trust); (b) to reimburse
the Trustee upon its request for all reasonable expenses, disbursements and
advances incurred or made by the Trustee in accordance with any provision of
the Agreement (including FHA Insurance premiums not paid by the Servicer and
reasonable compensation and the expenses and disbursements of its agents and
counsel), except any such expense, disbursement or advance as may be
attributable to its negligence or bad faith; and (c) to indemnify the Trustee
for, and to hold it harmless against, any loss, liability or expense incurred
without negligence or bad faith on its part, arising out of or in connection
with the acceptance or administration of the Trust and its duties
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thereunder, including the costs and expenses of defending itself against any
claim or liability in connection with the exercise or performance of any of
its powers or duties thereunder.
The Trustee is not obligated to expend or risk its own funds or otherwise
incur financial liability in the performance of its duties under the Agreement
if there is a reasonable ground for believing that the repayment of such funds
or adequate indemnity against such risk or liability is not reasonably
assured.
The Agreement also provides that the Trustee will maintain at its expense in
Minneapolis or St. Paul, Minnesota, an office or agency where Certificates may
be surrendered for registration of transfer or exchange and where notices and
demands to or upon the Trustee and the certificate registrar and transfer
agent in respect of the Certificates pursuant to the Agreement may be served.
On the date hereof the Trustee's office for such purposes is located at 180
East Fifth Street, St. Paul, Minnesota 55101. The Trustee will promptly give
written notice to the Company, the Servicer and the Certificateholders of any
change thereof.
THE TRUSTEE
[Trustee] has its corporate trust offices at [address], Minnesota .
The Trustee may resign from its duties under the Agreement at any time, in
which event the Servicer will be obligated to appoint a successor Trustee. The
Servicer may also remove the Trustee if the Trustee ceases to be eligible to
continue as such under the Agreement or if the Trustee becomes insolvent. In
such circumstances, the Servicer will also be obligated to appoint a successor
Trustee. Any resignation or removal of the Trustee and appointment of a
successor Trustee will not become effective until acceptance of the
appointment by the successor Trustee. Any successor Trustee must be an FHA
Title I approved lender.
REGISTRATION OF THE CERTIFICATES
The Certificates initially will be registered in the name of Cede & Co., the
nominee of DTC. The Certificates may be held by investors only through the
book-entry facilities of DTC. DTC is a limited-purpose trust company organized
under the laws of the State of New York, a member of the Federal Reserve
System, a "clearing corporation" within the meaning of the New York Uniform
Commercial Code, and a "clearing agency" registered pursuant to the provisions
of Section 17A of the Exchange Act. DTC accepts securities for deposit from
its participating organizations ("Participants") and facilitates the clearance
and settlement of securities transactions between Participants in such
securities through electronic book-entry changes in accounts of Participants,
thereby eliminating the need for physical movement of certificates.
Participants include securities brokers and dealers, banks and trust companies
and clearing corporations and may include certain other organizations.
Indirect access to the DTC system is also available to others such as banks,
brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a Participant, either directly or indirectly
("indirect participants").
The beneficial owners of Certificates ("Certificate Owners") who are not
Participants but desire to purchase, sell or otherwise transfer ownership of
the Certificates may do so only through Participants (unless and until
Definitive Certificates, as defined below, are issued). In addition,
Certificate Owners will receive all distributions of principal of, and
interest on, the Certificates from the Trustee through DTC and Participants.
Certificate Owners will not receive or be entitled to receive certificates
representing their respective interests in the Certificates, except under the
limited circumstances described below.
Unless and until Definitive Certificates (as defined below) are issued, it
is anticipated that the only "Certificateholder" of the Certificates will be
Cede & Co., as nominee of DTC. Certificate Owners will not be recognized by
the Trustee as Certificateholders as that term is used in the Agreement.
Certificate Owners are only permitted to exercise the rights of
Certificateholders indirectly through Participants and DTC.
While Certificates are outstanding (except under the circumstances described
below), under the rules, regulations and procedures creating and affecting DTC
and its operations (the "Rules"), DTC is required to
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make book-entry transfers among Participants on whose behalf it acts with
respect to the Certificates and is required to receive and transmit
distributions of principal of, and interest on, the Certificates. Participants
with whom Certificate Owners have accounts with respect to Certificates are
similarly required to make book-entry transfers and receive and transmit such
distributions on behalf of their respective Certificate Owners. Accordingly,
although Certificate Owners will not possess certificates, the Rules provide a
mechanism by which Certificate Owners will receive distributions and will be
able to transfer their interests.
Certificates will be issued in registered form to Certificate Owners, or
their nominees, rather than to DTC (such Certificates being referred to herein
as "Definitive Certificates"), only if (i) DTC or the Company advise the
Trustee in writing that DTC is no longer willing or able to discharge properly
its responsibilities as nominee and depository with respect to the
Certificates and the Company or the Trustee is unable to locate a qualified
successor or (ii) the Company at its sole option advises the Trustee in
writing that it elects to terminate the book-entry system through DTC. Upon
issuance of Definitive Certificates to Certificate Owners, such Certificates
will be transferable directly (and not exclusively on a book-entry basis) and
registered holders will deal directly with the Trustee with respect to
transfers, notices and distributions.
DTC has advised the Company that, unless and until Definitive Certificates
are issued, DTC will take any action permitted to be taken by a
Certificateholder under the Agreement only at the direction of one or more
Participants to whose DTC accounts the Certificates are credited. DTC has
advised the Company that DTC will take such action with respect to any
fractional interest of the Certificates only at the direction of and on behalf
of such Participants beneficially owning a corresponding fractional interest
of the Certificates. DTC may take actions, at the direction of the
Participants, with respect to some Certificates which conflict with actions
taken with respect to other Certificates.
Issuance of Certificates in book-entry form rather than as physical
certificates may adversely affect the liquidity of the Certificates in the
secondary market and the ability of Certificate Owners to pledge them. In
addition, since distributions on the Certificates will be made by the Trustee
to DTC and DTC will credit such distributions to the accounts of its
Participants, with the Participants further crediting such distributions to
the accounts of indirect participants or Certificate Owners, Certificate
Owners may experience delays in the receipt of such distributions.
DESCRIPTION OF THE LIMITED GUARANTY
In order to mitigate the effect of liquidation losses and delinquencies on
the Contracts, the Certificateholders are entitled to receive on each Payment
Date (subject to the limit of the Guaranty Amount) the amount equal to the
Guaranty Payment, if any, under the Limited Guaranty of the Company. The
Guaranty Payment for any Payment Date will equal the amount, if any, by which
the Formula Distribution Amount (equal to one month's interest at the Pass-
Through Rate on the Aggregate Certificate Principal Balance plus the Monthly
Principal for such Payment Date) exceeds the Amount Available in the
Certificate Account for such Payment Date.
The "Guaranty Amount" initially equals $ . Thereafter, on any Payment
Date, the Guaranty Amount will equal the lesser of (i) $ minus all
Guaranty Payments previously made by the Company, or (ii) the Aggregate
Certificate Principal Balance as of such Payment Date plus three months of
interest at the Pass-Through Rate on the Aggregate Certificate Principal
Balance as of such Payment Date.
The Limited Guaranty will be an unsecured general obligation of the Company
and will not be supported by any letter of credit or other credit enhancement
arrangement.
As compensation for providing the Limited Guaranty, the Company will be
entitled to receive a Guaranty Fee on each Payment Date equal to the Amount
Available in the Certificate Account less the amounts distributed to the
Certificateholders, the Monthly Servicing Fee and certain amounts required to
reimburse the Trustee or the Servicer, as described under "Description of the
Certificates--Distributions on the Certificates."
S-27
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
[Dorsey & Whitney LLP], counsel to the Company, will deliver its opinion
that, assuming ongoing compliance with the terms of the Agreement, the Trust
will be classified as a grantor trust for federal income tax purposes and not
as an association which is taxable as a corporation. The Company does not
intend to treat the Certificates as Stripped Certificates for federal income
tax reporting purposes. If, however, any fees paid to the Company are deemed
to exceed a reasonable amount, the Certificates may be required to be treated
as Stripped Certificates, which would require any discount at which a
Certificate is purchased to be treated as original issue discount. See
"Certain Federal Income Tax Consequences--Stripped Certificates" in the
Prospectus.
The Certificates held by financial institutions, thrift institutions taxed
as domestic building and loan associations and real estate investment trusts
will not represent interests in "qualifying real property loans," "loans
secured by an interest in real property" or "real estate assets" for purposes
of Sections 593(d), 7701(a)(19)(C) or 856(c)(5) of the Code, respectively.
Furthermore, interest paid with respect to Certificates held by a real estate
investment trust will not be considered to be "interest on obligations secured
by mortgages on real property or on interests in real property" for purposes
of Section 856(c)(3) of the Code.
For purposes of the exemption from United States withholding tax described
in the Prospectus, potential foreign investors are advised that all of the
Contracts were originated after July 18, 1984.
For further information regarding federal income tax consequences of
investing in the Certificates, see "Certain Federal Income Tax Consequences--
Non-REMIC Series" in the Prospectus.
ERISA CONSIDERATIONS
No transfer of any Certificates will be permitted to be made to any employee
benefit plan subject to the Employee Retirement Income Security Act of 1974,
as amended ("ERISA"), or Section 4975 of the Code (a "Plan") unless such Plan,
at its expense, delivers to the Trustee and the Company an opinion of counsel
(in form satisfactory to the Trustee and the Company) to the effect that the
purchase or holding of any Certificates by such Plan will not result in the
assets of the Trust being deemed to be "plan assets" and subject to the
prohibited transaction provisions of ERISA and the Code and will not subject
the Trustee, the Company or the Servicer to any obligation or liability in
addition to those undertaken in the Agreement. Unless such opinion is
delivered, each person acquiring a Certificate will be deemed to represent to
the Trustee, the Company and the Servicer that such person is neither a Plan,
nor acting on behalf of a Plan, subject to ERISA or to Section 4975 of the
Code.
S-28
<PAGE>
UNDERWRITING
The Underwriters have agreed, subject to the terms and conditions of the
Underwriting Agreement, to purchase from the Company the respective principal
amounts of the Certificates set forth opposite their names below.
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
UNDERWRITER OF CERTIFICATES
----------- ----------------
<S> <C>
........................................... $
.............................................. $
----------
Total................................................ $
==========
</TABLE>
In the Underwriting Agreement, the Underwriters have agreed, subject to the
terms and conditions set forth therein, to purchase all of the Certificates
offered hereby if any such Certificates are purchased. In the event of a
default by the Underwriter, the Underwriting Agreement provides that, in
certain circumstances, the Underwriting Agreement may be terminated.
The Underwriters propose to offer the Certificates in part directly to
purchasers at the initial public offering price set forth on the cover page of
this Prospectus Supplement and in part to certain securities dealers at such
price less concessions not to exceed % of the Original Series 1998-
Certificate Principal Balance. The Underwriters may allow, and such dealers
may reallow, concessions not to exceed % of the Original Series 1998-
Certificate Principal Balance to certain brokers and dealers. After the
Certificates are released for sale to the public, the offering price and other
selling terms may be varied by the Underwriters.
The Underwriting Agreement provides that the Company will indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended, or contribute to payments the Underwriters
may be required to make in respect thereof.
The Company has agreed that for a period of 30 days from the date of this
Prospectus Supplement it will not offer or sell publicly any other home
improvement contract pass-through certificates without the consent of the
Underwriters.
LEGAL MATTERS
Certain legal matters relating to the issuance of the Certificates will be
passed upon for the Company and the Trust by [Dorsey & Whitney LLP]
Minneapolis, Minnesota, and for the Underwriters by [Thacher Proffitt & Wood,
New York, New York.] The material federal income tax consequences of the
Certificates will be passed upon for the Company by [Dorsey & Whitney LLP].
S-29
<PAGE>
PROSPECTUS
BASE PROSPECTUS NO. 6
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 October 9, 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, 1997, and the Company's quarterly reports on Form 10-Q for the
quarters ended March 31, 1998 and June 30, 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.
5
<PAGE>
Subordinated Certificates.... One or more Classes of any Series may be Subor-
dinated Certificates, as specified in the re-
lated Prospectus Supplement. The rights of the
Subordinated Certificateholders to receive any
or a specified portion of distributions with
respect to the Contracts will be subordinated
to the rights of Senior Certificateholders to
the extent and in the manner specified in the
related Prospectus Supplement. If a Series of
Certificates contains more than one Class of
Subordinated Certificates, distributions and
losses will be allocated among such classes in
the manner specified in the related Prospectus
Supplement. The rights of the Subordinated
Certificateholders, to the extent not subordi-
nated, may be on a parity with those of the Se-
nior Certificateholders. This subordination is
intended to enhance the likelihood of regular
receipt by Senior Certificateholders of the
full amount of scheduled monthly payments of
principal and interest due them and to protect
the Senior Certificateholders against losses.
If so specified in the applicable Prospectus
Supplement, Mezzanine Certificates or other
Classes of Subordinated Certificates may be en-
titled to the benefits of other forms of credit
enhancement and may, if rated in one of the
four highest rating categories by a nationally
recognized statistical rating organization, be
offered pursuant to this Prospectus and such
Prospectus Supplement.
Credit Enhancement........... As an alternative, or in addition, to the credit
enhancement afforded by subordination of the
Subordinated Certificates, credit enhancement
with respect to a Series of Certificates may be
provided by pool insurance, letters of credit,
surety bonds, a guarantee of the Company, cash
reserve funds or other forms of enhancement ac-
ceptable to each nationally recognized rating
agency rating a Series of Certificates, in each
case as described in the related Prospectus
Supplement.
Interest..................... Except as otherwise set forth in the related
Prospectus Supplement, interest on the Certifi-
cates will be paid on the dates specified in
the related Prospectus Supplement (each, a
"Payment Date"). The related Prospectus Supple-
ment will set forth for each Class of Certifi-
cates the Pass-Through Rate, if any, for each
such Class or the method of determining such
Pass-Through Rate. See "Yield Considerations"
and "Description of the Certificates." As spec-
ified in the related Prospectus Supplement,
Classes of a Series of Certificates may be en-
titled to receive no interest or interest which
is not proportionate to the principal allocable
to such Certificates.
Principal (Including Except as otherwise set forth in the related
Prepayments)................ Prospectus Supple-ment, principal on each Con-
tract, including any principal prepayments,
will be passed through on each Payment Date.
See "Maturity and Prepayment Considerations"
and "Description of the Certificates."
6
<PAGE>
Optional Termination......... Unless otherwise specified in the related Pro-
spectus Supplement, each of the Company or the
Servicer may at its option repurchase all Con-
tracts relating to a Series of Certificates re-
maining outstanding at such time under the cir-
cumstances specified in such Prospectus Supple-
ment. Unless otherwise provided in the related
Prospectus Supplement, the repurchase price
will equal the principal amount of such Con-
tracts plus accrued and unpaid interest there-
on. See "Description of the Certificates--Ter-
mination of the Agreement."
Global Certificates.......... If so specified in the related Prospectus Sup-
plement, the Certificates of a Series, or of
one or more Classes within a Series, will be
issuable in the form of one or more global cer-
tificates (each, a "Global Certificate") to be
held by a depositary (each, a "Depositary") on
behalf of the beneficial owners of the Certifi-
cates, as described herein under "Description
of the Certificates--Global Certificates." The
description of the Certificates in this Pro-
spectus assumes that the Certificates of a Se-
ries will not be issued in the form of Global
Certificates. If some or all of the Certifi-
cates of a Series are issued in the form of one
or more Global Certificates, the term "Global
Certificateholder," as used herein, will refer
to such beneficial owners of such Certificates,
and the rights of such Certificateholders will
be limited as described herein under "Descrip-
tion of the Certificates--Global Certificates."
Representations and
Warranties of the Company...
As a condition to the Company's conveyance of
any Contract Pool to the Trust Fund, the Com-
pany will be required to make certain represen-
tations and warranties in the related Agreement
regarding the Contracts. Under the terms of the
Agreement, if the Company becomes aware of a
breach of any such representation or warranty
that materially adversely affects the Trust
Fund's interest in any Contract or receives
written notice of such a breach from the
Trustee or the Servicer, then the Company will
be obligated either to cure such breach or to
repurchase or, if so provided in the related
Prospectus Supplement, substitute for the af-
fected Contract, in each case under the condi-
tions further described herein and in the Pro-
spectus Supplement. See "Description of the
Certificates--Conveyance of Contracts."
Federal Income Tax The Trust Fund represented by a Series of Cer-
Considerations.............. tificates may be treated as a grantor trust for
federal income tax purposes and not as an asso-
ciation taxable as a corporation. In such
event, each Certificateholder will be treated
as the owner of an undivided pro rata interest
in income and corpus attributable to the re-
lated Contract Pool and any other assets held
by the Trust Fund and will be considered the
equitable owner of an undivided interest in the
Contracts included in such Contact Pool. If the
Trust Fund represented by a Series of Certifi-
cates will not be treated as a grantor trust,
the federal income tax consequences of owner-
ship
7
<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."
8
<PAGE>
RISK FACTORS
Prospective investors in Certificates should consider, among other things,
the following factors in connection with the purchase of the Certificates:
1. Limitations on Availability of FHA Insurance. The related Prospectus
Supplement will specify the number and percentage of the Contracts included
in the Contract Pool that are insured by FHA pursuant to Title I of the
National Housing Act ("Title I"). The availability of FHA Insurance
following a default on an FHA-insured Contract is subject to a number of
conditions, including strict compliance by the Company with FHA regulations
in originating and servicing the Contract. Although the Company is an FHA-
approved lender and believes, and will represent and warrant in the
Agreement, that it has complied with FHA regulations, such regulations are
susceptible to substantial interpretation. The Company is not required to
obtain, and has not obtained, approval from FHA of its origination and
servicing practices. Failure to comply with FHA regulations may result in a
denial of FHA Insurance claims, and there can be no assurance that FHA's
enforcement of its regulations will not become stricter in the future. From
time to time the Company is engaged in disputes with FHA over the validity
of claims submitted and the Company's compliance with FHA regulations in
servicing loans insured by FHA, such as the FHA-insured Contracts. In
addition, any insurance claim paid by FHA will cover only 90% of the sum of
the unpaid principal on the Contract, up to nine months unpaid interest
thereon (computed at 7% per annum) and certain liquidation costs.
The amount of FHA Insurance available with respect to a Series of
Certificates at any given time with respect to the FHA-insured Contracts
included in a Contract Pool is limited to the balance of a reserve amount
determined with respect to all FHA Title I loans originated and reported
for insurance by the Company and not sold, or sold with recourse, by the
Company, including manufactured housing contracts as well as home
improvement loans. Such reserve amount, as of December 31, 1997, was equal
to approximately $86,950,000, 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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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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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 $1,332,000,000. 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
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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 (651) 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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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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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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<PAGE>
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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<PAGE>
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 $86,950,000. These insurance reserves were available to
cover losses on approximately $883,889,000 of FHA-insured manufactured housing
contracts and approximately $128,145,000 of FHA-insured home improvement
loans, including the FHA-insured Contracts that may be owned by a Trust Fund.
If an Event of Termination (as defined under "Description of the
Certificates--Events of Termination") occurs, each Trustee will notify FHA of
the Company's termination as Servicer of the related FHA-insured Contracts and
will request that the portion of the Company's FHA Insurance reserves
allocable to the FHA-insured Contracts be transferred to the Trustee or a
successor servicer. Although each Trustee will request such a transfer of
reserves, FHA is not obligated to comply with such a request, and may
determine that it is not in FHA's interest to permit such transfer of
reserves. In addition, FHA has not specified how insurance reserves might be
allocated in such event, and there can be no assurance that any reserve
amount, if transferred to the Trustee or a successor Servicer, would not be
substantially less than 10% of the outstanding principal amount of the FHA-
insured Contracts. It is likely that the Trustee or any successor Servicer
would be the lender of record on other FHA Title I loans, so that any reserves
that are so permitted to be transferred would become commingled with reserves
available for other FHA Title I loans. FHA also reserves the right to transfer
reserves with "earmarking" (segregating such reserves so that they will not be
commingled with the reserves of the transferee) if it is in FHA's interest to
do so.
In general, FHA will insure 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
($124,500 for 1998, 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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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
32
<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
33
<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.
34
<PAGE>
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
35
<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, 1997
and 1996 and for each of the years in the three-year period ended December 31,
1997, 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.
36
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS SUPPLE-
MENT AND THE PROSPECTUS IN CONNECTION WITH THE OFFERING COVERED BY THIS PRO-
SPECTUS SUPPLEMENT. IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITER.
THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTITUTE AN OFFER TO
SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE CERTIFICATES IN ANY JURISDIC-
TION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR SO-
LICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND THE PROSPEC-
TUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IM-
PLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS OR IN THE AFFAIRS OF THE TRUST SINCE
THE DATE HEREOF.
