<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 27, 1997
Registration No. 333-37107
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 1
FORM S-3
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
ADVANTA MORTGAGE CONDUIT SERVICES, INC.
(As sponsor of the trusts described herein)
<TABLE>
<S> <C> <C>
Delaware 16875 West Bernardo Drive 23-2723382
(Jurisdiction) San Diego, California 92127 (I.R.S. Employee
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) Identification No.)
</TABLE>
ADVANTA CONDUIT RECEIVABLES INC.
(As transferor)
<TABLE>
<S> <C> <C>
Delaware c/o Griffin Corporate Services 88-0360305
(Jurisdiction) 1325 Airmotive Way, Suite 130 (I.R.S. Employee
Reno, Nevada 89502 Identification No.)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
</TABLE>
ANNETTE AGUIRRE, ESQ.
16875 WEST BERNARDO DRIVE
SAN DIEGO, CALIFORNIA 92127
(619) 674-3800
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
CHRIS DIANGELO, ESQ.
DEWEY BALLANTINE LLP
1301 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
From time to time after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration number of the earlier effective
registration statement for the same OFFERING. [ ]
If this Form is filed as a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, please check the following box and list the
Securities Act registration number of the earlier effective registration
statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
================================================================================================
Title of Securities Amount Proposed Proposed Amount of
Being Registered To be Maximum Maximum Registration
Registered(2) Aggregate Price Aggregate Fee(3)
Per Unit(1) Offering Price(1)
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage Loan Asset-Backed $3,500,000,000 100% $3,500,000,000 $1,045,151.52
Certificates
================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
(2) In accordance with Rule 429 under the Securities Act of 1933, the Prospectus
included herein is a combined prospectus which also relates to the
Registrants' Registration Statement on Form S-3, File No. 21265 (the "Prior
Registration Statement"). The amount of securities eligible to be sold under
the Prior Registration Statement ($50,000,000, as of October 2, 1997) shall
be carried forward to this Registration Statement.
(3) A filing fee of $303.03 was paid with the original filing of this
Registration Statement on October 3, 1997. A filing fee of $15,151.52
attributable to the amount being carried forward was paid with the Prior
Registration Statement.
THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
PURSUANT TO RULE 429 UNDER THE SECURITIES ACT OF 1933, THE PROSPECTUS FILED
AS PART OF THIS REGISTRATION STATEMENT MAY BE USED IN CONNECTION WITH THE
SECURITIES COVERED BY REGISTRATION STATEMENT NO. 333-21265.
<PAGE> 2
CROSS REFERENCE SHEET
TO FORM S-3
<TABLE>
<CAPTION>
ITEM AND CAPTION IN FORM S-3 CAPTION OR LOCATION IN PROSPECTUS
---------------------------- ---------------------------------
<S> <C>
1. Forepart of the Registration Statement and Outside Front Forepart of Registration Statement; Outside Front Cover
Cover Page of Prospectus................................ Page**
2. Inside Front and Outside Back Cover Page of Prospectus Inside Front and Outside Back Cover Page**
3. Summary Information, Risk Factors and Ratio of Summary of Prospectus**; Risk Factors**;
Earnings to Fixed Charges...............................
4. Use of Proceeds......................................... Use of Proceeds
5. Determination of Offering Price *
6. Dilution................................................ *
7. Selling Security Holders................................ *
8. Plan of Distribution.................................... Methods of Distribution**
9. Description of Securities to be Registered.............. Outside Front Cover Page**;
Summary of Prospectus**;
Description of the Securities**;
Certain Federal Income Tax
Consequences**
10. Interests of Named Experts and Counsel.................. *
11. Material Changes........................................ *
12. Incorporation by Reference.............................. See Page II-3
13. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities.......................... See Page II-4
</TABLE>
- --------------------
* Not applicable or answer is negative.
** To be completed from time to time by Prospectus Supplement.
<PAGE> 3
PROSPECTUS
MORTGAGE LOAN ASSET-BACKED SECURITIES, ISSUABLE IN SERIES
[Logo] [Logo]
Sponsor of the Trust Master Servicer
This Prospectus describes certain Mortgage Loan Asset-Backed Securities
(the "Securities") that may be issued from time to time in series and certain
classes of which may be offered hereby from time to time as described in the
related Prospectus Supplement. Each series of Securities will be issued by a
separate trust (each, a "Trust"). The primary assets of each Trust will consist
of a segregated pool (a "Mortgage Pool") of conventional one- to four-family
residential mortgage loans, multi-family residential mortgage loans, mixed use
mortgage loans, revolving home equity loans or certain balances thereof secured
by mortgages primarily on one- to four-family residential properties, or
certificates of interest or participation therein (collectively, the "Mortgage
Loans"), to be acquired by such Trust from Advanta Mortgage Conduit Services,
Inc. (the "Sponsor"). The Sponsor will acquire the Mortgage Loans from one or
more affiliated or unaffiliated institutions (the "Originators"). In connection
with the establishment of certain Trusts the Sponsor may first transfer the
related Trust Estate to Advanta Mortgage Receivables Inc. (the "Transferor") and
the Transferor will then transfer such Trust Estate to the related Trust. The
use of the Transferor will not affect the obligations of the Sponsor with
respect to the related Trust or the related Securities. If the Transferor is to
be involved in a particular offering the related Prospectus Supplement will
describe its role in such offering; for purposes of this Prospectus the role of
the Transferor is subsumed in the role of the Sponsor. See "The Mortgage Pools."
The Mortgage Loans in each Mortgage Pool and certain other assets
described herein and in the related Prospectus Supplement (collectively with
respect to each Trust, the "Trust Estate") and in the related Prospectus
Supplement will be held by the related Trust for the benefit of the holders of
the related series of Securities (the "Securityholders") pursuant to a Pooling
and Servicing Agreement to the extent and as more fully described herein and in
the related Prospectus Supplement. Unless otherwise specified in the related
Prospectus Supplement, each Mortgage Pool will consist of one or more of the
various types of Mortgage Loans described under "The Mortgage Pools."
See "Risk Factors" at page 13 for a discussion of certain risk factors which
should be considered by prospective investors in the securities offered hereby.
THE ASSETS OF THE RELATED TRUST ARE THE SOLE SOURCE OF PAYMENTS ON THE RELATED
SECURITIES. THE SECURITIES DO NOT REPRESENT AN INTEREST IN OR OBLIGATION OF THE
SPONSOR, THE MASTER SERVICER, ANY ORIGINATOR OR ANY OF THEIR AFFILIATES, EXCEPT
AS SET FORTH HEREIN AND IN THE RELATED PROSPECTUS SUPPLEMENT. NEITHER THE
SECURITIES NOR THE UNDERLYING MORTGAGE LOANS WILL BE GUARANTEED OR INSURED BY
ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY OR BY THE SPONSOR, THE MASTER
SERVICER, ANY ORIGINATOR OR ANY OF THEIR AFFILIATES, EXCEPT AS SET FORTH IN THE
RELATED PROSPECTUS SUPPLEMENT.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
Offers of the Securities may be made through one or more different
methods, including offerings through underwriters, as more fully described under
"Methods of Distribution" and in the related Prospectus Supplement. There will
be no secondary market for any series of Securities prior to the offering
thereof. There can be no assurance that a secondary market for any of the
Securities will develop or, if it does develop, that it will offer sufficient
liquidity of investment or will continue.
Retain this Prospectus for future reference. This Prospectus may not be
used to consummate sales of securities offered hereby unless accompanied by a
Prospectus Supplement.
The date of this Prospectus is , 1997.
<PAGE> 4
(Cover continued from previous page)
Each series of Securities will include one or more classes. The
Securities of any particular class may represent beneficial ownership interests
in the related Mortgage Loans held by the related Trust, or may represent debt
secured by such Mortgage Loans, as described herein and in the related
Prospectus Supplement. A series may include one or more classes of Securities
entitled to principal distributions, with disproportionate, nominal or no
interest distributions, or to interest distributions, with disproportionate,
nominal or no principal distributions. The rights of one or more classes of
Securities of any series may be senior or subordinate to the rights of one or
more of the other classes of Securities. A series may include two or more
classes of Securities which differ as to the timing, sequential order, priority
of payment, interest rate or amount of distributions of principal or interest or
both. Information regarding each class of Securities of a series, and certain
characteristics of the Mortgage Loans to be evidenced by such Securities, will
be set forth in the related Prospectus Supplement.
THE SPONSOR'S AND THE RELATED ORIGINATORS' ONLY OBLIGATIONS WITH
RESPECT TO A SERIES OF SECURITIES WILL BE PURSUANT TO THE SERVICING REQUIREMENTS
RELATING THERETO, AND PURSUANT TO CERTAIN REPRESENTATIONS AND WARRANTIES MADE BY
THE SPONSOR OR BY SUCH ORIGINATORS, EXCEPT AS OTHERWISE DESCRIBED IN THE RELATED
PROSPECTUS SUPPLEMENT. THE PROSPECTUS SUPPLEMENT FOR EACH SERIES OF SECURITIES
WILL NAME ADVANTA MORTGAGE CORP. USA AS MASTER SERVICER (THE "MASTER SERVICER")
WHICH WILL ACT, DIRECTLY OR THROUGH ONE OR MORE SUBSERVICERS (THE
"SUBSERVICER(S)"). THE PRINCIPAL OBLIGATIONS OF THE MASTER SERVICER WILL BE
PURSUANT TO ITS CONTRACTUAL SERVICING OBLIGATIONS (WHICH MAY INCLUDE A LIMITED
OBLIGATION TO MAKE CERTAIN ADVANCES IN THE EVENT OF DELINQUENCIES IN PAYMENTS ON
THE MORTGAGE LOANS AND INTEREST SHORTFALLS DUE TO PREPAYMENT OF MORTGAGE LOANS).
SEE "DESCRIPTION OF THE SECURITIES."
If so specified in the related Prospectus Supplement, the Trust Estate
for a series of Securities may include any combination of a mortgage pool
insurance policy, letter of credit, financial guaranty insurance policy,
bankruptcy bond, special hazard insurance policy, reserve fund or other form of
Credit Enhancement. In addition to or in lieu of the foregoing, Credit
Enhancement with respect to certain classes of Securities of any series may be
provided by means of subordination, cross-support among Mortgage Assets, as
defined herein, or over-collateralization. See "Description of Credit
Enhancement."
The rate of payment of principal of each class of Securities entitled
to principal payments will depend on the priority of payment of such class and
the rate of payment (including prepayments, defaults, liquidations and
repurchases of Mortgage Loans) of the related Mortgage Loans. A rate of
principal payment lower or higher than that anticipated may affect the yield on
each class of Securities in the manner described herein and in the related
Prospectus Supplement. The various types of Securities, the different classes of
such Securities and certain types of Mortgage Loans in a given Mortgage Pool may
have different prepayment risks and credit risks. The Prospectus Supplement for
a series of Securities or the related Current Report on Form 8-K will contain
information as to (i) types, maturities and certain statistical information
relating to credit risks of the Mortgage Loans in the related Mortgage Pool,
(ii) the effect of certain rates of prepayment, based upon certain specified
assumptions for a series of Securities and (iii) priority of payment and
maturity dates of the Securities. AN INVESTOR SHOULD CAREFULLY REVIEW THE
INFORMATION IN THE RELATED PROSPECTUS SUPPLEMENT CONCERNING THE DIFFERENT
CONSEQUENCES OF THE RISKS ASSOCIATED WITH THE DIFFERENT TYPES AND CLASSES OF
SECURITIES. See "Yield Considerations." A Trust may be subject to early
termination under the circumstances described herein and in the related
Prospectus Supplement.
One or more separate elections may be made to treat a Trust, or one or
more segregated pools of assets held by such Trust, as a real estate mortgage
investment conduit ("REMIC") or a Financial Asset Securitization Investment
Trust ("FASIT") for federal income tax purposes. If applicable, the Prospectus
Supplement for a series of Securities will specify which class or classes of the
related series of Securities will be considered to be regular interests in a
REMIC or FASIT and which classes of Securities or other interests will be
designated as the residual interest in a REMIC or as high-yield interests or the
ownership interest in a FASIT. Alternatively, a Trust may be treated as a
grantor trust or as a partnership for federal income tax purposes, or may be
treated for federal income tax purposes as a mere security device which
constitutes a collateral arrangement for the issuance of secured debt. See
"Certain Federal Income Tax Consequences" herein.
No dealer, salesman, or any other person has been authorized to give
any information, or to make any representations, other than those contained in
this Prospectus or the related Prospectus Supplement, and, if given or made,
such information must not be relied upon as having been authorized by the
Company or any dealer, salesman,
2
<PAGE> 5
or any other person. Neither the delivery of this Prospectus or the related
Prospectus Supplement nor any sale made hereunder or thereunder shall under any
circumstances create an implication that there has been no change in the
information herein or therein since the date hereof. This Prospectus and the
related Prospectus Supplement are not an offer to sell or a solicitation of an
offer to buy any security in any jurisdiction in which it is unlawful to make
such offer or solicitation.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
CAPTION PAGE
- ------- ----
<S> <C>
Summary of Prospectus........................ 4
Risk Factors................................. 14
Risks of the Mortgage Loans............. 15
The Trusts................................... 19
The Mortgage Pools........................... 26
General................................. 26
The Mortgage Pools...................... 26
Mortgage Loan Program........................ 28
Underwriting Guidelines................. 29
Qualifications of Originators........... 32
Sub-Servicers........................... 33
Representations by Originators.......... 33
Sub-Servicing by Originators............ 34
Description of the Securities................ 36
General................................. 36
Form of Securities...................... 38
Assignment of Mortgage Loans............ 39
Forward Commitments; Pre-Funding........ 41
Payments on Mortgage Loans; Deposits to
Distribution Account.................. 41
Withdrawals from the Principal and
Interest Account...................... 44
Distributions........................... 45
Principal and Interest on the Securities 45
Advances................................ 46
Reports to Securityholders.............. 47
Collection and Other Servicing
Procedures............................ 48
Realization Upon Defaulted Mortgage
Loans................................. 50
Subordination................................ 51
Description of Credit Enhancement............ 52
Hazard Insurance; Claims Thereunder.......... 57
Hazard Insurance Policies............... 57
The Sponsor and the Transferor............... 57
The Master Servicer.......................... 58
The Pooling and Servicing Agreement..........
Servicing and Other Compensation and
Payment of Expenses; Originator's
Retained Yield........................ 58
Evidence as to Compliance............... 59
Removal and Resignation of the Master
Servicer.............................. 59
Amendments.............................. 60
<CAPTION>
CAPTION PAGE
- ------- ----
<S> <C>
Termination; Retirement of Securities... 61
The Trustee............................. 61
Yield Considerations......................... 63
Maturity and Prepayment
Considerations............................. 65
Certain Legal Aspects of Mortgage Loans
and Related Matters........................ 67
General................................. 67
Cooperative Loans....................... 67
Foreclosure............................. 68
Foreclosure on Shares of Cooperatives... 69
Rights of Redemption.................... 70
Anti-Deficiency Legislation and Other
Limitations on Lenders................ 70
Environmental Legislation............... 71
Enforceability of Certain Provisions.... 72
Certain Provisions of California Deeds
of Trust.............................. 72
Applicability of Usury Laws............. 73
Alternative Mortgage Instruments........ 73
Soldiers' and Sailors' Civil Relief
Act of 1940........................... 73
Certain Federal Income Tax Consequences...... 74
General................................. 74
Grantor Trust Securities................ 75
REMIC Securities........................ 76
Special Tax Attributes.................. 77
Debt Securities......................... 82
Discount and Premium.................... 83
Backup Withholding...................... 86
Foreign Investors....................... 86
ERISA Considerations......................... 86
General................................. 84
Certificates............................ 85
Notes................................... 88
Consultation With Counsel............... 89
Legal Investment Matters..................... 89
Use of Proceeds.............................. 90
Methods of Distribution...................... 90
Legal Matters................................ 91
Financial Information........................ 91
Additional Information....................... 91
Index of Principal Definitions............... 92
Annex I...................................... A-1
</TABLE>
UNTIL 90 DAYS AFTER THE DATE OF EACH PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE RELATED SECURITIES, WHETHER OR NOT PARTICIPATING
IN THE DISTRIBUTION THEREOF, MAY BE REQUIRED TO DELIVER THIS PROSPECTUS AND THE
RELATED PROSPECTUS SUPPLEMENT. THIS DELIVERY REQUIREMENT 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.
3
<PAGE> 6
SUMMARY OF PROSPECTUS
The following summary of certain pertinent information is qualified in
its entirety by reference to the detailed information appearing elsewhere in
this Prospectus and by reference to the information with respect to each series
of Securities contained in the Prospectus Supplement to be prepared and
delivered in connection with the offering of such series. Capitalized terms used
in this summary that are not otherwise defined shall have the meanings ascribed
thereto in this Prospectus. An index indicating where certain terms used herein
are defined appears at the end of this Prospectus.
Securities Offered
Mortgage Loan Asset-Backed Securities.
Sponsor
Advanta Mortgage Conduit Services, Inc. See "The Sponsor and The Transferor."
Originators
The Sponsor will acquire the Mortgage Loans from one or more institutions
affiliated with the Sponsor ("Affiliated Originators") or institutions
unaffiliated with the Sponsor ("Unaffiliated Originators") (the Affiliated
Originators and the Unaffiliated Originators are collectively referred to as the
"Originators"). The Sponsor will transfer the related Trust Estate to the
related Trust. In connection with the establishment of certain Trusts the
Sponsor may first transfer the related Trust Estate to the Transferor and the
Transferor will then transfer such Trust Estate to the related Trust. The use of
the Transferor will not affect the obligations of the Sponsor with respect to
the related Trust or the related Securities. If the Transferor is to be involved
in a particular offering the related Prospectus Supplement will describe its
role in such offering; for purposes of this Prospectus the role of the
Transferor is subsumed in the role of the Sponsor.
Master Servicer
Advanta Mortgage Corp. USA. See "The Master Servicer" and "The Pooling and
Servicing Agreement--Removal and Resignation of the Master Servicer."
Sub-Servicers
Originators may act as Sub-Servicers for Mortgage Loans acquired by the Sponsor
from such Originators unless all servicing duties relating to such Mortgage
Loans have been transferred to the Master Servicer or to a third-party,
unaffiliated contract servicer approved by the Master Servicer. See "Mortgage
Loan Program--Sub-Servicers."
Trustee
The trustee (the "Trustee") for each series of Securities will be specified in
the related Prospectus Supplement.
The Securities
Issuance of Securities.
Each series of Securities will be issued at the direction of the Sponsor by a
separate Trust (each, a "Trust"). The primary assets of each Trust will consist
of a segregated pool (each, a "Mortgage Pool") of conventional, one- to
four-family residential mortgage loans or multi- family residential mortgage
loans (the "Mortgage Loans") or certificates of interest or participation
therein, acquired by such Trust from the Sponsor. The Sponsor will acquire the
Mortgage Loans from one or more of the Originators. The Securities issued by any
Trust may represent beneficial ownership interests in the related Mortgage Loans
held by the related Trust, or may represent debt secured by such Mortgage Loans,
as described herein and in the related
4
<PAGE> 7
Prospectus Supplement. Securities which represent beneficial ownership interests
in the related Trust will be referred to as "Certificates" in the related
Prospectus Supplement; Securities which represent debt issued by the related
Trust will be referred to as "Notes" in the related Prospectus Supplement.
Each Trust will be established pursuant to an agreement (each, a "Trust
Agreement") by and between the Sponsor and the Trustee named therein. Each Trust
Agreement will describe the related pool of assets to be held in trust (each
such asset pool, the "Trust Estate"), which will include the related Mortgage
Loans and, if so specified in the related Prospectus Supplement, may include any
combination of a mortgage pool insurance policy, letter of credit, financial
guaranty insurance policy, special hazard policy, reserve fund or other form of
Credit Enhancement.
The Mortgage Loans held by each Trust will be master serviced by the Master
Servicer pursuant to a servicing agreement (each, a "Servicing Agreement") by
and between the Master Servicer and the related Trustee.
With respect to Securities that represent debt issued by the related Trust, the
related Trust will enter into an indenture (each, an "Indenture") by and between
such Trust and the trustee named on such Indenture (the "Indenture Trustee"), as
set forth in the related Prospectus Supplement. Securities that represent
beneficial ownership interests in the related Trust will be issued pursuant to
the related Trust Agreement.
In the case of any individual Trust, the contractual arrangements relating to
the establishment of the Trust, the servicing of the related Mortgage Loans and
the issuance of the related Securities may be contained in a single agreement,
or in several agreements which combine certain aspects of the Trust Agreement,
the Servicing Agreement and the Indenture described above (for example, a
pooling and servicing agreement, or a servicing and collateral management
agreement). For purposes of this Prospectus, the term "Pooling and Servicing
Agreement" as used with respect to a Trust means, collectively, and except as
otherwise specified, any and all agreements relating to the establishment of the
related Trust, the servicing of the related Mortgage Loans and the issuance of
the related Securities.
Securities Will Be Recourse to the Assets of the Related Trust Only.
The sole source of payment for any series of Securities will be the assets of
the related Trust (i.e., the related Trust Estate). The Securities will not be
obligations, either recourse or non-recourse (except for certain non-recourse
debt described under "Certain Federal Income Tax Consequences"), of the Sponsor,
the Master Servicer, any Sub-Servicer, any Originator or any Person other than
the related Trust. In the case of Securities that represent beneficial ownership
interest in the related Trust Estate, such Securities will represent the
ownership of such Trust Estate; with respect to Securities that represent debt
issued by the related Trust, such Securities will be secured by the related
Trust Estate. Notwithstanding the foregoing, and as to be described in the
related Prospectus Supplement, certain
5
<PAGE> 8
types of Credit Enhancement, such as a financial guaranty insurance policy or a
letter of credit, may constitute a full recourse obligation of the issuer of
such Credit Enhancement.
General Nature of the Securities as Investments.
The Securities will consist of two basic types: (i) Securities of the
fixed-income type ("Fixed-Income Securities") and (ii) Securities of the equity
participation type ("Equity Securities"). No Class of Equity Securities will be
offered pursuant to this Prospectus or any Prospectus Supplement related hereto.
Fixed-Income Securities will generally be styled as debt instruments, having a
principal balance and a specified interest rate ("Interest Rate"). Fixed-Income
Securities may be either beneficial ownership interests in the related Mortgage
Loans held by the related Trust, or may represent debt secured by such Mortgage
Loans. Each series or class of Fixed-Income Securities may have a different
Interest Rate, which may be a fixed or adjustable Interest Rate. The related
Prospectus Supplement will specify the Interest Rate for each series or class of
Fixed-Income Securities, or the initial Interest Rate and the method for
determining subsequent changes to the Interest Rate.
A series may include one or more classes of Fixed-Income Securities ("Strip
Securities") entitled (i) to principal distributions, with disproportionate,
nominal or no interest distributions, or (ii) to interest distributions, with
disproportionate, nominal or no principal distributions. In addition, a series
may include two or more classes of Fixed-Income Securities that differ as to
timing, sequential order, priority of payment, Interest Rate or amount of
distributions of principal or interest or both, or as to which distributions of
principal or interest or both on any class may be made upon the occurrence of
specified events, in accordance with a schedule or formula, or on the basis of
collections from designated portions of the related Mortgage Pool, which series
may include one or more classes of Fixed-Income Securities ("Accrual
Securities"), as to which certain accrued interest will not be distributed but
rather will be added to the principal balance (or nominal principal balance, in
the case of Accrual Securities which are also Strip Securities) thereof on each
Payment Date, as hereinafter defined and in the manner described in the related
Prospectus Supplement.
If so provided in the related Prospectus Supplement, a series of Securities may
include one or more other classes of Fixed-Income Securities (collectively, the
"Senior Securities") that are senior to one or more other classes of
Fixed-Income Securities (collectively, the "Subordinate Securities") in respect
of certain distributions of principal and interest and allocations of losses on
Mortgage Loans.
In addition, certain classes of Senior (or Subordinate) Securities may be senior
to other classes of Senior (or Subordinate) Securities in respect of such
distributions or losses.
Equity Securities will represent the right to receive the proceeds of the
related Trust Estate after all required payments have been made to the
Securityholders of the related Fixed-Income Securities (both Senior
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<PAGE> 9
Securities and Subordinate Securities), and following any required deposits to
any reserve account which may be established for the benefit of the Fixed-Income
Securities. Equity Securities may constitute what are commonly referred to as
the "residual interest," "seller's interest" or the "general partnership
interest," depending upon the treatment of the related Trust for federal income
tax purposes. As distinguished from the Fixed-Income Securities, the Equity
Securities will not be styled as having principal and interest components. Any
losses suffered by the related Trust will first be absorbed by the related class
of Equity Securities, as described herein and in the related Prospectus
Supplement.
No Class of Equity Securities will be offered pursuant to this Prospectus or any
Prospectus Supplement related hereto. Equity Securities may be offered on a
private placement basis or pursuant to a separate Registration Statement to be
filed by the Sponsor. In addition, the Sponsor and its affiliates may initially
or permanently hold any Equity Securities issued by any Trust.
General Payment Terms of Securities.
As provided in the related Pooling and Servicing Agreement and as described in
the related Prospectus Supplement, Securityholders will be entitled to receive
payments on their Securities on specified dates (each, a "Payment Date").
Payment Dates with respect to Fixed-Income Securities will occur monthly,
quarterly or semi-annually, as described in the related Prospectus Supplement;
Payment Dates with respect to Equity Securities will occur as described in the
related Prospectus Supplement.
The related Prospectus Supplement will describe a date (the "Record Date")
preceding such Payment Date, as of which the Trustee or its paying agent will
fix the identity of the Securityholders for the purpose of receiving payments on
the next succeeding Payment Date. Unless otherwise described in the related
Prospectus Supplement, the Payment Date will be the twenty-fifth day of each
month (or, in the case of quarterly-pay Securities, the twenty-fifth day of
every third month; and in the case of semi-annual pay Securities, the
twenty-fifth day of every sixth month) and the Record Date will be the close of
business as of the last day of the calendar month that precedes the calendar
month in which such Payment Date occurs.
Each Pooling and Servicing Agreement will describe a period (each, a "Remittance
Period") antecedent to each Payment Date (for example, in the case of
monthly-pay Securities, the calendar month preceding the month in which a
Payment Date occurs or such other specified period). Unless otherwise provided
in the related Prospectus Supplement, collections received on or with respect to
the related Mortgage Loans during a Remittance Period will be required to be
remitted by the Master Servicer to the related Trustee prior to the related
Payment Date and will be used to fund payments to Securityholders on such
Payment Date. As may be described in the related Prospectus Supplement, the
related Pooling and Servicing Agreement may provide that all or a portion of the
principal collected on or with respect to the related Mortgage Loans may be
applied by
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the related Trustee to the acquisition of additional Mortgage Loans during a
specified period (rather than be used to fund payments of principal to
Securityholders during such period) with the result that the related securities
will possess an interest-only period, also commonly referred to as a revolving
period, which will be followed by an amortization period. Any such interest-only
or revolving period may, upon the occurrence of certain events to be described
in the related Prospectus Supplement, terminate prior to the end of the
specified period and result in the earlier than expected amortization of the
related Securities.
In addition, and as may be described in the related Prospectus Supplement, the
related Pooling and Servicing Agreement may provide that all or a portion of
such collected principal may be retained by the Trustee (and held in certain
temporary investments, including Mortgage Loans) for a specified period prior to
being used to fund payments of principal to Securityholders.
The result of such retention and temporary investment by the Trustee of such
principal would be to slow the amortization rate of the related Securities
relative to the amortization rate of the related Mortgage Loans, or to attempt
to match the amortization rate of the related Securities to an amortization
schedule established at the time such Securities are issued. Any such feature
applicable to any Securities may terminate upon the occurrence of events to be
described in the related Prospectus Supplement, resulting in the current
distribution of principal payments to the specified Securityholders and an
acceleration of the amortization of such Securities.
Unless otherwise specified in the related Prospectus Supplement, neither the
Securities nor the underlying Mortgage Loans will be guaranteed or insured by
any governmental agency or instrumentality or the Sponsor, the Master Servicer,
any Sub-Servicer, any Originator or any of their affiliates.
No Investment
Companies
Neither the Sponsor nor any Trust will register as an "investment company" under
the Investment Company Act of 1940, as amended (the "Investment Company Act").
Cross-Collateralization
Unless otherwise provided in the related Pooling and Servicing Agreement and
described in the related Prospectus Supplement, the source of payment for
Securities of each series will be the assets of the related Trust Estate only.
However, as may be described in the related Prospectus Supplement, a Trust
Estate may include the right to receive monies from a common pool of Credit
Enhancement which may be available for more than one series of Securities, such
as a master reserve account or a master insurance policy. Notwithstanding the
foregoing, unless specifically described otherwise in the related Prospectus
Supplement, no collections on any Mortgage Loans held by any Trust may be
applied to the payment of Securities issued by any other Trust (except to the
limited extent that certain collections in excess of amounts needed to pay the
related Securities may be deposited in a common, master reserve account that
provides Credit Enhancement for more than one series of Securities).
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The Mortgage Pools
Unless otherwise specified in the related Prospectus Supplement, each Trust
Estate will consist primarily of Mortgage Loans secured by liens on one- to
four-family residential or multi-family properties ("Mortgages"), located in any
one of the fifty states, the District of Columbia, Puerto Rico or any other
Territories of the United States. All Mortgage Loans will have been acquired by
the related Trust from the Sponsor. All Mortgage Loans will have been originated
either by (x) one or more institutions affiliated with the Sponsor (such
affiliated institutions, the "Affiliated Originators") or (y) one or more
institutions not affiliated with the Sponsor (such unaffiliated institutions,
the "Unaffiliated Originators"). The Mortgage Loans originated by the Affiliated
Originators generally will have been originated pursuant to the standard
underwriting guidelines (the "Sponsor's Guidelines") set forth in the Sponsor's
guide for originators (the "Sponsor's Originator Guide"), as modified from time
to time. The Mortgage Loans originated by the Unaffiliated Originators may be
originated either (i) generally pursuant to the Sponsor's Guidelines; (ii)
generally pursuant to such Unaffiliated Originators' underwriting guidelines as
approved by the Sponsor ("Approved Guidelines"); or (iii) generally pursuant to
such Originators' underwriting guidelines and purchased by the Sponsor in a bulk
acquisition ("Bulk Acquisition"). See "Mortgage Loan Program." For a description
of the types of Mortgage Loans that may be included in the Mortgage Pools, see
"The Mortgage Pools--The Mortgage Loans."
A Current Report on Form 8-K will be available to purchasers or underwriters of
the related series of Securities and will generally be filed, together with the
related Pooling and Servicing Agreement, with the Securities and Exchange
Commission within fifteen days after the initial issuance of such series.
Forward Commitments;
Pre-Funding
A Trust may enter into an agreement (each, a "Forward Purchase Agreement") with
the Sponsor whereby the Sponsor will agree to transfer additional Mortgage Loans
(the "Subsequent Mortgage Loans") to such Trust following the date on which such
Trust is established and the related Securities are issued. Any Forward Purchase
Agreement will require that any Mortgage Loans so transferred to a Trust conform
to the requirements specified in such Forward Purchase Agreement. In addition,
the Forward Purchase Agreement states that the Depositor shall only transfer the
Subsequent Mortgage Loans upon the satisfaction of certain conditions including
that the Depositor shall have delivered to the Certificate Insurer, the Rating
Agencies and the Trustee opinions of counsel (including bankruptcy, corporate
and tax opinions) with respect to the transfer of the Subsequent Mortgage Loans.
If a Forward Purchase Agreement is to be utilized, and unless otherwise
specified in the related Prospectus Supplement, the related Trustee will be
required to deposit in a segregated account (each, a "Pre-Funding Account") all
or a portion of the proceeds received by the Trustee in connection with the sale
of one or more classes of Securities of the related series; subsequently, the
additional Mortgage Loans will be transferred to the related Trust in exchange
for money released to the Sponsor from the related Pre- Funding Account in one
or more transfers. Each Forward Purchase
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Agreement will set a specified period during which any such transfers must
occur. The Forward Purchase Agreement or the related Pooling and Servicing
Agreement will require that, if all monies originally deposited to such
Pre-Funding Account are not so used by the end of such specified period, then
any remaining monies will be applied as a mandatory prepayment of the related
class or classes of Securities as specified in the related Prospectus
Supplement.
Credit Enhancement
If so specified in the Prospectus Supplement, the Trust Estate with respect to
any series of Securities may include any one or any combination of a letter of
credit, mortgage pool insurance policy, special hazard insurance policy,
bankruptcy bond, financial guaranty insurance policy, reserve fund or other type
of Credit Enhancement to provide full or partial coverage for certain defaults
and losses relating to the Mortgage Loans. Credit support also may be provided
in the form of the related class of Equity Securities, and/or by subordination
of one or more classes of Fixed-Income Securities in a series under which losses
in excess of those absorbed by any related class of Equity Securities are first
allocated to any Subordinate Securities up to a specified limit, cross-support
among groups of Mortgage Assets or overcollateralization. Unless otherwise
specified in the related Prospectus Supplement, any mortgage pool insurance
policy will have certain exclusions from coverage thereunder, which will be
described in the related Prospectus Supplement, which may be accompanied by one
or more separate Credit Enhancements that may be obtained to cover certain of
such exclusions. To the extent not set forth herein, the amount and types of
coverage, the identification of any entity providing the coverage, the terms of
any subordination and related information will be set forth in the Prospectus
Supplement relating to a series of Securities. See "Description of Credit
Enhancement" and "Subordination."
Advances
As to be described in the related Prospectus Supplement, the Master Servicer may
be obligated to make certain advances with respect to payments of delinquent
scheduled interest and/or principal on the Mortgage Loans, but only to the
extent that the Master Servicer believes that such amounts will be recoverable
by it. Any such advance made by the Master Servicer with respect to a Mortgage
Loan is recoverable by it as provided herein under "Description of the
Securities--Advances" either from recoveries on the specific Mortgage Loan or,
with respect to any such advance subsequently determined to be nonrecoverable,
out of funds otherwise distributable to the holders of the related series of
Securities, which may include the holders of any Senior Securities of such
series.
As to be described in the related Prospectus Supplement, the Master Servicer may
be required to pay Compensating Interest as defined hereafter under "Description
of the Securities--Advances."
In addition, unless otherwise specified in the related Prospectus Supplement,
the Master Servicer will be required to pay all "out of pocket" costs and
expenses incurred in the performance of its servicing obligations, but only to
the extent that the Master Servicer reasonably believes that such amounts will
increase Net Liquidation Proceeds on
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the related Mortgage Loan. See "Description of the Securities--Advances."
Optional Termination
The Master Servicer, the Sponsor, or, if specified in the related Prospectus
Supplement, the holders of the related class of Equity Securities or the Credit
Enhancer may at their respective option effect early retirement of a series of
Securities through the purchase of the Mortgage Loans and other assets in the
related Trust Estate under the circumstances and in the manner set forth herein
under "The Pooling and Servicing Agreement--Termination; Retirement of
Securities" and in the related Prospectus Supplement.
Mandatory Termination
The Trustee, the Master Servicer or certain other entities specified in the
related Prospectus Supplement may be required to effect early retirement of a
series of Securities by soliciting competitive bids for the purchase of the
related Trust Estate or otherwise, under other circumstances and in the manner
specified in "The Pooling and Servicing Agreement--Termination; Retirement of
Securities" and in the related Prospectus Supplement.
Legal Investment
Not all of the Mortgage Loans in a particular Mortgage Pool may 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 to
what extent a class of Securities constitutes legal investments for such
investors. See "Legal Investment" herein.
ERISA Considerations
A fiduciary of an employee benefit plan and certain other retirement plans and
arrangements, including individual retirement accounts and annuities, Keogh
plans, and collective investment funds and separate accounts in which such
plans, accounts, annuities or arrangements are invested, that is subject to the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or
Section 4975 of the Code (each such entity, a "Plan") should carefully review
with its legal advisors whether the purchase or holding of Securities could give
rise to a transaction that is prohibited or is not otherwise permissible either
under ERISA or Section 4975 of the Code. Investors are advised to consult their
counsel and to review "ERISA Considerations" herein.
Certain Federal Income
Tax Consequences
Securities of each series offered hereby will, for federal income tax purposes,
constitute either (i) interests ("Grantor Trust Securities") in a Trust treated
as a grantor trust under applicable provisions of the Code, (ii) "regular
interests" ("REMIC Regular Securities") or "residual interests" ("REMIC Residual
Securities") in a Trust treated as a REMIC (or, in certain instances, containing
one or more
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REMIC's) under Sections 860A through 860G of the Code, (iii) debt issued by a
Trust ("Debt Securities") (iv) interests in a Trust which is treated as a
partnership ("Partnership Interests"), or, on or after September 1, 1997, (v)
"regular interests" ("FASIT Regular Securities"), "high-yield interests" ("FASIT
High-Yield Securities") or an ownership interest in a Trust treated as a FASIT
(or, in certain circumstances containing one or more FASITs under Sections 860H
through 860L of the Code.
Investors are advised to consult their tax advisors and to review "Certain
Federal Income Tax Consequences" herein and in the related Prospectus
Supplement.
Registration of Securities
Securities may be represented by global securities registered in the name of
Cede & Co. ("Cede"), as nominee of The Depository Trust Company ("DTC"), or
another nominee. In such case, Securityholders will not be entitled to receive
definitive securities representing such Holders' interests, except in certain
circumstances described in the related Prospectus Supplement. See "Description
of the Securities-- Form of Securities" herein.
Ratings
Each class of Fixed-Income Securities offered pursuant to the related Prospectus
Supplement will be rated in one of the four highest rating categories by one or
more "national statistical rating organizations," as defined in the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and commonly referred to
as "Rating Agencies." Such ratings will address, in the opinion of such Rating
Agencies, the likelihood that the related Trust will be able to make timely
payment of all amounts due on the related Fixed-Income Securities in accordance
with the terms thereof. Such ratings will neither address any prepayment or
yield considerations applicable to any Securities nor constitute a
recommendation to buy, sell or hold any Securities.
Equity Securities will not be rated.
The ratings expected to be received with respect to any Securities will be set
forth in the related Prospectus Supplement.
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RISK FACTORS
Investors should consider, among other things, the following factors in
connection with the purchase of the Securities.
Limited Liquidity. There can be no assurance that a secondary market
for the Securities of any series or class will develop or, if it does develop,
that it will provide Securityholders with liquidity of investment or that it
will continue for the life of the Securities of any series. The Prospectus
Supplement for any series of Securities may indicate that an underwriter
specified therein intends to establish a secondary market in such Securities;
however, no underwriter will be obligated to do so. Unless otherwise specified
in the related Prospectus Supplement, the Securities will not be listed on any
securities exchange.
