PROSPECTUS SUPPLEMENT
(To Prospectus dated $ 140,000,000
September 11, 1997)
[INSERT MONEY STORE LOGO]
THE MONEY STORE SBA LOAN-BACKED ADJUSTABLE RATE
CERTIFICATES, SERIES 1997-1,
$ 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
1997-1 (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-20 HEREIN AND ON PAGE 20 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, 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 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 on or about September
29, 1997.
PRUDENTIAL SECURITIES INCORPORATED
September 11, 1997
(COVER CONTINUED FROM PREVIOUS PAGE)
The Unguaranteed Interests in 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 December 22, 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 $16,000,000 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 October 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 December 22, 1997 will be
distributed as a principal prepayment on December 23, 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 January 1998 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 September 11, 1997 (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 1997-1, 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 Certificates will be
issued in book-entry form 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. Part 120.
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 "FTA's Fee") payable to the SBA's
fiscal and transfer agent (the "FTA") 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 FTA'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 Cut-Off 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 August 31, 1997;
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
$124,000,000 (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 SBAss. 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 FTA pursuant to the
Multi-Party Agreement. The FTA will be
liable solely to the SBA for the FTA's
gross negligence or malfeasance. The SBA
will be liable to the Trustee, the
Sellers and the Servicer for the SBA's
and the FTA'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 October
1997, the Interest Accrual Period will be
the period commencing on the Closing Date
and ending on October 14, 1997.
Pre-Funding
Account............................ On the Closing Date, cash in
an amount not to exceed approximately
$16,000,000 (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 the Unguaranteed Interests
in the 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 December
22, 1997, amounts will, from time to
time, be withdrawn from the Pre- Funding
Account to purchase the Unguaranteed
Interests in the 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 December 22,
1997 will be distributed as a principal
prepayment on December 23, 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 October, November and December 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 FTA'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 October, November and
December 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
Certificateholders, 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 accrued
interest at the applicable Remittance
Rate on the amount of such prepayment.
Further, the Class A and Class B Interest
Distribution Amounts for the January 1998
Remittance Date will be based on 30 days'
interest on the related Certificate
Balance on December 23, 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, 6.25% 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 2.25% 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, 6.73% per annum. During
each subsequent Interest Accrual Period,
the Prime Rate in effect on the preceding
Adjustment Date minus 1.77% 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 January, 1998 (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 January, 1998 will be
based upon the Prime Rate in effect for
such SBA Loan in December, 1997 (which,
for SBA Loans adjusting quarterly,
generally will be the Prime Rate in
effect on October 1, 1997). This monthly
payment will be distributed to
Certificateholders on the Remittance Date
in February, 1998. 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 January, 1998.
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 October, November and December 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
October 15, 1997 (each, a "Remittance
Date"). Any Pre-Funded Amount remaining
at the close of business on December 22,
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 November 30, 1997.
The last scheduled Remittance Date for
the Certificates is January 15, 2025. 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...................... September 29, 1997
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 0.5% 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) 2.0% 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 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..................... Unless otherwise noted, all statistical
percentages in this Prospectus Supplement
are approximate and measured by the
aggregate principal balance of the SBA
and the related Unguaranteed Interests in
a preliminary pool of SBA Section 7(a)
Loans expected to be delivered to the
Trustee on the Closing Date. While the
statistical distribution of the
characteristics of the actual pool of SBA
Section 7(a) Loans delivered on the
Closing Date will vary somewhat from the
statistical distribution of such
characteristics for the preliminary pool
presented in this Prospectus Supplement,
the Representative does not believe that
the characteristics of the Pool delivered
on the Closing Date will differ
materially.
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 1,050 SBA
Section 7(a) Loans, approximately 52.28%
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 48 states and the District of
Columbia; primarily in California. As of
the Cut-Off Date, the preliminary pool
contains no more than approximately
22.35% of the SBA Section 7(a) Loans (by
principal balance of Unguaranteed
Interests), representing approximately 63
SBA Section 7(a) Loans, 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 preliminary
pool of SBA Section 7(a) Loans were
approximately $104,600,000 and $117,000,
respectively, the aggregate and average
unpaid principal portion of the
Guaranteed Interests of the preliminary
pool of SBA Section 7(a) Loans were
approximately $248,100,000 and $278,000,
respectively, the maximum and minimum
original principal portion of the
Unguaranteed Interests of the preliminary
pool of SBA Section 7(a) Loans were
approximately $847,000 and $7,000,
respectively, and the maximum and minimum
original principal portion of the
Guaranteed Interests of the preliminary
pool of SBA Section 7(a) Loans were
approximately $750,000 and $28,000,
respectively. The aggregate original
principal portion of the Unguaranteed
Interests of the preliminary pool of SBA
Section 7(a) Loans was approximately
$105,600,000 and the aggregate original
principal portion of the Guaranteed
Interests of the preliminary pool of SBA
Section 7(a) Loans was approximately
$250,600,000.
As of the Cut-Off Date, the
preliminary pool of SBA Section 7(a)
Loans bore interest at rates (each, a
"Note Rate") which ranged from 9.5% to
12.25% per annum and the weighted average
Note Rate was approximately 10.57% per
annum. As of the Cut-Off Date, the
preliminary pool of SBA Section 7(a)
Loans had a weighted average age of
approximately 4 months, a weighted
average original term of approximately
228 months, a weighted average gross
margin of approximately 2.08%, a weighted
average lifetime floor of approximately
3.24%, and a weighted average
debt-service coverage ratio of
approximately 1.60. The weighted average
Guaranteed Percentage of the preliminary
pool of SBA Section 7(a) Loans was
approximately 67.77%. The weighted
average Excess Spread, expressed as a
percentage of the principal balances of
the Unguaranteed Interests, was
approximately 2.80% as of the CutOff
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 preliminary pool of SBA Section
7(a) Loans. Approximately 64.44% of the
preliminary pool of 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 preliminary pool of SBA
Section 7(a) Loans with lifetime interest
rate caps was approximately 15.46%. 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. 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 FTA. On or before the Closing Date
(or, with respect to a Subsequent SBA
Loan, on or before the related transfer
date), the FTA 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 August 31, 1997,
for the benefit of the United States
Small Business Administration and holders
of The Money Store SBA Loan-Backed
Certificates, Series 1997-1, 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
August 31, 1997, subject to the
Multi-Party Agreement dated as of August
31, 1997." 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 August 31, 1997 (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' interest 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 FTA (plus, for the
Remittance Dates in October, November and
December 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). The Servicer
is not required to make monthly advances
which it determines, in good faith, would
be nonrecoverable from amounts received
in respect of the SBA Loans.
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 LLP, 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 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. 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 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 52.28% 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 the preliminary pool of SBA
Section 7(a) Loans having Unguaranteed Interests with an aggregate principal
amount of approximately $104,600,000, 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.
Approximately 23.36%, 9.24% and 7.87% of the SBA Loans were originated
to Obligors located in the states of California, Texas and Arizona,
respectively. Because of the relative geographic concentration of the SBA Loans
within these states, delinquencies and losses on the SBA Loans may be higher
than would be the case if the SBA Loans comprising the Trust Fund were more
geographically diversified. With respect to the SBA Loans in these states,
certain of the businesses may be more susceptible to certain types of special
hazards that are not covered by any casualty insurance, such as earthquakes,
floods and other natural disasters and major civil disturbances, than similar
properties located in other parts of the country.
<PAGE>
THE SBA LOAN POOL
GENERAL
Unless otherwise noted, all statistical percentages in this Prospectus
Supplement are approximately measured by the aggregate principal balances of the
SBA Section 7(a) Loans in a preliminary pool of 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. While
the statistical distribution of the characteristics of the actual pool of SBA
Section 7(a) Loans delivered on the Closing Date will vary somewhat from the
statistical distribution of such characteristics for the preliminary pool
presented in this Prospectus Supplement, the Representative does not believe
that the characteristics of the Pool delivered on the Closing Date will differ
materially. As used herein, the term "Cut-Off Date" means August 31, 1997 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 in the preliminary pool aggregated approximately $104,600,000
as of the Cut-Off Date. The SBA Section 7(a) Loans were originated to businesses
located in 48 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 23.36% of the preliminary pool of SBA Section 7(a) Loans
(by principal balance) were originated to businesses located in California. 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 ss. 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 the
preliminary pool 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:
<PAGE>
The interest rates borne by the SBA Notes (the "Note Rates") were
distributed as follows as of the Cut-Off Date:
<PAGE>
The Margins added to the Prime Rate on each Interest Adjustment Date to
determine the new Note Rates were distributed as of the Cut-Off Date as follows:
<PAGE>
The minimum lifetime Note Rates borne by the SBA Section 7(a) Loans
were as follows (1):
- -----------------------------
(1) For purposes of determining the weighted average minimum
lifetime Note Rate, those SBAss.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:
<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:
<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:
<PAGE>
The years in which the SBA Section 7(a) Loans were originated was as
follows:
<PAGE>
The Unguaranteed Percentage of the SBA Section 7(a) Loans as of the
Cut-Off Date was as follows:
<PAGE>
The distribution of the debt-service coverage ratios at origination of
the SBA Section 7(a) Loans was as follows: (1)
- ---------------------
(1) Represents the ratio of the pro forma annual debt service
payments to annual net operating income.
(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:
<PAGE>
The distribution of the original balances of the SBA Section 7(a) Loans
was as follows:
<PAGE>
The distribution of the original balances of the Unguaranteed Interests
was as follows:
<PAGE>
The distribution of the principal balances of the SBA Section 7(a)
Loans as of the Cut-Off Date was as follows:
<PAGE>
The distribution of the principal balances of the Unguaranteed
Interests as of the Cut-Off Date was as follows:
<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.........................................9.0%-13.0%
Range of ages.........................................0 to 12.0 months
Range of original terms...............................36 to 300 months
Range of gross margins....................................75% to 4.00%
Range of original debt service Coverage ratios..........1.20% to 2.50%
- --------
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>
1994 1995 1996 1997
Quarter ---- ---- ---- ----
- ------
<S> <C> <C> <C> <C>
1st 6.00% 8.50% 8.50% 8.25%
2nd 6.25% 9.00% 8.25% 8.50%
3rd 7.25% 9.00% 8.25% 8.50%
4th 7.75% 8.75% 8.25% __ __
</TABLE>
The values set forth in the table above are historical and may not be indicative
of future values of the Prime Rate.
<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.
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
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.
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. 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.
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 FTA, 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 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. 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
October, November and December 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 January 15,
2025, 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 SBA Loans delivered at closing for
the September 1997 scheduled payments are 10.160% and 10.187%, respectively per
the chart below and the initial note rates for the SBA loans delivered at the
subsequent funding for the December 1997 scheduled payments are 10.160% and
10.l87%, respectively per the chart below, 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 September 1, 1997, (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 September 1997 at the respective percentages of CPR set forth in the
table and (v) the Certificates will be issued on September 29, 1997. 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>
10.160 2.060 41,015,267.65 254
10.187 2.087 74,290,300.35 207
10.160 2.060 8,784,040.14 259
10.187 2.087 15,910,391.86 211
</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.
<PAGE>
WEIGHTED AVERAGE LIVES OF THE CLASS A AND CLASS B CERTIFICATES
<TABLE>
<CAPTION>
Earliest Retirement
CPR Weighted Average Life at Servicer's
(Years) (2) Option(3)
<S> <C> <C>
0% 12.310 4/15/16
4% 9.352 7/15/14
8% 7.285 11/15/12
12% 5.812 9/15/10
</TABLE>
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 $596 million of SBA Section 7(a) Loans during
calendar 1996 and, at December 31, 1996 and June 30, 1997, were servicing a
portfolio of SBA Section 7(a) Loans aggregating approximately $2.2 billion and
$2.4 billion, respectively.
The Parent, headquartered in Sacramento, California and 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 June 30, 1997, the Parent maintained 227 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 June 30, 1997, the Sellers originated SBA Section 7(a) Loans through
9 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, 1996, 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.
SBA LOAN DELINQUENCIES AND CHARGE-OFFS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
As and for the Years As and for the
Ended December 31, Six Months
Ended June 30,
1994 1995(1) 1996(1) 1997(1)
<S> <C> <C> <C> <C>
30-59 days past due(2) ..................... 0.89% 1.01% 1.08% 0.95%
60-89 days past due(2) ..................... 0.41% 0.35% 0.60% 0.60%
90+ days past due(2) ....................... 3.67% 3.97% 4.21% 4.64%
Unguaranteed portion of
SBA Loans in the serviced
loan portfolio(3)....................... $353,037 $437,829 $627,563 $712,772
Loans charged-off, net...................... $ 1,293 $1,732 $2,533 1,619
Loans charged-off, net as a
percentage of the
unguaranteed portion of the
SBA Loans in the serviced
loan portfolio(4) ..................... 0.37% 0.40% 0.41% 0.46%
Total SBAss.7(a) Loan serviced
portfolio(5)............................ $1,605,645 $1,907,050 $2,282,384 $2,461,069
</TABLE>
- --------------------
(1) Includes, 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.
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.
RECENT DEVELOPMENTS
On September 15, 1997 the Representative announced estimates that
annualized net charge-offs on the auto loan portfolio of TMS Auto Holdings, Inc.
("Auto Holdings"), one of its subsidiaries, will be as much as 7% for the
quarter ended September 30, 1997 (as compared to 3.82% for the quarter ending
June 30, 1997) and thirty day-and- over delinquencies at September 30, 1997 will
be as much as 10% (as compared to 4.25% at June 30, 1997). The Representative
believes that deterioration in the performance of the auto loan portfolio is
largely attributable to inconsistent application of underwriting standards
resulting in a diminution in the credit quality of auto loan originations. The
overall deterioration in the credit quality of such portfolio also put pressure
on servicing resources which further contributed to the decline in performance.
The Representative believes that the decentralization of processing through the
Auto Holdings' branch network together with the rapid growth of Auto Holdings'
auto loan originations led to less control over the credit quality of such loan
originations. In response to these developments, the Representative is
implementing a number of changes affecting Auto Holdings including strengthening
the quality of the management team, centralizing more processing functions and
consolidating its branch structure. The Representative anticipates a reduction
in auto loan originations while these changes are being implemented. No auto
loan receivables are included in any Pool of Loans.
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 Certificates will be issued in book-entry form 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 FTA'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 October, November and December 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 and may be exercised only
if the Spread Balance equals the then applicable Specified
Spread Account Requirements;
(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 October 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 December 22, 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 November 30, 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").
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 the Unguaranteed Interests in the 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 December 22, 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 October,
November and December 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 October, November and December 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.
Notwithstanding the foregoing, the Servicer shall not be entitled to
receive Reimburseable Amounts pursuant to clause (vi) above until the first
Remittance Date on which the Spread Balance equals the then applicable 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
FTA'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 October,
November and December 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
September 1997 with a August 31, 1997 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):
August 31................. 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 August 31, 1997
after application of all payments collected on or
before such date.
September 1-30............. 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.
September 30................ First Record Date. Distribution on
October 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.
October 9 ................... Determination Date. The Servicer
determines the amount of principal and interest
that will be distributed to the Certificateholders
on October 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.
October 15 ................. Remittance Date. The Trustee or the
Paying Agent will distribute to Certificateholders
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 0.50% 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.
MONTHLY ADVANCES
The Servicer is required to remit to the Trustee no later than the
Determination Date for deposit in the Certificate Account the amount of the
Monthly Advance, if any, by which (i) 30 days' interest at a rate equal to the
then applicable weighted average Class A and Class B Remittance Rates plus the
Adjusted SBA Loan Remitt ance 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 FTA (plus, for the Remittance Dates in October,November
and December 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). The Servicer is not required to make monthly
advances which it determines, in good faith, would be nonrecoverable from
amounts received in respect of the SBA Loans.
Monthly Advances are reimbursable in the first instance from late
collections of interest, Liquida tion 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.
REGISTRATION OF CERTIFICATES
The Certificates will initially be registered in the name of Cede, the
nominee of DTC. 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"). Notwithstanding the prior sentence, if at the time the Servicer
determines to exercise such option, and the unsecured long term debt obligations
of the Servicer are not rated at least Baa3 by Moody's and BBB- by Duff &
Phelps, if such Rating Agencies are still rating the Certificates, the Servicer
shall give such Rating Agencies prior written notice of the Servicer's
determination to exercise such option and shall not exercise such option,
without the consent of each such Rating Agency with an opinion of counsel, in
form and substance reasonably satisfactory to each such Rating Agency, that the
exercise of such option would not be deemed a fraudulent conveyance by the
Servicer; 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 LLP, 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 AS REAL PROPERTY LOANS
The Certificates generally 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 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.
<PAGE>
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 the income of which is
subject to United States federal income taxation regardless of its source.
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.
<PAGE>
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 September
26, 1997 (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 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 LLP, New York, New York. Stroock & Stroock & Lavan LLP 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.
<PAGE>
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>
INDEX OF PRINCIPAL TERMS
PAGE
Account......................................................S-73
Act..........................................................S-42
Additional Fee................................................S-5
Additional Fee SBA Loans......................................S-5
Adjusted SBA Loan Remittance Rate............................S-17
Adjustment Date...............................................S-9
Aggregate Class A Certificate Principal Balance..............S-73
Aggregate Class B Certificate Principal Balance..............S-73
Agreement.....................................................S-4
Annual Expense Escrow Amount.................................S-73
Assignee.....................................................S-15
Assignment of Mortgage.......................................S-73
Available Funds...............................................S-8
BIF..........................................................S-73
Book-entry Certificates......................................S-57
Business Day.................................................S-73
Capitalized Interest Account..................................S-7
Cede.........................................................S-19
Cedel........................................................S-19
Cedel Participants...........................................S-58
Certificate Account..........................................S-52
Certificate Owners...........................................S-57
Certificate Register.........................................S-73
Certificate Registrar........................................S-73
Certificateholder or Holder..................................S-73
Certificates..................................................S-4
Certified Lender.............................................S-42
Class A Carry-Forward Amount.................................S-11
Class A Certificates..........................................S-4
Class A Interest Distribution Amount.........................S-54
Class A Percentage...........................................S-11
Class A Principal Distribution Amount........................S-10
Class A Remittance Amount....................................S-11
Class A Remittance Rate.......................................S-8
Class B Carry-Forward Amount.................................S-11
Class B Certificates..........................................S-2
Class B Interest Distribution Amount.........................S-54
Class B Principal Distribution Amount........................S-10
Class B Remittance Amount....................................S-11
Class B Remittance Rate.......................................S-8
Class A Certificate Balance..................................S-10
Class B Certificate Balance..................................S-10
Class B Percentage...........................................S-11
Closing Date..................................................S-2
CLP..........................................................S-48
Code.........................................................S-63
Collateral...................................................S-73
Commercial Property..........................................S-73
Compensating Interest........................................S-17
Cooperative..................................................S-58
CPR.........................................................S-44
Curtailment..................................................S-74
Cut-Off Date..................................................S-6
Definitive Certificates......................................S-19
Designated Depository Institution............................S-74
Determination Date...........................................S-74
DTC..........................................................S-19
Due Date.....................................................S-74
Due Period...................................................S-10
Duff & Phelps................................................S-19
ERISA........................................................S-19
Euroclear.....................................................S-1
Euroclear Operator...........................................S-58
Event of Default.............................................S-74
Excess Payments..............................................S-74
Excess Proceeds..............................................S-74
Excess Spread.................................................S-5
Exemption....................................................S-66
Expense Account..............................................S-74
Extra Interest...............................................S-54
Extra Interest Percentage....................................S-54
FDIC.........................................................S-74
Federal Tax Counsel..........................................S-18
FHLMC........................................................S-74
FNMA.........................................................S-74
Foreclosed Property..........................................S-74
Foreclosed Property Disposition..............................S-74
FTA...........................................................S-5
FTA's Fee.....................................................S-5
Funding Period................................................S-7
Global Securities.............................................S-1
GPP..........................................................S-48
grantor trust................................................S-18
Guaranteed Interest...........................................S-5
Holders......................................................S-19
Initial Class A Certificate Principal Amount..................S-4
Initial Class B Certificate Principal Amount..................S-4
Initial Deposit..............................................S-12
Insurance Proceeds...........................................S-75
Interest Accrual Period.......................................S-7
IRS..........................................................S-63
Liquidated SBA Loan..........................................S-75
Liquidation Proceeds.........................................S-75
Loan Guaranty Agreement......................................S-75
Majority Certificateholders..................................S-75
Monthly Advance..............................................S-16
Monthly Payment..............................................S-75
Moody's......................................................S-19
Mortgage.....................................................S-75
Mortgaged Property...........................................S-75
MSNY..........................................................S-1
Multi-Party Agreement........................................S-16
Net Liquidation Proceeds....................................S-75
Note Rates...................................................S-26
Notes.........................................................S-6
Obligor.......................................................S-5
OID..........................................................S-18
Opinion of Counsel...........................................S-75
Original Class A Certificate Principal Balance...............S-75
Original Class B Certificate Principal Balance...............S-75
Original Pool Principal Balance...............................S-6
Parent.......................................................S-48
Paying Agent.................................................S-75
Percentage Interest..........................................S-75
Permitted Instruments........................................S-76
Person.......................................................S-76
Physical Certificates........................................S-59
PLP..........................................................S-48
Pool Principal Balance.......................................S-76
Preferred Lender.............................................S-42
Pre-Funded Amount.............................................S-7
Premium Protection Fee........................................S-5
Prime Rate....................................................S-9
Principal and Interest Account...............................S-76
Principal Balance............................................S-76
Principal Prepayment.........................................S-77
Prior Lien...................................................S-77
Prospectus....................................................S-2
Purchase Price...............................................S-63
Record Date..................................................S-12
Registered Holder............................................S-77
Reimbursable Amounts.........................................S-77
Released Mortgaged Property Proceeds.........................S-57
Relevant Depositary..........................................S-57
REMIC........................................................S-18
Remittance Date..............................................S-12
Representative................................................S-1
Residential Property.........................................S-77
Responsible Officer..........................................S-77
SAIF.........................................................S-77
SBA...........................................................S-1
SBA File.....................................................S-77
SBA Form 1086................................................S-77
SBA Loan Interest Rate.......................................S-77
SBA Loan Pool.................................................S-4
SBA Loan Schedule............................................S-77
SBA Loan-Backed Certificates..................................S-1
SBA Notes....................................................S-23
SBA Rules and Regulations....................................S-78
Section 7(a) Program.........................................S-42
Sellers.......................................................S-1
Servicer......................................................S-1
Servicer's Certificate.......................................S-78
Servicing Advances...........................................S-18
Servicing Fee...............................................S-18
Servicing Officer............................................S-78
Shortfall Amount.............................................S-20
simple interest..............................................S-23
Special Remittance Date.......................................S-7
Specified Spread Account Requirement.........................S-13
Spread.......................................................S-63
Spread Account...............................................S-12
Spread Account Agreement.....................................S-12
Spread Account Custodian.....................................S-78
Spread Account Depositor.....................................S-12
Spread Balance...............................................S-12
Subsequent SBA Loans..........................................S-1
Subservicer..................................................S-78
Subservicing Agreement.......................................S-78
Successor Servicer...........................................S-61
Tax Return...................................................S-78
Termination Price............................................S-61
Terms and Conditions.........................................S-58
TMSIC.........................................................S-1
Trust Fund....................................................S-1
Trustee.......................................................S-4
UCC..........................................................S-16
Underwriter..................................................S-20
Underwriting Agreement.......................................S-67
Unguaranteed Interests........................................S-1
Unguaranteed Percentage.......................................S-6
United States person.........................................S-66
Weighted Average Life........................................S-44
* 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 In terest 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 P-1 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 Bal ance 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 interest 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 pursuant 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 FTA, (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>
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 based upon a year consisting of 12 months of 30
days each. 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 based upon a year
consisting of 12 months of 30 days each. 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.
<PAGE>
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 or (iii) an estate or trust
the income of which is includible in gross income for United States tax
purposes, regardless of its source. This summary does not deal with all aspects
of U.S. Federal income tax withholding that may be relevant to foreign holders
of the Global Securities. Investors are advised to consult their own tax
advisors for specific tax advise concerning their holding and disposing of the
Global Securities.
<PAGE>
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
$140,000,000 ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE
[INSERT MONEY STORE LOGO] 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
THE MONEY STORE SBA LOAN-BACKED AN OFFER TO BUY, THE CERTIFICATES BY ADJUSTABLE
RATE CERTIFICATES, SERIES ANYONE IN ANY JURISDICTION IN WHICH 1997-1, 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 $ 130,200,000 Class A
Certificates PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
NEITHER $9,800,000 Class B Certificates THE DELIVERY OF THIS PROSPECTUS
SUPPLEMENT AND THE ACCOMPANYING (Approximate) 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.............................................
Risk Factors.................................................
The SBA Loan Pool............................................
The SBA Loan Program.........................................
Yield, Maturity and Prepayment
Considerations...............................................
The Sellers..................................................
Description of the Agreement and the
Certificates.................................................
The Trustee..................................................
Federal Income Tax Consequences..............................
ERISA Considerations.........................................
Legal Investment.............................................
Underwriting.................................................
Ratings......................................................
Legal Matters................................................
Financial Information........................................
Annex I......................................................
Index of Principal Terms.....................................
Certain Definitions..........................................
PROSPECTUS
Prospectus Supplement.......................................
