<PAGE>
Pursuant to Rule No. 424(b)(5)
Registration No. 333-37499
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED MARCH 25, 1998)
- --------------------------------------------------------------------------------
$300,000,000
UCFC HOME EQUITY LOAN OWNER TRUST 1998-AA
ASSET-BACKED NOTES, SERIES 1998-AA
UCFC ACCEPTANCE CORPORATION
DEPOSITOR
UNITED COMPANIES LENDING CORPORATION(REGISTERED) LOGO
SERVICER (REGISTERED)
------------------------------
UCFC Home Equity Loan Owner Trust 1998-AA (the 'Trust' or the 'Issuer')
will be established pursuant to a Trust Agreement, dated as of March 1, 1998
(the 'Trust Agreement'), between UCFC Acceptance Corporation, as depositor (the
'Depositor'), and Wilmington Trust Company, as owner trustee (the 'Owner
Trustee'). The Trust will issue its Asset-Backed Notes, Series 1998-AA (the
'Notes'). The Notes will be issued in the initial Class Principal Balance and
with the Note Rate set forth in the table below pursuant to the Indenture, dated
as of March 1, 1998 (the 'Indenture'), between the Trust and Bankers Trust
Company of California, N.A., as indenture trustee (in such capacity, the
'Indenture Trustee'). Timely payment of interest on, and ultimate payment of
principal of, the Notes will be unconditionally and irrevocably guaranteed
pursuant to the terms of the Note Insurance Policy issued by Financial Guaranty
Insurance Company ('FGIC').
[FGIC LOGO]
Financial Guaranty Insurance Company
FGIC is a registered service mark used by Financial Guaranty Insurance Company,
a private company not affiliated with any U.S. Government agency.
(cover continued on next page)
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<CAPTION>
INITIAL CLASS NOTE MATURITY
PRINCIPAL BALANCE RATE DATE (1)
<S> <C> <C> <C>
Series 1998-AA............................................... $ 300,000,000 (2) March 15, 2028
</TABLE>
(1) Determined as described under 'Maturity, Prepayment and Yield
Considerations' herein.
(2) The Note Rate will be calculated by reference to the London interbank
offered rate for one-month U.S. dollar deposits ('1-Month LIBOR') subject
to the limitations described herein. See 'Description of the Notes--Flow of
Funds and Payments on the Notes' herein.
------------------------------
INVESTORS SHOULD CONSIDER THE INFORMATION UNDER 'RISK FACTORS' BEGINNING ON
PAGE 12 OF THE PROSPECTUS.
THE NOTES REPRESENT NON-RECOURSE OBLIGATIONS OF THE TRUST AND DO NOT REPRESENT
INTERESTS IN OR OBLIGATIONS OF UCFC ACCEPTANCE CORPORATION, UNITED COMPANIES
LENDING CORPORATION, THE OWNER TRUSTEE, THE INDENTURE TRUSTEE, FGIC OR ANY OF
THEIR RESPECTIVE AFFILIATES. THE NOTES AND THE HOME EQUITY LOANS ARE NOT INSURED
OR GUARANTEED BY ANY GOVERNMENTAL AGENCY, NOR HAS ANY GOVERNMENTAL AGENCY PASSED
UPON THE ACCURACY OF THE INFORMATION CONTAINED IN THIS PROSPECTUS SUPPLEMENT OR
THE 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 NOR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------------
The Notes will be purchased by Prudential Securities Incorporated, Bear,
Stearns & Co. Inc. and First Union Capital Markets, a division of Wheat First
Securities Corp. (the 'Underwriters') from the Depositor and will be offered by
the Underwriters from time to time in negotiated transactions or otherwise, at
varying prices to be determined at the time of sale. Proceeds to the Depositor,
including accrued interest, are expected to be approximately 99.750000% of the
aggregate principal balance of the Notes before deducting expenses payable by
the Depositor estimated to be $827,000. See 'Underwriting' herein.
The Notes are offered by the Underwriters subject to prior sale, when, as
and if issued to and accepted by them, subject to approval of certain legal
matters by counsel for the Underwriters. The Underwriters reserve the right to
withdraw, cancel or modify such offer and to reject orders in whole or in part.
It is expected that the Notes will be issued on or about March 27, 1998, and
will thereafter be available from the Underwriters through the facilities of The
Depository Trust Company on the Same Day Funds Settlement System and Cedel Bank,
societe anonyme, and the Euroclear System.
PRUDENTIAL SECURITIES INCORPORATED
BEAR, STEARNS & CO. INC.
FIRST UNION CAPITAL MARKETS
- --------------------------------------------------------------------------------
The date of this Prospectus Supplement is March 25, 1998
<PAGE>
(Cover continued from front page)
The assets of the Trust consist primarily of a pool (the 'Collateral
Group') of single family residential home equity and home improvement loans (the
'Home Equity Loans') secured by first liens on condominiums, townhouses, one- to
four-family residences or mobile or manufactured homes treated as real estate
under applicable state law (each, a 'Mortgaged Property' and collectively, the
'Mortgaged Properties'). The Home Equity Loans will consist of adjustable rate
Home Equity Loans and Home Equity Loans the interest rates on which will become
adjustable after a period of time (collectively, 'ARMs'). All of the Home Equity
Loans are fully amortizing. The Trust also includes funds on deposit in a
separate trust account (the 'Pre-Funding Account') which may be used to purchase
additional single family residential home equity and home improvement loans
secured by liens on Mortgaged Properties (the 'Subsequent Loans') from time to
time on or before June 15, 1998. On the Closing Date (as defined herein), cash
in an amount not to exceed approximately $70,058,884 (the 'Pre-Funded Amount')
will be deposited in the Pre-Funding Account and may be used to acquire
Subsequent Loans which are ARMs secured by first liens.
All of the Home Equity Loans were, and any Subsequent Loans will be,
originated, directly or through correspondents or mortgage brokers, or purchased
and re-underwritten, by United Companies (as defined below) or certain
subsidiaries or affiliates thereof (United Companies, together with such
subsidiaries and affiliates, the 'Originators'). Except for certain
representations and warranties relating to the Home Equity Loans (including any
Subsequent Loans) and certain other matters, United Companies' obligations with
respect to the Home Equity Loans (including any Subsequent Loans) will be
limited to its contractual servicing obligations.
Payments of principal and interest on the Notes will be made on the 15th
day of each month or, if such day is not a business day, on the next succeeding
business day commencing in April 1998 (each, a 'Payment Date') to holders of
record on the last business day of the calendar month preceding the month of
such Payment Date (the 'Record Date').
There is currently no secondary market for the Notes. The Underwriters
intend to make a secondary market for the Notes, but no Underwriter is obligated
to do so. There can be no assurance that a secondary market for any of the Notes
will develop or, if one does develop, that it will continue or offer sufficient
liquidity of investment.
No election will be made to treat any assets of the Trust as a 'real estate
mortgage investment conduit' ('REMIC') pursuant to the Internal Revenue Code of
1986, as amended (the 'Code'). By acceptance of an interest in a Note, each
Owner thereof will have agreed to treat such Note as debt of the Trust secured
by the Collateral Group. See 'Certain Federal Income Tax Consequences' herein
and in the Prospectus.
The Notes may be redeemed in whole in certain circumstances. See 'The Sale
and Servicing Agreement-- Termination' herein.
------------------------------
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.
------------------------------
The Notes offered by this Prospectus Supplement constitute a separate
Series of Asset-Backed Notes being offered by the Depositor pursuant to its
Prospectus dated March 25, 1998, 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.
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<PAGE>
SUMMARY OF TERMS
This summary is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus Supplement and the
accompanying Prospectus. Capitalized terms not otherwise defined herein have the
meanings assigned to such terms in the Prospectus. See the 'Index of Principal
Terms' in the Prospectus.
<TABLE>
<S> <C>
ISSUER.................................... UCFC Home Equity Loan Owner Trust 1998-AA (the 'Trust' or the
'Issuer'), a Delaware business trust to be formed pursuant to the
Trust Agreement, dated as of March 1, 1998 (the 'Trust Agreement'),
between the Depositor and the Owner Trustee.
SECURITIES OFFERED........................ Asset-Backed Notes, Series 1998-AA (the 'Notes'),with the initial
Class Principal Balance set forth on the cover page hereof.
DEPOSITOR................................. UCFC Acceptance Corporation, a Louisiana corporation (the
'Depositor'). See 'The Depositor' in the Prospectus.
SERVICER.................................. United Companies Lending Corporation(Registered), a Louisiana
corporation ('United Companies' or the 'Servicer'), a wholly-owned,
indirect subsidiary of United Companies Financial Corporation (the
'Parent'). The Servicer's principal executive offices are located at
4041 Essen Lane, Baton Rouge, Louisiana 70809. See 'The Originators'
herein and in the Prospectus.
INDENTURE TRUSTEE......................... Bankers Trust Company of California, N.A. (in such capacity, the
'Indenture Trustee').
OWNER TRUSTEE............................. Wilmington Trust Company (the 'Owner Trustee').
ORIGINATORS OF THE HOME EQUITY LOANS...... The Home Equity Loans were, and any Subsequent Loans will be,
originated, either directly or through correspondents or mortgage
brokers, or purchased and re-underwritten, by United Companies and
certain affiliates thereof (the 'Originators'). See 'The
Originators' herein and in the Prospectus and 'The Home Equity Loan
Program' in the Prospectus.
APPROXIMATE AGGREGATE LOAN BALANCE AS OF
THE CUT-OFF DATE........................ $229,941,116.
CLOSING DATE.............................. On or about March 27, 1998.
CUT-OFF DATE.............................. The opening of business on March 1, 1998, except that the Cut-Off
Date with respect to any Mortgage Note (as defined herein) dated on
or after March 1, 1998, will be the date of such Mortgage Note.
THE HOME EQUITY LOANS..................... All of the Home Equity Loans will consist of mortgages, deeds of
trust or other instruments ('Mortgages') creating first liens on
single-family homes, including investment properties. Such homes may
be condominiums, townhouses, one- to four-family residences or
mobile or manufactured homes treated as real estate under applicable
state law (each, a 'Mortgaged Property' and collectively, the
'Mortgaged Properties'). The Home Equity Loans will consist of
adjustable rate Home Equity Loans and Home Equity Loans the interest
rates on which will become adjustable after a period of time
(collectively, 'ARMs'). All of the Home Equity Loans will be fully
amortizing, with payments generally due on the first day of each
month (each, a 'Due Date'). Although the Home Equity Loans may be
prepaid at any time, prepayments may subject the borrower to a
prepayment penalty, the terms and existence of which depend on state
regulation. The Home Equity Loans are not guaranteed by the
Depositor, the
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Servicer, the Owner Trustee, the Indenture Trustee or any of their
respective affiliates.
The per annum interest rate (the 'Mortgage Rate') borne by each ARM
is subject to adjustment on the date set forth in the Mortgage Note
for such ARM and at regular intervals thereafter (each, a 'Change
Date') to equal the sum of (i) the applicable index (the 'Index'),
and (ii) the number of basis points set forth in the related
Mortgage Note (the 'Gross Margin'), subject to rounding and to the
effects of the applicable Periodic Rate Cap, Lifetime Cap and
Lifetime Floor. The 'Periodic Rate Cap' limits changes in the
Mortgage Rate for each ARM on each Change Date. The 'Lifetime Cap'
for each ARM is the maximum Mortgage Rate that may be borne by such
ARM, and the 'Lifetime Floor' is the minimum Mortgage Rate that may
be borne by such ARM.
With respect to approximately 0.34% of the ARMs (by Principal Balance
as of the Cut-Off Date); (i) the Index is the weekly average yield
on United States treasury securities adjusted to a constant maturity
of one year ('CMT'), as made available by the Federal Reserve Board
as of the date 45 days (as set forth in the related Mortgage Note)
before the applicable Change Date; (ii) the Change Dates will occur
on the date set forth in the related Mortgage Note and every twelfth
month thereafter; (iii) the Periodic Rate Cap for substantially all
such ARMs is 200 basis points or 300 basis points; (iv) the Lifetime
Cap is 600 basis points greater than the initial Mortgage Rate; and
(v) the Lifetime Floor is as set forth in the related Mortgage Note.
With respect to the remaining ARMs: (i) the Index is the London
interbank offered rate for six-month United States dollar deposits
('6-Month LIBOR'), as published either in The Wall Street Journal,
of the edition, if any, specified in the related Mortgage Note or by
the Federal National Mortgage Association ('Fannie Mae'), and
available as of the date before the applicable Change Date specified
in the related Mortgage Note; and (ii) the Change Dates will occur
on the initial Change Date set forth in the related Mortgage Note
and every sixth month thereafter.
The initial Change Dates for approximately 2.41%, 15.60% and 60.75%
(by Principal Balance as of the Cut-Off Date) of the ARMs delivered
on the Closing Date will occur on the 12th, 24th and 36th due dates,
respectively. The Periodic Rate Caps for such ARMs generally range
from 100 basis points to 300 basis points on the initial Change
Dates and from 100 basis points to 200 basis points for the
subsequent Change Dates.
DESCRIPTION OF THE NOTES.................. The Notes will be issued by the Trust pursuant to the Indenture,
dated as of March 1, 1998 (the 'Indenture'), between the Trust and
the Indenture Trustee. The Trust also will issue a class of
Certificates (the 'Certificates') which are not being offered
hereby.
The Notes are issuable in original principal amounts of $25,000 and
integral multiples of $1,000 in excess thereof.
PRE-FUNDING ACCOUNT....................... On the Closing Date, the Indenture Trustee will establish and
thereafter maintain with itself a separate trust account (the 'Pre-
Funding Account'). On the Closing Date, cash in an amount not to
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exceed the Pre-Funded Amount will be deposited in the Pre-Funding
Account. The Pre-Funded Amount may be used only to (i) acquire
additional single family residential home equity and home
improvement loans secured by first liens on Mortgaged Properties
(the 'Subsequent Loans') and (ii) make accelerated payments of
principal of the Notes. All Subsequent Loans will be ARMs. During
the period (the 'Pre-Funding Period') from the Closing Date to the
earliest to occur of (i) the Funding Termination Date (defined
below), (ii) an Event of Default under the Indenture or a Servicer
Termination Event under the Sale and Servicing Agreement and (iii)
June 15, 1998, amounts on deposit in a Pre-Funding Account may be
withdrawn from time to time to acquire Subsequent Loans in
accordance with the Sale and Servicing Agreement and the Indenture.
The 'Funding Termination Date' will be the date on which the
Pre-Funded Amount has been reduced to less than $100,000. Any
Pre-Funded Amount remaining in the Pre-Funding Account at the end of
the Pre-Funding Period will be paid on the Payment Date at or
immediately following the end of such Pre-Funding Period to the
Owners of the Notes.
CAPITALIZED INTEREST ACCOUNT.............. On the Closing Date, the Indenture Trustee will establish and
thereafter maintain with itself a separate trust account (the
'Capitalized Interest Account'), into which amounts will be
deposited. The amounts so deposited will be used by the Indenture
Trustee on the Payment Dates during the applicable Pre-Funding
Period to fund the excess, if any, of the amount of interest accrued
on the Notes at the Note Rate over the Interest Remittance Amount
for such Payment Dates.
PAYMENT DATES AND RECORD DATES............ On the 15th day of each month, or, if such day is not a business day,
then the next succeeding business day, commencing in April 1998
(each, a 'Payment Date'), the Indenture Trustee will be required to
pay to the Owners of record of the Notes as of the last business day
of the calendar month immediately preceding the calendar month in
which such Payment Date occurs (the 'Record Date') such Owners'
Percentage Interests in the amounts required to be distributed to
the Owners of the Notes on such Payment Date.
AVAILABLE FUNDS........................... As of any Payment Date, 'Available Funds' will equal the sum of,
without duplication, (a) the amount on deposit in the Note Account
on such Payment Date plus (b) any amount transferred from the
Reserve Account to the Note Account on such Payment Date, minus (c)
the monthly premium of the Insurer and the monthly fees of the
Indenture Trustee. The Sale and Servicing Agreement provides that
the term 'Available Funds' does not include Insured Payments and
does not include any amounts that cannot be distributed to the
Owners of the Notes by the Indenture Trustee as a result of
proceedings under the United States Bankruptcy Code. See
'Description of the Notes--Flow of Funds and Payments on the Notes'
herein.
INTEREST PAYMENTS......................... Interest will accrue on the Notes at the then-applicable Note Rate
during the period (the 'Accrual Period') commencing on the Payment
Date in the month preceding the month of the applicable Payment Date
(or, in the case of the first Payment Date, commencing on the
Closing Date) and ending on the day preceding such applicable
Payment Date. Interest will be calculated on the
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S-5
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basis of a 360-day year and the actual number of days elapsed in
each Accrual Period. See 'Maturity, Prepayment and Yield
Considerations' herein.
During each Accrual Period, the Note Rate for each Series of Notes
will equal the lesser of (i) the LIBOR Rate and (ii) the Maximum
Rate. The 'LIBOR Rate' for each Accrual Period will equal the sum of
the London interbank offered rate for one-month U.S. dollar deposits
('1-Month LIBOR') and the Note Margin. The 'Maximum Rate' for any
Payment Date will equal the lesser of (i) 14.90% and (ii) a rate
equal to the weighted average of the Mortgage Rates on the ARMs
minus the sum of the Servicing Fee Rate, the Trustee's Fee Rate and
the premium (expressed as a per annum rate) for the Note Insurance
Policy (collectively, the 'Expense Fee Rate') and, beginning on the
thirteenth Payment Date, minus 0.50% per annum. The 'Note Margin'
will be 0.19%; provided, however, that for each Accrual Period after
the Servicer Optional Termination Date, the Note Margin will be
doubled.
On each Payment Date, Owners of the Notes will be entitled to receive
the sum of (i) the Current Interest for such Payment Date and (ii)
the Interest Carryover Amount for such Payment Date (such sum, the
'Interest Payment Amount').
The 'Current Interest' for any Payment Date will equal the interest
accruing during the related Accrual Period at the applicable Note
Rate on the Class Principal Balance immediately preceding such
Payment Date. The 'Interest Carryover Amount' for any Payment Date
will equal the sum of (i) the excess, if any, of the Current
Interest for the preceding Payment Date plus any outstanding
Interest Carryover Amount on such preceding Payment Date, over the
amount in respect of interest that is actually paid on the Notes on
such preceding Payment Date and (ii) one month's interest on such
excess at the related Note Rate, to the extent permitted by law. See
'Description of the Notes--Flow of Funds and Payments on the Notes'
herein.
If on any Payment Date the Note Rate is based on the Maximum Rate,
the excess of (i) the amount of interest such Notes would be
entitled to receive on such Payment Date at the then-applicable
LIBOR Rate over (ii) the amount of accrued interest for such Payment
Date at the applicable Maximum Rate, together with the unpaid
portion of any such excess from prior Payment Dates (and interest
accrued thereon at the then-applicable LIBOR Rate) is referred to
herein as the 'LIBOR Interest Carryover.' Any LIBOR Interest
Carryover will be paid on future Payment Dates as set forth herein
under 'Description of the Notes--Flow of Funds and Payments on the
Notes.' No LIBOR Interest Carryover will be paid to the Notes after
the Class Principal Balance thereof is reduced to zero. The ratings
of the Notes do not address the likelihood of the payment of any
LIBOR Interest Carryover, and the Note Insurance Policy does not
guarantee payment of any such amount.
PRINCIPAL PAYMENTS........................ The 'Basic Principal Amount' for a Payment Date will be an amount
equal to the sum of the following: (i) the principal portion of all
scheduled and unscheduled payments received on the Home Equity Loans
during the calendar month preceding the calendar
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month in which such Payment Date occurs (the 'Remittance Period'),
including (a) any full or partial principal prepayments of any Home
Equity Loans ('Prepayments') received during the related Remittance
Period, (b) the proceeds received of any insurance policy relating
to a Home Equity Loan, a Mortgaged Property or a Mortgaged Property
acquired through foreclosure or by deed-in-lieu of foreclosure
(each, an 'REO Property'), net of proceeds to be applied to the
repair of the Mortgaged Property or released to the Mortgagor (as
defined herein) and net of expenses reimbursable therefrom
('Insurance Proceeds'), (c) proceeds received in connection with the
liquidation of any defaulted Home Equity Loans, whether by trustee's
sale, foreclosure sale or otherwise ('Liquidation Proceeds'), net of
fees and advances reimbursable therefrom ('Net Liquidation
Proceeds'), (d) net rental income, if any, from REO Properties ('REO
Proceeds') and (e) proceeds received in connection with a taking of
a Mortgaged Property by condemnation or the exercise of eminent
domain or in connection with a release of part of the Mortgaged
Property from the related lien ('Released Mortgaged Property
Proceeds'), (ii) the principal portion of all amounts deposited in
the Principal and Interest Account on the related Remittance Date by
the applicable Originator in connection with the repurchase of, or
the substitution of a substantially similar home equity loan for, a
Home Equity Loan as to which there is defective documentation or a
breach of a representation or warranty contained in the Sale and
Servicing Agreement or by the Servicer in connection with the
purchase of any Home Equity Loan as permitted by the Sale and
Servicing Agreement, (iii) the principal balance of each defaulted
Home Equity Loan or REO Property as to which the Servicer has
determined that all amounts expected to be recovered have been
recovered (each, a 'Liquidated Mortgage Loan') to the extent not
included in the amounts described in the preceding clauses (i) and
(ii) and (iv) any amounts released from the Pre-Funding Account at
or following termination of the Pre-Funding Period.
The 'Principal Payment Amount' for any Payment Date will equal the
sum of (i) the Basic Principal Amount for such Payment Date and (ii)
the Principal Carry-Forward Amount.
As to any Payment Date, the 'Principal Carry-Forward Amount' will
equal the amount, if any, by which the amount of principal required
to be paid to the Owners of the Notes as of the preceding Payment
Date exceeded the amount of the actual payment of principal
(exclusive of amounts representing Insured Payments) to the Owners
of the Notes on such preceding Payment Date.
The 'Class Principal Balance' of the Notes, as of any date of
determination will equal the original Class Principal Balance
thereof on the Closing Date less the sum of all amounts previously
paid to the Owners of such Notes on account of principal. See
'Description of the Notes--Flow of Funds and Payments on the Notes'
herein.
REGISTRATION OF THE NOTES................. The Notes initially will be represented by one or more certificates
registered in the name of Cede & Co. ('Cede'), the nominee of The
Depository Trust Company ('DTC'). Persons acquiring beneficial
ownership interests in the Notes will hold their interests
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S-7
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through DTC, in the United States, or Cedel Bank, societe anonyme
('Cedel') or the Euroclear System ('Euroclear'), in Europe.
Transfers within DTC, Cedel or Euroclear, as the case may be, will
be in accordance with the usual rules and operating procedures of
the relevant system. So long as the Notes are in book-entry form,
such Notes will be evidenced by one or more Notes registered in the
name of Cede, as the nominee of DTC, or one of the relevant
depositaries (collectively, the 'European Depositaries').
Cross-market transfers between persons holding directly or
indirectly through DTC, on the one hand, and counterparties holding
directly or indirectly through Cedel or Euroclear, on the other,
will be effected in DTC through Citibank N.A. ('Citibank') or The
Chase Manhattan Bank ('Chase'), the relevant depositaries of Cedel
and Euroclear, respectively, and each a participating member of DTC.
The interests of such Noteholders will be represented by
book-entries on the records of DTC, participating members thereof
('Participants') and other entities, such as banks, brokers, dealers
and trust companies that clear through or maintain custodial
relationships with a Participant, either directly or indirectly
('Indirect Participants'). Notes representing the Notes will be
issued in definitive form only under the limited circumstances
described in the Prospectus. References herein to 'Holders' or
'Owners' reflect the rights of owners of the Notes only as they may
indirectly exercise such rights through DTC and Participants, except
as otherwise specified in the Prospectus. See 'Description of the
Notes--Book-Entry Notes' herein and 'Risk Factors--Book-Entry
Registration' and 'Description of the Securities--Book-Entry
Registration' in the Prospectus.
SERVICING OF THE HOME EQUITY LOANS........ The Servicer has agreed to serve as master servicer for the Home
Equity Loans (including Subsequent Loans) in accordance with the
Sale and Servicing Agreement, dated as of March 1, 1998 (the 'Sale
and Servicing Agreement'), among the Depositor, the Trust, the
Servicer and the Indenture Trustee. The Servicer may act through
sub-servicers, including affiliates of the Servicer. The Home Equity
Loans (including Subsequent Loans) will be serviced by the Servicer
on a 'scheduled/actual' basis (i.e., 'scheduled' interest and
'actual' principal receipts are required to be passed-through). See
'The Sale and Servicing Agreement' herein and in the Prospectus.
MONTHLY SERVICING FEE..................... The Servicer will retain a fee (the 'Servicing Fee') equal to 0.50%
per annum (the 'Servicing Fee Rate'), payable monthly at one-twelfth
the annual rate, of the then outstanding principal amount of each
Home Equity Loan (including Subsequent Loans) as of the first day of
each calendar month.
CREDIT ENHANCEMENT
General................................. The credit enhancement for the Notes will include a combination of
(a) the Note Insurance Policy and (b) the Reserve Account.
Note Insurance Policy................... Financial Guaranty Insurance Company, a New York stock insurance
corporation (the 'Note Insurer'), will provide a note insurance
policy (the 'Note Insurance Policy') relating to the Notes. Subject
to the requirements of the Note Insurance Policy described under
'The Note Insurance Policy and the Note
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Insurer,' the Note Insurance Policy unconditionally and irrevocably
guarantees that the full amount of each Insured Payment (as defined
herein) will be received by the Indenture Trustee or its successor
for payment by the Indenture Trustee to the Owners from the Note
Insurer. The Note Insurer's obligations under the Note Insurance
Policy will be discharged to the extent funds equal to the amount
required to be paid thereunder are received by the Indenture
Trustee, whether or not such funds are properly applied by the
Indenture Trustee. The Note Insurance Policy is noncancellable for
any reason.
The Note Insurance Policy does not (i) guarantee the Originators'
obligations to repurchase or substitute for Home Equity Loans
(including Subsequent Loans) with respect to which there has been a
breach of representation, (ii) guarantee any specified rate of
Prepayments, (iii) provide funds to redeem the Notes on any
specified date or (iv) guarantee the payment of any LIBOR Interest
Carryover.
The Indenture provides that to the extent the Note Insurer makes
Insured Payments, the Note Insurer will be subrogated to the rights
of the Owners of the Notes with respect to such Insured Payments.
The Note Insurer will receive reimbursement for such Insured
Payment, but only from the sources and in the manner provided in the
Sale and Servicing Agreement, the Guarantee Agreement and the
Insurance Agreement, dated as of March 1, 1998, among the Note
Insurer, the Depositor, the Servicer, the Trust, the Indenture
Trustee and the Underwriters (the 'Insurance Agreement'). Such
subrogation and reimbursement will have no effect on the Note
Insurer's obligations under the Note Insurance Policy.
Reserve Account......................... On the Closing Date, a reserve account comprised of two sub-accounts,
the Residual Sub-Account and the Guarantee Fee Sub-Account
(collectively, the 'Reserve Account'), will be established with
Bankers Trust Company of California, N.A. and an initial deposit may
be made into the Residual Sub-Account. On each Remittance Date on or
prior to the Subordination Termination Date, the Indenture Trustee
is required to deposit (i) the Residual Remittance Amount into the
Residual Sub-Account and (ii) the Guarantee Fee into the Guarantee
Fee Sub-Account.
As to any Remittance Date, the sum of the Residual Remittance Amount
and the Guarantee Fee will equal the Excess Interest for such
Remittance Date. The 'Excess Interest' will equal the product of (x)
one-twelfth of the difference between (i) the weighted average of
the Mortgage Rates of the Home Equity Loans (including Subsequent
Loans, if any) as of the first day of the related Remittance Period
and (ii) the Adjusted Note Rate, and (y) the Pool Principal Balance
as of the first day of the related Remittance Period, to the extent
such amount is received or advanced. The Reserve Account may be
funded in part by one or more letters of credit acceptable to the
Note Insurer.
The 'Adjusted Note Rate' for any Payment Date will equal the sum of
(i) the Note Rate and (ii) the Expense Fee Rate.
The aggregate amount required to be on deposit at any time in the
Reserve Account (taking into account the amounts available to be
</TABLE>
S-9
<PAGE>
<TABLE>
<S> <C>
withdrawn under any letters of credit deposited therein) will be
determined in accordance with the terms of the Sale and Servicing
Agreement (such amount, the 'Specified Reserve Account
Requirement'). Amounts, if any, on deposit or to be deposited in the
Reserve Account up to the Subordinated Amount (as defined herein)
will be available to fund any shortfall between the Available Funds
(before any withdrawals from the Reserve Account on a Payment Date)
and the Payment Amount for the Notes on any Payment Date.
Withdrawals from the Reserve Account for such purposes will be made
first from the Residual Sub-Account and second from the Guarantee
Fee Sub-Account.
The Sale and Servicing Agreement provides that, in the event
aggregate withdrawals from the Reserve Account with respect to
shortfalls on the Notes equal the amount specified in the Sale and
Servicing Agreement (such amount, the 'Subordinated Amount'), no
further withdrawals with respect to such shortfalls may be made from
the Reserve Account, and the Specified Reserve Account Requirement
will thereafter be zero. The Payment Date on which the Subordinated
Amount is reduced to zero is the 'Subordination Termination Date.'
The provisions in the Sale and Servicing Agreement relating to the
Reserve Account may be amended in any respect by the Depositor, the
Trust, the Servicer and the Note Insurer without the consent of, or
notice to, the Owners of the Notes. Such amendment could reduce or
eliminate the funding requirements of the Reserve Account. Funds on
deposit in the Reserve Account may be used to provide credit
enhancement for other transactions involving the Depositor or its
affiliates and the Note Insurer. Notwithstanding any reduction in
the funding requirements of the Reserve Account, or the depletion of
the Subordinated Amount or the Reserve Account, the Note Insurer
will be obligated on each Payment Date to fund the full amount of
each Insured Payment on such Payment Date. See 'Description of the
Notes--Reserve Account' herein.
GUARANTEE AGREEMENT....................... Pursuant to an agreement (the 'Guarantee Agreement') between the Note
Insurer and Adobe, Inc., a Nevada corporation which is an indirect,
wholly-owned subsidiary of the Servicer (the 'Guarantor'), the
Guarantor, in consideration of the Guarantee Fee, will agree to
reimburse the Note Insurer an amount up to the amount specified in
the Guarantee Agreement for Insured Payments that are not otherwise
reimbursed as provided in the Sale and Servicing Agreement. Payment
of the Guarantee Fee is subordinated to the limited extent provided
herein.
TERMINATION............................... The Servicer will have the right to purchase all the Home Equity
Loans remaining in the Trust on any Remittance Date when the
aggregate Loan Balance of such Home Equity Loans has declined to 10%
or less of an amount equal to the aggregate balances of the Home
Equity Loans as of the Cut-Off Date including the aggregate balances
of the Subsequent Loans as of the related subsequent cut-off date(s)
added to the Trust (the 'Servicer Optional Termination Date'). See
'The Transfer and Servicing Agreements-- Termination' herein.
RATINGS................................... It is a condition of the original issuance of the Notes that the
Notes receive ratings of AAA by Fitch IBCA, Inc. ('Fitch'), Aaa by
</TABLE>
S-10
<PAGE>
<TABLE>
<S> <C>
Moody's Investors Service, Inc. ('Moody's') and AAA, by Standard &
Poor's Ratings Services, a division of The McGraw-Hill Companies,
Inc. ('S&P'). A security rating is not a recommendation to buy, sell
or hold securities, and may be subject to revision or withdrawal at
any time by the assigning entity. Such ratings address credit risk,
but do not purport to address any prepayment risk associated with
the Notes. The ratings do not address the likelihood of the payment
of any LIBOR Interest Carryover. See 'Ratings' herein.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES... In the opinion of Stroock & Stroock & Lavan LLP ('Tax Counsel') for
federal income tax purposes, the Notes will be characterized as
debt, and the Trust will not be characterized as an association (or
a publicly traded partnership) or a taxable mortgage pool taxable as
a corporation. Each Noteholder, by the acceptance of a Note, will
agree to treat the Notes as indebtedness of the Trust. See 'Certain
Federal Income Tax Consequences' herein and in the Prospectus.
ERISA CONSIDERATIONS...................... Subject to the considerations discussed under 'ERISA Considerations'
herein, the Notes may be purchased by a pension or other employee
benefit plan subject to the Employee Retirement Income Security Act
of 1974, as amended ('ERISA'), or by individual retirement accounts
or Keogh plans covering only a sole proprietor or partner which are
not subject to ERISA but are subject to Section 4975 of the Code
('Plans'). A fiduciary of a Plan must determine that the purchase or
holding of a Note is consistent with its fiduciary duties under
ERISA and does not result in a nonexempt prohibited transaction as
defined in Section 406 of ERISA or Section 4975 of the Code. See
'ERISA Considerations' herein.
LEGAL INVESTMENT CONSIDERATIONS........... The Notes will not constitute 'mortgage related securities' for
purposes of the Secondary Mortgage Market Enhancement Act of 1984,
as amended ('SMMEA'). See 'Legal Investment' herein and in the
Prospectus.
</TABLE>
S-11
<PAGE>
THE HOME EQUITY LOANS
GENERAL
The Home Equity Loans were, and any Subsequent Loans will be, originated,
directly or through correspondents or mortgage brokers, or purchased and
re-underwritten, by the Originators in accordance with the policies set forth
under 'The Home Equity Loan Program' in the Prospectus. All of the Home Equity
Loans are, and all Subsequent Loans will be, Single Family Loans as described
under 'The Trusts' in the Prospectus. All of the Home Equity Loans are, and all
Subsequent Loans will be, non-conventional home equity and home improvement
loans bearing adjustable interest rates (the 'Mortgage Rates') and evidenced by
promissory notes (the 'Mortgage Notes') secured by deeds of trust, security
deeds or mortgages on Mortgaged Properties. Certain of the Home Equity Loans
(including Subsequent Loans) may have been made in connection with the
dispositions of previously foreclosed Mortgaged Properties. All of the Home
Equity Loans are fully amortizing loans. Although the Home Equity Loans may be
prepaid at any time, prepayment may subject the borrower to a prepayment
penalty, the terms and existence of which depend on state regulation. The
Mortgaged Properties securing the Home Equity Loans (including the Subsequent
Loans) consist of single-family residences (which may be townhouses, one- to
four-family dwellings, condominium units or mobile or manufactured homes treated
as real estate under local law). The Mortgaged Properties may be owner-occupied
(which includes second and vacation homes) and non-owner occupied investment
properties.
Each Home Equity Loan (including Subsequent Loans, if any) will be an ARM
secured by a first lien on the related Mortgaged Property. The per annum
interest rate borne by each ARM is subject to adjustment on the date set forth
in the Mortgage Note for such ARM and at regular intervals thereafter (each, a
'Change Date') to equal the sum of (i) the applicable Index and (ii) the number
of basis points set forth in the related Mortgage Note (the 'Gross Margin'),
subject to rounding and to the effects of the applicable Periodic Rate Cap,
Lifetime Cap and Lifetime Floor. The 'Periodic Rate Cap' limits changes in the
Mortgage Rate for each ARM on each Change Date. The 'Lifetime Cap' for each ARM
is the maximum Mortgage Rate that may be borne by such ARM, and the 'Lifetime
Floor' is the minimum Mortgage Rate that may be borne by such ARM. The ARMs do
not provide for negative amortization or limits on changes in the monthly
payments.
With respect to approximately 0.34% of the ARMs (by Principal Balance as of
the Cut-Off Date): (i) the Index is the weekly average of the quoted yields on
United States treasury securities adjusted to a constant maturity of one year
('CMT'), as made available by the Federal Reserve Board as of the date 45 days
(as set forth in the related Mortgage Note) before the applicable Change Date;
(ii) the Change Dates will occur on the date set forth in the related Mortgage
Note and every twelfth month thereafter; (iii) the Periodic Rate Cap for
substantially all such ARMs is 200 basis points or 300 basis points; (iv) the
Lifetime Cap is 600 basis points greater than the initial Mortgage Rate; and (v)
the Lifetime Floor is as set forth in the related Mortgage Note.
With respect to the remaining ARMs: (i) the Index is the London interbank
offered rate for six-month United States dollar deposits ('6-Month LIBOR'), as
published either in The Wall Street Journal of the edition, if any, specified in
the related Mortgage Note or by the Federal National Mortgage Association and
available as of the date before the applicable Change Date specified in the
related Mortgage Note; and (ii) the Change Dates will occur on the initial
Change Date set forth in the Mortgage Note and every sixth month thereafter.
The initial Change Dates for approximately 2.41%, 15.60% and 60.75% (by
Principal Balance as of the Cut-Off Date) of the ARMs delivered on the Closing
Date will occur on the 12th, 24th and 36th due dates, respectively. The Periodic
Rate Caps for such ARMs generally range from 100 basis points to 300 basis
points on the initial Change Dates and from 100 basis points to 200 basis points
for the subsequent Change Dates.
S-12
<PAGE>
STATISTICAL INFORMATION
Set forth below is certain approximate statistical information as of the
Cut-Off Date regarding the Home Equity Loans expected to be included in the
Trust as of the Closing Date. Prior to the Closing Date, Home Equity Loans may
be removed from the Trust and other Home Equity Loans may be substituted
therefor. The Depositor believes that the information set forth herein with
respect to the Pool as presently constituted is representative of the
characteristics of the Pool as it will be constituted at the Closing Date,
although certain characteristics of the Home Equity Loans may vary. The sum of
the percentage columns in the following tables may not equal 100% due to
rounding.
As of the Cut-Off Date: the Loan Balances ranged from $6,285 to $701,597;
the average Loan Balance was $85,639; the Collateral Mortgage Rates ranged from
6.50% to 13.38% per annum; the weighted average current Mortgage Rate was 9.89%
per annum; the original Loan-to-Value Ratios ranged from 10.00% to 100.00%; the
weighted average original Loan-to-Value Ratio was 80.96%; the remaining terms to
stated maturity ranged from 60 months to 360 months; the weighted average
remaining term to stated maturity was 341 months; the loan ages ranged from 0
months to 132 months; the weighted average loan age was 1 month; the Gross
Margins ranged from 3.00% to 8.75%; the weighted average Gross Margin was 5.32%;
the Lifetime Floors ranged from 4.88% to 13.38%; the weighted average Lifetime
Floor was 8.65%; the Lifetime Caps ranged from 12.55% to 20.38%; the weighted
average Lifetime Cap was 16.04%; the weighted average current Mortgage Rate of
the ARMs with initial fixed Mortgage Rates was 9.92% per annum; the weighted
average number of months to the next Change Date for the ARMs with initial fixed
Mortgage Rates was 33 months; and the weighted average number of months to the
next Change Date for the remaining ARMs was 6 months.
S-13
<PAGE>
GEOGRAPHIC DISTRIBUTION
<TABLE>
<CAPTION>
AGGREGATE UNPAID % OF AGGREGATE
NUMBER OF % OF AGGREGATE LOAN BALANCE UNPAID LOAN
HOME EQUITY NUMBER OF HOME AS OF THE BALANCE AS OF
STATE LOANS EQUITY LOANS CUT-OFF DATE THE CUT-OFF DATE
- -------------------------------------------- ----------- -------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Alabama..................................... 15 0.56% $ 1,943,053.08 0.85%
Arizona..................................... 27 1.01 3,264,180.77 1.42
Arkansas.................................... 34 1.27 2,364,572.27 1.03
California.................................. 159 5.92 24,819,020.77 10.79
Colorado.................................... 56 2.09 5,872,318.26 2.55
Connecticut................................. 26 0.97 2,615,480.08 1.14
Delaware.................................... 4 0.15 305,223.53 0.13
District of Columbia........................ 2 0.07 181,065.16 0.08
Florida..................................... 92 3.43 7,956,491.14 3.46
Georgia..................................... 43 1.60 3,864,144.91 1.68
Idaho....................................... 14 0.52 1,103,717.42 0.48
Illinois.................................... 66 2.46 6,770,554.14 2.94
Indiana..................................... 160 5.96 9,073,708.09 3.95
Iowa........................................ 39 1.45 2,412,246.63 1.05
Kansas...................................... 45 1.68 2,426,627.38 1.06
Kentucky.................................... 68 2.53 4,621,890.92 2.01
Louisiana................................... 109 4.06 8,856,577.55 3.85
Maine....................................... 43 1.60 3,465,136.37 1.51
Maryland.................................... 35 1.30 4,014,676.70 1.75
Massachusetts............................... 28 1.04 2,800,773.40 1.22
Michigan.................................... 195 7.26 11,835,763.42 5.15
Minnesota................................... 19 0.71 1,475,002.48 0.64
Mississippi................................. 69 2.57 4,694,752.07 2.04
Missouri.................................... 34 1.27 1,862,609.18 0.81
Montana..................................... 2 0.07 215,684.56 0.09
Nebraska.................................... 7 0.26 317,904.51 0.14
Nevada...................................... 3 0.11 322,538.99 0.14
New Hampshire............................... 41 1.53 3,345,021.47 1.45
New Jersey.................................. 54 2.01 6,296,311.66 2.74
New Mexico.................................. 24 0.89 1,995,756.99 0.87
New York.................................... 94 3.50 9,161,471.74 3.98
North Carolina.............................. 156 5.81 11,728,906.97 5.10
Ohio........................................ 237 8.83 16,164,986.73 7.03
Oklahoma.................................... 46 1.71 2,493,410.51 1.08
Oregon...................................... 43 1.60 4,632,289.17 2.01
Pennsylvania................................ 115 4.28 9,594,685.44 4.17
Rhode Island................................ 7 0.26 583,377.67 0.25
South Carolina.............................. 40 1.49 3,729,390.38 1.62
Tennessee................................... 117 4.36 9,527,154.28 4.14
Texas....................................... 36 1.34 4,120,233.49 1.79
Utah........................................ 32 1.19 4,843,717.94 2.11
Vermont..................................... 3 0.11 199,483.95 0.09
Virginia.................................... 44 1.64 4,137,108.46 1.80
Washington.................................. 46 1.71 5,969,685.94 2.60
West Virginia............................... 13 0.48 764,969.09 0.33
Wisconsin................................... 140 5.21 10,950,257.71 4.76
Wyoming..................................... 3 0.11 247,183.07 0.11
----------- ------- ---------------- -------
Total..................................... 2,685 100.00% $ 229,941,116.44 100.00%
----------- ------- ---------------- -------
----------- ------- ---------------- -------
</TABLE>
S-14
<PAGE>
ORIGINAL LOAN-TO-VALUE RATIO DISTRIBUTION
<TABLE>
<CAPTION>
AGGREGATE UNPAID % OF AGGREGATE
NUMBER OF % OF AGGREGATE LOAN BALANCE UNPAID LOAN
RANGE OF ORIGINAL HOME EQUITY NUMBER OF HOME AS OF THE BALANCE AS OF
LOAN-TO-VALUE RATIOS LOANS EQUITY LOANS CUT-OFF DATE THE CUT-OFF DATE
- -------------------------------------------- ----------- -------------- ---------------- ----------------
<S> <C> <C> <C> <C>
5.01- 10.00%............................... 1 0.04% $ 18,100.00 0.01%
10.01- 15.00................................ 3 0.11 47,968.12 0.02
15.01- 20.00................................ 1 0.04 30,700.00 0.01
20.01- 25.00................................ 4 0.15 207,042.90 0.09
25.01- 30.00................................ 7 0.26 270,017.63 0.12
30.01- 35.00................................ 16 0.60 1,110,913.04 0.48
35.01- 40.00................................ 14 0.52 569,281.61 0.25
40.01- 45.00................................ 24 0.89 1,079,301.26 0.47
45.01- 50.00................................ 34 1.27 2,312,989.42 1.01
50.01- 55.00................................ 47 1.75 2,872,681.69 1.25
55.01- 60.00................................ 77 2.87 4,772,592.73 2.08
60.01- 65.00................................ 82 3.05 6,472,980.35 2.82
65.01- 70.00................................ 139 5.18 11,700,085.52 5.09
70.01- 75.00................................ 240 8.94 22,880,846.66 9.95
75.01- 80.00................................ 480 17.88 51,576,201.07 22.43
80.01- 85.00................................ 408 15.20 36,139,226.92 15.72
85.01- 90.00................................ 601 22.38 52,568,655.77 22.86
90.01- 95.00................................ 314 11.69 21,673,808.19 9.43
95.01-100.00................................ 193 7.19 13,637,723.56 5.93
----------- ------- ---------------- -------
Total.................................. 2,685 100.00% $ 229,941,116.44 100.00%
----------- ------- ---------------- -------
----------- ------- ---------------- -------
</TABLE>
The Loan-to-Value Ratios shown above represent the ratio of the principal
amount of each Home Equity Loan at the time of origination of such Home Equity
Loan divided by the lesser of the appraised value of the related Mortgaged
Property at the time of origination (the 'Appraised Values') or the purchase
price of such Mortgaged Property, if applicable. No assurance can be given that
the values of the Mortgaged Properties have remained or will remain at their
levels on the dates of origination of the related Home Equity Loans. If the
residential real estate market should experience an overall decline in property
values such that the outstanding balances of the Home Equity Loans become equal
to or greater than the value of the Mortgaged Properties, the actual rates of
delinquencies, defaults, foreclosures and losses could be higher than those now
generally experienced in the mortgage lending industry.
S-15
<PAGE>
CURRENT MORTGAGE RATE DISTRIBUTION
<TABLE>
<CAPTION>
AGGREGATE UNPAID % OF AGGREGATE
NUMBER OF % OF AGGREGATE LOAN BALANCE UNPAID LOAN
RANGE OF CURRENT HOME EQUITY NUMBER OF HOME AS OF THE BALANCE AS OF
MORTGAGE RATES LOANS EQUITY LOANS CUT-OFF DATE THE CUT-OFF DATE
- --------------------------------------------- ----------- -------------- ---------------- ----------------
<S> <C> <C> <C> <C>
6.001- 6.500%............................... 2 0.07% $ 355,969.53 0.15%
6.501- 7.000................................ 4 0.15 520,818.92 0.23
7.001- 7.500................................ 7 0.26 927,231.10 0.40
7.501- 8.000................................ 25 0.93 3,737,525.10 1.63
8.001- 8.500................................ 71 2.64 9,241,689.26 4.02
8.501- 9.000................................ 208 7.75 27,936,884.72 12.15
9.001- 9.500................................ 425 15.83 44,369,767.65 19.30
9.501-10.000................................ 542 20.19 45,338,351.34 19.72
10.001-10.500................................ 403 15.01 34,926,526.94 15.19
10.501-11.000................................ 889 33.11 55,913,111.97 24.32
11.001-11.500................................ 55 2.05 3,782,542.10 1.65
11.501-12.000................................ 39 1.45 2,211,707.08 0.96
12.001-12.500................................ 6 0.22 255,919.78 0.11
12.501-13.000................................ 7 0.26 244,819.61 0.11
13.001-13.500................................ 2 0.07 178,251.34 0.08
----------- ------- ---------------- -------
Total................................... 2,685 100.00% $ 229,941,116.44 100.00%
----------- ------- ---------------- -------
----------- ------- ---------------- -------
</TABLE>
DISTRIBUTION OF OUTSTANDING LOAN BALANCES AS OF THE CUT-OFF DATE
<TABLE>
<CAPTION>
AGGREGATE UNPAID % OF AGGREGATE
NUMBER OF % OF AGGREGATE LOAN BALANCE UNPAID LOAN
RANGE OF HOME EQUITY NUMBER OF HOME AS OF THE BALANCE AS OF
LOAN BALANCES LOANS EQUITY LOANS CUT-OFF DATE THE CUT-OFF DATE
- --------------------------------------------- ----------- -------------- ---------------- ----------------
<S> <C> <C> <C> <C>
$ 0.01- 50,000.00....................... 755 28.12% $ 27,180,248.48 11.82%
50,000.01-100,000.00....................... 1,194 44.47 84,723,580.17 36.85
100,000.01-150,000.00....................... 459 17.09 55,821,929.21 24.28
150,000.01-200,000.00....................... 130 4.84 22,271,120.48 9.69
200,000.01-250,000.00....................... 70 2.61 15,561,769.58 6.77
250,000.01-300,000.00....................... 47 1.75 12,770,792.74 5.55
300,000.01-350,000.00....................... 11 0.41 3,591,381.78 1.56
350,000.01-400,000.00....................... 9 0.34 3,376,626.59 1.47
400,000.01-450,000.00....................... 6 0.22 2,545,745.63 1.11
450,000.01-500,000.00....................... 3 0.11 1,396,325.67 0.61
700,000.01-750,000.00....................... 1 0.04 701,596.11 0.31
----------- ------- ---------------- -------
Total................................... 2,685 100.00% $ 229,941,116.44 100.00%
----------- ------- ---------------- -------
----------- ------- ---------------- -------
</TABLE>
S-16
<PAGE>
LIEN STATUS AND OCCUPANCY STATUS
<TABLE>
<CAPTION>
AGGREGATE UNPAID % OF AGGREGATE
NUMBER OF % OF AGGREGATE LOAN BALANCE UNPAID LOAN
LIEN STATUS AND HOME EQUITY NUMBER OF HOME AS OF THE BALANCE AS OF
OCCUPANCY STATUS LOANS EQUITY LOANS CUT-OFF DATE THE CUT-OFF DATE
- --------------------------------------------- ----------- -------------- ---------------- ----------------
<S> <C> <C> <C> <C>
First Lien Non-Owner Occupied................ 79 2.94% $ 4,335,077.31 1.89%
First Lien Owner Occupied.................... 2,601 96.87 224,779,565.18 97.76
First Lien Second Home....................... 5 0.19 826,473.95 0.36
----------- ------- ---------------- -------
Total................................... 2,685 100.00% $ 229,941,116.44 100.00%
----------- ------- ---------------- -------
----------- ------- ---------------- -------
</TABLE>
DISTRIBUTION OF LOAN AGES (IN MONTHS)
<TABLE>
<CAPTION>
AGGREGATE UNPAID % OF AGGREGATE
RANGE OF NUMBER OF % OF AGGREGATE LOAN BALANCE UNPAID LOAN
LOAN AGES HOME EQUITY NUMBER OF HOME AS OF THE BALANCE AS OF
(MONTHS) LOANS EQUITY LOANS CUT-OFF DATE THE CUT-OFF DATE
- --------------------------------------------- ----------- -------------- ---------------- ----------------
<S> <C> <C> <C> <C>
0- 6...................................... 2,639 98.29% $ 226,183,332.39 98.37%
7- 12...................................... 15 0.56 1,309,372.09 0.57
13- 18...................................... 7 0.26 837,271.68 0.36
19- 24...................................... 1 0.04 41,141.94 0.02
25- 30...................................... 5 0.19 291,793.68 0.13
31- 36...................................... 3 0.11 208,417.00 0.09
37- 42...................................... 1 0.04 43,907.11 0.02
43- 48...................................... 3 0.11 133,553.14 0.06
49- 54...................................... 2 0.07 146,069.12 0.06
55- 60...................................... 1 0.04 44,545.19 0.02
67- 72...................................... 2 0.07 207,476.94 0.09
79- 84...................................... 2 0.07 291,627.44 0.13
85- 90...................................... 2 0.07 108,180.64 0.05
103-108...................................... 1 0.04 71,703.07 0.03
127-132...................................... 1 0.04 22,725.01 0.01
----------- ------- ---------------- -------
Total................................... 2,685 100.00% $ 229,941,116.44 100.00%
----------- ------- ---------------- -------
----------- ------- ---------------- -------
</TABLE>
PROPERTY TYPE
<TABLE>
<CAPTION>
AGGREGATE UNPAID % OF AGGREGATE
NUMBER OF % OF AGGREGATE LOAN BALANCE UNPAID LOAN
HOME EQUITY NUMBER OF HOME AS OF THE BALANCE AS OF
PROPERTY TYPE LOANS EQUITY LOANS CUT-OFF DATE THE CUT-OFF DATE
- --------------------------------------------- ----------- -------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Condominium.................................. 58 2.16% $ 6,474,536.35 2.82%
Duplex....................................... 72 2.68 6,992,513.25 3.04
Fourplex..................................... 9 0.34 689,869.71 0.30
Manufactured Housing......................... 3 0.11 175,451.00 0.08
Modular Housing.............................. 1 0.04 89,884.83 0.04
PUD.......................................... 11 0.41 1,333,163.15 0.58
Rowhouse..................................... 17 0.63 774,435.16 0.34
Semi-Detached................................ 2 0.07 66,900.00 0.03
Single Family Detached....................... 2,479 92.33 210,148,305.62 91.39
Townhouse.................................... 13 0.48 1,244,676.64 0.54
Triplex...................................... 20 0.74 1,951,380.73 0.85
----------- ------- ---------------- -------
Total................................... 2,685 100.00% $ 229,941,116.44 100.00%
----------- ------- ---------------- -------
----------- ------- ---------------- -------
</TABLE>
S-17
<PAGE>
DISTRIBUTION OF REMAINING TERM TO MATURITY
(IN MONTHS) AS OF THE CUT-OFF DATE
<TABLE>
<CAPTION>
AGGREGATE UNPAID % OF AGGREGATE
% OF AGGREGATE LOAN BALANCE UNPAID LOAN
RANGE OF MONTHS NUMBER OF HOME NUMBER OF HOME AS OF THE BALANCE AS OF
REMAINING TO MATURITY EQUITY LOANS EQUITY LOANS CUT-OFF DATE THE CUT-OFF DATE
- --------------------------------------- --------------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C>
49- 60................................ 1 0.04% $ 18,100.00 0.01%
61- 72................................ 2 0.07 88,002.52 0.04
85- 96................................ 1 0.04 25,900.00 0.01
97-108................................ 1 0.04 53,900.00 0.02
109-120................................ 8 0.30 322,300.00 0.14
121-132................................ 1 0.04 58,692.89 0.03
133-144................................ 1 0.04 13,700.00 0.01
145-156................................ 2 0.07 56,712.27 0.02
157-168................................ 2 0.07 83,515.57 0.04
169-180................................ 303 11.28 14,413,227.28 6.27
193-204................................ 1 0.04 45,840.36 0.02
205-216................................ 3 0.11 277,852.06 0.12
217-228................................ 2 0.07 68,558.64 0.03
229-240................................ 201 7.49 10,981,746.54 4.78
253-264................................ 1 0.04 71,703.07 0.03
265-276................................ 2 0.07 108,180.64 0.05
277-288................................ 3 0.11 369,780.26 0.16
289-300................................ 4 0.15 454,324.12 0.20
301-312................................ 2 0.07 131,921.42 0.06
313-324................................ 3 0.11 131,619.89 0.06
325-336................................ 5 0.19 313,156.60 0.14
337-348................................ 5 0.19 749,064.42 0.33
349-360................................ 2,131 79.37 201,103,317.89 87.46
------ ------- ---------------- -------
Total............................. 2,685 100.00% $ 229,941,116.44 100.00%
------ ------- ---------------- -------
------ ------- ---------------- -------
</TABLE>
S-18
<PAGE>
DISTRIBUTION OF GROSS MARGINS
<TABLE>
<CAPTION>
AGGREGATE UNPAID % OF AGGREGATE
% OF AGGREGATE LOAN BALANCE UNPAID LOAN
RANGE OF NUMBER OF HOME NUMBER OF HOME AS OF THE BALANCE AS OF
GROSS MARGINS EQUITY LOANS EQUITY LOANS CUT-OFF DATE THE CUT-OFF DATE
- --------------------------------------- --------------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C>
2.751-3.000%........................... 2 0.07% $ 186,800.00 0.08%
3.001-3.500............................ 4 0.15 426,700.00 0.19
3.501-3.750............................ 9 0.34 358,742.34 0.16
3.751-4.000............................ 206 7.67 15,603,677.28 6.79
4.001-4.250............................ 21 0.78 1,268,665.07 0.55
4.251-4.500............................ 401 14.93 31,447,340.52 13.68
4.501-4.750............................ 120 4.47 12,470,881.44 5.42
4.751-5.000............................ 256 9.53 29,040,197.47 12.63
5.001-5.250............................ 676 25.18 49,382,974.98 21.48
5.251-5.500............................ 136 5.07 11,898,379.03 5.17
5.501-5.750............................ 196 7.30 18,546,863.55 8.07
5.751-6.000............................ 321 11.96 26,578,168.14 11.56
6.001-6.250............................ 79 2.94 8,524,591.72 3.71
6.251-6.500............................ 77 2.87 7,375,831.09 3.21
6.501-6.750............................ 82 3.05 7,577,336.38 3.30
6.751-7.000............................ 41 1.53 4,413,075.35 1.92
7.001-7.250............................ 10 0.37 750,693.73 0.33
7.251-7.500............................ 27 1.01 2,616,366.25 1.14
7.501-7.750............................ 11 0.41 919,528.99 0.40
7.751-8.000............................ 2 0.07 68,044.80 0.03
8.001-8.250............................ 3 0.11 165,406.38 0.07
8.251-8.500............................ 3 0.11 279,484.37 0.12
8.501-8.750............................ 2 0.07 41,367.56 0.02
------ ------- ---------------- -------
Total............................. 2,685 100.00% $ 229,941,116.44 100.00%
------ ------- ---------------- -------
------ ------- ---------------- -------
</TABLE>
DISTRIBUTION OF LIFETIME CAPS
<TABLE>
<CAPTION>
AGGREGATE UNPAID % OF AGGREGATE
% OF AGGREGATE LOAN BALANCE UNPAID LOAN
RANGE OF NUMBER OF HOME NUMBER OF HOME AS OF THE BALANCE AS OF
LIFETIME CAPS EQUITY LOANS EQUITY LOANS CUT-OFF DATE THE CUT-OFF DATE
- --------------------------------------- --------------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C>
12.501-13.000%......................... 1 0.04% $ 169,600.00 0.07%
13.001-13.500.......................... 4 0.15 707,164.04 0.31
13.501-14.000.......................... 10 0.37 1,651,111.95 0.72
14.001-14.500.......................... 47 1.75 6,497,503.76 2.83
14.501-15.000.......................... 147 5.47 19,282,344.28 8.39
15.001-15.500.......................... 389 14.49 40,391,167.14 17.57
15.501-16.000.......................... 577 21.49 51,814,725.76 22.53
16.001-16.500.......................... 433 16.13 39,764,956.01 17.29
16.501-17.000.......................... 914 34.04 59,225,248.20 25.76
17.001-17.500.......................... 79 2.94 5,559,886.77 2.42
17.501-18.000.......................... 49 1.82 3,115,009.79 1.35
18.001-18.500.......................... 12 0.45 657,542.52 0.29
18.501-19.000.......................... 12 0.45 582,012.33 0.25
19.001-19.500.......................... 6 0.22 194,423.37 0.08
19.501-20.000.......................... 3 0.11 150,169.18 0.07
20.001-20.500.......................... 2 0.07 178,251.34 0.08
------ ------- ---------------- -------
Total............................. 2,685 100.00% $ 229,941,116.44 100.00%
------ ------- ---------------- -------
------ ------- ---------------- -------
</TABLE>
S-19
<PAGE>
DISTRIBUTION OF LIFETIME FLOORS
<TABLE>
<CAPTION>
AGGREGATE UNPAID % OF AGGREGATE
% OF AGGREGATE LOAN BALANCE UNPAID LOAN
RANGE OF NUMBER OF HOME NUMBER OF HOME AS OF THE BALANCE AS OF
LIFETIME FLOORS EQUITY LOANS EQUITY LOANS CUT-OFF DATE THE CUT-OFF DATE
- --------------------------------------- --------------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C>
4.501- 5.000%......................... 5 0.19% $ 374,404.18 0.16%
5.001- 5.500.......................... 4 0.15 423,273.84 0.18
5.501- 6.000.......................... 7 0.26 1,246,004.12 0.54
6.001- 6.500.......................... 31 1.15 5,025,784.53 2.19
6.501- 7.000.......................... 71 2.64 8,738,159.05 3.80
7.001- 7.500.......................... 244 9.09 21,655,316.29 9.42
7.501- 8.000.......................... 446 16.61 37,296,730.53 16.22
8.001- 8.500.......................... 329 12.25 31,481,454.46 13.69
8.501- 9.000.......................... 762 28.38 60,271,178.80 26.21
9.001- 9.500.......................... 203 7.56 25,040,769.26 10.89
9.501-10.000.......................... 126 4.69 11,311,103.39 4.92
10.001-10.500.......................... 111 4.13 7,729,203.62 3.36
10.501-11.000.......................... 271 10.09 15,811,743.33 6.88
11.001-11.500.......................... 35 1.30 1,754,598.55 0.76
11.501-12.000.......................... 27 1.01 1,202,652.23 0.52
12.001-12.500.......................... 5 0.19 188,271.99 0.08
12.501-13.000.......................... 6 0.22 212,216.93 0.09
13.001-13.500.......................... 2 0.07 178,251.34 0.08
------ ------- ---------------- -------
Total............................. 2,685 100.00% $ 229,941,116.44 100.00%
------ ------- ---------------- -------
------ ------- ---------------- -------
</TABLE>
S-20
<PAGE>
NUMBER OF MONTHS TO NEXT CHANGE DATE
<TABLE>
<CAPTION>
AGGREGATE UNPAID % OF AGGREGATE
% OF AGGREGATE LOAN BALANCE UNPAID LOAN
MONTHS TO NUMBER OF HOME NUMBER OF HOME AS OF THE BALANCE AS OF
NEXT CHANGE DATE EQUITY LOANS EQUITY LOANS CUT-OFF DATE THE CUT-OFF DATE
- --------------------------------------- --------------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C>
2..................................... 4 0.15% $ 653,058.33 0.28%
3..................................... 5 0.19 665,198.40 0.29
4..................................... 23 0.86 3,008,442.11 1.31
5..................................... 74 2.76 10,468,897.73 4.55
6..................................... 129 4.80 8,997,293.13 3.91
7..................................... 281 10.47 18,639,209.76 8.11
8..................................... 99 3.69 7,062,800.00 3.07
9..................................... 3 0.11 464,020.08 0.20
10..................................... 11 0.41 1,873,592.44 0.81
11..................................... 13 0.48 2,231,032.86 0.97
12..................................... 1 0.04 248,000.00 0.11
14..................................... 1 0.04 61,100.00 0.03
19..................................... 6 0.22 321,353.80 0.14
20..................................... 6 0.22 519,730.68 0.23
21..................................... 22 0.82 3,299,499.03 1.43
22..................................... 134 4.99 15,148,900.53 6.59
23..................................... 157 5.85 15,377,778.48 6.69
24..................................... 10 0.37 1,032,475.52 0.45
25..................................... 1 0.04 169,600.00 0.07
31..................................... 1 0.04 36,732.43 0.02
32..................................... 1 0.04 32,353.04 0.01
33..................................... 4 0.15 388,192.43 0.17
34..................................... 6 0.22 469,095.39 0.20
35..................................... 59 2.20 7,075,784.82 3.08
36..................................... 455 16.95 38,828,592.74 16.89
37..................................... 875 32.59 69,456,126.71 30.21
38..................................... 304 11.32 23,412,256.00 10.18
------ ------- ---------------- -------
Total............................. 2,685 100.00% $ 229,941,116.44 100.00%
------ ------- ---------------- -------
------ ------- ---------------- -------
</TABLE>
S-21
<PAGE>
SUBSEQUENT LOANS
The Depositor expects to sell Subsequent Loans to the Trust during the
Pre-Funding Period. The purchase price for such Subsequent Loans will equal the
outstanding principal balances thereof as the related subsequent cut-off date
and will be paid by withdrawal of funds on deposit in the Pre-Funding Account.