Limited Obligations. The Securities will not represent an interest in
or obligation, either recourse or non-recourse (except for certain non-recourse
debt described under "Certain Federal Income Tax Consequences"), of the Sponsor,
the Master Servicer, any Originator (as defined herein) or any person other than
the related Trust. The only obligations of the foregoing entities with respect
to the Securities or the Mortgage Loans will be the obligations (if any) of the
Sponsor, the related Originators and the Master Servicer pursuant to certain
limited representations and warranties made with respect to the Mortgage Loans,
the Master Servicer's servicing obligations under the related Pooling and
Servicing Agreement (including its limited obligation, if any, to make certain
advances in the event of delinquencies on the Mortgage Loans, but only to the
extent deemed recoverable) and, if and to the extent expressly described in the
related Prospectus Supplement, certain limited obligations of the Sponsor,
Master Servicer, applicable Sub-Servicer, or another party in connection with a
purchase obligation ("Purchase Obligation") or an agreement to purchase or act
as remarketing agent with respect to a Convertible Mortgage Loan upon conversion
to a fixed rate. Notwithstanding the foregoing, and as to be described in the
related Prospectus Supplement, certain types of Credit Enhancement, such as a
financial guaranty insurance policy or a letter of credit, may constitute a full
recourse obligation of the issuer of such Credit Enhancement. Except as
described in the related Prospectus Supplement, neither the Securities nor the
underlying Mortgage Loans will be guaranteed or insured by any governmental
agency or instrumentality, or by the Sponsor, the Master Servicer, any
Sub-Servicer or any of their affiliates. Proceeds of the assets included in the
related Trust Estate for each series of Securities (including the Mortgage Loans
and any form of Credit Enhancement) will be the sole source of payments on the
Securities, and there will be no recourse to the Sponsor or any other entity in
the event that such proceeds are insufficient or otherwise unavailable to make
all payments provided for under the Securities.
Limitations, Reduction and Substitution of Credit Enhancement. With
respect to each series of Securities, Credit Enhancement will be provided in
limited amounts to cover certain types of losses on the underlying Mortgage
Loans. Credit Enhancement will be provided in one or more of the forms referred
to herein, including, but not limited to: a letter of credit; a Purchase
Obligation; a mortgage pool insurance policy; a special hazard insurance policy;
a bankruptcy bond; a reserve fund; a financial guaranty insurance policy or
other type of Credit Enhancement to provide partial coverage for certain
defaults and losses relating to the Mortgage Loans. Credit Enhancement also may
be provided in the form of the related class of Equity Securities, subordination
of one or more classes of Fixed-Income Securities in a series under which losses
in excess of those absorbed by any related class of Equity Securities are first
allocated to any Subordinate Securities up to a specified limit, cross-support
among Mortgage Assets and/or overcollateralization. See "Subordination" and
"Description of Credit Enhancement" herein. Regardless of the form of Credit
Enhancement provided, the coverage will be limited in amount and in most cases
will be subject to periodic reduction in accordance with a schedule or formula.
Furthermore, such Credit Enhancements may provide only very limited coverage as
to certain types of losses, and may provide no coverage as to certain other
types of losses. Generally, Credit Enhancements do not directly or indirectly
guarantee to the investors any specified rate of prepayments. The Master
Servicer will generally be permitted to reduce, terminate or substitute all or a
portion of the Credit Enhancement for any series of Securities, if the
applicable Rating Agency indicates that the then-current rating thereof will not
be adversely affected. To the extent not set forth herein, the amount and types
of coverage, the identification of any entity providing the coverage, the terms
of any subordination and related information will be set forth in the Prospectus
Supplement relating to a series of Securities. See "Description of Credit
Enhancement" and "Subordination."
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RISKS OF THE MORTGAGE LOANS
Risk of the Losses Associated with Junior Liens. Certain of the
Mortgage Loans will be secured by junior liens subordinate to the rights of the
mortgagee or beneficiary under each related senior mortgage or deed of trust. As
a result, the proceeds from any liquidation, insurance or condemnation
proceedings will be available to satisfy the principal balance of a mortgage
loan only to the extent that the claims, if any, of each such senior mortgagee
or beneficiary are satisfied in full, including any related foreclosure costs.
In addition, a mortgagee secured by a junior lien may not foreclose on the
related mortgaged property unless it forecloses subject to the related senior
mortgage or mortgages, in which case it must either pay the entire amount of
each senior mortgage to the applicable mortgagee at or prior to the foreclosure
sale or undertake the obligation to make payments on each senior mortgage in the
event of default thereunder. In servicing junior lien loans in its portfolio, it
has generally been the practice of the Master Servicer to satisfy each such
senior mortgage at or prior to the foreclosure sale but only to the extent that
it determines any amounts so paid will be recoverable from future payments and
collections on such junior lien loans or otherwise. The Trusts will not have any
source of funds to satisfy any such senior mortgage or make payments due to any
senior mortgagee. See "Certain Legal Aspects of Mortgage Loans and Related
Matters--Foreclosure."
Risk of Losses Associated with Declining Real Estate Values. An
investment in securities such as the Securities that generally represent
beneficial ownership interests in the Mortgage Loans or debt secured by such
Mortgage Loans may be affected by, among other things, a decline in real estate
values and changes in the borrowers' financial condition. 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 balances of any senior liens, the Mortgage
Loans and any secondary financing on the Mortgaged Properties in a particular
Mortgage Pool become equal to or greater than the value of the Mortgaged
Properties, the actual rates of delinquencies, foreclosures and losses could be
higher than those now generally experienced in the nonconforming credit mortgage
lending industry. Such a decline could extinguish the interest of the related
Trust in the Mortgaged Properties before having any effect on the interest of
the related senior mortgagee. In addition, in the case of Mortgage Loans that
are subject to negative amortization, due to the addition to principal balance
of deferred interest ("Deferred Interest"), the principal balances of such
Mortgage Loans could be increased to an amount equal to or in excess of the
value of the underlying Mortgaged Properties, thereby increasing the likelihood
of default. To the extent that such losses are not covered by the applicable
Credit Enhancement, holders of Securities of the series evidencing interests in
the related Mortgage Pool will bear all risk of loss resulting from default by
Mortgagors and will have to look primarily to the value of the Mortgaged
Properties for recovery of the outstanding principal and unpaid interest on the
defaulted Mortgage Loans.
Risk of Losses Associated with Certain Non-Conforming Credit and
Non-Traditional Loans. The Sponsor's underwriting standards consider, among
other things, a mortgagor's credit history, repayment ability and debt
service-to-income ratio, as well as the value of the property; however, the
Sponsor's Mortgage Loan program generally provides for the origination of
Mortgage Loans relating to non-conforming credits. For purposes hereof,
"non-conforming credit" means a mortgage loan which, based upon standard
underwriting guidelines, is ineligible for purchase by the Federal National
Mortgage Association ("FNMA") or the Federal Home Loan Mortgage Corporation
("FHLMC") due to credit characteristics that do not meet FNMA or FHLMC
guidelines, respectively. Certain of the types of loans that may be included in
the Mortgage Pools may involve additional uncertainties not present in
traditional types of loans. For example, certain of the Mortgage Loans may
provide for escalating or variable payments by the borrower under the Mortgage
Loan (the "Mortgagor"), as to which the Mortgagor is generally qualified on the
basis of the initial payment amount. In some instances the Mortgagors' income
may not be sufficient to enable them to continue to make their loan payments as
such payments increase and thus the likelihood of default will increase.
Additionally, certain Mortgage Loans may have combined loan-to-value ratios in
excess of 100%, which may result in inadequate security for the Mortgage Loans.
For a more detailed discussion, see "Mortgage Loan Program."
Risk of Losses Associated with 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. Consequently, upon the maturity of a Balloon Loan, the Mortgagor will
be required to make a "balloon" payment that will be significantly larger than
such Mortgagor's previous monthly payments. The ability of such a Mortgagor to
repay a Balloon Loan at maturity frequently will depend on such borrower's
ability to refinance the Mortgage Loan. The ability of a Mortgagor to refinance
such a Mortgage Loan will be affected by a
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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 Securityholders 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 Sponsor,
the Originators, the Master Servicer, any Sub-Servicer or the Trustee will be
obligated to provide funds to refinance any Mortgage Loan, including Balloon
Loans.
Risk of Losses Associated with ARM Loans. ARM Loans may be underwritten
on the basis of an assessment that Mortgagors will have the ability to make
payments in higher amounts after relatively short periods of time. In some
instances, Mortgagors' income may not be sufficient to enable them to continue
to make their loan payments as such payments increase and thus the likelihood of
default will increase.
Risk of Losses Associated with Bankruptcy of Mortgagors. General
economic conditions have an impact on the ability of borrowers to repay Mortgage
Loans. Loss of earnings, illness and other similar factors also may lead to an
increase in delinquencies and bankruptcy filings by borrowers. 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 thereby 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.
Risk of Losses Associated with Mortgaged Properties. 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 delays in the receipt of related
proceeds by the Securityholders could occur. An action to foreclose on a
Mortgaged Property securing a Mortgage Loan is regulated by state statutes,
rules and judicial decisions 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) ("Liquidation Proceeds") 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 ("Liquidated
Mortgage Loan") and not yet repaid, including payments to prior lienholders,
accrued Servicing Fees, Delinquency Advances, Servicing Advances, 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 and insufficient funds are available
from any applicable Credit Enhancement, Securityholders 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 loan at the time of
default. Therefore, assuming that a servicer takes 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 less as a
percentage of the outstanding principal balance of the smaller principal balance
mortgage loan than would be the case with a larger principal balance loan.
Under environmental legislation and judicial decisions applicable in
various states, a secured party that takes a deed in lieu of foreclosure, or
acquires at a foreclosure sale a mortgaged property that, prior to foreclosure,
has been involved in decisions or actions which may lead to contamination of a
property, may be liable for the costs of cleaning up the purportedly
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 Pooling and
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Servicing Agreement, is not required to take an active role in operating the
Mortgaged Properties. See "Certain Legal Aspects of Mortgage Loans and Related
Matters--Environmental Legislation."
Certain of the Mortgaged Properties relating to Mortgage Loans may not
be noninvestor owned. It is possible that the rate of delinquencies,
foreclosures and losses on Mortgage Loans secured by noninvestor owned
properties could be higher than for loans secured by the primary residence of
the borrower.
Certain Mortgage Loans may have combined loan-to-value ratios in excess
of 100%. As a result, the Mortgage Properties may not provide adequate security
for the Mortgage Loans. Additionally, there is also the risk that if the related
Mortgagors relocate, such Mortgagors will be unable to discharge the Mortgage
Loans in full from the sale proceeds of the related Mortgaged Properties and any
other funds available to these borrowers. As a result, the costs incurred in the
collection and liquidation of Mortgage Loans with combined loan-to-value ratios
at the time of origination in excess of 100% may be higher than with respect to
Mortgage Loans with combined loan-to-value ratios of 100% or less because the
Servicer may be required to pursue collection solely against the Mortgagor. The
Master Servicer may, in accordance with accepted servicing procedures, pursue
alternative methods to maximize proceeds therefrom, including, without
limitation, the modification of defaulted Mortgage Loans, which may include the
abatement of accrued interest or the reduction of a portion of the outstanding
Principal Balance of such defaulted Mortgage Loan. Consequently, the losses on
such defaulted Mortgage Loans may be more severe as there is no assurance that
any proceeds will be recovered.
Litigation. Any material litigation relating to the Sponsor or the
Master Servicer will be specified in the related Prospectus Supplement.
Geographic Concentration of Mortgaged Properties. Certain geographic
regions from time to time will experience weaker regional economic conditions
and housing markets than will other regions, and, consequently, will experience
higher rates of loss and delinquency on mortgage loans generally. The Mortgage
Loans underlying certain series of Securities may be concentrated in such
regions, and such concentrations may present risk considerations in addition to
those generally present for similar mortgage loan asset-backed securities
without such concentrations. Information with respect to geographic
concentration of Mortgaged Properties will be specified in the related
Prospectus Supplement or related Current Report on Form 8-K.
Legal Considerations. Applicable state laws generally regulate interest
rates and other charges, require certain disclosures, and require licensing of
the Originators and the Master Servicer and Sub-Servicers. 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
that 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
Mortgage Loans and Related Matters."
The Mortgage Loans may also be subject to federal laws, including: (i)
the Federal Truth-in-Lending Act and Regulation Z promulgated thereunder and the
Real Estate Settlement Procedures Act and Regulation X 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; and (iii) the Fair Credit Reporting Act, which
regulates the use and reporting of information related to the borrower's credit
experience. Depending on the provisions of the applicable law and the specific
facts and circumstances involved, violations of these laws, policies and general
principles of equity 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 rescind the loan or to a refund of amounts previously paid and, in
addition, could subject the Master Servicer to damages and administrative
sanctions. If the Master Servicer is unable to collect all or part of the
principal or interest on the Mortgage Loans because of a violation of the
aforementioned laws, public policies or general principles of equity then the
Trust may be delayed or unable to repay all amounts owed to Investors.
Furthermore, depending upon whether damages and sanctions are assessed against
the Master Servicer or an Originator, such violations may materially impact the
financial ability of the Sponsor to continue to act as Master Servicer or the
ability of an Originator to repurchase or replace Mortgage Loans if such
violation breaches a representation or warranty contained in a Pooling and
Servicing Agreement.
Yield and Prepayment Considerations. The yield to maturity of the
Securities of each series will depend on the rate of payment of principal
(including prepayments, liquidations due to defaults, and repurchases due to
conversion of adjustable-rate mortgage loans ("ARM Loans") to fixed-rate loans
or breaches of representations and warranties) on the Mortgage Loans, the
combined loan-to-value ratios of the Mortgage Loans, and the price paid by
Securityholders. Such yield may be adversely affected by a higher or lower than
anticipated rate of prepayments on the related Mortgage Loans. The yield to
maturity on Strip Securities or Securities purchased at premiums or discounted
to par will be extremely sensitive to the rate of prepayments on the related
Mortgage Loans. In addition, the yield to maturity on certain other types of
classes of Securities, including Accrual Securities or certain other classes in
a series including more than one class of Securities, may be relatively more
sensitive to the rate of prepayment on the related Mortgage Loans than other
classes of Securities.
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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 be imposed in connection therewith. Unless so
specified in the related Prospectus Supplement, such penalties will not be
property of the related Trust. The rate of prepayments of the Mortgage Loans
cannot be predicted and is influenced by a wide variety of economic, social, and
other factors, including prevailing mortgage market interest rates, the
availability of alternative financing, local and regional economic conditions
and homeowner mobility. Therefore, no assurance can be given as to the level of
prepayments that a Trust will experience.
Prepayments may result from mandatory prepayments relating to unused
monies held in Pre-Funding Accounts, if any, 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 or
substitution adjustments required to be made under the Pooling and Servicing
Agreement will have the same effect on the Securityholders as a prepayment of
such Mortgage Loans. Unless otherwise specified in the related Prospectus
Supplement, all of the Mortgage Loans contain "due-on-sale" provisions, and the
Master Servicer will be required to enforce such provisions unless (i) the
"due-on-sale" clause, in the reasonable belief of the Master Servicer, is not
enforceable under applicable law or (ii) the Master Servicer reasonably believes
that to permit an assumption of the Mortgage Loan would not materially and
adversely affect the interests of the Securityholders or of the related Credit
Enhancer, if any. See "The Pooling and Servicing Agreement" in the related
Prospectus Supplement.
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 borrowers.
Book-Entry Registration. Issuance of the Securities in book-entry form
may reduce the liquidity of such Securities in the secondary trading market
since investors may be unwilling to purchase Securities for which they cannot
obtain definitive physical securities representing such Securityholders'
interests, except in certain circumstances described in the related Prospectus
Supplement.
Since transactions in Securities will, in most cases, be able to be
effected only through DTC, direct or indirect participants in DTC's book-entry
system ("Direct or Indirect Participants") and certain banks, the ability of a
Securityholder 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 security representing the
Securities.
Securityholders may experience some delay in their receipt of
distributions of interest on and principal of the Securities since distributions
may be required to be forwarded by the Trustee to DTC and, in such a case, DTC
will be required to credit such distributions to the accounts of its
Participants which thereafter will be required to credit them to the accounts of
the applicable class of Securityholders either directly or indirectly through
Indirect Participants. See "Description of the Securities--Form of Securities."
The Status of the Mortgage Loans in the Event of Bankruptcy of the
Sponsor or an Originator. In the event of the bankruptcy of the Sponsor or an
Originator at a time when it or any affiliate thereof holds an Equity Security,
a trustee in bankruptcy of the Sponsor, an Originator, or its creditors could
attempt to recharacterize the sale of the Mortgage Loans to the related Trust as
a borrowing by the Sponsor, the Originator or such affiliate with the result, if
such recharacterization is upheld, that the Securityholders would be deemed
creditors of the Sponsor, the Originator or such affiliate, secured by a pledge
of the Mortgage Loans. If such an attempt were successful, it could prevent
timely payments of amounts due to the Trust.
Limitations on Interest Payments and Foreclosures. 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 have an effect, for an indeterminate period of time, on the ability of the
Master Servicer to collect full
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amounts of interest on certain of the Mortgage Loans. In addition, the Relief
Act imposes limitations that 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.
Security Rating. The rating of Securities credit enhanced through
external Credit Enhancement such as a letter of credit, financial guaranty
insurance policy or mortgage pool insurance will depend primarily on the
creditworthiness of the issuer of such external Credit Enhancement device (a
"Credit Enhancer"). Any reduction in the rating assigned to the claims-paying
ability of the related Credit Enhancer below the rating initially given to the
Securities would likely result in a reduction in the rating of the Securities.
See "Ratings" in the Prospectus Supplement.
THE TRUSTS
A Trust for any series of Securities will include the primary mortgage
assets ("Mortgage Assets") consisting of (A) a Mortgage Pool comprised of (i)
Single Family Loans, (ii) Multi-family Loans, (iii) Cooperative Loans, (iv)
Contracts, (v) Home Improvement Loans, or (vi) other loans or (B) certificates
of interest or participation in the items described in clause (A) or in pools of
such items, in each case, as specified in the related Prospectus Supplement,
together with payments in respect of such primary Mortgage Assets and certain
other accounts, obligations or agreements, in each case as specified in the
related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, the
Securities will be entitled to payment only from the assets of the related Trust
(i.e., the related Trust Estate) and will not be entitled to payments in respect
of the assets of any other related Trust Estate established by the Sponsor, the
Originators or any of their affiliates. If specified in the related Prospectus
Supplement, certain Securities will evidence the entire fractional undivided
ownership interest in the related Mortgage Loans held by the related Trust or
may represent debt secured by the related Mortgage Loans.
The following is a brief description of the Mortgage Assets expected to
be included in the related Trusts. If specific information respecting the
primary Mortgage Assets is not known at the time the related series of
Securities initially is offered, 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 Pooling and Servicing Agreement with respect to each Series of
Securities will be attached to the Form 8-K and will be available for inspection
at the corporate trust office of the Trustee specified in the related Prospectus
Supplement. A schedule of the Mortgage Assets relating to such Series (the
"Mortgage Asset Schedule") will be attached to the Pooling and Servicing
Agreement delivered to the Trustee upon delivery of the Securities.
The Mortgage Loans--General. The real properties and Manufactured
Homes, as the case may be, that secure repayment of the Mortgage Loans and
Contracts (the "Mortgaged Properties") may be located in any one of the fifty
states, the District of Columbia, Puerto Rico or any other Territories of the
United States. Unless otherwise specified in the related Prospectus Supplement,
the Mortgage Loans or Contracts will be "Conventional Loans" (i.e., loans that
are not insured or guaranteed by any governmental agency). If specified in the
related Prospectus Supplement, Mortgage Loans with certain loan-to-value ratios
and/or certain principal balances may be covered wholly or partially by primary
mortgage insurance policies. Unless otherwise specified in the related
Prospectus Supplement, all of the Mortgage Loans will be covered by standard
hazard insurance policies (which may be in the form of a blanket or forced
placed hazard insurance policy). The existence, extent and duration of any such
coverage will be described in the applicable Prospectus Supplement. Unless
otherwise described in the related Prospectus Supplement, the Mortgage Loans
will not be guaranteed or insured by any government agency or other insurer.
Unless otherwise specified in the related Prospectus Supplement, all of
the Mortgage Loans in a Mortgage Pool will provide for payments to be made
monthly ("monthly pay") or bi-weekly. 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:
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(a) Interest may be payable at a Fixed Rate, or an Adjustable
Rate (i.e., a rate that is adjustable from time to time in relation to
an index, a rate that is fixed for a period of time and under certain
circumstances 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. If provided for in the Prospectus Supplement, certain
Mortgage Loans may be subject to temporary buydown plans ("Buydown
Mortgage Loans") pursuant to which the monthly payments made by the
Mortgagor during the early years of the Mortgage Loan (the "Buydown
Period") will be less than the scheduled monthly payments on the
Mortgage Loan, and the amount of any difference may be contributed from
(i) an amount (such amount, exclusive of investment earnings thereon,
being hereinafter referred to as "Buydown Funds") funded by the
originator of the Mortgage Loan or another source (including the Master
Servicer or the related Originator and the builder of the Mortgaged
Property) and placed in a custodial account (the "Buydown Account") and
(ii) if the Buydown Funds are contributed on a present value basis,
investment earnings on such Buydown Funds.
(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 or decrease 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 provide for deferred payment of
a portion of the interest due monthly during a specified period, and
recoup the deferred interest through negative amortization during such
period whereby the difference between the interest paid during such
period and interest accrued during such period 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
therewith. 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 transfers of the related Mortgaged Property.
Other Mortgage Loans may be assumable by persons meeting the then
applicable underwriting standards of the related Originator.
(e) As more fully described in the related Prospectus
Supplement, the Mortgage Loans may consist, in whole or in part, of
revolving home equity loans or certain balances thereof ("Revolving
Credit Line Loans"). Interest on each Revolving Credit Line Loan,
excluding introductory rates offered from time to time during
promotional periods, may be computed and payable monthly on the average
daily outstanding principal balance of such loan. From time to time
prior to the expiration of the related draw period specified in a
Revolving Credit Line Loan, principal amounts on such Revolving Credit
Line Loan may be drawn down (up to a maximum amount as set forth in the
related Prospectus Supplement) or repaid. If specified in the related
Prospectus Supplement, new draws by borrowers under the Revolving
Credit Line Loans will automatically become part of the Trust Estate
described in such Prospectus Supplement. As a result, the aggregate
balance of the Revolving Credit Line Loans will fluctuate from day to
day as new draws by borrowers are added to the Trust Estate and
principal payments are applied to such balances and such
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amounts will usually differ each day, as more specifically described in
the related Prospectus Supplement. Under certain circumstances, under a
Revolving Credit Line Loan, a borrower may, during the related draw
period, choose an interest only payment option, during which the
borrower is obligated to pay only the amount of interest which accrues
on the loan during the billing cycle, and may also elect to pay all or
a portion of the principal. An interest only payment option may
terminate at the end of the related draw period, after which the
borrower must begin paying at least a minimum monthly portion of the
average outstanding principal balance of the loan.
Except as otherwise described in the related Prospectus Supplement or
in the related Current Report on Form 8-K, interest will be calculated on each
Mortgage Loan pursuant to one of three methods:
Date of Payment Loans. Date of Payment Loans provide that
interest is charged to the Mortgagor at the applicable Mortgage Rate on
the outstanding principal balance of such Note and calculated based on
the number of days elapsed between receipt of the Mortgagor's last
payment through receipt of the Mortgagor's most current payment. Such
interest is deducted from the Mortgagor's payment amount and the
remainder, if any, of the payment is applied as a reduction to the
outstanding principal balance of such Note. Although the Mortgagor is
required to remit equal monthly payments on a specified monthly payment
date that would reduce the outstanding principal balance of such Note
to zero at such Note's maturity date, payments that are made by the
Mortgagor after the due date therefor would cause the outstanding
principal balance of such Note not to be reduced to zero. In such a
case, the Mortgagor would be required to make an additional principal
payment at the maturity date for such Note. On the other hand, if a
Mortgagor makes a payment (other than a prepayment) before the due date
therefor, the reduction in the outstanding principal balance of such
Note would occur over a shorter period of time than it would have
occurred had it been based on the original amortization schedule of
such Note.
Actuarial Loans. Actuarial Loans provide that interest is
charged to the Mortgagor thereunder, and payments are due from such
Mortgagor, as of a scheduled day of each month which is fixed at the
time of origination. Scheduled monthly payments made by the Mortgagors
on the Actuarial Loans either earlier or later than the scheduled due
dates thereof will not affect the amortization schedule or the relative
application of such payments to principal and interest.
Rule of 78's Loans. A Rule of 78's Loan provides for the
payment by the related Mortgagor of a specified total amount of
payments, payable in equal monthly installments on each due date, which
total represents the principal amount financed and add-on interest in
an amount calculated on the basis of the stated Mortgage Rate for the
term of the Loan. The rate at which such amount of add-on interest is
earned and, correspondingly, the amount of each fixed monthly payment
allocated to reduction of the outstanding principal are calculated in
accordance with the "Rule of 78's." Under a Rule of 78's Loan, the
amount of a payment allocable to interest is determined by multiplying
the total amount of add-on interest payable over the term of the loan
by a fraction derived as described below.
The fraction used in the calculation of add-on interest earned each
month under a Rule of 78's Loan has as its denominator a number equal to the sum
of a series of numbers. The series of numbers begins with one and ends with the
number of monthly payments due under the loan. For example, with a loan
providing for 12 payments, the denominator of each month's fraction will be 78,
the sum of the series of numbers from 1 to 12. The numerator of the fraction for
a given month is the number of original payments to stated maturity less the
number of payments made up to but not including the current month. Accordingly,
in the example of a twelve-month loan, the numerator for the first payment is
12, for the second payment, 11, for the third payment, 10, and so on through the
final payment, for which the numerator is 1. The applicable fraction is then
multiplied by the total add-on interest payable over the entire term of the
loan, and the resulting amount is the amount of add-on interest "earned" that
month. The difference between the amount of the monthly payment by the obligor
and the amount of earned add-on interest calculated for the month is applied to
principal reduction. Rule of 78's Loans are non-level yield instruments. The
yield in the initial months of a Rule of 78's Loan is somewhat higher than the
stated Mortgage Rate (computed on an actuarial basis) and the yield in the later
months of the loan is somewhat less than such stated Mortgage Rate.
The Prospectus Supplement for each series of Securities or the Current
Report on Form 8-K will contain certain information with respect to the Mortgage
Loans (or a sample thereof) contained in the related Mortgage Pool;
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such information, insofar as it may relate to statistical information relating
to such Mortgage Loans will be presented as of a date certain (the "Statistic
Calculation Date") which may also be the related cut-off date (the "Cut-Off
Date"). Such information will include to the extent applicable to the particular
Mortgage Pool (in all cases as of the Statistic Calculation Date) (i) the
aggregate outstanding principal balance and the average outstanding principal
balance of the Mortgage Loans, (ii) the largest principal balance and the
smallest principal balance of any of the Mortgage Loans, (iii) the types of
Mortgaged Property securing the Mortgage Loans (e.g., one- to four-family
houses, vacation and second homes, Manufactured Homes, multifamily apartments or
other real property), (iv) the original terms to stated maturity of the Mortgage
Loans, (v) the weighted average remaining term to maturity of the Mortgage Loans
and the range of the remaining terms to maturity; (vi) the earliest origination
date and latest maturity date of any of the Mortgage Loans, (vii) the weighted
average CLTV and the range of CLTV's of the Mortgage Loans at origination,
(viii) the weighted average Mortgage Rate or annual percentage rate (as
determined under Regulation Z) (the "APR") and ranges of Mortgage Rates or APRs
borne by the Mortgage Loans, (ix) in the case of Mortgage Loans having
adjustable rates, the weighted average of the adjustable rates and indices, if
any; (x) the aggregate outstanding principal balance, if any, of Buy-Down Loans
and Mortgage Loans having graduated payment provisions; (xi) the amount of any
mortgage pool insurance policy, special hazard insurance policy or bankruptcy
bond to be maintained with respect to such Mortgage Pool; (xii) a description of
any standard hazard insurance required to be maintained with respect to each
Mortgage Loan; (xiii) a description of any Credit Enhancement to be provided
with respect to all or any Mortgage Loans or the Mortgage Pool; and (xiv) the
geographical distribution of the Mortgage Loans on a state-by-state basis. In
addition, preliminary or more general information of the nature described above
may be provided in the Prospectus Supplement, and specific or final information
may be set forth in a Current Report on Form 8-K, together with the related
Pooling and Servicing Agreement, which will be filed with the Securities and
Exchange Commission and will be made available to holders of the related series
of Securities within fifteen days after the initial issuance of such Securities.
The loan-to-value ratio (the "LTV") of a Mortgage Loan is equal to the
ratio (expressed as a percentage) of the original principal balance of such
Mortgage Loan to appraised value of the related Mortgaged Property (unless
otherwise disclosed in the related Prospectus Supplement or in the related
Current Report on Form 8-K), at the time of origination of the Mortgage Loan.
Generally, in the case where the Mortgage represents a purchase money
instrument, the lesser of (a) the appraised value or (b) the purchase price is
used to calculate the LTV. The combined loan-to-value ratio (the "CLTV") of a
Mortgage Loan at any given time is the ratio, expressed as a percentage,
determined by dividing (x) the sum of the original principal balance of such
Mortgage Loan (unless otherwise disclosed in the related Prospectus Supplement
or in the related Current Report on Form 8-K) plus the then-current principal
balance of all mortgage loans (each, a "Senior Lien") secured by liens on the
related Mortgaged Property having priorities senior to that of the lien which
secures such Mortgage Loan, by (y) the value of the related Mortgaged Property,
based upon the appraisal or valuation (which may in certain instances include
estimated increases in value as a result of certain home improvements to be
financed with the proceeds of such Mortgage Loan) made at the time of
origination of the Mortgage Loan. If the related Mortgagor will use the proceeds
of the Mortgage Loan to refinance an existing Mortgage Loan which is being
serviced directly or indirectly by the Master Servicer, the requirement of an
appraisal or other valuation at the time the new Mortgage Loan is made may be
waived. Unless otherwise specified in the related Prospectus Supplement, for
purposes of calculating the CLTV of a Contract relating to a new Manufactured
Home, the value of such Manufactured Home will be no greater than the sum of a
fixed percentage of the list price of the unit actually billed by the
manufacturer to the dealer (exclusive of freight to the dealer site) including
"accessories" identified in the invoice (the "Manufacturer's Invoice Price"),
plus the actual cost of any accessories purchased from the dealer, a delivery
and set-up allowance, depending on the size of the unit, and the cost of state
and local taxes, filing fees and up to three years prepaid hazard insurance
premiums. Unless otherwise specified herein or in the related Prospectus
Supplement, the value of a used Manufactured Home will be either (x) the
appraised value, and National Automobile Dealer's Association book value plus
prepaid taxes and hazard insurance premiums or (y) the sum of (i) the appraised
value of the land to which the Manufactured Home is attached and (ii) the
appraised value of the Manufactured Home. The appraised value of a Manufactured
Home will be based upon the age and condition of the manufactured housing unit
and the quality and condition of the mobile home park in which it is situated,
if applicable.
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
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(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, the actual rates of delinquencies, foreclosures and
losses could be higher than those now generally experienced in the
non-conforming credit mortgage lending industry. 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 additional liens on the Mortgaged Properties, equal or exceed the value
of the Mortgaged Properties. Under such circumstances, the actual rates of
delinquencies, foreclosures and losses could be higher than those now generally
experienced in the non-conforming credit mortgage lending industry.
Certain Mortgage Loans may be secured by junior liens ("Junior Lien
Loans") subordinate to the rights of the mortgagee under any related senior
mortgage(s). The proceeds from any liquidation, insurance or condemnation of
Mortgaged Properties relating to Junior Lien Loans in a Mortgage Pool will be
available to satisfy the principal balance of such Junior Lien Loans only to the
extent that the claims, if any, of all related senior mortgagees, including any
related foreclosure costs, are satisfied in full. In addition, the Master
Servicer may not foreclose on a Mortgaged Property relating to a Junior Lien
Loan unless it forecloses subject to the related senior mortgage or mortgages,
in which case it must either pay the entire amount of each senior mortgage to
the applicable mortgagee at or prior to the foreclosure sale or undertake the
obligation to make payments on each senior mortgage in the event of default
thereunder. Generally, in servicing Junior Lien Loans in its loan portfolios, it
has been the Master Servicer's practice to satisfy each senior mortgage at or
prior to a foreclosure sale but only to the extent that it determines any
amounts so paid will be recoverable from future payments and collections on the
Mortgage Loans or otherwise. The Trusts will not have any source of funds to
satisfy any such senior mortgage or make payments due to any senior mortgagee.
See "Certain Legal Aspects of Mortgage Loans and Related Matters--Foreclosure."
Other factors affecting mortgagors' ability to repay Mortgage Loans
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 losses
on the Mortgage Loans are not covered by Credit Enhancements, such losses will
be borne, at least in part, by the Securityholders of the related series.
The Sponsor will cause the Mortgage Loans comprising each Mortgage Pool
to be assigned to the Trustee named in the related Prospectus Supplement for the
benefit of the holders of the Securities of the related series. The Master
Servicer will service the Mortgage Loans, either directly or through
Sub-Servicers, pursuant to the Pooling and Servicing Agreement and will receive
a fee for such services. See "Mortgage Loan Program" and "The Pooling and
Servicing Agreement." With respect to Mortgage Loans serviced through a
Sub-Servicer, the Master Servicer will remain liable for its servicing
obligations under the related Pooling and Servicing Agreement as if the Master
Servicer alone were servicing such Mortgage Loans.
Unless otherwise specified in the related Prospectus Supplement, the
only obligations of the Sponsor and the Originators with respect to a series of
Securities will be to provide (or, where the Sponsor or an 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 Sponsor's or Originator's rights
with respect to such representations and warranties. See "The Pooling and
Servicing Agreement." The obligations of the Master Servicer with respect to the
Mortgage Loans will consist principally of its contractual servicing obligations
under the related Pooling and Servicing Agreement (including its obligation to
enforce the obligations of the Sub-Servicers or Originators as more fully
described herein under "Mortgage Loan Program--Qualifications of Originators"
and "The Pooling and Servicing Agreement") and its obligation, as described in
the related Prospectus Supplement, to make certain cash advances in the event of
delinquencies in payments on, or prepayments received with respect to, the
Mortgage Loans in the amounts described herein under "Description of the
Securities--Advances." The obligations of a Master Servicer to make advances may
be subject to limitations, to the extent provided herein and in the related
Prospectus Supplement.
Single Family and Cooperative Loans. Unless otherwise specified in the
Prospectus Supplement, single family loans will consist of mortgage loans, deeds
of trust or participation or other beneficial interests therein, secured by
first or junior liens on one- to four-family residential properties ("Single
Family Loans"). The Mortgaged Properties relating to Single Family Loans will
consist of detached or semi-detached one-family dwelling units, two-
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to four-family dwelling units, townhouses, rowhouses, individual condominium
units in condominium developments, individual units in planned unit
developments, and certain mixed use and other dwelling units. Such Mortgaged
Properties may include noninvestor owned (which includes vacation and second
homes) and investor owned properties.
If so specified, the Single Family Loans may include loans or
participations therein secured by mortgages or deeds of trust on condominium
units in low- or high-rise condominium developments together with such
condominium units' appurtenant interests in the common elements of such
condominium developments. Unless otherwise specified, the Cooperative Loans will
be secured by security interests in or similar liens on stock, shares or
membership certificates issued by cooperatives and in the related proprietary
leases or occupancy agreements granting exclusive rights to occupy specific
dwelling units in such cooperatives' buildings.
Multi-family Loans. Multi-family loans will consist of mortgage loans,
deeds of trust or participation or other beneficial interests therein, secured
by first or junior liens on rental apartment buildings or projects containing
five or more residential units ("Multi-family Loans").
Mortgaged Properties that secure Multi-family Loans may include
high-rise, mid-rise and garden apartments. Certain of the Multi-family 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 that 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 Multi-family 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.
Home Improvement Loans. Unless otherwise specified in the Prospectus
Supplement, loans to make home improvements may be secured by first or junior
liens on conventional one- to four-family residential properties and
multi-family residential properties ("Home Improvement Loans"). Home Improvement
Loans may be conventional, or may be partially insured by the Federal Housing
Administration ("FHA") or another federal or state agency, as specified in the
related Prospectus Supplement. The loan proceeds from such Home Improvement
Loans are typically disbursed to an escrow agent which, according to guidelines
established by the Originators, releases such proceeds to the contractor upon
completion of the improvements or in draws as the work on the improvements
progresses. Costs incurred by the Mortgagor for loan origination including
origination points and appraisal, legal and title fees, are often included in
the amount financed. In addition, Home Improvement Loans generally provide
additional security to a first or junior mortgage loan because home improvements
typically retain or increase the value of a property.
Contracts. Contracts will consist of manufactured housing conditional
sales contracts and installment sales or loan agreements each secured by a
Manufactured Home ("Contracts"). Contracts may be conventional, insured
partially by the FHA or partially guaranteed by the Veterans Administration, as
specified in the related Prospectus Supplement. Unless otherwise specified in
the related Prospectus Supplement, each Contract will be fully amortizing and
will bear interest at its APR.
Unless otherwise specified in the related Prospectus Supplement, the
"Manufactured Homes" securing the Contracts will consist of manufactured homes
within the meaning of 42 United States Code, Section 5402(6), which defines a
"manufactured home" as "a structure, transportable in one or more sections,
which in the traveling mode, is eight body feet or more in width or forty body
feet or more in length, or, when erected on site, is three hundred twenty or
more square feet, and which is built on a permanent chassis and designed to be
used as a dwelling with or without a permanent foundation when connected to the
required utilities, and includes the plumbing, heating, air
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conditioning, and electrical systems contained therein; except that such term
shall include any structure which meets all the requirements of [this] paragraph
except the size requirements and with respect to which the manufacturer
voluntarily files a certification required by the Secretary of Housing and Urban
Development and complies with the standards established under [this] chapter."
The related Prospectus Supplement will specify for the Contracts
contained in the related Trust, among other things, the date of origination of
the Contracts; the Mortgage Rates or the APRs on the Contracts; the Contract
Loan-to-Value Ratios; the minimum and maximum outstanding principal balances as
of the Statistic Calculation Date and the average outstanding principal balance;
the outstanding principal balances of the Contracts included in the related
Trust; and the original maturities of the Contracts and the last maturity date
of any Contract.
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THE MORTGAGE POOLS
GENERAL
Unless otherwise specified in the related Prospectus Supplement, each
Mortgage Pool will consist primarily of (i) conventional Mortgage Loans, minus
any stripped portion of the interest payments due under the related Mortgage
Note that may have been retained by any Originator or broker ("Originator's
Retained Yield"), or any other interest retained by the Sponsor or any affiliate
of the Sponsor, evidenced by promissory notes (the "Mortgage Notes") secured by
mortgages or deeds of trust or other similar security instruments creating a
lien on single-family (i.e., one- to four-family) residential, multi-family
properties or mixed use properties, or (ii) certificates of interest or
participations in such Mortgage Notes. The Mortgaged Properties will consist
primarily of attached or detached one-family dwelling units, two- to four-family
dwelling units, condominiums, townhouses, row houses, individual units in
planned-unit developments and certain other dwelling units, mixed use properties
and the fee, leasehold or other interests in the underlying real property. The
Mortgaged Properties may be noninvestor owned (which includes second and
vacation homes) and investor owned properties. If specified in the related
Prospectus Supplement relating to a series of Securities, a Mortgage Pool may
contain cooperative apartment loans ("Cooperative Loans") evidenced by
promissory notes ("Cooperative Notes") secured by security interests in shares
issued by cooperatives and in the related proprietary leases or occupancy
agreements granting exclusive rights to occupy specific dwelling units in the
related buildings. In certain cases a Mortgage Loan may also be secured by the
pledge of a limited amount of collateral which is not real estate, such as
fixtures or personal property that includes, but is not limited to, furniture
and appliances. As used herein, unless the context indicates otherwise,
"Mortgage Loans" include Cooperative Loans, "Mortgaged Properties" include
shares in the related cooperative and the related proprietary leases or
occupancy agreements securing Cooperative Notes, "Mortgage Notes" include
Cooperative Notes and "Mortgages" include security agreements with respect to
Cooperative Notes.
