PROSPECTUS
SUPPLEMENT
(To Prospectus dated $140,000,000
December 20, 1996)
THE MONEY STORE
THE MONEY STORE SBA LOAN-BACKED ADJUSTABLE RATE
CERTIFICATES, SERIES 1996-2,
$130,200,000 Class A Certificates
$9,800,000 Class B Certificates
(EXCEPT FOR THE EXCESS SPREAD (AS DEFINED HEREIN), WHICH CONSTITUTES PART OF THE
TRUST FUND, THE UNITED STATES SMALL BUSINESS ADMINISTRATION (THE "SBA") NEITHER
GUARANTEES THE CERTIFICATES OFFERED HEREBY, THE BENEFICIAL OWNERSHIP INTEREST IN
THE TRUST FUND REPRESENTED THEREBY OR THE UNGUARANTEED INTEREST IN THE SBA LOANS
THAT CONSTITUTE THE ASSETS OF SUCH TRUST FUND NOR DOES THE SBA HAVE ANY DIRECT
OR INDIRECT OBLIGATION TO THE TRUST FUND OR THE CERTIFICATEHOLDERS).
The Money Store SBA Loan-Backed Adjustable Rate Certificates, Series 1996-2
(the "Certificates"), evidence the entire beneficial ownership interest in a
trust fund (the "Trust Fund") created by The Money Store Investment Corporation
("TMSIC") and The Money Store of New York, Inc. ("MSNY" and, together with
TMSIC, the "Sellers"). The Trust Fund consists primarily of the right to receive
payments and other recoveries attributable to certain unguaranteed interests
(the "Unguaranteed Interests") in a pool of loans partially guaranteed by the
U.S. Small Business Administration (collectively, the "SBA Loans"). See "The SBA
Loan Program--Loan Parameters" herein. The Certificates will be issued pursuant
to a Pooling and Servicing Agreement, among the Sellers, TMSIC, as servicer (in
such capacity, the "Servicer"), The Money Store Inc., as Representative (the
"Representative"), and Marine Midland Bank, as trustee. (cover continued on next
page)
SEE "RISK FACTORS" ON PAGE S-31 HEREIN AND ON PAGE 26 IN THE PROSPECTUS FOR
A DISCUSSION OF CERTAIN MATERIAL FACTORS WHICH SHOULD BE CONSIDERED IN
CONNECTION WITH AN INVESTMENT IN THE CERTIFICATES OFFERED HEREBY.
THE CERTIFICATES REPRESENT INTERESTS IN THE TRUST FUND ONLY AND DO NOT
REPRESENT INTERESTS IN OR OBLIGATIONS OF TMSIC, MSNY OR ANY OF THEIR RESPECTIVE
AFFILIATES OR SUBSIDIARIES. EXCEPT FOR THE EXCESS SPREAD, NEITHER THE
CERTIFICATES NOR THE UNDERLYING UNGUARANTEED INTERESTS OF THE SBA LOANS ARE
INSURED OR GUARANTEED BY THE UNITED STATES SMALL BUSINESS ADMINISTRATION OR ANY
OTHER GOVERNMENTAL AGENCY, AND NO GOVERNMENTAL AGENCY HAS PASSED UPON THE
ACCURACY OF THE INFORMATION CONTAINED IN THIS PROSPECTUS SUPPLEMENT OR THE
ACCOMPANYING PROSPECTUS
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 ACCOMPANYING
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The Underwriter has agreed to purchase the Class A and Class B Certificates
from the Sellers at approximately 99.50% of the principal amounts thereof, plus
accrued interest, subject to the terms and conditions set forth in the
Underwriting Agreement referred to herein under "Underwriting." Aggregate
proceeds to the Sellers from the sale of the Certificates offered hereby (before
deducting expenses payable by the Sellers estimated at $200,000) will be
approximately $139,300,000 plus accrued interest.
The Underwriter proposes to offer the Certificates from time to time for
sale in negotiated transactions or otherwise, at prices determined at the time
of sale. For further information with respect to the plan of distribution and
any discounts, commissions or profits that may be deemed underwriting discounts
or commissions, see "Underwriting."
The Certificates are offered by the Underwriter subject to prior sale,
when, as and if issued to and accepted by the Underwriter, subject to approval
of certain legal matters by counsel for the Underwriter. The Underwriter
reserves the right to withdraw, cancel or modify such offer and to reject orders
in whole or in part. It is expected that delivery of the Class A Certificates
will be made in book-entry form only through the Same Day Funds Settlement
System of The Depository Trust Company in the United States or Cedel Bank,
societe anonyme ("CEDEL") or the Euroclear System ("Euroclear") in Europe and
that delivery of the Class B Certificates will be made, at the option of the
Sellers, either (i) in book-entry form only through the Same Day Funds
Settlement System of The Depository Trust Company in the United States or CEDEL
or Euroclear in Europe, or (ii) in physical form, at the office of Prudential
Securities Incorporated, One New York Plaza, New York, New York 10292, in each
case on or about December 23, 1996.
PRUDENTIAL SECURITIES INCORPORATED
December 20, 1996
<PAGE>
(cover continued from previous page)
Additional SBA Loans (the "Subsequent SBA Loans") may be purchased by the
Trust from the Sellers from time to time on or before the close of business on
March 19, 1997 from funds, if any, on deposit in the Pre-Funding Account. On the
Closing Date (as defined herein), an aggregate cash amount of approximately
$31,700,000 will be deposited into the Pre-Funding Account.
Each SBA Loan was, and each Subsequent SBA Loan will have been, originated
or acquired by the Sellers in accordance with the Sellers' underwriting criteria
described in the attached Prospectus under "The SBA Loan Lending
Program--Underwriting Criteria for SBA Section 7(a) Loans." The SBA Loans will
be master serviced by the Servicer, although MSNY will service the SBA Loans
sold by it to the Trust Fund and TMSIC will service the SBA Loans sold by it to
the Trust Fund.
The Certificates will consist of two classes of certificates (the "Class A
Certificates" and the "Class B Certificates"). The Class B Certificates are
subordinate to the Class A Certificates in the right to receive payment of
interest and, after interest has been paid with respect to both Classes of
Certificates, the Class B Certificates are subordinate to the Class A
Certificates in the right to receive payments of principal. See "Description of
the Agreement and the Certificates--Flow of Funds" herein.
Distributions of principal and interest on the Certificates will be made on
the 15th day of each month or, if the 15th day is not a business day, the first
business day thereafter, commencing January 15, 1997. To the extent of Available
Funds (as defined herein), and prior to payments of principal on the
Certificates, holders of Class A and Class B Certificates, in that order, will
be entitled to receive interest accrued at an adjustable rate, as described
herein. To the extent of the Available Funds remaining after payment of interest
on the Certificates, holders of Class A and Class B Certificates, in that order,
will be entitled to receive distributions of principal, as described herein. See
"Description of the Agreement and the Certificates--Flow of Funds" herein.
Additionally, any Pre-Funded Amount (as defined herein) remaining in the
Pre-Funding Account at the close of business on March 19, 1997 will be
distributed as a principal prepayment on March 20, 1997 (together with accrued
interest at the applicable Remittance Rate on the amount of such prepayment) to
the Class A and Class B Certificates. The interest due the Certificates on the
April 1997 Remittance Date will be adjusted to take account of such
distribution.
There is currently no secondary market for the Certificates. Prudential
Securities Incorporated (the "Underwriter") intends to make a secondary market
for the Certificates, but has no obligation to do so. There can be no assurance
that a secondary market for the Certificates will develop or, if one does
develop, that it will continue.
No election will be made to treat the Trust Fund as a real estate mortgage
investment conduit. See "Material Federal Income Tax Consequences" herein.
The Certificates offered by this Prospectus Supplement constitute a
separate series of Certificates being offered by the Sellers and the
Representative pursuant to the Prospectus dated December 20, 1996 (the
"Prospectus"), of which this Prospectus Supplement is a part and which
accompanies this Prospectus Supplement. The Prospectus contains important
information regarding this offering which is not contained herein and
prospective investors are urged to read the Prospectus and this Prospectus
Supplement in full.
<PAGE>
--------------------------------------------------
UNTIL 90 DAYS AFTER THE DATE HEREOF, ALL DEALERS EFFECTING TRANSACTIONS IN
THE CERTIFICATES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE
REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS. THIS IS IN ADDITION
TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
--------------------------------------------------
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.
<PAGE>
SUMMARY OF TERMS
The following summary is qualified in its entirety by the more detailed
information appearing elsewhere in this Prospectus Supplement and the
accompanying Prospectus. Capitalized terms used but not defined elsewhere in
this Prospectus Supplement have the meanings assigned to such terms under
"Certain Definitions." Unless otherwise noted, all statistical percentages and
all dollar amounts in this Prospectus Supplement are measured by the aggregate
principal balances of the SBA Loans, the Unguaranteed Interests or the
Guaranteed Interests (each as defined below under "--Trust Fund Assets"), as the
case may be, at the close of business on the Cut-Off Date (as defined below
under "--Trust Fund Assets").
Securities Offered.............. The Money Store SBA Loan-Backed
Adjustable Rate Certificates, Series
1996-2, Class A and Class B
(the "Class A Certificates" and
the "Class B Certificates,"
respectively, and collectively,
the "Certificates"). The Class
A Certificates will be issued
in an aggregate initial
principal amount (the "Initial
Class A Certificate Principal
Amount") of approximately
$130,200,000. The Class B
Certificates will be issued in
an aggregate initial principal
amount (the "Initial Class B
Certificate Principal Amount")
of approximately $9,800,000.
The Class B Certificates are
subordinate to the Class A
Certificates in the right to receive
payments of interest and, after
interest has been paid to both
Classes of Certificates, the Class B
Certificates are subordinate to the
Class A Certificates in the right
to receive payments of principal,
in each case to the extent
described herein. See "Description
of the Agreement and the
Certificates--Flow of Funds"
herein.
The Certificates represent the
entire beneficial ownership
interest in a trust fund (the
"Trust Fund") formed pursuant
to a Pooling and Servicing
Agreement (the "Agreement") by
and among The Money Store
Investment Corporation
("TMSIC"), The Money Store of
New York, Inc. ("MSNY" and
together with TMSIC, the
"Sellers"), TMSIC, as servicer
(in such capacity, the
"Servicer"), The Money Store
Inc., as representative (the
"Representative"), and Marine
Midland Bank, as trustee (the "Trustee").
Denominations........... The Class A Certificates will
be issued in book-entry form
and the Class B Certificates
will be issued either in
book-entry or physical form, as
determined by the Sellers prior
to issuance of the Certificates. Each Class of
Certificates will be issued in
minimum denominations of $1,000
original principal amount and
integral multiples of $1,000 in
excess thereof, except that one
Certificate of each Class may
be issued in a different
denomination and, if so issued,
will be held in physical form.
See "Description of the
Agreement and the Certificates-- Registration
of Certificates" herein.
Trust Fund Assets.......... The Trust Fund will consist
primarily of the right to
receive all payments and other
recoveries attributable to the
Unguaranteed Interests (as
defined below) in a pool of
loans (the "SBA Loan Pool")
made to small business concerns
pursuant to Section 7(a) of the
Small Business Act, as amended,
and Title 13 of the Code of
Federal Regulations, as amended
(referred to herein as either
the "SBA Section 7(a) Loans" or the
"SBA Loans"). The SBA Section 7(a)
Loans are partially guaranteed
by the U.S. Small Business
Administration (the "SBA")
pursuant to a Small Business
Administration Loan Guaranty
Agreement (Deferred
Participation) (SBA Form 750),
dated August 13, 1980, by and
between TMSIC and the SBA, and
pertinent SBA regulations found
at 13 C.F.R. Parts 120 and 121.
As to any SBA Section 7(a) Loan, the
right to receive the guaranteed
portion of the principal balance
thereof together with interest
thereon at a per annum rate in
effect from time to time (which
rate is less than the rate paid
by the obligor on the related
SBA Section 7(a) Loan (the
"Obligor")) and the fee (the
"Agent of the SBA's Fee")
payable to the SBA's fiscal and
transfer agent (the "Agent of the SBA") is
referred to herein as the
"Guaranteed Interest." With
respect to SBA Section 7(a) Loans
for which the Guaranteed
Interest was sold in the
secondary market on or after
September 1, 1993 (unless the
related SBA Section 7(a) Loan was
approved by the SBA on or after
October 12, 1995) and SBA Section
7(a) Loans approved by the SBA
on or after October 12, 1995,
regardless of whether they were
sold in the secondary market
(the "Additional Fee SBA
Loans"), a fee equal to 40
basis points and 50 basis
points, respectively, per annum
on the outstanding balance of
the Guaranteed Interest of such
Additional Fee SBA Loans (the
"Additional Fee") is required
to be paid by the related
Seller to the SBA. Although
such Additional Fee is the
responsibility of the related
Seller, the Additional Fee will
be funded from the interest
received by the related Obligor
on the SBA Section 7(a) Loans.
Accordingly, any such
Additional Fee will reduce the
Excess Spread (as defined
herein) on the related SBA
Loan. The Guaranteed Interest
varies from SBA Section 7(a) Loan
to SBA Section 7(a) Loan, is not
included in the Trust Fund and
Certificateholders have no
right or interest therein. As
described herein, the portion
of the principal guaranteed by
the SBA for each SBA Section 7(a)
Loan varies depending upon the
program under which such SBA
Section 7(a) Loan was originated.
However, the SBA imposes a
maximum per borrower guaranty
of $750,000. See "The SBA Loan
Program--Section 7(a) Loan Parameters."
Pursuant to policies of the SBA, the
Servicer is required to retain for
each SBA Section 7(a) Loan an amount
equal to 0.60% per annum on the
outstanding balance of the
related Guaranteed Interest
(such amount is referred to
herein as the "Premium
Protection Fee" for the related
SBA Section 7(a) Loan). The Premium
Protection Fee is not included
in the Trust Fund and
Certificateholders have no
right or interest therein.
The "Unguaranteed Interest"
will equal all payments and
other recoveries on such SBA
Section 7(a) Loan not constituting
the Guaranteed Interest or the
Premium Protection Fee therein.
As stated above, the interest
accrued on the guaranteed
portion of the principal
balance of each SBA Section 7(a)
Loan exceeds the sum of
the interest payable to the
holder of the Guaranteed
Interest, the Agent of the
SBA's Fee, the Premium
Protection Fee and, with
respect to the Additional Fee
SBA Loans, the Additional Fee.
Such excess (the "Excess
Spread"), which is guaranteed
by the SBA for up to 120 days
of accrued interest, is
included in the Unguaranteed
Interest and will be available
to pay interest and principal
on the Certificates, the
Servicing Fee to the Servicer
and fund the Spread Account (as
defined under "--Spread
Account" herein) as described
under "--Spread Account" herein.
The "Unguaranteed Percentage"
will equal the fraction,
expressed as a percentage, the
numerator of which is the
principal portion of the
Unguaranteed Interest as of the
CutOff Date and the denominator
of which is the outstanding
principal balance of such SBA
Section 7(a) Loan as of the Cut-Off
Date. The Unguaranteed
Percentage for any given loan
will not change over time.
The "Cut-Off Date" is November
30, 1996; provided, however,
that for any SBA Section 7(a) Loan
originated after such date, the
Cut-Off Date shall be the date
of the origination of such SBA
Section 7(a) Loan.
As of the close of business on
the Cut-Off Date, the aggregate
principal amount of the
Unguaranteed Interests of the
SBA Section 7(a) Loans expected to
be delivered to the Trustee on
the Closing Date equaled
approximately $108,300,000 (the
"Original Pool Principal Balance").
Sellers........... TMSIC is a New Jersey
corporation, and MSNY is a New York
corporation. TMSIC is a wholly-owned
subsidiary of The Money Store
Inc., a New Jersey corporation,
and MSNY is a wholly-owned
subsidiary of TMSIC. All of the
SBA Section 7(a) Loans were, and
all of the Subsequent SBA Loans
will have been, originated or
acquired by TMSIC or MSNY. Each
Seller will deposit into the
Trust Fund the right to receive
the Unguaranteed Interests in
the SBA Loans originated or
acquired by it and will make
representations and warranties
with respect to such SBA Loans.
Servicers.......... MSNY will service the SBA Loans sold
by it to the Trust Fund and TMSIC
will service the SBA Loans sold
by it to the Trust Fund, in
each case in accordance with
the terms of the Agreement and
the SBA Rules and Regulations
and the Multi-Party Agreement
(as defined below under "--Multi-Party
Agreement"). TMSIC will be liable to the
Trustee for the servicing of all the
SBA Loans.
Trustee............. Marine Midland Bank, a trust company
headquartered in Buffalo, New York,
will be the Trustee. In the
Agreement, the Trustee will agree to
act as successor Servicer if TMSIC
can no longer serve in such
capacity.
Document Custodians...... The promissory notes evidencing
the SBA Section 7(a) Loans (the
"Notes") will be held by the
Agent of the SBA pursuant to
the Multi-Party Agreement. The
Agent of the SBA will be liable
solely to the SBA for
the Agent of the SBA's gross
negligence or malfeasance. The
SBA will be liable to the
Trustee, the Sellers and the
Servicer for the SBA's and the
Agent of the SBA's gross
negligence or malfeasance.
All other documents to be
delivered by the Sellers with
respect to the SBA Loans will
be delivered to and held by the
Trustee pursuant to the
Agreement. See "Description of
the Agreement and the
Certificates" herein.
Interest Accrual Period... With respect to each Remittance Date
(as defined below under "--
Remittance Date"), the "Interest Accrual
Period" will be the period commencing on the
15th day of the month preceding
such Remittance Date
and ending on the 14th day of
the month of such Remittance
Date. However, for the
Remittance Date occurring in
January 1997, the Interest
Accrual Period will be the period
commencing on December 1, 1996
and ending on January 14, 1997.
Pre-Funding Account....... On the Closing Date, cash in an
amount not to exceed
approximately $31,700,000 (the
"Pre-Funded Amount") will be
deposited on the Closing Date
into the Pre-Funding Account.
Amounts in the Pre-Funding
Account may be used only (i) to
acquire Subsequent SBA Loans
and (ii) to make accelerated
payments of principal on the
Certificates. During the period
(the "Funding 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 $100,000, (ii) the
date on which an Event of
Default occurs under the
Agreement or (iii) the close of
business on March 19, 1997,
amounts will, from time to
time, be withdrawn from the
Pre-Funding Account to purchase
Subsequent SBA Loans in
accordance with the Agreement.
Any Pre-Funded Amount remaining
at the end of the Funding
Period will be distributed as a
principal prepayment on the
next Remittance Date to the
Certificates. However, any
Pre-Funded Amount remaining at
the close of business on March
19, 1997 will be distributed as
a principal prepayment on March
20, 1997 (the "Special
Remittance Date") to the Certificates.
Capitalized Interest
Account............. On the Closing Date, the
Representative also will make a cash
deposit in an account (the
"Capitalized Interest Account") to
be pledged to the Trustee. The
amount deposited in the Capitalized
Interest Account will be used by the
Trustee on the Remittance
Dates occurring in January,
February and March 1997 to fund
the excess, if any, of (i) the
amount of interest accrued for
each such Remittance Date at
the weighted average Class A
and Class B Remittance Rates on the
portion of the Certificates having
principal balances exceeding the
principal balances of the
Unguaranteed Interests over (ii) the
amount of any earnings on funds in
the Pre-Funding Account that are
available to pay interest on the
Certificates on each such Remittance
Date. Additionally, if a principal
prepayment is made on the Special
Remittance Date to any Class of
Certificates, such Class of
Certificates also will receive
on such date, from the
Capitalized Interest Account,
accrued interest at the
applicable Remittance Rate on
the amount of such principal
prepayment. Any amounts remaining
in the Capitalized Interest Account
on the Special Remittance Date and
not used for such purposes are
required to be paid directly to
the Representative on such
Special Remittance Date.
Available Funds...... With respect to each Remittance
Date, the "Available Funds"
will equal the sum of (i) all
amounts (including any Excess
Spread) received from any
source by the Servicer or any
Subservicer during the
preceding calendar month with
respect to principal and
interest on the SBA Loans (net of the
amount payable to the holder of
the Guaranteed Interest, the
Agent of the SBA's Fee, the
Premium Protection Fee, the
Additional Fee and the
Servicing Fee (as defined under
"--Servicing Fee" herein)),
(ii) advances by the Servicer, (iii)
amounts to be transferred from
the Pre-Funding Account and the
Capitalized Interest Account
with respect to the Remittance
Dates in January, February and
March 1997 and (iv) amounts in
the Spread Account.
Interest........ To the extent of the Available
Funds, and prior to payments of
principal, on each Remittance
Date the Class A and Class B
Certificate holders, in that
order, will be entitled to
receive interest accrued
for the related Interest Accrual Period at the
adjustable rate described below
on the Class A or Class B
Certificate Balance, as the
case may be (each as defined below),
outstanding immediately prior to
such Remittance Date. If, on any
Remittance Date, the Class A or
Class B Certificates do not receive
the full amount of interest to which
they are entitled, such shortfall,
plus interest thereon compounded
monthly at the then applicable Class
A or Class B Remittance Rate
(each as defined below), will
be added to the amount of
interest they are entitled to
receive on succeeding
Remittance Dates. The aggregate
amounts of interest payable to
the Class A and Class B
Certificates on each Remittance
Date are referred to
herein as the "Class A Interest
Distribution Amount" and the "Class
B Interest Distribution Amount",
respectively. Notwithstanding the
foregoing, if a principal payment is
made to a Class of Certificates on
the Special Remittance Date, each
such Class also will receive on such
date 11 days' interest at the
applicable Remittance Rate on the
amount of such prepayment. Further,
the Class A and Class B
Interest Distribution Amounts
for the April 1997 Remittance
Date will be based on 30 days'
interest on the related
Certificate Balance on March
20, 1997, after giving effect
to such prepayment.
Interest will accrue on the
Certificates on the basis of a 360-
day year consisting of twelve 30-day
months at a per annum rate (the
"Class A Remittance Rate" and "Class
B Remittance Rate," respectively)
equal to:
Class A: During the initial
Interest Accrual Period,
6.11% per annum. During each
subsequent Interest Accrual
Period, the Prime Rate (as
defined below) in effect on the
preceding Adjustment Date (as
defined below) minus 2.14%
per annum, subject to the
adjustments described under
"Description of the Agreement
and the Certificates--Class A
and Class B Interest
Distribution Amounts" herein.
Class B: During the initial
Interest Accrual Period,
6.575% per annum. During each
subsequent Interest Accrual
Period, the Prime Rate in
effect on the preceding
Adjustment Date minus 1.675%
per annum, subject to the
adjustments described under
"Description of the Agreement
and the Certificates--Class A and
Class B Interest Distribution Amounts" herein.
The Class A and Class B
Remittance Rates will be
adjusted on the first Business
Day (as defined under "Certain
Definitions" herein) of each
January, April, July and
October, commencing April 1,
1997 (each, an "Adjustment
Date"). The Prime Rate will
equal the lowest prime lending
rate published in the Money
Rate Section of THE WALL STREET
JOURNAL for the applicable Adjustment Date.
As stated above, the amount of
interest paid on the Class A
and Class B Certificates on
each Remittance Date is based
upon the amount of interest due
on the SBA Loans in the month
preceding such Remittance Date.
For each such monthly payment,
the related SBA Loan Interest
Rate is based on the Prime Rate
in effect for such SBA Loan in
the month preceding the month
such monthly payment is due.
For example, the monthly
payment due on an SBA Loan in
July, 1997 will be based upon
the Prime Rate in effect for
such SBA Loan in June, 1997
(which, for SBA Loans adjusting
quarterly, generally will be
the Prime Rate in effect on
April 1, 1997). This monthly
payment will be distributed to
Certificate- holders on the
Remittance Date in August,
1997. For this Remittance Date,
interest on the Class A and
Class B Certificates will
accrue based upon the Prime
Rate in effect on the first
Business Day of July, 1997.
Interest accruing on the
Certificates for the Remittance
Dates occurring in each
February, May, August and
November will be based upon the
Prime Rate in effect on the
first Business Day in the
preceding January, April, July
and October, respectively.
However, the interest payments on the
SBA Loans required to be distributed to
Certificateholders on each such
Remittance Date generally will be based upon
the Prime Rate in effect on the
first Business Day in the preceding January,
April, July and October, respectively. As a
result of this mismatch, the actual amount of
interest distributed to the Certificateholders
in February, May, August and November may
be subject to the adjustments described under
"Description of the Agreement and
the Certificates--Class A and Class B Interest
Distribution Amounts" herein.
As of any date, the "Class A
Certificate Balance" will equal the
Class A Certificate Balance on the
Closing Date reduced by all amounts
previously distributed to Class A
Certificateholders and allocable to
principal. The "Class B Certificate
Balance" will be calculated in
a similar manner.
Principal....... To the extent of the Available Funds
remaining after payment of interest
as described above, on each
Remittance Date, holders of the
Class A Certificates will receive an
amount equal to the lesser of
(A) such remaining Available
Funds and (B) the sum of (i)
the Class A Principal
Distribution Amount (as defined
below) and (ii) the Class A
Carry-Forward Amount (as defined below).
To the extent of the Available Funds
remaining after payment of interest
as described above and payment of
principal on the Class A
Certificates, holders of the Class B
Certificates will receive an amount
equal to the lesser of (A) such
remaining Available Funds and
(B) the sum of (i) the Class B
Principal Distribution Amount
(as defined below) and (ii) the
Class B Carry-Forward Amount (as defined
below).
With respect to each Remittance
Date, the "Class A Principal
Distribution Amount" and the
"Class B Principal Distribution
Amount" will equal the Class A
Percentage or the Class B
Percentage (each as defined
below), as the case may be,
multiplied by the total of (i)
the Unguaranteed Percentage of
all payments and other
recoveries of principal of an
SBA Loan (net of amounts
reimbursable to the Servicer
pursuant to the Agreement)
received by the Servicer or any
Subservicer in the immediately
preceding calendar month (with
respect to any Remittance Date,
the "Due Period"), excluding
amounts received relating to
SBA Loans which
have been delinquent 24 months
or have been determined to be
uncollectible, in whole or in
part, by the Servicer to the
extent that the Class A
Certificateholders or the Class
B Certificateholders, as the
case may be, have previously
received the Class A Percentage
or the Class B Percentage, as
the case may be, of the
principal portion of the
Unguaranteed Interest of such
SBA Loans; (ii) the principal
portion of any Unguaranteed
Interest actually purchased by
a Seller for breach of a
representation and warranty or
other defect and actually received by the
Trustee as of the related
Determination Date; (iii) any
adjustments with respect to
substitutions of SBA Loans for which
a Seller has breached a
representation or warranty deposited
in the Principal and Interest
Account and transferred to the
Certificate Account as of the
related Determination Date;
(iv) the Unguaranteed
Percentage of all losses on SBA
Loans which were finally
liquidated during the
applicable Due Period; (v) the
Unguaranteed Percentage of the
then outstanding principal
balance of any SBA Loan which,
as of the first day of the
related Due Period, has been
delinquent for 24 months or has
been determined to be
uncollectible, in whole or in
part, by the Servicer; and (vi)
amounts, if any, released from
the Pre-Funding Account on the
January, February and March
1997 Remittance Dates.
With respect to each Remittance
Date, the "Class A
Carry-Forward Amount" and the
"Class B Carry-Forward Amount"
will equal the aggregate
amount, if any, by which (i)
the Class A Principal
Distribution Amount or the
Class B Principal Distribution
Amount, as the case may be,
with respect to any preceding
Remittance Date exceeded (ii)
the amount of the actual
principal distribution to the
Class A Certificates or the Class B
Certificates, as the case may be,
on such Remittance Date.
With respect to each Remittance
Date, the "Class A Percentage"
will equal 93%, representing
the beneficial ownership
interest of the Class A
Certificates in the Trust Fund.
With respect to each Remittance
Date, the "Class B Percentage"
will equal 7%, representing the
beneficial ownership interest
of the Class B Certificates in
the Trust Fund.
On each Remittance Date,
Available Funds remaining after
payment of interest and
principal to the Class A and
Class B Certificates and
payment of the Trustee's fees
and expenses will be deposited
in the Spread Account and, to
the extent amounts in the
Spread Account would exceed the
then applicable Specified
Spread Account Requirement,
such excess will be distributed
to the Spread Account Depositor
(as defined under "--Spread
Account"). See "--Spread
Account" herein.
The aggregate amount of
principal payable with respect
to each Class of Certificates
on each Remittance Date as
described above, together with
interest as calculated above
under "--Interest," constitutes
the "Class A Remittance Amount"
and the "Class B Remittance
Amount," as the case may be,
for such Remittance Date.
Subordination of Class B
Certificates.......... The rights of the holders of
the Class B Certificates to
receive distributions with
respect to interest and
principal will be subordinated
to such rights of the holders
of the Class A Certificates to
the extent described above
under "--Securities Offered."
This subordination is intended to
enhance the likelihood of regular
receipt by holders of Class A
Certificates of the full amount
of their scheduled monthly
payments of interest and, after
distribution of the Class B
Interest Distribution Amount,
principal, and to afford the
holders of the Class A
Certificates a measure of
protection against losses
resulting from liquidated SBA
Loans equal to (i) the amount
of funds remaining in the
Spread Account after payment of
interest on the Class A and
Class B Certificates and (ii)
the then outstanding Class B
Certificate Balance.
Remittance Date...... Distributions to Certificateholders
will be made on the 15th day of each
month, or if such day is not a
business day, on the succeeding
business day, commencing January 15,
1997 (each, a "Remittance Date").
Any Pre-Funded Amount remaining at
the close of business on March 19,
1997 (together with accrued interest
thereon at the applicable
Remittance Rates) will be
distributed by or on behalf of
the Trustee on the Special
Remittance Date to the Class A
and Class B Certificates. Such
distribution will be made to
each person in whose name a
Certificate of the applicable
Class is registered on February
28, 1997.
The last scheduled Remittance
Date for the Certificates is
April 15, 2024. It is expected
that the actual last Remittance
Date for each Class of
Certificates will occur
significantly earlier than such
scheduled Remittance Date. See
"Yield, Maturity, and
Prepayment Considerations"
herein.
Record Date........ Distributions on the
Certificates will be made by or
on behalf of the Trustee on
each Remittance Date to each
person in whose name a
Certificate is registered on
the last day of the preceding
calendar month (the "Record Date").
Closing Date...... December 23, 1996
Spread Account.... TMS SBA Holdings, Inc., a
special purpose, bankruptcy
remote Delaware corporation
(the "Spread Account
Depositor") will establish a
reserve account (the "Spread Account") with
the Trustee. The Spread Account
will not be a part of the Trust Fund
but will be pledged to the Trustee
as security for the obligations
of the Spread Account Depositor
under the Agreement pursuant to
an agreement (the "Spread
Account Agreement") between the
Spread Account Depositor and
the Trustee.
On the Closing Date, the Spread
Account Depositor will make an
initial cash deposit into the Spread
Account in an amount equal to
1% of the Original Pool
Principal Balance (the
"Initial Deposit").
Thereafter, on each Remittance
Date the Trustee will deposit
into the Spread Account the
cash, if any, remaining after
payment of interest and
principal to the holders of the
Certificates as described above
under "--Interest" and
"--Principal," and payment of
amounts required to be
deposited into the Expense
Account and certain amounts
reimbursable to the Servicer,
until the aggregate amount then
on deposit in the Spread
Account (the "Spread Balance")
equals the sum of (i) the then
outstanding principal balance
of the Unguaranteed Interests
of all SBA Loans 180 days or
more delinquent and (ii) the
greater of (a) 3.5% of the then
outstanding aggregate principal
balance of the Unguaranteed
Interests of all the SBA Loans,
or (b) 2% of the Original Pool
Principal Balance; provided,
however, that for purposes of
clauses (i) and (ii)(a), there
shall be excluded the principal
portion of the Unguaranteed
Interest of SBA Loans which
have been delinquent 24 months
or have been determined to be
uncollectible, in whole or in
part, by the Servicer, to the
extent that the Certificate
holders have previously
received the principal portion
of the Unguaranteed Interest of
such SBA Loans (the sum of such
amounts is referred to herein
as the "Specified Spread
Account Requirement").
Amounts, if any, on deposit in
the Spread Account will be
available to be applied to
payments of interest and
principal on the Certificates
on any Remittance Date.
The Spread Account Depositor
will not be required to refund
any amounts previously properly
distributed to it, regardless
of whether there are sufficient
funds on a subsequent
Remittance Date to make a full
distribution to holders of the
Certificates on such Remittance
Date.
The funding and maintenance of
the Spread Account is intended
to enhance the likelihood of
timely payment of principal and
interest to the holders of the
Certificates; however, if the
SBA Loan Pool experiences
levels of delinquencies and
losses above the scenarios used
to obtain the ratings on the
Class B Certificates, the
Spread Account could be
depleted, and shortfalls could
result. See "Risk Factors
--Spread Account," "Description
of the Agreement and the
Certificates--Spread Account"
and "Ratings" herein.
The SBA Loan Pool....... The following is a description of
the SBA Section 7(a) Loans and the related
Unguaranteed Interests
expected to be delivered to the
Trustee on the Closing Date.
All the SBA Section 7(a) Loans were
originated or acquired by the
Sellers in accordance with the
underwriting criteria described
in the Prospectus under "The
SBA Loan Lending Program--
Underwriting Criteria for SBA
Section 7(a) Loans." None of the
SBA Section 7(a) Loans are balloon
loans and each is fully
amortizing in accordance with
its terms. On the Closing Date,
it is expected that the Trust
Fund will contain the
Unguaranteed Interest in
1,138 SBA Section 7(a) Loans,
approximately 50% of which SBA
Section 7(a) Loans are secured
primarily by first liens on
commercial real property used
by the borrower or its
affiliates in the conduct of
their business. The remainder
of the SBA Section 7(a) Loans were
originated primarily to
targeted franchisees, health
care professionals and other
professionals, such as
attorneys and accountants,
and for financing
business acquisitions. These loans
often are secured by second liens on
personal real estate, personal
guarantees, liens on machinery
and equipment and other
business assets. The SBA Section
7(a) Loans were originated to
businesses located in 46 states
and the District of Columbia;
with approximately 20.98% being
originated to businesses located
in California. As of
the Cut-Off Date, no more than
approximately 17.84% of the SBA
Section 7(a) Loans (by principal
balance of Unguaranteed
Interests), representing 66 SBA
Section 7(a) Loans, were made to
borrowers whose businesses are
included in the same four digit
standard industrial code
classification. See "The SBA Loan
Program" herein.
As of the Cut-Off Date, the
aggregate and average unpaid
principal portion of the
Unguaranteed Interests of the
SBA Section 7(a) Loans were
approximately $108,300,000 and
$95,000, respectively, the
aggregate and average unpaid
principal portion of the
Guaranteed Interests of the SBA
Section 7(a) Loans were
approximately $272,600,000 and
$239,000, respectively, the
maximum and minimum original
principal portion of the
Unguaranteed Interests of the
SBA Section 7(a) Loans were
approximately $950,000 and
$4,000, respectively, and the
maximum and minimum original
principal portion of the
Guaranteed Interests of the SBA
Section 7(a) Loans were
approximately $777,600 and
$15,000, respectively. The
aggregate original principal
portion of the Unguaranteed
Interests of the SBA Section 7(a)
Loans was approximately
$109,300,000 and the aggregate
original principal portion of
the Guaranteed Interests of the
SBA Section 7(a) Loans was
approximately $275,300,000.
As of the Cut-Off Date, the SBA
Section 7(a) Loans bore interest at
rates (each, a "Note Rate")
which ranged from 9.75% to
12.00% per annum and the
weighted average Note Rate was
approximately 10.37% per annum.
As of the Cut-Off Date, the SBA
Section 7(a) Loans had a weighted
average age of approximately 4
months, a weighted average
original term of approximately
231 months, a weighted
average gross margin of
approximately 2.11%, a weighted
average lifetime floor of
approximately 3.79%, and a
weighted average debt-service
coverage ratio of approximately
1.62. The weighted average
Guaranteed Percentage of the
SBA Section 7(a) Loans was
approximately 69.44%. The
weighted average Excess Spread,
expressed as a percentage of
the principal balances of the
Unguaranteed Interests, was
approximately 2.62% as of the
Cut-Off Date. Such Excess
Spread is in addition to the
Extra Interest (as defined
under "Description of the
Agreement and the
Certificates--Class A and Class
B Interest Distribution
Amounts" herein) available from
the unguaranteed portion of the
SBA Section 7(a) Loans.
Approximately 48.52% of the SBA
Section 7(a) Loans (by principal
balance of Unguaranteed
Interests) do not have a
lifetime interest rate cap. As
of the Cut-Off Date, the
weighted average lifetime cap
of SBA Section 7(a) Loans with
lifetime interest rate caps was
approximately 15.40%. As
described herein, the existence
of a lifetime interest rate cap
or floor will not limit the
Excess Spread included in the
related Unguaranteed Interest.
See "The SBA Loan Pool" herein.
Each of the Subsequent SBA
Loans will have been originated
and identified prior to the
Closing Date and the Subsequent
SBA Loans in the aggregate will
conform in all material
respects to the characteristics
described herein under "The SBA
Loan Pool -- Subsequent SBA
Loans."
Transfer of Assets....... Each Note will be endorsed by
the applicable Seller by means
of an allonge (I.E., a separate
piece of paper attached to the
Note) and delivered to the
Agent of the SBA. On or before
the Closing Date (or, with
respect to a Subsequent SBA
Loan, on or before the related
transfer date), the Agent of the
SBA will acknowledge receipt of
will acknowledge receipt of
each such Note for each SBA
Loan in the SBA Loan Pool and
that each such Note has been
endorsed as follows: "Pay to
the order of Marine Midland
Bank, and its successors and
assigns, as trustee under that
certain Pooling and Servicing
Agreement dated as of November
30, 1996, for the benefit of
the United States Small
Business Administration
and holders of The Money Store
SBA Loan-Backed Certificates,
Series 1996-2, Class A and
Class B, as their respective
interests may appear, without recourse."
With respect to each SBA Loan in the
SBA Loan Pool, the applicable
Seller will be required to
deliver the following
additional documentation to the
Trustee at or prior to the
Closing Date (or, with respect
to a Subsequent SBA Loan, in
the case of (a) below, at or
prior to the related transfer
date):
(a) For each SBA Loan secured
by commercial real property or
residential real property:
(1) Original recorded Mortgage,
or if the original is
unavailable, a copy thereof
certified to be true and
complete by the applicable Seller.
(2) Certified copy of the
Assignment of the Mortgage
endorsed as follows: "Marine
Midland Bank, ("Assignee") its
successors and assigns, as
trustee under the Pooling and
Servicing Agreement dated as of
November 30, 1996, subject to
the Multi-Party Agreement dated
as of November 30, 1996." The
original assignments will be
transmitted by the applicable
Seller for recording promptly
following the Closing Date.
(3) Original recorded
intervening assignments, if
any, or if the original is
unavailable, copies thereof
certified by the applicable
Seller to be true and complete.
(4) Originals or certified
copies of all title insurance
policies or other evidence of
lien position, including but
not limited to PIRT policies,
limited liability reports and
lot book reports, to the extent
the Sellers obtain such
policies or other evidence of
lien position in accordance
with the criteria described
herein.
(b) For all SBA Loans:
(1) Blanket assignment of all
collateral securing the SBA
Loan, including without
limitation, all rights under
applicable guarantees and
insurance policies.
(2) Irrevocable power of
attorney of the applicable
Seller to the Trustee to
execute, deliver, file or
record and otherwise deal with
the collateral for the SBA Loans in
accordance with the Agreement. The
power of attorney will be delegable
by the Trustee to the Servicer and
any successor servicer and will
permit the Trustee or its
delegate to prepare, execute
and file or record UCC
financing statements and
notices to insurers.
(3) Blanket Uniform Commercial Code
("UCC") UCC-1 financing statements
identifying by type all
collateral for the SBA Loans in
the SBA Loan Pool and naming
the Trustee and the SBA as
Secured Parties and the
applicable Seller as the
Debtor. See "Risk
Factors--Unperfected Security
Interests in Certain
Collateral" herein and "The
Agreements--Sale of SBA Loans"
in the Prospectus.
The Trustee will be required to
provide an interim
certification as to the receipt
of such documents within 90
days after the Closing Date and
to provide a final
certification within one year
after the Closing Date.
Multi-Party Agreement...... TMSIC and MSNY, as Sellers, the
Servicer, the Trustee and the
SBA will enter into a
Multi-Party Agreement, dated as
of November 30, 1996 (the
"Multi-Party Agreement"), which
will set forth the relationship
of the parties with respect to
the SBA Section 7(a) Loans and the
proceeds thereof and the
consent of the SBA to the transactions
contemplated by the Agreement.
Servicing of the
SBA Loans................ MSNY will service the SBA Loans sold
by it to the Trust Fund and TMSIC
will service the SBA Loans sold
by it to the Trust Fund, in
each case, in accordance with
the Agreement, the SBA Rules
and Regulations and the
Multi-Party Agreement, and will
cause the SBA Loans to be
serviced with the same care as
it customarily
employs and exercises in
servicing and administering
small business loans for its
own account, giving due
consideration for the reliance
of the Trustee on the Servicer.
Such servicing includes,
without limitation, the right
to release and/or substitute
collateral for an SBA Loan.
Monthly Advances........ The Servicer is required to remit to
the Trustee no later than the day
of each month which is three
business days prior to the
Remittance Date (the
"Determination Date") for
deposit in the Certificate
Account the amount (the
"Monthly Advance"), if any, by
which (i) 30 days' inte rest at
a rate equal to the then
applicable weighted average
Class A and Class B Remittance
Rates plus the rate used in
determining certain expenses of
the Trust Fund (the "Adjusted
SBA Loan Remittance Rate") on
the aggregate Class A and Class
B Principal Balances immediately
prior to the related Remittance
Date (as the amount calculated
pursuant to this clause (i) may
be adjusted in accordance with
the limits described under
"Description of the Agreement
and the Certificates--Class A
and Class B Interest
Distribution Amounts" herein)
exceeds (ii) the amount
received by the Servicer as of
the related Record Date in
respect of interest on the SBA
Loans minus the interest
payable to the holders of the
Guaranteed Interest, the
Additional Fee, the Premium
Protection Fee, and the fee
payable to the Agent of the SBA
(plus, for the Remittance Dates
in January, February and March
1997, the sum of (a) all funds
to be transferred to the
Certificate Account from the
Capitalized Interest Account
for such Remittance Date and
(b) certain investment earnings on amounts in
the Pre-Funding Account for the
applicable Remittance Date).
Monthly Advances are reimbursable in
the first instance from late
collections of interest, Liquidation
Proceeds, Insurance Proceeds and
proceeds received by the Servicer in
connection with condemnation,
eminent domain or a release of lien
("Released Mortgaged Property
Proceeds") collected with respect to
the related SBA Loan as to
which the Monthly Advances were
made. The Servicer's right to
reimbursement for such advances
in excess of such amounts is
limited to late collections of
interest received on the SBA
Loans generally; PROVIDED,
HOWEVER, that the Servicer's
right to such reimbursement is
subordinate to the rights of
the Certificateholders, the
holder of the Premium
Protection Fee and the holders of the
Guaranteed Interest. Monthly
Advances are intended to
provide sufficient funds for
the payment of interest to the
Certificateholders at the then
applicable Class A or Class B
Remittance Rate, plus an
additional amount, if any,
required to pay the fees and
expenses of the Trustee.
Compensating Interest..... Not later than each
Determination Date, with
respect to each SBA Loan as to
which a principal prepayment in
full or a Curtailment was
received during the related Due
Period, the Servicer is
required to remit to the
Trustee, from amounts otherwise
payable to the Servicer as
servicing compensation, an
amount ("Compensating
Interest") equal to any excess
of (a) 30 days' interest on the
Unguaranteed Percentage of the
related principal balance at
the Adjusted SBA Loan Remittance
Rate over (b) that portion of
the amount of interest actually
received in respect of the
related SBA Loan during such
Due Period and available
to be paid to the
Certificateholders.
Servicing Advances.... The Servicer will be entitled
to reimbursement for amounts
advanced by it constituting
"out-of-pocket" costs and
expenses relating to (i) the
preservation and restoration of
any related Mortgaged Property
or other collateral, (ii)
enforcement proceedings,
including foreclosures and
(iii) certain other customary
amounts described in the
Agreement. Such advances
("Servicing Advances") are
generally reimbursable to the
Servicer from Liquidation Proceeds,
Released Mortgaged Property
Proceeds, Insurance Proceeds
and such other amounts as may
be collected by the Servicer
from the related Borrower or
otherwise relating to the SBA
Loan in respect of which such
amounts are owed; PROVIDED,
HOWEVER, that Servicing
Advances in excess of such
amounts are reimbursable to the
same extent and from the same
sources as Monthly Advances.
Servicing Fee...... The Servicer is entitled to a
servicing fee of 0.40% per
annum (the "Servicing Fee") of
the unpaid principal balance of
each SBA Loan, calculated and
paid monthly from the
interest portion of monthly
payments, Liquidation Proceeds
and certain other proceeds
collected. See "The
Agreements--Servicing and Other
Compensation and Payment of
Expenses" in the Prospectus.
Optional Termination by
the Servicer.......... The Servicer may, at its
option, terminate the Agreement
on any date on which the then
outstanding aggregate principal
balance of the Unguaranteed
Interests is less than 10% of
the sum of (i) the Original
Pool Principal Balance and (ii)
the Pre-Funded Amount by purchasing, on
the next succeeding Remittance
Date, all of the Unguaranteed
Interests and any other assets
in the Trust Fund at a price
equal to the sum of (i) 100% of
the then outstanding Class A
and Class B Principal Balances,
and (ii) 30 days' interest
thereon at the then applicable
Class A and Class B Remittance
Rates (the "Termination
Price"). See "Description of
the Agreement and the
Certificates--Termination;
Purchase of SBA Loans" herein.
Tax Considerations ... No real estate mortgage
investment conduit ("REMIC")
election will be made for the
Trust Fund. Stroock & Stroock &
Lavan, special Federal tax
counsel ("Federal Tax Counsel"),
will give its opinion that the Trust
Fund will be classified as a
"grantor trust" for federal
income tax purposes. See
"Federal Income Tax
Consequences" herein and
"Federal Income Tax
Consequences" in the Prospectus.
It is not anticipated that the Class
A Certificates or the Class B
Certificates will be treated as
issued with original issue
discount ("OID").
Special considerations may
apply to cash method holders of
Class B Certificates by reason
of the subordination of the
Class B Certificates. Also,
special considerations may
apply to individuals and
certain pass-through
entities that hold Class A
Certificates or Class B
Certificates. See "Risk
Factors--Tax Considerations"
and "Federal Income Tax
Consequences" herein and
"Federal Income Tax
Consequences" in the Prospectus.
ERISA Considerations...... No Certificates may be
purchased for, or on behalf of,
any employee benefit plan or
other retirement arrangement
which is subject to Title I of
the Employee Retirement Income
Security Act of 1974, as
amended, and/or Section 4975 of
the Internal Revenue Code of
1986, as amended, or any entity
whose underlying assets include
plan assets by reason of such
plan or account investing in
such entity (including
insurance company separate or
general accounts and collective
investment funds). By its
acceptance of a Certificate,
each Certificateholder will be
deemed to have represented and
warranted that it is not
subject to the foregoing
limitations. See "ERISA
Considerations" herein and in
the Prospectus.
Legal Investment..... No representation will be made as to
whether or the extent to which the
Certificates constitute legal
investments for investors.
Rating ............. It is a condition to their issuance
that the Class A Certificates be
rated "Aaa" and "AAA" by Moody's
Investors Service, Inc. ("Moody's")
and Duff & Phelps Credit Rating Co.
("Duff & Phelps"), respectively, and
that the Class B Certificates be
rated not lower than "A2" and "A" by
Moody's and Duff & Phelps,
respectively. A security rating is
not a recommendation to buy, sell or
hold securities and may be subject
to revision or withdrawal at any
time. No person is obligated to
maintain the rating on any
Certificate. See "Ratings" herein.
Registration of the
Certificates......... The Class A Certificates will
be represented by global
certificates registered in the
name of Cede & Co. ("Cede"), as
the nominee of The Depository
Trust Company ("DTC") in the
United States, or Cedel Bank, societe
anonyme ("CEDEL") or the Euroclear
System ("Euroclear") in Europe.
The Class B Certificates will
be either (i) registered in
the name of Cede, as the
nominee of DTC in the United
States, or CEDEL or Euroclear
in Europe, with similar effect as the
Class A Certificates, or (ii) issued
in physical form, as
determined by the Sellers prior
to the initial issuance of the
Certificates. No Holder of a
Certificate registered through
DTC will be entitled to receive
definitive certificates
("Definitive Certificates")
representing such person's interest,
except in the event that Definitive
Certificates are issued in respect
of such person's interest under
the limited circumstances
described herein. All
references herein to "Class A
and Class B Certificateholders"
or "Holders" will reflect the
rights of the beneficial owners
of Class A and Class B
Certificates, as such rights
may be exercised, in the case
of those Certificates
registered through DTC, CEDEL
or Euroclear, through DTC and
Participants, or CEDEL or
Euroclear, as the case may be,
except as otherwise specified
herein. See "Risk Factors" and
"Description of the
Certificates-- Registration of
Certificates" herein.
<PAGE>
RISK FACTORS
Investors should consider, among other things, the following factors in
addition to the other information set forth in this Prospectus Supplement in
connection with the purchase of Certificates. Investors also should consider the
factors set forth under the heading "Risk Factors" in the Prospectus.
LIMITED LIQUIDITY
There is currently no secondary market for the Certificates. Although
Prudential Securities Incorporated (the "Underwriter") currently intends to make
a secondary market in the Certificates, it is under no obligation to do so.
There can be no assurance that a secondary market will develop or, if a
secondary market does develop, that it will provide Holders of the Certificates
with liquidity of investment or that it will continue for the lives of the
Certificates. In addition, transfers of the Certificates will be restricted as
described under "ERISA Considerations."
FEDERAL INCOME TAX CONSIDERATIONS
If the Class B Certificateholders receive distributions of less than their
proportionate share of the Trust Fund's receipts of principal or interest (the
"Shortfall Amount") because of the subordination of the Class B Certificates,
although the matter is not free from doubt, Federal Tax Counsel believes that
holders of Class B Certificates would be treated for federal income tax purposes
as if they had (1) received as distributions their full share of such receipts,
(2) paid over to the Class A Certificateholders an amount equal to such
Shortfall Amount, and (3) retained the right to reimbursement of such amounts to
the extent of future collections otherwise available for deposit in the Spread
Account. However, Federal Tax Counsel cannot opine to such treatment.
Under this analysis, (1) Class B Certificateholders would be required to
accrue as current income any interest, OID income, or (to the extent paid on the
SBA Loans) accrued market discount of the Trust Fund that was a component of the
Shortfall Amount, even though such amount was in fact paid to the Class A
Certificateholders, (2) a loss would only be allowed to the Class B
Certificateholders when their right to receive reimbursement of such Shortfall
Amount became worthless (i.e., when it became clear that amount would not be
available from any source to reimburse such loss), and (3) reimbursement of such
Shortfall Amount prior to such a claim of worthlessness would not be taxable
income to Class B Certificateholders because such amount was previously included
in income. Those results should not significantly affect the inclusion of income
for Class B Certificateholders on the accrual method of accounting, but could
accelerate inclusion of income to Class B Certificateholders on the cash method
of accounting by, in effect, placing them on the accrual method. Moreover, the
character and timing of loss deductions is unclear.
A Certificateholder will be entitled to deduct, consistent with its method
of accounting, its pro rata share of reasonable servicing fees and other fees
paid or incurred by the Trust Fund as provided in Section 162 or 212 of the
Internal Revenue Code of 1986, as amended. If a Certificateholder is an
individual, estate or trust, the deduction for such Holder's share of such fees
will be allowed only to the extent that all of such Holder's miscellaneous
itemized deductions, including such Holder's share of such fees, exceed two
percent of such Holder's adjusted gross income. For other Federal income tax
considerations, see "Federal Income Tax Consequences" herein.
STATE TAX CONSIDERATIONS
In addition to the Federal income tax consequences described in "Federal
Income Tax Consequences" herein and "Federal Income Tax Consequences" in the
Prospectus, potential investors should consider the state income tax
consequences of the acquisition, ownership, and disposition of the Certificates.
State income tax law may differ substantially from the corresponding federal
law, and this Prospectus Supplement and the accompanying Prospectus do not
purport to describe any aspect of the income tax laws of any state. Therefore,
potential investors should consult their own tax advisors with respect to the
various state tax consequences of an investment in the Certificates.
NATURE OF COLLATERAL
As set forth herein under "The SBA Loan Pool--General," commencing in 1995
the Sellers increased their focus on originating SBA Loans to targeted
franchises and professionals and for financing business acquisitions. These
loans are secured primarily by liens on machinery and equipment, other business
assets and personal guarantees. In originating these loans, the Sellers place
primary emphasis on the creditworthiness of the small business concern and
related Obligor, and less emphasis is given to the value of the related
collateral. In some instances, the amount of the SBA Loan exceeds the sum of the
value of the related collateral. If such loans were to go into default, the
Trust may realize little or no liquidation proceeds.
Further, because the market value of equipment and other business assets
generally declines with age or obsolescence, such equipment and/or other assets
may not provide adequate security in the event it is repossessed and sold. Some
of the equipment, such as computers, also may be subject to sudden, significant
declines in value because of technological advances. Also, in liquidation sales
the Trust may be unable to realize the fair market value of any collateral sold.
UNPERFECTED SECURITY INTERESTS IN CERTAIN COLLATERAL
For each SBA Loan secured by real property, assignments of the related
Mortgages will be transmitted by the applicable Seller for recording promptly
following the Closing Date. Also, the Sellers will deliver to the Trustee
blanket assignments of all other collateral securing the SBA Loans. In
connection with originating SBA Loans secured by collateral other than real
estate, the Sellers obtain and file UCC financing statements naming the related
Obligor as debtor where such action is necessary to perfect a security interest
in such collateral. Because of the administrative burden and expense that would
be entailed in so doing, these UCC financing statements will not be re-assigned
to the Trustee. The Trustee will have the benefit of the Sellers' security
interest in the collateral related to such SBA Loans. However, since assignments
will not be recorded in the name of the Trustee, if the Sellers were to become
debtors under the federal bankruptcy code or similar applicable state laws, a
creditor or trustee in bankruptcy thereof, or the Sellers as
debtors-in-possession, might be able to defeat the Trustee's security interest
in such collateral. Additionally, certain judgment creditors of, or tax and
other liens against, the Sellers or their property may have priority over the
Trustee's security interest.
JUNIOR LIENS
Approximately 50% of the SBA Loans are secured by a Commercial Property
that constitutes a first lien on the related Commercial Property. The majority
of such SBA Loans also are secured by a first lien on related business assets.
However, certain SBA Loans secured by a Commercial Property, along with
substantially all of the SBA Loans secured by a Residential Property, constitute
second or third liens and the related Prior Liens are not included in the SBA
Loan Pool. Also, many of the SBA Loans are not secured by real property. Rather,
they are secured by other types of collateral. See "The SBA Loan Pool-- General"
herein.
The primary risk to holders of SBA Loans secured by junior liens is the
possibility that adequate funds will not be received in connection with a
foreclosure of the related Prior Liens to satisfy fully both such Prior Liens
and the SBA Loan. If a holder of a Prior Lien forecloses on a Mortgaged
Property, the proceeds of the foreclosure sale will be applied first to the
payment of court costs and fees in connection with the foreclosure, second to
real estate taxes, third in satisfaction of all principal, interest, prepayment
or acceleration penalties, if any, and any other sums due and owing to the
holders of each Prior Lien. The claims of the holders of all Prior Liens will be
satisfied in full out of proceeds of the liquidation of the Prior Liens, if such
proceeds are sufficient, before the Trust Fund receives any payments in respect
of the SBA Loan.
If the Servicer were to foreclose on any mortgage securing an SBA Loan, it
would do so subject to any related Prior Liens. For the debt related to the SBA
Loan to be paid in full at such sale, a bidder at the foreclosure sale of the
related Mortgaged Property would have to bid an amount sufficient to pay off all
sums due under the SBA Loan and the Prior Liens or purchase the Mortgaged
Property, for the full amount of the SBA Loan, subject to the Prior Liens.
Similarly, if the Servicer were to take possession of any other Collateral, it
would do so subject to any related Prior Lien. See "Federal Income Tax
Consequences" herein and "Federal Income Tax Consequences" in the Prospectus.
SBA LOAN INTEREST RATES
The rate of interest borne by each SBA Loan (the "SBA Loan Interest Rate")
is equal to the Prime Rate as of the first Business Day or, with respect to
certain SBA Loans, the first day of the related calendar quarter, in each case
plus the appropriate margin. With respect to SBA Section 7(a) Loans having
Unguaranteed Interests with an aggregate principal amount of approximately
$55,800,000, the terms of the related Notes limit the maximum and minimum SBA
Loan Interest Rates, respectively. Generally, the terms of such Notes provide
that the SBA Loan Interest Rate cannot increase (or decrease) more than five
percentage points above (or below) the SBA Loan Interest Rate in effect when the
related SBA Loan was fully funded. These maximum and minimum SBA Loan Interest
Rate provisions will not have a disproportionate effect on the Holders of either
Class of Certificates. As described herein, if, as a result of such maximum and
minimum SBA Loan Rate provisions, more or less interest is collected on the SBA
Loans than would be collected in the absence of such provisions, such excess or
shortfall will be allocated to the Class A and Class B Certificates pro rata in
accordance with the amount of interest each such Class of Certificates would
otherwise be entitled to receive but for such adjustment. Because in determining
the Class A and Class B Interest Distribution Amounts, provision is made for
such maximum and minimum SBA Loan Rates, if the full amount of interest required
to be paid on the SBA Loans in accordance with their terms is collected, and
required amounts are received by the Trust Fund, such amounts will be sufficient
to pay interest on the Certificates, regardless of changes in the underlying
interest rates. See "The SBA Loan Pool--Certain Characteristics of the SBA Loan
Pool" and "Description of the Agreement and the Certificates--Class A and Class
B Interest Distribution Amounts" herein.