----------------
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary of the Terms of the Certificates................................... S-3
Risk Factors............................................................... S-8
Structure of the Transaction............................................... S-8
Use of Proceeds............................................................ S-9
The Contracts.............................................................. S-9
Yield and Prepayment Considerations........................................ S-13
Green Tree Financial Corporation........................................... S-16
Description of the Certificates............................................ S-17
Description of the Limited Guaranty........................................ S-27
Certain Federal Income Tax Consequences.................................... S-28
ERISA Considerations....................................................... S-28
Underwriting............................................................... S-29
Legal Matters.............................................................. S-29
PROSPECTUS
Reports to Certificateholders.............................................. 2
Available Information...................................................... 2
Additional Information..................................................... 2
Incorporation of Certain Documents by Reference............................ 2
Summary of Terms........................................................... 4
Risk Factors............................................................... 9
The Trust Fund............................................................. 10
Use of Proceeds............................................................ 11
Green Tree Financial Corporation........................................... 11
Yield Considerations....................................................... 13
Maturity and Prepayment Considerations..................................... 13
Description of the Certificates............................................ 14
Description of FHA Insurance............................................... 25
Certain Legal Aspects of the Contracts; Repurchase Obligations............. 26
ERISA Considerations....................................................... 28
Certain Federal Income Tax Consequences.................................... 30
Legal Investment Considerations............................................ 34
Ratings.................................................................... 35
Underwriting............................................................... 35
Legal Matters.............................................................. 36
Experts.................................................................... 36
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
$ (APPROXIMATE)
LOGO
SELLER AND SERVICER
CERTIFICATES FOR HOME IMPROVEMENT LOANS
SERIES 1998-
% PASS-THROUGH RATE
------------------
PROSPECTUS SUPPLEMENT
------------------
[UNDERWRITERS]
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+THIS PRELIMINARY PROSPECTUS SUPPLEMENT AND THE INFORMATION CONTAINED HEREIN +
+ARE SUBJECT TO COMPLETION OR AMENDMENT AND PROSPECTIVE PURCHASERS ARE +
+REFERRED TO THE RELATED FINAL PROSPECTUS SUPPLEMENT FOR DEFINITIVE +
+INFORMATION ON ANY MATTER CONTAINED HEREIN. THIS PRELIMINARY PROSPECTUS +
+SUPPLEMENT 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 +
+JURISDICTION IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL +
+PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH +
+JURISDICTION. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS SUPPLEMENT
TO BASE NO. 7
PROSPECTUS SUPPLEMENT
(To Prospectus dated , 1998)
LOGO
$ (APPROXIMATE)
GREEN TREE FINANCIAL CORPORATION
(SELLER AND SERVICER)
GREEN TREE HOME IMPROVEMENT TRUST 1998-
$ (APPROXIMATE) FLOATING RATE ASSET-BACKED NOTES, CLASS A-1
$ (APPROXIMATE) % ASSET-BACKED NOTES, CLASS A-2
$ (APPROXIMATE) % ASSET-BACKED NOTES, CLASS A-3
$ (APPROXIMATE) % ASSET-BACKED NOTES, CLASS A-4
$ (APPROXIMATE) % ASSET-BACKED CERTIFICATES
----------
Green Tree Home Equity Loan Trust 1998- (the "Trust") will be governed
pursuant to a Trust Agreement, to be dated as of 1, 1998 (the "Trust
Agreement"), among Green Tree Financial Corporation ("Green Tree"), Green Tree
Second GP Inc. (the "General Partner"), a wholly owned subsidiary of Green
Tree, and Owner Trustee, as Owner Trustee. The Trust will issue a class of
floating rate Asset-Backed Notes, designated as the Class A-1 Notes, and three
classes of fixed rate Asset-Backed Notes, designated as the Class A-2, Class A-
3 and Class A-4 Notes, respectively, pursuant to an Indenture, to be dated as
of , (the "Indenture"), between the Trust and [Indenture Trustee], as
Indenture Trustee. The Class A-1 Notes, Class A-2 Notes, Class A-3 Notes and
Class A-4 Notes are referred to herein as the "Notes." The Trust will also
issue Asset-Backed Certificates (the "Certificates" and, together with the
Notes, the "Securities").
The Trust Property will include, among other things, a pool of retail
installment sales contracts and promissory notes financing home improvements
("the Contracts"), including the right to receive payments due on the Contracts
on or after the "Cutoff Date" (as defined herein). Most of the Contracts are
either secured by a subordinate lien on the related real estate, or are
unsecured.The Trust Property will also include an
(Continued on following page)
FOR A DISCUSSION OF CERTAIN FACTORS WHICH SHOULD BE CONSIDERED BY PROSPECTIVE
PURCHASERS OF THE SECURITIES, SEE "RISK FACTORS" ON PAGE S- HEREIN AND ON
PAGE IN THE ACCOMPANYING PROSPECTUS.
----------
THE NOTES REPRESENT OBLIGATIONS OF, AND THE
CERTIFICATES REPRESENT INTERESTS IN, THE TRUST
ONLY AND DO NOT REPRESENT OBLIGATIONS OF OR
INTERESTS IN GREEN TREE, THE GENERAL
PARTNER, THE UNDERWRITER OR ANY OF THEIR
RESPECTIVE AFFILIATES, EXCEPT TO THE
LIMITED EXTENT DESCRIBED 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 SUPPLEMENT OR THE
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Price to Underwriting Proceeds to
Public(1) Discount Green Tree(1)(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Class A-1:HE/HI Note............... % % %
- --------------------------------------------------------------------------------
Per Class A-2 Note..................... % % %
- --------------------------------------------------------------------------------
Per Class A-3 Note..................... % % %
- --------------------------------------------------------------------------------
Per Class A-4 Note..................... % % %
- --------------------------------------------------------------------------------
Per Certificate........................ % % %
- --------------------------------------------------------------------------------
Total.................................. $ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Plus accrued interest, if any, from and including , 1998.
(2) Before deducting estimated expenses of $ payable by Green Tree.
----------
The Securities are offered hereby by the Underwriter named below, subject to
receipt and acceptance by the Underwriter and its right to reject any order in
whole or in part. It is expected that delivery of the Securities will be made
on or about , 1998 (the "Closing Date").
----------
[UNDERWRITERS]
The date of the Prospectus Supplement is , 1998.
<PAGE>
(Continued from preceding page)
assignment of Green Tree's security interests in the mortgages securing
certain Contracts and certain other property, as more fully described herein.
Green Tree will also act as Servicer of the Contracts. Terms used and not
otherwise defined herein have the meanings ascribed thereto in the Prospectus
dated , 1998 attached hereto (the "Prospectus").
Principal and interest on the Notes are payable on the 15th day of each
month (or, if the 15th day is not a business day, the next business day
thereafter) (a "Distribution Date"), beginning in 1998. The rights of the
holders of the Class A-2, Class A-3 and Class A-4 Notes and the Certificates
to receive distributions on each Distribution Date will be subordinated to
such rights of the Class A-1 Noteholders; such rights of the holders of the
Class A-3 and Class A-4 Notes and the Certificates will be subordinated to
such rights of the Class A-2 Noteholders; such rights of the holders of the
Class A-4 Notes and the Certificates will be subordinated to such rights of
the Class A-3 Noteholders; and such rights of the Certificateholders will be
subordinated to such rights of the Class A-4 Noteholders.
The Certificates will represent fractional undivided interests in the Trust.
Interest will be distributed to the Certificateholders on each Distribution
Date as set forth herein. No distributions of principal on the Certificates
will be payable until all of the Notes have been paid in full. The
Certificateholders will have the benefit of a Limited Guaranty of Green Tree
to protect against losses that would otherwise be absorbed by the
Certificates. To the extent that available funds in the Collection Account are
insufficient to distribute to the holders of the Certificates the
Certificateholders' Distributable Amount (as described herein), Green Tree
will be obligated to make a payment under the Limited Guaranty equal to the
amount of such deficiency.
The Securities initially will be represented by certificates registered in
the name of Cede & Co., the nominee of The Depository Trust Company ("DTC").
The interests of beneficial owners of the Securities will be represented by
book entries on the records of the participating members of DTC. Definitive
Securities will be available only under the limited circumstances described
herein. Holders of the Securities may hold through DTC (in the United States)
or, solely in the case of the Notes, through CEDEL or Euroclear (as defined
herein) (in Europe) if they are participants of such systems, or indirectly
through organizations that are participants in such systems. The Certificates
may not be held, directly or indirectly, through CEDEL or Euroclear.
The Certificates may not be offered or sold in the United Kingdom. The Notes
may not be offered or sold in the United Kingdom by means of any document
except in circumstances which do not constitute an offer to the public within
the meaning of the Public Offers of Securities Regulations 1995. All
applicable provisions of the Financial Services Act of 1986 must be complied
with in connection with anything done in relation to the Notes in, from or
otherwise involving the United Kingdom. See "Underwriting."
There currently is no secondary market for the Securities. The Underwriter
expects, but is not obligated, to make a market in the Securities. There is no
assurance that any such market will develop or continue.
---------------
THIS PROSPECTUS SUPPLEMENT DOES NOT CONTAIN COMPLETE INFORMATION ABOUT THE
OFFERING OF THE SECURITIES. ADDITIONAL INFORMATION IS CONTAINED IN THE
PROSPECTUS AND PROSPECTIVE INVESTORS ARE URGED TO READ BOTH THIS PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS IN FULL. SALES OF THE SECURITIES MAY NOT BE
CONSUMMATED UNLESS THE PURCHASER HAS RECEIVED BOTH THIS PROSPECTUS SUPPLEMENT
AND THE PROSPECTUS.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE SECURITIES
OFFERED HEREBY. SUCH TRANSACTIONS MAY INCLUDE STABILIZING AND THE PURCHASE OF
SECURITIES TO COVER SYNDICATE SHORT POSITIONS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
REPORTS TO SECURITYHOLDERS
Unless and until Definitive Securities are issued, unaudited monthly and
annual reports, containing information concerning the Trust and prepared by
the Servicer, will be sent on behalf of the Trust to the Indenture Trustee,
the Owner Trustee, and Cede & Co., as registered holder of the Securities and
the nominee of DTC. See "Description of the Trust Documents and Indenture--
Statements to Securityholders," herein and "Certain Information Regarding the
Securities--Book-Entry Registration" and "--Reports to Securityholders" in the
accompanying Prospectus. Security Owners may receive such reports, upon
written request, together with a certification that they are Security Owners
and payment of reproduction and postage expenses associated with the
distribution of such reports, from the Indenture Trustee at [address]. Such
reports will not constitute financial statements prepared in accordance with
generally accepted accounting principles. The Servicer, on behalf of the
Trust, will file with the Securities and Exchange Commission (the
"Commission") periodic reports concerning the 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, in
accordance with the Exchange Act and the rules and regulations of the
Commission thereunder, Green Tree expects that the Trust's obligation to file
such reports will be terminated following the end of 1998.
S-2
<PAGE>
SUMMARY OF TERMS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus Supplement and in
the accompanying Prospectus. Capitalized terms used herein and not otherwise
defined herein shall have the respective meanings ascribed to such terms
elsewhere in this Prospectus Supplement or the accompanying Prospectus.
Issuer........................ Green Tree Home Improvement Loan Trust 1998-
(the "Trust"), a Delaware business trust
governed pursuant to a Trust Agreement, to be
dated as of , (the "Trust
Agreement"), among Green Tree Second GP Inc.
(the "General Partner"), Green Tree Financial
Corporation ("Green Tree") and [Owner Trustee],
as Owner Trustee (the "Owner Trustee").
Seller and Servicer........... Green Tree Financial Corporation. See "Green
Tree Financial Corporation" herein and in the
accompanying Prospectus.
Indenture Trustee............. [Indenture Trustee Address], (the "Indenture
Trustee"). See "The Notes--The Indenture
Trustee" in the accompanying Prospectus.
Owner Trustee................. [Owner Trustee], not in its individual capacity
but solely as Owner Trustee under the Trust
Agreement. See "Description of the Trust
Documents--The Trustee" in the accompanying
Prospectus.
The Notes..................... The Trust will issue a class of floating rate
Asset-Backed Notes, designated as the Class A-1
Notes, and three classes of fixed rate Asset-
Backed Notes, designated as the Class A-2,
Class A-3 and Class A-4 Notes, respectively.
The Class A-1 Notes, Class A-2 Notes, Class A-3
Notes and Class A-4 Notes are referred to
herein as the "Notes." The rights of the
holders of each Class of Notes to receive
distributions will be subordinated to the
rights of the holders of each Class of Notes
with a prior numeric designation, in the manner
and to the extent described herein. The Notes
will be issued pursuant to an Indenture, to be
dated as of , (the "Indenture"),
between the Trust and the Indenture Trustee.
The Notes will be offered for purchase in
denominations of $1,000 and integral multiples
thereof in book-entry form only. See "Certain
Information Regarding the Securities--Book-
Entry Registration" in the accompanying
Prospectus.
The Notes will be secured by the assets of the
Trust pursuant to the Indenture.
Original Class A-1 Principal $ (Approximate. Subject to a permitted
Balance....................... variance of plus or minus 5%).
Original Class A-2 Principal $ (Approximate. Subject to a permitted
Balance....................... variance of plus or minus 5%).
Original Class A-3 Principal $ (Approximate. Subject to a permitted
Balance....................... variance of plus or minus 5%).
S-3
<PAGE>
Original Class A-4 Principal $ (Approximate. Subject to a permitted
Balance....................... variance of plus or minus 5%).
The Certificates.............. The Trust will issue Asset-Backed Certificates
(the "Certificates") representing fractional
undivided interests in the Trust. The rights of
the holders of the Certificates (the
"Certificateholders") to receive distributions
will be subordinated to the rights of the
holders of the Notes (the "Noteholders") in the
manner and to the extent described herein. The
Certificates will be issued pursuant to the
Trust Agreement. The Certificates will be
offered for purchase in denominations of $1,000
and integral multiples thereof in book-entry
form only. See "Certain Information Regarding
the Securities--Book-Entry Registration" in the
accompanying Prospectus.
Original Certificate $ (Approximate. Subject to a permitted
Principal Balance............. variance of plus or minus 5%).
Distribution Date............. The 15th day of each month (or if such 15th day
is not a Business Day, the next Business Day
thereafter) commencing in 1998. A "Business
Day" is a day on which banking institutions in
Minneapolis or St. Paul, Minnesota, or in New
York City, New York, are not required or
authorized by law to be closed.
Record Date................... The Business Day immediately preceding the
related Distribution Date.
Trust Property................ Each Note will represent an obligation of, and
each Certificate will represent a fractional
undivided interest in, the Trust. The Trust's
assets (the "Trust Property") will include,
among other things, a pool (the "Contract
Pool") of retail installment sales contracts
and promissory notes financing home
improvements (the "Contracts"), and all rights
to receive payments due thereon on or after the
Cutoff Date. The Trust Property will also
include an assignment of Green Tree's security
interests in the mortgages securing certain
Contracts and of the right to receive proceeds
from claims on certain insurance policies
covering the real estate securing certain
Contracts, or the Obligors (as defined herein);
the Collection Account, the Spread Account, the
Reserve Account and the Pre-Funding Account,
including all investments therein, all income
from the investment of funds therein and all
proceeds thereof; certain other rights under
the Sale and Servicing Agreement to be dated as
of , (the "Sale and Servicing
Agreement"), between Green Tree and the Trust;
and certain rights under the Interest Rate Cap
Agreement (as defined herein). The Contracts
will be transferred by Green Tree to the Trust
pursuant to the Sale and Servicing Agreement,
and Green Tree will be obligated to repurchase
Contracts (each, a "Purchased Contract") upon
the occurrence of certain breaches of
representations and warranties thereunder. On
the Closing Date, Green Tree will deposit an
amount in an account (the "Pre-Funding
Account") to provide the Trust with sufficient
funds to purchase the Subsequent Contracts.
Pursuant to the Indenture, the
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Trust Property will be pledged to the Indenture
Trustee on behalf of the Noteholders. See "The
Trust" herein.
Contracts..................... The Contracts were originated or purchased by
Green Tree in the ordinary course of business.
As of the Cutoff Date, the Contracts had a
weighted average annual percentage rate of
% and a weighted average remaining
maturity of approximately months. As of the
Cutoff Date, no Contract had a scheduled
maturity prior to and no Contract was
more than 30 days past due. The final scheduled
payment date on the Contract with the latest
maturity occurs in . The Contracts are
generally prepayable at any time without
penalty to the Obligor. See "The Contract Pool"
herein and "The Contracts" in the accompanying
Prospectus.
Cutoff Date................... The "Cutoff Date" will be (i) , 1998 (or
the date of origination, if later), with
respect to all Contracts that had a first
scheduled payment due prior to , 1998, and
(ii) , 1998 with respect to those Contracts
that had a first scheduled payment due in ,
1998.
Terms of the Notes............ The principal terms of the Notes will be as
described below:
A. Distributions........... Noteholders will be entitled to receive on each
Distribution Date, to the extent that the
Amount Available in the Collection Account is
sufficient therefor, the Noteholders'
Distributable Amount, as defined under
"Description of the Trust Documents and
Indenture." Distributions on the Notes will be
made first to the Class A-1 Noteholders, then
to the Class A-2 Noteholders, then to the Class
A-3 Noteholders, and then to the Class A-4
Noteholders, in the manner described below.
The "Amount Available" on each Distribution
Date generally includes payments on the
Contracts due and received during the preceding
month, prepayments and other unscheduled
collections received during the preceding
month, any amounts deposited in respect of
Purchased Contracts, any Interest Rate Cap
Payment, any Guaranty Payment, and all earnings
from the investment of funds in the Collection
Account.
The outstanding principal amount of each Class
of Notes, to the extent not previously paid,
will be payable on the Distribution Date
occurring in (the "Final Scheduled
Distribution Date").
B. Interest Rates.......... Class A-1 Notes : one-month LIBOR (as defined
below) for the monthly interest period plus
% (the "Class A-1 Rate").
Class A-2 Notes : % per annum (the "Class A-
2 Rate").
Class A-3 Notes : % per annum (the "Class A-
3 Rate").
Class A-4 Notes : % per annum (the "Class A-
4 Rate").
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Interest on the Class A-2 Notes, Class A-3
Notes and Class A-4 Notes will be calculated on
the basis of a 360-day year consisting of
twelve 30-day months.
Interest on the Class A-1 Notes will be
calculated on the basis of the actual number of
days in the monthly interest period divided by
360.
"LIBOR" ("London Interbank Offered Rate") with
respect to any monthly interest period will be
established by the calculation agent appointed
by the Trust (the "Calculation Agent") and will
equal the offered rate for United States dollar
deposits for one month that appears on Telerate
Page 3750 as of 11:00 A.M., London time, on the
second LIBOR Business Day prior to such monthly
interest period (a "LIBOR Determination Date").
"Telerate Page 3750" means the display page so
designated on the Dow Jones Telerate Service
(or such other page as may replace that page on
that service, or such other service as may be
designated by the Calculation Agent as the
information vendor, for the purpose of
displaying London interbank offered rates of
major banks). If such rate appears on Telerate
Page 3750, LIBOR will be such rate. "LIBOR
Business Day" as used herein means a day that
is both a Business Day and a day on which
banking institutions in the City of London,
England are not required or authorized by law
to be closed. If on any LIBOR Determination
Date the offered rate does not appear on
Telerate Page 3750, the Calculation Agent will
request each of the reference banks (which
shall be major banks that are engaged in
transactions in the London interbank market
selected by the Calculation Agent) to provide
the Calculation Agent with its offered
quotation for United States dollar deposits for
one month to prime banks in the London
interbank market as of 11:00 A.M., London time,
on such date. If at least two reference banks
provide the Calculation Agent with such offered
quotations, LIBOR on such date will be the
arithmetic mean, rounded 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 New York City
selected by the Calculation Agent are quoting
as of 11:00 A.M., New York City time, on such
date to leading European banks for United
States dollar deposits for one month; provided,
however, that if such banks are not quoting as
described above, LIBOR for such date will be
LIBOR applicable to the monthly interest period
immediately preceding such monthly interest
period. The "Calculation Agent" will initially
be the Indenture Trustee.
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The interest rates for the various classes of
Notes are referred to collectively herein as
the "Interest Rates."
C. Class A-1 Interest...... Interest on the outstanding Class A-1 Principal
Balance will accrue from , 1998, or from
the most recent Distribution Date, to but
excluding the following Distribution Date, at
the Class A-1 Rate for such monthly interest
period. The "Class A-1 Principal Balance" as of
any Distribution Date will be the Original
Class A-1 Principal Balance minus all amounts
previously distributed to the Class A-1
Noteholders in respect of principal.
Interest will be paid on the Class A-1 Notes to
the extent of funds available on such
Distribution Date. In the event the funds
available are not sufficient to make a full
distribution of interest on the Class A-1
Notes, the amount of the shortfall will be
carried forward and added to the amount of
interest payable on the next Distribution Date.
Any amount so carried forward will bear
interest at the Class A-1 Rate, to the extent
legally permissible. See "Description of the
Notes."
D. Class A-1 Principal..... Class A-1 Noteholders will be entitled to
receive on each Distribution Date as payment of
principal, to the extent of funds available
after payment of all interest then payable on
the Class A-1 Notes, an amount equal to the sum
of % (approximate) of the Formula
Principal Distribution Amount for such
Distribution Date plus the Unpaid Class A-1
Principal Shortfall, if any, for such
Distribution Date.
The "Formula Principal Distribution Amount"
with respect to any Distribution Date (but
subject to the last sentence of this
definition) will generally be equal to the sum
of the following amounts with respect to the
related Monthly Period, in each case computed
in accordance with the method specified in each
Contract: (i) all scheduled payments of
principal due on each outstanding Contract
during the related Monthly Period, (ii) all
Partial Principal Prepayments applied and all
Principal Prepayments in Full received during
the related Monthly Period in respect of each
Contract, (iii) the Scheduled Principal Balance
of each Contract that became a Liquidated
Contract during the related Monthly Period,
(iv) the Scheduled Principal Balance of each
Contract which, during the related Monthly
Period, was purchased by Green Tree as a result
of a breach of a representation or warranty or
by the Servicer as a result of an uncured
breach of a covenant under the Sale and
Servicing Agreement, and (v) with respect to
the Distribution Date in 1998, any
remaining amounts on deposit in the Pre-Funding
Account. The Formula Principal Distribution
Amount for the Distribution Date in 2029
will be the sum of the Note Principal Balance
and the Certificate Principal Balance.