Available Information.......................................
Reports to Certificateholders...............................
Incorporation of Certain Documents by
Reference...................................................
Summary of Terms............................................
Risk Factors.................................................
The Trusts...................................................
Use of Proceeds..............................................
The Representative and the Originators
The SBA Loan Lending Program.................................
Description of the Certificates..............................
Credit Enhancement...........................................
Maturity, Prepayment and Yield
Considerations...............................................
The Agreements...............................................
Certain Legal Aspects of the SBA Loans
Federal Income Tax Consequences...............................
ERISA Considerations..........................................
Legal Investment Considerations...............................
Plan of Distribution..........................................
Legal Matters.................................................
Financial Information.........................................
Rating........................................................
Index of Principal Terms......................................
<PAGE>
$140,000,000
[INSERT MONEY STORE LOGO]
The Money Store SBA Loan-Backed Adjustable Rate
Certificates, Series 1997-1
$130,200,000 Class A Certificates
$9,800,000 Class B Certificates
(Approximate)
PROSPECTUS SUPPLEMENT
Prudential Securities Incorporated
September , 1997
PROSPECTUS
THE MONEY STORE INC.
(REPRESENTATIVE)
THE MONEY STORE ASSET BACKED CERTIFICATES
THE MONEY STORE ASSET BACKED NOTES
(ISSUABLE IN SERIES)
This Prospectus relates to The Money Store Asset Backed Certificates
(the "Certificates") and The Money Store Asset Backed Notes (the "Notes" and
collectively with the Certificates, the "Securities") described herein, issuable
in one or more Series (each a "Series"), which may be sold from time to time on
terms determined at the time of sale and described in the related Supplement to
this Prospectus (each a "Prospectus Supplement"), evidencing specified interests
in, or rights to receive payments from, 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 one or more 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 commercial loans with similar characteristics (the "Non-SBA Loans," and
collectively with the SBA Loans, the "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 and/or Notes.
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 of the
related Securities 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. Securities may also be entitled to the
benefits of insurance policies, cash accounts, letters of credit, financial
guaranty insurance policies, third party guarantees, guaranties of The Money
Store, supplemental interest payments or other forms of credit enhancement,
maturity protection or derivative instruments, to the extent described in the
related Prospectus Supplement. The Prospectus Supplement for each Series of
Securities 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 20 HEREIN FOR A DISCUSSION OF CERTAIN RISK
FACTORS WHICH SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SECURITIES
OFFERED HEREBY.
The date of this Prospectus is September 11, 1997.
<PAGE>
Each Series of Securities will be issued in one or more classes (each,
a "Class"). Each Class of Securities of any series will represent the right to
receive, or be secured by, a specified amount of payments of principal and/or
interest on the related Trust Assets in the manner described herein and in the
related Prospectus Supplement. The right of each Class of Securities to receive
payments may be senior or subordinate to the rights of one or more of the other
Classes of such Series. The right of the holders of any Class of Notes
("Noteholders") and the right of the holders of any Class of Certificates
("Certificateholders" and collectively with the Noteholders, "Securityholders"
or "Holders") to receive any distributions of principal and interest will be set
forth in the related Prospectus Supplement. A Series may include two or more
Classes of Certificates and/or Notes which differ as to the timing and priority
of payment, interest rate or amount of distributions in respect of principal or
interest or both. A Series may include one or more Classes of Certificates
and/or Notes entitled to distributions in respect of principal, with
disproportionate, nominal or no interest distributions, or to interest
distributions, with disproportionate, nominal or no distributions in respect of
principal. Distributions on Certificates of any Series will be subordinated to
prior payments due on the related Notes, if any, to the extent described herein
and in the related Prospectus Supplement. The Securities of each Series will
represent fractional undivided ownership interests in the related Trust.
Distributions to Holders of Securities 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 at which any Class of Certificates (the
"Pass-Through Rate") or the rate at which any Class of Notes (the "Interest
Rate") bear interest or the method of calculating such Pass-Through Rate or
Interest Rate, which may be fixed or variable, will be set forth in the related
Prospectus Supplement. Distributions on the Certificates and/or Notes of a
Series will be made only from the assets of the related Trust and certain
related property. The Pass-Through Rate for a Class of Certificates or the
Interest Rate for a Class of Notes that bear interest based upon a floating rate
of interest, as specified in the related Prospectus Supplement, may base such
floating rate upon any of following: (i) the auction procedures described herein
(such Securities being referred to herein as "Auction Rate Securities"), (ii)
the London interbank offered rate for U.S. dollar deposits for a specified
period ("LIBOR") plus an amount set forth in the related Prospectus Supplement ,
(iii) the average bond equivalent rates of weekly auctions of Treasury bills for
a specified period (the "T-Bill Rate") plus an amount set forth in the related
Prospectus Supplement, (iv) the prime lending rate of certain leading U.S.
commercial banks plus an applicable spread, as described in the related
Prospectus Supplement (the "Prime Rate"), or (v) any such other method or
procedures used to determine the floating rate of interest as may be described
in the applicable Prospectus Supplement.
The Securities will not represent an obligation of or interest in the
Representative (except for any Guaranty (as defined herein) issued in connection
with a Series), the Originators, or any affiliate thereof and, except to the
extent described herein or specified in the related Prospectus Supplement, will
not be insured or guaranteed by any governmental agency or instrumentality or
(except as specified in the Prospectus Supplement) by any other person. Unless
otherwise specified in the related Prospectus Supplement, the only obligations
of the Representative or the Originators with respect to a Series of Securities
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 and/or Notes will be limited to its contractual servicing
obligations. If the amount available for distribution to Holders 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 Holders, to the extent
such deficiency is attributable to delinquent payments of principal and/or
interest during the immediately preceding Due Period (as defined herein). See
"Description of the Securities--Monthly Advances and Compensating Interest."
The yield to Holders on each Class of Certificates and/or Notes 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 Securities 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 Securities will
be set forth in the related Prospectus Supplement. There can be no assurance
that a secondary market for the Securities will develop, or if it does develop,
that it will continue. This Prospectus may not be used to consummate sales of a
Series of Securities 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 and/or
Notes to be offered hereunder, among other things, will set forth with respect
to such Series of Certificates and/or Notes: (i) the aggregate principal amount,
the Pass-Through Rate, Interest 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 and/or Notes; (ii)
certain information concerning the Trust Assets and insurance policies, cash
accounts, letters of credit, financial guaranty insurance policies, third party
guarantees, guaranty of The Money Store, supplemental interest payments or other
forms of credit enhancement or maturity protection or other derivative
instruments, if any, relating to the Pools or all or part of the related
Certificates and/or Notes; (iii) the specified interest of each Class of
Certificates and/or Notes 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 and/or Notes, 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 and/or Notes.
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 Securities. 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 Securities offered
hereby and thereby nor an offer of the Securities 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 SECURITYHOLDERS
Periodic and annual reports concerning any Securities and the related
Trust will be provided to the Securityholders as described in the related
Prospectus Supplement. If specified in the related Prospectus Supplement, a
Series of Certificates and/or Notes may be issuable in book-entry form. In such
event, the related Certificates and/or Notes will be registered in the name of
Cede & Co. ("Cede"), the nominee of The Depository Trust Company ("DTC") or
another nominee. All reports will be provided to Cede or such other nominee,
which in turn will provide such reports to Participants and Indirect
Participants (as defined herein) of DTC or such other entities as described in
the related Prospectus Supplement. Such Participants and Indirect Participants
will then forward such reports to the beneficial owners of Securities. See
"Description of the Securities - 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 Securities issued by such Trust shall be
deemed to be incorporated by reference in this Prospectus and the related
Prospectus Supplement and to be a part hereof from the date of the filing of
such documents. With respect to any Class of Certificates and/or Notes that is
supported by a Guaranty of The Money Store (a "Guaranty"), The Money Store's
Annual Report on Form 10-K for the year ended December 31, 1996, and Quarterly
Reports on Form 10-Q for the periods ended March 31 and June 30, 1997, which
have been filed with the Commission, are hereby incorporated by reference in
this Prospectus and the related Prospectus Supplement . With respect to any
Class of Securities that is supported by a Guaranty, all documents filed by The
Money Store pursuant to Section 13(a), 13(c), 14 or 15(d) of the Securities
Exchange Act of 1934, as amended, subsequent to the date of this Prospectus and
prior to the termination of the offering of the Securities shall be deemed to be
incorporated by reference into this Prospectus and the related Prospectus
Supplement and to be a part hereof from the respective dates of filing 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........................... The Money Store Asset Backed Certificates
(the "Certificates") and The Money Store
Asset Backed Notes (the "Notes"). Notes are
issuable from time to time in Series
pursuant to an Indenture (an "Indenture"),
and Certificates are issuable from time to
time in Series pursuant to either a Pooling
and Servicing Agreement (a "Pooling and
Servicing Agreement") or a Trust Agreement
(a "Trust Agreement"). As used herein,
"Agreements" means, collectively, with
respect to a Series of Certificates, the
related Pooling and Servicing Agreement or
the related Trust Agreement, with respect
to a Series of Notes, the related Indenture
and the related Sale and Servicing
Agreement, as the context requires, and
with respect to a Series of Securities, the
relevant combination of Agreements for such
Series. Each Certificate of a Series will
evidence an interest in the Trust Fund or
Trust Funds for such Series, as specified
in the related Prospectus Supplement. Each
Series of Securities will consist of one or
more Classes, each Class may differ in,
among other things, the amounts allocated
to and the priority of principal and
interest payments. The Securities of each
Class will be issued in fully registered
form in the denominations specified in the
related Prospectus Supplement. If so
specified in the related Prospectus
Supplement, the Securities or certain
Classes of such Securities offered thereby
may be available in book- entry form only.
Issuers........................... Certain trust funds (each, a "Trust")
represented by The Money Store or its
affiliates, the primary assets of which
will be the right to receive payments and
other recoveries attributable to one or
more Pools of Loans and certain other Trust
Assets.
Representative
and Master
Servicer.......................... The Money Store Inc. ("The Money Store"),
a New Jersey corporation or certain of its
affiliates. The Prospectus Supplement
relating to any Series of Certificates
and/or Notes 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"), on the terms and
conditions set forth in the related Pooling
and Servicing Agreement or Sale and
Servicing Agreement (a "Sale and Servicing
Agreement"). 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 Securities will evidence fractional
undivided ownership interests in or rights
to receive payments from 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 (i) the
Unguaranteed Interest of 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 SBAss.7(a) Loan, which
related SBAss.7(a) Loan may or may not be
part of a Trust Fund (the "Section 7(a)
Companion Loans"), (iii) loans originated
under the SBA's 504 program ("SBA 504
Loans," and collectively with the
SBAss.7(a) Loans and the Section 7(a)
Companion Loans, the "SBA Loans") and (iv)
loans originated pursuant to the
Conventional Commercial Loan Program (as
defined below) that have many similar
characteristics to SBAss.7(a) Loans or SBA
504 Loans but were not originated pursuant
to an SBA program (the "Non-SBA Loans").
The SBA Loans and the Non-SBA Loans are
referred to herein collectively as the
"Loans".
The "Unguaranteed Interest" will equal (i)
as to any SBA ss.7(a) Loan, all payments
and other recoveries on such SBA ss.7(a)
Loan not constituting the Guaranteed
Interest therein and certain other amounts
to be described in a Prospectus Supplement
that will not be transferred to the related
Trust and (ii) as to any Section 7(a)
Companion Loan or SBA 504 Loan or Non-SBA
Loan, all payments and other recoveries on
such Section 7(a) Companion Loan, SBA 504
Loan or Non-SBA Loan.
The payment terms of the 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 a 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 a Loan for
such periods and under such
circumstances as may be specified in
the related Prospectus Supplement.
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 Loan, and
the amount of any difference may be
contributed from funds supplied by the
seller of the properties securing the
related Loan (the "Mortgaged
Properties") or another source or may
be treated as accrued interest and
added to the principal of the Loan.
(b) Principal may be payable on a level
basis to fully amortize the 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 Loan.
(c) Monthly payments of principal and
interest may be fixed for the life of
the Loan, may increase over a
specified period of time ("graduated
payments"), or may change from period
to period. 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 Loan or may
adjust or decline over time, and may
be prohibited for the life of the Loan
or for certain periods ("Lockout
Periods"). Certain 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 Loans may
permit prepayments without payment of
a fee unless the prepayment occurs
during specified time periods. The
Loans may include due-on-sale clauses
which permit the mortgagee to demand
payment of the entire Loan in
connection with the sale or certain
other transfers of the related
Mortgaged Properties. Other Loans may
be assumable by persons meeting the
then applicable underwriting standards
of the originator.
The Mortgaged Properties relating to Loans
may be located in any one of the fifty
states, the District of Columbia, the
Commonwealth of Puerto Rico or any other
commonwealth, territory or possession of
the United States. 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 Loans
underlying a given Series of Securities may
have been originated by the Representative,
the Originators or affiliates thereof and
certain 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 ss.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 ss.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 the lien of the related SBA
ss.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 ss.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 Non-SBA Loans will have been originated
or purchased by the Originators under the
programs described under "The Trusts --
Non-SBA Loans."
The Prospectus Supplement for each Series
of Securities will specify with respect to
all 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 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 Loans,
(iii) the types of Mortgaged Properties
and/or other assets securing the Loans,
(iv) the original terms to maturity of the
Loans, (v) the expected weighted average
term to maturity of the 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
Loans, (vii) the expected weighted average
Loan-to-Value Ratio of the Loans, (viii)
the expected weighted average Mortgage Rate
and ranges of Mortgage Rates borne by the
Loans, (ix) in the case of 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 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 or other
derivative instruments to be provided with
respect to all or any 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 Securities may exceed the
principal balance of the Trust Assets
initially being delivered to the Trustee.
Cash in an amount up to the amount of 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
current 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 Securities 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, 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 and/or Notes.
Multi-Party
Agreement......................... In connection with each issuance of
Securities relating to SBAss.7(a) Loans,
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 SBAss.7(a)
Loans and the proceeds thereof and the
consent of the SBA to the transactions
contemplated by the related Agreement.
Revolving Period and
Amortization Period;
Retained Interest................. If the related Prospectus Supplement so
provides, there may be a period commencing
on the date of issuance of a Class or
Classes of Notes and/or Certificates of a
Series and ending on the date set forth in
the related Prospectus Supplement (each, a
"Revolving Period") during which limited or
no principal payments will be made to one
or more Classes of Notes and/or
Certificates of the related Series as are
identified in such Prospectus Supplement.
Some or all collections of principal
otherwise allocated to such Classes of
Notes or Certificates may be (i) utilized
during the Revolving Period to acquire
additional Trust Assets which satisfy the
criteria described under "The
Trusts--General" and the criteria set forth
in the related Prospectus Supplement, (ii)
held in an account and invested in
Permitted Investments (as defined herein),
for later distribution to Securityholders,
(iii) applied to those Notes or
Certificates for such Series, if any,
specified in the related Prospectus
Supplement as then are in amortization, or
(iv) otherwise applied as specified in the
related Prospectus Supplement.
An "Amortization Period" is the period
during which an amount of principal is
payable to Holders of Securities which,
during the Revolving Period, were not
otherwise entitled to such payments. If so
specified in the related Prospectus
Supplement, during an Amortization Period
all or a portion of principal collections
on the Loans may be applied as specified
above for a Revolving Period and, to the
extent not so applied, will be distributed
to the Classes of Notes and/or Certificates
for such Series specified in the related
Prospectus Supplement as then being
entitled to payments of principal. In
addition, if so specified in the related
Prospectus Supplement, amounts deposited in
certain accounts for the benefit of one or
more Classes of Notes or Certificates for
such Series may be released from time to
time or on a specified date and applied as
a payment of principal on such Classes of
Notes and/or Certificates. The related
Prospectus Supplement will set forth the
circumstances which will result in the
commencement of an Amortization Period.
Each Series which has a Revolving Period
may also issue to the Representative or one
of its affiliates a certificate evidencing
an undivided beneficial interest (a
"Retained Interest") in such Series not
represented by the other Securities issued
by the related Trusts. As further described
in the related Prospectus Supplement, the
value of such Retained Interest will
fluctuate as the amount of Notes and
Certificates of the related Series of
Securities outstanding is reduced.
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 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"). In addition, a Series may
include one or more Series entitled to (i)
principal payments with disproportionate,
nominal or no interest payments or (ii)
interest payments with disproportionate,
nominal or no principal payments (such
Certificates, "Strip Certificates").
Certain Series or Classes of Certificates
may be covered by a 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, or derivative
products, 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 a floating 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
Pass-Through Rate for a Class of
Certificates that pay interest based upon a
floating rate of interest, as specified in
the related Prospectus Supplement, may base
such floating rate upon any of following:
(i) the auction procedures for Auction Rate
Securities described herein, (ii) LIBOR
plus an amount set forth in the related
Prospectus Supplement, (iii) the T-Bill
Rate plus an amount set forth in the
related Prospectus Supplement, (iv) the
Prime Rate plus an applicable spread, as
set forth in the related Prospectus
Supplement, or (v) any such other method or
procedures used to determine the floating
rate of interest as may be described in the
applicable 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
Securities."
With respect to any Series of Securities
including one or more Classes of Notes,
distributions in respect of the
Certificates may be subordinated in
priority of payment to payments on the
Notes of such Series, to the extent
specified in the related Prospectus
Supplement.
Description of the Notes.......... Any Series of Securities may include one or
more Classes of Notes, as specified in the
related Prospectus Supplement, each of
which will be issued pursuant to an
Indenture and will be treated as debt
obligations of the related Trust.
Unless otherwise specified in the related
Prospectus Supplement, Notes will be
available for purchase in denominations of
$1,000 and integral multiples of $1,000 (or
such other accounts as may be set forth in
a Prospectus Supplement), except that one
Note of each Class may be issued in a
different denomination, in book-entry form
or in definitive form, as specified in the
related Prospectus Supplement. See
"Description of the Securities."
Each Class of Notes will have a stated
principal amount and will bear interest at
the Interest Rate or Rates as specified in
the related Prospectus Supplement, which
may be different for each Class of Notes
and may be fixed, variable, adjustable, or
any combination of the foregoing. The
related Prospectus Supplement will specify
the Interest Rate for each Class of Notes
or the method for determining the Interest
Rate. The Interest Rate for a Class of
Notes that pay interest based upon a
floating rate of interest, as specified in
the related Prospectus Supplement, may base
such floating rate upon any of following:
(i) the auction procedures for Auction Rate
Securities described herein, (ii) LIBOR
plus an amount set forth in the related
Prospectus Supplement, (iii) the T-Bill
Rate plus an amount set forth in the
related Prospectus Supplement, (iv) the
Prime Rate plus an applicable spread, as
set forth in the related Prospectus
Supplement, or (v) any such other method or
procedures used to determine the floating
rate of interest as may be described in the
applicable Prospectus Supplement. Each Note
may also represent a fractional undivided
interest in, or be entitled to receive
payments from, monies on deposit, if any,
in the Pre-Funding Account as specified in
the related Prospectus Supplement and any
other account established for the benefit
of Noteholders, as specified in the related
Prospectus Supplement.
A Series may include two or more Classes of
Notes which differ as to the timing and
priority of payment, seniority, allocations
of loss, Interest Rate or amount of
payments of principal or interest, or as to
which payments of principal or interest may
or may not be made upon the occurrence of
specified events or on the basis
collections from designated portions of the
Trust Assets for such Series. In addition,
a Series may include one or more Classes of
Notes entitled to (i) principal payments
with disproportionate, nominal or no
interest payments or (ii) interest payments
with disproportionate, nominal or no
principal payments (such Notes, "Strip
Notes"). A Series of Notes may include one
or more Classes of senior Notes
(collectively, "Senior Notes") which
receive certain preferential treatment
specified in the related Prospectus
Supplement with respect to one or more
Classes of subordinate Notes (collectively,
the "Subordinated Notes"). Certain Series
or Classes of Notes may be covered by a
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 or
derivative instruments, as described herein
and in the related Prospectus Supplement.
Credit
Enhancement ...................... The Trust Assets in a Trust or the
Securities 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 all Certificateholders
will be subordinated to the rights of all
Noteholders of a Series to receive
distributions to the extent described in
the related Prospectus Supplement, with
respect to the Trust Assets and other
assets in the related Trust. The rights
of the holders of Subordinated Certificates
and/or Subordinated Notes, as the case may
be (collectively, "Subordinated
Securities"), of a Series to receive
distributions will be subordinated to the
rights of the holders of the Senior
Certificates and/or Senior Notes, as the
case may be (collectively, "Senior
Securities"), 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 Securities 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
Securities 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 Securities 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 Distribution Account (as
defined herein) to the extent described in
the related Prospectus Supplement. The
protection afforded to the holders of
Senior Securities through subordination
also may be accomplished by allocating
certain types of losses or delinquencies to
the related Subordinated Securities to the
extent described in the related Prospectus
Supplement.
If so specified in the related Prospectus
Supplement, the same Class of Securities
may constitute Senior Certificates and/or
Senior Notes, as the case may be, with
respect to certain types of payments or
certain losses or delinquencies and
Subordinated Certificates and/or
Subordinated Notes, as the case may be,
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
and/or Subordinated Notes, as the case may
be, 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 and/or
Subordinated Notes, as the case may be, 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 holders of Senior
Certificates and/or Senior Notes, as the
case may be, or released to holders of
Subordinated Certificates and/or
Subordinated Notes, as the case may be,
from the related Trust.
B. Guaranty
Insurance
Policy........................ A certificate or note guaranty insurance
policy (each a "Guaranty Insurance Policy")
may be obtained and maintained for each
Class or Series of Certificates and/or
Notes. Guaranty Insurance Policies
generally unconditionally and irrevocably
guarantee that the full amount of the
distributions of principal and interest
("Insured Payments"), 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 the Holders of the covered
Securities. 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 Loans, to guarantee
any specified rate of prepayments or to
provide funds to redeem Securities on any
specified date.
C. Spread
Amount........................ If so specified in the related Prospectus
Supplement, certain Classes of Certificates
and/or Notes 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
Securities. 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 Securities. 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 may 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 Securities 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
Securities 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
Securities.
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 Loans, limited in
scope, covering defaults on the related
Loans in an initial amount equal to a
specified percentage of the aggregate
principal balance of all 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 Loans 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 a Loan or a reduction by such court of
the principal amount of a 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
and/or Notes. In such case, credit support
may be provided by a cross-support feature
which requires that distributions be made
with respect to certain Certificates and/or
Notes evidencing interests in one or more
Trusts or asset groups prior to
distributions to other Certificates and/or
Notes 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 and/or Notes 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
Securities 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
Securities 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 and/or Notes may be entitled
to third-party payments to help provide
that the holders of such Securities receive
their unpaid principal on or prior to a
specified date.
J. The Guaranty.................. If so specified in the Prospectus
Supplement, and in order to provide
additional credit enhancement, The Money
Store may provide a guaranty of amounts due
on certain Classes of Certificates and/or
Notes. The amount and formula for
calculating such guaranty shall be as set
forth in the Prospectus Supplement.
K. Other Insurance,
Guarantees, Swaps,
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, other 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 Securities 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 hedge contract providing limited
protection against interest rate risks. If
provided in the related Prospectus
Supplement, interest and/or principal on
one or more Classes of the Securities of a
Series may be paid to Holders thereof in a
currency other than U.S. dollars. If so
provided, the Trust may, in connection
therewith, enter into one or more currency
rate swaps to provide limited protection
against foreign currency rate fluctuation
risks. One or more Classes of Securities
also may be issued in conjunction with a
put or call feature entitling (in the case
of a put) or obligating (in the case of a
call) the applicable Securityholders to
sell some or all of its Securities to the
party named in the applicable Prospectus
Supplement on the date or dates set forth
therein. Any such arrangements must be
acceptable to each nationally recognized
rating agency that provides a rating for
the related Series of Securities (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
Loan Remittance Rate (as defined herein
under "Description of the Securities--
Monthly Advances and Compensating
Interest") on the then outstanding
principal balance of the related Series of
Certificates and/or Notes 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 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 Loans
("Liquidation Proceeds"), amounts paid by
any insurer pursuant to any insurance
policy covering a 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 Loans as to
which the advances were made, and certain
other amount that would otherwise be
distributed on the Securities. The Master
Servicer will not be required to make any
Monthly Advances which it determines, in
good faith, would be nonrecoverable from
amount received in respect of the Loans.
See "Description of the Securities--Monthly
Advances and Compensating Interest."
Compensating
Interest.......................... If so specified in the related Prospectus
Supplement, with respect to each 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
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 Loan as of
the beginning of the related Due Period at
the applicable weighted average Adjusted
Loan Remittance Rate over (b) the amount of
interest actually received on the related
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 certain Classes of Certificates
or Notes, or certain other entities
specified in the related Prospectus
Supplement may have the option to effect
early retirement of a Series of Securities
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 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 Securities under the
circumstances and in the manner specified
in the related Prospectus Supplement and
herein under "The Agreement-- Termination;
Purchase of Loans."
Trustee ......................... The trustee or trustees under any
Agreement relating to a Series of
Securities (each, a "Trustee") will be
specified in the related Prospectus
Supplement. Additionally, any Co-Trustees,
Custodians or Co-Custodians will be set
forth in the related Prospectus Supplement.