The Subsequent Loans will be pledged to the Indenture Trustee for the benefit of
the Owners of the Notes. The Subsequent Loans may have characteristics which
differ from the Home Equity Loans initially included in the Trust Group. As a
result, following any sale of Subsequent Loans, the description of Collateral
Group One and/or set forth above may not accurately reflect the characteristics
of all of the Home Equity Loans and Subsequent Loans in the Trust. However, the
Subsequent Loans must conform to the representations and warranties set forth in
the Sale and Servicing Agreement. Following the end of the Pre-Funding Period,
the Depositor expects that the Home Equity Loans (including Subsequent Loans)
will have the following approximate characteristics.
<TABLE>
<S> <C>
Average Unpaid Principal Balance................................................... at least $80,000
Weighted Average Mortgage Rate..................................................... 9.85% - 10.475%
Weighted Average Remaining Term to Stated Maturity................................. 338 months - 344 months
Weighted Average Original Loan-to-Value Ratio...................................... not more than 82%
Weighted Average Loan Age.......................................................... 0 months - 4 months
Weighted Average Gross Margins..................................................... 5.30%
Loans Secured by Primary Residences................................................ at least 95%
Single Family Detached............................................................. at least 90%
2/28 Loans......................................................................... not more than 16%
3/12, 3/17 and 3/27 Loans.......................................................... not more than 62%
State Distribution
California...................................................................... not more than 13%
Florida......................................................................... not more than 8%
Indiana......................................................................... not more than 8%
Louisiana....................................................................... not more than 8%
Michigan........................................................................ not more than 8%
New York........................................................................ not more than 8%
North Carolina.................................................................. not more than 8%
Ohio............................................................................ not more than 10%
Pennsylvania.................................................................... not more than 8%
Tennessee....................................................................... not more than 8%
Wisconsin....................................................................... not more than 8%
Any other individual state...................................................... not more than 7%
</TABLE>
S-22
<PAGE>
MATURITY, PREPAYMENT AND YIELD CONSIDERATIONS
GENERAL
Prepayments. The weighted average life of and, if purchased at a price
other than par, the yield to maturity on, the Notes will be directly related to
the rate of payment of principal of the Home Equity Loans (which, for purposes
of this discussion, includes Subsequent Loans, if any) including for this
purpose Prepayments, delinquencies, liquidations due to defaults, casualties and
condemnations, and repurchases of Home Equity Loans by the Originators or the
Servicer. The Home Equity Loans may be prepaid by the related obligors on the
Mortgage Notes ('Mortgagors') at any time. However, prepayment may subject the
Mortgagor to a prepayment penalty, the existence and terms of which depend on
state regulation. The actual rate of principal prepayments on pools of home
equity loans is influenced by a variety of economic, tax, geographic,
demographic, social, legal and other factors and has fluctuated considerably in
recent years. In addition, the rate of principal prepayments may differ among
pools of home equity loans at any time because of specific factors relating to
the home equity loans in the particular pool, including, among other things, the
age of the home equity loans, the geographic locations of the properties
securing the home equity loans, the extent of the mortgagors' equity in such
properties, and changes in the mortgagors' housing needs, job transfers and
unemployment.
Although all of the Home Equity Loans are ARMs, the initial Change Dates
for approximately 2.41%, 15.60% and 60.75% (by Principal Balance as of the
Cut-Off Date) of the ARMs delivered on the Closing Date will occur on the 12th,
24th and 36th due dates, respectively ('Delayed Adjustment Loans'). As is the
case with fixed rate home equity loans, the ARMs may be subject to a greater
rate of principal prepayments in a low interest rate environment. For example,
if prevailing interest rates were to fall, Mortgagors with ARMs may be inclined
to refinance their ARMs with a fixed rate loan to 'lock in' a lower interest
rate. The prepayment behavior of the Delayed Adjustment Loans may differ from
that of the fixed rate Home Equity Loans and the other ARMs. As a Delayed
Adjustment Loan approaches its initial Change Date, the borrower may become more
likely to refinance such loan to avoid an increase in the Mortgage Rate, even if
fixed rate loans are only available at rates that are slightly lower or higher
than the Mortgage Rate before adjustment. The existence of the applicable
Periodic Rate Cap, Lifetime Cap and Lifetime Floor also may affect the
likelihood of prepayments resulting from refinancings. In addition, the
delinquency and loss experience on the ARMs may differ from that on the fixed
rate home equity loans because the amount of the monthly payments on the ARMs
are subject to adjustment on each Change Date.
The prepayment experience on non-conventional home equity loans may differ
from that on conventional first mortgage loans, primarily due to the credit
quality of the typical borrower. Because the credit histories of many home
equity borrowers may preclude them from other traditional sources of financing,
such borrowers may be less likely to refinance due to a decline in market
interest rates. Non-conventional home equity loans may experience more
prepayments in a rising interest rate environment as the borrowers' finances are
stressed to the point of default. However, the increased level of competition
among home equity lenders has increased the awareness among credit-impaired
borrowers of the availability of credit and the attraction of refinancing.
If purchased at a price other than par, the yield to maturity on a Note
will be affected by the rate and timing of payments of principal, including
Prepayments, of the Home Equity Loans. If the actual rate of payments on the
Home Equity Loans is slower than the rate anticipated by an investor who
purchases a Note at a discount, the actual yield to maturity to such investor
will be lower than such investor's anticipated yield. If the actual rate of
payments on the Home Equity Loans is faster than the rate anticipated by an
investor who purchases a Note at a premium, the actual yield to maturity to such
investor will be lower than such investor's anticipated yield.
Appendix B hereto sets forth life-to-date prepayment rates and pool factors
as of December 31, 1997, with respect to certain home equity loans previously
securitized by the Depositor.
Subsequent Loans. As described herein, the Depositor expects to sell
Subsequent Loans to the Trust during the Pre-Funding Periods. If the Pre-Funded
Amount is not used to purchase Subsequent Loans, the unused portion will be
applied as a Prepayment and allocated to the Notes as a payment of principal as
provided herein.
S-23
<PAGE>
Maturity Date. The Maturity Date for the Notes is set forth on the cover
hereof. The Maturity Date is the 360th Payment Date. The weighted average life
of the Notes is likely to be shorter, and the final Payment Date could occur
significantly earlier than the Maturity Date because (i) Prepayments are likely
to occur, (ii) the Originators may repurchase Home Equity Loans in the event of
breaches of representations and warranties and (iii) the Servicer may purchase
the Home Equity Loans on or after the Servicer Optional Termination Date.
Note Rate. Each Accrual Period for the Notes will consist of the actual
number of days elapsed from the Payment Date in the month preceding the month of
the applicable Payment Date (or, in the case of the first Accrual Period, from
the Closing Date) through the day preceding such Payment Date. After the initial
Accrual Period, the Note Rate will be adjusted by reference to changes in the
level of 1-Month LIBOR, subject to the effects of the Maximum Rate.
The Note Rate for the Notes may be calculated by reference to the Mortgage
Rates on the ARMs. Although the Mortgage Rates on the ARMs are subject to
adjustment, the Mortgage Rates adjust less frequently than the Note Rate and
adjust by reference to the Index. Changes in 1-Month LIBOR may not correlate
with changes in the applicable Index and either may not correlate with
prevailing interest rates. It is possible that an increased level of 1-Month
LIBOR could occur simultaneously with a lower level of prevailing interest
rates, which would be expected to result in faster prepayments, thereby reducing
the weighted average life of the Notes.
Certain of the ARMs, including the Delayed Adjustment Loans, were
originated with initial Mortgage Rates that were based on competitive conditions
and did not equal the sum of the Index and the related Gross Margin. As a
result, the Mortgage Rates on such ARMs are more likely to adjust on their
first, and possibly subsequent Change Dates, subject to the effects of the
applicable Periodic Rate Cap and Lifetime Cap. Because each Note Rate is limited
by the Maximum Rate on each Payment Date, limits on changes in the Mortgage
Rates of the ARMs may limit changes in the Note Rate. In addition, the Mortgage
Rates for the Delayed Adjustment Loans will not adjust until the date on which
the 12th, 24th or 36th scheduled monthly payment is due.
The Maximum Rate on a Payment Date will depend, in part, on the weighted
average of the then-current Mortgage Rates of the outstanding ARMs. If ARMs
bearing higher Mortgage Rates were to prepay, the weighted average Mortgage Rate
of such ARMs, and consequently the Maximum Rate, would be lower than otherwise
would be the case. Although the Owners of the Notes will be entitled to receive
any related LIBOR Interest Carryover from and to the extent of funds available
therefor as described herein, there is no assurance that such funds will be
available or sufficient for such purposes. The Note Insurance Policy does not
guarantee the payment, and the ratings of the Notes do not address the
likelihood of receipt, of any LIBOR Interest Carryover.
For additional factors which may affect the yield on the Notes, see
'Maturity, Prepayment and Yield Considerations' in the Prospectus.
STRUCTURING ASSUMPTIONS
The information in the decrement tables has been prepared on the basis of
the following assumed characteristics of the Home Equity Loans and the following
additional assumptions (collectively, the 'Structuring Assumptions'): (i) the
Home Equity Loans prepay at the specified percentages of PPC (as defined below),
(ii) no defaults or delinquencies in the payment by Mortgagors of principal of
and interest on the Home Equity Loans are experienced, (iii) the initial Class
Principal Balance of the Notes is as set forth on the cover page hereof, (iv)
interest accrues on the Notes in each period at the initial Note Rate described
herein, (v) payments in respect of the Notes are received in cash on the 15th
day of each month commencing in April 1998, (vi) the Servicer does not exercise
its option to repurchase the Home Equity Loans described herein under 'The Sale
and Servicing Agreement--Realization Upon Defaulted Home Equity Loans,' and the
Home Equity Loans are purchased on the first Servicer Optional Termination Date,
(vii) the Notes are purchased on March 30, 1998, (viii) scheduled payments on
the Home Equity Loans are received on the first day of each month commencing in
the calendar month following the Closing Date and are computed prior to giving
effect to prepayments received on the last day of the prior month, (ix)
prepayments represent prepayments in full of individual Home Equity Loans and
are received on the last day of each month and include 30 days' interest
thereon, commencing in the calendar month of the Closing Date, (x) the scheduled
monthly payment for each
S-24
<PAGE>
Home Equity Loan has been calculated based on the assumed Home Equity Loan
characteristics set forth in the following table such that each Home Equity Loan
will amortize in amounts sufficient to repay the balance of such Home Equity
Loan by its indicated remaining term to maturity, (xi) all of the indicated
Subsequent Loans purchased with funds from the Pre-Funding Account are purchased
during April 1998 as indicated in the following table, (xii) the Trust consists
of 11 Home Equity Loans with the characteristics set forth in the following
table, (xiii) the levels of 6-Month LIBOR, CMT and 1-Month LIBOR remain constant
at 5.707%, 5.360% and 5.6875%, respectively, (xiv) the Mortgage Rate for each
Home Equity Loan is adjusted on its next Change Date (and on subsequent Change
Dates, if necessary) to equal the sum of (a) the assumed level of the applicable
Index and (b) the Gross Margin (such sum being subject to the applicable
Periodic Rate Cap) and (xv) the Servicing Fee Rate is 0.50% per annum for each
Home Equity Loan. While it is assumed that each of the Home Equity Loans prepays
at the specified percentages of PPC, this is not likely to be the case.
Moreover, discrepancies will exist between the characteristics of the actual
Home Equity Loans which will be delivered to the Trustee (including Subsequent
Loans) and characteristics of the Home Equity Loans assumed in preparing the
tables herein.
Prepayments of home equity loans are commonly measured relative to a
prepayment standard or model. The model used herein is the Prepayment Curve
('PPC'). 100% PPC assumes (i) for ARMs with initial Change Dates after 36 months
('3/27 Loans'), a CPR of 4% in month one of the life of such home equity loans,
increasing in a linear fashion to 30% CPR in month 30, remaining constant at 30%
CPR for months 30 to 40 and reducing to 25% CPR in month 41 and thereafter and
(ii) for all other ARMs, a CPR of 28%. 'CPR' represents an assumed constant rate
of prepayment each month, expressed as an annual rate, relative to the then
outstanding principal balance of a pool of home equity loans for the life of
such home equity loans. Neither PPC nor CPR purports to be either an historical
description of the prepayment experience of any pool of home equity loans or a
prediction of the anticipated rate of prepayment of any home equity loans,
including the Home Equity Loans to be included in the Collateral Group.
<TABLE>
<CAPTION>
ORIGINAL REMAINING MONTHS INITIAL SUBSEQUENT
CURRENT TERM TO TERM TO TO NEXT RATE PERIODIC PERIODIC
PRINCIPAL MORTGAGE MATURITY MATURITY GROSS ADJUSTMENT RATE RATE
BALANCE($) RATE(%) (IN MONTHS) (IN MONTHS) MARGIN(%) DATE CAP(%) CAP (%)
-------------- --------- ----------- ----------- ---------- ------------ -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
6-Month LIBOR....... 14,795,596.57 8.737 358 355 6.017 5 1.373 1.373
6-Month LIBOR....... 8,997,293.13 10.100 323 321 5.477 6 1.000 1.000
6-Month LIBOR....... 25,702,009.76 10.247 327 327 5.396 7 1.000 1.000
6-Month LIBOR....... 4,877,745.38 9.101 358 351 5.356 11 1.055 1.055
6-Month LIBOR....... 19,289,484.04 9.256 360 356 5.816 22 1.294 1.294
6-Month LIBOR....... 16,579,854.00 9.590 360 358 6.040 23 1.323 1.323
6-Month LIBOR(2).... 46,830,750.85 10.058 345 343 5.250 36 3.465 1.016
6-Month LIBOR(2).... 92,868,382.71 10.093 336 336 4.968 37 2.692 1.014
CMT (1)............. 2,000,000.00 9.168 349 349 5.622 12 2.225 2.225
6-Month LIBOR(1).... 12,999,246.70 10.244 324 324 5.404 6 1.000 1.000
6-Month
LIBOR(1)(2)....... 55,059,636.86 10.083 339 339 5.018 36 2.800 1.017
</TABLE>
- ------------------
(1) Assumes transfer to the Trust in April 1998 with monthly payments calculated
thereafter using the assumed characteristics set forth above. During the
first interest Accrual Period, interest is assumed to be available at a rate
equal to the Current Mortgage Rate less the Servicing Fee.
(2) Such Home Equity Loans are the 3/27 Loans.
S-25
<PAGE>
DECREMENT TABLES
The following tables indicate, based on the Structuring Assumptions, the
percentages of the initial Class Principal Balance of the Notes that would be
outstanding after each of the dates shown at various percentages of PPC, and the
corresponding weighted average lives of such Notes. It is not likely that (i)
all of the Home Equity Loans will have the characteristics assumed, (ii) the
Home Equity Loans will prepay at the specified percentages of PPC, or at any
other constant percentage or (iii) the levels of 1-Month LIBOR, CMT and 6-Month
LIBOR will remain constant at the levels assumed or at any other levels.
Moreover, the diverse remaining terms to maturity of the Home Equity Loans could
produce slower or faster principal distributions than indicated in the tables at
the specified percentages of PPC, even if the weighted average remaining term to
maturity of the Home Equity Loans is consistent with the remaining terms to
maturity of the Home Equity Loans specified in the Structuring Assumptions.
PERCENT OF INITIAL CLASS PRINCIPAL
BALANCE OUTSTANDING*
<TABLE>
<CAPTION>
PERCENTAGE OF PPC
PAYMENT ---------------------------------------
DATE 0% 75% 100% 150% 200%
- ------- ---- --- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Initial Percent........................................................... 100% 100% 100 % 100 % 100 %
March 1999................................................................ 99 88 84 76 68
March 2000................................................................ 99 72 65 50 38
March 2001................................................................ 98 56 46 28 16
March 2002................................................................ 97 45 33 17 0
March 2003................................................................ 96 36 24 10 0
March 2004................................................................ 95 28 18 0 0
March 2005................................................................ 94 23 13 0 0
March 2006................................................................ 93 18 0 0 0
March 2007................................................................ 92 14 0 0 0
March 2008................................................................ 90 11 0 0 0
March 2009................................................................ 89 0 0 0 0
March 2010................................................................ 87 0 0 0 0
March 2011................................................................ 85 0 0 0 0
March 2012................................................................ 83 0 0 0 0
March 2013................................................................ 80 0 0 0 0
March 2014................................................................ 77 0 0 0 0
March 2015................................................................ 74 0 0 0 0
March 2016................................................................ 71 0 0 0 0
March 2017................................................................ 67 0 0 0 0
March 2018................................................................ 62 0 0 0 0
March 2019................................................................ 57 0 0 0 0
March 2020................................................................ 52 0 0 0 0
March 2021................................................................ 46 0 0 0 0
March 2022................................................................ 39 0 0 0 0
March 2023................................................................ 32 0 0 0 0
March 2024................................................................ 23 0 0 0 0
March 2025................................................................ 14 0 0 0 0
March 2026................................................................ 0 0 0 0 0
March 2027................................................................ 0 0 0 0 0
March 2028................................................................ 0 0 0 0 0
---- --- ---- ---- ----
Weighted Average Life (years)** 20.4 4.4 3.4 2.3 1.7
</TABLE>
- ------------------
* Rounded to the nearest whole percentage.
** The weighted average life of a Note is determined by (a) multiplying the
amount of the reduction, if any, of the Class Principal Balance of such Note
on each Payment Date by the number of years from the date of issuance to such
Payment Date, (b) summing the results and (c) dividing the sum by the
aggregate amount of the reductions in Class Principal Balance of such Note
referred to in clause (a).
S-26
<PAGE>
DESCRIPTION OF THE NOTES
GENERAL
The Notes will be issued in original principal amounts of $25,000 and
integral multiples of $1,000 in excess thereof. The Trust also will issue a
class of certificates (the 'Certificates') which are not being offered hereby.
PAYMENT DATES AND PAYMENTS
On the 15th day of each month, or, if such day is not a business day then
the next succeeding business day, commencing in April 1998, (each, a 'Payment
Date'), the Indenture Trustee will be required to distribute to the Owners of
record of the Notes as of the last business day of the calendar month
immediately preceding the calendar month in which such Payment Date occurs (the
'Record Date'), such Owners' Percentage Interests in the amounts required to be
distributed to the Owners of the Notes on such Payment Date.
The 'Percentage Interest' of each Note as of any date of determination
will be equal to the percentage obtained by dividing the principal balance of
such Note as of the Cut-Off Date by the Class Principal Balance of the Notes as
of the Cut-Off Date.
BOOK-ENTRY NOTES
The Notes will be book-entry notes (the 'Book-Entry Notes'). Persons
acquiring beneficial ownership interests in the Notes ('Note Owners') will hold
their Notes 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 Notes will be issued in
one or more certificates which equal the aggregate principal balance of the
Notes of the applicable Series and will initially be registered in the name of
Cede, the nominee of DTC. Unless and until Definitive Notes are issued, it is
anticipated that the only 'Noteholder' of the Notes will be Cede, as nominee of
DTC. Note Owners will not be Noteholders as that term is used in the Indentures.
Note Owners are only permitted to exercise their rights indirectly through
Participants and DTC. Monthly and annual reports on the Trust will be provided
to Cede, as nominee of DTC, and may be made available by Cede to beneficial
owners upon request, in accordance with the rules, regulations and procedures
creating and affecting the Depository, and to the Financial Intermediaries to
whose DTC accounts the Book-Entry Notes of such beneficial owners are credited.
For a description of the procedures generally applicable to the Book-Entry
Notes, see 'Description of the Securities--Book-Entry Registration' in the
Prospectus and Annex I hereto.
None of the Depositor, the Servicer, the Note Insurer, the Owner Trustee or
the Indenture Trustee will have any responsibility for any aspect of the records
relating to or payments made on account of beneficial ownership interests of the
Book-Entry Notes held by Cede, as nominee for DTC, or for maintaining,
supervising or reviewing any records relating to such beneficial ownership
interests.
FLOW OF FUNDS AND PAYMENTS ON THE NOTES
The Principal and Interest Accounts. The Sale and Servicing Agreement
requires the Servicer to establish one or more custodial accounts (each, a
'Principal and Interest Account') on behalf of the Indenture Trustee at a
depository institution meeting the requirements set forth in the Sale and
Servicing Agreement. The Sale and Servicing Agreement requires the Servicer to
deposit all collections (other than amounts escrowed for taxes and insurance)
related to the Home Equity Loans to the Principal and Interest Account on a
daily basis (but no later than the first business day after receipt). All funds
in the Principal and Interest Account are required to be invested in Eligible
Investments. Investment earnings on funds held in the Principal and Interest
Account are for the account of the Servicer.
Pursuant to the Sale and Servicing Agreement, on the tenth day (the
'Remittance Date') of each month commencing in April 1998, the Servicer is
required to remit to the Indenture Trustee the following amounts with respect to
the Home Equity Loans (including any related Subsequent Loans): (i) an amount
equal to the sum of (x) the aggregate portions of the interest payments (whether
or not collected) becoming due on the Home Equity Loans during the immediately
preceding Remittance Period, calculated at the applicable Adjusted Note Rate
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(defined below) and (y) any Compensating Interest (calculated for this purpose
at the applicable Adjusted Note Rate) due with respect to the Home Equity Loans
with respect to the immediately preceding Remittance Period, but for purposes of
this clause (i) net of the Servicing Fee (the amount described in this clause
(i) being the 'Interest Remittance Amount'), (ii) an amount equal to the sum of
(x) all scheduled principal collected by the Servicer on the Home Equity Loans
during the immediately preceding Remittance Period and (y) any Prepayments,
Insurance Proceeds, Net Liquidation Proceeds (but only to the extent that such
Net Liquidation Proceeds do not exceed the Loan Balance of the related Home
Equity Loan), REO Proceeds and Released Mortgaged Property Proceeds, in each
case, only to the extent collected on the Home Equity Loans during the preceding
Remittance Period (the amount described in this clause (ii) being the 'Principal
Remittance Amount'), (iii) all Loan Purchase Prices and Substitution Amounts
with respect to such Remittance Date and (iv) an amount equal to the Excess
Interest. For any Remittance Date, the Interest Remittance Amount, the Principal
Remittance Amount and the amounts described in clause (iii) of the preceding
sentence, are collectively referred to as the 'Monthly Remittance' for such
Remittance Date.
The 'Excess Interest' for any Remittance Date is the product of (x)
one-twelfth of the difference between (i) the weighted average Mortgage Rate on
the Home Equity Loans (including Subsequent Loans, if any) as of the first day
of the related Remittance Period and (ii) the applicable Adjusted Note Rate and
(y) the Pool Principal Balance as of the first day of the related Remittance
Period, to the extent such amount is received or advanced.
The 'Adjusted Note Rate' for any Payment Date will equal the sum of (i) the
Expense Fee Rate and (ii) the Note Rate (as in effect for the applicable Accrual
Period).
Delinquency Advances. The Sale and Servicing Agreement requires that if,
on any Remittance Date, the amount then on deposit in the Principal and Interest
Account from collections on the Home Equity Loans with respect to the preceding
Remittance Period is less than the applicable Monthly Remittance plus, prior to
the Subordination Termination Date, the aggregate amount of Excess Interest with
respect to the immediately preceding Remittance Period, then the Servicer is
required to deposit to the Principal and Interest Account a sufficient amount of
its own funds ('Delinquency Advances') to make such amount equal to the sum of
the Interest Remittance Amount, the Principal Remittance Amount, plus, prior to
the Subordination Termination Date, the aggregate amount of Excess Interest.
The Servicer is permitted to fund its payment of Delinquency Advances on
any Remittance Date from collections on the Home Equity Loans deposited in the
Principal and Interest Account subsequent to the related Remittance Period, but
must reimburse such Principal and Interest Account for any such amounts on or
prior to a subsequent Remittance Date on which such amounts are required.
Accounts. The Sale and Servicing Agreement provides that the Indenture
Trustee will create and maintain the Excess Interest Account, the Insured
Payment Account, the Note Account, the Pre-Funding Account and the Capitalized
Interest Account (collectively, the 'Accounts'). In addition the Reserve
Account, including the Residual Sub-Account and the Guarantee Fee Sub-Account
will be established with Bankers Trust Company of California, N.A. The Sale and
Servicing Agreement provides that the Indenture Trustee will (i) deposit the
initial deposit, if any, in the Residual Sub-Account, (ii) deposit the
Pre-Funded Amounts in the Pre-Funding Account, (iii) deposit the required
amounts in the Capitalized Interest Account, (iv) deposit monthly in the Note
Account (the 'Note Account') the remittances received from the Servicer with
respect to the Home Equity Loans described in clauses (i) through (iii) above
under 'The Principal and Interest Account,' (v) deposit monthly in the Excess
Interest Account (the 'Excess Interest Account') all remittances of Excess
Interest received from the Servicer and (vi) deposit all Insured Payments in the
Insured Payment Account (the 'Insured Payment Account').
On each Payment Date prior to the Subordination Termination Date, the
Indenture Trustee will withdraw, in the priority indicated, the following
amounts from the Excess Interest Account and deposit such amounts as follows:
(i) the Residual Remittance Amount to the Residual Sub-Account; and (ii) the
Guarantee Fee to the Guarantee Fee Sub-Account; provided, however, that no
amount will be required to be retained in the Reserve Account, after the
payments to be made therefrom with respect to the Notes on such Payment Date, in
excess of the Specified Reserve Account Requirement.
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Payments on Notes. On each Payment Date, in preparation of making payments
to Note Owners, the Indenture Trustee will be required (i) on the Payment Dates
prior to termination of the Pre-Funding Period, to transfer from the Capitalized
Interest Account to the Note Account an amount equal to the excess of (a) the
Interest Payment Amount over (b) the Interest Remittance Amount, (ii) on the
Payment Date occurring at or immediately following the end of the Pre-Funding
Period, to transfer from the Pre-Funding Account to the Note Account the amount
remaining on deposit in such Pre-Funding Account, (iii) if the amount on deposit
in the Note Account is insufficient to pay the full amount of the Payment Amount
for the Notes, and the fees of the Indenture Trustee and the premium due to the
Note Insurer for such Payment Date, to transfer to the Note Account the amount
of such insufficiency first from the Residual Sub-Account and second from the
Guarantee Fee Sub-Account, in each case to the extent of amounts available
therein, (iv) from amounts on deposit in the Note Account, to pay the premium
due the Note Insurer and the fees of the Trustee and (v) to transfer to the Note
Account from funds on deposit in the related Insured Payment Account, the amount
of any Insured Payments for the Notes.
On each Payment Date, the Trustee will be required to make the following
payments from the Note Account in the order of priority indicated:
(a) to the Owners of the Notes, the Interest Payment Amount for
such Payment Date;
(b) to the Owners of the Notes, the Principal Payment Amount,
until the Class Principal Balance thereof is reduced to zero;
(c) to the Note Insurer, any remaining Reimbursement Obligations
(as defined in the Insurance Agreement);
(d) to the Owner of the Notes, the related LIBOR Interest
Carryover, if any; and
(e) to the Owners of the Certificates, on behalf of the Trust,
any remaining funds and, at or immediately following the end of
the Pre-Funding Period, any amounts remaining in the Capitalized
Interest Account.
Any payments of principal of the Notes on a Payment Date will include any
Principal Carry-Forward Amount for such Series and Payment Date to the extent
funds are available therefor.
On each Payment Date, to the extent the amount on deposit in the Reserve
Account exceeds the Specified Reserve Account Requirement for such Payment Date,
such excess will be distributed first, to the Owners of the Notes to the extent
of any related LIBOR Interest Carryover, and second, to the Owners of the
Certificates or paid to the person entitled thereto.
If prior to any Payment Date, the Indenture Trustee determines that
Available Funds on such Payment Date will be insufficient to fund the full
amount of the Payment Amount for the Notes, the Indenture Trustee will be
required to make a claim for an Insured Payment under the Note Insurance Policy.
The Indenture provides that to the extent the Note Insurer makes Insured
Payments, the Note Insurer will be subrogated to the rights of the Owners of the
Notes with respect to such Insured Payments, will be deemed, to the extent of
the payments so made, to be a registered Owner of such Notes and will be
entitled to reimbursement for such Insured Payments, with interest thereon at
the Late Payment Rate specified in the Insurance Agreement on each Payment Date
following the making of an Insured Payment, only after the Owners of the Notes
have received the amount due such Owners on such Payment Date.
For purposes of the provisions described above, the following terms have
the respective meanings ascribed to them below, each determined as of any
Payment Date, and the term 'Home Equity Loans' includes Subsequent Loans.
'Accrual Period' means with respect to any Payment Date, the period
beginning on the Payment Date in the month preceding the month of such Payment
Date (or, in the case of the first Payment Date, beginning on the Closing Date)
and ending on the day preceding such Payment Date.
'Available Funds' means, as of any Payment Date, the sum, without
duplication, of (a) the amount on deposit in the Note Account on such Payment
Date, plus (b) any amount transferred from the Reserve Account to
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the Note Account on such Payment Date, minus (c) the monthly premium due the
Note Insurer and the monthly fees of the Indenture Trustee. The Sale and
Servicing Agreement provides that the term 'Available Funds' does not include
Insured Payments and does not include any amounts that cannot be distributed to
the Owners of the Notes by the Indenture Trustee as a result of proceedings
under the United States Bankruptcy Code.
'Basic Principal Amount' means, as to any Payment Date, an amount equal to
the sum, without duplication, of the following amounts: (i) the principal
portion of all scheduled and unscheduled payments received on the Home Equity
Loans during the calendar month preceding the calendar month in which such
Payment Date occurs (the 'Remittance Period'), including (a) any full or partial
principal prepayments of any Home Equity Loans ('Prepayments') received during
the related Remittance Period, (b) the proceeds of any insurance policy relating
to a Home Equity Loan, a Mortgaged Property or a property related to Mortgages
foreclosed or for which deeds in lieu of foreclosure have been accepted, and
held by the Servicer pending disposition (an 'REO Property'), net of proceeds to
be applied to the repair of the Mortgaged Property or released to the Mortgagor
and net of expenses reimbursable therefrom ('Insurance Proceeds'), (c) proceeds
received in connection with the liquidation of any defaulted Home Equity Loans,
whether by trustee's sale, foreclosure sale or otherwise ('Liquidation
Proceeds'), net of fees and advances reimbursable therefrom ('Net Liquidation
Proceeds'), (d) net rental income, if any, from REO Properties ('REO Proceeds')
and (e) proceeds received in connection with a taking of a Mortgaged Property by
condemnation or the exercise of eminent domain or in connection with a release
of part of the Mortgaged Property from the related lien ('Released Mortgaged
Property Proceeds'), (ii) the principal portion of all amounts deposited into
the Principal and Interest Account by the Originators in connection with the
repurchase of, or the substitution of a substantially similar home equity loan
for, a Home Equity Loan as to which there is defective documentation or a breach
of a representation or warranty contained in the Sale and Servicing Agreement or
by the Servicer in connection with the purchase of any Home Equity Loan as
permitted by the Sale and Servicing Agreement, (iii) the principal balance of
each defaulted Home Equity Loan or REO Property as to which the Servicer has
determined that all amounts expected to be recovered have been recovered (each,
a 'Liquidated Mortgage Loan') to the extent not included in the amounts
described in the preceding clauses (i) and (ii) and (iv) any amounts released
from the Pre-Funding Account at or following termination of the Pre-Funding
Period which are treated as a Prepayment.
'Class Principal Balance' means the Class Principal Balance of such Class
on the Closing Date, reduced by the sum of all amounts previously paid to the
Owners of the Notes in respect of principal on all previous Payment Dates.
'Current Interest' means with respect to any Payment Date, the interest
accrued during the related Accrual Period at the applicable Note Rate on the
Class Principal Balance immediately prior to such Payment Date.
'Interest Carryover Amount' means for any Payment Date, the sum of (i) the
excess, if any, of the Current Interest for the preceding Payment Date plus any
outstanding Interest Carryover Amount on such preceding Payment Date over the
amount in respect of interest that is actually paid on the Notes on such
preceding Payment Date and (ii) one month's interest on such excess at the
related Note Rate, to the extent permitted by law.
'Interest Payment Amount' means for any Payment Date, the sum of the
related Current Interest and the related Interest Carryover Amount.
'LIBOR Interest Carryover' means with respect to any Payment Date, the
excess, if any, of the related Current Interest, calculated at the LIBOR Rate,
over the actual Current Interest calculated at the applicable Maximum Rate,
together with any unpaid portion of such excess from prior Payment Dates (and
interest accrued thereon at the then-applicable LIBOR Rate).
'Payment Amount' means with respect to any Payment Date, the sum of the
applicable Principal Payment Amount and the applicable Interest Payment Amount
for such Payment Date.
'Principal Carryforward Amount' means for any Payment Date, the amount, if
any, by which the amount in respect of principal required to be paid to the
Owners of the Notes as of the preceding Payment Date exceeded the amount of the
actual payment of principal (exclusive of amounts representing Insured Payments)
to the Owners of the Notes on such preceding Payment Date.
'Principal Payment Amount' means with respect to any Payment Date, the sum
of (i) the Basic Principal Amount for such Payment Date and (ii) the Principal
Carry-Forward Amount for such Payment Date.
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CALCULATION OF 1-MONTH LIBOR
The Note Rate for the Notes for the initial Accrual Period will be
determined on the business day preceding the Closing Date. With respect to each
other Payment Date, 1-Month LIBOR will equal the interbank offered rate for
one-month United States dollar deposits in the London market as quoted on
Telerate Page 3750 as of 11:00 A.M., London time, on the second LIBOR Business
Day prior to the first day of the related Accrual Period. 'Telerate Page 3750'
means the display designated as page 3750 on the Telerate Service (or such other
page as may replace page 3750 on that service for the purpose of displaying
London interbank offered rates of major banks). If such rate does not appear on
such page (or such other page as may replace that page on that service, or if
such service is no longer offered, such other service for displaying LIBOR or
comparable rates as may be selected by the Indenture Trustee after consultation
with the Servicer), the rate will be the Reference Bank Rate. The 'Reference
Bank Rate' will be determined on the basis of the rates at which deposits in
U.S. Dollars are offered by the reference banks (which shall be three major
banks that are engaged in transactions in the London interbank market, selected
by the Indenture Trustee after consultation with the Servicer) as of 11:00 A.M.,
London time, on the day that is two LIBOR Business Days prior to the immediately
preceding Payment Date to prime banks in the London interbank market for a
period of one month in the amounts approximately equal to the Class Principal
Balance of the Notes. The Indenture Trustee will request the principal London
office of each of the reference banks to provide a quotation of its rate. If at
least two such quotations are provided, the rate will be the arithmetic mean of
the quotations. If on such date fewer than two quotations are provided as
requested, the rate will be the arithmetic mean of the rates quoted by one or
more major banks in New York City, selected by the Indenture Trustee after
consultation with the Servicer, as of 11:00 A.M., New York City time, on such
date for loans in U.S. Dollars to leading European banks for a period of one
month in amounts approximately equal to the Class Principal Balance of the
Notes. If no such quotations can be obtained, the rate will be LIBOR for the
prior Distribution Date. 'LIBOR Business Day' means any day other than (i) a
Saturday or a Sunday or (i) a day on which banking institutions in the State of
New York or in the city of London, England are required or authorized by law to
be closed.
The establishment of 1-Month LIBOR by the Indenture Trustee and the
Indenture Trustee's calculation of the rate of interest applicable to the Notes
for the related Accrual Period shall (in the absence of manifest error) be final
and binding. Each such rate of interest may be obtained by telephoning the
Indenture Trustee at (714) 253-7575.
RESERVE ACCOUNT
On the Closing Date, a reserve account comprised of two sub-accounts, the
Residual Sub-Account and the Guarantee Fee Sub-Account (collectively, the
'Reserve Account') will be established with Bankers Trust Company of California,
N.A. On the Closing Date, an initial deposit may be made into the Residual Sub-
Account. On each Remittance Date on or prior to the Subordination Termination
Date, the Indenture Trustee is required to deposit (i) the Residual Remittance
Amount into the Residual Sub-Account and (ii) the Guarantee Fee into the
Guarantee Fee Sub-Account. As to any Remittance Date, the sum of the Residual
Remittance Amount and the Guarantee Fee will equal the Excess Interest for such
Remittance Date. The Reserve Account may be funded in part by cash or by one or
more letters of credit (each, a 'Letter of Credit').
The aggregate amount required to be on deposit at any time in the Reserve
Account (after taking into account the amounts available to be withdrawn under
any Letters of Credit deposited therein) will be determined in accordance with
the terms of the Sale and Servicing Agreement (such amount, the 'Specified
Reserve Account Requirement'). Amounts, if any, on deposit in the Reserve
Account up to the Subordinated Amount (as defined below) will be available to
fund any shortfall between the Available Funds (before any withdrawals from the
Reserve Account on a Payment Date) and the Payment Amount for the Notes.
Withdrawals from the Reserve Account for such purposes will be made first from
the Residual Sub-Account and second from the Guarantee Fee Sub-Account.
The Sale and Servicing Agreement provides that, in the event aggregate
withdrawals from the Reserve Account with respect to shortfalls on the Notes
equal the amount specified in the Sale and Servicing Agreement (such amount, the
'Subordinated Amount'), no further withdrawals with respect to such shortfalls
may be made from the Reserve Account and the Specified Reserve Account
Requirement will thereafter be zero. The Payment Date on which the Subordinated
Amount is reduced to zero is the 'Subordination Termination Date.'
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The Sale and Servicing Agreement additionally provides that the Specified
Reserve Account Requirement and the Subordinated Amount may decline over time
based on criteria established by the Note Insurer, even if no withdrawals from
the Reserve Account are made.
The provisions of the Sale and Servicing Agreement relating to the Reserve
Account may be amended in any respect by the Depositor, the Servicer, the Trust
and the Note Insurer without the consent of, or notice to, the Owners of the
Notes but with prior notice to each of Fitch, Moody's and S&P. Such amendment
could reduce or eliminate the funding requirements of the Reserve Account. Funds
on deposit in the Reserve Account may be used to provide credit enhancement for
other transactions involving the Depositor or its affiliates and the Note
Insurer. Notwithstanding any reduction in or elimination of the funding
requirements of the Reserve Account, or depletion of the Subordinated Amount,
the Note Insurer will be obligated, in accordance with the terms of the Note
Insurance Policy, on each Payment Date to fund the full amount of the Payment
Amount for the Notes on such Payment Date.
THE ISSUER
The Issuer is a Delaware business trust established by the Depositor
pursuant to the Trust Agreement under the laws of the State of Delaware. After
its formation, the Issuer will not engage in any activity other than (i)
acquiring, holding and managing the Home Equity Loans and the other assets of
the Trust and the proceeds therefrom, (ii) issuing the Notes and the
Certificates, (iii) making payments on the Notes and the Certificates and (iv)
engaging in other activities that are necessary, suitable or convenient to
accomplish the foregoing or are incidental thereto or in connection therewith.
The Issuer does not have, nor is it expected in the future to have, any
significant assets, other than the assets included in the Trust.
The Owner Trustee of the Issuer will be Wilmington Trust Company. The
address of the Issuer will be c/o Wilmington Trust Company, Rodney Square North,
1100 N. Market Street, Wilmington, Delaware 19890.
THE ORIGINATORS
OVERVIEW
United Companies, headquartered in Baton Rouge, Louisiana, originates,
purchases, sells and services primarily first lien, non-conventional, home
equity loans which are typically not loans for the purchase of homes. These
loans are made primarily to individuals who may not otherwise qualify for
conventional loans which are readily marketable to government-sponsored mortgage
agencies or conduits and available through most commercial banks and many other
lending institutions. It operates through a branch network and correspondent
(i.e., wholesale) loan programs. As of December 31, 1997, United Companies'
branch network consisted of 221 offices located in 42 states.
UNICOR Mortgage(Registered), Inc. ('UNICOR') operates through a wholesale
loan network of correspondents and brokers. As of December 31, 1997, UNICOR was
operating in 47 states. UNICOR offers fixed and adjustable rate home equity
loans to borrowers of a credit quality comparable to borrowers who typically
receive loans through the United Companies' branch network. Loans may be secured
by one or more single family, owner-occupied or non-owner occupied, and
multi-family properties. A network of field account executives solicit
qualifying loans from mortgage correspondents and brokers within target markets
by employing a combination of direct solicitation, participation in seminars,
trade shows and conventions, as well as advertising directed at the mortgage
lender/broker market.
Correspondents and brokers are subjected to an approval process, including
but not limited to verification that appropriate local, state and federal
requirements for licensing are obtained and maintained and are required to
execute a contract with UNICOR prior to closing any loans. Appraisers and
closing agents are also subjected to an approval process including verification
that certification and licensing requirements are obtained and maintained. All
loans are underwritten prior to approval and funding by UNICOR personnel under
guidelines comparable to those used for loans originated by United Companies
through its branch network.
United Companies operates another wholesale loan network which offers
substantially the same products as the UNICOR program to banks and other
financial depository institutions through its division operating under the
registered servicemark GINGER MAE(Registered), the acronym for the Good Neighbor
Reinvestment Mortgage Assistance Loan Program. This program is intended to
permit participating institutions to originate loans to borrowers who do not
qualify for conventional credit. Loans purchased by United Companies under this
program are underwritten by the United Companies personnel prior to approval and
funding under substantially the same
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guidelines as those utilized by UNICOR. As of December 31, 1997, GINGER
MAE(Registered) had 136 active financial institutions in 34 states participating
in the GINGER MAE(Registered) program. GINGER MAE(Registered) is separate from,
and is not related to, the Government National Mortgage Association which is
sometimes referred to as 'Ginnie Mae.'
Home equity loans also are purchased in bulk by Southern Mortgage
Acquisition, Inc., an affiliate of United Companies, and are generally
re-underwritten by United Companies or UNICOR personnel prior to purchase
utilizing the underwriting guidelines of United Companies.
On March 10, 1998, Standard & Poor's ('S&P') announced that it lowered its
senior unsecured debt rating of United Companies Financial Corporation ('UC'),
the ultimate parent of the Originators, from 'BBB-' to 'BB+', its subordinated
debt rating from 'BB+' to 'BB-' and its rating on UC's preferred stock from 'BB'
to 'B+'. S&P's announcement stated UC's ratings were removed from its
creditwatch and stated further that its outlook for UC is now stable. The
announcement stated, in part, that 'the ratings reflect S&P's concern about
heightened competition in the sub-prime home equity market, as well as the
declining trend in [UC's] asset quality and profitability measures.'
On December 17, 1997, Moody's Investors Service confirmed its subordinated
debt ratings of United Companies Financial Corporation ('UC') but changed its
rating outlook to negative from stable. Moody's release stated, in part, 'the
outlook change reflects the increasing level of delinquencies in UC's
securitized home equity loans, the company's increasing effective leverage, and
the highly competitive conditions in UC's consumer businesses.'
HOME EQUITY LOANS
The Originators' principal products are home equity loans with a fixed
amount, and term to maturity, which is typically secured by a first mortgage on
the borrower's residence. These types of loans are commonly referred to as 'B'
and 'C' grade or 'sub-prime' loans. These loans are distinct from home equity
revolving lines of credit, which are generally secured by a second mortgage and
typically carry a floating interest rate. The Originators and their affiliates
originated $2.244 billion and $2.888 billion in home equity loans during the
year ended December 31, 1996 and December 31, 1997, respectively. The
Originators also make second mortgage loans. Most of the Originators' loan
originations are sold in the secondary market, and servicing rights are retained
by United Companies on substantially all loans sold.
As of December 31, 1997 approximately 96.8% in aggregate principal amount
of the home equity loans owned by the Originators and/or serviced by United
Companies are secured by a first mortgage with the remaining 3.2% in aggregate
principal amount secured by second or multi-property mortgages. The average home
equity loan at origination was approximately $56,000 during 1996 and $58,000
during 1997. Typically, the proceeds of the home equity loan will be used by the
borrower to refinance an existing first mortgage in order to finance home
improvements or for debt consolidation. On most home equity loans for home
improvements, the loan proceeds are disbursed to an escrow agent which,
according to guidelines established by the Originators, releases such proceeds
upon completion of the improvements or in draws as the work on the improvements
progresses. Costs incurred by the borrower for loan origination, including
origination points, and appraisal, legal and title fees, are often included in
the amount financed.
The Originators' principal market for home equity loans is individuals who
may not otherwise qualify for conventional loans which are readily marketable to
the government-sponsored mortgage agencies or conduits and available through
most commercial banks and many other lending institutions. Loans to such
borrowers may present a greater risk and therefore produce higher loan
origination fees and interest rates as compared to loans to customers of banks
and thrifts. There are generally numerous competitors for these borrowers in
each of the Originators' geographic markets. Principal competitors include
recognized national and regional lenders. The Originators believe that prompt
underwriting and response to loan applications provide a competitive advantage
in loan originations.
DELINQUENCY AND LOSS EXPERIENCE
The following two tables set forth information relating to certain
contractual delinquency, default and loan loss experience of United Companies
for its servicing portfolio of home equity loans as of the dates indicated in
the first table and for the periods indicated in the second table, including
loans owned by United Companies or its affiliates and loans serviced for others.
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DELINQUENCY EXPERIENCE ON UNITED COMPANIES' PORTFOLIO
OF HOME EQUITY LOANS
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------------------------
1995 1996 1997
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Dollar amount of home equity loans serviced............................. $2,701,481 $4,040,138 $5,528,923
---------- ---------- ----------
---------- ---------- ----------
Delinquency Period(1)
30-59 days............................................................ 2.73% 3.39% 3.20%
60-89 days............................................................ 0.61% 1.31% 1.05%
90 days and over...................................................... 0.28% 0.71% 0.85%
Defaults(1)
Foreclosures in process............................................... 2.78% 3.36% 3.43%
Bankruptcy............................................................ 1.75% 1.83% 2.10%
Real Estate Owned & Serviced............................................ $ 30,073 $ 52,573 $ 98,924
</TABLE>
- ------------------
(1) As a percentage of total 'dollar amount of home equity loans serviced' as of
the date indicated.
LOAN LOSS EXPERIENCE ON UNITED COMPANIES' PORTFOLIO
OF HOME EQUITY LOANS
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
--------------------------------------
1995 1996 1997
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Average dollar amount of home equity loans outstanding during period.... $2,192,590 $3,370,810 $4,784,531
Net Losses
Gross Losses (1)...................................................... $ 13,818 $ 19,484 $ 32,984
Recoveries (2)........................................................ $ (1,597) $ (2,371) $ (1,937)
---------- ---------- ----------
Net Losses (3)........................................................ $ 12,221 $ 17,113 $ 31,047
---------- ---------- ----------
---------- ---------- ----------
Net Losses as a percentage of average amount outstanding................ 0.56% 0.51% 0.65%
</TABLE>
- ------------------
(1) 'Gross Losses' are amounts which have been determined to be uncollectible
relating to home equity loans for each respective period.
(2) 'Recoveries' are recoveries from liquidation proceeds and deficiency
judgments.
(3) 'Net Losses' means 'Gross Losses' minus 'Recoveries.'
The Servicer believes that the increase in the total percentage of
delinquencies and defaults at December 31, 1997 compared to December 31, 1996 is
not attributable to any single factor but rather reflects a combination of
factors, such as the seasonal nature of delinquencies inherent in the portfolio,
aging of the portfolio and an industry-wide trend in increased bankruptcy
filings. The charge-off rate on the average home equity loan portfolio for the
first nine months of 1997 was 0.65% and was 0.51% for 1996.