SPREAD ACCOUNT
As described herein, the Spread Account is intended to enhance the
likelihood of timely payment of principal and interest on the Certificates.
However, if the SBA Loan Pool experiences extremely high levels of delinquencies
and losses, the Spread Account could be depleted, resulting in shortfalls in
payments to the Certificateholders. Any such shortfall would be allocated
against payments of principal, first to the Class B Certificateholders and then
to the Class A Certificateholders. Additional shortfalls would be allocated
against payments of interest, first to the Class B Certificateholders and then
to the Class A Certificateholders. See "Description of the Agreement and the
Certificates--Spread Account" herein.
THE SBA LOAN POOL
GENERAL
Unless otherwise noted, all statistical percentages in this Prospectus
Supplement are measured by the aggregate principal balances of the SBA Section
7(a) Loans expected to be delivered to the Trustee on the Closing Date, and the
Unguaranteed Interests or the Guaranteed Interests therein, as the case may be,
at the close of business on the Cut-Off Date and all dollar amounts are based on
the principal balances thereof at the close of business on the Cut-Off Date. As
used herein, the term "Cut-Off Date" means November 30, 1996 with respect to
each SBA Section 7(a) Loan originated on or prior to such date and the
applicable date of origination for each SBA Section 7(a) originated after such
date. All of the SBA Loans were, and all of the Subsequent SBA Loans will have
been, originated or acquired by the Sellers and consist of adjustable-rate
loans, evidenced by promissory notes (the "SBA Notes") and partially guaranteed
by the SBA. The principal portion of the Unguaranteed Interests of the SBA
Section 7(a) Loans aggregated approximately $108,300,000 as of the Cut-Off Date.
The SBA Section 7(a) Loans were originated to businesses located in 46 states
and the District of Columbia.
Historically, most of the SBA Section 7(a) Loans originated by the Sellers
were loans primarily secured by first liens on commercial real property used by
the related borrower or its affiliates in the conduct of their business.
Commencing in 1995, the Sellers increased their focus on originating loans to
targeted franchisees, health care professionals and other professionals, such as
attorneys and accountants, and for financing business acquisitions. These loans
generally are secured by second liens on personal real estate, personal
guarantees, liens on machinery and equipment and other business assets. The
Seller's believe that this approach is consistent with their philosophy of
expanding into selected markets that present opportunities for growth. In
originating these loans, the Sellers concentrate on analyzing the underlying
business and the borrower's ability to repay the related loan. The Sellers'
believe that at the time of origination each such loan is adequately secured by
one or more items of Collateral. See "The SBA Loan Lending Program--Underwriting
Criteria for SBA Section 7(a) Loans" in the Prospectus.
Approximately 20.98% of the SBA Section 7(a) Loans (by principal balance)
were originated to businesses located in California, a state that recently
experienced economic difficulties. This concentration results primarily from the
Servicer being headquartered in California, where it began originating SBA Loans
in the early 1980s and where it expanded its marketing efforts and market share
prior to the current economic conditions. The Sellers believe that the
concentration of SBA Section 7(a) Loans in the Trust Fund originated to
businesses located in California is representative of their SBA Section 7(a)
Loan portfolio as a whole.
PAYMENTS ON THE SBA LOANS
The SBA Loans have payments of principal and interest due on the first of
the month with interest payable in arrears at a rate equal to the Prime Rate as
of the first Business Day or, with respect to certain SBA Loans, the first day
of the related calendar quarter, in each case plus the appropriate margin
(subject to applicable lifetime floors and caps). For example, the Prime Rate on
July 1st is used to determine the interest rate paid for the months of July,
August and September. Since interest is paid in arrears, interest and principal
for these months is scheduled to be received in August, September and October,
respectively. The monthly payment received is apportioned between interest and
principal based upon a "simple interest" basis, which means that payments are
applied as they are received first to accrued interest, then to principal, with
interest calculated on the number of days between the current and previous
payments. If a monthly payment is received prior to its due date, less of such
payment will be allocated to interest than would be the case if such payment
were received on its due date. Conversely, if a monthly payment is received
after its due date, more of such payment will be allocated to interest than
would be the case if such payment were received on its due date. None of the SBA
Loans is a balloon loan and each is fully amortizing in accordance with its
terms. However, the monthly payments are re- calculated each quarter to reflect
changes in interest rates, the then-current principal balance and the
then-remaining term to maturity.
CERTAIN CHARACTERISTICS OF THE SBA LOAN POOL
Set forth below is a description of certain characteristics of SBA Section
7(a) Loans expected to constitute the SBA Loan Pool as of the Closing Date. It
is expected that the Sellers will sell to the Trust Fund SBA Section 7(a) Loans
having overall characteristics substantially similar to the SBA Section 7(a)
Loans described herein. Certain of the percentage columns may not sum to 100.00%
due to rounding.
<PAGE>
The geographic distribution of the SBA Section 7(a) Loans by state as
of the Cut-off Date was as follows:
<TABLE>
<CAPTION>
GEORGRAPHICAL DISTRIBUTION OF MORTGAGED PROPERTIES
Percentage of
Aggregate Cut-Off Date
Number of Current Unguar. Current Unguar. Percentage of
State Loans Principal Balance Principal Balance Loan Count
<S> <C> <C> <C> <C>
AK 2 76,787.53 0.07 .18
AL 9 541,294.84 0.50 .79
AR 2 818,174.93 0.76 .18
AZ 74 8,578,749.10 7.92 6.50
CA 267 22,719,104.59 20.98 23.46
CO 57 5,196,923.71 4.80 5.04
CT 10 1,279,170.79 1.18 .88
DC 4 275,276.03 0.25 .35
FL 70 5,371,338.47 4.96 6.15
GA 14 1,498,380.13 1.38 1.23
HI 6 151,825.59 0.14 .53
IA 1 132,146.99 0.12 .09
ID 15 1,440,284.41 1.33 1.32
IL 34 2,932,950.27 2.71 2.99
IN 20 2,248,396.62 2.08 1.76
KS 2 40,892.35 0.04 .18
KY 24 2,917,718.88 2.69 2.11
LA 5 224,798.13 0.21 .44
MA 6 500,917.37 0.46 .53
MD 18 1,190,009.44 1.10 1.58
MI 22 3,986,410.57 3.68 1.93
MN 27 1,660,676.29 1.53 2.37
MO 7 883,330.12 0.82 .62
MS 1 52,429.72 0.05 .09
MT 3 332,473.59 0.31 .26
NC 26 3,307,871.38 3.05 2.28
ND 1 47,899.49 0.04 .09
NE 2 169,740.10 0.16 .18
NH 2 139,207.38 0.13 .18
NJ 46 3,100,427.55 2.86 4.04
NM 11 1,028,344.44 0.95 .97
NV 10 1,267,838.57 1.17 .88
NY 40 4,450,867.01 4.11 3.51
OH 37 6,512,076.32 6.01 3.25
OK 16 1,791,274.87 1.65 1.41
OR 40 4,205,722.57 3.88 3.51
PA 28 1,754,676.28 1.62 2.46
RI 1 16,000.00 0.01 .09
SC 11 1,202,189.83 1.11 .97
TN 8 752,374.20 0.69 .70
TX 79 7,754,137.58 7.16 6.94
UT 2 59,318.05 0.05 .18
VA 29 1,594,907.89 1.47 2.55
WA 37 3,159,354.25 2.92 3.25
WI 11 889,903.42 0.82 .97
WY 1 47,173.98 0.04 .09
Total.. 1138 $108,301,765.62 100.00% 100.00%
</TABLE>
The interest rates borne by the SBA Notes (the "Note Rates") were
distributed as follows as of the Cut-Off Date:
<TABLE>
<CAPTION>
GROSS COUPON
Percentage of
Aggregate Cut-Off Date
Number of Current Unguar. Current Unguar. Percentage of
Gross Coupon Loans Principal Balance Principal Balance Loan Count
<S> <C> <C> <C> <C> <C>
9.50% {Gross Coupon {= 10.00% 151 21,960,986.05 20.28 13.27
10.00% { Gross Coupon {= 10.50% 568 59,872,840.26 55.28 49.91
10.50% { Gross Coupon {= 11.00% 398 26,327,655.34 24.31 34.97
11.00% { Gross Coupon {= 11.50% 1 20,000.00 0.02 .09
11.50% { Gross Coupon {= 12.00% 20 120,283.97 0.11 1.76
Total.................................. 1138 $108,301,765.62 100.00% 100.00%
</TABLE>
<PAGE>
The Margins added to the Prime Rate on each Interest Adjustment Date
to determine the new Note Rates were disributed as of the Cut-Off Date as
follows:
<TABLE>
<CAPTION>
GROSS MARGIN
Percentage of
Aggregate Cut-Off Date
Number of Current Unguar. Current Unguar. Percentage of
Gross Margin Loans Principal Balance Principal Balance Loan Count
<C> <C> <C> <C> <C> <C>
1.0 { Margin {= 1.5 90 13,516,479.35 12.48 7.91
1.5 { Margin {= 2.0 403 46,395,192.61 42.84 35.41
2.0 { Margin {= 2.5 381 37,922,277.53 35.02 33.48
2.5 { Margin {= 3.0 244 10,347,532.16 9.55 21.44
3.5 { Margin {= 4.0 20 120,283.97 0.11 1.76
Total......... 1138 $108,301,765.62 100.00% 100.00%
</TABLE>
<PAGE>
The minimum lifetime Note Rates borne by the SBA Section 7(a) Loans
were as follows (1):
<TABLE>
<CAPTION>
MINIMUM LIFETIME COUPON RATES (LIFE FLOOR)
Percentage of
Aggregate Cut-Off Date
Gross Number of Current Unguar. Current Unguar. Percentage of
Life Floor Loans Principal Balance Principal Balance Loan Count
<S> <C> <C> <C> <C> <C>
0.500 { Floor {= 1.000 1 562,440.00 0.52 .09
1.000 { Floor {= 1.500 70 9,436,979.35 8.71 6.15
1.500 { Floor {= 2.000 238 22,615,689.36 20.88 20.91
2.000 { Floor {= 2.500 182 13,236,580.36 12.22 15.99
2.500 { Floor {= 3.000 203 7,293,928.51 6.73 17.84
3.500 { Floor {= 4.000 21 619,149.32 0.57 1.85
4.000 { Floor {= 4.500 2 392,474.01 0.36 .18
4.500 { Floor {= 5.000 45 8,738,681.06 8.07 3.95
5.000 { Floor {=5.500 204 27,320,394.42 25.23 17.93
5.500 { Floor {=6.000 143 15,251,523.16 14.08 12.57
6.000 { Floor {=6.500 25 2,547,159.43 2.35 2.20
6.500 { Floor {= 7.000 3 269,900.50 0.25 .26
10.000 { Floor {= 10.500 1 16,866.14 0.02 .09
Total.................. 1138 $108,301,765.62 100.00% 100.00%
</TABLE>
_____________________
(1) For purposes of determining the weighted average minimum lifetime
Note Rate, those SBA Section 7 (a) Loans not containing a stated minimum
lifetime Note Rate are assumed to have a minimum lifetime Note Rate equal to the
applicable Margin.
<PAGE>
The maximum lifetime Note Rates borne by the SBA Section 7(a) Loans
were as follows:
<TABLE>
<CAPTION>
MAXIMUM LIFETIME COUPON RATE (LIFE CAP)
Percentage of
Cut-Off Date
Aggregatge Aggregate
Gross Number of Current Unguar. Current Unguar. Percentage of
Life Cap Mortgage Loans Principal Balance Principal Balance Loan Count
<S> <C> <C> <C> <C>
CAPLESS LOANS 712 52,544,461.55 48.52 62.57
14.500 { CAP {= 15.000 49 9,192,599.60 8.49 4.31
15.000 { CAP {= 15.500 251 32,407,077.72 29.92 22.06
15.500 { CAP {= 16.000 122 13,171,161.85 12.16 10.72
16.000 { CAP {= 16.500 3 872,783.41 0.81 .26
16.500 { CAP {= 17.000 1 113,681.49 0.10 .09
Total....................... 1138 $108,301,765.62 100.00% 100.00%
</TABLE>
<PAGE>
The distribution of the number of remaining months to maturity of the
SBA Section 7(a) Loans as of the Cut-Off Date was as follows:
<TABLE>
<CAPTION>
REMAINING TERM
Percentage of
Aggregate Cut-Off Date
Number of Current Unguar. Current Unguar. Percentage of
Remaining Term Loans Principal Balance Principal Balance Loan Count
<S> <C> <C> <C> <C> <C> <C>
48 { Rem Term {= 60 1 29,250.00 0.03% .09
72 { Rem Term {= 84 121 3,262,118.29 3.01% 10.63
84 { Rem Term {= 96 54 1,768,685.71 1.63% 4.75
96 { Rem Term {= 108 67 3,003,582.92 2.77 5.89
108 { Rem Term {= 120 324 20,530,282.47 18.96% 28.47
120 { Rem Term {= 132 6 506,680.19 0.47% .53
132 { Rem Term {= 144 12 735,627.77 0.68% 1.05
144 { Rem Term {= 156 6 693,127.57 0.64% .53
156 { Rem Term {= 168 6 672,885.93 0.62% .53
168 { Rem Term {= 180 28 4,560,833.77 4.21% 2.46
180 { Rem Term {= 192 8 1,031,433.28 0.95% .70
192 { Rem Term {= 204 10 1,369,358.57 1.26% .88
204 { Rem Term {= 216 9 633,685.99 0.59% .79
216 { Rem Term {= 228 18 2,220,172.97 2.05% 1.58
228 { Rem Term {= 240 38 6,285,866.57 5.80% 3.34
240 { Rem Term {= 252 20 3,003,203.60 2.77% 1.76
252 { Rem Term {= 264 27 3,551,437.28 3.28% 2.37
264 { Rem Term {= 276 29 3,399,244.60 3.14% 2.55
276 { Rem Term {= 288 32 3,913,109.03 3.61% 2.81
288 { Rem Term {= 300 322 47,131,179.11 43.52% 28.30
Total.................. 1138 $108,301,765.62 100.00% 100.00%
</TABLE>
<PAGE>
The distribution of the number of months since origination of the SBA
Section 7(a) Loans as of the Cut-Off Date was as follows:
<TABLE>
<CAPTION>
AGE
Percentage of
Aggregate Cut-Off Date
Number of Current Unguar. Current Unguar. Percentage of
Age Loans Principal Balance Principal Balance Loan Count
<S> <C> <C> <C> <C> <C>
Age = 0 124 13,993,790.00 12.92% 10.90
1 { Age {= 12 1,013 94,269,645.73 87.04% 89.02
12 { Age {= 24 1 38,329.89 0.04% .09
Total................ 1,138 108,301,765.62 100.00% 100.00%
</TABLE>
<PAGE>
The years in whcih the SBA Section 7(a) Loans were origianted was as
follows:
<TABLE>
<CAPTION>
YEARS OF ORIGINATION
Percentage of
Aggregate Cut-Off Date
Year of Number of Current Unguar. Current Unguar. Percentage of
Origination Mortgage Loans Principal Balance Principal Balance Loan Count
<C> <C> <C> <C> <C>
1995 6 1,923,469.40 1.78 1.41
1996 1122 106,378,296.22 98.22 98.59
Total............ 1138 $108,301,765.62 100.00% 100.00%
</TABLE>
<PAGE>
The Excess Spread as a percentage of the principal balance of the
Unguaranteed Interests of the SBA Section 7(a) Loans as of the Cut-Off Date was
as follows: (1)
<TABLE>
<CAPTION>
EXCESS SPREAD
Percentage of
Aggregate Cut-Off Date
Excess Interest Number of Current Unguar. Current Unguar. Percentage of
Rate Range Loans Principal Balance Principal Balance Loan Count
<S> <C> <C> <C> <C> <C>
0.00% { Excess {= 0.50% 1 872,520.36 0.81 .09
0.50% { Excess {= 1.00% 18 10,689,886.85 9.87 1.58
1.00% { Excess {= 1.50% 89 17,770,254.53 16.41 7.82
1.50% { Excess {= 2.00% 65 10,761,380.71 9.94 5.71
2.00% { Excess {= 2.50% 25 4,895,587.59 4.52 2.20
2.50% { Excess {= 3.00% 292 27,685,108.66 25.56 25.66
3.00% { Excess {= 3.50% 199 15,323,070.28 14.15 17.49
3.50% { Excess {= 4.00% 37 2,585,788.65 2.39 3.25
4.00% { Excess {= 4.50% 117 8,288,257.00 7.65 10.28
4.50% { Excess {= 5.00% 124 6,767,458.64 6.25 10.90
5.00% { Excess {= 5.50% 10 339,815.17 0.31 .88
5.50% { Excess {= 6.00% 14 221,526.17 0.20 1.23
6.50% { Excess {= 7.00% 122 1,916,665.62 1.77 10.72
7.00% { Excess {= 7.50% 1 9,835.70 0.01 .09
7.50% { Excess {= 8.00% 1 20,000.00 0.02 .09
10.50% { Excess {= 11.00% 20 120,283.97 0.11 1.76
11.00% { Excess {= 11.50% 1 9,469.72 0.01 .09
13.00% { Excess {= 13.50% 1 14,984.93 0.01 .09
16.50% { Excess {= 17.00% 1 9,871.07 0.01 .09
Total....................... 1138 $108,301,765.62 100.00% 100.00%
</TABLE>
___________________
(1) With respect to each SBA Section 7(a) Loan, the Excess Spread is
included in the related Unguaranteed Interest.
<PAGE>
The Unguaranteed Percentage of the SBA Section 7(a) Loans as of the
Cut-Off Date was as follows:
<TABLE>
<CAPTION>
UNGUARANTEED LOAN PERCENTAGE
Percentage of
Aggregate Cut-Off Date
Number of Current Unguar. Current Unguar. Percentage of
Unguar. Percentage Loans Principal Balance Principal Balance Loan Count
<S> <C> <C> <C> <C> <C>
5.000 { UNGR % {= 10.000 3 34,325.72 0.03 .26
15.000 { UNGR % {= 20.000 197 2,902,973.20 2.68 17.31
20.000 { UNGR % {= 25.000 830 67,727,848.83 62.54 72.93
25.000 { UNGR % {= 30.000 50 6,789,059.48 6.27 4.39
30.000 { UNGR % {= 35.000 11 3,932,517.13 3.63 .97
35.000 { UNGR % {= 40.000 20 9,121,140.65 8.42 1.76
40.000 { UNGR % {= 45.000 6 3,241,268.22 2.99 .53
45.000 { UNGR % {= 50.000 14 8,899,198.84 8.22 1.23
50.000 { UNGR % {= 55.000 6 4,707,504.90 4.35 .53
55.000 { UNGR % {= 60.000 1 945,928.65 0.87 .09
Total...................... 1138 $108,301,765.62 100.00% 100.00%
</TABLE>
<PAGE>
The distribution of the debt-service coverage ratios at origination of
the SBA Section 7(a) Loans was as follows: (1)
<TABLE>
<CAPTION>
DEBT SERVICE COVERAGE RATIO
Percentage of
Debt Service Aggregate Cut-Off Date
Coverage Ratio Number of Current Unguar. Current Unguar. Percentage of
Range Loans Principal Balance Principal Balance Loan Count
<S> <C> <C> <C> <C> <C>
Dsc Ratio = 0.00(2) 93 8,346,540.01 7.71 8.17
0.00% { Dsc Ratio {= 0.50 27 2,360,696.18 2.18 2.37
0.50% { Dsc Ratio {= 1.00 58 5,931,499.20 5.48 5.10
1.00% { Dsc Ratio {= 1.50 475 51,284,576.81 47.35 41.74
1.50% { Dsc Ratio {= 2.00 268 23,587,401.80 21.78 23.55
2.00% { Dsc Ratio {= 2.50 100 9,275,525.50 8.56 8.79
2.50% { Dsc Ratio {= 3.00 58 4,061,655.33 3.75 5.10
3.00% { Dsc Ratio {= 3.50 18 841,773.38 0.78 1.58
3.50% { Dsc Ratio {= 4.00 14 764,070.42 0.71 1.23
4.00% { Dsc Ratio {= 4.50 8 233,554.13 0.22 .70
4.50% { Dsc Ratio {= 5.00 3 190,790.09 0.18 .26
5.00% { Dsc Ratio {= 5.50 6 576,935.08 0.53 .53
5.50% { Dsc Ratio {= 6.00 2 537,558.10 0.50 .18
6.00% { Dsc Ratio {= 6.50 2 62,439.17 0.06 .18
6.50% { Dsc Ratio {= 7.00 3 101,795.40 0.09 .26
8.00% { Dsc Ratio {= 8.50 1 53,589.67 0.05 .09
9.00% { Dsc Ratio {= 9.50 1 57,115.35 0.05 .09
11.00% { Dsc Ratio {= 11.50 1 34,250.00 0.03 .09
Total........................ 1138 $108,301,765.62 100.00% 100.00%
</TABLE>
- --------------------
(1) Represents the ratio of annual net operating income to the pro forma
annual debt service payments.
(2) For these SBA Section 7(a) Loans, the Borrower had a negative net
operating income for the fiscal year for which ratio was determined.
The Sellers believed that based upon the projected net operating income
and certain other factors, it was appropriate to originate such SBA Section
7(a) Loan.
<PAGE>
The distribution of the original terms of the SBA Section 7(a) Loans
was as follows:
<TABLE>
<CAPTION>
ORIGINAL TERM
Percentage of
Aggregate Cut-Off Date
Number of Current Unguar. Current Unguar. Percentage of
Original Term Loans Principal Balance Principal Balance Loan Count
<S> <C> <C> <C> <C> <C>
48 { Orig. Term {= 60 1 29,250.00 0.03% .09
72 { Orig. Term {= 84 120 3,233,062.40 2.99% 10.54
84 { Orig. Term {= 96 55 1,797,741.60 1.66% 4.83
96 { Orig. Term {= 108 67 3,003,582.92 2.77% 5.89
108 { Orig. Term {= 120 324 20,530,282.47 18.96% 28.47
120 { Orig. Term {= 132 6 506,680.19 0.47% .53
132 { Orig. Term {= 144 12 735,627.77 0.68% 1.05
144 { Orig. Term {= 156 6 693,127.57 0.64% .53
156 { Orig. Term {= 168 6 672,885.93 0.62% .53
168 { Orig. Term {= 180 28 4,560,833.77 4.21% 2.46
180 { Orig. Term {= 192 8 1,031,433.28 0.95% .70
192 { Orig. Term {= 204 10 1,369,358.57 1.26% .88
204 { Orig. Term {= 216 9 633,685.99 0.59% .79
216 { Orig. Term {= 228 17 2,132,952.11 1.97% 1.49
228 { Orig. Term {= 240 39 6,373,087.43 5.88% 3.43
240 { Orig. Term {= 252 18 2,498,367.35 2.31% 1.58
252 { Orig. Term {= 264 27 3,821,993.98 3.53% 2.37
264 { Orig. Term {= 276 31 3,633,524.15 3.35% 2.72
276 { Orig. Term {= 288 28 3,581,462.78 3.31% 2.46
288 { Orig. Term {= 300 326 47,462,825.36 43.82% 28.65
Total..................... 1,138 108,301,765.62 100.00% 100.00%
</TABLE>
<PAGE>
The distribution of the original balances of the SBA Section 7(a)
Loans was as follows:
<TABLE>
<CAPTION>
ORIGINAL SBA AGGREGATE LOAN AMOUNTS
Percentage of
Cut-Off Date
Original Aggregate Number of Current Unguar. Current Unguar. Percentage of
Principal Balance Loans Principal Balance Principal Balance Loan Count
<S> <C> <C> <C> <C> <C> <C>
0 { Balance {= 50,000 34 236,166.43 0.22 2.99
50,000 { Balance {= 100,000 168 2,706,259.84 2.50 14.76
100,000 { Balance {= 150,000 136 4,275,248.33 3.95 11.95
150,000 { Balance {= 200,000 130 5,675,330.73 5.24 11.42
200,000 { Balance {= 250,000 119 6,680,743.45 6.17 10.46
250,000 { Balance {= 300,000 102 7,017,646.14 6.48 8.96
300,000 { Balance {= 350,000 66 5,379,758.13 4.97 5.80
350,000 { Balance {= 400,000 71 6,715,520.05 6.20 6.24
400,000 { Balance {= 450,000 56 5,950,777.92 5.49 4.92
450,000 { Balance {= 500,000 44 5,373,806.64 4.96 3.87
500,000 { Balance {= 550,000 33 4,416,815.98 4.08 2.90
550,000 { Balance {= 600,000 17 2,518,326.09 2.33 1.49
600,000 { Balance {= 650,000 19 3,002,828.60 2.77 1.67
650,000 { Balance {= 700,000 16 2,845,794.92 2.63 1.41
700,000 { Balance {= 750,000 20 3,863,656.37 3.57 1.76
750,000 { Balance {= 800,000 15 2,914,188.08 2.69 1.32
800,000 { Balance {= 850,000 8 1,898,454.96 1.75 .70
850,000 { Balance {= 900,000 10 2,177,718.87 2.01 .88
900,000 { Balance {= 950,000 4 1,080,368.43 1.00 .35
950,000 { Balance {= 1,000,000 13 3,445,381.78 3.18 1.14
1,000,000 { Balance {= 1,100,000 8 2,298,038.90 2.12 .70
1,100,000 { Balance {= 1,200,000 14 5,683,713.75 5.25 1.23
1,200,000 { Balance {= 1,300,000 14 6,845,546.37 6.32 1.23
1,300,000 { Balance {= 1,400,000 6 3,574,166.76 3.30 .53
1,400,000 { Balance {= 1,500,000 9 6,487,608.79 5.99 .79
1,500,000 { Balance 6 5,237,899.31 4.84 .53
Total............................. 1138 $108,301,765.62 100.00% 100.00%
</TABLE>
<PAGE>
The distribution of the original balances of the Unguaranteed
Interests was as follows:
<TABLE>
<CAPTION>
ORIGINAL UNGUARANTEED LOAN BALANCE
Percentage of
Aggregate Cut-Off Date
Original Unguar. Number of Current Unguar. Current Unguar. Percentage of
Principal Balance Loans Principal Balance Principal Balance Loan Count
<S> <C> <C> <C> <C> <C> <C>
0 { Balance {= 25,000 204 2,980,731.90 2.75 17.93
25,000 { Balance {= 50,000 260 9,702,009.60 8.96 22.85
50,000 { Balance {= 75,000 221 13,571,964.12 12.53 19.42
75,000 { Balance {= 100,000 134 11,665,546.55 10.77 11.78
100,000 { Balance {= 150,000 150 17,871,941.91 16.50 13.18
150,000 { Balance {= 200,000 72 12,424,882.62 11.47 6.33
200,000 { Balance {= 250,000 34 7,706,732.53 7.12 2.99
250,000 { Balance {= 300,000 6 1,641,187.79 1.52 .53
300,000 { Balance {= 350,000 4 1,246,194.04 1.15 .35
350,000 { Balance {= 400,000 7 2,628,860.55 2.43 .62
400,000 { Balance {= 450,000 10 4,229,224.91 3.91 .88
450,000 { Balance {= 500,000 13 6,299,407.44 5.82 1.14
500,000 { Balance {= 550,000 2 1,033,406.80 0.95 .18
550,000 { Balance {= 600,000 3 1,729,361.67 1.60 .26
600,000 { Balance {= 650,000 3 1,844,805.09 1.70 .26
650,000 { Balance {= 700,000 3 2,042,971.34 1.89 .26
700,000 { Balance {= 750,000 6 4,444,637.45 4.10 .53
750,000 { Balance {= 1,000,000 6 5,237,899.31 4.84 .53
Total............................. 1138 $108,301,765.62 100.00% 100.00%
</TABLE>
<PAGE>
The distribution of the principal balances of the SBA Section 7(a)
Loans as of the Cut-Off Date was as follows:
<TABLE>
<CAPTION>
CURRENT SBA AGGREGATE LOAN AMOUNTS
Percentage of
Cut-Off Date
Current Aggregate Number of Current Unguar. Current Unguar. Percentage of
Principal Balance Loans Principal Balance Principal Balance Loan Count
<S> <C> <C> <C> <C> <C> <C>
0 { Balance {= 50,000 37 265,774.90 0.25 3.25
50,000 { Balance {= 100,000 167 2,725,474.07 2.52 14.67
100,000 { Balance {= 150,000 137 4,314,520.80 3.98 12.04
150,000 { Balance {= 200,000 129 5,684,942.42 5.25 11.34
200,000 { Balance {= 250,000 122 6,892,963.57 6.36 10.72
250,000 { Balance {= 300,000 103 7,162,649.16 6.61 9.05
300,000 { Balance {= 350,000 66 5,438,747.16 5.02 5.80
350,000 { Balance {= 400,000 70 6,673,290.37 6.16 6.15
400,000 { Balance {= 450,000 53 5,703,923.60 5.27 4.66
450,000 { Balance {= 500,000 42 5,148,971.61 4.75 3.69
500,000 { Balance {= 550,000 35 4,691,498.01 4.33 3.08
550,000 { Balance {= 600,000 16 2,413,352.14 2.23 1.41
600,000 { Balance {= 650,000 18 2,833,120.52 2.62 1.58
650,000 { Balance {= 700,000 17 3,019,837.22 2.79 1.49
700,000 { Balance {= 750,000 22 4,249,653.45 3.92 1.93
750,000 { Balance {= 800,000 12 2,354,148.70 2.17 1.05
800,000 { Balance {= 850,000 8 1,898,454.96 1.75 .70
850,000 { Balance {= 900,000 10 2,177,718.87 2.01 .88
900,000 { Balance {= 950,000 5 1,347,721.79 1.24 .44
950,000 { Balance {= 1,000,000 13 3,445,381.78 3.18 1.14
1,000,000 { Balance {= 1,100,000 7 2,030,685.54 1.88 .62
1,100,000 { Balance {= 1,200,000 14 5,683,713.75 5.25 1.23
1,200,000 { Balance {= 1,300,000 14 6,845,546.37 6.32 1.23
1,300,000 { Balance {= 1,400,000 6 3,574,166.76 3.30 .53
1,400,000 { Balance {= 1,500,000 9 6,487,608.79 5.99 .79
1,500,000 { Balance 6 5,237,899.31 4.84 .53
Total............................. 1138 $108,301,765.62 100.00% 100.00%
</TABLE>
<PAGE>
The distribution of the principal balances of the Unguaranteed
Interests as of the Cut-Off Date was as follows:
<TABLE>
<CAPTION>
CURRENT UNGUARANTEED LOAN BALANCE
Percentage of
Aggregate Cut-Off Date
Current Unguaranteed Number of Current Unguar. Current Unguar. Percentage of
Principal Balance Loans Principal Balance Principal Balance Loan Count
<S> <C> <C> <C> <C> <C> <C>
0 { Balance {= 50,000 206 3,029,554.60 2.80 18.10
25,000 { Balance {= 50,000 262 9,850,452.57 9.10 23.02
50,000 { Balance {= 75,000 222 13,745,192.11 12.65 19.51
75,000 { Balance {= 100,000 135 11,864,422.29 10.95 11.86
100,000 { Balance {= 150,000 144 17,302,572.51 15.98 12.65
150,000 { Balance {= 200,000 72 12,424,882.62 11.47 6.33
200,000 { Balance {= 250,000 34 7,706,732.53 7.12 2.99
250,000 { Balance {= 300,000 7 1,908,541.15 1.76 .62
300,000 { Balance {= 350,000 3 978,840.68 0.90 .26
350,000 { Balance {= 400,000 10 3,814,572.07 3.52 .88
400,000 { Balance {= 450,000 7 3,043,513.39 2.81 .62
450,000 { Balance {= 500,000 13 6,299,407.44 5.82 1.14
500,000 { Balance {= 550,000 2 1,033,406.80 0.95 .18
550,000 { Balance {= 600,000 3 1,729,361.67 1.60 .26
600,000 { Balance {= 650,000 3 1,844,805.09 1.70 .26
650,000 { Balance {= 700,000 3 2,042,971.34 1.89 .26
700,000 { Balance {= 750,000 6 4,444,637.45 4.10 .53
800,000 { Balance {= 850,000 2 1,668,645.62 1.54 .18
850,000 { Balance {= 900,000 3 2,623,325.04 2.42 .26
900,000 { Balance {= 950,000 1 945,928.65 0.87 .09
Total............................. 1138 $108,301,765.62 100.00% 100.00%
</TABLE>
<PAGE>
Subsequent SBA Loans
The Subsequent SBA Loans to be included in the Trust Fund are expected to
have the following characteristics as of the Cut-Off Date (unless otherwise
indicated): 1
Maximum original Unguaranteed Interest......................$950,000
Minimum original Unguaranteed Interest......................$ 4,000
Maximum original Guaranteed Interest........................$750,000
Minimum original Guaranteed Interest........................$ 15,000
Range of Note Rates.....................................9.25%-12.50%
Range of ages.........................................0 to 12 months
Range of original terms.............................36 to 300 months
Range of gross margins.................................1.0% to 3.75%
Range of weighted average original debt service
coverage ratios.........................................1.20 to 2.00
- --------
1 The actual characteristics of the Subsequent SBA Loans to be included in
the Trust Fund may vary somewhat from the characteristics presented. The Sellers
do not expect that any such variation will be material.
<PAGE>
The following table sets forth the Prime Rate for the first business day of
each of the following calendar quarters as reported in THE WALL STREET JOURNAL:
<TABLE>
<CAPTION>
1993 1994 1995 1996
----- ---- ---- ----
QUARTER
<S> <C> <C> <C> <C>
1st 6.00% 6.00% 8.50% 8.50%
2nd 6.00% 6.25% 9.00% 8.25%
3rd 6.00% 7.25% 9.00% 8.25%
4th 6.00% 7.75% 8.75% 8.25%
The values set forth in the table above are historical and may not be indicative
of future values of the Prime Rate.
</TABLE>
<PAGE>
THE SBA LOAN PROGRAM
GENERAL
The Small Business Act of 1953 (the "Act"), which created the Small
Business Administration, also established the general business loan program
under Section 7(a) of the Act (the "Section 7(a) Program"). The Section 7(a)
Program was intended to encourage lenders to provide loans to qualifying small
businesses. Loans made under the Section 7(a) Program can be used to construct,
expand or convert facilities, to purchase building equipment or materials or to
finance machinery and equipment, business acquisitions and inventory. Money lent
under the Section 7(a) Program also can be used for working capital.
THE SECTION 7(A) LOAN GUARANTY PROGRAMS
The SBA administers three levels of lender participation in the Section
7(a) Program. Under the first level, known as the Guaranteed Participant
Program, the lender gathers and processes data from applicants and forwards it,
along with a request for the SBA's guaranty, to a local SBA office. The SBA then
completes an independent analysis and decides whether to guaranty the loan. SBA
turnaround time on such applications varies greatly, depending on its backlog of
loan applications. As of September 30, 1990, the most recent date for which such
information is available, loans made under the Guaranteed Participant Program
accounted for approximately $6.2 billion aggregate principal balance,
representing approximately 63% of the total outstanding principal balance of
loans originated under the Section 7(a) Program as of such date.
Under the second level of lender participation, known as the Certified
Lender Program, the lender (the "Certified Lender") gathers and processes data
from applicants and makes a request to the SBA, as in the Guaranteed Participant
Program procedure. The SBA then performs an expedited review of the lender's
credit analysis, which generally is completed within three working days. The SBA
requires that lenders originate loans meeting certain portfolio and volume
criteria before authorizing them to participate in the Certified Lender Program.
Loans made under this portion of the Section 7(a) Program accounted for
approximately $2.6 billion aggregate principal balance, representing
approximately 26% of the Section 7(a) Program portfolio as of September 30,
1990.
Under the third level of lender participation, known as the Preferred
Lender Program, the lender (the "Preferred Lender") has the authority to approve
a loan and obligate the SBA to guarantee the loan without submitting an
application to the SBA for credit review. The lender is required to notify the
SBA of the approved loan and submit certain documents. The standards established
for participants in the Preferred Lender Program are more stringent than those
for participants in the Certified Lender Program and involve meeting additional
portfolio quality and volume requirements. The granting of Preferred Lender
status is based upon a lender's ability to originate and service loans in a
particular territory to the satisfaction of the SBA. Preferred Lender Program
loans accounted for approximately $1.1 billion aggregate principal balance,
representing approximately 11% of the Section 7(a) Program portfolio as of
September 30, 1990.
SECTION 7(A) LOAN PARAMETERS
Under each of the Guaranteed Participant, Certified Lender and Preferred
Lender Programs, the SBA guarantees loans of $100,000 or less up to 80%, and
loans in excess of $100,000 up to 75%, subject to a per borrower guaranty
maximum of $750,000. Between May 15, 1995 and October 12, 1995, refinancings
generally were not allowed under any program. Loans processed under the
International Trade Loan Program provided for a maximum guaranty per borrower is
$1,250,000. For applications submitted between January 1, 1995 and October 12,
1995, the maximum loan size for most loans originated under all three programs
was reduced administratively to $500,000. For applications approved as of
October 12, 1995, the guaranty is limited to the lesser of the amount determined
under the applicable percentages or a per borrower guaranty maximum of $750,000.
Loans originated under the Section 7(a) Program can bear either fixed or
adjustable rates of interest, as negotiated between the lender and the borrower
at origination. Adjustable- rate loans generally adjust on the first business
day of each calendar quarter based on a specified margin over the lowest prime
rate, as published in THE WALL STREET JOURNAL. For loans made pursuant to the
Guaranteed Participant, Certified Lender or Preferred Lender Programs, this
margin generally does not exceed 2.75% per annum.
Terms to maturity for guaranteed loans vary depending upon the use of
proceeds and an evaluation of the borrower's ability to repay the loan. For
instance, working capital loans are limited to seven year terms unless an
extension is obtained, which can increase the term to a maximum of 10 years.
Real estate loans generally have terms up to 25 years, and machinery and
equipment loans generally have a maximum term of 15 years. If the loan proceeds
are to be used for multiple qualifying purposes, a blended term based on the
foregoing criteria may be offered by the Lender.
U.S. SBA SECTION 7(A) PORTFOLIO PERFORMANCE
The performance of loans originated under the Section 7(a) Program was
analyzed by the General Accounting Office ("GAO") in a report to the Chairman of
the Committee on Small Business of the House of Representatives dated December
1991 (GAO/RCED-92-49 SBA's Business Loan Portfolio) (the "GAO Report"). The GAO
Report indicates that the number of loans originated under the Section 7(a)
Program has been steadily decreasing. By 1990, the portfolio only had two-thirds
as many outstanding loans as in 1981. Despite this decrease in the overall
number of loans, however, the total amount of principal outstanding in the
portfolio increased from $8.9 billion in 1981 to $9.9 billion in 1990. This
increase was due primarily to a change in SBA regulations in August 1988 that
raised the guaranteed loan ceiling from $500,000 to $750,000.
The delinquency history of the portfolio improved from 1981 to 1990. After
an increase from 1981 to 1982, the default percentage decreased over the next
eight years. The differences in defaults and liquidations between the three
guaranteed programs has been substantial. The Preferred Lender Program had the
best performance of the three programs, with default and liquidation percentages
as of September 30, 1990 of 3.7% and 3.0%, respectively. The Certified Lender
Program's default and liquidation percentages as of September 30, 1990 were 4.4%
and 6.8%, respectively. The Guaranteed Participant Program had defaults as of
September 30, 1990 of 6.0% and liquidations of 11.4%, respectively. This
delinquency experience is consistent with the fact that Preferred and Certified
Lenders have more experience in originating, servicing and collecting loans than
their Guaranteed Participant Lender counterparts. Set forth below are the
default and liquidation percentages as set forth in the GAO Report for the
Section 7(a) Program as a whole for the periods indicated. Separate data is not
readily available from the SBA for each of the three Programs.
<PAGE>
<TABLE>
<CAPTION>
DEFAULT AND LIQUIDATION PERCENTAGES
IN THE SECTION 7(A) PORTFOLIO
Fiscal Year ended Default Liquidation
SEPTEMBER 30, PERCENTAGE PERCENTAGE
<S> <C> <C>
1981 9.5% 10.0%
1982 12.4 13.8
1983 11.5 16.4
1984 10.2 16.5
1985 9.5 17.0
1986 9.6 16.4
1987 8.3 15.4
1988 7.1 13.3
1989 6.9 11.5
1990 5.7 10.3
</TABLE>
The above default and liquidation percentages are historical only and are
not indicative of the future performance of the Section 7(a) Program. More
recent information is not readily available from the SBA. Also, no assurance is
given, or can be made, that the default and liquidation experience of the
Sellers' portfolio of SBA Loans in general, or the SBA Loans in the SBA Loan
Pool, will correspond to the experience realized by the Section 7(a) Program as
a whole.
THE SELLERS' PARTICIPATION IN SBA SECTION 7(A) PROGRAM
The Sellers have been named as Preferred Lenders by the SBA in each major
SBA loan market in which they operate (except for newly established offices).
Based upon this experience, the Sellers expect to be upgraded to Preferred
Lender status in all markets where they now operate. However, it is unknown when
such upgradings will occur. See "The Sellers" herein.
YIELD, MATURITY AND PREPAYMENT CONSIDERATIONS
The value of an investment in the Certificates may be affected by, among
other things, a change in interest rates. If interest rates fall below the then
current Note Rates on the SBA Loans, the rate of prepayment on such SBA Loans
may increase. Prepayments, delinquencies and defaults may also be influenced by
a number of other factors including economic conditions.
On each Remittance Date, the Certificateholders are entitled to receive 30
days' interest on the Class A or Class B Principal Balance, as the case may be,
immediately prior to such Remittance Date at the applicable Class A or Class B
Remittance Rate, subject to the adjustments described under "Description of the
Agreement and the Certificates--Class A and Class B Interest Distribution
Amounts" herein. This is the case even if Principal Prepayments or Curtailments
are received with respect to the SBA Loans during the related Due Period. With
respect to such Principal Prepayments and Curtailments the Servicer will remit
to the Trustee for deposit in the Certificate Account, from amounts otherwise
payable to it as servicing compensation, Compensating Interest as described
under "Description of the Agreement and the Certificates--Payments on the SBA
Loans; Distributions on the Certificates" herein.
For the Certificates, the net effect of each distribution respecting
interest generally will be the pass-through on each Remittance Date to each
Certificateholder of an amount which is equal to 30 days' interest at the Class
A or Class B Remittance Rate, as the case may be, subject to the adjustments
described herein.
The Excess Spread on the guaranteed portions of the SBA Section 7(a) Loans
will be available to make up shortfalls in amounts to which Certificateholders
are entitled on Remittance Dates. The amount of Excess Spread varies from loan
to loan and will be eliminated when a borrower prepays a loan in full. However,
the Excess Spread will not be affected by any applicable lifetime interest rate
caps on the SBA Section 7(a) Loans. This is because the Guaranteed Interests are
sold with lifetime interest rate caps equal to the cap on the related SBA
Section 7(a) Loan less the sum of the Excess Spread, the fee payable to the
Agent of the SBA, the Premium Protection Fee and, with respect to the Additional
Fee SBA Loans, the Additional Fee. In addition, the Excess Spread on an SBA
Section 7(a) Loan in default will be paid by the SBA until the purchase by the
SBA of the related Guaranteed Interest (up to 120 days of accrued interest).
With respect to SBA Section 7(a) Loans for which the Guaranteed Interest
was sold in the secondary market on or after September 1, 1993 (unless the
related SBA ss. 7(a) Loan was approved by the SBA on or after October 12, 1995)
and SBA ss. 7(a) Loans approved by the SBA on or after October 12, 1995,
regardless of whether they were sold in the Secondary Market (the "Additional
Fee SBA Loans"), a fee equal to 40 basis points and 50 basis points,
respectively, per annum on the outstanding balance of the Guaranteed Interest of
such Additional Fee SBA Loans (the "Additional Fee") is required to be paid by
the related Seller to the SBA. Although such Additional Fee is the
responsibility of the related Seller, the Additional Fee will be funded from the
interest received by the related Obligor. Accordingly, any such Additional Fee
will reduce the Excess Spread on the related SBA Section 7(a) Loan.
Unscheduled payments, delinquencies and defaults on the SBA Loans and
distributions from the Pre-Funding Account, if any, on the Remittance Dates in
January, February and March 1997 and the Special Remittance Date will affect the
amount of funds available to make distributions on each Remittance Date. In
addition, the Servicer may, at its option, on any date on which the then
outstanding aggregate principal balance of the Unguaranteed Interests is less
than 10% of the sum of (i) the Original Pool Principal Balance and (ii) the
Pre-Funded Amount, if any, purchase from the Trust Fund all of the Unguaranteed
Interests and any other assets in the Trust Fund at a price equal to the sum of
(x) 100% of the then outstanding Class A and Class B Principal Balances, and (y)
30 days' interest thereon at the then applicable Class A and Class B Remittance
Rates (the "Termination Price"). See "Description of the Agreement and the
Certificates--Termination; Purchase of SBA Loans" herein. However, because the
SBA Loans may prepay, the weighted average life of the Certificates or the date
on which the outstanding aggregate principal balances of the Unguaranteed
Interests will be less than 10% of the sum of (i) the Original Pool Principal
Balance and (ii) the original Pre-Funded Amount, if any, cannot be determined.
None of the SBA Loans are balloon loans and each is fully amortizing in
accordance with its terms. The SBA Loans may be prepaid at any time without
payment of a prepayment fee or penalty. In general, when the level of prevailing
interest rates for similar loans significantly declines, the rate of prepayment
is likely to increase, although the prepayment rate is influenced by a number of
other factors, including general economic conditions. Prepayments, liquidations
and purchases of the Unguaranteed Interests will result in distributions to
Certificateholders of amounts which would otherwise be distributed over the
remaining terms of the SBA Loans.
The final scheduled Remittance Date for the Certificates is April 15, 2024,
which is the date on which the principal balances of the Class A and Class B
Certificates would be reduced to zero, assuming that no prepayments are received
on the SBA Loans and that distributions of principal of and interest on each of
the SBA Loans are timely received. The weighted average life of the Certificates
is likely to be shorter than would be the case if payments actually made on the
SBA Loans conformed to the foregoing assumptions, and the final Remittance Date
with respect to the Certificates could occur significantly earlier than the
final scheduled Remittance Date because (i) prepayments are likely to occur and
(ii) the Servicer may cause a termination of the Trust Fund as described above.
The "weighted average life" of a Certificate refers to the average amount
of time that will elapse from the Closing Date to the date on which each dollar
in respect of principal of such Certificate is repaid. The weighted average
lives of the Certificates will be influenced by, among other factors, the rate
at which principal payments (including Monthly Payments, Principal Prepayments,
Excess Payments and Curtailments) are made on the SBA Loans.
Prepayments on loans are commonly measured relative to a prepayment
standard or model. The model used in this Prospectus Supplement, the Constant
Prepayment Rate ("CPR"), represents an assumed constant rate of prepayment per
annum relative to the then outstanding principal balance of a pool of new SBA
loans. The CPR does not purport to be either a historical description of the
prepayment experience of any pool of SBA loans or a prediction of the
anticipated rate of prepayment of any pool of SBA loans, including the SBA
Loans.
The Sellers make no representation as to the particular factors that will
affect the prepayment of the SBA Loans, as to the percentage of the principal
balance of the SBA Loans that will be paid as of any date or as to the overall
rate of prepayment on the SBA Loans.
Greater than anticipated prepayments of principal will increase the yield
on Certificates purchased at a price less than par. Greater than anticipated
prepayments of principal will decrease the yield on Certificates purchased at a
price greater than par. The effect on an investor's yield due to principal
prepayments on the SBA Loans occurring at a rate that is faster (or slower) than
the rate anticipated by the investor in the period immediately following the
issuance of the Certificates will not be entirely offset by a subsequent like
reduction (or increase) in the rate of principal payments. The weighted average
lives of the Certificates will also be affected by the amount and timing of
delinquencies and defaults on the SBA Loans and the recoveries, if any, on
defaulted SBA Loans and foreclosed properties. Delinquencies and defaults will
generally slow the rate of payment of principal to the Certificateholders.
However, this effect will be offset to the extent that lump sum recoveries on
defaulted SBA Loans and foreclosed properties result in principal payments on
the Certificates faster than otherwise scheduled.
The following table under the heading "Weighted Average Lives of the Class
A and Class B Certificates" assumes, among other things, that (i) (a) the
scheduled payment in each month for each SBA Loan has been based on the
outstanding balance as of the first day of the month preceding the month of such
payment, (b) the initial Note Rates for the December 1996 scheduled payments for
the SBA Loans delivered at closing are 10.346% and 10.384%, respectively, per
the chart below plus the applicable Gross Margin and the initial Note Rates for
the March 1997 scheduled payments for the SBA Loans delivered at the subsequent
funding are 10.346% and 10.384%, respectively per the chart below plus the
applicable Gross Margin, and (c) thereafter, the scheduled payments and
remaining term to stated maturity for each SBA loan is as set forth below
(rather than based on the actual SBA Loan characteristics) so that such
scheduled payments would amortize the remaining balance by its stated maturity
date, (ii) scheduled monthly payments of principal and interest on the SBA Loans
will be timely received on the first day of each month (with no defaults),
commencing December 1, 1996, (iii) the Servicer does not exercise its option to
purchase the Unguaranteed Interests and thereby cause a termination of the
Agreement, (iv) principal prepayments on the SBA Loans represent prepayments in
full of individual SBA Loans and will be received on the last day of each month
commencing December 1996 at the respective percentages of CPR set forth in the
table and (v) the Certificates will be issued on December 23, 1996. The
following table also assumes that the Pre-Funding Account is established, the
original Pre-Funded Amount equals its maximum permitted amount and the entire
Pre-Funded Amount is used to purchase SBA Section 7(a) Loans at the end of the
Pre-Funding Period.
<PAGE>
<TABLE>
<CAPTION>
NOTE RATE GROSS MARGIN BALANCE REMAINING TERM
--------- ------------ -------- --------------
<S> <C> <C> <C>
10.346% 2.095% $52,544,461.55 197
10.384% 2.131% $55,757,304.07 254
10.346% 2.095% $15,378,942.79 200
10.384% 2.131% $16,319,291.59 257
</TABLE>
Based upon the foregoing assumptions, some or all of which are unlikely to
reflect actual experience, the following table indicates the projected weighted
average lives of each Class of Certificates at various CPRs. As used in the
table, 0% CPR indicates no Principal Prepayments, Curtailments or Excess
Payments. The Class A and Class B Certificates were priced assuming 8% CPR.
WEIGHTED AVERAGE LIVES OF THE CLASS A AND CLASS B CERTIFICATES
Weighted Earliest Retirement
Average at Servicer's
CPR LIFE (YEARS)(2) OPTION(3)
0% 12.4 5/15/16
4% 9.4 2/15/14
8% 7.3 2/15/12
12% 5.8 11/15/09
Since the individual characteristics of the SBA Loans will not correspond
to those assumed above, the actual weighted average lives and the earliest
retirement dates of the Certificates will vary from those of the underlying SBA
Loans even if any indicated CPR is met. In addition, there is no assurance that
Principal Prepayments, Curtailments or Excess Payments will occur, or, if they
do occur, that they will occur at a constant rate approximating any of the
indicated CPRs.
- --------
(2) The weighted average life of a Certificate is determined by
(i) multiplying the amount of each payment of principal by
the number of years from the date of issuance to the
related Remittance Date, (ii) summing the results, and (iii) dividing
the sum by the total principal distributions.
(3) Assuming early termination of the Trust Fund when the then
outstanding aggregate principal balance of the Unguaranteed
Interests is less than 10% of the sum of (i) the Original Pool
Principal Balance and (ii) the Pre-Funded Amount, if any.
<PAGE>
THE SELLERS
TMSIC is a New Jersey corporation, and a wholly-owned subsidiary of The
Money Store Inc. (the "Parent"). MSNY, a New York corporation, is a wholly-owned
subsidiary of TMSIC. TMSIC is headquartered in Sacramento, California and began
originating SBA Section 7(a) Loans in 1979. MSNY is headquartered in Sacramento,
California and began originating SBA Section 7(a) Loans in 1980. MSNY only
originates SBA Section 7(a) Loans to businesses located in the State of New
York. The Sellers became the largest originator of SBA guaranteed loans in 1983
and have maintained that position in each of the past 14 SBA fiscal years. The
Sellers originated approximately $392 million of SBA Section 7(a) Loans during
calendar 1995 and, at December 31, 1995 and September 30, 1996, were servicing a
portfolio of SBA Section 7(a) Loans aggregating approximately $1.91 billion and
$2.13 billion, respectively.
The Parent, headquartered in Union, New Jersey, is a publicly-owned
financial services company engaged, through its operating divisions, primarily
in originating, servicing and selling consumer and commercial loans. As of
September 30, 1996, the Parent maintained 206 offices in 50 states, the District
of Columbia and Puerto Rico through which it conducted business in the following
areas: (i) mortgage loans; (ii) SBA Loans; (iii) government guaranteed student
loans and (iv) automotive loans. The Parent, through its subsidiaries, also
originates loans partially insured by the Federal Housing Administration under
Title I of the National Housing Act.
At September 30, 1996, the Sellers originated SBA Section 7(a) Loans
through 11 sales regions in 50 states, comprising 67 SBA Districts. The Sellers
have originated SBA Section 7(a) Loans in approximately 80 out of 85 total SBA
jurisdictions/field territories. They possess PLP status in 72 SBA jurisdictions
and they possess Guaranteed Participant Program ("GPP") status in an additional
13. For the year ended December 31, 1995, the Sellers originated approximately
63% of their SBA Section 7(a) Loans under the Preferred Lender Program ("PLP"),
with substantially all of the remainder originated under the Certified Lender
Program ("CLP"). New offices originate under the GPP until approved within the
SBA District. The Sellers apply the same level of loan review and documentation
for all loans, regardless of the program under which they were originated. In
the normal course of their business, the Sellers may have originated CLP loans
in areas where they were Preferred Lenders due to specific eligibility
requirements of the Section 7(a) Program. The Sellers believe that such practice
is common in the industry, that the SBA is aware of it and has raised no
objection thereto.
DELINQUENCY EXPERIENCE
The following table sets forth the Sellers' delinquency and charge-off
experience with respect to their portfolio of SBA Section 7(a) Loans as of the
dates indicated. There can be no assurance, and no representation is made, that
the delinquency and charge-off experience with respect to the SBA Section 7(a)
Loans included in the Trust Fund will be similar to that reflected in the table
below.
<TABLE>
<CAPTION>
SBA LOAN DELINQUENCIES AND CHARGE-OFFS
(DOLLARS IN THOUSANDS)
As of and for the Years 9 Months
ENDED DECEMBER 31, ENDED 9/30/96
1993 1994 1995(1) 1996
<S> <C> <C> <C> <C>
30-59 days past due(2) .......... 0.86% 0.89 %1.01% 1.08%
60-89 days past due(2) 0.36% 0.41% 0.35% .89%
90+ days past due(2) ............ 4.69% 3.67% 3.97% 4.03%
Unguaranteed portion of
SBA Loans in the serviced
loan portfolio(3) $251,274 $353,037 $437,829 $572,129
Loans charged-off, net. $ 1,607 $ 1,293 $ 1,732 $ 2,040
Loans charged-off, net as a
percentage of the
unguaranteed portion of the
SBA Loans in the serviced
loan portfolio(4)................ 0.64% 0.37% 0.40% .48%
Total SBA Section 7(a) Loan serviced
portfolio(5) .............. $1,270,453 $1,605,645 $1,907,050 $2,134,181
- --------------------
(1) Includes, for 1995, in addition to SBA Section 7(a) Loans, Section 7(a)
Companion Loans and SBA 504 Loans (each as defined in the attached
Prospectus).
(2) The delinquency percentages are calculated based upon the aggregate
guaranteed and unguaranteed interests of the SBA loans which are
delinquent by the number of days indicated divided by total aggregate
principal balance of the guaranteed and unguaranteed interests of the
SBA loans contained in the Sellers' SBA loan portfolio.
(3) Amounts shown are the aggregate principal balances of the unguaranteed
interests of loans in the Sellers' SBA loan portfolio on the last day
of the related period.
(4) The percentage of loan charge-offs is calculated based upon the dollar
amount of charge-offs divided by the dollar amount of the principal
portion of unguaranteed interests contained in the Sellers' SBA loan
portfolio.
(5) Includes guaranteed interests serviced for others.
</TABLE>
CERTAIN LITIGATION
Because the nature of the business of the Parent and the Sellers involves
the collection of numerous accounts, the validity of liens and compliance with
state and federal lending laws, the Parent and the Sellers are subject to claims
and legal actions in the ordinary course of their business. While it is
impossible to estimate with certainty the ultimate legal and financial liability
with respect to such claims and actions, including that described above, the
Parent and the Sellers believe that the aggregate amount of such liabilities
will not result in monetary damage which in the aggregate would have a material
adverse effect on the financial condition of the Parent or the Sellers.
DESCRIPTION OF THE AGREEMENT AND THE CERTIFICATES
GENERAL
The Certificates will be issued by a Trust Fund organized and existing
under the laws of the State of New York. Each Certificate represents a certain
fractional undivided ownership interest in the Trust Fund created and held
pursuant to the Agreement, subject to the limits and the priority of
distribution described therein. The Trust Fund consists primarily of the right
to receive the Unguaranteed Interests in such SBA Loans as are from time to time
subject to the Agreement, together with all proceeds thereof and certain related
assets.
The Certificates will not represent obligations of the Sellers, any of
their affiliates or the SBA.
The Class A Certificates will be issued in book-entry form and the Class B
Certificates will be issued either in book-entry or physical form, as determined
by the Sellers prior to issuance of the Certificates. Each Class of Certificates
will be issued in minimum denominations of $1,000 and integral multiples of
$1,000 in excess thereof, except that one Certificate of each Class may be
issued in a different denomination, and, if so issued, will be held in physical
form.