Federal
Income Tax
Consequences...................... The federal income tax consequences of
the purchase, ownership and disposition of
the Securities 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"), and, if such election is not
made, whether the Trust is structured and
intended to be treated as a grantor trust,
a partnership or otherwise.
REMIC. If an election is to be made to
treat the Trust (or certain assets of the
Trust) for a Series of Securities 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 LLP,
special federal tax counsel ("Federal Tax
Counsel"), Certificates representing an
interest in the REMIC generally will be
considered "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 deduc tions, 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 may be classified as a
grantor trust for federal income tax
purposes and not as an association taxable
as a corporation or a taxable mortgage
pool. 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 "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.
PARTNERSHIP. If no election is to be made
to treat the Trust for a Series as a REMIC
and it is so specified in the related
Prospectus Supplement, the Trust will be
treated as a partnership for federal income
tax purposes, and Federal Tax Counsel will
deliver its opinion generally to the effect
that the Trust will not be an association
(or publicly traded partnership) taxable as
a corporation, or a taxable mortgage pool,
for federal income tax purposes. Each
Noteholder, by the acceptance of a Note of
such series, will agree to treat such Note
as indebtedness, and each
Certificateholder, by the acceptance of a
Certificate of such series, will agree to
treat the related Trust as a partnership in
which such Certificateholder is a partner
for federal income and state tax purposes.
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 Securities 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 Securities 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
Securities 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
Securities........................ Securities may be represented by global
certificates and/or notes registered in the
name of Cede, as nominee of DTC, or another
nominee. In such case, Securityholders will
not be entitled to receive definitive
certificates and/or notes representing such
Holders' interests, except in certain
circumstances described in the related
Prospectus Supplement. See "Description of
the Securities--Book-Entry Registration"
herein.
<PAGE>
RISK FACTORS
LIMITED LIQUIDITY
There can be no assurance that a secondary market for the Securities
will develop or, if a secondary market does develop, that it will provide
Holders of the Securities with liquidity of investment or that it will continue
for the lives of the Securities. In addition, transfers of certain Classes of
Securities may be restricted as set forth in the related Prospectus Supplement.
BOOK-ENTRY REGISTRATION
Issuance of the Certificates and/or Notes in book-entry form may
reduce the liquidity of such Securities in the secondary trading market since
investors may be unwilling to purchase Securities for which they cannot obtain
physical certificates or notes.
Since transactions in Certificates and Notes will, in most cases, be
able to be effected only through DTC, Direct or Indirect Participants and
certain banks, the ability of a Securityholder to pledge a Certificate or Note
to persons or entities that do not participate in the DTC system, or otherwise
to take actions in respect of such Securities may be limited due to lack of a
physical certificate representing such Securities.
Securityholders may experience some delay in their receipt of
distributions of interest on and principal of the Securities 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 Securityholders either directly or indirectly through
Indirect Participants or such other entities as described in the related
Prospectus Supplement. See "Description of the Securities--Book-Entry
Registration."
NATURE OF SECURITY
Certain of the 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
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 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. The Representative will not be able to quantify
the impact of any property value declines on the 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 Loans could be
higher than those historically experienced in the mortgage lending industry in
general.
Certain of the 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 Loan. The ability of a
Mortgagor to refinance such a 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 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 Securityholders of the
proceeds in such an environment may produce a lower return than that previously
received in respect of the related 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 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 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 Loan or permanently reduce the
principal balance of such Loan, thus either delaying or permanently limiting the
amount received by the Trust with respect to such Loan. Moreover, in the event a
bankruptcy court prevents the transfer of the related Mortgaged Property to a
Trust, any remaining balance on such Loan may not be recoverable.
Even assuming that the Mortgaged Properties and other collateral
securing a Loan provide adequate security for the Loans, substantial delays
could be encountered in connection with the liquidation of defaulted Loans and
corresponding delays in the receipt of related proceeds by the Securityholders
could occur. An action to foreclose on a Mortgaged Property securing a 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 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 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 a Loan fail to provide adequate security for the Loans and
insufficient funds are available from applicable Credit Enhancement,
Securityholders 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 Loans--
Environmental Considerations."
In each Agreement the Originators will represent and warrant that at
the time of origination of each 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 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.
PRE-FUNDING ACCOUNTS
If a Trust Fund includes a Pre-Funding Account and the principal
balance of additional Loans delivered to the Trust Fund during the Pre-Funding
Period is less than the original Pre-Funded Amount, the Holders of the
Securities of the related Series will receive a prepayment of principal as and
to the extent described in the related Prospectus Supplement. Any such principal
prepayment may adversely affect the yield to maturity of the applicable
Securities.
The ability of a Trust Fund to obtain subsequent Loans during the
related Pre-Funding Period will be dependent on the ability of the Originators
to originate or acquire Loans that satisfy the requirements for transfer to the
Trust Fund. The ability of the Originators to originate or acquire such Loans
will be affected by a variety of social and economic factors, including the
prevailing level of market interest rates, unemployment levels and consumer
perception of general economic conditions.
PREPAYMENT CONSIDERATIONS
The Loans may be prepaid in full or in part at any time. The rate of
prepayments of the 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 LOANS IN THE EVENT OF BANKRUPTCY OF AN ORIGINATOR
The Originators believe that upon the sale of a Series of Certificates
and/or Notes to an independent third party for fair value and without recourse,
such sale will constitute an absolute and unconditional sale of such
Certificates and/or Notes and the interests in the 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 Loans, a trustee in bankruptcy
or other creditor could attempt to recharacterize the sale of the Loans as a
borrowing by such Originator or any such affiliate with the result that
Securities are deemed to be creditors of such Originator or such affiliate,
secured by a pledge of the Loans. If such an attempt were successful, a trustee
in bankruptcy could elect to accelerate payment of the Securities and liquidate
the Loans with the Securityholders entitled to the then outstanding principal
amount thereof together with accrued interest. Thus, the Holders of Securities
could lose the right to future payments of interest, might suffer reinvestment
loss in a lower interest rate environment and, if the Loans are sold for a price
less than the then outstanding principal balances of all classes of Securities,
certain Certificateholders and/or Noteholders might suffer a loss of principal.
In connection with the issuance of each Series of Securities, the
Trustee will receive an opinion of Stroock & Stroock & Lavan LLP, special
counsel, to the effect that if it were litigated, a court ultimately would
uphold the Originators' intention that the transfer of the Loans in each Loan to
a Trust constitutes a sale under applicable law. Therefore, the 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 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 Loans required to be made by
the Master Servicer under the Agreement will have the same effect on the
Securityholders as a prepayment of the related 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 Loans, the Certificates and/or Notes will be prepaid in part
from and to the extent of such remaining amounts.
Collections on the Loans may vary due to the level and frequency of
delinquent payments and of prepayments. Collections on the Loans may also vary
due to seasonal business patterns and payment habits of borrowers.
The Loans may be "simple interest" or "date-of-payment loans". If a
payment is received on a 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 Loan having a longer average life than
would have been the case had the payment been made as scheduled. Conversely, if
a payment on a 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 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.
SECURITY RATING
If as set forth in the related Prospectus Supplement, the rating of one
or more classes of Securities may depend, to a large extent, on the
creditworthiness of a third party provider of credit enhancement. In such event,
any reduction in the rating assigned to the claims-paying ability of such
provider below the rating initially given to such Class of Securities would
likely result in a reduction in the rating of such Series of Securities. See
"Rating."
UNAUDITED STATEMENTS
On each Remittance Date, the Trustee will mail to each Securityholder 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
Master Servicer and Trustee and the loss and delinquency status of the Loans.
Although the information contained in such statements will be prepared by the
Master Servicer, neither such information nor any other financial information
furnished to Securityholders 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 Securities -- Payments on the Loans; Distribution on the
Securities" herein.
THE TRUSTS
A Trust for any Series of Securities will include the Trust Assets
consisting of a Pool* comprised of (i) SBA ss.7(a) Loans, (ii) Section 7(a)
Companion Loans, (iii) SBA 504 Loans, and (iv) Non-SBA 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.
The Notes of each Series will be secured by the pledge of the assets of
the related Trust, and the Certificates of each Series will represent interests
in the assets of the related Trust. The Securities 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 Securities 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 Securities 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 Securities (the "Detailed Description"). A copy of the
Agreement with respect to each Series of Securities will be attached to the Form
8-K and will be available for inspection at the corporate trust office of the
Trustee specified in the related Prospectus Supplement. A schedule of the Trust
Assets relating to such Series (the "Trust Asset Schedule") will be attached to
the Agreement delivered to the Trustee upon delivery of the Securities.
GENERAL
The real property which secures repayment of the Loans (the "Mortgaged
Properties") may be located in any one of the fifty states, the District of
Columbia, the Commonwealth of Puerto Rico or any other commonwealth, territory
or possession of the United States. The 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 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
a 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 a Loan for such periods and under such
circumstances as may be specified in the related Prospectus
Supplement. 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 Loan, and the amount of any difference may be contributed
from funds supplied by the seller of the Mortgaged Property securing
the related Loan or another source or may be treated as accrued
interest added to the principal of the Loan.
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* Whenever the terms "Pool," "Certificates," "Notes" and "Securities"
are used in this Prospectus, such terms will be deemed to apply, unless the
context indicates otherwise, to one specific Pool, the Certificates
representing certain undivided fractional interests, as described below, in
a single Trust consisting primarily of the Loans in such Pool, and the
Notes shall refer to debt obligations of such Trust secured by the related
Pool of SBA Loans. Similarly, the term "Pass-Through Rate" will refer to
the Pass-Through Rate borne by the Certificates of one specific Series, the
term "Interest Rate" will refer to the Interest Rate borne by the Notes of
one specific Series and the term "Trust" will refer to one specific Trust.
<PAGE>
(b) Principal may be payable on a level basis to fully amortize
the 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 Loan.
(c) Monthly payments of principal and interest may be fixed for
the life of the Loan, may increase over a specified period of time
("graduated payments") or may change from period to period. 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. Loans may require the monthly payments of principal and
interest to increase for a specified period, provide for deferred
payment of some or all of the payments due during a specified period,
which may be recouped as deferred interest, or otherwise.
(d) Prepayments of principal may be subject to a prepayment fee,
which may be fixed for the life of the Loan or may decline over time,
and may be prohibited for the life of the Loan or for certain periods
("lockout periods"). Certain 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 Loans may permit prepayments without payment of a
fee unless the prepayment occurs during specified time periods. The
Loans may include due-on-sale clauses which permit the mortgagee to
demand payment of the entire Loan in connection with the sale or
certain transfers of the related Mortgaged Property. Other Loans may
be assumable by persons meeting the then applicable underwriting
standards of the Originator.
The Prospectus Supplement for each Series of Securities will contain
information with respect to all the 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 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 Loans; (iii) the types of Mortgaged Properties and/or
other assets securing the Loans (iv) the original terms to maturity of the
Loans; (v) the expected weighted average term to maturity of the 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 Loans; (vii) the expected Mortgage Interest Rate and ranges of Mortgage
Interest Rates borne by the Loans; (viii) in the case of Loans having Adjustable
Rates, the expected weighted average of the Adjustable Rates, if any; (ix) the
amount of any Guaranty Insurance Policy, Mortgage Pool Insurance Policy, Special
Hazard Insurance Policy or Bankruptcy Bond to be maintained with respect to such
Pool; (x) the amount, if any, and terms of any other credit enhancement or other
derivative instruments to be provided with respect to all or any Loans or the
Pool; and (xi) the expected geographic location of the Mortgaged Properties. If
specific information respecting the Loans is not known to the Representative at
the time the related Securities 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.
Unless otherwise provided in the related Prospectus Supplement, the
only obligations of the Representative or the Originators with respect to a
Series of Securities will be to provide (or, where the Representative or an
Originator acquired a Loan from another originator, obtain from such originator)
certain representations and warranties concerning the Loans and to assign to the
Trustee for such Series of Securities the Representative's or Originator's
rights with respect to such representations and warranties. See "The
Agreements--Sale of Loans." The obligations of the Master Servicer with respect
to the 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 Loans in the
amounts described herein under "Description of the Securities -- Monthly
Advances and Compensating Interest." 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 Securities 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 Securities 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
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 Section 7(a) 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. part 120. As to any SBA section7(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 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
section7(a) Loan to SBA section7(a) Loan, will not be included in the related
Trust Fund and Securityholders will have no right or interest therein. As to any
SBA ss.7(a) Loan, the "Unguaranteed Interest" will equal all payments and other
recoveries on such SBA section7(a) Loan not constituting the Guaranteed Interest
therein and certain other amounts to be described in a Prospectus Supplement
that will not be transferred to the related Trust.
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
require ments in terms of origination, servicing and liquidation capabilities as
well as loan volumes and portfolio quality.
THE SECTION 7(A) COMPANION LOANS
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 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 "--SBA 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.
NON-SBA LOANS
Certain of the Non-SBA Loans will be loans made in connection with the
Conventional Commercial Loan Program (the "Conventional Commercial Loan
Program") of the Representative and the Originators. Created November 1, 1996,
the Conventional Commercial Loan Program is designed to assist qualified
borrowers in obtaining financing ("Conventional Commercial Loans"). Conventional
Commercial Loans may currently be used for hotel/motel acquisition,
construction, renovation, conversion, refinance, expansion, land and site
improvements, acquisition and installation of furniture, fixtures and equipment
as well as certain closing costs and professional fees, working capital and the
interest on interim financing. The Originators provide up to approximately 75%
of project costs in a conventional loan agreement, with borrowers providing a
minimum 25% equity contribution.
ORIGINATION MECHANISMS. The Originators primarily generate Conventional
Commercial Loans through two mechanisms. The first, known as the Franchise
Finance Division, utilizes a national referral network of trade associations,
hotel/motel franchisors and independent or affiliated commercial loan brokers.
Franchise Account Managers perform essentially the same tasks as local sales
representatives and are compensated primarily through commissions.
The second origination arm, known as the HFS Group, generates business
primarily from its contractual relationship as a preferred vendor with HFS,
Incorporated ("HFS"). Commercial Loan Representatives of the HFS Group work with
the sales and transfer/renewal departments for each of the franchise concepts to
locate customers. All customer contact is handled by telephone through a
national sales center in Sacramento, California.
Both the Franchise Finance Division and the HFS Group also receive
referrals from the Originators' national network of sales offices serving local
markets.
COLLATERAL FOR CONVENTIONAL COMMERCIAL LOANS. Conventional Commercial
Loans are first-lien mortgages for the purchase, development or refinance of
franchise hotel/motel properties. The national franchisors that represent the
focus for this program include the HFS franchise concepts itemized above and
other major hotel/motel franchisors, including Choice Hotels International and
Best Western International.
Each Conventional Commercial Loan originated by an Originator is
secured by a first lien on the related primary collateral. Additional liens on
secondary collateral may also be taken. The borrower is required to fund at
least 25% of the total allowable project costs; however, the Originator may
require a higher equity percentage for certain larger projects and projects with
special credit risks. The Loan-to-Value Ratio for Conventional Commercial Loans
may not exceed 75% of the lower of cost or appraised value. The Originators also
generally require a minimum debt service coverage ratio of 1.25:1 for the most
recent two full years, interim and projected periods.
Conventional Commercial Loans that are originated for construction
purposes generally possess a maximum Loan-to-Value Ratio of 75% of the lower of
the appraised value or the total of the construction budget, interim interest,
contingency and loan point and fees.
COMPETITION. The Originators' main competitors vary by region and by
market. Its primary competitors are banks and finance companies such as PMC
Capital Inc., Allied Capital Commercial Corp. and Hotel Capital Corp. of
America. The Originators do not believe that any one competitor, or a small
group of competitors, is dominant in the industry.
UNDERWRITING CRITERIA FOR CONVENTIONAL COMMERCIAL LOANS. The
Originators seek to control the risk of default of the actual credit through
their underwriting standards. The underwriting for the Originators' Conventional
Commercial Loan Program emphasizes historical operating performance and debt
service coverage to help determine the repayment ability of the borrower. It is
also expected by the Originators that qualifying owners generally have direct
industry experience. Lack of experience must be offset by significant training
provided by the franchisor, by an extended transition period during which the
seller of the business will remain on site or by contracting with a
professional, qualified management firm.
As with SBA Section 7(a) Loans, SBA 504 Loans and SBA section 7(a)
Companion Loans, the Originators have established review procedures to help
ensure that all loans that they originate or acquire comply with the policy
defined for the Conventional Commercial Loan Program. Commercial loan officers
evaluate each applicant's financial statements, credit reports and other data to
determine if the credit and collateral satisfy the Originator's standards. These
standards include historic debt service coverage, reasonableness of projections
and strength of management. For each application, qualified personnel also
perform a site inspection to determine the appropriateness of the location for
the proposed use, observe the economic conditions of the local market and
inspect the property for obvious structural defects or environmental issues.
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 general knowledge of the industry, (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 industry
and knowledge specific to the market in which the project is proposed. Following
credit review and approval but prior to loan funding, a feasibility study and an
appraisal for the proposed project are commissioned by the commercial loan
officer from an appraiser approved by Originator. For construction loans, the
feasibility study must be based on, at a minimum, preliminary plans and
specifications along with a cost breakdown prepared by a qualified third party.
The Originators consider this feasibility information to be critical in
assessing the viability of a proposed project in a specific market area. A Phase
I environmental site assessment report is also required on each project to be
financed.
The maximum loan amount for the Conventional Commercial Loan Program is
$3,000,000; the minimum loan is $250,000. A prepayment penalty is imposed on
loans that are prepaid within the first five years of the loan term. The
Originators require a first lien position on the fee interest in the subject
facility and all business assets financed with a Conventional Commercial Loan.
The personal guarantees of owners, principals and affiliate businesses will
generally be required. Non-recourse financing may be considered on a case-by
case basis as warranted by the overall creditworthiness of the applicant and the
viability of the proposed project.
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 commercial loan officer. The commercial loan
officer is 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 and the strengths
and weaknesses of the credit. In addition, for each proposed loan, the
commercial loan officer performs a collateral analysis, financial analysis
(including historical debt service coverage) and business and personal credit
checks.
If the commercial loan officer 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. All Conventional Commercial Loans above
$1,500,000 are reviewed and approved by a committee of not less than three
members of an Originator's senior client administration group, including at
least one senior credit officer.
The Originators also may originate Non-SBA Loans with characteristics
substantially the same as SBA Section 7(a) Loans or SBA 504 Loans.
USE OF PROCEEDS
The Representative and the Originators may use the net proceeds to be
received from the sale of the Securities of each Series for general corporate
purposes, including repayment of debt, including, but not limited to, warehouse
facilities, and the origination and acquisition of Loans and other Trust Assets.
The Representative expects Securities to be sold in Series from time to time.
THE REPRESENTATIVE AND THE ORIGINATORS
The 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
Loans and other Trust Assets. Except for certain representations and warranties
relating to the Loans and other Trust Assets and certain other matters, the
obligations of The Money Store and the Originators with respect to the 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, 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, franchisors 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. Average
loan sizes for originations during 1994, 1995 and 1996 were approximately
$368,000, $302,000 and $359,000, 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 senior vice-president of production, who reports to
the executive vice-president of the 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 SS.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
SierraWest 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 SS.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 debt of the subject business to the subject businesses'
annual net operating income plus certain non-cash extraordinary items) 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 approval 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's 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" or "Loan-to-Value
Ratio") of 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 SS.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 SS.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 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 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, with respect to SBA Loans, 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 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 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 an SBA 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 SBA 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 SBA Section
7(a) Loans, except that The Money Store Commercial Mortgage Inc. (one of the
Originators) 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 SBA 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 related loan made by the SBA
being 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 related loan made by the SBA
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 and the Non-SBA Loans are substantially the same as those
described above for the SBA Section 7(a) Loans, except that the SBA is not
involved in the workout or liquidation procedures.
DESCRIPTION OF THE SECURITIES
Each Series of Certificates will be issued, from time to time, pursuant
to either a Pooling and Servicing Agreement or a Trust Agreement, and each
Series of Notes will be issued, from time to time, pursuant to an Indenture,
each to be 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/or certain affiliates thereof, and the Trustee for the benefit
of the related Certificateholders or Noteholders, as the case may be, of such
Series. A Series may contain either Certificates or Notes or a combination
thereof. The provisions of each Agreement will vary depending upon the nature of
the Securities to be issued thereunder and the nature of the related Trust. A
form of a Pooling and Servicing Agreement, Trust Agreement, Sale and Servicing
Agreement and an Indenture have each 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 Securities 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
Securities 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 Security of such Series
addressed to The Money Store, 2840 Morris Avenue, Union, New Jersey 07083,
Attention: Corporate Counsel.
GENERAL
The Securities of each Series will represent debt obligations of, in
the case of Notes, or fractional undivided ownership interests in, in the case
of Certificates, a Trust created pursuant to the related Agreement and/or such
other assets as may be described in the related Prospectus Supplement. The
Securities 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
do may be set forth in a Prospectus Supplement), except that one Certificate or
Note of each Class may be issued in a different denomination.
Definitive Securities, 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 Security 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 security
administrator may perform certain duties in connection with the administration
of the Securities.
The Securities will not represent obligations of the Representative
(except with respect to a Guaranty issued in connection with a Series), 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 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 Distribution 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 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,
guaranties of The Money Store or other credit enhancement or maturity protection
or other derivative instrument covering any Securities, any Loan in the related
Pool or any related Mortgaged Property which is required to be maintained
pursuant to the related Agreement.
Each Series of Securities will be issued in one or more Classes. Each
Class of Securities 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 Securities may be divided into two or more Sub-Classes,
as specified in the related Prospectus Supplement.
A Series may include two or more Classes of Certificates, as specified
in the related Prospectus Supplement, which differ as to the timing and priority
of payment, seniority, allocations of loss, Pass-Through Rate or amount of
payments of principal or interest, or as to which payments of principal or
interest may or may not be made upon the occurrence of specified events or on
the basis of collections from designated portions of the Trust Assets for such
Series. A Series of Certificates may include one or more Classes of Senior
Certificates that receive certain preferential treatment, specified in the
related Prospectus Supplement, with respect to one or more Classes of
Subordinated Certificates of such Series. Certain Series or Classes of
Certificates within a Series may be covered by a 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, or
derivative products, in each case as described herein and in the related
Prospectus Supplement. The Pass-Through Rate for a Class of Certificates that
pay interest based upon a floating rate of interest, as specified in the related
Prospectus Supplement, may base such floating rate upon any of the following:
(i) the auction procedures for Auction Rate Securities described herein, (ii)
LIBOR plus an amount set forth in the related Prospectus Supplement , (iii) the
T-Bill Rate plus an amount set forth in the related Prospectus Supplement, (iv)
the Prime Rate plus an applicable spread, as set forth in the related Prospectus
Supplement, or (v) any such other method or procedures used to determine the
floating rate of interest as may be described in the applicable Prospectus
Supplement. In addition, a Series may include one or more Classes of
Certificates entitled to (a) principal payments with disproportionate, nominal
or no interest payments or (b) interest payments with disproportionate, nominal
or no principal payments (Strip Certificates).
A Series may include two or more Classes of Notes, as specified in the
related Prospectus Supplement, which differ as to the timing and priority of
payment, seniority, allocations of loss, Interest Rate or amount of payments of
principal or interest, or as to which payments of principal or interest may or
may not be made upon the occurrence of specified events or on the basis of
collections from designated portions of the Trust Assets for such Series. A
Series of Notes may include one or more Classes of Senior Notes which receive
certain preferential treatment specified in the related Prospectus Supplement
with respect to one or more Classes of Subordinated Notes of such Series.
Certain Series or Classes of Notes within a Series may be covered by a 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, or derivative products, in each case as described herein and in the
related Prospectus Supplement. The Interest Rate for a Class of Notes that pay
interest based upon a floating rate of interest, as specified in the related
Prospectus Supplement, may base such floating rate upon any of following: (i)
the auction procedures for Auction Rate Securities described herein, (ii) LIBOR
plus an amount set forth in the related Prospectus Supplement , (iii) the T-Bill
Rate plus an amount set forth in the related Prospectus Supplement, (iv) the
Prime Rate plus an applicable spread, as set forth in the related Prospectus
Supplement, or (v) any such other method or procedures used to determine the
floating rate of interest as may be described in the applicable Prospectus
Supplement. In addition, a Series may include one or more Classes of Notes
entitled to (a) principal payments with disproportionate, nominal or no interest
payments or (b) interest payments with disproportionate, nominal or no principal
payments (Strip Notes).
With respect to any Series of Securities that includes one or more
Classes of Notes, distributions in respect of the Certificates may be
subordinated in priority of payment to payments on the Notes of such Series, to
the extent specified in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement,
distributions of principal and interest (or, where applicable, of principal only
or interest only) on the related Securities 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 Securities are
registered at the close of business on the record dates specified in the
Prospectus Supplement unless Definitive Securities have been issued, the
registered holder of all Securities will be Cede or such other nominee specified
in the related Prospectus Supplement. Distributions will be made by check mailed
to the persons entitled thereto at the address appearing in the register
maintained for holders of Securities (the "Security 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 Securities will be made only upon presentation and surrender
of the Securities at the office or agency of the Trustee or other person
specified in the final distribution notice to Securityholders.