Loans are placed on a non-accrual status when they are 150 days past due.
The above delinquency, default and loan loss experience represents United
Companies' recent experience. However, the delinquency, default and net loss
percentages may be affected by the increase in the size and aging of the
portfolio. In addition, United Companies can neither quantify the impact of
property value declines, if any, on the Home Equity Loans nor predict whether,
to what extent or how long such declines may exist. In a period of such decline,
the rates of delinquencies, defaults and losses on the Home Equity Loans could
be higher than those heretofore experienced in the residential mortgage lending
industry in general. Adverse economic conditions (which may or may not affect
real property values) may affect the timely payment by borrowers of scheduled
payments of principal and interest on the Home Equity Loans and, accordingly,
the actual rates of delinquencies, defaults and losses. As a result, the
information in the above tables should not be considered as a basis for
assessing the likelihood, amount or severity of delinquencies or losses on the
Home Equity Loans and no assurance can be given that the delinquency, default
and loss experience presented in the tables will be indicative of such
experience on the Home Equity Loans.
Appendix C hereto sets forth certain historical contractual delinquency,
default and cumulative loss information by year of origination for home equity
loans originated or acquired by the Originators.
S-34
<PAGE>
THE TRANSFER AND SERVICING AGREEMENTS
GENERAL
UCFC Home Equity Loan Owner Trust 1998-AA (the 'Trust') will issue the
Notes pursuant to the Indenture dated as of March 1, 1998, between the Trust and
the Indenture Trustee. The Trust also will issue the Certificates pursuant to
the terms of a Trust Agreement dated as of March 1, 1998, between the Depositor
and the Owner Trustee. The Notes will be secured by the collateral pursuant to
the Indenture. The Certificates will represent an undivided ownership interest
in the Trust. Only the Notes are being offered hereby. The Home Equity Loans
will be sold to the Trust pursuant to the Sale and Serving Agreement, dated as
of March 1, 1998, among the Depositor, the Trust, the Servicer and the Indenture
Trustee. The Servicer will service the Home Equity Loans pursuant to the Sale
and Servicing Agreement. The following summary, together with the information
set forth in the Prospectus under the caption 'The Agreements' describes the
material terms of the Trust Agreement, the Indenture and the Sale and Servicing
Agreement (collectively, the 'Transfer and Servicing Agreements'), but does not
purport to describe all of the terms of the Transfer and Servicing Agreements
and is therefore qualified in its entirety by reference to the Transfer and
Servicing Agreements. Reference is made to the Prospectus for important
additional information regarding the terms of the Transfer and Servicing
Agreements and the Notes.
PRE-FUNDING ACCOUNT
On the Closing Date, the Indenture Trustee will establish and thereafter
maintain with itself a separate trust account (the 'Pre-Funding Account'). On
the Closing Date, the Pre-Funded Amount will be deposited in the Pre-Funding
Account. The Pre-Funded Amount may be used only to (i) acquire additional single
family residential home equity and home improvement loans (the 'Subsequent
Loans') and (ii) make accelerated payments of principal of the Notes. All
Subsequent Loans will be ARMs. During the period (the 'Pre-Funding Period') from
the Closing Date to the earliest to occur of (a) the Funding Termination Date
(defined below), (b) an Event of Default under the Indenture or a Servicer
Termination Event under the Sale and Servicing Agreement and (c) June 15, 1998,
amounts on deposit in the Pre-Funding Account may be withdrawn from time to time
to acquire Subsequent Loans in accordance with the Sale and Servicing Agreement.
The 'Funding Termination Date' will be the date on which the Pre-Funded Amount
has been reduced to less than $100,000. Any Pre-Funded Amount remaining in the
Pre-Funding Account at the end of the Pre-Funding Period will be paid on the
Payment Date at or immediately following the end of such Pre-Funding Period as a
Prepayment and allocated to the Notes.
CAPITALIZED INTEREST ACCOUNT
On the Closing Date, the Indenture Trustee will establish and thereafter
maintain with itself a separate trust account (the 'Capitalized Interest
Account'), into which amounts will be deposited. The amounts so deposited will
be used by the Indenture Trustee on the Payment Dates during the Pre-Funding
Period to fund the excess, if any, of the amount of interest accrued on the
Notes at the applicable Note Rate, over the Interest Remittance Amount for such
Payment Dates.
COMPENSATING INTEREST
A full month's interest at the applicable Adjusted Note Rate (minus the
Servicing Fee), plus, prior to the Subordination Termination Date, a full
month's Excess Interest with respect to each Home Equity Loan, is due to the
Indenture Trustee on the outstanding Loan Balance of each Home Equity Loan as of
the beginning of each Remittance Period. If a Prepayment of a Home Equity Loan
occurs during any calendar month, any difference between the interest collected
from the Mortgagor during such calendar month and the full month's interest at
the applicable Adjusted Note Rate, plus, prior to the Subordination Termination
Date, a full month's Excess Interest with respect to such Home Equity Loan
('Compensating Interest') that is due is required to be deposited by the
Servicer to the Principal and Interest Account and will be included in the
Monthly Remittance and the aggregate amount of Excess Interest, if any, to be
made available to the Indenture Trustee on the next succeeding Remittance Date;
provided, however, that the Servicer's obligation in respect of Compensating
Interest is limited to the aggregate amount of its Servicing Fee for the related
Remittance Period.
S-35
<PAGE>
ASSIGNMENT OF HOME EQUITY LOANS
On the Closing Date, the Originators will sell the Home Equity Loans to the
Depositor, and the Depositor will sell the Home Equity Loans to the Trust. The
Trust will, concurrently with the sale of the Home Equity Loans and the deposit
of funds in the Pre-Funding Account, the Capitalized Interest Account and the
Reserve Account, deliver or cause to be delivered the Certificates to the
Depositor in exchange for the Home Equity Loans. The Trust will pledge and
assign the Home Equity Loans, the Pre-Funding Account and the Capitalized
Interest Account to the Indenture Trustee in exchange for the Notes.
The Depositor will deliver or cause to be delivered to the Indenture
Trustee on or before the Closing Date Mortgage Notes duly endorsed to the order
of the Indenture Trustee. The other items described in clauses (b)(i)-(iv) under
'The Agreements--Assignment of Mortgage Assets' in the Prospectus are required
to be delivered within 30 days after the Closing Date (subject to certain
extensions as set forth therein). In lieu of delivering certified copies of
mortgages and intervening assignments, the originals of which are unavailable
due to the recording process and originals of title policies or binders, the
Depositor will deliver or cause to be delivered a computerized list of such
documents.
DUE-ON-SALE CLAUSES; ASSUMPTION AND SUBSTITUTION AGREEMENTS
When a Mortgaged Property has been or is about to be conveyed by the
Mortgagor, the Servicer, to the extent it has knowledge of such conveyance or
prospective conveyance, is required to exercise its rights to accelerate the
maturity of the related Home Equity Loan under any 'due on sale' clause
contained in the related Mortgage or Mortgage Note; provided, however, that the
Servicer will not be required to exercise any such right if the 'due-on-sale'
clause, in the reasonable belief of the Servicer, is not enforceable under
applicable law; and provided further, that the Servicer may refrain from
exercising any such right if the Note Insurer gives its prior consent to such
non-enforcement. See 'The Agreements--Enforcement of Due on Sale Clauses' in the
Prospectus.
REALIZATION UPON DEFAULTED HOME EQUITY LOANS
In accordance with the Sale and Servicing Agreement, if the Servicer has
actual knowledge that a Mortgaged Property which the Servicer is contemplating
acquiring in foreclosure or by deed in lieu of foreclosure contains
environmental or hazardous waste risks known to the Servicer, the Servicer will
notify the Note Insurer and the Indenture Trustee prior to acquiring the
Property. The Servicer is not permitted to take any action with respect to such
a Mortgaged Property without the prior written approval of the Note Insurer.
The Servicer has the right and the option under the Sale and Servicing
Agreement, but not the obligation, to purchase for its own account any Home
Equity Loan (i) which becomes delinquent, in whole or in part, as to three
consecutive monthly installments or any Home Equity Loan as to which enforcement
proceedings have been brought by the Servicer and (ii) (x) with respect to which
the Note Insurer has refused to give its consent to the Servicer's non-exercise
of its rights under any 'due-on-sale' clause and (y) which is in default or as
to which a default is imminent. Any such Home Equity Loan so purchased will be
purchased by the Servicer on a Remittance Date at a purchase price equal to the
Loan Purchase Price thereof, which purchase price will be deposited in the
Principal and Interest Account.
EVIDENCE OF COMPLIANCE
The accountant's report and officer's certificate referred to in the
Prospectus under 'The Agreements-- Evidence of Compliance' must be delivered on
or before the last day of April of each year, commencing in 1999.
ASSIGNMENT OF SALE AND SERVICING AGREEMENT
The Servicer may not assign its obligations under the Sale and Servicing
Agreement, in whole or in part, unless it shall have first obtained the written
consent of the Indenture Trustee and the Note Insurer; provided, however, that
any assignee must meet the eligibility requirements set forth in the Sale and
Servicing Agreement for a successor servicer.
S-36
<PAGE>
REMOVAL AND RESIGNATION OF SERVICER
The Note Insurer or, with the consent of the Note Insurer, the Trustee (or
the Owners acting on behalf of the Indenture Trustee) may remove the Servicer
upon the occurrence of any Master Servicer Termination Event, defined as an
Event of Default in the Prospectus under 'The Agreements--Events of Default;
Rights Upon Events of Default--Pooling and Servicing Agreement; Sale and
Servicing Agreement.' In addition, the Note Insurer has the option to remove the
Servicer in the event that certain delinquency triggers set forth in the Sale
and Servicing Agreement are met.
TERMINATION
The Trust Agreement provides that the Trust will terminate upon the payment
to the Owners of all Notes from amounts other than those available under the
Note Insurance Policy all amounts required to be paid to such Owners upon the
final payment and other liquidation (or any advance made with respect thereto)
of the last Home Equity Loan in the Trust.
At its option, the Servicer may purchase all (but not fewer than all)
remaining Home Equity Loans and other property acquired by foreclosure, deed in
lieu of foreclosure or otherwise then constituting the Trust, and thereby effect
redemption of the Notes, on any Payment Date when the aggregate outstanding Loan
Balances of the Home Equity Loans is 10% or less of an amount equal to the
aggregate principal balances of the Home Equity Loans on the Cut-Off Date
including, the aggregate balances of the Subsequent Loans as of the related
subsequent cut-off date(s) added to the Trust.
The Owners of the Notes would receive from the proceeds of such purchase
any accrued interest thereon together with any principal not yet paid, in the
order set forth herein under 'Description of the Notes--Flow of Funds and
Payments on the Notes.' The purchase price must include any related LIBOR
Interest Carryover then outstanding.
THE INDENTURE TRUSTEE
Pursuant to the Indenture, Bankers Trust Company of California, N.A. will
serve as Indenture Trustee. See 'The Agreement--The Trustee' in the Prospectus.
THE INDENTURE
Modification of Indenture. The Indenture Trustee and the Issuer may, with
the consent of the Note Insurer and the Owners of not less than a majority of
the outstanding principal amount of the Notes, enter into a supplemental
indenture for the purpose of adding any provisions to, or changing in any manner
or eliminating any of the provisions of, the Indenture or of modifying in any
manner the rights of the affected Noteholders (except as provided below).
Without the consent of the holder of each outstanding Note affected thereby
no supplemental indenture will: (i) change the date of any installment of
principal of or interest on any such Note or reduce the principal amount
thereof, the interest rate thereon or the redemption price with respect thereto
or change the provisions of the Indenture relating to the application of
collections on, or the proceeds of the sale of, the Trust to payment of
principal or interest on the Notes, or change any place of payment where, or the
coin or currency in which, any such Note or any interest thereon is payable, or
impair the right to institute suit for the enforcement of certain provisions of
the Indenture regarding payment; (ii) reduce the percentage of the aggregate
principal amount of the outstanding Notes, the consent of the holders of which
is required for any such supplemental indenture or the consent of the holders of
which is required for any waiver of compliance with certain provisions of the
Indenture or certain defaults thereunder and their consequences as provided for
in such Indenture; (iii) modify or alter the provisions of the Indenture
regarding the definition of the term 'outstanding'; (iv) reduce the percentage
of the aggregate principal amount of the outstanding Notes, the consent of the
holders of which is required to direct the Indenture Trustee to sell or
liquidate the Trust if the proceeds of such sale would be insufficient to pay
the principal amount and accrued but unpaid interest on the outstanding Notes;
(v) modify the sections of the Indenture which specify the applicable percentage
of aggregate principal amount of the outstanding Notes necessary to amend such
Indenture or certain other related agreements; (vi) modify the provisions of the
S-37
<PAGE>
Indenture in such a manner as to affect the calculation of the amount of any
payment of interest or principal due on any Note on any Payment Date or to
affect the rights of the Noteholders to the benefit of any provisions for the
mandatory redemption of the Notes; or (vii) permit the creation of any lien
ranking prior to or on a parity with the lien of the Indenture with respect to
any part of the Trust or, except as otherwise permitted or contemplated in such
Indenture, terminate the lien of such Indenture on any such property or deprive
the holder of any such Note of the security provided by the lien of such
Indenture.
The Indenture Trustee and the Issuer may also enter into supplemental
indentures, without the consent of the Noteholders but with the consent of the
Note Insurer, for the purpose of, among other things adding any provisions to,
or changing in any manner or eliminating any of the provisions of, the Indenture
or modifying in any manner the rights of the Noteholders, provided that such
action shall not adversely affect in any material respect the interests of any
Noteholder.
Certain Covenants. The Indenture will provide that the Issuer will not
consolidate with or merge into any other entity, unless (i) the entity formed by
or surviving such consolidation or merger is organized under the laws of the
United States, any state or the District of Columbia, (ii) such entity expressly
assumes the Issuer's obligation to make due and punctual payments upon the Notes
and the performance or observance of every agreement and covenant of the Issuer
under the Indenture, (iii) no Event or Default shall have occurred and be
continuing immediately after such merger or consolidation, (iv) the Note Insurer
consents thereto and (v) the Issuer has received an opinion of counsel to the
effect that such consolidation or merger would have no material adverse tax
consequence to the Issuer or to any related Noteholder.
The Issuer will not, among other things, (i) except as expressly permitted
by the Indenture or the Sale and Servicing Agreement, sell, transfer, exchange
or otherwise dispose of any of the properties or assets of the Issuer, unless
directed to do so by the Indenture Trustee with the consent of the Note Insurer,
(ii) claim any credit on, or make any deduction from the principal or interest
payable in respect of, the Notes (other than amounts properly withheld under the
code or applicable state law) or assert any claim against any present or former
Noteholder by reason of the payment of tax levied or assessed upon any part of
the Trust; (iii) engage in any business or activity other than as permitted by
the Trust Agreement; (iv) permit the validity or effectiveness of the Indenture
to be amended, hypothecated, subordinated, terminated or discharged or permit
any person to be released from any covenants or obligations with respect to such
Notes under such Indenture except as may be expressly permitted thereby; or (v)
permit any lien, charge, excise, claim, security interest, mortgage or other
encumbrance (other than the lien of the Indenture) to be created on or extend to
or otherwise arise upon or burden the Trust or any part thereof, or any interest
therein or the proceeds thereof.
THE OWNER TRUSTEE AND INDENTURE TRUSTEE
The Owner Trustee, the Indenture Trustee and any of their respective
affiliates may hold Notes in their own names or as pledgees. For the purpose of
meeting the legal requirements of certain jurisdictions, the Servicer, the Owner
Trustee and the Indenture Trustee acting jointly (or in some instances, the
Owner Trustee or the Indenture Trustee acting alone) will have the power to
appoint co-trustees or separate trustees of all or any part of the Trust. In the
event of such an appointment, all rights, powers, duties and obligations
conferred or imposed upon the Owner Trustee by the Sale and Servicing Agreement
and the Trust Agreement and the Indenture Trustee by the Indenture will be
conferred or imposed upon the Owner Trustee and the Indenture Trustee,
respectively, and in each such case such separate trustee or co-trustee jointly,
or, in any jurisdiction in which the Owner Trustee or Indenture Trustee will be
incompetent or unqualified to perform certain acts, singly upon such separate
trustee or co-trustee who will exercise and perform such rights, powers, duties
and obligations solely at the direction of the Owner Trustee or the Indenture
Trustee, respectively.
The Owner Trustee and the Indenture Trustee may resign at any time, in
which event the Issuer will be obligated to appoint a successor thereto. The
Noteholders, with the consent of the Note Insurer may also remove the Owner
Trustee or the Indenture Trustee if either ceases to be eligible to continue as
such under the Trust Agreement or the Indenture, as the case may be, becomes
legally unable to act or becomes insolvent. In such circumstances, the Issuer
will be obligated to appoint a successor Owner Trustee or a successor Indenture
Trustee, as applicable, acceptable to the Note Insurer. Any resignation or
removal of the Owner Trustee or
S-38
<PAGE>
Indenture Trustee and appointment of a successor thereto will not become
effective until acceptance of the appointment by such successor.
DUTIES OF THE OWNER TRUSTEE AND INDENTURE TRUSTEE
The Owner Trustee will make no representations as to the validity or
sufficiency of the Trust Agreement, the Certificates (other than the execution
and authentication thereof), the Notes or of any Home Equity Loans or related
documents, and will not be accountable for the use or application by the
Depositor or the Servicer of any funds paid to the Depositor or the Servicer in
respect of the Notes, the Certificates or the Home Equity Loans, or the
investment of any monies by the Servicer before such monies are deposited into
the Note Account. So long as no Event of Default has occurred and is continuing,
the Owner Trustee will be required to perform only those duties specifically
required of it under the Trust Agreement. Generally, those duties will be
limited to the receipt of the various certificates, reports or other instruments
required to be furnished to the Owner Trustee under the Trust Agreement, in
which case it will only be required to examine them to determine whether they
conform to the requirements of the Trust Agreement. The Owner Trustee will not
be charged with knowledge of a failure by the Servicer to perform its duties
under the Trust Agreement or the Sale and Servicing Agreement which failure
constitutes an Event of Default unless the Owner Trustee obtains actual
knowledge of such failure as will be specified in the Trust Agreement.
The Indenture Trustee will make no representations as to the validity or
sufficiency of the Indenture, the Certificates, the Notes (other than the
execution and authentication thereof) or of any Home Equity Loans or related
documents, and will not be accountable for the use or application by the
Depositor, the Servicer or the Owner Trustee of any funds paid to the Depositor,
the Servicer or the Owner Trustee in respect of the Notes, the Certificates or
the Home Equity Loans, or the investment of any monies by the Servicer before
such monies are deposited into the Accounts. So long as no Event of Default
under the Indenture has occurred and is continuing, the Indenture Trustee will
be required to perform only those duties specifically required of it under the
Transfer and Servicing Agreements. Generally, those duties will be limited to
the receipt of the various certificates, reports or other instruments required
to be furnished to the Indenture Trustee under the Indenture, in which case it
will only be required to examine them to determine whether they conform to the
requirements of the Indenture. The Indenture Trustee will not be charged with
knowledge of a failure by the Servicer to perform its duties under the Trust
Agreement or the Sale and Servicing Agreement which failure constitutes an Event
of Default unless the Indenture Trustee obtains actual knowledge of such failure
as will be specified in the Indenture.
The Indenture Trustee will be under no obligation to exercise any of the
rights or powers vested in it by the Indenture or to make any investigation of
matters arising thereunder or to institute, conduct or defend any litigation
thereunder or in relation thereto at the request, order or direction of any of
the Noteholders, unless such Noteholders have offered to the Indenture Trustee
reasonable security or indemnity against the costs, expenses and liabilities
that may be incurred therein or thereby.
THE NOTE INSURANCE POLICY AND THE NOTE INSURER
The information set forth in this section and in the financial statements
of Financial Guaranty Insurance Company (the 'Note Insurer') set forth in
Appendix A hereto, has been provided by the Note Insurer.
Financial Guaranty Insurance Company, the Note Insurer, a New York stock
insurance corporation, is a monoline financial guaranty insurance company which,
since January 1984, has been a leading insurer of bonds issued by municipal
governmental subdivisions and agencies thereof. The Note Insurer also insures a
variety of non-municipal structured debt obligations and pass-through
securities. The Note Insurer is authorized to write insurance in all 50 states
and the District of Columbia and is also authorized to carry on general
insurance business in the United Kingdom and to write credit and guaranty
insurance in France.
The Note Insurer is a wholly-owned subsidiary of FGIC Corporation, a
Delaware holding company. FGIC Corporation is a subsidiary of General Electric
Capital Corporation ('GE Capital'). Neither FGIC Corporation nor GE Capital is
obligated to pay the debts of or the claims of the Note Insurer.
The Note Insurer and its holding company, FGIC Corporation, are subject to
regulation by the State of New York Insurance Department and by each other
jurisdiction in which the Note Insurer is licensed to write
S-39
<PAGE>
insurance. These regulations vary from jurisdiction to jurisdiction, but
generally require insurance holding companies and their insurance subsidiaries
to register and file certain reports, including information concerning their
capital structure, ownership and financial condition and require prior approval
by the insurance department of their state of domicile of changes in control, of
dividends and of other intercorporate transfer of assets and of transactions
between insurance companies, their parents and affiliates. The Note Insurer is
required to file quarterly and annual statutory financial statements and is
subject to statutory restrictions concerning the types and quality of
investments, the use of policy forms, premium rates and the size of risk that it
may insure, subject to reinsurance. Additionally, the Note Insurer is subject to
triennial audits by the State of New York Insurance Department.
The Note Insurer considers its role in providing insurance to be credit
enhancement rather than credit substitution. The Note Insurer only insures
securities that it considers to be of investment grade quality. With respect to
each category of obligations considered for insurance, the Note Insurer has
established and maintains its own underwriting standards that are based on those
aspects of credit quality that the Note Insurer deems important for the category
and that take into account criteria established for the category typically used
by rating agencies. Credit criteria for evaluating securities include economic
and social trends, debt management, financial management and legal and
administrative factors, the adequacy of anticipated cash flow, including the
historical and expected performance of assets pledged for payment of securities
under varying economic scenarios, underlying levels of protection such as
insurance or overcollateralization, and, particularly in the case of long-term
municipal securities, the importance of the project being financed.
The Note Insurer also reviews the security features and reserves created by
the financing documentation, as well as the financial and other covenants
imposed upon the credit backing the issue. In connection with underwriting new
issues, the Note Insurer sometimes requires, as a condition to insuring an
issue, that collateral be pledged or, in some instances, that a third-party
guarantee be provided for a term of the insured obligation by a party of
acceptable credit quality obligated to make payment prior to any payment by the
Note Insurer.
Insurance written by the Note Insurer insures the full and timely payment
of interest and principal when due on insured debt securities and timely
interest and ultimate principal payments due in respect of pass-through
securities such as the Notes. If the issuer of a security insured by the Note
Insurer defaults on its obligations to pay such debt service, or, in the case of
a pass-through security, available funds are insufficient to pay the insured
amounts, the Note Insurer will make the scheduled insured payments, without
regard to any acceleration of the securities which may have occurred, and will
be subjugated to the rights of security holders to the extent of its payments.
The claims paying ability of the Note Insurer is rated Aaa, AAA and AAA by
Moody's, Standard & Poor's and Fitch, respectively.
In consideration for issuing its insurance, the Note Insurer receives a
premium which is generally paid in full upon issuance of the policy or on an
annual, semiannual or monthly basis. The premium rates charged depend
principally on the credit strength of the securities as judged by the Note
Insurer according to its internal credit rating system and the type of issue.
As of December 31, 1997 and 1996, the Note Insurer had written directly or
assumed through reinsurance, guaranties of approximately $230.2 billion, and
$205.0 billion par value of securities, respectively (of which approximately 86
percent and 82 percent constituted guaranties of municipal bonds), for which it
had collected gross premiums of approximately $2.14 billion and $2.05 billion,
respectively. As of December 31, 1997, the Note Insurer had reinsured
approximately 23 percent of the risks it had written, 28 percent through quota
share reinsurance, 25 percent through excess of loss reinsurance, and 47 percent
through facultative arrangements.
S-40
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Note Insurer as of
December 31, 1997 and December 31, 1996, respectively, on the basis of generally
accepted accounting principles. No material adverse change in the capitalization
of the Note Insurer has occurred since December 31, 1997.
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1997
(IN (IN
MILLIONS) MILLIONS)
------------ ------------
<S> <C> <C>
Unearned premiums.......................................................... $ 682 $ 629
Other liabilities.......................................................... 288 250
Stockholder's equity
Common stock............................................................. 15 15
Additional paid-in capital............................................... 334 384
Unrealized gains......................................................... 39 85
Foreign currency translation adjustment.................................. (1) (1)
Retained earnings........................................................ 1,297 1,470
------------ ------------
Total stockholder's equity................................................. 1,684 1,953
------------ ------------
Total liabilities and stockholder's equity................................. $2,654 $2,832
------------ ------------
------------ ------------
</TABLE>
For further financial information concerning the Note Insurer, see the
audited financial statements of the Note Insurer included as Appendix A.
Copies of the Note Insurer's quarterly and annual statutory statements
filed by the Note Insurer with the New York Insurance Department are available
upon request to Financial Guaranty Insurance Company, 115 Broadway, New York,
New York 10006, Attention: Corporate Communications Department. The Note
Insurer's telephone number is (212) 312-3000.
The Note Insurer does not accept any responsibility for the accuracy or
completeness of this Prospectus Supplement or the Prospectus or any information
or disclosure contained herein, or omitted here from, other than with respect to
the accuracy of information in this Prospectus Supplement regarding the Note
Insurer and the Note Insurance Policy set forth under the heading 'The Note
Insurer and the Note Insurance Policy' herein and in Appendix A.
The Note Insurer will issue a note insurance policy for the Notes (the
'Note Insurance Policy'). The Note Insurance Policy unconditionally guarantees
the payment of Insured Payments on the Notes. 'Insured Payments' as to any
Payment Date means the sum of (i) the excess of the Interest Payment Amount for
the Notes over the Available Funds, (ii) the Principal Shortfall Amount and
(iii) on the Payment Date in March, 2028 the Class Principal Balance of the
Notes then outstanding after all other payments on such Payment Date. The Note
Insurer will make each such Insured Payment (other than that portion of an
Insured Payment constituting a Preference Amount (defined below)) to the
Indenture Trustee as paying agent on the later of (a) the Payment Date on which
such Insured Payment is distributable to the Owner pursuant to the Sale and
Servicing Agreement and (b) the business day next following the day on which the
Note Insurer shall have received telephonic or telegraphic notice, subsequently
confirmed in writing, or written notice by registered or certified mail, from
the Indenture Trustee as paying agent specifying that an Insured Payment is due.
The Note Insurance Policy will provide for payment of the amount (a 'Preference
Amount') of any distributions in respect of principal or interest previously
paid to an Owner that are subsequently recovered from such Owner prior to the
expiration date of the Note Insurance Policy, pursuant to a final, nonappealable
order of a court of competent jurisdiction under the United States Bankruptcy
Code. Any such payments would be made under the Note Insurance Policy on the
second business day following receipt by the Note Insurer of notice as described
above, a certified copy of such final order, assignment to the Note Insurer of
such Owner's rights and claims with respect to such Preference Amount and
appointment of the Note Insurer as such Owner's agent in respect of the
Preference Amount. No Owner shall be entitled to reimbursement for any payment
avoided as a preference as to which the Note Insurer previously has made a
payment under the Note Insurance Policy, nor is the Note Insurer obligated to
make any payment in respect of any Preference Amount which represent a payment
of the principal amount of
S-41
<PAGE>
the Notes prior to the time the Note Insurer otherwise would have been required
to make a payment in respect of such principal.
The Note Insurer's obligation under the Note Insurance Policy will be
discharged to the extent that funds are received by the Indenture Trustee for
distribution to the Owners, whether or not such funds are properly distributed
by the Indenture Trustee.
For purposes of the Note Insurance Policy, 'Owner' as to a particular Note,
does not include the Trust, Indenture Trustee, the Servicer, any Sub-Servicer or
the Depositor.
The Indenture Trustee Insurer only insures the timely receipt of interest
on the Notes and the ultimate receipt of principal on the Notes. The Note
Insurer does not guarantee (i) any rate of principal payments on the Notes, (ii)
any recovery of payments deemed voidable preferences under state law, or (iii)
the payment of the purchase price by the Originators in connection with the
purchase of Home Equity Loans due to defective documentation or a breach of
representation or warranty. The Note Insurance Policy is non-cancelable. The
Note Insurance Policy expires and terminates without any action on the part of
the Note Insurer or any other person on the date that is one year and one day
following the date on which the Notes have been paid in full.
THE NOTE INSURANCE POLICY IS NOT COVERED BY THE PROPERTY/ CASUALTY
INSURANCE SECURITY FUND SPECIFIED IN ARTICLE 76 OF THE NEW YORK INSURANCE LAW.
Pursuant to the Sale and Servicing Agreement, the Note Insurer will be
subrogated to the Owners to the extent of any such payment under the Note
Insurance Policy.
In the absence of payments under the Note Insurance Policy, Owners will
directly bear the credit and other risks associated with their undivided
interest in the Trust.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
PROSPECTIVE NOTEHOLDERS ARE ADVISED TO CONSULT THEIR TAX ADVISORS WITH
REGARD TO THE FEDERAL INCOME TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP, OR
DISPOSITION OF INTERESTS IN THE NOTES, AS WELL AS THE TAX CONSEQUENCES ARISING
UNDER THE LAWS OF ANY STATE, FOREIGN COUNTRY OR OTHER TAXING JURISDICTION.
Stroock & Stroock & Lavan LLP, special tax counsel to the Trust, is of the
opinion, that for federal income tax purpose the Notes will be characterized as
debt, and the Trust will not be characterized as an association (or a publicly
traded partnership) taxable as a corporation. Opinions of counsel are not
binding on the Internal Revenue Service (the 'IRS') and there can be no
assurance that the IRS could not successfully challenge this conclusion.
Moreover, no ruling will be sought from the IRS with respect to the transaction
described herein. Each Noteholder, by the acceptance of a Note, will agree to
treat the Notes as indebtedness for federal income tax purposes. See 'Certain
Federal Income Tax Consequences' in the Prospectus for additional information
concerning the application of federal income tax laws to the Trust and the
Notes.
The Notes may be treated as having been issued with original issue
discount. As a result, holders of Notes may be required to recognize income with
respect to the Notes in advance of the receipt of cash attributable to that
income. The prepayment assumption that will be used for pupose of computing
original issue discount for federal income tax purposes is 100% PPC.
S-42
<PAGE>
LEGAL INVESTMENT
The Notes will not constitute 'mortgage related securities' for purposes of
the Secondary Mortgage Market Enhancement Act of 1984 ('SMMEA'). See 'Legal
Investment' in the Prospectus.
ERISA CONSIDERATIONS
Section 406 of ERISA, and/or Section 4975 of the Code, prohibits a pension,
profit-sharing or other employee benefit plan, as well as individual retirement
accounts and certain types of Keogh Plans (each a 'Benefit Plan') from engaging
in certain transactions with persons that are 'articles in interest' under ERISA
or 'disqualified persons' under the Code with respect to such Benefit Plan. A
violation of these 'prohibited transaction' rules may result in an excise tax or
other penalties and liabilities under ERISA and the Code for such persons. Title
I of ERISA also requires that fiduciaries of a Benefit Plan subject to ERISA
make investments that are prudent, diversified (except if prudent not to do so)
and in accordance with governing plan documents.
Certain transactions involving the purchase, holding or transfer of the
Notes might be deemed to constitute prohibited transactions under ERISA and the
Code if assets of the Trust were deemed to be assets of a Benefit Plan. Under a
regulation issued by the United States Department of Labor (the 'Plan Assets
Regulation'), the assets of the Trust would be treated as plan assets of a
Benefit Plan for the purposes of ERISA and the Code only if the Benefit Plan
acquires an 'Equity Interest' in the Trust and none of the exceptions contained
in the Plan Assets Regulation is applicable. An equity interest is defined under
the Plan Assets Regulation as an interest other than an instrument which is
treated as indebtedness under applicable local law and which has no substantial
equity features. The Depositor believes that the Notes should be treated as
indebtedness without substantial equity features for purposes of the Plan Assets
Regulation. However, without regard to whether the Notes are treated as an
Equity Interest for such purposes, the acquisition or holding of Notes by or on
behalf of a Benefit Plan could be considered to give rise to a prohibited
transaction if the Trust, the Owner Trustee or the Indenture Trustee, the owner
of collateral, or any of their respective affiliates is or becomes a party in
interest or a disqualified person with respect to such Benefit Plan. In such
case, certain exemptions from the prohibited transaction rules could be
applicable depending on the type and circumstances of the plan fiduciary making
the decision to acquire a Note. Included among these exemptions are: Prohibited
Transaction Class Exemption ('PTCE') 90-1, regarding investments by insurance
company pooled separate accounts; PTCE 95-60, regarding investments by insurance
company general accounts; PTCE 91-38, regarding investments by bank collective
investment funds; PTCE 96-23, regarding transactions affected by in-house asset
managers; and PTCE 84-14, regarding transactions effected by 'qualified
professional asset managers.'
Employee benefit plans that are governmental plans (as defined in Section
3(32) of ERISA) and certain church plans (as defined in Section 3(33) of ERISA)
are not subject to ERISA requirements.
A plan fiduciary considering the purchase of Notes should consult its tax
and/or legal advisors regarding whether the assets of the Trust would be
considered plan assets, the possibility of exemptive relief from the prohibited
transaction rules and other issues and their potential consequences.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement
(the 'Underwriting Agreement') among the Depositor and the Underwriters named
below (the 'Underwriters') the Depositor has agreed to sell to the Underwriters
and each Underwriter has agreed to purchase from the Depositor the principal
amount of the Notes set forth below after its name.
<TABLE>
<CAPTION>
UNDERWRITER SERIES PRINCIPAL AMOUNT
- ----------- ------- ----------------
<S> <C> <C>
Prudential Securities
Incorporated 1998-AA $100,000,000
Bear, Stearns & Co. Inc. 1998-AA $100,000,000
First Union Capital Markets, a
division of Wheat First
Securities Corp. 1998-AA $100,000,000
</TABLE>
S-43
<PAGE>
The Notes will be offered by the Underwriters from time to time in
negotiated transactions or otherwise, at varying prices to be determined at the
time of sale. Proceeds to the Depositor, including accrued interest, are
expected to be approximately 99.750000% of the aggregate principal balance of
the Notes, before deducting expenses payable by the Depositor in connection with
the Notes, estimated to be $827,000. In connection with the purchase and sale of
the Notes, the Underwriters may be deemed to have received compensation from the
Depositor in the form of underwriting discounts.
The Underwriting Agreement provides that the Depositor will indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended.
REPORT OF EXPERTS
The financial statements of Financial Guaranty Insurance Company included
in this Prospectus Supplement in Appendix A, as of December 31, 1997 and 1996
and for each of the years in the three-year period ended December 31, 1997, have
been included in reliance upon the report of KPMG Peat Marwick LLP, independent
certified public accountants, appearing in Appendix A, upon the authority of
such firm as experts in accounting and auditing.
CERTAIN LEGAL MATTERS
Certain tax matters concerning the issuance of the Notes will be passed
upon by Stroock & Stroock & Lavan LLP, New York, New York. Certain legal matters
relating to the validity of the Notes will be passed upon for the Underwriters
by Stroock & Stroock & Lavan LLP, New York, New York. Stroock & Stroock & Lavan
LLP represents the Servicer and United Companies Financial Corporation, an
affiliate of the Depositor and the Servicer, from time to time.
RATINGS
It is a condition of the original issuance of the Notes that they receive
ratings of AAA by Fitch, Aaa by Moody's and AAA, by S&P. Such ratings are the
highest long-term ratings assigned to securities by such rating agencies. The
ratings do not address the likelihood of the payment of any LIBOR Interest
Carryover or the possibility that, as a result of principal prepayments, Owners
may receive a lower than anticipated yield. Such ratings will be based primarily
on the ratings assigned to the claims paying ability of the Note Insurer. Any
reduction in such ratings of the Note Insurer would most likely result in a
reduction in the ratings given to the Notes. The ratings will be the views only
of such rating agencies. There is no assurance that any such ratings will
continue for any period of time or that such ratings will not be revised or
withdrawn. Any such revision or withdrawal of such ratings may have an adverse
effect on the market price of the Notes. A security rating is not a
recommendation to buy, sell or hold securities.
S-44
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Asset-Backed
Notes, Series 1998-AA (the 'Global Securities') will be available only in
book-entry form. Investors in the Global Securities may hold such Global
Securities through any of DTC, Cedel or Euroclear. The Global Securities will be
tradeable as home market instruments in both the European and U.S. domestic
markets. Initial settlement and all secondary trades will settle in same-day
funds.
Secondary market trading 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.
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 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 specified by the Underwriters. 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 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
S-45
<PAGE>
Securities from and including the last coupon payment date to and excluding the
settlement date, on the basis of the actual number of days in such accrual
period and a year assumed to consist of 360 days. For transactions settling on
the 31st of the month, payment will include interest accrued to and excluding
the first day of the following month. Payment will then be made by the
respective Depositary of the DTC Participant's account against delivery of the
Global Securities. After settlement has been completed, the Global Securities
will be credited to the respective clearing system and by the clearing system,
in accordance with its usual procedures, to the Cedel Participant's or Euroclear
Participant's account. The securities credit will appear the next day (European
time) and the cash debt will be back-valued to, and the interest on the Global
Securities will accrue from, the value date (which would be the preceding day
when settlement occurred in New York). If settlement is not completed on the
intended value date (i.e., the trade fails), the Cedel or Euroclear cash debt
will be valued instead as of the actual settlement date.
Cedel Participants and Euroclear Participants will need to make available
to the respective clearing systems the funds necessary to process same-day funds
settlement. The most direct means of doing so is to preposition funds for
settlement, either from cash on hand or existing lines of credit, as they would
for any settlement occurring within Cedel or Euroclear. Under this approach,
they may take on credit exposure to Cedel or Euroclear until the Global
Securities are credited to their accounts one day later.
As an alternative, if Cedel or Euroclear has extended a line of credit to
them, Cedel Participants or Euroclear Participants can elect not to preposition
funds and allow that credit line to be drawn upon the finance settlement. Under
this procedure, Cedel Participants or Euroclear Participants purchasing Global
Securities would incur overdraft charges for one day, assuming they cleared the
overdraft when the Global Securities were credited to their accounts. However,
interest on the Global Securities would accrue from the value date. Therefore,
in many cases the investment income on the Global Securities earned during that
one-day period may substantially reduce or offset the amount of such overdraft
charges, although this result will depend on each Cedel Participant's or
Euroclear Participant's particular cost of funds.
Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for sending Global Securities to
the respective European Depositary for the benefit of Cedel Participants or
Euroclear Participants. The sale proceeds will be available to the DTC seller on
the settlement date. Thus, to the DTC Participants a cross-market transaction
will settle no differently than a trade between two DTC Participants.
Trading between Cedel or Euroclear Seller and DTC Purchaser. Due to time
zone differences in their favor, Cedel Participants and Euroclear Participants
may employ their customary procedures for transactions in which Global
Securities are to be transferred by the respective clearing system, through the
respective Depositary, to a DTC Participant. The seller will send instructions
to Cedel Participants or Euroclear Participants through a Cedel Participant or
Euroclear Participant at least one business day prior to settlement. In these
cases Cedel or Euroclear will instruct the respective Depositary, as
appropriate, to deliver the Global Securities to the DTC Participant's account
against payment. Payment will include interest accrued on the Global Securities
from and including the last coupon payment to and excluding the settlement date
on the basis of the actual number of days in such accrual period and a year
assumed to consist of 360 days. For transactions settling on the 31st of the
month, payment will include interest accrued to and excluding the first day of
the following month. The payment will then be reflected in the account of the
Cedel Participant or Euroclear Participant the following day, and receipt of the
cash proceeds in the Cedel Participant's or Euroclear Participant's account
would be back-valued to the value date (which would be the preceding day, when
settlement occurred in New York). Should the Cedel Participant or Euroclear
Participant have a line of credit with its respective clearing system and elect
to be in debt in anticipation of receipt of the sale proceeds in its account,
the back-valuation will extinguish any overdraft incurred over that one-day
period. If settlement is not completed on the intended value date (i.e., the
trade fails), receipt of the cash proceeds in the Cedel Participant's or
Euroclear Participant's account would instead be valued as of the actual
settlement date.
Finally, day traders that use Cedel or Euroclear and that purchase Global
Securities from DTC Participants for delivery to Cedel Participants or Euroclear
Participants should note that these trades would automatically fail
S-46
<PAGE>
on the sale side unless affirmative action were taken. At least three techniques
should be readily available to eliminate this potential problem:
(a) borrowing through Cedel or Euroclear for one day (until the
purchase side of the day trade is reflected in their Cedel or Euroclear
accounts) in accordance with the clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC Participant
no later than one day prior to settlement, which would give the Global
Securities sufficient time to be reflected in their Cedel or Euroclear
account in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade
so that the value date for the purchase from the DTC Participant is at
least one day prior to the value date for the sale to the Cedel Participant
or Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through Cedel or
Euroclear (or through DTC if the holder has an address outside the U.S.) will be
subject to the 30% U.S. withholding tax that generally applies to payments of
interest (including original issue discount) on registered debt issued by U.S.
persons, unless (i) each clearing system, bank or other financial institution
that holds customers' securities in the ordinary course of its trade or business
in the chain of intermediaries between such beneficial owner and the U.S. entity
required to withhold tax complies with applicable certification requirements and
(ii) such beneficial owner takes one of the following steps to obtain an
exemption or reduced tax rate:
Exemption 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 Owner 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 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 the income
of which is includible in gross income for United States tax purposes,
regardless of its source or a trust if a court within the United States is able
to exercise primary supervision of the administration of the trust and one or
more United States fiduciaries have the authority to control all substantial
decisions of the trust. This summary does not deal with all aspects of U.S.
Federal income tax withholding that may be relevant to foreign holders of the
Global Securities. Investors are advised to consult their own tax advisors for
specific tax advice concerning their holding and disposing of the Global
Securities.
S-47
<PAGE>
[This page intentionally left blank]
<PAGE>
APPENDIX A
FINANCIAL GUARANTY INSURANCE COMPANY
Financial Statements
December 31, 1997
(With Independent Auditors' Report Thereon)
<PAGE>
FINANCIAL GUARANTY INSURANCE COMPANY
AUDITED FINANCIAL STATEMENTS
DECEMBER 31, 1997
<TABLE>
<S> <C>
Report of Independent Auditors............................................................................. A-1
Balance Sheets............................................................................................. A-2
Statements of Income....................................................................................... A-3
Statements of Stockholder's Equity......................................................................... A-4
Statements of Cash Flows................................................................................... A-5
Notes to Financial Statements.............................................................................. A-6
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholder
Financial Guaranty Insurance Company:
We have audited the accompanying balance sheets of Financial Guaranty Insurance
Company as of December 31, 1997 and 1996, and the related statements of income,
stockholder's equity, and cash flows for each of the years in the three year
period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Financial Guaranty Insurance
Company as of December 31, 1997 and 1996 and the results of its operations and
its cash flows for each of the years in the three year period then ended in
conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
January 23, 1998
A-1
<PAGE>
FINANCIAL GUARANTY INSURANCE COMPANY
BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Fixed maturity securities available-for-sale (amortized cost of $2,313,458 in 1997
and $2,190,303 in 1996)............................................................ $2,443,746 $2,250,549
Short-term investments, at cost, which approximates market........................... 76,039 73,839
Cash................................................................................. 802 860
Accrued investment income............................................................ 38,927 37,655
Reinsurance recoverable.............................................................. 8,220 7,015
Prepaid reinsurance premiums......................................................... 154,208 167,683
Deferred policy acquisition costs.................................................... 86,286 91,945
Property and equipment, net of accumulated depreciation ($17,346 in 1997 and $15,333
in 1996)........................................................................... 3,142 4,696
Receivable for securities sold....................................................... -- 379
Prepaid expenses and other assets.................................................... 21,002 19,520
------------ ------------
Total assets.................................................................... $2,832,372 $2,654,141
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Unearned premiums.................................................................. $ 628,553 $ 681,816
Loss and loss adjustment expenses.................................................. 76,926 72,616
Ceded reinsurance balances payable................................................. 3,932 10,561
Accounts payable and accrued expenses.............................................. 26,352 54,165
Payable to Parent.................................................................. -- 1,791
Current federal income taxes payable............................................... 19,335 52,016
Deferred federal income taxes...................................................... 118,522 91,805
Payable for securities purchased................................................... 5,811 4,937
------------ ------------
Total liabilities............................................................... 879,431 969,707
------------ ------------
------------ ------------
Stockholder's Equity:
Common stock, par value $1,500 per share; 10,000 shares authorized, issued and
outstanding..................................................................... 15,000 15,000
Additional paid-in capital......................................................... 383,511 334,011
Net unrealized gains on fixed maturity securities available-for-sale, net of tax... 84,687 39,160
Foreign currency translation adjustment, net of tax................................ (752) (429)
Retained earnings.................................................................. 1,470,495 1,296,692
------------ ------------
Total stockholder's equity...................................................... 1,952,941 1,684,434
------------ ------------
Total liabilities and stockholder's equity...................................... $2,832,372 $2,654,141
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to financial statements.
A-2
<PAGE>
FINANCIAL GUARANTY INSURANCE COMPANY
STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
REVENUES:
Gross premiums written....................................................... $ 95,995 $ 97,027 $ 97,288
Ceded premiums............................................................... (19,780) (29,376) (19,319)
-------- -------- --------
Net premiums written....................................................... 76,215 67,651 77,969
Decrease in net unearned premiums............................................ 39,788 51,314 27,309
-------- -------- --------
Net premiums earned........................................................ 116,003 118,965 105,278
Net investment income........................................................ 127,773 124,635 120,398
Net realized gains........................................................... 16,700 15,022 30,762
-------- -------- --------
Total revenues............................................................. 260,476 258,622 256,438
EXPENSES:
Loss and loss adjustment expenses............................................ 12,539 2,389 (8,426)
Policy acquisition costs..................................................... 12,936 16,327 13,072
Decrease (Increase) in deferred policy acquisition costs..................... 5,659 2,923 (3,940)
Other underwriting expenses.................................................. 14,691 12,508 19,100
-------- -------- --------
Total expenses............................................................. 45,825 34,147 19,806
-------- -------- --------
Income before provision for Federal income taxes............................. 214,651 224,475 236,632
-------- -------- --------
Federal income tax expense:
Current.................................................................... 39,133 41,548 28,913
Deferred................................................................... 1,715 5,318 19,841
-------- -------- --------
Total Federal income tax expense........................................... 40,848 46,866 48,754
-------- -------- --------
Net income................................................................. $173,803 $177,609 $187,878
-------- -------- --------
-------- -------- --------
</TABLE>
See accompanying notes to financial statements.
A-3
<PAGE>
FINANCIAL GUARANTY INSURANCE COMPANY
STATEMENTS OF STOCKHOLDER'S EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NET UNREALIZED
GAINS (LOSSES) FOREIGN
ON FIXED MATURITY CURRENCY
ADDITIONAL SECURITIES TRANSLATION
COMMON PAID-IN AVAILABLE- ADJUSTMENT, RETAINED
STOCK CAPITAL FOR-SALE, NET OF TAX NET OF TAX EARNINGS
------- ---------- -------------------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1995........................... $15,000 $334,011 $(41,773) $(1,221) $ 973,706
Net income......................................... -- -- -- -- 187,878
Dividend paid...................................... -- -- -- -- (25,000)
Change in fixed maturity securities available for
sale, net of tax of $56,839...................... -- -- 105,558 -- --
Foreign currency translation adjustment............ -- -- -- (278) --
------- ---------- ---------- ----------- ----------
Balance, December 31, 1995......................... 15,000 334,011 63,785 (1,499) 1,136,584
------- ---------- ---------- ----------- ----------
Net Income......................................... -- -- -- -- 177,609
Dividend paid...................................... -- -- -- -- (17,500)
Change in fixed maturity securities available for
sale, net of tax of ($13,260).................... -- -- (24,625) -- --
Foreign currency translation adjustment............ -- -- -- 1,070 --
------- ---------- ---------- ----------- ----------
Balance at December 31, 1996....................... 15,000 334,011 39,160 (429) 1,296,692
------- ---------- ---------- ----------- ----------
Net Income......................................... -- -- -- -- 173,803
Capital contribution............................... -- 49,500 -- -- --
Change in fixed maturity securities available for
sale, net of tax of $24,516...................... -- -- 45,527 -- --
Foreign currency translation adjustment............ -- -- -- (323) --
------- ---------- ---------- ----------- ----------
Balance at December 31, 1997....................... $15,000 $383,511 $ 84,687 ($ 752) $1,470,495
------- ---------- ---------- ----------- ----------
------- ---------- ---------- ----------- ----------
</TABLE>
See accompanying notes to financial statements.
A-4
<PAGE>
FINANCIAL GUARANTY INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------
1997 1996 1995
---------- ---------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income................................................................ $ 173,803 $ 177,609 $ 187,878
Adjustments to reconcile net income to net cash provided by operating
activities:
Change in unearned premiums............................................. (53,263) (45,719) (29,890)
Change in loss and loss adjustment expense reserves..................... 4,310 (5,192) (20,938)
Depreciation of property and equipment.................................. 2,013 2,472 2,348
Change in reinsurance receivable........................................ (1,205) 657 6,800
Change in prepaid reinsurance premiums.................................. 13,475 (5,596) 2,581
Change in foreign currency translation adjustment....................... (497) 1,646 (427)
Policy acquisition costs deferred....................................... (12,936) (16,327) (16,219)
Amortization of deferred policy acquisition costs....................... 18,595 19,250 12,279
Change in accrued investment income, and prepaid expenses and other
assets............................................................... (2,754) (7,201) 2,906
Change in other liabilities............................................. (36,233) 30,117 (12,946)
Change in deferred income taxes......................................... 1,715 5,318 19,841
Amortization of fixed maturity securities............................... 2,698 792 1,922
Change in current income taxes payable.................................. (32,681) 720 (30,827)
Net realized gains on investments....................................... (16,700) (15,022) (30,762)
---------- ---------- ---------
Net cash provided by operating activities............................... 60,340 143,524 94,546
---------- ---------- ---------
INVESTING ACTIVITIES:
Sales and maturities of fixed maturity securities......................... 741,604 891,643 836,103
Purchases of fixed maturity securities.................................... (848,843) (1,033,345) (891,108)
Purchases, sales and maturities of short-term investments, net............ (2,200) 17,193 (15,358)
Purchases of property and equipment, net.................................. (459) (854) (750)
---------- ---------- ---------
Net cash used in investing activities..................................... (109,898) (125,363) (71,113)
---------- ---------- ---------
FINANCING ACTIVITIES:
Capital Contributions..................................................... 49,500 -- --
Dividends paid............................................................ -- (17,500) (25,000)
---------- ---------- ---------
Net cash provided by financing activities................................. 49,500 (17,500) (25,000)
---------- ---------- ---------
(Decrease) Increase in cash............................................... (58) 661 (1,567)
Cash at beginning of year................................................. 860 199 1,766
---------- ---------- ---------
Cash at end of year....................................................... $ 802 $ 860 $ 199
---------- ---------- ---------
---------- ---------- ---------
</TABLE>
See accompanying notes to financial statements.
A-5
<PAGE>
FINANCIAL GUARANTY INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS
Financial Guaranty Insurance Company (the 'Company') is a wholly-owned
insurance subsidiary of FGIC Corporation (the 'Parent'). The Parent is owned
approximately ninety-nine percent by General Electric Capital Corporation ('GE
Capital') and approximately one percent by Sumitomo Marine and Fire Insurance
Company, Ltd. The Company provides financial guaranty insurance on newly issued
municipal bonds and municipal bonds trading in the secondary market, the latter
including bonds held by unit investment trusts and mutual funds. The Company
also insures structured debt issues outside the municipal market. Approximately
86% of the business written since inception by the Company has been municipal
bond insurance.
The Company insures only those securities that, in its judgment, are of
investment grade quality. Municipal bond insurance written by the Company
insures the full and timely payment of principal and interest when due on
scheduled maturity, sinking fund or other mandatory redemption and interest
payment dates to the holders of municipal securities. The Company's insurance
policies do not provide for accelerated payment of the principal of, or interest
on, the bond insured in the case of a payment default. If the issuer of a
Company-insured bond defaults on its obligation to pay debt service, the Company
will make scheduled interest and principal payments as due and is subrogated to
the rights of bondholders to the extent of payments made by it.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements have been prepared on the basis of
generally accepted accounting principles ('GAAP') which differ in certain
respects from the accounting practices prescribed or permitted by regulatory
authorities (see Note 3). The prior years financial statements have been
reclassified to conform to the 1997 presentation. Significant accounting
policies are as follows:
Investments
The Company accounts for its investments in accordance with Statement of
Financial Accounting Standards No. 115 ('SFAS 115'), 'Accounting for Certain
Investments in Debt and Equity Securities.' The Statement defines three
categories for classification of debt securities and the related accounting
treatment for each respective category. The Company has determined that its
fixed maturity securities portfolio should be classified as available-for-sale.
Under SFAS 115, securities held as available-for-sale are recorded at fair value
and unrealized holding gains/losses are recorded as a separate component of
stockholder's equity, net of applicable income taxes.
Short-term investments are carried at cost, which approximates fair value.
Bond discounts and premiums are amortized over the remaining terms of the
securities. Realized gains or losses on the sale of investments are determined
on the basis of specific identification.
Premium Revenue Recognition
Premiums for policies where premiums are collected in a single payment at
policy inception are earned over the period at risk, based on the total exposure
outstanding at any point in time. Financial guaranty insurance policies exposure
generally declines according to predetermined schedules. For policies with
premiums that are collected periodically, premiums are reflected in income pro
rata over the period covered by the premium payment.
A-6
<PAGE>
FINANCIAL GUARANTY INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Policy Acquisition Costs
Policy acquisition costs include only those expenses that relate directly
to premium production. Such costs include compensation of employees involved in
underwriting, marketing and policy issuance functions, rating agency fees, state
premium taxes and certain other underwriting expenses, offset by ceding
commission income on premiums ceded to reinsurers (see Note 6). Net acquisition
costs are deferred and amortized over the period in which the related premiums
are earned. Anticipated loss and loss adjustment expenses are considered in
determining the recoverability of acquisition costs.
Loss and Loss Adjustment Expenses
Provision for loss and loss adjustment expenses is made in an amount equal
to the present value of unpaid principal and interest and other payments due
under insured risks at the balance sheet date for which, in management's
judgment, the likelihood of default is probable. Such reserves amounted to $76.9
million and $72.6 million at December 31, 1997 and 1996, respectively. As of
December 31, 1997 and 1996, such reserves included $35.1 million and $28.9
million, respectively, established based on an evaluation of the insured
portfolio in light of current economic conditions and other relevant factors. As
of December 31, 1997 and 1996, case-basis loss and loss adjustment expense
reserves were $41.8 million and $43.7 million, respectively. Loss and loss
adjustment expenses include amounts discounted at an interest rate between 5.9%
and 6.0% in 1997 and between 6.5% and 6.6% in 1996. The discount rate used is
based upon the risk free rate for the average maturity of the applicable bond
sector. The reserve for loss and loss adjustment expenses is necessarily based
upon estimates, however, in management's opinion the reserves for loss and loss
adjustment expenses is adequate. However, actual results will likely differ from
those estimates.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. These temporary differences relate principally to unrealized gains
(losses) on fixed maturity securities available-for-sale, premium revenue
recognition, deferred acquisition costs and deferred compensation. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Financial guaranty insurance companies are permitted to deduct from taxable
income, subject to certain limitations, amounts added to statutory contingency
reserves (see Note 3). The amounts deducted must be included in taxable income
upon their release from the reserves or upon earlier release of such amounts
from such reserves to cover excess losses as permitted by insurance regulators.