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<PAGE>
A "Monthly Period" with respect to a
Distribution Date is the calendar month
immediately preceding the month in which such
Distribution Date occurs. The "Scheduled
Principal Balance" of a Contract for any
Monthly Period is its principal balance as
specified in its amortization schedule, after
giving effect to any previous Partial Principal
Prepayments and to the scheduled payment due on
its scheduled payment date (the "Due Date") in
that month, but without giving effect to any
adjustments due to bankruptcy or similar
proceedings. A "Liquidated Contract" means any
defaulted Contract as to which the Servicer has
determined that all amounts which it expects to
recover from or on account of such Contract
through the date of disposition of the related
real property have been recovered or any
defaulted Contract in respect of which the
related real property has been realized upon
and disposed of and the proceeds of such
disposition have been received. See
"Description of the Trust Documents and
Indenture--Distributions."
E. Class A-2 Interest...... Interest on the outstanding Class A-2 Principal
Balance will accrue from , 1998, or from
the most recent Distribution Date, to but
excluding the following Distribution Date, at
the Class A-2 Rate for such monthly interest
period. The "Class A-2 Principal Balance" as of
any Distribution Date will be the Original
Class A-2 Principal Balance minus all amounts
previously distributed to the Class A-2
Noteholders in respect of principal and minus
any unreimbursed liquidation losses absorbed by
the Class A-2 Notes.
Interest will be paid on the Class A-2 Notes to
the extent of funds available on each
Distribution Date, after payment of all
interest and principal then payable on the
Class A-1 Notes. In the event such funds
available are not sufficient to make a full
distribution of interest on the Class A-2
Notes, the amount of the shortfall will be
carried forward and added to the amount of
interest payable on the next Distribution Date.
Any amount so carried forward will bear
interest at the Class A-2 Rate, to the extent
legally permissible. See "Description of the
Notes."
F. Class A-2 Principal..... Class A-2 Noteholders will be entitled to
receive on each Distribution Date as payment of
principal, to the extent of funds available
after payment of all interest and principal
then payable on the Class A-1 Notes and after
payment of all interest then payable on the
Class A-2 Notes, the sum of %
(approximate) of the Formula Principal
Distribution Amount for such Distribution Date
plus the Unpaid Class A-2 Principal Shortfall,
if any, from prior Distribution Dates.
G. Class A-3 Interest...... Interest on the outstanding Class A-3 Principal
Balance will accrue from , 1998, or from
the most recent Distribution Date, to but
excluding the following Distribution Date, at
the Class A-3 Rate for such monthly interest
period. The
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<PAGE>
"Class A-3 Principal Balance" as of any
Distribution Date will be the Original Class A-
3 Principal Balance minus all amounts
previously distributed to the Class A-3
Noteholders in respect of principal and minus
any unreimbursed liquidation losses absorbed by
the Class A-3 Notes.
Interest will be paid on the Class A-3 Notes to
the extent of funds available on such
Distribution Date, after payment of all
interest and principal then payable on the
Class A-2 Notes. In the event such funds
available are not sufficient to make a full
distribution of interest on the Class A-3
Notes, the amount of the shortfall will be
carried forward and added to the amount of
interest payable on the next Distribution Date.
Any amount so carried forward will bear
interest at the Class A-3 Rate, to the extent
legally permissible. See "Description of the
Notes."
H. Class A-3 Principal..... Class A-3 Noteholders will be entitled to
receive on each Distribution Date as payment of
principal, to the extent of funds available
after payment of all interest and principal
then payable on the Class A-2 Notes and after
payment of all interest then payable on the
Class A-3 Notes, the sum of % (approximate)
of the Formula Principal Distribution Amount
for such Distribution Date plus the Unpaid
Class A-3 Principal Shortfall, if any, from
prior Distribution Dates.
I. Class A-4 Interest...... Interest on the outstanding Class A-4 Principal
Balance will accrue from , 1998, or from
the most recent Distribution Date, to but
excluding the following Distribution Date, at
the Class A-4 Rate for such monthly interest
period. The "Class A-4 Principal Balance" as of
any Distribution Date will be the Original
Class A-4 Principal Balance minus all amounts
previously distributed to the Class A-4
Noteholders in respect of principal and minus
any unreimbursed liquidation losses absorbed by
the Class A-4 Notes.
Interest will be paid on the Class A-4 Notes to
the extent of funds available on each
Distribution Date, after payment of all
interest and principal then payable on the
Class A-3 Notes. In the event such funds
available are not sufficient to make a full
distribution of interest on the Class A-4
Notes, the amount of the shortfall will be
carried forward and added to the amount of
interest payable on the next Distribution Date.
Any amount so carried forward will bear
interest at the Class A-4 Rate, to the extent
legally permissible. See "Description of the
Notes."
J. Class A-4 Principal..... Class A-4 Noteholders will be entitled to
receive on each Distribution Date as payment of
principal, to the extent of funds available
after payment of all interest and principal
then payable on the Class A-3 Notes and after
payment of all interest then payable on the
Class A-4 Notes, the sum of % (approximate)
of the Formula Principal Distribution Amount
for such
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<PAGE>
Distribution Date plus the Unpaid Class A-4
Principal Shortfall, if any, from prior
Distribution Dates.
K. Optional Redemption..... The Notes will be redeemed in whole, but not in
part, on any Distribution Date on which Green
Tree exercises its option to purchase the
Contracts, which, subject to certain provisions
in the Sale and Servicing Agreement, can occur
after the Pool Scheduled Principal Balance
declines to 10% or less of the Cutoff Date Pool
Principal Balance, at a redemption price equal
to the unpaid principal amount of the Notes
plus accrued and unpaid interest thereon. The
"Pool Scheduled Principal Balance" is the
aggregate Scheduled Principal Balance of all
outstanding Contracts during a Monthly Period.
See "Description of the Notes--Optional
Redemption."
L. Mandatory Prepayments... The Class A-1, Class A-2, Class A-3 and Class
A-4 Notes will be prepaid in part on the first
Distribution Date after the Pre-Funding Period
(in no event later than , 1998) to the
extent of any Pre-Funded Amount remaining in
the Pre-Funding Account on such Distribution
Date. Green Tree believes that substantially
all of the Pre-Funded Amount will be used to
acquire Subsequent Contracts. It is unlikely,
however, that the aggregate principal amount of
Subsequent Contracts purchased by the Trust
will be identical to the Pre-Funded Amount, and
that consequently, Class A-1, Class A-2, Class
A-3 and Class A-4 Noteholders will receive some
prepayment of principal. See "Yield and
Prepayment Considerations."
Interest Rate Cap Class A-1 Noteholders will have the benefit of
Agreement..................... an Interest Rate Cap Agreement, dated as of
, 1998 (the "Interest Rate Cap
Agreement"), between the Trust and
[Counterparty] (the "Counterparty"), a .
Pursuant to the Interest Rate Cap Agreement,
the Counterparty will make a payment (the
"Interest Rate Cap Payment") to the Trust on
each Distribution Date to the extent that the
Class A-1 Rate exceeds 10%, in an amount equal
to the amount obtained by multiplying the Class
A-1 Principal Balance by the product of (i) the
maximum of (x) the excess of the Class A-1 Rate
over % or (y) 0% and (ii) the number of days
in the monthly interest period divided by 360.
See "Description of the Notes--Interest Rate
Cap Agreement" and "Description of the
Counterparty."
Spread Account................ Class A-2, Class A-3 and Class A-4 Noteholders
will have the benefit of a separate sub-account
for each Class contained in an account (the
"Spread Account") to be held by the Indenture
Trustee. On any Distribution Date, if the funds
in the Note Distribution Account (after making
all distributions on each Class of Notes with a
prior numeric designation) is insufficient to
distribute all interest then payable on the
Class A-2, Class A-3 or Class A-4 Notes, the
Indenture Trustee will withdraw the amount of
the deficiency from the applicable sub-account
(or the amount on deposit in the applicable
sub-account, if less) and deposit such
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<PAGE>
amount in the Note Distribution Account for
distribution to the applicable Class.
On the Closing Date, the amount on deposit in
the Class A-2, Class A-3 and Class A-4 sub-
accounts will be zero. On each Distribution
Date, the Indenture Trustee will deposit all
funds remaining in the Collection Account,
after distribution of all interest and
principal then payable on the Notes and all
interest then payable on the Certificates,
first to the Class A-2 sub-account, then to the
Class A-3 sub-account and then to the Class A-4
sub-account, until the amount on deposit in
such sub-accounts equals $ and $ ,
respectively (subject to reduction as provided
in, and to the other terms and conditions
contained in, the Sale and Servicing
Agreement). If any sub-account is drawn upon,
it will be replenished to the extent provided
in the Sale and Servicing Agreement and the
Indenture. The Spread Account will be included
in the Trust Property. See "Description of the
Notes--The Spread Account."
Reserve Account............... Noteholders will have the benefit of an account
(the "Reserve Account") to be held by the
Indenture Trustee. On any Distribution Date, if
the funds in the Note Distribution Account
(after making all distributions on each Class
of Notes with a prior numeric designation) are
insufficient to make full payment in respect of
interest or principal payable on a Class of
Notes (after making appropriate draws upon the
Spread Account), the Indenture Trustee will
withdraw the amount of the deficiency from the
Reserve Account (or the amount on deposit in
the Reserve Account, if less) and deposit such
amount in the Note Distribution Account for
distribution to the applicable Class.
On the Closing Date, the amount on deposit in
the Reserve Account will be zero. On each
Distribution Date, the Indenture Trustee will
deposit all funds remaining in the Collection
Account, after distribution of all interest and
principal then payable on the Notes, all
interest then payable on the Certificates and
all deposits in the Spread Account, until the
amount on deposit in the Reserve Account equals
% of the Pool Scheduled Principal Balance
(subject to reduction as provided in, and to
other terms and conditions contained in, the
Sale and Servicing Agreement). If the Reserve
Account is drawn upon, it will be replenished
to the extent provided in the Sale and
Servicing Agreement and the Indenture. The
Reserve Account will be included in the Trust
Property. See "Description of the Notes--The
Reserve Account."
Terms of the Certificates..... The principal terms of the Certificates will be
as described below:
A. Distributions............. Certificateholders will be entitled to receive
on each Distribution Date commencing in
1998, to the extent the Amount Available in the
Collection Account including the Guaranty
Payment described below is sufficient therefor,
the
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<PAGE>
Certificateholders' Distributable Amount, as
defined under "Description of the Trust
Documents and Indenture."
The outstanding principal amount of the
Certificates, to the extent not previously
paid, will be payable on the Final Scheduled
Distribution Date.
B. Pass-Through Rate......... % per annum (the "Pass-Through Rate")
payable monthly at one-twelfth of the annual
rate, calculated on the basis of a 360-day year
consisting of twelve 30-day months.
C. Interest.................. On each Distribution Date, the Owner Trustee
will distribute to the Certificateholders, to
the extent the Amount Available in the
Collection Account including the Guaranty
Payment described below is sufficient therefor,
accrued interest at the Pass-Through Rate on
the outstanding Certificate Principal Balance.
Interest in respect of a Distribution Date will
accrue from , 1998, or from the most
recent Distribution Date to but excluding the
following Distribution Date. The "Certificate
Principal Balance" as of any Distribution Date
will be the Original Certificate Principal
Balance minus all amounts previously
distributed to the Certificateholders in
respect of principal and minus any unreimbursed
liquidation losses absorbed by the
Certificates.
Interest will be paid on the Certificates to
the extent of funds available on each
Distribution Date, after payment of all
interest and principal then payable on the
Notes. In the event such funds available are
not sufficient to make a full distribution of
interest on the Certificates, the amount of the
shortfall will be carried forward and added to
the amount of interest payable on the next
Distribution Date. Any amount so carried
forward will bear interest at the Pass-Through
Rate, to the extent legally permissible. See
"Description of the Certificates."
D. Principal................. No distributions of principal on the
Certificates will be payable until all of the
Notes have been paid in full. On each
Distribution Date commencing on the
Distribution Date on which the Notes are paid
in full, principal on the Certificates will be
payable in an amount equal to the Formula
Principal Distribution Amount for such
Distribution Date (less, on the Distribution
Date on which the Notes are paid in full, the
portion thereof payable on the Notes), plus the
Unpaid Certificate Principal Shortfall, if any,
from prior Distribution Dates.
E. Limited Guaranty.......... In order to mitigate the effect of the
subordination of the Certificates and the
effect of liquidation losses on the Contracts,
the Certificateholders are entitled to receive
on each Distribution Date an amount equal to
the Guaranty Payment, if any, under Green
Tree's Limited Guaranty. The "Guaranty Payment"
for any Distribution Date will equal the
difference, if any, between the
Certificateholders' Distributable Amount and
the remaining funds available in the Collection
Account after payment of all interest
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<PAGE>
and principal on the Notes and the deposit in
any sub-account of the Spread Account or the
Reserve Account of any amounts previously
withdrawn therefrom and not previously
replenished. The "Certificateholders'
Distributable Amount" equals the unpaid and
accrued interest on the Certificates, plus on
each Distribution Date commencing on the
Distribution Date on which the Notes are paid
in full, principal in an amount equal to the
Formula Principal Distribution Amount for such
Distribution Date (less, on the Distribution
Date on which the Notes are paid in full, the
portion thereof payable on the Notes), plus any
Unpaid Certificate Principal Shortfall for such
Distribution Date, and plus any unreimbursed
Certificate Principal Liquidation Loss.
The Limited Guaranty will be an unsecured
general obligation of Green Tree and will not
be supported by any letter of credit or other
enhancement arrangement. The ratings assigned
to the Certificates may be affected by the
ratings of Green Tree's debt securities. Green
Tree's senior debt securities were recently
downgraded by Standard & Poor's Ratings
Services, a division of The McGraw-Hill
Companies, Inc. ("S&P") from "A-" to "BBB+" and
by Fitch IBCA, Inc. ("Fitch") from "A" to "A-",
which has been reflected in the ratings
assigned to the Certificates. See "Summary of
Terms--Ratings."
F. Optional Prepayment....... If Green Tree or the Servicer exercises its
option to purchase the Contracts, which,
subject to certain provisions in the Sale and
Servicing Agreement, can occur after the Pool
Scheduled Principal Balance declines to 10% or
less of the Cutoff Date Pool Principal Balance,
the Certificateholders will receive an amount
in respect of the Certificates equal to the
principal amount, together with accrued
interest at the Pass-Through Rate and the
Certificates will be retired. See "Description
of the Certificates--Optional Prepayment."
Collection Account; Priority Except under certain conditions described
of Payments................... herein or as otherwise acceptable to S&P and
Fitch, the Servicer will be required to remit
payments received with respect to the Contracts
within one Business Day of receipt thereof to
an account in the name of the Indenture Trustee
(the "Collection Account"). On each
Distribution Date, the Servicer will instruct
the Indenture Trustee to withdraw funds on
deposit in the Collection Account and to apply
such funds on such Distribution Date as follows
(in the priority indicated): (i) if Green Tree
is not the Servicer, the monthly servicing fee,
together with any unpaid servicing fees from
prior Distribution Dates, (ii) reimbursement of
any advances made that were recovered during
the prior Monthly Period, (iii) the
Noteholders' Interest Distributable Amount, the
Noteholders' Principal Distributable Amount and
any amounts previously withdrawn from any sub-
account of the Spread Account or the Reserve
Account and not previously replenished, (iv)
the Certificateholders' Interest Distributable
Amount and,
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<PAGE>
after the Notes have been paid in full, the
Certificateholders' Principal Distributable
Amount, (v) amounts necessary to fully fund the
Class A-2, Class A-3 and Class A-4 sub-accounts
of the Spread Account, (vi) the amount
necessary to fully fund the Reserve Account and
(vii) any remaining amount to Green Tree as the
monthly servicing and guaranty fee (the
"Monthly Servicing and Guaranty Fee").
Pre-Funding Account........... On the Closing Date, Green Tree will deposit an
amount (as reduced from time-to-time, the "Pre-
Funded Amount") in the Pre-Funding Account to
provide the Trust with sufficient funds to
purchase the Subsequent Contracts. The Pre-
Funded Amount will initially equal the
difference between $ and the aggregate
principal balance as of the Cutoff Date of the
Initial Contracts. The Pre-Funding Account will
be included in the Trust Property. Any
reimbursement income earned on amounts on
deposit in the Pre-Funding Account will be
taxable to Green Tree. See "Yield and
Prepayment Considerations" and "Description of
the Trust Documents and Indenture--Accounts"
herein.
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 associa-
tion (or a publicly traded partnership) taxable
as a corporation, and neither the Trust nor any
portion of the Trust will constitute a taxable
mortgage pool 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 Cer-
tificate, will agree to treat the Trust as a
partnership in which the Certificateholders are
partners for federal income tax purposes. Al-
ternative characterizations of the Trust and
the Certificates are possible, but would not
result in materially adverse tax consequences
to Certificateholders. See "Certain Federal and
State Income Tax Consequences" herein and "Cer-
tain Federal Income Tax Consequences" and "Cer-
tain State Income Tax Consequences" in the ac-
companying Prospectus.
ERISA Considerations.......... If the Notes are considered to be indebtedness
without substantial equity features under a
regulation issued by the United States
Department of Labor, the acquisition or holding
of Notes by or on behalf of a Benefit Plan will
not cause the assets of the Trust to become
plan assets, thereby generally preventing the
application of certain prohibited transaction
rules of the Employee Retirement Income
Security Act of 1974, as amended, and the
Internal Revenue Code of 1986, as amended, that
otherwise would possibly be applicable. Green
Tree believes that the Notes should be treated
as indebtedness without substantial equity
features for purposes of such regulation.
The Certificates may not be acquired by, or on
the behalf of, any employee benefit plan,
individual retirement account or Keogh
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<PAGE>
Plan subject to either Title I of the Employee
Retirement Income Security Act of 1974, as
amended, or the Internal Revenue Code of 1986,
as amended. See "ERISA Considerations" herein
and in the accompanying Prospectus.
Ratings....................... It is a condition to the issuance of the
Securities that:
the Class A-1 Notes be rated "AAA" by S&P and
"AAA" by Fitch;
the Class A-2 Notes be rated at least "AA" by
S&P and at least "AA" by Fitch;
the Class A-3 Notes be rated at least "A" by
S&P and at least "A" by Fitch;
the Class A-4 Notes be rated at least "BBB" by
S&P and at least "BBB" by Fitch; and
the Certificates be rated at least "BBB+" by
S&P and at least "A-" by Fitch.
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 a
Rating Agency. The rating of the Certificates
will be based in part on an assessment of Green
Tree's ability to make payments under the
Limited Guaranty. Any reduction in S&P's or
Fitch's ratings of Green Tree's debt securities
may result in a similar reduction in the
ratings of the Certificates. Green Tree's
senior debt securities were recently downgraded
by S&P from "A-" to "BBB+" and by Fitch from
"A" to "A-".
Green Tree has not requested a rating of the
Securities from any rating agencies other than
S&P and Fitch. There can be no assurance as to
whether any other rating agency will rate the
Securities or, if one does, what rating would
be assigned by such rating agency.
S-15
<PAGE>
RISK FACTORS
Prospective holders of the Securities should consider, in addition to the
factors described under "Risk Factors" in the Prospectus, the following factors
in connection with the purchase of the Securities:
SUBORDINATION OF CLASS A-2, CLASS A-3 AND CLASS A-4 NOTES AND CERTIFICATES;
LIMITED ASSETS
Distributions of interest and principal on each Class of Notes will be
subordinated to the rights of the holders of each Class of Notes with a prior
numeric designation to receive prior payment of interest and principal.
Distributions of interest and principal on the Certificates will be
subordinated in priority of payment to interest and principal due on the Notes.
Certificateholders, however, will not receive any distributions of principal
until the Distribution Date on which the outstanding principal amounts of all
of the Notes have been paid in full.
Holders of the Notes and the Certificates must primarily rely for repayment
upon payments on the Contracts. The Trust will not have, nor is it permitted or
expected to have, any significant assets or sources of funds other than the
Contracts, the Spread Account, the Reserve Account, the Interest Rate Cap
Payments and, for payment of losses absorbed by the Certificates, the Limited
Guaranty of Green Tree.
DELINQUENCY, LOAN LOSS AND REPOSSESSION EXPERIENCE
Green Tree has limited underwriting and servicing experience with home
improvement contracts similar to the Contracts. Although Green Tree has
calculated and presented herein its delinquency and net loss experience with
respect to its servicing portfolio of home improvement contracts, there can be
no assurance that the information presented will reflect actual experience with
respect to the Contracts. In addition, there can be no assurance that the
future delinquency, loan loss or repossession experience of the Trust with
respect to the Contracts will be better or worse than that set forth herein
with respect to Green Tree's servicing portfolio. See "The Contract Pool--
Delinquency, Loan Loss and Repossession Information."