DISTRIBUTIONS ON SECURITIES
Each Class of Securities 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 Securities 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 Securities of such Series
throughout the lives of the Securities 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 Securities entitled to distributions allocable to interest, the
right to receive interest at a fixed rate or a floating rate; and (vii) include,
as to Securities 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 Securities
will be made by the Trustee out of, and only to the extent of, funds available
in the related Distribution Account and other accounts (each a "Distribution
Account") 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 Distribution Account and
such other accounts as may be described in the related Prospectus Supplement and
distribute to the Securityholders 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 Distribution Account as of the Determination Date, or, in the case of
Classes which have been assigned an aggregate principal balance and Pass-Through
Rate or Interest Rate, payments of interest and payments in reduction of such
aggregate principal balance from all amounts on deposit in the Distribution
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 Securityholders will have the
effect of accelerating the amortization of Senior Notes or Senior Certificates,
as the case may be, while increasing the interests evidenced by the Subordinated
Notes or Subordinated Certificates, as the case may be, in the related Trust.
Distributions to any Class of Securities will be made pro rata to all
Securityholders of that Class, or as otherwise described in a Prospectus
Supplement.
SUMMARY OF AUCTION PROCEDURES
The following summarizes certain procedures that will be used in
determining the interest rates on any Notes or Certificates that are Auction
Rate Securities. Appendix I hereto contains a more detailed description of these
procedures. Prospective investors in the Auction Rate Securities should read
carefully the following summary, along with the more detailed description in
Appendix I.
The interest rate on each Class of Auction Rate Securities will be
determined periodically (generally, for periods ranging from 7 days to one year)
by means of a "Dutch Auction." In this Dutch Auction, investors and potential
investors submit orders through an eligible broker/dealer as to the principal
amount of Auction Rate Securities such investors wish to buy, hold or sell at
various interest rates. The broker/dealers submit their clients' orders to the
auction agent, who processes all orders submitted by all eligible broker/dealers
and determines the interest rate for the upcoming interest period. The
broker/dealers are notified by the auction agent of the interest rate for the
upcoming interest period and are provided with settlement instructions relating
to purchases and sales of Auction Rate Securities.
In the auction procedures, the following types of orders may be
submitted:
(i) Bid/Hold Orders - the minimum interest rate that a
current investor is willing to accept in order to
continue to HOLD some or all of its Auction Rate
Securities for the upcoming interest period;
(ii) Sell Orders - an order by a current investor to SELL
a specified principal amount of Auction Rate
Securities, regardless of the upcoming interest rate;
and
(iii) Potential Bid Orders - the minimum interest rate that
a potential investor (or a current investor wishing
to purchase additional Auction Rate Securities) is
willing to accept in order to BUY a specified
principal amount of Auction Rate Securities.
If an existing investor does not submit orders with respect to all its
Auction Rate Securities of the applicable Class, the investor will be deemed to
have submitted a Hold Order at the new interest rate for that portion of the
Auction Rate Securities for which no order was received.
In connection with each auction, Auction Rate Securities will be
purchased and sold between investors and potential investors at a price equal to
their then outstanding principal balance (I.E., par) plus any accrued interest.
The following example helps illustrate how the above-described procedures are
used in determining the interest rate on the Auction Rate Securities.
(a) Assumptions:
1. Denominations (Units) = $100,000
2. Interest Period = 28 Days
3. Principal Amount Outstanding = $50 Million (500 Units)
(b) Summary of All Orders Received For The Auction
BID/HOLD ORDERS SELL ORDERS POTENTIAL BID ORDERS
10 Units at 2.90% 50 Units Sell 20 Units at 2.95%
30 Units at 3.02% 50 Units Sell 30 Units at 3.00%
60 Units at 3.05% 100 Units Sell 50 Units at 3.05%
100 Units at 3.10% 200 Units 50 Units at 3.10%
100 Units at 3.12% 50 Units at 3.11%
300 Units 50 Units at 3.14%
100 Units at 3.15%
350 Units
Total units under existing Bid/Hold Orders and Sell Orders always equal issue
size (in this case 500 units).
(c) Auction Agent Organizes Orders In Ascending Order
<TABLE>
<CAPTION>
Order Number Cumulative Order Number Cumulative Total
Number of Units Total (Units) % Number of Units (Units) %
------ -------- ------------- ---- ------ --------- ------- --
<S> <C> <C> <C> <C> <C> <C> <C>
1 10(W) 10 2.90% 7 100(W) 300 3.10%
2 20(W) 30 2.95% 8 50(W) 350 3.10%
3 30(W) 60 3.00% 9 50(W) 400 3.11%
4 30(W) 90 3.02% 10 100(W) 500 3.12%
5 50(W) 140 3.05% 11 50(L) 3.14%
6 60(W) 200 3.05% 12 100(L) 3.15%
(W) Winning Order (L) Losing Order
</TABLE>
Order #10 is the order that clears the market of all available units.
All winning orders are awarded the winning rate (in this case, 3.12%) as the
interest rate for the next period that interest will accrue (each an "Interest
Period"), when another auction will be held. Multiple orders at the winning rate
are allocated units on a pro rata basis. Notwithstanding the foregoing, in no
event will the interest rate exceed the lesser of the Net Loan Rate or the
Maximum Auction Rate (each as described in Appendix I).
The above example assumes that a successful auction has occurred (I.E.,
all Sell Orders and all Bid/Hold Orders below the new interest rate were
fulfilled). In certain circumstances, there may be insufficient Potential Bid
Orders to purchase all the Auction Rate Securities offered for sale. In such
circumstances, the interest rate for the upcoming Interest Period will equal the
lesser of the Net Loan Rate and the Maximum Auction Rate. Also, if all the
Auction Rate Securities are subject to Hold Orders (I.E., each holder of Auction
Rate Securities wishes to continue holding its Auction Rate Securities,
regardless of the interest rate) the interest rate for the upcoming Interest
Period will equal the lesser of the Net Loan Rate and the All Hold Rate (as
defined below).
As stated above, the foregoing is only a summary of the auction
procedures. A more detailed description of these procedures is contained in
Appendix I.
MONTHLY ADVANCES AND COMPENSATING INTEREST
In order to maintain a regular flow of scheduled interest payments to
Securityholders (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 Loan Remittance Rate (as defined below)
on the then outstanding principal balance of the related Series of Securities
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 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 Securities, the "Adjusted Loan
Remittance Rate" will equal the sum of the related Pass-Through Rate or Interest
Rate and the rate used in determining certain expenses payable by the related
Trust, as more specifically set forth in the related Prospectus Supplement. The
Master Servicer will not be required to make any Monthly Advances which it
determines, in good faith, would be nonrecoverable from amounts in respect of
the Loans.
If so specified in the related Prospectus Supplement, not later than
the close of business on each Determination Date, with respect to each 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 Distribution 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 Loan as of the beginning of the related
Due Period at the applicable weighted average Adjusted Loan Remittance Rate,
over (b) the amount of interest actually received on the related Loan for such
Due Period (such difference, "Compensating Interest").
REVOLVING PERIOD AND AMORTIZATION PERIOD; RETAINED INTEREST
If the related Prospectus Supplement so provides, there may be a period
commencing on the date of issuance of a Class or Classes of Notes and/or
Certificates of a Series and ending on the date set forth in the related
Prospectus Supplement (each, a "Revolving Period") during which limited or no
principal payments will be made to one or more Classes of Notes or Certificates
of the related Series as are identified in such Prospectus Supplement. Some or
all collections of principal otherwise allocated to such Classes of Notes or
Certificates may be (i) utilized during the Revolving Period to acquire
additional Trust Assets which satisfy the criteria specified above and the
criteria set forth in the related Prospectus Supplement, (ii) held in an account
and invested in Permitted Investments for later distribution to Securityholders,
(iii) applied to those Notes or Certificates for such Series, if any, specified
in the related Prospectus Supplement as then are in amortization, or (iv)
otherwise applied as specified in the related Prospectus Supplement.
An "Amortization Period" is the period during which an amount of
principal is payable to Holders of a Series which, during the Revolving Period,
were not otherwise entitled to such payments. If so specified in the related
Prospectus Supplement, during an Amortization Period all or a portion of
principal collections on the Loans may be applied as specified above for a
Revolving Period and, to the extent not so applied, will be distributed to the
Classes of Notes or Certificates for such Series specified in the related
Prospectus Supplement as then being entitled to payments of principal. In
addition, if so specified in the related Prospectus Supplement, amounts
deposited in certain accounts for the benefit of one or more Classes of Notes or
Certificates for such Series may be released from time to time or on a specified
date and applied as a payment of principal on such Classes of Notes or
Certificates. The related Prospectus Supplement will set forth the circumstances
which will result in the commencement of an Amortization Period.
Each Series which has a Revolving Period may also issue to the
Representative or one of its affiliates a certificate evidencing an undivided
beneficial interest (a "Retained Interest") in such Series not represented by
the other Securities issued by the Representative. As further described in the
related Prospectus Supplement, the value of such Retained Interest will
fluctuate as the amount of Notes and Certificates of the related Series of
Securities.
BOOK-ENTRY REGISTRATION
If so specified in the related Prospectus Supplement, the Certificates
and/or Notes of a Series 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 and notes. 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 and/or Noteholders, as
applicable, that are not Participants or Indirect Participants but desire to
purchase, sell or otherwise transfer ownership of Certificates and/or Notes of a
Series registered in the name of Cede, as nominee of DTC, may do so only through
Participants and Indirect Participants. In addition, such Securityholders will
receive all distributions of principal of and interest on the Securities and
reports relating to the Securities from the Trustee through DTC and its
Participants. Under a book-entry format, Securityholders will receive payments
and reports relating to the Securities 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 Securityholders. Unless and until Definitive Securities
are issued, it is anticipated that the only Securityholder will be Cede, as
nominee of DTC, and that the beneficial holders of Securities will not be
recognized by the Trustee as Securityholders under the Agreement. The beneficial
holders of such Certificates and/or Notes of a Series will only be permitted to
exercise the rights of Certificateholders and/or Noteholders, as applicable,
under the applicable 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 Securities and is
required to receive and transmit reports and payments of principal of and
interest on the Securities. Participants and Indirect Participants with which
Securityholders have accounts with respect to the Securities similarly are
required to make book-entry transfers and receive and transmit such reports and
payments on behalf of their respective Securityholders. Accordingly, although
Securityholders will not possess Securities, the rules provide a mechanism by
which Securityholders will receive distributions and reports and will be able to
transfer their interests.
Unless and until Definitive Securities are issued, Securityholders who
are not Participants may transfer ownership of Securities only through
Participants by instructing such Participants to transfer Securities, by
book-entry transfer, through DTC for the account of the purchasers of such
Securities, which account is maintained with their respective Participants.
Under the Rules and in accordance with DTC's normal procedures, transfers of
ownership of Securities 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 Securityholders.
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
Securityholder to pledge Securities to persons or entities that do not
participate in the DTC system, or otherwise take actions in respect of such
Securities may be limited due to the lack of a physical certificate for such
Securities.
DTC in general advises that it will take any action permitted to be
taken by a Securityholder under an Agreement only at the direction of one or
more Participants to whose account with DTC the Securities are credited.
Additionally, DTC in general advises that it will take such actions with respect
to specified percentages of the Securityholders only at the direction of and on
behalf of Participants whose holdings include current principal amounts of
outstanding Securities that satisfy such specified percentages. DTC may take
conflicting actions with respect to other current principal amounts of
outstanding Securities to the extent that such actions are taken on behalf of
Participants whose holdings include such current principal amounts of
outstanding Securities.
Any Notes and/or Certificates initially registered in the name of Cede,
as nominee of DTC, will be issued in fully registered, certificated form to
Securityholders or their nominees ("Definitive Securities"), 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 Securities. Upon surrender by DTC of the certificates and/or notes
representing the Securities and instruction for re-registration, the Trustee
will issue the Notes and/or Certificates in the form of Definitive Securities,
and thereafter the Trustee will recognize the holders of such Definitive
Securities as Securityholders. Thereafter, payments of principal of and interest
on the Securities will be made by the Trustee directly to Securityholders in
accordance with the procedures set forth herein and in the related Agreement.
The final distribution of any Security (whether Definitive Securities or
Securities registered in the name of Cede), however, will be made only upon
presentation and surrender of such Securities on the final Remittance Date at
such office or agency as is specified in the notice of final payment to
Securityholders.
CREDIT ENHANCEMENT
GENERAL
Credit enhancement may be provided with respect to one or more Classes
of a Series of Securities 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 Notes and/or Certificates of such Series, (ii) the use of a
Guaranty 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, a Guaranty of The Money Store, other third party guarantees or maturity
protection, derivative instruments, 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 Securities 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 Securities
will bear their allocable share of deficiencies. If a form of credit enhancement
applies to several Classes of Securities, 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 Securities. 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
All Classes of Certificates are Subordinated in right of payment to any
Class of Notes in a given Series to the extent described in the related
Prospectus Supplement. To enhance the likelihood of regular receipt by holders
of Senior Certificates or Senior Notes, as the case may be, 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 or Subordinated Notes, as the case may be,
of a Series will instead be payable to holders of one or more Classes of Senior
Certificates or Senior Notes, as the case may be, under the circumstances and to
the extent specified in the Prospectus Supplement. If specified in the related
Prospectus Supplement, the holders of Senior Certificates or Senior Notes, as
the case may be, 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 Distribution Account, prior to any such distribution
being made to holders of the related Subordinated Certificates or Subordinated
Notes, a the case may be, 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 or Senior Notes, as the case may be,
through subordination also may be accomplished by first allocating certain types
of losses or delinquencies to the related Subordinated Certificates or
Subordinated Notes, as the case may be, to the extent described in the related
Prospectus Supplement. If aggregate losses and delinquencies in respect of such
Loans were to exceed the total amounts payable and available for distribution to
holders of Subordinated Certificates or Subordinated Notes, as the case may be,
or, if applicable, were to exceed the specified maximum amount, holders of
Senior Certificates or Senior Notes, as the case may be, would experience losses
on the Securities.
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 or Subordinated Notes, as the case may be,
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 Senior Notes, as the case may be,
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
Securities 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
Securities may be Senior Certificates or Senior Notes, as the case may be, with
respect to certain types of payments or certain types of losses or delinquencies
and Subordinated Certificates or Subordinated Notes, as the case may be, 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 or Senior Notes, as the case may be, and Subordinated Certificates
or Subordinated Notes, as the case may be, may themselves be subordinate in
their right to receive certain distributions to other Classes of Senior and
Subordinated Certificates or Subordinated Notes, as the case may be,
respectively, through a cross support mechanism or otherwise. As between Classes
of Senior Certificates or Senior Notes, as the case may be, and as between
Classes of Subordinated Certificates or Subordinated Notes, as the case may be,
distributions may be allocated among such Classes (i) in the order of their
scheduled final Remittance 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 or Subordinated Notes, as the case may be,
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
Holders of Senior Certificates or Senior Notes, as the case may be, or released
to Holder of Subordinated Certificates or Subordinated Notes, as the case may
be, from the related Trust.
GUARANTY INSURANCE POLICIES
If so specified in the related Prospectus Supplement, a Guaranty
Insurance Policy may be obtained and maintained for any Class or Series of
Certificates and/or Notes. The issuer of any Guaranty Insurance Policy (a
"Security Guaranty Insurer") will be described in the related Prospectus
Supplement. A copy of any such Guaranty Insurance Policy will be attached as an
exhibit to the related Prospectus Supplement.
If so specified in the related Prospectus Supplement, a Guaranty
Insurance Policy will unconditionally and irrevocably guarantee to
Securityholders 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 Securityholders, for distribution by the Trustee to each
Securityholder. The "Insured Payment" will equal the full amount of the
distributions of principal and interest to which Securityholders are entitled
under the related Agreement plus any other amounts specified therein or in the
related Prospectus Supplement.
The specific terms of any Guaranty Insurance Policy will be as set
forth in the related Prospectus Supplement. 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 Loans, to guarantee any specified rate of prepayments or to
provide funds to redeem Certificates and/or Notes on any specified date.
Subject to the terms of the related Agreement, the Guaranty Insurer may
be subrogated to the rights of each Securityholder to receive payments under the
Securities to the extent of any payments by such Security Guaranty Insurer under
the related Guaranty Insurance Policy.
SPREAD AMOUNT
If so specified in the related Prospectus Supplement, certain Classes
of Securities 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 Securities. 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 Securities. 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 Securities 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
Securities 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 Securities.
MORTGAGE POOL INSURANCE POLICIES
If specified in the Prospectus Supplement related to any Pool of 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 Loans. Each Mortgage Pool Insurance Policy will, subject to
the limitations described below, cover loss by reason of default in payment on
the related 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 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
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 a 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 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 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 Loan
occurring when the servicer of such 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 Securities 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 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 Securityholders.
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 Securities 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
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.
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 a Loan or a reduction by such court of the principal
amount of a 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 Securities 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 Loans--Anti-Deficiency
Legislation and Other Limitations on Lenders."
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 Securityholders, 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 Securityholders 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
Securities 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 Securities 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
Securities 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
Securities may be entitled to third- party payments to help provide that the
holders of such Securities receive their unpaid principal on or prior to a
specified date.
OTHER INSURANCE, GUARANTEES, SWAPS, 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, a Guaranty of The Money Store,
other 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 Securities 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 hedge contract
providing limited protection against interest rate risks. If provided in the
related Prospectus Supplement, interest and/or principal on one or more Classes
of the Securities of a Series may be paid to Holders thereof in a currency other
than U.S. dollars. If so provided, the Trust may, in connection therewith, enter
into one or more currency rate swaps to provide limited protection against
foreign currency rate fluctuation risks. One or more Classes of Securities also
may be issued in conjunction with a put or call feature entitling (in the case
of a put) or obligating (in the case of a call) the applicable Securityholders
to sell some or all of its Securities to the party named in the applicable
Prospectus Supplement on the date or dates set forth therein. Any such
arrangements must be acceptable to each nationally recognized rating agency that
provides a rating for the related Series of Securities (the "Rating Agency").
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 Securities. In such case, credit
support may be provided by a cross-support feature which requires that
distributions be made with respect to Securities 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 Securities 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
Securities, the Pass-Through Rate or Interest Rate for various Classes of
Securities and the purchase price paid for the Securities.
The original terms to maturity of the Loans in a given Pool will vary
depending upon the type of Loans included therein. Each Prospectus Supplement
will contain information with respect to the type and maturities of the Loans in
the related Pool. Loans generally may be prepaid without penalty in full or in
part at any time.
In general, prepayment of 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 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 Loans based upon current interest rates and
economic conditions or the historical prepayment experience of The Money Store's
and its affiliates' portfolios of Loans.
Greater than anticipated prepayments of principal will increase the
yield on Securities purchased at a price less than par. Similarly, greater than
anticipated prepayments of principal will decrease the yield on Securities
purchased at a price greater than par. The effect on an investor's yield of
principal prepayments on the 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 Securities may not be offset
by a subsequent like reduction (or increase) in the rate of principal payments.
The weighted average lives of Securities will also be affected by the
amount and timing of delinquencies and defaults on the Loans and the recoveries,
if any, on defaulted Loans and foreclosed properties. Delinquencies and defaults
will generally slow the rate of payment of principal to the Securityholders.
However, this effect will be offset to the extent that lump sum recoveries on
defaulted Loans and foreclosed properties result in principal payments on the
Securities faster than otherwise scheduled.
When a full prepayment or Curtailment occurs on a Loan, the Mortgagor
will be charged interest on the principal amount of the 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 a 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
Securities 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 Securities. See "The Agreement--Termination; Purchase of
Loans."
If so specified in the related Prospectus Supplement, the effective
yield to certain Securityholders 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 Securities 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 Securities.
The Prospectus Supplement relating to a Series of Securities 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 Securities. 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 Securities.
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 LOANS
Pursuant to each related Pooling and Servicing Agreement or Sale and
Servicing Agreement, as the case may be, at the time of issuance of Securities
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 Securities 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 Securityholders; 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, unless otherwise set
forth in a Prospectus Supplement the Representative and/or the Originators will
deliver to the Trustee or, with respect to the notes executed by borrowers
evidencing a loan (each a "Loan Note") relating to the SBA Section 7(a) Loans
being delivered pursuant to (a) below, to the fiscal and transfer agent of the
SBA (the "FTA"), the following documents with respect to each Loan
(collectively, the "Trustee's Document File"):
(a) The original Loan Note, endorsed by means of an allonge as
follows (bracketed language is only for SBA ss.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 The Money Store Asset-Backed
[Certificates] [Notes], 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 Loans secured by Mortgaged Properties,
either: (i) the original mortgage or deed of trust (each a
"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 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
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 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 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 Loans, blanket assignment of all collateral securing
the Loan, including without limitation, all rights under applicable
guarantees and insurance policies;
(g) For all 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 Loans in
accordance with the Agreement. The power of attorney will be delegable
by the Trustee to the Master 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 Loans, blanket UCC-1 financing statements identifying
by type all collateral for the Loans in each of the Pools 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.
Notwithstanding the foregoing, the Representative or the applicable
Originators will not be required to record the Assignment of Mortgage to the
Trustee if the Representative delivers opinions of counsel, satisfactory to the
Rating Agencies, to the effect that recordation of such assignments is not
required in the relevant jurisdictions to protect the interests of the Trustee
in the Loans.
REPRESENTATIONS AND WARRANTIES
Each Originator will represent to the Trustee and the Securityholders,
among other things, with respect to each 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 Loan set forth in the 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, with respect to the SBA Section 7(a) Loans, the
FTA, or as otherwise provided in the related Agreement;
(3) Each 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 Master Servicer or one or more Subservicers;
(4) With respect to those 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 to the security interest
in such Mortgaged Property granted in connection with the related SBA Section
7(a) Loan and each SBA 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 each Section 7(a) Companion Loan, each SBA 504 Loan,
each Non-SBA Loan, and the Unguaranteed Interest of each SBA Section 7(a) 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 Loan will be more than 59 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) No Loan will 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 Loan or any related Mortgage, or the exercise of any
right thereunder, render either the 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 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, with respect to the SBA Loans, the applicable SBA Rules and
Regulations;
(11) 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) 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 Loan will conform, and all such Loans in the aggregate will
conform, to the descriptions thereof set forth in this Prospectus and the
related Prospectus Supplement;
(14) The terms of each 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, with respect to
the SBA Section 7(a) Loans, and the Securityholders and which will have been
delivered to the Trustee;
(15) Each Mortgaged Property which is the primary collateral for the
related Loan will be, at the time of origination of such 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, which,
with respect to the SBA Loans, must be approved by the SBA;
(16) With respect to each Loan secured by a Mortgaged Property and
that is not a first mortgage loan, either (i) no consent for the 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 each 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 Master 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 Loans which materially and adversely affects the value of
the Loans or the interest of the Securityholders in the related Loan in the case
of a representation or warranty relating to a particular 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, (x) if such Loan is an SBA Section 7(a) Loan, (i) promptly cure
such breach in all material respects, (ii) purchase the Unguaranteed Interest of
such SBA Section 7(a) Loan from its own funds at a price equal to the then
current principal balance of the Unguaranteed Interest of such SBA Section 7(a)
Loan as of the date of purchase, plus 30 days' interest thereon at the related
Adjusted Loan Remittance Rate as of the next succeeding Determination Date, plus
any accrued unpaid Servicing Fees, Monthly Advances and Servicing Advances
reimbursable to the Master Servicer, which purchase price shall be deposited in
the Principal and Interest Account on the next succeeding Determination Date or
(iii) remove such SBA Section 7(a) Loan from the related Trust and substitute
one or more qualified SBA Section 7(a) Loans; or (y) if such Loan is a Section
7(a) Companion Loan, an SBA 504 Loan or a Non-SBA Loan, (i) promptly cure such
breach in all material respects, (ii) purchase such Loan from its own funds at a
price equal to the then current principal balance of such Loan as of the date of
purchase, plus 30 days' interest thereon at the related Adjusted Loan Remittance
Rate as of the next succeeding Determination Date, plus any accrued unpaid
Servicing Fees, Monthly Advances and Servicing Advances reimbursable to the
Master Servicer, which purchase price shall be deposited in the Principal and
Interest Account on the next succeeding Determination Date or (iii) remove such
Loan from the related Trust and substitute one or more qualified Loans of
similar type. In addition, the Originators will agree to indemnify the related
Trust, the Trustee, the Securityholders, and, with respect to SBA Loans, the
SBA, 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 Securityholders and the Trustee will constitute the sole remedy
respecting a material breach of any such representation or warranty to the
Securityholders or the Trustee.
PAYMENTS ON THE 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 Master 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 Loans (net of the
portion thereof, if any, required to be paid to the holders of the Guaranteed
Interest, the FTA's Fee, the Additional Fee and the Servicing Fee, other
servicing compensation payable to the Master Servicer as permitted by the
Agreement) and such other amounts as may be described in a Prospectus
Supplement, (ii) all payments received after the Cut-Off Date on account of
principal on the Loans (or with respect to SBA Section 7(a) Loans, the
Unguaranteed Interest of all such sums received), including 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 (or with respect to SBA Section 7(a) Loans, the
Unguaranteed Interest of all such sums received), (iii) any amounts paid in
connection with the repurchase of a Loan, or with respect to SBA Section 7(a)
Loans, the Unguaranteed Interest of such Loan, and the amount of any adjustment
for substituted 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 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 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 a 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
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 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 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 Master Servicer from the
Mortgagor or otherwise relating to the Loan. Servicing Advances will be
reimbursable to the Master 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 maintain
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 a 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, if applicable, 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, if applicable, 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,
if applicable), are required to be deposited by the Master Servicer in the
Principal and Interest Account.