Each Mortgage Loan will be selected by the Sponsor for inclusion in a
Mortgage Pool from among mortgage loans originated by one or more institutions
affiliated with the Sponsor (such affiliated institutions, the "Affiliated
Originators"), or from banks, savings and loan associations, mortgage bankers,
mortgage brokers, investment banking firms, the RTC, the FDIC and other mortgage
loan originators or purchasers not affiliated with the Sponsor (such
unaffiliated institutions, the "Unaffiliated Originators" and, collectively with
the Affiliated Originators, the "Originators"), all as described below under
"Mortgage Loan Program." The characteristics of the Mortgage Loans will be
described in the related Prospectus Supplement. Other mortgage loans available
for acquisition by a Trust may have characteristics that would make them
eligible for inclusion in a Mortgage Pool but may not be selected by the Sponsor
for inclusion in such Mortgage Pool.
Each Security will evidence an interest in only the related Mortgage
Pool and corresponding Trust Estate, and not in any other Mortgage Pool or any
other Trust Estate (except in those limited situations whereby certain
collections on any Mortgage Loans in a related Mortgage Pool in excess of
amounts needed to pay the related securities may be deposited in a common,
master reserve account that provides Credit Enhancement for more than one series
of Securities).
THE MORTGAGE POOLS
Unless otherwise specified below or in the related Prospectus
Supplement, all of the Mortgage Loans in a Mortgage Pool will (i) have payments
that are due monthly or bi-weekly, (ii) be secured by Mortgaged Properties
located in any of the fifty states, the District of Columbia, Puerto Rico or any
other Territories of the United States and (iii) consist of one or more of the
following types of mortgage loans:
(1) Fixed-rate, fully-amortizing mortgage loans (which may
include mortgage loans converted from adjustable-rate mortgage loans or
otherwise modified) providing for level monthly payments of principal
and interest and terms at origination or modification of generally not
more than 30 years;
(2) ARM Loans having original or modified terms to maturity of
generally not more than 30 years with a related Mortgage Rate that
adjusts periodically, at the intervals described in the related
Prospectus Supplement (which may have adjustments in the amount of
monthly payments at periodic intervals) over the term of the mortgage
loan to equal the sum of a fixed percentage set forth in the related
Mortgage Note (the "Note Margin") and an index (the "Index") to be
specified in the related Prospectus Supplement, such as, by way of
example: (i) U.S. Treasury securities of a specified constant maturity,
(ii)
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weekly auction average investment yield of U.S. Treasury bills of
specified maturities, (iii) the daily Bank Prime Loan rate made
available by the Federal Reserve Board or as quoted by one or more
specified lending institutions, (iv) the cost of funds of member
institutions for the Federal Home Loan Bank of San Francisco, or (v)
the interbank offered rates for U.S. dollar deposits in the London
Markets, each calculated as of a date prior to each scheduled interest
rate adjustment date that will be specified in the related Prospectus
Supplement. The related Prospectus Supplement will set forth the
relevant Index, and the related Prospectus Supplement or the related
Current Report on Form 8-K will indicate the highest, lowest and
weighted-average Note Margin with respect to the ARM Loans in the
related Mortgage Pool. If specified in the related Prospectus
Supplement, an ARM Loan may include a provision that allows the
Mortgagor to convert the adjustable Mortgage Rate to a fixed rate at
some point during the term of such ARM Loan subsequent to the initial
payment date;
(3) Fixed-rate, graduated payment mortgage loans having
original or modified terms to maturity of generally not more than 30
years with monthly payments during the first year calculated on the
basis of an assumed interest rate that will be lower than the Mortgage
Rate applicable to such mortgage loan in subsequent years. Deferred
Interest, if any, will be added to the principal balance of such
mortgage loans;
(4) Fixed-rate, graduated payment mortgage loans having
original or modified terms to maturity of generally not more than 30
years with monthly payments in subsequent years that are calculated on
the basis of an assumed interest rate that will be lower than the
Mortgage Rate applicable to such loan in the first year or first two
years, provided that the Mortgagor qualifies under certain positive
criteria, including, but not limited to, a good payment history.
(5) Balloon mortgage loans ("Balloon Loans"), which are
mortgage loans having original or modified terms to maturity of
generally 5 to 15 years as described in the related Prospectus
Supplement, which may have level monthly payments of principal and
interest based generally on a 10- to 30-year amortization schedule. The
amount of the monthly payment may remain constant until the maturity
date, upon which date the full outstanding principal balance on such
Balloon Loan will be due and payable (such amount, the "Balloon
Amount");
(6) Modified mortgage loans ("Modified Loans"), which are
fixed or adjustable-rate mortgage loans providing for terms at the time
of modification of generally not more than 30 years. Modified Loans may
be mortgage loans which have been consolidated and/or have had various
terms changed, mortgage loans which have been converted from adjustable
rate mortgage loans to fixed rate mortgage loans, or construction loans
which have been converted to permanent mortgage loans;
(7) Another type of mortgage loan described in the related
Prospectus Supplement; or
(8) As more fully described in the related Prospectus
Supplement, the Mortgage Loans may consist, in whole or in part, of
Revolving Credit Line Loans. Interest on each Revolving Credit Line
Loan, excluding introductory rates offered from time to time during
promotional periods, may be computed and payable monthly on the average
daily outstanding principal balance of such loan. From time to time
prior to the expiration of the related draw period specified in a
Revolving Credit Line Loan, principal amounts on such Revolving Credit
Line Loan may be drawn down (up to a maximum amount as set forth in the
related Prospectus Supplement) or repaid. If specified in the related
Prospectus Supplement, new draws by borrowers under the Revolving
Credit Line Loans will automatically become part of the Trust Estate
described in such Prospectus Supplement. As a result, the aggregate
balance of the Revolving Credit Line Loans will fluctuate from day to
day as new draws by borrowers are added to the Trust Estate and
principal payments are applied to such balances and such amounts will
usually differ each day, as more specifically described in the related
Prospectus Supplement. Under certain circumstances, under a Revolving
Credit Line Loan, a borrower may, during the related draw period,
choose an interest only payment option, during which the borrower is
obligated to pay only the amount of interest which accrues on the loan
during the billing cycle, and may also elect to pay all or a portion of
the principal. An interest only payment option may terminate at the end
of the related draw period, after which the borrower must begin paying
at least a minimum monthly portion of the average outstanding principal
balance of the loan.
If provided for in the related Prospectus Supplement, a Mortgage Pool
may contain either or both of the following types of mortgage loans (i) ARM
Loans which allow the Mortgagors to convert the adjustable rates on such
Mortgage Loans to a fixed rate at some point during the life of such Mortgage
Loans and (ii) fixed rate mortgage loans which allow the Mortgagors to convert
the fixed rates on such Mortgage Loans to an adjustable rate at some point
during the life of such Mortgage Loans (each such Mortgage Loan described in (i)
and (ii) above, a "Convertible Mortgage Loan").
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If provided for in the related Prospectus Supplement, certain of the
Mortgage Loans may be Buydown Mortgage Loans pursuant to which the monthly
payments made by the Mortgagor during the Buydown Period will be less than the
scheduled monthly payments on the Mortgage Loan, the resulting difference to be
made up from (i) Buydown Funds funded by the Originator of the Mortgaged
Property or another source (including the Master Servicer or the related
Originator) and placed in the Buydown Account and (ii) if the Buydown Funds are
contributed on a present value basis, investment earnings on such Buydown Funds.
See "Description of the Securities--Payments on Mortgage Loans; Deposits to
Distribution Account." The terms of the Buydown Mortgage Loans, if such loans
are included in a Trust, will be as set forth in the related Prospectus
Supplement.
The Sponsor will cause the Mortgage Loans constituting each Mortgage
Pool to be assigned to the Trustee named in the related Prospectus Supplement,
for the benefit of the holders of all of the Securities of a series. The Master
Servicer named in the related Prospectus Supplement will service the Mortgage
Loans, either directly or through other mortgage servicing institutions
(Sub-Servicers), pursuant to a Pooling and Servicing Agreement and will receive
a fee for such services. See "Mortgage Loan Program" and "Description of the
Securities." With respect to those Mortgage Loans serviced by the Master
Servicer through a Sub-Servicer, the Master Servicer will remain liable for its
servicing obligations under the related Pooling and Servicing Agreement as if
the Master Servicer alone were servicing such Mortgage Loans, unless otherwise
described in the related Prospectus Supplement.
The Sponsor and/or certain Originators may make certain representations
and warranties regarding the Mortgage Loans, but its assignment of the Mortgage
Loans to the Trustee will be without recourse. See "Description of the
Securities--Assignment of Mortgage Loans." The Master Servicer's obligations
with respect to the Mortgage Loans will consist principally of its contractual
servicing obligations under the related Pooling and Servicing Agreement
(including its obligation to enforce certain purchase and other obligations of
Sub-Servicers and of Originators, as more fully described herein under "Mortgage
Loan Program--Representations by Originators," "--Sub-Servicing by Originators"
and "Description of the Securities--Assignment of Mortgage Loans," and its
obligation, if any, to make certain cash advances in the event of delinquencies
in payments on or with respect to the Mortgage Loans and interest shortfalls due
to prepayment of Mortgage Loans, in amounts described herein under "Description
of the Securities--Advances"). The obligation of the Master Servicer to make
delinquency advances will be limited to the extent, in its good faith business
judgment such delinquency advances would be ultimately recoverable from the
proceeds of liquidation of the Mortgage Loans. See "Description of the
Securities--Advances."
MORTGAGE LOAN PROGRAM
As a general matter, the Sponsor's Mortgage Loan program will consist
of the origination and packaging of Mortgage Loans relating to non-conforming
credits. For purposes hereof, "non-conforming credit" means a mortgage loan
which, based upon standard underwriting guidelines, is ineligible for purchase
by FNMA or FHLMC due to credit characteristics that do not meet FNMA or FHLMC
guidelines, respectively. However, certain of the Mortgage Loans will relate to
FNMA or FHLMC conforming credits.
The Mortgagors generally will have taken out the related Mortgage Loans
for one or more of four reasons: (i) to purchase the related Mortgaged Property,
(ii) to refinance an existing mortgage loan on more favorable terms, (iii) to
consolidate debt, or (iv) to obtain cash proceeds by borrowing against the
Mortgagor's equity in the related Mortgaged Property; the Mortgage Loans
described in (i) are commonly referred to as purchase money loans and the
Mortgage Loans described in (ii), (iii) and (iv) on the whole are commonly
referred to as home equity loans.
It is the Sponsor's practice to solicit existing Mortgagors with
respect to the possible refinancing of their existing Mortgages.
UNDERWRITING GUIDELINES
As more fully described below under "Qualifications of Originators" and
as may also be described in greater detail in the related Prospectus Supplement,
there are various types of Originators that may participate in the Sponsor's
Mortgage Loan Program. Under the Sponsor's Mortgage Loan Program, the Sponsor
purchases and originates Mortgage Loans pursuant to three types of underwriting
guidelines: (1) standard underwriting guidelines according to the Sponsor's
Originator Guide, as modified from time to time, used by Affiliated Originators
and Unaffiliated Originators ("Sponsor's Guidelines"), (2) underwriting
guidelines utilized by certain Unaffiliated
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Originators and approved by the Sponsor ("Approved Guidelines"), and (3)
underwriting guidelines ("Bulk Guidelines") used by Unaffiliated Originators of
portfolios of Mortgage Loans subsequently purchased in whole or part by the
Sponsor as bulk acquisitions ("Bulk Acquisitions"). The respective underwriting
guidelines are described below.
Sponsor's Guidelines. The Sponsor's Guidelines are set forth in the
Sponsor's Originator Guide. The Sponsor's Guidelines are revised continuously
based on opportunities and prevailing conditions in the nonconforming credit
residential mortgage market, as well as the expected market for the resulting
Securities.
Mortgage Loans originated by Affiliated Originators generally will, and
Mortgage Loans originated by Unaffiliated Originators may have been, originated
in accordance with the Sponsor's Guidelines as set forth in the Sponsor's
Originator Guide. However, certain of the Mortgage Loans may be employee or
preferred customer loans with respect to which, in accordance with such
Affiliate's mortgage loan programs, no income or asset verifications were
required. In addition, certain Originators may originate Mortgage Loans in
satisfaction of specified requirements of federal or state law applicable to
certain Originators, such as, by way of illustration, the federal Community
Reinvestment Act of 1977, which is applicable to banks; such Mortgage Loans
generally will not have been originated pursuant to the Sponsor's standard
underwriting guidelines applicable to nonconforming loans but may have been
originated pursuant to alternative guidelines applicable to such loans. The
Sponsor will not review any Affiliated Originator mortgage loans for conformity
with the Sponsor's Guidelines set forth in the Sponsor's Originator Guide. The
Sponsor generally will review or cause to be reviewed only a limited portion of
the Mortgage Loans in any delivery of Mortgage Loans from Unaffiliated
Originators for conformity with the Sponsor's Originator Guide.
The following is a brief description of the Sponsor's Guidelines set
forth in the Sponsor's Originator Guide customarily and currently employed by
the Sponsor. The Sponsor believes that these standards are consistent with those
generally used by lenders in the business of making mortgage loans based on
non-conforming credits. The underwriting process is intended to assess both the
prospective borrower's ability to repay and the adequacy of the real property as
collateral for the loan granted. The general appreciation in value of real
estate experienced in the past has been a factor in limiting the Master
Servicer's loss experience on its portfolio of one- to four-family residential
mortgage loans. However, the past pattern of appreciation in value of the real
property securing such loans has not continued, and a depreciation in value has
occurred and may continue to occur in some market areas, and may occur in
others.
The Sponsor's Guidelines permit the origination and purchase of
mortgage loans with multi-tiered credit characteristics tailored to individual
credit profiles. In general, the Sponsor's Guidelines require an analysis of the
equity in the collateral, the payment history of the borrower, the borrower's
ability to repay debt, the property type, and the characteristics of the
underlying first mortgage, if any. A lower maximum CLTV is required for lower
gradations of credit quality and higher property values.
The Sponsor's Guidelines permit the origination or purchase of fixed or
adjustable rate loans that either fully amortize over a period generally not to
exceed 30 years or, in the case of a balloon mortgage, generally amortize based
on a 30-year or less amortization schedule with a due date and a "balloon"
payment due prior to the 30 year period.
The homes used for collateral to secure the loans generally may be
either noninvestor owned (which includes second and vacation homes) or investor
owned properties which, in either case are single-family residences (which may
be detached, part of a two- to four-family dwelling, a condominium unit or a
unit in a planned unit development). The Sponsor's Guidelines generally require
that the CLTV of a Mortgage Loan not exceed 100%, after taking into account the
amount of any primary mortgage insurance applicable to such Mortgage Loan. The
Sponsor, however, may originate or purchase Mortgage Loans that have a maximum
combined loan-to-value ratio of 125%. These Mortgage Loans are generally
targeted as debt consolidation loans for repeat or frequent borrowers with
generally strong credit ratings. Lending decisions for these loans are based on
an analysis of the prospective Mortgagor's documented cash flow and credit
history supplemented by a collateral evaluation deemed appropriate by the
Sponsor.
If a senior mortgage exists, the Sponsor may first review the senior
mortgage documentation. If it contains open end advance or negative amortization
provisions, the maximum potential senior mortgage balance may be used, although
for certain of the Sponsor's products the current balance may be used in
calculating the CLTV which determines the maximum loan amount. The Sponsor's
Guidelines do not permit the origination or purchase of loans where the senior
mortgage contains a provision pursuant to which the senior mortgagee may share
in any appreciation of the Mortgaged Property.
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In most cases, the value of each property proposed as security for a
mortgage loan is required to be determined by a full appraisal. A limited
appraisal of a property, conducted on a drive-by basis, may be utilized. Two
full appraisals are generally required for properties valued over $500,000.
Appraisals are required to be completed by qualified professional
appraisers. The Sponsor evaluates the performance of appraisers and maintains a
current disapproved appraiser list.
The Sponsor's Guidelines have provided for the origination of loans
under three general loan programs: (i) a full verification program for salaried
or self-employed borrowers, (ii) a "lite" documentation program for borrowers
who may have income which cannot be verified by traditional methods and (iii) a
non-income verification program for salaried and self-employed borrowers.
However, the Sponsor's Guidelines allow for certain borrowers with existing
loans to refinance such loans with either limited, or no, verification of
income. The Sponsor may also purchase pools of loans which may include some
loans originated under a non-income verification program. For the Sponsor's full
verification process, each mortgage applicant is required to provide, and the
Sponsor or its designee is required to verify, personal financial information.
The applicant's total monthly obligations (including principal and interest on
each mortgage, tax assessments, other loans, charge accounts and all other
scheduled indebtedness) generally (in the absence of countervailing
considerations, such as a lower Combined Loan-to-Value Ratio or a price
adjustment) should not exceed the applicant's ability to pay. Applicants who are
salaried employees must provide current employment information in addition to
recent employment history. The Sponsor or its designee verify this information
for salaried borrowers based on written confirmation from employers or a
combination of the most recent pay stub, the most recent W-2 tax form and
telephone confirmation from the employer. Self-employed applicants are generally
required to be self-employed in the same field for a minimum of two years. The
self-employed applicant is generally required to provide personal and business
financial statements and signed copies of complete federal income tax returns
(including schedules) filed for the most recent two years. For the Sponsor's
"lite" documentation program the borrower must establish proof of cash flow
trends to support the borrower's income. Such proof can include business bank
statements or personal bank statements. For the Sponsor's non-income verifier
program, proof of two year's history of employment plus proof of current
employment status is required. The applicant's debt-to-income ratio is
calculated based on income as certified by the borrower on the application and
must be reasonable.
A credit report by an independent, nationally recognized credit
reporting agency is required reflecting the applicant's complete credit history.
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 senior mortgage balance,
if any, the 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.
In connection with purchase-money loans, the Sponsor's Guidelines
generally require (x) (i) an acceptable source of downpayment funds, (ii)
verification of the source of the downpayment funds and (iii) adequate cash
reserves or (y) adequate equity in the collateral property.
Certain laws protect loan applicants by offering them a time frame
after loan documents are signed, termed 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.
Unless otherwise disclosed in the related Prospectus Supplement, the
Sponsor's Guidelines generally require title insurance coverage issued by an
approved ALTA or CLTA title insurance company on each Mortgage Loan it
purchases. The Sponsor, the related Originator and/or their assignees generally
are named as the insured. Title insurance policies indicate the lien position of
the mortgage loan and protect the insured against loss if the title or lien
position is not as indicated.
The applicant is required to secure property insurance in an amount
sufficient to cover the new loan and any senior mortgage. If the sum of the
outstanding first mortgage, if any, and the related mortgage loan exceeds
replacement value (the cost of rebuilding the subject property, which generally
does not include land value), insurance equal to replacement value may be
accepted. The Sponsor or its designee is required to ensure that its name
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and address is properly added to the "Mortgagee Clause" of the insurance policy.
In the event the Sponsor or the related 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.
Approved Guidelines. The Sponsor may cause a Trust to acquire Mortgage
Loans underwritten pursuant to underwriting guidelines that may differ from the
Sponsor's Guidelines as set forth in the Sponsor's Originator Guide. Certain of
the Mortgage Loans will be acquired in negotiated transactions, and such
negotiated transactions may be governed by agreements ("Master Commitments")
relating to ongoing acquisitions of Mortgage Loans by the Sponsor, from
Originators who will represent that the Mortgage Loans have been originated in
accordance with underwriting guidelines agreed to by the Sponsor. Certain other
Mortgage Loans will be acquired from Originators that will represent that the
Mortgage Loans were originated pursuant to underwriting guidelines determined by
a mortgage insurance company acceptable to the Sponsor. The Sponsor will accept
a certification from such insurance company as to a Mortgage Loan's insurability
in a mortgage pool as of the date of certification as evidence of a Mortgage
Loan conforming to applicable underwriting standards. Such certifications likely
will have been issued before the purchase of the Mortgage Loan by the Sponsor.
The Sponsor only will perform random quality assurance reviews on Mortgage Loans
delivered with such certifications.
The underwriting standards utilized in negotiated transactions and
Master Commitments and the underwriting standards of insurance companies may
vary substantially from the Sponsor's Guidelines. All of the underwriting
guidelines will provide an underwriter with information to evaluate either the
security for the related Mortgage Loan, which security consists primarily of the
borrower's repayment ability or the adequacy of the Mortgaged Property as
collateral, or a combination of both. Due to the variety of underwriting
guidelines and review procedures that may be applicable to the Mortgage Loans
included in any Mortgage Pool, the related Prospectus Supplement will not
distinguish among the various underwriting guidelines applicable to the Mortgage
Loans nor describe any review for compliance with applicable underwriting
guidelines performed by the Sponsor. Moreover, there can be no assurance that
every Mortgage Loan was originated in conformity with the Approved Guidelines in
all material respects, or that the quality or performance of Mortgage Loans
underwritten pursuant to varying guidelines as described above will be
equivalent under all circumstances.
Bulk Guidelines. Bulk portfolios of Mortgage Loans may be originated by
a variety of Originators under several different underwriting guidelines. For
bulk portfolios which are seasoned for a period of time, the Sponsor's
underwriting review of bulk portfolios of Mortgage Loans focuses primarily on
payment histories and estimated current values based on estimated property
appreciation or depreciation and loan amortization. Mortgage Loans that conform
to the related Bulk Guidelines may not conform to the requirements of either the
Sponsor's Guidelines or the Approved Guidelines. For example, the Sponsor may
purchase Mortgage Loans in bulk portfolios with Combined Loan-to-Value Ratios in
excess of that required under the Sponsor's Guidelines, without title insurance,
or with nonconforming appraisal methods such as tax assessments. Bulk
Acquisition portfolios may be purchased servicing released or retained. If
servicing is retained, the Originator must meet certain minimum requirements, as
modified from time to time, by the Sponsor. The Sponsor generally will cause the
Mortgage Loans acquired in a Bulk Acquisition to be reunderwritten on a sample
basis. Such reunderwriting may be performed by the Sponsor, the Master Servicer
or by a third party acting at the direction of the Sponsor.
Quality Control. The Master Servicer maintains a quality control
department which generally reviews loans originated by Affiliated Originators.
The quality control department randomly selects a portion of the files for
underwriting review. The Sponsor or its Affiliated Originators also cause
appraisal reviews to be performed on a random sample of loan production.
A periodic report is distributed to senior management and the
production offices describing material exceptions to underwriting and appraisal
guidelines, legal and regulatory requirements and variances based on the
reverification process. Appraisers demonstrating chronic errors, omissions or
large valuation errors are removed from the approved appraiser list. Training
programs, additional audits and performance evaluations for underwriting
personnel and management are influenced by the results of the quality control
review.
The Sponsor generally will cause Mortgage Loans acquired from
Unaffiliated Originators to be (i) reunderwritten for the purpose of determining
whether such Mortgage Loans were originated in accordance with the applicable
underwriting guidelines, (ii) reviewed to assess the accuracy of the appraised
values, and (iii) audited to
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determine the accuracy of the loan computer system as compared to the loan
files. Such process may consist of a review of all such Mortgage Loans or may be
performed on a sample basis. Such reunderwriting may be performed by the
Sponsor, the Master Servicer or a third party acting at the direction of the
Sponsor.
QUALIFICATIONS OF ORIGINATORS
Each Originator from which a Mortgage Loan is acquired will have been
accepted by the Sponsor for participation in the Sponsor's mortgage loan
program. Certain Unaffiliated Originators ("Conduit Participants") may be
qualified to enter into agreements to sell mortgage loans to the Sponsor
pursuant to Master Commitments which provide for the periodic purchase and sale
of loans meeting certain specified requirements.
Loans acquired from Unaffiliated Originators other than Conduit
Participants will be acquired on a "spot" basis, or in connection with a Bulk
Acquisition. Unless otherwise described in the related Prospectus Supplement
with respect to certain specified Unaffiliated Originators (in which case any
remedies for breach will lie only against such Unaffiliated Originator), the
Sponsor will make directly, or will guarantee compliance with, any
representations and warranties made by any Unaffiliated Originator, with respect
to the Mortgage Loans originated by it and acquired by a Trust.
All Conduit Participants must have received a satisfactory review by
the Sponsor of its operating procedures. All Unaffiliated Originators will have
delinquency and foreclosure rates monitored and maintained at levels acceptable
to the Sponsor. All Unaffiliated Originators are required to originate mortgage
loans in accordance with the applicable underwriting standards. However, with
respect to any Originator, some of the generally applicable underwriting
standards described herein and in the Sponsor's Originator Guide may be modified
or waived with respect to certain Mortgage Loans originated by such Originators.
The Federal Deposit Insurance Corporation (the "FDIC") (either in its
corporate capacity or as receiver or conservator for a depository institution)
may also be an Originator of the Mortgage Loans. The FDIC is an independent
executive agency originally established by the Banking Act of 1933 to insure the
deposits of all banks entitled to federal deposit insurance under the Federal
Reserve Act and Federal Deposit Insurance Act. The FDIC administers the system
of nationwide deposit insurance (mutual guaranty of deposits) for United States
Banks and, together with the United States Comptroller of the Currency,
regulates in areas related to the maintenance of reserves for certain types of
deposits, the maintenance of certain financial ratios, transactions with
affiliates and a broad range of other banking practices.
The Sponsor monitors the Originators and the Sub-Servicers under the
control of a Federal Corporation, as well as those Originators and Sub-Servicers
that are insolvent or in receivership or conservatorship or otherwise
financially distressed. Such Originators may not be able or permitted to
repurchase Mortgage Loans for which there has been a breach of representation
and warranty. Moreover, any such Originator may make no representations and
warranties with respect to Mortgage Loans sold by it. The Federal Corporations
(either in their respective corporate capacities or as receiver for a depository
institution) may also originate Mortgage Loans, in which event neither the
related Federal Corporation nor the depository institution for which such
Federal Corporation is acting as receiver may make representations and
warranties with respect to the Mortgage Loans that such Federal Corporation
sells, or such Federal Corporation may make only limited representations and
warranties (for example, that the related legal documents are enforceable). A
Federal Corporation may have no obligation to repurchase any Mortgage Loan for a
breach of a representation and warranty. If as a result of a breach of
representation and warranty an Originator is required to repurchase a Mortgage
Loan but is not permitted or otherwise fails to do so or if representations and
warranties are not made by an Originator, to the extent that neither the Sponsor
nor any other entity has assumed the representations and warranties or made
representations and warranties, neither the Sponsor nor that entity will be
required to repurchase such Mortgage Loan and, consequently such Mortgage Loan
will remain in the related Mortgage Pool and any related losses will be borne by
the Securityholders or by the related Credit Enhancement,
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if any. In addition, loans which are purchased either directly or indirectly
from a Federal Corporation may be subject to a contract right of such Federal
Corporation to repurchase such loans under certain limited circumstances.
SUB-SERVICERS
Each Originator of a Mortgage Loan will act as Sub-Servicer for such
Mortgage Loan pursuant to an agreement between the Master Servicer and the
Sub-Servicer (a "Sub-Servicing Agreement") unless the servicing obligations are
released to the Master Servicer or transferred to a servicer approved by the
Master Servicer. An Affiliated Originator of a Mortgage Loan may act as the
Sub-Servicer for such Mortgage Loan unless the other related servicing
obligations are released or transferred. An Unaffiliated Originator acting as a
Sub-Servicer for the Mortgage Loans will be required to meet certain additional
standards with respect to its mortgage loan servicing portfolio, GAAP tangible
net worth and other specified qualifications.
REPRESENTATIONS BY ORIGINATORS
Unless otherwise specified in the related Prospectus Supplement, each
Originator will have made representations and warranties in respect of the
Mortgage Loans sold by such Originator and evidenced by a series of Securities.
Such representations and warranties generally include, among other things, that
at the time of the sale by the Originator to the Sponsor of each Mortgage Loan:
(i) the information with respect to each Mortgage Loan set forth in the
Schedules of Mortgage Loans is true and correct as of the related Cut-Off Date;
(ii) each Mortgage Loan being transferred to the Trust which is a REMIC is a
qualified mortgage under the REMIC provisions of the Code and is a Mortgage;
(iii) each Mortgaged Property is improved by a single (one- to four-) family
residential dwelling or a multi-family structure, which may include condominiums
and townhouses, units in a "planned unit development" ("PUD") complex or a
manufactured home; (iv) each Mortgage Loan had, at the time of origination,
either an attorney's certification of title or a title search or title policy;
(v) as of the related Cut-Off Date each Mortgage Loan is secured by a valid and
subsisting lien of record on the Mortgaged Property having the priority
indicated on the related Schedule of Mortgage Loans subject in all cases to
exceptions to title set forth in the title insurance policy, if any, with
respect to the related Mortgage Loan; (vi) each Originator held good and
indefeasible title to, and was the sole owner of, each Mortgage Loan conveyed by
such Originator; and (vii) each Mortgage Loan was originated in accordance with
law and is the valid, legal and binding obligation of the related Mortgagor.
Unless otherwise described in the related Prospectus Supplement, all of
the representations and warranties of an Originator in respect of a Mortgage
Loan will be made as of the date on which such Originator sells the Mortgage
Loan to the Sponsor; the date as of which such representations and warranties
are made thus may be a date prior to the date of the issuance of the related
series of Securities. A substantial period of time may elapse between the date
as of which the representations and warranties are made and the later date of
issuance of the related series of Securities.
The Sponsor will assign to the Trustee for the benefit of the holders
of the related series of Securities all of its right, title and interest in each
agreement by which it acquires a Mortgage Loan from an Originator insofar as
such agreement relates to the representations and warranties made by an
Originator in respect of such Mortgage Loan and any remedies provided for breach
of such representations and warranties. If an Originator cannot cure a breach of
any representation or warranty made by it in respect of a Mortgage Loan that
materially and adversely affects the interests of the Securityholders in such
Mortgage Loan within a time period specified in the related Pooling and
Servicing Agreement, such Originator and/or the Sponsor will be obligated to
purchase from the related Trust such Mortgage Loan at a price (the "Loan
Purchase Price") set forth in the related Pooling and Servicing Agreement which
Loan Purchase Price will be equal to the principal balance thereof as of the
date of purchase plus one month's interest at the Mortgage Rate less the amount,
expressed as a percentage per annum, payable in respect of master servicing
compensation or subservicing compensation, as applicable, and the Originator's
Retained Yield, if any, together with, without duplication, the aggregate amount
of all delinquent interest, if any, net of Servicing Advances.
Unless otherwise specified in the related Prospectus Supplement, as to
any such Mortgage Loan required to be purchased by an Originator and/or the
Sponsor, as provided above, rather than repurchase the Mortgage Loan, the Master
Servicer may, at its sole option, remove such Mortgage Loan (a "Deleted Mortgage
Loan") from the related Trust and cause the Sponsor to substitute in its place
another Mortgage Loan of like kind (a "Qualified
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Replacement Mortgage" as such term is defined in the related Pooling and
Servicing Agreement). With respect to a Trust for which a REMIC election is to
be made, except as otherwise provided in the Prospectus Supplement relating to a
series of Securities, such substitution of a defective Mortgage Loan must be
effected within two years of the date of the initial issuance of the Securities,
and may not be made if such substitution would cause the Trust to not qualify as
a REMIC or result in a prohibited transaction tax under the Code. Unless
otherwise specified in the related Prospectus Supplement or Pooling and
Servicing Agreement, an Unaffiliated Originator generally will have no option to
substitute for a Mortgage Loan that it is obligated to repurchase in connection
with a breach of a representation and warranty.
The Master Servicer will be required under the applicable Pooling and
Servicing Agreement to enforce such purchase or substitution obligations for the
benefit of the Trustee and the Securityholders, following the practices it would
employ in its good faith business judgment if it were the owner of such Mortgage
Loan; provided, however, that this purchase or substitution obligation will in
no event become an obligation of the Master Servicer in the event the Originator
fails to honor such obligation. If the Originator fails to repurchase or
substitute a loan and no breach of the Sponsor's representations has occurred,
the Originator's purchase obligation will in no event become an obligation of
the Sponsor. Unless otherwise specified in the related Prospectus Supplement,
the foregoing will constitute the sole remedy available to Securityholders or
the Trustee for a breach of representation by an Originator in its capacity as a
seller of Mortgage Loans to the Sponsor.
Unless otherwise described in the related Prospectus Supplement with
respect to certain Unaffiliated Originators (in which case any remedies for
breach will lie only against such Unaffiliated Originator), the Sponsor will
make directly, or will guarantee compliance with, any representations and
warranties made by any Unaffiliated Originator with respect to the Mortgage
Loans originated or purchased by it and acquired by a Trust.
Notwithstanding the foregoing with respect to any Originator that
requests the Master Servicer's consent to the transfer of sub-servicing rights
relating to any Mortgage Loans to a successor servicer, the Master Servicer may
release such Originator from liability, under its representations and warranties
described above, upon the assumption by such successor servicer of the
Originator's liability for such representations and warranties as of the date
they were made. In that event, the Master Servicer's rights under the instrument
by which such successor servicer assumes the Originator's liability will be
assigned to the Trustee, and such successor servicer shall be deemed to be the
"Originator" for purposes of the foregoing provisions.
SUB-SERVICING BY ORIGINATORS
Each Originator of a Mortgage Loan will act as the Sub-Servicer for
such Mortgage Loan pursuant to a Sub-Servicing Agreement unless servicing is
released to the Master Servicer or has been transferred to a servicer approved
by the Master Servicer. The Master Servicer may, in turn, assign such
sub-servicing to designated sub-servicers that will be qualified Originators and
may include affiliates of the Sponsor. While such a Sub-Servicing Agreement will
be a contract solely between the Master Servicer and the Sub-Servicer, the
Pooling and Servicing Agreement pursuant to which a series of Securities is
issued will provide that, if for any reason the Master Servicer for such series
of Securities is no longer the master servicer of the related Mortgage Loans,
the Trustee or any successor Master Servicer must recognize the Sub-Servicer's
rights and obligations under such Sub-Servicing Agreement.
Unless otherwise specified in the related Prospectus Supplement, with
the approval of the Master Servicer, a Sub-Servicer may delegate its servicing
obligations to third-party servicers, but such Sub-Servicer will remain
obligated under the related Sub-Servicing Agreement. Each Sub-Servicer will be
required to perform the customary functions of a servicer, including collection
of payments from Mortgagors and remittance of such collections to the Master
Servicer; maintenance of hazard insurance (to the extent, if any, required by
the related Pooling and Servicing Agreement) and filing and settlement of claims
thereunder, subject in certain cases to the right of the Master Servicer to
approve in advance any such settlement; maintenance of escrow or impound
accounts of Mortgagors for payment of taxes, insurance and other items required
to be paid by the Mortgagor pursuant to the Mortgage Loan; processing of
assumptions or substitutions; attempting to cure delinquencies; supervising
foreclosures; inspecting and managing Mortgaged Properties under certain
circumstances; and maintaining accounting records relating to the Mortgage
Loans. A Sub-Servicer also may be obligated to make advances to the Master
Servicer in respect of delinquent installments of principal and/or interest (net
of any sub-servicing or other compensation) on Mortgage Loans, as described more
fully under "Description of the Securities--Advances," and in respect of certain
taxes and insurance premiums not paid on a timely basis by Mortgagors. A Sub-
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Servicer may also be obligated to deposit amounts in respect of Compensating
Interest to the related Principal and Interest Account in connection with
prepayments of principal received and applied to reduce the outstanding
principal balance of a Mortgage Loan. No assurance can be given that the
Sub-Servicers will carry out their advance or payment obligations, if any, with
respect to the Mortgage Loans. Unless otherwise specified in the related
Prospectus Supplement, a Sub-Servicer may transfer its servicing obligations to
another entity that has been approved for participation in the Sponsor's loan
purchase programs, but only with the prior written approval of the Master
Servicer.
As compensation for its servicing duties, the Sub-Servicer may be
entitled to a Base Servicing Fee. The Sub-Servicer may also be entitled to
collect and retain, as part of its servicing compensation, any late charges or
prepayment penalties provided in the Mortgage Note or related instruments. The
Sub-Servicer will be entitled to reimbursement for certain expenditures that it
makes, generally to the same extent that the Master Servicer would be reimbursed
under the applicable Pooling and Servicing Agreement. See "The Pooling and
Servicing Agreement--Servicing and Other Compensation and Payment of Expenses;
Originator's Retained Yield."
Each Sub-Servicer will be required to agree to indemnify the Master
Servicer for any liability or obligation sustained by the Master Servicer in
connection with any act or failure to act by the Sub-Servicer in its servicing
capacity. Each Sub-Servicer is required to maintain a fidelity bond and an
errors and omission policy with respect to its officers, employees and other
persons acting on its behalf or on behalf of the Master Servicer.
Each Sub-Servicer will be required to service each Mortgage Loan
pursuant to the terms of the Sub-Servicing Agreement for the entire term of such
Mortgage Loan, unless the Sub-Servicing Agreement is terminated earlier by the
Master Servicer or unless servicing is released to the Master Servicer. The
Master Servicer generally may terminate a Sub-Servicing Agreement immediately
upon the giving of notice upon certain stated events, including the violation of
such Sub-Servicing Agreement by the Sub-Servicer, or following a specified
period after notice to the Sub-Servicer without cause upon payment of an amount
equal to a specified termination fee calculated as a specified percentage of the
aggregate outstanding principal balance of all mortgage loans, including the
Mortgage Loans serviced by such Sub-Servicer pursuant to a Sub-Servicing
Agreement and certain transfer fees.
The Master Servicer may agree with a Sub-Servicer to amend a
Sub-Servicing Agreement. Upon termination of a Sub-Servicing Agreement, the
Master Servicer may act as servicer of the related Mortgage Loans or enter into
one or more new Sub-Servicing Agreements. If the Master Servicer acts as
servicer, it will not assume liability for the representations and warranties of
the Sub-Servicer that it replaces. If the Master Servicer enters into a new
Sub-Servicing Agreement, each new Sub-Servicer either must be an Originator,
meet the standards for becoming an Originator or have such servicing experience
that is otherwise satisfactory to the Master Servicer. The Master Servicer may
make reasonable efforts to have the new Sub-Servicer assume liability for the
representations and warranties of the terminated Sub-Servicer, but no assurance
can be given that such an assumption will occur and, in any event, if the new
Sub-Servicer is an affiliate of the Master Servicer, the liability for such
representations and warranties will not be assumed by such new Sub-Servicer. In
the event of such an assumption, the Master Servicer may in the exercise of its
business judgment release the terminated Sub-Servicer from liability in respect
of such representations and warranties. Any amendments to a Sub-Servicing
Agreement or to a new Sub-Servicing Agreement may contain provisions different
from those described above that are in effect in the original Sub-Servicing
Agreements. However, the Pooling and Servicing Agreement for each Trust Estate
will provide that any such amendment or new agreement may not be inconsistent
with such Pooling and Servicing Agreement to the extent that it would materially
and adversely affect the interests of the Securityholders.