The Servicer will be responsible for ensuring that each SBA Loan is
serviced in accordance with the Agreement and the SBA Rules and Regulations.
However, MSNY will service the SBA Loans originated or acquired by it.
PAYMENTS ON THE SBA LOANS; DISTRIBUTIONS ON THE CERTIFICATES
The Agreement requires that the Servicer cause an account (the "Principal
and Interest Account") to be established and maintained at one or more
Designated Depository Institutions.
All funds in the Principal and Interest Account are required to be held (i)
uninvested, up to the limits insured by the FDIC (as defined under "Certain
Definitions") or (ii) invested in Permitted Instruments. Any investment earnings
on funds held in the Principal and Interest Account are for the account of the
Servicer.
The Servicer is required to deposit in the Principal and Interest Account
(within two Business Days of receipt): (i) all payments received after the
Cut-Off Date on account of interest on the SBA Loans (net of the portion thereof
required to be paid to the holders of the Guaranteed Interest, the Agent of the
SBA's Fee, the Premium Protection Fee, the Additional Fee and the Servicing Fee
and other servicing compensation payable to the Servicer as permitted by the
Agreement), (ii) the Unguaranteed Percentage of all payments received after the
Cut-Off Date on account of principal on the SBA Loans, including the
Unguaranteed Percentage of all Excess Payments, Principal Prepayments,
Curtailments, Net Liquidation Proceeds, Insurance Proceeds (other than amounts
to be applied to the restoration or repair of the related Mortgaged Property, or
to be released to the Obligor) and Released Mortgaged Property Proceeds, (iii)
any amounts paid in connection with the repurchase of the Unguaranteed Interest
of an SBA Loan and the amount of any adjustment for substituted SBA Loans, (iv)
the amount of any losses incurred in connection with investments in Permitted
Instruments and (v) certain amounts relating to insufficient insurance policies
and Foreclosed Property.
The Servicer may make withdrawals from the Principal and Interest Account
only for the following purposes:
(i) to remit to the Trustee on each Determination
Date (as defined below) for deposit in the Certificate
Account, the portion of the Available Funds for the related
Remittance Date that is net of Compensating Interest, Monthly
Advances and amounts then on deposit in the Spread Account
(and, with respect to the Determination Dates occurring in
January, February and March 1997, net of amounts then on
deposit in the Pre- Funding Account and the Capitalized
Interest Account);
(ii) to reimburse itself for any accrued unpaid Servicing
Fees, unreimbursed Monthly Advances and for unreimbursed
Servicing Advances to the extent deposited in the Principal
and Interest Account (and not netted from Monthly Payments
received). The Servicer's right to reimburse itself for unpaid
Servicing Fees and, except as provided in the following
sentence, Servicing Advances and Monthly Advances shall be
limited to Liquidation Proceeds, Released Mortgaged Property
Proceeds, Insurance Proceeds and such other amounts as may be
collected by the Servicer from the Mortgagor or otherwise
relating to the SBA Loan in respect of which such unreimbursed
amounts are owed. The Servicer's right to reimbursement for
Monthly Advances and Servicing Advances in excess of such
amounts shall be limited to any late collections of interest
received on the SBA Loans generally, including Liquidation
Proceeds, Released Mortgaged Property Proceeds, Insurance
Proceeds and any other amounts. The Servicer's right thereto
shall be subordinate to the rights of the Certificateholders
and the holders of the Guaranteed Interest;
(iii) to withdraw any amount received from an
Obligor that is recoverable and sought to be recovered
as a voidable preference by a trustee in bankruptcy pursuant
to the United States Bankruptcy Code in accordance with a
final, nonappealable order of a court having competent
jurisdiction;
(iv) (a) to make investments in Permitted Instruments and
(b) to pay itself interest paid in respect of Permitted
Instruments or by a Designated Depository Institution on funds
deposited in the Principal and Interest Account;
(v) to withdraw any funds deposited in the Principal
and Interest Account that were not required to be deposited
therein or were deposited therein in error;
(vi) to pay itself servicing compensation or
interest as permitted under the definition of Excess
Proceeds; and
(vii) to clear and terminate the Principal and
Interest Account upon the termination of the Agreement;
Not later than the close of business on each Determination
Date, the Servicer will remit to the Trustee for deposit in the Certificate
Account any required Monthly Advance and/or Compensating Interest.
The Servicer is required to pay all reasonable and customary
"out-of-pocket" costs and expenses incurred in the performance of its servicing
obligations, including, but not limited to, the cost of (i) the preservation,
restoration and protection of the Mortgaged Property or other Collateral, (ii)
any enforcement or judicial proceedings, including foreclosures, and (iii) the
management and liquidation of Mortgaged Property acquired in satisfaction of the
related Mortgage. Each such expenditure will constitute a "Servicing Advance."
The Servicer is obligated to make the Servicing Advances incurred in the
performance of its servicing obligations. The Servicer may recover Servicing
Advances to the extent set forth in clause (ii) above.
On the 15th day of each month commencing in January 1997, or, if such 15th
day is not a Business Day, the first Business Day immediately following (each
such day being a "Remittance Date"), until the principal balances of the Class A
and Class B Certificates are reduced to zero, the Trustee or Paying Agent will
be required to distribute to each person in whose names a Certificate is
registered at the close of business on the last day of the month immediately
preceding the month of the related Remittance Date (the "Record Date") such
Certificateholder's Percentage Interest multiplied by the amount to be
distributed to the Class A or Class B Certificateholders, as the case may be on
such Remittance Date as described below under "--Flow of Funds" herein.
Additionally, any Pre-Funded Amount remaining at the close of business on
March 19, 1997 (together with accrued interest thereon at the applicable
Remittance Rates) will be distributed by or on behalf of the Trustee on the
Special Remittance Date to the Class A and Class B Certificates. Such
distribution will be made to each person in whose name a Certificate of the
applicable Class is registered on February 28, 1997.
On each Remittance Date, the Trustee will mail to each Certificateholder a
statement setting forth, among other things, certain information as to the
distribution being made on such Remittance Date, the fees to be paid to the
Servicer and Trustee and the loss and delinquency status of the SBA Loans.
Although the information contained in such statements will be prepared by the
Servicer, neither such information nor any other financial information furnished
to Certificateholders will be examined and reported upon, and an opinion will
not be expressed by, an independent public accountant.
CERTIFICATE ACCOUNT
The Trustee has agreed to establish and maintain in its trust department a
non-interest-bearing trust account (the "Certificate Account").
<PAGE>
PRE-FUNDING ACCOUNT
The Pre-Funded Amount will be deposited on the Closing Date into the
Pre-Funding Account. Amounts in the Pre-Funding Account may be used only (i) to
acquire Subsequent SBA Loans, and (ii) to make accelerated payments of principal
on the Certificates. During the Funding Period amounts will, from time to time,
be withdrawn from the Pre-Funding Account to purchase Subsequent SBA Loans in
accordance with the Agreement. Any Pre- Funded Amount remaining at the end of
the Funding Period will be distributed as a principal prepayment on the next
Remittance Date to the Certificates. However, any Pre-Funded Amount remaining at
the close of business on March 19, 1997 will be distributed as a principal
prepayment on the Special Remittance Date.
All funds in the Pre-Funding Account are required to be held (i)
uninvested, up to the limits insured by the Federal Deposit Insurance
Corporation or (ii) invested in instruments designated as "Permitted
Instruments" in the Agreement. Any investment earnings on funds in the
Pre-Funding Account will be applied to payment of interest on the Certificates.
CAPITALIZED INTEREST ACCOUNT
On the Closing Date, the Representative also will make a cash deposit into
the Capitalized Interest Account. The amount, if any, deposited therein will be
used by the Trustee on the Remittance Dates occurring in January, February and
March 1997 to fund the excess, if any, of (i) the amount of interest accrued for
each such Remittance Date at the weighted average on the portion of the Class A
and Class B Certificates having principal balances exceeding the principal
balances of the Unguaranteed Interests, over (ii) the amount of any earnings on
funds in the Pre-Funding Account that are available to pay interest on the
Certificates on each such Remittance Date. Additionally, if a principal
prepayment is made on the Special Remittance Date to any Class of Certificates,
such Class of Certificates also will receive on such date, from the Capitalized
Interest Account, accrued interest at the applicable Remittance Rate on the
amount of such principal prepayment. Any amounts remaining in the Capitalized
Interest Account on the Special Remittance Date and not used for such purposes
are required to be paid directly to the Representative on such Special
Remittance Date.
All funds in the Capitalized Interest Account are required to be held (i)
uninvested, up to the limits insured by the Federal Deposit Insurance
Corporation or (ii) invested in Permitted Instruments. Any investment earnings
on funds in the Capitalized Interest Account will be applied to payment of
interest on the Certificates.
FLOW OF FUNDS
The Agreement requires the Servicer to withdraw on each Determination Date
that portion of the Available Funds in the Principal and Interest Account and to
remit such amount together with the Monthly Advances and Compensating Interest
for the related Remittance Date to the Trustee for deposit in the Certificate
Account. Upon receipt on each Determination Date of such amount, the Trustee is
required to deposit such amount into the Certificate Account.
On each Remittance Date the Trustee is required to withdraw from the
Certificate Account the sum of (i) that portion of the Available Funds received
from the Servicer, (ii) the amounts, if any, deposited therein from the Spread
Account as described below under "--Spread Account" herein, and (iii) with
respect to the Remittance Dates in January, February and March 1997, the
amounts, if any, deposited therein from the Pre- Funding Account and the
Capitalized Interest Account, and make distributions thereof in the following
order of priority:
(i) First, to the Class A Certificates in an
amount up to the Class A Interest Distribution Amount;
(ii) Second, to the Class B Certificates in an
amount up to the Class B Interest Distribution Amount;
(iii) Third, to the Class A Certificates in an amount up
to the sum of (a) the Class A Principal Distribution Amount
and (b) the Class A Carry Forward
Amount;
(iv) Fourth, to the Class B Certificates, in
an amount up to the sum of (a) the Class B Principal
Distribution Amount and (b) the Class B Carry-Forward
Amount;
(v) Fifth, to the Expense Account in an amount up to
one-twelfth of the Annual Expense Escrow Amount plus any
amount required to be paid to the Trustee pursuant to the
Agreement resulting from insufficiencies in the Expense
Account;
(vi) Sixth, to the Servicer in an amount up to
the Reimbursable Amounts;
(vii) Seventh, to the Spread Account, any remainder
unless and until the amount therein equals the Specified
Spread Account Requirement; and
(viii) Eighth, to the Spread Account Depositor, any
amounts in excess of the Specified Spread Account Requirement.
CLASS A AND CLASS B INTEREST DISTRIBUTION AMOUNTS
To the extent of the Available Funds, and prior to payments of principal,
on each Remittance Date the Class A and Class B Certificateholders, in that
order, will be entitled to receive interest accrued for the related Interest
Accrual Period at the then applicable Class A or Class B Remittance Rate on the
Class A or Class B Principal Balance, as the case may be, outstanding
immediately prior to such Remittance Date, subject to the adjustment set forth
in the next paragraph. If, on any Remittance Date, the Class A or Class B
Certificates do not receive the full amount of interest to which they are
entitled, such shortfall, plus interest thereon at the then applicable Class A
or Class B Remittance Rate, compounded monthly, will be added to the amount of
interest they are entitled to receive on succeeding Remittance Dates. The
aggregate amounts of interest payable to the Class A and Class B Certificates on
each Remittance Date are referred to herein as the "Class A Interest
Distribution Amount" and the "Class B Interest Distribution Amount"
respectively.
As stated herein, many of the SBA Loans contain minimum and/or maximum Note
Rate provisions. As a result, if the then current Prime Rate plus the applicable
margin would exceed the applicable maximum Note Rate (or fall below the
applicable minimum Note Rate), the actual Note Rate borne by such SBA Loan will
be less than (or greater than) the Note Rate that such SBA Loan would bear if
such limits were not in effect. Additionally, as described under "Summary of
Terms--Interest," for the Remittance Dates occurring in each February, May,
August and November, interest accruing on the Class A and Class B Certificates
will be based upon the Prime Rate in effect on the first Business Day of the
preceding January, April, July and October, respectively, while interest
payments on the SBA Loans adjusting quarterly required to be distributed on such
Remittance Dates generally will be based on the Prime Rate in effect on the
first Business Day of the preceding October, January, April and July,
respectively. Accordingly, for each Remittance Date the aggregate amount of
interest payable with respect to each of the SBA Loans in accordance with their
terms, net of the interest payable to the holders of the Guaranteed Interest,
the Excess Spread (other than the portion thereof allocated to the Servicing Fee
on the Guaranteed Interest), the Servicing Fee, the Premium Protection Fee, the
Agent of the SBA's Fee, the Additional Fee (with respect to the Additional Fee
SBA Loans), the Extra Interest (as defined below) and the fees and expenses of
the Trustee allocable to such interest, might exceed or be less than the
interest accrued on the SBA Loans at the weighted average Class A and Class B
Remittance Rates. Any such excess or shortfall will be allocated to the Class A
and Class B Certificates pro rata in accordance with the amount of interest each
such Class of Certificates would otherwise be entitled to receive but for such
adjustment.
With respect to each SBA Loan, the "Extra Interest Percentage" will equal
the excess of (i) the Note Rate that would be in effect for such SBA Loan as of
the Cut-Off Date (or Subsequent Cut-Off Date) without giving effect to any
applicable lifetime floor or cap over (ii) the sum of the rates used in
determining the Servicing Fee and the Trustee's fees and expenses and the
initial weighted average Class A and Class B Remittance Rates without giving
effect to any applicable lifetime floor or cap.
For each Remittance Date, the "Extra Interest" for an SBA Loan will equal
the product of (i) the principal portion of the Unguaranteed Interest of such
SBA Loan for such Remittance Date and (ii) one-twelfth of the applicable Extra
Interest Percentage.
CLASS A AND CLASS B PRINCIPAL DISTRIBUTION AMOUNTS
With respect to each Remittance Date, the "Class A Principal Distribution
Amount" and the "Class B Principal Distribution Amount" will equal the Class A
Percentage or the Class B Percentage, as the case may be, multiplied by the
total of (i) the Unguaranteed Percentage of all payments and other recoveries of
principal of an SBA Loan (net of amounts reimbursable to the Servicer pursuant
to the Agreement) received by the Servicer or any Subservicer during the related
Due Period, excluding amounts received with respect to SBA Loans which have been
delinquent 24 months or have been determined to be uncollectible, in whole or in
part, by the Servicer to the extent that the Class A Certificateholders or the
Class B Certificateholders, as the case may be, have previously received the
Class A Percentage or the Class B Percentage, as the case may be, of the
principal portion of the Unguaranteed Interest of such SBA Loans; (ii) the
principal portion of any Unguaranteed Interest actually purchased by a Seller
for breach of a representation and warranty or other defect and actually
received by the Trustee as of the related Determination Date; (iii) any
adjustments with respect to substitutions of SBA Loans for which a Seller has
breached a representation or warranty deposited in the Principal and Interest
Account and transferred to the Certificate Account as of the related
Determination Date; (iv) the Unguaranteed Percentage of all losses on SBA Loans
which were finally liquidated during the applicable Due Period; (v) the
Unguaranteed Percentage of the then outstanding principal balance of any SBA
Loan which, as of the first day of the related Due Period, is delinquent 24
months or determined by the Servicer to be uncollectible in whole or in part;
and (vi) amounts, if any, released from the Pre-Funding Account on the January,
February and March 1997 Remittance Dates.
The following chart sets forth an example of distributions on the
Certificates, based upon the assumption that the Certificates will be issued in
December 1996 with a November 30, 1996 Cut-Off Date and that distributions on
the Certificates are made on the 15th day of each month (or, if such 15th day is
not a Business Day, the next succeeding Business Day):
November 30................. Cut-Off Date. The Original
Pool Principal Balance will
be the aggregate principal
amount of the Unguaranteed
Interests of the SBA Loans
at the close of business on
November 30, 1996 after
application of all payments
collected on or before such date.
December 1-31................ The Subservicers remit
to the Servicer for deposit
in the Principal and
Interest Account all amounts
received on account of the
Unguaranteed Interests of the SBA Loans.
December 31................. First Record Date.
Distribution on January 15,
1997 will be made to
Certificateholders of record
on the Closing Date.
Subsequent record dates will
be the last day of the month
preceding the Remittance Date.
January 10 .............. Determination Date. The
Servicer determines the
amount of principal and
interest that will be distributed to the
Certificateholders on January
15, and transfers funds in
the Principal and Interest Account
to the Trustee for deposit in the
Certificate Account together
with any Monthly Advances,
Compensating Interest and, to
the extent necessary, amounts
from the Spread Account.
January 15 .......... Remittance Date. The
Trustee or the Paying Agent
will distribute to
Certificate holders the
amounts required to be distributed
pursuant to the Agreement.
SPREAD ACCOUNT
On the Closing Date, the Spread Account Depositor will make an initial cash
deposit into the Spread Account in an amount equal to 1% of the Original Pool
Principal Balance (the "Initial Deposit"). Thereafter, on each Remittance Date
the Trustee will deposit into the Spread Account the Available Funds, if any,
remaining after payment of interest and principal to the holders of the
Certificates, amounts required to be deposited into the Expense Account and
certain amounts reimbursable to the Servicer, each as described above, until the
aggregate amount then on deposit in the Spread Account (the "Spread Balance")
equals the sum of (i) the then outstanding principal balance of the Unguaranteed
Interests of all SBA Loans 180 days or more delinquent and (ii) the greater of
(a) 3.5% of the then outstanding aggregate principal balance of the Unguaranteed
Interests of all the SBA Loans, or (b) 2% of the Original Pool Principal
Balance; provided, however, that for purposes of clauses (i) and (ii)(a), there
shall be excluded the principal portion of the Unguaranteed Interest of SBA
Loans which have been delinquent 24 months or have been determined to be
uncollectible, in whole or in part, by the Servicer, to the extent that the
Certificateholders have previously received the Unguaranteed Portion of the
principal balance of such SBA Loans (the sum of such amounts is referred to
herein as the "Specified Spread Account Requirement").
On each Remittance Date, to the extent funds are available therefor, the
Trustee will withdraw from the Spread Account for deposit into the Certificate
Account the amount, if any, by which (i) the sum of (a) the Class A and Class B
Interest Distribution Amounts, (b) the Class A and Class B Principal
Distribution Amounts and (c) the Class A and Class B Carry- Forward Amounts
exceeds (ii) the Available Funds for such Remittance Date (but excluding from
such definition, amounts in the Spread Account).
The Spread Account Depositor will not be required to refund any amounts
previously properly distributed to it, regardless of whether there are
sufficient funds on a subsequent Remittance Date to make a full distribution to
holders of the Certificates on such Remittance Date.
The funding and maintenance of the Spread Account is intended to enhance
the likelihood of timely payment of principal and interest to the holders of the
Certificates; however, if the SBA Loan Pool experiences levels of delinquencies
and losses above the scenarios used to obtain the ratings on the Class B
Certificates, the Spread Account could be depleted, and shortfalls could result.
See "Ratings" herein.
REGISTRATION OF CERTIFICATES
The Class A Certificates will initially be registered in the name of Cede,
the nominee of DTC. The Class B Certificates will be either (i) registered in
the name of Cede, as the nominee of DTC, with similar effect as the Class A
Certificates, or (ii) issued in physical form, as determined by the Sellers
prior to the initial issuance of the Certificates. Certificates registered in
the name of Cede are referred to as the "Book-entry Certificates."
Persons acquiring beneficial ownership interests in the Class A or Class B
Certificates ("Certificate Owners") will hold their Class A or Class B
Certificates through DTC in the United States, or CEDEL or Euroclear (in Europe)
if they are participants of such systems, or indirectly through organizations
which are participants in such systems. The Book-Entry Certificates will be
issued in one or more certificates which equal the aggregate principal balance
of the respective Class of Certificates. CEDEL and Euroclear will hold omnibus
positions on behalf of their participants through customers' securities accounts
in CEDEL's and Euroclear's names on the books of their respective depositaries
which in turn will hold such positions in customers' securities accounts in the
depositaries' names on the books of DTC. Citibank N.A. will act as depositary
for CEDEL and Morgan Guaranty Trust Company of New York, Brussels Office, will
act as depositary for Euroclear (in such capacities, individually the "Relevant
Depositary" and collectively the "European Depositaries").
Because of time zone differences, credits of securities received in CEDEL
or Euroclear as a result of a transaction with a Participant will be made during
subsequent securities settlement processing and dated the business day following
the DTC settlement date. Such credits or any transactions in such securities
settled during such processing will be reported to the relevant Euroclear or
CEDEL Participants on such business day. Cash received in CEDEL or Euroclear as
a result of sales of securities by or through a CEDEL Participant (as defined
below) or Euroclear Participant (as defined below) to a DTC 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 information with respect to tax documentation procedures
relating to the Certificates, see "GLOBAL CLEARANCE, SETTLEMENT AND TAX
DOCUMENTATION PROCEDURES--Certain U.S. Federal Income Tax Documentation
Requirements" in Annex I hereto.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between CEDEL Participants and Euroclear Participants will occur in
accordance with their respective 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 the Relevant 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 the
Relevant 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 European Depositaries.
DTC, which is a New York-chartered limited purpose trust company, performs
services for its participants, some of which (and/or their representatives) own
DTC. In accordance with its normal procedures, DTC is expected to record the
positions held by each DTC participant in the Book-Entry Certificates, whether
held for its own account or as a nominee for another person. In general,
beneficial ownership of Book-Entry Certificates will be subject to the rules,
regulations and procedures governing DTC and DTC participants as in effect from
time to time.
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. 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.
Euroclear was created in 1968 to hold securities for its participants
("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 be settled in any of 32 currencies, including United
States dollars. Euroclear 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 above. Euroclear is operated by the Brussels, Belgium office of Morgan
Guaranty Trust Company of New York (the "Euroclear Operator"), under contract
with Euroclear Clearance Systems 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 Euroclear on behalf of Euroclear Participants. Euroclear Participants
include banks (including central banks), securities brokers and dealers and
other professional financial intermediaries. Indirect access to Euroclear 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 Euroclear, withdrawals
of securities and cash from Euroclear, and receipts of payments with respect to
securities in Euroclear. All securities in Euroclear 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.
Under a book-entry format, beneficial owners of the Book-Entry Certificates
may experience some delay in their receipt of payments, since such payments will
be forwarded by the Trustee to Cede. 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 the Relevant Depositary. Such
distributions will be subject to tax reporting in accordance with relevant
United States tax laws and regulations. Because DTC can only act on behalf of
Financial Intermediaries, the ability of a beneficial owner to pledge Book-Entry
Certificates to persons or entities that do not participate in the Depository
system, or otherwise take actions in respect of such Book-Entry Certificates,
may be limited due to the lack of physical certificates for such Book- Entry
Certificates. In addition, issuance of the Book-Entry Certificates in book-entry
form may reduce the liquidity of such Certificates in the secondary market since
certain potential investors may be unwilling to purchase Certificates for which
they cannot obtain physical certificates.
DTC has advised the Trustee that DTC will take any action permitted to be
taken by the holders of the Book-Entry Certificates under the Agreement only at
the direction of one or more Financial Intermediaries to whose DTC accounts the
Book- Entry Certificates are credited, to the extent that such actions are taken
on behalf of Financial Intermediaries whose holdings include such Book-Entry
Certificates, CEDEL or the Euroclear Operator, as the case may be, will take any
other action permitted to be taken by a Certificateholder under the Agreement on
behalf of a CEDEL. Participant or Euroclear Participant only in accordance with
its relevant rules and procedures and subject to the ability of the Relevant
Depositary to effect such actions on its behalf through DTC. DTC may take
actions, at the direction of the related Participants, with respect to some
Class A or Class B Certificates which conflict with actions taken with respect
to other Class A or Class B Certificates.
Certificates Registered Through 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 1934 Act. See "Description of the
Certificates--Book-Entry Registration" in the Prospectus.
Certificates Not Registered through DTC. With respect to (i) any
Certificate not originally registered through DTC, or (ii) any Definitive
Certificate issued in exchange for a Book- Entry Certificate in connection with
the events described above (together, "Physical Certificates"), the Trustee will
be required to make payments and furnish reports directly to the related
Certificateholder.
If (i) any mutilated Physical Certificate is surrendered to the Certificate
Registrar (as defined under "Certain Definitions"), or the Trustee and the
Certificate Registrar receive satisfactory evidence of the destruction, loss or
theft of any Physical Certificate, and (ii) there is delivered to the Servicer,
the Trustee and the Certificate Registrar such security or indemnity as may be
required by each of them to save each of them harmless, then, in the absence of
notice to the Servicer, the Trustee and the Certificate Registrar that such
Physical Certificate has been acquired by a bona fide purchaser, the Servicer
shall execute and deliver, and the Trustee shall authenticate, in exchange for
or in lieu of any such mutilated, destroyed, lost or stolen Physical
Certificate, a new Physical Certificate of like tenor and Percentage Interest,
but bearing a number not contemporaneously outstanding. Upon the issuance of any
such new Physical Certificate, the Servicer and the Trustee may require the
payment of a sum sufficient to cover any tax or other governmental charge that
may be imposed in relation thereto and any other expenses connected therewith.
Any such duplicate Physical Certificate shall constitute complete and
indefeasible evidence of ownership in the Trust Fund, as if originally issued,
whether or not the mutilated, destroyed, lost or stolen Physical Certificate
shall be found at any time.
Physical Certificates will be transferable and exchangeable at the
corporate trust office of the Trustee or, at the election of the Trustee, at the
office of the Certificate Registrar. No service charge will be made for any
registration of exchange or transfer, but the Trustee may require payment of a
sum sufficient to cover any tax or other governmental charge.
Prior to due presentation of a Physical Certificate for registration of
transfer, the Servicer, the Trustee, the Sellers, the Paying Agent and the
Certificate Registrar may treat the Person in whose name any Physical
Certificate is registered as the owner of such Physical Certificate for the
purpose of receiving distributions with respect to such Certificate and for all
other purposes whatsoever, and the Servicer, the Trustee, the Seller and the
Certificate Registrar shall not be affected by notice to the contrary.
All Physical Certificates surrendered for registration of transfer or
exchange are required, if surrendered to any Person other than the Trustee, to
be delivered to the Trustee and to be promptly canceled by it. No Physical
Certificate is to be authenticated in lieu of or in exchange for any Physical
Certificate so canceled, except as expressly permitted by the Agreement. All
canceled Certificates may be held by the Trustee in accordance with its standard
retention policy.
REMOVAL AND RESIGNATION OF SERVICER
The Majority Certificateholders, by notice in writing to the Servicer, may,
pursuant to the Agreement, remove the Servicer upon the occurrence of any of the
following events:
(i) (A) the failure by the Servicer to make any
required Servicing Advance, to the extent such failure
materially or adversely affects the interests of the
Certificateholders; (B) the failure by the Servicer to
make any required Monthly Advance; (C) the failure by
the Servicer to remit any Compensating Interest; or
(D) any failure by the Servicer to remit to
Certificateholders, or to the Trustee for the benefit of the
Certificateholders, any payment required to be made under the
terms of the Agreement, which continues
unremedied (in the case of the events described in clauses
(i)(A), (i)(C) and (i)(D) for 30 days) after the date upon
which written notice of such failure, requiring the same to be
remedied, shall have been given to the Servicer by the Trustee
or to the Servicer and the Trustee by any Certificateholder;
or
(ii) failure by the Servicer or the Sellers duly to
observe or perform, in any material respect, any other
covenants, obligations or agreements of the Servicer or the
Sellers, as set forth in the Agreement, which failure
continues unremedied for a period of 60 days after the date on
which written notice of such failure, requiring the same to be
remedied, shall have been given to the Servicer or the
Sellers, as the case may be, by the Trustee or to the
Servicer, or the Sellers, as the case may be, and the Trustee
by any Certificateholder; or
(iii) a decree or order of a court or agency or
supervisory authority having jurisdiction for the
appointment of a conservator or receiver or liquidator
in any insolvency, readjustment of debt, marshalling of
assets and liabilities or similar proceedings, or for the
winding-up or liquidation of its affairs, shall have been
entered against the Servicer and such decree or order shall
have remained in force, undischarged or unstayed for a period
of 60 days; or
(iv) the Servicer shall consent to the appointment of a
conservator or receiver or liquidator in any insolvency,
readjustment of debt, marshalling of assets and liabilities or
similar proceedings of or relating to the Servicer or of or
relating to all or substantially all of the Servicer's
property; or
(v) the Servicer shall admit in writing its inability
to pay its debts as they become due, file a petition to take
advantage of any applicable insolvency or reorganization
statute, make an assignment for the benefit of its creditors,
or voluntarily suspend payment of its obligations.
The Servicer may not assign the Agreement nor resign from the obligations
and duties thereby imposed on it except by mutual consent of the Servicer, the
SBA, the Trustee and the Majority Certificateholders, or upon the determination
that the Servicer's duties thereunder are no longer permissible under applicable
law or administrative determination and such incapacity cannot be cured by the
Servicer. No such resignation shall become effective until a successor has
assumed the Servicer's responsibilities and obligations in accordance with the
Agreement.
Upon removal or resignation of the Servicer, the Trustee will be the
successor servicer (the "Successor Servicer"). If, however, the Trustee is
unable to act as Successor Servicer, or if the SBA so requests, the Trustee may
appoint, or petition a court of competent jurisdiction to appoint, any
established mortgage loan servicing institution acceptable to the SBA, Moody's
and Duff & Phelps having a net worth of not less than $15,000,000 and which is
an approved SBA guaranteed lender in good standing, operating pursuant to an
effective Loan Guaranty Agreement as the Successor Servicer in the assumption of
all or any part of the responsibilities, duties or liabilities of the Servicer.
TERMINATION; PURCHASE OF SBA LOANS
The Agreement will terminate upon notice to the Trustee of the earlier of
either: (a) the final payment or other liquidation of the last SBA Loan, or the
disposition of all property acquired upon foreclosure of any SBA Loan and the
remittance of all funds due thereunder or (b) mutual consent of the Servicer and
all Certificateholders in writing; provided, however, that in no event will the
trust established by the Agreement terminate later than twenty-one years after
the death of the last surviving lineal descendant of Joseph P. Kennedy, late
Ambassador of the United States to the Court of St. James, alive as of the
Cut-Off Date.
The Servicer may, at its option, terminate the Agreement on any date on
which the then outstanding aggregate principal balance of the Unguaranteed
Interests is less than 10% of the sum of (i) the Original Pool Principal Balance
and (ii) the Pre-Funded Amount, if any, by purchasing, on the next succeeding
Remittance Date, all of the Unguaranteed Interests and any other assets in the
Trust Fund at a price equal to the sum of (i) 100% of the then Outstanding Class
A and Class B Principal Balances, and (ii) 30 days' accrued interest thereon at
the then applicable Class A and Class B Remittance Rates (the "Termination
Price"); provided, however, that under certain circumstances set forth in the
Agreement, the Servicer may not take such action prior to providing Moody's and
Duff & Phelps with an opinion of counsel that such termination would not be
deemed a fraudulent conveyance by the Servicer.
THE TRUSTEE
Marine Midland Bank, a trust company located in New York, New York, has
been named Trustee pursuant to the Agreement.
The Agreement requires that the Trustee shall at all times be (i) a
national banking association or banking corporation or trust company organized
and doing business under the laws of the United States of America or of any
State, (ii) authorized under such laws to exercise corporate trust powers, (iii)
having a combined guaranteed capital and surplus of at least $30,000,000, (iv)
having unsecured and unguaranteed long-term debt obligations rated at least Baa3
by Moody's and BBB- by Duff & Phelps (provided Duff & Phelps is rating the
unsecured and unguaranteed long-term debt obligations of the Trustee), or such
other ratings as is acceptable to the SBA, (v) is subject to supervision or
examination by a federal or state authority, (vi) is an approved SBA guaranteed
lender in good standing, operating pursuant to an effective Loan Guaranty
Agreement, and (vii) is reasonably acceptable to the SBA. If at any time the
Trustee shall cease to be eligible in accordance with the provisions described
in this paragraph, it shall resign upon request of the Majority
Certificateholders in the manner and with the effect specified in the Agreement.
The Trustee, or any trustee or trustees hereafter appointed, may resign at
any time in the manner set forth in the Agreement. Upon receiving notice of
resignation, the Servicer shall promptly appoint a successor trustee or trustees
meeting the eligibility requirements set forth above in the manner set forth in
the Agreement. If no successor trustee shall have been appointed and have
accepted appointment within 60 days after the giving of such notice of
resignation, the resigning trustee may petition any court of competent
jurisdiction for the appointment of a successor trustee. Such court may
thereupon, after such notice, if any, as it may deem proper and prescribe,
appoint a successor trustee.
No resignation or removal of the Trustee and no appointment of a successor
trustee shall become effective until the acceptance of appointment by a
successor trustee.
The Majority Certificateholders with the consent of the SBA, Moody's and
Duff & Phelps, or the SBA, may remove the Trustee under the conditions set forth
in the Agreement and appoint a successor trustee in the manner set forth
therein.
The Servicer shall give notice of each removal of the Trustee to the
Certificateholders, which notice shall include the name of the successor trustee
and the address of its corporate trust office.
Upon acceptance of appointment by a successor trustee in the manner
provided in the Agreement, the Servicer shall give notice thereof to the
Certificateholders.
At any time, for the purpose of meeting any legal requirements of any
jurisdiction in which any part of the Trust Fund or property securing the same
may at the time be located, the Servicer and the Trustee acting jointly shall
have the power and shall execute and deliver all instruments to appoint one or
more Persons approved by the Trustee to act as co-trustee or co- trustees,
jointly with the Trustee, or separate trustee or separate trustees, of all or
any part of the Trust Fund, and to vest in such Person or Persons, in such
capacity, such title to the Trust Fund, or any part thereof, and, subject to the
provisions of the Agreement, such powers, duties, obligations, rights and trusts
as the Servicer and the Trustee may consider necessary or desirable.
Neither the Trustee, its authorized agent(s) nor representative(s) will
conduct an independent review and assessment on whether SBA Loans should be
foreclosed or the underlying property should be liquidated when a default has
occurred with respect thereto.
FEDERAL INCOME TAX CONSEQUENCES
The following discussion represents the opinion of Stroock & Stroock &
Lavan, special Federal tax counsel ("Federal Tax Counsel"), as to the
anticipated material federal income tax consequences of the purchase, ownership
and disposition of Certificates. The discussion, and the opinions referred to
below, are based on laws, regulations, rulings and decisions now in effect (or,
in the case of certain regulations, proposed), all of which are subject to
change or possibly differing interpretations. Investors should consult their own
tax advisors in determining the federal, state, local and other tax consequences
to them of the purchase, ownership and disposition of Certificates. For purposes
of this tax discussion (except with respect to information reporting, or where
the context indicates otherwise), the terms "Certificateholder" and "holder"
mean the beneficial owner of a Certificate.
TAX STATUS OF THE TRUST FUND
Upon the issuance of the Certificates, Federal Tax Counsel, will deliver
its opinion to the effect that, under then current law, assuming compliance with
the Agreement, the Trust Fund will be classified for federal income tax purposes
as a grantor trust and not as an association taxable as a corporation or a
taxable mortgage pool. Accordingly, each Certificateholder will be subject to
federal income taxation as if it owned directly its interest in each asset owned
by the Trust Fund and paid directly its share of expenses paid by the Trust
Fund.
For purposes of federal income tax, the Spread Account Depositor will be
deemed to have retained a fixed portion of the interest due on each SBA Loan
(the "Spread"). The Spread will be treated as "stripped coupons" within the
meaning of Section 1286 of the Code. The Servicer may also be deemed to have
retained a "stripped coupon" if and to the extent that the Servicing Fee is
determined to be unreasonable. In addition, because the Class B Remittance Rate
exceeds the Class A Remittance Rate, a portion of the interest accrued on each
SBA Loan will be treated as a "stripped coupon" purchased by the Class B
Certificateholders. Accordingly, each Class A Certificateholder will be treated
as owning its pro rata percentage interest in the principal of, and interest
payable on, the Unguaranteed Interest of each SBA Loan (minus the portion of the
interest payable on such SBA Loan that is treated as Spread, as a stripped
coupon retained by the Servicer or as a stripped coupon purchased by the Class B
Certificateholders), and such interest in the Unguaranteed Interest of each SBA
Loan will be treated as a "stripped bond" within the meaning of Section 1286 of
the Code. Similarly, each Class B Certificateholder will be treated as owning
its pro rata percentage interest in the principal of the Unguaranteed Interest
of each SBA Loan, plus a disproportionate share of the interest payable on each
SBA Loan.
CLASS A CERTIFICATEHOLDERS
Because Class A Certificates represent stripped bonds, they will be subject
to the original issue discount ("OID") rules of the Code. Accordingly, the tax
treatment of a Class A Certificateholder will depend upon whether the amount of
OID on a Class A Certificate is less than a statutorily defined de minimis
amount.
In general, under regulations issued under Section 1286 of the Internal
Revenue Code of 1986, as amended (the "Code"), the amount of OID on an SBA Loan
treated as a "stripped bond" will be de minimis if it is less than 0.25 percent
of the stated redemption price at maturity, as defined in Section 1273(a)(2) of
the Code, multiplied by the number of years remaining after the purchase date
until the maturity of the SBA Loan. The maturity date is based on the weighted
average maturity date (and a reasonable prepayment assumption may have to be
taken into account in determining weighted average maturity). Under the
regulations, the portion of the interest on each SBA Loan payable to the Class A
Certificateholders will be treated as "qualified stated interest." As a result,
the amount of OID on an SBA Loan will equal the amount by which the price at
which a Certificateholder is deemed to have acquired an interest in an SBA Loan
(the "Purchase Price") is less than the portion of the remaining principal
balance of the SBA Loan allocable to the interest acquired. Although Federal Tax
Counsel cannot opine on the matter, the Trust Fund intends to take the positions
(i) that the amount of OID on the SBA Loans will be determined by aggregating
all payments on the SBA Loans allocable to the Class A Certificateholders (not
including the Spread), and treating the portion of all payments on the SBA Loans
allocable to Class A Certificateholders as a single obligation on an aggregate
basis, rather than being determined separately with respect to each SBA Loan,
and (ii) that no separate allocation of consideration must be made to accrued
interest or to amounts held in the Certificate Account.
Based on these positions, the Trust Fund anticipates that the Certificates
will not be issued initially with OID (or that any OID present will be de
minimis). The Internal Revenue Service ("IRS") could require, instead, that the
computation be performed on an SBA-Loan-by-SBA-Loan basis. In the preamble to
the regulations under Section 1286 of the Code, the IRS requests comment on
appropriate aggregation rules. Any such recalculation could adversely affect the
timing and character of a Class A Certificateholder's income. The IRS might also
require that a portion of the purchase price for a Certificate be allocated to
accrued interest on each SBA Loan and to amounts held in the Certificate Account
pending distribution to Certificateholders at the time of purchase as though
such accrued interest and collections on the SBA Loans were separate assets
purchased by the Certificateholder. Any such allocation would reduce the
Purchase Price and thus increase the discount (or decrease the premium) on the
SBA Loans.
If the amount of OID is de minimis under the rule set forth above, the
Class A Certificates would not be treated as having OID. Each Class A
Certificateholder would be required to report on its federal income tax return
its share of the gross income of the Trust Fund, including interest and certain
other charges accrued on the SBA Loans and any gain upon collection or
disposition of the SBA Loans (but not including any portion of the Spread). Such
gross income attributable to interest on the SBA Loans would exceed the Class A
Remittance Rate by an amount equal to the Class A Certificateholder's share of
the expenses of the Trust Fund for the period during which it owns a Class A
Certificate. The Class A Certificateholder would be entitled to deduct its share
of expenses of the Trust Fund to the extent described below. Any amounts
received by a Class A Certificateholder from the Spread Account or from the
subordination of the Class B Certificates will be treated for federal income tax
purposes as having the same character as the payments they replace. A Class A
Certificateholder would report its share of the income of the Trust Fund under
its usual method of accounting. Accordingly, interest would be includable in a
Certificateholder's gross income when it accrues on the SBA Loans, or, in the
case of Certificateholders who are cash basis taxpayers, when received by the
Servicer on behalf of Certificateholders. The actual amount of discount on an
SBA Loan would be includable in income as principal payments are received on the
SBA Loans.
If, contrary to the treatment anticipated by the Trust Fund, the OID on an
SBA Loan is not de minimis, a Class A Certificateholder will be required to
include in income, in addition to the amounts described above, any OID as it
accrues, regardless of when cash payments are received, using a method
reflecting a constant yield on the SBA Loans. It is possible that the IRS could
require use of a prepayment assumption in computing the yield of an SBA Loan. If
an SBA Loan is deemed to be acquired by a Certificateholder at a significant
discount, such treatment could accelerate the accrual of income by a
Certificateholder.
Although the Trustee intends to account for OID, if any, reportable by
holders of Class A Certificates by reference to the price paid for a Class A
Certificate by an initial purchaser, the amount of OID will differ for
subsequent purchasers. Such subsequent purchasers should consult their tax
advisers regarding the proper calculation of OID on the interest in SBA Loans
represented by a Class A Certificate.
As to SBA Loans that are real estate mortgages, a Certificateholder may be
able (or may be required) to account for any discount on such SBA Loans as
market discount rather than OID if either (i) the amount of OID with respect to
the Certificate was treated as zero under the OID de minimis rule when the
Certificate was stripped or (ii) no more than 1% (i.e., 100 basis points),
including any amount of servicing in excess of reasonable servicing, is stripped
off from the SBA Loans. As noted above, the Trust Fund intends to account for
the SBA Loans on an aggregate basis and does not intend to report separately for
this purpose with respect to the SBA Loans that are real estate mortgages.
In the event that an SBA Loan is treated as purchased at a premium (i.e.,
its Purchase Price exceeds the portion of the remaining principal balance of
such SBA Loan allocable to the Certificateholder), such premium will be
amortizable by the Certificateholder as an offset to interest income (with a
corresponding reduction in the Certificateholder's basis) under a constant yield
method over the term of the SBA Loan if an election under Section 171 of the
Code is made with respect to the interests in the SBA Loans represented by the
Certificates or was previously in effect. Any such election will also apply to
all debt instruments held by the Certificateholder during the year in which the
election is made and all debt instruments acquired thereafter.
A Certificateholder will be entitled to deduct, consistent with its method
of accounting, its pro rata share of reasonable servicing fees and other fees
paid or incurred by the Trust Fund as provided in Section 162 or 212 of the
Code. If a Certificateholder is an individual, estate or trust, the deduction
for such holder's share of such fees will be allowed only to the extent that all
of such holder's miscellaneous itemized deductions, including such holder's
share of such fees, exceed two percent of such holder's adjusted gross income.
CLASS B CERTIFICATEHOLDERS
In General. Except as described below, it is believed that the Class B
Certificateholders will be subject to tax in the same manner as Class A
Certificateholders. However, no federal income tax authorities address the
precise method of taxation of an instrument such as the Class B Certificates and
Federal Tax Counsel cannot opine on this issue. In the absence of applicable
authorities, the Trustee intends to report income to Class B Certificateholders
in the manner described below.
Each Class B Certificateholder will be treated as owning (i) the Class B
Percentage of the principal portion of the Unguaranteed Interest on each SBA
Loan plus (ii) a disproportionate portion of the interest on each SBA Loan (not
including the Spread). Income will be reported to a Class B Certificateholder
based on the assumption that all amounts payable to the Class B
Certificateholders are taxable under the coupon stripping provisions of the Code
and treated as a single obligation. In applying those provisions, the Trustee
will take the position that a Class B Certificateholder's entire share of the
interest on an SBA Loan will qualify as "qualified stated interest." Thus,
except to the extent modified by the effects of subordination of the Class B
Certificates, as described below, income will be reported to Class B
Certificateholders in the manner described above for holders of the Class A
Certificates.
EFFECT OF SUBORDINATION
If the Certificateholders of one Class of Certificates receive
distributions of less than their share of the Trust Fund's receipts of principal
or interest (the "Shortfall Amount") because of the subordination of the
Certificates, it is believed that such Certificateholders would probably be
treated for federal income tax purposes as if they had (l) received as
distributions their full share of such receipts, (2) paid over to the
Certificateholders of the other Class of Certificates an amount equal to such
Shortfall Amount, and (3) retained the right to reimbursement of such amounts to
the extent of future collections otherwise available for deposit in the Spread
Account. However, Federal Tax Counsel cannot opine to such treatment.
Under this treatment, (1) Class B Certificateholders would be required to
accrue as current income any interest, OID income, or (to the extent paid on the
SBA Loans) accrued market discount of the Trust Fund that was a component of the
Shortfall Amount, even though such amount was in fact paid to the Class A
Certificateholders, (2) a loss would only be allowed to the Class B
Certificateholders when their right to receive reimbursement of such Shortfall
Amount became worthless (i.e., when it became clear that that amount would not
be available from any source to reimburse such loss), and (3) reimbursement of
such Shortfall Amount prior to such a claim of worthlessness would not be
taxable income to Class B Certificateholders because such amount was previously
included in income. Similarly, a loss would only be allowed to the Class A
Certificateholders when their right to receive reimbursement of such Shortfall
Amount became worthless. Those results should not significantly affect the
inclusion of income for Class B Certificateholders on the accrual method of
accounting, but could accelerate inclusion of income to Class B
Certificateholders on the cash method of accounting by, in effect, placing them
on the accrual method. Moreover, the character and timing of loss deductions is
unclear and Federal Tax Counsel cannot opine as to such character or timing.
STATUS OF THE CERTIFICATES
The Certificates generally will be "real estate assets" for purposes of
Section 856(c)(5)(A) of the Code, and interest income on the Certificates
generally will be "interest on obligations secured by mortgages on real
property" within the meaning of Section 856(c)(3)(B) of the Code, to the extent
that the SBA Loans are mortgages secured by real property. The Certificates
generally will be treated as "loans . . . secured by an interest in real
property" within the meaning of Section 7701(a)(19)(C)(v) of the Code, to the
extent that the SBA Loans are secured by residential real estate mortgages.
SALES OF CERTIFICATES
A holder that sells a Certificate will recognize gain or loss equal to the
difference between the amount realized on the sale and its adjusted basis in the
Certificate. In general, such adjusted basis will equal the holder's cost for
the Certificate, increased by the amount of any income previously reported 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. Any such gain or loss generally will be capital gain or loss
if the assets underlying the Certificate were held as capital assets, except
that, in the case of a Certificate that was acquired with more than a de minimis
amount of market discount, such gain will be treated as ordinary interest income
to the extent of the portion of such discount that accrued during the period in
which the seller held the Certificate and that was not previously included in
income.
FOREIGN INVESTORS
A Certificateholder who is not a "United States person" (as defined below)
and is not subject to federal income tax as a result of any direct or indirect
connection to the United States other than its ownership of a Certificate
generally will not be subject to United States income or withholding tax in
respect of payments of interest or original issue discount on a Certificate,
provided that the holder complies to the extent necessary with certain
identification requirements (including delivery of a statement, signed by the
Certificateholder under penalties of perjury, certifying that such holder is not
a United States person and providing the name and address of such holder).
However, distributions of interest to a holder who is not a United States person
will be subject to withholding tax at a rate of 30 percent, unless such
withholding tax rate is reduced by an applicable treaty, to the extent that such
interest distributions are attributable to SBA Loans originated on or prior to
July 18, 1984. For these purposes, the term "United States person" means a
citizen or a resident of the United States, a corporation, partnership, or other
entity created or organized in, or under the laws of, the United States or any
political subdivision thereof, or an estate or trust not described in Section
7701(a)(31) of the Code.
BACKUP WITHHOLDING
Payments of interest and principal, as well as payments of proceeds from
the sale of Certificates, to Certificateholders who are not "exempt recipients"
may be subject to the "backup withholding" tax under Section 3406 of the Code at
a rate of 31 percent, if such holders fail to furnish certain information,
including their taxpayer identification numbers, to the Trustee, its agent, or
the broker effecting a sale of the Certificate, or otherwise fail to establish
an exemption from such tax. Any amounts deducted and withheld from a
distribution to a Certificateholder would be allowed as a credit against such
Certificateholder's federal income tax. Furthermore, certain penalties may be
imposed by the IRS on a Certificateholder who is required to supply information
but who does not do so in the proper manner.
ERISA CONSIDERATIONS
Neither an Underwriter Exemption (as defined in the Prospectus) nor
Prohibited Transaction Class Exemption 83-1 is applicable to the purchase,
holding or transfer of the Certificates. Therefore, no Certificates may be
purchased for, or on behalf of, any employee benefit plan or other retirement
arrangement which is subject to Title I of the Employee Retirement Income
Security Act of 1974, as amended, and/or Section 4975 of the Internal Revenue
Code of 1986, as amended, or any entity whose underlying assets include plan
assets by reason of such plan or account investing in such entity (including
insurance company separate or general accounts and collective investment funds).
Each Certificateholder will be deemed to have represented and warranted that it
is not subject to the foregoing limitations. See "ERISA Considerations" in the
Prospectus.
LEGAL INVESTMENT
There may be 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.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement
for the sale of the Class A and Class B Certificates, dated December 19, 1996
(the "Underwriting Agreement"), the Sellers have agreed to sell and the
Underwriter has agreed to purchase all the Class A and Class B Certificates. The
Class A and Class B Certificates will be offered by the Underwriter to the
public in negotiated transactions. After the Class A and Class B Certificates
are released for sale to the public, the offering price and other selling terms
may be varied by the Underwriter. The Underwriter and any dealers that
participate with the Underwriter in the distribution of the Class A and Class B
Certificates may be deemed to be underwriters and any commissions received by
them and any profit on the resale of the Class A and Class B Certificates by
them may be deemed to be underwriting discounts and commissions under the 1933
Act.
The Representative and the Sellers have agreed to indemnify the Underwriter
against certain liabilities including liabilities under the 1933 Act.
In addition to purchasing the Certificates pursuant to the Underwriting
Agreement, the Underwriter and its affiliates have performed investment banking
services for the Representative and its affiliates.
RATINGS
It is a condition to their issuance that the Class A Certificates be rated
"Aaa" and "AAA" by Moody's and Duff & Phelps, respectively, and that the Class B
Certificates be rated at least "A2" and "A" by Moody's and Duff & Phelps,
respectively. A rating of "Aaa" and "AAA" is the highest rating assigned by
Moody's and Duff & Phelps, respectively. According to Moody's, securities which
are rated "Aaa" are judged to be of the best quality and, according to Duff &
Phelps, a rating of "AAA" indicates that the capacity to pay interest and repay
principal is extremely strong. According to Moody's, such securities carry the
smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues. According to Moody's, securities
which are rated "A2" possess many favorable investment attributes and are to be
considered as upper-medium- grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future. According
to Duff & Phelps, a rating of "A" indicates that the capacity to pay interest
and repay principal is average, although a security with these ratings is more
susceptible to adverse effects of changes in circumstances and economic
conditions than securities in higher categories. A security rating is not a
recommendation to buy, sell or hold securities and may be subject to revision or
withdrawal at any time. No person is obligated to maintain the rating on any
Certificate.
LEGAL MATTERS
Certain legal matters relating to the validity of the issuance of the
Certificates will be passed upon for the Sellers by Eric Elwin, Esq., Corporate
Counsel to the Sellers. Certain legal matters relating to the validity of the
issuance of the Certificates will be passed upon for the Underwriter by Stroock
& Stroock & Lavan, New York, New York. Stroock & Stroock & Lavan also will
render opinions relating to the transfer of the Unguaranteed Interests from the
Sellers to the Trust Fund and as to the material federal income tax consequences
associated with the purchase, ownership and disposition of the Certificates. See
"Risk Factors--The Status of the SBA Loans in the Event of Bankruptcy of the
Sellers" in the Prospectus and "Federal Income Tax Consequences" herein and
"Federal Income Tax Consequences" in the Prospectus.
FINANCIAL INFORMATION
The Sellers have determined that their financial statements are not
material to the offering made hereby. Except for certain representations and
warranties relating to the SBA Loans, the obligations of the Sellers with
respect to the SBA Loans are primarily limited to contractual servicing
obligations.
The Trust Fund has been formed to own the SBA Loans and to issue the
Certificates. The Trust Fund had no assets or obligations prior to the issuance
of the Certificates and will not engage in any activities other than those
described herein. Accordingly, no financial statements with respect to the Trust
Fund are included in this Prospectus Supplement.
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Class A and
Class B Certificates (the "Global Securities") will be available only in
book-entry form. Investors in the Global Securities may hold such Global
Securities through any of The Depository Trust Company, 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 Securities
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 Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations and prior issuances of securities generally
having the same characteristics as the Certificates and representing a pool of
SBA loans ("SBA Loan-Backed Certificates").
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 as DTC Participants.
Non-U.S. holders (as described below) of Global Securities 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 Securities will be held in book-entry form by DTC in the name of
Cede & Co. as nominee of DTC. Investors' interests in the Global Securities 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 Securities through DTC will follow
the settlement practices applicable to prior SBA Loan-Backed Certificates
issues. Investor 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 Securities 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 Securities will be credited to the
securities custody accounts on the settlement date against payment 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 prior SBA
Loan-Backed Certificates issues 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
Securities 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
will instruct the respective Depositary, as the case may be, to receive the
Global Securities against payment. Payment will include interest accrued on the
Global Securities from and including the last coupon payment date to and
excluding the settlement date, on the basis of the actual number of days in such
accrual period and a year assumed to consist of 360 days. For transactions
settling on the 31st of the month, payment will include interest accrued to and
excluding the first day of the following month. Payment will then be made by the
respective Depositary of the DTC Participant's account against delivery of the
Global Securities. After settlement has been completed, the Global Securities
will be credited to the respective clearing system and by the clearing system,
in accordance with its usual procedures, to the CEDEL Participant's or Euroclear
Participant's account. The securities credit will appear the next day (European
time) and the cash debt will be back-valued to, and the interest on the Global
Securities 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 debt
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 preposition 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 preposition
funds and allow that credit line to be drawn upon the finance settlement. Under
this procedure, CEDEL Participants or Euroclear Participants purchasing Global
Securities would incur overdraft charges for one day, assuming they cleared the
overdraft when the Global Securities were credited to their accounts. However,
interest on the Global Securities would accrue from the value date. Therefore,
in many cases the investment income on the Global Securities 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 Securities to
the respective European 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 Participants 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
Securities are to be transferred by the respective clearing system, through the
respective Depositary, 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 the respective Depositary, as appropriate, to deliver the Global
Securities to the DTC Participant's account against payment. Payment will
include interest accrued on the Global Securities from and including the last
coupon payment to and excluding the settlement date on the basis of the actual
number of days in such accrual period and a year assumed to consist of 360 days.
For transactions settling on the 31st of the month, payment will include
interest accrued to and excluding the first day of the following month. 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 respective clearing system and elect to be in debt in
anticipation of receipt of the sale proceeds in its account, the back-valuation
will extinguish any overdraft 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
Securities 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) 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 Securities in the U.S. from a
DTC Participant no later than one day prior to settlement, which would give
the Global Securities 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 Securities 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.
Exception for non-U.S. Persons (Form W-8). Beneficial owners of Global
Securities that are non-U.S. Persons can obtain a complete exemption from the
withholding tax by filing a signed Form W-8 (Certificate of Foreign Status). If
the information shown on Form W-8 changes, a new Form W-8 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 Certificate Owners 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 Certificate
Owners or his 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 Certificate Owner of a
Global Security or, in the case of a Form 1001 or a Form 4224 filer, his agent,
files by submitting the appropriate form to the person through whom it holds
(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, (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" as
defined in Section 7701(a)(31) of the Code. 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 Securities. Investors are advised to consult their own tax
advisors for specific tax advise concerning their holding and disposing of the
Global Securities.