REALIZATION UPON DEFAULTED LOANS WITH RELATED MORTGAGES
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 or a
Non-SBA 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
Loans. Consistent with the foregoing and the SBA Rules and Regulations, if
applicable, 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 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 a 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 Loans and payments on
the Securities, (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 Security Guaranty Insurer, if any, or the Holders of not less than
50 percent of each Class of Securities, other than the holders of residual
interests, if any (the "Majority Securityholders"), by notice in writing to the
Master Servicer and with the prior written consent of the Security 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) if the Series
has the benefit of a Guaranty Insurance Policy; (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
Security Guaranty Insurer, if any, or the Securityholders; (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 Securityholder or the Security 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 Securityholder or the Security 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 Security Guaranty Insurer, if any,
the SBA, the Trustee and the Majority Securityholders, 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 Security
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 Security 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 LOANS
The Trust established under a Pooling and Servicing Agreement or a
Trust Agreement will terminate upon notice to the Trustee following the earlier
to occur of (i) the final payment or other liquidation of such last 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 Master Servicer or the
Security Guaranty Insurer, if any, as described below, (iii) mutual consent of
the Master Servicer, the Security Guaranty Insurer, if any, and all
Securityholders 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 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 Security Guaranty Insurer, if any, may, at its
option, purchase, on the next succeeding Remittance Date, all of the Loans and
any related REO Properties at a price equal to the Termination Price. If so
provided in the related Prospectus Supplement, the Master Servicer or another
entity may purchase some or all of the Loans under the circumstances described
in such Prospectus Supplement.
On any Remittance Date on or after the Cross-Over Date on which 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
Loans, the Security Guaranty Insurer, if any, may determine to purchase and may
cause the purchase from the Trust of all 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.
INDENTURE. The Indenture will be discharged with respect to a Series of
Notes (except with respect to certain continuing rights specified in the
Indenture) upon the delivery to the Trustee for cancellation of all the Notes of
such Series or, with certain limitations, upon deposit with the Trustee of funds
sufficient for the payment in full of all of the Notes of such Series.
In addition to such discharge with certain limitations, the Indenture
may provide that, if so specified with respect to the Notes of any Series, the
related Trust Fund will be discharged from any and all obligations in respect of
the Notes of such Series (except for certain obligations relating to temporary
Notes and exchange of Notes, to register the transfer of or exchange Notes of
such Series, to replace stolen, lost or mutilated Notes of such Series, to
maintain paying agencies and to hold monies for payment in trust) upon the
deposit with the Trustee, in trust, of money and/or direct obligations of or
obligations guaranteed by the United States of America which, through the
payment of interest and principal in respect thereof in accordance with their
terms, will provide money in an amount sufficient to pay the principal of and
each installment of interest on the Notes of such Series on the final scheduled
Remittance Date for such Notes and any installment of interest on such Notes in
accordance with the terms of the Indenture and the Notes of such Series. In the
event of any such defeasance and discharge of Notes of such Series, holders of
Notes of such Series would be able to look only to such money and/or direct
obligations for payment of principal and interest, if any, on their Notes until
maturity.
REMIC CONSIDERATIONS. If a REMIC election is made for a Series of
Securities, 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 Securityholders 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 Security Guaranty Insurer, if any, may notify the
Trustee of the Security Guaranty Insurer's determination to purchase from the
Trust all Loans and all property theretofore acquired by foreclosure, deed in
lieu of foreclosure, or otherwise in respect of any 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 Loans as of the day of purchase minus
amounts remitted from the Principal and Interest Account to the Distribution
Account representing collections of principal on such Loans during the current
Due Period, (y) 30 days' interest on such amount computed at the applicable
weighted average of the Adjusted Loan Remittance Rates, and (z) the interest
portion of any unreimbursed Insured Payment made by the Security Guaranty
Insurer, if any. Upon receipt of such direction by the Majority Securityholders
or of such notice from the Security Guaranty Insurer, the Trustee will notify
the holders of the residual interest in the Trust (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 Loans and all property
theretofore acquired by foreclosure, deed in lieu of foreclosure, or otherwise
in respect of any 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 Securityholders have given the Trustee the
direction described in clause (i) above, the Trustee is required to sell the
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 Securityholders shall permit or
direct in writing, after the expiration of the Purchase Option Period and (ii)
in the event that the Security Guaranty Insurer has given the Trustee notice of
the Security Guaranty Insurer's determination to purchase the assets described
in clause (ii) preceding, the Security 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 Security 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 Securityholders and the Security 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 Loans and all property
theretofore acquired by foreclosure, deed in lieu of foreclosure, or otherwise
in respect of any 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 Securityholders 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 Securityholders may
exercise any trust or power conferred on the Trustee with respect to the
Securities 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 Securities, only Holders of such Class or
Classes may exercise such trust or power.
EVENTS OF DEFAULT UNDER THE INDENTURE; RIGHTS OF NOTEHOLDERS
Unless otherwise specified in the related Prospectus Supplement, Events
of Default under the Indenture for each Series of Notes include: (i) a default
for thirty (30) days or more in the payment of any principal of or interest on
any Note of such Series; (ii) failure to perform any other covenant of the
Representative or the Trust Fund in the Indenture which continues for a period
of sixty (60) days after notice thereof is given in accordance with the
procedures described in the related Prospectus Supplement; (iii) any
representation or warranty made by the Representative or the Trust Fund in the
Indenture or in any certificate or other writing delivered pursuant thereto or
in connection therewith with respect to or affecting such Series having been
incorrect in a material respect as of the time made, and such breach is not
cured within sixty (60) days after notice thereof is given in accordance with
the procedures described in the related Prospectus Supplement; (iv) certain
events of bankruptcy, insolvency, receivership or liquidation of the
Representative or the Trust Fund; or (v) any other Event of Default provided
with respect to Notes of that Series.
If an Event of Default with respect to the Notes of any Series at the
time outstanding occurs and is continuing, either the Trustee or the Holders of
a majority of the then aggregate outstanding amount of the Notes of such Series
may declare the principal amount of all the Notes of such Series to be due and
payable immediately. Such declaration may, under certain circumstances, be
rescinded and annulled by the Holders of a majority in aggregate outstanding
amount of the Notes of such Series.
If, following an Event of Default with respect to any Series of Notes,
the Notes of such Series have been declared to be due and payable, the Trustee
may, in its discretion, notwithstanding such acceleration, elect to maintain
possession of the collateral securing the Notes of such Series and to continue
to apply distributions on such collateral as if there had been no declaration of
acceleration if such collateral continues to provide sufficient funds for the
payment of principal of and interest on the Notes of such Series as they would
have become due if there had not been such a declaration. In addition, the
Trustee may not sell or otherwise liquidate the collateral securing the Notes of
a Series following an Event of Default other than a default in the payment of
any principal or interest on any Note of such Series for thirty (30) days or
more, unless (a) the Holders of 100% of the then aggregate outstanding amount of
the Notes of such Series consent to such sale, (b) the proceeds of such sale or
liquidation are sufficient to pay in full the principal of and accrued interest
due and unpaid on the outstanding Notes of such Series at the date of such sale
or (c) the Trustee determines that such collateral would not be sufficient on an
ongoing basis to make all payments on such Notes as such payments would have
become due if such Notes had not been declared due and payable, and the Trustee
obtains the consent of the Holders of 66B% of the then aggregate outstanding
amount of the Notes of such Series.
In the event that the Trustee liquidates the collateral in connection
with an Event of Default involving a default for thirty (30) days or more in the
payment of principal of or interest on the Notes of a Series, the Indenture
provides that the Trustee will have a prior lien on the proceeds of any such
liquidation for unpaid fees and expenses. As a result, upon the occurrence of
such an Event of Default, the amount available for distribution to the
Noteholders may be less than would otherwise be the case. However, the Trustee
may not institute a proceeding for the enforcement of its lien except in
connection with a proceeding for the enforcement of the lien of the Indenture
for the benefit of the Noteholders after the occurrence of such an Event of
Default.
Unless otherwise specified in the related Prospectus Supplement, in the
event the principal of the Note of a Series is declared due and payable, as
described above, the Holders of any such Notes issued at a discount from par may
be entitled to receive no more than an amount equal to the unpaid principal
amount thereof less the amount of such discount which is unamortized.
Subject to the provisions of the Indenture relating to the duties of
the Trustee, in case an Event of Default shall occur and be continuing with
respect to a Series of Notes, the Trustee will be under no obligation to
exercise any of the rights or powers under the Indenture at the request or
direction of any of the Holders of Notes of such Series, unless such Holders
offered to the Trustee security or indemnity satisfactory to it against the
costs, expenses and liabilities which might be incurred by it in complying with
such request or direction. Subject to such provisions for indemnification and
certain limitations contained in the Indenture, the Holders of a majority of the
then aggregate outstanding amount of the Notes of such Series shall have the
right to direct the time, method and place of conducting any proceeding for any
remedy available to the Trustee or exercising any trust or power conferred on
the Trustee with respect to the Notes of such Series, and the Holders of a
majority of the then aggregate outstanding amount of the Notes of such Series
may, in certain cases, waive any default with respect thereto, except a default
in the payment of principal or interest or a default in respect of a covenant or
provision of the Indenture that cannot be modified without the waiver or consent
of all the Holders of the outstanding Notes of such Series affected thereby.
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 Security Guaranty Insurer, if any, without the notice to, or consent of,
the Securityholders, 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 Securityholder 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 Securities without the consent of the Holder of such Security
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 Securities affected thereby, upon the prior written
consent of the SBA and the Security 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 Securities without the consent of the
Holders of 100% of each Class of Securities 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 Security Guaranty Insurer, if any, without the notice to
or consent of the Securityholders, 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, if the Trustee becomes
insolvent or if the Trustee enters into certain business combinations. 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.
CERTAIN LEGAL ASPECTS OF THE LOANS
GENERAL
The following discussion contains summaries, which are general in
nature, of certain legal matters relating to the 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 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 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 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 Securityholders if a Mortgaged Property securing a 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 LLP, 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
or Notes 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 Certificates or Notes. 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. In addition, if the related Prospectus
Supplement so provides, the transaction documents for a Trust may provide that
an election will be made on or after September 1, 1997 to qualify such Trust as
a Financial Asset Securitization Investment Trust ("FASIT") pursuant to new
provisions of the Code which will be effective as of such date. 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 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.
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. The REMIC Certificates will be "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
both 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 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. 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. 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, Federal Tax Counsel 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 under then
existing law 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 "real estate assets" within the meaning of Section 856(c)(5)(A) of the Code,
and assets described in 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 Internal Revenue 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. OID Regulations
concerning contingent payment debt instruments do not apply to the REMIC Regular
Certificates.
The OID Regulations 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 Remittance Date (or in the case of the first such period, begins on
the Closing Date) and ends on the next succeeding Remittance 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. Accordingly, if the interest on a
REMIC Regular Certificate does not constitute "qualified stated interest," the
REMIC Regular Certificate will have original issue discount. 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 reasonable legal remedies exist to compel timely
payment, or the debt instrument otherwise provides terms and conditions that
make the likelihood of late payment (other than a late payment that occurs
within a reasonable grace period) or nonpayment of interest a remote
contingency, as defined in the OID Regulations. Any terms or conditions that do
not reflect arm's length dealing or that the holder does not intend to enforce
are not considered. It is unclear whether the terms and conditions of the Trust
Assets underlying the REMIC Regular Certificates or the terms and conditions of
the REMIC Regular Certificates are considered when determining whether the
likelihood of late payment or nonpayment of interest is a remote contingency.
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 terms or conditions that would make the likelihood of late payment or
nonpayment of interest a remote contingency.
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 Remittance
Dates but ends prior to each Remittance 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, and (iii) it does not provide for any principal payments that are
contingent, as defined in the OID Regulations, except as provided in (i) above.
Because the OID Regulations relating to contingent payment debt instruments do
not apply to REMIC regular interests, principal payments on the REMIC Regular
Certificates should not be considered contingent for this purpose.
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. Federal Tax Counsel is unable to opine under current law how a
Variable Rate REMIC Regular Certificate would be taxed if such REMIC Regular
Certificate were treated as a contingent payment debt obligation since the OID
Regulations relating to contingent payment debt obligations do not apply to
REMIC regular interests.
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 or Interest
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.
Provisions governing the relationship between excess inclusions and the
alternative minimum tax provide 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. While these provisions are
generally effective for tax years beginning after December 31, 1986, a taxpayer
may elect to have them apply only with respect to tax years beginning after
August 20, 1996.
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 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 derives 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 a 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 cause
it to be subject to such tax. This provision will not affect the REMIC's ability
to accept substitute Loans or to sell defective 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 REMIC Residual Certificates in the
related REMIC rather than by the REMIC Regular Certificates, unless otherwise
specified in the Prospectus Supplement.
DEALERS' ABILITY TO MARK-TO-MARKET REMIC RESIDUAL CERTIFICATES.
Treasury regulations 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.
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 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 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, (iii) an estate
whose income is includible in gross income for United States federal income
taxation regardless of its source, and (iv) a trust other than a "foreign trust"
as defined in Section 7701(a)(31) of the Code. 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 REMIC Certificates could claim the
exemption from federal income and withholding tax.
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 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 ISSUED BY A GRANTOR TRUST
The discussion under this heading applies only to a series of
Certificates with respect to which a REMIC election is not made and for which
the Trust is classified as a grantor trust for federal income tax purposes.
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 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 Master
Servicer's servicing fee, or other amounts, if any, paid to (or retained by) the
Master Servicer or its affiliates, as specified in the applicable Prospectus
Supplement, represent greater than an arm's length consideration for servicing
the Loans and should be characterized for federal income tax purposes as an
ownership interest in the 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 Master 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 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 a 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 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 Loan. The method of allocating
such basis among the 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
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 a
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 a Loan under a constant yield method based on the yield of
the Loan to such holder, provided that such Loan was originated after September
27, 1985. Premium allocable to a Loan originated on or before that date should
be allocated among the principal payments on the 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 Loans or taking
account of a reasonable prepayment assumption, and Federal Tax Counsel is unable
to opine on this issue.
If a 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
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 Loan. The method of allocating
such basis among the 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 on 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
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
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 (or, after September 1,
1997, a FASIT), (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.
NON-REMIC CERTIFICATES AND NOTES OF A TRUST INTENDED TO BE
CHARACTERIZED AS A PARTNERSHIP
The discussion under this heading applies only to a series of
Certificates and Notes with respect to which a REMIC election is not made and
for which the Trust is intended to be classified as a partnership for federal
income tax purpose.
Federal Tax Counsel will deliver its opinion for a Trust which is
intended to be a partnership for federal income tax purposes, as specified in
the related Prospectus Supplement, generally to the effect that the Trust will
not be an association (or publicly traded partnership) taxable as a corporation
for federal income tax purposes. This opinion will be based on the assumption
that the terms of the Agreements and related documents will be complied with,
such that an election has not been and will not be made to treat the Trust as an
association taxable as a corporation, and on counsel's conclusion that the
nature of the income of the Trust will exempt it from the rule that certain
publicly traded partnerships are taxable as corporations or such rule is
otherwise inapplicable to the Trust, so that the Trust will not be characterized
as a publicly traded partnership taxable as a corporation.
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 (or, after September 1, 1997, a FASIT), (ii) substantially all of
the assets of the entity are debt obligations, and more than 50 percent of such
debt obligations consists 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 the Trust were treated as a taxable mortgage pool, it 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. Federal Tax Counsel will
deliver its opinion for a Trust which is intended to be a partnership for
federal income tax purposes, as specified in the related Prospectus Supplement,
generally to the effect that the Trust will not be a taxable mortgage pool. This
opinion will be based on the assumption that the terms of the Agreements and
related documents will be complied with, and on counsel's conclusion that either
the number of classes of debt obligations issued be the Trust, or the nature of
the assets held by the Trust, will exempt the Trust from treatment as a taxable
mortgage pool.
If the Trust were taxable as a corporation for federal income tax
purposes, the Trust would be subject to corporate income tax on its taxable
income. The Trust's taxable income would include all its income, possibly
reduced by its interest expense on the Notes. Any such corporate income tax
could materially reduce cash available to make payments on the Notes and
distributions on the Certificates, and Certificateholders could be liable for
any such tax that is unpaid by the Trust. In additions, all distributions to the
Certificateholders would be taxable as dividends.
TAX CONSEQUENCES TO HOLDERS OF THE NOTES ISSUED BY A PARTNERSHIP
TREATMENT OF THE NOTES AS INDEBTEDNESS. The Trust will agree, and the
Noteholders will agree by their purchase of Notes, to treat the Notes as debt
for federal income tax purposes. Except as otherwise provided in the related
Prospectus Supplement, Federal Tax Counsel will advise the Representative that
in its opinion the Notes will be classified as debt for federal income tax
purposes.
POSSIBLE ALTERNATIVE TREATMENTS OF THE NOTES. If, contrary to the
opinion of counsel, the Internal Revenue Service successfully asserted that one
or more of the Notes did not represent debt for federal income tax purposes, the
Notes might be treated as equity interests in the Trust. If so treated, the
Trust might be taxable as a corporation with the adverse consequences described
above (and the taxable corporation would not be able to reduce its taxable
income by deductions for interest expense on Notes recharacterized as equity).
Alternatively, the Trust might be treated as a publicly traded partnership that
would not be taxable as a corporation because it would meet certain qualifying
income tests. Nonetheless, treatment of the Notes as equity interests in such a
publicly traded partnership could have adverse tax consequences to certain
holders. For example, income to foreign holders generally would be subject to
United States federal income tax and United States federal income tax return
filing and withholding requirements, and individual holders might be subject to
certain limitations on their ability to deduct their share of the Trust's
expenses.
INTEREST INCOME ON THE NOTES. The stated interest on the Notes will be
taxable to a Noteholder as ordinary income when received or accrued in
accordance with such Noteholder's method of tax accounting. It is not
anticipated that the Notes will be issued with original issue discount within
the meaning of Section 1273 of the Code. A subsequent holder who purchases a
Note at a discount that exceeds a statutorily defined DE MINIMIS amount will be
subject to the "market discount" rules of the Code, and a holder who purchases a
Note at a premium will be subject to the premium amortization rules of the Code.
SALE OR OTHER DISPOSITION. If a Noteholder sells a Note, the holder
will recognize gain or loss in an amount equal to the difference between the
amount realized on the sale and the holder's adjusted tax basis in the Note. The
adjusted tax basis of a Note to a particular Noteholder will equal the holder's
cost for the Note, increased by any original issue discount (if any), market
discount and gain previously included by such Noteholder in income with respect
to the Note and decreased by the amount of bond premium (if any) previously
amortized and by the amount of principal payments previously received by such
Noteholder with respect to such Note. Subject to the rules of the Code
concerning market discount on the Notes, any such gain or loss generally will be
capital gain or loss if the Note was held as a capital asset. Capital losses
generally may be deducted only to the extent the Noteholder has capital gains
for the taxable year, although under certain circumstances non-corporate
Noteholders can deduct losses in excess of available capital gains.
FOREIGN HOLDERS. If interest paid (or accrued) to a Noteholder who is a
nonresident alien, foreign corporation or other non-United States person (a
"foreign person") is not effectively connected with the conduct of a trade or
business within the United States by the foreign person, the interest generally
will be considered "portfolio interest," and generally will not be subject to
United States federal income tax and withholding tax, if the foreign person (i)
is not actually or constructively a "10 percent shareholder" of the Trust or the
Representative (including a holder of 10% of the outstanding Certificates) or a
"controlled foreign corporation" with respect to which the Trust or the
Representative is a "related person" within the meaning of the Code and (ii)
provides the person otherwise required to withhold United States tax with an
appropriate statement, signed under penalties of perjury, certifying that the
beneficial owner of the Note is a foreign person and providing the foreign
person's name and address. If the information provided in the statement changes,
the foreign person must so inform the person otherwise required to withhold
United States tax within 30 days of such change. The statement generally must be
provided in the year a payment occurs (prior to such payment) or in either of
the two preceding years. If a Note is held through a securities clearing
organization or certain other financial institutions, the organization or
institution may provide a signed statement to the withholding agent. However, in
that case, the signed statement must be accompanies by a Form W-8 or substitute
form provided by the foreign person that owns the Note. If such interest in not
portfolio interest, then it will be subject to United States federal income and
withholding tax at a rate of 30%, unless reduced or eliminated pursuant to an
applicable tax treaty.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a Note by a foreign person will be exempt from United
States federal income and withholding tax, provided that (i) the gain is not
effectively connected with the conduct of a trade or business in the United
States by the foreign person and (ii) in the case of an individual foreign
person, the foreign individual is not present in the United States for 183 days
or more in the taxable year.
If the interest, gain or income on a Note held by a foreign person is
effectively connected with the conduct of a trade or business in the United
States by the foreign person (although exempt from the withholding tax
previously discussed if the holder provides an appropriate statement), the
holder generally will be subject to United States federal income tax on the
interest, gain or income at regular federal income tax rates. In addition, if
the foreign person is a foreign corporation, it may be subject to a branch
profits tax equal to 30% of its "effectively connected earnings and profits"
within the meaning of the Code for the taxable year, as adjusted for certain
items, unless it qualifies for a lower rate under an applicable tax treaty (as
modified by the branch profits tax rules).
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 for obtaining the
exemption from federal income and withholding tax.
INFORMATION REPORTING AND BACKUP WITHHOLDING. The Trust will be
required to report annually to the Internal Revenue Service, and to each
Noteholder of record, the amount of interest paid on the Notes (and the amount
of interest withheld for federal income taxes, if any) for each calendar year,
except as to exempt holders (generally, holders that are corporations,
tax-exempt organizations, qualified pension and profit-sharing trusts,
individual retirement accounts, or nonresident aliens who provide certification
as to their status as nonresidents). Accordingly, each holder (other than exempt
holders who are not subject to the reporting requirements) will be required to
provide, under penalties of perjury, a certificate containing the holder's name,
address, correct federal taxpayer identification number and a statement that the
holder is not subject to backup withholding. Should a nonexempt Noteholder fail
to provide the required certification, the Trust will be required to withhold
31% of the amount otherwise payable to the holder, and remit the withheld amount
to the Internal Revenue Service, as a credit against the holder's federal income
tax liability.
TAX CONSEQUENCES TO HOLDERS OF CERTIFICATES ISSUED BY A PARTNERSHIP
TREATMENT OF THE ISSUER AS A PARTNERSHIP. In the case of a Trust
intended to qualify as a partnership for federal income tax purposes, the Trust
and the Representative will agree, and the Certificateholders will agree by
their purchase of Certificates, to treat the Trust as a partnership for purposes
of United States federal and state income tax, franchise tax and any other tax
measured in whole or in part by income, with the assets of the partnership being
the assets held by the Trust, the partners of the partnership being the
Certificateholders, and the Notes, if any, being debt of the partnership.
However, the proper characterization of the arrangement involving the Trust, the
Certificates, the Notes, and the Master Servicer is not clear because there is
no authority on transactions closely comparable to that contemplated herein.
A variety of alternative characterizations are possible. For example,
because the Certificates have certain features characteristic of debt, the
Certificates might be considered debt of the Trust. Generally, provided the
Certificates are issued at or close to face value, any such characterization
should not result in materially adverse tax consequences to Certificateholders
as compared to the consequences from treatment of the Certificates as equity in
a partnership, described below. The following discussion assumes that the
Certificates represent equity interests in a partnership.
PARTNERSHIP TAXATION. As a partnership, the Trust will not be subject
to federal income tax. Rather, each Certificateholder will be required to
separately take into account such holder's allocated share of income, gains,
losses, deductions and credits of the Trust. The Trust's income will consist
primarily of interest and finance charges earned on the Loans (including
appropriate adjustments for market discount, original issue discount and bond
premium) and any gain upon collection or disposition of Loans. The Trust's
deductions will consist primarily of interest and original issue discount
accruing with respect to the Notes, servicing and other fees, and losses or
deductions upon collection or disposition of Loans.
The tax items of a partnership are allocable to the partners in
accordance with the Code, Treasury regulations and the partnership agreement
(here, the Trust Agreement and related documents). The Trust Agreement will
provide, in general, that the Certificateholders will be allocated taxable
income of the Trust for each month equal to the sum of (i) the interest that
accrues on the Certificates in accordance with their terms for such month,
including interest accruing at the Pass-Through Rate for such month and interest
on amounts previously due on the Certificates but not yet distributed; (ii) any
Trust income attributable to discount on the Loans that corresponds to any
excess of the principal amount of the Certificates over their initial issue
price; (iii) prepayment premium payable to the Certificateholders for such
month; and (iv) any other amounts of income payable to the Certificateholders
for such month. Such allocation will be reduced by any amortization by the Trust
of premium on Loans that corresponds to any excess of the issue price of
Certificates over their principal amount. All remaining taxable income of the
Trust will be allocated to the Representative. Based on the economic arrangement
of the parties, this approach for allocating Trust income should be permissible
under applicable Treasury regulations, although no assurance can be given that
the Internal Revenue Service would not require a greater amount of income to be
allocated to Certificateholders. Moreover, even under the foregoing method of
allocation, Certificateholders may be allocated income equal to the entire
Pass-Through Rate plus the other items described above even though the Trust
might not have sufficient cash to make current cash distributions of such
amount. Thus, cash basis holders will in effect be required to report income
from the Certificates on the accrual basis and Certificateholders may become
liable for taxes on Trust income even if they have not received cash from the
Trust to pay such taxes. In addition, because tax allocations and tax reporting
will be done on a uniform basis for all Certificateholders, but
Certificateholders may be purchasing Certificates at different times and at
different prices, Certificateholders may be required to report on their tax
returns taxable income that is greater or less than the amount reported to them
by the Trust.