ADEQUACY OF REAL ESTATE SECURING CONTRACTS
As of the Cutoff Date, approximately % of the Cutoff Date Principal
Balance represented Contracts which were either unsecured or secured by
subordinate liens on the related real estate. Consequently, the real estate
securing a Contract is not likely to provide adequate security in the event it
becomes necessary to realize upon the collateral. Even assuming that the real
estate securing a Contract provides adequate security, substantial delays could
be encountered in connection with the liquidation of such Contract that would
result in current shortfalls in distributions to the holders of the
Certificates to the extent described herein. In addition, liquidation expenses
relating to any Liquidated Contract (such as legal fees, real estate taxes and
maintenance and preservation expenses) will reduce the liquidation proceeds
otherwise available for payment to the holders of the Certificates. In the
event that any real estate securing a Contract fails to provide adequate
security, any losses in connection with such Contract will be borne by the
holders of the Certificates to the extent described herein.
GEOGRAPHIC CONCENTRATION OF INITIAL CONTRACTS
As of the Cutoff Date, the Obligors on approximately % of the Initial
Contracts (based on principal balance and billing address of the Obligor) were
located in [ ]. See "The Contract Pool." Accordingly, adverse economic
conditions or other factors particularly affecting this state could adversely
affect the delinquency, loan loss or repossession experience of the Trust with
respect to the Contracts.
S-16
<PAGE>
THE TRUST
The following information supplements and, to the extent inconsistent
therewith, supersedes the information contained in the accompanying Prospectus.
Prospective Securityholders should consider, in addition to the information
below, the information under "The Trusts" in the accompanying Prospectus.
GENERAL
Green Tree Home Improvement Loan Trust 1998-E is a business trust formed
under the laws of the State of Delaware pursuant to the Trust Agreement for the
transactions described in this Prospectus Supplement. After its formation, the
Trust will not engage in any activity other than (i) acquiring, holding and
managing the Contracts and the other assets of the Trust and proceeds
therefrom, (ii) issuing the Notes and the Certificates, (iii) making payments
on the Notes and the Certificates and (iv) engaging in other activities that
are necessary, suitable or convenient to accomplish the foregoing or are
incidental thereto or connected therewith.
The Trust will initially be capitalized with equity equal to $
(approximate) from the sale of the Certificates to third party investors that
are expected to be unaffiliated with Green Tree or its affiliates. The equity
of the Trust, together with the proceeds of the initial sale of the Notes, will
be used by the Trust to purchase the Contracts from Green Tree pursuant to the
Sale and Servicing Agreement.
The Trust's principal offices are in , Delaware, at the address listed
below under "--The Owner Trustee."
CAPITALIZATION OF THE TRUST
The following table illustrates the capitalization of the Trust as of the
Cutoff Date, as if the issuance and sale of the Notes and Certificates had
taken place on such date:
<TABLE>
<S> <C>
Class A-1 Notes.............................................. $
Class A-2 Notes..............................................
Class A-3 Notes..............................................
Class A-4 Notes..............................................
Certificates.................................................
------------
Total...................................................... $
============
</TABLE>
THE OWNER TRUSTEE
[Owner Trustee name] is the Owner Trustee under the Trust Agreement. [Owner
Trustee] is a Delaware banking corporation and its principal offices are
located at , Delaware . The Owner Trustee will perform
limited administrative functions under the Trust Agreement, including making
distributions from the Certificate Distribution Account. The Owner Trustee's
liability in connection with the issuance and sale of the Certificates and the
Notes is limited solely to the express obligations of the Owner Trustee as set
forth in the Trust Agreement.
S-17
<PAGE>
THE TRUST PROPERTY
The Trust Property will include, among other things, (i) the Contracts; (ii)
all rights to receive payments due thereon on or after the Cutoff Date
(excluding certain insurance premiums, late fees and other servicing charges);
(iii) such amounts as from time to time may be held in the Collection Account,
the Spread Account, the Reserve Account, the Pre-Funding Account and certain
other accounts established and maintained by the Servicer pursuant to the Sale
and Servicing Agreement, as described below (including all investments in the
Collection Account, the Spread Account, the Reserve Account and such other
accounts and all income from the investment of funds therein and all proceeds
thereof); (iv) an assignment of the mortgages on the real estate securing the
certain Contracts; and (v) certain other rights under the Trust Documents. See
"The Contracts" and "Description of the Trust Documents--Collections" in the
accompanying Prospectus.
Each Certificate will represent a fractional undivided interest in the Trust
Property. Pursuant to the Indenture the Trust will grant a security interest in
the Trust Property in favor of the Indenture Trustee on behalf of the
Noteholders. Any proceeds of such security interest in the Trust Property would
be distributed according to the Indenture, as described below under
"Description of the Trust Documents and Indenture--Distributions."
Green Tree, as [Indenture Trustee] or custodian on its behalf, will hold each
original Contract, as well as copies of documents and instruments relating to
such Contract and evidencing the lien on the real estate securing such Contract
(the "Contract Files"). In order to protect the Trust's ownership interest in
the Contracts, Green Tree will file a UCC-1 financing statement in Minnesota
and Delaware to give notice of the Trust's ownership of the Contracts and the
related Trust Property.
S-18
<PAGE>
THE CONTRACT POOL
GENERAL
This Prospectus Supplement contains information regarding the Initial
Contracts, which were originated through and will be transferred to
the Trust on the Closing Date. The information for each Initial Contract is as
of the Cutoff Date for such Contract. The Initial Contracts had an aggregate
principal balance as of the Cutoff Date of $ . The Sale and Servicing
Agreement provides that the Initial Contracts will be purchased by the Trust on
the Closing Date and that subsequent Contracts will be purchased by the Trust
from time to time during the Pre-Funding Period.
All of the Contracts will be purchased by Green Tree from dealers, home
improvement contractors and correspondent lenders who regularly originate and
sell such contracts to Green Tree, or will be originated by Green Tree
directly. Green Tree believes that the underwriting standards employed by such
independent financing company are similar to the standards used by Green Tree.
CERTAIN OTHER CHARACTERISTICS
The Initial Contracts (i) had a remaining maturity, as of the Cutoff Date, of
at least months, but not more than months, (ii) had an original maturity
of at least months, but not more than months, (iii) had an original
principal balance of at least $ and not more than $ , (iv) had a
remaining principal balance as of the Cutoff Date of at least $ and not
more than . Neither Green Tree nor the Servicer may substitute other
contracts for the Home Improvement Contracts at any time at any time during the
term of the Pooling and Servicing Agreement.
The Initial Contracts have an aggregate principal balance as of the Cutoff
Date of approximately $ (the "Cutoff Date Principal Balance"). The
Initial Contracts were originated between and . A significant
portion of the Initial Contracts were purchased by Green Tree from an
independent financing company. Green Tree believes that the underwriting
standards employed by such independent financing company are similar to the
standards used by Green Tree.
CHARACTERISTICS OF INITIAL CONTRACTS
<TABLE>
<CAPTION>
WEIGHTED
% OF AVERAGE WEIGHTED
% OF SCHEDULED SCHEDULED AVERAGE WEIGHT ORIGINAL AVERAGE
NUMBER OF INITIAL PRINCIPAL PRINCIPAL PRINCIPAL AVERAGE SCHEDULED REMAINING
ASSET TYPE CONTRACTS CONTRACTS BALANCE BALANCE BALANCE RATE TERM TERM (1)
- ------------------------ --------- --------- ------------- ---------- --------- ------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Unsecured Home
Improvement............ % % %
Debt Consolidation Home
Improvement............ % % %
----- ------- ------------- ------- ------- ------ --- ---
Total ................ 100.00% $ 100.00% $ %
===== ======= ============= ======= ======= ====== === ===
</TABLE>
- --------
(1) Based on scheduled payments due after the Cutoff Date and assuming no
prepayments on the Contracts.
S-19
<PAGE>
GEOGRAPHIC CONCENTRATION OF INITIAL CONTRACTS
<TABLE>
<CAPTION>
NUMBER OF
CONTRACTS AS OF PERCENT OF NUMBER PRINCIPAL BALANCE PERCENT OF CUTOFF DATE
STATE (1) CUTOFF DATE OF CONTRACTS AS OF CUTOFF DATE PRINCIPAL BALANCE
--------- --------------- ----------------- ----------------- ----------------------
<S> <C> <C> <C> <C>
Alabama................. % $ %
Arizona.................
Arkansas................
California..............
Colorado................
Connecticut.............
Delaware................
District of Columbia....
Florida.................
Georgia.................
Idaho...................
Illinois................
Indiana.................
Iowa....................
Kansas..................
Kentucky................
Louisiana...............
Maine...................
Maryland................
Massachusetts...........
Michigan................
Minnesota...............
Mississippi.............
Missouri................
Montana.................
Nebraska................
Nevada..................
New Hampshire...........
New Jersey..............
New Mexico..............
New York................
North Carolina..........
North Dakota............
Ohio....................
Oklahoma................
Oregon..................
Pennsylvania............
Rhode Island............
South Carolina..........
South Dakota............
Tennessee...............
Texas...................
Utah....................
Vermont.................
Virginia................
Washington..............
West Virginia...........
Wisconsin...............
Wyoming.................
----- ------ --------------- ------
Total................. 100.00% $ 100.00%
===== ====== =============== ======
</TABLE>
- --------
(1) Based on the address of the Obligor set forth in Green Tree's records.
S-20
<PAGE>
DISTRIBUTION OF ORIGINAL CONTRACT AMOUNTS OF INITIAL CONTRACTS
<TABLE>
<CAPTION>
AGGREGATE
PRINCIPAL % OF
BALANCE CONTRACT POOL
NUMBER OF OUTSTANDING BY OUTSTANDING
CONTRACTS AS OF CUTOFF PRINCIPAL BALANCE
ORIGINAL CONTRACT AMOUNT AS OF CUTOFF DATE DATE AS OF CUTOFF DATE
------------------------ ----------------- --------------- -----------------
<S> <C> <C> <C>
Less than $10,000......... $ %
Between $10,000 and
$19,999..................
Between $20,000 and
$29,999..................
Between $30,000 and
$39,999..................
Between $40,000 and
$49,999..................
Between $50,000 and
$59,999..................
Between $60,000 and
$69,999..................
Between $70,000 and
$79,999..................
Between $80,000 and
$89,999..................
Between $90,000 and
$99,999..................
Between $100,000 and
$109,999.................
Between $110,000 and
$119,999.................
Between $120,000 and
$129,999.................
Between $130,000 and
$139,999.................
Between $140,000 and
$149,999.................
Between $150,000 and
$159,999.................
Between $160,000 and
$169,999.................
Between $170,000 and
$179,999.................
Between $180,000 and
$189,999.................
Between $190,000 and
$199,999.................
Between $200,000 and
$249,999.................
Between $250,000 and
$299,999.................
Over $300,000.............
----- --------------- ------
Total................... $ 100.00%
===== =============== ======
</TABLE>
YEAR OF ORIGINATION OF INITIAL CONTRACTS
<TABLE>
<CAPTION>
% OF
AGGREGATE CONTRACT POOL
NUMBER OF PRINCIPAL BALANCE BY OUTSTANDING
YEAR OF CONTRACTS OUTSTANDING PRINCIPAL BALANCE
OIGINATIONR AS OF CUTOFF DATE AS OF CUTOFF DATE AS OF CUTOFF DATE
- ----------- ----------------- ----------------- -----------------
<S> <C> <C> <C>
1989.................... $ %
1990....................
1991....................
1992....................
1993....................
1994....................
1995....................
1996....................
1997....................
------ ------------- ------
Total................. $ 100.00%
====== ============= ======
</TABLE>
S-21
<PAGE>
INITIAL CONTRACT RATES
<TABLE>
<CAPTION>
AGGREGATE PRINCIPAL % OF CONTRACT POOL BY
NUMBER OF CONTRACTS BALANCE OUTSTANDING OUTSTANDING PRINCIPAL
CONTRACT RATE AS OF CUTOFF DATE AS OF CUTOFF DATE BALANCE AS OF CUTOFF DATE
------------- ------------------- ------------------- -------------------------
<S> <C> <C> <C>
Less than 9.00%......... $ %
9.01% to 10.00%........
10.01% to 11.00%........
11.01% to 12.00%........
12.01% to 13.00%........
13.01% to 14.00%........
14.01% to 15.00%........
15.01% to 16.00%........
16.01% to 17.00%........
Over 17.00%.............
----- ------------- ------
Total................. $ 100.00%
===== ============= ======
</TABLE>
S-22
<PAGE>
REMAINING MONTHS TO MATURITY OF INITIAL CONTRACTS
<TABLE>
<CAPTION>
AGGREGATE PRINCIPAL % OF CONTRACT POOL BY
NUMBER OF CONTRACTS BALANCE OUTSTANDING OUTSTANDING PRINCIPAL
REMAINING MONTHS TO MATURITY AS OF CUTOFF DATE AS OF CUTOFF DATE BALANCE AS OF CUTOFF DATE
- ---------------------------- ------------------- ------------------- -------------------------
<S> <C> <C> <C>
Fewer than 31............. $ %
31 to 60................
61 to 90................
91 to 120................
121 to 150................
151 to 180................
181 to 210................
211 to 240................
241-270...................
271-300...................
301-330...................
331-360...................
----- ------------- ------
Total................... $ 100.00%
===== ============= ======
</TABLE>
LIEN POSITION OF INITIAL CONTRACTS
<TABLE>
<CAPTION>
NUMBER OF % OF
CONTRACTS CONTRACTS % OF
AS OF AS OF AGGREGATE PRINCIPAL CUTOFF DATE
CUT-OFF CUT-OFF BALANCE OUTSTANDING PRINCIPAL
LIEN POSITION DATE DATE AS OF CUT-OFF DATE BALANCE
------------- --------- --------- ------------------- -----------
<S> <C> <C> <C> <C>
First....................... % $ %
Second......................
Third.......................
Fourth......................
----- ------ ------------- ------
Total..................... 100.00% $ 100.00%
===== ====== ============= ======
</TABLE>
- --------
(1) Excludes unsecured Home Improvement Contracts.
S-23
<PAGE>
GREEN TREE FINANCIAL CORPORATION
The following information supplements the information in the Prospectus under
the heading "Green Tree Financial Corporation."
DELINQUENCY, LOAN LOSS AND REPOSSESSION INFORMATION FOR THE HOME IMPROVEMENT
CONTRACTS
The following tables set forth information relating to Green Tree's
delinquency, loan loss and repossession information for each period indicated
with respect to all unsecured home improvement contracts and all debt-
consolidation home improvement contracts it has purchased and continues to
service.
DELINQUENCY EXPERIENCE--UNSECURED AND DEBT CONSOLIDATION HOME IMPROVEMENT
CONTRACTS
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------
1994 1995 1996 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Number of Contracts Outstanding (1)............. 10,397 18,411 25,104 25,077
Number of Contracts Delinquent (2)
30-59 Days.................................... 50 115 198 221
60-89 Days.................................... 18 44 68 90
90 Days or More............................... 4 14 38 140
------ ------ ------ ------
Total Contracts Delinquent...................... 72 173 304 451
====== ====== ====== ======
Delinquencies as a Percentage of Contracts
Outstanding (3)................................ 0.69% 0.94% 1.21% 1.80%
</TABLE>
- --------
(1) Excludes contracts already in repossession.
(2) The period of delinquency is based on the number of days payments are
contractually past due (assuming 30-day months). Consequently, a contract
due on the first day of a month is not 30 days delinquent until the first
day of the next month.
(3) By number of contracts.
S-24
<PAGE>
LOAN LOSS/REPOSSESSION EXPERIENCE--UNSECURED AND DEBT CONSOLIDATION HOME
IMPROVEMENT CONTRACTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1994 1995 1996 1997
------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Number of Contracts Serviced (1)..... 10,412 18,412 25,145 25,117
Principal Balance of Contracts (1)... $59,329 $97,544 $122,372 $113,405
Contract Liquidations:
Units.............................. 93 254 519 603
Percentage (2)..................... 0.89% 1.38% 2.06% 2.40%
Net Losses:
Dollars (3)........................ $ 578 $ 1,710 $ 2,863 $ 3,056
Percentage (4)..................... 0.97% 1.75% 2.34% 2.69%
</TABLE>
- --------
(1) As of period end. Includes contracts already in repossession.
(2) As a percentage of the total number of contracts being serviced as of
period end.
(3) The calculation of net loss includes unpaid interest to the date of
repossession and all expenses of repossession and liquidation.
(4) As a percentage of the principal balance of contracts being serviced as of
period end.
There can be no assurance that the delinquency, loan loss and repossession
experience of the Trust with respect to the Home Improvement Contracts will be
better than, worse than or comparable to the experience set forth above. See
"Risk Factors--Delinquency, Loan Loss and Repossession Experience" herein.
There can be no assurance that the delinquency, loan loss or repossession
experience of the Trust with respect to the unsecured Home Improvement
Contracts will be better than, worse than or comparable to the experience set
forth above. See "Risk Factors--Delinquency, Loan Loss and Repossession
Experience" herein.
DELINQUENCY INFORMATION FOR SECURED HOME IMPROVEMENT CONTRACTS
The following tables set forth information relating to Green Tree's
delinquency, loan loss and repossession experience for each period indicated
with respect to all secured home improvement contracts serviced by Green Tree.
Because of the rapid growth of Green Tree's portfolio of secured Home
Improvement Contracts, the experience shown in more recent periods may not be
indicative of the experience to be expected of a more seasoned portfolio.
DELINQUENCY EXPERIENCE--SECURED HOME IMPROVEMENT CONTRACTS
<TABLE>
<CAPTION>
AT DECEMBER 31, AS OF
------------------------------
1994 1995 1996 1997 1998
------ ------ ------ ------ --------
<S> <C> <C> <C> <C> <C>
Number of Contracts Outstanding
(1)................................ 56,673 81,953 96,022
Number of Contracts Delinquent
(2)(3)
30-59 Days........................ 294 856 1,115
60-89 Days........................ 105 230 364
90 Days or More................... 161 309 477
Total Contracts Delinquent.......... 560 1,395 1,956
Delinquencies as a Percent of
Contracts Outstanding (4).......... 0.99% 1.70% 2.04% % %
</TABLE>
- --------
(1) Excludes defaulted contracts not yet liquidated.
(2) A contract is considered delinquent by Green Tree if any payment of $25 or
more is past-due 30 days or more.
(3) The period of delinquency is based on the number of days that payments are
contractually past-due (assuming 30-day months). Consequently, a contract
due on the first day of a month is not 30 days delinquent until the first
day of the next month.
(4) By number of contracts.
S-25
<PAGE>
LOAN LOSS/REPOSSESSION EXPERIENCE--SECURED HOME IMPROVEMENT CONTRACTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AT DECEMBER 31, AS OF
------------------------------------------ MARCH 30,
1994 1995 1996 1997 1998
-------- ---------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C>
Number of Contracts
Serviced (1)........... 56,710 109,030 96,230
Principal Balance of
Contracts (1).......... $617,341 $1,015,783 $1,308,549 $ $
Contract Liquidations:
Units................. 541 766 1,564
Percentage (2)........ 0.95% 0.70% 1.63% % %
Net Losses:
Dollars (3)........... $ 908 $ 3,715 $ 11,646 $ $
Percentage (4)........ 0.15% 0.37% 0.89% % %
</TABLE>
- --------
(1) As of period end. Includes contracts already in repossession.
(2) As a percentage of the total number of contracts being serviced as of
period end.
(3) The calculation of net loss includes unpaid interest to the date of
repossession and all expenses of repossession and liquidation.
(4) As a percentage of the principal balance of contracts being serviced as of
period end.
There can be no assurance that the delinquency, loan loss and repossession
experience of the Trust with respect to the Home Improvement Contracts will be
better than, worse than or comparable to the experience set forth above. See
"Risk Factors--Delinquency, Loan Loss and Repossession Experience" herein.
RECENT DEVELOPMENTS
On June 30, 1998, Green Tree became a wholly owned subsidiary of Conseco,
Inc., pursuant to a Merger Agreement announced on April 7, 1998. Headquartered
in Carmel, Indiana, Conseco is among the nation's leading providers of
supplemental health insurance, retirement annuities and universal life
insurance.
On July 6, 1998, Conseco announced a second-quarter charge of $498 million,
net of income taxes, related to the acquisition of Green Tree. The charges are
directly related to (1) $148 million in merger-related costs, and (2) a $350
million non-cash supplemental reserve against the valuation of Green Tree's
interest-only securities and servicing rights.
The Company has been served with various lawsuits in the United States
District Court for the District of Minnesota. These lawsuits were filed by
certain stockholders of the Company as purported class actions on behalf of
persons or entities who purchased common stock of the Company during the
alleged class periods. In addition to the Company, certain current and former
officers and directors of the Company are named as defendants in one or more of
the lawsuits. The Company and the other defendants intend to seek consolidation
of each of the lawsuits in the United States District Court for the District of
Minnesota. Plaintiffs in the lawsuits assert claims under Sections 10(b) and
20(a) of the Securities Exchange Act of 1934. In each case, plaintiffs allege
that the Company and the other defendants violated federal securities laws by,
among other things, making false and misleading statements about the current
state and future prospects of the Company (particularly with respect to
prepayment assumptions and performance of certain of the Company's loan
portfolios) which allegedly rendered the Company's financial statements false
and misleading. The Company believes that the lawsuits are without merit and
intends to defend such lawsuits vigorously.
S-26
<PAGE>
YIELD AND PREPAYMENT CONSIDERATIONS
The following information supplements the information in the Prospectus under
the heading "Yield and Prepayment Considerations."