<PAGE>
INDEX OF PRINCIPAL TERMS PAGE
Account...............................................*
Act................................................S-60
Additional Fee......................................S-6
Additional Fee SBA Loans............................S-6
Adjusted SBA Loan Remittance Rate..................S-26
Adjustment Date....................................S-14
Agent of the SBA....................................S-6
Agent of the SBA's Fee..............................S-6
Aggregate Class A Certificate Principal Balance.......*
Aggregate Class B Certificate Principal Balance.......*
Agreement...........................................S-4
Annual Expense Escrow Amount..........................*
Assignee...........................................S-24
Assignment of Mortgage................................*
Available Funds....................................S-11
BIF...................................................*
Book-entry Certificates.......................... S-80
Business Day..........................................*
Capitalized Interest Account.......................S-10
Cede...............................................S-31
CEDEL...............................................S-1
CEDEL Participants.................................S-81
Certificate Account................................S-74
Certificateholder or Holder...........................*
Certificate Owners.................................S-80
Certificate Register..................................*
Certificate Registrar.................................*
Certificates........................................S-1
Certified Lender...................................S-60
Class A Carry-Forward Amount.......................S-17
Class A Certificate Balance........................S-15
Class A Certificates................................S-2
Class A Interest Distribution Amount...............S-12
Class A Percentage.................................S-17
Class A Principal Distribution Amount..............S-16
Class A Remittance Amount..........................S-18
Class A Remittance Rate............................S-12
Class B Carry-Forward Amount.......................S-17
Class B Certificate Balance........................S-15
Class B Certificates................................S-2
Class B Interest Distribution Amount...............S-12
Class B Percentage.................................S-17
Class B Principal Distribution Amount..............S-16
Class B Remittance Amount..........................S-18
Class B Remittance Rate............................S-12
Closing Date.......................................S-19
CLP................................................S-69
Code...............................................S-88
Collateral............................................*
Commercial Property .................................*
Compensating Interest..............................S-28
Cooperative........................................S-82
CPR................................................S-65
Curtailment...........................................*
Cut-Off Date........................................S-8
Definitive Certificates............................S-31
Designated Depository Institution.....................*
Determination Date.................................S-26
DOL...................................................*
DTC................................................S-31
Due Date .............................................*
Due Period.........................................S-16
Duff & Phelps......................................S-30
ERISA..............................................S-30
Euroclear...........................................S-1
Euroclear Operator.................................S-82
Euroclear Participants.............................S-82
European Depositaries..............................S-80
Event of Default .....................................*
Excess Payments.......................................*
Excess Proceeds.......................................*
Excess Spread.......................................S-7
Excluded Plan.........................................*
Exemption..........................................S-93
Expense Account.......................................*
Extra Interest.....................................S-75
Extra Interest Percentage..........................S-75
FDIC..................................................*
Federal Tax Counsel................................S-30
FHLMC ...............................................*
Fitch.................................................*
FNMA .................................................*
Foreclosed Property .................................*
Foreclosed Property Disposition .....................*
Funding Period......................................S-9
GAO................................................S-62
GAO Report.........................................S-62
Global Securities..................................S-96
GPP................................................S-69
Grantor trust......................................S-29
Guaranteed Interest.................................S-6
Holders............................................S-31
Initial Class A Certificate Principal Amount........S-4
Initial Class B Certificate Principal Amount........S-4
Initial Deposit....................................S-19
Insurance Proceeds....................................*
Interest Accrual Period.............................S-9
IRS................................................S-89
Liquidated SBA Loan ................................*
Liquidation Proceeds..................................*
Loan Guaranty Agreement .............................*
Majority Certificateholders...........................*
Monthly Advance....................................S-26
Monthly Payment .....................................*
Moody's ...........................................S-30
Mortgage .............................................*
Mortgaged Property....................................*
MSNY................................................S-1
Multi-Party Agreement ............................S-26
Net Liquidation Proceeds..............................*
Note Rate..........................................S-22
Notes...............................................S-9
OID................................................S-29
Obligor ...........................................S-6
Opinion of Counsel....................................*
Original Class A Certificate Principal Balance........*
Original Class B Certificate Principal Balance........*
Original Pool Principal Balance.....................S-8
Parent.............................................S-69
Paying Agent..........................................*
Percentage Interest...................................*
Permitted Instruments.................................*
Person ...............................................*
Physical Certificates..............................S-83
Plan..................................................*
Plan Asset Regulation.................................*
PLP................................................S-69
Pool Principal Balance................................*
Preferred Lender...................................S-60
Pre-Funded Amount...................................S-9
Premium Protection Fee..............................S-7
Pre-Funding Account.................................S-9
Prime Rate.........................................S-14
Principal and Interest Account........................*
Principal Balance ...................................*
Principal Prepayment..................................*
Prior Lien............................................*
Prospectus..........................................S-2
Purchase Price.....................................S-88
Record Date .......................................S-19
Registered Holder ...................................*
Reimbursable Amounts..................................*
Released Mortgaged Property Proceeds...............S-27
Relevant Depository................................S-80
REMIC..............................................S-29
Representative......................................S-1
Remittance Date....................................S-18
Residential Property..................................*
Responsible Officer .................................*
Restricted Group......................................*
SAIF .................................................*
SBA ................................................S-1
SBA File .............................................*
SBA Form 1086 ........................................*
SBA Loan-Backed Certificates.......................S-96
SBA Loan Interest Rate ...............................*
SBA Loan Pool.......................................S-5
SBA Loans...........................................S-1
SBA Loan Schedule ....................................*
SBA Notes..........................................S-36
SBA Rules and Regulations ............................*
SBA Section 7(a) Loans .............................S-5
Section 7(a) Program...............................S-60
Sellers ............................................S-1
Servicer............................................S-1
Servicer's Certificate ...............................*
Servicing Advances ..............................S-28
Servicing Fee................................... S-29
Servicing Officer ....................................*
Shortfall Amount...................................S-32
Simple Interest....................................S-36
S&P...................................................*
Special Remittance Date............................S-10
Specified Spread Account Requirement...............S-20
Spread.............................................S-88
Spread Account ....................................S-19
Spread Account Agreement...........................S-20
Spread Account Custodian..............................*
Spread Account Depositor...........................S-19
Spread Balance.....................................S-20
Subsequent SBA Loans................................S-2
Subservicer...........................................*
Subservicing Agreement................................*
Successor Servicer.............................. S-85
Tax Return ...........................................*
Termination Price..................................S-29
Terms and Conditions...............................S-86
TMSIC...............................................S-1
Trustee.............................................S-5
Trust Fund..........................................S-1
UCC................................................S-25
Underwriter.........................................S-2
Underwriting Agreement.............................S-93
Unguaranteed Interest...............................S-1
Unguaranteed Percentage ............................S-7
United States person...............................S-92
U.S. Person.......................................S-100
Weighted average life .............................S-65
* Defined in "Certain Definitions."
<PAGE>
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the definitions contained in the
Agreement and used in this Prospectus Supplement. Reference is made to the
Agreement for the full definitions of all terms.
ACCOUNT: The Certificate Account, the Pre-Funding Account and the
Capitalized Interest Account, each established by the Trustee for the benefit of
the Certificateholders; the Expense Account established by the Trustee for the
benefit of the Trustee and the Spread Account held by the Spread Account
Custodian pursuant to the Spread Account Agreement. The Trustee's obligation to
establish and maintain the Certificate Account pursuant to the Agreement is not
delegable.
AGGREGATE CLASS A CERTIFICATE PRINCIPAL BALANCE: As of any date of
determination, the Original Class A Aggregate Certificate Principal Balance less
the sum of all amounts previously distributed to the Class A Certificateholders
in respect of principal.
AGGREGATE CLASS B CERTIFICATE PRINCIPAL BALANCE: As of any date of
determination, the Original Aggregate Class B Certificate Principal Balance less
the sum of all amounts previously distributed to the Class B Certificateholders
in respect of principal.
ANNUAL EXPENSE ESCROW AMOUNT: The product of 0.06% per annum and the Pool
Principal Balance, which is computed and payable on a monthly basis and
represents the estimated annual Trustee's fees and Trust Fund expenses.
ASSIGNMENT OF MORTGAGE: With respect to those SBA Loans secured by a
Mortgaged Property, an assignment of the Mortgage, notice of transfer or
equivalent instrument sufficient under the laws of the jurisdiction wherein the
related Mortgaged Property is located to reflect of record the transfer of the
related SBA Loan to the Trustee.
BIF: The Bank Insurance Fund, or any successor thereto.
BUSINESS DAY: Any day other than (i) a Saturday or Sunday, or (ii) a day on
which banking institutions in the States of California, New York or New Jersey
are authorized or obligated by law or executive order to be closed.
CERTIFICATEHOLDER or HOLDER: Each Person in whose name a Class A or Class B
Certificate is registered in the Certificate Register, except that, solely for
the purposes of giving any consent, waiver, request or demand pursuant to the
Agreement, any Certificate registered in the name of the Sellers, the Servicer,
any Subservicer or any affiliate of any of them, shall be deemed not to be
outstanding and the undivided Percentage Interest evidenced thereby shall not be
taken into account in determining whether the requisite percentage of
Certificates necessary to effect any such consent, waiver, request or demand has
been obtained.
CERTIFICATE REGISTER: The Certificate Register established and maintained
in accordance with the Agreement.
CERTIFICATE REGISTRAR: Initially, Marine Midland Bank and thereafter, any
successor appointed pursuant to the Agreement.
COLLATERAL: All items of property (including a Mortgaged Property), whether
real or personal, tangible or intangible, or otherwise, pledged by an Obligor or
others to a Seller to secure payment under an SBA Loan.
COMMERCIAL PROPERTY: Real property (other than agricultural property or
Residential Property) that is generally used by the Obligor in the conduct of
its business.
CURTAILMENT: With respect to an SBA Loan, any payment of principal received
during a Due Period as part of a payment that is in excess of five times the
amount of the Monthly Payment due for such Due Period and which is not intended
to satisfy the SBA Loan in full, nor is intended to cure a delinquency.
DESIGNATED DEPOSITORY INSTITUTION: With respect to the Principal and
Interest Account, an entity which is an institution whose deposits are insured
by either the BIF or SAIF administered by the FDIC, the unsecured and
uncollateralized long-term debt obligations of which shall be rated A2 or better
by Moody's and A or better by Duff & Phelps or P1 by Moody's and A1 by Duff &
Phelps, and which is either (i) a federal savings association duly organized,
validly existing and in good standing under the federal banking laws, (ii) an
institution duly organized, validly existing and in good standing under the
applicable banking laws of any state, (iii) a national banking association duly
organized, validly existing and in good standing under the federal banking laws,
or (iv) a principal subsidiary of a bank holding company, in each case acting or
designated by the Servicer as the depository institution for the Principal and
Interest Account.
DETERMINATION DATE: That day of each month which is the third Business Day
prior to the 15th day of such month.
DUE DATE: The day of the month on which the Monthly Payment is due from
the Obligor on an SBA Loan.
EVENT OF DEFAULT: The Events of Default of the Servicer specified in the
Agreement.
EXCESS PAYMENTS: With respect to a Due Period, any amounts received on an
SBA Loan in excess of the Monthly Payment due on the Due Date relating to such
Due Period which does not constitute either a Curtailment or a Principal
Prepayment or payment with respect to an overdue amount. Excess Payments are
payments of principal for purposes of the Agreement.
EXCESS PROCEEDS: As of any Remittance Date, with respect to any Liquidated
SBA Loan, the excess, if any, of (a) the Unguaranteed Percentage of the total
Net Liquidation Proceeds, over (b) the Principal Balance of such SBA Loan as of
the date such SBA Loan became a Liquidated SBA Loan plus 30 days interest
thereon at the then applicable Adjusted SBA Loan Remittance Rate; provided,
however, that such excess shall be reduced by the amount by which interest
accrued on the advance, if any, made by the Servicer at the related SBA Loan
Interest Rate(s) exceeds in terest accrued on such advance at the then
applicable weighted average Class A and Class B Remittance Rates.
EXPENSE ACCOUNT: The expense account established and maintained by the
Trustee in accordance with the Agreement.
FDIC: The Federal Deposit Insurance Corporation and any successor thereto.
FHLMC: The Federal Home Loan Mortgage Corporation and any successor
thereto.
FNMA: The Federal National Mortgage Association and any successor thereto.
FORECLOSED PROPERTY: Property, the title to which is acquired in
foreclosure or by deed in lieu of foreclosure.
FORECLOSED PROPERTY DISPOSITION: The final sale of a Foreclosed Property
acquired in foreclosure or by deed in lieu of foreclosure. The proceeds of any
Foreclosed Property Disposition constitute part of the definition of Liquidation
Proceeds.
INSURANCE PROCEEDS: Proceeds paid by any insurer pursuant to any insurance
policy covering an SBA Loan, Collateral or Foreclosed Property, including but
not limited to title, hazard, life, health and/or accident insurance policies.
LIQUIDATED SBA LOAN: Any defaulted SBA Loan or Foreclosed Property as to
which the Servicer has determined that all amounts which it reasonably and in
good faith expects to recover have been recovered from or on account of such SBA
Loan.
LIQUIDATION PROCEEDS: Cash, including Insurance Proceeds, proceeds of any
Foreclosed Property Disposition, revenues received with respect to the
conservation and disposition of a Foreclosed Property, and any other amounts
received in connection with the liquidation of defaulted SBA Loans, whether
through trustee's sale, foreclosure sale or otherwise.
LOAN GUARANTY AGREEMENT: The Loan Guaranty Agreement (Deferred
Participation) (SBA Form 750) dated August 13, 1980 between the SBA and The
Money Store Investment Corporation, as such agreement may be amended from time
to time.
MAJORITY CERTIFICATEHOLDERS: The Holder or Holders of Class A and Class B
Certificates evidencing an Aggregate Class A Certificate Principal Balance and
Aggregate Class B Certificate Principal Balance, as the case may be, in excess
of 50% of the Aggregate Class A Certificate Principal Balance and Aggregate
Class B Certificate Principal Balance, as the case may be.
MONTHLY PAYMENT: The monthly payment of principal and/or interest required
to be made by an Obligor on the related SBA Loan, as adjusted pursuant to the
terms of the related SBA Note.
MORTGAGE: The mortgage, deed of trust or other instrument creating a lien
on a Mortgaged Property.
MORTGAGED PROPERTY: The underlying real property, if any, securing an SBA
Loan, consisting of a Commercial Property or Residential Property and any
improvements thereon.
NET LIQUIDATION PROCEEDS: Liquidation Proceeds net of (i) any
reimbursements to the Servicer made therefrom pursuant to the Agreement and (ii)
amounts required to be released to the related Obligor pursuant to applicable
law.
OPINION OF COUNSEL: A written opinion of counsel, who may, without
limitation, be counsel for the Sellers or Servicer, reasonably acceptable to the
Trustee and experienced in matters relating thereto.
ORIGINAL CLASS A CERTIFICATE PRINCIPAL BALANCE: The initial aggregate
principal amount of Class A Certificates issued on the Closing Date.
ORIGINAL CLASS B CERTIFICATE PRINCIPAL BALANCE: The initial aggregate
principal amount of Class B Certificates on the Closing Date.
PAYING AGENT: Initially, Marine Midland Bank, and thereafter, any other
Person that meets the eligibility standards for the Paying Agent specified in
the Agreement and is authorized by the Trustee to make payments on the
Certificates on behalf of the Trustee.
PERCENTAGE INTEREST: With respect to a Class A or Class B Certificate, the
portion of the Trust Fund evidenced by such Class A or Class B Certificate,
expressed as a percentage, the numerator of which is the denomination
represented by such Class A or Class B Certificate and the denominator of which
is the Original Class A Certificate Principal Balance or Original Class B
Certificate Principal Balance, as the case may be.
PERMITTED INSTRUMENTS: As used herein, Permitted Instruments shall include
the following:
(i) direct general obligations of, or obligations fully and
unconditionally guaranteed as to the timely payment of principal and
interest by, the United States or any agency or instrumentality
thereof, provided such obligations are backed by the full faith and
credit of the United States, FHA debentures, Federal Home Loan Bank
consolidated senior debt obligations, and FNMA senior debt obligations,
but excluding any of such securities whose terms do not provide for
payment of a fixed dollar amount upon maturity or call for redemption;
(ii) federal funds, certificates of deposit, time deposits and
banker's acceptances (having original maturities of not more than 365
days) of any bank or trust company incorporated under the laws of the
United States or any state thereof, provided that the short-term debt
obligations of such bank or trust company at the date of acquisition
thereof have been rated Prime-1 or better by Moody's and Duff 1+ or
better by Duff & Phelps;
(iii) deposits of any bank or savings and loan association which has
combined capital, surplus and undivided profits of at least $3,000,000
which deposits are held only up to the limits insured by the BIF or
SAIF administered by the FDIC, provided that the unsecured long-term
debt obligations of such bank or savings and loan association have been
rated A3 or better by Moody's and A or better by Duff & Phelps;
(iv) commercial paper (having original maturities of not more than
365 days) rated Prime-1 or better by Moody's and Duff 1+ or better by
Duff & Phelps;
(v) debt obligations rated Aaa by Moody's and AAA by Duff & Phelps
(other than any such obligations that do not have a fixed par value
and/or whose terms do not promise a fixed dollar amount at maturity or
call date);
(vi) investments in money market funds rated Aaa or better by
Moody's and Duff 1+ or better by Duff & Phelps the assets of which are
invested solely in instruments described in clauses (i)-(v) above;
(vii) certain guaranteed investment contracts and
repurchase agreements satisfying the criteria set forth in
the Agreement; and
(viii) any other investment acceptable to the Rating Agencies,
written confirmation of which shall be furnished to the Trustee prior
to any such investment.
PERSON: Any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, national banking association,
unincorporated organization or government or any agency or political subdivision
thereof.
POOL PRINCIPAL BALANCE: The aggregate Principal Balances as of any date of
determination.
PRINCIPAL AND INTEREST ACCOUNT: The principal and interest account
established by the Servicer pursuant to the Agreement.
PRINCIPAL BALANCE: With respect to any SBA Loan or related Foreclosed
Property, at any date of determination, (i) the Unguaranteed Percentage of the
principal balance of the SBA Loan outstanding as of the Cut-Off Date (or, with
respect to any Subsequent SBA Loan, as of the date set forth in the Agreement),
after application of principal payments received on or before such date, minus
(ii) the sum of (a) the Unguaranteed Percentage of the principal portion of the
Monthly Payments received during each Due Period ending prior to the most recent
Remittance Date, which were distributed pursuant to the Agreement on any
previous Remittance Date, and (b) the Unguaranteed Percentage of all Principal
Prepayments, Curtailments, Excess Payments, Insurance Proceeds, Released
Mortgaged Property Proceeds, Net Liquidation Proceeds and net income from a
Foreclosed Property to the extent applied by the Servicer as recoveries of
principal in accordance with the provisions of the Agreement, which were
distributed pursuant to the Agreement on any previous Remittance Date. The
Principal Balance of any Liquidated SBA Loan or any SBA Loan that has been paid
off will equal $0.
PRINCIPAL PREPAYMENT: Any payment or other recovery of principal on an SBA
Loan equal to the outstanding principal balance thereof, received in advance of
the final scheduled Due Date which is intended to satisfy an SBA Loan in full.
PRIOR LIEN: With respect to any SBA Loan secured by a lien which is not a
first priority lien, each loan relating to the corresponding Collateral having a
prior priority lien.
REGISTERED HOLDER: With respect to any SBA Loan, the Person identified as
such in the applicable SBA Form 1086, and any permitted assignees thereof.
REIMBURSABLE AMOUNTS: As of any date of determination, an amount payable to
the Servicer and/or a Seller with respect to (i) the Monthly Advances and
Servicing Advances reimbursable pursuant to the Agreement, (ii) any advances
reimbursable pursu ant to the Agreement and not previously reimbursed, and (iii)
any other amounts reimbursable to the Servicer or a Seller pursuant to the
Agreement.
RESIDENTIAL PROPERTY: Any one or more of the following, (i) single family
dwelling unit not attached in any way to another unit, (ii) row house, (iii)
two-family house, (iv) low-rise condominium, (v) planned unit development, (vi)
three- or four-family house, (vii) high-rise condominium, (viii) mixed use
building or (ix) manufactured home (as defined in FNMA/FHLMC Seller-Servicers'
Guide) to the extent that it constitutes real property in the state in which it
is located.
RESPONSIBLE OFFICER: When used with respect to the Trustee, any officer
assigned to the Corporate Trust Division, including any Vice President,
Assistant Vice President, any Assistant Secretary, any trust officer or any
other officer of the Trustee customarily performing functions similar to those
performed by any of the above designated officers and also, with respect to a
particular matter, any other officer to whom such matter is referred because of
such officer's knowledge of and familiarity with the particular subject. When
used with respect to a Seller, the President, any Vice President, Assistant Vice
President, or any Secretary or Assistant Secretary.
SAIF: The Savings Association Insurance Fund, or any successor thereto.
SBA FILE: The SBA File maintained with respect to each SBA Loan in
accordance with the Agreement.
SBA Form 1086: The Secondary Participation Guaranty and Certification
Agreement on SBA Form 1086, pursuant to which investors purchase the SBA
Guaranteed Portion.
SBA LOAN INTEREST RATE: With respect to any date of determination, the then
applicable annual rate of interest borne by an SBA Loan, pursuant to its terms,
which, as of the Cut-Off Date, is shown on the SBA Loan Schedule.
SBA LOAN SCHEDULE: The schedule of SBA Loans attached as an exhibit to the
Agreement, such schedule identifying each SBA Loan by address of the related
premises, and the name of the Obligor and setting forth as to each SBA Loan the
following information: (i) the Principal Balance as of the close of business on
the Cut- Off Date, (ii) the Account Number, (iii) the original principal amount
of the SBA Loan, (iv) the SBA Loan Date and original number of months to
maturity, in months, (v) the SBA Loan Interest Rate as of the Cut-Off Date and
guaranteed rate payable to the Registered Holder and the Agent of the SBA, (vi)
when the first Monthly Payment was due, (vii) the Monthly Payment as of the
Cut-Off Date, (viii) the remaining number of months to maturity as of the
Cut-Off Date, (ix) the Unguaranteed Percentage, (x) the SBA loan number, (xi)
the margin which is added to the Prime Rate to determine the SBA Loan Interest
Rate, and (xii) the lifetime minimum and maximum SBA Loan Interest Rates, if
applicable.
SBA RULES AND REGULATIONS: The Small Business Act, as amended, codified at
15 U.S.C. 631 ET. SEQ., all rules and regulations promulgated from time to time
thereunder and the Loan Guaranty Agreement.
SERVICER'S CERTIFICATE: The monthly certificate of the Servicer, delivered
to the Trustee in accordance with the Agreement.
SERVICING OFFICER: Any officer of the Servicer involved in, or responsible
for, the administration and servicing of the SBA Loans whose name appears on a
list of servicing officers furnished to the Trustee by the Servicer, as such
list may from time to time be amended.
SPREAD ACCOUNT CUSTODIAN: Marine Midland Bank, in its capacity as Spread
Account Custodian under the Spread Account Agreement, or any successor thereto.
SUBSERVICER: The Money Store of New York, Inc. or any other person with
whom the Servicer has entered into a Subservicing Agreement and who satisfies
any requirements set forth in the Agreement in respect of the qualification of a
Subservicer.
SUBSERVICING AGREEMENT: Any agreement between the Servicer and any
Subservicer relating to subservicing and/or administration of certain SBA Loans
as provided in the Agreement, a copy of which shall be delivered, along with any
modifications thereto, to the Trustee and the SBA.
TAX RETURN: The federal income tax return to be filed on behalf of the
Trust Fund together with any and all other information reports or returns that
may be required to be furnished to the Certificateholders or filed with the
Internal Revenue Service or any other governmental taxing authority under any
applicable provision of federal, state or local tax laws.
<PAGE>
PROSPECTUS
THE MONEY STORE INC.
(Representative)
TMS SBA ASSET BACKED CERTIFICATES
(Issuable in Series)
This Prospectus relates to TMS SBA Asset Backed Certificates (the
"Certificates"), issuable in Series, which may be sold from time to time on
terms determined at the time of sale and described in the related Prospectus
Supplement, evidencing specified interests in one or more trust funds (each, a
"Trust"), the primary assets of which will consist of the right to receive
payments and other recoveries attributable to certain unguaranteed interests
(the "Unguaranteed Interests") in pools (each, a "Pool") of certain loans
partially guaranteed by the U.S. Small Business Administration and certain loans
originated in connection with such loans (the "SBA Loans"), and certain other
related or similar assets more particularly described herein (collectively, the
"Trust Assets"). The Trust Assets and other assets of any Trust will be
described in the Prospectus Supplement for the related Series of Certificates.
Certain of the Trust Assets may have been originated by wholly-owned
subsidiaries (the "Originators") of The Money Store Inc. ("The Money Store" or
the "Representative"). Certain other of the Trust Assets may have been acquired
by The Money Store, an Originator or an affiliate thereof from other lenders or
government agencies. In addition, if so specified in the related Prospectus
Supplement, the Trust will include monies on deposit in one or more trust
accounts to be established with a Trustee (as defined herein), which may include
a Pre-Funding Account (as defined herein) which would be used to purchase
additional Trust Assets for the related Trust from time to time during the
Funding Period (as defined herein) specified in the related Prospectus
Supplement. If specified in the related Prospectus Supplement, certain
Certificates may evidence a fractional undivided ownership interest in a Trust
which will hold a beneficial ownership interest in another trust fund which will
contain the Trust Assets. Certificates may also be entitled to the benefits of
insurance policies, cash accounts, letters of credit, financial guaranty
insurance policies, third party guarantees, supplemental interest payments or
other forms of credit enhancement or maturity protection, to the extent
described in the related Prospectus Supplement. The Prospectus Supplement for
each Series of Certificates will name the entities (which will include The Money
Store or one of its affiliates and may include other entities) which will act,
directly or through one or more sub-servicers, as master servicers (each, in
such capacity, the "Master Servicer") of such Trust Assets.
SEE RISK FACTORS ON PAGE 26 HEREIN FOR A DISCUSSION OF CERTAIN RISK
FACTORS WHICH SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE CERTIFICATES
OFFERED HEREBY.
The date of this Prospectus is December 20, 1996.
<PAGE>
Each Series of Certificates will be issued in one or more classes (each, a
"Class"). Each Class of Certificates will evidence a fractional undivided
ownership interest of a specified percentage or portion of future interest
payments and a specified percentage or portion of future principal payments on
the Trust Assets in the related Trust. A Series of Certificates may include one
or more Classes that receive certain preferential treatment with respect to one
or more other Classes. One or more Classes of Certificates may be entitled to
receive distributions of principal, interest or any combination thereof prior to
one or more other Classes of Certificates or after the occurrence of specified
events, or may be required to absorb one or more types of losses prior to one or
more other Classes of Certificates, in each case as specified in the related
Prospectus Supplement.
Distributions to holders of Certificates ("Certificateholders" or
"Holders") will be made on certain dates specified in the related Prospectus
Supplement (each, a "Remittance Date"), which may be monthly, quarterly,
semi-annually or at such other intervals as are specified therein. The rate (the
"Pass-Through Rate") at which Certificateholders will receive distributions of
interest on any Class of Certificates or the method of calculating such
Pass-Through Rate, which may be fixed or variable, will be set forth in the
related Prospectus Supplement. Distributions on the Certificates of a Series
will be made only from the assets of the related Trust.
The Certificates will not represent an obligation of or interest in the
Representative, the Originators, or any affiliate thereof and, except to the
extent specified in the related Prospectus Supplement, will not be insured or
guaranteed by any governmental agency or instrumentality or by any other person.
The only obligations of the Representative or the Originators with respect to a
Series of Certificates will be pursuant to certain limited representations and
warranties. Except for certain representations and warranties relating to the
Trust Assets and certain other exceptions, the Master Servicer's obligations
with respect to the related Series of Certificates will be limited to its
contractual servicing obligations. If the amount available for distribution to
Certificateholders on any Remittance Date is less than the amount due to them,
the Master Servicer, to the extent provided in the related Prospectus
Supplement, may be obligated, under certain terms and conditions, to advance
cash to such Certificateholders, to the extent such deficiency is attributable
to delinquent payments of principal and interest during the immediately
preceding Due Period (as defined herein). See "Description of the
Certificates--Monthly Advances and Compensating Interest."
The yield to Certificateholders on each Class of Certificates of a Series
may be affected by the rate of payment of principal (including prepayments) of
the Trust Assets in the related Trust and the timing of receipt of such payments
as described herein and in the related Prospectus Supplement. A Trust may be
subject to early termination under the circumstances described herein and in the
related Prospectus Supplement.
If specified in a Prospectus Supplement, an election may be
made to treat each Trust as a "real estate mortgage investment
conduit" ("REMIC") for federal income tax purposes. See "Federal
Income Tax Consequences."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS OR THE RELATED PROSPECTUS SUPPLEMENT. 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.
Offers of the Certificates may be made through one or more different
methods, including offerings through underwriters, as more fully described under
"Plan of Distribution" herein and in the related Prospectus Supplement. The
intention of any underwriter to make a secondary market in the Certificates will
be set forth in the related Prospectus Supplement. There can be no assurance
that a secondary market for the Certificates will develop, or if it does
develop, that it will continue. This Prospectus may not be used to consummate
sales of a Series of Certificates unless accompanied by a Prospectus Supplement.
Until 90 days after the date of each Prospectus Supplement, all dealers
effecting transactions in the securities covered by such Prospectus Supplement,
whether or not participating in the distribution thereof, may be required to
deliver such Prospectus Supplement and this Prospectus. This is in addition to
the obligation of dealers to deliver a Prospectus and Prospectus Supplement when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
PROSPECTUS SUPPLEMENT
The Prospectus Supplement relating to a Series of Certificates to be
offered hereunder, among other things, will set forth with respect to such
Series of Certificates: (i) the aggregate principal amount, Pass-Through Rate or
Rates or other applicable annual rate or rates of interest (or the manner of
determining such rate or rates) and authorized denominations of each Class of
such Certificates; (ii) certain information concerning the Trust Assets and
insurance policies, cash accounts, letters of credit, financial guaranty
insurance policies, third party guarantees, supplemental interest payments or
other forms of credit enhancement or maturity protection, if any, relating to
the Pools or all or part of the related Certificates; (iii) the specified
interest of each Class of Certificates in, and manner and priority of, the
distributions on the Trust Assets; (iv) information as to the nature and extent
of subordination with respect to such Series of Certificates, if any; (v) the
Remittance Dates; (vi) information as to the Master Servicer; (vii) the
circumstances, if any, under which each Trust may be subject to early
termination; (viii) whether the Representative intends to elect to cause the
Trust to be treated as a REMIC; and (ix) additional information with respect to
the plan of sale of such Certificates.
AVAILABLE INFORMATION
The Representative has filed a Registration Statement under the Securities
Act of 1933, as amended (the "1933 Act"), with the Securities an Exchange
Commission (the "Commission") with respect to the Certificates. The Registration
Statement and amendments thereof and to the exhibits thereto, as well as such
reports and other information, are available for inspection without charge at
the public reference facilities maintained by the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549; 7 World Trade Center, 13th Floor, New
York, New York 10048; and Northwestern Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511. Copies of the Registration Statement
and amendments thereof and exhibits thereto may be obtained from the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. The Commission also maintains a Website
(http://www.sec.gov) that contains reports, proxy and information statements and
other information filed electronically with the Commission.
No person has been authorized to give any information or to make any
representation other than those contained in this Prospectus and any Prospectus
Supplement with respect hereto and, if given or made, such information or
representations must not be relied upon. This Prospectus and any Prospectus
Supplement with respect hereto do not constitute an offer to sell or a
solicitation of an offer to buy any securities other than the Certificates
offered hereby and thereby nor an offer of the Certificates to any person in any
state or other jurisdiction in which such offer would be unlawful. The delivery
of this Prospectus at any time does not imply that information herein is correct
as of any time subsequent to its date.
REPORTS TO CERTIFICATEHOLDERS
Periodic and annual reports concerning any Certificates and the related
Trust will be provided to the Certificateholders as described in the related
Prospectus Supplement. If specified in the related Prospectus Supplement, a
Series of Certificates may be issuable in book-entry form. In such event, the
related Certificates will be registered in the name of Cede, the nominee of The
Depository Trust Company. All reports will be provided to Cede, which in turn
will provide such reports to its Participants and Indirect Participants (as
defined herein). Such Participants and Indirect Participants will then forward
such reports to the beneficial owners of Certificates. See "Description of the
Certificates--Book-Entry Registration."
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed by or on behalf of the Trust referred to in the
accompanying Prospectus Supplement with the Commission pursuant to Section
13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), subsequent to the date of this Prospectus and prior to the
termination of the offering of the Certificates issued by such Trust shall be
deemed to be incorporated by reference in this Prospectus and to be a part of
this Prospectus from the date of the filing of such documents. Any statement
contained herein or in a document 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 the
accompanying Prospectus Supplement) 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 such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute part of this
Prospectus. The Representative will provide without charge to each person to
whom a copy of the Prospectus is delivered, on the written or oral request of
any such person, a copy of any or all of the documents incorporated herein by
reference, except the exhibits to such documents (unless such exhibits are
specifically incorporated by reference in such documents). Requests for such
copies should be directed to The Money Store Inc., 3301 C Street, Suite 100-M,
Sacramento, California 95816, Attention: Investor Relations, Telephone: (916)
446-5000.
<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 related Prospectus
Supplement. Capitalized terms used but not defined in this Prospectus shall have
the meanings assigned to such terms elsewhere in this Prospectus.
Securities
Offered............. TMS SBA Asset Backed Certificates (the
"Certificates"), evidencing interests in
certain Pools of SBA Loans and certain other
Trust Assets (each, as defined below), may
be issued from time to time in Series
pursuant to separate Pooling and Servicing
Agreements (each, an "Agreement") among The
Money Store Inc., as Representative (the
"Representative") of certain Trusts,
Originators, a Master Servicer, and a
Trustee, each as defined herein and as
specified in the related Prospectus
Supplement for such Series of Certificates.
Issuers............. Certain trust funds (each, a "Trust")
represented by The Money Store, the primary
assets of which will be the right to receive
payments and other recoveries attributable
to a Pool of SBA Loans and certain other
Trust Assets.
Representative
and Master
Servicer............ The Money Store Inc. ("The Money Store"), a
New Jersey corporation. The Prospectus
Supplement relating to any Series of
Certificates will name the entities (which
may include The Money Store or one of its
affiliates and may additionally include
other unrelated entities) which will act,
directly or through one or more
Sub-Servicers (as defined herein), as master
servicers (each, in such capacity, the
"Master Servicer"). The principal offices
of The Money Store are located in
Sacramento, California and Union, New
Jersey. See "The Representative and the
Originators."
The Trust
Assets.............. The Certificates will evidence fractional
undivided ownership interests in certain
Trusts further described herein. The
primary assets of each Trust may consist of
one or more pools (each, a "Pool") of assets
(the "Trust Assets"), which may include the
Unguaranteed Interest of (i) loans
originated under the U.S. Small Business
Administration (the "SBA") general business
loan program created under Section 7(a) of the
Small Business Act of 1953 ("SBA Section 7(a)
Loans"), (ii) loans made to small businesses
in connection with the origination of an SBA
Section 7(a) Loan, which related SBA Section 7(a)
Loan may or may not be part of a Trust Fund (the
"Section 7(a) Companion Loans"), and (iii)
loans originated under the SBA's 504 program
("SBA 504 Loans"). The SBA Section 7(a) Loans,
the Section 7(a) Companion Loans and the SBA
504 Loans are referred to herein
collectively as the ("SBA Loans").
The "Unguaranteed Interest" will equal (i) as to any SBA
Section 7(a) Loan, all payments and other recoveries on
such SBA Section 7(a) Loan not constituting the Guaranteed
Interest therein and (ii) as to any Section 7(a) Companion
Loan or SBA 504 Loan, all payments and other recoveries
on such Section 7(a) Companion Loan or Rule 504 Loan.
The payment terms of the SBA Loans to be included in any
Pool will be described in the related Prospectus
Supplement and may include any of the following features,
combinations thereof or other features described in the
related Prospectus Supplement:
(a) Interest may be payable at a fixed rate (a "Fixed
Rate") or may be payable at a rate that is adjustable
from time to time in relation to an index, that may be
fixed for a period of time or under certain
circumstances and is followed by an adjustable rate, a
rate that otherwise varies from time to time, or a
rate that is convertible from an adjustable rate to a
fixed rate (each, an "Adjustable Rate"). The specified
rate of interest on an SBA Loan is its "Mortgage
Interest Rate." Changes to an Adjustable Rate may be
subject to periodic limitations, maximum rates,
minimum rates or a combination of such limitations.
Accrued interest may be deferred and added to the
principal of an SBA Loan for such periods and under
such circumstances as may be specified in the related
Prospectus Supplement. SBA Loans may permit the
payment of interest at a rate lower than the Mortgage
Interest Rate for a period of time or for the life of
the SBA Loan, and the amount of any difference may be
contributed from funds supplied by the seller of the
properties securing the related SBA Loan (the
"Mortgaged Properties") or another source or may be
treated as accrued interest and added to the principal
of the SBA Loan.
(b) Principal may be payable on a level basis to fully
amortize the SBA Loan over its term, may be calculated
on the basis of an assumed amortization schedule that
is significantly longer than the original term to
maturity or on an interest rate that is different from
the Mortgage Interest Rate, or may not be amortized
during all or a portion of the original term. Payment
of all or a substantial portion of the principal may
be due on maturity (a "balloon" payment). From time to
time, principal may include interest that has been
deferred and added to the principal balance of the SBA
Loan.
(c) Monthly payments of principal and interest may be
fixed for the life of the SBA Loan, may increase over
a specified period of time ("graduated payments"), or
may change from period to period. SBA Loans may
include limits on periodic increases or decreases in
the amount of monthly payments and may include maximum
or minimum amounts of monthly payments.
(d) Prepayments of principal may be subject to a
prepayment fee, which may be fixed for the life of the
SBA Loan or may adjust or decline over time, and may
be prohibited for the life of the SBA Loan or for
certain periods ("Lockout Periods"). Certain SBA Loans
may permit prepayments after expiration of the
applicable Lockout Period and may require the payment
of a prepayment fee in connection with any such
subsequent prepayment. Other SBA Loans may permit
prepayments without payment of a fee unless the
prepayment occurs during specified time periods. The
SBA Loans may include due-on-sale clauses which permit
the mortgagee to demand payment of the entire SBA Loan
in connection with the sale or certain other transfers
of the related Mortgaged Properties. Other SBA Loans
may be assumable by persons meeting the then
applicable underwriting standards of the originator.
The Mortgaged Properties relating to SBA Loans may be
located in any one of the fifty states or the District of
Columbia. Unless otherwise specified in the related
Prospectus Supplement, all of the Mortgaged Properties
will be covered by standard hazard insurance policies
("Standard Hazard Insurance Policies") insuring against
losses due to fire and various other causes. As set forth
in the related Prospectus Supplement, certain of the SBA
Loans underlying a given Series of Certificates may have
been originated by the Representative, the Originators or
affiliates thereof and certain SBA Loans may have been
purchased by the Representative, an Originator or an
affiliate thereof in the open market or in privately
negotiated transactions, including transactions with
entities affiliated with the Representative.
The SBA Section 7(a) Loans will have been originated under
Section 7(a) (the "Section 7(a) Program") of the Small
Business Act of 1953 (the "SBA Act"). The Section 7(a)
Program was intended to encourage lenders to provide loans
to qualifying small businesses. To assist qualified
borrowers in obtaining more financing when needed, the
Originators originate Section 7(a) Companion Loans in
conjunction with the origination of an SBA Section 7(a)
Loan to the same borrower. Although the Section 7(a)
Companion Loan is not guaranteed by the SBA, it is secured
by a lien on collateral prior to, or pari passu with, the
lien of the related SBA Section 7(a) Loan.
The SBA has also established a program (the "SBA 504 Loan
Program") to encourage lenders to provide fixed asset
financing to qualifying small businesses. In the SBA 504
Loan Program, the Originators provide approximately 50% of
project costs in a conventional loan agreement, with
borrowers providing a minimum 10% equity contribution. The
SBA provides the remainder of the financing. The loans
originated by the Originators under the SBA 504 Loan
Program are not guaranteed by the SBA. The funds used by
the SBA to originate its portion of an SBA 504 Loan are
generated by issuing SBA-guaranteed debentures on behalf
of a certified development company.
SBA Section 7(a) Loans originated by the Originators
generally range in size from $50,000 to $1.3 million. The
maximum amount for a Section 7(a) Companion Loans is
currently $1,750,000, although this amount may be
increased where the Originators believe the collateral or
other factors warrant such increase. The maximum size of
an SBA 504 Loan originated by the Originators is currently
$1.75 million.
The Prospectus Supplement for each Series of Certificates
will specify with respect to all SBA Loans expected to be
included in the related Pool as of the related closing
date, among other things, (i) the expected aggregate
outstanding principal balance and the expected average
outstanding principal balance of the SBA Loans in such
Pool as of the date specified in the Prospectus
Supplement, (ii) the largest expected principal balance
and the smallest expected principal balance of any of the
SBA Loans, (iii) the types of Mortgaged Properties and/or
other assets securing the SBA Loans, (iv) the original
terms to maturity of the SBA Loans, (v) the expected
weighted average term to maturity of the SBA Loans as of
the date specified in the Prospectus Supplement and the
expected range of the terms to maturity, (vi) the earliest
origination date and latest maturity date of any of the
SBA Loans, (vii) the expected weighted average Combined
Loan-to-Value Ratio of the SBA Loans, (viii) the expected
weighted average Mortgage Rate and ranges of Mortgage
Rates borne by the SBA Loans, (ix) in the case of SBA
Loans having Adjustable Rates, the expected weighted
average of the Adjustable Rates as of the date set forth
in the Prospectus Supplement and maximum permitted
Adjustable Rates, if any, (x) the amount of any
Certificate Guaranty Insurance Policy, Mortgage Pool
Insurance Policy, Special Hazard Insurance Policy or
Bankruptcy Bond (each as defined herein) to be maintained
with respect to such Pool, (xi) the amount, if any, and
terms of any other credit enhancement to be provided with
respect to all or any SBA Loans or the Pool and (xii) the
expected geographic location of the Mortgaged Properties.
Pre-Funding
Account............. If provided in the related Prospectus
Supplement, the original principal amount of
a Series of Certificates may exceed the
principal balance of the Trust Assets
initially being delivered to the Trustee.
Cash in an amount equal to such difference
(such amount, the "Pre-Funded Amount") will
be deposited into a separate trust account
(the "Pre-Funding Account") maintained with
the Trustee for the benefit of the Holders.
During the period set forth in the related
Prospectus Supplement (the "Funding
Period"), the Pre-Funded Amount in the
Pre-Funding Account may be used to purchase
additional Trust Assets for the related
Trust subject to the satisfaction of certain
conditions specified under the Agreements.
For a Trust that elects to be characterized as either a
REMIC or a grantor trust under federal income tax laws,
the maximum length of the related Funding Period will not
exceed three calendar months or 90 days, respectively,
from the date of issuance of the Certificates and
otherwise the maximum length of the Funding Period will
not exceed the period set forth in the related Prospectus
Supplement. The amount of the initial Pre-Funded Amount is
intended not to exceed the aggregate principal balance of
additional Trust Assets that the Representative
anticipates will be acquired and conveyed to the Trust
during the applicable Funding Period.
Prior to the conveyance of any additional Trust Assets to
the Trust, the Representative will be required to give
notice of the additional Trust Assets to be conveyed to
the Trust to the Trustee(s) and any third-party credit
enhancement provider. Upon the satisfaction of the
conditions set forth in the Agreement, including the
receipt by the Trustee of an executed assignment, an
Officer's Certificate and a legal opinion, the Trustee
will release from the Pre-Funding Account the necessary
funds to purchase the additional Trust Assets to be
conveyed to the Trust on such date. If any Pre-Funded
Amount remains on deposit in the Pre-Funding Account at
the end of the Funding Period, such amount, in the amounts
and in the manner specified in the related Prospectus
Supplement, will be used to prepay some or all Classes of
the related Series of Certificates.
Multi-Party
Agreement........... In connection with each issuance of
Certificates, the applicable Originators,
the Master Servicer and the Trustee will
enter into an agreement (the "Multi-Party
Agreement"), which will set forth the
relationship of the parties with respect to
the SBA Section 7(a) Loans and the proceeds
thereof and the consent of the SBA to the
transactions contemplated by the related
Agreement.
Description of the
Certificates........ Each Certificate will represent a fractional
undivided ownership interest in the Trust
created pursuant to the related Agreement.
The primary assets of such Trust will be a
Pool of SBA Loans and certain other Trust
Assets. The Certificates of any Series may
be issued in one or more Classes, as
specified in the related Prospectus
Supplement. A Series of Certificates may
include one or more Classes of senior
Certificates (collectively, "Senior
Certificates") which receive certain
preferential treatment specified in the
related Prospectus Supplement with respect
to one or more Classes of subordinate
Certificates (collectively, the
"Subordinated Certificates"). Certain
Series or Classes of Certificates may be
covered by a Certificate Guaranty Insurance
Policy, Mortgage Pool Insurance Policy,
Special Hazard Insurance Policy, Bankruptcy
Bond or other insurance policies, cash
accounts, letters of credit, financial
guaranty insurance policies, third party
guarantees, supplemental interest payments
or other forms of credit enhancement or
maturity protection, as described herein and
in the related Prospectus Supplement.
Each Class of Certificates within a Series will evidence
the interests specified in the related Prospectus
Supplement, which may (i) include the right to receive
distributions allocable only to principal, only to
interest or to any combination thereof; (ii) include the
right to receive distributions only of prepayments of
principal throughout the lives of the Certificates or
during specified periods; (iii) be subordinated in its
right to receive distributions of scheduled payments of
principal, prepayments of principal, interest or any
combination thereof to one or more other Classes of
Certificates of such Series throughout the lives of the
Certificates or during specified periods or may be
subordinated with respect to certain losses or
delinquencies; (iv) include the right to receive such
distributions only after the occurrence of events
specified in the Prospectus Supplement; (v) include the
right to receive distributions in accordance with a
schedule or formula or on the basis of collections from
designated portions of the assets in the related Trust;
(vi) include, as to Certificates entitled to distributions
allocable to interest, the right to receive interest at a
Fixed Rate or an Adjustable Rate; and (vii) include, as to
Certificates entitled to distributions allocable to
interest, the right to distributions allocable to interest
only after the occurrence of events specified in the
related Prospectus Supplement, and in each case, may
accrue interest until such events occur, as specified in
such Prospectus Supplement. The timing and amounts of such
distributions may vary among Classes, over time, or
otherwise as specified in the related Prospectus
Supplement.
The Certificates will be issuable in fully registered
form, in minimum denominations of $1,000 and integral
multiples of $1,000 in excess thereof (or such other
amounts as may be set forth in a Prospectus Supplement),
except that one Certificate of each Class may be issued in
a different denomination. See "Description of
Certificates."
Credit
Enhancement ........ The Trust Assets in a Trust or the
Certificates of one or more Classes in the
related Series may have the benefit of one
or more types of credit enhancement, as
described in the related Prospectus
Supplement. The protection against losses
afforded by any such credit support may be
limited. Such credit enhancement may include
one or more of the following types:
A. Subordination
and Reserve
Accounts........ The rights of the holders of Subordinated
Certificates of a Series to receive
distributions with respect to the Trust
Assets and other assets in the related Trust
will be subordinated to the rights of the
holders of the Senior Certificates of the
same Series to receive distributions to the
extent described in the related Prospectus
Supplement. This subordination is intended
to enhance the likelihood of regular receipt
by holders of Senior Certificates of the
full amount of payments which such holders
would be entitled to receive if there had
been no losses or delinquencies. The
protection afforded to the holders of Senior
Certificates through subordination may be
accomplished by the preferential right of
such holders to receive, prior to any
distribution being made in respect of the
related Subordinated Certificates, the
amounts of principal and interest due to
them on each Remittance Date out of the
funds available for distribution on such
date in the related Certificate Account (as
defined herein) to the extent described in
the related Prospectus Supplement. The
protection afforded to the holders of Senior
Certificates through subordination also may
be accomplished by allocating certain types
of losses or delinquencies to the related
Subordinated Certificates to the extent
described in the related Prospectus
Supplement.
If so specified in the related Prospectus Supplement, the
same Class of Certificates may constitute Senior
Certificates with respect to certain types of payments or
certain losses or delinquencies and Subordinated
Certificates with respect to other types of payments or
losses or delinquencies. If so specified in the related
Prospectus Supplement, subordination may apply only in the
event of certain types of losses not covered by other
forms of credit support, such as hazard losses not covered
by Standard Hazard Insurance Policies or losses due to the
bankruptcy of a Mortgagor not covered by a Bankruptcy
Bond. If further specified in the related Prospectus
Supplement, one or more reserve accounts (each, a "Reserve
Account") may be established and maintained, in whole or
in part, by the deposit therein of distributions allocable
to the holders of Subordinated Certificates for a
specified time or until a specified level is reached. The
related Prospectus Supplement will set forth information
concerning the amount of subordination of a Class or
Classes of Subordinated Certificates in a Series, the
circumstances in which such subordination will be
applicable, the manner, if any, in which the amount of
subordination will decrease over time, the manner of
funding any Reserve Account, and the conditions under
which amounts in any such Reserve Account will be used to
make distributions to Senior Certificateholders or
released to Subordinated Certificateholders from the
related Trust.
B. Certificate
Guaranty
Insurance
Policy.......... A certificate guaranty insurance policy or
policies ("Certificate Guaranty Insurance
Policy") may be obtained and maintained for
each Class or Series of Certificates.
Certificate Guaranty Insurance Policies
generally unconditionally and irrevocably
guarantee that the full amount of the
distributions of principal and interest, as
well as any other amounts specified in the
related Prospectus Supplement, will be
received by an agent of the Trustee, for
distribution by the Trustee to
Certificateholders. Certificate Guaranty
Insurance Policies may have certain
limitations set forth in the related
Prospectus Supplement, including (but not
limited to) limitations on the insurer's
obligation to guarantee the Master
Servicer's obligation to repurchase or
substitute for any SBA Loans, to guarantee
any specified rate of prepayments or to
provide funds to redeem Certificates on any
specified date.
C. Spread
Amount........... If so specified in the related Prospectus
Supplement, certain Classes of Certificates
may be entitled to receive limited
acceleration of principal relative to the
amortization of the related Trust Assets.
The accelerated amortization will be
achieved by applying certain excess interest
collected on the Trust Assets to the payment
of principal on such Classes of
Certificates. This acceleration feature is
intended to create an amount (the "Spread
Amount"), resulting from, and generally
equal to, the excess of the aggregate
principal balances of the applicable Trust
Assets over the principal balances of the
applicable Classes of Certificates. Once
the required Spread Amount is reached, and
subject to the provisions described in the
next sentence and in the related Prospectus
Supplement, the acceleration feature will
cease, unless necessary to maintain the
required level of the Spread Amount. The
applicable Agreement will provide that,
subject to certain floors, caps and
triggers, the required level of the Spread
Amount may increase or decrease over time.
An increase would result in a temporary
period of accelerated amortization of the
applicable Classes of Certificates to
increase the actual level of the Spread
Amount to its required level; a decrease
would result in a temporary period of
decelerated amortization to reduce the
actual level of the Spread Amount to its
required level. An Agreement also may
provide that after one or more Classes of
Certificates have been paid to the required
level of the Spread Amount, excess interest,
together with certain other excess amounts,
may be applied to make-up shortfalls in, or
accelerate the amortization of, other
Classes of Certificates.
D. Mortgage Pool
Insurance
Policy.......... A mortgage pool insurance policy or policies
("Mortgage Pool Insurance Policy") may be
obtained and maintained for each Series
pertaining to SBA Loans, limited in scope,
covering defaults on the related SBA Loans
in an initial amount equal to a specified
percentage of the aggregate principal
balance of all SBA Loans included in the
Pool as of the Cut-off Date or such other
date as is specified in the related
Prospectus Supplement.
E. Special Hazard
Insurance
Policy.......... In the case of SBA Loans or Contracts,
certain physical risks that are not
otherwise insured against by Standard Hazard
Insurance Policies may be covered by a
special hazard insurance policy or policies
(a "Special Hazard Insurance Policy"). The
level of coverage of each Special Hazard
Insurance Policy will be specified in the
related Prospectus Supplement.
F. Bankruptcy
Bonds........... A mortgagor bankruptcy bond or bonds
("Bankruptcy Bond") may be obtained to cover
certain losses resulting from a reduction by
a bankruptcy court of scheduled payments of
principal or interest on an SBA Loan or a
reduction by such court of the principal
amount of an SBA Loan, and will cover
certain unpaid interest on the amount of
such a principal reduction. The level of
coverage of each Bankruptcy Bond will be
specified in the related Prospectus
Supplement.
G. Cross
Support......... If so specified in the Prospectus
Supplement, the ownership interests of
separate Trusts or separate groups of assets
may be evidenced by separate Classes of the
related Series of Certificates. In such
case, credit support may be provided by a
cross-support feature which requires that
distributions be made with respect to
certain Certificates evidencing interests in
one or more Trusts or asset groups prior to
distributions to other Certificates
evidencing interests in other asset groups
or Trusts. If specified in the related
Prospectus Supplement, the coverage provided
by one or more forms of credit support may
apply concurrently to two or more separate
Trusts, without priority among such Trusts,
until the credit support is exhausted. If
applicable, the Prospectus Supplement will
identify the Trusts or asset groups to which
such credit support relates and the manner
of determining the amount of the coverage
provided thereby and of the application of
such coverage to the identified Trusts or
asset groups.
H. Supplemental
Interest
Payments........ If so specified in the Prospectus
Supplement, one or more Classes of
Certificates may be entitled to receive
supplemental interest payments under
specified circumstances. Supplemental
interest payments will be available to fund
some or all of the difference, if any,
between the interest owed to a Class of
Certificates on a Remittance Date and the
interest that would be available to pay such
interest assuming no defaults or
delinquencies on the Trust Assets. Such
differences may result if the interest rates
on the applicable Classes of Certificates
are based upon an index that differs from
the index used in determining the interest
rates on the Trust Assets. Except as
otherwise provided in a Prospectus
Supplement, supplemental interest payments
will not be available to fund shortfalls
resulting from delinquencies or defaults on
the Trust Assets.
I. Maturity
Protection...... If so specified in the Prospectus
Supplement, one or more Classes of
Certificates may be entitled to third-party
payments to help provide that the holders of
such Certificates receive their unpaid
principal on or prior to a specified date.
J. Other Credit
Enhancement..... Other credit enhancement arrangements, as
described in the related Prospectus
Supplement, including (but not limited to)
one or more reserve funds, letters of
credit, financial guaranty insurance
policies or third party guarantees, may be
used to provide coverage for certain risks
of defaults or losses. These arrangements
may be in addition to or in substitution for
any forms of credit support described in the
Prospectus. Any such arrangement must be
acceptable to each nationally recognized
rating agency that provides a rating for the
related Series of Certificates (the "Rating
Agency").
Monthly Advances.... If so specified in the related Prospectus
Supplement, the Master Servicer will be
required under each Agreement to remit to
the Trustee no later than the day of each
month which is at least three business days
prior to the Remittance Date and is in no
case earlier than the seventh business day
of such month (the "Determination Date") the
amount (a "Monthly Advance"), if any, by
which (a) the sum of (x) 30 days' interest
at the weighted average Adjusted SBA Loan
Remittance Rate (as defined herein under
"Description of the Certificates--Monthly
Advances and Compensating Interest") on the
then outstanding principal balance of the
related Series of Certificates and (y) the
amount, if any, required to be deposited
into the related Reserve Account (as
specified in the related Prospectus
Supplement) for the related Remittance Date
exceeds (b) the amount received by the
Master Servicer in respect of interest on
the SBA Loans as of the related Record Date
(less certain amounts not required to be
deposited into the related Trust). Such
advances by the Master Servicer are
reimbursable in the first instance from late
collections of interest, including amounts
received in connection with the liquidation
of defaulted SBA Loans ("Liquidation
Proceeds"), amounts paid by any insurer
pursuant to any insurance policy covering an
SBA Loan, Mortgaged Property or REO Property
("Insurance Proceeds"), and proceeds
received by the Master Servicer in
connection with condemnation, eminent domain
or a release of lien ("Released Mortgaged
Property Proceeds") collected with respect
to the related SBA Loans as to which the
advances were made, and certain other amount
that would otherwise be distributed on the
Certificates. See "Description of the
Certificates--Monthly Advances and
Compensating Interest."
Compensating
Interest............ If so specified in the related Prospectus
Supplement, with respect to each SBA Loan as
to which the Master Servicer receives a
principal payment in full in advance of the
final scheduled due date (a "Principal
Prepayment") or receives a principal payment
that exceeds the scheduled payment by a
specified multiple, but which was not
intended by the Mortgagor to satisfy the SBA
Loan in full or to cure a delinquency (a
"Curtailment"), the Master Servicer will be
required to remit to the Trustee, from
amounts otherwise payable to the Master
Servicer as servicing compensation, an
amount ("Compensating Interest") equal to
any excess of (a) 30 days' interest on the
principal balance of each such SBA Loan as
of the beginning of the related Due Period
at the applicable weighted average Adjusted
SBA Loan Remittance Rate over (b) the amount
of interest actually received on the related
SBA Loan during such Due Period (less
certain amounts not required to be deposited
into the related Trust).
Optional
Termination......... The Master Servicer, certain insurers, the
holders of REMIC Residual Certificates (as
defined herein), or certain other entities
specified in the related Prospectus
Supplement may have the option to effect
early retirement of a Series of Certificates
through the purchase of the related Trust
Assets and other assets in the related Trust
under the circumstances and in the manner
described in "The Agreement--Termination;
Purchase of SBA Loans."
Mandatory
Termination......... The Trustee, the Master Servicer or certain
other entities specified in the related
Prospectus Supplement may be required to
effect early retirement of a Series of
Certificates under the circumstances and in
the manner specified in the related
Prospectus Supplement and herein under "The
Agreement--Termination; Purchase of SBA
Loans."
Trustee ............ The trustee or trustees under any Agreement
relating to a Series of Certificates (each,
a "Trustee") will be specified in the
related Prospectus Supplement.
Federal
Income Tax
Consequences........ The federal income tax consequences of the
purchase, ownership and disposition of the
Certificates of each series will depend on
whether an election is made to treat the
corresponding Trust (or certain assets of
the Trust) as a "real estate mortgage
investment conduit" ("REMIC") under the
Internal Revenue Code of 1986, as amended
(the "Code").
REMIC. If an election is to be made to treat the Trust for
a Series of Certificates as a REMIC for federal income tax
purposes, the related Prospectus Supplement will specify
which Class or Classes thereof will be designated as
regular interests in the REMIC ("REMIC Regular
Certificates") and which class of Certificates will be
designated as the residual interest in the REMIC ("REMIC
Residual Certificates"). To the extent provided herein and
in the related Prospectus Supplement, in the opinion of
Stroock & Stroock & Lavan, special Federal tax counsel
("Federal Tax Counsel"), Certificates representing an
interest in the REMIC generally will be considered
"qualifying real property loans" within the meaning of
Section 593(d) of the Code, "real estate assets" for
purposes of Section 856(c)(5)(A) of the Code and assets
described in Section 7701(a)(19)(C) of the Code.
In the opinion of Federal Tax Counsel, for federal income
tax purposes, REMIC Regular Certificates generally will be
treated as debt obligations of the Trust with payment
terms equivalent to the terms of such Certificates.
Holders of REMIC Regular Certificates will be required to
report income with respect to such Certificates under an
accrual method, regardless of their normal tax accounting
method. Original issue discount, if any, on REMIC Regular
Certificates will be includible in the income of the
Holders thereof as it accrues, in advance of receipt of
the cash attributable thereto, which rate of accrual will
be determined based on a reasonable assumed prepayment
rate. The REMIC Residual Certificates generally will not
be treated as evidences of indebtedness for federal income
tax purposes, but instead, as representing rights to the
taxable income or net loss of the REMIC.