The amounts deducted are allowed as deductions from taxable income only to the
extent that U.S. government non-interest bearing tax and loss bonds are
purchased and held in an amount equal to the tax benefit attributable to such
deductions.
Property and Equipment
Property and equipment consists of furniture, fixtures, equipment and
leasehold improvements which are recorded at cost and are charged to income over
their estimated service lives. Office furniture and equipment are depreciated
straight-line over five years. Leasehold improvements are amortized over their
estimated service life or over the life of the lease, whichever is shorter.
Computer equipment and software are depreciated over three years. Maintenance
and repairs are charged to expense as incurred.
A-7
<PAGE>
FINANCIAL GUARANTY INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Foreign Currency Translation
The Company has established foreign branches in France and the United
Kingdom and determined that the functional currencies of these branches are
local currencies. Accordingly, the assets and liabilities of these foreign
branches are translated into U.S. dollars at the rates of exchange existing at
December 31, 1997 and 1996 and revenues and expenses are translated at average
monthly exchange rates. The cumulative translation loss at December 31, 1997 and
1996 was $0.7 million and $0.4 million, respectively, net of tax, and is
reported as a separate component of stockholder's equity.
3. STATUTORY ACCOUNTING PRACTICES
The financial statements are prepared on the basis of GAAP, which differs
in certain respects from accounting practices prescribed or permitted by state
insurance regulatory authorities. The following are the significant ways in
which statutory-basis accounting practices differ from GAAP:
(a) premiums are earned directly in proportion to the scheduled
principal and interest payments rather than in proportion to the total
exposure outstanding at any point in time.
(b) policy acquisition costs are charged to current operations as
incurred rather than as related premiums are earned;
(c) a contingency reserve is computed on the basis of statutory
requirements for the security of all policyholders, regardless of whether
loss contingencies actually exist, whereas under GAAP, a reserve is
established based on an ultimate estimate of exposure;
(d) certain assets designated as non-admitted assets are charged
directly against surplus but are reflected as assets under GAAP, if
recoverable;
(e) federal income taxes are only provided with respect to taxable
income for which income taxes are currently payable, while under GAAP taxes
are also provided for differences between the financial reporting and the
tax bases of assets and liabilities;
(f) purchases of tax and loss bonds are reflected as admitted assets,
while under GAAP they are recorded as federal income tax payments; and
(g) all fixed income investments are carried at amortized cost rather
than at fair value for securities classified as available-for-sale under
GAAP.
A-8
<PAGE>
FINANCIAL GUARANTY INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. STATUTORY ACCOUNTING PRACTICES--(CONTINUED)
The following is a reconciliation of net income and stockholder's equity
presented on a GAAP basis to the corresponding amounts reported on a
statutory-basis for the periods indicated below (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------------------
1997 1996 1995
------------------------- ------------------------- -------------------------
NET STOCKHOLDER'S NET STOCKHOLDER'S NET STOCKHOLDER'S
INCOME EQUITY INCOME EQUITY INCOME EQUITY
-------- ------------- -------- ------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
GAAP basis amount........................ $173,803 $ 1,952,941 $177,609 $ 1,684,434 $187,878 $ 1,547,881
Premium revenue recognition.............. (4,924) (181,209) (9,358) (176,285) (22,555) (166,927)
Deferral of acquisition costs............ 5,659 (86,286) 2,923 (91,945) (3,940) (94,868)
Contingency reserve...................... -- (540,677) -- (460,973) -- (386,564)
Contingency reserve tax deduction (see
Note 2)................................ -- 95,185 -- 85,176 -- 78,196
Non-admitted assets...................... -- (2,593) -- (3,879) -- (5,731)
Case basis loss reserves................. 1,377 (1,872) (3,197) (3,249) 4,048 (52)
Portfolio loss reserves.................. 5,000 29,000 -- 24,000 (22,100) 24,000
Deferral of income taxes................. 1,715 72,260 5,317 70,719 19,842 64,825
Unrealized (gains) on fixed maturity
securities held at fair value, net of
tax.................................... -- (84,687) -- (39,160) -- (63,785)
Recognition of profit commission......... (1,203) (7,388) (441) (6,185) 3,096 (5,744)
Allocation of tax benefits due to
Parent's net operating loss to the
Company (see Note 5)................... 313 10,916 313 10,603 (637) 10,290
-------- ------------- -------- ------------- -------- -------------
Statutory-basis amount.............. $181,740 $ 1,255,590 $173,166 $ 1,093,256 $166,906 $ 1,001,521
-------- ------------- -------- ------------- -------- -------------
-------- ------------- -------- ------------- -------- -------------
</TABLE>
A-9
<PAGE>
FINANCIAL GUARANTY INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
4. INVESTMENTS
Investments in fixed maturity securities carried at fair value of $3.1
million and $3.1 million as of December 31, 1997 and 1996, respectively, were on
deposit with various regulatory authorities as required by law.
The amortized cost and fair values of short-term investments and of
investments in fixed maturity securities classified as available-for-sale are as
follows (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING FAIR
1997 COST GAINS LOSSES VALUE
- ---- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of U.S. government
corporations and agencies.................................. $ 11,539 $ 185 $ -- $ 11,724
Obligations of states and political subdivisions............. 2,272,225 130,183 655 2,401,753
Debt securities issued by foreign governments................ 29,694 603 28 30,269
---------- ---------- ---------- ----------
Investments available-for-sale............................... 2,313,458 130,971 683 2,443,746
Short-term investments....................................... 76,039 -- -- 76,039
---------- ---------- ---------- ----------
Total........................................................ $2,389,497 $ 130,971 $683 $2,519,785
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
The amortized cost and fair values of short-term investments and of
investments in fixed maturity securities available-for-sale at December 31,
1997, by contractual maturity date, are shown below. Expected maturities may
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
AMORTIZED FAIR
1997 COST VALUE
- ---- ---------- ----------
<S> <C> <C>
Due in one year or less........................................... $ 85,199 $ 85,395
Due after one year through five years............................. 61,168 62,955
Due after five years through ten years............................ 589,772 619,972
Due after ten years through twenty years.......................... 1,604,167 1,700,193
Due after twenty years............................................ 49,191 51,270
---------- ----------
Total............................................................. $2,389,497 $2,519,785
---------- ----------
---------- ----------
</TABLE>
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING FAIR
1996 COST GAINS LOSSES VALUE
- ---- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of U.S. government
corporations and agencies.................................. $ 57,987 $ 373 $ 1 $ 58,359
Obligations of states and political subdivisions............. 2,098,486 65,254 4,854 2,158,886
Debt securities issued by foreign governments................ 33,830 -- 526 33,304
---------- ---------- ---------- ----------
Investments available-for-sale............................... 2,190,303 65,627 5,381 2,250,549
Short-term investments....................................... 73,839 -- -- 73,839
---------- ---------- ---------- ----------
Total........................................................ $2,264,142 $ 65,627 $5,381 $2,324,388
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
In 1997, 1996 and 1995, proceeds from sales and maturities of investments
in fixed maturity securities available-for-sale carried at fair value were
$741.6 million, $891.6 million, and $836.1 million, respectively. For 1997, 1996
and 1995 gross gains of $19.1 million, $19.8 million and $36.3 million
respectively, and gross losses of $2.4 million, $4.8 million and $5.5 million
respectively, were realized on such sales.
A-10
<PAGE>
FINANCIAL GUARANTY INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
4. INVESTMENTS--(CONTINUED)
Net investment income of the Company is derived from the following sources
(in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Income from fixed maturity securities $122,372 $119,290 $112,684
Income from short-term investments........................................... 6,366 6,423 8,450
-------- -------- --------
Total investment income...................................................... 128,738 125,713 121,134
Investment expenses.......................................................... 965 1,078 736
-------- -------- --------
Net investment income........................................................ $127,773 $124,635 $120,398
-------- -------- --------
-------- -------- --------
</TABLE>
As of December 31, 1997, the Company did not have more than 10% of its
investment portfolio concentrated in a single issuer or industry.
5. INCOME TAXES
The Company files a federal tax return as part of the consolidated return
of General Electric Capital Corporation ('GE Capital'). Under a tax sharing
agreement with GE Capital, taxes are allocated to the Company and the Parent
based upon their respective contributions to consolidated net income. The
Company also has a separate tax sharing agreement with its Parent. Under this
agreement the Company can utilize its Parent's net operating loss to offset
taxable income on a stand-alone basis. The Company's effective federal corporate
tax rate (19.0 percent in 1997, 20.8 percent in 1996 and 20.6 percent in 1995)
is less than the corporate tax rate on ordinary income of 35 percent in 1997,
1996 and 1995.
Federal income tax expense relating to operations of the Company for 1997,
1996 and 1995 is comprised of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Current tax expense.......................................................... $ 39,133 $ 41,548 $ 28,913
Deferred tax expense......................................................... 1,715 5,318 19,841
-------- -------- --------
Federal income tax expense................................................... $ 40,848 $ 46,866 $ 48,754
-------- -------- --------
-------- -------- --------
</TABLE>
The following is a reconciliation of federal income taxes computed at the
statutory rate and the provision for federal income taxes (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Income taxes computed on income before provision for federal income taxes, at
the statutory rate......................................................... $ 75,128 $ 78,566 $ 82,821
Tax effect of:
Tax-exempt interest........................................................ (34,508) (32,609) (30,630)
Other, net................................................................. 228 909 (3,437)
-------- -------- --------
Provision for income taxes................................................... $ 40,848 $ 46,866 $ 48,754
-------- -------- --------
-------- -------- --------
</TABLE>
A-11
<PAGE>
FINANCIAL GUARANTY INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. INCOME TAXES--(CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the net deferred tax liability or asset at December 31, 1997 and
1996 are presented below (in thousands):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Deferred tax assets:
Loss reserves................................................................. $ 10,999 $ 9,249
Deferred compensation......................................................... 2,242 2,531
Tax over book capital gains................................................... 2,996 2,144
Other......................................................................... 2,260 2,601
-------- --------
Total gross deferred tax assets................................................. 18,497 16,525
-------- --------
Deferred tax liabilities:
Unrealized gains on fixed maturity securities, available-for-sale............. 45,601 21,086
Deferred acquisition costs.................................................... 30,200 32,181
Premium revenue recognition................................................... 40,103 37,159
Rate differential on tax and loss bonds....................................... 9,454 9,454
Other......................................................................... 11,661 8,450
-------- --------
Total gross deferred tax liabilities............................................ 137,019 108,330
-------- --------
Net deferred tax liability...................................................... $118,522 $ 91,805
-------- --------
-------- --------
</TABLE>
Based upon the level of historical taxable income, projections of future
taxable income over the periods in which the deferred tax assets are deductible
and the estimated reversal of future taxable temporary differences, the Company
believes it is more likely than not that it will realize the benefits of these
deductible differences and has not established a valuation allowance at December
31, 1997 and 1996. The Company anticipates that the related deferred tax asset
will be realized based on future profitable business.
Total federal income tax payments during 1997, 1996 and 1995 were $71.8
million, $33.9 million, and $59.8 million, respectively.
6. REINSURANCE
The Company reinsures portions of its risk with other insurance companies
through quota share reinsurance treaties and, where warranted, on a facultative
basis. This process serves to limit the Company's exposure on risks
underwritten. In the event that any or all of the reinsuring companies were
unable to meet their obligations, the Company would be liable for such defaulted
amounts. The Company evaluates the financial condition of its reinsurers and
monitors concentrations of credit risk arising from activities or economic
characteristics of the reinsurers to minimize its exposure to significant losses
from reinsurer insolvencies. The Company holds collateral under reinsurance
agreements in the form of letters of credit and trust agreements in various
amounts with various reinsurers totaling $37.0 million that can be drawn on in
the event of default.
Net premiums earned are presented net of ceded earned premiums of $33.3
million, $23.7 million and $21.9 million for the years ended December 31, 1997,
1996 and 1995, respectively. Loss and loss adjustment expenses incurred are
presented net of ceded losses of $0.2 million, $(0.8) million and $1.1 million
for the years ended December 31, 1997, 1996 and 1995, respectively.
A-12
<PAGE>
FINANCIAL GUARANTY INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
7. LOSS AND LOSS ADJUSTMENT EXPENSES
Activity in the reserve for loss and loss adjustment expenses is summarized
as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Balance at January 1,........................................................ $ 72,616 $ 77,808 $ 98,746
Less reinsurance recoverable............................................... 7,015 (7,672) 14,472
-------- -------- --------
Net balance at January 1,.................................................. 65,601 70,136 84,274
Incurred related to:
Current year................................................................. 1,047 -- 26,681
Prior years.................................................................. 6,492 2,389 (1,207)
Portfolio reserves........................................................... 5,000 -- (33,900)
-------- -------- --------
Total Incurred............................................................... 12,539 2,389 (8,426)
-------- -------- --------
Paid related to:
Current year................................................................. (1,047) -- (197)
Prior years.................................................................. (8,387) (6,924) (5,515)
-------- -------- --------
Total Paid................................................................... (9,434) (6,924) (5,712)
-------- -------- --------
Net balance at December 31,.................................................. 68,706 65,601 70,136
Plus reinsurance recoverable................................................. 8,220 7,015 7,672
-------- -------- --------
Balance at December 31,...................................................... $ 76,926 $ 72,616 $ 77,808
-------- -------- --------
-------- -------- --------
</TABLE>
The changes in incurred portfolio and case reserves principally relates to
business written in prior years. The changes are based upon an evaluation of the
insured portfolio in light of current economic conditions and other relevant
factors.
8. RELATED PARTY TRANSACTIONS
The Company has various agreements with subsidiaries of General Electric
Company ('GE') and GE Capital. These business transactions include appraisal
fees and due diligence costs associated with underwriting structured finance
mortgage-backed security business; payroll and office expenses incurred by the
Company's international branch offices but processed by a GE subsidiary;
investment fees pertaining to the management of the Company's investment
portfolio; and telecommunication service charges. Approximately $4.9 million,
$8.1 million and $3.2 million in expenses were incurred in 1997, 1996 and 1995,
respectively, related to such transactions.
The Company also insured certain non-municipal issues with GE Capital
involvement as sponsor of the insured securitization and/or servicer of the
underlying assets. For some of these issues, GE Capital also provides first loss
protection in the event of default. Gross premiums written on these issues
amounted to $0.5 million in 1997, $0.6 million in 1996, and $1.3 million in
1995. As of December 31, 1997, par outstanding on these deals before reinsurance
was $112.9 million.
The Company insures bond issues and securities in trusts that were
sponsored by affiliates of GE (approximately 1 percent of gross premiums
written) in 1997, 1996 and 1995.
9. COMPENSATION PLANS
Officers and other key employees of the Company participate in the Parent's
incentive compensation, deferred compensation and profit sharing plans. Expenses
incurred by the Company under compensation plans and bonuses amounted to $5.0
million, $4.5 million and $7.5 million in 1997, 1996 and 1995, respectively,
before deduction for related tax benefits.
A-13
<PAGE>
FINANCIAL GUARANTY INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
10. DIVIDENDS
Under New York insurance law, the Company may pay a dividend only from
earned surplus subject to the following limitations: (a) statutory surplus after
such dividend may not be less than the minimum required paid-in capital, which
was $66.4 million in 1997 and 1996, and (b) dividends may not exceed the lesser
of 10 percent of its surplus or 100 percent of adjusted net investment income,
as defined by New York insurance law, for the 12 month period ending on the
preceding December 31, without the prior approval of the Superintendent of the
New York State Insurance Department. At December 31, 1997 and 1996, the amount
of the Company's surplus available for dividends was approximately $124.6
million and $91.8 million, respectively.
During 1997, 1996 and 1995, the Company paid dividends of $0.0, $17.5
million and $25.0 million, respectively.
11. CAPITAL CONTRIBUTION
During 1997, the Parent made a capital contribution of $49.5 million to the
Company.
12. FINANCIAL INSTRUMENTS
Fair Value of Financial Instruments
The following methods and assumptions were used by the Company in
estimating fair values of financial instruments:
Fixed Maturity Securities: Fair values for fixed maturity securities
are based on quoted market prices, if available. If a quoted market price
is not available, fair values is estimated using quoted market prices for
similar securities. Fair value disclosure for fixed maturity securities is
included in the balance sheets and in Note 4.
Short-Term Investments: Short-term investments are carried at cost,
which approximates fair value.
Cash, Receivable for Securities Sold, and Payable for Securities
Purchased: The carrying amounts of these items approximate their fair
values.
The estimated fair values of the Company's financial instruments at
December 31, 1997 and 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
------------------------ ------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Financial Assets
Cash
On hand and in demand accounts............ $ 802 $ 802 $ 860 $ 860
Short-term investments....................... $ 76,039 $ 76,039 $ 73,839 $ 73,839
Fixed maturity securities.................... $2,443,746 $2,443,746 $2,250,549 $2,250,549
</TABLE>
Financial Guaranties: The carrying value of the Company's financial
guaranties is represented by the unearned premium reserve, net of deferred
acquisition costs, and loss and loss adjustment expense reserves. Estimated fair
values of these guaranties are based on amounts currently charged to enter into
similar agreements (net of applicable ceding commissions), discounted cash flows
considering contractual revenues to be received adjusted for expected
prepayments, the present value of future obligations and estimated losses, and
current interest rates. The estimated fair values of such financial guaranties
range between $355.7 million and $382.6 million compared to a carrying value of
$456.8 million as of December 31, 1997 and between $358.7 million and $387.4
million compared to a carrying value of $487.8 million as of December 31, 1996.
A-14
<PAGE>
FINANCIAL GUARANTY INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
12. FINANCIAL INSTRUMENTS--(CONTINUED)
Concentrations of Credit Risk
The Company considers its role in providing insurance to be credit
enhancement rather than credit substitution. The Company insures only those
securities that, in its judgment, are of investment grade quality. The Company
has established and maintains its own underwriting standards that are based on
those aspects of credit that the Company deems important for the particular
category of obligations considered for insurance. Credit criteria include
economic and social trends, debt management, financial management and legal and
administrative factors, the adequacy of anticipated cash flows, including the
historical and expected performance of assets pledged for payment of securities
under varying economic scenarios and underlying levels of protection such as
insurance or overcollateralization.
In connection with underwriting new issues, the Company sometimes requires,
as a condition to insuring an issue, that collateral be pledged or, in some
instances, that a third-party guarantee be provided for a term of the obligation
insured by a party of acceptable credit quality obligated to make payment prior
to any payment by the Company. The types and extent of collateral pledged
varies, but may include residential and commercial mortgages, corporate debt,
government debt and consumer receivables.
As of December 31, 1997, the Company's total insured principal exposure to
credit loss in the event of default by bond issuers was $108.4 billion, net of
reinsurance of $31.6 billion. The Company's insured portfolio as of December 31,
1997 was broadly diversified by geography and bond market sector with no single
debt issuer representing more than 1% of the Company's principal exposure
outstanding, net of reinsurance.
As of December 31, 1997, the composition of principal exposure by type of
issue, net of reinsurance, was as follows (in millions):
<TABLE>
<CAPTION>
NET
PRINCIPAL
OUTSTANDING
-----------
<S> <C>
Municipal:
General obligation...................................................................... $ 57,244.4
Special revenue......................................................................... 35,526.8
Industrial revenue...................................................................... 405.7
Non-municipal........................................................................... 15,268.7
-----------
Total..................................................................................... $ 108,445.6
-----------
-----------
</TABLE>
The Company's gross and net exposure outstanding was $254,441.1 million and
$193,612.9 million, respectively, as of December 31, 1997.
As of December 31, 1997, the composition of principal exposure ceded to
reinsurers was as follows (in millions):
<TABLE>
<CAPTION>
CEDED
PRINCIPAL
OUTSTANDING
-----------
<S> <C>
Reinsurer:
Capital Re............................................................................... $14,909.1
Enhance Re............................................................................... 8,431.7
Other.................................................................................... 8,290.7
-----------
Total................................................................................. $31,631.5
-----------
-----------
</TABLE>
A-15
<PAGE>
FINANCIAL GUARANTY INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
12. FINANCIAL INSTRUMENTS--(CONTINUED)
The Company is authorized to do business in 50 states, the District of
Columbia, and in the United Kingdom and France. Principal exposure outstanding
at December 31, 1997 by state, net of reinsurance, was as follows (in millions):
<TABLE>
<CAPTION>
NET
PRINCIPAL
OUTSTANDING
-----------
<S> <C>
California................................................................................ $ 12,308.1
Pennsylvania.............................................................................. 10,277.8
Florida................................................................................... 10,181.7
New York.................................................................................. 8,945.5
Illinois.................................................................................. 7,203.8
Texas..................................................................................... 6,072.4
Michigan.................................................................................. 4,526.3
New Jersey................................................................................ 4,476.2
Arizona................................................................................... 3,109.2
Ohio...................................................................................... 2,616.1
-----------
Sub-total................................................................................. 69,717.1
Other states.............................................................................. 38,421.7
International............................................................................. 306.8
-----------
Total..................................................................................... $ 108,445.6
-----------
-----------
</TABLE>
13. COMMITMENTS
Total rent expense was $2.4 million, $2.8 million and $2.2 million in 1997,
1996 and 1995, respectively. For each of the next five years and in the
aggregate as of December 31, 1997, the minimum future rental payments under
noncancellable operating leases having remaining terms in excess of one year
approximate (in thousands):
<TABLE>
<CAPTION>
YEAR AMOUNT
- ---- -------
<S> <C>
1998......................................................................................... $ 2,909
1999......................................................................................... 2,909
2000......................................................................................... 2,909
2001......................................................................................... 2,911
2002......................................................................................... --
-------
Total minimum future rental payments......................................................... $11,638
-------
-------
</TABLE>
A-16
<PAGE>
APPENDIX B
CERTAIN HISTORICAL PREPAYMENT INFORMATION
The following table provides life-to-date prepayment rates and pool factors
as of December 31, 1997, with respect to the home equity loans previously
securitized by the Depositor by year of securitization:
<TABLE>
<CAPTION>
FIXED ARM HYBRID
----------------------------------- --------------------------------- ---------------------------------
LIFE- LIFE- LIFE-
YEAR OF ORIGINAL TO-DATE POOL ORIGINAL TO-DATE POOL ORIGINAL TO-DATE POOL
SECURITIZATION BALANCE CPR FACTOR(1) BALANCE CPR FACTOR(1) BALANCE CPR FACTOR(1)
- -------------- ---------- ------- ---------- -------- ------- ---------- -------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1993 $ 415,525 26% 23.26% $ 34,990 36% 14.71% $ -- -- --
1994 935,568 25% 36.00% 74,987 37% 22.62% -- -- --
1995 1,030,698 25% 48.85% 391,652 30% 45.59% -- -- --
1996 1,350,058 21% 70.59% 732,762 30% 64.20% 142,308 20% 73.55%
1997(2) 924,998 16% 91.58% 339,595 19% 90.60% 585,406 11% 95.27%
</TABLE>
- ------------------
(1) Pool Factor - Percentage of the securitization remaining outstanding at
December 31, 1997.
(2) Amounts exclude 1997-D securitization, which was not fully funded as of
December 31, 1997.
B-1
<PAGE>
APPENDIX C
CERTAIN HISTORICAL INFORMATION
The following table provides certain contractual delinquency and default
data with respect to the home equity loans serviced by the Servicer, by year of
loan origination, as of the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------------------------------------------------------------------------------
DEFAULTS
DELINQUENCY -------------------------------- TOTAL
CONTRACTUAL ------------------------------- FORECLOSURES DELINQUENCY
YEAR OF ORIGINATION BALANCE 30-59 60-89 90+ TOTAL IN PROCESS BANKRUPTCY TOTAL & DEFAULTS
- ------------------- ----------- ----- ----- ---- ----- ------------ ---------- ----- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1991 & prior............. $ 75,114 4.79 % 1.06 % 1.56% 7.41 % 4.92% 5.72% 10.64% 18.05%
1992..................... 43,134 5.21 % 1.72 % 2.28% 9.21 % 4.82% 5.23% 10.05% 19.26%
1993..................... 135,399 4.59 % 1.12 % 1.01% 6.72 % 4.79% 5.30% 10.09% 16.81%
1994..................... 302,819 4.95 % 1.54 % 1.47% 7.96 % 6.17% 6.79% 12.96% 20.92%
1995..................... 710,685 5.04 % 1.59 % 1.46% 8.09 % 7.80% 5.66% 13.46% 21.55%
1996..................... 1,544,278 4.54 % 1.50 % 1.22% 7.26 % 5.39% 2.28% 7.67% 14.93%
1997..................... 2,717,494 1.62 % 0.58 % 0.35% 2.55 % 0.74% 0.23% 0.97% 3.52%
-----------
Total.................. $ 5,528,923 3.20 % 1.05 % 0.85% 5.10 % 3.43% 2.10% 5.53% 10.63%
-----------
-----------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------------------------------------------------------------------------------------
DEFAULTS
DELINQUENCY -------------------------------- TOTAL
CONTRACTUAL ------------------------------- FORECLOSURES DELINQUENCY
YEAR OF ORIGINATION BALANCE 30-59 60-89 90+ TOTAL IN PROCESS BANKRUPTCY TOTAL & DEFAULTS
- ------------------- ----------- ----- ----- ---- ----- ------------ ---------- ----- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1990 & prior............. $ 75,252 5.12 % 1.20 % 1.22% 7.54 % 5.97% 4.85% 10.82% 18.36%
1991..................... 38,114 5.26 % 0.97 % 0.83% 7.06 % 5.45% 6.59% 12.04% 19.10%
1992..................... 63,842 4.74 % 1.74 % 1.97% 8.45 % 5.87% 5.40% 11.27% 19.72%
1993..................... 199,037 4.39 % 1.28 % 1.07% 6.74 % 4.94% 5.05% 9.99% 16.73%
1994..................... 451,224 5.15 % 1.58 % 0.92% 7.65 % 4.70% 6.37% 11.07% 18.72%
1995..................... 1,069,818 4.75 % 2.12 % 1.17% 8.04 % 2.64% 6.26% 8.90% 16.94%
1996..................... 2,142,851 2.11 % 0.86 % 0.35% 3.32 % 0.20% 0.95% 1.15% 4.47%
-----------
Total.................. $ 4,040,138 3.39 % 1.31 % 0.71% 5.41 % 3.36% 1.83% 5.19% 10.60%
-----------
-----------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------------------------------------------------------------------------------------
DEFAULTS
DELINQUENCY -------------------------------- TOTAL
CONTRACTUAL ------------------------------- FORECLOSURES DELINQUENCY
YEAR OF ORIGINATION BALANCE 30-59 60-89 90+ TOTAL IN PROCESS BANKRUPTCY TOTAL & DEFAULTS
- ------------------- ----------- ----- ----- ---- ----- ------------ ---------- ----- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1989 & prior............. $ 68,275 3.39 % 0.95 % 0.34% 4.68 % 5.51% 4.83% 10.34% 15.02%
1990..................... 44,862 3.76 % 0.47 % 0.19% 4.42 % 5.46% 5.56% 11.02% 15.44%
1991..................... 57,815 4.22 % 0.74 % 0.36% 5.32 % 5.35% 5.84% 11.19% 16.51%
1992..................... 98,473 3.81 % 0.90 % 0.89% 5.60 % 5.96% 6.22% 12.18% 17.78%
1993..................... 298,882 3.72 % 0.58 % 0.39% 4.69 % 3.63% 4.55% 8.18% 12.87%
1994..................... 668,797 4.03 % 0.90 % 0.40% 5.33 % 2.29% 4.45% 6.74% 12.07%
1995..................... 1,464,377 1.74 % 0.45 % 0.16% 2.35 % 0.41% 1.12% 1.53% 3.88%
-----------
Total.................. $ 2,701,481 2.73 % 0.61 % 0.28% 3.62 % 2.78% 1.75% 4.53% 8.15%
-----------
-----------
</TABLE>
C-1
<PAGE>
The following table provides certain pool factors and cumulative losses
with respect to the home equity loans serviced by the Servicer, by year of
production:
<TABLE>
<CAPTION>
CUMULATIVE
YEAR HOME-EQUITY NET LOSSES AS
OF LOAN POOL 5 OF
PRODUCTION PRODUCTION FACTOR(1) PRODUCTION
- ------------------ ----------- --------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
FIXED
- -----
1993 $ 500,900 25.42% 1.98%
1994 $ 837,901 34.69% 2.01%
1995 $1,130,715 47.27% 1.03%
1996 $1,383,714 71.28% 0.11%
1997 $1,373,984 93.42% 0.00%
ARM
- ---
1993 $ 38,968 20.65% 1.64%
1994 $ 70,920 17.16% 0.55%
1995 $ 410,922 42.89% 0.58%
1996 $ 860,744 64.82% 0.05%
1997 $1,513,667 94.73% 0.00%
</TABLE>
(1) Pool Factor--Percentage of the year's production remaining outstanding at
December 31, 1997.
C-2
<PAGE>
PROSPECTUS
$4,000,000,000
ASSET-BACKED CERTIFICATES
ASSET-BACKED NOTES
(ISSUABLE IN SERIES)
------------------------
UCFC ACCEPTANCE CORPORATION
(DEPOSITOR)
------------------------
The Asset-Backed Certificates (the 'Certificates') and the Asset-Backed
Notes (the 'Notes' and, collectively with the Certificates, the 'Securities')
described herein may be sold from time to time in one or more series (each, a
'Series') in amounts, at prices and on terms to be determined at the time of
sale and to be set forth in a supplement to this Prospectus (a 'Prospectus
Supplement'). Each Series of Securities will include either one or more classes
of Certificates or, if Notes are issued as part of a Series, one or more Classes
of Notes and one or more Classes of Certificates, as set forth in the related
Prospectus Supplement. The locations of certain capitalized terms used herein
are set forth in 'Index of Principal Terms' beginning on page 83.
The Certificates of a Series will evidence undivided interests in certain
assets deposited into a trust (each, a 'Trust') by UCFC Acceptance Funding
Corporation (the 'Depositor') pursuant to a Pooling and Servicing Agreement or a
Trust Agreement, as described herein. The Notes of a Series will be issued and
secured pursuant to an Indenture and will represent indebtedness of the related
Trust. The Trust for a Series of Securities will include (a) Mortgage Assets,
which may include (i) one or more pools of closed-end home equity loans (the
'Home Equity Loans'), secured by mortgages on one- to four-family residential or
mixed-use properties, and (ii) securities ('Private Securities') backed or
secured by Home Equity Loans (the 'Underlying Loans'), (b) certain monies
received or due thereunder on or after the date specified in the related
Prospectus Supplement (the 'Cut-off Date'), (c) if specified in the related
Prospectus Supplement, funds on deposit in one or more pre-funding accounts
and/or capitalized interest accounts and (d) reserve funds, letters of credit,
surety bonds, insurance policies or other forms of credit support as described
herein and in the related Prospectus Supplement. Amounts on deposit in a
pre-funding account for any Series will be used to purchase additional Home
Equity Loans during the funding period specified in the related Prospectus
Supplement in the manner specified therein. The amount initially deposited in a
pre-funding account for a Series of Securities will not exceed twenty-five
percent of the aggregate principal amount of such Series of Securities.
Certain of the Mortgage Assets may have been originated or acquired by
affiliates of UCFC Acceptance Corporation (the 'Depositor'), including United
Companies Lending Corporation(Registered) ('United Companies') UNICOR
Mortgage(Registered), Inc., GINGER MAE(Registered), Inc. and Southern Mortgage
Acquisition, Inc. These affiliates, together with any other affiliates of the
Depositor which originate or purchase Mortgage Assets from third parties, are
collectively referred to herein as the 'Originators.'
Each Series of Securities will be issued in one or more classes (each, a
'Class'). Interest on and principal of the Securities of a Series will be
payable on the date or dates specified in the related Prospectus Supplement
(each, a 'Distribution Date'), at the times, at the rates, in the amounts and in
the order of priority set forth in the related Prospectus Supplement.
If a Series includes multiple Classes, such Classes may vary with respect to
the amount, percentage (which may be 0%) and timing of distributions of
principal, interest or both and one or more Classes may be subordinated to other
Classes with respect to distributions of principal, interest or both as
described herein and in the related Prospectus Supplement. The Mortgage Assets
and other assets comprising the Trust may be divided into one or more Mortgage
Groups and each Class of the related Series will evidence beneficial ownership
of the corresponding Mortgage Group, as applicable.
The yield on each Class of Securities of a Series may be affected by the
rate of payment of principal (including prepayments) of the Mortgage 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, one or more elections may be made
to treat each Trust or specified portions thereof as a 'real estate mortgage
investment conduit' ('REMIC') for federal income tax purposes. See 'Federal
Income Tax Consequences.'
------------------------
NOTES OF A GIVEN SERIES REPRESENT OBLIGATIONS OF, AND CERTIFICATES OF A SERIES
EVIDENCE BENEFICIAL INTERESTS IN, THE RELATED TRUST ONLY AND ARE NOT GUARANTEED
BY ANY GOVERNMENTAL AGENCY OR BY THE DEPOSITOR, THE TRUSTEE, THE SERVICER OR
BY ANY OF THEIR RESPECTIVE AFFILIATES OR, UNLESS OTHERWISE SPECIFIED IN THE
RELATED PROSPECTUS SUPPLEMENT, BY ANY OTHER PERSON OR ENTITY. THE
DEPOSITOR'S ONLY OBLIGATIONS WITH RESPECT TO ANY SERIES OF SECURITIES WILL
BE PURSUANT TO CERTAIN REPRESENTATIONS AND WARRANTIES SET FORTH IN THE
RELATED AGREEMENT AS DESCRIBED HEREIN OR IN THE RELATED PROSPECTUS
SUPPLEMENT.
------------------------
PROSPECTIVE INVESTORS SHOULD REVIEW THE INFORMATION UNDER 'RISK FACTORS'
BEGINNING ON PAGE 12.
------------------------
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 or by selling security holders, as more
fully described under 'Method of Distribution' herein and in the related
Prospectus Supplement. Prior to issuance, there will have been no market for the
Securities of any Series, and 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.
THE DATE OF THIS PROSPECTUS IS MARCH 25, 1998.
<PAGE>
PROSPECTUS SUPPLEMENT
The Prospectus Supplement relating to a Series of Securities to be offered
hereunder, among other things, will set forth with respect to such Series of
Securities: (i) a description of the Class or Classes of such Securities; (ii)
the rate of interest or other applicable rate (or the manner of determining such
rate) and authorized denominations of each Class of such Securities; (iii)
certain information concerning the Mortgage Assets and insurance policies, cash
accounts, letters of credit, financial guaranty insurance policies, third party
guarantees or other forms of credit enhancement, if any, relating to one or more
Pools or all or part of the related Securities; (iv) the specified interest of
each Class of Securities in, and manner and priority of, the distributions on
the Mortgage Assets; (v) information as to the nature and extent of
subordination with respect to such Series of Securities, if any; (vi) the
Distribution Dates; (vii) information regarding the Master Servicer; (viii) the
circumstances, if any, under which each Trust may be subject to early
termination; (ix) whether a REMIC election will be made and the designation of
the regular and residual interest therein; and (x) additional information with
respect to the plan of distribution of such Securities.
AVAILABLE INFORMATION
The Depositor has filed a Registration Statement under the Securities Act
of 1933, as amended (the '1933 Act'), with the Securities and Exchange
Commission (the 'Commission') with respect to the Securities. The Registration
Statement and amendments thereof and the exhibits thereto 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; Seven World Trade
Center, New York, New York 10048; and 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 maintains an Internet Web site that
contains reports, proxy and information statements and other information
regarding the registrants that file electronically with the Commission,
including the Depositor. The address of such Internet Web site is
(http://www.sec.gov).
Each Trust will be required to file certain reports with the Commission
pursuant to the requirements of the Securities Exchange Act of 1934, as amended
(the 'Exchange Act'). The Depositor intends to cause each Trust to suspend
filing such reports if and when such reports are no longer required under the
Exchange Act.
REPORTS TO HOLDERS
Periodic and annual reports concerning the Securities and the related Trust
will be provided to the Holders. See 'The Agreements--Reports to Holders.' If
the Securities of a Series are to be issued in book-entry form, such reports
will be provided to the Holder of record and beneficial owners of such
Securities will have to rely on the procedures described herein under
'Description of the Securities--Book-Entry Registration.'
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents subsequently filed by or on behalf of each Trust referred to
in the accompanying Prospectus Supplement with the Commission pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act, after the date of this
Prospectus and prior to the termination of any offering of the Certificates
issued by such Trust shall be deemed to be incorporated by reference in this
Prospectus and to be a part of this Prospectus from the date of the filing of
such documents. Any statement contained in a document incorporated or deemed to
be incorporated by reference herein shall be deemed to be modified or superseded
for all 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 replaces such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus.
The Depositor will provide without charge to each person to whom this
Prospectus is delivered, on the written or oral request of such person, a copy
of any or all of the documents referred to above that have been or may be
incorporated by reference in this Prospectus (not including exhibits to the
information that is incorporated by reference unless such exhibits are
specifically incorporated by reference into the information that this Prospectus
incorporates). Such requests should be directed to UCFC Acceptance Corporation,
4041 Essen Lane, Baton Rouge, Louisiana 70809 Attention: Secretary, telephone
(504) 924-6007.
2
<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. See 'Index of
Principal Terms' beginning on page 83.
<TABLE>
<S> <C>
Title of Securities...... Asset-Backed Certificates (the 'Certificates') and
Asset-Backed Notes (the 'Notes,' and collectively with
the Certificates, the 'Securities'), issuable in
Series.
Depositor................ UCFC Acceptance Corporation, a Louisiana corporation.
The principal office of the Depositor is located in
Baton Rouge, Louisiana. See 'The Depositor' and 'The
Originators.'
The Master Servicer...... The Prospectus Supplement relating to any Series of
Securities will name the entities (which may include
United Companies Lending Corporation(Registered)
('United Companies'), one of the other Originators or
an affiliate of the Originators and may additionally
include other unrelated entities) which will act,
directly or through one or more Sub-servicers (as
defined herein), as master servicer (each, in such
capacity, the 'Master Servicer'). The principal office
of United Companies is located in Baton Rouge,
Louisiana. See 'The Originators.'
The Mortgage Assets...... The primary assets of each Trust will consist of one
or more pools (each, a 'Pool') of mortgage loans and
certain other mortgage-related assets (collectively,
the 'Mortgage Assets') specified in the related
Prospectus Supplements, which may include (i) first
and second lien mortgage loans, deeds of trust or
participations therein secured by detached or
semi-detached one-family dwelling units, two- to
four-family dwelling units, townhouses, rowhouses,
individual condominium units in condominium buildings,
individual units in planned unit developments, mobile
or manufactured homes treated as real estate under
applicable state law, and certain mixed use and other
dwelling units (collectively, 'Single Family Loans'),
(ii) first and second lien mortgage loans, deeds of
trust or participations therein secured by multifamily
residential properties, such as rental apartment
buildings or projects containing five or more
residential units ('Multifamily Loans'), or (iii)
privately issued mortgage-backed securities ('Private
Mortgage-Backed Securities' or 'PMBS'). Single Family
Loans and Multifamily Loans are sometimes referred to
herein collectively as 'Mortgage Loans.'
A. Mortgage Loans........ Unless otherwise specified in the related Prospectus
Supplement, the Mortgage Loans will be
non-conventional loans (i.e., loans which are not
insured or guaranteed by any governmental agency). The
payment terms of the Mortgage 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
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
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'). 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 Mortgage Loan for
such periods and under such circumstances as may
be specified in the related Prospectus
Supplement. Mortgage Loans may permit the payment
of interest at a rate lower than the Mortgage
Rate for a period of time or for the life of the
Mortgage Loan, and the amount of any difference
may be contributed from funds supplied by the
seller of the properties securing the related
Mortgage Loan (the 'Mortgaged Properties') or
another source or may be treated as accrued
interest and added to the principal of the
Mortgage Loan.
(b) Principal may be payable on a level
debt service basis to fully amortize the Mortgage
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 interest rate on the Mortgage Loan, 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 Mortgage Loan.
(c) Monthly payments of principal and
interest may be fixed for the life of the
Mortgage Loan, may increase over a specified
period of time ('graduated payments'), or may
change from period to period. Mortgage 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 Mortgage Loan or may decline over
time, and may be prohibited for the life of the
Mortgage Loan or for certain periods ('lockout
periods'). Certain Mortgage 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 Mortgage Loans may
permit prepayments without payment of a fee
unless the prepayment occurs during specified
time periods. The Mortgage Loans may include
due-on-sale clauses which permit the mortgagee to
demand payment of the entire Mortgage Loan in
connection with the sale or certain other
transfers of the related Mortgaged Properties.
Other Mortgage Loans may be assumable by persons
meeting the then applicable underwriting
standards of the applicable Originator.
The Mortgaged Properties may be located in any one of
the fifty states or the District of Columbia. Unless
otherwise specified in the
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related Prospectus Supplement, all of the Mortgage
Loans will be covered by standard hazard insurance
policies ('Standard Hazard Insurance Policies')
insuring against losses due to fire and various other
causes. The Mortgage Loans with Loan-to-Value Ratios
(as defined below) in excess of 80% may be covered by
a primary mortgage guaranty insurance policy which
provides compensation to a mortgage noteholder in the
event of default by the obligor under such Mortgage
Note ('Primary Mortgage Insurance Policies'), as
described in the related Prospectus Supplement. It is
expected that the Mortgage Loans will have been
originated or purchased by the Originators, through
their retail offices, through their correspondent
(i.e., wholesale) loan programs or their bulk purchase
program.
The Prospectus Supplement for each Series of
Securities will specify with respect to all Mortgage
Loans included in each related Pool, among other
things, (i) the aggregate outstanding principal
balance and the average outstanding principal balance
of the Mortgage Loans in such Pool as of the date
specified in the Prospectus Supplement (the 'Cut-off
Date'), (ii) the largest principal balance and the
smallest principal balance of any of the Mortgage
Loans, (iii) the types of Mortgaged Properties
securing the Mortgage Loans, (iv) the original terms
to maturity of the Mortgage Loans, (v) the weighted
average term to maturity of the Mortgage Loans as of
the Cut-off Date and the range of the terms to
maturity, (vi) the earliest origination date and
latest maturity date of any of the Mortgage Loans,
(vii) the ranges of the Loan-to-Value Ratios at
origination, (viii) the weighted average Mortgage Rate
and ranges of Mortgage Rates borne by the Mortgage
Loans, (ix) in the case of Mortgage Loans having
Adjustable Rates, the weighted average of the
Adjustable Rates as of the Cut-off Date and maximum
permitted Adjustable Rates, if any, and (x) the
geographic distribution of the Mortgaged Properties on
a state-by-state basis.
B. Private
Mortgage-Backed
Securities............. Private Mortgage-Backed Securities may include (i)
mortgage participations or pass-through certificates
representing beneficial interests in certain mortgage
loans or (ii) collateralized mortgage obligations
('CMOs') secured by such mortgage loans. Although
individual mortgage loans underlying a Private
Mortgage-Backed Security may be insured or guaranteed
by the United States or an agency or instrumentality
thereof, they need not be, and the Private
Mortgage-Backed Securities themselves will not be, so
insured or guaranteed. Payments on the Private
Mortgage-Backed Securities will be distributed
directly to the Trustee as registered owner of such
Private Mortgage-Backed Securities.
The Prospectus Supplement for each Series of
Securities will specify, with respect to any Private
Mortgage-Backed Securities owned by the related Trust:
(i) the aggregate approximate principal amount and
type of Private Mortgage-Backed Securities; (ii)
certain characteristics of the mortgage loans
underlying the Private Mortgage-Backed Securities,
including (A) the payment features of such mortgage
loans, (B) the approximate aggregate principal amount,
if known, of the underlying mortgage loans which are
insured or guaranteed by a governmental entity, (C)
the servicing fee
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or range of servicing fees with respect to such
mortgage loans, and (D) the minimum and maximum stated
maturities of the mortgage loans at origination; (iii)
the maximum original term-to-stated maturity of the
Private Mortgage-Backed Securities; (iv) the weighted
average term-to-stated maturity of the Private
Mortgage-Backed Securities; (v) the pass-through or
certificate rate or ranges thereof for the Private
Mortgage-Backed Securities; (vi) the weighted average
pass-through or certificate rate of the Private
Mortgage-Backed Securities; (vii) the issuer of the
Private Mortgage-Backed Securities (the 'PMBS
Issuer'), the servicer of the Private Mortgage-Backed
Securities (the 'PMBS Servicer') and the trustee of
the Private Mortgage-Backed Securities (the 'PMBS
Trustee'); (viii) certain characteristics of credit
support, if any, such as reserve funds, insurance
policies, letters of credit, financial guaranty
insurance policies or third party guarantees, relating
to the mortgage loans underlying the Private Mortgage-
Backed Securities, or to such Private Mortgage-Backed
Securities themselves; (ix) the terms on which the
underlying mortgage loans for such Private
Mortgage-Backed Securities may, or are required to, be
repurchased prior to stated maturity; and (x) the
terms on which substitute mortgage loans may be
delivered to replace those initially deposited with
the PMBS Trustee. See 'The Trusts-- Private
Mortgage-Backed Securities.'
Description of the
Securities............. Certificates are issuable from time to time in Series
pursuant to a Pooling and Servicing Agreement or Trust
Agreement. Each Certificate of a Series will evidence
an interest in the Trust for such Series, or in a
Mortgage Group specified in the related Prospectus
Supplement. Notes are issuable from time to time in a
Series pursuant to an Indenture.
The Securities of any Series may be issued in one or
more Classes, as specified in the related Prospectus
Supplement. A Series of Securities may include one or
more Classes of senior Securities (collectively,
'Senior Securities') which receive certain
preferential treatment specified in the related
Prospectus Supplement with respect to one or more
Classes of subordinate Securities (collectively, the
'Subordinated Securities'). Certain Series or Classes
of Securities may be covered by Enhancement (as
defined below) in the related Prospectus Supplement.
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 the
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
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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 an
adjustable 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. The timing and amounts
of such distributions may vary among Classes, over
time, or otherwise as specified in the related
Prospectus Supplement.
Pre-Funding and
Capitalized Interest
Accounts............... If specified in the related Prospectus Supplement, a
Trust will include one or more segregated trust
accounts (each, a 'Pre-Funding Account') for the
related Series. If so specified, on the closing date
for such Series, a portion of the proceeds of the sale
of the Securities of such Series (such amount, the
'Pre-Funded Amount') will be deposited in the
Pre-Funding Account and may be used to purchase
additional Mortgage Assets during the period of time,
not to exceed six months, specified in the related
Prospectus Supplement (the 'Pre-Funding Period'). The
Mortgage Assets to be so purchased will be required to
have certain characteristics specified in the related
Prospectus Supplement. If any Pre-Funded Amount
remains on deposit in the Pre-Funding Account at the
end of the Pre-Funding Period, such amount will be
applied in the manner specified in the related
Prospectus Supplement to prepay the Classes of
Securities of the applicable Series specified in the
related Prospectus Supplement. The amount initially
deposited in a Pre-Funding Account for a Series of
Securities will not exceed twenty-five percent of the
aggregate principal amount of such Series of
Certificates.
If a Pre-Funding Account is established, one or more
segregated trust accounts (each, a 'Capitalized
Interest Account') may be established for the related
Series. On the closing date for such Series, a portion
of the proceeds of the sale of the Securities of such
Series may be deposited in the Capitalized Interest
Account and used to fund the excess, if any, of the
sum of (i) the amount of interest accrued on the
Securities of such Series and (ii) if specified in the
related Prospectus Supplement, certain fees and
expenses during the Pre-Funding Period, such as
Trustee fees and credit enhancement fees, over the
amount of interest available therefor from the
Mortgage Assets in the Trust. If so specified in the
related Prospectus Supplement, amounts on deposit in
the Capitalized Interest Account may be released to
the person specified in the related Prospectus
Supplement prior to the end of the Pre-Funding Period
subject to the satisfaction of certain tests specified
in the related Prospectus Supplement. Any amounts on
deposit in the Capitalized Interest Account at the end
of the Pre-Funding Period that are not necessary for
such purposes will be distributed to the person
specified in the related Prospectus Supplement.
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Credit Enhancement....... Enhancement with respect to a Series or any Class of
Securities may include any one or more of the
following: a financial guaranty insurance policy,
overcollateralization, a letter of credit, a cash
reserve fund, insurance policies, one or more Classes
of Subordinated Securities , derivative products or
other forms of credit enhancement, or any combination
thereof (collectively, 'Enhancement'). The Enhancement
with respect to any Series or any Class of Securities
may be structured to provide protection against
delinquencies and/or losses on the Mortgage Assets,
against changes in interest rates, or other risks, to
the extent and under the conditions specified in the
related Prospectus Supplement. Any form of Enhancement
will have certain limitations and exclusions from
coverage thereunder, which will be described in the
related Prospectus Supplement. Further information
regarding any provider of the Enhancement (the
'Enhancer'), including financial information when
material, will be included in the related Prospectus
Supplement. See 'Credit Enhancement.'
Advances................. The Master Servicer and, if applicable, each mortgage
servicing institution that services a Mortgage Loan in
a Pool on behalf of the Master Servicer (each, a
'Sub-servicer') generally will be obligated to advance
amounts corresponding to all or a portion of
delinquent interest payments on such Mortgage Loan
monthly (or at such other intervals specified in the
Prospectus Supplement) until the date on which the
related Mortgaged Property is sold at a foreclosure
sale or the related Mortgage Loan is otherwise
liquidated or charged off. Any such obligation to make
advances may be limited to amounts due to holders of
Senior Securities, to amounts deemed to be recoverable
from late payments or liquidation proceeds, for
specified periods or any combination thereof, in each
case as specified in the related Prospectus
Supplement. See 'The Agreements-- Delinquency Advances
and Compensating Interest.'
Compensating Interest.... With respect to each Mortgage Loan as to which the
Master Servicer receives a principal payment in full
in advance of the final scheduled due date (a
'Principal Prepayment'), the Master Servicer generally
will be required to remit to the Trustee, from amounts
otherwise payable to the Master Servicer as servicing
compensation, an amount generally representing the
excess of interest on the principal balance of such
Mortgage Loan prior to such Principal Prepayment over
the amount of interest actually received on the
related Mortgage Loan during the applicable period.
See 'The Agreements--Delinquency Advances and
Compensating Interest.'
Optional Termination..... The Master Servicer, the holders of REMIC Residual
Certificates (as defined herein), or certain other
entities specified in the related Prospectus
Supplement may have the option to effect early
retirement of one or more Classes or a Series of
Securities through the purchase of the Mortgage Assets
in the related Trust, subject to the principal balance
of the related Mortgage Assets being less than the
percentage, not more than 25%, specified in the
related Prospectus Supplement of the aggregate
principal balance of the Mortgaged Assets at the
Cut-off Date for the related Class or Series. See 'The
Agreements--Termination; Optional Termination.'
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FEDERAL INCOME TAX
CONSEQUENCES
A. DEBT SECURITIES AND
REMIC RESIDUAL
SECURITIES....... If (i) an election is made to treat all or a portion
of a Trust Fund for a Series as a 'real estate
mortgage investment conduit' (a 'REMIC') or (ii) so
provided in the related Prospectus Supplement, a
Series of Securities will include one or more Classes
of taxable debt obligations under the Internal Revenue
Code of 1986, as amended (the 'Code'). Stated interest
with respect to such Classes of Securities will be
reported by a Holder in accordance with the Holder's
method of accounting except that, in the case of
Securities constituting 'regular interests' in a REMIC
('Regular Interests'), such interest will be required
to be reported on the accrual method regardless of a
Holder's usual method of accounting. Certain Classes
of Securities may be issued with original issue
discount that is not de minimis. In such cases, the
Holder will be required to include original issue
discount in gross income as it accrues, which may be
prior to the receipt of cash attributable to such
income. If a Security is issued at a premium, the
Holder may be entitled to make an election to amortize
such premium on a constant yield method.
In the case of a REMIC election, a Class of Securities
may be treated as REMIC 'residual interests'
('Residual Interest'). A Holder of a Residual Interest
will be required to include in its income its pro rata
share of the taxable income of the REMIC. In certain
circumstances, the Holder of a Residual Interest may
have REMIC taxable income or tax liability
attributable to REMIC taxable income for a particular
period in excess of cash distributions for such period
or have an after-tax return that is less than the
after-tax return on comparable debt instruments. In
addition, a portion (or, in some cases, all) of the
income from a Residual Interest (i) except in certain
circumstances with respect to a Holder classified as a
thrift institution under the Code, may not be subject
to offset by losses from other activities or
investments, (ii) for a Holder that is subject to tax
under the Code on unrelated business taxable income,
may be treated as unrelated business taxable income
and (iii) for a foreign holder, may not qualify for
exemption from or reduction of withholding. In
addition, (x) Residual Interests are subject to
transfer restrictions and (y) certain transfers of
Residual Interests will not be recognized for federal
income tax purposes. Further, individual holders are
subject to limitations on the deductibility of
expenses of the REMIC.
B. NON-REMIC
PASS-THROUGH
SECURITIES....... If so specified in the related Prospectus Supplement,
the Trust Fund for a Series will be treated as a
grantor trust and will not be classified as an
association taxable as a corporation for federal
income tax purposes and Holders of Securities of such
Series ('Pass-Through Securities') will be treated as
owning directly rights to receive certain payments of
interest or principal, or both, on the Mortgage Assets
held in the Trust for such Series. All income with
respect to a Stripped Security (as defined herein)
will be accounted for as original issue discount and,
unless otherwise specified in the related Prospectus
Supplement, will be reported by
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the Trustee on an accrual basis, which may be prior to
the receipt of cash associated with such income.
C. OWNER TRUST
SECURITIES....... If so specified in the Prospectus Supplement, the
Trust will be treated as a partnership for purposes of
federal and state income tax. Each Noteholder, by the
acceptance of a Note of a given Series, will agree to
treat such Note as indebtedness, and each
Certificateholder, by the acceptance of a Certificate
of a given 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. Alternative characterizations of such Trust
and such Certificates are possible, but would not
result in materially adverse tax consequences to
Certificateholders. See 'Federal Income Tax
Consequences.'
ERISA Considerations..... Subject to the considerations discussed under 'ERISA
Considerations' herein and in the related Prospectus
Supplement, the Notes may be eligible for purchase by
employee benefit plans. The related Prospectus
Supplement will provide further information with
respect to the eligibility of a Class of Certificates
for purchase by employee benefit plans.
Fiduciaries of employee benefit plans or other
retirement plans or arrangements, including individual
retirement accounts, certain Keogh plans, and
collective investment funds and separate accounts in
which such plans, accounts or arrangements are
invested, that are subject to the Employee Retirement
Income Security Act of 1974, as amended ('ERISA'), or
the Code should carefully review with their legal
advisors whether an investment in Certificates will
cause the assets of the related Trust to be considered
plan assets under the Department of Labor ('DOL')
regulations set forth in 29 C.F.R. Section 2510.3-101
(the 'Plan Asset Regulations'), thereby subjecting the
Trustee and the Master Servicer to the fiduciary
investment standards of ERISA, and whether the
purchase, holding or transfer of Certificates gives
rise to a transaction that is prohibited under ERISA
or subject to the excise tax provisions of Section
4975 of the Code, unless a DOL administrative
exemption applies. See 'ERISA Considerations.'