DESCRIPTION OF THE SECURITIES
GENERAL
The Securities will be issued in series. Each series of Securities (or,
in certain instances, two or more series of Securities) will be issued pursuant
to a Pooling and Servicing Agreement. The following summaries (together with
additional summaries under "The Pooling and Servicing Agreement" below) describe
all material terms and provisions relating to the Securities common to each
Pooling and Servicing Agreement. 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 Pooling and Servicing Agreement for the related Trust and the
related Prospectus Supplement.
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The Securities will consist of two basic types: (i) Securities of the
fixed-income type ("Fixed-Income Securities") and (ii) Securities of the equity
participation type ("Equity Securities"). No Class of Equity Securities will be
offered pursuant to this Prospectus or any Prospectus Supplement related hereto.
Fixed-Income Securities generally will be styled as debt instruments, having a
principal balance and a specified interest rate ("Interest Rate"). Fixed-Income
Securities may be either beneficial ownership interests in the related Mortgage
Loans held by the related Trust, or may represent debt secured by such Mortgage
Loans. Each series or class of Fixed-Income Securities may have a different
Interest Rate, which may be a fixed, variable or adjustable Interest Rate. The
related Prospectus Supplement will specify the Interest Rate for each series or
class of Fixed-Income Securities, or the initial Interest Rate and the method
for determining subsequent changes to the Interest Rate.
A series may include one or more classes of Fixed-Income Securities
("Strip Securities") entitled to (i) principal distributions, with
disproportionate, nominal or no interest distributions, or (ii) interest
distributions, with disproportionate, nominal or no principal distributions. In
addition, a series may include two or more classes of Fixed-Income Securities
that differ as to timing, sequential order, priority of payment, Interest Rate
or amount of distributions of principal or interest or both, or as to which
distributions of principal or interest or both on any class may be made upon the
occurrence of specified events, in accordance with a schedule or formula, or on
the basis of collections from designated portions of the related Mortgage Pool,
which series may include one or more classes of Fixed-Income Securities
("Accrual Securities"), as to which certain accrued interest will not be
distributed but rather will be added to the principal balance (or nominal
principal balance in the case of Accrual Securities which are also Strip
Securities) thereof on each Payment Date, as hereinafter defined and in the
manner described in the related Prospectus Supplement.
If so provided in the related Prospectus Supplement, a series of
Securities may include one or more classes of Fixed-Income Securities
(collectively, the "Senior Securities") that are senior to one or more classes
of Fixed-Income Securities (collectively, the "Subordinate Securities") in
respect of certain distributions of principal and interest and allocations of
losses on Mortgage Loans. In addition, certain classes of Senior (or
Subordinate) Securities may be senior to other classes of Senior (or
Subordinate) Securities in respect of such distributions or losses.
Equity Securities will represent the right to receive the proceeds of
the related Trust Estate after all required payments have been made to the
Securityholders of the related Fixed-Income Securities (both Senior Securities
and Subordinate Securities), and following any required deposits to any reserve
account that may be established for the benefit of the Fixed-Income Securities.
Equity Securities may constitute what are commonly referred to as the "residual
interest," "seller's interest" or the "general partnership interest," depending
upon the treatment of the related Trust for federal income tax purposes. As
distinguished from the Fixed-Income Securities, the Equity Securities will not
be styled as having principal and interest components. Any losses suffered by
the related Trust first will be absorbed by the related class of Equity
Securities, as described herein and in the related Prospectus Supplement.
No Class of Equity Securities will be offered pursuant to this
Prospectus or any Prospectus Supplement related hereto. Equity Securities may be
offered on a private placement basis or pursuant to a separate Registration
Statement to be filed by the Sponsor. In addition, the Sponsor and its
affiliates may initially or permanently hold any Equity Securities issued by any
Trust.
General Payment Terms of Securities. As provided in the related Pooling
and Servicing Agreement and as described in the related Prospectus Supplement,
Securityholders will be entitled to receive payments on their Securities on
specified dates ("Payment Dates"). Payment Dates with respect to Fixed-Income
Securities will occur monthly, quarterly or semi-annually, as described in the
related Prospectus Supplement; Payment Dates with respect to Equity Securities
will occur as described in the related Prospectus Supplement.
The related Prospectus Supplement will describe a date (the "Record
Date") preceding such Payment Date, as of which the Trustee or its paying agent
will fix the identity of the Securityholders for the purpose of receiving
payments on the next succeeding Payment Date. Unless otherwise described in the
related Prospectus Supplement, the Payment Date will be the twenty-fifth day of
each month (or, in the case of quarterly-pay Securities, the twenty-fifth day of
every third month; and, in the case of semi-annually-pay Securities, the
twenty-fifth day of every sixth month) and the Record Date will be the close of
business as of the last day of the calendar month which precedes such Payment
Date.
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The related Prospectus Supplement and the Pooling and Servicing
Agreement will describe a period (a "Remittance Period") antecedent to each
Payment Date (for example, in the case of monthly-pay Securities, the calendar
month preceding the month in which a Payment Date occurs or such other specified
period). Unless otherwise provided in the related Prospectus Supplement,
collections received on or with respect to the related Mortgage Loans during a
Remittance Period will be required to be remitted by the Master Servicer to the
related Trustee prior to the related Payment Date and will be used to distribute
payments to Securityholders on such Payment Date. As may be described in the
related Prospectus Supplement, the related Pooling and Servicing Agreement may
provide that all or a portion of the principal collected on or with respect to
the related Mortgage Loans may be applied by the related Trustee to the
acquisition of additional Mortgage Loans during a specified period (rather than
used to distribute payments of principal to Securityholders during such period)
with the result that the related securities possess an interest-only period,
also commonly referred to as a revolving period, which will be followed by an
amortization period. Any such interest-only or revolving period may, upon the
occurrence of certain events to be described in the related Prospectus
Supplement, terminate prior to the end of the specified period and result in the
earlier than expected amortization of the related Securities.
In addition, and as may be described in the related Prospectus
Supplement, the related Pooling and Servicing Agreement may provide that all or
a portion of such collected principal may be retained by the Trustee (and held
in certain temporary investments, including Mortgage Loans) for a specified
period prior to being used to distribute payments of principal to
Securityholders.
The result of such retention and temporary investment by the Trustee of
such principal would be to slow the amortization rate of the related Securities
relative to the amortization rate of the related Mortgage Loans, or to attempt
to match the amortization rate of the related Securities to an amortization
schedule established at the time such Securities are issued. Any such feature
applicable to any Securities may terminate upon the occurrence of events to be
described in the related Prospectus Supplement, resulting in the current funding
of principal payments to the related Securityholders and an acceleration of the
amortization of such Securities.
Unless otherwise specified in the related Prospectus Supplement,
neither the Securities nor the underlying Mortgage Loans will be guaranteed or
insured by any governmental agency or instrumentality or the Sponsor, the Master
Servicer, any Sub-Servicer, any Originator or any of their affiliates.
Unless otherwise specified in the Prospectus Supplement with respect to
a series, Securities of each series covered by a particular Pooling and
Servicing Agreement will evidence specified beneficial ownership interest in a
separate Trust Estate created pursuant to such Pooling and Servicing Agreement.
A Trust Estate will consist of, to the extent provided in the Pooling and
Servicing Agreement: (i) a pool of Mortgage Loans (and the related mortgage
documents) or certificates of interest or participations therein underlying a
particular series of Securities as from time to time are subject to the Pooling
and Servicing Agreement, exclusive of, if specified in the related Prospectus
Supplement, any Originator's Retained Yield or other interest retained by the
related Originator, the Sponsor or any of its affiliates with respect to each
such Mortgage Loan; (ii) certain other assets including, without limitation,
payments and collections in respect of the Mortgage Loans due, accrued or
received, as described in the related Prospectus Supplement, on and after the
related Cut-Off Date, as from time to time are identified as deposited in
respect thereof in the Principal and Interest Account and in the related
Distribution Account; (iii) property acquired by foreclosure of the Mortgage
Loans or deed in lieu of foreclosure; (iv) hazard insurance policies and primary
insurance policies, if any, and certain proceeds thereof; and (v) any
combination, as specified in the related Prospectus Supplement, of a letter of
credit, financial guaranty insurance policy, purchase obligation, mortgage pool
insurance policy, special hazard insurance policy, bankruptcy bond, reserve fund
or other type of Credit Enhancement as described under "Description of Credit
Enhancement." To the extent that any Trust Estate includes certificates of
interest or participations in Mortgage Loans, the related Prospectus Supplement
will describe the material terms and conditions of such certificates or
participations.
FORM OF SECURITIES
Unless otherwise specified in the related Prospectus Supplement, the
Securities of each series will be issued as physical certificates ("Physical
Certificates") in fully registered form only in the denominations specified in
the related Prospectus Supplement, and will be transferable and exchangeable at
the corporate trust office of the registrar
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of the Securities (the "Security Registrar") named in the related Prospectus
Supplement. No service charge will be made for any registration of exchange or
transfer of Securities, but the Trustee may require payment of a sum sufficient
to cover any tax or other governmental charge.
If so specified in the related Prospectus Supplement, specified classes
of a series of Securities will be issued in uncertificated book-entry form
("Book-Entry Securities"), and will be registered in the name of Cede, the
nominee of DTC. DTC is a limited purpose trust company organized under the laws
of the State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the Uniform Commercial Code ("UCC") and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
Securities Exchange Act of 1934, as amended. DTC was created to hold securities
for its participating organizations ("Participants") and facilitate the
clearance and settlement of securities transactions between Participants through
electronic book-entry changes in their accounts, thereby eliminating the need
for physical movement of certificates. Participants include securities brokers
and dealers, banks, trust companies and clearing corporations and may include
certain other organizations. Indirect access to the DTC system also is available
to others such as brokers, dealers, banks and trust companies that clear through
or maintain a custodial relationship with a Participant, either directly or
indirectly ("Indirect Participant").
Under a book-entry format, Securityholders that are not Participants or
Indirect Participants but desire to purchase, sell or otherwise transfer
ownership of Securities registered in the name of Cede, as nominee of DTC, may
do so only through Participants and Indirect Participants. In addition, such
Securityholders will receive all distributions of principal of and interest on
the Securities from the Trustee through DTC and its Participants. Under a
book-entry format, Securityholders will receive payments after the related
Payment Date because, while payments are required to be forwarded to Cede, as
nominee for DTC, on each such date, DTC will forward such payments to its
Participants, which thereafter will be required to forward such payments to
Indirect Participants or Securityholders. Unless and until Physical Securities
are issued, it is anticipated that the only Securityholder will be Cede, as
nominee of DTC, and that the beneficial holders of Securities will not be
recognized by the Trustee as Securityholders under the Pooling and Servicing
Agreement. The beneficial holders of such Securities will only be permitted to
exercise the rights of Securityholders under the Pooling and Servicing Agreement
indirectly through DTC and its Participants who in turn will exercise their
rights through DTC.
Under the rules, regulations and procedures creating and affecting DTC
and its operations, DTC is required to make book-entry transfers among
Participants on whose behalf it acts with respect to the Securities and is
required to receive and transmit payments of principal of and interest on the
Securities. Participants and Indirect Participants with which Securityholders
have accounts with respect to their Securities similarly are required to make
book-entry transfers and receive and transmit such payments on behalf of their
respective Securityholders. Accordingly, although Securityholders will not
possess Securities, the rules provide a mechanism by which Securityholders will
receive distributions and will be able to transfer their interests.
Unless and until Physical Certificates are issued, Securityholders who
are not Participants may transfer ownership of Securities only through
Participants by instructing such Participants to transfer Securities, by
book-entry transfer, through DTC for the account of the purchasers of such
Securities, which account is maintained with their respective Participants.
Under the Rules and in accordance with DTC's normal procedures, transfers of
ownership of Securities will be executed through DTC and the accounts of the
respective Participants at DTC will be debited and credited. Similarly, the
respective Participants will make debits or credits, as the case may be, on
their records on behalf of the selling and purchasing Securityholders.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a
Securityholder to pledge Securities to persons or entities that do not
participate in the DTC system, or otherwise take actions in respect of such
Securities may be limited due to the lack of a Physical Certificate for such
Securities.
DTC in general advises that it will take any action permitted to be
taken by a Securityholder under a Pooling and Servicing Agreement only at the
direction of one or more Participants to whose account with DTC the related
Securities are credited. Additionally, DTC in general advises that it will take
such actions with respect to specified percentages of the Securityholders only
at the direction of and on behalf of Participants whose holdings include current
principal amounts of outstanding Securities that satisfy such specified
percentages. DTC may take conflicting
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actions with respect to other current principal amounts of outstanding
Securities to the extent that such actions are taken on behalf of Participants
whose holdings include such current principal amounts of outstanding Securities.
Any Securities initially registered in the name of Cede, as nominee of
DTC, will be issued in fully registered, certificated form to Securityholders or
their nominees ("Physical Certificates"), rather than to DTC or its nominee only
under the events specified in the related Pooling and Servicing Agreement and
described in the related Prospectus Supplement. Upon the occurrence of any of
the events specified in the related Pooling and Servicing Agreement and the
Prospectus Supplement, DTC will be required to notify all Participants of the
availability through DTC of Physical Certificates. Upon surrender by DTC of the
securities representing the Securities and instruction for reregistration, the
Trustee will issue the Securities in the form of Physical Certificates, and
thereafter the Trustee will recognize the holders of such Physical Certificates
as Securityholders. Thereafter, payments of principal of and interest on the
Securities will be made by the Trustee directly to Securityholders in accordance
with the procedures set forth herein and in the Pooling and Servicing Agreement.
The final distribution of any Security (whether Physical Certificates or
Securities registered in the name of Cede), however, will be made only upon
presentation and surrender of such Securities on the final Payment Date at such
office or agency as is specified in the notice of final payment to
Securityholders.
None of the Company, the Originators, the Master Servicer or the
Trustee will have any liability for any actions taken by DTC or its nominee or
Cedel or Euroclear, including, without limitation, actions for any aspect of the
records relating to or payments made on account of beneficial ownership
interests in the Securities held by Cede, as nominee for DTC, or for
maintaining, supervising or reviewing any records relating to such beneficial
ownership interests.
ASSIGNMENT OF MORTGAGE LOANS
At the time of issuance of a series of Securities, the Sponsor will
cause the Mortgage Loans being included in the related Trust Estate to be
assigned to the Trustee together with, unless otherwise specified in the related
Prospectus Supplement, all payments and collections in respect of the Mortgage
Loans due, accrued or received, as described in the related Prospectus
Supplement on or after the related Cut-Off Date. If specified in the related
Prospectus Supplement, the Sponsor or any of its affiliates may retain the
Originator's Retained Yield, if any, for itself or transfer the same to others.
The Trustee will, concurrently with such assignment, deliver a series of
Securities to the Sponsor in exchange for the Mortgage Loans. Each Mortgage Loan
will be identified in a schedule appearing as an exhibit to the related Pooling
and Servicing Agreement. Such schedule will include, among other things,
information as to the principal balance of each Mortgage Loan as of the Cut-Off
Date, as well as information regarding the Mortgage Rate, the currently
scheduled monthly payment of principal and interest and the maturity of the
Mortgage Note.
In connection with the establishment of certain Trusts the Sponsor may
first transfer the related Trust Estate to the Transferor and the Transferor
will then transfer such Trust Estate to the related Trust. The use of the
Transferor will not affect the obligations of the Sponsor with respect to the
related Trust or the related Securities. If the Transferor is to be involved in
a particular offering the related Prospectus Supplement will describe its role
in such offering; for purposes of this Prospectus the role of the Transferor is
subsumed in the role of the Sponsor.
The related Prospectus Supplement will describe any applicable
requirements relating to the delivery of documents, such as the related Notes,
and the preparation and/or filing of transfer documentation, such as assignments
of Mortgage, in connection with the establishment of the related Trust. To the
extent that the ratings, if any, then assigned to the unsecured debt of the
Sponsor or of the Sponsor's ultimate corporate parent are satisfactory to the
Rating Agencies, all or any portion of such document delivery requirements
and/or transfer document preparation and filing requirements may be waived, all
as to be described in the related Prospectus Supplement.
A typical provision relating to document delivery requirements would
provide that the Sponsor deliver to the Trustee a file consisting of (i) the
original Notes or certified copies thereof, endorsed by the Originator thereof
in blank or to the order of the holder, (ii) originals of all intervening
assignments, showing a complete chain of title from origination to the
applicable Originators, if any, including warehousing assignments, with evidence
of recording thereon, (iii) originals of all assumption and modification
agreements, if any, and, unless such Mortgage Loan is covered by a counsel's
opinion as described in the next paragraph, (iv) either: (a) the original
Mortgage, with
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evidence of recording thereon, (b) a true and accurate copy of the Mortgage
where the original has been transmitted for recording, until such time as the
original is returned by the public recording office or (c) a copy of the
Mortgage certified by the public recording office in those instances where the
original recorded Mortgage has been lost. To the extent that such a file
containing all or a portion of such items has been delivered to the Trustee, the
Trustee will generally be required, for the benefit of the Securityholders, to
review each such file within a specified period, generally not exceeding 90
days, to ascertain that all required documents (or certified copies of
documents) have been executed and received.
A typical provision relating to the preparation and filing of transfer
documentation would require the Originators to cause to be prepared and
recorded, within a specified period, generally not exceeding 75 business days of
the execution and delivery of the applicable Pooling and Servicing Agreement
(or, if original recording information is unavailable, within such later period
as is permitted by the Pooling and Servicing Agreement) assignments of the
Mortgages from the Originators to the Trustee, in the appropriate jurisdictions
in which such recordation is necessary to perfect the lien thereof as against
creditors of or purchasers from the Originators, to the Trustee; provided,
however, that if the Originators furnish to the Trustee and to the Certificate
Insurer an opinion of counsel to the effect that no such recording is necessary
to perfect the Trustee's interests in the Mortgages with respect to any of the
jurisdictions in which the related Mortgaged Properties are located, then such
recording will not be required with respect to such jurisdictions or at the
election of the Certificate Insurer, any jurisdiction.
Unless otherwise specified in the related Prospectus Supplement, if any
such document is found to be missing or defective in any material respect, the
Trustee (or such custodian) shall promptly so notify the Sponsor, which shall
notify the related Sub-Servicer or Originator, as the case may be. If the
Sub-Servicer or Originator does not cure the omission or defect within a
specified period, generally not exceeding 60 days after notice is given to the
Sponsor, the Sub-Servicer or Originator, as the case may be, will be obligated
to purchase on the next succeeding Remittance Date the related Mortgage Loan
from the Trustee at its Loan Purchase Price (or, if specified in the related
Prospectus Supplement, will be permitted to substitute for such Mortgage Loan
under the conditions specified in the related Prospectus Supplement). The Master
Servicer will be obligated to enforce this obligation of the Sub-Servicer or
Originator, as the case may be, to the extent described above under "Mortgage
Loan Program--Representations by Originators." Unless otherwise specified in the
related Prospectus Supplement, neither the Master Servicer nor the Sponsor will,
however, be obligated to purchase or substitute for such Mortgage Loan if the
Sub-Servicer or Originator, as the case may be, defaults on its obligation to do
so, and there can be no assurance that a Sub-Servicer or Originator, as the case
may be, will carry out any such obligation. Unless otherwise specified in the
related Prospectus Supplement, such purchase obligation constitutes the sole
remedy available to the Securityholders or the Trustee for omission of, or a
material defect in, a constituent document.
The Trustee will be authorized at any time 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 the agent of the
Trustee. The identity of any such custodian to be appointed on the date of
initial issuance of the Securities will be set forth in the related Prospectus
Supplement.
Pursuant to each Pooling and Servicing Agreement, the Master Servicer,
either directly or through Sub-Servicers, will service and administer the
Mortgage Loans assigned to the Trustee as more fully set forth below.
FORWARD COMMITMENTS; PRE-FUNDING
A Trust may enter into an agreement (each, a "Forward Purchase
Agreement") with the Sponsor whereby the Sponsor will agree to transfer
additional Mortgage Loans to such Trust following the date on which such Trust
is established and the related Securities are issued. The Trust may enter into
Forward Purchase Agreements to permit the acquisition of additional Mortgage
Loans (the "Subsequent Mortgage Loans") that could not be delivered by the
Sponsor or have not formally completed the origination process, in each case
prior to the date on which the Securities are delivered to the Securityholders
(the "Closing Date"). Any Forward Purchase Agreement will require that any
Mortgage Loans so transferred to a Trust conform to the requirements specified
in such Forward Purchase Agreement. In addition, the Forward Purchase Agreement
states that the Depositor shall only transfer the Subsequent Mortgage Loans upon
the satisfaction of certain conditions including that the Depositor shall have
delivered to the Certificate Insurer, the Rating Agencies and the Trustee
opinions of counsel (including bankruptcy, corporate and tax opinions) with
respect to the transfer of the Subsequent Mortgage Loans.
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If a Forward Purchase Agreement is to be utilized, and unless otherwise
specified in the related Prospectus Supplement, the related Trustee will be
required to deposit in a segregated account (each, a "Pre-Funding Account") up
to 100% of the net proceeds received by the Trustee in connection with the sale
of one or more classes of Securities of the related series; the additional
Mortgage Loans will be transferred to the related Trust in exchange for money
released to the Sponsor from the related Pre-Funding Account. Each Forward
Purchase Agreement will set a specified period (the "Funding Period") during
which any such transfers must occur; for a Trust which elects federal income
treatment as a REMIC or as a grantor trust, the related Funding Period will be
limited to three months from the date such Trust is established; for a Trust
which is treated as a mere security device for federal income tax purposes, the
related Funding Period will be limited to nine months from the date such Trust
is established. The Forward Purchase Agreement or the related Pooling and
Servicing Agreement will require that, if all monies originally deposited to
such Pre-Funding Account are not so used by the end of the related Funding
Period, then any remaining monies will be applied as a mandatory prepayment of
the related class or classes of Securities as specified in the related
Prospectus Supplement.
During the Funding Period, the monies deposited to the Pre-Funding
Account will either (i) be held uninvested or (ii) will be invested in
cash-equivalent investments that are rated in one of the four highest rating
categories by at least one nationally recognized statistical rating organization
and that will either mature prior to the end of the Funding Period, or will be
drawable on demand and in any event, will not constitute the type of investment
that would require registration of the related Trust as an "investment company"
under the Investment Company Act of 1940, as amended. On payment dates that
occur during the Funding Period, the Trustee will transfer any earnings on the
monies in the Pre-Funding Account to the Certificate Account for distribution to
the Certificateholders.
The Pre-Funding Account will be maintained by the Trustee, which must
be a bank having combined capital and surplus, generally, of at least
$100,000,000, long-term, unsecured debt rated at least investment grade and a
long-term deposit rating of at least investment grade.
PAYMENTS ON MORTGAGE LOANS; DEPOSITS TO DISTRIBUTION ACCOUNT
Each Sub-Servicer servicing a Mortgage Loan pursuant to a Sub-Servicing
Agreement will establish and maintain an account (the "Sub-Servicing Account")
which generally meets the requirements set forth in the Sponsor's Originator
Guide from time to time, and is otherwise acceptable to the Master Servicer. A
Sub-Servicing Account must be established with a Federal Home Loan Bank or with
a depository institution (including the Sub-Servicer itself) whose accounts are
insured by the National Credit Union Share Insurance Fund or the FDIC, provided
that any such depository institution must meet certain minimum rating criteria
set forth in the Sponsor's Originator Guide. Except as otherwise permitted by
the applicable Rating Agencies, a Sub-Servicing Account must be segregated and
may not be established as a general ledger account.
A Sub-Servicer is required to deposit into its Sub-Servicing Account on
a daily basis all amounts described above under "Mortgage Loan
Program--Sub-Servicing by Originators" that are received by it in respect of the
Mortgage Loans, less its servicing or other compensation. On or before the date
specified in the Sub-Servicing Agreement (which date may be no later than the
business day prior to the Determination Date referred to below or, if such day
is not a business day, the preceding business day), the Sub-Servicer must remit
or cause to be remitted to the Master Servicer all funds held in the
Sub-Servicing Account with respect to Mortgage Loans that are required to be so
remitted. A Sub-Servicer may also be required to make such Servicing Advances
and Delinquency Advances and to pay Compensating Interest as set forth in the
related Sub-Servicing Agreement.
The Master Servicer will deposit or will cause to be deposited into the
Principal and Interest Account on a daily basis certain payments and collections
due and accrued on or after the Cut-Off Date or received and accrued on or
after the Cut-Off Date, as described in the related Prospectus Supplement and,
as specifically set forth in the related Pooling and Servicing Agreement, such
as the following except as otherwise provided therein:
(i) all payments on account of principal, including principal
payments received in advance of the date on which the related monthly
payment is due (the "Due Date") ("Principal Prepayments"), on the
Mortgage Loans comprising a Trust Estate;
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(ii) all payments on account of interest on the Mortgage Loans
comprising such Trust Estate, net of the portion of each payment
thereof retained by the Sub-Servicer, if any, as its servicing or other
compensation;
(iii) all amounts received and retained, if any, in connection
with the liquidation of any defaulted Mortgage Loan, by foreclosure,
deed in lieu of foreclosure or otherwise ("Liquidation Proceeds"),
including all proceeds of any special hazard insurance policy,
bankruptcy bond, mortgage pool insurance policy, financial guaranty
insurance policy and any title, hazard or other insurance policy
covering any Mortgage Loan in such Mortgage Pool (together with any
payments under any letter of credit, "Insurance Proceeds") or proceeds
from any alternative arrangements established in lieu of any such
insurance and described in the applicable Prospectus Supplement, other
than proceeds to be applied to the restoration of the related property
or released to the Mortgagor in accordance with the Master Servicer's
normal servicing procedures (such amounts, net of related unreimbursed
liquidation expenses and insured expenses incurred and unreimbursed
advances of the Master Servicer or by the related Sub-Servicer, "Net
Liquidation Proceeds");
(iv) any Buydown Funds (and, if applicable, investment
earnings thereon) required to be paid to Securityholders, as described
below;
(v) all proceeds of any Mortgage Loan in such Trust Estate
purchased (or, in the case of a substitution, certain amounts
representing a principal adjustment) by the Master Servicer, the
Sponsor, any Sub-Servicer or Originator or any other person pursuant to
the terms of the Pooling and Servicing Agreement. See "Mortgage Loan
Program--Representations by Originators," "--Assignment of Mortgage
Loans" above;
(vi) any amounts required to be deposited by the Master Servicer
in connection with losses realized on investments of funds held in the
Principal and Interest Account, as described below;
(vii) any amounts required to be deposited in connection with
the liquidation of the related Trust; and
(viii) any amounts required to be transferred from the
Distribution Account to the Principal and Interest Account.
In addition to the Principal and Interest Account, the Sponsor shall
cause to be established and the Trustee will maintain, at the corporate trust
office of the Trustee, in the name of the Trust for the benefit of the holders
of each series of Securities, an account for the disbursement of payments on the
Mortgage Loans evidenced by each series of Securities (the "Distribution
Account"). The Principal and Interest Account and the Distribution Account each
must be maintained with a Designated Depository Institution. A "Designated
Depository Institution" is an institution whose deposits are insured by the Bank
Insurance Fund or the Savings Association Insurance Fund of the FDIC, the
long-term deposits of which have a rating satisfactory to the Rating Agencies
and the related Credit Enhancer, if any, and which is any of the following: (i)
a federal savings and loan association duly organized, validly existing and in
good standing under the federal banking laws, (ii) an institution duly
organized, validly existing and in good standing under the applicable banking
laws of any state, (iii) a national banking association duly organized, validly
existing and in good standing under the federal banking laws, (iv) a principal
subsidiary of a bank holding company, or (v) approved in writing by the related
Credit Enhancer, if any, each Rating Agency and, in each case acting or
designated by the Master Servicer as the depository institution for the
Principal and Interest Account; provided, however, that any such institution or
association will generally be required to have combined capital, surplus and
undivided profits of at least $50,000,000. Notwithstanding the foregoing, the
Principal and Interest Account may be held by an institution otherwise meeting
the preceding requirements except that the only applicable rating requirement
shall be that the unsecured and uncollateralized debt obligations thereof shall
be rated at a level satisfactory to one or more Rating Agencies if such
institution has trust powers and the Principal and Interest Account is held by
such institution in its trust capacity and not in its commercial capacity. The
Distribution Account, the Principal and Interest Account and other accounts
described in the related Prospectus Supplement are collectively referred to as
"Accounts." All funds in the Distribution Account shall be invested and
reinvested by the Trustee for the benefit of the Securityholders and the related
Credit Enhancer, if any, as directed by the Master Servicer, in
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certain defined obligations set forth in the related Pooling and Servicing
Agreement ("Eligible Investments"). The Principal and Interest Account may
contain funds relating to more than one series of Securities as well as payments
received on other mortgage loans serviced or master serviced by it that have
been deposited into the Principal and Interest Account. All funds in the
Principal and Interest Account will be required to be held (i) uninvested, up to
limits insured by the FDIC or (ii) invested in Eligible Investments. The Master
Servicer will be entitled to any interest or other income or gain realized with
respect to the funds on deposit in the Principal and Interest Account.
To the extent that the ratings, if any, then assigned to the unsecured
debt of the Master Servicer or of the Master Servicer's corporate parent and
satisfactory to the Rating Agencies, the Master Servicer may be permitted to
co-mingle Mortgage Loan payments and collections with the Master Servicer's
general funds rather than required to deposit such amounts into a segregated
Principal and Interest Account.
Unless otherwise specified in the related Prospectus Supplement, on the
day seven days preceding each Payment Date (the "Remittance Date"), the Master
Servicer will withdraw from the Principal and Interest Account and remit to the
Trustee for deposit in the applicable Distribution Account, in immediately
available funds, the amount to be distributed therefrom to Securityholders on
such Payment Date. The Master Servicer will remit to the Trustee for deposit
into the Distribution Account the amount of any advances made by the Master
Servicer as described herein under "--Advances," any amounts required to be
transferred to the Distribution Account from a Reserve Fund, as described under
"Credit Enhancement" below, any amounts required to be paid by the Master
Servicer out of its own funds due to the operation of a deductible clause in any
blanket policy maintained by the Master Servicer to cover hazard losses on the
Mortgage Loans as described under "Hazard Insurance; Claims Thereunder--Hazard
Insurance Policies" below and any other amounts as specifically set forth in the
related Pooling and Servicing Agreement. The Trustee will cause all payments
received by it from any Credit Enhancer to be deposited in the Distribution
Account not later than the related Payment Date.
Unless otherwise specified in the related Prospectus Supplement, the
portion of any payment received by the Master Servicer in respect of a Mortgage
Loan that is allocable to the Originator's Retained Yield generally will not be
deposited into the Principal and Interest Account, but will not be paid over to
the parties entitled thereto as provided in the related Pooling and Servicing
Agreement.
Funds on deposit in the Principal and Interest Account attributable to
Mortgage Loans underlying a series of Securities may be invested in Eligible
Investments maturing in general not later than the business day preceding the
next Payment Date. Unless otherwise specified in the related Prospectus
Supplement, all income and gain realized from any such investment will be for
the account of the Master Servicer. Funds on deposit in the related Distribution
Account may be invested in Eligible Investments maturing, in general, no later
than the business day preceding the next Payment Date.
With respect to each Buydown Mortgage Loan, the Sub-Servicer will
deposit the related Buydown Funds provided to it in a Buydown Account that will
comply with the requirements set forth herein with respect to a Sub-Servicing
Account. Unless otherwise specified in the related Prospectus Supplement, the
terms of all Buydown Mortgage Loans provide for the contribution of Buydown
Funds in an amount equal to or exceeding either (i) the total payments to be
made from such funds pursuant to the related buydown plan or (ii) if such
Buydown Funds are to be deposited on a discounted basis, that amount of Buydown
Funds which, together with investment earnings thereon at a rate as set forth in
the Sponsor's Originator Guide from time to time, will support the scheduled
level of payments due under the Buydown Mortgage Loan. Neither the Master
Servicer nor the Sponsor will be obligated to add to any such discounted Buydown
Funds any of its own funds should investment earnings prove insufficient to
maintain the scheduled level of payments. To the extent that any such
insufficiency is not recoverable from the Mortgagor or, in an appropriate case,
from the related Originator or the related Sub-Servicer, distributions to
Securityholders may be affected. With respect to each Buydown Mortgage Loan, the
Sub-Servicer will withdraw from the Buydown Account and remit to the Master
Servicer on or before the date specified in the Sub-Servicing Agreement
described above the amount, if any, of the Buydown Funds (and, if applicable,
investment earnings thereon) for each Buydown Mortgage Loan that, when added to
the amount due from the Mortgagor on such Buydown Mortgage Loan, equals the full
monthly payment which would be due on the Buydown Mortgage Loan if it were not
subject to the buydown plan.
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If the Mortgagor on a Buydown Mortgage Loan prepays such Mortgage Loan
in its entirety during the Buydown Period, the Sub-Servicer will withdraw from
the Buydown Account and remit to the Mortgagor or such other designated party in
accordance with the related buydown plan any Buydown Funds remaining in the
Buydown Account. If a prepayment by a Mortgagor during the Buydown Period
together with Buydown Funds will result in full prepayment of a Buydown Mortgage
Loan, the Sub-Servicer will generally be required to withdraw from the Buydown
Account and remit to the Master Servicer the Buydown Funds and investment
earnings thereon, if any, which together with such prepayment will result in a
prepayment in full; provided that Buydown Funds may not be available to cover a
prepayment under certain Mortgage Loan programs. Any Buydown Funds so remitted
to the Master Servicer in connection with a prepayment described in the
preceding sentence will be deemed to reduce the amount that would be required to
be paid by the Mortgagor to repay fully the related Mortgage Loan if the
Mortgage Loan were not subject to the buydown plan. Any investment earnings
remaining in the Buydown Account after prepayment or after termination of the
Buydown Period will be remitted to the related Mortgagor or such other
designated party pursuant to the agreement relating to each Buydown Mortgage
Loan (the "Buydown Agreement"). If the Mortgagor defaults during the Buydown
Period with respect to a Buydown Mortgage Loan and the property securing such
Buydown Mortgage Loan is sold in liquidation (either by the Master Servicer, the
Primary Insurer, the insurer under the mortgage pool insurance policy (the "Pool
Insurer") or any other insurer), the Sub-Servicer will be required to withdraw
from the Buydown Account the Buydown Funds and all investment earnings thereon,
if any, and remit the same to the Master Servicer or, if instructed by the
Master Servicer, pay the same to the primary insurer or the Pool Insurer, as the
case may be, if the Mortgaged Property is transferred to such insurer and such
insurer pays all of the loss incurred in respect of such default.
WITHDRAWALS FROM THE PRINCIPAL AND INTEREST ACCOUNT
The Master Servicer may, from time to time, make withdrawals from the
Principal and Interest Account for certain purposes, as specifically set forth
in the related Pooling and Servicing Agreement, which generally will include the
following except as otherwise provided therein:
(i) to effect the timely remittance to the Trustee for deposit
to the Distribution Account in the amounts and in the manner provided
in the Pooling and Servicing Agreement and described in "--Payments on
Mortgage Loans; Deposits to Distribution Account" above;
(ii) to reimburse itself or any Sub-Servicer for any accrued and
unpaid Servicing Fees and for Delinquency Advances and Servicing
Advances as to any Mortgaged Property, out of late payments or
collections on the related Mortgage Loan, including Liquidation
Proceeds, Insurance Proceeds and such other amounts as may be collected
by the Master Servicer from the related Mortgagor or otherwise relating
to the Mortgage Loan with respect to which such Delinquency Advances or
Servicing Advances were made;
(iii) to reimburse itself for any Delinquency Advances or
Servicing Advances determined in good faith to have become
Non-Recoverable Advances, such reimbursement to be made from any funds
in the Principal and Interest Account;
(iv) to withdraw investment earnings on amounts on deposit in
the Principal and Interest Account;
(v) to pay the Sponsor or its assignee all amounts allocable to
the Originator's Retained Yield out of collections or payments which
represent interest on each Mortgage Loan (including any Mortgage Loan
as to which title to the underlying Mortgaged Property was acquired);
(vi) to withdraw amounts that have been deposited in the
Principal and Interest Account in error;
(vii) to clear and terminate the Principal and Interest Account in
connection with the termination of the Trust Estate pursuant to the
Pooling and Servicing Agreement, as described in "The Pooling and
Servicing Agreement--Termination, Retirement of Securities"; and
(viii) to invest in Eligible Investments.
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DISTRIBUTIONS
Beginning on the Payment Date in the month following the month (or, in
the case of quarterly-pay Securities, the third month following such month and
each third month thereafter or, in the case of semi-annually-pay Securities, the
sixth month following such month and each sixth month thereafter) in which the
Cut-Off Date occurs (or such other date as may be set forth in the related
Prospectus Supplement) for a series of Securities, distributions of principal
and interest (or, where applicable, of principal only or interest only) on each
class of Securities entitled thereto will be made either by the Trustee or a
paying agent appointed by the Trustee (the "Paying Agent"), to the persons who
are registered as Securityholders at the close of business on the Record Date in
proportion to their respective Percentage Interests. Unless otherwise specified
in the related Prospectus Supplement, interest that accrues and is not payable
on a class of Securities will be added to the principal balance of each Security
of such class in proportion to its Percentage Interest. The undivided percentage
interest (the "Percentage Interest") represented by a Security of a particular
class will be equal to the percentage obtained by dividing the initial principal
balance or notional amount of such Security by the aggregate initial amount or
notional balance of all the Securities of such class. Distributions will be made
in immediately available funds (by wire transfer or otherwise) to the account of
a Securityholder at a bank or other entity having appropriate facilities
therefor, if such Securityholder has so notified the Trustee or the Paying
Agent, as the case may be, and the applicable Pooling and Servicing Agreement
provides for such form of payment, or by check mailed to the address of the
person entitled thereto as it appears on the Security Register; provided,
however, that the final distribution in retirement of the Securities (other than
any Book-Entry Securities) will be made only upon presentation and surrender of
the Securities at the office or agency of the Trustee specified in the notice to
Securityholders of such final distribution.
PRINCIPAL AND INTEREST ON THE SECURITIES
The method of determining, and the amount of, distributions of
principal and interest (or, where applicable, of principal only or interest
only) on a particular series of Securities will be described in the related
Prospectus Supplement. Each class of Securities (other than certain classes of
Strip Securities) may bear interest at a different interest rate (the
"Pass-Through Rate"), which may be a fixed or adjustable Pass-Through Rate. The
related Prospectus Supplement will specify the Pass-Through Rate for each class,
or in the case of an adjustable Pass-Through Rate, the initial Pass-Through Rate
and the method for determining the Pass-Through Rate. Unless otherwise specified
in the related Prospectus Supplement, interest on the Securities will be
calculated on the basis of a 360-day year consisting of twelve 30-day months.