Each holder of a REMIC Residual Certificate will be
required to take into account separately its pro rata
portion of the REMIC's taxable income or loss. Certain
income of a REMIC (referred to as "excess inclusions")
generally may not be offset by such a holder's net
operating loss carryovers or other deductions, and in the
case of a tax-exempt holder of a REMIC Residual
Certificate will be treated as "unrelated business taxable
income." In certain situations, particularly in the early
years of a REMIC, holders of a REMIC Residual Certificate
may have taxable income, and possibly tax liabilities with
respect to such income, in excess of cash distributed to
them. "DISQUALIFIED ORGANIZATIONS," AS DEFINED IN "FEDERAL
INCOME TAX CONSEQUENCES--REMIC RESIDUAL CERTIFICATES--TAX
ON DISPOSITION OF REMIC RESIDUAL CERTIFICATES; RESTRICTION
ON TRANSFER; HOLDING BY PASS-THROUGH ENTITIES," ARE
PROHIBITED FROM ACQUIRING OR HOLDING ANY BENEFICIAL
INTEREST IN THE REMIC RESIDUAL CERTIFICATES.
GRANTOR TRUST. If no election is to be made to treat the
Trust for a series of Certificates ("Non-REMIC
Certificates") as a REMIC, the Trust will be classified as
a grantor trust for federal income tax purposes and not as
an association taxable as a corporation. In the opinion of
Federal Tax Counsel, holders of Non-REMIC Certificates
will be treated for such purposes, subject to the possible
application of the stripped bond rules, as owners of
undivided interests in the related Trust Assets generally
will be required to report as income their pro rata share
of the entire gross income (including amounts paid as
reasonable servicing compensation) from the Trust Assets
and will be entitled, subject to certain limitations, to
deduct their pro rata share of expenses of the Trust.
To the extent provided in the related Prospectus
Supplement, Non-REMIC Certificates may represent interests
in "qualifying real property loans" within the meaning of
Section 593(d) of the Code, "real estate assets" for
purposes of Section 856(c)(5)(A) of the Code and "Loans .
. . principally secured by an interest in real property"
within the meaning of Section 7701(a)(19)(C)(v) of the
Code.
Investors are advised to consult their tax advisors and to
review "Federal Income Tax Consequences" herein and, if
applicable, in the related Prospectus Supplement.
ERISA
Considerations...... Fiduciaries of employee benefit plans or
other retirement plans or arrangements,
including individual retirement accounts,
certain Keogh plans, and collective
investment funds, separate accounts and
insurance company general accounts in which
such plans, accounts or arrangements are
invested, that are subject to the Employee
Retirement Income Security Act of 1974,
as amended ("ERISA"), or the Code should
carefully review with their legal advisors
whether an investment in Certificates will
cause the assets of the related Trust to be
considered plan assets under the Department
of Labor ("DOL") regulations set forth in 29
C.F.R. Section 2510.3-101 (the "Plan Asset
Regulations"), thereby subjecting the
Trustee and the Master Servicer to the
fiduciary investment standards of ERISA, and
whether the purchase, holding or transfer of
Certificates gives rise to a transaction
that is prohibited under ERISA or subject to
the excise tax provisions of Section 4975 of
the Code, unless a DOL administrative
exemption applies. See "ERISA
Considerations."
Legal
Investment.......... Each Prospectus Supplement will describe the
extent, if any, to which the Classes of
Certificates offered thereby will constitute
"mortgage-related securities" for purposes
of the Secondary Mortgage Market Enhancement
Act of 1984 ("SMMEA") and whether they will
be legal investments for certain types of
institutional investors under SMMEA. See
"Legal Investment" herein.
Registration of
Certificates........ Certificates may be represented by global
certificates registered in the name of Cede
& Co. ("Cede"), as nominee of The Depository
Trust Company ("DTC"), or another nominee.
In such case, Certificateholders will not be
entitled to receive definitive certificates
representing such Holders' interests, except
in certain circumstances described in the
related Prospectus Supplement. See
"Description of the Certificates--Book-Entry
Registration" herein.
<PAGE>
RISK FACTORS
LIMITED LIQUIDITY
There can be no assurance that a secondary market for the Certificates
will develop or, if a secondary market does develop, that it will provide
Holders of the Certificates with liquidity of investment or that it will
continue for the lives of the Certificates. In addition, transfers of certain
Classes of Certificates may be restricted as set forth in the related Prospectus
Supplement.
BOOK-ENTRY REGISTRATION
Issuance of the Certificates in book-entry form may reduce the liquidity
of such Certificates in the secondary trading market since investors may be
unwilling to purchase Certificates for which they cannot obtain physical
certificates.
Since transactions in Certificates will, in most cases, be able to be
effected only through DTC, Direct or Indirect Participants and certain banks,
the ability of a Certificateholder to pledge a Certificate to persons or
entities that do not participate in the DTC system, or otherwise to take actions
in respect of such Certificates, may be limited due to lack of a physical
certificate representing the Certificates.
Certificateholders may experience some delay in their receipt of
distributions of interest on and principal of the Certificates since
distributions may be required to be forwarded by the Trustee to DTC and, in such
a case, DTC will be required to credit such distributions to the accounts of its
Participants which thereafter will be required to credit them to the accounts of
the applicable Class of Certificateholders either directly or indirectly through
Indirect Participants. See "Description of the Certificates--Book-Entry
Registration."
NATURE OF SECURITY
Certain of the SBA Loans will be loans secured by junior liens subordinate
to the rights of the mortgagee under each related senior mortgage. As a result,
the proceeds from any liquidation, insurance or condemnation proceedings will be
available to satisfy the principal balance of a junior mortgage loan only to the
extent that the claims, if any, of each such senior mortgagee are satisfied in
full, including any related foreclosure costs. In addition, a mortgagee may not
foreclose on the mortgaged property unless it forecloses subject to any related
senior mortgage or mortgages, in which case it must either pay the entire amount
of each senior mortgage to the applicable mortgagee at or prior to the
foreclosure sale or undertake the obligation to make payments on each senior
mortgage in the event of default thereunder. In servicing mortgage loans in
their portfolios, it has been the Originators' practice to satisfy each such
senior mortgage at or prior to the foreclosure sale only to the extent that they
determine any amounts so paid will be recoverable from future payments and
collections on the mortgage loans or otherwise. The Trusts will not have any
source of funds to satisfy any such senior mortgage or make payments due to any
senior mortgagee. See "Certain Legal Aspects of the SBA
Loans--Foreclosure/Repossession."
An overall decline in the market value of residential or commercial real
estate, the general condition of a Mortgaged Property, or other factors, could
adversely affect the values of the Mortgaged Properties such that the
outstanding balances of the SBA Loans which are junior mortgage loans, together
with any senior liens on the Mortgaged Properties, equal or exceed the value of
the Mortgaged Properties. Such a decline could extinguish the interest of the
related Trust in the Mortgaged Property before having any effect on the interest
of the related senior mortgagee. Certain of the SBA Loans may be secured by
Mortgaged Properties located in California and Texas. Certain areas of the
country, including California and Texas, have experienced declines in real
estate values over the last few years. Economic conditions in California are
often volatile and from time to time have been adversely affected by natural
disasters, contractions in the defense industry and declining real estate
values. The President of the United States has endorsed a list of military bases
to be closed within the next two to six years, which list includes significant
bases in California. These closures, which have been approved by Congress, along
with the recent general decline in defense spending, could have an adverse
affect on economic conditions in California. The Representative will not be able
to quantify the impact of any property value declines on the SBA Loans or
predict whether, to what extent or how long such declines may continue. In
periods of such declines, the actual rates of delinquencies, foreclosures and
losses on the SBA Loans could be higher than those historically experienced in
the mortgage lending industry in general.
Certain of the SBA Loans may constitute "Balloon Loans." Balloon Loans are
originated with a stated maturity of less than the period of time of the
corresponding amortization schedule. As a result, upon the maturity of a Balloon
Loan, the Mortgagor will be required to make a "balloon" payment which will be
significantly larger than such Mortgagor's previous monthly payments. The
ability of such a Mortgagor to repay a Balloon Loan at maturity frequently will
depend on such borrower's ability to refinance the SBA Loan. The ability of a
Mortgagor to refinance such an SBA Loan will be affected by a number of factors,
including the level of available mortgage rates at the time, the value of the
related Mortgaged Property and other collateral securing the SBA Loan, the
Mortgagor's equity in the related Mortgaged Property, the financial condition of
the Mortgagor and the tax laws and general economic conditions at the time.
Although a low interest rate environment may facilitate the refinancing of
a balloon payment, the receipt and reinvestment by Certificateholders of the
proceeds in such an environment may produce a lower return than that previously
received in respect of the related SBA Loan. Conversely, a high interest rate
environment may make it more difficult for the Mortgagor to accomplish a
refinancing and may result in delinquencies or defaults. None of the
Representative, the Originators, the Master Servicer or the Trustee will be
obligated to provide funds to refinance any SBA Loan.
General economic conditions have an impact on the ability of borrowers to
repay loans. Loss of earnings, illness and other similar factors may lead to an
increase in delinquencies and bankruptcy filings by borrowers. In the event of
bankruptcy of a Mortgagor, it is possible that a Trust could experience a loss
with respect to such Mortgagor's SBA Loan. In conjunction with a Mortgagor's
bankruptcy, a bankruptcy court may suspend or reduce the payments of principal
and interest to be paid with respect to such SBA Loan or permanently reduce the
principal balance of such SBA Loan, thus either delaying or permanently limiting
the amount received by the Trust with respect to such SBA Loan. Moreover, in the
event a bankruptcy court prevents the transfer of the related Mortgaged Property
to a Trust, any remaining balance on such SBA Loan may not be recoverable.
Even assuming that the Mortgaged Properties and other collateral securing
an SBA Loan provide adequate security for the SBA Loans, substantial delays
could be encountered in connection with the liquidation of defaulted SBA Loans
and corresponding delays in the receipt of related proceeds by the
Certificateholders could occur. An action to foreclose on a Mortgaged Property
securing an SBA Loan is regulated by state statutes and rules and is subject to
many of the delays and expenses of other lawsuits if defenses or counterclaims
are interposed, sometimes requiring several years to complete. Furthermore, in
some states an action to obtain a deficiency judgment is not permitted following
a nonjudicial sale of a Mortgaged Property. In the event of a default by a
Mortgagor, these restrictions, among other things, may impede the ability of the
Master Servicer to foreclose on or sell the Mortgaged Property or to obtain
Liquidation Proceeds (net of expenses) sufficient to repay all amounts due on
the related SBA Loan. The Master Servicer will be entitled to deduct from
Liquidation Proceeds all expenses reasonably incurred in attempting to recover
amounts due on the related liquidated SBA Loan and not yet repaid, including
payments to prior lienholders, legal fees and costs of legal action, real estate
taxes, and maintenance and preservation expenses. In the event that any
Mortgaged Properties and other collateral securing an SBA Loan fail to provide
adequate security for the SBA Loans and insufficient funds are available from
applicable Credit Enhancement, Certificateholders could experience a loss on
their investment.
Liquidation expenses with respect to defaulted loans do not vary directly
with the outstanding principal balance of the loan at the time of default.
Therefore, assuming that a servicer took the same steps in realizing upon a
defaulted loan having a small remaining principal balance as it would in the
case of a defaulted loan having a larger principal balance, the amount realized
after expenses of liquidation would be smaller as a percentage of the
outstanding principal balance of the smaller loan than would be the case with a
larger loan.
ENVIRONMENTAL CONSIDERATIONS
Under environmental legislation and case law applicable in various states,
including California, a secured party that takes a deed in lieu of foreclosure,
acquires a mortgaged property at a foreclosure sale or which, prior to
foreclosure, has been involved in decisions or actions which may lead to
contamination of a property, may be liable for the costs of cleaning up a
contaminated site. Although such costs could be substantial, it is unclear
whether they would be imposed on a holder of a mortgage note (such as a Trust)
which, under the terms of the Agreement, is not required to take an active role
in operating the Mortgaged Properties. See "Certain Legal Aspects of the SBA
Loans--Environmental Considerations."
In each Agreement the Originators will represent and warrant that at the
time of origination of each SBA Loan, the related commercial real property was
below regulatory agency action levels of contamination from toxic substances or
hazardous wastes and that as of the Cut-Off Date, the Originators have no
knowledge of any contamination from toxic substances or hazardous wastes on any
commercial real property, except for commercial real property subject to ongoing
environmental rehabilitation. The Servicer will agree that if it has reasonable
cause to believe a property may have contamination from toxic substances or
hazardous wastes (unless subject to ongoing environmental rehabilitation), it
will not foreclose upon the related SBA Loan until after it obtains a Phase I
environmental report. See "The Agreements--Representations and Warranties"
herein.
Beginning in November 1995, the SBA approved a program that allows
lenders, subject to certain conditions, to take as collateral commercial real
property that is subject to ongoing environmental rehabilitation. These
conditions include the lender identifying a party that has accepted
responsibility for, and has commenced clean-up under, an environmental
rehabilitation program approved by the appropriate regulatory agency. The party
responsible for clean-up must execute an indemnity agreement approved by the
SBA, which agreement holds such party accountable for completing all required
remediation. The indemnity agreement inures to the benefit of subsequent holders
of the property. The lender must obtain adequate financial data on the
indemnitor indicating that the indemnitor will be able to complete the required
remediation.
PREPAYMENT CONSIDERATIONS
The SBA Loans may be prepaid in full or in part at any time. The rate of
prepayments of the SBA Loans cannot be predicted and may be affected by a wide
variety of economic, social, and other factors, including prevailing interest
rates and the availability of alternative financing. Therefore, no assurance can
be given as to the level of prepayments that a Trust will experience.
THE STATUS OF THE SBA LOANS IN THE EVENT OF BANKRUPTCY OF AN
ORIGINATOR
The Originators believe that upon the sale of a Series of Certificates to
an independent third party for fair value and without recourse, such sale will
constitute an absolute and unconditional sale of such Certificates and the
interests in the SBA Loans evidenced thereby. However, in the event of the
bankruptcy of an Originator at a time when it or any affiliate thereof holds any
interest in the SBA Loans, a trustee in bankruptcy or other creditor could
attempt to recharacterize the sale of the SBA Loans as a borrowing by such
Originator or any such affiliate with the result that Certificateholders are
deemed to be creditors of such Originator or such affiliate, secured by a pledge
of the SBA Loans. If such an attempt were successful, a trustee in bankruptcy
could elect to accelerate payment of the Certificates and liquidate the SBA
Loans with the Certificateholders entitled to the then outstanding principal
amount thereof together with accrued interest. Thus, the Holders of Certificates
could lose the right to future payments of interest, might suffer reinvestment
loss in a lower interest rate environment and, if the SBA Loans are sold for a
price less than the then outstanding Class A and Class B Principal Balances,
might suffer a loss of principal.
In connection with the issuance of each Series of Certificates, the
Trustee will receive an opinion of Stroock & Stroock & Lavan, special counsel,
to the effect that if it were litigated, a court ultimately would uphold the
Originators' intention that the transfer of the SBA Loans in each SBA Loan to a
Trust constitutes a sale under applicable law. Therefore, the SBA Loans would
not be property of the Originators in the event of the appointment of a receiver
or conservator for the Originators. Such opinion is limited to matters of New
York and federal law and the conclusions thereof are based upon a reasoned
analysis of the transaction and legal principles derived from existing case law
believed to be applicable by analogy. It should be recognized, however, that a
court is not bound by such legal opinion.
Prepayments may result from voluntary early payments by borrowers
(including payments in connection with refinancings of the related senior
mortgage loan or loans), sales of businesses financed by the SBA Loans, sales of
Mortgaged Properties subject to "due-on-sale" provisions and liquidations due to
default, as well as the receipt of proceeds from insurance policies. In
addition, repurchases or purchases from a Trust of SBA Loans required to be made
by the Servicer under the Agreement will have the same effect on the
Certificateholders as a prepayment of the related SBA Loans. See "Yield,
Maturity and Prepayment Considerations" herein. Also, if a Pre-Funding Account
is established and during the Funding Period the entire Pre-Funded Amount is not
used to purchase Subsequent SBA Loans, the Certificates will be prepaid in part
from and to the extent of such remaining amounts.
Collections on the SBA Loans may vary due to the level and frequency of
delinquent payments and of prepayments. Collections on the SBA Loans may also
vary due to seasonal business patterns and payment habits of borrowers.
The SBA Loans may be "simple interest" or "date-of-payment loans". If a
payment is received on an SBA Loan later than scheduled, a smaller portion of
such payment will be applied to principal and a greater portion will be applied
to interest than would have been the case had the payment been received on its
scheduled due date, resulting in such SBA Loan having a longer average life than
would have been the case had the payment been made as scheduled. Conversely, if
a payment on an SBA Loan is received earlier than scheduled, more of such
payment will be applied to principal and less to interest than would have been
the case had the payment been received on its scheduled due date, resulting in
such SBA Loan having a shorter average life than would have been the case had
the payment been made as scheduled. However, this effect is mitigated because
the monthly payment amount is recalculated periodically to reflect changes in
the interest rate, the then-current principal balance and the then-remaining
term to maturity.
CERTIFICATE RATING
The rating of the Certificates will depend primarily on the
creditworthiness of any third party provider of credit enhancement, if any, as
set forth in the related Prospectus Supplement. Any reduction in the rating
assigned to the claims-paying ability of such provider below the rating
initially given to a Series of Certificates would likely result in a reduction
in the rating of such Series of Certificates. See "Rating."
UNAUDITED STATEMENTS
On each Remittance Date, the Trustee will mail to each Certificateholder a
statement setting forth, among other things, certain information as to the
distribution being made on such Remittance Date, the fees to be paid to the
Servicer and Trustee and the loss and delinquency status of the SBA Loans.
Although the information contained in such statements will be prepared by the
Servicer, neither such information nor any other financial information furnished
to Certificateholders will be examined and reported upon, and an opinion will
not be expressed by, an independent public accountant. See "Description of the
Agreement and the Certificates -- Payments on the SBA Loans; Distribution on the
Certificates" herein.
<PAGE>
THE TRUSTS
A Trust for any Series of Certificates will include the Trust Assets
consisting of a Pool* comprised of (i) SBA Section 7(a) Loans, (ii) Section 7(a)
Companion Loans and (iii) SBA 504 Loans, in each case, as specified in the
related Prospectus Supplement, together with payments in respect of such Trust
Assets and certain other accounts, obligations or agreements, in each case as
specified in the related Prospectus Supplement.
____________________________
* Whenever the terms "Pool" and "Certificates" are used in this
Prospectus, such terms will be deemed to apply, unless the context
indicates otherwise, to one specific Pool and the Certificates
representing certain undivided fractional interests, as described
below, in a single Trust consisting primarily of the SBA Loans in
such Pool. Similarly, the term "Pass-Through Rate" will refer to
the Pass-Through Rate borne by the Certificates of one specific
Series and the term "Trust" will refer to one specific Trust.
The Certificates will be entitled to payment from the assets of the
related Trust and, to the extent specified in a Prospectus Supplement, payments
in respect of the assets of other trusts established by the Representative, the
Originators or any of their affiliates. If specified in the related Prospectus
Supplement, certain Certificates will evidence the entire fractional undivided
ownership interest in a Trust which will contain a beneficial ownership interest
in another Trust which will contain all or some of the Trust Assets.
Certain of the Trust Assets may have been originated by the Originators.
Other Trust Assets may have been acquired by the Representative, an Originator
or an affiliate thereof in the open market or in privately negotiated
transactions, including transactions with entities affiliated with the
Representative.
The following is a brief description of the Trust Assets expected to be
included in the Trusts. If specific information respecting the Trust Assets is
not known at the time the related Series of Certificates initially is offered,
more general information of the nature described below will be provided in the
Prospectus Supplement, and specific information will be set forth in a report on
Form 8-K to be filed with the Commission within fifteen days after the initial
issuance of such Certificates (the "Detailed Description"). 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
Trust Assets relating to such Series (the "Trust Asset Schedule") will be
attached to the Agreement delivered to the Trustee upon delivery of the
Certificates.
GENERAL
The real property which secures repayment of the SBA Loans (the "Mortgaged
Properties") may be located in any one of the fifty states, Puerto Rico or the
District of Columbia. The SBA Loans in a Pool will provide for payments to be
made monthly ("monthly pay"), bi-weekly or at such other times as may be set
forth in a Prospectus Supplement. The payment terms of the SBA Loans to be
included in a Trust will be described in the related Prospectus Supplement and
may include any of the following features or combinations thereof or other
features described in the related Prospectus Supplement:
(a) Interest may be payable at a Fixed Rate, or an Adjustable Rate
(i.e., a rate that is adjustable from time to time in relation to an
index, a rate that is fixed for a period of time or under certain
circumstances and is followed by an adjustable rate, a rate that otherwise
varies from time to time, or a rate that is convertible from an adjustable
rate to a fixed rate). The specified rate of interest on an SBA Loan is
its Mortgage Interest Rate. Changes to an Adjustable Rate may be subject
to periodic limitations, maximum rates, minimum rates or a combination of
such limitations. Accrued interest may be deferred and added to the
principal of an SBA Loan for such periods and under such circumstances as
may be specified in the related Prospectus Supplement. SBA Loans may
provide for the payment of interest at a rate lower than the Mortgage
Interest Rate for a period of time or for the life of the SBA Loan, and
the amount of any difference may be contributed from funds supplied by the
seller of the Mortgaged Property securing the related SBA Loan or another
source or may be treated as accrued interest added to the principal of the
SBA Loan.
(b) Principal may be payable on a level basis to fully amortize the
SBA Loan over its term, may be calculated on the basis of an assumed
amortization schedule that is significantly longer than the original term
to maturity or on an interest rate that is different from the Mortgage
Interest Rate, or may not be amortized during all or a portion of the
original term. Payment of all or a substantial portion of the principal
may be due on maturity ("balloon" payments). Principal may include
interest that has been deferred and added to the principal balance of the
SBA Loan.
(c) Monthly payments of principal and interest may be fixed for the
life of the SBA Loan, may increase over a specified period of time
("graduated payments") or may change from period to period. SBA Loans may
include limits on periodic increases or decreases in the amount of monthly
payments and may include maximum or minimum amounts of monthly payments.
SBA Loans having graduated payment provisions may require the monthly
payments of principal and interest to increase for a specified period,
provide for deferred payment of a portion of the interest due monthly
during such period, and recoup the deferred interest through negative
amortization whereby the difference between the scheduled payment of
interest and the amount of interest actually accrued is added monthly to
the outstanding principal balance.
(d) Prepayments of principal may be subject to a prepayment fee,
which may be fixed for the life of the SBA Loan or may decline over time,
and may be prohibited for the life of the SBA Loan or for certain periods
("lockout periods"). Certain SBA Loans may permit prepayments after
expiration of the applicable lockout period and may require the payment of
a prepayment fee in connection with any such subsequent prepayment. Other
SBA Loans may permit prepayments without payment of a fee unless the
prepayment occurs during specified time periods. The SBA Loans may include
due-on-sale clauses which permit the mortgagee to demand payment of the
entire SBA Loan in connection with the sale or certain transfers of the
related Mortgaged Property. Other SBA Loans may be assumable by persons
meeting the then applicable underwriting standards of the Originator.
The Prospectus Supplement for each Series of Certificates will contain
information with respect to all the SBA Loans expected to be included in the
related Pools as of the related closing date, including (i) the expected
aggregate outstanding principal balance and the expected average outstanding
principal balance of the SBA Loans as of the date set forth in the Prospectus
Supplement, (ii) the largest expected principal balance and the smallest
expected, principal balance of any of the SBA Loans, (iii) the types of
Mortgaged Properties and/or other assets securing the SBA Loans (iv) the
original terms to maturity of the SBA Loans, (v) the expected weighted average
term to maturity of the SBA Loans as of the date set forth in the Prospectus
Supplement and the expected range of the terms to maturity; (vi) the earliest
origination date and latest maturity date of any of the SBA Loans, (vii) the
expected weighted average Combined Loan-to-Value Ratio of the SBA Loans, (viii)
the expected Mortgage Interest Rate and ranges of Mortgage Interest Rates borne
by the SBA Loans, (ix) in the case of SBA Loans having Adjustable Rates, the
expected weighted average of the Adjustable Rates, if any; (x) the amount of any
Certificate Guaranty Insurance Policy, Mortgage Pool Insurance Policy, Special
Hazard Insurance Policy or Bankruptcy Bond to be maintained with respect to such
Pool; (xi) the amount, if any, and terms of any other credit enhancement to be
provided with respect to all or any SBA Loans or the Pool; and (xii) the
expected geographic location of the Mortgaged Properties. If specific
information respecting the SBA Loans is not known to the Representative at the
time the related Certificates are initially offered, more general information of
the nature described above will be provided in the Prospectus Supplement and
specific information will be set forth in the Detailed Description.
The only obligations of the Representative or the Originators with respect
to a Series of Certificates will be to provide (or, where the Representative or
an Originator acquired an SBA Loan from another originator, obtain from such
originator) certain representations and warranties concerning the SBA Loans and
to assign to the Trustee for such Series of Certificates the Representative's or
Originator's rights with respect to such representations and warranties. See
"The Agreements--Sale of SBA Loans." The obligations of the Master Servicer with
respect to the SBA Loans will consist principally of its contractual servicing
obligations under the related Agreement and its obligation to make certain cash
advances in the event of delinquencies in payments on or with respect to the SBA
Loans in the amounts described herein under "Description of the
Certificates--Advances." The obligations of a Master Servicer to make advances
may be subject to limitations, to the extent provided herein and in the related
Prospectus Supplement.
If provided in the related Prospectus Supplement, the original principal
amount of a Series of Certificates may exceed the principal balance of the Trust
Assets initially being delivered to the Trustee. Cash in an amount equal to such
difference (the "Pre-Funded Amount") will be deposited into a separate trust
account (the "Pre-Funding Account") maintained with the Trustee. During the
period set forth in the related Prospectus Supplement (the "Funding Period"),
amounts on deposit in the Pre-Funding Account may be used to purchase additional
Trust Assets for the related Trust subject to the satisfaction of certain
conditions specified under the Agreements. Any amounts remaining in the
Pre-Funding Account at the end of such period will be distributed as a principal
prepayment to the holders of the related Series of Certificates at the time and
in the manner set forth in the related Prospectus Supplement.
SBA SECTION 7(A) LOANS
The SBA Section 7(a) Loans will consist of the Unguaranteed Interests (as
defined below) in loans originated under Section 7(a) (the "Section 7(a)
Program") of the Small Business Act of 1953 (the "SBA Act"), which Act created
the Small Business Administration (the "SBA"). The Section 7(a) Program was
intended to encourage lenders to provide loans to qualifying small businesses.
Loans made under the Section 7(a) Program can be used to construct, purchase,
expand or convert facilities or to purchase building equipment, leaseholds or
materials. Money lent under the Section 7(a) Program also can, under certain
circumstances, be used for working capital.
The SBA Loans are partially guaranteed by the SBA pursuant to a Small
Business Administration Loan Guaranty Agreement (Deferred Participation) (SBA
Form 750), dated August 13, 1980 by and between The Money Store Investment
Corporation and the SBA (the "Loan Guaranty Agreement") and pertinent SBA
regulations found at 13 C.F.R. parts 120 and 121. As to any SBA Loan, the right
to receive the guaranteed portion of the principal balance thereof together with
interest thereon at a per annum rate in effect from time to time plus a fee paid
to the SBA's fiscal and transfer agent is referred to herein as the "Guaranteed
Interest". The Guaranteed Interest varies from SBA Loan to SBA Loan, will not be
included in the related Trust Fund and Certificateholders will have no right or
interest therein. As to any SBA Loan, the "Unguaranteed Interest" will equal all
payments and other recoveries on such SBA Loan not constituting the Guaranteed
Interest therein.
The SBA administers three levels of lender participation in the Section
7(a) Program. Under the first level, known as the "Guaranteed Participant
Program", the lender gathers and processes data from applicants and forwards it,
along with a request for the SBA's guaranty, to a local SBA office. The SBA then
completes an independent analysis and decides whether to guaranty the loan. SBA
turnaround time on such applications varies greatly, depending on its backlog of
loan applications.
Under the second level of lender participation, known as the "Certified
Lender Program," the lender (the "Certified Lender") gathers and processes data
from applicants and makes a request to the SBA, as in the Guaranteed Participant
Program procedure. The SBA then performs an expedited review of the lender's
credit analysis, which generally is completed within three working days. The SBA
requires that lenders originate loans meeting certain portfolio and volume
criteria before authorizing them to participate in the Certified Lender Program.
Under the third level of lender participation, known as the "Preferred
Lender Program", the lender (the "Preferred Lender") has the authority to
approve a loan and obligate the SBA to guarantee the loan without submitting an
application to the SBA for credit review. The lender is required to notify the
SBA of the approved loan and submit certain documents. The standards established
for participants in the Preferred Lender Program are more stringent than those
for participants in the Certified Lender Program and involve meeting additional
requirements in terms of origination, servicing and liquidation capabilities as
well as loan volumes and portfolio quality.
THE SECTION 7(A) COMPANION LOANS
As described above, for applications submitted between January 1, 1995 and
October 12, 1995, the maximum loan size for most loans originated under the
Section 7(a) Program was reduced administratively to $500,000. To assist
qualified borrowers in obtaining more financing when needed, the Originators
introduced a program (the "Section 7(a) Companion Program") pursuant to which an
Originator originated a loan (the "Section 7(a) Companion Loan") to the related
borrower in situations in which the total amount financed would otherwise have
exceeded the $500,000 limit. The Originators may originate Section 7(a)
Companion Loans in the future where a qualified borrower requests financing in
an amount that otherwise would exceed the limits of the Section 7(a) Program.
Although Section 7(a) Companion Loans are not guaranteed by the SBA, they are
secured by a lien on the related primary collateral, which lien is prior to, or
pari passu with, the lien of the related SBA Section 7(a) Loan.
Section 7(a) Companion Loans may be utilized by a borrower for all
eligible SBA Section 7(a) Loan purposes. Section 7(a) Companion Loans are
originated only in conjunction with a Seller obtaining an SBA guarantee of the
accompanying SBA Section 7(a) Loan under the Certified Lender Program (the SBA
currently prohibits Section 7(a) Companion Loans in connection with the
Preferred Lender Program). Section 7(a) Companion Loans bear interest and have
terms to maturity as described above under "--Section 7(a) Loan Parameters."
SBA 504 LOANS
The SBA 504 Loans will consist of loans originated by the Originators
under the SBA 504 Loan Program (the "SBA 504 Loan Program"). The SBA 504 Loan
Program was established under the SBA Act to encourage lenders to provide fixed
asset financing to qualifying small businesses. SBA 504 Loans may be used for
plant acquisition, construction, renovation, expansion, land and site
improvements, acquisition and installation of machinery and equipment as well as
certain closing costs and professional fees and the interest on interim
financing. The Originators provide approximately 50% of project costs in a
conventional loan agreement, with borrowers providing a minimum 10% equity
contribution. The SBA provides the remainder of the financing. Each loan by the
Originators must receive prior approval by the SBA.
The funds used by the SBA to originate its portion of a project generated
pursuant to the SBA 504 Loan Program are generated by issuing SBA-guaranteed
debentures on behalf of a certified development company (a "CDC"). A CDC is an
organization sponsored by private interests or by state or local governments.
The debentures are pooled monthly and sold through a certificate mechanism to
the public market. The loans originated by the Originators under the SBA 504
Loan Program are not guaranteed by the SBA.
USE OF PROCEEDS
The Representative and the Originators may use the net proceeds to be
received from the sale of the Certificates of each Series for general corporate
purposes, including repayment of debt and the origination and acquisition of SBA
Loans and other Trust Assets. The Representative expects Certificates to be sold
in Series from time to time.
THE REPRESENTATIVE AND THE ORIGINATORS
The SBA Loans will have been originated or acquired by the Originators.
The Money Store or one of its affiliates will act as the Master Servicer of the
SBA Loans and other Trust Assets. Except for certain representations and
warranties relating to the SBA Loans and other Trust Assets and certain other
matters, the obligations of The Money Store and the Originators with respect to
the SBA Loans and other Trust Assets will be limited to its contractual
servicing obligations.
The Money Store is a New Jersey corporation and is headquartered in
Sacramento, California and Union, New Jersey.
The Money Store is a financial services company engaged, through its
subsidiaries (including the Originators), in the business of originating,
purchasing, selling and servicing consumer and commercial loans of specified
types and offering related services. Loans originated by The Money Store and its
subsidiaries have consisted primarily of mortgage loans, SBA Loans, student
loans, and automobile loans.
Since 1967, The Money Store and its subsidiaries have been active in the
development of the residential home equity lending industry in the United
States.
THE SBA LOAN LENDING PROGRAM
The following describes the procedures used by the Originators in
originating substantially all of the SBA Section 7(a) Loans to be
transferred to a Trust.
The Originators generate business principally through a national network
of sales offices serving local markets and a national products division that
markets nationally through a centralized sales operation. The national network
of sales offices is divided into sales territories, each serving a specific
geographic area. These offices are staffed by business development officers
("BDOs"), with some offices in large metropolitan areas having several BDOs and
clerical support staff, all serving a local market. Each of the 11 sales
territories is supervised by a regional sales manager.
BDOs locate customers primarily through a referral network of commercial
real estate brokers, business brokers, accountants, lawyers, chambers of
commerce, local business associations and other financial institutions. BDOs
work with the customer to match the correct loan product to their financing
needs. BDOs also screen applications for credit worthiness and eligibility for
the applicable SBA program and assemble the loan application for submission to
the underwriting department. BDOs are compensated primarily through commissions.
The national products division generates business primarily through a
national referral network of professional organizations and independent or
affiliated commercial loan brokers. Commercial loan representatives of the
national products division perform essentially the same tasks as a BDO, however,
customer contact is handled by telephone through a national sales center located
in Sacramento, California.
SBA Section 7(a) Loans originated by the Originators generally range
in size from $50,000 to $1.3 million. In certain cases, an Originator may
originate a loan exceeding $1.3 million when an Originator believed the credit
is particularly strong and/or under programs, such as the International Trade
Loan Program, in which the guaranteed portion provided for larger guarantees. As
explained in further detail below, due to changes in the Section 7(a) Program,
the maximum size for most SBA Section 7(a) Loans approved between January 1,
1995 and October 12, 1995 was $500,000. Average loan sizes for originations
during 1993, 1994 and 1995 were approximately $366,000, $368,000, and $302,000,
respectively.
The Originators' loan origination network is organized on a functional
basis (I.E., business development, credit underwriting and processing). Middle
management consists of regional sales managers, credit managers and processing
managers, each of whom reports to a national supervisor. The national
supervisors report to the vice president of production, who reports to the
president of the SBA Loan Originators, who is located in Sacramento, California.
In addition to years of experience, the Originators consider their
employees' knowledge of SBA Rules and Regulations, responsiveness to customers,
professional demeanor and commitment to be important with respect to the
qualification and abilities of their personnel.
LOAN PURPOSE AND COLLATERAL FOR SBA ' 7(A) LOANS
Prior to 1986, the Originators estimate that over 50% of their SBA Section
7(a) Loans were made as working capital and equipment loans. Since 1986,
however, the Originators have refocused their lending on owner/user commercial
real estate loans to established businesses with track records generally of at
least three to four years. The Originators have continued to develop lending for
larger owner/user commercial real estate loans to established businesses. These
loans are generally larger and better collateralized than working capital,
equipment or general-purpose small-business loans. The SBA requires that
owner/users occupy at least 67% of the mortgaged premises in the case of
newly-constructed facilities and 51% in the case of existing facilities.
A majority of the SBA Section 7(a) Loan originations have been first-lien
mortgages for either the purchase or refinancing of commercial real estate, with
the balance being loans made by the Originators to franchisees of national
franchisors and general business loans for business acquisition, equipment
purchases, working capital or debt consolidation. As described below, where an
SBA Section 7(a) Companion Loan is originated in connection with an SBA Section
7(a) Loan, the SBA Section 7(a) Companion Loan will be secured by a first-lien
mortgage, with the SBA Section 7(a) Loan being secured by a second-lien mortgage
in addition to other collateral. SBA Section 7(a) Loans generally are guaranteed
personally by the borrower. In cases where a second or third mortgage on a
residential property is taken as additional collateral, the Originators may not
require the borrower to obtain a title insurance policy.
COMPETITION
The Originators' main competitors vary by region to region and market to
market. Its primary competitors are small independent banks such as Truckee
River Bank and the San Diego Bank of Commerce and companies such as AT&T Capital
Corporation, ITT Small Business Finance Corp. and Heller First Capital
Corporation. The Originators do not believe that any one competitor, or a small
group of competitors, is dominant in the industry. Although methods of
competition vary according to region, the Originators believe that as one of the
few SBA lenders with a national network, they are able to compete effectively in
all markets in which they operate. The Originators believe that their experience
and breadth of operations give them a unique knowledge of the intricacies of SBA
lending. The Originators believe that this knowledge, coupled with the fact SBA
lending and associated activities constitute their sole business, enables them
to respond to customers quickly and efficiently.
UNDERWRITING CRITERIA FOR SBA SECTION 7(A) LOANS
The Originators seek to control two risks through their underwriting
standards: (i) default of the actual credit and (ii) SBA repudiation of its
guaranty due to ineligibility, non-compliance with SBA lending regulations or
poor documentation. The Originators' underwriting emphasizes historical
operating performance and debt-service coverage to help determine the repayment
ability of the borrower. The Originators have established review procedures to
help ensure that all loans that they originate or acquire comply with the
requirements of the SBA.
Commercial loan officers ("CLOs") evaluate each applicant's financial
statements, credit reports, business plans and other data to determine if the
credit and collateral satisfy the Originators' standards. These standards
include historic debt-service-coverage, reasonableness of projections, strength
of management and sufficiency of secondary repayment, as well as the SBA's
eligibility rules. For each application, qualified personnel also perform a site
inspection to determine the appropriateness of the location for the proposed
business use, observe the economic conditions of the local market and inspect
the property for obvious structural defects or environmental issues (as
discussed further below).
The Originators' loan officers assess the reasonableness of projections
based primarily upon (i) their experience with other similar loans in the same
industry and area, (ii) their knowledge of the industry of the applicant, (iii)
their general experience in assessing small business loans and (iv) the business
experience of the applicant. The qualification of an applicant to prepare such
projections is generally based upon the applicant's experience in the business
area and market for which the loan is requested. Some applicants prepare
projections with the assistance of accountants, business consultants and/or
franchisors, while some applicants obtain no such assistance. Typically, there
is no independent third party review of such projections.
The Originators have a tiered system of generally acceptable maximum
Loan-to-Value Ratios or LTVs (as defined below) based on the type of property
securing a loan, the characteristics of the borrower and the industry of the
borrower. Maximum permissible Loan-to-Value Ratios also depend on the length of
time that the debt service coverage on the property has at least equaled a
specified ratio. Applicants having significantly higher earnings before interest
and taxes relative to their debt service than the Originators normally require
may be considered for higher Loan-to-Value Ratios. Conversely, applicants not
meeting the debt service requirement may be considered for a loan with a lower
Loan-to-Value Ratio than the permitted maximum based on the overall
creditworthiness of the applicant.
For commercial real estate transactions, the highest LTVs are typically
reserved for situations where general purpose property is being financed and the
subject business is in a non-cyclical industry. In such cases, if the debt
service coverage ratio (I.E., the ratio of the pro forma annual debt service
payments on the proposed loan to the subject businesses' annual net operating
income) equals and/or exceeds 1.2:1 for the most recent two full years and
interim period, a borrower may qualify for 100% LTV financing. Where general
purpose property is being financed and the business is either cyclical,
particularly interest rate sensitive and/or seasonal in nature, and where debt
service coverage meets or exceeds 1.2:1 for the most recent two full years and
interim period, the maximum permissible LTV is generally 90%. When special
purpose real estate is involved (e.g., restaurants), and debt service coverage
meets or exceeds 1.2:1 for the most recent two full years and interim period,
maximum LTVs of between 80%-90% are considered.
Applications significantly exceeding the previously mentioned debt service
requirements may receive special consideration from the loan committee for loans
with higher LTVs. Conversely, applications which do not meet the stated debt
service requirements, but still indicate a reasonable level of repayment
capacity, may still be considered at lower LTVs. These exceptions to policy are
entertained on a case-by-case basis as warranted by the overall creditworthiness
of the applicant. Other characteristics evaluated in determining an appropriate
LTV in these situations include (but are not limited to): (i) experience,
strength and continuity of business management; (ii) overall financial strength
of the subject business as evidenced by balance sheet and profit/loss statements
(e.g., current as well as pro forma liquidity and equity positions, historical
sales trends and profitability as well as projections); and (iii) availability
of additional sources of repayment (e.g., personal financial strength of the
applicant including liquidity, supplementary outside income(s) and/or additional
collateral).
All loan applications are submitted to a centralized loan underwriting and
processing center in Sacramento, California. The loan application package is
screened initially for completeness by a credit manager or senior loan officer,
who then assigns the package to a CLO. CLOs are responsible for analyzing the
creditworthiness of the applicant and preparing a loan memorandum, which
includes a credit analysis (including a description of the collateral), states
the purpose of the loan, strengths and weaknesses of the credit, and eligibility
for the applicable SBA program. In addition, for each proposed loan, the CLOs
perform a collateral analysis, financial analysis (including historical debt
service coverage), personal resource analysis, and business and personal credit
checks. Any real property to be taken as collateral is appraised by an
independent appraiser.
If the CLO recommends the loan for approval, the loan memorandum and
supporting documents are submitted to the senior loan officer, credit manager,
or a senior credit officer for review based on the various levels of credit
authority. Upon concurrence of the CLOs recommendation by the senior loan
officer, credit manager or senior credit officer, as the case may be, a
commitment letter and SBA submission documents are generated by the CLO and, in
most cases, forwarded to the BDO. The BDO meets with the customer to explain the
commitment letter and SBA documentation, obtains required customer signatures
and deposits, and returns the signed documents to the processing center in
Sacramento. The loan package is forwarded to a loan processing manager, who
screens the loan package for completeness and then assigns the package to a loan
processor. The loan processor prepares the Loan Authorization and Agreement, and
all necessary documentation to submit to the SBA for a loan guarantee, and for
closing the loan in strict accordance to the credit memorandum, SBA regulations,
and state and federal law.
Once loan approval has been granted, approved applications under the
Preferred Lender Program are submitted directly to the SBA's central PLP
processing center for assignment of a authorization number. Loans not made
pursuant to the Preferred Lender Program require prior approval by an SBA
district office.
Once a loan is funded, the complete original file is forwarded to loan
servicing. When the loan package is received, the final physical file is
established in a uniform manner, and a computerized "tickler system" tracks
follow-up items, such as UCC filing renewals, insurance policy expirations and
deeds of trust recording. The loan file then undergoes a final post-closing
audit, to help verify that the loan was originated in accordance with the
Sellers' procedures and consistent with the SBA loan authorization. Once the
file has been audited and is complete, it is microfilmed.
The Originators originate loans to a variety of industries. However, based
upon their loss experience and economic forecasts obtained from industry
associations, chambers of commerce, academic institutions, governmental entities
and others, the Originators may de-emphasize lending in certain regions or
industries from time to time. The Originators also periodically have refined
their underwriting guidelines to exclude certain high-risk ventures, such as car
washes.
Collateral for SBA Section 7(a) Loans originated by the Originators
generally consists of one or more of the following: (i) first liens on
commercial real estate (or second liens when the SBA Section 7(a) Loan is
originated in conjunction with a Section 7(a) Companion Loan), (ii)second liens
on residential properties, (iii) personal guarantees and (iv) business assets.
The Originators believe that the pledge of a borrower's personal wealth provides
appropriate incentives, thereby minimizing defaults and maximizing recoveries.
Generally, the Originators do not take inventory or accounts receivable as
collateral, thereby allowing borrowers to obtain short-term financing with these
assets from other sources. The Originators also originate machinery and
equipment loans; however, some of these also are secured by real estate. For
example, loans are provided for medical/dental equipment, machinery, print shop
equipment and franchise restaurant equipment.
The Originators define the Loan-to-Value Ratio ("LTV") of an SBA
Section 7(a) Loan as the gross amount of the loan divided by the total "net
collateral value" of all collateral (primary and secondary, but excluding the
value of any personal guarantees) securing such loan. In determining "net
collateral value", the Originators apply discounts of appraised value based on
the type of collateral and lien position. Generally, first liens on commercial
or residential property are allowed a maximum "collateral value" of 100% of the
lower of cost or appraised value and, therefore, are not discounted. Second and
third mortgages are allowed a maximum collateral value of 80%, unless the first
lien is of nominal value. The maximum collateral value allowed for used
machinery and equipment is 30% of cost and 50% for new machinery and equipment.
In determining the appropriate LTV required for a particular credit, the
Originators review the historical debt-service coverage ratio, stability of the
industry, level of equity from the borrower, purpose of the loan, economic
condition of the market and size of the loan. The Originators usually require a
1.2x debt-service coverage ratio for the most recent two complete years and
interim period. The Originators generally do not give credit for rental income
when performing debt-service coverage analysis.
SERVICING AND COLLECTIONS OF SBA SECTION 7(A) LOANS
The Originators service substantially all the SBA Section 7(a)
Loans they originate. Servicing includes collecting payments from borrowers,
remitting payments on Guaranteed Interests to the Agent of the SBA, accounting
for principal and interest, contacting delinquent borrowers and supervising loan
liquidations.
Each quarter, borrowers are sent payment coupons and statements showing
the interest rate for the next quarter, the outstanding loan balance, the next
payment adjustment date and the monthly payment for that quarter.
The loan servicing department is responsible for all post-closing
follow-up until the loan is repaid. These duties include tracking receipt of
payments, performing field visits, analyzing post-closing financials, reviewing
UCC filings and coordinating post-closing borrower requests with the SBA (E.G.,
exchanges of collateral or assumptions). In addition, the loan servicing
department typically conducts field visits to the borrower's place of business
shortly after closing and within 24 months thereafter. Finally, all loan
documents require that borrowers submit updated financial statements. For
delinquent accounts, these statements are reviewed by the loan servicing
department to determine debt-service-coverage ratios and compliance with loan
covenants.
Delinquency reports are generated every ten days and borrowers are
contacted frequently to determine the cause of any delinquency. A customer
service officer maintains contact with each delinquent borrower until the loan
becomes current or is transferred to the credit services unit within the loan
servicing department. If a loan is chronically delinquent, even if currently
performing, the loan will be serviced by customer service until such loan is
repurchased by the SBA, and then by a credit services officer for the remainder
of the loan.
WORKOUTS AND LIQUIDATIONS OF SBA SECTION 7(A) LOANS
When an SBA Section 7(a) Loan becomes 75 days past due, the
appropriate Originator initiates procedures that result in the SBA's repurchase
of the Guaranteed Interest of the defaulted SBA Section 7(a) Loan from the
secondary market investor. In most cases the repurchase process is completed
within 30 days. The SBA tries to minimize the repurchase time frame because it
pays accrued interest (up to 120 days) on the guaranteed portion of the loan
until the loan is repurchased. After it has repurchased a Guaranteed Interest,
the SBA owns a direct participation in the related loan.
A credit services officer is assigned the responsibility for the workout
or liquidation once an SBA Section 7(a) Loan is repurchased. The loan workout
officer evaluates the borrower's corporate and personal ability to repay and
then formulates an appropriate workout plan. Generally, workout plans indicate
the expected recovery time period or the possibility of an assumption of the
debt by a third-party; plans also include liquidation options.
To some degree, the SBA is involved in every repurchased loan, depending
on the nature of the recovery and the particular SBA District. In most cases,
the SBA allows the Originators to perform workouts. In some instances, the SBA
takes over the servicing of repurchased loans. In the Originators' experience,
this happens primarily with new offices, where local SBA personnel are
unfamiliar with the Originators. In the majority of foreclosure situations,
title is assumed in the name of the SBA. In the remainder of the foreclosure
situations, at the direction of the SBA, title is assumed in the name of one of
the Originators.
In formulating workout plans, the Originators assess the value of the
collateral through a variety of sources including brokers, appraisers and other
market sources. The Originators also take steps to help protect the value of the
collateral, such as performing site visits, appraising properties and ensuring
payment of taxes and, where appropriate, maintenance of insurance. Where
necessary, the Originators engage property managers or take other measures
designed to protect the collateral value from deterioration.
Loan workouts are focused on allowing the business to recover from
temporary setbacks, if possible. The Originators believe that recoveries are
improved if the borrower is cooperative and works with the lender to achieve a
resolution. The Originators stress the development of a strong relationship with
borrowers over the long term. This generally results in cooperation by the
borrower in the workout, and the Originators generally receive substantial cash
flow from these troubled loans.
Although the SBA generally is reluctant to allow foreclosure on a personal
residence until all other avenues have been pursued, the Originators believe
that the possibility of foreclosure is a powerful incentive to borrowers to make
the loan current.
The Originators view SBA Section 7(a) Loans as small business loans as
opposed to commercial real estate mortgages. Accordingly, the workout is more
complex and the period to recovery or reinstatement takes longer than for
typical commercial real estate loans. However, because the Originators often
receive substantial cash flow from troubled assets during the workout period,
loan workouts are generally more efficient than foreclosures on the collateral.
If a borrower is uncooperative or the business is not viable, the Originators
prepare a liquidation plan and determine the likely recovery value and best
method of liquidation. The SBA must approve all liquidation plans.
On average, the workout process requires approximately 24 months. The
length of the workout is determined primarily by the complexity and long-term
viability of the business, as well as the bankruptcy status of the borrower. In
particular, a bankruptcy may lengthen the workout timeframe by approximately 12
to 18 months.
In certain cases, the Originators may forbear payments of interest and
principal for a period of three to six months if the borrower is experiencing
temporary difficulties. Under SBA servicing policy, the lender has unilateral
authority to defer loans for up to 90 days. Past 90 days, the lender must obtain
approval from the investors in the guaranteed portions, which is usually
granted. For deferments in excess of 180 days, SBA approval must be obtained.
ENVIRONMENTAL POLICY
The Originators have developed an environmental credit policy to help
minimize potential environmental liabilities. This policy conforms to the
environmental requirements set by the SBA, and many of the Originators'
guidelines are stricter than those of the SBA. The standard
environmental-related requirements for SBA loans secured by commercial real
property include: (i) obtaining a commitment letter from the borrower
acknowledging that the closing is contingent upon compliance with environmental
laws, (ii) obtaining a detailed environmental questionnaire from the borrower
and, if possible, the previous owner of the property, (iii) performing a site
visit of the property, (iv) checking the property against a published list of
"Superfund" sites and, if the property is listed, performing an environmental
audit or, for any SBA Loan approved after January 1, 1996, searching a
comprehensive state and federal environmental data base for each commercial real
property taken as collateral for which a Phase I environmental report has not
been ordered or obtained and (v) obtaining a certificate from the borrower
providing representations and warranties as to the absence of hazardous
substances and providing a broad indemnification. If, after performance of these
requirements, there is any evidence of a potential environmental problem which
might require remediation, the applicable Originator will require remediation to
be performed or require a Phase I or a Phase II environmental report on the
property and the loan will be closed only after remediation to levels below
regulatory agency action levels, the property is subject to ongoing
rehabilitation approved by the SBA, or if no problem is revealed. A Phase I
environmental report describes the results of an audit of the related property
performed by a licensed environmental assessment firm, which audit includes (i)
an inspection of the related and adjacent properties; (ii) a historical review
of site records; (iii) a review of files of regulatory agencies concerning the
site; and (iv) interviews with individuals knowledgeable about the site use and
operations.
In preparing a Phase I environmental report, the licensed environmental
assessment firm may contact the United States Environmental Protection Agency,
state and local water control authorities, state and local environmental
departments and local fire departments to ascertain whether a particular
property has an environmental problem and, if so, the nature thereof. The
Originators typically do not contact such authorities unless an environmental
problem has been revealed.
In the Agreement the Originators will represent and warrant that at the
time of origination of each SBA Loan forming part of the Trust, even those
originated prior to January 1990, the related commercial real property was free
of contamination from toxic substances or hazardous wastes and that, as of the
Cut-Off Date, the Originators have no knowledge of any such contamination from
toxic substances or hazardous wastes on any commercial real property. The Master
Servicer will agree that if it has reasonable cause to believe a property may
have contamination from toxic substances or hazardous wastes, it will not
foreclose upon the related SBA Loan until after it obtains a favorable Phase 1
environmental report.
ORIGINATION OF SECTION 7(A) COMPANION LOANS
For most applications submitted between January 1, 1995 and October 12,
1995, the maximum loan size for a loan originated under the Section 7(a) Program
was reduced administratively to $500,000. To assist qualified borrowers in
obtaining more financing when needed, the Originators introduced the Section
7(a) Companion Program pursuant to which the Originators originated a Section
7(a) Companion Loan to a borrower requesting a Section 7(a) Loan from an
Originator where the total amount financed would otherwise exceed $500,000. The
Originators may originate Section 7(a) Companion Loans in the future where a
qualified borrower requests financing in an amount that otherwise exceeds the
limits of the Section 7(a) Program.
The Originators will not fund a Section 7(a) Companion Loan unless and
until the SBA issues its guaranty of the related Section 7(a) Loan. The
underwriting criteria, servicing and collection procedures, workout and
liquidation policies and environmental policy for the Section 7(a) Companion
Loans are substantially the same as those described above for the Section 7(a)
Loans, except that TMSCMI generally requires a debt-service coverage ratio of
1.1:1 and the required LTV for Section 7(a) Companion Loans is generally
50%-60%. Also, the SBA is not required to be involved in the workout or
liquidation of a Section 7(a) Companion Loan. However, if in connection with the
workout or liquidation of a Section 7(a) Companion Loan, the Originators wish to
workout or liquidate the related Section 7(a) Loan, the SBA will be involved in
such procedures.
ORIGINATION OF SBA 504 LOANS.
The SBA 504 Loans will consist of loans originated by an Originator under
the SBA 504 Loan Program (the "SBA 504 Loan Program"). The SBA 504 Loan Program
was established under the Act to encourage lenders to provide fixed asset
financing to existing qualifying small businesses. SBA 504 Loans may be used for
plant acquisition, construction, renovation, expansion, land and site
improvements, acquisition and installation of machinery and equipment and the
interest on interim financing.
Each SBA 504 Loan originated by an Originator is secured by a first lien
on the related primary collateral, with the SBA loan secured by a second lien,
in addition to a lien on other collateral. The borrower is required to fund at
least 10% of the total allowable project costs, however, an Originator may
require a higher percentage for certain larger projects and projects with
special credit risks. The LTV for SBA 504 Loans generally may not exceed
55%-60%. The Originators also generally require a minimum debt service coverage
ratio of 1.1:1 for the most recent two full years and interim periods.
Applications with a lower debt service coverage ratio may be considered, but
generally only if the LTV is below approximately 55%. When special purpose real
estate is involved (e.g., restaurants), or in the case of cyclical or interest
rate sensitive industries, the Originators also generally require LTVs below
approximately 55%.
SBA 504 Loans that are originated for construction purposes generally
possess an LTV of 80% during the construction phase pending issuance of the
SBA-guaranteed debenture upon completion of the construction. Additionally,
secondary collateral required by the CDC for the SBA loan also will serve as
collateral for the interim construction loan.
Except as set forth above, the underwriting criteria, servicing and
collection procedures, workout and liquidation policies and environmental policy
for the SBA 504 Loans are substantially the same as those described above for
the Section 7(a) Loans, except that the SBA is not involved in the workout or
liquidation procedures.
DESCRIPTION OF THE CERTIFICATES
Each Series of Certificates will be issued pursuant to an Agreement, dated
as of the date set forth in the related Prospectus Supplement (each such date, a
"Cut-off Date"), among The Money Store, the applicable Originators and the
Trustee for the benefit of the Certificateholders of such Series. The provisions
of each Agreement will vary depending upon the nature of the Certificates to be
issued thereunder and the nature of the related Trust. A form of an Agreement
has been filed as an exhibit to the Registration Statement of which this
Prospectus is a part. The following summaries describe certain material
provisions which may appear in each Agreement. The Prospectus Supplement for a
Series of Certificates will describe any provision of the Agreement relating to
such Series that materially differs from the description thereof contained in
this Prospectus. The summaries do not purport to be complete and are subject to,
and are qualified in their entirety by reference to, all of the provisions of
the Agreement for each Series of Certificates and the applicable Prospectus
Supplement. The Representative will provide a copy of the Agreement (without
exhibits) relating to any Series without charge upon written request of a holder
of a Certificate of such Series addressed to The Money Store, 2840 Morris
Avenue, Union, New Jersey 07083, Attention: Corporate Counsel.
GENERAL
The Certificates of each Series will represent fractional undivided
ownership interests in a Trust created pursuant to the related Agreement and/or
such other assets as may be described in the related Prospectus Supplement. The
Certificates will be issued in fully registered form, in minimum denominations
of $1,000 and integral multiples of $1,000 in excess thereof (or such other
amounts as may be set forth in a Prospectus Supplement), except that one
Certificate of each Class may be issued in a different denomination.
Definitive Certificates, if issued, will be transferable and exchangeable
at the corporate trust office of the Trustee or, at the election of the Trustee,
at the office of a Certificate Registrar appointed by the Trustee. No service
charge will be made for any registration of exchange or transfer, but the
Trustee may require payment of a sum sufficient to cover any tax or other
governmental charge. If provided in the related Agreement, a certificate
administrator may perform certain duties in connection with the administration
of the Certificates.