If Notes are also issued, some or all of the taxable income allocated
to a Certificateholder that is a pension, profit sharing or employee benefit
plan or other tax-exempt entity (including an individual retirement account)
will constitute "unrelated business taxable income" generally taxable to such a
holder under the Code.
An individual taxpayer's share of expenses of the Trust (including fees
to the Servicer but not interest expense) would be miscellaneous itemized
deductions. Such deductions might be disallowed to the individual in whole or in
part and might result in such holder being taxed on an amount of income that
exceeds the amount of cash actually distributed to such holder over the life of
the Trust.
The Trust intends to make all tax calculations relating to income and
allocations to Certificateholders on an aggregate basis. If the Internal Revenue
Service were to require that such calculations be made separately for each Loan,
the Trust might be required to incur additional expense but it is believed that
there would not be a material adverse effect on Certificateholders.
DISCOUNT AND PREMIUM. It is believed that the Loans were not issued
with original issue discount and, therefore, the Trust should not have original
issue discount income. However, the purchase price paid by the Trust for the
Loans may be greater or less than the remaining principal balance of the Loans
at the time of purchase. If so, the Loan will have been acquired at a premium or
discount, as the case may be. (As indicated above, the Trust will make this
calculation on an aggregate basis, but might be required to recompute it on a
Loan by Loan basis.)
If the Trust acquires the Loans at a market discount or premium, the
Trust will elect to include any such discount in income currently as it accrues
over the life of the Loans or to offset any such premium against interest income
on the Loans. As indicated above, a portion of such market discount income or
premium deduction may be allocated to Certificateholders.
SECTION 708 TERMINATION. Under Section 708 of the Code, the Trust will
be deemed to terminate for federal income tax purposes if 50% or more of the
capital and profits interests in the Trust are sold or exchanged within a
12-month period. If such a termination occurs, the partnership will be
considered to transfer its assets and liabilities to a new partnership in
exchange for interests in that new partnership, which it would then be treated
as transferring to its partners. The Trust will not comply with certain
technical requirements that might apply when such a constructive termination
occurs. As a result, the Trust may be subject to certain tax penalties and may
incur additional expenses if it is required to comply with those requirements.
Furthermore, the Trust might not be able to comply due to lack of data.
DISPOSITION OF CERTIFICATES. Generally, capital gain or loss will be
recognized on a sale of Certificates in an amount equal to the difference
between the amount realized and the seller's tax basis in the Certificates sold.
A Certificateholder's tax basis in a Certificate will generally equal the
holder's cost increased by the holder's share of Trust income (includible in
income) and decreased by any distributions received with respect to such
Certificate. In addition, both the tax basis in the Certificates and the amount
realized on a sale of a Certificate would include the holder's share of the
Notes and other liabilities of the Trust. A holder acquiring Certificates at
different prices may be required to maintain a single aggregate adjusted tax
basis in such Certificates, and, upon sale or other disposition of some of the
Certificates, allocate a portion of such aggregate tax basis to the Certificates
sold (rather than maintaining a separate tax basis in each Certificate for
purposes of computing gain or loss on a sale of that Certificate).
Any gain on the sale of a Certificate attributable to the holder's
share of unrecognized accrued market discount on the Loans would generally be
treated as ordinary income to the holder and would give rise to special tax
reporting requirements. The Trust does not expect to have any other assets that
would give rise to such special reporting requirements. Thus, to avoid those
special reporting requirements, the Trust will elect to include market discount
in income as it accrues.
If a Certificateholder is required to recognize an aggregate amount of
income (not including income attributable to disallowed itemized deductions
described above) over the life of the Certificates that exceeds the aggregate
cash distributions with respect thereto, such excess will generally give rise to
a capital loss upon the retirement of the Certificates.
ALLOCATIONS BETWEEN REPRESENTATIVE AND TRANSFEREES. In general, the
Trust's taxable income and losses will be determined monthly and the tax items
for a particular calendar month will be apportioned among the Certificateholders
in proportion to the principal amount of Certificates owned by them as of the
close of the last day of such month. As a result, a holder purchasing
Certificates may be allocated tax items (which will affect its tax liability and
tax basis) attributable to periods before the actual transaction.
The use of such a monthly convention may not be permitted by existing
regulations and federal tax counsel is unable to opine on the matter. If a
monthly convention is not allowed (or only applies to transfers of less than all
of the partner's interest), taxable income or losses of the Trust might be
reallocated among the Certificateholders. The Trust's method of allocation
between transferors and transferees may be revised to conform to a method
permitted by future regulations.
SECTION 754 ELECTION. In the event that a Certificateholder sells its
Certificates at a profit (loss), the purchasing Certificateholder will have a
higher (lower) basis in the Certificates than the selling Certificateholder had.
The tax basis of the Trust's assets will not be adjusted to reflect that higher
(or lower) basis unless the Trust were to file an election under Section 754 of
the Code. In order to avoid the administrative complexities that would be
involved in keeping accurate accounting records, as well as potentially onerous
information reporting requirements, the Trust currently does not intend to make
such election. As a result, Certificateholders might be allocated a greater or
lesser amount of Trust income than would be appropriate based on their own
purchase price for Certificates.
ADMINISTRATIVE MATTERS. The Trustee is required to keep or have kept
complete and accurate books of the Trust. Such books will be maintained for
financial reporting and tax purposes on an accrual basis and the fiscal year of
the Trust will be the calendar year. The Trustee will file a partnership
information return (Internal Revenue Service Form 1065) with the Internal
Revenue Service for each taxable year of the Trust and will report each
Certificateholder's allocable share of items of Trust income and expense to
holders and the Internal Revenue Service on Schedule K-1. The Trust will provide
the Schedule K-1 information to nominees that fail to provide the Trust with the
information statement described below and such nominees will be required to
forward such information to the beneficial owners of the Certificates.
Generally, holders must file tax returns that are consistent with the
information return filed by the Trust or be subject to penalties unless the
holder notifies the Internal Revenue Service of all such inconsistencies.
Under Section 6031 of the Code, any person that holds Certificates as a
nominee at any time during a calendar year is required to furnish the Trust with
a statement containing certain information on the nominee, the beneficial owners
and the Certificates so held. Such information includes (i) the name, address
and taxpayer identification number of the nominee and (ii) as to each beneficial
owner (x) the name, address and identification number of such person, (y)
whether such person is a United States person, a tax-exempt entity or a foreign
government, an international organization, or any wholly owned agency or
instrumentality of either of the foregoing, and (z) certain information on
Certificates that were held, bought or sold on behalf of such person throughout
the year. In addition, brokers and financial institutions that hold Certificates
through a nominee are required to furnish directly to the Trust information as
to themselves and their ownership of Certificates. A clearing agency registered
under Section 17A of the Exchange Act is not required to furnish any such
information statement to the Trust. The information referred to above for any
calendar year must be furnished to the Trust on or before the following January
31. Nominees, brokers and financial institutions that fail to provide the Trust
with the information described above may be subject to penalties.
The Representative will be designated as the tax matters partner in the
related Trust Agreement and, as such, will be responsible for representing the
Certificateholders in any dispute with the Internal Revenue Service. The Code
provides for administrative examination of a partnership as if the partnership
were a separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire before three years after the date on which the
partnership information return is filed. Any adverse determination following an
audit of the return of the Trust by the appropriate taxing authorities could
result in an adjustment of the returns of the Certificateholders, and, under
certain circumstances, a Certificateholder may be precluded from separately
litigating a proposed adjustment to the items of the Trust. An adjustment could
also result in an audit of a Certificateholder's returns and adjustments of
items not related to the income and losses of the Trust.
TAX CONSEQUENCES TO FOREIGN CERTIFICATEHOLDERS. It is not clear and
federal tax counsel is unable to opine whether the Trust would be considered to
be engaged in a trade or business in the United States for purposes of federal
withholding taxes with respect to non-United States persons because there is no
clear authority dealing with that issue under facts substantially similar to
those described herein. Although it is not expected that the Trust would be
engaged in a trade or business in the United States for such purposes, the Trust
will withhold as if it were so engaged in order to protect the Trust from
possible adverse consequences of a failure to withhold. The Trust expects to
withhold on the portion of its taxable income that is allocable to foreign
Certificateholders pursuant to Section 1446 of the Code, as if such income were
effectively connected to a United States trade or business, at a rate of 35% for
foreign holders that are taxable as corporations and 39.6% for all other foreign
holders. Subsequent adoption of Treasury regulations or the issuance of other
administrative pronouncements may require the Trust to change its withholding
procedures.
If the trust is engaged in a United States trade or business, each
foreign holder might be required to file a United States individual or corporate
income tax return (including, in the case of a corporation, the branch profits
tax) on its share of the Trust's income. A foreign holder generally would be
entitled to file with the Internal Revenue Service a claim for refund with
respect to taxes withheld by the Trust taking the position that no taxes were
due because the Trust was not engaged in a United States trade or business.
However, interest payments made (or accrued) to a Certificateholder who is a
foreign person generally will be considered guaranteed payments to the extent
such payments are determined without regard to the income of the Trust, and for
that reason or because of the nature of the assets of the Trust probably will
not be considered "portfolio interest." As a result, even if the Trust was not
considered to be engaged in a United States trade or business,
Certificateholders will be subject to United States federal income tax which
must be withheld at a rate of 30%, unless reduced or eliminated pursuant to an
applicable treaty. A foreign holder would be entitled to claim a refund for such
withheld tax, taking the position that the interest was portfolio interest and
therefore not subject to United States tax. However, the Internal Revenue
Service may disagree and no assurance can be given as to the appropriate amount
of tax liability. As a result, each potential foreign Certificateholder should
consult its tax advisor as to whether an interest in a Certificate is an
unsuitable investment.
BACKUP WITHHOLDING. Distributions made on the Certificates and proceeds
from the sale of the Certificates will be subject to a "backup" withholding tax
of 31% if, in general, the Certificateholder fails to comply with certain
identification procedures, unless the holder is an exempt recipient under
applicable provisions of the Code.
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 Security 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 Security 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 Securities 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
U.S. 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 Loans and any other assets of the Trust and not merely an
interest in the Securities, the assets of the Trust would become subject to the
fiduciary investment standards of ERISA, and transactions occurring between the
Representative, the Trustee, the Master Servicer, the Security 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 Securities or to the servicing
of the Loans are noted below.
Regardless of whether the Securities are treated as debt or equity for
purposes of ERISA, the acquisition or holding of Securities which are Notes by
or behalf of a Plan could still be considered to give rise to a prohibited
transaction if the Trusts is or becomes a party in interest or disqualified
person with respect to such Plan or in the event that a subsequent transfer of a
Note is made between a Plan and such party in interest or disqualified person.
However, one or more Investor Based Exemptions referred to below may be
applicable to exempt such prohibited transaction.
The DOL 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 Loans and the property securing such Loans, and for
indemnifying holders of Securities 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 Loans, or 1% of
the principal balance of the largest covered pooled 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 Loans, plus reasonable compensation for
services provided to the Trust.
In addition, PTCE 83-1 exempts the initial sale of Securities to a Plan
with respect to which the Representative, the Security Guaranty Insurer, the
Master Servicer, or the Trustee is a party in interest if the Plan does not pay
more than fair market value for such Securities and the rights and interests
evidenced by such Securities are not subordinated to the rights and interests
evidenced by other Securities 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 Master
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
Master Servicer, the Security 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 Securities is expressly approved by an
independent fiduciary who has authority to manage and control those plan assets
being invested in Securities; (ii) the Plan pays no more for the Securities 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
Securities to the Plan; (iv) the total value of the Securities purchased by such
Plan does not exceed 25% of the amount issued; and (v) at least 50% of the
aggregate amount of Securities is acquired by persons independent of the
Representative, the Trustee, the Master Servicer, and the Security Guaranty
Insurer.
Before purchasing Securities a fiduciary of a Plan should confirm that
the Trust is a "mortgage pool," that the Securities 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 Securities on behalf of a Plan.
In addition, the DOL has granted to certain underwriters and/or
placement agents individual prohibited transaction exemptions (each on
"Underwriter Exemption") 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 Securities 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 Underwriter
Exemption which may be applicable to the Securities. The conditions of
Underwriter Exemption, if applied, will be set forth in "ERISA Considerations"
in the Prospectus Supplement.
One or more other prohibited transaction exemptions issued by the DOL
may be available to a Plan investing in Securities depending in part upon the
type of Plan fiduciary making the decision to acquire a Security 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, PTCE
84-14, regarding investments effectuated by "qualified plan asset managers",
PTCE 96-23, regarding investments effectuated by "in-house asset managers" and
PTCE 95-60, regarding investments by insurance company general accounts
("Investor Based Exemptions"). However, even if the conditions specified in an
Underwriter 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 Security 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 Securities 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 Securities offered thereby will constitute "mortgage related
securities" for purposes of SMMEA. No representation is made herein as to
whether the Securities 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 Securities
as legal investments for such purchasers prior to investing in any Class of
Securities.
PLAN OF DISTRIBUTION
The Securities 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 Securities will be determined.
The Securities 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
Securities described in the related Prospectus Supplement, if they are
purchased. If Securities 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 Securities of such Series.
The place and time of delivery for the Securities 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
Securities 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 Securities of each Series will
be passed upon for the Underwriter of the Securities of each Series by Stroock &
Stroock & Lavan LLP, New York, New York. Stroock & Stroock & Lavan LLP has
performed legal services for the Representative and it is expected that it will
continue to perform such services in the future.
EXPERTS
The consolidated financial statements of The Money Store Inc. as of
December 31, 1996 and 1995 and for each of the three years in the period ended
December 31, 1996 incorporated by reference herein have been audited by KPMG
Peat Marwick LLP, independent accountants, as stated in their opinion given upon
their authority as experts in accounting and auditing.
FINANCIAL INFORMATION
A new Trust will be formed to own the Trust Assets and to issue each
Series of Securities. Each such Trust will have no assets or obligations prior
to the issuance of the Securities 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 Securities 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 securities address the likelihood of
receipt by securityholders of all distributions on the underlying mortgage
loans. These ratings address the structural, legal and issuer-related aspects
associated with such securities, the nature of the underlying mortgage loans and
the credit quality of the guarantor, if any. Ratings on mortgage pass-through
securities 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, securityholders might
suffer a lower than anticipated yield, and, in addition, holders of stripped
pass-through securities in extreme cases might fail to recoup their underlying
investments.
A rating of a security 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................................................. 6
Adjusted Loan Remittance Rate................................... 41
Agreements...................................................... 5
Amortization Period............................................. 9
ARM............................................................. 81
Auction Rate Securities......................................... 2
Balloon Loans................................................... 20
Bankruptcy Bond................................................. 14
Basis Risk Shortfall............................................ 64
Buydown Funds................................................... 65
CDC............................................................. 27
Cede............................................................ 4
Certificateholder............................................... 2
Certificates.................................................... 1
Certified Lender................................................ 26
Certified Lender Program........................................ 26
Class........................................................... 2
Class R Certificates............................................ 58
Cleanup Costs................................................... 64
Code............................................................ 17
Commission...................................................... 3
Compensating Interest........................................... 16
Contingency Fee................................................. 54
Conventional Commercial Loan.................................... 27
Conventional Commercial Loan Program............................ 27
Curtailment..................................................... 16
Cut-Off Date.................................................... 36
Designated Depository Institution............................... 53
Detailed Description............................................ 24
Determination Date.............................................. 16
Distribution Account............................................ 38
DTC............................................................. 4
ERISA........................................................... 18
Event of Nonpayment............................................. 56
Federal Tax Counsel............................................. 17
Final Determination............................................. 58
FTA............................................................. 50
Funding Period.................................................. 8
Guaranteed Interest............................................. 26
Guaranteed Participant Program.................................. 26
Guaranty........................................................ 4
Guaranty Insurance Policy....................................... 13
Holders......................................................... 2
Indenture....................................................... 5
Indirect Participant............................................ 42
Insurance Proceeds.............................................. 16
Insurance Paying Agent.......................................... 44
Insured Payment................................................. 13
Interest Rate................................................... 2
IRS............................................................ 58
LIBOR........................................................... 2
Liquidation Proceeds............................................ 16
Loan Guaranty Agreement......................................... 26
Loan Note....................................................... 50
Loans........................................................... 1
Lockout Periods................................................. 7
Lower Tier REMIC................................................ 74
Majority Securityholders........................................ 56
Master Servicer................................................. 1
Monthly Advance................................................. 16
Mortgage........................................................ 50
Mortgage Interest Rate.......................................... 6
Mortgage Pool................................................... 89
Mortgage Pool Insurance Policy.................................. 14
Mortgaged Properties............................................ 6
Multi-Party Agreement........................................... 9
1933 Act........................................................ 3
Non-REMIC Certificates.......................................... 18
Non-SBA Loans................................................... 6
Noteholders..................................................... 2
Notes........................................................... 1
Originators..................................................... 1
Participants.................................................... 42
Pass-Through Rate............................................... 2
Permitted Instruments........................................... 53
Permitted Investments........................................... 47
Plan............................................................ 88
Pool............................................................ 1
Pooling and Servicing Agreement................................. 5
Pool Insurer.................................................... 45
Preferred Lender................................................ 26
Preferred Lender Program........................................ 26
Pre-Funding Account............................................. 8
Prepayment Assumption........................................... 67
Prime Rate...................................................... 2
Principal and Interest Account.................................. 53
Prospectus Supplement........................................... 1
Rating Agency................................................... 15
REMIC........................................................... 2
REMIC Certificates.............................................. 64
REMIC Regular Certificates...................................... 17
REMIC Residual Certificates..................................... 17
REMIC Regulations............................................... 65
Remittance Date................................................. 2
Representative.................................................. 1
Retained Interest............................................... 10
Reserve Account................................................. 13
Revolving Period................................................ 9
Sale and Servicing Agreement.................................... 5
SBA............................................................. 6
SBA Act......................................................... 7
SBA Loans....................................................... 1
SBA Rules and Regulations....................................... 54
SBA 504 Loans.................................................. 6
SBA 504 Loan Program............................................ 7
SBA Section 7(a) Loans.......................................... 6
Section 7(a) Program............................................ 7
Section 7(a) Companion Loans.................................... 6
Securities...................................................... 1
Security Guaranty Insurer....................................... 44
Securityholder.................................................. 2
Security Register............................................... 38
Senior Certificates............................................. 10
Senior Notes.................................................... 12
Servicing Advance............................................... 54
Servicing Fee................................................... 54
SMMEA........................................................... 18
Special Hazard Insurance Policy................................. 14
Special Hazard Insurer.......................................... 46
Spread Amount................................................... 13
Standard Hazard Insurance Policies.............................. 7
Strip Notes..................................................... 12
Subordinated Certificates....................................... 10
Subordinated Notes.............................................. 12
Sub-Servicer.................................................... 55
Successor Servicer.............................................. 57
Superlien....................................................... 64
Supplemental Interest Payments.................................. 47
T-Bill Rate..................................................... 2
Termination Notice.............................................. 58
Termination Price............................................... 58
Tiered REMICs................................................... 66
Trust .......................................................... 1
Trust Agreement................................................. 5
Trust Assets.................................................... 1
Trustee......................................................... 17
Trustee's Document File......................................... 50
UCC............................................................. 42
Underwriters.................................................... 90
Unguaranteed Interests.......................................... 1
United States person............................................ 77
Variable Rate REMIC Regular Certificate......................... 66
Yield Supplement Agreement...................................... 64
<PAGE>
APPENDIX I
AUCTION PROCEDURES
The following description of the Auction Procedures applies to each
Class of Auction Rate Securities (and may be different if otherwise set forth in
a related Prospectus Supplement). The term "Security," as used in this Appendix,
refers to each Class of Auction Rate Securities that are either Notes or
Certificates and the term "Securityholder" refers to Holders of Auction Rate
Securities.
DEFINITIONS
Capitalized terms used herein and not otherwise defined have the
meanings ascribed in the accompanying Prospectus and Prospectus Supplement.
Additionally, the following terms have the meanings ascribed to them:
"All Hold Rate" means ninety percent (90%) of One-Month LIBOR or such
other rate as may be set forth in the related Prospectus Supplement.
"Auction" means the implementation of the Auction Procedures on an
Auction Date.
"Auction Agent" means the initial auction agent under the initial
Auction Agent Agreement unless and until a substitute Auction Agent Agreement
becomes effective, after which "Auction Agent" shall mean the substitute auction
agent.
"Auction Agent Agreement" means the initial Auction Agent Agreement
unless and until a substitute Auction Agent Agreement is entered into, after
which "Auction Agent Agreement" shall mean such substitute Auction Agent
Agreement.
"Auction Agent Fee" has the meaning set forth in the Auction Agent
Agreement.
"Auction Agent Fee Rate" has the meaning set forth in the Auction Agent
Agreement.
"Auction Date" means, with respect to the Initial Period for each Class
of Securities, the date set forth in the related Prospectus Supplement and
thereafter, the Business Day immediately preceding the first day of each Auction
Period for each Security, other than:
(A) each Auction Period commencing after the ownership of the
Securities is no longer maintained in Book-Entry Form by DTC;
(B) each Auction Period commencing after and during the continuance
of an Event of Default; or
(C) each Auction Period commencing less than two Business Days
after the cure or waiver of an Event of Default.
Notwithstanding the foregoing, the Auction Date for one or more Auction Periods
may be changed pursuant to the related Agreement and the related Terms
Supplement, as described herein.
"Auction Period" means, with respect to each Security, the Interest
Period applicable to such Security during which time the applicable Security
Interest Rate is determined pursuant to the related Agreement and the related
Terms Supplement, which Auction Period (after the Initial Period for such
Security) initially shall consist of between 7 days and one year (as set forth
in the related Prospectus Supplement), as the same may be adjusted pursuant to
such related Agreement and the related Terms Supplement.
"Auction Period Adjustment" means an adjustment to the Auction Period
as provided in the related Terms Supplement, as described herein.
"Auction Procedures" means the procedures set forth in the related
Terms Supplement and described herein by which the Auction Rate applicable to a
Security is determined.
"Auction Rate" means, with respect to any Security, the rate of
interest per annum that results from the implementation of the Auction
Procedures and is determined as described in the related Agreement and the
related Terms Supplement and this Appendix I.
"Authorized Denominations" means, the dollar amount set forth in the
related Prospectus Supplement.
"Broker-Dealer" means the initial broker-dealer under the initial
Broker-Dealer Agreement or any other broker or dealer (each as defined in the
Securities Exchange Act of 1934, as amended), commercial bank or other entity
permitted by law to perform the functions required of a Broker-Dealer set forth
in the Auction Procedures that (a) is a Participant (or an affiliate of a
Participant), (b) has been appointed as such by the Representative and the
Trustee pursuant to the related Agreement and (c) has entered into a
Broker-Dealer Agreement that is in effect on the date of reference.
"Broker-Dealer Agreement" means each agreement between the Auction
Agent and a Broker-Dealer, and approved by Representative and the Trust,
pursuant to which the Broker-Dealer agrees to participate in Auctions as set
forth in the Auction Procedures, as from time to time amended or supplemented.
"Broker-Dealer Fee" has the meaning set forth in the Auction Agent
Agreement.
"Broker-Dealer Fee Rate" has the meaning set forth in the Auction Agent
Agreement.
"Effective Interest Rate" means, for any Loan and any collection
period, the per annum rate at which such Loan accrues interest during such
collection period.
"Existing Securityholder" means (i) with respect to and for the purpose
of dealing with the Auction Agent in connection with an Auction, a Person who is
a Broker-Dealer listed in the Existing Securityholder Registry at the close of
business on the Business Day immediately preceding such Auction and (ii) with
respect to and for the purpose of dealing with the Broker-Dealer in connection
with an Auction, a Person who is a beneficial owner of any Security.
"Existing Securityholder Registry" means the registry of Persons who
are owners of the Securities, maintained by the Auction Agent as provided in the
Auction Agent Agreement.
"Federal Funds Rate" means, for any date of determination, the federal
funds (effective) rate as published on page 118 of the Dow Jones Telerate
Service (or such other page as may replace that page on that service for the
purpose of displaying comparable rates or prices) on the immediately preceding
Business Day. If no such rate is published on such page on such date, "Federal
Funds Rate" shall mean for any date of determination, the Federal funds
(effective) rate as published by the Federal Reserve Board in the most recent
edition of Federal Reserve Statistical Release No. H.15 (519) that is available
on the Business Day immediately preceding such date.
"Initial Period" means, as to any Security, the period commencing on
the Closing Date of such Security and continuing through the day immediately
preceding the Security Initial Rate Adjustment Date for such Security.
"Interest Period" means, with respect to a Security, the Initial Period
for such Security and each period commencing on the Rate Adjustment Date for
such Security and ending on the day before (i) the next Rate Adjustment Date for
such Security or (ii) the final maturity date of such Security, as applicable.