On each Payment Date for a series of Securities, the Trustee will
distribute or cause the Paying Agent to distribute, as the case may be, to each
holder of record on the Record Date of a class of Securities, an amount equal to
the Percentage Interest represented by the Security held by such holder
multiplied by such class' Distribution Amount. The Distribution Amount for a
class of Securities for any Payment Date will be the portion, if any, of the
principal distribution amount (as defined in the related Prospectus Supplement)
allocable to such class for such Payment Date, as described in the related
Prospectus Supplement, plus, if such class is entitled to payments of interest
on such Payment Date, the interest accrued at the applicable Pass-Through Rate
on the principal balance or notional amount of such class, as specified in the
applicable Prospectus Supplement, less (unless otherwise specified in the
Prospectus Supplement) the amount of any Deferred Interest added to the
principal balance of the Mortgage Loans and/or the outstanding balance of one or
more classes of Securities on the related Due Date and any other interest
shortfalls allocable to Securityholders which are not covered by advances or the
applicable Credit Enhancement, in each case in such amount that is allocated to
such class on the basis set forth in the Prospectus Supplement.
As may be described in the related Prospectus Supplement, the related
Pooling and Servicing Agreement may provide that all or a portion of the
principal collected on or with respect to the related Mortgage Loans may be
applied by the related Trustee to the acquisition of additional Mortgage Loans
during a specified period (rather than used to fund payments of principal to
Securityholders during such period) with the result that the related securities
will possess an interest-only period, also commonly referred to as a revolving
period, which will be followed by an amortization period. Any such interest-only
or revolving period may, upon the occurrence of certain events to be described
in the related Prospectus Supplement, terminate prior to the end of the
specified period and result in the earlier than expected amortization of the
related Securities.
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In addition, and as may be described in the related Prospectus
Supplement, the related Pooling and Servicing Agreement may provide that all or
a portion of such collected principal may be retained by the Trustee (and held
in certain temporary investments, including Mortgage Loans) for a specified
period prior to being used to fund payments of principal to Securityholders.
In the case of a series of Securities that includes two or more classes
of Securities, the timing, sequential order, priority of payment or amount of
distributions in respect of principal, and any schedule or formula or other
provisions applicable to the determination thereof (including distributions
among multiple classes of Senior Securities or Subordinate Securities) of each
such class shall be as provided in the related Prospectus Supplement.
Distributions in respect of principal of any class of Securities will be made on
a pro rata basis among all of the Securities of such class.
Except as otherwise provided in the related Pooling and Servicing
Agreement, on or prior to the third business day next preceding the Payment Date
(or such earlier day as shall be agreed by the related Credit Enhancer, if any,
and the Trustee) of the month of distribution (the "Determination Date"), the
Trustee will determine the amounts of principal and interest which will be
passed through to Securityholders on the immediately succeeding Payment Date. If
the amount in the Distribution Account is insufficient to cover the amount to be
passed through to Securityholders, the Trustee will be required to notify the
related Credit Enhancer, if any, pursuant to the related Pooling and Servicing
Agreement for the purpose of funding such deficiency.
ADVANCES
Unless otherwise specified in the related Prospectus Supplement, each
Servicer will be required, not later than each Remittance Date, to deposit into
the Principal and Interest Account an amount equal to the sum of the interest
portions (net of the Servicing Fees and the Originators' Retained Yield) due,
but not collected, with respect to delinquent Mortgage Loans directly serviced
by such Servicer during the prior Remittance Period, but only if, in its good
faith business judgment, such Servicer believes that such amount will ultimately
be recovered from the related Mortgage Loan. As may be described in the related
Prospectus Supplement, such Servicer may also be required so to advance
delinquent payments of principal. Any such amounts so advanced are "Delinquency
Advances". The Master Servicer will be permitted to fund its payment of
Delinquency Advances on any Remittance Date from collections on any Mortgage
Loan deposited to the Principal and Interest Account subsequent to the related
Remittance Period, and will be required to deposit into the Principal and
Interest Account with respect thereto (i) collections from the Mortgagor whose
delinquency gave rise to the shortfall which resulted in such Delinquency
Advance and (ii) Net Liquidation Proceeds recovered on account of the related
Mortgage Loan to the extent of the amount of aggregate Delinquency Advances
related thereto. A Sub-Servicer will be permitted to fund its payment of
Delinquency Advances as set forth in the related Sub-Servicing Agreement.
A Mortgage Loan is "delinquent" if any payment due thereon is not made
by the close of business on the day such payment is scheduled to be due plus
any applicable grace period.
Unless otherwise specified in the related Prospectus Supplement, on or
prior to each Remittance Date, each Servicer will be required to deposit in the
Principal and Interest Account with respect to any full prepayment received on a
Mortgage Loan directly serviced by such Servicer during the related Remittance
Period out of its own funds without any right of reimbursement therefor, an
amount equal to the difference between (x) 30 days' interest at the Mortgage
Loan's Mortgage Rate (less the related Base Servicing Fees and the Originators'
Retained Yield, if any) on the principal balance of such Mortgage Loan as of the
first day of the related Remittance Period and (y) to the extent not previously
advanced, the interest (less the Servicing Fee and the Originators' Retained
Yield, if any) paid by the Mortgagor with respect to the Mortgage Loan during
such Remittance Period (any such amount paid by such Servicer, "Compensating
Interest"). No Servicer shall be required to pay Compensating Interest with
respect to any Remittance Period in an amount in excess of the aggregate related
Base Servicing Fees received by such Servicer with respect to all Mortgage Loans
directly serviced by such Servicer for such Remittance Period.
Each Servicer will be required to pay all "out of pocket" costs and
expenses incurred in the performance of its servicing obligations, but only to
the extent that such Servicer reasonably believes that such amounts will
increase Net Liquidation Proceeds on the related Mortgage Loan. Each such amount
so paid will constitute a "Servicing Advance". Such Servicer may recover
Servicing Advances to the extent permitted by the Mortgage Loans
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or, if not theretofore recovered from the Mortgagor on whose behalf such
Servicing Advance was made, from Liquidation Proceeds realized upon the
liquidation of the related Mortgage Loan or, in certain cases, from excess cash
flow otherwise payable to the holders of the related Equity Securities or prior
to any distributions being made to the related Securityholders.
Notwithstanding the foregoing, if the Master Servicer exercises its
option, if any, to purchase the assets of a Trust Estate as described under "The
Pooling and Servicing Agreement--Termination; Retirement of Securities" below,
the Master Servicer will net from the purchase price of such amounts for all
related advances previously made by it and not theretofore reimbursed to it. The
Master Servicer's obligation to make advances may be supported by Credit
Enhancement as described in the related Pooling and Servicing Agreement. In the
event that the provider of such support is downgraded by a Rating Agency rating
the related Securities or if the collateral supporting such obligation is not
performing or is removed pursuant to the terms of any agreement described in the
related Prospectus Supplement, the Securities may also be downgraded.
REPORTS TO SECURITYHOLDERS
With each distribution to Securityholders of a particular class the
Trustee will forward or cause to be forwarded to each holder of record of such
class of Securities a statement or statements with respect to the related Trust
setting forth the information specifically described in the related Pooling and
Servicing Agreement, which generally will include the following as applicable
except as otherwise provided therein:
(i) the amount of the distribution with respect to each class
of Securities;
(ii) the amount of such distribution allocable to principal,
separately identifying the aggregate amount of any prepayments or other
recoveries of principal included therein;
(iii) the amount of such distribution allocable to interest;
(iv) the aggregate unpaid Principal Balance of the Mortgage
Loans after giving effect to the distribution of principal on such
Payment Date;
(v) with respect to a series consisting of two or more
classes, the outstanding principal balance or notional amount of each
class after giving effect to the distribution of principal on such
Payment Date;
(vi) the amount of coverage under any letter of credit,
mortgage pool insurance policy or other form of Credit Enhancement
covering default risk as of the close of business on the applicable
Determination Date and a description of any Credit Enhancement
substituted therefor;
(vii) information furnished by the Sponsor pursuant to section
6049(d)(7)(C) of the Code and the regulations promulgated thereunder to
assist Securityholders in computing their market discount;
(viii) the total of any Substitution Amounts and any Loan
Purchase Price amounts included in such distribution; and
(ix) a number with respect to each class (the "Pool Factor")
computed by dividing the principal balance of all Securities in such
class (after giving effect to any distribution of principal to be made
on such Payment Date) by the original principal balance of the
Securities of such class on the Closing Date.
Items (i) through (iii) above shall, with respect to each class of
Securities, be presented on the basis of a certificate having a $1,000
denomination. In addition, by January 31 of each calendar year during which
Securities are outstanding, the Trustee shall furnish a report to each
Securityholder at any time during each calendar year as to the aggregate amounts
reported pursuant to (i), (ii) and (iii) with respect to the Securities for such
calendar year. If a class of Securities are in book-entry form, DTC will supply
such reports to the Securityholders in accordance with its procedures.
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In addition, on each Payment Date the Trustee will forward or cause to
be forwarded additional information, as of the close of business on the last day
of the prior calendar month, as more specifically described in the related
Pooling and Servicing Agreement, which generally will include the following as
applicable except as otherwise provided therein:
(i) the total number of Mortgage Loans and the aggregate
principal balances thereof, together with the number, percentage (based
on the then-outstanding principal balances) and aggregate principal
balances of Mortgage Loans (a) 30-59 days delinquent, (b) 60-89 days
delinquent and (c) 90 or more days delinquent;
(ii) the number, percentage (based on the then-outstanding
principal balances), aggregate Mortgage Loan balances and status of all
Mortgage Loans in foreclosure proceedings (and whether any such
Mortgage Loans are also included in any of the statistics described in
the foregoing clause (i));
(iii) the number, percentage (based on the then-outstanding
principal balances) and aggregate Mortgage Loan balances of all
Mortgage Loans relating to Mortgagors in bankruptcy proceedings (and
whether any such Mortgage Loans are also included in any of the
statistics described in the foregoing clause (i));
(iv) the number, percentage (based on the then-outstanding
principal balances) and aggregate Mortgage Loan balances of all
Mortgage Loans relating to the status of any Mortgaged Properties as to
which title has been taken in the name of, or on behalf of the Trustee
(and whether any such Mortgage Loans are also included in any of the
statistics described in the foregoing clause (i)); and
(v) the book value of any real estate acquired through
foreclosure or grant of a deed in lieu of foreclosure.
COLLECTION AND OTHER SERVICING PROCEDURES
Acting directly or through one or more Sub-Servicers as provided in the
related Pooling and Servicing Agreement, the Master Servicer, is required to
service and administer the Mortgage Loans in accordance with the Pooling and
Servicing Agreement and with reasonable care, and using that degree of skill and
attention that the Master Servicer exercises with respect to comparable mortgage
loans that it services for itself or others.
The duties of the Master Servicer include collecting and posting of all
payments, responding to inquiries of Mortgagors or by federal, state or local
government authorities with respect to the Mortgage Loans, investigating
delinquencies, reporting tax information to Mortgagors in accordance with its
customary practices and accounting for collections and furnishing monthly and
annual statements to the Trustee with respect to distributions and making
Delinquency Advances and Servicing Advances to the extent described in the
related Pooling and Servicing Agreement. The Master Servicer is required to
follow its customary standards, policies and procedures in performing its duties
as Master Servicer.
The Master Servicer (i) is authorized and empowered to execute and
deliver, on behalf of itself, the Securityholders and the Trustee or any of
them, 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 related Mortgaged Properties; (ii)
may consent to any modification of the terms of any Note not expressly
prohibited by the Pooling and Servicing Agreement if the effect of any such
modification (x) will not materially and adversely affect the security afforded
by the related Mortgaged Property or the timing of receipt of any payments
required thereunder (in each case other than as permitted by the related Pooling
and Servicing Agreement); and (y) will not cause a Trust which is a REMIC to
fail to qualify as a REMIC.
The related Pooling and Servicing Agreement will require the Master
Servicer to follow such collection procedures as it follows from time to time
with respect to mortgage loans in its servicing portfolio that are comparable to
the Mortgage Loans; provided that the Master Servicer is required always at
least to follow collection procedures that are consistent with or better than
standard industry practices. The Master Servicer may in its discretion (i) waive
any assumption fees, late payment charges, charges for checks returned for
insufficient funds,
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prepayment fees, if any, or the fees which may be collected in the ordinary
course of servicing the Mortgage Loans, (ii) if a Mortgagor is in default or
about to be in default because of a Mortgagor's financial condition, arrange
with the Mortgagor a schedule for the payment of delinquent payments due on the
related Mortgage Loan; provided, however, the Master Servicer shall generally
not be permitted to reschedule the payment of delinquent payments more than one
time in any twelve consecutive months with respect to any Mortgagor or (iii)
modify payments of monthly principal and interest on any Mortgage Loan becoming
subject to the terms of the Relief Act in accordance with the Master Servicer's
general policies of the comparable mortgage loans subject to such Relief Act.
When a Mortgaged Property (other than Mortgaged Property subject to an
ARM Loan) has been or is about to be conveyed by the Mortgagor, the Master
Servicer will be required, to the extent it has knowledge of such conveyance or
prospective conveyance, to exercise its rights to accelerate the maturity of the
related Mortgage Loan under any "due-on-sale" clause contained in the related
Mortgage or Note; provided, however, that the Master Servicer will not be
required to exercise any such right if (i) the "due-on-sale" clause, in the
reasonable belief of the Master Servicer, is not enforceable under applicable
law or (ii) the Master Servicer reasonably believes that to permit an assumption
of the Mortgage Loan would not materially and adversely affect the interests of
Securityholders or the related Credit Enhancer or jeopardize coverage under any
primary insurance policy or applicable Credit Enhancement arrangements. In such
event, the Master Servicer will be required to enter into an assumption and
modification agreement with the person to whom such Mortgaged Property has been
or is about to be conveyed, pursuant to which such person becomes liable under
the Mortgage Note and, unless prohibited by applicable law or the related
documents, the Mortgagor remains liable thereon. If the foregoing is not
permitted under applicable law, the Master Servicer will be authorized 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 assumed loan must
conform in all respects to the requirements, representations and warranties of
the Pooling and Servicing Agreement.
An ARM Loan may be assumed if such ARM Loan is by its terms assumable
and if, in the reasonable judgment of the Master Servicer or the Sub-Servicer,
the proposed transferee of the related Mortgaged Property establishes its
ability to repay the loan and the security for such ARM Loan would not be
impaired by the assumption. If a Mortgagor transfers the Mortgaged Property
subject to an ARM Loan without consent, such ARM Loan may be declared due and
payable. Any fee collected by the Master Servicer or Sub-Servicer for entering
into an assumption or substitution of liability agreement will be retained by
the Master Servicer or Sub-Servicer as additional servicing compensation unless
otherwise set forth in the related Prospectus Supplement. See "Certain Legal
Aspects of Mortgage Loans and Related Matters--Enforceability of Certain
Provisions" herein.
The Master Servicer will have the right under the Pooling and Servicing
Agreement to approve applications of Mortgagors seeking consent for (i) partial
releases of Mortgages, (ii) alterations and (iii) removal, demolition or
division of Mortgaged Properties. No application for consent may be approved by
the Master Servicer unless: (i) the provisions of the related Mortgage Note and
Mortgage have been complied with; (ii) the credit profile of the related
Mortgage Loan after any release is consistent with the Sponsor's Originator
Guide then applicable to such Mortgage Loan; and (iii) the lien priority of the
related Mortgage is not reduced.
REALIZATION UPON DEFAULTED MORTGAGE LOANS
The Master Servicer shall foreclose upon or otherwise comparably effect
the ownership 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 the related
Pooling and Servicing Agreement (such Mortgage Loans, "REO Property"). In
connection with such foreclosure or other conversion, the Master Servicer shall
exercise such of the rights and powers vested in it, and use the same degree of
care and skill in their exercise or use, as prudent mortgage lenders would
exercise or use under the circumstances in the conduct of their own affairs,
including, but not limited to, making Servicing Advances for the payment of
taxes, amounts due with respect to Senior Liens, and insurance premiums. Unless
otherwise provided in the related Prospectus Supplement, the Master Servicer
shall sell any REO Property within 23 months of its acquisition by the Trust.
The Pooling and Servicing Agreements generally will permit the Master Servicer
to cease further collection and foreclosure activity if the Master Servicer
reasonably determines that such further activity would not increase collections
or recoveries to be received by the related Trust with respect to the related
Mortgage Loan. In addition, any required advancing may be permitted to cease at
this point.
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Notwithstanding the generality of the foregoing provisions, the Master
Servicer will be required to manage, conserve, protect and operate each REO
Property for the Securityholders solely for the purpose of its prompt
disposition and sale as "foreclosure property" within the meaning of Section
860G(a)(8) of the Code or to prevent the receipt by the Trust of any "income
from non-permitted assets" within the meaning of Section 860F(a)(2)(B) of the
Code or any "net income from foreclosure property" which is subject to taxation
under the REMIC Provisions. Pursuant to its efforts to sell such REO Property,
the Master Servicer shall either itself or through an agent selected by the
Master Servicer protect and conserve such REO Property in the same manner and to
such extent as is customary in the locality where such REO Property is located
and may, incident to its conservation and protection of the interests of the
Securityholders, rent the same, or any part thereof, as the Master Servicer
deems to be in the best interest of the Securityholders for the period prior to
the sale of such REO Property. The Master Servicer shall take into account the
existence of any hazardous substances, hazardous wastes or solid wastes, as such
terms are defined in the Comprehensive Environmental Response Compensation and
Liability Act, the Resource Conservation and Recovery Act of 1976, or other
federal, state or local environmental legislation, on a Mortgaged Property in
determining whether to foreclose upon or otherwise comparably convert the
ownership of such Mortgaged Property.
The Master Servicer shall determine, with respect to each defaulted
Mortgage Loan, when it has recovered, whether through trustee's sale,
foreclosure sale or otherwise, all amounts it expects to recover from or on
account of such defaulted Mortgage Loan, whereupon such Mortgage Loan shall
become a Liquidated Mortgage Loan. A Mortgage Loan which is "charged-off", i.e.,
as to which the Master Servicer ceases further collection and/or foreclosure
activity as a result of a determination that such further actions will not
increase collections or recoveries to be received by the related Trust is also a
"Liquidated Mortgage Loan."
If a loss is realized on a defaulted Mortgage Loan or REO Property upon
the final liquidation thereof that is not covered by any applicable form of
Credit Enhancement or other insurance, the Securityholders will bear such loss.
However, if a gain results from the final liquidation of an REO Property that is
not required by law to be remitted to the related Mortgagor, the Master Servicer
will be entitled to retain such gain as additional servicing compensation unless
the related Prospectus Supplement provides otherwise. For a description of the
Master Servicer's obligations to maintain and make claims under applicable forms
of Credit Enhancement and insurance relating to the Mortgage Loans, see
"Description of Credit Enhancement" and "Hazard Insurance; Claims Thereunder;
Hazard Insurance Policies."68
SUBORDINATION
A Senior/Subordinate Series of Securities will consist of one or more
classes of Senior Securities and one or more classes of Subordinate Securities,
as specified in the related Prospectus Supplement. Unless otherwise specified in
the related Prospectus Supplement, only the Senior Securities will be offered
hereby. Subordination of the Subordinate Securities of any Senior/Subordinate
Series of Securities will be effected by the following method, unless an
alternative method is specified in the related Prospectus Supplement. In
addition, certain classes of Senior (or Subordinate) Securities may be senior to
other classes of Senior (or Subordinate) Securities, as specified in the related
Prospectus Supplement, in which case the following discussion is qualified in
its entirety by reference to the related Prospectus Supplement with respect to
the various priorities and other rights as among the various classes of Senior
Securities or Subordinate Securities, as the case may be.
With respect to any Senior/Subordinate Series of Securities, the total
amount available for distribution on each Payment Date, as well as the method
for allocating such amount among the various classes of Securities included in
such series, will be as set forth in the related Prospectus Supplement.
Generally, the amount available for contribution will be allocated first to
interest on the Senior Securities of such series, and then to principal of the
Senior Securities up to the amounts determined as specified in the related
Prospectus Supplement, prior to allocation to the Subordinate Securities of such
series.
In the event of any Realized Losses (as defined below) on Mortgage
Loans not in excess of the limitations described below, other than Extraordinary
Losses, the rights of the Subordinate Securityholders to receive distributions
with respect to the Mortgage Loans will be subordinate to the rights of the
Senior Securityholders. With respect to any defaulted Mortgage Loan that becomes
a Liquidated Mortgage Loan, through foreclosure sale, disposition of the related
Mortgaged Property if acquired by deed in lieu of foreclosure, "charged-off" or
otherwise, the amount of loss realized, if any (as more fully described in the
related Pooling and Servicing Agreement, a
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"Realized Loss"), will equal the portion of the stated principal balance
remaining, after application of all amounts recovered (net of amounts
reimbursable to the Master Servicer for related advances and expenses) towards
interest and principal owing on the Mortgage Loan. With respect to a Mortgage
Loan the principal balance of which has been reduced in connection with
bankruptcy proceedings, the amount of such reduction will be treated as a
Realized Loss.
Except as noted below, all Realized Losses will be allocated to the
Subordinate Securities of the related series, until the Principal Balance (as
defined in the related Prospectus Supplement) of such Subordinate Securities
thereof has been reduced to zero. Any additional Realized Losses will be
allocated to the Senior Securities (or, if such series includes more than one
class of Senior Securities, either on a pro-rata basis among all of the Senior
Securities in proportion to their respective outstanding Principal Balances or
as otherwise provided in the related Prospectus Supplement).
With respect to certain Realized Losses resulting from physical damage
to Mortgaged Properties that are generally of the same type as are covered under
a special hazard insurance policy, the amount thereof that may be allocated to
the Subordinate Securities of the related series may be limited to an amount
(the "Special Hazard Amount") specified in the related Prospectus Supplement.
See "Description of Credit Enhancement--Special Hazard Insurance Policies." If
so, any Special Hazard Losses in excess of the Special Hazard Amount will be
allocated among all outstanding classes of Securities of the related series,
either on a pro-rata basis in proportion to their outstanding Security Principal
Balances, regardless of whether any Subordinate Securities remain outstanding,
or as otherwise provided in the related Prospectus Supplement. The respective
amounts of other specified types of losses (including Fraud Losses and
Bankruptcy Losses) that may be borne solely by the Subordinate Securities may be
similarly limited to an amount (with respect to Fraud Losses, the "Fraud Loss
Amount" and with respect to Bankruptcy Losses, the "Bankruptcy Loss Amount"),
and the Subordinate Securities may provide no coverage with respect to certain
other specified types of losses, as described in the related Prospectus
Supplement, in which case such losses would be allocated on a pro-rata basis
among all outstanding classes of Securities.
Any allocation of a Realized Loss (including a Special Hazard Loss) to
a Security in a Senior/Subordinate Series will be made by reducing the Security
Principal Balance thereof as of the Payment Date following the calendar month in
which such Realized Loss was incurred.
In lieu of the foregoing provisions, subordination may be effected in
the following manner, or in any other manner described in the related Prospectus
Supplement. The rights of the holders of Subordinate Securities to receive any
or a specified portion of distributions with respect to the Mortgage Loans may
be subordinated to the extent of the amount set forth in the related Prospectus
Supplement (the "Subordinate Amount"). As specified in the related Prospectus
Supplement, the Subordinate Amount may be subject to reduction based upon the
amount of losses borne by the holders of the Subordinate Securities as a result
of such subordination, a specified schedule or such other method of reduction as
such Prospectus Supplement may specify. If so specified in the related
Prospectus Supplement, additional credit support for this form of subordination
may be provided by the establishment of a reserve fund for the benefit of the
holders of the Senior Securities (which may, if such Prospectus Supplement so
provides, initially be funded by a cash deposit by the Originator) into which
certain distributions otherwise allocable to the holders of the Subordinate
Securities may be placed; such funds would thereafter be available to cure
shortfalls in distributions to holders of the Senior Securities.
DESCRIPTION OF CREDIT ENHANCEMENT
Unless otherwise expressly provided and described in the applicable
Prospectus Supplement, each series of Securities shall have credit support
(referred to herein as "Credit Enhancement") comprised of one or more of the
following components. Each component will have a monetary limit and will provide
coverage with respect to Realized Losses that are (i) attributable to the
Mortgagor's failure to make any payment of principal or interest as required
under the Mortgage Note, but not including Special Hazard Losses, Extraordinary
Losses or other losses resulting from damage to a Mortgaged Property, Bankruptcy
Losses or Fraud Losses (any such loss, a "Defaulted Mortgage Loss"); (ii) of a
type generally covered by a special hazard insurance policy (as defined below)
(any such loss, a "Special Hazard Loss"); (iii) attributable to certain actions
which may be taken by a bankruptcy court in connection with a Mortgage Loan,
including a reduction by a bankruptcy court of the principal balance of or the
Mortgage Rate on a Mortgage Loan or an extension of its maturity (any such loss,
a "Bankruptcy Loss"); and (iv) incurred on defaulted Mortgage Loans as to which
there was fraud in the origination of such Mortgage Loans (any
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such loss, a "Fraud Loss"). Losses occasioned by war, civil insurrection,
certain governmental actions, nuclear reaction and certain other risks
("Extraordinary Losses") will not be covered unless otherwise specified. To the
extent that the Credit Enhancement for any series of Securities is exhausted,
the Securityholders will bear all further risks of loss not otherwise insured
against.
As set forth below and in the applicable Prospectus Supplement, Credit
Enhancement may be provided with respect to one or more classes of a series of
Securities or with respect to the Mortgage Assets in the related Trust. Credit
Enhancement may be in the form of (i) the subordination of one or more classes
of Subordinate Securities to provide credit support to one or more classes of
Senior Securities as described under "Subordination," (ii) the use of a mortgage
pool insurance policy, special hazard insurance policy, bankruptcy bond, reserve
fund, letter of credit, financial guaranty insurance policy, other third party
guarantees, another method of Credit Enhancement described in the related
Prospectus Supplement, or the use of a cross-support feature or
overcollateralization, or (iii) any combination of the foregoing. Unless
otherwise specified in the Prospectus Supplement, any Credit Enhancement will
not provide protection against all risks of loss and will not guarantee
repayment of the entire principal balance of the Securities and interest
thereon. If losses occur that exceed the amount covered by Credit Enhancement or
are not covered by the Credit Enhancement, holders of one or more classes of
Securities will bear their allocable share of deficiencies. If a form of Credit
Enhancement applies to several classes of Securities, and if principal payments
equal to the aggregate principal balances of certain classes will be distributed
prior to such distributions to the classes, the classes that receive such
distributions at a later time are more likely to bear any losses that exceed the
amount covered by Credit Enhancement.
The amounts and type of Credit Enhancement arrangement as well as the
provider thereof, if applicable, with respect to each series of Securities will
be set forth in the related Prospectus Supplement. To the extent provided in the
applicable Prospectus Supplement and the Pooling and Servicing Agreement, the
Credit Enhancement arrangements may be periodically modified, reduced and
substituted for based on the aggregate outstanding principal balance of the
Mortgage Loans covered thereby. See "Description of Credit
Enhancement--Reduction or Substitution of Credit Enhancement." If specified in
the applicable Prospectus Supplement, Credit Enhancement for a series of
Securities may cover one or more other series of Securities.
The descriptions of any insurance policies or bonds described in this
Prospectus or any Prospectus Supplement and the coverage thereunder do not
purport to be complete and are qualified in their entirety by reference to the
actual forms of such policies, copies of which are available upon request.
Letter of Credit. If any component of Credit Enhancement as to any
series of Securities is to be provided by a letter of credit (the "Letter of
Credit"), a bank (the "Letter of Credit Bank") will deliver to the Trustee an
irrevocable Letter of Credit. The Letter of Credit may provide direct coverage
with respect to the related Securities or, if specified in the related
Prospectus Supplement, support the Sponsor's or any other person's obligation
pursuant to a Purchase Obligation to make certain payments to the Trustee with
respect to one or more components of Credit Enhancement. The Letter of Credit
Bank, as well as the amount available under the Letter of Credit with respect to
each component of Credit Enhancement, will be specified in the applicable
Prospectus Supplement. The Letter of Credit will expire on the expiration date
set forth in the related Prospectus Supplement, unless earlier terminated or
extended in accordance with its terms. On or before each Payment Date, either
the Letter of Credit Bank or the Trustee (or other obligor under a Purchase
Obligation) will be required to make the payments specified in the related
Prospectus Supplement after notification from the Trustee, to be deposited in
the related Distribution Account, if and to the extent covered, under the
applicable Letter of Credit.
Mortgage Pool Insurance Policies. Any mortgage pool insurance policy
("Mortgage Pool Insurance Policy") obtained by the Sponsor for each related
Trust Estate will be issued by the Pool Insurer named in the related Prospectus
Supplement. Each Mortgage Pool Insurance Policy will, subject to limitations
specified in the related Prospectus Supplement described below, cover Defaulted
Mortgage Losses in an amount equal to a percentage specified in the related
Prospectus Supplement (or in a Current Report on Form 8-K) of the aggregate
principal balance of the Mortgage Loans on the Cut-Off Date. As set forth under
"Maintenance of Credit Enhancement," the Master Servicer will use reasonable
efforts to maintain the Mortgage Pool Insurance Policy and to present claims
thereunder to the Pool Insurer on behalf of itself, the Trustee and the
Securityholders. The Mortgage Pool Insurance Policies, however, are not blanket
policies against loss (typically, such policies do not cover Special Hazard
Losses, Fraud Losses and Bankruptcy Losses), since claims thereunder may only be
made respecting particular defaulted
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Mortgage Loans and only upon satisfaction of certain conditions precedent
described below due to a failure to pay irrespective of the reason therefor.
Special Hazard Insurance Policies. Any insurance policy covering
Special Hazard Losses (a "Special Hazard Insurance Policy") obtained by the
Sponsor for a Trust Estate will be issued by the insurer named in the related
Prospectus Supplement. Each Special Hazard Insurance Policy will, subject to
limitations described in the related Prospectus Supplement, protect holders of
the related series of Securities from (i) losses due to direct physical damage
to a Mortgaged Property other than any loss of a type covered by a hazard
insurance policy or a flood insurance policy, if applicable, and (ii) losses
from partial damage caused by reason of the application of the co-insurance
clauses contained in hazard insurance policies. See "Hazard Insurance; Claims
Thereunder." A Special Hazard Insurance Policy will not cover Extraordinary
Losses. Aggregate claims under a Special Hazard Insurance Policy will be limited
to a maximum amount of coverage, as set forth in the related Prospectus
Supplement or in a Current Report on Form 8-K. A Special Hazard Insurance Policy
will provide that no claim may be paid unless hazard and, if applicable, flood
insurance on the Mortgaged Property securing the Mortgage Loan has been kept in
force and other protection and preservation expenses have been paid by the
Master Servicer.
Subject to the foregoing limitations, in general a Special Hazard
Insurance Policy will provide that, where there has been damage to property
securing a foreclosed Mortgage Loan (title to which has been acquired by the
insured) and to the extent such damage is not covered by the hazard insurance
policy or flood insurance policy, if any, maintained by the Mortgagor or the
Master Servicer or the Sub-Servicer, the insurer will pay the lesser of (i) the
cost of repair or replacement of such property or (ii) up on transfer of the
property to the insurer, the unpaid principal balance of such Mortgage Loan at
the time of acquisition of such property by foreclosure or deed in lieu of
foreclosure, plus accrued interest at the Mortgage Rate to the date of claim
settlement and certain expenses incurred by the Master Servicer or the
Sub-Servicer with respect to such property. If the property is transferred to a
third party in a sale approved by the issuer of the Special Hazard Insurance
Policy (the "Special Hazard Insurer"), the amount that the Special Hazard
Insurer will pay will be the amount under (ii) above reduced by the net proceeds
of the sale of the property.
As indicated under "Description of the Securities--Assignment of
Mortgage Loans" above and to the extent set forth in the related Prospectus
Supplement, coverage in respect of Special Hazard Losses for a series of
Securities may be provided, in whole or in part by a type of special hazard
instrument other than a Special Hazard Insurance Policy or by means of the
special hazard representation of the Sponsor.
Bankruptcy Bonds. In the event of a personal bankruptcy of a Mortgagor,
it is possible that the bankruptcy court may establish the value of the
Mortgaged Property of such Mortgagor at an amount less than the
then-outstanding, principal balance of the Mortgage Loan secured by such
Mortgaged Property (a "Deficient Valuation"). The amount of the secured debt
then could be reduced to such value, and, thus, the holder of such Mortgage Loan
would become an unsecured creditor to the extent the outstanding principal
balance of such Mortgage Loan exceeds the value assigned to the Mortgaged
Property by the bankruptcy court. In addition, certain other modifications of
the terms of a Mortgage Loan can result from a bankruptcy proceeding, including
a reduction in the amount of the monthly payment on the related Mortgage Loan or
a reduction in the mortgage interest rate (a "Debt Service Reduction"; Debt
Service Reductions and Deficient Valuations, collectively referred to herein as
"Bankruptcy Losses"). See "Certain Legal Aspects of Mortgage Loans and Related
Matters--Anti-Deficiency Legislation and Other Limitations on Lenders." Any
bankruptcy bond ("Bankruptcy Bond") to provide coverage for Bankruptcy Losses
for proceedings under the federal Bankruptcy Code obtained by the Sponsor for a
Trust Estate will be issued by an insurer named in the related Prospectus
Supplement. The level of coverage under each Bankruptcy Bond will be set forth
in the applicable Prospectus Supplement or in a Current Report on Form 8-K.
Reserve Funds. If so provided in the related Prospectus Supplement, the
Sponsor will deposit or cause to be deposited in an account (a "Reserve Fund")
any combination of cash, one or more irrevocable letters of credit or one or
more Eligible Investments in specified amounts, amounts otherwise distributable
to Subordinate Securityholders or the owners of any Originator's Retained Yield,
or any other instrument satisfactory to the Rating Agency or Agencies, which
will be applied and maintained in the manner and under the conditions specified
in such Prospectus Supplement. In the alternate or in addition to such deposit
to the extent described in the related Prospectus Supplement, a Reserve Fund may
be funded through application of all or a portion of amounts otherwise payable
on any related Subordinate Securities from the Originator's Retained Yield or
otherwise. In addition, with respect to any series of Securities as to which
Credit Enhancement includes a Letter of Credit, if so specified in the related
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Prospectus Supplement, under certain circumstances the remaining amount of the
Letter of Credit may be drawn by the Trustee and deposited in a Reserve Fund.
Amounts in a Reserve Fund may be distributed to Securityholders, or applied to
reimburse the Master Servicer for outstanding advances or may be used for other
purposes, in the manner and to the extent specified in the related Prospectus
Supplement. A Trust Estate may contain more than one Reserve Fund, each of which
may apply only to a specified class of Securities or to specified Mortgage
Assets.
Financial Guaranty Insurance Policies. If so specified in the related
Prospectus Supplement, a financial guaranty insurance policy or surety bond
("Financial Guaranty Insurance Policy") may be obtained and maintained for each
class or series of Securities. The issuer of any Financial Guaranty Insurance
Policy (a "Financial Guaranty Insurer") will be described in the related
Prospectus Supplement. A copy of any such Financial Guaranty Insurance Policy
will be attached as an exhibit to the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, a
Financial Guaranty Insurance Policy will unconditionally and irrevocably
guarantee to Securityholders that an amount equal to each full and complete
insured payment will be received by an agent of the Trustee (an "Insurance
Paying Agent") on behalf of Securityholders, for distribution by the Trustee to
each Securityholder. The "insured payment" will be defined in the related
Prospectus Supplement, and will generally equal the full amount of the
distributions of principal and interest to which Securityholders are entitled
under the related Pooling and Servicing Agreement plus any other amounts
specified therein or in the related Prospectus Supplement (the "Insured
Payment").
Financial Guaranty Insurance Policies may apply only to certain
specified classes, or may apply at the Mortgage Asset level and only to
specified Mortgage Assets.
The specific terms of any Financial Guaranty Insurance Policy will be
as set forth in the related Prospectus Supplement. Financial Guaranty Insurance
Policies may have limitations including (but not limited to) limitations on the
insurer's obligation to guarantee the obligations of the Originators to
repurchase or substitute for any Mortgage Loans, Financial Guaranty Insurance
Policies will not guarantee any specified rate of prepayments and/or to provide
funds to redeem Securities on any specified date.
Subject to the terms of the related Pooling and Servicing Agreement,
the Financial Guaranty Insurer may be subrogated to the rights of each
Securityholder to receive payments under the Securities to the extent of any
payment by such Financial Guaranty Insurer under the related Financial Guaranty
Insurance Policy.
Other Insurance, Guarantees and Similar Instruments or Agreements. If
specified in the related Prospectus Supplement, a Trust may include in lieu of
some or all of the foregoing or in addition thereto third party guarantees, and
other arrangements for maintaining timely payments or providing additional
protection against losses on all or any specified portion of the assets included
in such Trust, paying administrative expenses, or accomplishing such other
purpose as may be described in the Prospectus Supplement. The Trust may include
a guaranteed investment contract or reinvestment agreement pursuant to which
funds held in one or more accounts will be invested at a specified rate. If any
class of Securities has a floating interest rate, or if any of the Mortgage
Assets has a floating interest rate, the Trust may include an interest rate swap
contract, an interest rate cap agreement or similar contract providing limited
protection against interest rate risks.
Cross Support. If specified in the Prospectus Supplement, the
beneficial ownership of separate groups of assets included in a Trust may be
evidenced by separate classes of the related series of Securities. In such case,
credit support may be provided by a cross-support feature which requires that
distributions be made with respect to one class of Securities may be made from
excess amounts available from other asset groups within the same Trust which
support other classes of Securities. The Prospectus Supplement for a series that
includes a cross-support feature will describe the manner and conditions for
applying such cross-support feature.
If specified in the Prospectus Supplement, the coverage provided by one
or more forms of credit support may apply concurrently to two or more separate
Trusts. If applicable, the Prospectus Supplement will identify the Trusts to
which such credit support relates and the manner of determining the amount of
the coverage provided thereby and of the application of such coverage to the
identified Trusts.
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Overcollateralization. If specified in the Prospectus Supplement,
subordination provisions of a Trust may be used to accelerate to a limited
extent the amortization of one or more classes of Securities relative to the
amortization of the related Mortgage Loans. The accelerated amortization is
achieved by the application of certain excess interest to the payment of
principal of one or more classes of Securities. This acceleration feature
creates, with respect to the Mortgage Loans or groups thereof, over
collateralization which results from the excess of the aggregate principal
balance of the related Mortgage Loans, or a group thereof, over the principal
balance of the related class of Securities. Such acceleration may continue for
the life of the related Security, or may be limited. In the case of limited
acceleration, once the required level of overcollateralization is reached, and
subject to certain provisions specified in the related Prospectus Supplement,
such limited acceleration feature may cease, unless necessary to maintain the
required level of overcollateralization.
Maintenance of Credit Enhancement. To the extent that the applicable
Prospectus Supplement does not expressly provide for Credit Enhancement
arrangements in lieu of some or all of the arrangements mentioned below, the
following paragraphs shall apply.