Legal Investment......... A Trust may include Mortgage Loans which do not
represent first liens. Accordingly, as disclosed in
the related Prospectus Supplement, certain Classes of
Securities offered hereby and by the related
Prospectus Supplement may not constitute 'mortgage-
related securities' for purposes of the Secondary
Mortgage Market Enhancement Act of 1984 ('SMMEA') and,
if so, will not be legal investments for certain types
of institutional investors under SMMEA.
Institutions whose investment activities are subject
to legal investment laws and regulations or to review
by certain regulatory authorities may be subject to
additional restrictions on investment in certain
Classes of Securities. Any such institution should
consult its own legal advisors in determining whether
and the extent to which a Class of Securities
constitutes legal investments for such investors. See
'Legal Investment' herein.
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Registration of
Securities............. Securities may be represented by book-entry
certificates registered in the name of Cede & Co.
('Cede'), as nominee of The Depository Trust Company
('DTC'). Persons acquiring beneficial ownership
interests in such Securities will hold their interests
through DTC, in the United States, or Cedel Bank
societe anonyme ('Cedel') or the Euroclear System
('Euroclear'), in Europe. Transfers within DTC, Cedel
or Euroclear, as the case may be, will be in
accordance with the usual rules and operating
procedures of the relevant system. So long as such
Securities are in book-entry form, such Securities
will be evidenced by one or more Securities registered
in the name of Cede, as the nominee of DTC, or one of
the relevant depositaries (collectively, the 'European
Depositaries'). Cross-market transfers between persons
holding directly or indirectly through DTC, on the one
hand, and counterparties holding directly or
indirectly through Cedel or Euroclear, on the other,
will be effected in DTC through Citibank N.A.
('Citibank') or The Chase Manhattan Bank ('Chase'),
the relevant depositaries of Cedel and Euroclear,
respectively, and each a participating member of DTC.
The interests of such Holders will be represented by
book-entries on the records of DTC, participating
members thereof and other entities, such as banks,
brokers, dealers and trust companies that clear
through or maintain custodial relationships with a
participant, either directly or indirectly. In such
case, Holders will not be entitled to receive
definitive certificates representing such Holders'
interests, except in certain circumstances described
in the related Prospectus Supplement. References
herein to 'Holders' or 'Owners' reflect the rights of
owners of the Securities issued as book-entry
certificates only as they may indirectly exercise such
rights through DTC and participants, except as
otherwise specified in the related Prospectus
Supplement. See 'Description of the
Securities--Book-Entry Registration' herein.
Ratings.................. It will be a requirement that each Class of Securities
offered by this Prospectus and the related Prospectus
Supplement be rated by at least one nationally
recognized statistical rating organization (each, a
'Rating Agency') in one of its four highest applicable
rating categories. The rating or ratings applicable to
Securities of each Series offered hereby and by the
related Prospectus Supplement will be as set forth in
the related Prospectus Supplement. There is no
assurance that the rating initially assigned to such
Securities will not be subsequently lowered or
withdrawn by the Rating Agency. In the event the
rating initially assigned to any Securities is
subsequently lowered for any reason, no person or
entity will be obligated to provide any credit
enhancement in addition to the Enhancement, if any,
specified in the related Prospectus Supplement.
A securities rating should be evaluated independently
of similar ratings on different types of securities. A
securities rating is not a recommendation to buy, hold
or sell securities and does not address the effect
that the rate of prepayments on the Mortgage Assets
for a Series may have on the yield to investors in the
Securities of such Series. See 'Risk Factors--Ratings
Are Not Recommendations.'
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RISK FACTORS
NO SECONDARY MARKET
Prior to issuance, there will have been no market for the Securities of any
Series. 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 Certificates. Certain Classes of the Securities may not
constitute 'mortgage related securities' under the Secondary Mortgage Market
Enhancement Act of 1984, as amended ('SMMEA'). Certain investors may be subject
to legal restrictions which could preclude them from purchasing such non-SMMEA
Securities and which may have a negative effect on the development of a
secondary market in the Securities.
TRUST ASSETS ARE ONLY SOURCE OF REPAYMENT
The assets of any Trust, including the Mortgage Loans and any Enhancement,
will be the sole source of funds for the payment of the required distributions
on the Securities of the related Series. The Certificates of a Series represent
beneficial ownership interests in, and the Notes of a Series represent
obligations of, the related Trust only and do not represent interests in or
other obligations of the Depositor or the Master Servicer. There will be no
recourse to the Depositor or any other person for any default on the Notes or
any failure to receive distributions on the Certificates. Neither the Securities
nor the Mortgage Assets are insured or guaranteed by any governmental agency.
Holders of Notes will be required under the Indenture to proceed only
against the Mortgage Assets and other assets constituting the related Trust in
the case of a default with respect to such Notes and may not proceed against any
assets of the Depositor or any affiliate. There is no assurance that the market
value of the Mortgage Assets or any other assets for a Series will at any time
be equal to or greater than the aggregate principal amount of the Securities of
such Series then outstanding, plus accrued interest thereon. Moreover, upon an
event of default under the Indenture for a Series of Notes and a sale of the
assets in the Trust or upon a sale of the assets of a Trust for a Series of
Certificates, the Trustee, the Master Servicer, if any, the Enhancer and any
other service provider specified in the related Prospectus Supplement generally
will be entitled to receive the proceeds of any such sale to the extent of
unpaid fees and other amounts owing to such persons under the related Agreement
prior to distributions to Holders of Securities. Upon any such sale, the
proceeds thereof may be insufficient to pay in full the principal of and
interest on the Securities of such Series.
BOOK-ENTRY REGISTRATION MAY AFFECT LIQUIDITY
Issuance of the Securities in book-entry form may reduce the liquidity of
such Securities in the secondary trading market since some investors may be
unwilling to purchase Securities for which they cannot obtain physical
certificates. Since transactions in Securities will, in most cases, be able to
be effected only through Participants, Indirect Participants and certain banks,
the ability of a Holder to pledge a Security 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
the Securities. Holders 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 Holders either directly or indirectly through Indirect
Participants. See 'Description of the Securities--Book-Entry Registration.'
PROPERTY VALUES MAY BE INSUFFICIENT
Potential Decline in Value of Mortgaged Property. An overall decline in
the market value of residential 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 Mortgage Loans,
together with any other liens on the Mortgaged Properties, equal or exceed the
value of the Mortgaged Properties. Such a decline could extinguish the interest
of the related Trust in the Mortgaged Property before having any effect on the
interest of the related senior mortgagee. Certain areas of the country have
experienced, may continue to experience or may
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hereafter experience a significant decline in real estate values. The Depositor
will not be able to quantify the impact of any property value declines on the
Mortgage Loans or predict whether, to what extent or how long such declines may
continue. In periods of such decline, the actual rates of delinquencies,
foreclosures and losses on the Mortgage Loans could be higher than those
historically experienced in the mortgage lending industry in general.
Characteristics of Second Mortgages. Certain of the Mortgage Loans will be
home equity loans secured by junior liens subordinate to the rights of the
mortgagee under each related senior mortgage ('Second Mortgage Loans'). As a
result, the proceeds from any liquidation, insurance or condemnation proceedings
will be available to satisfy the principal balance of a Second 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
second mortgagee may not foreclose on the Mortgaged Property securing the Second
Mortgage Loan unless it forecloses subject to the related senior mortgage, 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 a default
thereunder. Generally, a servicer will satisfy each such senior mortgage at or
prior to the foreclosure sale only to the extent that it determines that any
amounts so paid will be recoverable from future payments and collections on the
Second Mortgage Loans or otherwise. The Trusts will not have any source of funds
(and may not be permitted under the REMIC provisions of the Code) to satisfy any
such senior mortgage or make payments due to any senior mortgagee. See 'Certain
Legal Aspects of the Mortgage Loans-- Foreclosure/Repossession.'
Balloon Loans. Certain of the Mortgage 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 Mortgagor's ability to refinance the
Mortgage Loan. The ability of a Mortgagor to refinance such a Mortgage 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, the Mortgagor's
equity in the related Mortgaged Property, the financial condition of the
Mortgagor, 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 Holders of the proceeds in
such an environment may produce a lower return than that previously received in
respect of the related Mortgage 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 Depositor,
the Originators, the Master Servicer or the Trustee will be obligated to provide
funds to refinance any Mortgage Loan.
Risks Associated with Liquidation of Defaulted Mortgage Loans. General
economic conditions and other factors (which may not affect real property
values) have an impact on the ability of Mortgagors to repay Mortgage Loans.
Loss of earnings, illness, divorce and other similar factors may lead to an
increase in delinquencies and bankruptcy filings by Mortgagors. In the event of
personal bankruptcy of a Mortgagor, it is possible that a Trust could experience
a loss with respect to such Mortgagor's Mortgage 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 Mortgage Loan or
permanently reduce the principal balance of such Mortgage Loan, thus either
delaying or permanently limiting the amount received by the Trust with respect
to such Mortgage Loan. Moreover, in the event a bankruptcy court prevents the
transfer of the related Mortgaged Property to a Trust, any remaining balance on
such Mortgage Loan may not be recoverable.
In the case of Multifamily Loans, such other factors could include
excessive building resulting in an oversupply of housing stock or a decrease in
employment reducing the demand for units in an area; federal, state or local
regulations and controls affecting rents; prices of goods and energy;
environmental restrictions; increasing labor and material costs; and the
relative attractiveness of the Mortgaged Properties. To the extent that such
losses are not covered by Enhancement, such losses will be borne, at least in
part, by the Holders of the related Series.
Even assuming that the Mortgaged Properties provide adequate security for
the Mortgage Loans, substantial delays could be encountered in connection with
the liquidation of defaulted Mortgage Loans and corresponding
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delays in the receipt of related proceeds by the Holders could occur. An action
to foreclose on a Mortgaged Property securing a Mortgage 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 Mortgage 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 Mortgage Loan and not yet repaid, including unreimbursed Delinquency
Advances and Servicing Advances, 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 fail to provide adequate
security for the related Mortgage Loans, insufficient funds are available from
any Enhancement, Holders could experience a loss on their investment.
Liquidation expenses with respect to defaulted Mortgage Loans do not vary
directly with the outstanding principal balance of the Mortgage Loans at the
time of default. Therefore, assuming that a Master Servicer took the same steps
in realizing upon a defaulted Mortgage Loan having a small remaining principal
balance as it would in the case of a defaulted Mortgage 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
Mortgage Loan than would be the case with a larger Mortgage Loan. Because the
average outstanding principal balances of the Mortgage Loans which are Second
Mortgage Loans are small relative to the size of the Mortgage Loans in a typical
pool composed entirely of first mortgages, realizations net of liquidation
expenses on defaulted Mortgage Loans which are Second Mortgage Loans may also be
smaller as a percentage of the principal amount of such Mortgage Loans than
would be the case with a typical pool of first mortgage loans.
Environmental Risks. Under environmental legislation and case law
applicable in various states, 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 Mortgaged 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 related Agreement, is not required to take an
active role in operating the Mortgaged Properties. See 'Certain Legal Aspects of
the Mortgage Loans--Environmental Considerations.'
Risks Associated with Non-Owner Occupied Properties. Certain of the
Mortgaged Properties relating to Mortgage Loans may not be owner occupied. It is
possible that the rate of delinquencies, foreclosures and losses on Mortgage
Loans secured by non-owner occupied properties could be higher than for Mortgage
Loans secured by the primary residence of the borrower.
CONSUMER PROTECTION LAWS MAY AFFECT MORTGAGE LOANS
Applicable state laws generally regulate interest rates and other charges,
require certain disclosures, and require licensing of the Originators and the
Master Servicer. In addition, most states have other laws, public policy and
general principles of equity relating to the protection of consumers, unfair and
deceptive practices and practices which may apply to the origination, servicing
and collection of the Mortgage Loans. Depending on the provisions of the
applicable law and the specific facts and circumstances involved, violations of
these laws, policies and principles may limit the ability of the Master Servicer
to collect all or part of the principal of or interest on the Mortgage Loans,
may entitle the borrower to a refund of amounts previously paid and, in
addition, could subject the Master Servicer to damages and administrative
sanctions. See 'Certain Legal Aspects of the Mortgage Loans.'
The Mortgage Loans may also be subject to federal laws, including: (i) the
Federal Truth in Lending Act and Regulation Z promulgated thereunder, which
require certain disclosures to the borrowers regarding the terms of the Mortgage
Loans; (ii) the Equal Credit Opportunity Act and Regulation B promulgated
thereunder, which prohibit discrimination on the basis of age, race, color, sex,
religion, marital status, national origin, receipt of public assistance or the
exercise of any right under the Consumer Credit Protection Act, in the extension
of credit; (iii) the Real Estate Settlement Procedures Act, which establishes
certain requirements for disclosure
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regarding mortgage transactions and originators of mortgage loans; and (iv) the
Fair Credit Reporting Act, which regulates the use and reporting of information
related to the borrower's credit experience.
The Mortgage Loans may be subject to the Home Ownership and Equity
Protection Act of 1994 (the 'Act') which amended the Truth in Lending Act as it
applies to mortgages subject to the Act. The Act requires certain additional
disclosures, specifies the timing of such disclosures and limits or prohibits
the inclusion of certain provisions in mortgages subject to the Act. The Act
also provides that any purchaser or assignee of a mortgage covered by the Act is
subject to all of the claims and defenses which the borrower could assert
against the original lender. The maximum damages that may be recovered under the
Act from an assignee is the remaining amount of indebtedness plus the total
amount paid by the borrower in connection with the Mortgage Loan. Any Trust for
which the Mortgage Assets include Mortgage Loans subject to the Act would be
subject to all of the claims and defenses which the borrower could assert
against the applicable Originator. Any violation of the Act which would result
in such liability would be a breach of the Originator's representations and
warranties, and the Originator would be obligated to cure, repurchase or, if
permitted by the related Agreement, substitute for the Mortgage Loan in
question.
Generally, under the terms of the Soldiers' and Sailors' Civil Relief Act
of 1940, as amended (the 'Relief Act'), or similar state legislation, a
Mortgagor who enters military service after the origination of the related
Mortgage Loan (including a Mortgagor who is a member of the National Guard or is
in reserve status at the time of the origination of the Mortgage Loan and is
later called to active duty) may not be charged interest (including fees and
charges) above an annual rate of 6% during the period of such Mortgagor's active
duty status, unless a court orders otherwise upon application of the lender. It
is possible that such action could affect, for an indeterminate period of time,
the ability of the Master Servicer to collect full amounts of interest on
certain of the Mortgage Loans. In addition, the Relief Act imposes limitations
which impair the ability of the Master Servicer to foreclose on an affected
Mortgage Loan during the Mortgagor's period of active duty status. Thus, in the
event that such a Mortgage Loan goes into default, there may be delays and
losses occasioned by the inability to realize upon the Mortgaged Property in a
timely fashion.
YIELD MAY VARY
The yields to maturity of the Classes of Securities of a Series will be
affected by the amount and timing of principal payments on the related Mortgage
Assets, the allocation of available funds and/or losses among such Classes, the
interest rates or amounts of interest payable on such Classes and the purchase
prices paid for such Classes. The interaction of the foregoing factors may have
different effects on, and create different risks for the various Classes of
Securities, and the effects and/or risks for any one Class may vary over the
life of such Class. Investors should carefully consider the different
consequences of such risks for different Classes of Securities of a Series as
described in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, the
Mortgage Loans may be prepaid in full or in part at any time; however, a
prepayment penalty or premium may still be imposed in connection therewith. The
rate of prepayments of the Mortgage Loans cannot be predicted and may be
affected by a wide variety of economic, social, and other factors, including
prevailing interest rates, the availability of alternative financing and
homeowner mobility. Therefore, no assurance can be given as to the level of
prepayments that a Trust will experience.
Although published statistical data regarding the effects of interest rates
on prepayment rates for home equity loans of the type typically made or acquired
by the Originators ('Home Equity Loans') is limited, a number of factors suggest
that the prepayment behavior of a pool including Home Equity Loans may be
significantly different from that of a pool composed entirely of agency
conforming, non-conforming 'jumbo' or government insured (i.e., 'traditional')
first mortgage loans with equivalent interest rates and maturities. One such
factor is the typically smaller average principal balance of a Home Equity Loan
which may result in a higher prepayment rate than that of a traditional first
mortgage loan with a larger average balance, regardless of the interest rate
environment. A small principal balance, however, also may make refinancing a
Home Equity Loan at a lower interest rate less attractive to the borrower
relative to refinancing a larger balance first mortgage loan, as the perceived
impact to the borrower of lower interest rates on the size of the monthly
payment for a Home Equity Loan may be less than for a traditional first mortgage
loan with a larger balance. Other factors that might
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be expected to affect the prepayment rate of a pool of Home Equity Loans include
the amounts of, and interest rates on, the underlying senior mortgage loans, if
any, and the use of first mortgage loans as long-term financing for home
purchase and home equity loans as shorter-term financing for a variety of
purposes, including home improvement, education expenses and purchases of
consumer durables such as automobiles. Accordingly, the Mortgage Loans which are
Home Equity Loans may experience a higher rate of prepayment than traditional
first mortgage loans. In addition, any future limitations on the right of
borrowers to deduct interest payments on Home Equity Loans for federal income
tax purposes may further increase the rate of prepayments of such home equity
loans. See 'Maturity, Prepayment and Yield Considerations.'
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 Mortgaged Properties subject to 'due-on-sale'
provisions and liquidations due to default, as well as the receipt of proceeds
from physical damage, credit life and disability insurance policies. In
addition, repurchases or purchases from a Trust of Mortgage Loans required to be
made by the Originators or by the Master Servicer under the related Agreement
will have the same effect on the Holders as a prepayment of such Mortgage Loans.
Unless otherwise specified in the related Prospectus Supplement, all of the
Single Family Loans contain 'due-on-sale' provisions, and the Master Servicer
will be required to enforce such provisions unless (i) such enforcement would
materially increase the risk of default or delinquency on, or materially
decrease the security for, such Mortgage Loan or (ii) such enforcement is not
permitted by applicable law, in which case the Master Servicer is authorized to
permit the purchaser of the related Mortgaged Property to assume the Mortgage
Loan. Additionally, the Originators' practice of soliciting refinancings from
existing borrowers may have the effect of increasing the rate of prepayments,
due to refinancings, on the Mortgage Loans. See 'The Home Equity Loan
Program--Refinancing Policy' herein.
Prepayments on the Mortgage Loans comprising or underlying the Mortgage
Assets for a Series generally will result in a faster rate of distributions of
principal on the Securities. Thus, the prepayment experience on the Mortgage
Loans comprising or underlying the Mortgage Assets will affect the average life
and yield to investors of each Class and the extent to which each such Class is
paid prior to its final scheduled Distribution Date. A Series may include
Classes of Securities which pay 'interest only' or are entitled to receive a
disproportionately high level of interest distributions as compared to the
amount of principal to which such Classes of Securities are entitled (each, an
'Interest Weighted Class') or Classes of Securities which pay 'principal only'
or are entitled to receive a disproportionately high level of principal
distributions compared to the amount of interest to which such Classes of
Securities are entitled (each, a 'Principal Weighted Class'). A Series may
include an Interest Weighted Class offered at a significant premium or a
Principal Weighted Class offered at a substantial discount. Yields on such
Classes of Securities will be extremely sensitive to prepayments on the Mortgage
Loans comprising or underlying the Mortgage Assets for such Series. In general
if a Security, including a Security of an Interest Weighted Class, is purchased
at a premium and principal distributions on the Mortgage Loans occur at a rate
faster than anticipated at the time of purchase, the investor's actual yield to
maturity could be significantly lower than that assumed at the time of purchase.
Where the amount of interest allocated with respect to an Interest Weighted
Class is extremely disproportionate to principal, a Holder could, under some
such prepayment scenarios, fail to recoup its original investment. Conversely,
if a Security, including a Security of a Principal Weighted Class, is purchased
at a discount and principal distributions thereon occur at a rate slower than
assumed at the time of purchase, the investor's actual yield to maturity could
be significantly lower than that originally anticipated. Any rating assigned to
the Securities by a Rating Agency will reflect only such Rating Agency's
assessment of the likelihood that timely distributions will be made with respect
to such Securities in accordance with the related Agreement. Such rating will
not constitute an assessment of the likelihood that principal prepayments on the
Mortgage Loans underlying or comprising the Mortgage Assets will be made by
Mortgagors or of the degree to which the rate of such prepayments might differ
from that originally anticipated. As a result, such rating will not address the
possibility that prepayment rates higher or lower than anticipated by an
investor may cause such investor to experience a lower than anticipated yield,
or that an investor purchasing an Interest Weighted Class at a significant
premium might fail to recoup its initial investment. Depending on the prevailing
interest rate environment, prepayments may be more likely to occur with respect
to adjustable-rate mortgage loans which may be included in a Pool. Prepayment
and yield considerations related to adjustable-rate mortgage loans will be set
forth in the related Prospectus Supplement.
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Collections on the Mortgage Loans may vary due to the level of incidence of
delinquent payments and of prepayments. Collections on the Mortgage Loans may
also vary due to seasonal purchasing and payment habits of Mortgagors.
Prepayments on Private Mortgage-Backed Securities will be a function of the
prepayment, repurchase and default experience on the underlying Mortgage Loans
as described above as well as the allocation of such prepayments among the
various classes of the related series of Private Mortgage-Backed Securities and
the types and scope of credit enhancement, if any, supporting such securities.
If a Trust includes Private Mortgage-Backed Securities, the Prospectus
Supplement for the related Series of Securities will describe the various
factors affecting prepayments.
PRE-FUNDING AND ADDITIONAL MORTGAGE ASSETS MAY ADVERSELY AFFECT INVESTMENT
If a Trust includes a Pre-Funding Account and the principal balance of
additional Mortgage Assets delivered to the Trust during the Pre-Funding Period
is less than the 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. Since prevailing
interest rates are subject to fluctuation, there can be no assurance that
investors will be able to reinvest such a prepayment at yields equaling or
exceeding the yield on the related Securities. It is possible that the yield on
any such reinvestment will be lower, and may be significantly lower, than the
yield on the related Securities.
Each additional Mortgage Asset must satisfy the eligibility criteria
specified in the related Prospectus Supplement and the related Agreement. Such
eligibility criteria will be determined in consultation with each Rating Agency
(and/or Enhancer) prior to the issuance of the related Series and are designed
to ensure that if such additional Mortgage Assets were included as part of the
initial Mortgage Assets, the credit quality of such assets would be consistent
with the initial rating of each Class of Securities of such Series. The
Depositor will certify to the Trustee that all conditions precedent to transfer
of the additional Mortgage Assets, including the satisfaction of the eligibility
criteria, to the Trust have been satisfied. Following the transfer of additional
Mortgage Assets to the Trust, the aggregate characteristics of the Mortgage
Assets then held in the Trust may vary from those of the initial Mortgage Assets
of such Trust. As a result, the additional Mortgage Assets may adversely affect
the performance of the related Securities.
The ability of a Trust to invest in additional Mortgage Assets during the
related Pre-Funding Period will be dependent on the ability of the Originators
to originate or acquire Mortgage Assets that satisfy the requirements for
transfer to the Trust specified in the related Prospectus Supplement. The
ability of the Originators to originate or acquire such Mortgage Assets will be
affected by a variety of social and economic factors, including the prevailing
level of market interest rates, unemployment levels, and consumer perceptions of
general economic conditions.
BANKRUPTCY OF THE DEPOSITOR MAY ADVERSELY AFFECT INVESTMENT
In the event of the bankruptcy of the Depositor, a trustee in bankruptcy of
the Depositor or its creditors could attempt to recharacterize the sale of the
Mortgage Assets to the related Trust as a borrowing by the Depositor. If such
recharacterization were to be upheld, the related Holders could be deemed to be
creditors of the Depositor, with the Mortgage Assets constituting security for
such debt, and thus, the Mortgage Assets may be subject to the automatic stay of
the bankruptcy court having jurisdiction over the Depositor's bankruptcy estate.
Even if such allegations are unsuccessful, Holders may be subject to substantial
delays in distributions due to the bankruptcy proceedings. If such an attempt
were successful, a trustee in bankruptcy could elect to accelerate payment of
the Securities and liquidate the Mortgage Assets, with the Holders entitled to
the then outstanding principal amount thereof together with accrued interest.
Thus, the Holders could lose the right to future payments of interest, and might
suffer reinvestment loss in a lower interest rate environment.
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RATINGS ARE NOT RECOMMENDATIONS
Each Class of Securities offered by this Prospectus and the related
Prospectus Supplement must be rated in one of the four highest rating categories
by the Rating Agency identified in the related Prospectus Supplement. Any such
rating would be based on, among other things, the adequacy of the value of the
Mortgage Assets and any Enhancement with respect to such Series. Such rating
should not be deemed a recommendation to purchase, hold or sell Securities,
inasmuch as it does not address market price or suitability for a particular
investor. There is also no assurance that any such rating will remain in effect
for any given period of time or may not be lowered or withdrawn entirely by the
Rating Agency if in its judgment circumstances in the future so warrant. In
addition to being lowered or withdrawn due to any erosion in the adequacy of the
value of the Mortgage Assets, such rating might also be lowered or withdrawn,
among other reasons, because of an adverse change in the financial or other
condition of an Enhancer or a change in the rating of such Enhancer's long term
debt.
THE TRUSTS
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. A Trust for any Series of Certificates will
include the Mortgage Assets consisting of (A) a Pool comprised of (i) Single
Family Loans or (ii) Multifamily Loans, (B) Private Mortgage-Backed Securities,
or (C) a combination of (A) and (B), in each case, as specified in the related
Prospectus Supplement, together with payments in respect of such Mortgage Assets
and certain other accounts, obligations or agreements, in each case as specified
in the related Prospectus Supplement.
The Securities will be non-recourse obligations of the related Trust. The
assets of the Trust specified in the related Prospectus Supplement for a Series
of Securities, unless otherwise specified in the related Prospectus Supplement,
will serve as collateral only for that Series of Securities. Holders of a Series
of Notes may only proceed against such collateral securing such Series of Notes
in the case of a default with respect to such Series of Notes and may not
proceed against any assets of the Depositor or the related Trust not pledged to
secure such Notes.
The Mortgage Assets for a Series will be transferred by the Depositor to
the Trust. Mortgage Loans relating to a Series will be serviced by the Master
Servicer pursuant to a Pooling and Servicing Agreement, with respect to a Series
consisting of only Certificates or a Sale and Servicing Agreement (each, a 'Sale
and Servicing Agreement') between the Depositor, the Trust and the Master
Servicer, with respect to a Series that includes Notes.
As used herein, 'Agreement' means, with respect to a Series of
Certificates, the Pooling and Servicing Agreement or Trust Agreement, and with
respect to a Series that includes Notes, the Indenture and the Sale and
Servicing Agreement, as the context requires.
If so specified in the related Prospectus Supplement, a Trust relating to a
Series of Securities may be a business trust formed under the laws of the state
specified in the related Prospectus Supplement pursuant to a trust agreement
(each, a 'Trust Agreement') between the Depositor and the Trustee of such Trust
specified in the related Prospectus Supplement.
Certain of the Mortgage Assets may have been originated or purchased by the
Originators, through their retail branch offices or their correspondent (i.e.,
wholesale) loan programs. Other Mortgage Assets may have been acquired by the
Depositor, any Originator or an affiliate thereof in the open market or in
privately negotiated transactions. See 'The Home Equity Loan
Program--Underwriting of Home Equity Loans.'
THE MORTGAGE LOANS--GENERAL
The real property (including manufactured housing and mobile homes, to the
extent treated as real property under the laws of the applicable jurisdictions)
which secures repayment of the Mortgage Loans (the 'Mortgaged Properties') may
be located in any one of the fifty states or the District of Columbia. Unless
otherwise specified in the related Prospectus Supplement, the Mortgage Loans
will be conventional loans (i.e., loans that are not insured or guaranteed by
any governmental agency). Mortgage Loans with Loan-to-Value Ratios and/or
certain principal balances may be covered wholly or partially by Primary
Mortgage Insurance Policies. Unless otherwise
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specified in the related Prospectus Supplement, all of the Mortgage Loans will
be covered by Standard Hazard Insurance Policies. The existence and extent of
any such coverage will be described in the applicable Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, all of the
Mortgage Loans in a Pool will provide for payments to be made monthly ('monthly
pay'). Unless otherwise specified in the related Prospectus Supplement, the due
dates for payments on the monthly-pay Mortgage Loans in a Pool will occur
throughout the month.
The payment terms of the Mortgage Loans to be included in a Trust will be
described in the related Prospectus Supplement and may include any of the
following features or combination thereof or other features described in the
related Prospectus Supplement:
(a) Interest may be payable at a fixed rate, a rate that is
adjustable from time to time in relation to an index, a rate that is fixed
for 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 Mortgage Loan is its 'Mortgage 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 Mortgage Loan for such periods and
under such circumstances as may be specified in the related Prospectus
Supplement. Mortgage Loans may provide for the payment of interest at a
rate lower than the Mortgage Rate for a period of time or for the life of
the Mortgage Loan, and the amount of any difference may be contributed from
funds supplied by the seller of the Mortgaged Property securing the related
Mortgage Loan or another source or may be treated as accrued interest added
to the principal of the Mortgage Loan.
(b) Principal may be payable on a level debt service basis to fully
amortize the Mortgage 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 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 Mortgage
Loan.
(c) Monthly payments of principal and interest may be fixed for the
life of the Mortgage Loan, may increase over a specified period of time
('graduated payments') or may change from period to period. Mortgage 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. Mortgage Loans having graduated payment provisions may require
the monthly payments of principal and interest to increase for a specified
period, provide for deferred payment of a portion of the interest due
monthly during such period, and recoup the deferred interest through
negative amortization whereby the difference between the scheduled payment
of interest and the amount of interest actually accrued is added monthly to
the outstanding principal balance. Other Mortgage Loans sometimes referred
to as 'growing equity' mortgage loans may provide for periodic scheduled
payment increases for a specified period with the full amount of such
increases being applied to principal.
(d) Prepayments of principal may be subject to a prepayment fee,
which may be fixed for the life of the Mortgage Loan or may decline over
time, and may be prohibited for the life of the Mortgage Loan or for
certain periods ('lockout periods'). Certain Mortgage 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 Mortgage Loans may permit prepayments without
payment of a fee unless the prepayment occurs during specified time
periods. The Mortgage Loans may include due-on-sale clauses which permit
the mortgagee to demand payment of the entire Mortgage Loan in connection
with the sale or
- ------------------
* Whenever the terms 'Pool' and 'Securities' are used in this Prospectus, such
terms will be deemed to apply, unless the context indicates otherwise, to one
specific Pool and the 'Securities' representing the debt of, or certain
beneficial ownership interests, as described below, in a single Trust
consisting primarily of the Mortgage Loans in such Pool. Similarly, the term
'Trust' will refer to one specific Trust.
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certain transfers of the related Mortgaged Property. Other Mortgage Loans
may be assumable by persons meeting the then applicable underwriting
standards of the applicable Originator.
The Prospectus Supplement for each Series of 'Securities' will contain
information, as of the date of such Prospectus Supplement and to the extent then
specifically known to the Depositor, with respect to the Mortgage Loans
contained in the related Pool, including (i) the aggregate outstanding principal
balance and the average outstanding principal balance of the Mortgage Loans as
of the applicable Cut-off Date, (ii) the largest principal balance and the
smallest principal balance of any of the Mortgage Loans, (iii) the types of
Mortgaged Properties securing the Mortgage Loans (e.g., one- to four-family
houses, vacation and second homes, manufactured housing and mobile homes (to the
extent permanently affixed and treated as real property under the laws of the
applicable jurisdiction), multifamily apartments or other real property), (iv)
the original terms to maturity of the Mortgage Loans, (v) the weighted average
term to maturity of the Mortgage Loans as of the related Cut-off Date and the
range of the terms to maturity; (vi) the earliest origination date and latest
maturity date of any of the Mortgage Loans, (vii) the ranges of Loan-to-Value
Ratios at origination, (viii) the Mortgage Rate and ranges of Mortgage Rates
borne by the Mortgage Loans, (ix) in the case of Mortgage Loans having
Adjustable Rates, the weighted average of the Adjustable Rates, if any, and (x)
the geographical distribution of the Mortgaged Properties on a state-by-state
basis.
If specific information respecting the Mortgage 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 available for inspection at the
corporate trust office of the Trustee specified in the related Prospectus
Supplement. A schedule of the Mortgage Assets relating to such Series will be
attached to, or incorporated by reference into, the Agreement delivered to the
Trustee upon delivery of the Securities.
The 'Loan-to-Value Ratio' of a Mortgage Loan at any given time is the
fraction, expressed as a percentage, the numerator of which is the current
principal balance of the related Mortgage Loan at the date of determination and
the denominator of which is the Collateral Value of the related Mortgaged
Property. 'Collateral Value' is the appraised value of a Mortgaged Property
based upon the lesser of (i) the appraisal (as reviewed and approved by the
applicable Originator) made at the time of the origination of the related
Mortgage Loan, or (ii) the sales price of such Mortgaged Property at such time
of origination, in either case, plus any financed improvements. With respect to
a Mortgage Loan the proceeds of which were used to refinance an existing
mortgage loan, the appraised (as reviewed and approved by the related
Originator) value of the Mortgaged Property will be based upon the appraisal (as
reviewed and approved by the related Originator) obtained at the time of
refinancing.
No assurance can be given that values of the Mortgaged Properties have
remained or will remain at their levels on the dates of origination of the
related Mortgage Loans. If the residential real estate market should experience
an overall decline in property values such that the outstanding principal
balances of the Mortgage Loans (plus any additional financing by other lenders
on the same Mortgaged Properties), in a particular Pool become equal to or
greater than the value of such Mortgaged Properties or if the general condition
of a Mortgaged Property declines, the actual rates of delinquencies,
foreclosures and losses could be higher than those now generally experienced in
the mortgage lending industry. Because a Pool may contain Mortgage Loans with
original Loan-to-Value Ratios of up to 100% at origination, any overall decline
in property values or of particular Mortgaged Properties will be likely to
result in the outstanding principal balance of such Mortgage Loans becoming
greater than the value of such Mortgaged Properties which may give rise to the
consequences discussed in the preceding sentence.
The only obligations of the Depositor with respect to a Series of
Securities will be to provide from the applicable Originator (or, where the
Depositor or any Originator acquired a Mortgage Loan from another originator,
obtain from such originator) certain representations and warranties concerning
the Mortgage Loans and to assign to the Trustee for such Series of Securities
the Depositor's rights with respect to such representations and warranties. See
'The Agreements--Assignment of Mortgage Loans.' The obligations of the Master
Servicer with respect to the Mortgage Loans will consist principally of its
contractual servicing
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obligations under the related Agreement (including its obligations to make
Servicing Advances and to enforce the obligations of the Sub-servicers) and its
obligation to make certain Delinquency Advances in the event of delinquencies in
payments on or with respect to the Mortgage Loans in the amounts described
herein under 'The Agreements--Delinquency Advances and Compensating Interest.'
The obligations of a Master Servicer to make Delinquency Advances may be subject
to limitations, to the extent provided herein and in the related Prospectus
Supplement.
SINGLE FAMILY LOANS
'Single Family Loans' will consist of mortgage loans, deeds of trust or
participations or other beneficial interests therein, secured by first or second
liens on one- to four-family residential properties. Single Family Loans also
may include loans or participations therein secured by mortgages or deeds of
trust on condominium units in condominium buildings together with such
condominium units' appurtenant interests in the common elements of the
condominium buildings.
The Mortgaged Properties relating to Single Family Loans will consist of
detached or semi-detached one-family dwelling units, two- to four-family
dwelling units, townhouses, rowhouses, individual condominium units in
condominium buildings, individual units in planned unit developments, mobile or
manufactured homes treated as real estate under applicable state law, and
certain mixed use and other dwelling units. Such Mortgaged Properties may
include vacation and second homes or investment properties.
MULTIFAMILY LOANS
Multifamily Loans will consist of mortgage loans, deeds of trust or
participations or other beneficial interests therein, secured by first or second
liens on rental apartment buildings or projects containing five or more
residential units.
Mortgaged Properties which secure Multifamily Loans may include high-rise,
mid-rise and garden apartments. Certain of the Multifamily Loans may be secured
by apartment buildings owned by cooperatives. In such cases, the cooperative
owns all the apartment units in the building and all common areas. The
cooperative is owned by tenant-stockholders who, through ownership of stock,
shares or membership certificates in the corporation, receive proprietary leases
or occupancy agreements which confer exclusive rights to occupy specific
apartments or units. Generally, a tenant-stockholder of a cooperative must make
a monthly payment to the cooperative representing such tenant-stockholder's pro
rata share of the cooperative's payments for its mortgage loan, real property
taxes, maintenance expenses and other capital or ordinary expenses. Those
payments are in addition to any payments of principal and interest the
tenant-stockholder must make on any loans to the tenant-stockholder secured by
its shares in the cooperative. The cooperative will be directly responsible for
building management and, in most cases, payment of real estate taxes and hazard
and liability insurance. A cooperative's ability to meet debt service
obligations on a Multifamily Loan, as well as all other operating expenses, will
be dependent in large part on the receipt of maintenance payments from the
tenant-stockholders, as well as any rental income from units or commercial areas
the cooperative might control. Unanticipated expenditures may in some cases have
to be paid by special assessments on the tenant-stockholders.
PRIVATE MORTGAGE-BACKED SECURITIES
General. Private Mortgage-Backed Securities may consist of (a) mortgage
pass-through certificates evidencing an undivided interest in a pool of Mortgage
Loans, or (b) collateralized mortgage obligations ('CMOs') secured by Mortgage
Loans. Private Mortgage-Backed Securities will have been issued pursuant to a
private mortgage-backed securities agreement (the 'PMBS Agreement'). The
seller/servicer of the underlying Mortgage Loans will have entered into the PMBS
Agreement with the PMBS Trustee under the PMBS Agreement. The PMBS Trustee or
its agent, or a custodian, will possess the Mortgage Loans underlying such
Private Mortgage-Backed Security. Mortgage Loans underlying a Private
Mortgage-Backed Security will be serviced by the PMBS Servicer directly or by
one or more sub-servicers who may be subject to the supervision of the PMBS
Servicer. Unless otherwise described in the Prospectus Supplement, the PMBS
Servicer will be a Federal National Mortgage Association ('FNMA') or Federal
Home Loan Mortgage Corporation ('FHLMC') approved servicer and, if Federal
Housing Administration ('FHA') Loans underlie the Private Mortgage-
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Backed Securities, approved by the Department of Housing and Urban Development
('HUD') as an FHA mortgagee.
The PMBS Issuer will be a financial institution or other entity engaged
generally in the business of mortgage lending or the acquisition of mortgage
loans, a public agency or instrumentality of a state, local or federal
government, or a limited purpose or other corporation organized for the purpose
of among other things, establishing trusts and acquiring and selling housing
loans to such trusts and selling beneficial interests in such trusts. If so
specified in the Prospectus Supplement, the PMBS Issuer may be the Depositor or
an affiliate thereof. The obligations of the PMBS Issuer will generally be
limited to certain representations and warranties with respect to the assets
conveyed by it to the related trust. Unless otherwise specified in the related
Prospectus Supplement, the PMBS Issuer will not have guaranteed any of the
assets conveyed to the related underlying trust or any of the Private
Mortgage-Backed Securities issued under the PMBS Agreement. Additionally,
although the Mortgage Loans underlying the Private Mortgage-Backed Securities
may be guaranteed by an agency or instrumentality of the United States, the
Private Mortgage-Backed Securities themselves will not be so guaranteed.
Distributions of principal and interest will be made on the Private
Mortgage-Backed Securities on the dates specified in the related Prospectus
Supplement. The Private Mortgage-Backed Securities may be entitled to receive
nominal or no principal distributions or nominal or no interest distributions.
Principal and interest distributions will be made on the Private Mortgage-Backed
Securities by the PMBS Trustee or the PMBS Servicer. The PMBS Issuer or the PMBS
Servicer may have the right to repurchase assets underlying the Private
Mortgage-Backed Securities after a certain date or under other circumstances
specified in the related Prospectus Supplement.
The Mortgage Loans underlying the Private Mortgage-Backed Securities may
consist of fixed rate, level payment, fully amortizing loans or graduated
payment mortgage loans, buydown loans, adjustable rate mortgage loans, or loans
having balloon or other special payment features. Such Mortgage Loans may be
Single Family Loans or Multifamily Loans.
Credit Support Relating to Private Mortgage-Backed Securities. Credit
support in the form of subordination of other private mortgage certificates
issued under the PMBS Agreement, reserve funds, insurance policies, letters of
credit, financial guaranty insurance policies, guarantees or other types of
credit support may be provided with respect to the Mortgage Loans underlying the
Private Mortgage-Backed Securities or with respect to the Private
Mortgage-Backed Securities themselves.
Additional Information. The Prospectus Supplement for a Series of
Securities for which the related Trust includes Private Mortgage-Backed
Securities will specify (such disclosure may be on an approximate basis and will
be as of the date specified in the related Prospectus Supplement) to the extent
relevant and to the extent such information is reasonably available to the
Depositor and the Depositor reasonably believes such information to be reliable
(i) the aggregate approximate principal amount and type of the Private
Mortgage-Backed Securities to be included in the Trust Fund, (ii) certain
characteristics of the Mortgage Loans underlying the Private Mortgage-Backed
Securities including (A) the payment features of such Mortgage Loans, (B) the
approximate aggregate principal balance, if known, of underlying Mortgage Loans
insured or guaranteed by a governmental entity, (C) the servicing fee or range
of servicing fees with respect to the underlying Mortgage Loans, and (D) the
minimum and maximum stated maturities of the underlying Mortgage Loans at
origination, (iii) the maximum original term-to-stated maturity of the Private
Mortgage-Backed Securities, (iv) the weighted average term-to-stated maturity of
the Private Mortgage-Backed Securities, (v) the pass-through or certificate rate
of the Private Mortgage-Backed Securities, (vi) the weighted average
pass-through or certificate rate of the Private Mortgage-Backed Securities,
(vii) the PMBS Issuer, the PMBS Servicer (if other than the PMBS Issuer) and the
PMBS Trustee for such Private Mortgage-Backed Securities, (viii) certain
characteristics of credit support, if any, such as reserve funds, insurance
policies, letters of credit or guarantees relating to the Mortgage Loans
underlying the Private Mortgage-Backed Securities or to such Private
Mortgage-Backed Securities themselves, (ix) the terms on which the underlying
Mortgage Loans for such Private Mortgage-Backed Securities may, or are required
to, be purchased prior to their stated maturity or the stated maturity of the
Private Mortgage-Backed Securities and (x) the terms on which other Mortgage
Loans may be substituted for those originally underlying the Private
Mortgage-Backed Securities.
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USE OF PROCEEDS
The Depositor intends to use the net proceeds to be received from the sale
of the Securities of each Series to acquire the Mortgage Assets to be deposited
in the related Trust, and to pay other expenses connected with pooling such
Mortgage Assets and issuing such Securities. Any amounts remaining after such
payments may be used for general corporate purposes. The Depositor expects to
sell Securities in Series from time to time.
THE DEPOSITOR
UCFC Acceptance Corporation (the 'Depositor') was incorporated in the State
of Louisiana on March 26, 1993, and is an indirect wholly-owned subsidiary of
United Companies Financial Corporation (the 'Parent'). The Depositor maintains
its principal offices at 4041 Essen Lane, Baton Rouge, Louisiana 70809. Its
telephone number is (504) 924-6007.
The Depositor does not have, nor is it expected in the future to have, any
significant assets.
THE ORIGINATORS
It is anticipated that the Mortgage Loans will be purchased by the
Depositor from United Companies Lending Corporation(Registered) ('United
Companies'), UNICOR Mortgage(Registered), Inc. ('UNICOR'), GINGER
MAE(Registered), Inc. ('GINGER MAE') and Southern Mortgage Acquisition, Inc.
('SMAI') (collectively, the 'Originators').
Each of the Originators is a Louisiana corporation and an indirect
wholly-owned subsidiary of the Parent. The Parent is a financial services
holding company having mortgage lending operations focused on the origination,
purchase, sale and servicing of first mortgage, non-conventional, home equity
loans. The Parent's principal offices are in Baton Rouge, Louisiana.
Because the nature of the business of the Originators involves the
collection of numerous accounts, the validity of liens and compliance with state
and federal lending laws, each is subject to numerous claims and legal actions
in the ordinary course of its business. While it is impossible to estimate with
certainty the ultimate legal and financial liability with respect to such claims
and actions, the management of United Companies believes, based on information
currently available, 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 Originators.
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THE HOME EQUITY LOAN PROGRAM
GENERAL
Each of the Originators engages in a different method of loan production:
United Companies originates loans through a branch network; UNICOR conducts a
wholesale operation which acquires loans primarily from brokers and
correspondents; GINGER MAE, which currently is operating as a division of United
Companies, conducts a wholesale operation which acquires loans from banks and
other depository institutions; and SMAI acquires loans in bulk purchases. Each
of United Companies, UNICOR and GINGER MAE has its own staff of underwriters in
order to provide better service to its respective customers. SMAI applies the
underwriting standards of United Companies to the loans that it purchases.
Regardless of the manner of origination, the appropriate underwriters apply
essentially similar underwriting standards.
UNDERWRITING OF HOME EQUITY LOANS
The underwriting function is centralized in Baton Rouge. The underwriting
process is intended to assess both the prospective borrower's ability to repay
the loan and the adequacy of the real property security as collateral for the
loan granted. On a case by case basis, after review and approval by the
Originator's underwriters, home equity loans may be made which vary from the
underwriting guidelines.
The Originators originate fixed rate home equity loans with original terms
to maturity not to exceed: 360 months for single family, owner occupied first
mortgages; 360 months for single family, non-owner occupied first mortgages; 360
months for single family, combination owner occupied/rental property first
mortgages; and 180 months for single family, owner occupied second mortgages.
The fixed rate home equity loan amounts generally do not exceed $500,000, in the
case of loans secured by first liens, and $150,000, in the case of loans secured
by second liens, in each case unless a higher amount is specifically approved by
the applicable underwriters. Except for Balloon Loans, all of the Originators'
fixed rate home equity loans are fully amortizing. UNICOR originates and the
other Originators may originate a fixed rate loan with an original term to
maturity ranging from 60 to 240 months and a longer amortization schedule
ranging from 180 to 360 months ('Balloon Loans'). Balloon Loans must be secured
by first liens on single family, owner occupied residential properties. UNICOR
and GINGER MAE also originate fixed rate home equity loans which provide that
the interest rate may decrease by one percentage point if the borrower makes the
first 12 consecutive monthly payments without a delinquency. At that time, the
monthly payments will be recalculated to fully amortize the loan at the reduced
rate over the remaining term to maturity. Adjustable rate home equity loans
originated by the Originators generally fully amortize over a period not to
exceed 360 months. The maximum loan amount for adjustable rate home equity loans
is $500,000 unless a higher amount is specifically approved by the applicable
underwriters.
The homes used for collateral to secure the fixed rate home equity loans
may be owner occupied, non-owner occupied rental properties or a combination of
owner occupied/rental properties, which in any case are one- to four-family
residences (which may be a detached or semi-detached row house, townhouse, a
condominium unit or a unit in a planned unit development). In addition, such
loans may be secured by single-family owner occupied manufactured or mobile
homes with land if the manufactured or mobile homes are permanently affixed and
defined as real estate under applicable state law. Certain loans may be secured
by a leasehold interest and the improvements thereon. Second mortgages are
generally permitted only for fixed rate home equity loans and generally are
limited to one- to four-family owner occupied property. Such a loan secured by a
second mortgage typically will not be made if the first mortgage is a balloon or
an individual or owner financed mortgage. The homes used for collateral to
secure adjustable rate home equity loans may be owner occupied or non-owner
occupied rental properties, which in any case are one- to four-family residences
(which may be a detached or semi-detached, row house, townhouse, a condominium
unit or a unit in a planned unit development).
In general, the value of each property proposed as security for a home
equity loan is required to be determined by a current appraisal from an
independent appraiser who has been approved by United Companies. The Originators
select the appraiser and order the appraisal except for broker or correspondent
originated home
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equity loans for which the broker or the correspondent selects the appraiser
from a list of appraisers pre-approved by United Companies.
The Originators require that the appraisal provide an adequately supported
estimate of the value of the property proposed as security for the requested
home equity loan and a complete, accurate description of the property. In some
cases, the appraisal is subject to completion of improvements which are to be
made with the proceeds of the proposed home equity loan. The property is
analyzed by the Originators, based on the appraisal, to determine its
acceptability as security for the loan requested.
The total amount of a home equity loan generally includes origination fees,
credit life insurance premium, if any, prepaid interest and other closing costs
(such as the cost of an appraisal report and title insurance premiums).
Loan-to-value is the percentage equal to the note amount divided by the lesser
of appraised value or the purchase price of the real estate plus financed
improvements for the real estate. For fixed rate and adjustable rate home equity
loans originated through UNICOR or GINGER MAE, the maximum Loan-to-Value is 90%,
with the maximum for rural properties generally being 80%. For home equity loans
originated through United Companies, an Underwriting Loan-to-Value Ratio, as
described below, is utilized. The total amount of a home equity loan, net of the
origination fees, credit life insurance premium, if any, prepaid tax and
insurance escrow, real estate tax service fee, loan application fee and prepaid
interest, is defined as the 'Cash Out'. The 'Underwriting Loan-to-Value Ratio'
for underwriting purposes is the Cash Out divided by the appraised value or
purchase price of the property plus financed improvements for the real estate,
whichever is less. The Cash Out with respect to fixed rate and adjustable rate
home equity loans originated through United Companies is limited to 90% of the
lesser of the applicable appraised value or purchase price of the property.
Because the Underwriting Loan-to-Value Ratio is based on the Cash Out rather
than the actual principal balance of the related loan, the Loan-to-Value Ratio
of such loan will be higher and could be substantially higher than the
Underwriting Loan-to-Value Ratio. However, the Loan-to-Value Ratio may not
exceed 100%.
Generally, the maximum Underwriting Loan-to-Value Ratio is 85% for a loan
with a second mortgage on the property. With respect to rural properties, the
maximum Underwriting Loan-to-Value Ratio (utilizing only up to ten acres and the
improvements thereon) is 80%. The maximum Underwriting Loan-to-Value Ratio
generally applicable to non-owner occupied homes and owner occupied
manufactured/mobile homes with land is generally 80%.
Verification of personal financial information for each applicant is
required by the Originators. The applicant's total monthly obligations
(including principal and interest on each mortgage, tax assessments, other
loans, charge accounts and all scheduled indebtedness) generally should not
exceed 50% of a borrower's gross monthly income. In the case of adjustable rate
home equity loans, the debt ratio calculation is based upon the principal and
interest payment amount utilizing the maximum rate on the second change date.
Generally, the borrowers are required to have two years of employment with their
current employer or two years of like experience. Applicants who are salaried
employees must provide current employment information in addition to recent
employment history. Originators verify this information for salaried borrowers
based on written confirmation from employers, or a combination of a telephone
confirmation from the employer and the most recent pay stub and the most recent
W-2 tax form. A self-employed applicant is generally required to provide copies
of complete federal income tax returns (including schedules) filed for the most
recent two years. Re-verification of the foregoing information generally is not
undertaken for home equity loans purchased through the bulk purchase program of
the Originators.
A credit report by an independent, nationally recognized credit reporting
agency reflecting the applicant's credit history is required. The credit report
should reflect all delinquencies of 30 days or more, repossessions, judgments,
foreclosures, garnishments, bankruptcies and similar instances of adverse credit
that can be discovered by a search of public records. Verification is required
to be obtained of the first mortgage balance, if any, its status and whether
local taxes, interest, insurance and assessments are included in the applicant's
monthly payment. All taxes and assessments not included in the payment are
required to be verified as current. A borrower's mortgage payment history
generally should reflect no more than three payments over 30 days delinquent in
the last twelve months; however, in some cases, a borrower is permitted to have
no more than five
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payments over 30 days delinquent in the last twelve months and one payment over
60 days delinquent in the last twelve months. Credit analysis is subjective and
subject to interpretation in the underwriting process.
Certain laws protect loan applicants by offering them a timeframe after
loan documents are signed, called the 'rescission period,' during which the
applicant has the right to cancel the loan. The rescission period must have
expired prior to funding a loan and may not be waived by the applicant except as
permitted by law.
The Originators generally require title insurance coverage on each home
equity loan they originate. The Originators and their assignees are generally
named as the insured on the title insurance policies and the addressee of the
title opinion.
The borrower is required to obtain property insurance in an amount
sufficient to cover in the case of a first mortgage the new loan and in the case
of a fixed rate second mortgage, the new loan and any prior mortgage. If the sum
of an outstanding first mortgage, if any, and the fixed rate home equity loan
exceeds the lesser of replacement or insurable value, insurance equal to the
lesser of replacement or insurable value may be accepted. The Originator
requires that its name and address are properly added to the 'mortgagee clause'
of the insurance policy. In the event the Originator's name is added to a 'loss
payee clause' and the policy does not provide for written notice of policy
changes or cancellation, an endorsement adding such provision is required. The
borrower is required to obtain flood insurance to the extent such insurance is
available under the Flood Disaster Protection Act of 1973, as amended.
After a loan is underwritten, approved and funded, the mortgage loan
packages are reviewed and monitored by home office loan review personnel. A
random sample of the mortgage loan packages are subsequently subjected to a
quality control audit.
SERVICING OF HOME EQUITY LOANS
United Companies performs the following services for investors to whom it
has sold home equity loans and retained servicing: investor reporting;
collecting and remitting periodic principal and interest payments to investors
and performing other administrative services, including maintaining required
escrow accounts for payment of real estate taxes and standard hazard insurance;
determining the adequacy of standard hazard insurance; advising investors of
delinquent loans; conducting foreclosure proceedings, and inspecting and
reporting on the physical condition of the Mortgaged Properties securing the
Mortgage Loans; and disposing of foreclosed properties. United Companies is
generally obligated to advance interest on delinquent home equity loans to the
secondary market investors at the pass-through rate until satisfaction of the
note, liquidation of the Mortgaged Property or charge off of the home equity
loan. To the extent that the amount recovered through liquidation of collateral
is insufficient to cover the unpaid balance of the Home Equity Loan, United
Companies incurs a loss up to the limit specified in the related loan sale
agreement. In connection with its servicing activities, United Companies sends
to borrowers monthly statements that specify the fixed payment amount and due
date in the case of fixed rate home equity loans and the adjusted payment amount
and due date in the case of adjustable rate home equity loans and the late
payment amount, if any. Due dates for payments generally occur on the first day
of the calendar month. With respect to adjustable rate home equity loans, United
Companies provides written notices to borrowers of upcoming rate adjustments
along with new payment coupon books reflecting the adjusted payment amounts.
United Companies, as the Master Servicer, is required under each Agreement
to service the Mortgage Loans either directly or through Sub-servicers.
Servicing includes, but is not limited to, post-origination loan processing,
customer service, remittance handling, collections and liquidations.
United Companies centralizes all servicing activities at the home office
other than the disposal of foreclosed properties.
If payment is not received within the grace period as dictated by the
applicable state law in which the loan originated, a notice will be sent to the
customer. Most of the home equity loans allow a 10 day grace period. In
addition, follow-up correspondence is automatically generated on the 21st, 32nd
and 45th day of delinquency.