The Certificates will not represent obligations of the Representative, the
Originators or any affiliate thereof. The assets of each Trust will consist of
one or more of the following, as set forth in the related Prospectus Supplement,
(a) the SBA Loans that from time to time are subject to the related Agreement
and which are held in the related Pool; (b) the assets for the Trust that from
time to time are required by the Agreement to be deposited in certain reserve
accounts, including the Certificate Account, the Principal and Interest Account,
the Expense Account, the Letter of Credit Fee Account and the Insurance Account
(each, as defined herein), or to be invested in Permitted Investments (as
defined herein); (c) property and any proceeds thereof acquired by foreclosure
of the SBA Loans in such Pool, deed in lieu of foreclosure or a comparable
conversion; (d) any Primary Mortgage Insurance Policies; (e) any Mortgage Pool
Insurance Policies; (f) any Special Hazard Insurance Policies; (g) any
Bankruptcy Bonds; and (h) all rights under any other insurance policies,
guarantees, supplemental interest payments, surety bonds, letters of credit or
other credit enhancement or maturity protection covering any Certificates, any
SBA Loan in the related Pool or any related Mortgaged Property which is required
to be maintained pursuant to the related Agreement.
Each Series of Certificates will be issued in one or more Classes. Each
Class of Certificates of a Series will evidence beneficial ownership of the
interest in assets of the related Trust specified in the related Prospectus
Supplement. A Class of Certificates may be divided into two or more Sub-Classes,
as specified in the related Prospectus Supplement.
A Series of Certificates may include one or more Classes of Senior
Certificates that receive certain preferential treatment with respect to one or
more Subordinated Classes of Certificates of such Series. Certain Series or
Classes of Certificates may he covered by a Mortgage Pool Insurance Policy,
Special Hazard Insurance Policy, Bankruptcy Bond or other insurance policies,
cash accounts, letters of credit, financial guaranty insurance policies, third
party guarantees, supplemental interest payments or other forms of credit
enhancement or maturity protection, in each case as described herein and in the
related Prospectus Supplement. Distributions on one or more Classes of a Series
of Certificates may be made prior to one or more other Classes, after the
occurrence of specified events, in accordance with a schedule or formula, on the
basis of collections from designated portions of the Trust Assets in the related
Trust or on a different basis, in each case, as specified in the related
Prospectus Supplement. The timing and amounts of such distributions may vary
among classes or over time as specified in the related Prospectus Supplement.
Distributions of principal and interest (or, where applicable, of
principal only or interest only) on the related Certificates will be made by the
Trustee on each Remittance Date, in the amounts specified in the related
Prospectus Supplement. Distributions will be made to the persons in whose names
the Certificates are registered at the close of business on the record dates
specified in the Prospectus Supplement Unless Definitive Certificates have been
issued, the registered holder of all Certificates will be Cede. Distributions
will be made by check mailed to the persons entitled thereto at the address
appearing in the register maintained for holders of Certificates (the
"Certificate Register") or, to the extent described in the related Prospectus
Supplement, by wire transfer or by such other means as are described therein,
except that the final distribution in retirement of the Certificates will be
made only upon presentation and surrender of the Certificates at the office or
agency of the Trustee or other person specified in the final distribution notice
to Certificateholders.
DISTRIBUTIONS ON CERTIFICATES
Each Class of Certificates within a Series will evidence the interests
specified in the related Prospectus Supplement, which may (i) include the right
to receive distributions allocable only to principal, only to interest or to any
combination thereof; (ii) include the right to receive distributions only of
prepayments of principal throughout the lives of the Certificates or during
specified periods; (iii) be subordinated in its right to receive distributions
of scheduled payments of principal, prepayments of principal, interest or any
combination thereof to one or more other Classes of Certificates of such Series
throughout the lives of the Certificates or during specified periods or may be
subordinated with respect to certain losses or delinquencies; (iv) include the
right to receive such distributions only after the occurrence of events
specified in the Prospectus Supplement; (v) include the right to receive
distributions in accordance with a schedule or formula or on the basis of
collections from designated portions of the assets in the related Trust; (vi)
include, as to Certificates entitled to distributions allocable to interest, the
right to receive interest at a Fixed Rate or an Adjustable Rate; and (vii)
include, as to Certificates entitled to distributions allocable to interest, the
right to distributions allocable to interest only after the occurrence of events
specified in the related Prospectus Supplement, and in each case, may accrue
interest until such events occur, as specified in such Prospectus Supplement.
Distributions allocable to principal and interest on the Certificates will
be made by the Trustee out of, and only to the extent of, funds available in the
related Certificate Account and other accounts to the extent described in the
related Prospectus Supplement. To the extent described in the related Prospectus
Supplement, on each Remittance Date, the Master Servicer will withdraw from the
applicable Certificate Account and such other accounts as may be described in
the related Prospectus Supplement and distribute to the Certificateholders of
each Class (other than a Series having a Class of Subordinated Certificates, as
described below), either the specified interest of such Class in the Pool times
the aggregate of all amounts on deposit in the Certificate Account as of the
Determination Date, or, in the case of Classes which have been assigned an
aggregate principal balance and Pass-Through Rate, payments of interest and
payments in reduction of such aggregate principal balance from all amounts on
deposit in the Certificate Account on the Determination Date, in the priority
and calculated in the manner set forth in the related Prospectus Supplement.
The timing and amounts of distributions allocable to interest and
principal and, if applicable, Principal Prepayments and scheduled payments of
principal, to be made on any Remittance Date may vary among Classes, over time
or otherwise as specified in the Prospectus Supplement. Differing allocations of
principal and interest to different Classes of Certificateholders will have the
effect of accelerating the amortization of Senior Certificates while increasing
the interests evidenced by the Subordinated Certificates in the related Trust.
Distributions to any Class of Certificates will be made pro rata to all
Certificateholders of that Class, or as otherwise described in a Prospectus
Supplement.
MONTHLY ADVANCES AND COMPENSATING INTEREST
In order to maintain a regular flow of scheduled interest payments to
Certificateholders (rather than to guarantee or insure against losses) if so
provided in the related Prospectus Supplement, the Master Servicer will be
required to advance to the Trustee, on or before each Remittance Date (from its
own funds), the amount, if any, by which (a) the sum of (x) 30 days' interest at
the applicable weighted average Adjusted SBA Loan Remittance Rate (as defined
below) on the then outstanding principal balance of the related Series of
Certificates and (y) the amount, if any, required to be deposited into the
related Reserve Account (as specified in the Prospectus Supplement) for the
related Remittance Date exceeds (b) the amount received by the Master Servicer
and any Sub-Servicers in respect of interest on the SBA Loans as of the related
Record Date (less certain amounts not required to be deposited into the related
Trust) (such excess, the "Monthly Advance"). For each Class of Certificates, the
"Adjusted SBA Loan Remittance Rate" will equal the sum of the related
Pass-Through Rate and the rate used in determining certain expenses payable by
the related Trust, as more specifically set forth in the related Prospectus
Supplement.
If so specified in the related Prospectus Supplement, not later than the
close of business on each Determination Date, with respect to each SBA Loan for
which a Principal Prepayment in full or Curtailment was received during the
related Due Period, the Master Servicer will be required to remit to the Trustee
for deposit in the Certificate Account from amounts otherwise payable to it as
servicing compensation, an amount equal to the excess of (a) 30 days' interest
on the principal balance of each such SBA Loan as of the beginning of the
related Due Period at the applicable weighted average Adjusted SBA Loan
Remittance Rate, over (b) the amount of interest actually received on the
related SBA Loan for such Due Period (such difference, "Compensating Interest").
BOOK-ENTRY REGISTRATION
If so specified in the related Prospectus Supplement, the Certificates
initially will be registered in the name of Cede, 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 Uniform Commercial Code ("UCC") and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Securities Exchange
Act of 1934, as amended. DTC was created to hold securities for its
participating organizations ("Participants") and facilitate the clearance and
settlement of securities transactions between Participants through electronic
book-entry changes in their accounts, thereby eliminating the need for physical
movement of certificates. Participants include securities brokers and dealers,
banks, trust companies and clearing corporations and may include certain other
organizations. Indirect access to the DTC system also is available to others
such as brokers, dealers, banks and trust companies that clear through or
maintain a custodial relationship with a Participant, either directly or
indirectly ("Indirect Participant").
Under a book-entry format, Certificateholders that are not Participants or
Indirect Participants but desire to purchase, sell or otherwise transfer
ownership of Certificates registered in the name of Cede, as nominee of DTC, may
do so only through Participants and Indirect Participants. In addition, such
Certificateholders will receive all distributions of principal of and interest
on the Certificates and reports relating to the Certificates from the Trustee
through DTC and its Participants. Under a book-entry format, Certificateholders
will receive payments and reports relating to the Certificates after the related
Remittance Date because, while payments and such reports are required to be
forwarded to Cede, as nominee for DTC, on each such date, DTC will forward such
payments and reports to its Participants which thereafter will be required to
forward them to Indirect Participants or Certificateholders. Unless and until
Definitive Certificates are issued, it is anticipated that the only
Certificateholder will be Cede, as nominee of DTC, and that the beneficial
holders of Certificates will not be recognized by the Trustee as
Certificateholders under the Agreement. The beneficial holders of such
Certificates will only be permitted to exercise the rights of Certificateholders
under the Agreement indirectly through DTC and its Participants who in turn will
exercise their rights through DTC.
Under the rules, regulations and procedures creating and affecting DTC and
its operations, 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 reports and payments of principal of and interest on the
Certificates. Participants and Indirect Participants with which
Certificateholders have accounts with respect to the Certificates similarly are
required to make book-entry transfers and receive and transmit such reports and
payments on behalf of their respective Certificateholders. Accordingly, although
Certificateholders will not possess certificates, the rules provide a mechanism
by which Certificateholders will receive distributions and reports and will be
able to transfer their interests.
Unless and until Definitive Certificates are issued, Certificateholders
who are not Participants may transfer ownership of Certificates only through
Participants by instructing such Participants to transfer Certificates, by
book-entry transfer, through DTC for the account of the purchasers of such
Certificates, which account is maintained with their respective Participants.
Under the Rules and in accordance with DTC's normal procedures, transfers of
ownership of Certificates will be executed through DTC and the accounts of the
respective Participants at DTC will be debited and credited. Similarly, the
respective Participants will make debits or credits, as the case may be, on
their records on behalf of the selling and purchasing Certificateholders.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a
Certificateholder to pledge Certificates to persons or entities that do not
participate in the DTC system, or otherwise take actions in respect of such
Certificates may be limited due to the lack of a physical certificate for such
Certificates.
DTC in general advises that it will take any action permitted to be taken
by a Certificateholder under an Agreement only at the direction of one or more
Participants to whose account with DTC the Certificates are credited.
Additionally, DTC in general advises that it will take such actions with respect
to specified percentages of the Certificateholders only at the direction of and
on behalf of Participants whose holdings include current principal amounts of
outstanding Certificates that satisfy such specified percentages. DTC may take
conflicting actions with respect to other current principal amounts of
outstanding Certificates to the extent that such actions are taken on behalf of
Participants whose holdings include such current principal amounts of
outstanding Certificates.
Any Certificates initially registered in the name of Cede, as nominee of
DTC, will be issued in fully registered, certificated form to Certificateholders
or their nominees ("Definitive Certificates"), rather than to DTC or its nominee
only under the events specified in the related Agreement and described in the
related Prospectus Supplement. Upon the occurrence of any of the events
specified in the related Agreement and Prospectus Supplement, DTC will be
required to notify all Participants of the availability through DTC of
Definitive Certificates. Upon surrender by DTC of the certificates representing
the Certificates and instruction for re-registration, the Trustee will issue the
Certificates in the form of Definitive Certificates, and thereafter the Trustee
will recognize the holders of such Definitive Certificates as
Certificateholders. Thereafter, payments of principal of and interest on the
Certificates will be made by the Trustee directly to Certificateholders in
accordance with the procedures set forth herein and in the Agreement. The final
distribution of any Certificate (whether Definitive Certificates or Certificates
registered in the name of Cede), however, will be made only upon presentation
and surrender of such Certificates on the final Remittance Date at such office
or agency as is specified in the notice of final payment to Certificateholders.
CREDIT ENHANCEMENT
GENERAL
Credit enhancement may be provided with respect to one or more Classes of
a Series of Certificates or with respect to the Trust Assets in the related
Trust. Credit enhancement may be in the form of (i) the subordination of one or
more Classes of the Certificates of such Series, (ii) the use of a Certificate
Guarantee Insurance Policy, Spread Amount, Mortgage Pool Insurance Policy,
Special Hazard Insurance Policy, Bankruptcy Bond, Reserve Accounts, Supplemental
Interest Payments, a letter of credit, a limited financial guaranty insurance
policy, other third party guarantees or maturity protection, another method of
credit enhancement described in the related Prospectus Supplement, or the use of
a cross-support feature, or (iii) any combination of the foregoing. Credit
enhancement will not provide protection against all risks of loss and will not
guarantee repayment of the entire principal balance of the Certificates and
interest thereon. If losses occur which exceed the amount covered by credit
enhancement or which are not covered by the credit enhancement, holders of one
or more Classes of Certificates will bear their allocable share of deficiencies.
If a form of credit enhancement applies to several Classes of Certificates, and
if principal payments equal to the aggregate principal balances of certain
Classes will be distributed prior to such distributions to other Classes, the
Classes which receive such distributions at a later time are more likely to bear
any losses which exceed the amount covered by credit enhancement. Coverage under
any credit enhancement may be canceled or reduced by the Master Servicer or the
Representative if such cancellation or reduction would not adversely affect the
rating or ratings of the related Certificates. The Trustee of the related Trust
will have the right to sue providers of credit enhancement if a default is made
on a required payment.
SUBORDINATION
To enhance the likelihood of regular receipt by holders of Senior
Certificates of the full amount of payments which they would be entitled to
receive in the absence of any losses or delinquencies, if so specified in the
related Prospectus Supplement, distributions of scheduled principal, Principal
Prepayments, interest or any combination thereof that otherwise would have been
payable to one or more Classes of Subordinated Certificates of a Series will
instead be payable to holders of one or more Classes of Senior Certificates,
under the circumstances and to the extent specified in the Prospectus
Supplement. If specified in the related Prospectus Supplement, the holders of
Senior Certificates will receive the amounts of principal and/or interest due to
them on each Remittance Date, out of the funds available for distribution on
such date in the related Certificate Account, prior to any such distribution
being made to holders of the related Subordinated Certificates, in each case
under the circumstances and subject to the limitations specified in the
Prospectus Supplement. The protection afforded to the holders of Senior
Certificates through subordination also may be accomplished by first allocating
certain types of losses or delinquencies to the related Subordinated
Certificates, to the extent described in the related Prospectus Supplement. If
aggregate losses and delinquencies in respect of such SBA Loans were to exceed
the total amounts payable and available for distribution to holders of
Subordinated Certificates or, if applicable, were to exceed the specified
maximum amount, holders of Senior Certificates would experience losses on the
Certificates.
In addition to or in lieu of the foregoing, if so specified in the
Prospectus Supplement, all or any portion of distributions otherwise payable to
holders of Subordinated Certificates on any Remittance Date may instead be
deposited into one or more Reserve Accounts established and maintained with the
Trustee. If so specified in the Prospectus Supplement, such deposits may be made
on each Remittance Date, on each Remittance Date for specified periods or until
the balance in the Reserve Account has reached a specified amount and, following
payments from the Reserve Account to holders of Senior Certificates or
otherwise, thereafter to the extent necessary to restore the balance in the
Reserve Account to required levels, in each case as specified in the Prospectus
Supplement. If so specified in the related Prospectus Supplement, amounts on
deposit in the Reserve Account may be released to the holders of the Class of
Certificates specified in the Prospectus Supplement at the times and under the
circumstances specified in the Prospectus Supplement. See "--Reserve Accounts"
below.
If so specified in the related Prospectus Supplement, the same Class of
Certificates may be Senior Certificates with respect to certain types of
payments or certain types of losses or delinquencies and Subordinated
Certificates with respect to other types of payment or types of losses or
delinquencies. If specified in the related Prospectus Supplement, various
Classes of Senior Certificates and Subordinated Certificates may themselves be
subordinate in their right to receive certain distributions to other Classes of
Senior and Subordinated Certificates, respectively, through a cross support
mechanism or otherwise. As between Classes of Senior Certificates and as between
Classes of Subordinated Certificates, distributions may be allocated among such
Classes (i) in the order of their scheduled final distribution dates, (ii) in
accordance with a schedule or formula, (iii) in relation to the occurrence of
events, or (iv) otherwise, in each case as specified in the Prospectus
Supplement. The related Prospectus Supplement will set forth information
concerning the amount of subordination of a Class or Classes of Subordinated
Certificates in a Series, the circumstances in which such subordination will be
applicable, the manner, if any, in which the amount of subordination will
decrease over time, the manner of funding any Reserve Account, and the
conditions under which amounts in any such Reserve Account will be used to make
distributions to Senior Certificateholders or released to Subordinated
Certificateholders from the related Trust.
CERTIFICATE GUARANTY INSURANCE POLICIES
If so specified in the related Prospectus Supplement, a Certificate
Guaranty Insurance Policy may be obtained and maintained for any Class or Series
of Certificates. The issuer of any Certificate Guaranty Insurance Policy (a
"Certificate Guaranty Insurer") will be described in the related Prospectus
Supplement. A copy of any such Certificate Guaranty Insurance Policy will be
attached as an exhibit to the related Prospectus Supplement.
If so specified in the related Prospectus Supplement, a Certificate
Guaranty Insurance Policy will unconditionally and irrevocably guarantee to
Certificateholders that an amount equal to each full and complete Insured
Payment will be received by an agent of the Trustee (an "Insurance Paying
Agent") on behalf of Certificateholders, for distribution by the Trustee to each
Certificateholder. The "Insured Payment" will equal the full amount of the
distributions of principal and interest to which Certificateholders are entitled
under the related Agreement plus any other amounts specified therein or in the
related Prospectus Supplement.
The specific terms of any Certificate Guaranty Insurance Policy will be as
set forth in the related Prospectus Supplement. Certificate Guaranty Insurance
Policies may have limitations including (but not limited to) limitations on the
insurer's obligation to guarantee the Master Servicer's obligation to repurchase
or substitute for any SBA Loans, to guarantee any specified rate of prepayments
or to provide funds to redeem Certificates on any specified date.
Subject to the terms of the related Agreement, the Certificate Guaranty
Insurer may be subrogated to the rights of each Certificateholder to receive
payments under the Certificates to the extent of any payments by such
Certificate Guaranty Insurer under the related Certificate Guaranty Insurance
Policy.
SPREAD AMOUNT
If so specified in the related Prospectus Supplement, certain Classes of
Certificates may be entitled to receive limited acceleration of principal
relative to the amortization of the related Trust Assets. The accelerated
amortization will be achieved by applying certain excess interest collected on
the Trust Assets to the payment of principal on such Classes of Certificates.
This acceleration feature is intended to create an amount (the "Spread Amount"),
resulting from, and generally equal to, the excess of the aggregate principal
balances of the applicable Trust Assets over the principal balances of the
applicable Classes of Certificates. Once the required Spread Amount is reached,
and subject to the provisions described in the next sentence and in the related
Prospectus Supplement, the acceleration feature will cease, unless necessary to
maintain the required level of the Spread Amount. The applicable Agreement will
provide that, subject to certain floors, caps and triggers, the required level
of the Spread Amount may increase or decrease over time. An increase would
result in a temporary period of accelerated amortization of the applicable
Classes of Certificates to increase the actual level of the Spread Amount to its
required level; a decrease would result in a temporary period of decelerated
amortization to reduce the actual level of the Spread Amount to its required
level. An Agreement also may provide that after one or more Classes of
Certificates have been paid to the required level of the Spread Amount, excess
interest, together with certain other excess amounts, may be applied to make-up
shortfalls in, or accelerate the amortization of, other Classes of Certificates.
MORTGAGE POOL INSURANCE POLICIES
If specified in the Prospectus Supplement related to any Pool of SBA
Loans, a Mortgage Pool Insurance Policy issued by the insurer (the "Pool
Insurer") named in such Prospectus Supplement will be obtained and maintained
for each Series pertaining to SBA Loans. Each Mortgage Pool Insurance Policy
will, subject to the limitations described below, cover loss by reason of
default in payment on the related SBA Loans in the Pool in an amount, unless
otherwise specified in the related Prospectus Supplement, initially equal to a
specified percentage of the aggregate principal balance of all SBA Loans
included in the Pool as of the Cut-off Date or such other date as is specified
in such Prospectus Supplement. The Mortgage Pool Insurance Policies, however,
are not blanket policies against loss, since claims thereunder may only be made
respecting particular defaulted SBA Loans and only upon satisfaction of certain
conditions precedent described below.
A Mortgage Pool Insurance Policy generally will not insure (and many
Primary Mortgage Insurance Policies do not insure) against loss sustained by
reason of a default arising from, among other things, (i) fraud or negligence in
the origination or servicing of an SBA Loan, including misrepresentation by the
Mortgagor, the originator or persons involved in the origination thereof, or
(ii) failure to construct a Mortgaged Property in accordance with plans and
specifications. If so specified in the related Prospectus Supplement, an
endorsement to the Mortgage Pool Insurance Policy, a bond or other credit
support may cover fraud in connection with the origination of SBA Loans. If so
specified in the related Prospectus Supplement, a failure of coverage
attributable to an event specified in clause (i) or (ii) above might result in a
breach of the Master Servicer's representations described above and, in such
event, might give rise to an obligation on the part of the Master Servicer to
purchase the defaulted SBA Loan if the breach cannot be cured by the Master
Servicer. No Mortgage Pool Insurance Policy will cover (and many Primary
Mortgage Insurance Policies do not cover) a claim in respect of a defaulted SBA
Loan occurring when the servicer of such SBA Loan, at the time of default or
thereafter, was not approved by the applicable insurer.
The original amount of coverage under each Mortgage Pool Insurance Policy
will be reduced over the life of the related Certificates by the aggregate
dollar amount of claims paid less the aggregate of the net amounts realized by
the Pool Insurer upon disposition of all foreclosed properties. The amount of
claims paid will include certain expenses incurred by the Master Servicer as
well as accrued interest on delinquent SBA Loans to the date of payment of the
claim. Accordingly, if aggregate net claims paid under any Mortgage Pool
Insurance Policy reach the original policy limit, coverage under that Mortgage
Pool Insurance Policy will be exhausted and any further losses will be borne by
the Certificateholders.
The terms of any pool insurance policy relating to a pool of Contracts
will be described in the related Prospectus Supplement.
SPECIAL HAZARD INSURANCE POLICIES
If specified in the related Prospectus Supplement, a separate Special
Hazard Insurance Policy will be obtained for the Pool and will be issued by the
insurer (the "Special Hazard Insurer") named in such Prospectus Supplement. Each
Special Hazard Insurance Policy will, subject to limitations described below,
protect holders of the related Certificates from (i) loss by reason of damage to
Mortgaged Properties caused by certain hazards (including earthquakes and, to a
limited extent, tidal waves and related water damage) not insured against under
the standard form of hazard insurance policy for the respective states in which
the Mortgaged Properties are located or under a flood insurance policy if the
Mortgaged Property is located in a federally designated flood area, and (ii)
loss caused by reason of the application of the coinsurance clause contained in
hazard insurance policies. See "The Agreement--Hazard Insurance." No Special
Hazard Insurance Policy will cover losses occasioned by war, civil insurrection,
certain governmental action, errors in design, faulty workmanship or materials
(except under certain circumstances), nuclear reaction, flood (if the Mortgaged
Property is located in a federally designated flood area), chemical
contamination and certain other risks. The amount of coverage under any Special
Hazard Insurance Policy will be specified in the related Prospectus Supplement.
Each Special Hazard Insurance Policy will provide that no claim may be paid
unless hazard and, if applicable, flood insurance on the property securing the
SBA Loan has been kept in force and other protection and preservation expenses
have been paid.
Unless otherwise specified in the related Prospectus Supplement, since
each Special Hazard Insurance Policy will be designed to permit full recovery
under the Mortgage Pool Insurance Policy in circumstances in which such
recoveries would otherwise be unavailable because property has been damaged by a
cause not insured against by a standard hazard policy and thus would not be
restored, each Agreement will provide that, if the related Mortgage Pool
Insurance Policy shall have been terminated or been exhausted through payment of
claims, the Master Servicer will be under no further obligation to maintain such
Special Hazard Insurance Policy.
The terms of any Special Hazard Insurance Policy relating to a pool of
Contracts will be described in the related Prospectus Supplement.
BANKRUPTCY BONDS
If specified in the related Prospectus Supplement, a Bankruptcy Bond for
proceedings under the federal Bankruptcy Code will be issued by an insurer named
in such Prospectus Supplement. Each Bankruptcy Bond will cover certain losses
resulting from a reduction by a bankruptcy court of scheduled payments of
principal and interest on an SBA Loan or a reduction by such court of the
principal amount of an SBA Loan and will cover certain unpaid interest on the
amount of such a principal reduction from the date of the filing of a bankruptcy
petition. The required amount of coverage under each Bankruptcy Bond will be set
forth in the related Prospectus Supplement. To the extent specified in an
applicable Prospectus Supplement, the Master Servicer may deposit cash, an
irrevocable letter of credit or any other instrument acceptable to each
nationally recognized rating agency rating the Certificates of the related
Series in the Trust to provide protection in lieu of or in addition to that
provided by a Bankruptcy Bond. See "Certain Legal Aspects of the SBA
Loans--Anti-Deficiency Legislation and Other Limitations on Lenders."
The terms of any Bankruptcy Bond relating to a pool of Contracts will be
described in the related Prospectus Supplement.
RESERVE ACCOUNTS
If specified in a Prospectus Supplement, cash, U.S. Treasury securities,
instruments evidencing ownership of principal or interest payments thereon,
letters of credit, demand notes, certificates of deposit or a combination
thereof in the aggregate amount specified in the Prospectus Supplement may be
deposited by the Master Servicer or Representative on the date specified in the
Prospectus Supplement in one or more Reserve Accounts established with the
Trustee. In addition to or in lieu of the foregoing, if so specified in such
Prospectus Supplement, all or any portion of distributions otherwise payable to
holders of Subordinated Certificates on any Remittance Date may instead be
deposited into such Reserve Accounts. Such deposits may be made on the date
specified in the Prospectus Supplement, which may include each Remittance Date,
each Remittance Date for specified periods or until the balance in the Reserve
Account has reached a specified amount. See "--Subordination" above.
The cash and other assets in the Reserve Accounts will be used to enhance
the likelihood of timely payment of principal of, and interest on, or, if so
specified in the Prospectus Supplement, to provide additional protection against
losses in respect of, the assets in the related Trust, to pay the expenses of
the Trust or for such other purposes specified in the Prospectus Supplement. Any
cash in a Reserve Account and the proceeds upon maturity or liquidation of any
other asset or instrument therein will be invested, to the extent acceptable to
the applicable Rating Agency, in obligations of the United States and certain
agencies thereof, certificates of deposit, certain commercial paper, time
deposits and bankers acceptances sold by eligible commercial banks, certain
repurchase agreements of United States government securities with eligible
commercial banks and certain other instruments acceptable to the applicable
Rating Agency ("Permitted Investments"). Any asset or instrument deposited in
the Reserve Account generally will name the Trustee, in its capacity as trustee
for the Certificateholders, as beneficiary and will be issued by an entity
acceptable to the applicable Rating Agency. Additional information with respect
to such instruments deposited in the Reserve Accounts will be set forth in the
Prospectus Supplement.
Any amounts so deposited and payments on assets and instruments deposited
in a Reserve Account will be available for withdrawal from such Reserve Account
for distribution to Certificateholders for the purposes, in the manner and at
the times specified in the Prospectus Supplement.
SUPPLEMENTAL INTEREST PAYMENTS
If so specified in the Prospectus Supplement, one or more Classes of
Certificates may be entitled to receive supplemental interest payments under
specified circumstances. Supplemental interest payments will be available to
fund some or all of the difference, if any, between the interest owed to a Class
of Certificates on a Remittance Date and the interest that would be available to
pay such interest assuming no defaults or delinquencies on the Trust Assets.
Such differences may result if the interest rates on the applicable Classes of
Certificates are based upon an index that differs from the index used in
determining the interest rates on the Trust Assets. Except as otherwise provided
in a Prospectus Supplement, supplemental interest payments will not be available
to fund shortfalls resulting from delinquencies or defaults on the Trust Assets.
MATURITY PROTECTION
If so specified in the Prospectus Supplement, one or more Classes of
Certificates may be entitled to third-party payments to help provide that the
holders of such Certificates receive their unpaid principal on or prior to a
specified date.
OTHER INSURANCE, GUARANTEES AND SIMILAR INSTRUMENTS OR AGREEMENTS
If specified in the related Prospectus Supplement, a Trust may include in
lieu of some or all of the foregoing or in addition thereto letters of credit,
financial guaranty insurance policies, third party guarantees, limited
guarantees or insurance from agencies or instrumentalities of the United States,
and other arrangements for maintaining timely payments or providing additional
protection against losses on the assets included in such Trust, paying
administrative expenses, or accomplishing such other purpose as may be described
in the Prospectus Supplement. The Trust may include a guaranteed investment
contract or reinvestment agreement pursuant to which funds held in one or more
accounts will be invested at a specified rate. If any Class of Certificates has
a floating interest rate, or if any of the Trust Assets has a floating interest
rate, the Trust may include an interest rate swap contract, an interest rate cap
agreement or similar contract providing limited protection against interest rate
risks.
CROSS SUPPORT
If specified in the related Prospectus Supplement, the beneficial
ownership of separate groups of assets included in a Trust may be evidenced by
separate Classes of the related Series of Certificates. In such case, credit
support may be provided by a cross-support feature which requires that
distributions be made with respect to Certificates evidencing a beneficial
ownership interest in other asset groups within the same Trust. The Prospectus
Supplement for a Series which includes a cross-support feature will describe the
manner and conditions for applying such cross-support feature.
If specified in the related Prospectus Supplement, the coverage provided
by one or more forms of credit support may apply concurrently to two or more
separate Trusts. If applicable, the Prospectus Supplement will identify the
Trusts to which such credit support relates and the manner of determining the
amount of the coverage provided thereby and of the application of such coverage
to the identified Trusts.
MATURITY, PREPAYMENT AND YIELD CONSIDERATIONS
The yields to maturity of the Certificates will be affected by the amount
and timing of principal payments on or in respect of the Trust Assets included
in the related Trusts, the allocation of available funds to various Classes of
Certificates, the Pass-Through Rate for various Classes of Certificates and the
purchase price paid for the Certificates.
The original terms to maturity of the SBA Loans in a given Pool will vary
depending upon the type of SBA Loans included therein. Each Prospectus
Supplement will contain information with respect to the type and maturities of
the SBA Loans in the related Pool. SBA Loans generally may be prepaid without
penalty in full or in part at any time.
In general, prepayment of SBA Loans is likely to increase when the level
of prevailing interest rates for similar loans declines significantly, although
the prepayment rate is influenced by a number of other factors, including
general economic conditions. Similarly, when the level of prevailing interest
rates rises, prepayment rates may decrease. No prediction can be made as to the
prepayment rate that the SBA Loans will actually experience.
The prepayment experience of the Pools may be affected by a wide variety
of factors, including general and local economic conditions, mortgage market
interest rates and the availability of alternative financing. The Representative
is unaware of any reliable studies that would project the prepayment risks
associated with the SBA Loans based upon current interest rates and economic
conditions or the historical prepayment experience of The Money Store's and its
affiliates' portfolios of SBA Loans.
Greater than anticipated prepayments of principal will increase the yield
on Certificates purchased at a price less than par. Similarly, greater than
anticipated prepayments of principal will decrease the yield on Certificates
purchased at a price greater than par. The effect on an investor's yield of
principal prepayments on the SBA Loans occurring at a rate that is faster (or
slower) than the rate anticipated by the investor in the period immediately
following the issuance of the applicable Class of Certificates may not be offset
by a subsequent like reduction (or increase) in the rate of principal payments.
The weighted average lives of Certificates will also be affected by the
amount and timing of delinquencies and defaults on the SBA Loans and the
recoveries, if any, on defaulted SBA Loans and foreclosed properties.
Delinquencies and defaults will generally slow the rate of payment of principal
to the Certificateholders. However, this effect will be offset to the extent
that lump sum recoveries on defaulted SBA Loans and foreclosed properties result
in principal payments on the Certificates faster than otherwise scheduled.
When a full prepayment or Curtailment occurs on an SBA Loan, the Mortgagor
will be charged interest on the principal amount of the SBA Loan so prepaid only
for the number of days in the month actually elapsed up to the date of the
prepayment rather than for a full month. If so specified in the related
Prospectus Supplement, in the event that less than 30 days' interest is
collected on an SBA Loan during a Due Period, whether due to prepayment in full
or a Curtailment, the Master Servicer will be obligated to pay Compensating
Interest with respect thereto, but only to the extent of the aggregate Servicing
Fee and Contingency Fee for the related Remittance Date. To the extent such
shortfalls exceed the amount of Compensating Interest that the Master Servicer
is obligated to pay, and are not otherwise covered by Insured Payments, the
yield on the Certificates could be adversely affected.
Under certain circumstances, the Master Servicer, certain insurers, the
holders of REMIC Residual Certificates or certain other entities specified in
the related Prospectus Supplement may have the option to purchase the Trust
Assets and other assets of a Trust, thereby effecting earlier retirement of the
related Series of Certificates. See "The Agreement--Termination; Purchase of SBA
Loans."
If so specified in the related Prospectus Supplement, the effective yield
to certain Certificateholders may be slightly lower than the yield otherwise
produced by the applicable Remittance Rate and purchase price, because while
interest generally will accrue on such Certificates from the first day of each
month, the distribution of such interest will not be made earlier than a
specified date in the month following the month of accrual.
In addition, if so specified in the related Prospectus Supplement,
prepayments may result from amounts on deposit, if any, in the Pre-Funding
Account at the end of the Funding Period being applied to the payment of
principal of the Certificates.
The Prospectus Supplement relating to a Series of Certificates will
discuss in greater detail the effect of the rate and timing of principal
payments (including prepayments) on the yield, weighted average lives and
maturities of such Certificates. Factors other than those identified herein and
in the related Prospectus Supplement could significantly affect principal
prepayments at any time and over the lives of the Certificates.
THE AGREEMENTS
Set forth below is a summary of certain provisions of each Agreement which
are not described elsewhere in this Prospectus. The summary does not purport to
be complete and is subject to, and qualified in its entirety by reference to,
the provisions of each Agreement. Where particular provisions or terms used in
the Agreements are referred to, such provisions or terms are as specified in the
Agreements.
SALE OF SBA LOANS
Pursuant to each Agreement, at the time of issuance of Certificates of a
Series, the Originators and/or The Money Store will sell to the related Trust,
without recourse, all interest of the Originators and/or The Money Store in each
of the Trust Assets comprising the assets of such Trust and all interest in all
actual payments collected after the Cut-off Date with respect to such Trust
Assets.
In addition, to the extent specified in the related Prospectus Supplement,
the net proceeds received from the sale of the Certificates of a given Series
will be applied to the deposit of the Pre-Funded Amount into the Pre-Funding
Account. The aggregate principal balance of additional Trust Assets to be
purchased for the related Trust generally will be equal to the Pre-Funded Amount
on the date of the issuance of the related Series. On each applicable purchase
date, the Originators and/or The Money Store will sell to the related Trust,
without recourse, the entire interest of the Originators and/or The Money Store
in the additional Trust Assets identified in a schedule attached to a
supplemental conveyance relating to such additional Trust Assets executed on
such date by the Originators and/or The Money Store. In connection with each
purchase of additional Trust Assets, the related Trust will be required to pay
to the Originators and/or The Money Store a cash purchase price equal to the
outstanding principal balance of each additional Trust Asset as of its related
Cut-off Date. The purchase price will be withdrawn from the Pre-Funding Account
and paid to the Originators and/or The Money Store so long as the
representations and warranties set forth in "--Representations and Warranties"
below apply to each additional Trust Asset to be conveyed, and the conditions
set forth in the paragraph below and in the related Agreement are satisfied. The
Originators and/or The Money Store will convey the additional Trust Assets to
the related Trust on the applicable purchase date pursuant to the Agreement.
Any conveyance of additional Trust Assets will be subject to the following
conditions, among others specified in the related Prospectus Supplement: (i)
each such additional Trust Asset must satisfy the eligibility criteria specified
in the related Agreement as of its applicable Cut-off Date and such additional
criteria as may be specified in the related Prospectus Supplement; (ii) if and
to the extent specified in the related Prospectus Supplement, the third-party
credit enhancement provider, if any, shall have approved the transfer of such
additional Trust Assets to the related Trust; (iii) neither the Originator nor
The Money Store will have selected such additional Trust Assets in a manner that
either believes is adverse to the interests of Certificateholders; and (iv) the
Originator and The Money Store will deliver certain opinions of counsel to the
Trustee(s) and the Rating Agencies with respect to the validity of the
conveyance of such additional Trust Assets.
In connection with such transfer and assignment, the Representative
and/or the Originators will deliver to the Trustee or, with respect to the SBA
Notes relating to the SBA Section 7(a) Loans being delivered pursuant to (a)
below, to fiscal and transfer agent of the SBA (the "Agent of the SBA"), the
following documents with respect to each SBA Loan (collectively, the "Trustee's
Document File"):
(a) The original SBA Note, endorsed by means of an allonge as follows
(bracketed language is only for SBA Section 7(a) Loans): "Pay to the order
of [Name of Trustee], and its successors and assigns, as trustee under
that certain Pooling and Servicing Agreement dated as of ____________,
199_ for the benefit of [the United States Small Business Administration
and] holders of TMS SBA Loan-Backed Certificates, Series 199_-_, Class __
and Class __[, as their respective interests may appear], without
recourse" and signed, by facsimile or manual signature, in the name of the
applicable Originator by a Responsible Officer, with all prior and
intervening endorsements showing a complete chain of endorsement from the
originator to the applicable Originator, if such Originator was not the
originator;
(b) With respect to those SBA Loans secured by Mortgaged Properties,
either: (i) the original Mortgage, with evidence of recording thereon,
(ii) a copy of the Mortgage certified as a true copy by a Responsible
Officer of the applicable Originator where the original has been
transmitted for recording until such time as the original is returned by
the public recording office or duly licensed title or escrow officer or
(iii) a copy of the Mortgage certified by the public recording office in
those instances where the original recorded Mortgage has been lost;
(c) With respect to those SBA Loans secured by Mortgaged Properties,
either: (i) the original Assignment of Mortgage from the applicable Seller
endorsed as follows (bracketed language is only for SBA Section 7(a)
Loans): "[Name of Trustee], ("Assignee") its successors and assigns, as
trustee under the Pooling and Servicing Agreement dated as of _____, 199_
[, subject to the Multi-Party Agreement dated as of ____________, 199_]"
with evidence of recording thereon (provided, however, that where
permitted under the laws of the jurisdiction wherein the Mortgaged
Property is located, the Assignment of Mortgage may be effected by one or
more blanket assignments for SBA Loans secured by Mortgaged Properties
located in the same county), or (ii) a copy of such Assignment of Mortgage
certified as a true copy by a Responsible Officer of the applicable
Originator where the original has been transmitted for recording
(PROVIDED, HOWEVER, that where the original Assignment of Mortgage is not
being delivered to the Trustee, each such Responsible Officer may complete
one or more blanket certificates attaching copies of one or more
Assignments of Mortgage relating to the Mortgages originated or acquired
by the applicable Originator);
(d) With respect to those SBA Loans secured by Mortgaged Properties,
either: (i) originals of all intervening assignments, if any, showing a
complete chain of title from the originator to the applicable Originator,
including warehousing assignments, with evidence of recording thereon if
such assignments were recorded, (ii) copies of any assignments certified
as true copies by a Responsible Officer of the applicable Originator where
the originals have been submitted for recording until such time as the
originals are returned by the public recording officer, or (iii) copies of
any assignments certified by the public recording office in any instances
where the original recorded assignments have been lost;
(e) With respect to those SBA Loans secured by Mortgaged Properties,
either: (i) originals of any title insurance policies relating to the
Mortgaged Properties or (ii) copies of any title insurance policies or
other evidence of lien position, including but not limited to PIRT
policies, limited liability reports and lot book reports, to the extent
the Originators obtain such policies or other evidence of lien position,
certified as true by the applicable Originator;
(f) For all SBA Loans, blanket assignment of all collateral securing the
SBA Loan, including without limitation, all rights under applicable
guarantees and insurance policies;
(g) For all SBA Loans, irrevocable power of attorney of the applicable
Originator to the Trustee to execute, deliver, file or record and
otherwise deal with the collateral for the SBA Loans in accordance with
the Agreement. The power of attorney will be delegable by the Trustee to
the Servicer and any successor servicer and will permit the Trustee or its
delegate to prepare, execute and file or record UCC financing statements
and notices to insurers; and
(h) For all SBA Loans, blanket UCC-1 financing statements identifying by
type all collateral for the SBA Loans in the SBA Loan Pool and naming the
Trustee, and with respect to the SBA Section 7(a) Loans, the SBA, as
Secured Parties and the applicable Originator as the Debtor.
REPRESENTATIONS AND WARRANTIES
Each Originator will represent to the Trustee and the Certificateholders,
among other things, with respect to each SBA Loan originated or acquired by it,
as of the related Cut-Off Date or such other date as may be set forth in an
Agreement:
(1) The information with respect to each SBA Loan set forth in the SBA
Loan Schedule is true and correct;
(2) All of the original or certified documentation set forth in the
Agreement (including all material documents related thereto) has been or will be
delivered to the Trustee or the Agent of the SBA, or as otherwise provided in
the related Agreement;
(3) Each SBA Loan has been originated or acquired by an Originator in
accordance with the applicable underwriting criteria set forth herein and is
being serviced by the Servicer or one or more Subservicers;
(4) With respect to those SBA Loans secured by a Mortgaged Property, each
Mortgage is a valid and subsisting lien of record on the Mortgaged Property
subject only to any applicable prior liens on such Mortgaged Property and
subject in all cases to such exceptions that are generally acceptable to banking
institutions in connection with their regular commercial lending activities, and
such other exceptions to which similar properties are commonly subject and which
do not individually, or in the aggregate, materially and adversely affect the
benefits of the security intended to be provided by such Mortgage;
(5) Each Section 7(a) Companion Loan, if any, is secured by a Mortgaged
Property, which security interest is senior or pari passu to the security
interest in such Mortgaged Property granted in connection with the related
Section 7(a) Loan and each Rule 504 Loan, if any, is secured by a Mortgaged
Property, which security interest is senior to the security interest in such
Mortgaged Property granted in connection with the related loan made by the SBA;
(6) Immediately prior to the transfer and assignment contemplated by
the Agreement, the applicable Originator held good and indefeasible title to,
and was the sole owner of, the Unguaranteed Interest of each SBA Section 7(a)
Loan, each Section 7(a) Companion Loan and such Rule 504 Loan conveyed by the
Originator subject to no liens, charges, mortgages, encumbrances or rights of
others except as set forth in paragraphs (4) and (5) above or other liens which
will be released simultaneously with such transfer and assignment;
(7) As of the related Cut-Off Date, no SBA Loan will be 59
or more days delinquent in payment;
(8) To the best of the Originator's knowledge, there will be no delinquent
tax or assessment lien on any Mortgaged Property which is the primary collateral
for the related loan, and each such Mortgaged Property will be free of material
damage and will be in good repair;
(9) The SBA Loan will not be subject to any right of rescission, set-off,
counterclaim or defense, including the defense of usury, nor will the operation
of any of the terms of the SBA Loan or any related Mortgage, or the exercise of
any right thereunder, render either the SBA Loan or any related Mortgage
unenforceable in whole or in part, or subject to any right of rescission,
set-off, counterclaim or defense, including the defense of usury, and no such
right of rescission, set-off, counterclaim or defense has been asserted with
respect thereto;
(10) Each SBA Loan at the time it was made complied in all material
respects with applicable state and federal laws and regulations, including,
without limitation, usury, equal credit opportunity, disclosure and recording
laws and the applicable SBA Rules and Regulations;
(11) Pursuant to the SBA Rules and Regulations, the Originator requires
that the improvements upon each Mortgaged Property which is the primary
collateral for the related loan are covered by a valid and existing hazard
insurance policy with a generally acceptable carrier that provides for fire and
extended coverage;
(12) Pursuant to the SBA Rules and Regulations, the Originator requires
that if a Mortgaged Property is in an area identified in the Federal Register by
the Federal Emergency Management Agency as having special flood hazards, a flood
insurance policy is in effect with respect to such Mortgaged Property with a
generally acceptable carrier;
(13) Each SBA Loan will conform, and all such SBA Loans in the aggregate
will conform, to the descriptions thereof set forth in this Prospectus and the
related Prospectus Supplement;
(14) The terms of the SBA Loan and the related Mortgage or other security
agreement pursuant to which collateral was pledged will not have been impaired,
altered or modified in any respect, except by a written instrument which has
been recorded, if necessary, to protect the interest of the SBA and the
Certificateholders and which will have been delivered to the Trustee;
(15) Each Mortgaged Property which is the primary collateral for the
related SBA Loan will be, at the time of origination of such SBA Loan, and to
the best of the Originator's knowledge will be, as of the related Cut-Off Date,
below regulatory agency action levels of contamination from toxic substances or
hazardous wastes or is subject to ongoing environmental rehabilitation approved
by the SBA;
(16) With respect to each SBA Loan secured by a Mortgaged Property and
that is not a first mortgage loan, either (i) no consent for the SBA Loan is
required by the holder of any related prior lien or (ii) such consent has been
obtained;
(17) Any related Mortgage will contain customary and enforceable
provisions which render the rights and remedies of the holder thereof adequate
for the realization against the Mortgaged Property of the benefits of the
security, including, (i) in the case of a Mortgage designated as a deed of
trust, by trustee's sale, and (ii) otherwise by judicial foreclosure. There will
be no homestead or other exemption available to the Mortgagor which would
materially interfere with the right to sell the Mortgaged Property at a
trustee's sale or the right to foreclose the Mortgage; and
(18) There will be no default, breach, violation or event of acceleration
existing under the SBA Loan and no event which, with the passage of time or with
notice and the expiration of any grace or cure period, would constitute a
default, breach, violation or event of acceleration, and the Originators will
not have waived any default, breach, violation or event of acceleration.
Pursuant to the Agreement, upon the discovery by The Money Store, the
Originators, the Servicer, any Subservicer or the Trustee of a breach of any of
the representations and warranties contained in the Agreement relating to an
Originator or the SBA Loans which materially and adversely affects the value of
the SBA Loans or the interest of the Certificateholders in the related SBA Loan
in the case of a representation or warranty relating to a particular SBA Loan
(notwithstanding that such representation and warranty was made to the
applicable Originator's best knowledge), the party discovering such breach is
required to give prompt written notice to the other parties. Within 60 days of
the earlier to occur of its discovery or its receipt of notice of any such
breach, the appropriate Originator will (i) promptly cure such breach in all
material respects, (ii) purchase the Unguaranteed Interest of such SBA Loan from
its own funds at a price equal to the then current principal balance of the
Unguaranteed Interest of such SBA Loan as of the date of purchase, plus 30 days'
interest thereon at the related Adjusted SBA Loan Remittance Rate as of the next
succeeding Determination Date, plus any accrued unpaid Servicing Fees, Monthly
Advances and Servicing Advances reimbursable to the Servicer, which purchase
price shall be deposited in the Principal and Interest Account on the next
succeeding Determination Date or (iii) remove such SBA Loan from the related
Trust and substitute one or more qualified SBA Loans. In addition, the
Originators will agree to indemnify the related Trust, the Trustee, the SBA and
the Certificateholders, against any loss arising from a material breach of any
such representation and warranty. The obligation of the Originators to so
purchase or substitute and to indemnify the Certificateholders and the Trustee
will constitute the sole remedy respecting a material breach of any such
representation or warranty to the Certificateholders or the Trustee.
PAYMENTS ON THE SBA LOANS
The Agreement will require the Master Servicer to establish and maintain
one or more principal and interest accounts (each a "Principal and Interest
Account") at one or more institutions designated as a "Designated Depository
Institution" in the Agreement.
All funds in the Principal and Interest Accounts will be required to be
held (i) uninvested, up to the limits insured by the Federal Deposit Insurance
Corporation or (ii) invested in instruments designated as "Permitted
Instruments" in the Agreement. Any investment earnings on funds held in the
Principal and Interest Accounts are for the account of the Master Servicer.
The Servicer is required to deposit in the Principal and Interest Account
(within two Business Days of receipt): (i) all payments received after the
Cut-Off Date on account of interest on the SBA Loans (net of the portion thereof
required to be paid to the holders of the Guaranteed Interest, the Agent of the
SBA's Fee, the Additional Fee and the Servicing Fee and other servicing
compensation payable to the Servicer as permitted by the Agreement), (ii) the
Unguaranteed Percentage of all payments received after the Cut-Off Date on
account of principal on the SBA Loans, including the Unguaranteed Percentage of
all Excess Payments, Principal Prepayments, Curtailments, Net Liquidation
Proceeds, Insurance Proceeds (other than amounts to be applied to the
restoration or repair of the related Mortgaged Property, or to be released to
the Obligor) and Released Mortgaged Property Proceeds, (iii) any amounts paid in
connection with the repurchase of the Unguaranteed Interest of an SBA Loan and
the amount of any adjustment for substituted SBA Loans, (iv) the amount of any
losses incurred in connection with investments in Permitted Instruments and (v)
certain amounts relating to insufficient insurance policies and Foreclosed
Property.
GENERAL SERVICING STANDARDS
Unless otherwise specified in the related Prospectus Supplement, the
Master Servicer will agree to master service the SBA Loans in accordance with
the related Agreement and, with respect to the SBA Section 7(a) Loans, the
Multi-Party Agreement and the SBA Rules and Regulations. As used herein, "SBA
Rules and Regulations" means the SBA Act, all rules and regulations promulgated
from time to time thereunder and the Loan Guaranty Agreement. Pursuant to each
Agreement and in accordance with applicable SBA Rules and Regulations, the
Master Servicer will be required to make reasonable efforts to collect all
payments called for under the terms of the related SBA Loan. Nonetheless, the
Master Servicer, in determining the type of action that is reasonable to pursue
may consider, among other things, the unpaid principal balance of an SBA Loan
against the estimated cost of collection or foreclosure action, the unpaid
balance of the related prior mortgage, if any, the condition and estimated
market value ("as is" and "if repaired"), the estimated marketability of the
related Mortgaged Property and the borrower's ability to repay.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The Master Servicer will be entitled to a servicing fee (the "Servicing
Fee") and, to the extent set forth in the related Prospectus Supplement, a
contingency fee (the "Contingency Fee") equal to the percentages per annum
specified in the related Prospectus Supplement of the principal balance of each
SBA Loan. The Contingency Fee is meant to provide additional servicing
compensation to a successor servicer if The Money Store or one of its affiliates
is replaced as Master Servicer under the related Agreement. However, as long as
The Money Store or one of its affiliates acts as Master Servicer, it will be
entitled to receive any applicable Contingency Fee, although such amount is not
deemed servicing compensation. Unless otherwise specified in the related
Prospectus Supplement, the Servicing Fee and Contingency Fee, if any, will each
be calculated and payable monthly from the interest portion of scheduled monthly
payments, liquidation proceeds and certain other collected proceeds. In
addition, the Master Servicer will be entitled under the Agreement to retain
additional servicing compensation in the form of assumption and other
administrative fees, any applicable prepayment penalties, premiums and late
payment charges, interest paid on funds in the Principal and Interest Account,
interest paid on earnings realized on Permitted Instruments, and certain other
excess amounts.
The Master Servicer will be required to pay all reasonable and customary
"out-of-pocket" costs and expenses incurred in the performance of its
obligations under the Agreements, including, but not limited to, the cost of (i)
the preservation, restoration and protection of a Mortgaged Property, (ii) any
enforcement or judicial proceedings, including foreclosures, and (iii) the
management and liquidation of Mortgaged Property and other collateral acquired
in satisfaction of the related SBA Loan. Such expenditures may include costs of
collection efforts, reappraisals, forced placement of hazard insurance if a
borrower allows his hazard policy to lapse, legal fees in connection with
foreclosure actions, advancing payments on the related senior mortgage, if any,
advances of delinquent property taxes, upkeep and maintenance of the property if
it is acquired through foreclosure and similar types of expenses. Each such
expenditure constitutes a "Servicing Advance." The Master Servicer will be
obligated to make the Servicing Advances incurred in the performance of its
servicing obligations. The Master Servicer will be entitled to recover Servicing
Advances to the extent permitted by the SBA Loans or, if not theretofore
recovered from the Mortgagor on whose behalf such Servicing Advance was made,
from Liquidation Proceeds, Released Mortgaged Property Proceeds, Insurance
Proceeds and such other amounts as may be collected by the Servicer from the
Mortgagor or otherwise relating to the SBA Loan. Servicing Advances will be
reimbursable to the Servicer from the sources described above out of the funds
on deposit in the Principal and Interest Account.
HAZARD INSURANCE
The Master Servicer will be required under each Agreement to comply with
the SBA Rules and Regulations concerning the issuance and maintenance of fire
and hazard insurance with extended coverage customary in the area where a
Mortgaged Property is located. Such requirements vary from region to region. If
at origination of an SBA Loan, to the best of the Master Servicer's knowledge
after reasonable investigation, the related Mortgaged Property is in an area
identified in the Federal Register by the Flood Emergency Management Agency as
having special flood hazards (and such flood insurance has been made available)
consistent with the SBA Rules and Regulations, the Master Servicer will require
the related obligor to purchase a flood insurance policy with a generally
acceptable insurance carrier, in an amount representing coverage not less than
the lesser of (a) the full insurable value of the Mortgaged Property, or (b) the
maximum amount of insurance available under the National Flood Insurance Act of
1968, as amended. The Master Servicer will also be required to maintain, to the
extent such insurance is available and in accordance with the SBA Rules and
Regulations and the Master Servicer's policies, on Foreclosed Property
constituting real property, fire and hazard insurance in the amounts described
above and liability insurance. Any amounts collected by the Master Servicer
under any such policies (other than amounts to be applied to the restoration or
repair of the Mortgaged Property, or to be released to the Obligor in accordance
with the SBA Rules and Regulations), are required to be deposited by the Master
Servicer in the Principal and Interest Account.
REALIZATION UPON DEFAULTED MORTGAGE
In accordance with SBA Rules and Regulations and with the prior
written consent of the SBA, the Master Servicer will be required to foreclose
upon or otherwise comparably effect the ownership in the name of the SBA of
Mortgaged Properties relating to defaulted SBA Section 7(a) Loans as to which no
satisfactory arrangements can be made for collection of delinquent payments.
Although the consent of the SBA will not be required for the Master Servicer to
foreclose on a Mortgaged Property relating to a Section 7(a) Companion Loan, the
Master Servicer will have to obtain such consent in connection with the related
SBA Section 7(a) Loan. No consent of the SBA will be required for the Master
Servicer to foreclose on a Mortgaged Property relating to an SBA 504 Loan. In
connection with such foreclosure or other conversion, the Master Servicer will
be required to exercise collection and foreclosure procedures with the same
degree of care and skill in its exercise or use, as it would exercise or use
under the circumstances in the conduct of its own affairs. The Master Servicer
will take into account the existence of any hazardous substances, hazardous
wastes or solid wastes on Mortgaged Properties in determining whether to
foreclose upon or otherwise comparably convert the ownership of such Mortgaged
Property, and will not foreclose on a Mortgaged Property where it has cause to
believe contamination from such substances exists unless it has received a Phase
I environmental report and such report reveals no environmental problems, or
such Mortgaged Property is subject to an environmental rehabilitation for which
the Originators are not responsible.
WAIVERS AND DEFERMENTS OF CERTAIN PAYMENTS
The Agreement will require the Master Servicer to make reasonable efforts
to collect all payments called for under the terms and provisions of the SBA
Loans. Consistent with the foregoing and the SBA Rules and Regulations, the
Master Servicer may in its discretion waive any assumption fee or any other fee
or charge which the Master Servicer would be entitled to retain as servicing
compensation and may waive, vary or modify any term of any SBA Loan or consent
to the postponement of strict compliance with any such term or in any matter
grant indulgence to any Mortgagor, subject to the limitations set forth in the
Agreement. In the event the Master Servicer consents to the deferment of the due
dates for payments due on an SBA Loan, the Master Servicer will nonetheless make
payment of any required Monthly Advance with respect to the payments so extended
to the same extent as if such installment were due, owing and delinquent and had
not been deferred.
SUB-SERVICERS
The Master Servicer will be permitted under the related Agreement to enter
into sub-servicing arrangements with sub-servicers meeting the requirements of
the related Agreement (each, a "Sub-Servicer"). Such sub-servicing arrangements
will not relieve the Master Servicer of any liability it might otherwise have,
had the sub-servicing arrangement not been entered into.
The Master Servicer is required to deliver to the Trustee and the SBA on
or before March 31 of each year, an Officers' Certificate stating, as to each
signer thereof, that (i) the Master Servicer has fully complied with certain
provisions of the Agreement relating to servicing of the SBA Loans and payments
on the Certificates, (ii) a review of the activities of the Master Servicer
during such preceding year and of performance under the Agreement has been made
under such officers' supervision, and (iii) to the best of such officers'
knowledge, based on such review, the Master Servicer has fulfilled all its
obligations under the Agreement for such year, or, if there has been a default
in the fulfillment of any such obligation, specifying each such default known to
such officers and the nature and status thereof including the steps being taken
by the Master Servicer to remedy such default.
On or before March 31 of each year, the Master Servicer is required to
cause to be delivered to the Trustee a letter or letters of a firm of nationally
recognized independent certified public accountants reasonably acceptable to the
Trustee stating that such firm has, with respect to the Master Servicer's
overall servicing operations, examined such operations in accordance with the
requirements of the Uniform Single Audit Program for Mortgage Bankers, and
stating such firm's conclusions relating thereto.