If a form of Credit Enhancement has been obtained for a series of
Securities, the Sponsor will be obligated to exercise its best reasonable
efforts to keep or cause to be kept such form of credit support in full force
and effect throughout the term of the applicable Pooling and Servicing
Agreement, unless coverage thereunder has been exhausted through payment of
claims or otherwise, or substitution therefor is made as described below under
"Reduction or Substitution of Credit Enhancement."
In lieu of the Sponsor's obligation to maintain a particular form of
Credit Enhancement, the Sponsor may obtain a substitute or alternate form of
Credit Enhancement. If the Master Servicer obtains such a substitute form of
Credit Enhancement, it will maintain and keep such form of Credit Enhancement in
full force and effect as provided herein. Prior to its obtaining any substitute
or alternate form of Credit Enhancement, the Sponsor will obtain written
confirmation from the Rating Agency or Agencies that rated the related series of
Securities that the substitution or alternate form of Credit Enhancement for the
existing Credit Enhancement will not adversely affect the then-current ratings
assigned to such Securities by such Rating Agency or Agencies.
The Master Servicer, on behalf of itself, the Trustee and
Securityholders, will provide the Trustee information required for the Trustee
to draw under a Letter of Credit or Financial Guaranty Insurance Policy, will
present claims to each Pool Insurer, to the issuer of each Special Hazard
Insurance Policy or other special hazard instrument, to the issuer of each
Bankruptcy Bond and will take such reasonable steps as are necessary to permit
recovery under such Letter of Credit, Financial Guaranty Insurance Policy,
Purchase Obligation, insurance policies or comparable coverage respecting
defaulted Mortgage Loans or Mortgage Loans which are the subject of a bankruptcy
proceeding. Additionally, the Master Servicer will present such claims and take
such steps as are reasonably necessary to provide for the performance by another
party of its Purchase Obligation. As set forth above, all collections by the
Master Servicer under any Purchase Obligation, any Mortgage Pool Insurance
Policy, or any Bankruptcy Bond and, where the related property has not been
restored, any Special Hazard Insurance Policy, are to be deposited initially in
the Principal and Interest Account and ultimately in the Distribution Account,
subject to withdrawal as described above. All draws under any Letter of Credit
or Financial Guaranty Insurance Policy will be deposited directly in the
Distribution Account.
If any property securing a defaulted Mortgage Loan is damaged and
proceeds, if any, from the related hazard insurance policy or any applicable
Special Hazard Instrument are insufficient to restore the damaged property to a
condition sufficient to permit recovery under any applicable form of Credit
Enhancement, the Master Servicer is not required to expend its own funds to
restore the damaged property unless it determines (i) that such restoration will
increase the proceeds to one or more classes of Securityholders on liquidation
of the Mortgage Loan after reimbursement of the Master Servicer for its expenses
and (ii) that such expenses will be recoverable by it through Liquidation
Proceeds or Insurance Proceeds. If recovery under any applicable form of Credit
Enhancement is not available because the Master Servicer has been unable to make
the above determinations, has made such determinations incorrectly or recovery
is not available for any other reason, the Master Servicer is nevertheless
obligated to follow such normal practices and procedures (subject to the
preceding sentence) as it deems necessary or advisable to realize upon the
defaulted Mortgage Loan and in the event such determination has been incorrectly
made, is entitled to reimbursement of its expenses in connection with such
restoration.
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Reduction or Substitution of Credit Enhancement. Unless otherwise
specified in the related Prospectus Supplement, the amount of credit support
provided pursuant to any of the Credit Enhancements (including, without
limitation, a Mortgage Pool Insurance Policy, Financial Guaranty Insurance
Policy, Special Hazard Insurance Policy, Bankruptcy Bond, Letter of Credit, or
any alternative form of Credit Enhancement) may be reduced under certain
specified circumstances. In addition, if so described in the related Prospectus
Supplement, any formula used in calculating the amount or degree of Credit
Enhancement may be changed without the consent of the Securityholders upon
written confirmation from each Rating Agency then rating the Securities that
such change will not adversely affect the then-current rating or ratings
assigned to the Securities. In most cases, the amount available pursuant to any
Credit Enhancement will be subject to periodic reduction in accordance with a
schedule or formula on a nondiscretionary basis pursuant to the terms of the
related Pooling and Servicing Agreement as the aggregate outstanding principal
balance of the Mortgage Loans declines. Additionally, in certain cases, such
credit support (and any replacements therefor) may be replaced, reduced or
terminated upon the written assurance from each applicable Rating Agency that
the then-current rating of the related series of Securities will not be
adversely affected. Furthermore, in the event that the credit rating of any
obligor under any applicable Credit Enhancement is downgraded, the credit rating
of the related Securities may be downgraded to a corresponding level, and,
unless otherwise specified in the related Prospectus Supplement, the Sponsor
thereafter will not be obligated to obtain replacement credit support in order
to restore the rating of the Securities, and also will be permitted to replace
such credit support with other Credit Enhancement instruments issued by obligors
whose credit ratings are equivalent to such downgraded level and in lower
amounts which would satisfy such downgraded level, provided that the
then-current, albeit downgraded, rating of the related series of Securities is
maintained. Where the credit support is in the form of a Reserve Fund, a
permitted reduction in the amount of Credit Enhancement will result in a release
of all or a portion of the assets in the Reserve Fund to the Sponsor, the Master
Servicer, one or more Originators or such other person that is entitled thereto.
Any assets so released will not be available to fund distribution obligations in
future periods.
HAZARD INSURANCE; CLAIMS THEREUNDER
Each Mortgage Loan will be required to be covered by a hazard insurance
policy (as described below). The following is only a brief description of
certain insurance policies and does not purport to summarize or describe all of
the provisions of these policies. Such insurance is subject to underwriting and
approval of individual Mortgage Loans by the respective insurers. The
descriptions of any insurance policies described in this Prospectus or any
Prospectus Supplement and the coverage thereunder do not purport to be complete
and are qualified in their entirety by reference to such forms of policies,
sample copies of which are available from the Trustee upon request.
HAZARD INSURANCE POLICIES
Generally, the terms of the Mortgage Loans require each Mortgagor to
maintain a hazard insurance policy for the Mortgage Loan. Additionally, the
Pooling and Servicing Agreement will generally require the Master Servicer to
cause to be maintained with respect to each Mortgage Loan a hazard insurance
policy with a generally acceptable carrier that provides for fire and extended
coverage relating to such Mortgage Loan in an amount not less than the least of
(i) the outstanding principal balance of the Mortgage Loan, (ii) the minimum
amount required to compensate for damage or loss on a replacement cost basis or
(iii) the full insurable value of the premises.
If a Mortgage Loan at the time of origination relates to a Mortgaged
Property in an area identified in the Federal Register by the Federal Emergency
Management Agency as having special flood hazards, the Master Servicer will be
generally required to maintain with respect thereto a flood insurance policy in
a form meeting the requirements of the then-current guidelines of the Federal
Insurance Administration with a generally acceptable carrier in an amount
representing coverage, and which provides for recovery by the Master Servicer on
behalf of the Trust of insurance proceeds relating to such Mortgage Loan of not
less than the least of (i) the outstanding principal balance of the Mortgage
Loan, (ii) the minimum amount required to compensate for damage or loss on a
replacement cost basis, (iii) the maximum amount of insurance that is available
under the Flood Disaster Protection Act of 1973. Pursuant to the related Pooling
and Servicing Agreement, the Master Servicer will be required to indemnify the
Trust out of the Master Servicer's own funds for any loss to the Trust resulting
from the Master Servicer's failure to maintain such flood insurance.
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In the event that the Master Servicer obtains and maintains a blanket
policy insuring against fire with extended coverage and against flood hazards on
all of the Mortgage Loans, then, to the extent such policy names the Master
Servicer 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 Pooling and Servicing Agreement,
the Master Servicer shall be deemed conclusively to have satisfied its
obligations with respect to fire and hazard insurance coverage under the Pooling
and Servicing Agreement. Such blanket policy may contain a deductible clause, in
which case the Master Servicer will be required, in the event that there shall
not have been maintained on the related Mortgaged Property a policy complying
with the Pooling and Servicing Agreement, and there shall have been a loss that
would have been covered by such policy, to deposit in the Principal and Interest
Account from the Master Servicer's own funds the difference, if any, between the
amount that would have been payable under a policy complying with the Pooling
and Servicing Agreement and the amount paid under such blanket policy.
THE SPONSOR AND THE TRANSFEROR
The Sponsor, Advanta Mortgage Conduit Services, Inc., was incorporated
in the State of Delaware in April, 1993. It is a direct subsidiary of the Master
Servicer, Advanta Mortgage Corp. USA, in addition to Advanta Mortgage Corp.
Midatlantic, Advanta Mortgage Corp., Midatlantic II, Advanta Mortgage Corp.
Midwest, Advanta Mortgage Corp. of New Jersey and Advanta Mortgage Corp.
Northeast. The Sponsor was organized for the purpose of the purchase and
securitization of first and junior mortgage loans.
The Sponsor maintains its principal office at 16875 West Bernardo
Drive, San Diego, California 92127. Its telephone number is (619) 674-1800.
The Transferor, Advanta Conduit Receivables Inc., was incorporated in
the State of Delaware in March, 1994. It is a direct subsidiary of the
Sponsor, and was formed as a special purpose finance subsidiary to facilitate
certain issuances of Securities. The use of the Transferor will not affect the
obligations of the Sponsor with respect to the related Trust or the related
Securities. If the Transferor is to be involved in a particular offering the
related Prospectus Supplement will describe its role in such offering; for
purposes of this Prospectus the role of the Transferor is subsumed in the role
of the Sponsor.
The Transferor maintains its principal office at 16875 West Bernardo
Drive, San Diego, California 92127. Its telephone number is (619) 674-1800.
THE MASTER SERVICER
Unless otherwise specified in the related Prospectus Supplement,
Advanta Mortgage Corp. USA will act as the Master Servicer for a series of
Securities.
Advanta Mortgage Corp. USA was acquired by Advanta Corp., a Delaware
corporation ("Advanta Parent") in September, 1986 and is an indirect subsidiary
of Advanta Parent. The Master Servicer is an affiliate of Colonial National Bank
USA ("Colonial"), a national banking association domiciled in Delaware, and the
parent of Advanta Mortgage Corp. Midatlantic, Advanta Mortgage Corp. Midatlantic
II, Advanta Mortgage Corp. Midwest, Advanta Mortgage Corp. of New Jersey and
Advanta Mortgage Corp. Northeast and Advanta Finance Corp. Advanta Mortgage
Corp. USA is a Delaware corporation incorporated in 1983. It is a nationwide
servicer of first and junior mortgage loans. Advanta Mortgage Corp. USA has
centralized servicing functions located in San Diego, California. This provides
for economies of scale and a depth of appraisal, attorney and realtor contacts
throughout the country.
THE POOLING AND SERVICING AGREEMENT
As described above under "Description of the Securities--General," each
series of Securities will be issued pursuant to a Pooling and Servicing
Agreement as described in that section. The following summaries describe certain
additional provisions common to each Pooling and Servicing Agreement.
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SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES; ORIGINATOR'S RETAINED
YIELD
Each servicer, whether the Master Servicer or any Sub-Servicer (either
the Master Servicer or any Sub- Servicer being a "Servicer"), will retain a fee
in connection with its servicing activities for each series of Securities equal
to the percentage per annum specified in the related Prospectus Supplement or
Current Report on Form 8-K (the "Base Servicing Fee"), generally payable monthly
with respect to each Mortgage Loan directly serviced by such Servicer at
one-twelfth the annual rate, of the then-outstanding principal amount of each
such Mortgage Loan as of the first day of each calendar month. The Master
Servicer acting as master servicer with respect to Mortgage Loans being serviced
directly by a Sub-Servicer will retain a fee equal to the percentage per annum
specified in the related Prospectus Supplement or Current Report on Form 8-K
("Master Servicing Fee"), generally payable monthly on one-twelfth the annual
rate, of the then-outstanding principal amount of each such Mortgage Loan as of
the first day of each calendar month. The Base Servicing Fees and the Master
Servicing Fee are collectively referred to as the "Servicing Fee."
In addition to the Base Servicing Fee, each Servicer will generally be
entitled under the Pooling and Servicing Agreement to retain additional
servicing compensation in the form of prepayment charges, release fees, bad
check charges, assumption fees, late payment charges, or any other
servicing-related fees, Net Liquidation Proceeds not required to be deposited in
the Principal and Interest Account pursuant to the Pooling and Servicing
Agreement, and similar items.
Unless otherwise specified in the related Prospectus Supplement, the
Master Servicer will pay or cause to be paid certain ongoing expenses associated
with each Trust Estate and incurred by it in connection with its
responsibilities under the Pooling and Servicing Agreement, including, without
limitation, payment of any fee or other amount payable in respect of any
alternative Credit Enhancement arrangements, payment of the fees and
disbursements of the Trustee or accountant, any custodian appointed by the
Trustee, the Security Registrar and any Paying Agent, and payment of expenses
incurred in enforcing the obligations of Sub-Servicers and Originators. The
Master Servicer may be entitled to reimbursement of expenses incurred in
enforcing the obligations of Sub-Servicers and Originators under certain limited
circumstances. In addition, as indicated in the preceding section, the Master
Servicer will be entitled to reimbursements for certain expenses incurred by it
in connection with Liquidated Mortgage Loans and in connection with the
restoration of Mortgaged Properties, such right of reimbursement being prior to
the rights of Securityholders to receive any related Liquidation Proceeds
(including Insurance Proceeds).
The Prospectus Supplement for a series of Securities will specify if
there will be any Originator's Retained Yield retained. Any such Originator's
Retained Yield will be a specified portion of the interest payable on each
Mortgage Loan in a Mortgage Pool. Any such Originator's Retained Yield will be
established on a loan-by-loan basis and the amount thereof with respect to each
Mortgage Loan in a Mortgage Pool will be specified on an exhibit to the related
Pooling and Servicing Agreement. Any Originator's Retained Yield in respect of a
Mortgage Loan will represent a specified portion of the interest payable thereon
and will not be part of the related Trust Estate. Any partial recovery of
interest in respect of a Mortgage Loan will be allocated between the owners of
any Originator's Retained Yield and the holders of classes of Securities
entitled to payments of interest as provided in the Prospectus Supplement and
the applicable Pooling and Servicing Agreement.
EVIDENCE AS TO COMPLIANCE
Each Pooling and Servicing Agreement will require the Master Servicer
to deliver annually to the Trustee and any Credit Enhancer, an officers'
certificate stating, as to each signer thereof, that (i) a review of the
activities of the Master Servicer during such preceding year and of performance
under the related Pooling and Servicing Agreement has been made under such
officers' supervision, and (ii) to the best of such officers' knowledge, based
on such review, the Master Servicer has fulfilled all its obligations under the
related Pooling and Servicing Agreement for such year, or, if there has been a
default in the fulfillment of any such obligations, specifying each such default
known to such officers and the nature and status thereof including the steps
being taken by the Master Servicer to remedy such defaults.
Each Pooling and Servicing Agreement will require the Master Servicer
to cause to be delivered to the Trustee and any Credit Enhancer a letter or
letters of a firm of independent, nationally recognized certified public
accountants reasonably acceptable to the Credit Enhancer, if applicable, stating
that such firm has, with respect to
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the Master Servicer's overall servicing operations (i) performed applicable
tests in accordance with the compliance testing procedures as set forth in
Appendix 3 of the Audit Guide for Audits of HUD Approved Nonsupervised
Mortgagees or (ii) examined such operations in accordance with the requirements
of the Uniform Single Attestation Program for Mortgage Bankers, and in either
case stating such firm's conclusions relating thereto.
Copies of the annual accountants' statement and the annual statement of
officers of the Master Servicer may be obtained by Securityholders without
charge upon written request to the Master Servicer.
REMOVAL AND RESIGNATION OF THE MASTER SERVICER
Unless otherwise specified in the related Prospectus Supplement, each
Pooling and Servicing Agreement will provide that the Master Servicer may not
resign from its obligations and duties thereunder, except in connection with a
permitted transfer of servicing, unless such duties and obligations are no
longer permissible under applicable law or are in material conflict by reason of
applicable law with any other activities of a type and nature presently carried
on by it. No such resignation will become effective until the Trustee has
assumed the Master Servicer's obligations and duties under the Pooling and
Servicing Agreement. The Trustee, the Securityholders or a Credit Enhancer, if
applicable, will have the right, pursuant to the related Pooling and Servicing
Agreement, to remove the Master Servicer upon the occurrence of any of (a)
certain events of insolvency, readjustment of debt, marshalling of assets and
liabilities or similar proceedings regarding the Master Servicer and certain
actions by the Master Servicer indicating its insolvency or inability to pay its
obligations; (b) the failure of the Master Servicer to perform any one or more
of its material obligations under the Pooling and Servicing Agreement as to
which the Master Servicer shall continue in default with respect thereto for a
specified period, generally of sixty (60) days, after notice by the Trustee or
any Credit Enhancer (if required by the Pooling and Servicing Agreement) of said
failure; or (c) the failure of the Master Servicer to cure any breach of any of
its representations and warranties set forth in the Pooling and Servicing
Agreement which materially and adversely affects the interests of the
Securityholders or any Credit Enhancer, for a specified period, generally of
thirty (30) days after the Master Servicer's discovery or receipt of notice
thereof.
The Pooling and Servicing Agreement may also provide that the related
Credit Enhancer may remove the Master Servicer upon the occurrence of any of
certain events including:
(i) with respect to any Payment Date, if the total available
funds with respect to the Mortgage Loans Group will be less than the
related distribution amount on the class of credit-enhanced securities
in respect of such Payment Date; provided, however, that the Credit
Enhancer generally will have no right to remove the Master Servicer
pursuant to the provision described in this clause (i) if the Master
Servicer can demonstrate to the reasonable satisfaction of the Credit
Enhancer that such event was due to circumstances beyond the control of
the Master Servicer;
(ii) the failure by the Master Servicer to make any required
Servicing Advance;
(iii) the failure of the Master Servicer to perform one or
more of its material obligations under the Pooling and Servicing
Agreement; or
(iv) the failure by the Master Servicer to make any required
Delinquency Advance or to pay any Compensating Interest;
provided, however, that prior to any removal of the Master Servicer by the
related Credit Enhancer pursuant to clauses (i), (ii) or (iii) above the Master
Servicer shall first have been given by the related Credit Enhancer notice of
the occurrence of one or more of the events set forth in clauses (i) or (ii)
above and the Master Servicer shall not have remedied, or shall not have taken
action satisfactory to such Credit Enhancer to remedy, such event or events
within a specified period, generally 30 days (60 days with respect to clause
(iii)) after the Master Servicer's receipt of such notice; and provided, further
that in the event of the refusal or inability of the Master Servicer to make any
required Delinquency Advance or to pay any Compensating Interest as described in
clause (iv) above, such removal shall be effective (without the requirement of
any action on the part of such Credit Enhancer or of the Trustee) not later than
a shorter specified period, generally not in excess of five business days,
following the day on which the Trustee notifies an authorized officer of the
Master Servicer that a required Delinquency Advance or to pay any Compensating
Interest has not been received by the Trustee.
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AMENDMENTS
The Trustee, the Sponsor and the Master Servicer may at any time and
from time to time, with the prior approval of the related Credit Enhancer, if
required, but without the giving of notice to or the receipt of the consent of
the Securityholders, amend a Pooling and Servicing Agreement, and the Trustee
will be required to consent to such amendment, for the purposes of (x) (i)
curing any ambiguity, or correcting or supplementing any provision of such
Pooling and Servicing Agreement which may be inconsistent with any other
provision of the Pooling and Servicing Agreement, (ii) in connection with a
Trust making REMIC elections, if accompanied by an approving opinion of counsel
experienced in federal income tax matters, removing the restriction against the
transfer of a REMIC residual security to a Disqualified Organization (as such
term is defined in the Code) or (iii) complying with the requirements of the
Code and the regulations proposed or promulgated thereunder; 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 Securityholder
(without its written consent) or (y) such other purposes set forth in the
related Pooling and Servicing Agreement.
Unless otherwise specified in the related Prospectus Supplement, each
Pooling and Servicing Agreement may also be amended by the Trustee, the Sponsor
and the Master Servicer at any time and from time to time, with the prior
written approval of the related Credit Enhancer, if required, and not less than
a majority of the Percentage Interest represented by each related class of
Securities then outstanding, for the purpose of adding any provisions or
changing in any manner or eliminating any of the provisions of such Pooling and
Servicing Agreement or of modifying in any manner the rights of the
Securityholders thereunder; provided, however, that no such amendment shall (a)
change in any manner the amount of, or delay the timing of, payments which are
required to be distributed to any Securityholders without the consent of the
holder of such Security or (b) change the aforesaid percentages of Percentage
Interest 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.
TERMINATION; RETIREMENT OF SECURITIES
Unless otherwise specified in the related Prospectus Supplement, each
Pooling and Servicing Agreement will provide that a Trust will terminate upon
the earlier of (i) the payment to the Securityholders of all Securities issued
by the Trust from amounts other than those available under, if applicable, the
related Credit Enhancement of all amounts required to be paid to such
Securityholders upon the later to occur of (a) the final payment or other
liquidation (or any advance made with respect thereto) of the last Mortgage Loan
in the Trust Estate or (b) the disposition of all property acquired in respect
of any Mortgage Loan remaining in the Trust Estate, (ii) any time when a
Qualified Liquidation (as defined in the Code) of the Trust Estate (if the
related Trust is a REMIC) is effected. In no event, however, will the trust
created by the Pooling and Servicing Agreement continue beyond the expiration of
21 years from the death of the survivor of certain persons named in such Pooling
and Servicing Agreement. Written notice of termination of the Pooling and
Servicing Agreement will be given to each Securityholder, and the final
distribution will be made only upon surrender and cancellation of the Securities
at an office or agency appointed by the Trustee that will be specified in the
notice of termination. If the Securityholders are permitted to terminate the
trust under the applicable Pooling and Servicing Agreement, a penalty may be
imposed upon the Securityholders based upon the fee that would be foregone by
the Master Servicer because of such termination.
Any purchase of Mortgage Loans and property acquired in respect of
Mortgage Loans evidenced by a series of Securities shall be made at the option
of the Master Servicer, the Sponsor or, if applicable, the holder of the REMIC
Residual Securities at the price specified in the related Prospectus Supplement.
The exercise of such right will effect earlier than expected retirement of the
Securities of that series, but the right of the Master Servicer, the Sponsor or,
if applicable, such holder to so purchase is, unless otherwise specified in the
applicable Prospectus Supplement, subject to the aggregate principal balance of
the Mortgage Loans for that series as of any Remittance Date being less than the
percentage specified in the related Prospectus Supplement of the aggregate
principal balance of the Mortgage Loans at the Cut-Off Date for that series. The
Prospectus Supplement for each series of Securities will set forth the amounts
that the holders of such Securities will be entitled to receive upon such
earlier than expected retirement. If a REMIC election has been made, the
termination of the related Trust Estate will be effected in a manner consistent
with applicable federal income tax regulations and its status as a REMIC.
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THE TRUSTEE
The Trustee under each Pooling and Servicing Agreement will be named in
the related Prospectus Supplement. Each Pooling and Servicing Agreement will
provide that the Trustee shall be under no obligation to exercise any of the
rights or powers vested in it by the Pooling and Servicing Agreement at the
request or direction of any of the Securityholders, unless such Securityholders
shall have 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 trusts or powers granted by each
Pooling and Servicing Agreement or perform any duties thereunder either directly
or by or through agents or attorneys, and the Trustee will not be 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 each Pooling and Servicing Agreement, the Trustee will not
be 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 Pooling and Servicing Agreement.
Unless otherwise described in the related Prospectus Supplement, each
Pooling and Servicing Agreement will permit the removal of the Trustee upon the
occurrence and continuance of one of the following events:
(1) the Trustee shall fail to distribute to the
Securityholders entitled thereto on any Payment Date amounts available
for distribution in accordance with the terms of the Pooling and
Servicing Agreement; or
(2) the Trustee shall default in the performance of, or
breach, any covenant or agreement of the Trustee in the Pooling and
Servicing Agreement, or if any representation or warranty of the
Trustee made in the Pooling and Servicing Agreement or in any
certificate or other writing delivered pursuant thereto or in
connection therewith shall prove to be incorrect in any material
respect as of the time when the same shall have been made, and such
default or breach shall continue or not be cured for the period then
specified in the related Pooling and Servicing Agreement after the
Trustee shall have received notice specifying such default or breach
and requiring it to be remedied; or
(3) a decree or order of a court or agency or supervisory
authority having jurisdiction for the appointment of a conservator or
receiver or liquidator in any insolvency, readjustment of debt,
marshalling of assets and liabilities or similar proceedings, or for
the winding-up or liquidation of its affairs, shall have been entered
against the Trustee, and such decree or order shall have remained in
force undischarged or unstayed for the period then specified in the
related Pooling and Servicing Agreement; or
(4) a conservator or receiver or liquidator or sequestrator or
custodian of the property of the Trustee is appointed in any
insolvency, readjustment of debt, marshalling of assets and liabilities
or similar proceedings of or relating to the Trustee or relating to all
or substantially all of its property; or
(5) the Trustee shall become insolvent (however insolvency is
evidenced), generally fail to pay its debts as they come due, file or
consent to the filing of a petition to take advantage of any applicable
insolvency or reorganization statute, make an assignment for the
benefit of its creditors, voluntarily suspend payment of its
obligations, or take corporate action for the purpose of any of the
foregoing.
If an event described above occurs and is continuing, then, and in
every such case (i) the Sponsor, (ii) the Securityholders (on the terms set
forth in the related Pooling and Servicing Agreement), or (iii) if there is a
Credit Enhancer, such Credit Enhancer may, whether or not the Trustee has
resigned, immediately, concurrently with the giving of notice to the Trustee,
and without delay, appoint a successor Trustee pursuant to the terms of the
Pooling and Servicing Agreement.
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No Securityholder will have any right to institute any proceeding,
judicial or otherwise, with respect to a Pooling and Servicing Agreement or any
Credit Enhancement, if applicable, or for the appointment of a receiver or
trustee, or for any other remedy under the Pooling and Servicing Agreement,
unless:
(1) such Securityholder has previously given written notice to
the Sponsor and the Trustee of such Securityholder's intention to
institute such proceeding;
(2) the Securityholders of not less than 25% of the Percentage
Interests represented by certain specified classes of Securities then
outstanding shall have made written request to the Trustee to institute
such proceeding;
(3) such Securityholder or Securityholders 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 the period specified in the related
Pooling and Servicing Agreement, generally not in excess of 60 days
after receipt of such notice, request and offer of indemnity, has
failed to institute such proceeding;
(5) as long as such action affects any credit-enhanced class
of Securities outstanding, the related Credit Enhancer has consented in
writing thereto; and
(6) no direction inconsistent with such written request has
been given to the Trustee during such specified period by the
Securityholders of a majority of the Percentage Interests represented
by certain specified classes of Securities.
No one or more Securityholders will have any right in any manner
whatever by virtue of, or by availing themselves of, any provision of the
Pooling and Servicing Agreement to affect, disturb or prejudice the rights of
any other Securityholder of the same class or to obtain or to seek to obtain
priority or preference over any other Securityholder of the same class or to
enforce any right under the Pooling and Servicing Agreement, except in the
manner provided in the Pooling and Servicing Agreement and for the equal and
ratable benefit of all of the Securityholders of the same class.
In the event the Trustee receives conflicting or inconsistent requests
and indemnity from two or more groups of Securityholders, 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, notwithstanding
any other provision of the Pooling and Servicing Agreement.
Notwithstanding any other provision in the Pooling and Servicing
Agreement, the Securityholder of any Security has the right, which is absolute
and unconditional, to receive distributions to the extent provided in the
Pooling and Servicing Agreement with respect to such Security or to institute
suit for the enforcement of any such distribution, and such right shall not be
impaired without the consent of such Security.
Either (i) the Securityholders of a majority of the Percentage
Interests represented by certain specified classes of Securities then
outstanding or (ii) if there is a Credit Enhancer, such Credit Enhancer may
direct the time, method and place of conducting any proceeding for any remedy
available to the Sponsor with respect to the Certificates or exercising any
trust or power conferred on the Trustee with respect to such Certificates;
provided that:
(1) such direction shall not be in conflict with any rule of
law or with a Pooling and Servicing Agreement;
(2) the Sponsor or the Trustee, as the case may be, shall have
been provided with indemnity satisfactory to them; and
(3) the Sponsor or the Trustee, as the case may be, may take
any other action deemed proper by the Trustee which is not inconsistent
with such direction; provided, however, that the Sponsor or the
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Trustee, as the case may be, need not take any action which they
determine might involve them in liability or may be unjustly
prejudicial to the Securityholders not so directing.
The Trustee will be liable under the Pooling and Servicing Agreement
only to the extent of the obligations specifically imposed upon and undertaken
by the Trustee therein. Neither the Trustee nor any of the directors, officers,
employees or agents of the Trustee will be under any liability on any Security
or otherwise to any Account, the Sponsor, the Master Servicer or any
Securityholder for any action taken or for refraining from the taking of any
action in good faith under a Pooling and Servicing Agreement, or for errors in
judgment; provided, however, that such provision shall not protect the Trustee
or any such person against any liability which would otherwise be imposed by
reason of negligent action, negligent failure to act or willful misconduct in
the performance of duties or by reason of reckless disregard of obligations and
duties thereunder.
YIELD CONSIDERATIONS
The yield to maturity of a Security will depend on the price paid by
the holder for such Security, the Pass- Through Rate on any such Security
entitled to payments of interest (which Pass-Through Rate may vary if so
specified in the related Prospectus Supplement) and the rate of payment of
principal on such Security (or the rate at which the notional amount thereof is
reduced if such Security is not entitled to payments of principal) and other
factors.
Each month the interest payable on an actuarial type of Mortgage Loan
will be calculated as one-twelfth of the applicable Mortgage Rate multiplied by
the principal balance of such Mortgage Loan outstanding as of a specified day,
usually the first day of the month prior to the month in which the Payment Date
for the related series of Securities occurs, after giving effect to the payment
of principal due on such day, subject to any Deferred Interest. With respect to
date of payment Mortgage Loans, interest is charged to the Mortgagor at the
Mortgage Rate on the outstanding principal balance of such Note and calculated
based on the number of days elapsed between receipt of the Mortgagor's last
payment through receipt of the Mortgagor's most current payments. The amount of
such payments with respect to each Mortgage Loan distributed (or accrued in the
case of Deferred Interest or Accrual Securities) either monthly, quarterly or
semi-annually to holders of a class of Securities entitled to payments of
interest will be similarly calculated on the basis of such class' specified
percentage of each such payment of interest (or accrual in the case of Accrual
Securities) and will be expressed as a fixed, adjustable or variable
Pass-Through Rate payable on the outstanding principal balance or notional
amount of such Security, calculated as described herein and in the related
Prospectus Supplement. Holders of Strip Securities or a class of Securities
having a fixed Pass-Through Rate that varies based on the weighted average
Mortgage Rate of the underlying Mortgage Loans will be affected by
disproportionate prepayments and repurchases of Mortgage Loans having higher Net
Mortgage Rates or rates applicable to the Strip Securities, as applicable.
The effective yield to maturity to each holder of fixed-rate Securities
entitled to payments of interest will be below that otherwise produced by the
applicable Pass-Through Rate and purchase price of such Security because, while
interest will accrue on each Mortgage Loan from the first day of each month, the
distribution of such interest will be made on the 25th day (or, if such day is
not a business day, the next succeeding business day) of the month (or, in the
case of quarterly-pay Securities, the twenty-fifth day of every third month, or,
in the case of semi-annual-pay Securities, the twenty-fifth day of every sixth
month) following the month of accrual.
A class of Securities may be entitled to payments of interest at a
fixed Pass-Through Rate specified in the related Prospectus Supplement, a
variable Pass-Through Rate or adjustable Pass-Through Rate calculated based on
the weighted average of the Mortgage Rates (net of Servicing Fees and any
Originator's Retained Yield (each, a "Net Mortgage Rate")) of the related
Mortgage Loans for the designated periods preceding the Payment Date if so
specified in the related Prospectus Supplement, or at such other variable rate
as may be specified in the related Prospectus Supplement.
As will be described in the related Prospectus Supplement, the
aggregate payments of interest on a class of Securities, and the yield to
maturity thereon, will be effected by the rate of payment of principal on the
Securities (or the rate of reduction in the notional balance of Securities
entitled only to payments of interest) and, in the case of Securities evidencing
interests in ARM Loans, by changes in the Net Mortgage Rates on the ARM Loans.
See "Maturity and Prepayment Considerations" below. The yield on the Securities
also will be effected by liquidations
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of Mortgage Loans following Mortgagor defaults and by purchases of Mortgage
Loans required by the Pooling and Servicing Agreement in the event of breaches
of representations made in respect of such Mortgage Loans by the Sponsor, the
Originators, the Master Servicer and others, or repurchases due to conversions
of ARM Loans to a fixed interest rate. See "Mortgage Loan
Program--Representations by Originators" and "Descriptions of the Securities--
Assignment of Mortgage Loans" above. In general, if a class of Securities is
purchased at initial issuance at a premium and payments of principal on the
related Mortgage Loans occur at a rate faster than anticipated at the time of
purchase, the purchaser's actual yield to maturity will be lower than that
assumed at the time of purchase. Conversely, if a class of Securities is
purchased at initial issuance at a discount and payments of principal on the
related Mortgage Loans occur at a rate slower than that assumed at the time of
purchase, the purchaser's actual yield to maturity will be lower than that
originally anticipated. The effect of principal prepayments, liquidations and
purchases on yield will be particularly significant in the case of a series of
Securities having a class entitled to payments of interest only or to payments
of interest that are disproportionately high relative to the principal payments
to which such class is entitled. Such a class likely will be sold at a
substantial premium to its principal balance, if any, and any faster than
anticipated rate of prepayments will adversely affect the yield to holders
thereof. In certain circumstances, rapid prepayments may result in the failure
of such holders to recoup their original investment. In addition, the yield to
maturity on certain other types of classes of Securities, including Accrual
Securities or certain other classes in a series including more than one class of
Securities, may be relatively more sensitive to the rate of prepayment on the
related Mortgage Loans than other classes of Securities.
The timing of changes in the rate of principal payments on or
repurchases of the Mortgage Loans may significantly affect an investor's actual
yield to maturity, even if the average rate of principal payments experienced
over time is consistent with an investor's expectation. In general, the earlier
a prepayment of principal on the underlying Mortgage Loans or a repurchase
thereof, 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 payments and repurchases
occurring at a rate higher (or lower) than the rate anticipated by the investor
during the period immediately following the issuance of a series of Securities
would not be fully offset by a subsequent like reduction (or increase) in the
rate of principal payments.
The Mortgage Rates on certain ARM Loans subject to negative
amortization adjust monthly and their amortization schedules adjust less
frequently. During a period of rising interest rates as well as immediately
after origination (initial Mortgage Rates are generally lower than the sum of
the Indices applicable at origination and the related Note Margins) the amount
of interest accruing on the principal balance of such Mortgage Loans may exceed
the amount of the minimum scheduled monthly payment thereon. As a result, a
portion of the accrued interest on negatively amortizing Mortgage Loans may
become Deferred Interest that will be added to the principal balance thereof and
will bear interest at the applicable Mortgage Rate. The addition of any such
Deferred Interest to the principal balance will lengthen the weighted average
life of the Securities evidencing interests in such Mortgage Loans and may
adversely affect yield to holders thereof depending upon the price at which such
Securities were purchased. In addition, with respect to certain ARM Loans
subject to negative amortization, during a period of declining interest rates,
it might be expected that each minimum scheduled monthly payment on such a
Mortgage Loan would exceed the amount of scheduled principal and accrued
interest on the principal balance thereof, and since such excess will be applied
to reduce such principal balance, the weighted average life of such Securities
will be reduced and may adversely affect yield to holders thereof depending upon
the price at which such Securities were purchased.
For each Mortgage Pool, if all necessary advances are made and if there
is no unrecoverable loss on any Mortgage Loan and if the related Credit Enhancer
is not in default under its obligations or other Credit Enhancement has not been
exhausted, the net effect of each distribution respecting interest will be to
pass-through to each holder of a class of Securities entitled to payments of
interest an amount which is equal to one month's interest (or, in the case of
quarterly-pay Securities, three month's interest or, in the case of
semi-annually-pay Securities, six months' interest) at the applicable
Pass-Through Rate on such class' principal balance or notional balance, as
adjusted downward to reflect any decrease in interest caused by any principal
prepayments and the addition of any Deferred Interest to the principal balance
of any Mortgage Loan. "Description of the Securities--Principal and Interest on
the Securities."
With respect to certain of the ARM Loans, the Mortgage Rate at
origination may be below the rate that would result if the index and margin
relating thereto were applied at origination. Under the Sponsor's underwriting
standards, the Mortgagor under each Mortgage Loan will be qualified on the basis
of the Mortgage Rate in effect
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at origination. The repayment of any such Mortgage Loan may thus be dependent on
the ability of the Mortgagor to make larger level monthly payments following the
adjustment of the Mortgage Rate.
MATURITY AND PREPAYMENT CONSIDERATIONS
As indicated above under "The Mortgage Pools," the original terms to
maturity of the Mortgage Loans in a given Mortgage Pool will vary depending upon
the type of Mortgage Loans included in such Mortgage Pool. The Prospectus
Supplement for a series of Securities will contain information with respect to
the types and maturities of the Mortgage Loans in the related Mortgage Pool.
Unless otherwise specified in the related Prospectus Supplement, all of the
Mortgage Loans may be prepaid without penalty in full or in part at any time.
The prepayment experience with respect to the Mortgage Loans in a Mortgage Pool
will affect the maturity, average life and yield of the related series of
Securities.
With respect to Balloon Loans, payment of the Balloon Amount (which,
based on the amortization schedule of such Mortgage Loans, may be a substantial
amount) will generally depend on the Mortgagor's ability to obtain refinancing
of such Mortgage Loan or to sell the Mortgaged Property prior to the maturity of
the Balloon Loan. The ability to obtain refinancing will depend on a number of
factors prevailing at the time refinancing or sale is required, including,
without limitation, real estate values, the Mortgagor's financial situation,
prevailing mortgage loan interest rates, the Mortgagor's equity in the related
Mortgaged Property, tax laws and prevailing general economic conditions. Unless
otherwise specified in the related Prospectus Supplement, neither the Sponsor,
the Master Servicer, nor any of their affiliates will be obligated to refinance
or repurchase any Mortgage Loan or to sell the Mortgaged Property.