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Collection calls begin at or before the expiration of the grace period.
Calls at this stage are targeted towards loans with a history of slow payment.
In addition, newer loans are targeted for calls to help establish a satisfactory
payment record. Collection calls continue until corrective arrangements are
made, or foreclosure is initiated.
If an account becomes 30 days past due, a 30 day loan counselor analyzes
the account to determine the appropriate course of action. When an account
becomes 60 days past due, a property inspection and borrower interview may be
requested through a third party contractor. In addition the initial loan file is
reviewed and generally an up-to-date credit report is obtained. Also at 60 days
past due, if appropriate corrective arrangements have not been made with the
borrower, a recommendation for foreclosure, along with an accompanying package,
may be submitted to the collection supervisor. This package generally includes
the original appraisal, loan approval memorandum, the note and the mortgage. If
approved by the collection supervisor, the package is forwarded to the vice
president of collections for review. If approved the package is forwarded to the
litigation department for the initiation of foreclosure proceedings.
Depending upon the circumstances surrounding the delinquent account, a
temporary suspension of payments, a repayment plan to return the account to an
up-to-date status, or (to the extent authorized by the related Agreement) an
extension/modification may be permitted.
The course of action followed for a delinquent account is dependent upon a
number of factors, including the borrower's payment history, the amount of
equity in the Mortgaged Property and the reason for the current inability to
make timely payments. If a borrower is experiencing difficulty in making
payments on time, the Master Servicer may modify the payment schedule (as
permitted by the related Agreement). In the event a loan is extended and thereby
removed from delinquency status, the Master Servicer may require the borrower to
pay an extension fee. Modifications to payment schedules are considered on a
case-by-case basis and are limited to revisions to the contract rate and/or term
only. A request for modification must be submitted by the borrower to the Master
Servicer. Prior to evaluating each modification request, the Master Servicer
obtains an updated credit report and, in some cases, a budget analysis worksheet
application. Provided that the review and analysis of the circumstances and
relevant documentation substantiates a favorable decision to modify the related
loan, the appropriate documentation is generated by the Master Servicer and
executed by the borrower to facilitate formal modification of the home equity
loan. Any extension fees collected by the Master Servicer are retained by the
Master Servicer as part of its servicing compensation.
Foreclosure regulations and practices and the rights of the owner in
default vary from state to state, but generally procedures may be initiated if:
(i) the loan is 90 days or more delinquent; (ii) a notice of default on a senior
lien is received; or (iii) United Companies discovers circumstances indicating
potential loss exposure.
During the foreclosure process, any expenses incurred by United Companies
are added to the amount owed by the borrower, as permitted by applicable law.
Upon completion of the foreclosure, the property is sold to an outside bidder,
or passes to the mortgagee, in which case United Companies proceeds to liquidate
the asset.
United Companies may not foreclose on the property securing a Second
Mortgage Loan unless it forecloses subject to each senior mortgage, in which
case United Companies generally will pay the amount due on the senior mortgage
to the senior mortgagee, if United Companies determines that doing so will
minimize the loss. In the event that foreclosure proceedings have been
instituted on a senior mortgage prior to the initiation of United Companies'
foreclosure action, United Companies may either satisfy such mortgage at the
time of the foreclosure sale or take other appropriate action.
Servicing and charge-off policies and collection practices may change over
time in accordance with United Companies' business judgment, changes in its
real-estate loan portfolio and applicable laws and regulations.
Regulations and practices regarding the liquidation of properties (e.g.,
foreclosure) and the rights of the Mortgagor in default vary greatly from state
to state. Only if United Companies determines that a delinquency cannot
otherwise be cured will it decide that foreclosure is the appropriate course of
action. Many real estate properties owned by United Companies are ultimately
sold by United Companies to new borrowers to whom United Companies will provide
a mortgage. If, after determining that purchasing a property securing a home
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equity loan will minimize the loss associated with such defaulted loan, United
Companies may bid at the foreclosure sale for such property or accept a deed in
lieu of foreclosure.
Although the servicing practices and procedures of any Sub-servicer may
differ from those described above, such practices and procedures will be
required to be at least as stringent as those applied by United Companies. In
addition, United Companies, as Master Servicer, will remain responsible for the
servicing of the sub-serviced Mortgage Loans in accordance with the applicable
Agreement to the same extent as if it were servicing such Mortgage Loans
directly.
REFINANCING POLICY
When the Originators believe that borrowers with existing loans with the
Originators are likely to refinance such loans due to interest rate changes,
equity build-up or other reasons, the Originators actively attempt to retain
such borrowers through solicitations of such borrowers to refinance with the
Originators. Such refinancings generate fee income for the Originators and
servicing income for the Master Servicer. Solicitations by the Originators of
their borrowers is done universally in order to retain the borrowers and are not
targeted to affect loans which have been placed in securitized pools. Therefore,
since the solicited borrowers are not targeted and because they may refinance
their existing loans in any case, the Originators believe that this practice
will be unlikely to affect the prepayment experience of the home equity loans in
a material respect.
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DESCRIPTION OF THE SECURITIES
GENERAL
Each Series of Notes will be issued pursuant to an indenture (the
'Indenture') between the related Trust and the entity named in the related
Prospectus Supplement as trustee (the 'Trustee') with respect to such Series. A
form of Indenture has been filed as an exhibit to the Registration Statement of
which this Prospectus forms a part. The Certificates will also be issued in
Series pursuant to separate agreements (each, a 'Pooling and Servicing
Agreement' or a 'Trust Agreement') among the Depositor, the Master Servicer, if
the Series relates to Mortgage Loans, and the Trustee. A form of Pooling and
Servicing Agreement and a form of Trust Agreement have been filed as exhibits to
the Registration Statement of which this Prospectus forms a part. A Series may
consist of both Notes and Certificates.
The following summaries describe the material provisions which may appear
in each Agreement. The Prospectus Supplement for a Series of Securities will
describe any material provision of the Agreements relating to such Series that
materially differs from the descriptions 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 Depositor 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 UCFC Acceptance Corporation, 4041
Essen Lane, Baton Rouge, LA 70809, Attention: Secretary.
Unless otherwise specified in the Prospectus Supplement, the Securities of
each Series will be issued in fully registered form only in the denominations
specified in the related Prospectus Supplement, will represent obligations of,
or beneficial ownership interests in, a Trust created pursuant to the related
Agreement and will not be entitled to payments in respect of the Mortgage Assets
included in any other Trust. Definitive Securities 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 Registrar appointed by the Trustee. No service
charge will be incurred for any registration of exchange or transfer, but the
Trustee may require payment of a sum sufficient to cover any tax or other
governmental charge. If provided in the related Agreement, a certificate
administrator may perform certain duties in connection with the administration
of the Certificates.
Distributions on Securities will be made only from the assets of the
related Trust, and the Securities will not represent obligations of the
Depositor, the Master Servicer, the Trustee 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 Mortgage Assets that from time to time
are subject to the related Agreement; (b) amounts on deposit in the related
Pre-Funding Account and/or Capitalized Interest Account, if any; (c) the assets
for the Trust that from time to time are required by the Agreement to be
deposited in the Distribution Account, the Principal and Interest Account and
any other accounts established pursuant to the related Agreement (collectively,
the 'Accounts'), or to be invested in Eligible Investments (as defined in the
related Agreement); (d) property and any proceeds thereof acquired by
foreclosure, deed in lieu of foreclosure or a comparable conversion of the
Mortgage Loans in such Pool; and (e) all rights under any other insurance
policies, guarantees, surety bonds, letters of credit or other credit
enhancement covering any Securities, any Mortgage 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. A Series
of Securities may include one or more Classes of Senior Securities that receive
certain preferential treatment with respect to one or more Subordinated Classes
of Securities of such Series. Certain Series or Classes of Securities may be
covered by Enhancement as described in the related Prospectus Supplement.
Distributions on one or more Classes of a Series of Securities may be made prior
to one or more other Classes, after the occurrence of specified events, in
accordance with a schedule or formula, on the basis of collections from
designated portions of the Mortgage Assets in the related Trust or on a
different basis, in each case, as specified in the related Prospectus
Supplement. The timing and amounts of such distributions may vary among Classes
or over time as specified in the related Prospectus Supplement.
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
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Distribution Date specified in the related Prospectus Supplement (each, a
'Distribution 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. 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 '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 Holders.
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 an adjustable 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 ON SECURITIES
General. In general, the method of determining the amount of distributions
on a particular Series of Securities will depend on the type of credit support,
if any, that is used with respect to such Series. See 'Credit Enhancement.' Set
forth below are descriptions of various methods that may be used to determine
the amount of distributions on the Securities of a particular Series. The
Prospectus Supplement for each Series of Securities will describe the method to
be used in determining the amount of distributions on the Securities of such
Series.
Distributions allocable to principal and interest on the Securities will be
made by the Trustee out of, and only to the extent of, funds in the related
Distribution Account, including any funds transferred from any Reserve Account
and funds received as a result of credit enhancement. As between Securities of
different Classes and as between distributions of interest and principal and, if
applicable, between distributions of prepayments of principal and scheduled
payments of principal, distributions made on any Distribution Date will be
applied as specified in the Prospectus Supplement. Unless otherwise specified in
the Prospectus Supplement, distributions to any Class of Securities will be made
pro rata to all Holders of that Class.
Available Funds. All distributions on the Securities of each Series on
each Distribution Date will be made from the Available Funds described below, in
accordance with the terms described in the related Prospectus Supplement. Unless
otherwise specified in the related Prospectus Supplement, 'Available Funds' for
each Distribution Date will equal the sum of the following amounts:
(i) the aggregate of all previously undistributed payments on account
of principal (including principal prepayments, if any, and prepayment
penalties, if so provided in the related Prospectus Supplement) and
interest on the Mortgage Loans in the related Trust received by the Master
Servicer after the Cut-off Date and on or prior to the day of the month of
the related Distribution Date specified in the Prospectus Supplement (the
'Determination Date') except:
(a) all payments which were due on or before the Cut-off Date;
(b) all cash amounts received in connection with the liquidation of
defaulted Mortgage Loans ('Liquidation Proceeds'), all proceeds (net of
unreimbursed Servicing Advances) of title insurance, hazard insurance
and primary mortgage insurance, if any ('Insurance Proceeds'), all
Principal Prepayments (defined herein), all proceeds received in
connection with the condemnation of a Mortgaged Property or the release
of part of a Mortgaged Property ('Released Mortgage Property
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Proceeds') and all proceeds of any Mortgage Loan purchased by the
Depositor or any other entity pursuant to the Agreement that were
received after the prepayment period specified in the Prospectus
Supplement and all related payments of interest representing interest
for any period after such prepayment period;
(c) all scheduled payments of principal and interest due on a date
or dates subsequent to the first day of the month of distribution;
(d) amounts received on particular Mortgage Loans as late payments
of principal or interest or other amounts required to be paid by the
mortgagors (the 'Mortgagors'), and, unless otherwise specified in the
related Prospectus Supplement, which are to be retained by the Master
Servicer (including any Sub-servicer) as additional compensation;
(e) amounts representing reimbursement, to the extent permitted by
the Agreement and as described under 'The Agreements--Delinquency
Advances and Compensating Interest' and '--Servicing and Other
Compensation and Payment of Expenses,' for advances made by the Master
Servicer and advances made by any Sub-servicers that were deposited into
the Distribution Account, and amounts representing reimbursement for
certain other losses and expenses incurred by the Master Servicer or the
Depositor and described below or in the related Agreement;
(f) that portion of each collection of interest on a particular
Mortgage Loan in such Trust which represents servicing compensation
payable to the Master Servicer which is to be retained from such
collection or is permitted to be retained from related Insurance
Proceeds, Liquidation Proceeds or proceeds of Mortgage Loans purchased
pursuant to the Agreement; and
(g) the Certificate Guaranty Insurance Policy premium and Trustee
Fees;
(ii) the amount of any Delinquency Advance or payment in respect of
Compensating Interest made by the Master Servicer (including any
Sub-servicer) as deposited by it in the Distribution Account; and
(iii) if applicable, amounts withdrawn from a Reserve Account or
received in connection with other credit enhancement.
Distributions of Interest. Interest will accrue on the aggregate Security
Principal Balance (defined below)(or, in the case of Securities entitled only to
distributions allocable to interest, the aggregate notional principal balance)
of each Class of Securities entitled to interest from the date, at the
Pass-Through Rate or Note Rate, for the periods and to the extent specified in
the Prospectus Supplement. To the extent funds are available therefor, interest
accrued during each such specified period on each Class of Securities entitled
to interest (other than a Class of Securities that provides for interest that
accrues, but is not currently payable, referred to hereafter as 'Accrual
Securities') will be distributable on the Distribution Dates specified in the
Prospectus Supplement until the aggregate Security Principal Balance of the
Securities of such Class has been distributed in full or, in the case of
Securities entitled only to distributions allocable to interest, until the
aggregate notional principal balance of such Securities is reduced to zero or
for the period of time designated in the Prospectus Supplement.
The original Security Principal Balance of each Security will equal the
aggregate distributions allocable to principal to which such Security is
entitled. Distributions allocable to interest on each Security that is not
entitled to distributions allocable to principal will be calculated on the basis
set forth in the related Prospectus Supplement. The notional principal balance
of a Security will not evidence an interest in or entitlement to distributions
allocable to principal but will be used solely for convenience in expressing the
calculation of interest and for certain other purposes.
With respect to any Class of Accrual Securities, if specified in the
Prospectus Supplement, any interest that has accrued but is not paid on a given
Distribution Date will be added to the aggregate Security Principal Balance of
such Class of Securities on that Distribution Date. Distributions of interest on
each Class of Accrual Securities will commence only after the occurrence of the
events specified in the Prospectus Supplement. Any such Class of Accrual
Securities will thereafter accrue interest on its outstanding Security Principal
Balance as so adjusted.
Distributions of Principal. Unless otherwise specified in the Prospectus
Supplement, the aggregate 'Security Principal Balance' of any Class of
Securities entitled to distributions of principal will be the aggregate original
Security Principal Balance of such Class of Securities specified in the
Prospectus Supplement, reduced
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by all distributions and losses reported to the holders of such Securities as
allocable to principal, and, in the case of Accrual Securities, increased by all
interest accrued but not then distributable on such Accrual Securities. The
Prospectus Supplement will specify the method by which the amount of principal
to be distributed on the Securities on each Distribution Date will be calculated
and the manner in which such amount will be allocated among the Classes of
Securities entitled to distributions of principal.
If so provided in the Prospectus Supplement, one or more Classes of Senior
Securities will be entitled to receive all or a disproportionate percentage of
the payments of principal which are received from borrowers in advance of their
scheduled due dates and are not accompanied by amounts representing scheduled
interest due after the month of such payments ('Principal Prepayments') in the
percentages and under the circumstances or for the periods specified in the
Prospectus Supplement. Any such allocation of Principal Prepayments to such
Class or Classes of Securities will have the effect of accelerating the
amortization of such Senior Securities while increasing the interests evidenced
by the Subordinated Securities in the Trust. Increasing the interests of the
Subordinated Securities relative to that of the Senior Securities is intended to
preserve the availability of the subordination provided by the Subordinated
Securities. See 'Credit Enhancement--Subordination.' 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 Distribution
Date may vary among Classes, over time or otherwise as specified in the
Prospectus Supplement.
REPORTS TO HOLDERS
On or before each Distribution Date, the Master Servicer or the Trustee
will be required to forward to each Holder of record of the related Series a
statement setting forth the following to the extent applicable to such Series or
Class:
(i) the amount of such distribution allocable to principal, separately
identifying the aggregate amount of any Principal Prepayments and if so
specified in the related Prospectus Supplement, prepayment penalties
included therein;
(ii) the amount of such distribution allocable to interest;
(iii) the amount of any Delinquency Advance by the Master Servicer (or
any Sub-servicer);
(iv) the aggregate amount (a) otherwise allocable to the Holders of
Subordinated Securities on such Distribution Date, and (b) withdrawn from a
Reserve Account, if any, that is included in the amounts distributed to the
Holders of Senior Securities;
(v) the total amount of any Insured Payments included in the amount
distributed on such Distribution Date;
(vi) the outstanding principal balance of such Class after giving
effect to the distribution of principal on such Distribution Date;
(vii) if applicable, the percentage of principal payments on the
Mortgage Loans, if any, which such Class will be entitled to receive on the
following Distribution Date;
(viii) unless the Pass-Through Rate or Note Rate is a fixed rate, the
Pass-Through Rate or Note Rate applicable to the distribution on the
Distribution Date;
(ix) the number and aggregate principal balance of Mortgage Loans in
the related Pool delinquent (a) one month and (b) two or more months;
(x) the number and aggregate principal balance of all Mortgage Loans
in foreclosure or other similar proceedings, and the book value of any real
estate acquired through foreclosure or grant of a deed in lieu of
foreclosure; and
(xi) if applicable, the amount remaining in any Reserve Account or the
amount remaining of any other credit support, after giving effect to the
distribution on the Distribution Date.
Where applicable, any amount set forth above may be expressed as a dollar
amount per single Security of the relevant Class having the denomination or
interest specified in the related Prospectus Supplement or the
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report to Holders. The report to Holders for any Class or Series of Securities
may include additional or other information of a similar nature to that
specified above.
In addition, within a reasonable period of time after the end of each
calendar year, the Master Servicer or the Trustee will mail to each person who
was a Holder of record at any time during such calendar year a report (a) as to
the aggregate of amounts reported pursuant to (i) and (ii) for such calendar
year or, in the event such person was a Holder of record during a portion of
such calendar year, for the applicable portion of such year and (b) such other
customary information as may be deemed necessary or desirable for Holders to
prepare their tax returns.
BOOK-ENTRY REGISTRATION
If so specified in the related Prospectus Supplement, the Securities will
be book-entry securities (the 'Book-Entry Securities'). Persons acquiring
beneficial ownership interests in such Securities ('Beneficial Owners') will
hold their Securities 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 Securities
will be issued in one or more certificates which equal the aggregate principal
balance of the applicable Series of Securities and will initially be registered
in the name of Cede, the nominee of DTC. 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 will act as depositary for
Cedel and Chase will act as depositary for Euroclear (in such capacities,
individually the 'Relevant Depositary' and collectively the 'European
Depositaries'). Except as described below, no person acquiring a Book-Entry
Security will be entitled to receive a physical certificate representing such
Security (a 'Definitive Security'). Unless and until Definitive Securities are
issued, the only 'Holder' of Book-Entry Securities will be Cede, as nominee of
DTC. Beneficial Owners will not be Holders as that term is used in the
applicable Agreement. Beneficial Owners are only permitted to exercise their
rights indirectly through participants in DTC ('DTC Participants').
The Beneficial Owner's ownership of a Book-Entry Security will be recorded
on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a 'Financial Intermediary') that maintains the
Beneficial Owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book-Entry Security will be recorded on the
records of DTC (or of DTC Participant that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of DTC, if
the Beneficial Owner's Financial Intermediary is not a DTC Participant and on
the records of Cedel or Euroclear, as appropriate).
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 on 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.
Transfers between DTC 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 securities 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
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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 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 Securities whether held
for its own account or as a nominee for another person. In general, beneficial
ownership of Book-Entry Securities 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 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.
Distributions on the Book-Entry Securities will be made on each
Distribution Date by the applicable Trustee to DTC. DTC will be responsible for
crediting the amount of such payments to the accounts of the applicable DTC
Participants in accordance with DTC's normal procedures. Each DTC Participant
will be responsible for disbursing such payments to the Beneficial Owners of the
Book-Entry Securities that it represents and to each Financial Intermediary for
which it acts as agent. Each such Financial Intermediary will be responsible for
disbursing funds to the Beneficial Owners of the Book-Entry Securities that it
represents.
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Under a book-entry format, Beneficial Owners of the Book-Entry Securities
may experience some delay in their receipt of payments, since such payments will
be forwarded by the Trustee to Cede. Distributions with respect to Securities
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
Securities to persons or entities that do not participate in the depository
system, or otherwise take actions in respect of such Book-Entry Securities, may
be limited due to the lack of physical certificates for such Book-Entry
Securities. In addition, issuance of the Book-Entry Securities in book-entry
form may reduce the liquidity of such securities in the secondary market since
certain potential investors may be unwilling to purchase securities for which
they cannot obtain physical certificates.
DTC has advised the Depositor that, unless and until Definitive Securities
are issued, DTC will take any action permitted to be taken by the Beneficial
Owners of the Book-Entry Securities under the applicable Agreement only at the
direction of one or more Financial Intermediaries to whose DTC accounts the
Book-Entry Securities are credited, to the extent that such actions are taken on
behalf of Financial Intermediaries whose holdings include such Book-Entry
Securities. Cedel or the Euroclear Operator, as the case may be, will take any
other action permitted to be taken by a Holder under the applicable 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 DTC Participants, with respect to some
Book-Entry Securities of a Series which conflict with actions taken with respect
to other Book-Entry Securities of such Series.
Definitive Securities will be issued to beneficial owners of the Book-Entry
Securities, or their nominees, rather than to DTC, only if (a) DTC or the
Depositor advises the applicable Trustee in writing that DTC is no longer
willing, qualified or able to discharge properly its responsibilities as nominee
and depository with respect to the Book-Entry Securities and the Depositor or
such Trustee is unable to locate a qualified successor, (b) the Depositor, at
its sole option, elects to terminate the book-entry system through DTC or (c)
after the occurrence of an Event of Default (as defined herein), Beneficial
Owners having Percentage Interests aggregating not less than 51% advise the
Trustee and DTC through the Financial Intermediaries and the DTC Participants in
writing that the continuation of a book-entry system through DTC (or a successor
thereto) is no longer in the best interests of Beneficial Owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the applicable Trustee will be required to notify all
affected Beneficial Owners of the occurrence of such event and the availability
through DTC of Definitive Securities. Upon surrender by DTC of the global
certificate or certificates representing the Book-Entry Securities and
instructions for re-registration, the applicable Trustee will issue Definitive
Securities, and thereafter such Trustee will recognize the holders of such
Definitive Securities as Holders under the applicable Agreement.
Although DTC, Cedel and Euroclear have agreed to the foregoing procedures
in order to facilitate transfers of Securities among participants of DTC, Cedel
and Euroclear, they are under no obligation to perform or continue to perform
such procedures and such procedures may be discontinued at any time.
Neither the Depositor, the Master Servicer nor the Trustee will have any
responsibility for any aspect of the records relating to or payments made on
account of beneficial ownership interests of the Book-Entry Securities held by
Cede, as nominee for DTC, or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests.
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CREDIT ENHANCEMENT
The amounts and types of credit enhancement arrangements and the provider
thereof, if applicable, with respect to a Series or any Class of Securities will
be set forth in the related Prospectus Supplement. If and to the extent provided
in the related Prospectus Supplement, enhancement may be in the form of a
financial guaranty insurance policy, overcollateralization, a letter of credit,
cash reserve fund, insurance policies, one or more Classes of Subordinated
Securities, derivative products or other form of enhancement, or any combination
thereof, as may be described in the related Prospectus Supplement (collectively,
'Enhancement'). If specified in the applicable Prospectus Supplement,
Enhancement for any Series of Securities may cover one or more Classes of
Securities, and accordingly may be exhausted for the benefit of a particular
Class of Securities and thereafter may be unavailable to such other Classes of
Securities. Further information regarding any provider of credit enhancement
(the 'Enhancer'), including financial information when material, will be
included in the related Prospectus Supplement.
The presence of Enhancement is intended to increase the likelihood of
receipt by the Holders of the full amount of principal and interest due them and
to decrease the likelihood that the Holders will experience losses, or may be
structured to provided protection against changes in interest rates or against
other risks, to the extent and under the conditions specified in the related
Prospectus Supplement. The Enhancement for a Class of Securities may not provide
protection against all risks of loss and may not guarantee repayment of the
entire principal and interest thereon. If losses occur which exceed the amount
covered by any Enhancement or which are not covered by any Enhancement, Holders
will bear their allocable share of deficiencies. In addition, if a form of
Enhancement covers more than one Class of Securities of a Series, Holders of any
such Class will be subject to the risk that such Enhancement will be exhausted
by the claims of Holders of other Classes.
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 Mortgage Assets included in
the related Trust, the allocation of available funds to various Classes of
Securities, the Pass-Through Rate or Note Rate for various Classes of Securities
and the purchase price paid for the Certificates.
The original terms to maturity of the Mortgage Loans in a given Pool will
vary depending upon the type of Mortgage Loans included therein. Each Prospectus
Supplement will contain information with respect to the type and maturities of
the Mortgage Loans in the related Pool. Unless otherwise specified in the
related Prospectus Supplement, Single Family Loans may be prepaid without
penalty in full or in part at any time, although a prepayment fee or penalty may
be imposed in connection therewith. Multifamily Loans may prohibit prepayment
for a specified period after origination, may prohibit partial prepayments
entirely, and may require the payment of a prepayment fee or penalty upon
prepayment in full or in part.
The rate of prepayments with respect to non-conventional mortgage loans has
fluctuated significantly in recent years. In general, if prevailing rates fall
below the Mortgage Rates borne by the Mortgage Loans, such Mortgage Loans are
likely to be subject to higher prepayment rates than if prevailing interest
rates remain at or above such Mortgage Rates. Conversely, if prevailing interest
rates rise appreciably above the Mortgage Rates borne by the Mortgage Loans,
such Mortgage Loans are likely to experience a lower prepayment rate than if
prevailing rates remain at or below such Mortgage Rates. However, there can be
no assurance that such will be the case.
Prepayments are influenced by a variety of economic, geographical, social,
tax, legal and additional factors. The rate of prepayments on Single Family
Loans may be affected by changes in a mortgagor's housing needs, job transfers,
unemployment, a borrower's net equity in the mortgaged properties, the
enforcement of due-on-sale clauses and other servicing decisions. Adjustable
rate mortgage loans, bi-weekly mortgage loans, graduated payment mortgage loans,
growing equity mortgage loans, reverse mortgage loans, buy-down mortgage loans
and mortgage loans with other characteristics may experience a rate of principal
prepayments which is different from that of fixed rate, monthly pay, fully
amortizing mortgage loans. The rate of prepayment on Multifamily Loans may be
affected by other factors, including Mortgage Loan terms (e.g., the existence of
lockout periods, due-on-sale and due-on-encumbrance clauses and prepayment
penalties), relative economic conditions in the area where
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the Mortgaged Properties are located, the quality of management of the Mortgaged
Properties and the relative tax benefits associated with the ownership of
income-producing real property.
Generally, second Mortgage Loans have smaller average principal balances
than senior or first mortgage loans and are not viewed by borrowers as permanent
financing. Accordingly, Mortgage Loans which are second Mortgage Loans may
experience a higher rate of prepayment than Mortgage Loans which represent first
liens. In addition, any future limitations on the right of borrowers to deduct
interest payments on second Mortgage Loans for Federal income tax purposes may
result in a higher rate of prepayment of such Mortgage Loans. The obligation of
the Master Servicer to enforce due-on-sale provisions (described below) of the
Mortgage Loans may also increase prepayments. 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, the availability of
alternative financing and homeowner mobility. The Depositor is unaware of any
reliable studies that would project the prepayment risks associated with the
Mortgage Loans based upon current interest rates and economic conditions or the
historical prepayment experience of United Companies and its affiliates'
portfolios of mortgage loans. However, the Originators' practice of soliciting
refinancings from existing borrowers may have the effect of increasing the rate
of prepayments, due to refinancings, on the Mortgage Loans. See 'The Home Equity
Loan Program--Refinancing Policy' herein.
Unless otherwise provided in the related Prospectus Supplement, all of the
Single Family Loans will contain due-on-sale provisions permitting the mortgagee
to accelerate the maturity of the Mortgage Loan upon sale or certain transfers
by the borrower of the underlying Mortgaged Property. Unless otherwise provided
in the related Prospectus Supplement, the Master Servicer generally will enforce
any due-on-sale or due-on-encumbrance clause, to the extent it has knowledge of
the conveyance or further encumbrance or the proposed conveyance or proposed
further encumbrance of the Mortgaged Property and reasonably believes that it is
entitled to do so under applicable law; provided, however, that the Master
Servicer will not take any enforcement action that would materially increase the
risk of default or delinquency on, or materially decrease the security for, such
Mortgage Loan or if the applicable Enhancer, if any, gives its consent to such
non-enforcement. See 'The Agreements-- Enforcement of Due on Sale Clauses'
herein.
The weighted average lives of Securities will also be affected by the
amount and timing of delinquencies and defaults on the Mortgage Loans and the
liquidations of defaulted Mortgage Loans. Delinquencies and defaults will
generally slow the rate of payment of principal to the Holders. However, this
effect will be offset to the extent that lump sum recoveries on defaulted
Mortgage Loans and foreclosed Mortgaged Properties result in principal payments
on the Mortgage Loans faster than otherwise scheduled.
When a full prepayment occurs on a Single Family Loan, the Mortgagor will
be charged interest on the principal amount of the Mortgage 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. Interest shortfalls also could result
from the application of the Relief Act, as described under 'Certain Legal
Aspects of the Mortgage Loans--Soldiers' and Sailors' Civil Relief Act' herein.
Unless otherwise specified in the related Prospectus Supplement, in the event
that less than 30 days' interest is collected on a Mortgage Loan during a
Remittance Period, the Master Servicer or a Sub-servicer will be obligated to
pay Compensating Interest with respect thereto, but only to the extent of the
aggregate Servicing Fee for the related Distribution Date. To the extent such
shortfalls exceed the amount of Compensating Interest that the Master Servicer
or such Sub-servicer is obligated to pay, the yield on the Securities could be
adversely affected. Partial prepayments in a given month may be applied to the
outstanding principal balances of the Mortgage Loans so prepaid on the first day
of the month of receipt or the month following receipt. In the latter case,
partial prepayments will not reduce the amount of interest passed through in
such month.
Under certain circumstances, the Depositor, the Master Servicer, the
holders of REMIC Residual Certificates or certain other entities specified in
the related Prospectus Supplement may have the option to purchase the Mortgage
Loans and other assets of a Trust, thereby effecting earlier retirement of the
related Series of Securities, subject to the principal balance of the related
Mortgage Assets being less than the percentage specified in the related
Prospectus Supplement of the aggregate principal balance of the Mortgage Assets
at the Cut-off Date for the related Series. See 'The Agreements--Termination;
Purchase of Mortgage Loans.'
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Unless otherwise specified in the related Prospectus Supplement, the
effective yield to Holders will be slightly lower than the yield otherwise
produced by the applicable Pass-Through Rate or Note Rate and purchase price,
because while interest generally will accrue on the 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.
The timing of payments on the Mortgage Assets may significantly affect an
investor's yield. In general, the earlier a prepayment of principal on the
Mortgage Assets, the greater will be the effect on an investor's yield to
maturity. As a result, the effect on an investor's yield of principal
prepayments occurring at a rate higher (or lower) than the rate anticipated by
the investor during the period immediately following the issuance of the
Securities will not be offset by a subsequent like reduction (or increase) in
the rate of principal payments.
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, including the effect of prepayments and allocation of realized
losses on the Mortgage Loans as they relate to specific Classes of Securities.
Factors other than those identified herein and in the Prospectus Supplement
could significantly affect principal prepayments at any time and over the lives
of the Securities. The relative combination of the various factors affecting
prepayment may also vary from time to time. There can be no assurance as to the
rate of payment of principal of the Mortgage Assets at any time or over the
lives of the Securities.
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THE AGREEMENTS
Set forth below is a summary of the material provisions of each Agreement
which are not described elsewhere in this Prospectus. The summary does not
purport to describe all provisions of each Agreement 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.
ASSIGNMENT OF MORTGAGE ASSETS
Assignment of the Mortgage Loans. At the time of issuance of the
Securities of a Series, the Depositor will cause the Mortgage Loans comprising
the related Trust to be sold and assigned to the Trustee, together with all
principal and interest received by or on behalf of the Depositor on or with
respect to such Mortgage Loans after the Cut-off Date, other than principal and
interest due on or before the Cut-off Date. The Trustee will, concurrently with
such assignment, deliver the Securities to the Depositor in exchange for the
Mortgage Loans. Each Mortgage Loan will be identified in a schedule appearing as
an exhibit to the related Agreement (a 'Mortgage Loan Schedule'). Such schedule
will include information as to the outstanding principal balance of each
Mortgage Loan after application of payments due on the Cut-off Date, as well as
information regarding the Mortgage Rate, the current scheduled monthly payment
of principal and interest, the maturity of the loan, the Loan-to-Value Ratio at
origination and certain other information.
In addition, unless otherwise specified in the related Prospectus
Supplement, the Depositor will be required:
(a) on or prior to the date of issuance of the related Securities (the
'Closing Date'), to deliver or cause the applicable Originator to deliver
to the Trustee the original Mortgage Notes or copies thereof certified by
the Depositor where the original Mortgage Note has been lost, endorsed
without recourse to the order of the Trustee;
(b) within 30 days after the Closing Date, to deliver or cause the
applicable Originator to deliver to the Trustee:
(i) either: (1) the original Mortgage, with evidence of recording
thereon, (2) where the original Mortgage has been transmitted for
recording, a computerized list of such Mortgages until such time as the
original or certified copy is returned by the public recording office or
(3) a copy of the Mortgage certified by the public recording office in
those instances where the original recorded Mortgage has been retained
by the public recording office or has been lost;
(ii) a computerized list of each title insurance policy or, if such
policy has not yet been issued, a commitment or binder therefor;
(iii) a copy of an assignment of the Mortgage to the Trustee;
(iv) originals of each intervening assignment with evidence of
recording thereon showing a complete chain of title from origination to
such Originator, or if the original of any such intervening assignment
is unavailable, a computerized list until such time as the original or a
copy certified by the public recording office is returned; and
(iv) originals of all assumptions and modification agreements, if
any.
(c) to cause assignments of the Mortgages from the applicable
Originator to the Trustee, promptly to be submitted for recording in the
appropriate jurisdictions; provided, however, that the applicable
Originator is not required to submit an assignment for any Mortgage with
respect to which the original recording information is lacking; and
(d) to deliver the original or certified copies of the Mortgages, as
the case may be, and such recorded assignments or certified copies thereof,
together with originals or duly certified copies of any and all prior
recorded assignments, to the Trustee within 30 days of receipt thereof by
the applicable Originator (but in any event within one year after the
Closing Date).
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With respect to each Mortgage Loan for which (i) all or a portion of the
proceeds thereof were originally paid into an escrow account pending completion
of improvements to be made to the related property and (ii) the appraised value
of such property was specifically subject to the completion of such improvements
(an 'Escrow Loan'), the Depositor is required to deliver or cause the applicable
Originator to deliver to the Trustee by the thirteenth month after the Closing
Date, the third party inspector's certificate of final completion pursuant to
which the inspector confirms that, upon inspection of the completed improvements
to the Mortgaged Property, all items listed by the appraiser have been performed
or completed.
The Trustee will be authorized to appoint a custodian pursuant to a
custodial agreement to maintain possession of and, if applicable, to review the
documents relating to the Mortgage Loans as agent of the Trustee.
Assignment of Private Mortgage-Backed Securities. The Depositor will cause
Private Mortgage-Backed Securities to be registered in the name of the Trustee.
The Trustee (or the custodian) will have possession of any certificated Private
Mortgage-Backed Securities. Unless otherwise specified in the related Prospectus
Supplement, the Trustee will not be in possession of or be assignee of record of
any underlying assets for a Private Mortgage-Backed Security. See 'The
Trusts--Private Mortgage-Backed Securities' herein. Each Private Mortgage-Backed
Security will be identified in a schedule appearing as an exhibit to the related
Agreement which will specify the original principal amount, outstanding
principal balance as of the Cut-off Date, annual pass-through rate or interest
rate and maturity date for each Private Mortgage-Backed Security conveyed to the
Trustee.
Reviews; Repurchases. In the event that any required appraiser's
certification or any such item with respect to title has not been delivered to
the Trustee by the thirteenth month after the Closing Date, then the applicable
Originator is required, on the next succeeding Distribution Date, at its option,
to (i) substitute in lieu of the related Mortgage Loan a qualified replacement
mortgage (each, a 'Qualified Replacement Mortgage') and, if the outstanding
principal amount of such Qualified Replacement Mortgage as of the first day of
the calendar month in which such Qualified Replacement Mortgage is conveyed to
the Trustee (each, a 'Replacement Cut-off Date') is less than the Loan Balance
of the replaced Mortgage Loan as of such Replacement Cut-off Date, deliver an
amount equal to such difference (the 'Substitution Amount') to the Master
Servicer for deposit in the Principal and Interest Account or (ii) purchase such
Mortgage Loan from the Trustee at a purchase price equal to the Loan Purchase
Price thereof. The 'Loan Purchase Price' means, with respect to any Mortgage
Loan, an amount equal to the Loan Balance of such Mortgage Loan as of the date
of purchase, plus accrued interest on the outstanding Loan Balance thereof,
together with the aggregate amounts of (i) all Delinquency Advances and
Servicing Advances theretofore made with respect to such Mortgage Loan and (ii)
all Delinquency Advances which the Master Servicer has theretofore failed to
remit with respect to such Mortgage Loan. The 'Loan Balance' of a Mortgage Loan
is the outstanding principal balance thereof on the Cut-off Date, less any
principal amounts relating to such Mortgage Loan previously distributed to
Certificateholders.
The Trustee will agree to review the items delivered by or on behalf of the
Depositor within 45 days after the Closing Date (or, with respect to any
document delivered after the Closing Date, within 45 days of receipt and with
respect to any Qualified Replacement Mortgage, within 45 days after the
assignment thereof) and to deliver to the Depositor a certification to the
effect that, as to each Mortgage Loan (other than any Mortgage Loan paid in full
or any Mortgage Loan specifically identified in such certification as not
covered by such certification), (i) all documents required to be delivered to it
pursuant to the applicable Agreement are in its possession, (ii) such documents
have been reviewed by it and have not been mutilated, damaged, torn or otherwise
physically altered and relate to such Mortgage Loan and (iii) based on its
examination and only as to the foregoing documents, the information set forth on
the applicable Mortgage Loan Schedule delivered by the Depositor as to loan
number and address, accurately reflects the information set forth in the
documents delivered to the Trustee (collectively referred to as the 'File'). The
Trustee is under no duty or obligation to inspect, review or examine any such
documents, instruments, certificates or other papers to determine that they are
genuine, enforceable, or appropriate for the represented purpose or that they
are other than what they purport to be on their face, nor is the Trustee under
any duty to determine independently whether there are any intervening
assignments or assumption or modification agreements with respect to any
Mortgage Loan.
If the Trustee during such 45-day period finds any document constituting a
part of a File which is not properly executed, has not been received, or is
unrelated to the Mortgage Loans identified in the related Mortgage
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Loan Schedule, or that any Mortgage Loan does not conform in a material respect
to the description thereof as set forth in the related Mortgage Loan Schedule,
the Trustee is required to promptly so notify the Depositor. The Depositor will
use or cause the applicable Originator to use reasonable efforts to remedy a
material defect in a document constituting part of a File of which it is so
notified by the Trustee. If, however, within 60 days after the Trustee's notice
to it respecting such defect the applicable Originator has not remedied the
defect and the defect materially and adversely affects the interest of the
Certificateholders in the related Mortgage Loan, such Originator is required, on
the next succeeding Distribution Date, to, at its option, (i) substitute in lieu
of such Mortgage Loan a Qualified Replacement Mortgage and deliver the
Substitution Amount applicable thereto to the Master Servicer for deposit in the
Principal and Interest Account, or (ii) purchase such Mortgage Loan at a
purchase price equal to the Loan Purchase Price thereof, provided a favorable
opinion of tax counsel is delivered in connection therewith.
Unless otherwise specified in the related Prospectus Supplement, the
Depositor will have assigned to the Trustee representations and warranties made
by the Originators in respect of the Mortgage Loans sold by the Depositor and
evidenced by a Series of Certificates. Such representations and warranties
generally include, among other things: (i) that title insurance (or in the case
of Mortgaged Properties located in areas where such policies are generally not
available, an attorney's certificate of title) was in effect on the Closing
Date; (ii) that the Depositor had title to each such Mortgage Loan and such
Mortgage Loan was subject to no offsets, defenses or counterclaims; (iii) that
each Mortgage Loan constituted a valid first or second lien on the Mortgaged
Property (subject only to permissible title insurance exceptions, if applicable,
and certain other exceptions described in the Agreement) and that the Mortgaged
Property was free from damage and was in good repair; (iv) that there were no
delinquent tax or assessment liens against the Mortgaged Property; (v) that no
required payment on a Mortgage Loan was more than thirty days delinquent as of
the related Cut-off Date; and (vi) that each Mortgage Loan was made in
compliance with, and is enforceable under, all applicable state and federal laws
and regulations in all material respects.
Upon the discovery by the Depositor, the Master Servicer or the Trustee
that the representations in the applicable Agreement are untrue in any material
respect as of the dates specified therein, with the result that the interests of
the Certificateholders in the related Mortgage Loan are materially and adversely
affected, the party discovering such breach is required to give prompt written
notice to the other parties. Upon the earliest to occur of the Depositor's
discovery, its receipt of notice of breach from any of the other parties or such
time as a situation resulting from a representation which is untrue materially
and adversely affects the interests of the Certificateholders, the Depositor is
required promptly to cause the applicable Originator to cure such breach in all
material respects or the Depositor will cause the applicable Originator to on
the second Distribution Date next succeeding such discovery, receipt of notice
or such other time, at its option (i) substitute in lieu of such affected
Mortgage Loan, a Qualified Substitute Mortgage and deliver an amount equal to
the applicable Substitution Amount to the Master Servicer for deposit in the
Principal and Interest Account or (ii) purchase such Mortgage Loan from the
Trustee at the Loan Purchase Price thereof. The obligation of the Originators so
to cure, substitute or purchase any Mortgage Loan as to which such a breach has
not been remedied constitutes the sole remedy available to the
Certificateholders or the Trustee respecting a discovery of any such statement
which is untrue in any material respect.
The purchase agreements pursuant to which the Depositor acquires the
Mortgage Assets to be deposited in a Trust will contain similar representations
and obligations pursuant to which the seller of such Mortgage Assets will be
obligated to take the actions required of the Depositor as described above. The
Trustee will have the ability to enforce such obligations directly against such
sellers in the event that the Depositor fails to do so.
PAYMENTS ON THE MORTGAGE LOANS
Unless otherwise specified in the related Prospectus Supplement, 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 meeting the requirements set forth in the related
Agreement. Pursuant to the related Agreement, the Master Servicer will be
required to deposit all collections (other than amounts escrowed for taxes and
insurance) related to the Mortgage Loans into the Principal and Interest Account
no later than the business day after receipt. All funds in the Principal and
Interest Accounts will be required to be invested
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in instruments designated as 'Eligible Investments' 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 may make withdrawals from the Principal and Interest
Account only for the following purposes: (a) to effect the timely remittance to
the Trustee of the Monthly Remittance and the Excess Interest due on the
Remittance Date; (b) to withdraw investment earnings on amounts on deposit in
the Principal and Interest Account; (c) to withdraw amounts that have been
deposited to the Principal and Interest Account in error; and (d) to clear and
terminate the Principal and Interest Account.
At any time and in lieu of the requirement of depositing collections on the
Mortgage Loans into the Principal and Interest Account, the Master Servicer may
deliver to the Trustee a letter of credit (a 'Servicer LOC') meeting the
requirements set forth in the Agreement.
Not later than the day of each month specified in the Agreement (the
'Remittance Date'), the Master Servicer will be required to wire transfer to the
Trustee for deposit in the segregated trust accounts to be maintained with the
Trustee for such purpose (each a 'Distribution Account') the sum (without
duplication) of the following amounts:
(i) an amount equal to the sum of (x) the aggregate portions of the
interest payments (whether or not collected) becoming due on the Mortgage
Loans during the immediately preceding calendar month (the 'Remittance
Period'), calculated at a per annum rate set forth in the Agreement (the
'Adjusted Pass-Through Rate') and (y) any Compensating Interest (calculated
at the Adjusted Pass-Through Rate) due with respect to the Mortgage Loans
with respect to the immediately preceding Remittance Period (the amount
described in this clause (i) being the 'Interest Remittance Amount');
(ii) an amount equal to the sum of (x) all principal collected by the
Master Servicer on the Mortgage Loans during the immediately preceding
Remittance Period and (y) any prepayments and Liquidation Proceeds, net of
unreimbursed Servicing Advances and Delinquency Advances ('Net Liquidation
Proceeds') (but only to the extent that such Net Liquidation Proceeds do
not exceed the Loan Balance of the related Mortgage Loan) and Released
Mortgaged Property Proceeds, in each case and only to the extent collected
on the Mortgage Loans during the preceding Remittance Period (the amount
described in this clause (ii) being the 'Principal Remittance Amount');
(iii) all Loan Purchase Prices and Substitution Amounts with respect
to such Distribution Date; and
(iv) an amount equal to the Excess Interest.
Unless otherwise specified in the related Prospectus Supplement, the 'Excess
Interest' for any Distribution Date is the product of (x) one-twelfth of the
difference between (i) the weighted average annual Mortgage Rate on the Mortgage
Loans as of the last day of the related Remittance Period and (ii) the Adjusted
Pass-Through Rate and (y) the Pool Principal Balance as of the last day of the
related Remittance Period to the extent such amount is received or advanced.
PRE-FUNDING AND CAPITALIZED INTEREST ACCOUNTS
If specified in the related Prospectus Supplement, a Trust will include one
or more segregated trust accounts (each, a 'Pre-Funding Account') established
and maintained with the Trustee for the related Series. If so specified, on the
closing date for such Series, a portion of the proceeds of the sale of the
Securities of such Series not to exceed fifty percent of the aggregate principal
amount of such Series (such amount, the 'Pre-Funded Amount') may be deposited in
the Pre-Funding Account and may be used to purchase additional Mortgage Assets
during the period of time not to exceed six months specified in the related
Prospectus Supplement (the 'Pre-Funding Period'). If any Pre-Funded Amount
remains on deposit in the Pre-Funding Account at the end of the Pre-Funding
Period, such amount will be applied in the manner specified in the related
Prospectus Supplement to prepay the Securities of the applicable Series.
Each additional Mortgage Asset must satisfy the eligibility criteria
specified in the related Prospectus Supplement and related Agreement. Such
eligibility criteria will be determined in consultation with each Rating Agency
(and/or any Enhancer) prior to the issuance of the related Series and are
designed to ensure that if such additional Mortgage Assets were included as part
of the initial Mortgage Assets, the credit quality of such assets
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would be consistent with the initial rating of the Securities of such Series.
The Depositor will certify to the Trustee that all conditions precedent to the
transfer of the additional Mortgage Assets to the Trust, including the
satisfaction of the eligibility criteria, have been satisfied. Following the
transfer of additional Mortgage Assets to the Trust, the aggregate
characteristics of the Mortgage Assets then held in the Trust may vary from
those of the initial Mortgage Assets of such Trust. As a result, the additional
Mortgage Assets may adversely affect the performance of the related Securities.
If a Pre-Funding Account is established, one or more segregated trust
accounts (each, a 'Capitalized Interest Account') may be established and
maintained with the Trustee for the related Series. On the closing date for such
Series, a portion of the proceeds of the sale of the Securities of such Series
will be deposited in the Capitalized Interest Account and used to fund the
excess, if any, of the sum of (i) the amount of interest accrued on the
Securities of such Series and (ii) if specified in the related Prospectus
Supplement, certain fees or expenses during the Pre-Funding Period such as
Trustee fees and credit enhancement fees, over the amount of interest available
therefor from the Mortgage Assets in the Trust. If so specified in the related
Prospectus Supplement, amounts on deposit in the Capitalized Interest Account
may be released to the person specified in the related Prospectus Supplement
prior to the end of the Pre-Funding Period subject to the satisfaction of
certain tests specified in the related Prospectus Supplement. Any amounts on
deposit in the Capitalized Interest Account at the end of the Pre-Funding Period
that are not necessary for such purposes will be distributed to the person
specified in the related Prospectus Supplement.
INVESTMENT OF ACCOUNTS
All or a portion of any Account, including the Principal and Interest
Account, may be invested and reinvested, in one or more Eligible Investments
bearing interest or sold at a discount. The bank serving as Trustee or any
affiliate thereof, may be the obligor on any investment in any Account which
otherwise qualifies as an Eligible Investment. No investment in any Account held
by the Trustee may mature later than the business day immediately preceding the
next succeeding Distribution Date; provided, however, that if the investment is
an investment of the bank serving as Trustee, then it may mature on the
Distribution Date.
The Trustee will not in any way be held liable by reason of any
insufficiency in any Account resulting from any loss on any Eligible Investment
included therein (except to the extent that the bank serving as Trustee is the
obligor thereon).
All income or other gain from investments in any Account will be required
to be deposited in such Account immediately upon receipt, and any loss resulting
from such investments will be required to be charged to such Account.
ELIGIBLE INVESTMENTS
Each Agreement generally will define the following as Eligible Investments:
(a) Direct general obligations of the United States or the obligations
of any agency or instrumentality of the United States, the timely payment
or the guarantee of which constitutes a full faith and credit obligation of
the United States.
(b) Federal Housing Administration debentures but excluding any such
securities whose terms do not provide for payment of a fixed dollar amount
upon maturity or call for redemption.
(c) FHLMC senior debt obligations, but excluding any such securities
whose terms do not provide for payment of a fixed dollar amount upon
maturity or call for redemption.
(d) Federal Home Loan Banks' consolidated senior debt obligations, but
excluding any such securities whose terms do not provide for payment of a
fixed dollar amount upon maturity or call for redemption.
(e) FNMA senior debt obligations, but excluding any such securities
whose terms do not provide for payment of a fixed dollar amount upon
maturity or call for redemption.
(f) Federal funds, certificates of deposit, time and demand deposits,
and bankers' acceptances (having original maturities of not more than 365
days) of any domestic bank, the short-term debt obligations of
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which have been rated A-1 or better by Standard & Poor's Corporation
('S&P') and P1 by Moody's Investors Service ('Moody's').
(g) 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 not in excess of the applicable limits insured by the
Bank Insurance Fund or the Savings Association Insurance Fund of the FDIC,
provided that the long-term deposits of such bank or savings and loan
association are rated at least 'BBB' by S&P and 'Baa3' by Moody's.
(h) Commercial paper (having original maturities of not more than 270
days) rated A-1 or better by S&P and P1 or better by Moody's.
(i) Investments in money market funds rated AAAm or AAAm-G by S&P and
P-1 by Moody's.
No instrument described above is permitted to evidence either the right to
receive (a) only interest with respect to obligations underlying such instrument
or (b) both principal and interest payments derived from obligations underlying
such instrument and the interest and principal payments with respect to such
instrument provided a yield to maturity at par greater than 120% of the yield to
maturity at par of the underlying obligations, and no instrument described above
may be purchased at a price greater than par if such instrument may be prepaid
or called at a price less than its purchase price prior to stated maturity.
DELINQUENCY ADVANCES AND COMPENSATING INTEREST
In order to maintain a regular flow of scheduled interest and principal
payments to Holders (rather than to guarantee or insure against losses) unless
otherwise provided in the related Prospectus Supplement, each Agreement will
require that if, on any Distribution Date, the amount then on deposit in the
Principal and Interest Account from Mortgage Loan collections with respect to
the preceding Remittance Period is less than the sum of the Interest Remittance
Amount, the Principal Remittance Amount and the aggregate amount of Excess
Interest with respect to the immediately preceding Remittance Period, the Master
Servicer is required to deposit in the Principal and Interest Account a
sufficient amount of its own funds ('Delinquency Advances') to make such amount
equal to the sum of the Interest Remittance Amount, the Principal Remittance
Amount and the aggregate amount of Excess Interest (unless a Subordinate Class
of Certificates is outstanding).
The Master Servicer is permitted to fund its payment of Delinquency
Advances on any Distribution Date from collections on the Mortgage Loans
deposited into the Principal and Interest Account subsequent to the related
Remittance Period, but must reimburse the Principal and Interest Account for any
such amounts. In the event that the Master Servicer makes such Delinquency
Advances from its own funds, such Delinquency Advances will be reimbursable to
the Master Servicer from late collections of interest, Liquidation Proceeds,
Insurance Proceeds and Released Mortgaged Property Proceeds collected with
respect to the related Mortgage Loan as to which the Delinquency Advances were
made. Delinquency Advances by the Master Servicer also will be reimbursable to
the Master Servicer from cash otherwise distributable to Holders at such time as
the Master Servicer determines that any such Delinquency Advances previously
made are not ultimately recoverable from the proceeds of the related Mortgage
Loan or, if required by the applicable Rating Agency, at such time as a loss is
realized with respect to a related Mortgage Loan.
Unless otherwise specified in the related Prospectus Supplement, a full
month's interest at the Adjusted Pass-Through Rate plus a full month's Excess
Interest with respect to such Mortgage Loan, is due to the Trustee on the
outstanding Loan Balance of each Mortgage Loan as of the beginning of each
Remittance Period. If a prepayment of a Mortgage Loan occurs during any calendar
month, any difference between the interest collected from the Mortgagor during
such calendar month and the full month's interest at the applicable Adjusted
Pass-Through Rate plus a full month's Excess Interest with respect to such
Mortgage Loan ('Compensating Interest') that is due is required to be deposited
by the Master Servicer in the Principal and Interest Account; provided, however,
that the Master Servicer's obligation in respect of the payment of Compensating
Interest is limited to the amount of the Servicing Fee for the related
Distribution Date.
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GENERAL SERVICING PROCEDURES
Acting directly or through one or more Sub-servicers, the Master Servicer,
as an independent contract servicer, is required to service and administer the
Mortgage Loans in accordance with the Sale and Servicing Agreement or the
Pooling and Servicing Agreement, as applicable.
The Master Servicer in its own name or in the name of any Sub-servicer is
authorized and empowered pursuant to the Agreement (i) to execute and deliver
any and all instruments of satisfaction or cancellation or of partial or full
release or discharge and all other comparable instruments with respect to the
Mortgage Loans and with respect to the Mortgaged Properties, (ii) to institute
foreclosure proceedings or obtain a deed in lieu of foreclosure so as to effect
ownership of any Mortgaged Property in its own name on behalf of the Trustee,
and (iii) to hold title in its own name to any Mortgaged Property upon such
foreclosure or deed in lieu of foreclosure on behalf of the Trustee; provided,
however, that to the extent any instrument described in clause (i) would be
delivered by the Master Servicer outside of its ordinary procedures for mortgage
loans held for its own account, the Master Servicer may be required, prior to
executing and delivering such instrument, to obtain the prior written consent of
the Enhancer, if any.
The Master Servicer has the right to approve requests of Mortgagors for
consent to (i) partial releases of Mortgages, (ii) alterations, and (iii)
removal, demolition or division of Mortgaged Properties subject to Mortgages.
The Agreement generally will provide that no such request may be approved by the
Master Servicer unless: (i) (x) provisions of the related Note and Mortgage have
been complied with, (y) the Loan-to-Value Ratio after any release does not
exceed the Loan-to-Value Ratio set forth for such Mortgage Loan in the
applicable Mortgage Loan Schedule, and (z) the lien priority of the related
Mortgage is not affected; or (ii) if applicable, the Certificate Insurer has
approved the granting of such request.