The Servicer and Green Tree each has the option to purchase from the Trust
all remaining Contracts, and thereby effect early redemption of the Notes and
early retirement of the Certificates, on any Distribution Date when the Pool
Scheduled Principal Balance is 10% or less of the Cutoff Date Pool Principal
Balance. See "Description of the Trust Documents--Termination" in the
Prospectus.
The Class A-1, Class A-2, Class A-3 and Class A-4 Notes will be prepaid in
part on the first Distribution Date after the Pre-Funding Period (in no event
later than , 1998) to the extent of any Pre-Funded Amount remaining in the
Pre-Funding Account on such Distribution Date. Green Tree believes that
substantially all of the Pre-Funded Amount will be used to acquire the
Subsequent Contracts. It is unlikely, however, that the aggregate principal
amount of Subsequent Contracts purchased by the Trust will be identical to the
Pre-Funded Amount, and that consequently, Class A-1, Class A-2, Class A-3 and
Class A-4 Noteholders will receive a prepayment of principal, in accordance
with their applicable percentage of the Formula Principal Distribution Amount.
Principal prepayments on the Contracts will result in accelerating principal
payments on the Notes. The rate of principal payments on pools of home equity
loans and home improvement contracts is influenced by a variety of economic,
geographic, social and other factors, including the level of interest rates and
the rate at which homeowners sell their homes or default on their loans. Other
factors affecting prepayment of home improvement contacts include changes in
obligors' housing needs, job transfers, unemployment and obligors' net equity
in their homes. Since home improvement contracts are not generally viewed by
borrowers as permanent financing, Contracts may experience a higher rate of
prepayments than traditional mortgage loans. In addition, if prevailing
interest rates fall significantly below the interest rates on such loans, the
loans are likely to be subject to higher prepayment rates than if prevailing
interest rates remain at or above the rates borne by such loans. Conversely, if
prevailing interest rates rise above the interest rates on such loans, the rate
of prepayment would be expected to decrease.
Green Tree has no significant experience with respect to the rate of
principal prepayments on home improvement contracts. In addition, liquidations
of defaulted Contracts or the exercise by Green Tree or the Servicer of the
option to purchase the remaining pool of Contracts will affect the timing of
principal distributions on the Securities.
WEIGHTED AVERAGE LIFE OF THE NOTES AND THE CERTIFICATES
The following information is given solely to illustrate the effect of
prepayments on the Contracts on the weighted average life of the Notes and the
Certificates under the stated assumptions and is not a prediction of the
prepayment rate that might actually be experienced by the Contracts.
Weighted average life refers to the average amount of time from the date of
issuance of a security until each dollar of principal of such security will be
repaid to the investor. The weighted average life of the Notes and the
Certificates will be influenced by the rate at which principal on the Contracts
is paid. Principal payments on the Contracts may be in the form of scheduled
amortization or prepayments (including, for this purpose, liquidations due to
default).
The Base Case prepayment model is Green Tree management's best estimate of
the prepayment rates that may be experienced on the Contracts. Because Green
Tree began originating and servicing home improvement contracts only recently,
such estimate is based in part on industry experience with similar loans and
contracts rather than Green Tree's experience. There can be no assurance that
the Contracts will experience prepayments at such projected rates or in the
manner assumed by the prepayment model used for that type of Contract, or that
S-27
<PAGE>
the Contracts in the aggregate will experience prepayments similar to the
overall prepayment rate or in the manner projected in the Base Case.
<TABLE>
<CAPTION>
BASE CASE
PRODUCT PREPAYMENT RATE
------- ---------------
<S> <C>
Home Improvement (unsecured).............................. % CPR
Home Improvement (secured)................................ % CPR
</TABLE>
The model used in this Prospectus Supplement is the Constant Prepayment Rate
("CPR"). The CPR represents an assumed constant rate of prepayment each month,
expressed as a per annum percentage of the outstanding principal balance of the
Contracts.
As used in the following tables, the columns headed 80%, 90%, 100%, 110% and
120% assume that prepayments on the Contracts are made at Base Case Prepayment
Rates of 80%, 90%, 100%, 110% and 120%, respectively. For example, Home
Improvement Contracts (unsecured) have been assumed to have a prepayment rate
equal to % CPR and % CPR, respectively; and Home Improvement Contracts
(secured) have been assumed to have a prepayment rate equal to % CPR and
% CPR, respectively; CPR DOES NOT PURPORT TO BE AN HISTORICAL DESCRIPTION
OF PREPAYMENT EXPERIENCE OR A PREDICTION OF THE ANTICIPATED RATE OF PREPAYMENT
OF ANY POOL OF CONTRACTS, INCLUDING THE CONTRACTS.
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DESCRIPTION OF THE NOTES
The following information supplements and, to the extent inconsistent
therewith, supersedes the information contained in the accompanying Prospectus.
Prospective Noteholders should consider, in addition to the information below,
the information in the accompanying Prospectus under "The Notes," "Certain
Information Regarding the Securities," and "Description of the Trust
Documents."
GENERAL
The Notes will be issued pursuant to the terms of the Indenture, a form of
which has been filed as an exhibit to the Registration Statement. A copy of the
Indenture, as executed, will be filed with the Commission following the
issuance of the Securities. The following summary describes certain terms of
the Notes and the Indenture. The summary does not purport to be complete and is
subject to, and is qualified in its entirety by reference to, all the
provisions of the Notes and the Indenture. The following summary supplements
the description of the general terms and provisions of the Notes of any given
series and the related Indenture set forth in the accompanying Prospectus, to
which description reference is hereby made. [Indenture Trustee], a national
banking association headquartered in , will be the Indenture Trustee.
DISTRIBUTIONS
Noteholders will be entitled to receive on each Distribution Date commencing
in 1998, to the extent that funds available are sufficient therefor, the
Noteholders' Distributable Amount. Distributions on the Notes will be made from
funds available first to the holders of the Class A-1 Notes, then to the
holders of the Class A-2 Notes, then to the holders of the Class A-3 Notes and
then to the holders of the Class A-4 Notes, in the manner and order of priority
described below.
CLASS A-1 INTEREST
Interest on the outstanding Class A-1 Principal Balance will accrue from
, , or from the most recent Distribution Date, to but excluding the
following Distribution Date, at the Class A-1 Rate for such monthly interest
period. The "Class A-1 Principal Balance" as of any Distribution Date will be
the Original Class A-1 Principal Balance minus all amounts previously
distributed to the Class A-1 Noteholders in respect of principal.
Interest will be paid on the Class A-1 Notes to the extent of funds available
on such Distribution Date. In the event the funds available are not sufficient
to make a full distribution of interest on the Class A-1 Notes, the amount of
the shortfall will be carried forward and added to the amount of interest
payable on the next Distribution Date. Any amount so carried forward will bear
interest at the Class A-1 Rate, respectively, to the extent legally
permissible.
CLASS A-1 PRINCIPAL
To the extent of funds available after payment of all interest payable on the
Class A-1 Notes, the Class A-1 Noteholders will be entitled to receive on each
Distribution Date as payment of principal an amount equal to the sum of %
(approximate) of the Formula Principal Distribution Amount for such
Distribution Date plus the Unpaid Class A-1 Principal Shortfall, if any, for
such Distribution Date.
The "Formula Principal Distribution Amount" with respect to any Distribution
Date (but subject to the last sentence of this definition) will generally be
equal to the sum of the following amounts with respect to the related Monthly
Period, in each case computed in accordance with the method specified in each
Contract: (i) all scheduled payments of principal due on each outstanding
Consumer Product Contract during the related Monthly Period, (ii) all Partial
Principal Prepayments applied and all Principal Prepayments in Full received
during the related Monthly Period in respect of each Contract, (iii) the
Scheduled Principal Balance of each Contract that became a Liquidated Contract
during the related Monthly Period, (iv) the Scheduled Principal Balance of each
Contract which, during
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<PAGE>
the related Monthly Period, was purchased by Green Tree as a result of a breach
of a representation as warranty or by the Servicer as a result of an uncured
breach of a covenant under the Sale and Servicing Agreement, and (v) with
respect to the Distribution Date in 1998, any remaining amounts on deposit
in the Pre-Funding Account. The Formula Principal Distribution Amount for the
Distribution Date in , will be the sum of the Note Principal Balance and
the Certificate Principal Balance. The "Unpaid Class A-1 Principal Shortfall"
for any Distribution Date will equal any amount required to be paid in respect
of principal on the Class A-1 Notes on any prior Distribution Date but not paid
on any intervening Distribution Date.
A "Monthly Period" with respect to a Distribution Date is the calendar month
immediately preceding the month in which such Distribution Date occurs. The
"Scheduled Principal Balance" of a Contract for any Monthly Period is its
principal balance as specified in its amortization schedule, after giving
effect to any previous Partial Principal Prepayments and to the scheduled
payment due on its scheduled payment date (the "Due Date") in that month, but
without giving effect to any adjustments due to bankruptcy or similar
proceedings. A "Liquidated Contract" means any defaulted Contract as to which
the Servicer has determined that all amounts which it expects to recover from
or on account of such Contract through the date of disposition of the related
real property have been recovered or any defaulted Contract in respect of which
the related real property has been realized upon and disposed of and the
proceeds of such disposition have been received.
CLASS A-2 INTEREST
Interest on the outstanding Class A-2 Principal Balance will accrue from
, , or from the most recent Distribution Date, to but excluding the
following Distribution Date, at the Class A-2 Rate for such monthly interest
period. The "Class A-2 Principal Balance" as of any Distribution Date will be
the Original Class A-2 Principal Balance minus all amounts previously
distributed to the Class A-2 Noteholders in respect of principal, and minus any
unreimbursed Class A-2 Principal Liquidation Loss (described below under "--
Losses on Liquidated Contracts").
Interest will be paid on the Class A-2 Notes to the extent of funds available
on such Distribution Date, after payment of all interest and principal then
payable on the Class A-1 Notes. In the event such remaining funds available are
not sufficient to make a full distribution of interest on the Class A-2 Notes,
the amount of the shortfall will be carried forward and added to the amount of
interest payable on the next Distribution Date. Any amount so carried forward
will bear interest at the Class A-2 Rate, to the extent legally permissible.
CLASS A-2 PRINCIPAL
Class A-2 Noteholders will be entitled to receive on each Distribution Date
as payment of principal, to the extent of funds available after payment of all
interest and principal payable on the Class A-1 Notes and after payment of all
interest payable on the Class A-2 Notes, the sum of % (approximate) of the
Formula Principal Distribution Amount for such Distribution Date, plus any
Unpaid Class A-2 Principal Shortfall (as defined below) for such Distribution
Date.
The "Unpaid Class A-2 Principal Shortfall" for any Distribution Date will
equal any amount required to be paid in respect of principal on the Class A-2
Notes on any prior Distribution Date but not paid on any intervening
Distribution Date, less any unreimbursed Class A-2 Principal Liquidation Loss.
CLASS A-3 INTEREST
Interest on the outstanding Class A-3 Principal Balance will accrue from
, , or from the most recent Distribution Date, to but excluding the
following Distribution Date, at the Class A-3 Rate for such monthly interest
period. The "Class A-3 Principal Balance" as of any Distribution Date will be
the Original Class A-3 Principal Balance minus all amounts previously
distributed to the Class A-3 Noteholders in respect of principal, and minus any
unreimbursed Class A-3 Principal Liquidation Loss (described below under "--
Losses on Liquidated Contracts").
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Interest will be paid on the Class A-3 Notes to the extent of funds available
on such Distribution Date, after payment of all interest and principal then
payable on the Class A-2 Notes. In the event such remaining funds available are
not sufficient to make a full distribution of interest on the Class A-3 Notes,
the amount of the shortfall will be carried forward and added to the amount of
interest payable on the next Distribution Date. Any amount so carried forward
will bear interest at the Class A-3 Rate, to the extent legally permissible.
CLASS A-3 PRINCIPAL
Class A-3 Noteholders will be entitled to receive on each Distribution Date
as payment of principal, to the extent of funds available after payment of all
interest and principal payable on the Class A-2 Notes and after payment of all
interest payable on the Class A-3 Notes, the sum of % (approximate) of the
Formula Principal Distribution Amount for such Distribution Date, plus any
Unpaid Class A-3 Principal Shortfall (as defined below) for such Distribution
Date.
The "Unpaid Class A-3 Principal Shortfall" for any Distribution Date will
equal any amount required to be paid in respect of principal on the Class A-3
Notes on any prior Distribution Date but not paid on any intervening
Distribution Date, less any unreimbursed Class A-3 Principal Liquidation Loss.
CLASS A-4 INTEREST
Interest on the outstanding Class A-4 Principal Balance will accrue from
, , or from the most recent Distribution Date, to but excluding the
following Distribution Date, at the Class A-4 Rate for such monthly interest
period. The "Class A-4 Principal Balance" as of any Distribution Date will be
the Original Class A-4 Principal Balance minus all amounts previously
distributed to the Class A-4 Noteholders in respect of principal, and minus any
unreimbursed Class A-4 Principal Liquidation Loss (described below under "--
Losses on Liquidated Contracts").
Interest will be paid on the Class A-4 Notes to the extent of funds available
on such Distribution Date, after payment of all interest and principal then
payable on the Class A-3 Notes. In the event such remaining funds available are
not sufficient to make a full distribution of interest on the Class A-4 Notes,
the amount of the shortfall will be carried forward and added to the amount of
interest payable on the next Distribution Date. Any amount so carried forward
will bear interest at the Class A-4 Rate, to the extent legally permissible.
CLASS A-4 PRINCIPAL
Class A-4 Noteholders will be entitled to receive on each Distribution Date
as payment of principal, to the extent of funds available after payment of all
interest and principal payable on the Class A-3 Notes and after payment of all
interest payable on the Class A-4 Notes, the sum of % (approximate) of the
Formula Principal Distribution Amount for such Distribution Date, plus any
Unpaid Class A-4 Principal Shortfall (as defined below) for such Distribution
Date.
The "Unpaid Class A-4 Principal Shortfall" for any Distribution Date will
equal any amount required to be paid in respect of principal on the Class A-4
Notes on any prior Distribution Date but not paid on any intervening
Distribution Date, less any unreimbursed Class A-4 Principal Liquidation Loss.
OPTIONAL REDEMPTION
The Notes will be redeemed in whole, but not in part, on any Distribution
Date on which Green Tree exercises its option to purchase the Contracts. Green
Tree may purchase the Contracts when the Pool Scheduled Principal Balance has
declined to 10% or less of the Cutoff Date Pool Principal Balance, as described
in the accompanying Prospectus under "Description of the Trust Documents--
Termination." The "Pool Scheduled Principal Balance" is the aggregate Scheduled
Principal Balance of all outstanding Contracts during a Monthly
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<PAGE>
Period. Such redemption will effect early retirement of the Notes. The
redemption price will be equal to the unpaid principal amount of the Notes
redeemed plus accrued and unpaid interest thereon.
MANDATORY PREPAYMENTS
The Class A-1, Class A-2, Class A-3 and Class A-4 Notes will be prepaid in
part on the first Distribution Date after the Pre-Funding Period (in no event
later than , 1998) to the extent of any Pre-Funded Amount remaining in
the Pre-Funding Account on such Distribution Date. Green Tree believes that
substantially all of the Pre-Funded Amount will be used to acquire the
Subsequent Contracts. It is unlikely, however, that the aggregate principal
amount of Subsequent Contracts purchased by the Trust will be identical to the
Pre-Funded Amount, and that consequently, Class A-1, Class A-2, Class A-3 and
Class A-4 Noteholders will receive a prepayment of principal, in accordance
with their applicable percentage of the Formula Principal Distribution Amount.
THE INTEREST RATE CAP AGREEMENT
Class A-1 Noteholders will have the benefit of the Interest Rate Cap
Agreement between the Trust and the Counterparty. Pursuant to the Interest Rate
Cap Agreement, the Counterparty will make a payment (the "Interest Rate Cap
Payment") to the Trust on each Distribution Date to the extent that the Class
A-1 Rate exceeds %, in an amount equal to the amount obtained by multiplying
the Class A-1 Principal Balance by the product of (i) the maximum of (x) the
excess of the Class A-1 Rate over 10% or (y) 0% and (ii) the number of days in
the monthly interest period divided by 360. Payments received by the Indenture
Trustee pursuant to the Interest Rate Cap Agreement will be deposited in the
Collection Account. See "Description of the Counterparty."
THE SPREAD ACCOUNT
Class A-2, Class A-3 and Class A-4 Noteholders will have the benefit of a
separate sub-account for each Class contained in the Spread Account to be held
by the Indenture Trustee. On any Distribution Date, if the funds in the Note
Distribution Account (after making all distributions on each Class of Notes
with a prior numeric designation) is insufficient to distribute all interest
then payable on the Class A-2, Class A-3 or Class A-4 Notes, the Indenture
Trustee will withdraw the amount of the deficiency from the applicable sub-
account (or the amount on deposit in the applicable sub-account, if less) and
deposit such amount in the Note Distribution Account for distribution to the
applicable Class. On any Distribution Date, the amount of funds in the Spread
Account will not be available to cover a shortfall in principal distributable
on any Class of Notes, but would only be available to cover a shortfall in
interest distributable on the Class A-2, Class A-3 and Class A-4 Notes.
On the Closing Date, the amount on deposit in the Class A-2, Class A-3 and
Class A-4 sub-accounts will be zero. On each Distribution Date, the Indenture
Trustee will deposit all funds remaining in the Collection Account, after
distribution of all interest and principal then payable on the Notes and all
interest then payable on the Certificates, first to the Class A-2 sub-account,
then to the Class A-3 sub-account and then to the Class A-4 sub-account, until
the amount on deposit in such sub-accounts equals $ , $ and
$ , respectively (subject to reduction as provided in, and to the other
terms and conditions contained in, the Sale and Servicing Agreement). If any
sub-account is drawn upon, it will be replenished to the extent provided in the
Sale and Servicing Agreement and the Indenture. The Spread Account is included
in the Trust Property. Any amount remaining in the Spread Account upon
termination of the Trust will be distributed to Green Tree.
THE RESERVE ACCOUNT
Noteholders will have the benefit of the Reserve Account to be held by the
Indenture Trustee. On any Distribution Date, if the funds in the Note
Distribution Account (after making all distributions on each Class of Notes
with a prior numeric designation) are insufficient to make full payment in
respect of interest or principal payable on a Class of Notes (after making
appropriate draws upon the Spread Account), the Indenture Trustee will withdraw
the amount of the deficiency from the Reserve Account (or the amount on deposit
in the Reserve
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Account, if less) and deposit such amount in the Note Distribution Account for
distribution to the applicable Class.
On the Closing Date, the amount on deposit in the Reserve Account will be
zero. On each Distribution Date, the Indenture Trustee will deposit all funds
remaining in the Collection Account, after distribution of all interest and
principal then payable on the Notes, all interest then payable on the
Certificates and all deposits in the Spread Account, until the amount on
deposit in the Reserve Account equals % of the Pool Scheduled Principal
Balance (subject to reduction as provided in, and to other terms and conditions
contained in, the Sale and Servicing Agreement). If the Reserve Account is
drawn upon, it will be replenished to the extent provided in the Sale and
Servicing Agreement and the Indenture. The Reserve Account is included in the
Trust Property. Any amount remaining in the Reserve Account upon termination of
the Trust will be distributed to Green Tree.
LOSSES ON LIQUIDATED CONTRACTS
As described above, the distribution of principal to each Class of Notes is
intended to equal the applicable percentage of the Formula Principal
Distribution Amount. On each Distribution Date, each such amount includes the
Scheduled Principal Balance of each Contract that became a Liquidated Contract
during the Monthly Period related to such Distribution Date. If the Net
Liquidation Proceeds from such Liquidated Contract are less than the Scheduled
Principal Balance of such Liquidated Contract, the deficiency will, in effect,
be absorbed first by the Monthly Servicing and Guaranty Fee otherwise payable
to Green Tree, then by the Certificateholders (although Green Tree will be
obligated to make a Guaranty Payment equal to any shortfall in the distribution
to the Certificateholders), and then by each Class of Notes in inverse numeric
order (although funds on deposit in the Reserve Account will be available to
pay any shortfall in the distribution of interest and principal to any Class of
Notes).
If the funds available for any Distribution Date, after making all required
distributions of interest and principal to more senior Classes of Notes, are
insufficient to make a full distribution of interest and/or principal to a
Class of Notes or the Certificates, such deficiency will be carried forward and
added to the amount to be distributed to such Class of Notes or the
Certificates on the following Distribution Date.
If the Pool Scheduled Principal Balance for any Distribution Date is less
than the sum of the aggregate outstanding principal balance of the Notes and
the Certificate Principal Balance after giving effect to all distributions of
principal on such Distribution Date, then the Certificate Principal Balance
will be reduced by the amount of such deficiency (a "Certificate Principal
Liquidation Loss"). Green Tree will be obligated to pay the amount of any such
Certificate Principal Liquidation Loss under the Limited Guaranty. If Green
Tree should fail to pay such amount, however, the amount distributable on the
Certificates on future Distribution Dates would include interest on any such
Certificate Principal Liquidation Loss at the Pass-Through Rate (and, to the
extent legally permissible, interest on any unpaid interest at the Pass-Through
Rate) accrued from the date such Certificate Principal Liquidation Loss was
incurred, and the amount of such Certificate Principal Liquidation Loss.