"Market Agent" means the entity named as market agent under the related
Agreement, or any successor to it in such capacity thereunder.
"Maximum Auction Rate" generally means (i) for Auction Periods of 34
days or less, either (a) the greater of (1) One-Month LIBOR plus 0.60% or (2)
the Federal Funds Rate plus 0.60% (if both ratings assigned by the Rating
Agencies to the applicable Security are "Aa3" or "AA-" or better) or
(B)One-Month LIBOR plus 1.50% (if any one of the ratings assigned by the Rating
Agencies to the Security is less than "Aa3" or "AA-") or (ii) for Auction
Periods of greater than or equal to 35 days, either (a) the greater of One-Month
LIBOR or Three-Month LIBOR, plus in either case, 0.60% (if both of the ratings
assigned by the Rating Agencies to the applicable Security are "Aa3" or "AA-" or
better) or (B) the greater of One-Month LIBOR or Three-Month LIBOR, plus in
either case, 1.50% (if any one of the ratings assigned by the Rating Agencies to
the applicable Security is less than "Aa3" or "AA-") or such other rate as may
be set forth in the related Prospectus Supplement. For purposes of the Auction
Agent and the Auction Procedures, the ratings referred to in this definition
shall be the last ratings of which the Auction Agent has been given notice
pursuant to the Auction Agent Agreement.
"Net Loan Rate" for any Interest Period will equal the weighted average
Effective Interest Rate for the Collection Period immediately preceding such
Interest Period less the amount set forth in the related Prospectus Supplement.
"Non-Payment Rate" means One-Month LIBOR plus 1.50%, as the same may be
adjusted pursuant to a Terms Supplement or such other rate as may be set forth
in the related Prospectus Supplement.
"Person" means any individual, corporation, estate, partnership, joint
venture, association, joint stock company, trust (including any beneficiary
thereof), unincorporated organization or government or any agency or political
subdivision thereof.
"Potential Securityholder" means any Person (including an Existing
Securityholder that is (i) a Broker-Dealer when dealing with the Auction Agent
and (ii) a potential beneficial owner when dealing with a Broker-Dealer) who may
be interested in acquiring Securities (or, in the case of an Existing
Securityholder thereof, an additional principal amount of Securities).
"Rate Adjustment Date" means, with respect to each Security, the date
on which the applicable Security Interest Rate is effective and means, with
respect to each such Security, the date of commencement of each Auction Period.
"Rate Determination Date" means, with respect to any Security, the
Auction Date, or if no Auction Date is applicable to such Series, the Business
Day immediately preceding the date of commencement of an Auction Period.
"Security Initial Rate" means, with respect to any Class of Notes or
Certificates, the rate identified as such in the related Prospectus Supplement.
"Security Initial Rate Adjustment Date" means, with respect to any
Class of Notes, the date identified as such in the related Prospectus Supplement
and, with respect to any Class of Certificates, the date set forth in the
related Agreement or the related Terms Supplement.
"Three-Month LIBOR" means the London interbank offered rate for
deposits in U.S. dollars having a maturity of three months commencing on the
related LIBOR Determination Date (the "Three-Month Index Maturity") which
appears on Telerate Page 3750 as of 11:00 a.m., London time, on such LIBOR
Determination Date. If such rate does not appear on Telerate Page 3750, the rate
for that day will be determined on the basis of the rates at which deposits in
U.S. dollars, having the Three Month Index Maturity and in a principal amount of
not less than U.S. $1,000,000, are offered at approximately 11:00 a.m., London
time, on such LIBOR Determination Date to prime banks in the London interbank
market by the Reference Banks. The Auction Agent will request the principal
London office of each of such Reference Banks to provide a quotation of its
rate. If at least two such quotations are provided, the rate for that day will
be the arithmetic mean of the quotations. If fewer than two quotations are
provided, the rate for that day will be the arithmetic mean of the rates quoted
by major banks in New York City, selected by the Auction Agent, at approximately
11:00 a.m., New York City time, on such LIBOR Determination Date for loans in
U.S. dollars to leading European banks having the Three Month Index Maturity and
in a principal amount equal to an amount of not less than U.S. $1,000,000;
provided that if the banks selected as aforesaid are not quoting as mentioned in
this sentence, Three-Month LIBOR in effect for the applicable Interest Period
will be Three-Month LIBOR in effect for the previous Interest Period.
EXISTING SECURITYHOLDERS AND POTENTIAL SECURITYHOLDERS
Participants in each Auction will include: (1) "Existing
Securityholders," which shall mean any Securityholder according to the records
of the Auction Agent at the close of business on the Business Day preceding each
Auction Date; and (ii) "Potential Securityholders," which shall mean any person,
including any Existing Securityholder or a Broker/Dealer, who may be interested
in acquiring Securities (or, in the case of an Existing Securityholder, an
additional principal amount of the Security such Securityholder then holds). See
"--Broker-Dealer."
By purchasing a Security, whether in an Auction or otherwise, each
prospective purchaser of Securities or its Broker-Dealer must agree and will be
deemed to have agreed: (i) to participate in Auctions on the terms described
herein; (ii) so long as the beneficial ownership of the Securities is maintained
in Book-Entry Form to sell, transfer or otherwise dispose of the Securities only
pursuant to a Bid (as defined below) or a Sell Order (as defined below) in an
Auction, or to or through a Broker-Dealer, provided that in the case of all
transfers other than those pursuant to an Auction, the Existing Securityholder
of the Securities so transferred, its Participant or Broker-Dealer advises the
Auction Agent of such transfer; (iii) to have its beneficial ownership of
Securities maintained at all times in Book-Entry Form for the account of its
Participant, which in turn will maintain records of such beneficial ownership,
and to authorize such Participant to disclose to the Auction Agent such
information with respect to such beneficial ownership as the Auction Agent may
request; (iv) that a Sell Order placed by an Existing Securityholder will
constitute an irrevocable offer to sell the principal amount of the Security
specified in such Sell Order; (v) that a Bid placed by an Existing
Securityholder will constitute an irrevocable offer to sell the principal amount
of the Security specified in such Bid if the rate specified in such Bid is
greater than, or in some cases equal to, the Security Interest Rate of such
Security, determined as described herein; and (vi) that a Bid placed by a
Potential Securityholder will constitute an irrevocable offer to purchase the
amount, or a lesser principal amount, of the Security specified in such Bid if
the rate specified in such Bid is, respectively, less than or equal to the
Security Interest Rate of the specified Security, determined as described
herein.
The principal amount of the Securities purchased or sold may be subject
to probation procedures on the Auction Date. Each purchase or sale of Securities
on the Auction Date will be made for settlement on the first day of the Interest
Period immediately following such Auction Date at a price equal to 100% of the
principal amount thereof, plus accrued but unpaid interest thereon. The Auction
Agent is entitled to rely upon the terms of any Order submitted to it by a
Broker-Dealer.
AUCTION AGENT
The entity named in the related Prospectus Supplement, will be
appointed as Auction Agent to serve as agent for a Trust in connection with
Auctions. The Trustee and the Representative will enter into the Auction
Agreement with the Auction Agent. Any Auction Agent or Substitute Auction Agent
will be (i) a bank, national banking association or trust company duly organized
under the laws of the United States of America or any state or territory thereof
having its principal place of business in the Borough of Manhattan, New York, or
such other location as approved by the Trustee and the Market Agent in writing
and having a combined capital stock or surplus of at least $50,000,000, or (ii)
a member of the National Association of Securities Dealers, Inc. having a
capitalization of at least $50,000,000, and, in either case, authorized by law
to perform all the duties imposed upon it under the related Agreement and under
the Auction Agent Agreement. The Auction Agent may at any time resign and be
discharged of the duties and obligations created by the related Agreement by
giving at least 90 days notice to the Trustee, the Trust, the Representative and
the Market Agent. The Auction Agent may be removed at any time by the Trustee
upon the written direction of the Security Guaranty Insurer, if applicable, or,
with the consent of the Security Guaranty Insurer, if applicable, the
Securityholders of 66B% of the aggregate principal amount of the Securities then
outstanding, by an instrument signed by the Security Guaranty Insurer, if
applicable, or such Securityholders or their attorneys and filed with the
Auction Agent, the Representative, the Trustee and the Market Agent upon at
least 90 days' notice. Neither resignation nor removal of the Auction Agent
pursuant to the preceding two sentences will be effective until and unless a
Substitute Auction Agent has been appointed and has accepted such appointment.
If required by the Trust or the Representative or by the Market Agent, with the
Trust's and the Representative's consent, a Substitute Auction Agent Agreement
shall be entered into with a Substitute Auction Agent. Notwithstanding the
foregoing, the Auction Agent may terminate the Auction Agent Agreement if,
within 25 days after notifying the Trustee, the Trust, the Representative, the
Security Guaranty Insurer, if applicable, and the Market Agent in writing that
it has not received payment of any Auction Agent Fee due it in accordance with
the terms of the Auction Agent Agreement, the Auction Agent does not receive
such payment.
If the Auction Agent should resign or be removed or be dissolved, or if
the property or affairs of the Auction Agent shall be taken under the control of
any state or federal court or administrative body because of bankruptcy or
insolvency, or for any other reason, the Trustee, at the direction of the
Representative (after receipt of a certificate from the Market Agent confirming
that any proposed Substitute Auction Agent meets the requirements described in
the immediately preceding paragraph above), shall use its best efforts to
appoint a Substitute Auction Agent.
The Auction Agent is acting as agent for the Trust in connection with
Auctions. In the absence of bad, faith, negligent failure to act or negligence
on its part, the Auction Agent will not be liable for any action taken, suffered
or omitted or any error of judgment made by it in the performance of its duties
under the Auction Agent Agreement and will not be liable for any error of
judgment made in good faith unless the Auction Agent will have been negligent in
ascertaining (or failing to ascertain) the pertinent facts.
The Trustee will pay the Auction Agent the Auction Agent Fee on the
Note Remittance Date or Certificate Remittance Date set forth in the related
Prospectus Supplement, and will reimburse the Auction Agent upon its request for
all reasonable expenses, disbursements and advances incurred or made by the
Auction Agent in accordance with any provision of the Auction Agent Agreement or
the Broker-Dealer Agreements (including the reasonable compensation and the
expenses and disbursements of its agents and counsel). The Trust will indemnify
and hold harmless the Auction Agent for and against any loss, liability or
expense incurred without negligence or bad faith on the Auction Agent's part,
arising out of or in connection with the acceptance or administration of its
agency under the Auction Agent Agreement and the Broker-Dealer Agreements
including the reasonable costs and expenses (including the reasonable fees and
expenses of its counsel) of defending itself against any such claim or liability
in connection with its exercise or performance of any of its respective duties
thereunder and of enforcing this indemnification provision; provided that the
Trust will not indemnify the Auction Agent as described in this paragraph for
any fees and expenses incurred by the Auction Agent in the normal course of
performing its duties under the Auction Agent Agreement and under the
Broker-Dealer Agreements, such fees and expenses being payable as described
above.
BROKER-DEALER
Existing Securityholders and Potential Securityholders may participate
in Auctions only by submitting orders (in the manner described below) through a
"Broker-Dealer," including the Broker-Dealer, as the sole Broker-Dealer or any
other broker or dealer (each as defined in the Securities Exchange Act of 1934,
as amended), commercial bank or other entity permitted by law to perform the
functions required of a Broker-Dealer set forth below which (i) is a Participant
or an affiliate of a Participant, (ii) has been selected by the Trust and (iii)
has entered into a Broker-Dealer Agreement with the Auction Agent that remains
effective, in which the Broker-Dealer agrees to participate in Auctions as
described in the Auction Procedures, as from time to time amended or
supplemented.
The Broker-Dealers are entitled to a Broker-Dealer Fee, which is
payable by the Auction Agent from monies received from the Trustee, on the Note
Remittance Date or Certificate Remittance Date set forth in the related
Prospectus Supplement.
MARKET AGENT
In connection with each Series of Notes and the Certificates, the
"Market Agent," will act solely as agent of the Trust and will not assume any
obligation or relationship of agency or trust for or with any of the
Securityholders.
AUCTION PROCEDURES
GENERAL
Pursuant to the related Agreement and the related Terms Supplement,
Auctions to establish the Auction Rate for each Security issued by the Trust
will be held on each applicable Auction Date, except as described below, by
application of the Auction Procedures described herein. Such procedures are to
be applicable separately to each Class of Notes and each Class of Certificates.
The Auction Agent will calculate the Maximum Auction Rate, the All Hold
Rate and One-Month LIBOR or Three-Month LIBOR, as the case may be, on each
Auction Date. The Administrator will calculate and, no later than the Business
Day preceding each Auction Date, will report to the Auction Agent in writing,
the Net Loan Rate. If the ownership of a Security is no longer maintained in
Book-Entry Form, the Trustee will calculate the Maximum Auction Rate, and
Administrator will report to the Trustee in writing the Net Loan Rate, on the
Business Day immediately preceding the first day of each Interest Period
commencing after delivery of such Security. If an Event of Default has occurred,
under the Indenture or the Pooling and Servicing Agreement, as applicable, the
Trustee will calculate the Non-Payment Rate on the Rate Determination Date for
(i) each Interest Period commencing after the occurrence and during the
continuance of such Payment Default and (ii) any Interest Period commencing less
than two Business Days after the cure of any Event of Default. The Auction Agent
will determine One-Month LIBOR or the Three-Month LIBOR, as applicable, for each
Interest Period other than the Initial Period for a Security; provided, that if
the ownership of the Securities is no longer maintained in Book-Entry Form, or
if an Event of Default has occurred, then the Trustee will determine the
One-Month LIBOR or the Three-Month LIBOR, as applicable, for each such Interest
Period. The determination by the Trustee or the Auction Agent, as the case may
be, of the One-Month LIBOR or the Three-Month LIBOR, as applicable, will (in the
absence of manifest error) be final and binding upon the Securityholders and all
other parties. If calculated or determined by the Auction Agent, the Auction
Agent will promptly advise the Trustee of the One-Month LIBOR or the Three-Month
LIBOR, as applicable.
SUBMISSION OF ORDERS
So long as the ownership of the Securities is maintained in Book-Entry
Form, an Existing Securityholder may sell, transfer or otherwise dispose of
Securities only pursuant to a Bid or Sell Order (as hereinafter defined) placed
in an Auction or through a Broker-Dealer, provided that, in the case of all
transfers other than pursuant to Auctions, such Existing Securityholder, its
Broker-Dealer or its Participant advises the Auction Agent of such transfer.
Auctions for each Class of Notes and each Class of Certificates will be
conducted on each applicable Auction Date, if there is an Auction Agent on such
Auction Date, in the following manner (such procedures to be applicable
separately to each Class of Notes and each Class of Certificates).
Prior to the Submission Deadline (defined as 1:00 p.m., eastern time,
on any Auction Date or such other time on any Auction Date by which
Broker-Dealers are required to submit Orders to the Auction Agent as specified
by the Auction Agent from time to time) on each Auction Date relating to a
Security:
(a) each Existing Securityholder of the applicable Security may
submit to a Broker-Dealer by telephone or otherwise information as to: (i) the
principal amount and Class of outstanding Securities, if any, held by such
Existing Securityholder which such Existing Securityholder desires to continue
to hold without regard to the Security Interest Rate for such Securities for the
next succeeding Auction Period (a "Hold Order"); (ii) the principal amount and
Class of outstanding Securities, if any, which such Existing Securityholder
offers to sell if the Security Interest Rate for such Securities for the next
succeeding Auction Period will be less than the rate per annum specified by such
Existing Securityholder (a "Bid"); and/or (iii) the principal amount and Class
of outstanding Securities, if any, held by such Existing Securityholder which
such Existing Securityholder offers to sell without regard to the Security
Interest Rate for such Securities for the next succeeding Auction Period (a
"Sell Order"); and
(b) one or more Broker-Dealers may contact Potential
Securityholders to determine the principal amount and Class of Securities which
each such Potential Securityholder offers to purchase, if the Security Interest
Rate for such Securities for the next succeeding Auction Period will not be less
than the rate per annum specified by such Potential Securityholder (also a
"Bid").
Each Hold Order, Bid and Sell Order will be an "Order." Each Existing
Securityholder and each Potential Securityholder placing an Order is referred to
as a "Bidder."
Subject to the provisions described below under "Validity of Orders," a
Bid by an Existing Securityholder will constitute an irrevocable offer to sell:
(i) the principal amount and Class of the outstanding Securities specified in
such Bid if the Security Interest Rate for such Securities will be less than the
rate specified in such Bid, (ii) such principal amount or a lesser principal
amount and Class of the outstanding Securities to be determined as described
below in "Acceptance and Rejection of Orders," if the Security Interest Rate for
such Securities will be equal to the rate specified in such Bid or (iii) such
principal amount or a lesser principal amount of the then outstanding Securities
to be determined as described below under "Acceptance and Rejection of Orders,"
if the rate specified therein will be higher than the Security Interest Rate for
such Securities and Sufficient Bids (as defined below) have not been made.
Subject to the provisions described below under "Validity of Orders," a
Sell Order by an Existing Securityholder will constitute an irrevocable offer to
sell: (i) the principal amount of the Security specified in such Sell Order or
(ii) such principal amount or a lesser principal amount of outstanding
Securities of the specified Security as described below under "Acceptance and
Rejection of Orders," if Sufficient Bids have not been made.
Subject to the provisions described below under "Validity of Orders," a
Bid by a Potential Securityholder will constitute an irrevocable offer to
purchase: (i)the principal amount of the Security specified in such Bid if the
Security Interest Rate for such Securities will be higher than the rate
specified in such Bid or (ii) such principal amount or a lesser principal amount
of such Securities as described below in "Acceptance and Rejection of Orders,"
if the Security Interest Rate is equal to the rate specified in such Bid.
Each Broker-Dealer will submit in writing to the Auction Agent prior to
the Submission Deadline on each Auction Date all Orders obtained by such
Broker-Dealer and will specify with respect to each such Order: (i) the name of
the Bidder placing such Order; (ii) the aggregate principal amount and Class of
Security that are the subject of such Order; (iii) to the extent that such
Bidder is an Existing Securityholder: (a) the principal amount and Class of
Securities, if any, subject to any Hold Order placed by such Existing
Securityholder; (b) the principal amount, and Class of Securities, if any,
subject to any Bid placed by such Existing Securityholder and the rate specified
in such Bid; and (c) the principal amount, and Class of Securities, if any,
subject to any Sell Order placed by such Existing Securityholder, and (iv) to
the extent such Bidder is a Potential Securityholder, the rate specified in such
Potential Securityholder's Bid.
If any rate specified in any Bid contains more than three figures to
the right of the decimal point, the Auction Agent will round such rate up to the
next highest one-thousandth (.001) of one percent.
If an Order or Orders covering all Securities of the applicable Class
held by any Existing Securityholder are not submitted to the Auction Agent prior
to the Submission Deadline, the Auction Agent will deem a Hold Order to have
been submitted on behalf of such Existing Securityholder covering the principal
amount of Securities held by such Existing Securityholder and not subject to an
Order submitted to the Auction Agent.
Neither the Trust, the Representative, the Trustee nor the Auction
Agent will be responsible for any failure of a Broker-Dealer to submit an Order
to the Auction Agent on behalf of any Existing Securityholder or Potential
Securityholder.
An Existing Securityholder may submit multiple Orders, of different
types and specifying different rates, in an Auction with respect to Securities
then held by such Existing Securityholder. An Existing Securityholder that
offers to purchase additional Securities is, for purposes of such offer, treated
as a Potential Securityholder.
Any Bid specifying a rate higher than the Maximum Auction Rate will (i)
be treated as a Sell Order if submitted by a Existing Securityholder and (ii)
not be accepted if submitted by a Potential Securityholder.
VALIDITY OF ORDERS
If any Existing Securityholder submits through a Broker-Dealer to the
Auction Agent one or more Orders covering in the aggregate more than the
principal amount of the Class of Securities held by such Existing
Securityholder, such Orders will be considered valid as follows and in the order
of priority described below.
HOLD ORDERS. All Hold Orders will be considered valid, but only up to
the aggregate principal amount of the Class of Securities held by such Existing
Securityholder, and if the aggregate principal amount of the Class of Securities
subject to such Hold Orders exceeds the aggregate principal amount of the Class
of Securities held by such Existing Securityholder, the aggregate principal
amount of the Class of Securities subject to each such Hold Order will be
reduced pro rata so that the aggregate principal amount of the Class of
Securities subject to all such Hold Orders equals the aggregate principal amount
of the Class of Securities held by such Existing Securityholder.
BIDS. Any Bid will be considered valid up to an amount equal to the
excess of the principal amount of the Class of Securities held by such Existing
Securityholder over the aggregate principal amount of such Security, subject to
any Hold Orders referred to above. Subject to the preceding sentence, if
multiple Bids with the same rate are submitted on behalf of such Existing
Securityholder and the aggregate principal amount of Securities subject to such
Bids is greater than such excess, such Bids will be considered valid up to an
amount equal to such excess. Subject to the two preceding sentences, if more
than one Bid with different rates are submitted on behalf of such Existing
Securityholder, such Bids will be considered valid first in the ascending order
of their respective rates until the highest rate is reached at which such excess
exists and then at such rate up to the amount of such excess. In any event, the
aggregate principal amount of Securities, if any, subject to Bids not valid
under the provisions described above will be treated as the subject of a Bid by
a Potential Securityholder at the rate therein specified.
SELL ORDERS. All Sell Orders will be considered valid up to an amount
equal to the excess of the principal amount of Securities of the Class held by
such Existing Securityholder over the aggregate principal amount of Securities
subject to valid Hold Orders and valid Bids as referred to above.
If more than one Bid for a Class of Security is submitted on behalf of
any Potential Securityholder, each Bid submitted will be a separate Bid with the
rate and principal amount therein specified. Any Bid or Sell Order submitted by
an Existing Securityholder covering an aggregate principal amount of Securities
not equal to an Authorized Denomination or an integral multiple thereof will be
rejected and will be deemed a Hold Order. Any Bid submitted by a Potential
Securityholder covering an aggregate principal amount of Securities not equal to
an Authorized Denomination or an integral multiple thereof will be rejected. Any
Order submitted in an Auction by a Broker-Dealer to the Auction Agent prior to
the Submission Deadline on any Auction Date will be irrevocable.
A Hold Order, a Bid or a Sell Order that has been determined valid
pursuant to the procedures described above is referred to as a "Submitted Hold
Order," a "Submitted Bid" and a "Submitted Sell Order," respectively
(collectively, "Submitted Orders").
DETERMINATION OF SUFFICIENT BID AND BID AUCTION RATE
Not earlier than the Submission Deadline on each Auction Date, the
Auction Agent will assemble all valid Submitted Orders and will determine:
(a) for the applicable Security, the excess of the total
principal amount of such Securities over the sum of the aggregate principal
amount of such Securities subject to Submitted Hold Orders (such excess being
hereinafter referred to as the "Available Securities"); and
(b) from such Submitted Orders whether the aggregate principal
amount of Securities of such Class subject to Submitted Bids by Potential
Securityholders specifying one or more rates equal to or lower than the Maximum
Auction Rate exceeds or is equal to the sum of (i) the aggregate principal
amount of Securities of such Class subject to Submitted Bids by Existing
Securityholders specifying one or more rates higher than the Maximum Auction
Rate and (ii) the aggregate principal amount of Securities of such Class subject
to Submitted Sell Orders (in the event such excess or such equality exists other
than because all of the Securities are subject to Submitted Hold Orders, such
Submitted Bids by Potential Securityholders above will be hereinafter referred
to collectively as "Sufficient Bids"); and
(c) if Sufficient Bids exist, the "Bid Auction Rate," which will
be the lowest rate specified in such Submitted Bids such that if:
(i) each such Submitted Bid from Existing
Securityholders of such Security specifying such lowest rate
and all other Submitted Bids from Existing Securityholders of
such Security specifying lower rates were rejected (thus
entitling such Existing Securityholders to continue to hold the
principal amount of Securities subject to such Submitted Bids);
and
(ii) each such Submitted Bid from Potential
Securityholders of such Security specifying such lowest rate
and all other Submitted Bids from Potential Securityholders
specifying lower rates, were accepted, the result would be that
such Existing Securityholders described in subparagraph (c)(i)
above would continue to hold an aggregate principal amount of
Securities which, when added to the aggregate principal amount
of Securities to be purchased by such Potential Securityholders
described in this subparagraph (ii) would equal not less than
the Available Securities.
DETERMINATION OF AUCTION RATE AND SECURITY INTEREST RATE, NOTICE
Promptly after the Auction Agent has made the determinations described
above, the Auction Agent is to advise the Trustee of the Net Loan Rate, the
Maximum Auction Rate, the All Hold Rate and the components thereof on the
Auction Date, and based on such determinations, the Auction Rate for the next
succeeding Interest Period for the applicable Security as follows:
(a) if Sufficient Bids exist, that the Auction Rate for the next
succeeding Interest Period will be equal to the Bid Auction Rate so determined;
(b) if Sufficient Bids do not exist (other than because all of
the Securities of the applicable Security are subject to Submitted Hold Orders),
that the Auction Rate for the next succeeding Interest Period will be equal to
the Maximum Auction Rate; or
(c) if all Securities of the applicable Security are subject to
Submitted Hold Orders, that the Auction Rate for the next succeeding Interest
Period will be equal to the All Hold Rate.