The Master Servicer and any affiliate may make loans to and generally
engage in any kind of business with the Mortgagors and/or any other obligors
under the Mortgage Loans as though the Master Servicer were not a party to the
Agreement. The Master Servicer may have other existing loans and in the future
may make additional loans to any of the Mortgagors and/or to other obligors
under the Mortgage Loans, which other and/or additional loans may not be sold,
or a loan participation therein granted, to the Trustee. The Master Servicer has
no obligation to attempt to collect payment under the Mortgage Loans in
preference and priority over the collection and/or enforcement of any other
and/or additional loans by the Master Servicer or any other affiliate.
The Master Servicer is required generally to service the Mortgage Loans in
a Pool in a prudent manner consistent with its general servicing standards and
to make reasonable efforts to collect all payments called for under the terms
and provisions of such Mortgage Loans, and will agree, to the extent such
procedures are consistent with the provisions of the Agreement, to follow
collection procedures for all Mortgage Loans at least as rigorous as those the
Master Servicer would ordinarily take in servicing loans and in collecting
payments thereunder for its own account.
Consistent with the foregoing, the Master Servicer may (i) in its
discretion waive or permit to be waived any late payment charge, prepayment
charge, assumption fee or any penalty interest in connection with the prepayment
of a Mortgage Loan or any other fee or charge which the Master Servicer would be
entitled to retain as servicing compensation, (ii) extend the due date for
payments due on a Mortgage Note for a period (with respect to each payment date
as to which the due date is extended) not greater than 125 days after the
initially scheduled due date for such payment, (iii) amend any Mortgage Note to
reduce the Mortgage Rate applicable thereto, subject to any applicable
limitations set forth in the related Agreement and (iv) amend any Mortgage Note
to extend the maturity thereof, subject to any applicable limitations set forth
in the related Agreement. In the event the Master Servicer consents to the
deferment of the due dates for payments due on a Mortgage Note, the Master
Servicer will be nonetheless required to make payment of any required
Delinquency 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.
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SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
As compensation for its servicing activities under an Agreement, the Master
Servicer will be entitled to retain the amount of the Servicing Fee (as defined
in the related Agreement) with respect to each Mortgage Loan. Additional
servicing compensation in the form of prepayment charges, release fees, bad
check charges, assumption fees, extension fees, late payment charges, and any
other servicing-related fees, Net Liquidation Proceeds not required to be
deposited in the Principal and Interest Account and similar items may, to the
extent collected from Mortgagors, be retained by the Master Servicer.
The Master Servicer will be 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, (ii) any enforcement or
judicial proceedings, including foreclosures, and (iii) the management and
liquidation of Mortgaged Property acquired in satisfaction of the related
Mortgage. 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, advancing delinquent
property taxes, and upkeep and maintenance of the Mortgaged 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. Unless otherwise specified in the related Prospectus
Supplement, the Master Servicer will be entitled to recover Servicing Advances
to the extent permitted by the Mortgage Loans or, if not theretofore recovered
from the Mortgagor on whose behalf such Servicing Advance was made, from
Liquidation Proceeds, relating to the affected Mortgage 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.
MAINTENANCE OF HAZARD INSURANCE
Unless otherwise specified in the related Prospectus Supplement, the Master
Servicer will be required to cause to be maintained fire and hazard insurance
with extended coverage customary in the area where the Mortgaged Property is
located, in an amount which is at least equal to the least of (i) the
outstanding principal balance owing on the Mortgage Loan and the related senior
mortgage, if any, (ii) the full insurable value of the premises securing the
Mortgage Loan, and (iii) the minimum amount required to compensate for damage or
loss on a replacement cost basis. If the 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),
the Master Servicer will be required to cause to be purchased a flood insurance
policy with a generally acceptable insurance carrier, in an amount representing
coverage not less than the least of (a) the outstanding principal balance of the
Mortgage Loan and the senior mortgage, if any, (b) the full insurable value of
the Mortgaged Property, or (c) 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, on REO
Property, fire and hazard insurance in the applicable amounts described above,
liability insurance and, to the extent required and available under the National
Flood Insurance Act of 1968, as amended, flood insurance in an amount equal to
that required above. 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 Mortgagor in accordance with
customary first or second mortgage servicing procedures) are required to be
deposited by the Master Servicer in the Principal and Interest Account.
In the event that the Master Servicer obtains and maintains a blanket
policy insuring against fire and hazards of extended coverage on all of the
Mortgage Loans, then, to the extent such policy names the Trustee as loss payee
and provides coverage in an amount equal to the aggregate unpaid principal
balance on the Mortgage Loans without co-insurance, and otherwise complies with
the requirements of the preceding paragraph, the Master Servicer will be deemed
conclusively to have satisfied its obligations with respect to fire and hazard
insurance coverage. If such blanket policy contains a deductible clause, the
Master Servicer will be required to pay to the Trustee the difference between
the amount that would have been payable under a policy described in the
preceding paragraph and the amount paid under the blanket policy.
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ENFORCEMENT OF DUE ON SALE CLAUSES
Unless otherwise specified in the related Prospectus Supplement, when a
Mortgaged Property has been or is about to be conveyed by the Mortgagor, the
Master Servicer, on behalf of the Trustee, will, to the extent it has knowledge
of such conveyance or prospective conveyance, be required to enforce the rights
of the Trustee as the mortgagee of record to accelerate the maturity of the
related Mortgage Loan under any 'due-on-sale' clause contained in the related
Mortgage or Mortgage Note; provided, however, that the Master Servicer will not
be required to exercise any such right if the 'due-on-sale' clause, in the
reasonable belief of the Master Servicer, is not enforceable under applicable
law, if such enforcement would materially increase the risk of default or
delinquency on, or materially decrease the security for, such Mortgage Loan or
if the applicable Enhancer, if any, gives its consent to such non-enforcement.
In such event, the Master Servicer will attempt to enter into an assumption and
modification agreement with the person to whom such property has been or is
about to be conveyed, pursuant to which such person becomes liable under the
Mortgage Note and, to the extent permitted by applicable law or the mortgage
documents, the Mortgagor remains liable thereon. The Master Servicer also will
be authorized with the prior approval of the Enhancer, if any, to enter into a
substitution of liability agreement with such person, pursuant to which the
original Mortgagor is released from liability and such person is substituted as
Mortgagor and becomes liable under the Mortgage Note. The Master Servicer will
not enter into an assumption agreement unless permitted by applicable law and
unless such assumption agreement would not materially increase the risk of
default or delinquency on, or materially decrease the security for, such
Mortgage Loan.
REALIZATION UPON DEFAULTED MORTGAGE LOANS
Unless otherwise specified in the related Prospectus Supplement, the Master
Servicer is required to foreclose upon or otherwise comparably effect the
ownership in the name of the Master Servicer on behalf of the Trustee of
Mortgaged Properties relating to defaulted Mortgage Loans as to which no
satisfactory arrangements can be made for collection of delinquent payments and
which the Master Servicer has not purchased pursuant to its purchase option
described below, unless the Master Servicer reasonably believes that Net
Liquidation Proceeds with respect to such Mortgage Loan would not be increased
as a result of such foreclosure or other action, in which case such Mortgage
Loan will be charged off and will become a Liquidated Mortgage Loan. In
connection with such foreclosure or other conversion, the Master Servicer is
required to exercise or use foreclosure procedures with the same degree of care
and skill as it would ordinarily exercise or use under the circumstances in the
conduct of its own affairs. Any amounts advanced in connection with such
foreclosure or other action will constitute Servicing Advances. In accordance
with the Agreement, if the Master Servicer has actual knowledge that a Mortgaged
Property which the Master Servicer is contemplating acquiring in foreclosure or
by deed in lieu of foreclosure contains environmental or hazardous waste risks
known to the Master Servicer, the Master Servicer will notify the Enhancer, if
any, and the Trustee prior to acquiring the Mortgaged Property. The Master
Servicer will not be permitted to take any action with respect to such a
Mortgaged Property without the prior written approval of the Enhancer, if any.
Unless otherwise specified in the related Prospectus Supplement, if a REMIC
election has been made, the Master Servicer will be required to sell any
Mortgaged Property acquired by foreclosure or deed in lieu of foreclosure ('REO
Property') within 23 months of its acquisition by the Trustee, unless the Master
Servicer obtains for the Trustee an opinion of counsel experienced in federal
income tax matters, addressed to the Trustee and the Master Servicer, to the
effect that the holding by the Trust of such REO Property for a greater
specified period will not result in the imposition of taxes on 'prohibited
transactions' of the Trust as defined in Section 860F of the Code or cause the
Trust to fail to qualify as a REMIC.
The Master Servicer is required to determine, with respect to each
defaulted Mortgage Loan, when it has recovered, whether through trustee's sale,
foreclosure sale or otherwise, all amounts, if any, it expects to recover from
or on account of such defaulted Mortgage Loan, whereupon such Mortgage Loan
shall become a 'Liquidated Mortgage Loan.'
Unless otherwise specified in the related Prospectus Supplement, the Master
Servicer will have the right and the option under the related Agreement, but not
the obligation, to purchase for its own account any Mortgage Loan (i) which
becomes delinquent, in whole or in part, as to four consecutive monthly
installments or any
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Mortgage Loan as to which enforcement proceedings have been brought by the
Master Servicer or (ii) with respect to which the applicable Enhancer, if any,
has refused to consent to the Master Servicer's non-enforcement of the
'due-on-sale' clause and such Mortgage Loan is in default or such a default is
imminent. Any such Mortgage Loan so purchased will be purchased by the Master
Servicer on a Distribution Date at the Loan Purchase Price thereof.
SUBSERVICERS
The Master Servicer will be permitted under the Agreement to enter into
subservicing arrangements with sub-servicers meeting the requirements of the
Agreement (each, a 'Sub-servicer'). Any material subservicing arrangements, if
any, will be described in the related Prospectus Supplement, and in any case,
will not relieve the Master Servicer of any liability it might otherwise have,
had the subservicing arrangement not been entered into.
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT
Pooling and Servicing Agreement; Sale and Servicing Agreement. Unless
otherwise specified in the related Prospectus Supplement the Trustee may remove
the Master Servicer upon the occurrence of any of the following events (each, an
'Event of Default'):
(i) The Master Servicer shall (a) apply for or consent to the
appointment of a receiver, trustee, liquidator or custodian or similar
entity with respect to itself or its property, (b) admit in writing its
inability to pay its debts generally as they become due, (c) make a general
assignment for the benefit of creditors, (d) be adjudicated a bankrupt or
insolvent, (e) commence a voluntary case under the federal bankruptcy laws
of the United States of America or file a voluntary petition or answer
seeking reorganization, an arrangement with creditors or an order for
relief or seeking to take advantage of any insolvency law or file an answer
admitting the material allegations of a petition filed against it in any
bankruptcy, reorganization or insolvency proceeding or (f) cause corporate
action to be taken by it for the purpose of effecting any of the foregoing;
or
(ii) If without the application, approval or consent of the Master
Servicer, a proceeding shall be instituted in any court of competent
jurisdiction, under any law relating to bankruptcy, insolvency,
reorganization or relief of debtors, seeking in respect of the Master
Servicer an order for relief or an adjudication in bankruptcy,
reorganization, dissolution, winding up, liquidation, a composition or
arrangement with creditors, of a readjustment of debts, the appointment of
a trustee, receiver, liquidator or custodian or similar entity with respect
to the Master Servicer or of all or any substantial part of its assets, or
other like relief in respect thereof under any bankruptcy or insolvency
law, and, if such proceeding is being contested by the Master Servicer in
good faith, the same shall (a) result in the entry of an order for relief
or any such adjudication or appointment or (b) continue undismissed or
pending and unstayed for any period of seventy-five (75) consecutive days;
or
(iii) The Master Servicer shall fail to perform any one or more of its
obligations under the related Agreement (other than its obligations
referenced in clauses (vi) and (vii) below) and shall continue in default
thereof for a period of thirty (30) days after the earlier to occur of (x)
the date on which an authorized officer of the Master Servicer knows or
reasonably should know of such failure or (y) receipt by the Master
Servicer of a written notice from the Trustee, any Holder, the Depositor or
the Enhancer, if any, of said failure; provided, however, that if the
Master Servicer demonstrates to the reasonable satisfaction of the
Enhancer, if any, that it is diligently pursuing corrective action, the
cure period may be extended for up to an additional 60 days; or
(iv) The Master Servicer shall fail to cure any breach of any of its
representations and warranties set forth in the related Agreement which
materially and adversely affects the interests of the Holders or the
Enhancer, if any, for a period of thirty (30) days after the earlier of (x)
the date on which an authorized officer of the Master Servicer knows or
reasonably should know of such breach or (y) receipt by the Master Servicer
of a written notice from the Trustee, any Holder, the Depositor or the
Enhancer, if any, of such breach; provided, however, that if the Master
Servicer demonstrates to the reasonable satisfaction of the Enhancer, if
any, that it is diligently pursuing corrective action, the cure period
shall be extended for up to an additional 30 days; or
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(v) If the Enhancement consists of a certificate guaranty insurance
policy and the Enhancer pays out any money under such policy, or if the
Enhancer otherwise funds any shortfall with its own money, because the
amounts available to the Trustee (other than from the Enhancer) are
insufficient to make required distributions on the Securities; provided,
however, that the Master Servicer may not be removed under this clause (v)
if the Master Servicer can demonstrate to the reasonable satisfaction of
the Trustee and the Enhancer that such event was due to circumstances
beyond the control of the Master Servicer; or
(vi) The failure by the Master Servicer to make any required Servicing
Advance for a period of 30 days following the earlier of (x) the date on
which an authorized officer of the Master Servicer knows or reasonably
should know of such failure or (y) receipt by the Master Servicer of a
written notice from the Trustee, any Holder, the Depositor or the Enhancer,
if any, of such failure; or
(vii) The failure by the Master Servicer to make any required
Delinquency Advance or to pay any Compensating Interest or to pay over the
Monthly Remittance, Loan Purchase Prices and Substitution Amounts;
provided, however, that (x) prior to any removal of the Master Servicer pursuant
to clauses (i) through (vi) above, any applicable grace period granted by any
such clause shall have expired prior to the time such occurrence shall have been
remedied and (y) in the event of the refusal or inability of the Master Servicer
to comply with its obligations described in clause (vii) above, such removal
shall be effective (without the requirement of any action on the part of the
Depositor, the Trustee or the Enhancer, if any) at 4 p.m. on the second business
day following the day on which the Trustee notifies the Master Servicer that a
required amount described in clause (vii) above has not been received by the
Trustee, unless the required amount described in clause (vii) above is paid by
the Master Servicer prior to such time. Upon the Trustee's determination that a
required amount described in clause (vii) above has not been made by the Master
Servicer, the Trustee will so notify the Master Servicer, the Depositor and the
Enhancer, if any, as soon as is reasonably practical.
The Master Servicer may not resign from the obligations and duties imposed
on it under the related Agreement, except upon determination that its duties
thereunder are no longer permissible under applicable law or are in material
conflict by reason of applicable law with any other activities carried on by it,
the other activities of the Master Servicer so causing such a conflict being of
a type and nature carried on by the Master Servicer at the date of the related
Agreement. Any such determination permitting the resignation of the Master
Servicer shall be evidenced by an opinion of counsel to such effect which shall
be delivered to the Trustee, the Depositor and the Enhancer, if any. The Master
Servicer may not assign its obligations under an Agreement, in whole or in part,
unless it shall have first obtained the written consent of the Trustee and the
Enhancer, if any; provided, however, that any assignee must meet the eligibility
requirements set forth in the Agreement for a successor servicer.
No removal or resignation of the Master Servicer will become effective
until the Trustee or a successor servicer has assumed the Master Servicer's
responsibilities and obligations in accordance with the related Agreement.
Any person into which the Master Servicer may be merged or consolidated, or
any person resulting from any merger or consolidation to which the Master
Servicer is a party, or any person succeeding to the business of the Master
Servicer, will be the successor of the Master Servicer under each Agreement,
provided that such person is qualified to sell mortgage loans to, and service
mortgage loans on behalf of, FNMA or FHLMC and further provided that such
merger, consolidation or succession does not adversely affect the then current
rating or ratings of the Class or Classes of Certificates of such Series that
have been rated.
Indenture. Unless otherwise specified in the related Prospectus
Supplement, Events of Default under the Indenture for each Series of Notes
include: (i) a default for 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 Depositor or the Trust in the Indenture which continues for a period of
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 Depositor or the Trust 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 60
days after notice thereof is given in accordance with the procedures described
in the
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related Prospectus Supplement; (iv) certain events of bankruptcy, insolvency,
receivership or liquidation of the Depositor or the Trust; 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
with, if specified in the related Prospectus Supplement, the consent of the
Enhancer, 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, unless
otherwise specified in the related Prospectus Supplement, 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 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 66 2/3% 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 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 Notes 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 offer 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.
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TRUSTEE TO ACT AS SUCCESSOR MASTER SERVICER
Unless otherwise specified in the related Prospectus Supplement, upon
removal or resignation of the Master Servicer, the Trustee (x) may solicit bids
for a successor master servicer, and (y) pending the appointment of a successor
master servicer as a result of soliciting such bids, will be required to serve
as Master Servicer. The Trustee, if it is unable to obtain a qualifying bid and
is prevented by law from acting as Master Servicer, may appoint, or petition a
court of competent jurisdiction to appoint, any housing and home finance
institution, bank or mortgage servicing institution which has been designated as
an approved seller-servicer by FNMA or FHLMC for first and second mortgage loans
and has equity of not less than $15,000,000, as determined in accordance with
generally accepted accounting principles, and acceptable to the Certificate
Insurer, if any.
The Trustee or any other successor Master Servicer, upon assuming the
duties of the Master Servicer is required to immediately make payment of all
Compensating Interest and all Delinquency Advances which the Master Servicer has
theretofore failed to remit with respect to the Mortgage Loans; provided,
however, that if the Trustee is acting as successor Master Servicer, the Trustee
is only required to make Delinquency Advances (including the Delinquency
Advances described in this sentence) if, in the Trustee's reasonable good faith
judgment, such Delinquency Advances will ultimately be recoverable from the
related Mortgage Loans.
EVIDENCE AS TO COMPLIANCE
Each Agreement will provide that on or before a specified date in each
year, a firm of independent public accountants will furnish a statement to the
Trustee to the effect that, on the basis of the examination by such firm
conducted substantially in compliance with the Uniform Single Attestation
Program for Mortgage Bankers or the Audit Guide for Audits of HUD Approved
Nonsupervised Mortgagees, the servicing by or on behalf of the Master Servicer
of mortgage loans or private mortgage-backed securities under pooling and
servicing agreements substantially similar to each other (including the related
Agreement) was conducted in compliance with such agreements except for any
significant exceptions or errors in records that, in the opinion of the firm,
the Uniform Single Attestation Program for Mortgage Bankers or the Audit Guide
for Audits of HUD Approved Nonsupervised Mortgagees requires it to report.
Each Agreement will also provide for delivery to the Trustee, on or before
a specified date in each year, of an annual statement signed by an authorized
officer of the Master Servicer to the effect that the Master Servicer has
fulfilled its obligations under the Agreement throughout the preceding year.
Copies of the annual accountants' statement and the officer's statement may
be obtained by Holders of the related Series without charge upon written request
to the Master Servicer at the address set forth in the related Prospectus
Supplement.
AMENDMENTS
The Trustee, the Depositor and the Master Servicer may at any time and from
time to time, with the consent of the Enhancer, if any, but without the consent
of the Holders, amend the related Agreement, for the purposes of (a) curing any
ambiguity, or correcting or supplementing any provision of such agreement which
may be inconsistent with any other provision of such agreement, (b) if a REMIC
election has been made and if accompanied by an approving opinion of counsel
experienced in federal income tax matters, removing the restriction against the
transfer of a Residual Certificate to a Disqualified Organization (as such term
is defined in the Code) or (c) complying with the requirements of the Code;
provided, however, that such action shall not, as evidenced by an opinion of
counsel delivered to the Trustee, materially and adversely affect the interests
of any Holder or materially and adversely affect (without its written consent)
the rights and interests of the Enhancer, if any.
The related Agreement may also be amended by the Trustee, the Depositor and
the Master Servicer at any time and from time to time, with the prior written
approval of the Enhancer, if any, and of not less than a majority of the
Percentage Interests (as defined in the Agreement) represented by each affected
Class of Securities then outstanding, for the purpose of adding any provisions
or changing in any manner or eliminating any of the provisions thereof or of
modifying in any manner the rights of the Holders thereunder; provided, however,
that no such amendment shall (a) change in any manner the amount of, or delay
the timing of, payments which are
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required to be distributed to any Holder without the consent of such Holder or
(b) change the aforesaid percentages of Percentage Interests which are required
to consent to any such amendments, without the consent of the Holders of all
Securities of the Class or Classes affected then outstanding. If a REMIC
election has been made with respect to the related Trust, any such amendment
must be accompanied by an opinion of tax counsel as to REMIC matters.
TERMINATION; OPTIONAL TERMINATION
Pooling and Servicing Agreement; Trust Agreement. The obligations created
by the Pooling and Servicing Agreement or the Trust Agreement for each Series
will terminate upon the payment to the related Holders of all amounts held in
any Accounts or by the Master Servicer and required to be paid to them pursuant
to such Agreement following the later of (i) the final payment or other
liquidation of the last of the Mortgage Assets subject thereto or the
disposition of all property acquired upon foreclosure or deed in lieu of
foreclosure of any such Mortgage Assets remaining in the Trust and (ii) the
purchase by the Master Servicer or other entity specified in the related
Prospectus Supplement including, if REMIC treatment has been elected, by the
holder of the residual interest in the REMIC from the related Trust of all of
the remaining Mortgage Assets and all property acquired in respect of such
Mortgage Assets.
Any such purchase of Mortgage Assets and property acquired in respect of
Mortgage Assets will be made at the option of the Master Servicer or other
entity at a price, and in accordance with the procedures, specified in the
Prospectus Supplement. The exercise of such right will effect early retirement
of the Securities of that Series, but the right of the Master Servicer or other
entity to so purchase is subject to the principal balance of the related
Mortgage Assets being less than the percentage specified in the related
Prospectus Supplement of the aggregate principal balance of the Mortgage Assets
at the Cut-off Date for the Series. The foregoing is subject to the provisions
that if a REMIC election is made with respect to a Trust, any repurchase
pursuant to clause (ii) above will be made only in connection with a 'qualified
liquidation' of the REMIC within the meaning of Section 860F(g)(4) of the Code.
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 will
provide that, if so specified with respect to the Notes of any Series, the
related Trust 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
Distribution 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.
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 Depositor will be obligated to appoint a successor Trustee.
The Depositor may remove the Trustee if the Trustee ceases to be eligible to
continue as such under the Agreement or if the Trustee becomes insolvent. Any
resignation or removal of the Trustee and appointment of a successor Trustee
will not become effective until acceptance of the appointment by the successor
Trustee.
Each Agreement will provide that the Trustee is under no obligation to
exercise any of the rights or powers vested in it by the Agreement at the
request or direction of any of the Holders, unless such Holders shall have
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offered to the Trustee reasonable security or indemnity against the costs,
expenses and liabilities which might be incurred by it in compliance with such
request or direction. The Trustee may execute any of the rights or powers
granted by the Agreement or perform any duties thereunder either directly or by
or through agents or attorneys, and the Trustee is responsible for any
misconduct or negligence on the part of any agent or attorney appointed and
supervised with due care by it thereunder.
Pursuant to the Agreement, the Trustee is not liable for any action it
takes or omits to take in good faith which it reasonably believes to be
authorized by an authorized officer of any person or within its rights or powers
under the Agreement.
Each Agreement will provide that no Holder has any right to institute any
proceeding, judicial or otherwise, with respect to the Agreement or any credit
enhancement, unless:
(1) such Holder has previously given written notice to the Depositor
and the Trustee of such Holder's intention to institute such proceeding;
(2) the Holders of not less than 25% of the Percentage Interests
represented by any Class of Securities then outstanding shall have made
written request to the Trustee to institute such proceeding in its own name
as representative of the Holders;
(3) such Holder or Holders have offered to the Trustee reasonable
indemnity against the costs, expenses and liabilities to be incurred in
compliance with such request;
(4) the Trustee for 30 days after its receipt of such notice, request
and offer of indemnity, has failed to institute such proceeding; and
(5) no direction inconsistent with such written consent has been given
to the Trustee during such 30-day period by the Holders of a majority of
the Percentage Interests represented by each Class of Securities then
outstanding.
Each Agreement will provide that no one or more Holders shall have any
right in any manner whatever by virtue of, or by availing themselves of, any
provision of the Agreement to affect, disturb or prejudice the rights of any
Holder or to obtain or to seek to obtain priority or preference over any other
Holder or to enforce any right under the Agreement, except in the manner herein
provided and for the equal and ratable benefit of all of the Holders.
In the event the Trustee receives conflicting or inconsistent requests and
indemnity from two or more groups of Holders, each representing less than a
majority of the applicable Class of Securities, the Trustee in its sole
discretion may determine what action, if any, shall be taken.
The Trustee, prior to the occurrence of an Event of Default and after the
curing of all Events of Default which may have occurred, undertakes to perform
such duties and only such duties as are specifically set forth in the Agreement.
If an Event of Default has occurred and has not been cured or waived, each
Agreement requires the Trustee to exercise such of the rights and powers vested
in it by the Agreement, and use the same degree of care and skill in its
exercise as a prudent person would exercise or use under the circumstances in
the conduct of such person's own affairs. Prior to the occurrence of an Event of
Default, and after the curing of all such Events of Default which may have
occurred, the Trustee (i) undertakes to perform such duties and only such duties
as are specifically set forth in the Agreement, and no implied covenants or
obligations shall be read into the Agreement against the Trustee and (ii) in the
absence of bad faith on its part, may conclusively rely, as to the truth of the
statements and the correctness of the opinions expressed therein, upon
certificates or opinions furnished pursuant to and conforming to the
requirements of the Agreement; provided, however, that such provisions do not
protect the Trustee or any such person against any liability which would
otherwise be imposed by reason of negligent actions, negligent failure to act or
willful misconduct in the performance of duties or by reason of reckless
disregard of obligations and duties thereunder.
The Trustee and any director, officer, employee or agent of the Trustee may
rely and will be protected in acting or refraining from acting in good faith in
reliance on any certificate, notice or other document of any kind prima facie
properly executed and submitted by the authorized officer of any person
respecting any matters arising under the Agreement.
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CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS
GENERAL
The following discussion contains summaries, which are general in nature,
of material legal matters relating to the Mortgage Loans. Because such legal
aspects are governed primarily by applicable state law (which laws may differ
substantially), the summaries do not purport to be complete or to reflect the
laws of any particular state, or to encompass the laws of all states in which
the security for the Mortgage Loans is situated.
NATURE OF THE MORTGAGE LOANS
The Single Family Loans and Multifamily Loans 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.
Certain of the Mortgage Loans may be loans secured by condominium units.
The condominium building may be a multi-unit building or buildings, or a group
of buildings whether or not attached to each other, located on property subject
to condominium ownership. Condominium ownership is a form of ownership of a real
property wherein each owner is entitled to the exclusive ownership and
possession of his or her individual condominium unit and also owns a
proportionate undivided interest in all parts of the condominium building (other
than the individual condominium units) and all areas or facilities, if any, for
the common use of the condominium units. The condominium unit owners appoint or
elect the condominium association to govern the affairs of the condominium.
FORECLOSURE/REPOSSESSION
Foreclosure of a deed of trust is generally accomplished by a non-judicial
sale under a specific provision in the deed of trust which authorizes the
trustee to sell the property at public auction upon any default by the borrower
under the terms of the note or deed of trust. 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. Before
such non-judicial sale 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
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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 may purchase 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.
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 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.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states have adopted statutory prohibitions restricting the right of
the beneficiary or mortgagee to obtain a deficiency judgment against borrowers
financing the purchase of their residence or following sale under a deed of
trust or certain other foreclosure proceedings. A deficiency judgment is a
personal judgment against the borrower equal in most cases to the difference
between the amount due to the lender and the fair market value of the real
property sold 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 anti-deficiency and related legislation, numerous other
federal and state 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 its security. For
example, in a proceeding under the federal Bankruptcy Code, a lender may not
foreclose on the mortgaged property without the permission of the bankruptcy
court. The rehabilitation plan proposed by the debtor may provide, if the court
determines that the value of the mortgaged property is less than the principal
balance of the mortgage loan, for the reduction of the secured indebtedness to
the value of the mortgaged property as of the date of the commencement of the
bankruptcy, rendering the lender a general unsecured creditor for the
difference, and also may reduce the monthly
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payments due under such mortgage loan, change the rate of interest and alter the
mortgage loan repayment schedule. The effect of any such proceedings under the
federal Bankruptcy Code, including but not limited to any automatic stay, could
result in delays in receiving payments on the Mortgage Loans underlying a Series
of Securities and possible reductions in the aggregate amount of such payments.
Some states also have homestead exemption laws which would protect a principal
residence from a liquidation in bankruptcy.
Federal and local real estate tax laws provide priority to certain tax
liens over the lien of a mortgage or secured party. Numerous federal and state
consumer protection laws impose substantive requirements upon mortgage lenders
and manufactured housing lenders in connection with the origination, servicing
and enforcement of such loans. These laws include the federal Truth-in-Lending
Act, Real Estate Settlement Procedures Act, Equal Credit Opportunity Act, Fair
Credit Billing Act, Fair Credit Reporting Act and related statutes and
regulations. These federal and state laws impose specific statutory liabilities
upon lenders who fail to comply with the provisions of the law. In some cases,
this liability may affect assignees of the loans.
DUE-ON-SALE CLAUSES
Unless otherwise provided in the related Prospectus Supplement, each
conventional Mortgage Loan will contain a due-on-sale clause which will
generally provide that if the Mortgagor sells, transfers or conveys the
Mortgaged Property, the Mortgage Loan may be accelerated by the mortgagee. The
Garn-St Germain Depository Institutions Act of 1982 (the 'Garn-St Germain Act'),
subject to certain exceptions, preempts state constitutional, statutory and case
law prohibiting the enforcement of due-on-sale clauses. As to loans secured by
an owner-occupied residence (which could include a manufactured home), the
Garn-St Germain Act sets forth nine specific instances in which a mortgagee
covered by the Act may not exercise its rights under a due-on-sale clause,
notwithstanding the fact that a transfer of the property may have occurred. The
inability to enforce a due-on-sale clause may result in transfer of the related
mortgaged property to an uncreditworthy person, which could increase the
likelihood of default.
PREPAYMENT CHARGES
Under certain state laws, prepayment charges may not be imposed after a
certain period of time following origination of the mortgage loans with respect
to prepayments on mortgage loans secured by liens encumbering owner-occupied
residential properties. Since many of the Mortgaged Properties will be
owner-occupied, it is anticipated that prepayment charges may not be imposed
with respect to many of the Mortgage Loans. The absence of such a restraint on
prepayment, particularly with respect to fixed rate Single Family Loans having
higher Mortgage Rates, may increase the likelihood of refinancing or other early
retirement of such Mortgage Loans. Legal restrictions, if any, on prepayment of
Multifamily Loans will be described in the related Prospectus Supplement.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, enacted in March 1980 ('Title V'), provides that state usury
limitations shall not apply to certain types of residential first mortgage loans
originated by certain lenders after March 31, 1980. The Office of Thrift
Supervision, as successor to the Federal Home Loan Bank Board, is authorized to
issue rules and regulations and to publish interpretations governing
implementation of Title V. The statute authorized the states to reimpose
interest rate limits by adopting, before April 1, 1983, a law or constitutional
provision which expressly rejects an application of the federal law. In
addition, even where Title V is not so rejected, any state is authorized by the
law to adopt a provision limiting discount points or other charges on mortgage
loans covered by Title V. Certain states have taken action to reimpose interest
rate limits and/or to limit discount points or other charges.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT
Generally, under the terms of the Relief Act, a Mortgagor who enters
military service after the origination of the related Mortgage Loan (including a
Mortgagor who is a member of the National Guard or is in reserve status at the
time of the origination of the Mortgage Loan and is later called to active duty)
may not be charged interest above an annual rate of 6% during the period of such
borrower's active duty status, unless a court orders
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otherwise upon application of the lender. It is possible that such interest rate
limitation could have an effect, for an indeterminate period of time, on the
ability of the Master Servicer to collect full amounts of interest on certain of
the Mortgage Loans. Unless otherwise provided in the applicable Prospectus
Supplement, any shortfall in interest collections resulting from the application
of the Relief Act could result in losses to the holders of the Securities. In
addition, the Relief Act imposes limitations which would impair the ability of
the Master Servicer to foreclose on an affected Mortgage Loan during the
Mortgagor's period of active duty status. Thus, in the event that such a
Mortgage Loan goes into default, there may be delays and losses occasioned by
the inability to realize upon the Mortgaged Property in a timely fashion.
ENVIRONMENTAL CONSIDERATIONS
Environmental conditions may diminish the value of the Mortgage Loans 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 Mortgage
Loans. 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 Holders if a Mortgaged Property securing a Mortgage Loan
became the property of such Trust in certain circumstances and if such Cleanup
Costs were incurred. Moreover, certain states by statute impose a superpriority
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.
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FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
This section sets forth (i) certain federal income tax opinions of Stroock
& Stroock & Lavan LLP, special counsel to the Seller ('Federal Tax Counsel'),
and (ii) a summary, based on the advice of Federal Tax Counsel, of the material
federal income tax consequences of the purchase, ownership and disposition of
Securities. The summary does not purport to deal with all aspects of federal
income taxation that may affect particular investors in light of their
individual circumstances, nor with certain types of investors subject to special
treatment under the federal income tax laws. The summary focuses primarily upon
investors who will hold Securities as 'capital assets' (generally, property held
for investment) within the meaning of Section 1221 of the of the Internal
Revenue Code of 1986, as amended (the 'Code'), but much of the discussion is
applicable to other investors as well. Because tax consequences may vary based
on the status or tax attributes of the owner of a Security, prospective
investors are advised to consult their own tax advisers concerning the federal,
state, local and any other tax consequences to them of the purchase, ownership
and disposition of the Securities. For purposes of this tax discussion (except
with respect to information reporting, or where the context indicates
otherwise), any reference to the 'Holder' means the beneficial owner of a
Security.
The summary is based upon the provisions of the Code, the regulations
promulgated thereunder, including, where applicable, proposed regulations, and
the judicial and administrative rulings and decisions now in effect, all of
which are subject to change or possible differing interpretations. The statutory
provisions, regulations, and interpretations on which this interpretation is
based are subject to change, and such a change could apply retroactively.
The federal income tax consequences to Holders will vary depending on
whether (i) the Securities of a Series are classified as indebtedness for
federal income tax purposes; (ii) an election is made to treat the Trust (or
certain assets of the Trust) relating to a particular Series of Securities as a
real estate mortgage investment conduit ('REMIC') under the Code; (iii) the
Securities represent an ownership interest for federal income tax purposes in
some or all of the assets included in the Trust for a Series; or (iv) for
federal income tax purposes the Trust relating to a particular Series of
Certificates is classified as a partnership. The Prospectus Supplement for each
Series of Securities will specify how the Securities will be treated for federal
income tax purposes and will discuss whether a REMIC election, if any, will be
made with respect to such Series.
OPINIONS
Federal Tax Counsel is of the opinion that:
(i) If a Prospectus Supplement indicates that one or more Classes of
Securities of the related Series are to be treated as indebtedness for
federal income tax purposes, assuming that all of the provisions of the
applicable Agreement are complied with, the Securities so designated will
be considered indebtedness of the Trust for federal income tax purposes;
(ii) If a Prospectus Supplement indicates that one or more REMIC
elections will be made with respect to the related Trust, assuming that
such elections are timely made and all of the provisions of the applicable
Agreement are complied with (a) each segregated pool of assets specified in
such Agreement will constitute a REMIC for federal income tax purposes, (b)
the Class or Classes of Securities of the related Series which are
designated as 'regular interests' in such Prospectus Supplement will be
considered 'regular interests' in a REMIC for federal income tax purposes
and (c) the Class of Securities of the related Series which is designated
as the 'residual interest' in such Prospectus Supplement will be considered
the sole class of 'residual interests' in the applicable REMIC for federal
income tax purposes;
(iii) If a Prospectus Supplement indicates that a Trust will be
treated as a grantor trust for federal income tax purposes, assuming
compliance with all of the provisions of the applicable Agreement, (a) the
Trust will be considered to be a grantor trust under Subpart E, Part 1 of
Subchapter J of the Code and will not be considered to be an association
taxable as a corporation and (b) a Holder of the related Securities will be
treated for federal income tax purposes as the owner of an undivided
interest in the Mortgage Assets included in the Trust; and
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(iv) If a Prospectus Supplement indicates that a Trust is to be
treated as a partnership for federal income tax purposes, assuming that all
of the provisions of the applicable Agreements are complied with, such
Trust will be considered to be a partnership for federal income tax
purposes and will not be considered to be an association or publicly traded
partnership taxable as a corporation.
Each such opinion is an expression of an opinion only, is not a guarantee
of results and is not binding on the Internal Revenue Service or any
third-party.
TAXATION OF DEBT SECURITIES (INCLUDING REGULAR INTEREST SECURITIES)
Interest and Acquisition Discount. Securities representing regular
interest in a REMIC ('Regular Interest Securities') are generally taxable to
Holders in the same manner as evidences of indebtedness issued by the REMIC.
Stated interest on the Regular Interest Securities will be taxable as ordinary
income and taken into account using the accrual method of accounting, regardless
of the Holder's normal accounting method. Interest (other than original issue
discount) on Securities (other than Regular Interest Securities) that are
characterized as indebtedness for federal income tax purposes will be includible
in income by Holders thereof in accordance with their usual methods of
accounting. Securities characterized as debt for federal income tax purposes and
Regular Interest Securities will be referred to hereinafter collectively as
'Debt Securities.' For Certificates treated as debt for federal income tax
purposes, see 'Certain Certificates Treated as Indebtedness.'
Debt Securities that are Compound Interest Securities will, and certain of
the other Debt Securities may, be issued with 'original issue discount' ('OID').
The following discussion is based in part on the rules governing OID which are
set forth in Sections 1271-1275 of the Code and the Treasury regulations issued
thereunder on February 2, 1994 (the 'OID Regulations'). A Holder should be
aware, however, that the OID Regulations do not adequately address certain
issues relevant to prepayable securities, such as the Debt Securities.
In general, OID, if any, will equal the excess of the stated redemption
price at maturity of a Debt Security over its issue price. A Holder of a Debt
Security must include such OID in gross income as ordinary interest income as it
accrues under a prescribed method which takes into account an economic accrual
of the discount. In general, OID must be included in income in advance of the
receipt of the cash representing that income. The amount of OID on a Debt
Security will be considered to be zero if it is less than a de minimis amount
determined under the Code.
The issue price of a Debt Security is the first price at which a
substantial amount of Debt Securities of that class are sold to the public
(excluding bond houses, brokers, underwriters or wholesalers). If less than a
substantial amount of a particular class of Debt Securities is sold for cash on
or prior to the Closing Date, the issue price for such class will be treated as
the fair market value of such class on the Closing Date. The stated redemption
price at maturity of a Debt Security includes the original principal amount of
the Debt Security, but generally will not include distributions of interest if
such distributions constitute 'qualified stated interest.'
Under the OID Regulations, interest payments will not be qualified stated
interest unless the interest payments are 'unconditionally payable.' The OID
Regulations state that interest is unconditionally payable if late payment of
interest (other than late payment that occurs within a reasonable grace period)
or nonpayment of interest is expected to be penalized or reasonable remedies
exist to compel payment. The meaning of 'penalized' under the OID regulations is
unclear particularly in the case of obligations based on other debt obligations.
Interest payments on Debt Securities which do not have reasonable remedies to
compel timely payment of interest may not be qualified stated interest, and such
Debt Securities may have original issue discount.
Certain Debt Securities will provide for distributions of interest based on
a period that is the same length as the interval between Distribution Dates but
ends prior to each Distribution Date. Any interest that accrues prior to the
Closing Date may be treated under the OID Regulations either (i) as part of the
issue price and the stated redemption price at maturity of the Debt Securities
or (ii) as not included in the issue price or 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
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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.
Under the de minimis rule, OID on a Debt Security will be considered to be
zero if such OID is less than 0.25% of the stated redemption price at maturity
of the Debt Security multiplied by the weighted average maturity of the Debt
Security. For this purpose, the weighted average maturity of the Debt Security
is computed as the sum of the amounts determined by multiplying the number of
full years (i.e., rounding down partial years) from the issue date until each
distribution in reduction of stated redemption price at maturity is scheduled to
be made by a fraction, the numerator of which is the amount of each distribution
included in the stated redemption price at maturity of the Debt Security and the
denominator of which is the stated redemption price at maturity of the Debt
Security. Holders generally must report de minimis OID pro rata as principal
payments are received, and such income will be capital gain if the Debt Security
is held as a capital asset. However, accrual method Holders may elect to accrue
all de minimis OID as well as market discount under a constant interest method.
See '--Election to Treat All Interest as Original Issue Discount.'
The Holder of a Debt Security issued with OID must include in gross income,
for all days during its taxable year on which it holds such Debt Security, the
sum of the 'daily portions' of such original issue discount. The amount of OID
includible in income by a Holder will be computed by allocating to each day
during a taxable year a pro rata portion of the original issue discount that
accrued during the relevant accrual period. In the case of a Debt Security that
is not a Regular Interest Security and the principal payments on which are not
subject to acceleration resulting from prepayments on the Loans, the amount of
OID includible in income of a Holder for an accrual period (generally the period
over which interest accrues on the debt instrument) will equal the product of
the yield to maturity of the Debt Security and the adjusted issue price of the
Debt Security, reduced by any payments of qualified stated interest. The
adjusted issue price is the sum of its issue price plus prior accruals of OID,
reduced by the total payments made with respect to such Debt Security in all
prior periods, other than qualified stated interest payments.
The amount of OID to be included in income by a Holder of a debt
instrument, such as certain Classes of the Debt Securities, that is subject to
acceleration due to prepayments on other debt obligations securing such
instruments (a 'Pay-Through Security'), is computed by taking into account the
anticipated rate of prepayments assumed in pricing the debt instrument (the
'Prepayment Assumption'). The amount of OID that will accrue during an accrual
period on a Pay-Through Security is the excess (if any) of the sum of (a) the
present value of all payments remaining to be made on the Pay-Through Security
as of the close of the accrual period and (b) the payments during the accrual
period of amounts included in the stated redemption price of the Pay-Through
Security, over the adjusted issue price of the Pay-Through Security at the
beginning of the accrual period. The present value of the remaining payments is
to be determined on the basis of three factors: (i) the original yield to
maturity of the Pay-Through Security (determined on the basis of compounding at
the end of each accrual period and properly adjusted for the length of the
accrual period), (ii) events which have occurred before the end of the accrual
period and (iii) the assumption that the remaining payments will be made in
accordance with the original Prepayment Assumption. The effect of this method is
to increase the portions of OID required to be included in income by a Holder to
take into account prepayments with respect to the Loans at a rate that exceeds
the Prepayment Assumption, and to decrease (but not below zero for any period)
the portions of OID required to be included in income by a Holder of a
Pay-Through Security to take into account prepayments with respect to the Loans
at a rate that is slower than the Prepayment Assumption. Although OID will be
reported to Holders of Pay-Through Securities based on the Prepayment
Assumption, no representation is made to Holders that Loans will be prepaid at
that rate or at any other rate.
The Seller may adjust the accrual of OID on a Class of Regular Interest
Securities (or other regular interests in a REMIC) in a manner that it believes
to be appropriate, to take account of realized losses on the Loans, although the
OID Regulations do not provide for such adjustments. If the Internal Revenue
Service were to require that OID be accrued without such adjustments, the rate
of accrual of OID for a Class of Regular Interest Securities could increase.
Certain classes of Regular Interest Securities may represent more than one
class of REMIC regular interests. Unless the applicable Prospectus Supplement
specifies otherwise, the Trustee intends, based on the OID
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Regulations, to calculate OID on such Securities as if, solely for the purposes
of computing OID, the separate regular interests were a single debt instrument.
A subsequent Holder of a Debt Security will also be required to include OID
in gross income, but such a Holder who purchases such Debt Security for an
amount that exceeds its adjusted issue price will be entitled (as will an
initial Holder who pays more than a Debt Security's issue price) to offset such
OID by comparable economic accruals of portions of such excess.
Effects of Defaults and Delinquencies. Holders will be required to report
income with respect to the related Securities under an accrual method without
giving effect to delays and reductions in distributions attributable to a
default or delinquency on the Mortgage Loans, except possibly to the extent that
it can be established that such amounts are uncollectible. As a result, the
amount of income (including OID) reported by a Holder of such a Security in any
period could significantly exceed the amount of cash distributed to such Holder
in that period. The Holder will eventually be allowed a loss (or will be allowed
to report a lesser amount of income) to the extent that the aggregate amount of
distributions on the Securities is reduced as a result of a Mortgage Loan
default. However, the timing and character of such losses or reductions in
income are uncertain and, accordingly, Holders of Securities should consult
their own tax advisors on this point.
Interest-Only Debt Securities. The Trust intends to report income from
interest-only classes of Debt Securities to the Internal Revenue Service and to
Holders of interest-only Debt Securities based on the assumption that the stated
redemption price at maturity is equal to the sum of all payments determined
under the applicable prepayment assumption. As a result, such interest-only Debt
Securities Certificates will be treated as having original issue discount.
Variable Rate Debt Securities. Under the OID Regulations, Debt Securities
paying interest at a variable rate (a 'Variable Rate Debt Security') are subject
to special rules. A Variable Rate Debt Security 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 Debt Security by more than a
specified de minimis amount and (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.
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 Debt Security 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 zero but not
more than 1.35 or (ii) the product of a qualified floating rate and a fixed
multiple that is greater than zero 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 Debt Security 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 Debt Security'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 Debt Security or the restriction will not
significantly affect the yield of the Variable Rate Debt Security.
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 (i)
one or more qualified floating rates, (ii) one or more rates where each rate
would be a qualified floating rate for a debt instrument denominated in a
currency other than the currency in which the Variable Rate Debt Security is
denominated, (iii) either the yield or changes in the price of one or more items
of actively traded personal property or (iv) a combination of rates described in
(i), (ii) and (iii). 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 Debt Security will not constitute an objective rate if it is
reasonably expected that the average value of such rate during the first
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half of the Variable Rate Debt Security'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 Debt Security's term. 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 cost of newly
borrowed funds. The OID Regulations also provide that if a Variable Rate Debt
Security 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
Debt Security'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
Debt Security's issue date, the variable rate will be conclusively presumed to
approximate the fixed rate.
For Variable Rate Debt Securities 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 Debt Security'), original issue discount is computed as
described above based on the following: (i) stated interest on the Single
Variable Rate Debt Security which is unconditionally payable in cash or property
(other than debt instruments of the issuer) at least annually will constitute
qualified stated interest and (ii) by assuming that the variable rate on the
Single Variable Debt Security is a fixed rate equal to: (a) in the case of a
Single Variable Rate Debt Security 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 Debt Security with an objective rate (other than a
qualified inverse floating rate), a fixed rate which reflects the reasonably
expected yield for such Single Variable Debt Security.
In general, any Variable Rate Debt Security other than a Single Variable
Rate Debt Security (a 'Multiple Variable Rate Debt Security') 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 Debt Security. The OID Regulations generally require that such a Multiple
Variable Rate Debt Security 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 Debt
Security 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 Debt Security's issue date. Any objective rate (other than a qualified
inverse floating rate) provided for under the terms of the Multiple Variable
Rate Debt Security is converted into a fixed rate that reflects the yield that
is reasonably expected for the Multiple Variable Rate Debt Security. In the case
of a Multiple Variable Rate Debt Security 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 Debt Security
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
Debt Security as of the Multiple Variable Rate Debt Security'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 Debt Security is then converted into an
'equivalent' fixed rate debt instrument in the manner described above.
Once the Multiple Variable Rate Debt Security 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 above. A Holder of the Multiple Variable Rate Debt Security
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
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'equivalent' fixed rate debt instrument in the event that such amounts differ
from the accrual amount of interest accrued or paid on the Multiple Variable
Rate Debt Security during the accrual period.
The OID Regulations do not clearly address the treatment of a Variable Rate
Debt Security that is based on a weighted average of the interest rates on
underlying Loans. Under the OID Regulations, interest payments on such a
Variable Rate Debt Security may be characterized as qualified stated interest
which is includible in income in a manner similar to that described in the
previous paragraph. However, it is also possible that interest payments on such
a Variable Rate Debt Security would be treated as contingent interest (possibly
includible in income when the payments become fixed) or in some other manner.
If a Variable Rate Debt Security does not qualify as a 'variable rate debt
instrument' under the OID Regulations, then the Variable Rate Debt Security
would be treated as a contingent payment debt obligation. It is not clear under
current law how a Variable Rate Debt Security would be taxed if such Debt
Security were treated as a contingent payment debt obligation.
The Internal Revenue Service (the 'IRS') recently issued final regulations
(the 'Contingent Regulations') governing the calculation of OID on instruments
having contingent interest payments. The Contingent Regulations specifically do
not apply for purposes of calculating OID on debt instruments to Code Section
1272(a)(6), such as the Debt Security. Additionally, the OID Regulations do not
contain provisions specifically interpreting Code Section 1272(a)(6). Until the
Treasury issues guidelines to the contrary, the Trustee intends to base its
computation on Code Section 1272(a)(6) and the OID Regulations as described in
this Prospectus. However, because no regulatory guidance exists under Code
Section 1272(a)(6), there can be no assurance that such methodology represents
the correct manner of calculating OID.
Market Discount. A purchaser of a Security may be subject to the market
discount rules of Sections 1276-1278 of the Code. A Holder that acquires a Debt
Security with more than a prescribed de minimis amount of 'market discount'
(generally, the excess of the principal amount of the Debt Security over the
purchaser's purchase price) will be required to include accrued market discount
in income as ordinary income in each month, but limited to an amount not
exceeding the principal payments on the Debt Security received in that month
and, if the Securities are sold, the gain realized. Such market discount would
accrue in a manner to be provided in Treasury regulations but, until such
regulations are issued, such market discount would in general accrue either (i)
on the basis of a constant yield (in the case of a Pay-Through Security, taking
into account a prepayment assumption) or (ii) in the ratio of (a) in the case of
Securities (or in the case of a Pass-Through Security, as set forth below, the
Loans underlying such Security) not originally issued with original issue
discount, stated interest payable in the relevant period to total stated
interest remaining to be paid at the beginning of the period or (b) in the case
of Securities (or, in the case of a Pass-Through Security, as described below,
the Loans underlying such Security) originally issued at a discount, OID in the
relevant period to total OID remaining to be paid.
Section 1277 of the Code provides that, regardless of the origination date
of the Debt Security (or, in the case of a Pass-Through Security, the Loans),
the excess of interest paid or accrued to purchase or carry a Security (or, in
the case of a Pass-Through Security, as described below, the underlying Loans)
with market discount over interest received on such Security is allowed as a
current deduction only to the extent such excess is greater than the market
discount that accrued during the taxable year in which such interest expense was
incurred. In general, the deferred portion of any interest expense will be
deductible when such market discount is included in income, including upon the
sale, disposition, or repayment of the Security (or in the case of a
Pass-Through Security, an underlying Loan). A Holder may elect to include market
discount in income currently as it accrues, on all market discount obligations
acquired by such Holder during the taxable year such election is made and
thereafter, in which case the interest deferral rule will not apply.
Premium. A Holder who purchases a Debt Security (other than an Interest
Weighted Security to the extent described above) at a cost greater than its
stated redemption price at maturity, generally will be considered to have
purchased the Security at a premium, which it may elect to amortize as an offset
to interest income on such Security (and not as a separate deduction item) on a
constant yield method. Although no regulations addressing the computation of
premium accrual on securities similar to the Securities have been issued, the
legislative history of the 1986 Act indicates that premium is to be accrued in
the same manner as market discount. Accordingly, it appears that the accrual of
premium on a Class of Pay-Through Securities will be calculated using
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the prepayment assumption used in pricing such Class. If a Holder makes an
election to amortize premium on a Debt Security, such election will apply to all
taxable debt instruments (including all REMIC regular interests and all
pass-through certificates representing ownership interests in a trust holding
debt obligations) held by the Holder at the beginning of the taxable year in
which the election is made, and to all taxable debt instruments acquired
thereafter by such Holder, and will be irrevocable without the consent of the
IRS. Purchasers who pay a premium for the Securities should consult their tax
advisers regarding the election to amortize premium and the method to be
employed.
Election to Treat All Interest as Original Issue Discount. The OID
Regulations permit a Holder Debt Security to elect to accrue all interest,
discount (including de minimis market or original issue discount) and premium in
income as interest, based on a constant yield method for Debt Securities
acquired on or after April 4, 1994. If such an election were to be made with
respect to a Debt Security with market discount, the Holder of the Debt Security
would be deemed to have made an election to include in income currently market
discount with respect to all other debt instruments having market discount that
such Holder of the Debt Security acquires during the year of the election or
thereafter. Similarly, a Holder of a Debt Security that makes this election for
a Debt Security that is acquired at a premium will be deemed to have made an
election to amortize bond premium with respect to all debt instruments having
amortizable bond premium that such Holder owns or acquires. The election to
accrue interest, discount and premium on a constant yield method with respect to
a Debt Security is irrevocable.
Sale or Exchange. A Holder's tax basis in its Debt Security is the price
such Holder pays for a Debt Security, plus amounts of OID or market discount
included in income and reduced by any payments received (other than qualified
stated interest payments) and any amortized premium. Gain or loss recognized on
a sale, exchange, or redemption of a Debt Security, measured by the difference
between the amount realized and the Debt Security's basis as so adjusted, will
generally be capital gain or loss, assuming that the Debt Security is held as a
capital asset. In the case of a Debt Security held by a bank, thrift, or similar
institution described in Section 582 of the Code, however, gain or loss realized
on the sale or exchange of a Debt Security will be taxable as ordinary income or
loss. In addition, gain from the disposition of a Regular Interest Security that
might otherwise be capital gain will be treated as ordinary income to the extent
of the excess, if any, of (i) the amount that would have been includible in the
Holder's income if the yield on such Regular Interest Security had equaled 110%
of the applicable federal rate as of the beginning of such Holder' s holding
period, over the amount of ordinary income actually recognized by the Holder
with respect to such Regular Interest Security.
TAXATION OF THE REMIC AND ITS HOLDERS
Status of Regular Interest Securities as Real Property Loans. Regular
Interest Securities and Securities representing a residual interest in a REMIC
(both types of securities collectively referred to as 'REMIC Securities') 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 more of those sections, applying each section separately, 'qualifying
assets') to the extent that the REMIC's assets are qualifying assets. However,
if at least 95 percent of the REMIC's assets are qualifying assets, then 100
percent of the REMIC Securities will be qualifying assets. Similarly, income on
the REMIC Securities 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
Mortgage Loans, the REMIC's assets will include payments on Mortgage Loans held
pending distribution to Holders of REMIC Securities, amounts in reserve accounts
(if any), other credit enhancements (if any) and possibly buydown funds
('Buydown Funds'). The Mortgage Loans generally will be qualifying assets under
all three of the foregoing sections of the Code. However, Mortgage Loans 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 Mortgage Loan exceeds the value of the property securing the
Mortgage Loan, it is unclear and Federal Tax Counsel is unable to opine whether
the Mortgage 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 Mortgage Loans and held pending distribution to Holders of
Regular
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Interest Securities ('cash flow investments') will be treated as qualifying
assets. It is unclear whether reserve funds or Buydown Funds would also
constitute qualifying assets under any of those provisions.