Similarly, if the Certificate Principal Balance were reduced to zero (which
would be caused only by Certificate Principal Liquidation Losses, whether or
not Green Tree makes any required payments under the Limited Guaranty) and the
Pool Scheduled Principal Balance on any Distribution Date were less than the
aggregate outstanding principal balance of the Notes after giving effect to
distributions of principal on such Distribution Date, then the Class A-4
Principal Balance would be reduced by the amount of such deficiency (a "Class
A-4 Principal Liquidation Loss"). The funds on deposit in the Reserve Account
will be available to pay the amount of any such Class A-4 Principal Liquidation
Loss. If the funds available in the Reserve Account are insufficient to pay
such amount, however, the amount distributable on the Class A-4 Notes on future
Distribution Dates would include interest on any such Class A-4 Principal
Liquidation Loss at the Class A-4 Rate (and, to the extent legally permissible,
interest on such unpaid interest at the Class A-4 Rate) accrued from the date
such Class A-4 Principal Liquidation Loss was incurred, and the amount of such
Class A-4 Principal Liquidation Loss. Each more senior Class of Notes would
similarly be subject to reduction in its outstanding principal balance if the
aggregate outstanding principal balance of all more junior Classes of Notes
were reduced to zero and the
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Pool Scheduled Principal Balance were less than the aggregate outstanding
principal balance of the Notes, and would similarly be entitled on future
Distribution Dates to receive interest on any such Principal Liquidation Loss
at the applicable Interest Rate, and the amount of such Principal Liquidation
Loss. The applicable percentage of the Formula Principal Distribution Amount
distributable to each Class of Notes on each Distribution Date will not be
affected by any Principal Liquidation Loss experienced by a Class of Notes.
Accordingly, even if a Class of Notes has experienced a Principal Liquidation
Loss, such Class will continue to be entitled to receive applicable percentage
of the Formula Principal Distribution Amount (or, if the Amount Available in
the Collection Account is insufficient to make such distribution, such Class
will be entitled to receive the amount of such deficiency on subsequent
Distribution Dates as an Unpaid Principal Shortfall).
BOOK-ENTRY REGISTRATION
Holders of the Notes or the Certificates may hold through DTC (in the United
States) or, solely in the case of the Notes, CEDEL or Euroclear (in Europe) if
they are participants of such systems, or indirectly through organizations that
are participants in such systems. The Certificates may not be held, directly or
indirectly, through CEDEL or Euroclear.
Cede & Co., as nominee for DTC, will hold the Notes and the Certificates.
CEDEL and Euroclear will hold omnibus positions in the Notes on behalf of the
CEDEL Participants and the Euroclear Participants, respectively, through
customers' securities accounts in CEDEL's and Euroclear's names on the books of
their respective depositaries (collectively, the "Depositaries"), which in turn
will hold such positions in customers' securities accounts in the Depositaries'
names on the books of DTC.
Transfers between DTC's participating organizations (the "Participants") will
occur in accordance with DTC rules. Transfers between CEDEL Participants and
Euroclear Participants will occur in the ordinary way in accordance with their
applicable rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly through
DTC, on the one hand, and directly or indirectly through CEDEL Participants or
Euroclear Participants, on the other, will be effected in DTC in accordance
with DTC rules on behalf of the relevant European international clearing system
by its Depositary; however, such cross-market transactions will require
delivery of instructions to the relevant European international clearing system
by the counterparty in such system in accordance with its rules and procedures
and within its established deadlines (European time). The relevant European
international clearing system will, if the transaction meets its settlement
requirements, deliver instructions to its Depositary to take action to effect
final settlement on its behalf by delivering or receiving securities in DTC,
and making or receiving payment in accordance with normal procedures for same-
day funds settlement applicable to DTC. CEDEL Participants and Euroclear
Participants may not deliver instructions directly to the Depositaries.
Because of time-zone differences, credits of securities in CEDEL or Euroclear
as a result of a transaction with a Participant will be made during the
subsequent securities settlement processing, dated the business day following
the DTC settlement date, and such credits or any transactions in such
securities settled during such processing will be reported to the relevant
CEDEL Participant or Euroclear Participant on such business day. Cash received
in CEDEL or Euroclear as a result of sales of securities by or through a CEDEL
Participant or a Euroclear Participant to a Participant will be received with
value on the DTC settlement date but will be available in the relevant CEDEL or
Euroclear cash account only as of the business day following settlement in DTC.
For a description of transfers between persons holding directly or indirectly
through DTC, see "Certain Information Regarding the Securities--Book-Entry
Registration" in the Prospectus.
Cedel Bank, societe anonyme ("CEDEL") is incorporated under the laws of
Luxembourg as a professional depository. CEDEL holds securities for its
participating organizations ("CEDEL Participants") and facilitates the
clearance and settlement of securities transactions between CEDEL Participants
through electronic book-entry changes in accounts of CEDEL Participants,
thereby eliminating the need for physical movement of
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certificates. Transactions may be settled in CEDEL in any of 28 currencies,
including United States dollars. CEDEL provides to its CEDEL Participants,
among other things, services for safekeeping, administration, clearance and
settlement of internationally traded securities and securities lending and
borrowing. CEDEL interfaces with domestic markets in several countries. As a
professional depository, CEDEL is subject to regulation by the Luxembourg
Monetary Institute. CEDEL Participants are recognized financial institutions
around the world, including underwriters, securities brokers and dealers,
banks, trust companies, clearing corporations and certain other organizations
and may include the Underwriters. Indirect access to CEDEL is also available to
others, such as banks, brokers, dealers and trust companies that clear through
or maintain a custodial relationship with a CEDEL Participant, either directly
or indirectly.
The Euroclear System was created in 1968 to hold securities for participants
of the Euroclear System ("Euroclear Participants") and to clear and settle
transactions between Euroclear Participants through simultaneous electronic
book-entry delivery against payment, thereby eliminating the need for physical
movement of certificates and any risk from lack of simultaneous transfers of
securities and cash. Transactions may now be settled in Euroclear in any of 32
currencies, including United States dollars. The Euroclear System includes
various other services, including securities lending and borrowing, and
interfaces with domestic markets in several countries generally similar to the
arrangements for cross-market transfers with DTC described in Annex I hereto.
The Euroclear System is operated by Morgan Guaranty Trust Company of New York,
Brussels, Belgium office (the "Euroclear Operator" or "Euroclear"), under
contract with Euroclear Clearance System, S.C., a Belgian cooperative
corporation (the "Cooperative"). All operations are conducted by the Euroclear
Operator, and all Euroclear securities clearance accounts and Euroclear cash
accounts are accounts with the Euroclear Operator, not the Cooperative. The
Cooperative establishes policy for the Euroclear System on behalf of Euroclear
Participants. Euroclear Participants include banks (including central banks),
securities brokers and dealers and other professional financial intermediaries
and may include the Underwriters. Indirect access to the Euroclear System is
also available to other firms that clear through or maintain a custodial
relationship with a Euroclear Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it
is regulated and examined by the Board of Governors of the Federal Reserve
System and the New York State Banking Department, as well as the Belgian
Banking Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian law
(collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within the Euroclear System, withdrawal of
securities and cash from the Euroclear System, and receipts of payments with
respect to securities in the Euroclear System. All securities in the Euroclear
System are held on a fungible basis without attribution of specific
certificates to specific securities clearance accounts. The Euroclear Operator
acts under the Terms and Conditions only on behalf of Euroclear Participants
and has no record of or relationship with persons holding through Euroclear
Participants.
Distributions with respect to Notes held through CEDEL or Euroclear will be
credited to the cash accounts of CEDEL Participants or Euroclear Participants
in accordance with the relevant system's rules and procedures, to the extent
received by its Depositary. Such distributions will be subject to tax reporting
in accordance with relevant United States tax laws and regulations. See
"Certain Federal Income Tax Consequences" in the Prospectus and "Global
Clearance, Settlement and Tax Documentation Procedures" in Annex I to this
Prospectus Supplement. CEDEL or the Euroclear Operator, as the case may be,
will take any other action permitted to be taken by a Noteholder under the
Indenture on behalf of a CEDEL Participant or Euroclear Participant only in
accordance with its relevant rules and procedures and subject to its
Depositary's ability to effect such actions on its behalf through DTC.
Although DTC, CEDEL and Euroclear have agreed to the foregoing procedures in
order to facilitate transfers of Notes among participants of DTC, CEDEL and
Euroclear, they are under no obligation to perform or continue to perform such
procedures and such procedures may be discontinued at any time.
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<PAGE>
DESCRIPTION OF THE COUNTERPARTY
[description of counterparty]
The description of the Counterparty set out above has been provided by the
Counterparty. The Counterparty has not, however, been involved in the
preparation of, and does not accept responsibility for, this Prospectus
Supplement as a whole.
DESCRIPTION OF THE CERTIFICATES
The following information supplements the information contained in the
accompanying Prospectus. Prospective Certificateholders should consider, in
addition to the information below, the information in the accompanying
Prospectus under "The Certificates," "Certain Information Regarding the
Securities," and "Description of the Trust Documents."
GENERAL
The Certificates will be issued pursuant to the terms of the Trust Agreement,
a form of which has been filed as an exhibit to the Registration Statement. A
copy of the Trust Agreement, as executed, will be filed with the Commission
following the issuance of the Securities. The following summary describes
certain terms of the Certificates and the Trust Agreement. The summary does not
purport to be complete and is subject to, and qualified in its entirety by
reference to, all the provisions of the Certificates and the Trust Agreement.
The following summary supplements, and to the extent inconsistent therewith
replaces, the description of the general terms and provisions of the
Certificates of any given series and the related Trust Agreement set forth in
the Prospectus, to which description reference is hereby made.
DISTRIBUTIONS
Certificateholders will be entitled to receive on each Distribution Date
commencing in , to the extent that funds available together with the
Guaranty Payment described below are sufficient therefor, the
Certificateholders' Distributable Amount.
INTEREST
On each Distribution Date, the Owner Trustee will distribute pro rata to
Certificateholders accrued interest at the Pass-Through Rate on the outstanding
Certificate Principal Balance. Interest in respect of a Distribution Date will
accrue from , 1998, or from the most recent Distribution Date to but
excluding the following Distribution Date. The "Certificate Principal Balance"
as of any Distribution Date will be the Original Certificate Principal Balance,
reduced by all amounts allocable to principal previously distributed to
Certificateholders minus any unreimbursed Certificate Principal Liquidation
Loss (described below under "--Losses on Liquidated Contracts").
Interest will be paid on the Certificates to the extent of funds available on
such Distribution Date, after payment of all interest and principal then
payable on the Notes and any amounts previously withdrawn from any
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sub-account of the Spread Account or the Reserve Account and not previously
replenished. In the event such funds available are not sufficient to make a
full distribution of interest on the Certificates, the amount of the shortfall
will be carried forward and added to the amount of interest payable on the next
Distribution Date. Any amount so carried forward will bear interest at the
Pass-Through Rate, to the extent legally permissible. See "Description of the
Certificates."
PRINCIPAL
No distributions of principal on the Certificates will be payable until all
of the Notes have been paid in full. On each Distribution Date commencing on
the Distribution Date on which the Notes are paid in full, principal on the
Certificates will be payable in an amount equal to the Formula Principal
Distribution Amount for such Distribution Date (less, on the Distribution Date
on which the Notes are paid in full, the portion thereof payable on the Notes),
plus the Unpaid Certificate Principal Shortfall, if any, from prior
Distribution Dates.
The "Unpaid Certificate Principal Shortfall" for any Distribution Date will
equal any amount required to be paid in respect of principal on the
Certificates on any prior Distribution Date but not paid on any intervening
Distribution Date, less any unreimbursed Certificate Principal Liquidation
Loss.
OPTIONAL PREPAYMENT
If Green Tree exercises its option to purchase the Contracts when the Pool
Scheduled Principal Balance declines to 10% or less of the Cutoff Date Pool
Principal Balance, Certificateholders will receive an amount in respect of the
Certificates equal to the outstanding principal amount together with accrued
interest at the Pass-Through Rate, which distribution will effect early
retirement of the Certificates. See "Description of the Trust Documents--
Termination" in the accompanying Prospectus.
LIMITED GUARANTY
In order to mitigate the effect of the subordination of the Certificates and
the effect of liquidation losses and delinquencies on the Contracts, the
Certificateholders are entitled to receive on each Distribution Date the amount
equal to the Guaranty Payment, if any, under Green Tree's Limited Guaranty. The
Guaranty Payment for any Distribution Date will equal the difference, if any,
between the Certificateholders' Distributable Amount and the remaining funds
available in the Collection Account after payment of all interest and principal
on the Notes and the deposit in any sub-account of the Spread Account or the
Reserve Account of any amounts previously withdrawn therefrom and not
previously replenished. The "Certificateholders' Distributable Amount" equals
the unpaid and accrued interest on the Certificates, plus on each Distribution
Date commencing on the Distribution Date on which the Notes are paid in full,
principal in an amount equal to the Formula Principal Distribution Amount for
such Distribution Date (less, on the Distribution Date on which the Notes are
paid in full, the portion thereof payable on the Notes), plus any Unpaid
Certificate Principal Shortfall for such Distribution Date, and plus any
unreimbursed Certificate Principal Liquidation Loss.
The Limited Guaranty will be an unsecured general obligation of Green Tree
and will not be supported by any letter of credit or other enhancement
arrangement. The ratings assigned to the Certificates may be affected by the
ratings of Green Tree's debt securities. Green Tree's senior debt securities
were recently downgraded by S&P from "A-" to "BBB+" and by Fitch from "A" to
"A-", which has been reflected in the ratings assigned to the Certificates. See
"Summary of Terms--Ratings."
The Limited Guaranty will not benefit in any way, or result in any payment
to, the Class A-1:HI, Class A-1, Class A-2, Class A-3 or Class A-4 Noteholders.
As compensation for servicing the Contracts and providing the Limited
Guaranty, Green Tree will be entitled to receive the Monthly Servicing and
Guaranty Fee on each Distribution Date, which will be equal to
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the Amount Available remaining after payment of the Certificateholders'
Distributable Amount and any deposits into the Spread Account or the Reserve
Account required on that Distribution Date.
TRANSFERS OF CERTIFICATES
Certificateholders, other than individuals or entities holding Certificates
through a broker who reports sales of securities on Form 1099-B, are required
under the Trust Agreement to notify the Owner Trustee of any transfer of their
Certificates in a taxable sale or exchange within 30 days of such transfer.
LOSSES ON LIQUIDATED CONTRACTS
As described above, the distribution of principal to the Certificates is
intended to equal the Class A-1:HI Formula Principal Distribution Amount. Such
amount includes the Scheduled Principal Balance of each Contract that became a
Liquidated Contract during the Monthly Period preceding such Distribution Date.
If the Net Liquidation Proceeds from such Liquidated Contract are less than the
Scheduled Principal Balance of such Liquidated Contract, the deficiency will,
in effect, be absorbed first by the Monthly Servicing and Guaranty Fee
otherwise payable to Green Tree and then by the Certificateholders (although
Green Tree will be obligated to make a Guaranty Payment equal to any shortfall
in the distribution to the Certificateholders).
If the funds available for any Distribution Date, after making all required
distributions of interest and principal to the Notes, are insufficient to make
a full distribution of interest and/or principal to the Certificates, such
deficiency will be carried forward and added to the amount to be distributed to
the Certificates on the following Distribution Date.
If the Pool Scheduled Principal Balance for any Distribution Date is less
than the sum of the aggregate outstanding Principal Balance of the Notes and
the Certificate Principal Balance after giving effect to all distributions of
principal on such Distribution Date, then the Certificate Principal Balance
will be reduced by the amount of such deficiency (a "Certificate Principal
Liquidation Loss"). Green Tree will be obligated to pay the amount of any such
Certificate Principal Liquidation Loss under the Limited Guaranty. If Green
Tree should fail to pay such amount, however, the amount distributable on the
Certificates on future Distribution Dates would include interest on any such
Certificate Principal Liquidation Loss at the Pass-Through Rate (and, to the
extent legally permissible, interest on any unpaid interest at the Pass-Through
Rate) accrued from the date such Certificate Principal Liquidation Loss was
incurred, and the amount of such Certificate Principal Liquidation Loss.
DESCRIPTION OF THE TRUST DOCUMENTS AND INDENTURE
The following summary describes certain terms of the Sale and Servicing
Agreement and the Trust Agreement (together, the "Trust Documents") and the
Indenture. Forms of the Trust Documents and Indenture, as executed, have been
filed as exhibits to the Registration Statement. A copy of each of the Trust
Documents and Indenture will be filed with the Commission following the
issuance of the Securities. The summary does not purport to be complete and is
subject to, and qualified in its entirety by reference to, all the provisions
of the Trust Documents and Indenture. The following summary supplements, the
description of the general terms and provisions of the Trust Documents and
Indenture (as such terms are used in the accompanying Prospectus) set forth in
the accompanying Prospectus, to which description reference is hereby made.
ACCOUNTS
The Servicer will establish and maintain one or more accounts, in the name of
the Indenture Trustee on behalf of the Noteholders and the Certificateholders,
into which all payments made on or with respect to the Contracts will be
deposited (the "Collection Account"). The Servicer will establish and maintain
the Spread Account, which will include sub-accounts for the Class A-2, Class A-
3 and Class A-4 Noteholders, in the name
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of the Indenture Trustee on behalf of the Noteholders, in which amounts will be
deposited to cover shortfalls in interest distributable on the Class A-2, Class
A-3 and Class A-4 Notes. In addition, the Servicer will establish and maintain
the Reserve Account in the name of the Indenture Trustee on behalf of the
Noteholders, in which amounts will be deposited to cover shortfalls in interest
or principal distributable on the Notes. The Servicer will establish and
maintain an account, in the name of the Indenture Trustee on behalf of the
Noteholders, in which amounts released from the Collection Account, the Spread
Account and the Reserve Account for distribution to Noteholders will be
deposited and from which all distributions to Noteholders will be made (the
"Note Distribution Account"). The Servicer will also establish and maintain an
account, in the name of the Owner Trustee on behalf of the Certificateholders,
in which amounts released from the Collection Account for distribution to
Certificateholders will be deposited and from which all distributions to
Certificateholders will be made (the "Certificate Distribution Account"). See
"Description of the Trust Documents--Collections" in the accompanying
Prospectus.
An account (the "Pre-Funding Account") will be established by the Indenture
Trustee and funded by Green Tree on the Closing Date to provide the Trust with
sufficient funds to purchase Subsequent Contracts. The amount deposited in the
Pre-Funding Account (as reduced from time-to-time, the "Pre-Funded Amount")
will initially equal the difference between $ and the aggregate
principal balance as of the Cutoff Date of the Initial Contracts and Additional
Contracts. The Pre-Funding Account will be used to purchase Subsequent
Contracts during the period from the Closing Date until the earliest of (i) the
date on which the amount on deposit in the Pre-Funding Account is less than
$10,000, (ii) , 1998 or (iii) the date on which an Event of Termination
occurs under the Sale and Servicing Agreement (the "Pre-Funding Period"). The
Pre-Funded Amount will be reduced during the Pre-Funding Period by the amount
used to purchase Subsequent Contracts in accordance with the Sale and Servicing
Agreement.
Under the Sale and Servicing Agreement, following the initial issuance of the
Securities, the Trust will be obligated to purchase Subsequent Contracts from
Green Tree during the Pre-Funding Period, subject to the availability thereof.
Each Subsequent Contract will have been underwritten in accordance with Green
Tree's standard underwriting criteria. Subsequent Contracts will be transferred
to the Trust pursuant to subsequent transfer instruments between Green Tree and
the Trust. In connection with the purchase of Subsequent Contracts on such
dates of transfer (the "Subsequent Transfer Dates"), the Trust will be required
to pay to Green Tree from amounts on deposit in the Pre-Funding Account a cash
purchase price of 100% of the principal balance thereof. Green Tree will
designate the Subsequent Transfer Date as the Cutoff Date with respect to the
related Subsequent Contracts purchased on such date. The amount paid from the
Pre-Funding Account on each Subsequent Transfer Date will not include accrued
interest on the related Subsequent Contracts. Following each Subsequent
Transfer Date, the aggregate principal balance of the Subsequent Contracts in
the Trust will increase by an amount equal to the aggregate principal balance
of the Contracts so purchased and the amount in the Pre-Funding Account will
decrease accordingly. Any Pre-Funded Amount remaining after the purchase of
Subsequent Contracts will be applied on the first Distribution Date on or after
the last day of the Pre-Funding Period to prepay principal on the Class A-1
Class A-2, Class A-3 and Class A-4 Notes.
Any conveyance of Subsequent Contracts on a Subsequent Transfer Date is
subject to certain conditions including, but not limited to: (a) each
Subsequent Contract must satisfy the representations and warranties specified
in the related subsequent transfer instrument and the Sale and Servicing
Agreement; (b) Green Tree will not select Subsequent Contracts in a manner that
it believes is adverse to the interests of the Securityholders; (c) as of its
respective Cutoff Date, each Subsequent Contract will satisfy the following
criteria: (i) no Subsequent Contract may be more than 59 days contractually
delinquent; (ii) the remaining stated term to maturity of each Subsequent
Contract will not exceed 240 months; (iii) each Subsequent Contract will be
underwritten in accordance with Green Tree's standard underwriting criteria;
and (iv) no Subsequent Contract will have a loan-to-value ratio greater than
100%.