REMOVAL AND RESIGNATION OF MASTER SERVICER
The Certificate Guaranty Insurer, if any, or the Holders of not less than
50 percent of each Class of Certificates other than the Class R Certificates, if
any, (the "Majority Certificateholders"), by notice in writing to the Master
Servicer and with the prior written consent of the Certificate Guaranty Insurer,
if any, which consent may not be unreasonably withheld, may, pursuant to the
related Agreement, remove the Master Servicer upon the occurrence of any of the
following events:
(i) (A) an Event of Nonpayment (as defined below); (B) the failure by the
Master Servicer to make any required Servicing Advance to the extent such
failure materially or adversely affects the interests of the Certificate
Guaranty Insurer, if any, or the Certificateholders; (C) the failure by
the Master Servicer to make any required Monthly Advance; (D) the failure
by the Master Servicer to remit any Compensating Interest; or (E) any
failure by the Master Servicer to remit to the Trustee any payment
required to be made under the terms of the related Agreement, which in
each case continues unremedied (in the case of the events described in
clauses (i)(A), (i)(B), (i)(D) and (i)(E) for 30 days) after the date upon
which written notice of such failure, requiring the same to be remedied,
shall have been given to the Master Servicer by the Trustee or to the
Master Servicer and the Trustee by any Certificateholder or the
Certificate Guaranty Insurer, if any; or
(ii) failure by the Master Servicer or The Money Store (so long as The
Money Store is the Master Servicer) duly to observe or perform, in any
material respect, any other covenants, obligations or agreements of the
Master Servicer or the Representative, as set forth in the related
Agreement, which failure continues unremedied for a period of 60 days
after the date on which written notice of such failure, requiring the same
to be remedied, shall have been given to the Master Servicer or The Money
Store, as the case may be, by the Trustee or to the Master Servicer or The
Money Store, as the case may be, and the Trustee by any Certificateholder
or the Certificate Guaranty Insurer, if any; or
(iii) a decree or order of a court or agency or supervisory authority
having jurisdiction for the appointment of a conservator or receiver or
liquidator in any insolvency, readjustment of debt, marshaling of assets
and liabilities or similar proceedings, or for the winding-up or
liquidation of its affairs, shall have been entered against the Master
Servicer and such decree or order shall have remained in force,
undischarged or unstayed for a period of 60 days; or
(iv) the Master Servicer shall consent to the appointment of a
conservator or receiver or liquidator in any insolvency, readjustment of
debt, marshaling of assets and liabilities or similar proceedings of or
relating to the Master Servicer or of or relating to all or substantially
all of the Master Servicer's property; or
(v) the Master Servicer shall admit in writing its inability to pay its
debts as they become due, file a petition to take advantage of any
applicable insolvency or reorganization statute, make an assignment for
the benefit of its creditors, or voluntarily suspend payment of its
obligations.
Unless otherwise specified in the related Prospectus Supplement, an "Event
of Nonpayment" will generally be defined in the Agreements as a shortfall on any
Remittance Date in moneys (excluding any amounts representing Insured Payments)
available to fund the full amount of the Distribution Amounts due on such
Remittance Date.
The Master Servicer may not assign its obligations under the Agreement nor
resign from the obligations and duties thereby imposed on it except by mutual
consent of the Master Servicer, the Certificate Guaranty Insurer, if any, the
SBA, the Trustee and the Majority Certificateholders, or upon the determination
that the Master Servicer's duties thereunder are no longer permissible under
applicable law and such incapacity cannot be cured by the Master Servicer. No
such resignation shall become effective until a successor has assumed the Master
Servicer's responsibilities and obligations in accordance with the Agreement.
Upon removal or resignation of the Master Servicer, the Trustee will be
the successor servicer (the "Successor Servicer"), except that the Trustee as
Successor Servicer will not be required to make Monthly Advances and certain
other advances to the extent that the Trustee determines reasonably and in good
faith that such advances would not be recoverable. If, however, the Trustee is
unwilling or unable to act as Successor Servicer, or if the SBA or the
Certificate Guaranty Insurer, if any, so request, the Trustee may appoint, or
petition a court of competent jurisdiction to appoint, any established mortgage
loan servicing institution acceptable to the SBA, the Certificate Guaranty
Insurer, if any, or such other entities as may be specified in a Prospectus
Supplement, having a net worth of not less than $15,000,000 and which is an
approved SBA guaranteed lender in good standing as the Successor Servicer in the
assumption of all or any part of the responsibilities, duties or liabilities of
the Master Servicer.
The Successor Servicer will be entitled to receive the Servicing Fee, the
Contingency Fee, if any, and such other compensation as is described under
"--Servicing and Other Compensation and Payment of Expenses" above.
TERMINATION; PURCHASE OF SBA LOANS
The Trust established under each Agreement will terminate upon notice to
the Trustee following the earlier to occur of (i) the final payment or other
liquidation of such last SBA Loan remaining in the related Trust or the
disposition of all REO Property, (ii) the optional purchase of the assets of the
Trust by the Servicer or the Certificate Guaranty Insurer, if any, as described
below, (iii) mutual consent of the Master Servicer, the Certificate Guaranty
Insurer, if any, and all Certificateholders in writing; or (iv) if a REMIC
election has been made for the related Trust, the occurrence of a "qualified
liquidation" of the Trust, as permitted by the REMIC provisions of the Code as
described below; provided, however, that in no event will any Trust terminate
later than twenty-one years after the death of the last survivor of the person
named in the related Agreement.
Subject to provisions in an Agreement concerning adopting a plan of
complete liquidation, on any date on which the aggregate principal balances of
the SBA Loans are less than 10% of the Original Pool Principal Balance (or such
other percentage as may be specified in the related Prospectus Supplement), the
Master Servicer may, at its option, and in the absence of the exercise thereof
by the Master Servicer, the Certificate Guaranty Insurer, if any, may, at its
option, purchase, on the next succeeding Remittance Date, all of the SBA Loans
and any related REO Properties at a price equal to the Termination Price.
On any Remittance Date on or after the Cross-Over Date on which SBA Loans
with an aggregate principal balance as of the Cut-off Date that equals or
exceeds 25% of the Original Pool Principal Balance (or such other percentage as
may be specified in the related Prospectus Supplement) have become liquidated
SBA Loans, the Certificate Guaranty Insurer, if any, may determine to purchase
and may cause the purchase from the Trust of all SBA Loans and REO Properties in
the Pool at a price equal to the sum of the Termination Price and the
outstanding and unpaid fees and expenses of the Trustee and the Master Servicer.
If a REMIC election is made for a Series of Certificates, following a
final determination by the Internal Revenue Service (the "IRS") or by a court of
competent jurisdiction, in either case from which no appeal is taken within the
permitted time for such appeal, or if any appeal is taken, following a final
determination of such appeal from which no further appeal can be taken, to the
effect that the REMIC does not and will no longer qualify as a REMIC pursuant to
Section 860D of the Code (the "Final Determination"), at any time on or after
the date which is 30 calendar days following such Final Determination (i) the
Majority Certificateholders may direct the Trustee on behalf of such Trust to
adopt a "plan of complete liquidation" (within the meaning of Section
860F(a)(4)(B)(i) of the Code) with respect to such REMIC and (ii) the
Certificate Guaranty Insurer, if any, may notify the Trustee of the Certificate
Guaranty Insurer's determination to purchase from the Trust all SBA Loans and
all property theretofore acquired by foreclosure, deed in lieu of foreclosure,
or otherwise in respect of any SBA Loan, then remaining in such REMIC at a price
(the "Termination Price") equal to the sum of (x) 100% of the aggregate
principal balances of such SBA Loans as of the day of purchase minus amounts
remitted from the Principal and Interest Account to the Certificate Account
representing collections of principal on such SBA Loans during the current Due
Period, (y) 30 days' interest on such amount computed at the applicable weighted
average of the Adjusted SBA Loan Remittance Rates, and (z) the interest portion
of any unreimbursed Insured Payment made by the Certificate Guaranty Insurer, if
any. Upon receipt of such direction by the Majority Certificateholders or of
such notice from the Certificate Guaranty Insurer, the Trustee will notify the
holders of the Class R Certificates of such election to liquidate or such
determination to purchase, as the case may be (the "Termination Notice"). The
Holders of a majority of the percentage interest of the Class R Certificates
then outstanding may, within 60 days from the date of receipt of the Termination
Notice (the "Purchase Option Period"), at their option, purchase from the
related Trust all SBA Loans and all property theretofore acquired by
foreclosure, deed in lieu of foreclosure, or otherwise in respect of any SBA
Loan then remaining in the REMIC at a purchase price equal to the Termination
Price.
If, during a Purchase Option Period, the holders of the Class R
Certificates have not exercised the option described in the immediately
preceding paragraph, then upon the expiration of the Purchase Option Period (i)
in the event that the Majority Certificateholders have given the Trustee the
direction described in clause (i) above, the Trustee is required to sell the SBA
Loans and such other property in the REMIC and distribute the proceeds of the
liquidation of the REMIC, each in accordance with the plan of complete
liquidation, such that, if so directed, the liquidation of the REMIC and the
distribution of the proceeds of the liquidation occur no later than the close of
the 60th day, or such later day as the Majority Certificateholders shall permit
or direct in writing, after the expiration of the Purchase Option Period and
(ii) in the event that the Certificate Guaranty Insurer has given the Trustee
notice of the Certificate Guaranty Insurer's determination to purchase the
assets described in clause (ii) preceding, the Certificate Guaranty Insurer
shall so purchase such assets within 60 days after the expiration of the
Purchase Option Period.
Following a Final Determination, the holders of a majority of the
percentage interest of the Class R Certificates then outstanding may, at their
option and upon delivery to the Trustee and the Certificate Guaranty Insurer, if
any, of an opinion of nationally recognized tax counsel selected by the Holders
of such Class R Certificates, which opinion shall be reasonably satisfactory in
form and substance to the Majority Certificateholders and the Certificate
Guaranty Insurer, if any, that the effect of the Final Determination is to
increase substantially the probability that the gross income of the REMIC will
be subject to federal taxation, purchase from the Trust all SBA Loans and all
property theretofore acquired by foreclosure, deed in lieu of foreclosure, or
otherwise in respect of any SBA Loan then remaining in the applicable REMIC at a
purchase price equal to the Termination Price. The foregoing opinion shall be
deemed satisfactory unless the Majority Certificateholders give the holders of a
majority of percentage interests in the Class R Certificates notice that such
opinion is not satisfactory within thirty days after receipt of such opinion.
CONTROL BY HOLDERS
Each Agreement will provide that the Majority Certificateholders may
exercise any trust or power conferred on the Trustee with respect to the
Certificates or the Trusts, upon satisfaction of certain conditions set forth in
the Agreements; provided, however, that with respect to any action or event
affecting only one or more Classes of Certificates, only Holders of such Class
or Classes may exercise such trust or power.
AMENDMENT
Each Agreement may be amended from time to time by the Master Servicer and
the Trustee by written agreement, upon the prior written consent of the SBA and
the Certificate Guaranty Insurer, if any, without the notice to, or consent of,
the Certificateholders, to cure any ambiguity, to correct or supplement any
provisions therein, to comply with any changes in the Code, or to make any other
provisions with respect to matters or questions arising under the Agreement
which are not inconsistent with the provisions of such Agreement, or any
agreement for the retention of each Trustee's Document File; provided, however,
that such action shall not, as evidenced by an Opinion of Counsel delivered to
the Trustee, adversely affect the interest of any Certificateholder or any other
party and further provided that no such amendment shall reduce in any manner the
amount of, or delay the timing of, any amounts which are required to be
distributed on any Certificate without the consent of the Holder of such
Certificate, or change the rights or obligations of any other party thereto
without the consent of such party.
Each Agreement may be amended from time to time by The Money Store, the
Master Servicer, the Trustee and the Holders of the majority of the percentage
interest in each Class of Certificates affected thereby, upon the prior written
consent of the SBA and the Certificate Guaranty Insurer, if any, 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 any provisions
thereof; provided, however, that if a REMIC election is made for the applicable
Trust, no such amendment shall be made unless the Trustee receives an Opinion of
Counsel, at the expense of the party requesting the change, that such change
will not adversely affect the status of the Trust as a REMIC or cause a tax to
be imposed on the REMIC, and provided further, that no such amendment shall
reduce in any manner the amount of, or delay the timing of, any amounts which
are required to be distributed on any Certificates without the consent of the
Holders of 100% of each Class of Certificates affected thereby.
Each Agreement may be amended from time to time by the Master Servicer,
The Money Store and the Trustee by written agreement, upon the prior written
consent of the SBA and Certificate Guaranty Insurer, if any, without the notice
to or consent of the Certificateholders, in connection with the substitution of
cash, a letter of credit or any other collateral deposited in a Reserve Account.
It will not be necessary for the consent of holders to approve the
particular form of any proposed amendment, but it will be sufficient if such
consent shall approve the substance thereof.
THE TRUSTEE
Each Prospectus Supplement will name the Trustee under the related
Agreement. The Agreement will provide that the Trustee may resign at any time,
in which event the Representative will be obligated to appoint a successor
Trustee. The Representative 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.
<PAGE>
CERTAIN LEGAL ASPECTS OF THE SBA LOANS
GENERAL
The following discussion contains summaries, which are general in nature,
of certain legal matters relating to the SBA Loans. Laws and practices relating
to the legal effects and enforcement of mortgages and deeds of trust vary
somewhat from state to state. In general, however, the most significant
applicable legal principles are similar in all states. The following discussion
addresses the more significant legal principles applicable to mortgages and
deeds of trust in all states. It should be noted that some of the SBA Loans may
relate to Mortgaged Properties located in California, which has enacted various
laws, not common to most other states, which impose special limitations on the
remedies available to the holders of mortgages and deeds of trust. These laws,
called "anti-deficiency laws," are discussed below.
NATURE OF THE TRUST ASSETS
The SBA Loans generally will be secured by mortgages, deeds of trust,
security deeds or deeds to secure debt, depending upon the prevailing practice
in the state in which the property subject to the loan is located. A mortgage
creates a lien upon the real property encumbered by the mortgage, which lien is
generally not prior to the lien for real estate taxes and assessments. Priority
between mortgages depends on their terms and generally on the order of recording
with a state or county office. There are two parties to a mortgage, the
mortgagor, who is the borrower and owner of the mortgaged property, and the
mortgagee, who is the lender. The mortgagor delivers to the mortgagee a note or
bond and the mortgage. Although a deed of trust is similar to a mortgage, a deed
of trust formally has three parties, the borrower-property owner called the
trustor (similar to a mortgagor), a lender (similar to a mortgagee) called the
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 payment of the
obligation. A security deed and a deed to secure debt are special types of deeds
which indicate on their face that they are granted to secure an underlying debt.
By executing a security deed or deed to secure debt, the grantor conveys title
to, as opposed to merely creating a lien upon, the subject property to the
grantee until such time as the underlying debt is repaid. The mortgagee's
authority under a mortgage, the trustee's authority under a deed of trust and
the grantee's authority under a security deed or deed to secure debt are
governed by law and, with respect to some deeds of trust, the directions of the
beneficiary.
FORECLOSURE/REPOSSESSION
Foreclosure of a deed of trust or a security deed is generally
accomplished by a non-judicial trustee's sale under a specific provision in the
deed of trust or security deed which authorizes the trustee to sell the property
at public auction upon any default by the borrower under the terms of the note,
deed of trust or security deed. In some states, the trustee must record a notice
of default and send a copy to the borrower-trustor, to any person who has
recorded a request for a copy of any notice of default and notice of sale, to
any successor in interest to the borrower-trustor, to the beneficiary of any
junior deed of trust and to certain other persons. 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 obligations. Before such
non-judicial sales takes place, typically a notice of sale must be posted in a
public place and published during a specific period of time in one or more
newspapers, posted on the property, and sent to parties having an interest of
record in the property.
Foreclosure of a mortgage is generally accomplished by judicial action.
The action is initiated by the service of legal pleadings upon all parties
having an interest in the real property. Delays in completion of the foreclosure
may occasionally result from difficulties in locating necessary parties. 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 generally issues a judgment of
foreclosure and appoints a referee or other court officer to conduct the sale of
the property. In general, the borrower, or any other person having a junior
encumbrance on the real estate, may, during a statutorily prescribed
reinstatement period, cure a monetary default by paying the entire amount in
arrears plus other designated costs and expenses incurred in enforcing the
obligation. Generally, state law controls the amount of foreclosure expenses and
costs, including attorney's fees, which may be recovered by a lender. After the
reinstatement period has expired without the default having been cured, the
borrower or junior lienholder no longer has the right to reinstate the loan and
must pay the loan in full to prevent the scheduled foreclosure sale. If the
mortgage is not reinstated, a notice of sale must be posted in a public place
and, in most states, published for a specific period of time in one or more
newspapers. In addition, some state laws require that a copy of the notice of
sale be posted on the property and sent to all parties having an interest in the
real property.
Although foreclosure sales are typically public sales, frequently no third
party purchaser bids in excess of the lender's lien because of the difficulty of
determining the exact status of title to the property, the possible
deterioration of the property during the foreclosure proceedings and a
requirement that the purchaser pay for the property in cash or by cashier's
check. Thus the foreclosing lender often purchases the property from the trustee
or referee for an amount equal to the principal amount outstanding under the
loan, accrued and unpaid interest and the expenses of foreclosure. Thereafter,
the lender will assume the burden of ownership, including obtaining hazard
insurance and making such repairs at its own expense as are necessary to render
the property suitable for sale. The lender will commonly obtain the services of
a real estate broker and pay the broker's 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.
Courts have imposed general equitable principles upon foreclosure, which
are generally designed to mitigate the legal consequences to the borrower of the
borrower's defaults under the loan documents. Some courts have been faced with
the issue of whether federal or state constitutional provisions reflecting due
process concerns for fair notice require that borrowers under deeds of trust
receive notice longer than that prescribed by statute. 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 does not involve sufficient state
action to afford constitutional protection to the borrower.
In the case of foreclosure on a building which was converted from a rental
building to a building owned by a Cooperative under a non-eviction plan, some
states require that a purchaser at a foreclosure sale take the property subject
to rent control and rent stabilization laws which apply to certain tenants who
elected to remain in the building but who did not purchase shares in the
Cooperative when the building was so converted.
RIGHTS OF REDEMPTION
In some states, after sale pursuant to a deed of trust or foreclosure of a
mortgage, the borrower and foreclosed junior lienors are given a statutory
period in which to redeem the property from the foreclosure sale. In some
states, redemption may occur only upon payment of the entire principal balance
of the loan, 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. The effect of a statutory right of redemption is to diminish the
ability of the lender to sell the foreclosed property. The rights of redemption
would defeat the title of any purchaser from the lender subsequent to
foreclosure or sale under a deed of trust. Consequently, the practical effect of
the redemption right is to force the lender to retain the property and pay the
expenses of ownership until the redemption period has run.
FORECLOSURE IN CALIFORNIA
It is expected that a significant portion of the SBA Loans (by principal
balance) will be originated to businesses located in California. Foreclosure of
a deed of trust in California may be effected by a judicial or nonjudicial
foreclosure proceeding, with the choice of remedy depending on the
circumstances. Where the likelihood of a large recoverable deficiency is
present, a judicial foreclosure action may be preferred. The discussion above
under the heading "Foreclosure/Repossession" and "Rights of Redemption" are
generally accurate with respect to foreclosure of a deed of trust in California.
Generally, upon the completion of a non-judicial foreclosure sale in
California, the foreclosing lender is prohibited from obtaining a deficiency
judgment against the borrower. A deficiency judgment is available following a
judicial foreclosure, subject to the limitation of the excess of the outstanding
debt over the fair market value of the property at the time of sale, and in no
event may the deficiency exceed the difference between the outstanding debt and
the purchase price at the foreclosure sale. California law also requires the
deed of trust beneficiary to exhaust all real property security in a single
action (i.e. in a judicial foreclosure) before a deficiency judgment may be
sought against the borrower.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states (including California) have imposed statutory prohibitions
which 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 would be a
personal judgment against the former borrower equal in most cases to the
difference between the amount due to the lender and the net amount realized upon
any sale of the real property sold at the foreclosure sale. Other statutes
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. Finally, other statutory
provisions limit any deficiency judgment against the former borrower following a
judicial sale to the excess of the outstanding debt over the fair market value
of the property at the time of the sale. The purpose of these statutes is
generally 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. As a result of these prohibitions, it is anticipated that
in many instances the Master Servicer will not seek deficiency judgments against
defaulting mortgagors.
In addition to laws limiting or prohibiting deficiency judgments, numerous
other statutory provisions, including the federal bankruptcy laws and state laws
affording relief to debtors, may interfere with or affect the ability of the
secured mortgage lender to realize upon collateral and/or enforce a deficiency
judgment. For example, with respect to federal bankruptcy law, a court with
federal bankruptcy jurisdiction may permit a debtor through his Chapter 11 or
Chapter 13 rehabilitative plan to cure a monetary default in respect of a
mortgage loan on a debtor's residence by paying arrearages within a reasonable
time period and reinstating 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 residence
had yet occurred prior to the filing of the debtor's 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.
Courts with federal bankruptcy jurisdiction have also indicated that the
terms of a mortgage loan secured by property of the debtor may be modified.
These courts have suggested that such modifications may include reducing the
amount of each monthly payment, changing the rate of interest, altering the
repayment schedule, and reducing the lender's security interest to the value of
the property, thus leaving the lender a general unsecured creditor for the
difference between the value of the property and the outstanding balance of the
loan.
Federal and local real estate and tax laws provide priority to certain tax
liens over the lien of the mortgage. In addition, substantive requirements are
imposed upon mortgage lenders in connection with the origination and the
servicing of mortgage loans by numerous federal and some state consumer
protection laws. 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, and related statutes. These federal laws
impose specific statutory liabilities upon lenders who originate mortgage loans
and who fail to comply with the provisions of the applicable laws. In some
cases, this liability may affect assignees of the mortgage loans.
ENFORCEABILITY OF CERTAIN PROVISIONS
Some courts have imposed general equitable principles to limit the
remedies available in connection with foreclosure. These equitable principles
are generally designed to relieve the borrower from the legal effect of his
defaults under the loan documents. For example, some courts have required that
the lender undertake affirmative and expensive 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 substituted their judgment for
the lenders' judgment and have required that lenders reinstate loans or recast
payment schedules in order to accommodate borrowers who are suffering from
temporary financial disability. In other cases, courts have limited the right of
the lenders to foreclose if the default under the mortgage instrument or deed of
trust is not monetary, such as the borrower's failure to maintain adequately the
property or the borrower's execution of a second mortgage or deed of trust
affecting the property. Finally, some courts have been willing to relieve a
borrower from the consequences of the default if the borrower has not received
adequate notice of the default.
ENVIRONMENTAL CONSIDERATIONS
Environmental conditions may diminish the value of the Trust Assets and
give rise to liability of various parties. There are many federal and state
environmental laws concerning hazardous waste, hazardous substances, gasoline,
radon and other materials which may affect the property securing the Trust
Assets. For example, under the federal Comprehensive Environmental Response
Compensation and Liability Act, as amended, and possibly under state law in
certain states, a secured party which takes a deed in lieu of foreclosure or
purchases a mortgaged property at a foreclosure sale may become liable in
certain circumstances for the costs of a remedial action ("Cleanup Costs") if
hazardous wastes or hazardous substances have been released or disposed of on
the property. Such Cleanup Costs may be substantial. It is possible that such
costs could become a liability of a Trust and reduce the amounts otherwise
distributable to the Certificateholders if a Mortgaged Property securing an SBA
Loan became the property of such Trust in certain circumstances and 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 (a "Superlien"). All subsequent liens on such property are
subordinated to such Superlien and, in some states, even prior recorded liens
are subordinated to such Superliens. In the latter states, the security interest
of the Trustee in a property that is subject to such a Superlien could be
adversely affected.
FEDERAL INCOME TAX CONSEQUENCES
In the opinion of Stroock & Stroock & Lavan, special Federal tax counsel
("Federal Tax Counsel"), the following are the material federal income tax
consequences of the purchase, ownership and disposition of the Certificates
offered hereby. The discussion, and the opinions referred to below, are based on
laws, regulations, rulings and decisions now in effect (or, in the case of
certain regulations, proposed), all of which are subject to change or possibly
differing interpretations. Because tax consequences may vary based upon the
status or tax attributes of the owner of a Certificate, prospective investors
should consult their own tax advisors in determining the federal, state, local
and other tax consequences to them of the purchase, ownership and disposition of
a Certificate. For purposes of this tax discussion (except with respect to
information reporting, or where the context indicates otherwise), the terms
"Certificateholder" and "holder" mean the beneficial owner of a Certificate.
REMIC ELECTIONS
Under the Internal Revenue Code of 1986, as amended (the "Code"), an
election may be made with respect to each Trust related to a series of
Certificates to treat such Trust or certain assets of such Trust as a "real
estate mortgage investment conduit" ("REMIC"). The Prospectus Supplement for
each series of Certificates will indicate whether a REMIC election will be made
with respect to the related Trust. To the extent provided in the Prospectus
Supplement for a series, Certificateholders may also have the benefit of a
Reserve Fund and of certain agreements (each, a "Yield Supplement Agreement")
under which payment will be made from the Reserve Fund in the event that
interest accrued on the SBA Loans at their Mortgage Interest Rates is
insufficient to pay interest on the Certificates of such Series (a "Basis Risk
Shortfall"). If a REMIC election is to be made, the Prospectus Supplement will
designate the Certificates of such series as "regular interests" ("REMIC Regular
Certificates") in the REMIC (within the meaning of Section 860G(a)(1) of the
Code) or as the "residual interest" ("REMIC Residual Certificates") in the REMIC
(within the meaning of Section 860G(a)(2) of the Code). The terms "REMIC
Certificates" and "Non-REMIC Certificates" denote, respectively, Certificates of
a series with respect to which a REMIC election will, or will not, be made. The
discussion below is divided into two parts, the first part applying only to
REMIC Certificates and the second part applying only to Non-REMIC Certificates.
REMIC CERTIFICATES
With respect to each series of REMIC Certificates, the Trustee will agree
in the Agreement to elect to treat the related Trust or certain assets of such
Trust as a REMIC. Qualification as a REMIC requires ongoing compliance with
certain conditions. Upon the issuance of each series of REMIC Certificates,
Federal Tax Counsel will deliver its opinion generally to the effect that, with
respect to each series of REMIC Certificates for which a REMIC election is to be
made, under then existing law and assuming a proper and timely REMIC election
and ongoing compliance with the provisions of the Agreement and applicable
provisions of the Code and applicable Treasury regulations and rulings, the
related Trust or certain assets of such Trust will be a REMIC and the REMIC
Certificates will be considered to evidence ownership of "regular interests" or
"residual interests" within the meaning of the REMIC provisions of the Code.
To the extent provided in the Prospectus Supplement for a series, REMIC
Regular Certificateholders who are entitled to payments from the Reserve Fund in
the event of a Basis Risk Shortfall will be required to allocate their purchase
price between their beneficial ownership interests in the related REMIC regular
interests and Yield Supplement Agreements, and will be required to report their
income realized with respect to each, calculated taking into account such
allocation. In general, such allocation would be based on the respective fair
market values of the REMIC regular interests and the related Yield Supplement
Agreements on the date of purchase of the related Certificate. No representation
is or will be made as to the fair market value of the Yield Supplement
Agreements or the relative values of the REMIC regular interests and the Yield
Supplement Agreements, upon initial issuance of the related REMIC Regular
Certificates or at any time thereafter. REMIC Regular Certificateholders are
advised to consult their own tax advisors concerning the determination of such
fair market values. Under the Agreement, holders of applicable classes of REMIC
Regular Certificates will agree that, for federal income tax purposes, they will
be treated as owners of the respective class of regular interests and of the
corresponding Yield Supplement Agreement.
Status of REMIC Certificates as Real Property Loans. The REMIC
Certificates will be "qualifying real property loans" within the meaning of
Section 593(d) of the Code, "real estate assets" for purposes of Section
856(c)(5)(A) of the Code and assets described in Section 7701(a)(19)(C) of the
Code (assets qualifying under one or more of those sections, applying each
section separately, "qualifying assets") to the extent that the REMIC's assets
are qualifying assets, but not to the extent that the REMIC's assets consist of
Yield Supplement Agreements. However, if at least 95 percent of the REMIC's
assets are qualifying assets, then 100 percent of the REMIC Certificates will be
qualifying assets. Similarly, income on the REMIC Certificates will be treated
as "interest on obligations secured by mortgages on real property" within the
meaning of Section 856(c)(3)(B) of the Code, subject to the limitations of the
preceding two sentences. In addition to Trust Assets, the REMIC's assets will
include payments on Trust Assets held pending distribution to holders of REMIC
Certificates, amounts in reserve accounts (if any), other credit enhancements
(if any) and possibly buydown funds ("Buydown Funds"). The Trust Assets may be
qualifying assets under all three of the foregoing sections of the Code.
However, Trust Assets that are not secured by residential real property or real
property used primarily for church purposes may not constitute qualifying assets
under Section 7701(a)(19)(C)(v) of the Code, and Trust Assets that are not
secured by improved real property or real property which is to be improved using
loan proceeds will not constitute qualifying assets under Section 593(d) of the
Code. In addition, to the extent that the principal amount of a Trust Asset
exceeds the value of the property securing the Trust Asset, it is unclear and
Federal Tax Counsel is unable to opine whether the loans will be qualifying
assets. The regulations under Sections 860A through 860G of the Code (the "REMIC
Regulations") treat credit enhancements as part of the mortgage or pool of
mortgages to which they relate, and therefore credit enhancements generally
should be qualifying assets. Regulations issued in conjunction with the REMIC
Regulations provide that amounts paid on Trust Assets and held pending
distribution to holders of Certificates ("cash flow investments") will be
treated as qualifying assets. It is unclear whether reserve funds or Buydown
Funds would also constitute qualifying assets under any of those provisions. The
Prospectus Supplement for each series will indicate (if applicable) that it has
Buydown Funds.
TIERED REMIC STRUCTURES
For certain series of Certificates, two or more separate elections may be
made to treat designated portions of the related Trust as REMICs ("Tiered
REMICs") for federal income tax purposes. Upon the issuance of any such series
of Certificates, Stroock & Stroock & Lavan will deliver its opinion generally to
the effect that, assuming compliance with all provisions of the related Pooling
and Servicing Agreement and applicable provisions of the Code and applicable
Treasury regulations and rulings, the Tiered REMICs will each qualify as a REMIC
and the REMIC Certificates issued by the Tiered REMICs, respectively, will be
considered to evidence ownership of "regular interests" or "residual interests"
in the related REMIC within the meaning of the REMIC provisions of the Code.
Solely for purposes of determining whether the REMIC Certificates will be
"qualifying real property loans" under Section 593(d) of the Code, "real estate
assets" within the meaning of Section 856(c)(5)(A) of the Code, and "loans
secured by an interest in real property" under Section 7701(a)(19)(C) of the
Code, and whether the income on such Certificates is interest described in
Section 856(c)(3)(B) of the Code, the Tiered REMICs will be treated as one
REMIC.
REMIC REGULAR CERTIFICATES
Current Income on REMIC Regular Certificates--General. Except as otherwise
indicated herein, the REMIC Regular Certificates will be treated for federal
income tax purposes (but not necessarily for accounting or other purposes) as
debt instruments that are issued by the REMIC on the date of issuance of the
REMIC Regular Certificates and not as ownership interests in the REMIC or the
REMIC's assets. Holders of REMIC Regular Certificates who would otherwise report
income under a cash method of accounting will be required to report income with
respect to REMIC Regular Certificates under an accrual method.
Payments of interest on REMIC Regular Certificates may be based on a fixed
rate, a variable rate as permitted by the REMIC Regulations, or may consist of a
specified portion of the interest payments on qualified mortgages where such
portion does not vary during the period the REMIC Regular Certificate is
outstanding. The definition of a variable rate for purposes of the REMIC
Regulations is based on the definition of a qualified floating rate for purposes
of the rules governing original issue discount set forth in Sections 1271
through 1275 of the Code and the regulations thereunder (the "OID Regulations")
with certain modifications and permissible variations. See "REMIC Regular
Certificates-Current Income on REMIC Regular Certificates--Original Issue
Discount--Variable Rate REMIC Regular Certificates," below, for a discussion of
the definition of a qualified floating rate for purposes of the OID Regulations.
In contrast to the OID Regulations, for purposes of the REMIC Regulations, a
qualified floating rate does not include any multiple of a qualified floating
rate (also excluding multiples of qualified floating rates that themselves would
constitute qualified floating rates under the OID Regulations), and the
characterization of a variable rate that is subject to a cap, floor or similar
restriction as a qualified floating rate for purposes of the REMIC Regulations
will not depend upon the OID Regulations relating to caps, floors, and similar
restrictions. See "REMIC Regular Certificates-Current Income on REMIC Regular
Certificates--Original Issue Discount--Variable Rate REMIC Regular
Certificates," below, for a discussion of the OID Regulations relating to caps,
floors and similar restrictions. A qualified floating rate, as defined above for
purposes of the REMIC Regulations (a "REMIC qualified floating rate"), qualifies
as a variable rate for purposes of the REMIC Regulations if such REMIC qualified
floating rate is set at a "current rate" as defined in the OID Regulations. In
addition, a rate equal to the highest, lowest or an average of two or more REMIC
qualified floating rates qualifies as a variable rate for REMIC purposes. A
REMIC Regular Certificate also may have a variable rate based on a weighted
average of the interest rates on some or all of the qualified mortgages held by
the REMIC where each qualified mortgage taken into account has a fixed rate or a
variable rate that is permissible under the REMIC Regulations. Further, a REMIC
Regular Certificate may have a rate that is the product of a REMIC qualified
floating rate or a weighted average rate and a fixed multiplier, is a constant
number of basis points more or less than a REMIC qualified floating rate or a
weighted average rate, or is the product, plus or minus a constant number of
basis points, of a REMIC qualified floating rate or a weighted average rate and
a fixed multiplier. An otherwise permissible variable rate for a REMIC Regular
Certificate, described above, will not lose its character as such because it is
subject to a floor or a cap, including a "funds available cap" as that term is
defined in the REMIC Regulations. Lastly, a REMIC Regular Certificate will be
considered as having a permissible variable rate if it has a fixed or otherwise
permissible variable rate during one or more payment or accrual periods and
different fixed or otherwise permissible variable rates during other payment or
accrual periods.
Original Issue Discount. REMIC Regular Certificates of certain series may
be issued with "original issue discount" within the meaning of Section 1273(a)
of the Code. Holders of REMIC Regular Certificates issued with original issue
discount generally must include original issue discount in gross income for
federal income tax purposes as it accrues, in advance of receipt of the cash
attributable to such income, under a method that takes account of the
compounding of interest. The Code requires that information with respect to the
original issue discount accruing on any REMIC Regular Certificate be reported
periodically to the Service and to certain categories of holders of such REMIC
Regular Certificates.
Each Trust will report original issue discount, if any, to the holders of
REMIC Regular Certificates based on the OID Regulations.
These rules provide that, in the case of a debt instrument such as a REMIC
Regular Certificate, (i) the amount and rate of accrual of original issue
discount will be calculated based on a reasonable assumed prepayment rate (the
"Prepayment Assumption"), and (ii) adjustments will be made in the amount and
rate of accrual of such discount to reflect differences between the actual
prepayment rate and the Prepayment Assumption. The method for determining the
appropriate assumed prepayment rate will eventually be set forth in Treasury
regulations, but those regulations have not yet been issued. The applicable
legislative history indicates, however, that such regulations will provide that
the assumed prepayment rate for securities such as the REMIC Regular
Certificates will be the rate used in pricing the initial offering of the
securities. The Prospectus Supplement for each series of REMIC Regular
Certificates will specify the Prepayment Assumption, but no representation is
made that the REMIC Regular Certificates will, in fact, prepay at a rate based
on the Prepayment Assumption or at any other rate.
In general, a REMIC Regular Certificate will be considered to be issued
with original issue discount if its stated redemption price at maturity exceeds
its issue price. Except as discussed below under "Payment Lag REMIC Regular
Certificates; Initial Period Considerations" and "Qualified Stated Interest,"
and in the case of certain Variable Rate REMIC Regular Certificates (as defined
below) and accrual certificates, the stated redemption price at maturity of a
REMIC Regular Certificate is its principal amount. The issue price of a REMIC
Regular Certificate is the initial offering price to the public (excluding bond
houses and brokers) at which a substantial amount of the class of REMIC Regular
Certificates was sold. The issue price will be reduced if any portion of such
price is allocable to a related Yield Supplement Agreement. Notwithstanding the
general definition of original issue discount, such discount will be considered
to be zero for any REMIC Regular Certificate on which such discount is less than
0.25% of its stated redemption price at maturity multiplied by its weighted
average life. The weighted average life of a REMIC Regular Certificate
apparently is computed for purposes of this de minimis rule as the sum, for all
distributions included in the stated redemption price at maturity of the REMIC
Regular Certificate, of the amounts determined by multiplying (i) the number of
complete years (rounding down for partial years) from the Closing Date to the
date on which each such distribution is expected to be made, determined under
the Prepayment Assumption, by (ii) a fraction, the numerator of which is the
amount of such distribution and the denominator of which is the REMIC Regular
Certificate's stated redemption price at maturity. The OID Regulations provide
that holders will include any de minimis original issue discount ratably as
payments of stated principal are made on the REMIC Regular Certificates.
The holder of a REMIC Regular Certificate issued with original issue
discount must include in gross income the sum of the "daily portions" of such
original issue discount for each day during its taxable year on which it held
such REMIC Regular Certificate. In the case of an original holder of a REMIC
Regular Certificate, the daily portions of original issue discount are
determined first by calculating the portion of the original issue discount that
accrued during each period (an "accrual period") that begins on the day
following a Distribution Date (or in the case of the first such period, begins
on the Closing Date) and ends on the next succeeding Distribution Date. The
original issue discount accruing during each accrual period is then allocated
ratably to each day during such period to determine the daily portion of
original issue discount for that day.
The portion of the original issue discount that accrues in any accrual
period will equal the excess, if any, of (i) the sum of (A) the present value,
as of the end of the accrual period, of all of the distributions to be made on
the REMIC Regular Certificate, if any, in future periods and (B) the
distributions made on the REMIC Regular Certificate during the accrual period
that are included in such REMIC Regular Certificate's stated redemption price at
maturity, over (ii) the adjusted issue price of such REMIC Regular Certificate
at the beginning of the accrual period. The present value of the remaining
distributions referred to in the preceding sentence will be calculated (i)
assuming that the REMIC Regular Certificates will be prepaid in future periods
at a rate computed in accordance with the Prepayment Assumption and (ii) using a
discount rate equal to the original yield to maturity of the REMIC Regular
Certificates. For these purposes, the original yield to maturity of the REMIC
Regular Certificates will be calculated based on their issue price and assuming
that the REMIC Regular Certificates will be prepaid in accordance with the
Prepayment Assumption. The adjusted issue price of a REMIC Regular Certificate
at the beginning of any accrual period will equal the issue price of such REMIC
Regular Certificate, increased by the portion of the original issue discount
that has accrued during prior accrual periods, and reduced by the amount of any
distributions made on such REMIC Regular Certificate in prior accrual periods
that were included in such REMIC Regular Certificate's stated redemption price
at maturity.
The daily portions of original issue discount may increase or decrease
depending on the extent to which the actual rate of prepayments diverges from
the Prepayment Assumption. If original issue discount accruing during any
accrual period computed as described above is negative, it is likely that a
holder will be entitled to offset such amount only against positive original
issue discount accruing on such REMIC Regular Certificate in future accrual
periods. Although Federal Tax Counsel is unable to opine with respect to this
matter, such a holder may be entitled to deduct a loss to the extent that its
remaining basis would exceed the maximum amount of future payments to which such
holder is entitled. It is unclear whether the Prepayment Assumption is taken
into account for this purpose.
A subsequent holder that purchases a REMIC Regular Certificate issued with
original issue discount at a cost less than its remaining stated redemption
price at maturity will also generally be required to include in gross income,
for each day on which it holds such REMIC Regular Certificate, the daily
portions of original issue discount with respect to the REMIC Regular
Certificate, calculated as described above. However, if (i) the excess of the
remaining stated redemption price at maturity over such cost is less than (ii)
the aggregate amount of such daily portions for all days after the date of
purchase until final retirement of such REMIC Regular Certificate, then such
daily portions will be reduced proportionately in determining the income of such
holder.
Qualified Stated Interest. Interest payable on a REMIC Regular Certificate
which qualifies as "qualified stated interest" for purposes of the OID
Regulations will not be includible in the stated redemption price at maturity of
the REMIC Regular Certificate. Interest payments will not qualify as qualified
stated interest unless the interest payments are "unconditionally payable." The
OID Regulations state that interest is unconditionally payable if late payment
of interest (other than late payment that occurs within a reasonable grace
period) or nonpayment of interest is expected to be penalized or reasonable
remedies exist to compel payment. The meaning of "penalized" under the OID
regulations is unclear. The Internal Revenue Service has taken the position that
a penalty must inure directly to the benefit of the debt instrument holder and
must be large enough to ensure that, at the time the debt instruments are
issued, it is reasonably certain that, absent insolvency, the issuer will make
interest payments when due. In its determination, the accrual of interest on
past-due interest payments at a penalty rate that is two percentage points above
the stated yield of a debt instrument is not a sufficient penalty, but the
accrual of interest on past-due interest payments at a penalty rate that is
twelve percentage points above the stated yield of the debt instrument might be
a sufficient penalty, depending on the facts and circumstances. Accordingly,
Federal Tax Counsel is unable to opine whether interest payments on REMIC
Regular Certificates that otherwise would not be treated as having original
issue discount would be considered to have original issue discount because there
are not reasonable remedies to compel timely payment of interest or adequate
penalties for the nonpayment of interest.
Premium. A purchaser of a REMIC Regular Certificate that purchases such
REMIC Regular Certificate at a cost greater than its remaining stated redemption
price at maturity will be considered to have purchased such REMIC Regular
Certificate at a premium, and may, under Section 171 of the Code, elect to
amortize such premium under a constant yield method over the life of the REMIC
Regular Certificate. The Prepayment Assumption is probably taken into account in
determining the life of the REMIC Regular Certificate for this purpose. Except
as provided in regulations, amortizable premium will be treated as an offset to
interest income on the REMIC Regular Certificate.
Payment Lag REMIC Regular Certificates; Initial Period Considerations.
Certain REMIC Regular Certificates will provide for distributions of interest
based on a period that is the same length as the interval between Distribution
Dates but ends prior to each Distribution Date. Any interest that accrues prior
to the Closing Date may be treated under the OID Regulations either (i) as part
of the issue price and the stated redemption price at maturity of the REMIC
Regular Certificates or (ii) as not included in the issue price or the stated
redemption price. The OID Regulations provide a special application of the de
minimis rule for debt instruments with long first accrual periods where the
interest payable for the first period is at a rate which is effectively less
than that which applies in all other periods. In such cases, for the sole
purpose of determining whether original issue discount is de minimis, the OID
Regulations provide that the stated redemption price is equal to the
instrument's issue price plus the greater of the amount of foregone interest or
the excess (if any) of the instrument's stated principal amount over its issue
price.
Variable Rate REMIC Regular Certificates. Under the OID Regulations,
REMIC Regular Certificates paying interest at a variable rate (a "Variable Rate
REMIC Regular Certificate") are subject to special rules. A Variable Rate REMIC
Regular Certificate will qualify as a "variable rate debt instrument" if (i) its
issue price does not exceed the total noncontingent principal payments due under
the Variable Rate REMIC Regular Certificate by more than a specified de minimis
amount, (ii) it provides for stated interest, paid or compounded at least
annually, at (a) one or more qualified floating rates, (b) a single fixed rate
and one or more qualified floating rates, (c) a single objective rate or (d) a
single fixed rate and a single objective rate that is a qualified inverse
floating rate, (iii) it does not provide for any principal payments that are
contingent, as defined in the OID Regulations, except as provided in (i) above.
A "qualified floating rate" is any variable rate where variations in the
value of such rate can reasonably be expected to measure contemporaneous
variations in the cost of newly borrowed funds in the currency in which the
Variable Rate REMIC Regular Certificate is denominated. A multiple of a
qualified floating rate will generally not itself constitute a qualified
floating rate for purposes of the OID Regulations. However, a variable rate
equal to (i) the product of a qualified floating rate and a fixed multiple that
is greater than 0.65 but not more than 1.35 or (ii) the product of a qualified
floating rate and a fixed multiple that is greater than 0.65 but not more than
1.35, increased or decreased by a fixed rate will constitute a qualified
floating rate for purposes of the OID Regulations. In addition, under the OID
Regulations, two or more qualified floating rates that can reasonably be
expected to have approximately the same values throughout the term of the
Variable Rate REMIC Regular Certificate will be treated as a single qualified
floating rate (a "Presumed Single Qualified Floating Rate"). Two or more
qualified floating rates with values within 25 basis points of each other as
determined on the Variable Rate REMIC Regular Certificate's issue date will be
conclusively presumed to be a Presumed Single Qualified Floating Rate.
Notwithstanding the foregoing, a variable rate that would otherwise constitute a
qualified floating rate but which is subject to one or more restrictions such as
a cap or floor, will not be a qualified floating rate for purposes of the OID
Regulations unless the restriction is fixed throughout the term of the Variable
Rate REMIC Regular Certificate or the restriction will not significantly affect
the yield of the Variable Rate REMIC Regular Certificate.
An "objective rate" is a rate that is not itself a qualified floating
rate but which is determined using a single fixed formula and which is based
upon objective financial or economic information. The OID Regulations also
provide that other variable rates may be treated as objective rates if so
designated by the Internal Revenue Service in the future. Despite the foregoing,
a variable rate of interest on a Variable Rate REMIC Regular Certificate will
not constitute an objective rate if it is reasonably expected that the average
value of such rate during the first half of the Variable Rate REMIC Regular
Certificate's term will be either significantly less than or significantly
greater than the average value of the rate during the final half of the Variable
Rate REMIC Regular Certificate's term. Further, an objective rate does not
include a rate that is based on information that is within the control of or
unique to the circumstances of the issuer or a party related to the issuer. An
objective rate will qualify as a "qualified inverse floating rate" if such rate
is equal to a fixed rate minus a qualified floating rate and variations in the
rate can reasonably be expected to inversely reflect contemporaneous variations
in the qualified floating rate. The OID Regulations also provide that if a
Variable Rate REMIC Regular Certificate provides for stated interest at a fixed
rate for an initial period of less than one year followed by a variable rate
that is either a qualified floating rate or an objective rate and if the
variable rate on the Variable Rate REMIC Regular Certificate's issue date is
intended to approximate the fixed rate, then the fixed rate and the variable
rate together will constitute either a single qualified floating rate or
objective rate, as the case may be (a "Presumed Single Variable Rate"). If the
value of the variable rate and the initial fixed rate are within 25 basis points
of each other as determined on the Variable Rate REMIC Regular Certificate's
issue date, the variable rate will be conclusively presumed to approximate the
fixed rate.
For Variable Rate REMIC Regular Certificates that qualify as a
"variable rate debt instrument" under the OID Regulations and provide for
interest at either a single qualified floating rate, a single objective rate, a
Presumed Single Qualified Floating Rate or a Presumed Single Variable Rate
throughout the term (a "Single Variable Rate REMIC Regular Certificate"),
original issue discount is computed as described in "REMIC Regular
Certificates-Current Income on REMIC Regular Certificates--Original Issue
Discount" based on the following: (i) stated interest on the Single Variable
Rate REMIC Regular Certificate which is unconditionally payable in cash or
property (other than debt instruments of the issuer) at least annually will
constitute qualified stated interest; (ii) by assuming that the variable rate on
the Single Variable Rate REMIC Certificate is a fixed rate equal to: (a) in the
case of a Single Variable Rate REMIC Regular Certificate with a qualified
floating rate or a qualified inverse floating rate, the value of, as of the
issue date, of the qualified floating rate or the qualified inverse floating
rate or (b) in the case of a Single Variable Rate REMIC Regular Certificate with
an objective rate (other than a qualified inverse floating rate), a fixed rate
which reflects the reasonably expected yield for such Single Variable Rate REMIC
Regular Certificate; and (iii) the qualified stated interest allocable to an
accrual period is increased (or decreased) if the interest actually paid during
an accrual period exceeds (or is less than) the interest assumed to be paid
under the assumed fixed rate described in (ii) above.
In general, any Variable Rate REMIC Regular Certificate other than a
Single Variable Rate REMIC Regular Certificate (a "Multiple Variable Rate REMIC
Regular Certificate") that qualifies as a "variable rate debt instrument" will
be converted into an "equivalent" fixed rate debt instrument for purposes of
determining the amount and accrual of original issue discount and qualified
stated interest on the Multiple Variable Rate REMIC Regular Certificate. The OID
Regulations generally require that such a Multiple Variable Rate REMIC Regular
Certificate be converted into an "equivalent" fixed rate debt instrument by
substituting any qualified floating rate or qualified inverse floating rate
provided for under the terms of the Multiple Variable Rate REMIC Regular
Certificate with a fixed rate equal to the value of the qualified floating rate
or qualified inverse floating rate, as the case may be, as of the Multiple
Variable Rate REMIC Regular Certificate's issue date. Any objective rate (other
than a qualified inverse floating rate) provided for under the terms of the
Multiple Variable Rate REMIC Regular Certificate is converted into a fixed rate
that reflects the yield that is reasonably expected for the Multiple Variable
Rate REMIC Regular Certificate. In the case of a Multiple Variable Rate REMIC
Regular Certificate that qualifies as a "variable rate debt instrument" and
provides for stated interest at a fixed rate in addition to either one or more
qualified floating rates or a qualified inverse floating rate, the fixed rate is
initially converted into a qualified floating rate (or a qualified inverse
floating rate, if the Multiple Variable Rate REMIC Regular Certificate provides
for a qualified inverse floating rate). Under such circumstances, the qualified
floating rate or qualified inverse floating rate that replaces the fixed rate
must be such that the fair market value of the Multiple Variable Rate REMIC
Regular Certificate as of the Multiple Variable Rate REMIC Regular Certificate's
issue date is approximately the same as the fair market value of an otherwise
identical debt instrument that provides for either the qualified floating rate
or qualified inverse floating rate rather than the fixed rate. Subsequent to
converting the fixed rate into either a qualified floating rate or a qualified
inverse floating rate, the Multiple Variable Rate REMIC Regular Certificate is
then converted into an "equivalent" fixed rate debt instrument in the manner
described above.
Once the Multiple Variable Rate REMIC Regular Certificate is converted
into an "equivalent" fixed rate debt instrument pursuant to the foregoing rules,
the amount of original issue discount and qualified stated interest, if any, are
determined for the "equivalent" fixed rate debt instrument by applying the
original issue discount rules to the "equivalent" fixed rate debt instrument in
the manner described in "REMIC Regular Certificates-Current Income on REMIC
Regular Certificates--Original Issue Discount". A Holder of the Multiple
Variable Rate REMIC Regular Certificate will account for such original issue
discount and qualified stated interest as if the Holder held the "equivalent"
fixed rate debt instrument. Each accrual period appropriate adjustments will be
made to the amount of qualified stated interest or original issue discount
assumed to have been accrued or paid with respect to the "equivalent" fixed rate
debt instrument in the event that such amounts differ from the actual amount of
interest accrued or paid on the Multiple Variable Rate REMIC Regular Certificate
during the accrual period.
If a Variable Rate REMIC Regular Certificate does not qualify as a
"variable rate debt instrument" under the OID Regulations, then the Variable
Rate REMIC Regular Certificate would be treated as a contingent payment debt
obligation.
Interest-Only REMIC Regular Certificates. The Trust intends to report
income from interest-only classes of REMIC Regular Certificates to the Internal
Revenue Service and to holders of interest-only REMIC Regular Certificates based
on the assumption that the stated redemption price at maturity is equal to the
sum of all payments determined under the Prepayment Assumption. As a result,
such interest-only REMIC Regular Certificates will be treated as having original
issue discount.
Market Discount. A holder that acquires a REMIC Regular Certificate at a
market discount (that is, a discount that exceeds any unaccrued original issue
discount) will recognize gain upon receipt of a principal distribution,
regardless of whether the distribution is scheduled or is a prepayment. In
particular, the REMIC Regular Certificateholder will be required to allocate
that principal distribution first to the portion of the market discount on such
REMIC Regular Certificate that has accrued but has not previously been
includible in income, and will recognize ordinary income to that extent. In
general terms, unless Treasury regulations when issued state otherwise, market
discount on a REMIC Regular Certificate may be treated, at the REMIC
Certificateholder's election, as accruing either (i) under a constant yield
method, taking into account the Prepayment Assumption, or (ii) in proportion to
accruals of original issue discount (or, if there is no original issue discount,
in proportion to payments of interest at the Pass-Through Rate).
In addition, a holder may be required to defer deductions for a portion of
the holder's interest expense on any debt incurred or continued to purchase or
carry a REMIC Regular Certificate purchased with market discount. The deferred
portion of any interest deduction would not exceed the portion of the market
discount on the REMIC Regular Certificate that accrues during the taxable year
in which such interest would otherwise be deductible and, in general, would be
deductible when such market discount is included in income upon receipt of a
principal distribution on, or upon the sale of, the REMIC Regular Certificate.
The Code requires that information necessary to compute accruals of market
discount be reported periodically to the Internal Revenue Service and to certain
categories of holders of REMIC Regular Certificates.
Notwithstanding the above rules, market discount on a REMIC Regular
Certificate will be considered to be zero if such discount is less than 0.25% of
the remaining stated redemption price at maturity of such REMIC Regular
Certificate multiplied by its weighted average remaining life. Weighted average
remaining life presumably is calculated in a manner similar to weighted average
life (described above under "Current Income on REMIC Regular
Certificates-Original Issue Discount"), taking into account distributions
(including prepayments) prior to the date of acquisition of such REMIC Regular
Certificate by the subsequent purchaser. If market discount on a REMIC Regular
Certificate is treated as zero under this rule, the actual amount of such
discount must be allocated to the remaining principal distributions on the REMIC
Regular Certificate, and when each such distribution is made, gain equal to the
discount, if any, allocated to the distribution will be recognized.
Election to Treat All Interest Under the Constant Yield Rules. The OID
Regulations provide that all Holders may elect to include in gross income all
interest that accrues on a debt instrument issued after April 4, 1994 by using
the constant yield method. For purposes of this election, interest includes
stated interest, original issue discount, and market discount, as adjusted to
account for any premium. Holders should consult their own tax advisors regarding
the availability or advisability of such an election.
Sales of REMIC Regular Certificates. If a REMIC Regular Certificate is
sold, the seller will recognize gain or loss equal to the difference between the
amount realized on the sale and its adjusted basis in the REMIC Regular
Certificate. A holder's adjusted basis in a REMIC Regular Certificate generally
equals the cost of the REMIC Regular Certificate to the holder, increased by
income reported by the holder with respect to the REMIC Regular Certificate and
reduced (but not below zero) by distributions on the REMIC Regular Certificate
received by the holder and by amortized premium. Except as indicated in the next
two paragraphs, any such gain or loss generally will be capital gain or loss
provided the REMIC Regular Certificate is held as a capital asset.
Gain from the sale of a REMIC Regular Certificate that might otherwise be
capital gain will be treated as ordinary income to the extent that such gain
does not exceed the excess, if any, of (i) the amount that would have been
includible in the seller's income with respect to the REMIC Regular Certificate
had income accrued thereon at a rate equal to 110% of "the applicable Federal
rate" (generally, an average of current yields on Treasury securities),
determined as of the date of purchase of the REMIC Regular Certificate, over
(ii) the amount actually includible in the seller's income. In addition, gain
recognized on the sale of a REMIC Regular Certificate by a seller who purchased
the REMIC Regular Certificate at a market discount would be taxable as ordinary
income in an amount not exceeding the portion of such discount that accrued
during the period the REMIC Regular Certificate was held by such seller, reduced
by any market discount includible in income under the rules described above
under "Current Income on REMIC Regular Certificates--Market Discount."
REMIC Regular Certificates will be "evidences of indebtedness" within the
meaning of Section 582(c)(1) of the Code, so that gain or loss recognized from a
sale of a REMIC Regular Certificate by a bank or other financial institution to
which such section applies would be ordinary income or loss.
Termination. The REMIC will terminate shortly following the REMIC's
receipt of the final payment in respect of the Trust Assets. The last
distribution on a REMIC Regular Certificate should be treated as a payment in
full retirement of a debt instrument.
TAX TREATMENT OF YIELD SUPPLEMENT AGREEMENTS
Whether a REMIC Regular Certificateholder of a series will have a separate
contractual right to payments under a Yield Supplement Agreement, and the tax
treatment of such payments, if any, will be addressed in the related Prospectus
Supplement.
REMIC RESIDUAL CERTIFICATES
Because the REMIC Residual Certificates will be treated as "residual
interests" in the REMIC, each holder of a REMIC Residual Certificate will be
required to take into account its daily portion of the taxable income or net
loss of the REMIC for each day during the calendar year on which it holds its
REMIC Residual Certificate. The daily portion is determined by allocating to
each day in a calendar quarter a ratable portion of the taxable income or net
loss of the REMIC for that quarter and allocating such daily amounts among the
holders on such day in proportion to their holdings. All income or loss of the
REMIC taken into account by a REMIC Residual Certificateholder must be treated
as ordinary income or loss as the case may be. Income from residual interests is
"portfolio income" which cannot be offset by "passive activity losses" in the
hands of individuals or other persons subject to the passive loss rules. The
Code also provides that all residual interests must be issued on the REMIC's
startup day and designated as such. For this purpose, "startup day" means the
day on which the REMIC issues all of its regular and residual interests, and
under the REMIC Regulations may, in the case of a REMIC to which property is
contributed over a period of up to ten consecutive days, be any day designated
by the REMIC within such period.
The taxable income of the REMIC, for purposes of determining the amounts
taken into account by holders of REMIC Residual Certificates, is determined in
the same manner as in the case of an individual, with certain exceptions. The
accrual method of accounting must be used and the taxable year of the REMIC must
be the calendar year. The basis of property contributed to the REMIC in exchange
for regular or residual interests is its fair market value immediately after the
transfer. The REMIC Regulations determine the fair market value of the
contributed property by deeming it equal to the aggregate issue prices of all
regular and residual interests in the REMIC.