REMIC EXPENSES; SINGLE CLASS REMICS
As a general rule, all of the expenses of a REMIC will be taken into
account by Holders of the Residual Interest Securities. In the case of a 'single
class REMIC,' however, the expenses will be allocated, under Treasury
regulations, among the Holders of the Regular Interest Securities and the
Holders of the Residual Interest Securities on a daily basis in proportion to
the relative amounts of income accruing to each Holder on that day. In the case
of a Holder of a Regular Interest Security who is an individual or a
'pass-through interest Holder' (including certain pass-through entities but not
including real estate investment trusts), such expenses will be deductible only
to the extent that such expenses, plus other 'miscellaneous itemized deductions'
of the Holder, exceed 2% of such 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 will be reduced by the
lesser of (i) 3% 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. The reduction or disallowance of this deduction may have a
significant impact on the yield of the Regular Interest Security 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. Unless otherwise stated in the applicable Prospectus
Supplement, the expenses of the REMIC will be allocated to Holders of the
related Residual Interest Securities.
TAXATION OF THE REMIC
General. Although a REMIC is a separate entity for federal income tax
purposes, a REMIC is not generally subject to entity-level tax. Rather, the
taxable income or net loss of a REMIC is taken into account by the Holders of
residual interests. As described above, the regular interests are generally
taxable as debt of the REMIC.
Tiered REMIC Structures. For certain Series of Securities, 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. Solely for purposes
of determining whether the REMIC Securities will be 'real estate assets' within
the meaning of Section 856(c)(5)(A) of the Code, and 'loans secured by an
interest in real property' under Section 7701(a)(19)(C) of the Code, and whether
the income on such Securities is interest described in Section 856(c)(3)(B) of
the Code, the Tiered REMICs will be treated as one REMIC.
The Small Business Job Protection Act of 1996, as part of the repeal of the
bad debt reserve method for thrift institutions, repealed the application of
Code Section 593(d) to any taxable year beginning after December 31, 1995.
Calculation of REMIC Income. The taxable income or net loss of a REMIC is
determined under an accrual method of accounting and in the same manner as in
the case of an individual, with certain adjustments. In general, the taxable
income or net loss will be the difference between (i) the gross income produced
by the REMIC's assets, including stated interest and any original issue discount
or market discount on loans and other assets, and (ii) deductions, including
stated interest and original issue discount accrued on Regular Interest
Securities, amortization of any premium with respect to Mortgage Loans, and
servicing fees and other expenses of the REMIC. A Holder of a Residual Interest
Security that is an individual or a 'pass-through interest Holder' (including
certain pass-through entities, but not including real estate investment trusts)
will be unable to deduct servicing fees payable on the Loans or other
administrative expenses of the REMIC for a given taxable year, to the extent
that such expenses, when aggregated with such Holder's other miscellaneous
itemized deductions for that year, do not exceed two percent of such Holder's
adjusted gross income and such Holder may not be able to deduct such fees and
expenses to any extent in computing such holders alternative minimum tax
liability.
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For purposes of computing its taxable income or net loss, the REMIC should
have an initial aggregate tax basis in its assets equal to the aggregate fair
market value of the regular interests and the residual interests on the Startup
Day (generally, the day that the interests are issued). Such aggregate basis
will be allocated among the assets of the REMIC in proportion to their
respective fair market values.
The OID provisions of the Code apply to loans of individuals originated on
or after March 2, 1984, and the market discount provisions apply to loans.
Subject to possible application of the de minimis rules, the method of accrual
by the REMIC of OID income on such loans will be equivalent to the method under
which Holders of Pay-Through Securities accrue original issue discount (i.e.,
under the constant yield method taking into account the Prepayment Assumption).
The REMIC will deduct OID on the Regular Interest Securities in the same manner
that the Holders of the Regular Interest Securities include such discount in
income, but without regard to the de minimis rules. See 'Taxation of Debt
Securities (Including Regular Interest Securities)' above. However, a REMIC that
acquires loans at a market discount must include such market discount in income
currently, as it accrues, on a constant interest basis.
To the extent that the REMIC's basis allocable to loans that it holds
exceeds their principal amounts, the resulting premium, if attributable to
mortgages originated after September 27, 1985, will be amortized over the life
of the loans (presumably taking into account the Prepayment Assumption) on a
constant yield method. Although the law is somewhat unclear regarding recovery
of premium attributable to loans originated on or before such date, it is
possible that such premium may be recovered in proportion to payments of loan
principal.
Prohibited Transactions and Contributions Tax. The REMIC will be subject
to a 100% tax on any net income derived from a 'prohibited transaction.' For
this purpose, net income will be calculated without taking into account any
losses from prohibited transactions or any deductions attributable to any
prohibited transaction that resulted in a loss. In general, prohibited
transactions include: (i) subject to limited exceptions, the sale or other
disposition of any qualified mortgage transferred to the REMIC; (ii) subject to
a limited exception, the sale or other disposition of a cash flow investment;
(iii) the receipt of any income from assets not permitted to be held by the
REMIC pursuant to the Code; or (iv) the receipt of any fees or other
compensation for services rendered by the REMIC. It is anticipated that a REMIC
will not engage in any prohibited transactions in which it would recognize a
material amount of net income. In addition, subject to a number of exceptions, a
tax is imposed at the rate of 100% on amounts contributed to a REMIC after the
Startup Day. The Holders of Residual Interest Securities will generally be
responsible for the payment of any such taxes imposed on the REMIC. To the
extent not paid by such Holders or otherwise, however, such taxes will be paid
out of the Trust and will be allocated pro rata to all outstanding Classes of
Securities of such REMIC.
TAXATION OF HOLDERS OF RESIDUAL INTEREST SECURITIES
The Holder of a Security representing a residual interest (a 'Residual
Interest Security') will take into account the 'daily portion' of the taxable
income or net loss of the REMIC for each day during the taxable year on which
such Holder held the Residual Interest Security. The daily portion is determined
by allocating to each day in any calendar quarter its ratable portion of the
taxable income or net loss of the REMIC for such quarter, and by allocating that
amount among the Holders (on such day) of the Residual Interest Securities in
proportion to their respective holdings on such day.
The Holder of a Residual Interest Security must report its proportionate
share of the taxable income of the REMIC whether or not it receives cash
distributions from the REMIC attributable to such income or loss. The reporting
of taxable income without corresponding distributions could occur, for example,
in certain REMIC issues in which the Mortgage Loans held by the REMIC were
issued or acquired at a discount, since mortgage prepayments cause recognition
of discount income, while the corresponding portion of the prepayment could be
used in whole or in part to make principal payments on REMIC Regular Interests
issued without any discount or at an insubstantial discount. (If this occurs, it
is likely that cash distributions will exceed taxable income in later years.)
Taxable income may also be greater in earlier years of certain REMIC issues as a
result of the fact that interest expense deductions, as a percentage of
outstanding principal on REMIC Regular Interest Securities, will typically
increase over time as lower yielding Securities are paid, whereas interest
income with respect to loans will generally remain constant over time as a
percentage of loan principal.
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In any event, because the Holder of a residual interest is taxed on the net
income of the REMIC, the taxable income derived from a Residual Interest
Security in a given taxable year will not be equal to the taxable income
associated with investment in a corporate bond or stripped instrument having
similar cash flow characteristics and pretax yield. Therefore, the after-tax
yield on the Residual Interest Security may be less than that of such a bond or
instrument.
Limitation on Losses. The amount of the REMIC's net loss that a Holder may
take into account currently is limited to the Holder's adjusted basis at the end
of the calendar quarter in which such loss arises. A Holder's basis in a
Residual Interest Security will initially equal such Holder's purchase price,
and will subsequently be increased by the amount of the REMIC's taxable income
allocated to the Holder, and decreased (but not below zero) by the amount of
distributions made and the amount of the REMIC's net loss allocated to the
Holder. Any disallowed loss may be carried forward indefinitely, but may be used
only to offset income of the REMIC generated by the same REMIC. The ability of
Holders of Residual Interest Securities to deduct net losses may be subject to
additional limitations under the Code, as to which such Holders should consult
their tax advisers.
Distributions. Distributions on a Residual Interest Security (whether at
their scheduled times or as a result of prepayments) will generally not result
in any additional taxable income or loss to a Holder of a Residual Interest
Security. If the amount of such payment exceeds a Holder's adjusted basis in the
Residual Interest Security, however, the Holder will recognize gain (treated as
gain from the sale of the Residual Interest Security) to the extent of such
excess.
Sale or Exchange. A Holder of a Residual Interest Security will recognize
gain or loss on the sale or exchange of a Residual Interest Security equal to
the difference, if any, between the amount realized and such Holder's adjusted
basis in the Residual Interest Security at the time of such sale or exchange.
Except to the extent provided in regulations, which have not yet been issued,
any loss upon disposition of a Residual Interest Security will be disallowed if
the selling Holder acquires any residual interest in a REMIC or similar mortgage
pool within six months before or after such disposition.
Excess Inclusions. The portion of the REMIC taxable income of a Holder of
a Residual Interest Security consisting of 'excess inclusion' income may not be
offset by other deductions or losses, including net operating losses, on such
Holder's federal income tax return. Further, if the Holder of a Residual
Interest Security is an organization subject to the tax on unrelated business
income imposed by Code Section 511, such Holder's excess inclusion income will
be treated as unrelated business taxable income of such Holder. In addition,
under Treasury regulations yet to be issued, if a real estate investment trust,
a regulated investment company, a common trust fund, or certain cooperatives
were to own a Residual Interest Security, a portion of dividends (or other
distributions) paid by the real estate investment trust (or other entity) would
be treated as excess inclusion income. If a Residual Security is owned by a
foreign person, excess inclusion income is subject to tax at a rate of 30% which
may not be reduced by treaty, is not eligible for treatment as 'portfolio
interest' and is subject to certain additional limitations. See 'Tax Treatment
of Foreign Investors.'
The Small Business Job Protection Act of 1996 has eliminated the special
rule permitting Section 593 institutions ('thrift institutions') to use net
operating losses and other allowable deductions to offset their excess inclusion
income from REMIC residual certificates that have 'significant value' within the
meaning of the REMIC Regulations, effective for taxable years beginning after
December 31, 1995, except with respect to residual certificates held by thrift
institutions since November 1, 1995.
In addition, the Small Business Job Protection Act of 1996 provides three
rules for determining the effect on excess inclusions on the alternative minimum
taxable income of a residual holder. First, alternative minimum taxable income
for such residual holder is determined without regard to the special rule that
taxable income cannot be less than excess inclusions. Second, a residual
holder's alternative minimum income for a tax year cannot be less than excess
inclusions for the year. Third, the amount of any alternative minimum tax net
operating loss deductions must be computed without regard to any excess
inclusions. These rules are effective for tax years beginning after December 31,
1986, unless a residual holder elects to have such rules apply only to tax years
beginning after August 20, 1996.
The excess inclusion portion of a REMIC's income is generally equal to the
excess, if any, of REMIC taxable income for the quarterly period allocable to a
Residual Interest Security, over the daily accruals for such
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quarterly period of (i) 120% of the long term applicable federal rate on the
Startup Date multiplied by (ii) the adjusted issue price of such Residual
Interest Security at the beginning of such quarterly period. The adjusted issue
price of a Residual Interest Security at the beginning of each calendar quarter
will equal its issue price (calculated in a manner analogous to the
determination of the issue price of a Regular Interest Security), increased by
the aggregate of the daily accruals for prior calendar quarters, and decreased
(but not below zero) by the amount of loss allocated to a Holder and the amount
of distributions made on the Residual Interest Security before the beginning of
the quarter. The long-term federal rate, which is announced monthly by the
Treasury Department, is an interest rate that is based on the average market
yield of outstanding marketable obligations of the United States government
having remaining maturities in excess of nine years.
Under the REMIC Regulations, in certain circumstances, transfers of
Residual Interest Securities may be disregarded. See '--Restrictions on
Ownership and Transfer of Residual Interest Securities' and 'Tax Treatment of
Foreign Investors' below.
Restrictions on Ownership and Transfer of Residual Interest Securities. As
a condition to qualification as a REMIC, reasonable arrangements must be made to
prevent the ownership of a REMIC residual interest by any 'Disqualified
Organization.' Disqualified Organizations include the United States, any State
or political subdivision thereof, any foreign government, any international
organization, or any agency or instrumentality of any of the foregoing, a rural
electric or telephone cooperative described in Section 1381(a)(2)(C) of the
Code, or any entity exempt from the tax imposed by Sections 1-1399 of the Code,
if such entity is not subject to tax on its unrelated business income.
Accordingly, the applicable Agreement will prohibit Disqualified Organizations
from owning a Residual Interest Security. In addition, no transfer of a Residual
Interest Security will be permitted unless the proposed transferee shall have
furnished to the Trustee an affidavit representing and warranting that it is
neither a Disqualified Organization nor an agent or nominee acing on behalf of a
Disqualified Organization.
If a Residual Interest Security is transferred to a Disqualified
Organization (in violation of the restrictions set forth above), a substantial
tax will be imposed on the transferor of such Residual Interest Security at the
time of the transfer. In addition, if a Disqualified Organization holds an
interest in a pass-through entity (including, among others, a partnership,
trust, real estate investment trust, regulated investment company, or any person
holding as nominee an interest in a pass-through entity), that owns a Residual
Interest Security, the pass-through entity will be required to pay an annual tax
on its allocable share of the excess inclusion income of the REMIC.
The REMIC Regulations provide that a transfer of a 'noneconomic residual
interest' will be disregarded for all federal income tax purposes unless
impeding the assessment or collection of tax was not a significant purpose of
the transfer. A residual interest will be treated as a 'noneconomic residual
interest' unless, at the time of the transfer (1) the present value of the
expected future distributions on the residual interest at least equals the
product of (x) the present value of all anticipated excess inclusions with
respect to the residual interest and (y) the highest corporate tax rate,
currently 35 percent, and (2) the transferor reasonably expects that for each
anticipated excess inclusion, the transferee will receive distributions from the
REMIC, at or after the time at which taxes on such excess inclusion accrue,
sufficient to pay the taxes thereon. A significant purpose to impede the
assessment or collection of tax exists if the transferor, at the time of the
transfer, either knew or should have known (had 'improper knowledge') that the
transferee would be unwilling or unable to pay taxes due on its share of the
taxable income of the REMIC. A transferor will be presumed not to have improper
knowledge if (i) the transferor conducts, at the time of the transfer, a
reasonable investigation of the financial condition of the transferee and, as a
result of the investigation, the transferor finds that the transferee has
historically paid its debts as they came due and finds no significant evidence
to indicate that the transferee will not continue to pay its debts as they come
due in the future, and (ii) the transferee represents to the transferor that (A)
the transferee understands that it might incur tax liabilities in excess of any
cash received with respect to the residual interest and (B) the transferee
intends to pay the taxes associated with owning the residual interest as they
come due. A different formulation of this rule applies to transfers of Residual
Interest Security by or to foreign transferees. See 'Tax Treatment to Foreign
Investors'.
Mark to Market Rules. On January 3, 1995, the IRS released proposed
regulations under Section 475 (the 'Proposed Mark-to-Market Regulations'). The
Proposed Mark-to-Market Regulations provide that any REMIC Residual Interest
acquired after January 3, 1995 cannot be marked to market, regardless of the
value of such REMIC residual interest.
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ADMINISTRATIVE MATTERS
The REMIC's books must be maintained on a calendar year basis and the REMIC
must file an annual federal income tax return. The REMIC will also 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 income, gain, loss, deduction, or credit, by the IRS in a unified
administrative proceeding.
TAX STATUS AS A GRANTOR TRUST
General. As further described below, each Holder of a Security issued by a
grantor trust (a 'Pass-Through Security') must report on its federal income tax
return the gross income from the portion of the Mortgage Loans that is allocable
to such Pass-Through Security and may deduct the portion of the expenses
incurred or accrued by the Trust that is allocable to such Pass-Through
Security, 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 Mortgage Loans and received or accrued directly its share of the payments on
the Mortgage Loans and incurred or accrued directly its share of expenses
incurred or accrued by the Trust when those amounts are received, incurred or
accrued by the Trust.
A Holder of a Pass-Through Security 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. Moreover, a Holder of a
Pass-Through Security 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
Mortgage Loans. As a result, the Trust will report additional taxable income to
Holders of Pass-Through Securities in an amount equal to their allocable share
of such deductions, and individuals, estates, or trusts holding Pass-Through
Securities may have taxable income in excess of the cash received.
Status of the Pass-Through Securities as Real Property Loans. The
Pass-Through Securities 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 more of those sections, applying each section
separately, 'qualifying assets') to the extent that the Trust's assets are
qualifying assets. The Pass-Through Securities may not be qualifying assets
under any of the foregoing sections of the Code to the extent that the Trust's
assets include Buydown Funds, reserve funds, or payments on Mortgage Loans held
pending distribution to Holders. Further, the Pass- Through Securities may not
be 'qualifying real property loans' to the extent loans held by the Trust are
not secured by improved real property or real property which is to be improved
using the loan proceeds, 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 loans will be qualifying assets.
Taxation of Pass-Through Securities Under Stripped Bond Rules. The federal
income tax treatment of the Pass-Through Securities will depend on whether they
are subject to the rules of Section 1286 of the Code (the 'stripped bond
rules'). The Pass-Through Securities will be subject to those rules if stripped
interest-only Securities are issued. In addition, whether or not stripped
interest-only Securities are issued, the IRS may contend that the stripped bond
rules apply on the ground that the Servicer's servicing fee, or other amounts,
if any, paid to (or retained by) the Servicer or its affiliates, as specified in
the applicable Prospectus Supplement, represent greater than an arm's length
consideration for servicing the Mortgage Loans and should be characterized for
federal income tax purposes as an ownership interest in the Mortgage Loans. The
IRS has taken the position in Revenue Ruling 91-46 that a retained interest in
excess of reasonable compensation for servicing is treated as a 'stripped
coupon' under the rules of Code Section 1286.
If interest retained for the Servicer's servicing fee or other interest is
treated as a 'stripped coupon,' the Pass-Through Securities will either be
subject to the OID rules or the market discount rules. A Holder of a Pass-
Through Security will account for any discount on the Pass-Through Security as
market discount rather than OID if either (i) the amount of OID with respect to
the Pass-Through Security was treated as zero under the OID de minimis rule when
the Pass-Through Security was stripped or (ii) no more than 100 basis points
(including any
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amount of servicing in excess of reasonable servicing) is stripped off from the
Mortgage Loans. If neither of the above exceptions applies, the OID rules will
apply to the Pass-Through Securities.
If the OID rules apply, the Holder of a Pass-Through Security (whether a
cash or accrual method taxpayer) will be required to report interest income from
the Pass-Through Security in each taxable year equal to the income that accrues
on the Pass-Through Security in that year calculated under a constant yield
method based on the yield of the Pass-Through Security (or, possibly, the yield
of each Mortgage Loan underlying such Pass-Through Security) to such Holder.
Such yield would be computed at the rate (assuming monthly compounding) that, if
used in discounting the Holder's share of the payments on the Mortgage Loans,
would cause the present value of those payments to equal the price at which the
Holder purchased the Pass-Through Security. With respect to certain categories
of debt instruments, Section 1272(a)(6) of the Code requires that OID 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 Pass-Through Securities, whether Section 1272(a)(6) might apply to
the Pass-Through Securities 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 this issue. If required to report interest income on the
Pass-Through Securities to the IRS under the stripped bond rules, it is
anticipated that the Trustee will calculate the yield of the Pass-Through
Securities based on a representative initial offering price of the Pass-Through
Securities and a reasonable assumed rate of prepayment of the Mortgage Loans
(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 Pass-Through Securities will describe the
prepayment assumption that will be used for this purpose, but no representation
is made that the Mortgage Loans will prepay at that rate or at any other rate.
Assume that Holders are not taxed as directly owning the Mortgage Loans, in
the case of a Pass-Through Security acquired at a price equal to the principal
amount of the Mortgages allocable to the Pass-Through Security, 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 Pass-Through Security 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 Mortgage Loan is prepaid in full, the Holder of a Pass-Through
Security 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 Mortgage Loan that is allocable to the Pass-Through
Security and the portion of the adjusted basis of the Pass-Through Security (see
'Sales of Pass-Through Securities' below) that is allocable to the Mortgage
Loan. The method of allocating such basis among the Mortgage Loans may differ
depending on whether a reasonable prepayment assumption is used in calculating
the yield of the Pass-Through Securities for purposes of accruing OID. 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.
Pass-Through Securities of certain series ('Variable Rate Pass-Through
Securities') may provide for a Pass-Through Rate based on the weighted average
of the interest rates of the Mortgage Loans held by the Trust, which interest
rates may be fixed or variable. In the case of a Variable Rate Pass-Through
Security that is subject to the OID rules, the daily portions of OID generally
will be calculated under the principles discussed in '--Taxation of Debt
Securities (Including Regular Interest Securities)-Variable Rate Debt
Securities.'
Taxation of Pass-Through Securities If Stripped Bond Rules Do Not
Apply. If the stripped bond rules do not apply to a Pass-Through Security, then
the Holder will be required to include in income its share of the interest
payments on the Mortgage Loans in accordance with its tax accounting method. In
addition, if the Holder purchased the Pass-Through Security 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 OID as defined in the Code and, in the case of discount other
than OID, whether such other discount exceeds a de minimis amount. In the case
of OID, 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 OID to be
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accrued in each month, if any, will be significant relative to the interest paid
currently on the Mortgage Loans. However, OID could arise with respect to a
Mortgage Loan that provides for interest at a rate equal to the sum of an index
of market interest rates and a fixed number ('ARM'). The OID for ARMs generally
will be determined under the principles discussed in 'Taxation of Debt
Securities (Including Regular Interest Securities)--Variable Rate Debt
Securities.'
If discount other than OID 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 Mortgage Loan, to the amount of principal on such Mortgage Loan
received by the Trust in that month. Because the Mortgage Loans will 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 OID). The Holder
may elect to accrue such discount under a constant yield method based on the
yield of the Pass-Through Security to such Holder (or possibly based on the
yields of each Mortgage Loan). 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 Pass-Through Security
will be considered to be zero if it is less than the product of (i) 0.25% of the
principal amount of the Mortgage Loans allocable to the Pass-Through Security
and (ii) the weighted average life (in complete years) of the Mortgage Loans
remaining at the time of purchase of the Pass-Through Security.
If a Holder purchases a Pass-Through Security 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 Mortgage Loan under a constant yield method based on the yield
of the Mortgage Loan to such Holder, provided that such Mortgage Loan was
originated after September 27, 1985. Premium allocable to a Mortgage Loan
originated on or before that date should be allocated among the principal
payments on the Mortgage 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 Mortgage Loans or taking
account of a reasonable prepayment assumption, and Federal Tax Counsel is unable
to opine on this issue.
If a Mortgage Loan is prepaid in full, the Holder of a Pass-Through
Security 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 Mortgage Loan that is allocable to the Pass-Through Security and the
portion of the adjusted basis of the Pass-Through Security (see 'Sales of
Pass-Through Securities' below) that is allocable to the Mortgage Loan. The
method of allocating such basis among the Mortgage Loans may differ depending on
whether a reasonable prepayment assumption is used in calculating the yield of
the Pass-Through Securities for purposes of accruing OID. 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.
MISCELLANEOUS TAX ASPECTS
Backup Withholding. A Holder, other than a Holder of a Residual Interest
Security, may, under certain circumstances, be subject to 'backup withholding'
at a rate of 31% with respect to distributions or the proceeds of a sale of
certificates to or through brokers that represent interest or original issue
discount on the Securities. This withholding generally applies if the Holder of
a Security (i) fails to furnish the Trustee with its taxpayer identification
number ('TIN'); (ii) furnishes the Trustee an incorrect TIN; (iii) fails to
report properly interest, dividends or other 'reportable payments' as defined in
the Code; or (iv) under certain circumstances, fails to provide the Trustee or
such Holder's securities broker with a certified statement, signed under penalty
of perjury, that the TIN provided is its correct number and that the Holder is
not subject to backup withholding. Backup withholding will not apply, however,
with respect to certain payments made to Holders, including payments to certain
exempt recipients (such as exempt organizations) and to certain Nonresidents (as
defined below). Holders should consult their tax advisers as to their
qualification for exemption from backup withholding and the procedure for
obtaining the exemption.
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The Trustee will report to the Holders and to the Servicer for each
calendar year the amount of any 'reportable payments' during such year and the
amount of tax withheld, if any, with respect to payments on the Securities.
TAX TREATMENT OF FOREIGN INVESTORS
Subject to the discussion below with respect to Trusts which are treated as
partnerships for federal income tax purposes and with respect to Securities
treated as debt for federal income tax purposes, unless interest (including OID)
paid on a Security (other than a Residual Interest Security) is considered to be
'effectively connected' with a trade or business conducted in the United States
by a nonresident alien individual, foreign partnership or foreign corporation
('foreign investors'), such interest will normally qualify as portfolio interest
(except where (i) the recipient is a Holder, directly or by attribution, of 10%
or more of the capital or profits interest in the issuer, or (ii) the recipient
is a controlled foreign corporation to which the issuer is a related person) and
will be exempt from federal income tax. See '--Tax Consequences to Holders of
the Certificates Issued by a Partnership--Tax Consequences to Foreign
Certificateholders' and '--Certain Certificates Treated as Indebtedness--Foreign
Investors'. Upon receipt of appropriate ownership statements, the issuer
normally will be relieved of obligations to withhold tax from such interest
payments. These provisions supersede the generally applicable provisions of
United States law that would otherwise require the issuer to withhold at a 30%
rate (unless such rate were reduced or eliminated by an applicable tax treaty)
on, among other things, interest and other fixed or determinable, annual or
periodic income paid to Nonresidents. Holders of Pass-Through Securities
however, may be subject to withholding to the extent that the Mortgage Loans
were originated on or before July 18, 1984.
Interest and OID of Holders who are foreign persons are not subject to
withholding if they are effectively connected with a United States business
conducted by the Holder and timely provide an IRS Form 4224. They will, however,
generally be subject to the regular United States income tax.
Payments to Holders of Residual Interest Securities who are foreign persons
will generally be treated as interest for purposes of the 30% (or lower treaty
rate) United States withholding tax. Holders should assume that such income does
not qualify for exemption from United States withholding tax as 'portfolio
interest.' It is clear that, to the extent that a payment represents a portion
of REMIC taxable income that constitutes excess inclusion income, a Holder of a
Residual Interest Security will not be entitled to an exemption from or
reduction of the 30% (or lower treaty rate) withholding tax rule. If the
payments are subject to United States withholding tax, they generally will be
taken into account for withholding tax purposes only when paid or distributed
(or when the Residual Interest Security is disposed of). The Treasury has
statutory authority, however, to promulgate regulations which would require such
amounts to be taken into account at an earlier time in order to prevent the
avoidance of tax. Such regulations could, for example, require withholding prior
to the distribution of cash in the case of Residual Interest Securities that do
not have significant value. Under the REMIC Regulations, if a Residual Interest
Security has tax avoidance potential, a transfer of a Residual Interest Security
to a Nonresident will be disregarded for all federal tax purposes. A Residual
Interest Security has tax avoidance potential unless, at the time of the
transfer the transferor reasonably expects that the REMIC will distribute to the
transferee residual interest Holder amounts that will equal at least 30% of each
excess inclusion, and that such amounts will be distributed at or after the time
at which the excess inclusions accrue and not later than the calendar year
following the calendar year of accrual. If a Nonresident transfers a Residual
Interest Security to a United States person, and if the transfer has the effect
of allowing the transferor to avoid tax on accrued excess inclusions, then the
transfer is disregarded and the transferor continues to be treated as the owner
of the Residual Interest Security for purposes of the withholding tax provisions
of the Code. See 'Taxation of Holders of Residual Interest Securities--Excess
Inclusions.'
Subject to the discussion in the previous paragraph, any capital gain
realized on the sale, redemption, retirement or other taxable disposition of a
Security by a foreign person will be exempt from United States federal income
and withholding tax, provided that (i) such 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 person
is not present in the United States for 183 days or more in the taxable year.
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TAX CHARACTERIZATION OF THE TRUST AS A PARTNERSHIP
If a Trust is intended to be a partnership for federal income tax purposes,
the applicable Agreements will provide 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 the issuance of the Certificates will be structured
as a private placement under an IRS safe harbor, so that the Trust will not be
characterized as a publicly traded partnership taxable as a corporation.
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 Seller that the Notes
will be classified as debt for federal income tax purposes. Consequently,
Holders of Notes will be subject to taxation as described in 'Taxation of Debt
Securities (Including Regular Interest Securities)' above for Debt Securities
which are not Regular Interest Securities.
Possible Alternative Treatment of the Notes. If, contrary to the opinion
of Federal Tax Counsel, the IRS 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 would likely
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 U.S. federal income tax and U.S.
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.
TAX CONSEQUENCES TO HOLDERS OF THE CERTIFICATES ISSUED BY A PARTNERSHIP
Treatment of the Trust as a Partnership. In the case of a Trust intended
to qualify as a partnership for federal income tax purposes, the Trust and the
Seller will agree, and the Certificateholders will agree by their purchase of
Certificates, to treat the Trust as a partnership for purposes of federal and
state income tax, franchise tax and any other tax measured in whole or in part
by income, with the assets of the partnership being the assets held by the
Trust, the partners of the partnership being the Certificateholders, and the
Notes, if any, being debt of the partnership. However, the proper
characterization of the arrangement involving the Trust, the Certificates, the
Notes, the Trust and the 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. Any such characterization
would not result in materially adverse tax consequences to Certificateholders as
compared to the consequences from treatment of the Certificates as equity in a
partnership, described below. The following discussion assumes that the
Certificates represent equity interests in a partnership. The following
discussion also assumes that all payments on the Certificates are denominated in
U.S. dollars, none of the Certificates have interest rates which would qualify
as contingent interest under the OID regulations, and that a Series of
Securities includes a single Class of Certificates. If these conditions are not
satisfied with respect to any given Series of Certificates, additional tax
considerations with respect to such Certificates will be disclosed in the
applicable Prospectus Supplement.
Partnership Taxation. As a partnership, the Trust will not be subject to
federal income tax. Rather, eachn 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, OID and bond premium) and any gain
upon collection or disposition of Loans. The Trust's deductions will consist
primarily of interest and OID accruing with respect to the Notes, servicing and
other fees, and losses or deductions upon collection or disposition of Loans.
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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 Seller. 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 IRS 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, 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 IRS were to
require that such calculations be made separately for each Mortgage 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 Mortgage Loans will not have
been issued with OID and, therefore, the Trust should not have OID 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 Mortgage 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 Mortgage Loan by
Mortgage Loan basis.)
If the Trust acquires the Mortgage 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 Mortgage Loans or to offset any such premium
against interest income on the Mortgage 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 Trust will be considered to
distribute its assets to the partners, who would then be treated as
recontributing those assets to the Trust as a new partnership. 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.
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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 Sellers 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. 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 Owner 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 (IRS Form 1065) with the IRS 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 IRS 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 IRS 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
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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 Seller 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 IRS. The Code provides for
administrative examination of a partnership as if the partnership were a
separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire before three years after the date on which the
partnership information return is filed. Any adverse determination following an
audit of the return of the Trust by the appropriate taxing authorities could
result in an adjustment of the returns of the Certificateholders, and, under
certain circumstances, a Certificateholder may be precluded from separately
litigating a proposed adjustment to the items of the Trust. An adjustment could
also result in an audit of a Certificateholder's returns and adjustments of
items not related to the income and losses of the Trust.
Tax Consequences to Foreign Certificateholders. It is not clear whether
the Trust 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-U.S.
persons because there is no clear authority dealing with that issue under facts
substantially similar to those described herein. Although it is not expected
that the Trust 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 U.S. trade or business, at a rate
of 35% for foreign Holders that are taxable as corporations and 39.6% for all
other foreign Holders. Subsequent adoption of Treasury regulations or the
issuance of other administrative pronouncements may require the Trust to change
its withholding procedures.
Each foreign Holder might be required to file a U.S. individual or
corporate income tax return (including, in the case of a corporation, the branch
profits tax) on its share of the Trust's income. Each foreign Holder must obtain
a taxpayer identification number from the IRS and submit that number to the
Trust on Form W-8 in order to assure appropriate crediting of the taxes
withheld. A foreign Holder generally would be entitled to file with the IRS 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 U.S. 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.
If these interest payments are properly characterized as guaranteed payments,
then the interest probably will not be considered 'portfolio interest.' As a
result, Certificateholders will be subject to United States federal income tax
and withholding tax at a rate of 30%, unless reduced or eliminated pursuant to
an applicable treaty. In such case, a foreign Holder would only be entitled to
claim a refund for that portion of the taxes, if any, in excess of the taxes
that should be withheld with respect to the guaranteed payments.
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.
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ERISA CONSIDERATIONS
GENERAL
ERISA imposes certain requirements on employee benefit plans and collective
investment funds and separate 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.
CERTIFICATES
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 Depositor, the Originators, the Enhancer, the Underwriter and the
Trustee and certain of their affiliates might be considered 'parties in
interest' or 'disqualified persons' with respect to a Plan. If so, the
acquisition or holding or transfer of Certificates by or on behalf of such Plan
could be considered to give rise to a 'prohibited transaction' within the
meaning of ERISA and the Code unless an exemption is available. In addition, the
Department of Labor ('DOL') has issued a regulation (29 C.F.R. Section
2510.3-101) concerning the definition of what constitutes the assets of a Plan
(the 'Plan Asset Regulations'), which provides that, as a general rule, the
underlying assets and properties of corporations, partnerships, trusts and
certain other entities in which a Plan makes an 'equity' investment will be
deemed for purposes of ERISA to be assets of the investing Plan unless certain
exceptions apply. If an investing Plan's assets were deemed to include an
interest in the Mortgage Loans and any other assets of the Trust and not merely
an interest in the Certificates, transactions occurring between the Depositor,
the Trustee, the Master Servicer, Sub-servicers, if any, the Enhancer or any of
their affiliates might constitute prohibited transactions, and the assets of the
Trust would become subject to the fiduciary investment standards of ERISA,
unless an administrative exemption applies. Certain such exemptions which may be
applicable to the acquisition and holding of the Certificates or to the
servicing of the Mortgage Loans are noted below.
The U.S. Department of Labor has issued an administrative exemption,
Prohibited Transaction Class Exemption 83-1 ('PTCE 83-1'), which, under certain
conditions, exempts from the application of the prohibited transaction rules of
ERISA and the excise tax provisions of Section 4975 of the Code transactions
involving a Plan in connection with the operation of a 'mortgage pool' and the
purchase, sale and holding of 'mortgage pool pass-through certificates.' A
'mortgage pool' is defined as an investment pool, consisting solely of interest
bearing obligations secured by first or second mortgages or deeds of trust on
single-family residential property, property acquired in foreclosure and
undistributed cash. A 'mortgage pool pass-through certificate' is defined as a
certificate which represents a beneficial undivided interest in a mortgage pool
which entitles the holder to pass-through payments of principal and interest
from the mortgage loans.
For the exemption to apply, PTCE 83-1 requires that (i) the Depositor and
the Trustee maintain a system of insurance or other protection for the Mortgage
Loans and the property securing such Mortgage Loans, and for indemnifying
holders of Certificates against reductions in pass-through payments due to
defaults in loan payments or property damage in an amount at least equal to the
greater of 1% of the aggregate principal balance of the Mortgage Loans, or 1% of
the principal balance of the largest covered pooled Mortgage Loan; (ii) the
Trustee may not be an affiliate of the Depositor; and (iii) the payments made to
and retained by the Depositor 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 Mortgage Loans, plus reasonable
compensation for services provided to the Trust.
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In addition, PTCE 83-1 exempts the initial sale of Certificates to a Plan
with respect to which the Depositor, the Enhancer, the Master Servicer or the
Trustee is a party in interest if the Plan does not pay more than fair market
value for such Certificates and the rights and interests evidenced by such
Certificates are not subordinated to the rights and interests evidenced by other
Certificates of the same pool. PTCE 83-1 also exempts from the prohibited
transaction rules and transactions in connection with the servicing and
operation of the Pool, provided that any payments made to the 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 Depositor, the Master
Servicer, the Enhancer or the Trustee is a fiduciary, PTCE 83-1 will only apply
if, in addition to the other requirements: (i) the initial sale, exchange or
transfer of Certificates is expressly approved by an independent fiduciary who
has authority to manage and control those plan assets being invested in
Certificates; (ii) the Plan pays no more for the Certificates than would be paid
in an arm's length transaction; (iii) no investment management, advisory or
underwriting fee, sale commission, or similar compensation is paid to the
Depositor with regard to the sale, exchange or transfer of Certificates to the
Plan; (iv) the total value of the Certificates purchased by such Plan does not
exceed 25% of the amount issued; and (v) at least 50% of the aggregate amount of
Certificates is acquired by persons independent of the Depositor, the Trustee,
the Master Servicer and the Certificate Insurer, if any.
Before purchasing Certificates, a fiduciary of a Plan should confirm that
the Trust is a 'mortgage pool,' that the Certificates constitute 'mortgage pool
pass-through certificates,' and that the conditions set forth in PTCE 83-1 would
be satisfied. In addition to making its own determination as to the availability
of the exemptive relief provided in PTCE 83-1, the Plan fiduciary should
consider the availability of any other prohibited transaction exemptions. The
Plan fiduciary also should consider its general fiduciary obligations under
ERISA in determining whether to purchase any Certificates on behalf of a Plan.
In addition, DOL has granted to certain underwriters and/or placement
agents individual prohibited transaction exemptions which may be applicable to
avoid certain of the prohibited transaction rules of ERISA with respect to the
initial purchase, the holding and the subsequent resale in the secondary market
by Plans of pass-through certificates representing a beneficial undivided
ownership interest in the assets of a trust that consist of certain receivables,
loans and other obligations that meet the conditions and requirements of the
Exemption which may be applicable to the Certificates.
One or more other prohibited transaction exemptions issued by the DOL may
be available to a Plan investing in Certificates, depending in part upon the
type of Plan fiduciary making the decision to acquire Certificates 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
95-60 (regarding investments by insurance company general accounts), PTCE 84-14
(regarding investments by qualified professional asset managers) or PTCE 96-23
(regarding investment by in-house asset managers). However, even if the
conditions specified in the Exemption or one or more of these other exemptions
are met, the scope of the relief provided might or might not cover all acts
which might be construed as prohibited transactions.
Any Plan fiduciary considering the purchase of a Certificate should consult
with its counsel with respect to the potential applicability of ERISA and the
Code to such investment. Moreover, each Plan fiduciary should determine whether,
under the general fiduciary standards of investment prudence and
diversification, an investment in the Certificates is appropriate for the Plan,
taking into account the overall investment policy of the Plan and the
composition of the Plan's investment portfolio. Special caution ought to be
exercised before a Plan purchases a Certificate in such circumstances.
NOTES
Certain transactions involving the purchase, holding or transfer of the
Notes might be deemed to constitute prohibited transactions under ERISA and the
Code if assets of the Trust were deemed to be assets of a Plan. Under the Plan
Assets Regulation, the assets of the Trust would be treated as plan assets of a
Plan for the purposes of ERISA and the Code only if the Plan acquires an 'Equity
Interest' in the Trust and none of the exceptions contained in the Plan Assets
Regulation is applicable. An Equity Interest is defined under the Plan Assets
Regulation as an interest other than an instrument which is treated as
indebtedness under applicable local
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law and which has no substantial equity features. It is believed that the Notes
should be treated as indebtedness without substantial equity features for
puposes of the Plan Assets Regulation. However, without regard to whether the
Notes are treated as an Equity Interest for such purposes, the acquisition or
holding of Notes by or on behalf of a Plan could be considered to give rise to a
prohibited transaction if the Trust, the Trustee or any of their respective
affiliates is or becomes a party in interest or a disqualified person with
respect to such Plan. In such case, certain exemptions from the prohibited
transaction rules could be applicable depending on the type and circumstances of
the plan fiduciary making the decision to acquire a Note. Included among these
exemptions are: Prohibited Transaction Class Exemption ('PTCE') 90-1, regarding
investments by insurance company pooled separate accounts: PTCE 91-38 regarding
investments by bank collective investment funds; and PTCE 84-14, regarding
transactions effected by 'qualified professional asset managers.'
A plan fiduciary considering the purchase of Notes should consult its tax
and/or legal advisors regarding whether the assets of the Trust would be
considered plan assets, the possibility of exemptive relief from the prohibited
transaction rules and other issues and their potential consequences.
LEGAL INVESTMENT
SMMEA
The related Prospectus Supplement will indicate whether the related
Securities will constitute 'mortgage related securities' for purposes of SMMEA.
If the Securities so qualify, absent state legislation described below, such
Securities will be legal investments for persons, trusts, corporations,
partnerships, associations, business trusts and business entities (including
depository institutions, life insurance companies and pension funds) created
pursuant to or existing under the laws of the United States or of any state
(including the District of Columbia and Puerto Rico) whose authorized
investments are subject to state regulation to the same extent that under
applicable law obligations issued by or guaranteed as to principal and interest
by the United States or any agency or instrumentality thereof constitute legal
investments for such entities. Under SMMEA, if a state enacted legislation prior
to October 4, 1991 specifically limiting the legal investment authority of any
such entities with respect to 'mortgage related securities,' the Securities will
constitute legal investments for entities subject to such legislation only to
the extent provided therein. Certain states adopted legislation which limits the
ability of insurance companies domiciled in these states to purchase
mortgage-related securities, such as the Securities.
SMMEA also amended the legal investment authority of federally-chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal with Securities
without limitation as to the percentage of their assets represented thereby,
federal credit unions may invest in Securities, and national banks may purchase
Securities for their own account without regard to the limitations generally
applicable to investment securities set forth in 12 U.S.C. 24 (Seventh), subject
in each case to such regulations as the applicable federal regulatory authority
may prescribe.
FFIEC POLICY STATEMENT
The Board of Governors of the Federal Reserve System, the Federal Deposit
Insurance Corporation, the Comptroller of the Currency and the Office of Thrift
Supervision have adopted the Federal Financial Institutions Examination
Council's Supervisory Policy Statement on Securities Activities (the 'Policy
Statement'). Although the National Credit Union Administration has not yet
adopted the Policy Statement, it has adopted other regulations affecting
mortgage-backed securities and is expected to consider adoption of the Policy
Statement. The Policy Statement, among other things, places responsibility on a
depository institution to develop and monitor appropriate policies and
strategies regarding the investment, sale and trading of securities and
restricts an institution's ability to engage in certain types of transactions.
The Policy Statement and any applicable modifications or supplements
thereto should be reviewed prior to the purchase of any Securities by a
depository institution. The summary of the Policy Statement contained herein
does not purport to be complete and should not be relied upon for purposes of
making any regulatory determinations. In addition, any regulator may adopt
modifications or supplements to the Policy Statement or additional restrictions
on the purchase of mortgage-backed or other securities. Investors are urged to
consult their
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own legal advisors prior to making any determinations with respect to the Policy
Statement or other regulatory requirements.
The Policy Statement provides that a 'high-risk mortgage security' is not
suitable as an investment portfolio holding for a depository institution. A
high-risk mortgage security must be reported in the trading account at market
value or as an asset held for sale at the lower of cost or market value and
generally may only be acquired to reduce an institution's interest rate risk.
However, an institution with strong capital and earnings and adequate liquidity
that has a closely supervised trading department is not precluded from acquiring
high-risk mortgage securities for trading purposes.
A depository institution must ascertain and document prior to purchase and
no less frequently than annually thereafter that a nonhigh-risk mortgage
security held for investment remains outside the high-risk category. If an
institution is unable to make these determinations through internal analysis, it
must use information derived from a source that is independent of the party from
whom the product is being purchased. The institution is responsible for ensuring
that the assumptions underlying the analysis and resulting calculations are
reasonable. Reliance on analyses and documentation from a securities dealer or
other outside party without internal analyses by the institution is
unacceptable.
In general, a high-risk mortgage security is a mortgage derivative product
possessing greater price volatility than a benchmark fixed rate 30-year
mortgage-backed pass-through security. Mortgage derivative products include
CMOs, REMICs, CMO and REMIC residuals and stripped mortgage-backed securities. A
mortgage derivative product that, at the time of purchase or at a subsequent
testing date, meets any one of three tests will be considered a high-risk
mortgage security. When the characteristics of a mortgage derivative product are
such that the first two tests cannot be applied (such as interest-only strips),
the mortgage derivative product remains subject to the third test.
The three tests of a high-risk mortgage security are as follows: (i) the
mortgage derivative product has an expected weighted average life greater than
10.0 years; (ii) the expected weighted average life of the mortgage derivative
product: (a) extends by more than 4.0 years, assuming an immediate and sustained
parallel shift in the yield curve of plus 300 basis points, or (b) shortens by
more than 6.0 years, assuming an immediate and sustained parallel shift in the
yield curve of minus 300 basis points; and (iii) the estimated change in the
price of the mortgage derivative product is more than 17%, due to an immediate
and sustained parallel shift in the yield curve of plus or minus 300 basis
points.
When performing the price sensitivity test, the same prepayment assumptions
and same cash flows that were used to estimate average life sensitivity must be
used. The discount rate assumptions should be determined by (i) assuming that
the discount rate for the security equals the yield on a comparable average life
U.S. Treasury security plus a constant spread, (ii) calculating the spread over
Treasury rates from the bid side of the market for the mortgage derivative
product, and (iii) assuming the spread remains constant when the Treasury curve
shifts up or down 300 basis points. Discounting the cash flows by their
respective discount rates estimates a price in the plus or minus 300 basis point
environments. The initial price must be determined by the offer side of the
market and used as the base price from which the 17% price sensitivity test will
be measured.
Generally, a floating-rate debt class will not be subject to the average
life and average life sensitivity tests described above if it bears a rate that,
at the time of purchase or at a subsequent testing date, is below the
contractual cap on the instrument. An institution may purchase interest rate
contracts that effectively uncap the instrument. For purposes of the Policy
Statement, a CMO floating-rate debt class is a debt class whose rate adjusts at
least annually on a one-for-one basis with the debt class's index. The index
must be a conventional, widely-used market interest rate index such as the
London Interbank Offered Rate (LIBOR). Inverse floating rate debt classes are
not included in the definition of a floating rate debt class.
Securities and other products, whether carried on or off balance sheet
(such as CMO swaps but excluding servicing assets), having characteristics
similar to those of high-risk mortgage securities, will be subject to the same
supervisory treatment as high-risk mortgage securities. Long-maturity holdings
of zero coupon, stripped and deep discount OID products which are
disproportionately large in relation to the total investment portfolio or total
capital of a depository institution are considered an imprudent investment
practice. Long-maturity generally means a remaining maturity exceeding 10 years.
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GENERAL
There may be other restrictions on the ability of certain investors,
including depository institutions, either to purchase Securities, to purchase
Securities representing more than a specified percentage of the investor's
assets, or to purchase certain types of Securities, such as residual interests
or stripped mortgage-backed securities. Investors should consult their own legal
advisors in determining whether and to what extent the Securities constitute
legal investments for such investors and comply with any other applicable
requirements.
METHOD OF DISTRIBUTION
The Securities offered hereby and by the Prospectus Supplement will be
offered in Series, either directly by the Depositor 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 Depositor, 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.
If any of the Securities are to be offered for the account of security
holders, the related Prospectus Supplement will specify the name of such holder,
the nature of any position, office or other material relationship which such
holder has had within the past three years with the Depositor or any of its
affiliates, and the amount and Percentage Interest of the applicable Class or
Series of Securities (i) held by such Holder prior to the offering, (ii) being
offered and (iii) to be held by such Holder following completion of the
offering.
The Depositor will indemnify any Underwriters against certain civil
liabilities, including liabilities under the 1933 Act, or will contribute to
payments any Underwriters may be required to make in respect thereof.
In the ordinary course of business, the Depositor, its affiliates and any
Underwriters may engage in various securities and financing transactions,
including repurchase agreements to provide interim financing of the Depositor's
Mortgage Assets pending the sale of such Mortgage Assets or interests therein,
including the Certificates.
The Depositor anticipates that the Securities will be sold primarily to
institutional investors. Purchasers of Securities, including dealers, may,
depending on the facts and circumstances of such purchases, be deemed to be
'underwriters' within the meaning of the 1933 Act in connection with reoffers
and sales by them of Securities. Holders of Securities should consult with their
legal advisors in this regard prior to any such reoffer or sale.
LEGAL MATTERS
Certain legal matters relating to the issuance of the Securities of each
Series, including certain federal income tax consequences with respect thereto,
will be passed upon by Stroock & Stroock & Lavan LLP, 180 Maiden Lane, New York,
New York 10038.
81
<PAGE>
FINANCIAL INFORMATION
The Depositor has determined that its financial statements are not material
to the offering made hereby.
A new Trust will be formed to own the Mortgage 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 will be included in this Prospectus or any Prospectus Supplement.
RATING
Unless otherwise specified in the related Prospectus Supplement, it is a
condition to the issuance of the Securities of each Series offered hereby 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 (each, a 'Rating Agency').
Ratings on asset backed notes and asset backed certificates address the
likelihood of receipt by holders 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 asset backed notes and
asset backed certificates do not represent any assessment of the likelihood of
principal prepayments by mortgagors or of the degree by which such prepayments
might differ from those originally anticipated. As a result, holders might
suffer a lower than anticipated yield, and, in addition, holders of stripped
pass-through certificates in extreme cases might fail to recoup their underlying
investments.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
organization. Each security rating should be evaluated independently of any
other security rating.
82
<PAGE>
INDEX OF PRINCIPAL TERMS
Unless the context indicates otherwise, the following terms shall have the
meanings set forth on the page indicated below:
<TABLE>
<S> <C>
Accounts.......................................... 30
Accrual Certificates.............................. 32
Agreement......................................... 7
Available Funds................................... 31
Balloon Loans..................................... 15
Bankruptcy Bond................................... 10
Cede.............................................. 13
Certificate Guaranty Insurance Policy............. 9
Certificate Insurer............................... 37
Certificate Principal Balance..................... 33
Certificate Register.............................. 31
Certificateholders................................ 30
Certificates...................................... 4
Class............................................. 30
Cleanup Costs..................................... 59
CMOs.............................................. 6
Code.............................................. 11
Commission........................................ 2
Cut-off Date...................................... 6
Definitive Certificates........................... 35
Delinquency Advances.............................. 47
Depositor......................................... 4
Detailed Description.............................. 20
Determination Date................................ 32
Distribution Date................................. 31
DTC............................................... 13
Eligible Investments.............................. 46
ERISA............................................. 13
Event of Default.................................. 51
Excess Interest................................... 46
Exchange Act...................................... 2
Garn-St Germain Act............................... 58
Home Equity Loans................................. 17
HUD............................................... 22
Indirect Participant.............................. 34
Insurance Proceeds................................ 32
Interest Weighted Class........................... 18
Liquidation Proceeds.............................. 32
Loan Balance...................................... 44
Loan Purchase Price............................... 44
Loan-to-Value Ratio............................... 21
Master Servicer................................... 4
Mortgage Assets................................... 4
Mortgage Loans.................................... 4
Mortgage Loan Schedule............................ 42
Mortgage Pool Insurance Policy.................... 10
Mortgage Rate..................................... 20
Mortgaged Properties.............................. 5
Mortgagors........................................ 32
Multifamily Loans................................. 4
</TABLE>
83
<PAGE>
<TABLE>
<S> <C>
1933 Act.......................................... 2
Non-REMIC Certificates............................ 12
Participants...................................... 34
Pass-Through Rate................................. 2
Plan.............................................. 78
Plan Asset Regulations............................ 78
PMBS.............................................. 4
PMBS Issuer....................................... 7
PMBS Servicer..................................... 7
PMBS Trustee...................................... 7
Pool.............................................. 4
Pool Insurer...................................... 37
Prepayment Assumption............................. 61
Primary Mortgage Insurance Policies............... 6
Principal Prepayment.............................. 11
Private Mortgage-Backed Securities................ 4
Proposed OID Regulations.......................... 61
PTCE 83-1......................................... 78
Rating Agency..................................... 11
REIT.............................................. 69
Relief Act........................................ 19
REMIC............................................. 11
REMIC Certificates................................ 60
REMIC Regular Certificates........................ 12
REMIC Residual Certificates....................... 12
Second Mortgage Loans............................. 14
Senior Certificates............................... 7
Single Family Loans............................... 4
SMMEA............................................. 13
Special Hazard Insurance Policy................... 10
Special Hazard Insurer............................ 38
Standard Hazard Insurance Policies................ 6
Subordinated Certificates......................... 7
Sub-servicer...................................... 11
Tiered REMICs..................................... 61
Title V........................................... 58
Trust............................................. 7
Trustee........................................... 4
UCC............................................... 34
United Companies.................................. 4
United States Person.............................. 72
Variable Rate Non-REMIC Certificates.............. 75
Variable Rate REMIC Regular Certificate........... 63
</TABLE>
84
<PAGE>
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NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING
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 DEPOSITOR OR ANY 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
CERTIFICATES OFFERED HEREBY NOR AN OFFER OF SUCH CERTIFICATES 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.
UNTIL 90 DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTING IN THE CERTIFICATES OFFERED HEREBY, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS
SUPPLEMENT AND THE 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.
------------------------------
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
----------
<S> <C>
Summary of Terms........................ S-3
The Home Equity Loans................... S-12
Maturity, Prepayment and Yield
Considerations . S-23
Description of the Notes................ S-27
The Issuer.............................. S-32
The Originators......................... S-32
The Transfer and Servicing Agreements... S-35
The Note Insurance Policy and the Note
Insurer . S-39
Certain Federal Income Tax
Consequences .......................... S-42
Legal Investment........................ S-43
ERISA Considerations.................... S-43
Underwriting............................ S-43
Report of Experts....................... S-44
Certain Legal Matters................... S-44
Ratings................................. S-44
Annex I--Global Clearance, Settlement
and Tax Documentation Procedures....... S-45
Appendix A--Financial Statements of the
Note Insurer........................... A-1
Appendix B--Certain Historical
Prepayment Information................. B-1
Appendix C--Certain Historical
Information............................ C-1
PROSPECTUS
Prospectus Supplement................... 2
Available Information................... 2
Reports to Holders...................... 2
Incorporation of Certain Documents by
Reference.............................. 2
Summary of Terms........................ 3
Risk Factors............................ 12
The Trusts.............................. 18
Use of Proceeds......................... 23
The Depositor........................... 23
The Originators......................... 23
The Home Equity Loan Program............ 24
Description of the Securities........... 29
Credit Enhancement...................... 36
Maturity, Prepayment and Yield
Considerations . 36
The Agreements.......................... 39
Certain Legal Aspects of the Mortgage
Loans.................................. 54
Federal Income Tax Consequences......... 58
ERISA Considerations.................... 77
Legal Investment........................ 79
Method of Distribution.................. 81
Legal Matters........................... 81
Financial Information................... 82
Rating.................................. 82
Index of Principal Terms................ 83
</TABLE>
$300,000,000
UCFC HOME EQUITY LOAN
OWNER TRUST 1998-AA
ASSET-BACKED NOTES,
SERIES 1998-AA
UCFC ACCEPTANCE CORPORATION
(DEPOSITOR)
UNITED COMPANIES LENDING
CORPORATION(REGISTERED)
(SERVICER)
[LOGO]
(REGISTERED)
------------------------------
PROSPECTUS SUPPLEMENT
------------------------------
PRUDENTIAL SECURITIES INCORPORATED
BEAR, STEARNS & CO. INC.
FIRST UNION CAPITAL MARKETS
March 25, 1998
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