A number of factors, including homeowner mobility, economic conditions,
enforceability of due-on-sale clauses, mortgage market interest rates and the
availability of mortgage funds, affect prepayment experience. Unless otherwise
specified in the related Prospectus Supplement, the Mortgage Loans will
generally contain due-on-sale provisions permitting the mortgagee to accelerate
the maturity of the Mortgage Loan upon sale or certain transfers by the
Mortgagor of the underlying Mortgaged Property. Unless the related Prospectus
Supplement indicates otherwise, the Master Servicer will generally enforce any
due-on-sale clause to the extent it has knowledge of the conveyance or proposed
conveyance of the underlying Mortgaged Property and it is entitled to do so
under applicable law; provided, however, that the Master Servicer will not take
any action in relation to the enforcement of any due-on-sale provision which
would adversely affect or jeopardize coverage under any applicable insurance
policy. Certain ARM Loans may be assumable under certain conditions if the
proposed transferee of the related Mortgaged Property establishes its ability to
repay the Mortgage Loan and, in the reasonable judgment of the Master Servicer
or the related Sub-Servicer, the security for the ARM Loan would not be impaired
or might be improved by the assumption. The extent to which ARM Loans are
assumed by purchasers of the Mortgaged Properties rather than prepaid by the
related Mortgagors in connection with the sales of the Mortgaged Properties will
affect the weighted average life of the related series of Securities. See
"Description of the Securities--Collection and Other Servicing Procedures" and
"Certain Legal Aspects of the Mortgage Loans and Related Matters--Enforceability
of Certain Provisions" for a description of certain provisions of the Pooling
and Servicing Agreement and certain legal developments that may affect the
prepayment experience on the Mortgage Loans.
There can be no assurance as to the rate of prepayment of the Mortgage
Loans. The Sponsor is not aware of any reliable, publicly available statistics
relating to the principal prepayment experience of diverse portfolios of
mortgage loans such as the Mortgage Loans over an extended period of time. All
statistics known to the Sponsor that have been compiled with respect to
prepayment experience on mortgage loans indicates that while some mortgage loans
may remain outstanding until their stated maturities, a substantial number will
be paid prior to their respective stated maturities.
Although the Mortgage Rates on ARM Loans will be subject to periodic
adjustments, such adjustments will, unless otherwise specified in the related
Prospectus Supplement, (i) not increase or decrease such Mortgage Rates by more
than a fixed percentage amount on each adjustment date, (ii) not increase such
Mortgage Rates over a fixed percentage amount during the life of any ARM Loan
and (iii) be based on an index (which may not rise and fall consistently with
mortgage interest rates) plus the related Note Margin (which may be different
from margins being used at the time for newly originated adjustable rate
mortgage loans). As a result, the Mortgage Rates on the ARM Loans in a Mortgage
Pool at any time may not equal the prevailing rates for similar, newly
originated adjustable rate
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mortgage loans. In certain rate environments, the prevailing rates on fixed-rate
mortgage loans may be sufficiently low in relation to the then-current Mortgage
Rates on ARM Loans that the rate of prepayment may increase as a result of
refinancings. There can be no certainty as to the rate of prepayments on the
Mortgage Loans during any period or over the life of any series of Securities.
As may be described in the related Prospectus Supplement, the related
Pooling and Servicing Agreement may provide that all or a portion of the
principal collected on or with respect to the related Mortgage Loans may be
applied by the related Trustee to the acquisition of additional Mortgage Loans
during a specified period (rather than used to fund payments of principal to
Securityholders during such period) with the result that the related securities
possess an interest-only period, also commonly referred to as a revolving
period, which will be followed by an amortization period. Any such interest-only
or revolving period may, upon the occurrence of certain events to be described
in the related Prospectus Supplement, terminate prior to the end of the
specified period and result in the earlier than expected amortization of the
related Securities.
In addition, and as may be described in the related Prospectus
Supplement, the related Pooling and Servicing Agreement may provide that all or
a portion of such collected principal may be retained by the Trustee (and held
in certain temporary investments, including Mortgage Loans) for a specified
period prior to being used to fund payments of principal to Securityholders.
The result of such retention and temporary investment by the Trustee of
such principal would be to slow the amortization rate of the related Securities
relative to the amortization rate of the related Mortgage Loans, or to attempt
to match the amortization rate of the related Securities to an amortization
schedule established at the time such Securities are issued. Any such feature
applicable to any Securities may terminate upon the occurrence of events to be
described in the related Prospectus Supplement, resulting in the current funding
of principal payments to the related Securityholders and an acceleration of the
amortization of such Securities.
Under certain circumstances, the Master Servicer, the Sponsor or, if
specified in the related Prospectus Supplement, the holders of the REMIC
Residual Securities or the Credit Enhancer may have the option to purchase the
Mortgage Loans in a Trust Estate. See "The Pooling and Servicing
Agreement--Termination; Retirement of Securities."
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS AND RELATED MATTERS
The following discussion contains summaries of certain legal aspects of
mortgage loans that are general in nature. Because such legal aspects are
governed in part by applicable state law (which laws may differ substantially),
the summaries do not purport to be complete nor to reflect the laws of any
particular state nor to encompass the laws of all states in which the Mortgaged
Properties may be situated. The summaries are qualified in their entirety by
reference to the applicable federal and state laws governing the Mortgage Loans.
GENERAL
The Mortgage Loans will be secured by either deeds of trust or
mortgages, depending upon the prevailing practice in the state in which the
Mortgaged Property subject to a Mortgage Loan is located. In some states, a
mortgage creates a lien upon the real property encumbered by the mortgage. In
other states, the mortgage conveys legal title to the property to the mortgagee
subject to a condition subsequent (i.e., the payment of the indebtedness secured
thereby). The mortgage is not prior to the lien for real estate taxes and
assessments and other charges imposed under governmental police powers. Priority
between mortgages depends on their terms in some cases or on the terms of
separate subordination or intercreditor agreements, and generally on the order
of recordation of the mortgage in the appropriate recording office. There are
two parties to a mortgage, the mortgagor, who is the borrower and homeowner, and
the mortgagee, who is the lender. Under the mortgage instrument, the mortgagor
delivers to the mortgagee a note or bond and the mortgage. In the case of a land
trust, there are three parties because title to the property is held by a land
trustee under a land trust agreement of which the borrower is the beneficiary;
at origination of a mortgage loan, the borrower executes a separate undertaking
to make payments on the mortgage note. Although a deed of trust is similar to a
mortgage, a deed of trust has three parties; the borrower-homeowner 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,
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in trust, generally with a power of sale, to the trustee to secure payment of
the obligation. The trustee's authority under a deed of trust and the
mortgagee's authority under a mortgage are governed by law, the express
provisions of the deed of trust or mortgage, and, in some cases, the directions
of the beneficiary.
COOPERATIVE LOANS
If specified in the Prospectus Supplement relating to a series of
Securities, the Mortgage Loans also may consist of Cooperative Loans evidenced
by Cooperative Notes secured by security interests in shares issued by
cooperatives, which are private corporations that are entitled to be treated as
housing cooperatives under federal tax law, and in the related proprietary
leases or occupancy agreements granting exclusive rights to occupy specific
dwelling units in the cooperatives' buildings. The security agreement will
create a lien upon, or grant a title interest in, the property which it covers,
the priority of which will depend on the terms of the particular security
agreement as well as the order of recordation of the agreement in the
appropriate recording office. Such a lien or title interest is not prior to the
lien for real estate taxes and assessments and other charges imposed under
governmental police powers.
Each cooperative owns in fee or has a leasehold interest in all the
real property and owns in fee or leases the building and all separate dwelling
units therein. The cooperative is directly responsible for property management
and, in most cases, payment of real estate taxes, other governmental impositions
and hazard and liability insurance. If there is a blanket mortgage or mortgages
on the cooperative apartment building or underlying land, as is generally the
case, or an underlying lease of the land, as is the case in some instances, the
cooperative, as property mortgagor, or lessee, as the case may be, also is
responsible for meeting these mortgage or rental obligations. A blanket mortgage
is ordinarily incurred by the cooperative in connection with either the
construction or purchase of the cooperative's apartment building or the
obtaining of capital by the cooperative. The interest of the occupant under
proprietary leases or occupancy agreements as to which that cooperative is the
landlord generally is subordinate to the interest of the holder of a blanket
mortgage and to the interest of the holder of a land lease. If the cooperative
is unable to meet the payment obligations (i) arising under a blanket mortgage,
the mortgagee holding a blanket mortgage could foreclose on that mortgage and
terminate all subordinate proprietary leases and occupancy agreements or (ii)
arising under its land lease, the holder of the landlord's interest under the
land lease could terminate it and all subordinate proprietary leases and
occupancy agreements. Also, a blanket mortgage on a cooperative may provide
financing in the form of a mortgage that does not fully amortize, with a
significant portion of principal being due in one final payment at maturity. The
inability of the cooperative to refinance a mortgage and its consequent
inability to make such final payment could lead to foreclosure by the mortgagee.
Similarly, a land lease has an expiration date and the inability of the
cooperative to extend its term or, in the alternative, to purchase the land
could lead to termination of the cooperative's interest in the property and
termination of all proprietary leases and occupancy agreements. In either event,
a foreclosure by the holder of a blanket mortgage or the termination of the
underlying lease could eliminate or significantly diminish the value of any
collateral held by the lender who financed the purchase by an individual
tenant-stockholder of cooperative shares or, in the case of the Mortgage Loans,
the collateral securing the Cooperative Loans.
The cooperative is owned by tenant-stockholders who, through ownership
of stock or shares in the corporation, receive proprietary leases or occupancy
agreements that confer exclusive rights to occupy specific 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 blanket mortgage, real property taxes,
maintenance expenses and other capital or ordinary expenses. An ownership
interest in a cooperative and accompanying occupancy rights are financed through
a cooperative share loan evidenced by a promissory note and secured by an
assignment of and a security interest in the occupancy agreement or proprietary
lease and a security interest in the related cooperative shares. The lender
generally takes possession of the share certificate and a counterpart of the
proprietary lease or occupancy agreement and a financing statement covering the
proprietary lease or occupancy agreement and the cooperative shares is filed in
the appropriate state and local offices to perfect the lender's interest in its
collateral. Subject to the limitations discussed below, upon default of the
tenant-stockholder, the lender may sue for judgment on the promissory note,
dispose of the collateral at a public or private sale or otherwise proceed
against the collateral or tenant-stockholder as an individual as provided in the
security agreement covering the assignment of the proprietary lease or occupancy
agreement and the pledge of cooperative shares. See "Foreclosure on Shares of
Cooperatives" below.
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FORECLOSURE
Foreclosure of a deed of trust is generally accomplished by a
non-judicial trustee's sale (private sale) under a specific provision in the
deed of trust and state laws which authorize the trustee to sell the property
upon any default by the borrower under the terms of the note or deed of trust.
Beside the nonjudicial remedy, a deed of trust may be judicially foreclosed. In
addition to any notice requirements contained in a deed of trust, in some
states, the trustee must record a notice of default and within a certain period
of time send a copy to the borrower trustor and to any person who has recorded a
request for a copy of notice of default and notice of sale. In addition, the
trustee must provide notice in some states to any other individual having an
interest of record in the real property, including any junior lienholders. If
the deed of trust is not reinstated within a specified period, 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 local 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 of record in the real property.
Foreclosure of a mortgage is generally accomplished by judicial action.
Generally, the action is initiated by the service of legal pleadings upon all
parties having an interest of record in the real property. Delays in completion
of the foreclosure may occasionally result from difficulties in locating
necessary parties. Judicial foreclosure proceedings are often not contested by
any of the applicable parties. If the mortgagee's right to foreclose is
contested, the legal proceedings necessary to resolve the issue can be
time-consuming.
In some states, the borrower-trustor has the right to reinstate the
loan at any time following default until shortly before the trustee's sale. In
general, in such states, the borrower, or any other person having a junior
encumbrance on the real estate, may, during a reinstatement period, cure the
default by paying the entire amount in arrears plus the costs and expenses
incurred in enforcing the obligation.
In the case of foreclosure under either a mortgage or a deed of trust,
the sale by the referee or other designated officer or by the trustee is a
public sale. However, because of the difficulty a potential buyer at the sale
would have in determining the exact status of title and because the physical
condition of the property may have deteriorated during the foreclosure
proceedings, it is uncommon for a third party to purchase the property at a
foreclosure sale unless there is a great deal of economic incentive for the new
purchaser to purchase the subject property at the sale. Rather, it is common for
the lender to purchase the property from the trustee or referee for a credit bid
less than or equal to the unpaid principal amount of the mortgage or deed of
trust, accrued and unpaid interest and the expense of foreclosure. Generally,
state law controls the amount of foreclosure costs and expenses, including
attorneys' fees, which may be recovered by a lender. Thereafter, subject to the
right of the borrower in some states to remain in possession during the
redemption period, the lender will assume the burdens of ownership, including
obtaining hazard insurance 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 and, in some states, the lender may be entitled to a
deficiency judgment. Any loss may be reduced by the receipt of any mortgage
insurance proceeds.
FORECLOSURE ON SHARES OF COOPERATIVES
The cooperative shares and proprietary lease or occupancy agreement
owned by the tenant-stockholder and pledged to the lender are, in almost all
cases, subject to restrictions on transfer as set forth in the cooperative's
certificate of incorporation and by-laws, as well as in the proprietary lease or
occupancy agreement. The proprietary lease or occupancy agreement, even while
pledged, may be cancelled by the cooperative for failure by the tenant
stockholder to pay rent or other obligations or charges owed by such
tenant-stockholder, including mechanics' liens against the cooperative apartment
building incurred by such tenant-stockholder. Commonly, rent and other
obligations and charges arising under a proprietary lease or occupancy agreement
that are owed to the cooperative are made liens upon the shares to which the
proprietary lease or occupancy agreement relates. In addition, the proprietary
lease or occupancy agreement generally permits the cooperative to terminate such
lease or agreement in the event the borrower defaults in the performance of
covenants thereunder. Typically, the lender and the cooperative enter into a
recognition agreement that, together with any lender protection provisions
contained in the proprietary lease, establishes the rights and obligations of
both parties in the event of a default by the tenant-stockholder on its
obligations under the proprietary lease or occupancy agreement. A default by the
tenant-stockholder under the
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proprietary lease or occupancy agreement usually will constitute a default under
the security agreement between the lender and the tenant-stockholder.
The recognition agreement generally provides that, in the event that
the tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the cooperative will take no action to terminate such lease or
agreement until the lender has been provided with notice of and an opportunity
to cure the default. The recognition agreement typically provides that if the
proprietary lease or occupancy agreement is terminated, the cooperative will
recognize the lender's lien against proceeds from a sale of the cooperative
apartment, subject, however, to the cooperative's right to sums due under such
proprietary lease or occupancy agreement or sums that have become liens on the
shares relating to the proprietary lease or occupancy agreement. The total
amount owed to the cooperative by the tenant-stockholder, which the lender
generally cannot restrict and does not monitor, could reduce the amount realized
upon a sale of the collateral below the outstanding principal balance of the
Cooperative Loan and accrued and unpaid interest thereon.
Recognition agreements generally also provide that in the event of a
foreclosure on a Cooperative Loan, the lender must obtain the approval or
consent of the cooperative as required by the proprietary lease before
transferring the cooperative shares or assigning the proprietary lease.
Generally, the lender is not limited in any rights it may have to dispossess the
tenant-stockholder.
In New York, foreclosure on the cooperative shares is accomplished by
public sale in accordance with the provisions of Article 9 of the UCC and the
security agreement relating to those shares. Article 9 of the UCC requires that
a sale be conducted in a "commercially reasonable" manner. Whether a sale has
been conducted in a "commercially reasonable" manner will depend on the facts in
each case. In determining commercial reasonableness, a court will look to the
notice given the debtor and the method, manner, time, place and terms of the
sale and the sale price. Generally, a sale conducted according to the usual
practice of banks selling similar collateral will be considered reasonably
conducted.
Article 9 of the UCC provides that the proceeds of the sale will be
applied first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the cooperative corporation to receive sums due under
the proprietary lease or occupancy agreement. If there are proceeds remaining,
the lender must account to the tenant-stockholder for the surplus. Conversely,
if a portion of the indebtedness remains unpaid, the tenant-stockholder is
generally responsible for the deficiency. See "Anti-Deficiency Legislation and
Other Limitations on Lenders" below.
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 or other parties are
given a statutory period in which to redeem the property from the foreclosure
sale. In some states, redemption may occur only upon payment of the entire
principal balance of the loan, accrued interest and expenses of foreclosure. In
other states, redemption may be authorized if the former borrower pays only a
portion of the sums due. The effect of a statutory right of redemption is to
diminish the ability of the lender to sell the foreclosed property. The rights
of redemption would defeat the title of any purchaser subsequent to foreclosure
or sale under a deed of trust. Consequently, the practical effect of the
redemption right is to force the lender to maintain the property and pay the
expenses of ownership until the redemption period has expired. In some states,
there is no right to redeem property after a trustee's sale under a deed of
trust.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states have imposed statutory prohibitions that limit the
remedies of a beneficiary under a deed of trust or a mortgagee under a mortgage.
In some states, including California, statutes limit the right of the
beneficiary or mortgagee to obtain a deficiency judgment against the borrower
following foreclosure. A deficiency judgment is a personal judgment against the
former borrower equal in most cases to the difference between the amount due to
the lender and the net amount realized upon the public sale of the real
property. In the case of a Mortgage Loan secured by a property owned by a trust
where the Mortgage Note is executed on behalf of the trust, a deficiency
judgment against the trust following foreclosure or sale under a deed of trust,
even if obtainable under applicable
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law, may be of little value to the mortgagee or beneficiary if there are no
trust assets against which such deficiency judgment may be executed. Other
statutes require the beneficiary or mortgagee to exhaust the security afforded
under a deed of trust or mortgage by foreclosure in an attempt to satisfy the
full debt before bringing a personal action against the borrower. In certain
other states, the lender has the option of bringing a personal action against
the borrower on the debt without first exhausting such security; however, in
some of these states the lender, following judgment on such personal action, may
be deemed to have elected a remedy and may be precluded from exercising remedies
with respect to the security. Consequently, the practical effect of the election
requirement, in those states permitting such election, is that lenders will
usually proceed against the security first rather than bringing a personal
action against the borrower. Finally, in certain other states, statutory
provisions limit any deficiency judgment against the former borrower following a
foreclosure to the excess of the outstanding debt over the fair value of the
property at the time of the public sale. The purpose of these statutes is
generally to prevent a beneficiary or mortgagee from obtaining a large
deficiency judgment against the former borrower as a result of low or no bids at
the judicial sale.
In addition to laws limiting or prohibiting deficiency judgments,
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 collateral
or enforce a deficiency judgment. For example, with respect to federal
bankruptcy law, a court with federal bankruptcy jurisdiction may permit a debtor
through his or her Chapter 11 or Chapter 13 rehabilitative plan to cure a
monetary default in respect of a mortgage loan on a debtor's residence by paying
arrearages within a reasonable time period and reinstating the original mortgage
loan payment schedule even though the lender accelerated the mortgage loan and
final judgment of foreclosure had been entered in state court (provided no sale
of the residence had yet occurred) prior to the filing of the debtor's petition.
Some courts with federal bankruptcy jurisdiction have approved plans, based on
the particular facts of the reorganization case, that effected the curing of a
mortgage loan default by paying arrearages over a number of years.
Courts with federal bankruptcy jurisdiction also have indicated that
the terms of a mortgage loan secured by property of the debtor may be modified.
These courts have allowed modifications that include reducing the amount of each
monthly payment, changing the rate of interest, altering the repayment schedule,
forgiving all or a portion of the debt and reducing the lender's security
interest to the value of the residence, thus leaving the lender a general
unsecured creditor for the difference between the value of the residence and the
outstanding balance of the loan.
Certain states have imposed general equitable principles upon judicial
foreclosure. These equitable principles are generally designed to relieve the
borrower from the legal effect of the borrower's default under the related loan
documents. Examples of judicial remedies that have been fashioned include
judicial requirements that the lender undertake affirmative and expensive
actions to determine the causes for the borrower's default and the likelihood
that the borrower will be able to reinstate the loan. In some cases, lenders
have been required to reinstate loans or recast payment schedules in order to
accommodate borrowers who are suffering from temporary financial disabilities.
In other cases, such courts have limited the right of the lender to foreclose if
the default under the loan is not monetary, such as the borrower failing to
adequately maintain the property or the borrower executing a second deed of
trust affecting the property.
Certain tax liens arising under the Internal Revenue Code of 1986, as
amended, may in certain circumstances provide priority over the lien of a
mortgage or deed of trust. In addition, substantive requirements are imposed
upon mortgage lenders in connection with the origination and the servicing of
mortgage loans by numerous federal and some state consumer protection laws.
These laws include, by example, 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 state laws, such as the
California Fair Debt Collection Practices Act. These laws and regulations impose
specific statutory liabilities upon lenders who originate mortgage loans and
fail to comply with the provisions of the law. In some cases, this liability may
affect assignees of the mortgage loans.
ENVIRONMENTAL LEGISLATION
Certain states impose a statutory lien for associated costs on property
that is the subject of a cleanup action by the state on account of hazardous
wastes or hazardous substances released or disposed of on the property. Such a
lien generally will have priority over all subsequent liens on the property and,
in certain of these states, will have priority over prior recorded liens
including the lien of a mortgage. In some states, however, such a lien will not
have
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priority over prior recorded liens of a deed of trust. In addition, under
federal environmental legislation and under state law in a number of states, a
secured party which takes a deed in lieu of foreclosure or acquires a mortgaged
property at a foreclosure sale or assumes active control over the operation or
management of a property so as to be deemed an "owner" or "operator" of the
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 lender (such as a Trust Estate) secured by residential real
property. In the event that title to a Mortgaged Property securing a Mortgage
Loan in a Trust Estate was acquired by the Trust and cleanup costs were incurred
in respect of the Mortgaged Property, the holders of the related series of
Securities might realize a loss if such costs were required to be paid by the
Trust.
ENFORCEABILITY OF CERTAIN PROVISIONS
Unless the Prospectus Supplement indicates otherwise, generally all of
the Mortgage Loans contain due-on-sale clauses. These clauses permit the lender
to accelerate the maturity of the loan if the borrower sells, transfers or
conveys the property. The enforceability of these clauses has been the subject
of legislation or litigation in many states including California, and in some
cases the enforceability of these clauses was limited or denied. However, the
Garn-St. Germain Depository Institutions Act of 1982 (the "Garn-St. Germain
Act") preempts state constitutional, statutory and case law that prohibits the
enforcement of due-on-sale clauses and permits lenders to enforce these clauses
in accordance with their terms, subject to certain limited exceptions. The
Garn-St. Germain Act does "encourage" lenders to permit assumption of loans at
the original rate of interest or at some other rate less than the average of the
original rate and the market rate.
The Garn-St. Germain Act also sets forth nine specific instances in
which a mortgage lender covered by the Garn-St. Germain Act may not exercise a
due-on-sale clause, notwithstanding the fact that a transfer of the property may
have occurred. These include intra-family transfers, certain transfers by
operation of law, leases of fewer than three years and the creation of a junior
encumbrance. Regulations promulgated under the Garn-St. Germain Act also
prohibit the imposition of a prepayment penalty upon the acceleration of a loan
pursuant to a due-on-sale clause.
The inability to enforce a due-on-sale clause may result in a mortgage
loan bearing an interest rate below the current market rate being assumed by a
new home buyer rather than being paid off, that may have an impact upon the
average life of the Mortgage Loans and the number of Mortgage Loans that may be
outstanding until maturity.
Upon foreclosure, courts have imposed general equitable principles.
These equitable principles generally are designed to relieve the borrower from
the legal effect of his defaults under the loan documents. Examples of judicial
remedies that have been fashioned include judicial requirements that the lender
undertake affirmative and expensive actions to determine the causes for the
borrower's default and the likelihood that the borrower will be able to
reinstate the loan. In some cases, courts have substituted their judgment for
the lender's judgment and have required that lenders reinstate loans or recast
payment schedules in order to accommodate borrowers who are suffering from
temporary financial disability. In other cases, courts have limited the right of
the lender to foreclose if the default under the mortgage instrument is not
monetary, such as the borrower failing to adequately maintain the property or
the borrower executing a second mortgage or deed of trust affecting the
property. Finally, some courts have been faced with the issue of whether or not
federal or state constitutional provisions reflecting due process concerns for
adequate notice require that borrowers under deeds of trust or mortgages receive
notices in addition to the statutorily prescribed minimum. For the most part,
these cases have upheld the notice provisions as being reasonable or have found
that the sale by a trustee under a deed of trust, or under a mortgage having a
power of sale, does not involve sufficient state action to afford constitutional
protections to the borrower.
CERTAIN PROVISIONS OF CALIFORNIA DEEDS OF TRUST
Most institutional lenders in California use a form of deed of trust
that confers on the beneficiary the right both to receive all proceeds collected
under any hazard insurance policy and all awards made in connection with any
condemnation proceedings, and to apply such proceeds and awards to any
indebtedness secured by the deed of trust, in such order as the beneficiary may
determine, provided, however, that California law prohibits the beneficiary from
applying insurance and condemnation proceeds to the indebtedness secured by the
deed of trust unless the beneficiary's security has been impaired by the
casualty or condemnation, and, if such security has been impaired, permits such
proceeds to be so applied only to the extent of such impairment. Thus, in the
event improvements on
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the property are damaged or destroyed by fire or other casualty, or in the event
the property is taken by condemnation, and, as a result thereof, the
beneficiary's security is impaired, the beneficiary under the underlying first
deed of trust will have the prior right to collect any insurance proceeds
payable under a hazard insurance policy and any award of damages in connection
with the condemnation and to apply the same to the indebtedness secured by the
first deed of trust. Proceeds in excess of the amount of indebtedness secured by
a first deed of trust will, in most cases, be applied to the indebtedness of a
junior deed of trust.
Another provision typically found in the forms of deed of trust used by
most institutional lenders in California obligates the trustor to pay before
delinquency all taxes and assessments on the property and, when due, all
encumbrances, charges and liens on the property which appear prior to the deed
of trust, to provide and maintain fire insurance on the property, to maintain
and repair the property and not to commit or permit any waste thereof, and to
appear in and defend any action or proceeding purporting to affect the property
or the rights of the beneficiary under the deed of trust. Upon a failure of the
trustor to perform any of these obligations, the beneficiary is given the right
under the deed of trust to perform the obligation itself, at its election, with
the trustor agreeing to reimburse the beneficiary for any sums expended by the
beneficiary on behalf of the trustor. All sums so expended by the beneficiary
become part of the indebtedness secured by the deed of trust.
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. A similar federal
statute was in effect with respect to mortgage loans made during the first three
months of 1980. The Office of Thrift Supervision is authorized to issue rules
and regulations and to publish interpretations governing implementation of Title
V. The statute authorized any state to reimpose interest rate limits by
adopting, before April 1, 1983, a law or constitutional provision which
expressly rejects 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 or to limit
discount points or other charges.
As indicated above under "Mortgage Loan Program--Representations by
Originators," each Originator of a Mortgage Loan will have represented that such
Mortgage Loan was originated in compliance with then applicable state laws,
including usury laws, in all material respects. However, the Mortgage Rates on
the Mortgage Loans will be subject to applicable usury laws as in effect from
time to time.
ALTERNATIVE MORTGAGE INSTRUMENTS
Alternative mortgage instruments, including ARM Loans and early
ownership mortgage loans, originated by non-federally chartered lenders have
historically been subjected to a variety of restrictions. Such restrictions
differed from state to state, resulting in difficulties in determining whether a
particular alternative mortgage instrument originated by a state-chartered
lender was in compliance with applicable law. These difficulties were alleviated
substantially as a result of the enactment of Title VIII of the Garn-St. Germain
Act ("Title VIII"). Title VIII provides that: notwithstanding any state law to
the contrary, state-chartered banks may originate alternative mortgage
instruments in accordance with regulations promulgated by the Comptroller of the
Currency with respect to origination of alternative mortgage instruments by
national banks; state-chartered credit unions may originate alternative mortgage
instruments in accordance with regulations promulgated by the National Credit
Union Administration with respect to origination of alternative mortgage
instruments by federal credit unions; and all other non-federally chartered
housing creditors, including state-chartered savings and loan associations,
state-chartered savings banks and mutual savings banks and mortgage banking
companies, may originate alternative mortgage instruments in accordance with the
regulations promulgated by the Federal Home Loan Bank Board, predecessor to the
Office of Thrift Supervision, with respect to origination of alternative
mortgage instruments by federal savings and loan associations. Title VIII
provides that any state may reject applicability of the provisions of Title VIII
by adopting, prior to October 15, 1985, a law or constitutional provision
expressly rejecting the applicability of such provisions. Certain states have
taken such action.
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SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the terms of the Soldiers' and Sailors' Civil Relief Act of 1940,
as amended (the "Relief Act"), a Mortgagor who enters military service after the
origination of such Mortgagor's Mortgage Loan (including a Mortgagor who was in
reserve status and is called to active duty after origination of the Mortgage
Loan), 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. The Relief Act applies to
Mortgagors who are members of the Army, Navy, Air Force, Marines, National
Guard, Reserves, Coast Guard, and officers of the U.S. Public Health Service
assigned to duty with the military. Because the Relief Act applies to Mortgagors
who enter military service (including reservists who are called to active duty)
after origination of the related Mortgage Loan, no information can be provided
as to the number of loans that may be affected by the Relief Act. Application of
the Relief Act would adversely 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. Any shortfall in interest collections resulting from the
application of the Relief Act or similar legislation or regulations, which would
not be recoverable from the related Mortgage Loans, would result in a reduction
of the amounts distributable to the holders of the related Securities, and would
not be covered by advances, any Letter of Credit or any other form of Credit
Enhancement provided in connection with the related series of Securities. In
addition, the Relief Act imposes limitations that would impair the ability of
the Master Servicer to foreclose on an affected Mortgage Loan during the
Mortgagor's period of active duty status, and, under certain circumstances,
during an additional three month period thereafter. Thus, in the event that the
Relief Act or similar legislation or regulations apply to any Mortgage Loan
which goes into default, there may be delays in payment and losses on the
related Securities in connection therewith. Any other interest shortfalls,
deferrals or forgiveness of payments on the Mortgage Loans resulting from
similar legislation or regulations may result in delays in payments or losses to
Securityholders of the related series.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following is a general discussion of the material anticipated
federal income tax consequences to investors of the purchase, ownership and
disposition of the Securities offered hereby. The discussion is based upon laws,
regulations, rulings and decisions now in effect, all of which are subject to
change. The discussion below does not purport to deal with all federal tax
consequences applicable to all categories of investors, some of which may be
subject to special rules. Investors should consult their own tax advisors in
determining the federal, state, local and any other tax consequences to them of
the purchase, ownership and disposition of the Securities. For purposes of this
discussion, references to a "Securityholder" or a "Holder" are to the beneficial
owner of a Security.
The following discussion addresses securities of three general types:
(i) securities ("Grantor Trust Securities") representing interests in a Trust
Estate (a "Grantor Trust Estate") which the Sponsor will covenant not to elect
to have treated as a real estate mortgage investment conduit (REMIC); (ii)
securities ("REMIC Securities") representing interests in a Trust Estate, or a
portion thereof, which the Sponsor will covenant to elect to have treated as a
REMIC under sections 860A through 860G of the Internal Revenue Code of 1986, as
amended (the "Code"); and (iii) securities ("Debt Securities") that are intended
to be treated for federal income tax purposes as indebtedness secured by the
underlying Mortgage Loans. This Prospectus does not address the tax treatment of
partnership interests or interests in a FASIT. Such a discussion will be set
forth in the related Prospectus Supplement for any Trust issuing Securities
characterized as partnership interests or interests in a FASIT. The Prospectus
Supplement for each series of Securities will indicate whether a REMIC or FASIT
election (or elections) will be made for the related Trust Estate and, if a
REMIC or FASIT election is to be made, will identify all "regular interests" and
"residual interests" in the REMIC or all "regular interests," "high-yield
interests" or "ownership interest" in the FASIT. Pursuant to the Small Business
Job Protection Act of 1996, enacted on August 20, 1996 (the "1996 Act"), a FASIT
election can be made on or after September 1, 1997.
The Taxpayer Relief Act of 1997 adds provisions to the Code that require
the recognition of gain upon the "constructive sale of an appreciated financial
position." A constructive sale of an appreciated financial position occurs if a
taxpayer enters into certain transactions or series of such transactions with
respect to a financial instrument that have the effect of substantially
eliminating the taxpayer's risk of loss and opportunity for gain with respect
to the financial instrument. These provisions apply only to Classes of
Certificates that do not have a principal balance.
GRANTOR TRUST SECURITIES
With respect to each series of Grantor Trust Securities, Dewey
Ballantine, special tax counsel to the Sponsor, will deliver its opinion to the
Sponsor that (unless otherwise limited in the related Prospectus Supplement) the
related Grantor Trust Estate will be classified as a grantor trust and not as a
partnership or an association taxable as a
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corporation. Accordingly, each Holder of a Grantor Trust Security will generally
be treated as the owner of an interest in the Mortgage Loans included in the
Grant or Trust Estate.
For purposes of the following discussion, a Grantor Trust Security
representing an undivided equitable ownership interest in the principal of the
Mortgage Loans constituting the related Grantor Trust Estate, together with
interest thereon at a pass-through rate, will be referred to as a "Grantor Trust
Fractional Interest Security." A Grantor Trust Security representing ownership
of all or a portion of the difference between interest paid on the Mortgage
Loans constituting the related Grantor Trust Estate and interest paid to the
Holders of Grantor Trust Fractional Interest Securities issued with respect to
such Grantor Trust Estate will be referred to as a "Grantor Trust Strip
Security."
Special Tax Attributes
Unless otherwise disclosed in a related Prospectus Supplement, Dewey B
llantine, special tax counsel to the Sponsor, will deliver its opinion to the
Sponsor that (a) Grantor Trust Fractional Interest Securities will represent
interests in (i) "loans . . . secured by an interest in real property" within
the meaning of section 7701(a)(19)(C)(v) of the Code; and (ii) "obligations
(including any participation or certificate of beneficial ownership therein)
which . . . are principally secured by an interest in real property" within the
meaning of section 860G(a)(3)(A) of the Code; and (b) interest on Grantor Trust
Fractional Interest Securities will be considered "interest on obligations
secured by mortgages on real property or on interests in real property" within
the meaning of section 856(c)(3)(B) of the Code. In addition, the Grantor Trust
Strip Securities will be "obligations (including any participation or
certificate of beneficial ownership therein) . . . principally secured by an
interest in real property" within the meaning of section 860G(a)(3)(A) of the
Code.
The 1996 Act repeals the bad debt reserve method of accounting for
mutual savings banks and domestic building and loan associations for tax years
beginning after December 31, 1995. As a result, section 593(d) of the Code is no
longer applicable to treat the Certificates as "qualifying real property loans."
Taxation of Holders of Grantor Trust Securities
Holders of Grantor Trust Fractional Interest Securities generally will
be required to report on their federal i come tax returns their respective
shares of the income from the Mortgage Loans (including amounts used to pay
reasonable servicing fees and other expenses but excluding amounts payable to
Holders of any corresponding Grantor Trust Strip Securities) and, subject to the
limitations described below, will be entitled to deduct their shares of any such
reasonable servicing fees and other expenses. If a Holder acquires a Grantor
Trust Fractional Interest Security for an amount that differs from its
outstanding principal amount, the amount includible in income on a Grantor Trust
Fractional Interest Security may differ from the amount of interest
distributable thereon. See "Discount and Premium," below. Individuals holding a
Grantor Trust Fractional Interest Security directly or through certain
pass-through entities will be allowed a deduction for such reasonable servicing
fees and expenses only to the extent that the aggregate of such Holder's
miscellaneous itemized deductions exceeds 2% of such Holder's adjusted gross
income. Further, Holders (other than corporations) subject to the alternative
minimum tax may not deduct miscellaneous itemized deductions in determining
alternative minimum taxable income.
Holders of Grantor Trust Strip Securities generally will be required to
treat such Securities as "stripped coupons" under section 1286 of the Code.
Accordingly, such a Holder will be required to treat the excess of the total
amount of payments on such a Security over the amount paid for such Security as
original issue discount and to include such discount in income as it accrues
over the life of such Security. See "--Discount and Premium," below.
Grantor Trust Fractional Interest Securities may also be subject to the
coupon stripping rules if a class of Grantor Trust Strip Securities is issued as
part of the same series of Securities. The consequences of the application of
the coupon stripping rules would appear to be that any discount arising upon the
purchase of such a Security (and perhaps all stated interest thereon) would be
classified as original issue discount and includible in the Holder's income as
it accrues (regardless of the Holder's method of accounting), as described below
under "--Discount and Premium." The coupon stripping rules will not apply,
however, if (i) the pass-through rate is no more than 100 basis points lower
than the gross rate of interest payable on the underlying Mortgage Loans and
(ii) the difference between
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the outstanding principal balance on the Security and the amount paid for such
Security is less than 0.25% of such principal balance times the weighted average
remaining maturity of the Security.
Sales of Grantor Trust Securities
Any gain or loss recognized on the sale of a Grantor Trust Security
(equal to the difference between the amount realized on the sale and the
adjusted basis of such Grantor Trust Security) will be capital gain or loss,
except to the extent of accrued and unrecognized market discount, which will be
treated as ordinary income, and in the case of banks and other financial
institutions except as provided under section 582(c) of the Code. The adjusted
basis of a Grantor Trust Security will generally equal its cost, increased by
any income reported by the seller (including original issue discount and market
discount income) and reduced (but not below zero) by any previously reported
losses, any amortized premium and by any distributions of principal.
Grantor Trust Reporting
The Trustee will furnish to each Holder of a Grantor Trust Fractional
Interest Security with each distribution a statement setting forth the amount of
such distribution allocable to principal on the underlying Mortgage Loans and to
interest thereon at the related Pass-Through Rate. In addition, within a
reasonable time after the end of each calendar year, based on information
provided by the Master Servicer, the Trustee will furnish to each Holder during
such year such customary factual information as the Master Servicer deems
necessary or desirable to enable Holders of Grantor Trust Securities to prepare
their tax returns and will furnish comparable information to the Internal
Revenue Service (the "IRS") as and when required to do so by law.
REMIC SECURITIES
If provided in a related Prospectus Supplement, an election will be
made to treat a Trust Estate as a REMIC under the Code. Qualification as a REMIC
requires ongoing compliance with certain conditions. With respect to each series
of Securities for which such an election is made, Dewey Ballantine, special tax
counsel to the Sponsor, will deliver its opinion to the Sponsor that (unless
otherwise limited in the related Prospectus Supplement), assuming compliance
with the Pooling and Servicing Agreement, the Trust Estate will be treated as a
REMIC for federal income tax purposes. A Trust Estate for which a REMIC election
is made will be referred to herein as a "REMIC Trust." The Securities of each
class will be designated as "regular interests" in the REMIC Trust except that a
separate class will be designated as the "residual interest" in the REMIC Trust.
The Prospectus Supplement for each series of Securities will state whether
Securities of each class will constitute a regular interest (a REMIC Regular
Security) or a residual interest (a REMIC Residual Security).
A REMIC Trust will not be subject to federal income tax except with
respect to income from prohibited transactions and in certain other instances
described below. See "--Taxes on a REMIC Trust." Generally, the total income
from the Mortgage Loans in a REMIC Trust will be taxable to the Holders of the
Securities of that series, as described below.
Regulations issued by the Treasury Department on December 23, 1992 (the
"REMIC Regulations") provide some guidance regarding the federal income tax
consequences associated with the purchase, ownership and disposition of REMIC
Securities. While certain material provisions of the REMIC Regulations are
discussed below, investors should consult their own tax advisors regarding the
possible application of the REMIC Regulations in their specific circumstances.