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DISTRIBUTIONS
On each Distribution Date, the Servicer shall instruct the Indenture Trustee
to distribute from the Collection Account the Amount Available in the following
order of priority:
1. If Green Tree or an affiliate is no longer the Servicer, then to the
Servicer, the Servicing Fee for the related Monthly Period.
2. To the Servicer, reimbursement for advances made with respect to
delinquent payments that were recovered during the prior Monthly Period.
3. To the Note Distribution Account, the Noteholders' Distributable
Amount and any amounts previously withdrawn from any sub-account of the
Spread Account or the Reserve Account and not previously replenished.
4. To the Certificate Distribution Account, the Certificateholders'
Interest Distributable Amount and, after the Notes have been paid in full,
the Certificateholders' Principal Distributable Amount.
5. To the Indenture Trustee for deposit in the Spread Account, to fund
the initial amounts required in the Class A-2, Class A-3 and Class A-4 sub-
accounts.
6. To the Indenture Trustee for deposit in the Reserve Account, to fund
the initial amount required therein.
7. To Green Tree, the Monthly Servicing and Guaranty Fee.
On each Distribution Date, the Indenture Trustee will distribute all amounts
on deposit in the Note Distribution Account in the following order of priority:
(i) to the Class A-1 Noteholders, interest, principal, interest and
principal shortfalls from prior payment periods;
(ii) to the Class A-2 Noteholders, interest, principal, interest and
principal shortfalls from prior payment periods, and interest and principal
in respect of Principal Liquidation Losses;
(iii) to the Class A-2 sub-account of the Spread Account to the extent
amounts have previously been withdrawn therefrom to pay interest on the
Class A-2 Notes and have not previously been replenished;
(iv) to the Class A-3 Noteholders, interest, principal, interest and
principal shortfalls from prior payment periods, and interest and principal
in respect of Principal Liquidation Losses;
(v) to the Class A-3 sub-account of the Spread Account to the extent
amounts have previously been withdrawn therefrom to pay interest on the
Class A-3 Notes and have not previously been replenished;
(vi) to the Class A-4 Noteholders, interest, principal, interest and
principal shortfalls from prior payment periods, and interest and principal
in respect of Principal Liquidation Losses;
(vii) to the Class A-4 sub-account of the Spread Account to the extent
amounts have previously been withdrawn therefrom to pay interest on the
Class A-4 Notes and have not previously been replenished; and
(viii) to the Reserve Account to the extent amounts have previously been
withdrawn therefrom to pay interest or principal on any Class of Notes and
have not previously been replenished.
On each Distribution Date, the Owner Trustee or its Paying Agent will
distribute all amounts on deposit in the Certificate Distribution Account to
the Certificateholders.
For the purposes hereof, the following terms shall have the following
meanings:
"Amount Available" with respect to any Distribution Date, means generally the
sum of payments on the Contracts due and received during the preceding month,
prepayments and other unscheduled collections received during the preceding
month, any amounts deposited in respect of Purchased Contracts, any Interest
Rate Cap Payment, any Guaranty Payment, and all earnings from the investment of
funds in the Collection Account, minus, with respect to all Distribution Dates
other than the Distribution Date in 1998, all collections of
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principal on the Consumer Product Contracts received during the preceding month
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 prior month).
The "Formula Principal Distribution Amount" with respect to any Distribution
Date (but subject to the last sentence of this definition) will generally be
equal to the sum of the following amounts with respect to the related Monthly
Period, in each case computed in accordance with the method specified in each
Contract: (i) all scheduled payments of principal due on each outstanding
Contract during the related Monthly Period, (ii) all Partial Principal
Prepayments applied and all Principal Prepayments in Full received during the
related Monthly Period in respect of each Contract, (iii) the Scheduled
Principal Balance of each Contract that became a Liquidated Contract during the
related Monthly Period, (iv) the Scheduled Principal Balance of each Contract
which, during the related Monthly Period, was purchased by Green Tree as a
result of a breach of a representation or warranty or by the Servicer as a
result of an uncured breach of a covenant under the Sale and Servicing
Agreement, and (v) with respect to the Distribution Date in 1998, any
remaining amounts on deposit in the Pre-Funding Account. The Formula Principal
Distribution Amount for the Distribution Date in 2029, will be the sum of
the Note Principal Balance and the Certificate Principal Balance.
"Liquidated Contract" means any defaulted Contract as to which the Servicer
has determined that all amounts which it expects to recover from or on account
of such Contract through the date of disposition of the related real property
have been recovered; provided that any defaulted Contract in respect of which
the related real property has been realized upon and disposed of and proceeds
of such disposition have been received shall be deemed to be a Liquidated
Contract.
"Purchased Contract" means a Contract (i) that Green Tree has become
obligated to repurchase (or, under certain circumstances, has elected to
repurchase) as a result of an uncured breach by Green Tree of a representation
or warranty made by Green Tree with respect to such Contract or (ii) that the
Servicer has become obligated to repurchase (or, under certain circumstances,
has elected to repurchase) as a result of an uncured breach of the covenants
made by it with respect to such Contract.
"Noteholders' Distributable Amount" means, with respect to any Distribution
Date, the sum of the Noteholders' Interest Distributable Amount and the
Noteholders' Principal Distributable Amount.
"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, interest accrued for the related monthly interest period
on each Class of Notes at the respective Interest Rate for such Class on (i)
the outstanding Principal Balance of the Notes of such Class and (ii) the
aggregate unreimbursed Principal Liquidation Losses of such Class on each prior
Distribution Date, in each case after giving effect to all payments of
principal to the Noteholders of such Class on the immediately preceding
Distribution Date.
"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 (after giving
effect to any Principal Liquidation Losses imposed on such junior Classes and
Certificates) exceeds the Pool Scheduled Principal Balance, after giving effect
to all distributions of principal on such Distribution Date.
"Principal Balance" means, with respect to any Determination Date and any
Class of Notes, the Original Principal Balance of such Class minus all amounts
previously distributed in respect of principal of such Class and minus any
unreimbursed Principal Liquidation Losses of such Class.
"Noteholders' Interest Carryover Shortfall" means, with respect to any
Distribution Date, the excess of the Noteholders' Monthly Interest
Distributable Amount for the preceding Distribution Date and any outstanding
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Noteholders' Interest Carryover Shortfall on such preceding Distribution Date,
over the amount in respect of interest that is actually deposited in the Note
Distribution Account on such preceding Distribution Date, plus interest on the
amount of interest due but not paid to Noteholders on the preceding
Distribution Date, to the extent permitted by law, at the respective Interest
Rate for each Class of Notes for the applicable monthly interest period.
"Noteholder's 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,
however, that the Noteholders' Principal Distributable Amount shall not exceed
the outstanding principal balance of the Notes, and provided further, that the
Noteholders' Principal Distributable Amount on the Final Scheduled Distribution
Date shall not 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 outstanding
principal balances (including all unreimbursed Principal Liquidation Losses) of
all Classes of Notes to zero.
"Noteholders' Monthly Principal Distributable Amount" means, with respect to
any Distribution Date, the Noteholders' Percentage of the Formula Principal
Distribution Amount plus the aggregate unreimbursed Principal Liquidation
Losses of each Class of Notes.
"Noteholders' Percentage" means, 100% until and including the Distribution
Date on which the aggregate Principal Balance of the Notes are paid in full and
0% thereafter.
"Noteholders' Unpaid Principal Shortfall" means, as of the close of any
Distribution Date, the excess of the Noteholders' Monthly Principal
Distributable Amount and any outstanding Noteholders' Unpaid Principal
Shortfall from the preceding Distribution Date over the amount in respect of
principal that is actually deposited in the Note Distribution Account on such
Distribution Date.
"Certificateholders' Distributable Amount" means, with respect to any
Distribution Date, the sum of the Certificateholders' Interest Distributable
Amount and the Certificateholders' Principal Distributable Amount.
"Certificateholders' Interest Distributable Amount" means, with respect to
any Distribution Date, the sum of the Certificateholders' Monthly Interest
Distributable Amount for such Distribution Date and the Certificateholders'
Interest Carryover Shortfall for such Distribution Date.
"Certificateholders' Monthly Interest Distributable Amount" means, with
respect to any Distribution Date, interest accrued at the Pass-Through Rate on
(i) the Certificate Principal Balance and (ii) the aggregate unreimbursed
Certificate Principal Liquidation Losses on each prior Distribution Date, in
each case after giving effect to all payments of principal to the
Certificateholders on the immediately preceding Distribution Date.
"Certificate Principal Liquidation Loss" means, with respect to any
Distribution Date, the amount by which the aggregate Principal Balance of the
Notes and the Certificate Principal Balance exceeds the Pool Scheduled
Principal Balance, after giving effect to all distributions of principal on
such Distribution Date.
"Certificate Principal Balance" equals, initially, $ (approximate)
and, thereafter, equals the Original Certificate Principal Balance, reduced by
all amounts allocable to principal previously distributed to Certificateholders
minus any unreimbursed Certificate Principal Liquidation Losses.
"Certificateholders' Interest Carryover Shortfall" means, with respect to any
Distribution Date, the excess of the Certificateholders' Monthly Interest
Distributable Amount for the preceding Distribution Date and any outstanding
Certificateholders' Interest Carryover Shortfall on such preceding Distribution
Date, over the amount in respect of interest at the Pass-Through Rate that is
actually deposited in the Certificate Distribution Account on such preceding
Distribution Date, plus interest on such excess, to the extent permitted by
law, at the Pass-Through Rate from such preceding Distribution Date to but
excluding the current Distribution Date.
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"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 Certificateholders'
Unpaid Principal Shortfall as of the close of the preceding Distribution Date;
provided, however, that the Certificateholders' Principal Distributable Amount
shall not exceed the Certificate Principal Balance plus any unreimbursed
Certificate Principal Liquidation Losses. In addition, 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 unreimbursed
Certificate Principal Liquidation Losses.
"Certificateholders' Monthly Principal Distributable Amount" means, with
respect to any Distribution Date prior to the Distribution Date on which the
Notes are paid in full, zero; and with respect to any Distribution Date
commencing on the Distribution Date on which the Notes are paid in full, the
Formula Principal Distribution Amount (less, on the Distribution Date on which
the Notes are paid in full, the portion thereof payable on the Notes).
"Certificateholders' Unpaid Principal Shortfall" means, as of the close of
any Distribution Date, the excess of the Certificateholders' Monthly Principal
Distributable Amount and any outstanding Certificateholders' Unpaid Principal
Shortfall from the preceding Distribution Date, over the amount in respect of
principal that is actually deposited in the Certificate Distribution Account.
STATEMENTS TO SECURITYHOLDERS
On or prior to each Distribution Date, the Servicer will prepare and provide
to the Indenture Trustee a statement to be delivered to the Noteholders and to
the Owner Trustee a statement to be delivered to the Certificateholders 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. Each such statement to be delivered to Noteholders will
include the following information as to the Notes, and 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:
(i) the amount of the distribution allocable to interest on or with
respect to each Class of Notes and to the Certificates;
(ii) the amount of the distribution allocable to principal on or with
respect to each Class of Notes and to the Certificates;
(iii) the aggregate outstanding principal balance and the Note Pool
Factor for the Notes and the Certificate Principal Balance and the
Certificate Pool Factor for the Certificates after giving effect to all
payments reported under (ii) above on such date;
(iv) the Noteholders' Interest Shortfall, the Noteholders' Principal
Shortfall, the Certificateholders' Interest Shortfall and the
Certificateholders' Principal Shortfall, if any, and the change in such
amounts from the preceding statement;
(v) the amount, if any, of Principal Liquidation Losses, aggregate
unreimbursed Principal Liquidation Losses since the Closing Date and the
amount of the distribution allocable to such losses for the Notes and
Certificates;
(vi) the amount, if any, deposited or withdrawn from each sub-account of
the Spread Account and the amount on deposit in each sub-account of the
Spread Account after giving effect to all withdrawals and deposits on such
Distribution Date;
(vii) the amount, if any, deposited or withdrawn from the Reserve Account
and the amount on deposit in the Reserve Account after giving effect to all
withdrawals and deposits on such Distribution Date;
(viii) the amount, if any, of the Interest Rate Cap Payment and the
Guaranty Payment;
(ix) the amount of the Monthly Servicing and Guaranty Fee paid to the
Servicer;
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(x) the number and aggregate principal balances of delinquent Contracts,
the number of Products repossessed and repossessed and remaining in
inventory, the number of foreclosures and the number of Contracts that
became Liquidated Contracts with respect to the immediately preceding
Monthly Period; and
(xi) 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.
Each amount set forth pursuant to subclauses (i) through (vi) with respect to
Certificates or Notes will be expressed as a dollar amount per $1,000 of the
initial principal amount of the Notes or the initial Certificate Principal
Balance, as applicable.
Unless and until Definitive Notes or Definitive Certificates are issued, such
reports will be sent on behalf of the Trust to Cede & Co., as registered holder
of the Notes and the Certificates and the nominee of DTC. Note Owners and
Certificate Owners may receive copies of such reports upon written request,
together with a certification that they are Note Owners or Certificate Owners,
as the case may be, and payment of any expenses associated with the
distribution of such reports, from the Indenture Trustee or Owner Trustee. See
"Reports to Securityholders" herein and "Reports to Securityholders" and
"Certain Information Regarding the Securities" in the accompanying Prospectus.
Within the required period of time after the end of each calendar year, the
Indenture Trustee and the Owner Trustee, as applicable, will furnish to each
person who at any time during such calendar year was a Noteholder or
Certificateholder, a statement as to the aggregate amounts of interest and
principal paid to such Noteholder or Certificateholder, information regarding
the amount of servicing compensation received by the Servicer and such other
information as Green Tree deems necessary to enable such Noteholder or
Certificateholder to prepare its tax returns. See "Certain Federal Income Tax
Consequences" herein.
ADMINISTRATOR
Green Tree Financial Servicing Corporation, a Delaware corporation (the
"Administrator"), will provide the notices and perform other administrative
obligations required by the Indenture and the Trust Agreement. The
Administrator, a subsidiary of Green Tree, will enter into an Administration
Agreement with the Trust and the Indenture Trustee relating to its duties and
obligations as Administrator.
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CERTAIN FEDERAL AND STATE INCOME TAX CONSEQUENCES
The following is a general discussion of certain federal and state income tax
consequences relating to the purchase, ownership, and disposition of the Notes
and the Certificates. 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. For additional
information regarding federal and state income tax consequences, see "Certain
Federal Income Tax Consequences--Owner Trust Series" and "Certain State Income
Tax Consequences" in the Prospectus.
Prospective investors should consult their own tax advisors to determine the
federal, state, local and other tax consequences of the purchase, ownership and
disposition of the Notes and the Certificates. Prospective investors should
note that no rulings have been or will be sought from the Internal Revenue
Service (the "IRS") with respect to any of the federal income tax consequences
discussed herein or in the accompanying Prospectus, and no assurance can be
given that the IRS will not take contrary positions. Moreover, there are no
cases or IRS rulings on transactions similar to those described herein with
respect to the Trust, involving both debt and equity interests issued by a
trust with terms similar to those of the Notes and the Certificates.
Prospective investors are urged to consult their own tax advisors in
determining the federal, state, local, foreign and any other tax consequences
to them of the purchase, ownership and disposition of the Securities.
In the opinion of [Dorsey & Whitney LLP], 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 and neither the Trust nor any portion of the Trust will constitute
a taxable mortgage pool taxable as a corporation. Each Certificateholder, by
the acceptance of a Certificate, agrees to treat the Trust as a partnership in
which the Certificateholders are partners for federal income tax purposes. The
Notes will not be issued with original issue discount ("OID"). The Class A-1
Notes provide for stated interest at a floating rate based on LIBOR. Under
Treasury regulations, stated interest payable at a variable rate is not treated
as OID or contingent interest if the variable rate is a qualified floating rate
or a qualified objective rate. The stated interest on the Class A-1 Notes
represents interest payable at a qualified floating rate and will be taxable to
holders of such Notes as interest and not as OID or contingent interest. The
Class A-2, Class A-3 and Class A-4 Notes will not be issued with OID or
contingent interest because interest will be payable at a single fixed rate at
least annually.
ERISA CONSIDERATIONS
Section 406 of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), and or Section 4975 of the Code, prohibit a pension, profit-
sharing or other employee benefit plan, as well as individual retirement
accounts and certain types of Keogh Plans (each a "Benefit Plan") from engaging
in certain transactions with persons that are "parties in interest" under ERISA
or "disqualified persons" under the Code with respect to such Benefit Plan. A
violation of these "prohibited transaction" rules may result in an excise tax
or other penalties and liabilities under ERISA and the Code for such persons.
Title I of ERISA also requires that fiduciaries of a Benefit Plan subject to
ERISA make investments that are prudent, diversified (except if prudent not to
do so) and in accordance with governing plan documents.
Certain transactions involving the purchase, holding or transfer of the
Securities might be deemed to constitute prohibited transactions under ERISA
and the Code if assets of the Trust were deemed to be assets of a Benefit Plan.
Under a regulation issued by the United States Department of Labor (the "Plan
Assets Regulation"), the assets of the Trust would be treated as plan assets of
a Benefit Plan for the purposes of ERISA and the Code only if the Benefit Plan
acquires an "Equity Interest" in the Trust and none of the exceptions contained
in the Plan Assets Regulation is 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. Green Tree believes that the Notes should be
treated as
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indebtedness without substantial equity features for purposes of the Plan
Assets Regulation. However, without regard to whether the Notes are treated as
an Equity Interest for such purposes, the acquisition or holding of Notes by or
on behalf of a Benefit Plan could be considered to give rise to a prohibited
transaction if the Trust, the Owner Trustee or the Indenture Trustee, the owner
of collateral, or any of their respective affiliates is or becomes a party in
interest or a disqualified person with respect to such Benefit Plan. In such
case, certain exemptions from the prohibited transaction rules could be
applicable depending on the type and circumstances of the plan fiduciary making
the decision to acquire a Note. Included among these exemptions are: Prohibited
Transaction Class Exemption ("PTCE") 90-1, regarding investments by insurance
company pooled separate accounts; PTCE 91-38 regarding investments by bank
collective investment funds; and PTCE 84-14, regarding transactions effected by
"qualified professional asset managers."
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 I
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. By its acceptance of a Certificate, each
Certificateholder will be deemed to have represented and warranted that it is
not subject to the foregoing limitation. In this regard, purchasers that are
insurance companies should consult with their counsel with respect to the
United States Supreme Court case interpreting the fiduciary responsibility
rules of ERISA, John Hancock Mutual Life Insurance Co. v. Harris Trust and
Savings Bank (decided December 13, 1993). In John Hancock, the Supreme Court
ruled that assets held in an insurance company's general account may be deemed
to be "plan assets" for ERISA purposes under certain circumstances. Prospective
purchasers should determine whether the decision affects their ability to make
purchases of the Certificates. In particular, such an insurance company should
consider the exemptive relief granted by the Department of Labor for
transactions involving insurance company general accounts in Prohibited
Transactions Exemption 95-60, 60 Fed. Reg. 35925 (July 12, 1995). The Small
Business Job Protection Act of 1996 (the "1996 Act") became effective on August
20, 1996. The 1996 Act amends ERISA to require the Department of Labor to issue
regulations to clarify, retroactively, the application of ERISA and the
prohibited transaction provisions of the Code to insurance company general
accounts. For additional information regarding treatment of the Certificates
under ERISA, see "ERISA Considerations" in the Prospectus.
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. Such plans may, however, be subject to
the provisions of other applicable federal and state laws, including, for any
such governmental or church plan qualified under Section 401(a) of the Code and
exempt from taxation under Section 501(a) of the Code, the prohibited
transaction rules set forth in Section 503 of the Code.
A plan fiduciary considering the purchase of Notes 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.
S-46
<PAGE>
UNDERWRITING
[Underwriters] (the "Underwriter") has agreed, subject to the terms and
conditions of the Underwriting Agreement, to purchase from Green Tree the
respective principal amounts of Notes and Certificates set forth below:
<TABLE>
<CAPTION>
CLASS A-1 CLASS A-2 CLASS A-3 CLASS A-4
NOTES NOTES NOTES NOTES CERTIFICATES
----------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
$ $ $ $ $
</TABLE>
The Underwriting Agreement provides that the Underwriter is obligated to
purchase all of the Notes and Certificates offered hereby, if any of such Notes
and Certificates are purchased.
Green Tree has been advised by the Underwriter that it proposes initially to
offer the Notes and Certificates to the public at the public offering prices
set forth on the cover page of this Prospectus Supplement and to certain
dealers at such price less a concession not in excess of % of the Class A-1
Principal Balance, % of the Class A-2 Principal Balance, % of the Class
A-3 Principal Balance, % of the Class A-4 Principal Balance and % of the
Certificate Principal Balance, and that the Underwriter and such dealers may
reallow a discount of not in excess of % of the Class A-1 Principal
Balance, % of the Class A-2 Principal Balance, % of the Class A-3
Principal Balance, % of the Class A-4 Principal Balance and % of the
Certificate Principal Balance, to other dealers. The public offering price and
the concession and discount to dealers may be changed by the Underwriter after
the initial public offering of the Notes and Certificates offered hereby.
Until the distribution of the Securities is completed, rules of the
Commission may limit the ability of the Underwriter and certain selling group
members to bid for and purchase the Securities. As an exception to these rules,
the Underwriter is permitted to engage in certain transactions that stabilize
the price of the Securities. Such transactions consist of bids or purchases for
the purpose of pegging, fixing or maintaining the price of the Securities.