Promptly after the Auction Agent has determined the Auction Rate, the
Auction Agent will determine and advise the Trustee of the Security Interest
Rate for each applicable Security, which rate will be the lesser of (a) the
Auction Rate for each such Security and (b) the Net Loan Rate. In no event shall
a Security Interest Rate exceed the rate (the "Security Interest Rate
Limitation") set forth in the related Prospectus Supplement.
ACCEPTANCE AND REJECTION OF ORDERS
Existing Securityholders of the applicable Security will continue to
hold the principal amount of Securities of such Class that are subject to
Submitted Hold Orders. If, with respect to a Security, the Net Loan Rate is
equal to or greater than the Bid Auction Rate and if Sufficient Bids, as
described above under "Determination of Sufficient Bids and Bid Auction Rate,"
have been received by the Auction Agent, the Bid Auction Rate will be the
Security Interest Rate, and Submitted Bids and Submitted Sell Orders will be
accepted or rejected and the Auction Agent will take such other action as
provided in the related Agreement and described below under "Sufficient Bids."
If the Net Loan Rate is less than the Auction Rate, the Security
Interest Rate will be the Net Loan Rate. If the Auction Rate and the Net Loan
Rate are both greater than the Security Interest Rate Limitation, the Security
Interest Rate for each series shall be equal to the Security Interest Rate
Limitation. If the Auction Agent has not received Sufficient Bids as described
above under "Determination of Sufficient Bids and Bid Auction Rate" (other than
because all of the Securities are subject to Submitted Holds Orders), the
Security Interest Rate will be the lesser of the Maximum Auction Rate or the Net
Loan Rate. In any of the cases described above in this paragraph, Submitted
Orders will be accepted or rejected and the Auction Agent will take such other
action as described below under "Insufficient Bids."
SUFFICIENT BIDS. If Sufficient Bids have been made with a respect to a
Security and the Net Loan Rate is equal to or greater than the Bid Auction Rate
(in which case the Interest Rate shall be the Bid Auction Rate), all Submitted
Sell Orders will be accepted and, subject to the denomination requirements
described below, Submitted Bids will be accepted or rejected as follows in the
following order of priority and all other Submitted Bids will be rejected:
(a) Existing Securityholders' Submitted Bids specifying any rate
that is higher than the Security Interest Rate will be accepted, thus requiring
each such Existing Securityholder to sell the aggregate principal amount of
Securities subject to such Submitted Bids;
(b) Existing Securityholders' Submitted Bids specifying any rate
that is lower than the Security Interest Rate will be rejected, thus entitling
each such Existing Securityholder to continue to hold the aggregate principal
amount of Securities subject to such Submitted Bids;
(c) Potential Securityholders' Submitted Bids specifying any rate
that is lower than the Security Interest Rate will be accepted;
(d) Each Existing Securityholder's Submitted Bid specifying a
rate that is equal to the Security Interest Rate will be rejected, thus
entitling such Existing Securityholder to continue to hold the aggregate
principal amount of Securities subject to such Submitted Bid, unless the
aggregate principal amount of Securities subject to such Submitted Bids will be
greater than the principal amount of Securities (the "remaining principal
amount") equal to the excess of the Available Securities over the aggregate
principal amount of Securities subject to Submitted Bids described in
subparagraphs (b) and (c) above, in which event such Submitted Bid of such
Existing Securityholder will be rejected in part and such Existing
Securityholder will be entitled to continue to hold the principal amount of
Securities subject to such Submitted Bid, but only in an amount equal to the
aggregate principal amount of Securities obtained by multiplying the remaining
principal amount by a fraction, the numerator of which will be the principal
amount of Securities held by such Existing Securityholder subject to such
Submitted Bid and the denominator of which will be the sum of the principal
amount of Securities subject to such Submitted Bids made by all such Existing
Securityholders that specified a rate equal to the Security Interest Rate; and
(e) Each Potential Securityholder's Submitted Bid specifying a
rate that is equal to the Security Interest Rate will be accepted, but only in
an amount equal to the principal amount of Securities obtained by multiplying
the excess of the aggregate principal amount of Available Securities over the
aggregate principal amount of Securities subject to Submitted Bids described in
subparagraphs (b), (c) and (d) above by a fraction, the numerator of which will
be the aggregate principal amount of Securities subject to such Submitted Bid
and the denominator of which will be the sum of the principal amount of
Securities subject to Submitted Bids made by all such Potential Securityholders
that specified a rate equal to the Security Interest Rate.
INSUFFICIENT BIDS. If Sufficient Bids have not been made with respect
to a Security (other than because all of the Securities of such Class are
subject to Submitted Hold Orders) or if the Net Loan Rate is less than the Bid
Auction Rate (in which case the Security Interest Rate shall be the Net Loan
Rate) or if the Security Interest Rate Limitation applies, subject to the
denomination requirements described below, Submitted Orders will be accepted or
rejected as follows in the following order of priority and all other Submitted
Bids will be rejected:
(a) Existing Securityholders' Submitted Bids specifying any rate
that is equal to or lower than the Security Interest Rate will be rejected, thus
entitling such Existing Securityholders to continue to hold the aggregate
principal amount of Securities subject to such Submitted Bids;
(b) Potential Securityholders' Submitted Bids specifying any rate
that is equal to or lower than the Security Interest Rate will be accepted, and
specifying any rate that is higher than the Security Interest Rate will be
rejected; and
(c) each Existing Securityholder's Submitted Bid specifying any
rate that is higher than the Security Interest Rate and the Submitted Sell Order
of each Existing Securityholder will be accepted, thus entitling each Existing
Securityholder that submitted any such Submitted Bid or Submitted Sell Order to
sell the Securities subject to such Submitted Bid or Submitted Sell Order, but
in both cases only in an amount equal to the aggregate principal amount of
Securities obtained by multiplying the aggregate principal amount of Securities
subject to Submitted Bids described in subparagraph (b)above by a fraction, the
numerator of which will be the aggregate principal amount of Securities held by
such Existing Securityholder subject to such Submitted Bid or Submitted Sell
Order and the denominator of which will be the aggregate principal amount of
Securities subject to all such Submitted Bids and Submitted Sell Orders.
ALL HOLD ORDERS. If all Securities of a Class are subject to Submitted
Hold Orders, all Submitted Bids will be rejected.
AUTHORIZED DENOMINATIONS REQUIREMENT. If, as a result of the procedures
described above regarding Sufficient Bids and Insufficient Bids, any Existing
Securityholder would be entitled or required to sell, or any Potential
Securityholder would be entitled or required to purchase, a principal amount of
Securities that is not equal to an Authorized Denomination or an integral
multiple thereof, the Auction Agent will, in such manner as in its sole
discretion it will determine, round up or down the principal amount of
Securities to be purchased or sold by any Existing Securityholder or Potential
Securityholder so that the principal amount of Securities purchased or sold by
each Existing Securityholder or Potential Securityholder will be equal to an
Authorized Denomination or an integral multiple in excess thereof. If, as a
result of the procedures described above regarding Insufficient Bids, any
Potential Securityholder would be entitled or required to purchase less than a
principal amount of Securities equal to an Authorized Denomination or any
integral multiple thereof, the Auction Agent will, in such manner as in its sole
discretion it will determine, allocate Securities for purchase among Potential
Securityholders so that only Securities in an Authorized Denomination or any
integral multiples in excess thereof are purchased by any Potential
Securityholder, even if such allocation results in one or more of such Potential
Securityholders not purchasing any Securities.
Based on the results of each Auction, the Auction Agent is to determine
the aggregate principal amount of Securities of each Class to be purchased and
the aggregate principal amount of Securities of each Class to be sold by
Potential Securityholders and Existing Securityholders on whose behalf each
Broker-Dealer submitted Bids or Sell Orders and, with respect to each
Broker-Dealer, to the extent that such aggregate principal amount of Securities
to be sold differs from such aggregate principal amount of Securities to be
purchased, determine to which other Broker-Dealer or Broker-Dealers acting for
one or more purchasers such Broker-Dealer will deliver, or from which
Broker-Dealers acting for one or more sellers such Broker-Dealer will receive,
as the case may be, Securities.
Any calculation by the Auction Agent (or the Trustee, if applicable) of
the Security Interest Rate, One-Month LIBOR, Three-Month LIBOR, the Maximum
Auction Rate, the All Hold Rate, the Net Loan Rate and the Non-Payment Rate
will, in the absence of manifest error, be binding on all other parties.
Notwithstanding anything in any related Agreement or, a related Terms
Supplement to the contrary, no Auction is to be held on any Auction Date on
which there are insufficient moneys held by the Trustee under the related
Agreement and available to pay the principal of and interest due on the
applicable Security on the Note Remittance Date or Certificate Remittance Date
immediately following such Auction Date.
SETTLEMENT PROCEDURES
The Auction Agent is required to advise each Broker-Dealer that
submitted an Order in an Auction of the Security Interest Rate for a Security
for the next Interest Period and, if such Order was a Bid or Sell Order, whether
such Bid or Sell Order was accepted or rejected, in whole or in part, by
telephone not later than 3:00 p.m., eastern time, on the Auction Date if the
Interest Rate is the Auction Rate and not later than 4:00 p.m. eastern time on
the Auction Date if the Interest Rate is the Net Loan Rate. Each Broker-Dealer
that submitted an Order on behalf of a Bidder is required to then advise such
Bidder of the applicable Security Interest Rate for the next Interest Period
and, if such Order was a Bid or a Sell Order, whether such Bid or Sell Order was
accepted or rejected, in whole or in part, confirm purchases and sales with each
Bidder purchasing or selling Securities as a result of the Auction and advise
each Bidder purchasing or selling Securities as a result of the Auction to give
instructions to its Participant to pay the purchase price against delivery of
such Securities or to deliver such Securities against payment therefor, as
appropriate. Pursuant to the Auction Agent Agreement, the Auction Agent is to
record each transfer of Securities on the Existing Securityholders Registry to
be maintained by the Auction Agent.
In accordance with DTC's normal procedures, on the Business Day after
the Auction Date, the transactions described above will be executed through DTC,
so long as DTC is the depository, and the accounts of the respective
Participants at DTC will be debited and credited and Securities delivered as
necessary to effect the purchases and sales of Securities as determined in the
Auction. Purchasers are required to make payment through their Participants in
same-day funds to DTC against delivery through their Participants. DTC will make
payment in accordance with its normal procedures, which now provide for payment
against delivery by its Participants in immediately available funds.
If any Existing Securityholder selling Securities in an Auction fails
to deliver such Securities, the Broker-Dealer of any person that was to have
purchased Securities in such Auction may deliver to such person a principal
amount of Securities that is less than the principal amount of Securities that
otherwise was to be purchased by such person but in any event equal to an
Authorized Denomination or any integral multiple thereof. In such event, the
principal amount of Securities to be delivered will be determined by such
Broker-Dealer. Delivery of such lesser principal amount of Securities will
constitute good delivery. Neither the Trustee nor the Auction Agent will have
any responsibility or liability with respect to the failure of a Potential
Securityholder, Existing Securityholder or their respective Broker-Dealer or
Participant to deliver the principal amount of Securities or to pay for the
Securities purchased or sold pursuant to an Auction or otherwise. For a further
description of the settlement procedures, see "SETTLEMENT PROCEDURES."
TRUSTEE NOT RESPONSIBLE FOR AUCTION AGENT, MARKET AGENT AND BROKER-DEALERS
The Trustee shall not be liable or responsible for the actions of or
failure to act by the Auction Agent, Market Agent or any Broker-Dealer under the
related Agreement, the related Terms Supplement or under the Auction Agent
Agreement, the Market Agent Agreement or any Broker-Dealer Agreement. The
Trustee may conclusively rely upon any information required to be furnished by
the Auction Agent, the Market Agent or any Broker-Dealer without undertaking any
independent review or investigation of the truth or accuracy of such
information.
CHANGES IN AUCTION TERMS
CHANGES IN AUCTION PERIOD OR PERIODS
While any of the Securities are outstanding, the Administrator, may,
from time to time, change the length of the one or more Auction Periods in order
to conform with then current market practice with respect to similar securities
or to accommodate economic and financial factors that may affect or be relevant
to the length of the Auction Period and the interest rate borne by the
Securities (an "Auction Period Adjustment"). The Administrator will not initiate
such change in the length of the Auction Period unless it shall have received
the written consent from the Market Agent, which consent will not be
unreasonably withheld, not less than three days nor more than 20 days prior to
the effective date of an Auction Period Adjustment. The Administrator will
initiate an Auction Period Adjustment by giving written notice to the Trustee,
the Auction Agent, the Market Agent, the Security Guaranty Insurer and DTC in
substantially the form of, or containing substantially the information contained
in, the related Agreement at least 10 days prior to the Auction Date for such
Auction Period.
Any such Auction Period Adjustment shall not result in an Auction
Period of less than 7 days nor more than 91 days. If any such Auction Period
Adjustment will result in an Auction Period of less than the number of days in
the then current Auction Period, the notice described above will be effective
only if it is accompanied by a written statement of the Trustee, the Auction
Agent and DTC to the effect that they are capable of performing their duties, if
any, under the related Agreement, the Auction Agent Agreement and any
Broker-Dealer Agreement with respect to such changed Auction Period.
An Auction Period Adjustment will take effect only if (a) the Trustee
and the Auction Agent receive, by 11:00 a.m., eastern time, on the Business Day
before the Auction Date for the first such Auction Period, a certificate from
the Representative authorizing an Auction Period Adjustment specified in such
certificate, the certificate of the Market Agent described above and the written
statement of the Trustee, the Auction Agent DTC described above and (B)
Sufficient Bids exist at the Auction on the Auction Date for such first Auction
Period. If the condition referred to in (a) is not met, the Security Interest
Rate applicable for the next Auction Period will be determined pursuant to the
Auction Procedures and the Auction Period will be the Auction Period determined
without reference to the proposed change. If the condition referred to in (a) is
met, but the condition referred to in (B) above is not met, the Security
Interest Rate applicable for the next Auction Period will be the lesser of the
Maximum Auction Rate and the Net Loan Rate and the Auction Period will be the
Auction Period determined without reference to the proposed change.
CHANGES IN THE AUCTION DATE
The Market Agent, at the written direction of the Representative, may
specify an earlier Auction Date (but in no event more than five Business Days
earlier) than the Auction Date that would otherwise be determined in accordance
with the definition of "Auction Date" with respect to one or more specified
Auction Periods in order to conform with then current market practice with
respect to similar securities or to accommodate economic and financial factors
that may affect or be relevant to the day of the week constituting an Auction
Date and the interest rate borne on the Securities. The Representative will not
consent to such change in the Auction Date unless the Representative will have
received from the Market Agent not less than three days nor more than 20 days
prior to the effective date of such change a written request for consent
together with a certificate demonstrating the need for change in reliance on
such factors. The Market Agent will provide notice of its determination to
specify an earlier Auction Date for one or more Auction Periods by means of a
written notice delivered at least 10 days prior to the proposed changed Auction
Date to the Trustee, the Auction Agent, the Trust, the Representative, and DTC.
The changes in Auction terms described above may be made with respect
to any Class of the Securities. In connection with any change in Auction Terms
described above, the Auction Agent is to provide such further notice to such
parties as is specified in the Auction Agent Agreement.
<PAGE>
APPENDIX II
SETTLEMENT PROCEDURES
These Settlement Procedures apply separately to each Class of
Securities and may be different if specified in the related Prospectus
Supplement.
(a) Not later than (i) 3:00 p.m. if the Security Interest Rate is the
Auction Rate or (2) 4:00 p.m. if the Security Interest Rate is the Net Loan
Rate, the Auction Agent is to notify by telephone each Broker-Dealer that
participated in the Auction held on such Auction Date and submitted an Order on
behalf of an Existing Securityholder or Potential Securityholder of:
(i) the Security Interest Rate fixed for the next Interest
Period;
(ii) whether there were Sufficient Bids in such Auction;
(iii) if such Broker-Dealer (a "Seller's Broker-Dealer")
submitted Bids or Sell Orders on behalf of an Existing
Securityholder, whether such Bid or Sell Order was accepted or
rejected, in whole or in part, and the principal amount of
Securities, if any, to be sold by such Existing Securityholder;
(iv) if such Broker-Dealer (a "Buyer's Broker-Dealer")
submitted a Bid on behalf of a Potential Securityholder, whether
such Bid was accepted or rejected, in whole or in part, and the
principal amount of Securities, if any, to be purchased by such
Potential Securityholder;
(v) if the aggregate amount of Securities to be sold by all
Existing Securityholders on whose behalf such Seller's
Broker-Dealer submitted Bids or Sell Orders exceeds the aggregate
principal amount of Securities to be purchased by all Potential
Securityholders on whose behalf such Buyer's Broker-Dealer
submitted a Bid, the name or names of one or more Buyer's
Broker-Dealers and the name of the Participant, if any, of each
such Buyer's Broker-Dealer (a "Participant") acting for one or
more purchasers of such excess principal amount of Securities and
the principal amount of Securities to be purchased from one or
more Existing Securityholders on whose behalf such Seller's
Broker- Dealer acted by one or more Potential Securityholders on
whose behalf each of such Buyer's Broker- Dealers acted;
(vi) if the principal amount of Securities to be purchased
by all Potential Securityholders on whose behalf such Buyer's
Broker-Dealer submitted a Bid exceeds the amount of Securities to
be sold by all Existing Securityholders on whose behalf such
Seller's Broker-Dealer submitted a Bid or a Sell Order, the name
or names of one or more Seller's Broker-Dealers (and the name of
the Participant, if any, of each such Seller's Broker-Dealer)
acting for one or more sellers of such excess principal amount of
Securities and the principal amount of Securities to be sold to
one or more Potential Securityholders on whose behalf such
Buyer's Broker-Dealer acted by one or more Existing
Securityholder on whose behalf each of such Seller's
Broker-Dealers acted; and
(vii) the Auction Date for the next succeeding Auction.
(b) On each Auction Date, each Broker-Dealer that submitted an Order
on behalf of any Existing Securityholder or Potential Securityholder is to:
(i) advise each Existing Securityholder and Potential
Securityholder on whose behalf such Broker-Dealer submitted a Bid
or Sell Order in the Auction on such Auction Date whether such
Bid or Sell Order was accepted or rejected, in whole or in part;
(ii) in the case of a Broker-Dealer that is a Buyer's
Broker-Dealer, advise each Potential Securityholder on whose
behalf such Buyer's Broker-Dealer submitted a Bid that was
accepted, in whole or in part, to instruct such Potential
Securityholder's Participant to pay to such Buyer's Broker-
Dealer (or its Participant) through DTC the amount necessary to
purchase the principal amount of the Securities to be purchased
pursuant to such Bid against receipt of such Securities together
with accrued interest;
(iii) in the case of a Broker-Dealer that is a Seller's
Broker-Dealer, instruct each Existing Securityholder on whose
behalf such Seller's Broker-Dealer submitted a Sell Order that
was accepted, in whole or in part, or a Bid that was accepted, in
whole or in part, to instruct such Existing Securityholder's
Participant to deliver to such Seller's Broker-Dealer (or its
Participant) through DTC the principal amount of the Securities
to be sold pursuant to such Order against payment therefor;
(iv) advise each Existing Securityholder on whose behalf
such Broker-Dealer submitted an Order and each Potential
Securityholder on whose behalf such Broker-Dealer submitted a Bid
of the Security Interest Rate for the next Interest Period;
(v) advise each Existing Securityholder on whose behalf such
Broker-Dealer submitted an Order of the next Auction Date; and
(vi) advise each Potential Securityholder on whose behalf
such Broker-Dealer submitted a Bid that was accepted, in whole or
in part, of the next Auction Date.
(c) On the basis of the information provided to it pursuant to
paragraph (a) above, each Broker- Dealer that submitted a Bid or Sell Order in
an Auction is required to allocate any funds received by it in connection with
such Auction pursuant to paragraph (b)(ii) above, and any Securities received by
it in connection with such Auction pursuant to paragraph (b)(iii) above, among
the Potential Securityholders, if any, on whose behalf such Broker-Dealer
submitted Bids, the Existing Securityholder, if any, on whose behalf such
Broker-Dealer submitted Bids or Sell Orders in such Auction, and any
Broker-Dealers identified to it by the Auction Agent following such Auction
pursuant to paragraph (a) (v) or (a) (vi) above.
(d) On each Auction Date:
(i) each Potential Securityholder and Existing
Securityholder with an Order in the Auction on such Auction Date
will instruct its Participant as provided in (b)(ii) or (b)(iii)
above, as the case may be:
(ii) each Seller's Broker-Dealer that is not a Participant
in DTC's system will instruct its Participant to deliver such
Securities through DTC to a Buyer's Broker-Dealer (or its
Participant) identified to such Seller's Broker-Dealer pursuant
to (a) (v) above against payment therefor; and
(iii) each Buyer's Broker-Dealer that is not a Participant
in DTC's system will instruct its Participant to pay through DTC
to Seller's Broker-Dealer (or its Participant) identified
following such Auction pursuant to (a) (vi) above the amount
necessary to purchase the Securities to be purchased pursuant to
(b)(ii) above against receipt of such Securities.
(e) On the Business Day following each Auction Date;
(i) each Participant for a Bidder in the Auction on such
Auction Date referred to in (d)(i) above will instruct DTC to
execute the transactions described under (b)(ii) or (b)(iii)
above for such Auction, and DTC will execute such transactions;
(ii) each Seller's Broker-Dealer or its Participant will
instruct DTC to execute the transactions described in (d)(ii)
above for such Auction, and DTC will execute such transactions;
and
(iii) each Buyer's Broker-Dealer or its Participant will
instruct DTC to execute the transactions described in (d)(iii)
above for such Auction, and DTC will execute such transactions.
(f) If an Existing Securityholder selling Securities in an Auction
fails to deliver such Securities (by authorized book-entry), a Broker-Dealer may
deliver to the Potential Securityholder on behalf of which it submitted a Bid
that was accepted a principal amount of Securities that is less than the
principal amount of Securities that otherwise was to be purchased by such
Potential Securityholder. In such event, the principal amount of Securities to
be so delivered will be determined solely by such Broker-Dealer (but only in
Authorized Denominations). Delivery of such lesser principal amount of
Securities will constitute good delivery. Notwithstanding the foregoing terms of
this paragraph (f), any delivery or nondelivery of Securities which will
represent any departure from the results of an Auction, as determined by the
Auction Agent, will be of no effect unless and until the Auction Agent will have
been notified of such delivery or nondelivery in accordance with the provisions
of the Auction Agent Agreement and the Broker-Dealer Agreements. Neither the
Trustee nor the Auction Agent will have any responsibility or liability with
respect to the failure of a Potential Securityholder, Existing Securityholder or
their Respective Broker-Dealer or Participant to take delivery of or deliver, as
the case may be, the principal amount of the Securities purchased or sold
pursuant to an Auction or otherwise.
<PAGE>
NO DEALER, SALESMAN OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN 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 REPRESENTATIVE OR THE UNDERWRITER. THIS PROSPECTUS SUPPLEMENT
AND THE ACCOMPANYING PROSPECTUS DO NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES OFFERED
HEREBY NOR AN OFFER OF SUCH SECURITIES TO ANY PERSON IN ANY STATE OR OTHER
JURISDICTION IN WHICH SUCH OFFER WOULD BE UNLAWFUL. THE DELIVERY OF THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS AT ANY TIME DOES NOT IMPLY
THAT INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
PAGE
Summary of Terms.................................................. S- 2
Risk Factors...................................................... S-22
The Loan Pool..................................................... S-25
The SBA Loan Program.............................................. S-47
Yield, Maturity and Prepayment Considerations..................... S-49
The Sellers....................................................... S-52
Description of the Agreement and the Securities................... S-54
The Trustee....................................................... S-66
Federal Income Tax Consequences................................... S-67
ERISA Considerations.............................................. S-71
Legal Investment.................................................. S-71
Underwriting...................................................... S-72
Ratings........................................................... S-72
Legal Matters..................................................... S-73
Financial Information............................................. S-73
Annex I........................................................... S-74
Index of Principal Terms.......................................... S-78
Certain Definitions............................................... S-82
(Back cover continued
on next page)
<PAGE>
PROSPECTUS
Prospectus Supplement ............................................... 3
Available Information ............................................... 3
Reports to Securityholders........................................... 4
Incorporation of Certain Documents by Reference...................... 4
Summary of Terms .................................................... 5
Risk Factors......................................................... 20
The Trusts........................................................... 24
Use of Proceeds ..................................................... 29
The Representative and the Originators............................... 29
The SBA Loan Lending Program......................................... 30
Description of the Securities........................................ 36
Credit Enhancement .................................................. 43
Maturity, Prepayment and Yield Considerations ....................... 48
The Agreements ...................................................... 49
Certain Legal Aspects of the Loans .................................. 61
Federal Income Tax Consequences ..................................... 64
ERISA Considerations ................................................ 88
Legal Investment Considerations ..................................... 90
Plan of Distribution ................................................ 90
Legal Matters ....................................................... 91
Experts.............................................................. 91
Financial Information................................................ 91
Rating............................................................... 91
Index of Principal Terms............................................. 93
Appendix I - Auction Procedures ..................................... I-1
Appendix II - Settlement Procedures..................................II-1