A REMIC Regular Certificate will be considered indebtedness of the REMIC.
Market discount on any of the Trust Assets held by the REMIC must be included in
the income of the REMIC as it accrues, rather than being included in income only
upon sale of the Trust Assets or as principal on the Trust Assets is paid. The
REMIC is not entitled to any personal exemptions or to deductions for taxes paid
to foreign countries and U.S. possessions, charitable contributions or net
operating losses, or to certain other deductions to which individuals are
generally entitled. Income or loss in connection with a "prohibited transaction"
is disregarded. See "Prohibited Transactions."
As previously discussed, the timing of recognition of negative original
issue discount, if any, on a REMIC Regular Certificate is uncertain. As a
result, the timing of recognition of the REMIC taxable income related to a REMIC
Residual Certificate is also uncertain. Although Federal Tax Counsel is unable
to opine as to this matter, the related REMIC taxable income may be recognized
when the adjusted issue price of such REMIC Regular Certificate would exceed the
maximum amount of future payments with respect to such REMIC Regular
Certificate. It is unclear whether the Prepayment Assumption is taken into
account for this purpose.
A REMIC Residual Certificate has a tax basis in its holder's hands that is
distinct from the REMIC's basis in its assets. The tax basis of a REMIC Residual
Certificate in its holder's hands will be its cost (i.e., the purchase price of
the REMIC Residual Certificate), and will be reduced (but not below zero) by the
holder's share of cash distributions and losses and increased by its share of
taxable income from the REMIC.
If, in any year, cash distributions to a holder of a REMIC Residual
Certificate exceed its share of the REMIC's taxable income, the excess will
constitute a return of capital to the extent of the holder's basis in its REMIC
Residual Certificate. A return of capital is not treated as income for federal
income tax purposes, but will reduce the tax basis of the holder in its REMIC
Residual Certificate (but not below zero). If a REMIC Residual Certificate's
basis is reduced to zero, any cash distributions with respect to that REMIC
Residual Certificate in any taxable year in excess of its share of the REMIC's
income would be taxable to the holder as gain on the sale or exchange of its
interest in the REMIC.
The losses of the REMIC taken into account by a holder of a REMIC Residual
Certificate in any quarter may not exceed the holder's basis in its REMIC
Residual Certificate. Any excess losses may be carried forward indefinitely to
future quarters subject to the same limitation.
There is no REMIC counterpart to the partnership election under Code
Section 754 to increase or decrease the partnership's basis in its assets by
reference to the adjusted basis to subsequent partners of their partnership
interest. The REMIC Regulations do not provide for a similar election or other
adjustment. Consequently, a subsequent purchaser of a REMIC Residual Certificate
at a premium will not be able to use the premium to reduce his share of the
REMIC's taxable income.
Mismatching of Income and Deductions; Excess Inclusions. The taxable
income recognized by the holder of a REMIC Residual Certificate in any taxable
year will be affected by, among other factors, the relationship between the
timing of recognition of interest and discount income (or deductions for
amortization of premium) with respect to Trust Assets, on the one hand, and the
timing of deductions for interest (including original issue discount) on the
REMIC Regular Certificates, on the other. In the case of multiple classes of
REMIC Regular Certificates issued at different yields, and having different
weighted average lives, taxable income recognized by the holders of REMIC
Residual Certificates may be greater than cash flow in earlier years of the
REMIC (with a corresponding taxable loss or less taxable income than cash flow
in later years). This may result from the fact that interest expense deductions,
expressed as a percentage of the outstanding principal amount of the REMIC
Regular Certificates, will increase over time as the shorter term, lower
yielding classes of REMIC Regular Certificates are paid, whereas interest income
from the Trust Assets may not increase over time as a percentage of the
outstanding principal amount of the Trust Assets.
In the case of Tiered REMICs, the OID Regulations provide that the regular
interests in the REMIC which directly owns the Trust Assets (the "Lower Tier
REMIC") will be treated as a single debt instrument for purposes of the original
issue discount provisions. Therefore, the Trust will calculate the taxable
income of Tiered REMICs by treating the Lower Tier REMIC regular interests as a
single debt instrument.
Any "excess inclusions" with respect to a REMIC Residual Certificate will
be subject to certain special rules. The excess inclusions with respect to a
REMIC Residual Certificate are equal to the excess, if any, of its share of
REMIC taxable income for the quarterly period over the sum of the daily accruals
for such quarterly period. The daily accrual for any day on which the REMIC
Residual Certificate is held is determined by allocating to each day in a
quarter its allocable share of the product of (A) 120% of the long-term
applicable Federal rate (for quarterly compounding) that would have applied to
the REMIC Residual Certificates (if they were debt instruments) on the closing
date under Code Section 1274(d)(1) and (B) the adjusted issue price of such
REMIC Residual Certificates at the beginning of a quarterly period. For this
purpose, the adjusted issue price of such REMIC Residual Certificate at the
beginning of a quarterly period is the issue price of such Certificates plus the
amount of the daily accruals of REMIC taxable income for all prior quarters,
decreased by any distributions made with respect to such Certificates prior to
the beginning of such quarterly period.
The excess inclusions of a REMIC Residual Certificate may not be offset by
other deductions, including net operating loss carryforwards, on a holder's
return. An exception exists for organizations to which Code Section 593 applies
(generally, certain thrift institutions); however, the Code grants the Treasury
Department authority to issue regulations providing that this exception will not
apply to the extent necessary or appropriate to prevent avoidance of tax. The
REMIC Regulations provide that the exception for thrifts applies only if a REMIC
Residual Certificate has "significant value." For this purpose, a REMIC Residual
Certificate has significant value if (i) the aggregate issue price of the
residual interest in the REMIC equals at least two percent of the total issue
prices of all interests in the REMIC, and (ii) the REMIC Residual Certificate
has an anticipated weighted average life at least equal to 20 percent of the
anticipated weighted average life of the REMIC. The anticipated weighted average
life of the REMIC is the weighted average of the anticipated weighted average
lives of all classes of interests in the REMIC. This weighted average is
determined under a formula provided in the REMIC Regulations, applied by
treating all payments taken into account in computing the anticipated weighted
average lives of the regular and residual interests in the REMIC as principal
payments on a single regular interest.
Legislation has been introduced with respect to the relationship between
excess inclusions and the alternative minimum tax. This legislation provides
that (i) the alternative minimum taxable income of a taxpayer is based on the
taxpayer's regular taxable income computed without regard to the rule that
taxable income cannot be less than the amount of excess inclusions, (ii) the
alternative minimum taxable income of a taxpayer for a taxable year cannot be
less than the amount of excess inclusions for that year, and (iii) the amount of
any alternative minimum tax net operating loss is computed without regard to any
excess inclusions. No prediction can be made whether such legislation or similar
legislation will be enacted.
The rule permitting thrift institutions to offset excess inclusions with
their net operating losses generally applies only when the thrift institution
itself (rather than an affiliate of the thrift) holds the residual interest.
However, excess inclusions of a "qualified subsidiary" of a thrift institution
(defined generally as a subsidiary organized and operated exclusively in
connection with the organization and operation of one or more REMICs) may be
offset by net operating losses of its parent thrift as if the parent thrift held
the residual interest directly.
If the holder of a REMIC Residual Certificate is an organization subject
to the tax on unrelated business income imposed by Code Section 511, the excess
inclusions will be treated as unrelated business taxable income of such holder
for purposes of Code Section 511. In addition, the Code provides that under
Treasury regulations, if a real estate investment trust ("REIT") owns a REMIC
Residual Certificate, to the extent excess inclusions of the REIT exceed its
real estate investment trust taxable income (excluding net capital gains), the
excess inclusions would be allocated among the shareholders of the REIT in
proportion to the dividends received by the shareholders from the REIT. Excess
inclusions derived by regulated investment companies ("RICs"), common trust
funds, and subchapter T cooperatives must be allocated to the shareholders of
such entities using rules similar to those applicable to REITs. The Internal
Revenue Service has not yet adopted or proposed such regulations as to REITs,
RICs, or similar entities. A life insurance company cannot adjust its reserve
with respect to variable contracts to the extent of any excess inclusion, except
as provided in regulations.
The Internal Revenue Service has authority to promulgate regulations
providing that if the aggregate value of the REMIC Residual Certificates is not
considered to be "significant," then the entire share of REMIC taxable income of
a holder of a REMIC Residual Certificate (including a holder which is a thrift
institution) may be treated as excess inclusions subject to the foregoing
limitations. This authority has not been exercised to date.
The REMIC is subject to tax at a rate of 100 percent on any net income it
derived from "prohibited transactions." In general, "prohibited transaction"
means the disposition of a Mortgage Asset other than pursuant to specified
exceptions, the receipt of income as compensation for services, the receipt of
income from a source other than an SBA Loan or certain other permitted
investments, or gain from the disposition of an asset representing a temporary
investment of payments on the Trust Assets pending distribution on the REMIC
Certificates. In addition, a tax is imposed on the REMIC equal to 100 percent of
the value of certain property contributed to the REMIC after its "startup day."
No REMIC in which interests are offered hereunder will accept contributions that
would be subject to such tax. This provision will not affect the REMIC's ability
to accept substitute SBA Loans or to sell defective SBA Loans in accordance with
the Agreement.
A REMIC is subject to a tax (deductible from its income) on any "net
income from foreclosure property" (determined in accordance with Section
857(b)(4)(B) of the Code as if the REMIC were a REIT).
Any tax described in the two preceding paragraphs that may be imposed on
the Trust initially would be borne by the holders of the REMIC Residual
Certificates in the related REMIC rather than by the REMIC Regular
Certificateholders, unless otherwise specified in the Prospectus Supplement.
Dealers' Ability to Mark-to-Market REMIC Residual Certificates. Temporary
regulations provide that "negative-value" REMIC Residual Certificates are not
securities and cannot be marked-to-market pursuant to Section 475 of the Code
(relating to the requirement that dealers in securities mark them to market). A
REMIC Residual Certificate is a negative-value REMIC Residual Certificate if on
the date the dealer acquires the REMIC Residual Certificate the present value of
the anticipated tax liabilities associated with holding the REMIC Residual
Certificate (net of the present value of the tax savings resulting from losses
associated with holding the REMIC Residual Certificate) exceeds the present
value of the expected future distributions on the REMIC Residual Certificate.
Pursuant to the temporary regulations, the Commissioner has the authority to
treat REMIC Residual Certificates which have the same economic effect as a
negative-value REMIC Residual Certificate as not being a security for purposes
of Section 475 of the Code. Proposed regulations would provide that all REMIC
Residual Certificates acquired on or after January 4, 1995, and similar
interests or arrangements acquired on or after January 4, 1995 that are
determined by the Commissioner to have substantially the same economic effect as
a REMIC Residual Certificate, are not securities and cannot be marked to market
pursuant to Section 475 of the Code.
The anticipated and expected tax consequences and distributions are
determined by taking into account events that have occurred through the date of
acquisition, the Prepayment Assumption and reinvestment assumption adopted when
the residual was created, and by taking account of required liquidations and
required or permitted clean up calls.
TRANSFERS OF REMIC RESIDUAL CERTIFICATES
Tax on Disposition of REMIC Residual Certificates. The sale of a REMIC
Residual Certificate by a holder will result in gain or loss equal to the
difference between the amount realized on the sale and the adjusted basis of the
REMIC Residual Certificate.
If the seller of a REMIC Residual Certificate held the REMIC Residual
Certificate as a capital asset, the gain or loss generally will be capital gain
or loss. However, under Code Section 582(c), the sale of a REMIC Residual
Certificate by certain banks and other financial institutions will be considered
a sale of property other than a capital asset, resulting in ordinary income or
loss. Although Federal Tax Counsel is unable to opine with respect to the tax
treatment of a REMIC Residual Certificate that has unrecovered basis after all
funds of the Trust have been distributed, the holder may be entitled to claim a
loss in the amount of the unrecovered basis.
The Code provides that, except as provided in Treasury regulations (which
have not yet been issued), if a holder sells a REMIC Residual Certificate and
acquires the same or other REMIC Residual Certificates, residual interests in
another REMIC, or any similar interests in a "taxable mortgage pool" (as defined
in Section 7701(i) of the Code) during the period beginning six months before,
and ending six months after, the date of such sale, such sale will be subject to
the "wash sale" rules of Section 1091 of the Code. In that event, any loss
realized by the seller on the sale generally will not be currently deductible.
A tax is imposed on the transfer of any residual interest in a REMIC to a
"disqualified organization." The tax is imposed on the transferor, or, where the
transfer is made through an agent of the disqualified organization, on the
agent. "Disqualified organizations" include for this purpose the United States,
any State or political subdivision thereof, any foreign government, any
international organization or agency or instrumentality of the foregoing (with
an exception for certain taxable instrumentalities of the United States, of a
State or of a political subdivision thereof), any rural electrical and telephone
cooperative, and any tax-exempt entity (other than certain farmers'
cooperatives) not subject to the tax on unrelated business income.
The amount of tax to be paid by the transferor on a transfer to a
disqualified organization is equal to the present value of the total anticipated
excess inclusions with respect to the interest transferred for periods after
such transfer multiplied by the highest corporate rate of tax. The transferor
(or agent, as the case may be) will be relieved of liability so long as the
transferee furnishes an affidavit that it is not a disqualified organization and
the transferor or agent does not have actual knowledge that the affidavit is
false. Under the REMIC Regulations, an affidavit will be sufficient if the
transferee furnishes (A) a social security number, and states under penalties of
perjury that the social security number is that of the transferee, or (B) a
statement under penalties of perjury that it is not a disqualified organization.
Treatment of Payments to a Transferee in Consideration of Transfer of a
REMIC Residual Certificate. The federal income tax consequences of any
consideration paid to a transferee on a transfer of an interest in a REMIC
Residual Certificate are unclear and Federal Tax Counsel is unable to opine with
respect to this issue. The preamble to the REMIC Regulations indicates that the
Internal Revenue Service is considering the tax treatment of these types of
residual interests. A transferee of such an interest should consult its own tax
advisors.
Restrictions on Transfer; Holding by Pass-Through Entities. An entity
cannot qualify as a REMIC absent reasonable arrangements designed to ensure that
(1) residual interests in such entity are not held by disqualified organizations
and (2) information necessary to calculate the tax due on transfers to
disqualified organizations (i.e., a computation of the present value of the
excess inclusions) is made available by the REMIC. The governing instruments of
a Trust will contain provisions designed to ensure the foregoing, and any
transferee of a REMIC Residual Certificate must execute and deliver an affidavit
stating that neither the transferee nor any person for whose account such
transferee is acquiring the REMIC Residual Certificate is a disqualified
organization. In addition, as to the requirement that reasonable arrangements be
made to ensure that disqualified organizations do not hold a residual interest
in the REMIC, the REMIC Regulations require that notice of the prohibition be
provided either through a legend on the certificate that evidences ownership, or
through a conspicuous statement in the prospectus or other offering document
used to offer the residual interest for sale. As to the requirement that
sufficient information be made available to calculate the tax on transfers to
disqualified organizations (or the tax, discussed below, on pass-through
entities, interests in which are held by disqualified organizations), the REMIC
Regulations further require that such information also be provided to the
Internal Revenue Service.
A tax is imposed on "pass-through entities" holding residual interests
where a disqualified organization is a record holder of an interest in the
pass-through entity. "Pass-through entity" is defined for this purpose to
include RICs, REITs, common trust funds, partnerships, trusts, estates, and
subchapter T cooperatives. Except as provided in regulations, nominees holding
interests in a "pass-through entity" for another person will also be treated as
"pass-through entities" for this purpose. The tax is equal to the amount of
excess inclusions allocable to the disqualified organization for the taxable
year multiplied by the highest corporate rate of tax, and is deductible by the
"pass-through entity" against the gross amount of ordinary income of the entity.
The Agreement provides that any attempted transfer of a beneficial or
record interest in a REMIC Residual Certificate will be null and void unless the
proposed transferee provides to the Trustee an affidavit that such transferee is
not a disqualified organization.
Legislation has been introduced which would provide that partners of
certain partnerships having a large number of partners will be treated as
disqualified organizations for purposes of the tax imposed on pass-through
entities if such partnerships hold residual interests in a REMIC. When
applicable, the legislation would disallow 70 percent of a large partnership's
miscellaneous itemized deductions, including deductions for servicing and
guaranty fees and any expenses of the REMIC, although the remaining deductions
would not be subject to the 2 percent floor applicable to individual partners.
See "Deductibility of Trust Expenses" below. No prediction can be made regarding
whether such legislation will be enacted.
The REMIC Regulations provide that a transfer of a "noneconomic residual
interest" will be disregarded for all federal income tax purposes unless
impeding the assessment or collection of tax was not a significant purpose of
the transfer. A residual interest will be treated as a "noneconomic residual
interest" unless, at the time of the transfer (1) the present value of the
expected future distributions on the residual interest at least equals the
product of (x) the present value of all anticipated excess inclusions with
respect to the residual interest and (y) the highest corporate tax rate,
currently 35 percent, and (2) the transferor reasonably expects that for each
anticipated excess inclusion, the transferee will receive distributions from the
REMIC, at or after the time at which taxes on such excess inclusion accrue,
sufficient to pay the taxes thereon. 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 (had "improper knowledge") that the
transferee would be unwilling or unable to pay taxes due on its share of the
taxable income of the REMIC. A transferor will be presumed not to have improper
knowledge if (i) the transferor conducts, at the time of the transfer, a
reasonable investigation of the financial condition of the transferee and, as a
result of the investigation, the transferor finds that the transferee has
historically paid its debts as they came due and finds no significant evidence
to indicate that the transferee will not continue to pay its debts as they come
due in the future, and (ii) the transferee represents to the transferor that (A)
the transferee understands that it might incur tax liabilities in excess of any
cash received with respect to the residual interest and (B) the transferee
intends to pay the taxes associated with owning the residual interest as they
come due. A different formulation of this rule applies to transfers of REMIC
Residual Certificates by or to foreign transferees. See "Foreign Investors"
below.
DEDUCTIBILITY OF TRUST EXPENSES
A holder that is an individual, estate or trust will be subject to the
limitation with respect to certain itemized deductions described in Code Section
67, to the extent that such deductions, in the aggregate, do not exceed two
percent of the holder's adjusted gross income, and such holder may not be able
to deduct such fees and expenses to any extent in computing such holder's
alternative minimum tax liability. In addition, the amount of itemized
deductions otherwise allowable for the taxable year for an individual whose
adjusted gross income exceeds the applicable amount (which amount will be
adjusted for inflation for taxable years beginning after 1990) will be reduced
by the lesser of (i) 3 percent of the excess of adjusted gross income over the
applicable amount, or (ii) 80 percent of the amount of itemized deductions
otherwise allowable for such taxable year. Such deductions will include
servicing, guarantee, and administrative fees paid to the servicer of the SBA
Loans. These deductions will be allocated entirely to the holders of the REMIC
Residual Certificates in the case of REMIC Trusts with multiple classes of REMIC
Regular Certificates that do not pay their principal amounts ratably. As a
result, the REMIC will report additional taxable income to holders of REMIC
Residual Certificates in an amount equal to their allocable share of such
deductions, and individuals, estates, or trusts holding an interest in such
REMIC Residual Certificates may have taxable income in excess of the cash
received. In the case of a "single-class REMIC," the expenses will be allocated,
under Treasury regulations, among the holders of the REMIC Regular Certificates
and the REMIC Residual Certificates on a daily basis in proportion to the
relative amounts of income accruing to each Certificateholder on that day. In
the case of a holder of a REMIC Regular Certificate who is an individual or a
"pass-through interest holder" (including certain pass-through entities, but not
including real estate investment trusts), the deductibility of such expenses
will be subject to the limitations described above. The reduction or
disallowance of these deductions may have a significant impact on the yield of
REMIC Regular Certificates to such a holder. In general terms, a single-class
REMIC is one that either (i) would qualify, under existing Treasury regulations,
as a grantor trust if it were not a REMIC (treating all interests as ownership
interests, even if they would be classified as debt for federal income tax
purposes) or (ii) is similar to such a trust and which is structured with the
principal purpose of avoiding the single- class REMIC rules.
FOREIGN INVESTORS
REMIC Regular Certificates. Except as discussed below, a holder of a REMIC
Regular Certificate who is not a "United States person" (as defined below)
generally will not be subject to United States income or withholding tax in
respect of a distribution on a REMIC Regular Certificate, provided that (i) the
holder complies to the extent necessary with certain identification
requirements, including timely delivery of a statement, signed by the holder of
the REMIC Regular Certificate under penalties of perjury, certifying that the
holder of the REMIC Regular Certificate is not a United States person and
providing the name and address of the holder, (ii) the holder is not a
"10-percent shareholder" within the meaning of Code Section 871(h)(3)(B), which
could be interpreted to apply to a holder of a REMIC Regular Certificate who
holds a direct or indirect 10 percent interest in the REMIC Residual
Certificates, (iii) the holder is not a "controlled foreign corporation" (as
defined in the Code) related to the REMIC or related to a 10 percent holder of a
residual interest in the REMIC, and (iv) the holder is not engaged in a United
States trade or business, or otherwise subject to federal income tax as a result
of any direct or indirect connection to the United States other than through its
ownership of a REMIC Regular Certificate. For these purposes, the term "United
States person" means (i) a citizen or resident of the United States, (ii) a
corporation, partnership or other entity created or organized in or under the
laws of the United States or any political subdivision thereof, or (iii) an
estate or trust whose income is includible in gross income for United States
federal income taxation regardless of its source.
REMIC Residual Certificates. The Conference Report to the Tax Reform Act
of 1986 states that amounts paid to foreign persons with respect to residual
interests should be considered interest for purposes of the withholding rules.
Interest paid to a foreign person which is not effectively connected with a
trade or business of the foreign person in the United States is subject to a 30%
withholding tax. The withholding tax on interest does not apply, however, to
"portfolio interest" (if certain certifications as to beneficial ownership are
made, as discussed above under "Foreign Investors--Regular Certificates") or to
the extent a tax treaty reduces or eliminates the tax. Treasury regulations
provide that amounts paid with respect to residual interests qualify as
portfolio interest only if interest on the qualified mortgages held by the REMIC
qualifies as portfolio interest. Generally, interest on SBA Loans held by a
Trust will not qualify as portfolio interest, although interest on the Private
Mortgage-Backed Securities, other pass-through certificates, or REMIC regular
interests held by a Trust may qualify. In any case, a holder of a REMIC Residual
Certificate will not be entitled to the portfolio interest exception from the
30% withholding tax (or to any treaty exemption or rate reduction) for that
portion of a payment that constitutes excess inclusions. Generally, the
withholding tax will be imposed when REMIC gross income is paid or distributed
to the holder of a residual interest or there is a disposition of the residual
interest.
The REMIC Regulations provide that a transfer of a REMIC Residual
Certificate to a foreign transferee will be disregarded for all federal income
tax purposes if the transfer has "tax avoidance potential." A transfer to a
foreign transferee will be considered to have tax avoidance potential unless at
the time of the transfer, the transferor reasonably expects that (1) the future
distributions on the REMIC Residual Certificate will equal at least 30 percent
of the anticipated excess inclusions and (2) such amounts will be distributed at
or after the time at which the excess inclusion accrues, but not later than the
close of the calendar year following the calendar year of accrual. A safe harbor
in the REMIC Regulations provides that the reasonable expectation requirement
will be satisfied if the above test would be met at all assumed prepayment rates
for the Trust Assets from 50 percent of the Prepayment Assumption to 200 percent
of the Prepayment Assumption. A transfer by a foreign transferor to a domestic
transferee will likewise be disregarded under the REMIC Regulations if the
transfer would have the effect of allowing the foreign transferor to avoid the
tax on accrued excess inclusions.
BACKUP WITHHOLDING
Distributions made on the REMIC Certificates and proceeds from the sale of
REMIC Certificates to or through certain brokers may be subject to a "backup"
withholding tax of 31 percent of "reportable payments" (including interest
accruals, original issue discount, and, under certain circumstances,
distributions in reduction of principal amount) unless, in general, the holder
of the REMIC Certificate complies with certain procedures or is an exempt
recipient. Any amounts so withheld from distributions on the REMIC Certificates
would be refunded by the Internal Revenue Service or allowed as a credit against
the holder's federal income tax.
REMIC ADMINISTRATIVE MATTERS
The federal information returns for a Trust (Form 1066 and Schedules Q
thereto) must be filed as if the Trust were a partnership for federal income tax
purposes. Information on Schedule Q must be provided to holders of REMIC
Residual Certificates with respect to every calendar quarter. Each holder of a
REMIC Residual Certificate will be required to treat items on its federal income
tax returns consistently with their treatment on the Trust's information returns
unless the holder either files a statement identifying the inconsistency or
establishes that the inconsistency resulted from an incorrect schedule received
from the Trust. The Trust also will be subject to the procedural and
administrative rules of the Code applicable to partnerships, including the
determination of any adjustments to, among other things, items of REMIC taxable
income by the Internal Revenue Service. (Treasury regulations exempt from
certain of these procedural rules REMICs having no more than one residual
interest holder.) Holders of REMIC Residual Certificates will have certain
rights and obligations with respect to any administrative or judicial
proceedings involving the Internal Revenue Service. Under the Code and
Regulations, a REMIC generally is required to designate a tax matters person.
Generally, subject to various limitations, the tax matters person has authority
to act on behalf of the REMIC and the holders of the REMIC Residual Certificates
in connection with administrative determinations and judicial review respecting
returns of taxable income of the REMIC.
Unless otherwise indicated in the Prospectus Supplement, and to the extent
allowable, the Representative or its designee will act as the tax matters person
for each REMIC. Each holder of a REMIC Residual Certificate, by the acceptance
of its interest in the REMIC Residual Certificate, agrees that the
Representative or its designee will act as the holder's fiduciary in the
performance of any duties required of the holder in the event that the holder is
the tax matters person.
NON-REMIC CERTIFICATES
The discussion under this heading applies only to a series of Certificates
with respect to which a REMIC election is not made.
Tax Status of the Trust. Upon the issuance of each series of Non-REMIC
Certificates, Federal Tax Counsel will deliver its opinion to the effect that,
under then current law, assuming compliance with the Agreement, the related
Trust will be classified for federal income tax purposes as a grantor trust and
not as an association taxable as a corporation or a taxable mortgage pool.
Accordingly, each holder of a Non-REMIC Certificate will be treated for federal
income tax purposes as the owner of an undivided interest in the Trust Assets
included in the Trust. As further described below, each holder of a Non-REMIC
Certificate therefore must report on its federal income tax return the gross
income from the portion of the Trust Assets that is allocable to such Non-REMIC
Certificate and may deduct the portion of the expenses incurred by the Trust
that is allocable to such Non-REMIC Certificate, at the same time and to the
same extent as such items would be reported by such holder if it had purchased
and held directly such interest in the Trust Assets and received directly its
share of the payments on the Trust Assets and incurred directly its share of
expenses incurred by the Trust when those amounts are received or incurred by
the Trust.
A holder of a Non-REMIC Certificate that is an individual, estate, or
trust will be allowed deductions for such expenses only to the extent that the
sum of those expenses and the holder's other miscellaneous itemized deductions
exceeds two percent of such holder's adjusted gross income. In addition, the
amount of certain itemized deductions otherwise allowable for the taxable year
for an individual whose adjusted gross income exceeds the "applicable amount"
($100,000 (or $50,000 in the case of a separate return by a married individual),
adjusted for changes in the cost of living subsequent to 1990) will be reduced
by the lesser of (i) 3 percent of the excess of adjusted gross income over the
applicable amount, or (ii) 80% of the amount of itemized deductions otherwise
allowable for such taxable year. A holder of a Non-REMIC Certificate that is not
a corporation cannot deduct such expenses for purposes of the alternative
minimum tax (if applicable). Such deductions will include servicing, guarantee
and administrative fees paid to the servicer of the SBA Loans. As a result, the
Trust will report additional taxable income to holders of Non-REMIC Certificates
in an amount equal to their allocable share of such deductions, and individuals,
estates, or trusts holding Non-REMIC Certificates may have taxable income in
excess of the cash received.
Status of the Non-REMIC Certificates. The Non-REMIC Certificates will be
"real estate assets" for purposes of Section 856(c)(5)(A) of the Code and "loans
. . . secured by an interest in real property" within the meaning of Section
7701(a)(19)(C)(v) of the Code (assets qualifying under one or both of those
sections, applying each section separately, "qualifying assets") to the extent
that the Trust's assets are qualifying assets. The Non-REMIC Certificates may
not be qualifying assets under either of the foregoing sections of the Code to
the extent that the Trust's assets include Buydown Funds, reserve funds, or
payments on mortgages held pending distribution to Certificateholders. Further,
the Non-Remic Certificates may not be "real estate assets" to the extent loans
held by the trust are not secured by real property, and may not be "loans . . .
secured by an interest in real property" to the extent loans held by the trust
are not secured by residential real property or real property used primarily for
church purposes. In addition, to the extent that the principal amount of a loan
exceeds the value of the property securing the loan, it is unclear and Federal
Tax Counsel is unable to opine whether the loan will be a qualifying asset.
Taxation of Non-REMIC Certificates Under Stripped Bond Rules. The federal
income tax treatment of the Non-REMIC Certificates will depend on whether they
are subject to the rules of section 1286 of the Code (the "stripped bond
rules"). The Non-REMIC Certificates will be subject to those rules if stripped
interest-only Certificates are issued. In addition, whether or not stripped
interest-only Certificates are issued, the Internal Revenue Service may contend
that the stripped bond rules apply on the ground that the Servicer's servicing
fee, or other amounts, if any, paid to (or retained by) the Servicer or its
affiliates, as specified in the applicable Prospectus Supplement, represent
greater than an arm's length consideration for servicing the SBA Loans and
should be characterized for federal income tax purposes as an ownership interest
in the SBA Loans. The Internal Revenue Service has taken the position in Revenue
Ruling 91-46 that retained interest in excess of reasonable compensation for
servicing is treated as a "stripped coupon" under the rules of Code Section
1286.
If interest retained for the Servicer's servicing fee or other interest is
treated as a "stripped coupon," the Non-REMIC Certificates will either be
subject to the original issue discount rules or the market discount rules. A
holder of a Non-REMIC Certificate will account for any discount on the Non-REMIC
Certificate as market discount rather than original issue discount if either (i)
the amount of original issue discount with respect to the Non-REMIC Certificate
was treated as zero under the original issue discount de minimis rule when the
Non-REMIC Certificate was stripped or (ii) no more than 100 basis points
(including any amount of servicing in excess of reasonable servicing) is
stripped off from the SBA Loans. If neither of the above exceptions applies, the
original issue discount rules will apply to the Non-REMIC Certificates.
If the original issue discount rules apply, the holder of a Non-REMIC
Certificate (whether a cash or accrual method taxpayer) will be required to
report interest income from the Non-REMIC Certificate in each taxable year equal
to the income that accrues on the Non-REMIC Certificate in that year calculated
under a constant yield method based on the yield of the Non-REMIC Certificate
(or, possibly, the yield of each Trust Asset underlying such Non-REMIC
Certificate) to such holder. Such yield would be computed at the rate that, if
used in discounting the holder's share of the payments on the Trust Assets,
would cause the present value of those payments to equal the price at which the
holder purchased the Non-REMIC Certificate. With respect to certain categories
of debt instruments, Section 1272(a)(6) of the Code requires that original issue
discount be accrued based on a prepayment assumption determined in a manner
prescribed by forthcoming regulations. It is unclear whether such regulations
would apply this rule to the Non-REMIC Certificates, whether Section 1272(a)(6)
might apply to the Non-REMIC Certificates in the absence of such regulations, or
whether the Internal Revenue Service could require use of a reasonable
prepayment assumption based on other tax law principles and Federal Tax Counsel
is unable to opine with respect to these issues. If required to report interest
income on the Non-REMIC Certificates to the Internal Revenue Service under the
stripped bond rules, it is anticipated that the Trustee will calculate the yield
of the Non-REMIC Certificates based on a representative initial offering price
of the Non-REMIC Certificates and a reasonable assumed rate of prepayment of the
Trust Assets (although such yield may differ from the yield to any particular
holder that would be used in calculating the interest income of such holder).
The Prospectus Supplement for each series of Non-REMIC Certificates will
describe the prepayment assumption that will be used for this purpose, but no
representation is made that the Trust Assets will prepay at that rate or at any
other rate.
In the case of a Non-REMIC Certificate acquired at a price equal to the
principal amount of the Trust Assets allocable to the Non-REMIC Certificate, the
use of a reasonable prepayment assumption would not have any significant effect
on the yield used in calculating accruals of interest income. In the case,
however, of a Non-REMIC Certificate acquired at a discount or premium (that is,
at a price less than or greater than such principal amount, respectively), the
use of a reasonable prepayment assumption would increase or decrease such yield,
and thus accelerate or decelerate the reporting of interest income,
respectively.
If an SBA Loan is prepaid in full, the holder of a Non-REMIC Certificate
acquired at a discount or premium generally will recognize ordinary income or
loss equal to the difference between the portion of the prepaid principal amount
of the SBA Loan that is allocable to the Non-REMIC Certificate and the portion
of the adjusted basis of the Non-REMIC Certificate (see "Sales of Non-REMIC
Certificates" below) that is allocable to the SBA Loan. The method of allocating
such basis among the SBA Loans may differ depending on whether a reasonable
prepayment assumption is used in calculating the yield of the Non-REMIC
Certificates for purposes of accruing original issue discount. It is not clear
whether any other adjustments would be required to reflect differences between
the prepayment rate that was assumed in calculating yield and the actual rate of
prepayments.
In the case of a Non-REMIC Certificate which represents interests in
SBA Loans that are subject to the original issue discount rules, the daily
portions of original issue discount generally will be calculated under the
principles discussed in "REMIC Regular Certificates-Current Income on REMIC
Regular Certificates--Original Issue Discount--Variable Rate REMIC Regular
Certificates."
Taxation of Non-REMIC Certificates If Stripped Bond Rules Do Not Apply. If
the stripped bond rules do not apply to a Non-REMIC Certificate, then the holder
will be required to include in income its share of the interest payments on the
Trust Assets in accordance with its tax accounting method. In addition, if the
holder purchased the Non-REMIC Certificate at a discount or premium, the holder
will be required to account for such discount or premium in the manner described
below. The treatment of any discount will depend on whether the discount is
original issue discount as defined in the Code and, in the case of discount
other than original issue discount, whether such other discount exceeds a de
minimis amount. In the case of original issue discount, the holder (whether a
cash or accrual method taxpayer) will be required to report as additional
interest income in each month the portion of such discount that accrues in that
month, calculated based on a constant yield method. In general it is not
anticipated that the amount of original issue discount to be accrued in each
month, if any, will be significant relative to the interest paid currently on
the Trust Assets. However, original issue discount could arise with respect to
an SBA Loan ("ARM") that provides for interest at a rate equal to the sum of an
index of market interest rates and a fixed number. The original issue discount
for ARMs generally will be determined under the principles discussed in "REMIC
Regular Certificates-Current Income on REMIC Regular Certificates--Original
Issue Discount--Variable Rate REMIC Regular Certificates."
If discount other than original issue discount exceeds a de minimis amount
(described below), the holder will also generally be required to include in
income in each month the amount of such discount accrued through such month and
not previously included in income, but limited, with respect to the portion of
such discount allocable to any Trust Asset, to the amount of principal on such
Trust Asset received by the Trust in that month. Because the Trust Assets may
provide for monthly principal payments, such discount may be required to be
included in income at a rate that is not significantly slower than the rate at
which such discount accrues (and therefore at a rate not significantly slower
than the rate at which such discount would be included in income if it were
original issue discount). The holder may elect to accrue such discount under a
constant yield method based on the yield of the Non-REMIC Certificate to such
holder. In the absence of such an election, it may be necessary to accrue such
discount under a more rapid straight-line method. Under the de minimis rule,
market discount with respect to a Non-REMIC Certificate will be considered to be
zero if it is less than the product of (i) 0.25% of the principal amount of the
Trust Assets allocable to the Non-REMIC Certificate and (ii) the weighted
average life (in complete years) of the Trust Assets remaining at the time of
purchase of the Non-REMIC Certificate.
If a holder purchases a Non-REMIC Certificate at a premium, such holder
may elect under Section 171 of the Code to amortize the portion of such premium
that is allocable to an SBA Loan under a constant yield method based on the
yield of the SBA Loan to such holder, provided that such SBA Loan was originated
after September 27, 1985. Premium allocable to an SBA Loan originated on or
before that date should be allocated among the principal payments on the SBA
Loan and allowed as an ordinary deduction as principal payments are made or,
perhaps, upon termination.
It is not clear whether the foregoing adjustments for discount or premium
would be made based on the scheduled payments on the SBA Loans or taking account
of a reasonable prepayment assumption, and Federal Tax Counsel is unable to
opine on this issue.
If an SBA Loan is prepaid in full, the holder of a Non-REMIC Certificate
acquired at a discount or premium will recognize ordinary income or loss equal
to the difference between the portion of the prepaid principal amount of the SBA
Loan that is allocable to the Non-REMIC Certificate and the portion of the
adjusted basis of the Non-REMIC Certificate (see "Sales of Non-REMIC
Certificates" below) that is allocable to the SBA Loan. The method of allocating
such basis among the SBA Loans may differ depending on whether a reasonable
prepayment assumption is used in calculating the yield of the Non-REMIC
Certificates for purposes of accruing original issue discount. Other adjustments
might be required to reflect differences between the prepayment rate that was
assumed in accounting for discount or premium and the actual rate of
prepayments.
Sales of Non-REMIC Certificates. A holder that sells a Non-REMIC
Certificate will recognize gain or loss equal to the difference between the
amount realized in the sale and its adjusted basis in the Non-REMIC Certificate.
In general, such adjusted basis will equal the holder's cost for the Non-REMIC
Certificate, increased by the amount of any income previously reported 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. Any such gain or loss generally will be
capital gain or loss if the assets underlying the Non-REMIC Certificate were
held as capital assets, except that, for a Non-REMIC Certificate to which the
stripped bond rules do not apply and that was acquired with more than a de
minimis amount of discount other than original issue discount (see "Taxation of
Non-REMIC Certificates if Stripped Bond Rules Do Not Apply" above), such gain
will be treated as ordinary interest income to the extent of the portion of such
discount that accrued during the period in which the seller held the Non-REMIC
Certificate and that was not previously included in income.
Foreign Investors. A holder of a Non-REMIC Certificate who is not a
"United States person" (as defined below) and is not subject to federal income
tax as a result of any direct or indirect connection to the United States other
than its ownership of a Non-REMIC Certificate generally will not be subject to
United States income or withholding tax in respect of payments of interest or
original issue discount on a Non-REMIC Certificate to the extent attributable to
SBA Loans that were originated after July 18, 1984, provided that the holder
complies to the extent necessary with certain identification requirements
(including delivery of a statement, signed by the holder of the Non-REMIC
Certificate under penalties of perjury, certifying that such holder is not a
United States person and providing the name and address of such holder).
Proposed Treasury regulations, which would be effective with respect to payments
made after December 31, 1997 if adopted in their current form, would provide
alternative certification requirements and means by which a holder of Non-REMIC
Certificates could claim the exemption from federal income and withholding tax.
Interest or original issue discount on a Non-REMIC Certificate attributable to
SBA Loans that were originated prior to July 19, 1984 will be subject to a 30%
withholding tax (unless such tax is reduced or eliminated by an applicable tax
treaty). For these purposes, the term "United States person" means a citizen or
a resident of the United States, a corporation, partnership or other entity
created or organized in, or under the laws of, the United States or any
political subdivision thereof, an estate the income of which is subject to
United States federal income taxation regardless of its source or a trust other
than a "foreign trust", as defined in Section 7701(a)(31) of the Code.
TAXABLE MORTGAGE POOLS
Effective January 1, 1992, certain entities classified as "taxable
mortgage pools" are subject to corporate level tax on their net income. A
"taxable mortgage pool" is generally defined as an entity that meets the
following requirements: (i) the entity is not a REMIC, (ii) substantially all of
the assets of the entity are debt obligations, and more than 50 percent of such
debt obligations consist of real estate mortgages (or interests therein), (iii)
the entity is the obligor under debt obligations with two or more maturities,
and (iv) payments on the debt obligations on which the entity is the obligor
bear a relationship to the payments on the debt obligations which the entity
holds as assets. With respect to requirement (iii), the Code authorizes the
Internal Revenue Service to provide by regulations that equity interests may be
treated as debt for purposes of determining whether there are two or more
maturities. If a Series of Non-REMIC Certificates were treated as obligations of
a taxable mortgage pool, the Trust would be ineligible to file consolidated
returns with any other corporation and could be liable for corporate tax.
Treasury regulations do not provide for the recharacterization of equity as debt
for purposes of determining whether an entity has issued debt with two
maturities, except in the case of transactions structured to avoid the taxable
mortgage pool rules.
ERISA CONSIDERATIONS
ERISA imposes certain requirements on employee benefit plans and
collective investment funds, separate accounts and insurance company general
accounts in which such plans or arrangements are invested to which it applies
and on those persons who are fiduciaries with respect to such benefit plans.
Certain employee benefit plans, such as 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. In accordance with ERISA's general fiduciary
standards, before investing in a Certificate a benefit plan fiduciary should
determine whether such an investment is permitted under the governing benefit
plan instruments and is appropriate for the benefit plan in view of its overall
investment policy and the composition and diversification of its portfolio and
is prudent.
In addition, benefit plans subject to ERISA and individual retirement
accounts or certain types of Keogh plans not subject to ERISA but subject to
Section 4975 of the Code (each a "Plan") are prohibited from engaging in a broad
range of transactions involving Plan assets and persons having certain specified
relationships to a Plan ("parties in interest" and "disqualified persons"). Such
transactions are treated as "prohibited transactions" under Sections 406 and 407
of ERISA and excise taxes are imposed upon such persons by Section 4975 of the
Code. The Representative, the Originators, the Certificate Guaranty Insurer, the
Underwriter and the Trustee and certain of their affiliates might be considered
"parties in interest" or "disqualified persons" with respect to a Plan. If so,
the acquisition or holding or transfer of Certificates by or on behalf of such
Plan could be considered to give rise to a "prohibited transaction" within the
meaning of ERISA and the Code unless an exemption is available. In addition, the
Department of Labor ("DOL") has issued a regulation (29 C.F.R. Section
2510.3-101) concerning the definition of what constitutes the assets of a Plan
(the "Plan Asset Regulations"), which provides that, as a general rule, the
underlying assets and properties of corporations, partnerships, trusts and
certain other entities in which a Plan makes an "equity" investment will be
deemed for purposes of ERISA to be assets of the investing Plan unless certain
exceptions apply. If an investing Plan's assets were deemed to include an
interest in the SBA Loans and any other assets of the Trust and not merely an
interest in the Certificates, the assets of the Trust would become subject to
the fiduciary investment standards of ERISA, and transactions occurring between
the Representative, the Trustee, the Servicer, the Certificate Guaranty Insurer
or any of their affiliates might constitute prohibited transactions, unless an
administrative exemption applies. Certain such exemptions which may be
applicable to the acquisition and holding of the Certificates or to the
servicing of the SBA Loans are noted below.
The U.S. Department of Labor has issued an administrative exemption,
Prohibited Transaction Class Exemption 83-1 ("PTCE 83-1"), which, under certain
conditions, exempts from the application of the prohibited transaction rules of
ERISA and the excise tax provisions of Section 4975 of the Code transactions
involving a Plan in connection with the operation of a "mortgage pool" and the
purchase, sale and holding of "mortgage pool pass-through certificates." A
"mortgage pool" is defined as an investment pool, consisting solely of interest
bearing obligations secured by first or second mortgages or deeds of trust on
single-family residential property, property acquired in foreclosure and
undistributed cash. A "mortgage pool pass-through certificate" is defined as a
certificate which represents a beneficial undivided interest in a mortgage pool
which entitles the holder to pass-through payments of principal and interest
from the mortgage loans.
For the exemption to apply, PTCE 83-1 requires that (i) the Representative
and the Trustee maintain a system of insurance or other protection for the SBA
Loans and the property securing such SBA Loans, and for indemnifying holders of
Certificates against reductions in pass-through payments due to defaults in loan
payments or property damage in an amount at least equal to the greater of 1% of
the aggregate principal balance of the SBA Loans, or 1% of the principal balance
of the largest covered pooled SBA Loan; (ii) the Trustee may not be an affiliate
of the Representative; and (iii) the payments made to and retained by the
Representative in connection with the Trust, together with all funds inuring to
its benefit for administering the Trust, represent no more than "adequate
consideration" for selling the SBA Loans, plus reasonable compensation for
services provided to the Trust.
In addition, PTCE 83-1 exempts the initial sale of Certificates to a Plan
with respect to which the Representative, the Certificate Guaranty Insurer, the
Servicer, or the Trustee is a party in interest if the Plan does not pay more
than fair market value for such Certificates and the rights and interests
evidenced by such Certificates are not subordinated to the rights and interests
evidenced by other Certificates of the same pool. PTCE 83-1 also exempts from
the prohibited transaction rules and transactions in connection with the
servicing and operation of the Pool, provided that any payments made to the
Servicer in connection with the servicing of the Trust are made in accordance
with a binding agreement, copies of which must be made available to prospective
investors.
In the case of any Plan with respect to which the Representative, the
Servicer, the Certificate Guaranty Insurer, or the Trustee is a fiduciary, PTCE
83-1 will only apply if, in addition to the other requirements: (i) the initial
sale, exchange or transfer of Certificates is expressly approved by an
independent fiduciary who has authority to manage and control those plan assets
being invested in Certificates; (ii) the Plan pays no more for the Certificates
than would be paid in an arm's length transaction; (iii) no investment
management, advisory or underwriting fee, sale commission, or similar
compensation is paid to the Representative with regard to the sale, exchange or
transfer of Certificates to the Plan; (iv) the total value of the Certificates
purchased by such Plan does not exceed 25% of the amount issued; and (v) at
least 50% of the aggregate amount of Certificates is acquired by persons
independent of the Representative, the Trustee, the Servicer, and the
Certificate Guaranty Insurer.
Before purchasing Certificates, a fiduciary of a Plan should confirm that
the Trust is a "mortgage pool," that the Certificates constitute "mortgage pool
pass-through certificates," and that the conditions set forth in PTCE 83-1 would
be satisfied. In addition to making its own determination as to the availability
of the exemptive relief provided in PTCE 83-1, the Plan fiduciary should
consider the availability of any other prohibited transaction exemptions. The
Plan fiduciary also should consider its general fiduciary obligations under
ERISA in determining whether to purchase any Certificates on behalf of a Plan.
In addition, DOL has granted to certain underwriters and/or placement
agents individual prohibited transaction exemptions which may be applicable to
avoid certain of the prohibited transaction rules of ERISA with respect to the
initial purchase, the holding and the subsequent resale in the secondary market
by Plans of pass-through certificates representing a beneficial undivided
ownership interest in the assets of a trust that consist of certain receivables,
loans and other obligations that meet the conditions and requirements of the
Exemption which may be applicable to the Certificates.
One or more other prohibited transaction exemptions issued by the DOL may
be available to a Plan investing in Certificates, depending in part upon the
type of Plan fiduciary making the decision to acquire a Certificate and the
circumstances under which such decision is made, including but not limited to:
PTCE 90-1, regarding investments by insurance company pooled separate accounts,
PTCE 91-38, regarding investments by bank collective investment funds and PTCE
95-60, regarding investments by insurance company general accounts. However,
even if the conditions specified in the Exemption or one or more of these other
exemptions are met, the scope of the relief provided might or might not cover
all acts which might be construed as prohibited transactions.
Any Plan fiduciary considering the purchase of a Certificate should
consult with its counsel with respect to the potential applicability of ERISA
and the Code to such investment. Moreover, each Plan fiduciary should determine
whether, under the general fiduciary standards of investment prudence and
diversification, an investment in the Certificates is appropriate for the Plan,
taking into account the overall investment policy of the Plan and the
composition of the Plan's investment portfolio.
LEGAL INVESTMENT CONSIDERATIONS
Each Prospectus Supplement will describe the extent, if any, to which the
Classes of Certificates offered thereby will constitute "mortgage related
securities" for purposes of SMMEA. No representation is made herein as to
whether the Certificates will constitute legal investments for any entity under
any applicable statute, law, rule, regulation or order. Prospective purchasers
are urged to consult with their counsel concerning the status of the
Certificates as legal investments for such purchasers prior to investing in any
Class of Certificates.
PLAN OF DISTRIBUTION
The Certificates offered hereby will be offered in Series, either directly
by the Representative or through one or more underwriters or underwriting
syndicates ("Underwriters"). The Prospectus Supplement for each Series will set
forth the terms of the offering of such Series and of each Class within such
Series, including the name or names of the Underwriters, the proceeds to and
their use by the Representative and the Originators, and either the initial
public offering price, the discounts and commissions to the Underwriters and any
discounts or concessions allowed or reallowed to certain dealers, or the method
by which the price at which the Underwriters will sell the Certificates will be
determined.
The Certificates in a Series may be acquired by Underwriters for their own
account and may be resold from time to time in one or more transactions,
including negotiated transactions, at a fixed public offering price or at
varying prices determined at the time of sale. The obligations of any
Underwriters will be subject to certain conditions precedent, and such
Underwriters will be severally obligated to purchase all of a Series of
Certificates described in the related Prospectus Supplement, if they are
purchased. If Certificates of a Series are offered other than through
Underwriters, the related Prospectus Supplement will contain information
regarding the nature of such offering and any agreements to be entered into
between the seller and purchasers of Certificates of such Series.
The place and time of delivery for the Certificates of a Series in respect
of which this Prospectus is delivered will be set forth in the related
Prospectus Supplement.
LEGAL MATTERS
Certain legal matters relating to the validly of the issuance of the
Certificates of each Series will be passed upon for the Representative by Eric
R. Elwin, Esq., Corporate Counsel of the Representative and certain legal
matters relating to the validity of the issuance of the Certificates of each
Series will be passed upon for the Underwriter of the Certificates of each
Series by Stroock & Stroock & Lavan, New York, New York. Stroock & Stroock &
Lavan has performed legal services for the Representative and it is expected
that it will continue to perform such services in the future.
FINANCIAL INFORMATION
The Representative has determined that its financial statements are not
material to the offering made hereby.
A new Trust will be formed to own the Trust Assets and to issue each
Series of Certificates. Each such Trust will have no assets or obligations prior
to the issuance of the Certificates and will not engage in any activities other
than those described herein. Accordingly, no financial statements with respect
to such Trusts are included in this Prospectus.
RATING
It is a condition to the issuance of the Certificates of each Series
offered hereby and by the Prospectus Supplement that they shall have been rated
in one of the four highest rating categories by the nationally recognized
statistical rating agency or agencies specified in the related Prospectus
Supplement.
Ratings on mortgage pass-through certificates address the likelihood of
receipt by Certificateholders of all distributions on the underlying mortgage
loans. These ratings address the structural, legal and issuer-related aspects
associated with such certificates, the nature of the underlying mortgage loans
and the credit quality of the guarantor, if any. Ratings on mortgage
pass-through certificates do not represent any assessment of the likelihood of
principal prepayments by mortgagors or of the degree by which such prepayments
might differ from those originally anticipated. As a result, Certificateholders
might suffer a lower than anticipated yield, and, in addition, holders of
stripped pass-through certificates in extreme cases might fail to recoup their
underlying investments.
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
organization. Each security rating should be evaluated independently of any
other security rating.
<PAGE>
INDEX OF PRINCIPAL TERMS
Unless the context indicates otherwise, the following terms shall have the
meanings set forth on the page indicated below:
Adjustable Rate............................................ 8
Adjusted SBA Loan Remittance Rate.......................... 54
Agent of the SBA........................................... 69
Agreement.................................................. 7
ARM........................................................ 120
Balloon Loans.............................................. 27
Bankruptcy Bond............................................ 18
Basis Risk Shortfall....................................... 91
Buydown Funds.............................................. 93
CDC........................................................ 38
Cede....................................................... 25
Certificate Guaranty Insurance Policy...................... 16
Certificate Guaranty Insurer............................... 59
Certificate Register....................................... 53
Certificate Holders........................................ 3
Certificates............................................... 1
Certified Lender........................................... 37
Certified Lender Program................................... 37
Class...................................................... 3
Cleanup Costs.............................................. 90
Code....................................................... 22
Commission................................................. 5
Compensating Interest...................................... 21
Contingency Fee............................................ 75
Curtailment................................................ 21
Cut-off Date............................................... 51
Definitive Certificates.................................... 56
Designated Depository Institution.......................... 74
Detailed Description....................................... 33
Determination Date......................................... 20
DTC........................................................ 25
ERISA...................................................... 24
Event of Nonpayment........................................ 79
Federal Tax Counsel........................................ 22
Final Determination........................................ 81
Funding Period............................................. 12
Guaranteed Interest........................................ 37
Guaranteed Participant Program............................. 37
Index...................................................... 128
Indirect Participant....................................... 55
Insurance Proceeds......................................... 20
Insurance Paying Agent..................................... 59
Insured Payment............................................ 59
IRS........................................................ 81
Liquidation Proceeds....................................... 20
Loan Guaranty Agreement.................................... 37
Lockout Periods............................................ 9
Lower Tier REMIC........................................... 107
Majority Certificateholders................................ 78
Master Servicer............................................ 1
Monthly Advance............................................ 20
Mortgage Interest Rate..................................... 8
Mortgage Pool.............................................. 124
Mortgage Pool Insurance Policy............................. 18
Mortgaged Properties....................................... 9
Multi-Party Agreement...................................... 13
1933 Act................................................... 5
Non-REMIC Certificates..................................... 23
Originators................................................ 1
Participants............................................... 55
Pass-Through Rate.......................................... 3
Permitted Instruments...................................... 74
Permitted Investments...................................... 64
Plan....................................................... 123
Pool....................................................... 1
Pool Insurer............................................... 61
Preferred Lender........................................... 37
Preferred Lender Program................................... 37
Pre-Funding Account........................................ 12
Prepayment Assumption...................................... 95
Proposed OID Regulations................................... 94
Rating Agency.............................................. 20
REMIC...................................................... 4
REMIC Certificates......................................... 90
REMIC Regular Certificates................................. 22
REMIC Residual Certificates................................ 22
REMIC Regulations.......................................... 93
Remittance Date............................................ 3
Representative............................................. 1
Reserve Account............................................ 16
SBA........................................................ 8
SBA Act.................................................... 10
SBA Loans.................................................. 1
SBA Rules and Regulations.................................. 75
SBA 504 Loans.............................................. 8
SBA 504 Loan Program....................................... 10
SBA Section 7(a) Loans...................................... 8
Section 7(a) Program....................................... 10
Section 7(a) Companion Loans............................... 8
Senior Certificates........................................ 13
Servicing Advance.......................................... 76
Servicing Fee.............................................. 75
SMMEA...................................................... 25
Special Hazard Insurance Policy............................ 18
Special Hazard Insurer..................................... 62
Spread Amount.............................................. 17
Standard Hazard Insurance Policies......................... 10
Subordinated Certificates.................................. 13
Sub-Servicer............................................... 78
Successor Servicer......................................... 80
Superlien.................................................. 90
Supplemental Interest Payments............................. 64
Termination Notice......................................... 81
Termination Price.......................................... 81
Tiered REMICs.............................................. 93
Trust ..................................................... 1
Trust Assets............................................... 1
Trustee.................................................... 22
Trustee's Document File.................................... 69
UCC........................................................ 55
Underwriters............................................... 127
Unguaranteed Interests..................................... 1
United States person....................................... 114
Variable Rate REMIC Regular Certificate.................... 99
Yield Supplement Agreement................................. 91
<PAGE>
====================================================================
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS IN CONNECTION WITH THE
OFFER MADE BY THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE SELLERS OR THE UNDER WRITER. THIS PROSPECTUS
SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS DO NOT CONSTITUTE AN OFFER TO SELL,
OR A SOLICITATION OF AN OFFER TO BUY, THE CERTIFICATES BY ANYONE IN ANY
JURISDICTION IN WHICH 1996-2, SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR
IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO,
OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.
-------------------
TABLE OF CONTENTS
-------------------
PROSPECTUS SUPPLEMENT
PAGE
Summary of Terms............................................S-4
Risk Factors...............................................S-31
The SBA Loan Pool..........................................S-35
The SBA Loan Program.......................................S-56
Yield, Maturity and Prepayment
Considerations.............................................S-59
The Sellers................................................S-66
Description of the Agreement and the
Certificates...............................................S-68
The Trustee................................................S-85
Federal Income Tax Consequences............................S-86
ERISA Considerations.......................................S-93
Legal Investment...........................................S-93
Underwriting...............................................S-93
Ratings....................................................S-94
Legal Matters..............................................S-95
Financial Information......................................S-95
Annex I....................................................S-96
Index of Principal Terms...................................S-102
Certain Definitions........................................S-106
PROSPECTUS
Prospectus Supplement........................................4
Available Information........................................5
Reports to Certificateholders................................6
Incorporation of Certain Documents by
Reference....................................................6
Summary of Terms.............................................7
Risk Factors.................................................26
The Trusts...................................................33
Use of Proceeds..............................................39
The Representative and the Originators.......................39
The SBA Loan Lending Program.................................40
Description of the Certificates..............................51
Credit Enhancement...........................................57
Maturity, Prepayment and Yield
Considerations...............................................66
The Agreements...............................................68
Certain Legal Aspects of the SBA Loans.......................85
Federal Income Tax Consequences...............................91
ERISA Considerations..........................................123
Legal Investment Considerations...............................126
Plan of Distribution..........................................127
Legal Matters.................................................127
Financial Information.........................................128
Rating........................................................128
Index of Principal Terms......................................128
=====================================================================
$140,000,000
THE MONEY STORE
The Money Store SBA Loan-Backed Adjustable Rate
Certificates, Series 1996-2,
$130,200,000 Class A Certificates
$9,800,000 Class B Certificates
PROSPECTUS SUPPLEMENT
Prudential Securities Incorporated
December 20, 1996