If the Underwriter creates a short position in the Securities in connection
with the offering, i.e., if they sell more securities than are set forth on the
cover page of this Prospectus Supplement, the Underwriter may reduce that short
position by purchasing Securities in the open market.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases.
Neither Green Tree nor the Underwriter makes any representation or prediction
as to the direction or magnitude of any effect that the transactions described
above may have on the prices of the Securities. In addition, neither Green Tree
nor the Underwriter makes any representation that the Underwriter will engage
in such transactions or that such transactions, once commenced, will not be
discontinued without notice.
The Underwriter has represented, warranted and agreed that (i) it has not
offered or sold and, prior to the expiration of the period of six months from
the Closing Date, will not offer or sell any Securities to persons in the
United Kingdom except to persons whose ordinary activities involve them in
acquiring, holding, managing or disposing of investments (as principal or
agent) for the purposes of their businesses or otherwise in circumstances which
have not resulted and will not result in an offer to the public in the United
Kingdom within the meaning of the Public Offers of Securities Regulations 1995;
(ii) it has complied and will comply with all applicable provisions of the
Financial Services Act 1986 with respect to anything done by it in relation to
the Securities in, from or otherwise involving the United Kingdom; and (iii) it
has only issued or passed on and will only issue or pass on in the United
Kingdom any document received by it in connection with the issue of the
Securities to a person who is of a kind described in Article 11(3) of the
Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1995
(as amended) or is a person to whom such document may otherwise lawfully be
issued or passed on.
S-47
<PAGE>
The Notes have not been and will not be registered under the Securities and
Exchange Law of Japan (the "Securities and Exchange Law") and the Underwriter
has agreed that it will not offer or sell any of the Notes, directly or
indirectly, in Japan or to, or for the benefit of, any resident of Japan
(which term as used herein means any person resident in Japan, including any
corporation or other entity organized under the laws of Japan), except
pursuant to an exemption from the registration requirements of, and otherwise
in compliance with, the Securities and Exchange Law and any other applicable
laws, regulations and ministerial guidelines of Japan.
Green Tree has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended.
Green Tree does not intend to apply for listing of the Notes and
Certificates on a national securities exchange, but has been advised by the
Underwriter that the Underwriter currently intends to make a market in the
Securities as permitted by applicable laws and regulations. The Underwriter is
not obligated, however, to make a market in the Securities and any such market
may be discontinued at any time at the sole discretion of the Underwriter.
Accordingly, no assurance can be given as to the liquidity of, or trading
markets for, the Securities.
LEGAL MATTERS
Certain matters with respect to the legality of the Notes and Certificates
and with respect to the federal and Minnesota income tax matters discussed
under "Certain Federal and State Income Tax Consequences" will be passed upon
for Green Tree by , Minnesota. The validity of the Notes and
Certificates will be passed upon for the Underwriter by , New York, New
York.
S-48
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the Notes will be available only in
book-entry form (the "Global Notes"). Investors in the Global Notes may hold
such Global Notes through any of DTC, CEDEL or Euroclear. The Global
Securities will be tradeable as home market instruments in both the European
and U.S. domestic markets. Initial settlement and all secondary trades will
settle in same-day funds.
Secondary market trading between investors holding Global Notes through
CEDEL and Euroclear will be conducted in the ordinary way in accordance with
their normal rules and operating procedures and in accordance with
conventional eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Notes through DTC
will be conducted according to the rules and procedures applicable to U.S.
corporate debt obligations.
Secondary cross-market trading between CEDEL or Euroclear and DTC
Participants holding Notes will be effected on a delivery-against-payment
basis through the respective Depositaries of CEDEL and Euroclear (in such
capacity) and DTC Participants.
Non-U.S. holders (as described below) of Global Notes will be subject to
U.S. withholding taxes unless such holders meet certain requirements and
deliver appropriate U.S. tax documents to the securities clearing
organizations or their participants.
INITIAL SETTLEMENT
All Global Notes will be held in book-entry form by DTC in the name of Cede
& Co. as nominee of DTC. Investors' interests in the Global Notes will be
represented through financial institutions acting on their behalf as direct
and indirect Participants in DTC. As a result, CEDEL and Euroclear will hold
positions on behalf of their participants through their respective
Depositaries, which in turn will hold such positions in accounts as DTC
Participants.
Investors electing to hold their Global Notes through DTC will follow the
settlement practices applicable to United States corporate debt obligations.
Investors securities custody accounts will be credited with their holdings
against payment in same-day funds on the settlement date.
Investors electing to hold their Global Notes through CEDEL or Euroclear
accounts will follow the settlement procedures applicable to conventional
eurobonds, except that there will be no temporary global security and no
"lock-up" or restricted period. Global Notes will be credited to the
securities custody accounts on the settlement date against payments in same-
day funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired
value date.
Trading between DTC Participants. Secondary market trading between DTC
Participants will be settled using the procedures applicable to book-entry
securities in same-day funds.
Trading between CEDEL and/or Euroclear Participants. Secondary market
trading between CEDEL Participants or Euroclear Participants will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
Trading between DTC seller and CEDEL or Euroclear purchaser. When Global
Notes are to be transferred from the account of a DTC Participant to the
account of a CEDEL Participant or a Euroclear Participant, the
A-1
<PAGE>
purchaser will send instructions to CEDEL or Euroclear through a CEDEL
Participant or Euroclear Participant at least one business day prior to
settlement. CEDEL or Euroclear, as applicable, will instruct its Depositary to
receive the Global Notes against payment. Payment will include interest
accrued on the Global Notes from and including the last coupon payment date to
and excluding the settlement date. Payment will then be made by such
Depositary to the DTC Participant's account against delivery of the Global
Notes. After settlement has been completed, the Global Notes will be credited
to the applicable clearing system and by the clearing system, in accordance
with its usual procedures, to the CEDEL Participant's or Euroclear
Participant's account. The Global Notes credit will appear the next day
(European time) and the cash debit will be back-valued to, and the interest on
the Global Notes will accrue from, the value date (which would be the
preceding day when settlement occurred in New York). If settlement is not
completed on the intended value date (i.e., the trade fails), the CEDEL or
Euroclear cash debit will be valued instead as of the actual settlement date.
CEDEL Participants and Euroclear Participants will need to make available to
the respective clearing systems the funds necessary to process same-day funds
settlement. The most direct means of doing so is to pre-position funds for
settlement, either from cash on hand or existing lines of credit, as they
would for any settlement occurring within CEDEL or Euroclear. Under this
approach, they may take on credit exposure to CEDEL or Euroclear until the
Global Securities are credited to their accounts one day later.
As an alternative, if CEDEL or Euroclear has extended a line of credit to
them, CEDEL Participants or Euroclear Participants can elect not to pre-
position funds and allow that credit line to be drawn upon the finance
settlement. Under this procedure, CEDEL Participants or Euroclear Participants
purchasing Global Notes would incur overdraft charges for one day, assuming
they cleared the overdraft when the Global Notes were credited to their
accounts. However, interest on the Global Notes would accrue from the value
date. Therefore, in many cases the investment income on the Global Notes
earned during that one-day period may substantially reduce or offset the
amount of such overdraft charges, although this result will depend on each
CEDEL Participant's or Euroclear Participant's particular cost of funds.
Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for sending Global Notes to the
respective Depositary for the benefit of CEDEL Participants or Euroclear
Participants. The sale proceeds will be available to the DTC seller on the
settlement date. Thus, to the DTC Participant a cross-market transaction will
settle no differently than a trade between two DTC Participants.
Trading between CEDEL or Euroclear seller and DTC purchaser. Due to time
zone differences in their favor, CEDEL Participants and Euroclear Participants
may employ their customary procedures for transactions in which Global Notes
are to be transferred by the respective clearing systems, through their
respective Depositaries, to a DTC Participant. The seller will send
instructions to CEDEL or Euroclear through a CEDEL Participant or Euroclear
Participant at least one business day prior to settlement. In these cases,
CEDEL or Euroclear will instruct their respective Depositaries, as
appropriate, to deliver the Notes to the DTC Participant's account against
payment. Payment will include interest accrued on the Global Notes from and
including the last coupon payment date to and excluding the settlement date.
The payment will then be reflected in the account of the CEDEL Participant or
Euroclear Participant the following day, and receipt of the cash proceeds in
the CEDEL Participant's or Euroclear Participant's account would be back-
valued to the value date (which would be the preceding day, when settlement
occurred in New York). Should the CEDEL Participant or Euroclear Participant
have a line of credit with its clearing system and elect to be in debit in
anticipation of receipt of the sale proceeds in its account, the bank-
valuation will extinguish any overdraft charges incurred over that one-day
period. If settlement is not completed on the intended value date (i.e., the
trade fails), receipt of the cash proceeds in the CEDEL Participant's or
Euroclear Participant's account would instead be valued as of the actual
settlement date. Finally, day traders that use CEDEL or Euroclear and that
purchase Global Notes from DTC Participants for delivery to CEDEL Participants
or Euroclear Participants should note that these trades would automatically
fail on the sale side unless affirmative action were taken. At least three
techniques should be readily available to eliminate this potential problem:
A-2
<PAGE>
(a) borrowing through CEDEL or Euroclear for one day (until the purchase
side of the day trade is reflected in their CEDEL or Euroclear accounts) in
accordance with the clearing system's customary procedures;
(b) borrowing the Global Notes in the U.S. from a DTC Participant no
later than one day prior to settlement, which would give the Global Notes
sufficient time to be reflected in their CEDEL or Euroclear account in
order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade so
that the value date for the purchase from the DTC Participant is at least
one day prior to the value date for the sale to the CEDEL Participant or
Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Notes holding securities through CEDEL or
Euroclear (or through DTC if the holder has an address outside the U.S.) will
be subject to the 30% U.S. withholding tax that generally applies to payments
of interest (including original issue discount) on registered debt issued by
U.S. Persons, unless (i) each clearing system, bank or other financial
institution that holds customers' securities in the ordinary course of its
trade or business in the chain of intermediaries between such beneficial owner
and the U.S. entity required to withhold tax complies with applicable
certification requirements and (ii) such beneficial owner takes one of the
following steps to obtain an exemption or reduced tax rate:
Exemption of non-U.S. Persons (Form W-8). Beneficial owners of Notes that
are non-U.S. Persons generally can obtain a complete exemption from the
withholding tax by filing a signed Form W-8 (Certificate of Foreign Status)
and a certificate under penalties of perjury (the "Tax Certificate") that
such beneficial owner is (i) not a controlled foreign corporation (within
the meaning of Section 957(a) of the Code) that is related (within the
meaning of Section 864(d)(4) of the Code) to the Trust or the Transferor
and (ii) not a 10 percent shareholder (within the meaning of Section
871(h)(3)(B) of the Code) of the Trust or the Transferor. If the
information shown on Form W-8 or the Tax Certificate changes, a new Form W-
8 or Tax Certificate, as the case may be, must be filed within 30 days of
such change.
Exemption for non-U.S. Person with effectively connected income (Form
4224). A non-U.S. Person, including a non-U.S. corporation or bank with a
U.S. branch, for which the interest income is effectively connected with
its conduct of a trade or business in the United States can obtain an
exemption from the withholding tax by filing Form 4224 (Exemption from
Withholding of Tax on Income Effectively Connected with the Conduct of a
Trade or Business in the United States).
Exemption or reduced rate for non-U.S. Persons resident in treaty
countries (Form 1001). Non-U.S. Persons that are beneficial owners of Notes
residing in a country that has a tax treaty with the United States can
obtain an exemption or reduced tax rate (depending on the treaty terms) by
filing Form 1001 (Ownership, Exemption or Reduced Rate Certificate). If the
treaty provides only for a reduced rate, withholding tax will be imposed at
that rate unless the filer alternatively files Form W-8. Form 1001 may be
filed by the beneficial owner of Notes or such owner's agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The beneficial owner of a
Global Security or, in the case of a Form 1001 or a Form 4224 filer, such
owner's agent, files by submitting the appropriate form to the person
through whom it holds the security (the clearing agency, in the case of
persons holding directly on the books of the clearing agency). Form W-8 and
Form 1001 are effective for three calendar years and Form 4224 is effective
for one calendar year.
The term "U.S. Person" means (i) a citizen or resident of the United States,
(ii) a corporation or partnership organized in or under the laws of the United
States or any political subdivision thereof, or (iii) an estate or trust the
income of which is includible in gross income for United States tax purposes,
regardless of its source. This summary does not deal with all aspects of U.S.
federal income tax withholding that may be relevant to foreign holders of the
Global Notes. Investors are advised to consult their own tax advisors for
specific tax advice concerning their holding and disposing of the Global
Notes.
A-3
<PAGE>
PROSPECTUS
BASE PROSPECTUS NO. 7 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 OCTOBER 9, 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,
1997, and the Company's quarterly reports on Form 10-Q for the quarters ended
March 31, 1998 and June 30, 1998, which have been filed with the Commission,
is 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.
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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.
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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").
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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
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in the related Prospectus Supplement. See
"Certain Information Regarding the
Securities--Book-Entry Registration."
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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
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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."
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The Certificates of a Series will not be
guaranteed or insured by any government
agency or, unless otherwise
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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 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 $86,950,000, 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 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 $1,332,000,000. 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 (651) 293-3400).
Green Tree's Annual Report on Form 10-K for the year ended December 31, 1997,
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,
------------------------
MONTHS
ENDED
1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---------
<S> <C> <C> <C> <C> <C> <C>
Ratio of Earnings to Fixed Charges........... 4.81 7.98 7.90 5.44 3.94
</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 $86,950,000. These insurance reserves were available to cover
losses on approximately $883,889,000 of FHA-insured manufactured housing
contracts and approximately $128,145,000 of FHA-insured home improvement
loans, including the FHA-insured Contracts that may be owned by a Trust Fund.
If an Event of Termination (as defined under "Description of the 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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<PAGE>
(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 ($124,500 in 1998, 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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<PAGE>
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
50
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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.
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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
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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, 1997
and 1996 and for each of the years in the three-year period ended December 31,
1997, 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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NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION
NOT CONTAINED IN THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS, AND ANY INFOR-
MATION OR REPRESENTATION NOT CONTAINED HEREIN OR THEREIN MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY GREEN TREE OR ANY UNDERWRITER. THIS PROSPEC-
TUS SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTITUTE AN OFFER OF ANY SECURITIES
OTHER THAN THE REGISTERED SECURITIES TO WHICH THE PROSPECTUS SUPPLEMENT RE-
LATES OR AN OFFER TO ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER WOULD
BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND THE PRO-
SPECTUS NOR ANY SALES MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF GREEN TREE OR
THE TRUST SINCE THE DATE HEREOF.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
PROSPECTUS SUPPLEMENT
<S> <C>
Reports to Securityholders................................................. S-2
Summary of Terms........................................................... S-3
Risk Factors............................................................... S-16
The Trust.................................................................. S-17
The Trust Property......................................................... S-18
The Contract Pool.......................................................... S-19
Green Tree Financial Corporation........................................... S-24
Yield and Prepayment Considerations........................................ S-27
Description of the Notes................................................... S-29
Description of the Counterparty............................................ S-36
Description of the Certificates............................................ S-36
Description of the Trust Documents and Indenture........................... S-38
Certain Federal and State Income Tax Consequences.......................... S-45
ERISA Considerations....................................................... S-45
Underwriting............................................................... S-47
Legal Matters.............................................................. S-48
Annex I.................................................................... A-1
PROSPECTUS
Available Information...................................................... 3
Reports to Securityholders................................................. 3
Incorporation of Certain Documents by Reference............................ 3
Prospectus Summary......................................................... 4
Risk Factors............................................................... 15
The Trusts................................................................. 17
Green Tree Financial Corporation........................................... 19
Yield Considerations....................................................... 20
Maturity and Prepayment Considerations..................................... 21
Pool Factor................................................................ 21
Use of Proceeds............................................................ 22
The Notes.................................................................. 22
The Certificates........................................................... 26
Certain Information Regarding the Securities............................... 28
Description of the Trust Documents......................................... 31
Description of FHA Insurance............................................... 41
Certain Legal Aspects of the Contracts; Repurchase Obligations............. 42
Certain Federal Income Tax Consequences.................................... 44
Certain State Income Tax Consequences...................................... 50
ERISA Considerations....................................................... 51
Legal Investment Considerations............................................ 52
Ratings.................................................................... 52
Underwriting............................................................... 52
Legal Matters.............................................................. 53
Experts.................................................................... 53
</TABLE>
---------------
FOR 90 DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT ALL DEALERS EFFECT-
ING TRANSACTIONS IN THE SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DIS-
TRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE
OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS SUPPLEMENT AND A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
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- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
$ (APPROXIMATE)
LOGO
SELLER AND SERVICER
GREEN TREE HOME IMPROVEMENT
LOAN TRUST 1998-
$ (APPROXIMATE) % ASSET-BACKED NOTES, CLASS A-1:HI
$ (APPROXIMATE) FLOATING RATE ASSET-BACKED NOTES, CLASS A-1
$ (APPROXIMATE) % ASSET-BACKED NOTES, CLASS A-2
$ (APPROXIMATE) % ASSET-BACKED NOTES, CLASS A-3
$ (APPROXIMATE) % ASSET-BACKED NOTES, CLASS A-4
$ (APPROXIMATE) % ASSET-BACKED CERTIFICATES
-----------------
PROSPECTUS SUPPLEMENT
-----------------
[UNDERWRITERS]
, 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
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 Restated 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 (4)
</TABLE>
II-1
<PAGE>
<TABLE>
<S> <C>
4.3 Form of Trust Agreement(4)
4.4 Form of Indenture between the Trust and the Indenture Trustee, including form of Note(4)
*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 (5)
**23.1 Consent of KPMG Peat Marwick LLP (filed herewith)
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-5)
25.1 Form of T-1 Statement of Eligibility under the Trust Indenture Act of 1939 of the Indenture Trustee
(6)
</TABLE>
- --------
* Previously filed
** Filed herewith
(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. 333-
52233.
(3) Incorporated by reference to the similarly numbered exhibit (unless
otherwise indicated) to the Registrant's Current Report on Form 8-K
dated March 13, 1998.
(4) Incorporated by reference to the similarly numbered exhibit to the
Registrant's Registration Statement No. 333-46457.
(5) Incorporated by reference to the similarly numbered exhibit (unless
otherwise indicated) to the Registrant's Quarterly Report on Form 10-Q
for the period ended June 30, 1998.
(6) To be filed subsequently pursuant to Section 305(b)(2) of the Trust
Indenture Act of 1939, as amended.
II-2
<PAGE>
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers, and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that, in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as a part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
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.
II-3
<PAGE>
(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-4
<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 AMENDMENT NO. 1
TO 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 30TH DAY OF SEPTEMBER, 1998.
Green Tree Financial Corporation
By /s/ Joel H. Gottesman
----------------------------------
JOEL H. GOTTESMAN
Senior Vice President, General
Counsel and Secretary
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 JAMES S.
ADAMS AS HIS/HER TRUE AND LAWFUL ATTORNEY-IN-FACT AND AGENT, WITH FULL POWER
OF SUBSTITUTION, TO SIGN ON THEIR 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
Chairman of the
* Board and Chief
- ------------------------------------- Executive Officer
LAWRENCE M. COSS (Principal
Executive Officer
and Director)
Executive Vice
* President and Chief
- ------------------------------------- Financial Officer
ROLLIN M. DICK (Principal
Financial Officer)
Senior Vice
* President and Chief
- ------------------------------------- Accounting Officer
JAMES S. ADAMS (Principal
Accounting Officer)
Director
*
- -------------------------------------
STEPHEN C. HILBERT
Director
*
- -------------------------------------
THOMAS J. KILIAN
*By:/s/ Joel H. Gottesman Director September 30,
1998
---------------------------------
JOEL H. GOTTESMAN ATTORNEY-IN-FACT
II-5
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
1.1 Proposed form of Underwriting Agreement (1)
3.1 Certificate of Incorporation of Green Tree (2)
3.2 Restated By-Laws of Green Tree (2)
4.1 Form of Pooling and Servicing Agreement (3)
4.2 Form of Sale and Servicing Agreement (4)
4.3 Form of Trust Agreement (4)
4.4 Form of Indenture between the Trust and the Indenture Trustee,
including form of
Note (4)
*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 (5)
**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 (6)
</TABLE>
- -------
*Filed herewith.
**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. 333-
52233.
(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 to the
Registrant's Registration Statement No. 333-46457.
(5) Incorporated by reference to the similarly numbered exhibit (unless
otherwise indicated) to the Registrant's Quarterly Report on Form 10-Q
for the period ended June 30, 1998.
(6) To be filed subsequently pursuant to Section 305(b)(2) of the Trust
Indenture Act of 1939, as amended
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Green Tree Financial Corporation:
We consent to the incorporation by reference in the Registration Statement
(No. 333-63305) on Form S-3 of Green Tree Financial Corporation of our report
dated January 27, 1998, except as to Note O which is as of February 13, 1998,
with respect to the consolidated balance sheets of Green Tree Financial
Corporation and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the years in the three-year period ended December 31, 1997, and to the
reference to our firm under the heading "EXPERTS" in the Registration Statement.
Our report refers to the Company's adoption of the Financial Accounting
Standards Board's Statement No. 125 "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," in 1997.
/s/ KPMG Peat Marwick LLP
Minneapolis, Minnesota
September 22, 1998