SPECIAL TAX ATTRIBUTES
REMIC Regular Securities and REMIC Residual Securities will be "regular
or residual interests in a REMIC" within the meaning of section
7701(a)(19)(C)(xi) of the Code and "real estate assets" within the meaning of
section 856(c)(5)(A) of the Code. If at any time during a calendar year less
than 95% of the assets of a REMIC Trust consist of "qualified mortgages" (within
the meaning of section 860G(a)(3) of the Code) then the portion of the REMIC
Regular Securities and REMIC Residual Securities that are qualifying assets
under those sections during such calendar year may be limited to the portion of
the assets of such REMIC Trust that are qualified mortgages. Similarly, income
on the REMIC Regular Securities and REMIC Residual Securities will be treated as
"interest on
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obligations secured by mortgages on real property" within the meaning of section
856(c)(3)(B) of the Code, subject to the same limitation as set forth in the
preceding sentence. For purposes of applying this limitation, a REMIC Trust
should be treated as owning the assets represented by the qualified mortgages.
The assets of the Trust Estate will include, in addition to the Mortgage Loans,
payments on the Mortgage Loans held pending distribution on the REMIC Regular
Securities and REMIC Residual Securities and any reinvestment income thereon.
REMIC Regular Securities and REMIC Residual Securities held by a financial
institution to which section 585, 586 or 593 of the Code applies will be treated
as evidences of indebtedness for purposes of section 582(c)(1) of the Code.
REMIC Regular Securities will also be qualified mortgages with respect to other
REMICs.
The 1996 Act repeals the bad debt reserve method of accounting for
mutual savings banks and domestic building and loan associations for tax years
beginning after December 31, 1995. As a result, section 593(d) of the Code is no
longer applicable to treat the Certificates as "qualifying real property loans."
Taxation of Holders of REMIC Regular Securities
Except as indicated below in this federal income tax discussion, the
REMIC Regular Securities will be treated for federal income tax purposes as debt
instruments issued by the REMIC Trust on the date such Securities are first sold
to the public (the "Settlement Date") and not as ownership interests in the
REMIC Trust or its assets. Holders of REMIC Regular Securities that otherwise
report income under a cash method of accounting will be required to report
income with respect to such Securities under an accrual method. For additional
tax consequences relating to REMIC Regular Securities purchased at a discount or
with premium, see "--Discount and Premium," below.
Taxation of Holders of REMIC Residual Securities
Daily Portions. Except as indicated below, a Holder of a REMIC Residual
Security for a REMIC Trust generally will be required to report its daily
portion of the taxable income or net loss of the REMIC Trust for each day during
a calendar quarter that the Holder owned such REMIC Residual Security. For this
purpose, the daily portion shall be determined by allocating to each day in the
calendar quarter its ratable portion of the taxable income or net loss of the
REMIC Trust for such quarter and by allocating the amount so allocated among the
Residual Holders (on such day) in accordance with their percentage interests on
such day. Any amount included in the gross income or allowed as a loss of any
Residual Holder by virtue of this paragraph will be treated as ordinary income
or loss.
The requirement that each Holder of a REMIC Residual Security report
its daily portion of the taxable income or net loss of the REMIC Trust will
continue until there are no Securities of any class outstanding, even though the
Holder of the REMIC Residual Security may have received full payment of the
stated interest and principal on its REMIC Residual Security.
The Trustee will provide to Holders of REMIC Residual Securities of
each series of Securities (i) such information as is necessary to enable them to
prepare their federal income tax returns and (ii) any reports regarding the
Securities of such series that may be required under the Code.
Taxable Income or Net Loss of a REMIC Trust. The taxable income or net
loss of a REMIC Trust will be the income from the qualified mortgages it holds
and any reinvestment earnings less deductions allowed to the REMIC Trust. Such
taxable income or net loss for a given calendar quarter will be determined in
the same manner as for an individual having the calendar year as the taxable
year and using the accrual method of accounting, with certain modifications. The
first modification is that a deduction will be allowed for accruals of interest
(including any original issue discount, but without regard to the investment
interest limitation in section 163(d) of the Code) on the REMIC Regular
Securities (but not the REMIC Residual Securities), even though REMIC Regular
Securities are for non-tax purposes evidences of beneficial ownership rather
than indebtedness of a REMIC Trust. Second, market discount or premium equal to
the difference between the total stated principal balances of the qualified
mortgages and the basis to the REMIC Trust therein generally will be included in
income (in the case of discount) or deductible (in the case of premium) by the
REMIC Trust as it accrues under a constant yield method, taking into account the
"Prepayment Assumption" (as defined in the Related Prospectus Supplement, see
"--Discount and Premium--Original Issue Discount," below). The basis to a REMIC
Trust in the qualified mortgages is the aggregate
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of the issue prices of all the REMIC Regular Securities and REMIC Residual
Securities in the REMIC Trust on the Settlement Date. If, however, a substantial
amount of a class of REMIC Regular Securities or REMIC Residual Securities has
not been sold to the public, then the fair market value of all the REMIC Regular
Securities or REMIC Residual Securities in that class as of the date of the
Prospectus Supplement should be substituted for the issue price.
Third, no item of income, gain, loss or deduction allocable to a
prohibited transaction (see "--Taxes on a REMIC Trust--Prohibited Transactions"
below) will be taken into account. Fourth, a REMIC Trust generally may not
deduct any item that would not be allowed in calculating the taxable income of a
partnership by virtue of section 703(a)(2) of the Code. Finally, the limitation
on miscellaneous itemized deductions imposed on individuals by section 67 of the
Code will not be applied at the REMIC Trust level to any servicing and guaranty
fees. (See, however, "--Pass-Through of Servicing and Guaranty Fees to
Individuals" below.) In addition, under the REMIC Regulations, any expenses that
are incurred in connection with the formation of a REMIC Trust and the issuance
of the REMIC Regular Securities and REMIC Residual Securities are not treated as
expenses of the REMIC Trust for which a deduction is allowed. If the deductions
allowed to a REMIC Trust exceed its gross income for a calendar quarter, such
excess will be a net loss for the REMIC Trust for that calendar quarter. The
REMIC Regulations also provide that any gain or loss to a REMIC Trust from the
disposition of any asset, including a qualified mortgage or "permitted
investment" (as defined in section 860G(a)(5) of the Code) will be treated as
ordinary gain or loss.
A Holder of a REMIC Residual Security may be required to recognize
taxable income without being entitled to receive a corresponding amount of cash.
This could occur, for example, if the qualified mortgages are considered to be
purchased by the REMIC Trust at a discount, some or all of the REMIC Regular
Securities are issued at a discount, and the discount included as a result of a
prepayment on a Mortgage Loan that is used to pay principal on the REMIC Regular
Securities exceeds the REMIC Trust's deduction for unaccrued original issue
discount relating to such REMIC Regular Securities. Taxable income may also be
greater in earlier years because interest expense deductions, expressed as a
percentage of the outstanding principal amount of the REMIC Regular Securities,
may increase over time as the earlier classes of REMIC Regular Securities are
paid, whereas interest income with respect to any given Mortgage Loan expressed
as a percentage of the outstanding principal amount of that Mortgage Loan, will
remain constant over time.
Basis Rules and Distributions. A Holder of a REMIC Residual Security
has an initial basis in its Security equal to the amount paid for such REMIC
Residual Security. Such basis is increased by amounts included in the income of
the Holder and decreased by distributions and by any net loss taken into account
with respect to such REMIC Residual Security. A distribution on a REMIC Residual
Security to a Holder is not included in gross income to the extent it does not
exceed such Holder's basis in the REMIC Residual Security (adjusted as described
above) and, to the extent it exceeds the adjusted basis of the REMIC Residual
Security, shall be treated as gain from the sale of the REMIC Residual Security.
A Holder of a REMIC Residual Security is not allowed to take into
account any net loss for any calendar quarter to the extent such net loss
exceeds such Holder's adjusted basis in its REMIC Residual Security as of the
close of such calendar quarter (determined without regard to such net loss). Any
loss disallowed by reason of this limitation may be carried forward indefinitely
to future calendar quarters and, subject to the same limitation, may be used
only to offset income from the REMIC Residual Security.
Excess Inclusions. Any excess inclusions with respect to a REMIC
Residual Security are subject to certain special tax rules. With respect to a
Holder of a REMIC Residual Security, the excess inclusion for any calendar
quarter is defined as the excess (if any) of the daily portions of taxable
income over the sum of the "daily accruals" for each day during such quarter
that such REMIC Residual Security was held by such Holder. The daily accruals
are determined by allocating to each day during a calendar quarter its ratable
portion of the product of the "adjusted issue price" of the REMIC Residual
Security at the beginning of the calendar quarter and 120% of the "federal
long-term rate" in effect on the Settlement Date, based on quarterly
compounding, and properly adjusted for the length of such quarter. For this
purpose, the adjusted issue price of a REMIC Residual Security as of the
beginning of any calendar quarter is equal to the issue price of the REMIC
Residual Security, increased by the amount of daily accruals for all prior
quarters and decreased by any distributions made with respect to such REMIC
Residual Security before the beginning of such quarter. The issue price of a
REMIC Residual Security is the initial offering price to the public (excluding
bond houses and brokers) at which a substantial number of the REMIC Residual
Securities was
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sold. The federal long-term rate is a blend of current yields on Treasury
securities having a maturity of more than nine years, computed and published
monthly by the IRS.
In general, Holders of REMIC Residual Securities with excess inclusion
income cannot offset such income by losses from other activities. For Holders
that are subject to tax only on unrelated business taxable income (as defined in
section 511 of the Code), an excess inclusion of such Holder is treated as
unrelated business taxable income. With respect to variable contracts (within
the meaning of section 817 of the Code), a life insurance company cannot adjust
its reserve to the extent of any excess inclusion, except as provided in
regulations. The REMIC Regulations indicate that if a Holder of a REMIC Residual
Security is a member of an affiliated group filing a consolidated income tax
return, the taxable income of the affiliated group cannot be less than the sum
of the excess inclusions attributable to all residual interests in REMICS held
by members of the affiliated group. For a discussion of the effect of excess
inclusions on certain foreign investors that own REMIC Residual Securities, see
"--Foreign Investors" below.
The Treasury Department also has the authority to issue regulations
that would treat all taxable income of a REMIC Trust as excess inclusions if the
REMIC Residual Security does not have "significant value." Although the Treasury
Department did not exercise this authority in the REMIC Regulations, future
regulations may contain such a rule. If such a rule were adopted, it is unclear
how significant value would be determined for these purposes. If no such rule is
applicable, excess inclusions should be calculated as discussed above.
In the case of any REMIC Residual Securities that are held by a real
estate investment trust, the aggregate excess inclusions with respect to such
REMIC Residual Securities reduced (but not below zero) by the real estate
investment trust taxable income (within the meaning of section 857(b)(2) of the
Code, excluding any net capital gain) will be allocated among the shareholders
of such trust in proportion to the dividends received by such shareholders from
such trust, and any amount so allocated will be treated as an excess inclusion
with respect to a REMIC Residual Security as if held directly by such
shareholder. Similar rules will apply in the case of regulated investment
companies, common trust funds and certain cooperatives that hold a REMIC
Residual Security.
Pass-Through of Servicing and Guaranty Fees to Individuals. A Holder of
a REMIC Residual Security who is an individual will be required to include in
income a share of any servicing and guaranty fees. A deduction for such fees
will be allowed to such Holder only to the extent that such fees, along with
certain of such Holder's other miscellaneous itemized deductions exceed 2% of
such Holder's adjusted gross income. In addition, a Holder of a REMIC Residual
Security may not be able to deduct any portion of such fees in computing such
Holder's alternative minimum tax liability. A Holder's share of such fees will
generally be determined by (i) allocating the amount of such expenses for each
calendar quarter on a pro rata basis to each day in the calendar quarter, and
(ii) allocating the daily amount among the Holders in proportion to their
respective holdings on such day.
Taxes on a REMIC Trust
Prohibited Transactions. The Code imposes a tax on a REMIC equal to
100% of the net income derived from "prohibited transactions." In general, a
prohibited transaction means the disposition of a qualified mortgage other than
pursuant to certain specified exceptions, the receipt of investment income from
a source other than a Mortgage Loan or certain other permitted investments, the
receipt of compensation for services, or the disposition of an asset purchased
with the payments on the qualified mortgages for temporary investment pending
distribution on the regular and residual interests.
Contributions to a REMIC after the Startup Day. The Code imposes a tax
on a REMIC equal to 100% of the value of any property contributed to the REMIC
after the "startup day" (generally the same as the Settlement Date). Exceptions
are provided for cash contributions to a REMIC (i) during the three month period
beginning on the startup day, (ii) made to a qualified reserve fund by a Holder
of a residual interest, (iii) in the nature of a guarantee, (iv) made to
facilitate a qualified liquidation or clean-up call, and (v) as otherwise
permitted by Treasury regulations.
Net Income from Foreclosure Property. The Code imposes a tax on a REMIC
equal to the highest corporate rate on "net income from foreclosure property."
The terms "foreclosure property" (which includes property acquired by deed in
lieu of foreclosure) and "net income from foreclosure property" are defined by
reference to the rules
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applicable to real estate investment trusts. Generally, foreclosure property
would be treated as such for a period of two years, with possible extensions.
Net income from foreclosure property generally means gain from the sale of
foreclosure property that is inventory property and gross income from
foreclosure property other than qualifying rents and other qualifying income for
a real estate investment trust.
Sales of REMIC Securities
General. Except as provided below, if a Regular or REMIC Residual
Security is sold, the seller will recognize gain or loss equal to the difference
between the amount realized in the sale and its adjusted basis in the Security.
The adjusted basis of a REMIC Regular Security generally will equal the cost of
such Security to the seller, increased by any original issue discount or market
discount included i the seller's gross income with respect to such Security and
reduced by distributions on such Security previously received by the seller of
amounts included in the stated redemption price at maturity and by any premium
that has reduced the seller's interest income with respect to such Security. See
"--Discount and Premium." The adjusted basis of a REMIC Residual Security is
determined as described above under "--Taxation of Holders of REMIC Residual
Securities--Basis Rules and Distributions." Except as provided in the following
paragraph or under section 582(c) of the Code, any such gain or loss will be
capital gain or loss, provided such Security is held as a "capital asset"
(generally, property held for investment) within the meaning of section 1221 of
the Code.
Gain from the sale of a REMIC Regular Security that might otherwise be
capital gain will be treated as ordinary income to the extent that such gain
does not exceed the excess, if any, of (i) the amount that would have been
includible in the income of the Holder of a REMIC Regular Security had income
accrued at a rate equal to 110% of the "applicable federal rate" (generally, an
average of current yields on Treasury securities) as of the date of purchase
over (ii) the amount actually includible in such Holder's income. In addition,
gain recognized on such a sale by a Holder of a REMIC Regular Security who
purchased such a Security at a market discount would also be taxable as ordinary
income in an amount not exceeding the portion of such discount that accrued
during the period such Security was held by such Holder, reduced by any market
discount includible in income under the rules described below under "--Discount
and Premium."
If a Holder of a REMIC Residual Security sells its REMIC Residual
Security at a loss, the loss will not be recognized if, within six months before
or after the sale of the REMIC Residual Security, such Holder purchases another
residual interest in any REMIC or any interest in a taxable mortgage pool (as
defined in section 7701(i) of the Code) comparable to a residual interest in a
REMIC. Such disallowed loss would be allowed upon the sale of the other residual
interest (or comparable interest) if the rule referred to in the preceding
sentence does not apply to that sale. While this rule may be modified by
Treasury regulations, no such regulations have yet been published.
Transfers of REMIC Residual Securities. Section 860E(e) of the Code
imposes a substantial tax, payable by the transferor (or, if a transfer is
through a broker, nominee, or other middleman as the transferee's agent, payable
by that agent) upon any transfer of a REMIC Residual Security to a disqualified
organization and upon a pass-through entity (including regulated investment
companies, real estate investment trusts, common trust funds, partnerships,
trusts, estates, certain cooperatives, and nominees) that owns a REMIC Residual
Security if such pass-through entity has a disqualified organization as a
record-holder. For purposes of the preceding sentence, a transfer includes any
transfer of record or beneficial ownership, whether pursuant to a purchase, a
default under a secured lending agreement or otherwise.
The term "disqualified organization" includes the United States, any
state or political subdivision thereof, any foreign government, any
international organization, or any agency or instrumentality of the foregoing
(other than certain taxable instrumentalities), any cooperative organization
furnishing electric energy or providing telephone service to persons in rural
areas, or any organization (other than a farmers' cooperative) that is exempt
from federal income tax, unless such organization is subject to the tax on
unrelated business income. Moreover, an entity will not qualify as a REMIC
unless there are reasonable arrangements designed to ensure that (i) residual
interests in such entity are not held by disqualified organizations and (ii)
information necessary for the application of the tax described herein will be
made available. Restrictions on the transfer of a REMIC Residual Security and
certain other provisions that are intended to meet this requirement are
described in the Pooling and Servicing Agreement, and will be discussed more
fully in the related Prospectus Supplement relating to the offering of any REMIC
Residual Security. In addition, a pass-through entity (including a nominee) that
holds a REMIC Residual Security may be subject to
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additional taxes if a disqualified organization is a record-holder therein. A
transferor of a REMIC Residual Security (or an agent of a transferee of a REMIC
Residual Security, as the case may be) will be relieved of such tax liability if
(i) the transferee furnishes to the transferor (or the transferee's agent) an
affidavit that the transferee is not a disqualified organization, and (ii) the
transferor (or the transferee's agent) does not have actual knowledge that the
affidavit is false at the time of the transfer. Similarly, no such tax will be
imposed on a pass-through entity for a period with respect to an interest
therein owned by a disqualified organization if (i) the record-holder of such
interest furnishes to the pass-through entity an affidavit that it is not a
disqualified organization, and (ii) during such period, the pass-through entity
has no actual knowledge that the affidavit is false.
The Taxpayer Relief Act of 1997 adds provisions to the Code that will
apply to an "electing large partnership." If an electing large partnership
holds a Residual Certificate, all interests in the electing large partnership
are treated as held by disqualified organizations for purposes of the tax
imposed upon a pass-through entity by section 860E(e) of the Code. An exception
to this tax, otherwise available to a pass-through entity that is furnished
certain affidavits by record holders of interests in the entity and that does
not know such affidavits are false, is not available to an electing large
partnership.
Under the REMIC Regulations, a transfer of a "noneconomic residual
interest" to a U.S. Person (as defined below in "--Foreign Investors--Grantor
Trust Securities and REMIC Regular Securities") will be disregarded for all
federal tax purposes unless no significant purpose of the transfer is to impede
the assessment or collection of tax. A REMIC Residual Security would be treated
as constituting a noneconomic residual interest unless, at the time of the
transfer, (i) the present value of the expected future distributions on the
REMIC Residual Security is no less than the product of the present value of the
"anticipated excess inclusions" with respect to such Security and the highest
corporate rate of tax for the year in which the transfer occurs, and (ii) the
transferor reasonably expects that the transferee will receive distributions
from the applicable REMIC Trust in an amount sufficient to satisfy the liability
for income tax on any "excess inclusions" at or after the time when such
liability accrues. Anticipated excess inclusions are the excess inclusions that
are anticipated to be allocated to each calendar quarter (or portion thereof)
following the transfer of a REMIC Residual Security, determined as of the date
such Security is transferred and based on events that have occurred as of that
date and on the Prepayment Assumption. See "--Discount and Premium" and
"--Taxation of Holders of REMIC Residual Securities--Excess Inclusions."
The REMIC Regulations provide that a significant purpose to impede the
assessment or collection of tax exists if, at the time of the transfer, a
transferor of a REMIC Residual Security has "improper knowledge" (i.e., either
knew, or should have known, that the transferee would be unwilling or unable to
pay taxes due on its share of the taxable income of the REMIC Trust). A
transferor is presumed not to have improper knowledge if (i) the transferor
conducts, at the time of a 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
come 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 makes certain representations to the transferor in the affidavit
relating to disqualified organizations discussed above. Transferors of a REMIC
Residual Security should consult with their own tax advisors for further
information regarding such transfers.
Reporting and Other Administrative Matters. For purposes of the
administrative provisions of the Code, each REMIC Trust will be treated as a
partnership and the Holders of REMIC Residual Securities will be treated as
partners. The Trustee will prepare, sign and file federal income tax returns for
each REMIC Trust, which returns are subject to audit by the IRS. Moreover,
within a reasonable time after the end of each calendar year, the Trustee will
furnish to each Holder that received a distribution during such year a statement
setting forth the portions of any such distributions that constitute interest
distributions, original issue discount, and such other information as is
required by Treasury regulations and, with respect to Holders of REMIC Residual
Securities in a REMIC Trust, information necessary to compute the daily portions
of the taxable income (or net loss) of such REMIC Trust for each day during such
year. The Trustee will also act as the tax matters partner for each REMIC Trust,
either in its capacity as a Holder of a REMIC Residual Security or in a
fiduciary capacity. Each Holder of a REMIC Residual Security, by the acceptance
of its REMIC Residual Security, agrees that the Trustee will act as its
fiduciary in the performance of any duties required of it in the event that it
is the tax matters partner.
Each Holder of a REMIC Residual Security is required to treat items on
its return consistently with the treatment on the return of the REMIC Trust,
unless the Holder either files a statement identifying the inconsistency or
establishes that the inconsistency resulted from incorrect information received
from the REMIC Trust. The IRS may assert a deficiency resulting from a failure
to comply with the consistency requirement without instituting an administrative
proceeding at the REMIC Trust level. Unless otherwise specified in the related
Prospectus Supplement, the Trustee does not intend to register any REMIC Trust
as a tax shelter pursuant to section 6111 of the Code.
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Termination
In general, no special tax consequences will apply to a Holder of a
REMIC Regular Security upon the termination of a REMIC Trust by virtue of the
final payment or liquidation of the last Mortgage Loan remaining in the Trust
Estate. If a Holder of a REMIC Residual Security's adjusted basis in its REMIC
Residual Security at the time such termination occurs exceeds the amount of cash
distributed to such Holder in liquidation of its interest, although the matter
is not entirely free from doubt, it would appear that the Holder of the REMIC
Residual Security is entitled to a loss equal to the amount of such excess.
DEBT SECURITIES
General
With respect to each series of Debt Securities, Dewey Ballantine,
special tax counsel to the Sponsor, will deliver its opinion to the Sponsor that
(unless otherwise limited in the related Prospectus Supplement) the Securities
will be classified as debt of the Sponsor secured by the related Mortgage Loans.
Consequently, the Debt Securities will not be treated as ownership interests in
the Mortgage Loans or the Trust. Holders will be required to report income
received with respect to the Debt Securities in accordance with their normal
method of accounting. For additional tax consequences relating to Debt
Securities purchased at a discount or with premium, see "--Discount and
Premium," below.
Special Tax Attributes
As described above, Grantor Trust Securities will possess certain
special tax attributes by virtue of their being ownership interests in the
underlying Mortgage Loans. Similarly, REMIC Securities will possess similar
attributes by virtue of the REMIC provisions of the Code. In general, Debt
Securities will not possess such special tax attributes. Investors to whom such
attributes are important should consult their own tax advisors regarding
investment in Debt Securities.
Sale or Exchange
If a Holder of a Debt Security sells or exchanges such Security, the
Holder will recognize gain or loss equal to the difference, if any, between the
amount received and the Holder's adjusted basis in the Security. The adjusted
basis in the Security generally will equal its initial cost, increased by any
original issue discount or market discount previously included in the seller's
gross income with respect to the Security and reduced by the payments previously
received on the Security, other than payments of qualified stated interest, and
by any amortized premium.
In general (except as described in "--Discount and Premium--Market
Discount," below), except for certain financial institutions subject to section
582(c) of the Code, any gain or loss on the sale or exchange of a Debt Security
recognized by an investor who holds the Security as a capital asset (within the
meaning of section 1221 of the Code), will be capital gain or loss and will be
long-term or short-term depending on whether the Security has been held for more
than one year.
DISCOUNT AND PREMIUM
A Security purchased for an amount other than its outstanding principal
amount will be subject to the rules governing original issue discount, market
discount or premium. In addition, all Grantor Trust Strip Securities and certain
Grantor Trust Fractional Interest Securities will be treated as having original
issue discount by virtue of the coupon stripping rules in section 1286 of the
Code. In very general terms, (i) original issue discount is treated as a form of
interest and must be included in a Holder's income as it accrues (regardless of
the Holder's regular method of accounting) using a constant yield method; (ii)
market discount is treated as ordinary income and must be included in a Holder's
income as principal payments are made on the Security (or upon a sale of a
Security); and (iii) if a Holder so elects, premium may be amortized over the
life of the Security and offset against inclusions of interest income. These tax
consequences are discussed in greater detail below.
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Original Issue Discount
In general, a Security will be considered to be issued with original
issue discount equal to the excess, if any, of its "stated redemption price at
maturity" over its "issue price." The issue price of a Security is the initial
offering price to the public (excluding bond houses and brokers) at which a
substantial number of the Securities was sold. The issue price also includes any
accrued interest attributable to the period between the beginning of the first
Remittance Period and the Settlement Date. The stated redemption price at
maturity of a Security that has a notional principal amount or receives
principal only or that is or may be an Accrual Security is equal to the sum of
all distributions to be made under such Security. The stated redemption price at
maturity of any other Security is its stated principal amount, plus an amount
equal to the excess (if any) of the interest payable on the first Payment Date
over the interest that accrues for the period from the Settlement Date to the
first Payment Date.
Notwithstanding the general definition, original issue discount will be
treated as zero if such discount is less than 0.25% of the stated redemption
price at maturity multiplied by its weighted average life. The weighted average
life of a Security is apparently computed for this purpose as the sum, for all
distributions included in the stated redemption price at maturity of the amounts
determined by multiplying (i) the number of complete years (rounding down for
partial years) from the Settlement Date until the date on which each such
distribution is expected to be made under the assumption that the Mortgage Loans
prepay at the rate specified in the related Prospectus Supplement (the
"Prepayment Assumption") by (ii) a fraction, the numerator of which is the
amount of such distribution and the denominator of which is the Security's
stated redemption price at maturity. If original issue discount is treated as
zero under this rule, the actual amount of original issue discount must be
allocated to the principal distributions on the Security and, when each such
distribution is received, gain equal to the discount allocated to such
distribution will be recognized.
Section 1272(a)(6) of the Code contains special original issue discount
rules directly applicable to REMIC Securities and Debt Securities. The Taxpayer
Relief Act of 1997 extends application of Section 1272(a)(6) to the Grantor
Trust Securities for tax years beginning after August 5, 1997. Under these rules
(described in greater detail below), (i) the amount and rate of accrual of
original issue discount on each series of Securities will be based on (x) the
Prepayment Assumption, and (y) in the case of a Security calling for a variable
rate of interest, an assumption that the value of the index upon which such
variable rate is based remains equal to the value of that rate on the Settlement
Date, and (ii) adjustments will be made in the amount of discount accruing in
each taxable year in which the actual prepayment rate differs from the
Prepayment Assumption.
Section 1272(a)(6)(B)(iii) of the Code requires that the prepayment
assumption used to calculate original issue discount be determined in the manner
prescribed in Treasury regulations. To date, no such regulations have been
promulgated. The legislative history of this Code provision indicates that the
assumed prepayment rate must be the rate used by the parties in pricing the
particular transaction. The Sponsor anticipates that the Prepayment Assumption
for each series of Securities will be consistent with this standard. The Sponsor
makes no representation, however, that the Mortgage Loans for a given series
will prepay at the rate reflected in the Prepayment Assumption for that series
or at any other rate. Each investor must make its own decision as to the
appropriate prepayment assumption to be used in deciding whether or not to
purchase any of the Securities.
Each Securityholder must include in gross income the sum of the "daily
portions" of original issue discount on its Security for each day during its
taxable year on which it held such Security. For this purpose, in the case of an
original Holder, the daily portions of original issue discount will be
determined as follows. A calculation will first be made of the portion of the
original issue discount that accrued during each "accrual period." The Trustee
will supply, at the time and in the manner required by the IRS, to
Securityholders, brokers and middlemen information with respect to the original
issue discount accruing on the Securities. Unless otherwise disclosed in the
related Prospectus Supplement, the Trustee will report original issue discount
based on accrual periods of one month, each beginning on a payment date (or, in
the case of the first such period, the Settlement Date) and ending on the day
before the next payment date.
Under section 1272(a)(6) of the Code, the portion of original issue
discount treated as accruing for any accrual period will equal the excess, if
any, of (i) the sum of (A) the present values of all the distributions remaining
to be made on the Security, if any, as of the end of the accrual period and (B)
the distribution made on such Security
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during the accrual period of amounts included in the stated redemption price at
maturity, over (ii) the adjusted issue price of such Security at the beginning
of the accrual period. The present value of the remaining distributions referred
to in the preceding sentence will be calculated based on (i) the yield to
maturity of the Security, calculated as of the Settlement Date, giving effect to
the Prepayment Assumption, (ii) events (including actual prepayments) that have
occurred prior to the end of the accrual period, (iii) the Prepayment
Assumption, and (iv) in the case of a Security calling for a variable rate of
interest, an assumption that the value of the index upon which such variable
rate is based remains the same as its value on the Settlement Date over the
entire life of such Security. The adjusted issue price of a Security at any time
will equal the issue price of such Security, increased by the aggregate amount
of previously accrued original issue discount with respect to such Security, and
reduced by the amount of any distributions made on such Security as of that time
of amounts included in the stated redemption price at maturity. The original
issue discount accruing during any accrual period will then be allocated ratably
to each day during the period to determine the daily portion of original issue
discount.
In the case of Grantor Trust Strip Securities and certain REMIC
Securities, the calculation described in the preceding paragraph may produce a
negative amount of original issue discount for one or more accrual periods. No
definitive guidance has been issued regarding the treatment of such negative
amounts. The legislative history to section 1272(a)(6) indicates that such
negative amounts may be used to offset subsequent positive accruals but may not
offset prior accruals and may not be allowed as a deduction item in a taxable
year in which negative accruals exceed positive accruals. Holders of such
Securities should consult their own tax advisors concerning the treatment of
such negative accruals.
A subsequent purchaser of a Security that purchases such Security at a
cost less than its remaining stated redemption price at maturity also will be
required to include in gross income for each day on which it holds such
Security, the daily portion of original issue discount with respect to such
Security (but reduced, if the cost of such Security to such purchaser exceeds
its adjusted issue price, by an amount equal to the product of (i) such daily
portion and (ii) a constant fraction, the numerator of which is such excess and
the denominator of which is the sum of the daily portions of original issue
discount on such Security for all days on or after the day of purchase).
Market Discount
A Holder that purchases a Security at a market discount, that is, at a
purchase price less than the remaining stated redemption price at maturity of
such Security (or, in the case of a Security with original issue discount, its
adjusted issue price), will be required to allocate each principal distribution
first to accrued market discount on the Security, and recognize ordinary income
to the extent such distribution does not exceed the aggregate amount of accrued
market discount on such Security not previously included in income. With respect
to Securities that have unaccrued original issue discount, such market discount
must be included in income in addition to any original issue discount. A Holder
that incurs or continues indebtedness to acquire a Security at a market discount
may also be required to defer the deduction of all or a portion of the interest
on such indebtedness until the corresponding amount of market discount is
included in income. In general terms, market discount on a Security may be
treated as accruing either (i) under a constant yield method or (ii) in
proportion to remaining accruals of original issue discount, if any, or if none,
in proportion to remaining distributions of interest on the Security, in any
case taking into account the Prepayment Assumption. The Trustee will make
available, as required by the IRS, to Holders of Securities information
necessary to compute the accrual of market discount.
Notwithstanding the above rules, market discount on a Security will be
considered to be zero if such discount is less than 0.25% of the remaining
stated redemption price at maturity of such Security multiplied by its weighted
average remaining life. Weighted average remaining life presumably would be
calculated in a manner similar to weighted average life, taking into account
payments (including prepayments) prior to the date of acquisition of the
Security by the subsequent purchaser. If market discount on a Security is
treated as zero under this rule, the actual amount of market discount must be
allocated to the remaining principal distributions on the Security and, when
each such distribution is received, gain equal to the discount allocated to such
distribution will be recognized.
Securities Purchased at a Premium
A purchaser of a Security that purchases such Security at a cost
greater than its remaining stated redemption price at maturity will be
considered to have purchased such Security (a "Premium Security") at a premium.
Such a
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purchaser need not include in income any remaining original issue discount and
may elect, under section 171(c)(2) of the Code, to treat such premium as
"amortizable bond premium." If a Holder makes such an election, the amount of
any interest payment that must be included in such Holder's income for each
period ending on a Payment Date will be reduced by the portion of the premium
allocable to such period based on the Premium Security's yield to maturity. The
legislative history of the Tax Reform Act of 1986 states that such premium
amortization should be made under principles analogous to those governing the
accrual of market discount (as discussed above under "-- Market Discount"). If
such election is made by the Holder, the election will also apply to all bonds
the interest on which is not excludible from gross income ("fully taxable
bonds") held by the Holder at the beginning of the first taxable year to which
the election applies and to all such fully taxable bonds thereafter acquired by
it, and is irrevocable without the consent of the IRS. If such an election is
not made, (i) such a Holder must include the full amount of each interest
payment in income as it accrues, and (ii) the premium must be allocated to the
principal distributions on the Premium Security and, when each such distribution
is received, a loss equal to the premium allocated to such distribution will be
recognized. Any tax benefit from the premium not previously recognized will be
taken into account in computing gain or loss upon the sale or disposition of the
Premium Security.
Some Securities may provide for only nominal distributions of principal
in comparison to the distributions of interest thereon. It is possible that the
IRS or the Treasury Department may issue guidance excluding such Securities from
the rules generally applicable to debt instruments issued at a premium. In
particular, it is possible that such a Security will be treated as having
original issue discount equal to the excess of the total payments to be received
thereon over its issue price. In such event, section 1272(a)(6) of the Code
would govern the accrual of such original issue discount, but a Holder would
recognize substantially the same income in any given period as would be
recognized if an election were made under section 171(c)(2) of the Code. Unless
and until the Treasury Department or the IRS publishes specific guidance
relating to the tax treatment of such Securities, the Trustee intends to furnish
tax information to Holders of such Securities in accordance with the rules
described in the preceding paragraph.
Special Election
For any Security acquired on or after April 4, 1994, a Holder may elect
to include in gross income all "interest" that accrues on the Security by using
a constant yield method. For purposes of the election, the term "interest"
includes stated interest, acquisition discount, original issue discount, de
minimis original issue discount, market discount, de minimis market discount and
unstated interest as adjusted by any amortizable bond premium or acquisition
premium. A Holder should consult its own tax advisor regarding the time and
manner of making and the scope of the election and the implementation of the
constant yield method.
BACKUP WITHHOLDING
Distributions of interest and principal, as well as distributions of
proceeds from the sale of Securities, may be subject to the "backup withholding
tax" under section 3406 of the Code at a rate of 31% if recipients of such
distributions fail to furnish to the payor certain information, including their
taxpayer identification numbers, or otherwise fail to establish an exemption
from such tax. Any amounts deducted and withheld from a distribution to a
recipient would be allowed as a credit against such recipient's federal income
tax. Furthermore, certain penalties may be imposed by the IRS on a recipient of
distributions that is required to supply information but that does not do so in
the proper manner.
FOREIGN INVESTORS
Grantor Trust Securities and REMIC Regular Securities
Distributions made on a Grantor Trust Security or a REMIC Regular
Security to, or on behalf of a Holder that is not a U.S. Person generally will
be exempt from U.S. federal income and withholding taxes. The term "U.S. Person"
means a citizen or resident of the United States, a corporation, partnership or
other entity created or organized in or under the laws of the United States or
any political subdivision thereof, an estate that is subject to U.S. federal
income tax regardless of the source of its income, or a trust if a court within
the United States can exercise primary supervision over its administration and
at least one United States fiduciary has the authority to control all
substantial decisions of the trust. This exemption is applicable provided (a)
the Holder is not subject to
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U.S. tax as a result of a connection to the United States other than ownership
of the Security, (b) the Holder signs a statement under penalties of perjury
that certifies that such Holder is not a U.S. Person, and provides the name and
address of such Holder, and (c) the last U.S. Person in the chain of payment to
the Holder receives such statement from such Holder or a financial institution
holding on its behalf and does not have actual knowledge that such statement is
false. Holders should be aware that the IRS might take the position that this
exemption does not apply to a Holder that also owns 10% or more of the REMIC
Residual Securities of any REMIC trust, or to a Holder that is a "controlled
foreign corporation" described in section 881(c)(3)(C) of the Code.
REMIC Residual Securities
Amounts distributed to a Holder of a REMIC Residual Security that is a
not a U.S. Person generally will be treated as interest for purposes of applying
the 30% (or lower treaty rate) withholding tax on income that is not effectively
connected with a U.S. trade or business. Temporary Treasury Regulations clarify
that amounts not constituting excess inclusions that are distributed on a REMIC
Residual Security to a Holder that is not a U.S. Person generally will be exempt
from U.S. federal income and withholding tax, subject to the same conditions
applicable to distributions on Grantor Trust Securities and REMIC Regular
Securities, as described above, but only to the extent that the obligations
directly underlying the REMIC Trust that issued the REMIC Residual Security
(e.g., Mortgage Loans or regular interests in another REMIC) were issued after
July 18, 1984. In no case will any portion of REMIC income that constitutes an
excess inclusion be entitled to any exemption from the withholding tax or a
reduced treaty rate for withholding. See "--REMIC Securities--Taxation of
Holders of REMIC Residual Securities--Excess Inclusions."
ERISA CONSIDERATIONS
GENERAL
Section 406 of ERISA and Section 4975 of the Code prohibit a pension,
profit sharing or other employee benefit plan (a "Plan") and certain individual
retirement arrangements from engaging in certain transactions involving "plan
assets" with persons that are "parties in interest" under ERISA or
"disqualified persons" under the Code with respect to the Plan, unless a
statutory or administrative exemption applies to the transaction. ERISA and the
Code also prohibit generally certain actions involving conflicts of interest by
persons who are fiduciaries of such Plans or arrangements. A violation of these
"prohibited transaction" rules may generate excise tax and other liabilities
under ERISA and the Code for such persons. In addition, investments by Plans
are subject to ERISA's general fiduciary requirements, including the
requirement of
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investment prudence and diversification and the requirement that a Plan's
investments be made in accordance with the documents governing the Plan.
Employee benefit plans that are governmental plans (as defined in Section 3(32)
of ERISA) and certain church plans (as deemed in Section 3(33) of ERISA) are
not subject to ERISA requirements.
Certain transactions involving the Trust might be deemed to constitute
prohibited transactions under ERISA and the Code with respect to a Plan
(including an individual retirement arrangement) that purchased Securities, if
the assets of the Trust were deemed to be assets of the Plan. Under a
regulation (the "Plan Assets Regulation") issued by the United States
Department of Labor (the "DOL"), 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
acquired an equity interest in the Trust and none of the exceptions contained
in the Plan Assets Regulation were 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. In addition, in John Hancock Mutual Life Insurance
Co. v. Harris Trust and Savings Bank, 114 S.Ct. 517(1993), the United States
Supreme Court ruled that assets held in an insurance company's general account
may be deemed to be "plan assets" for ERISA purposes under certain
circumstances. Therefore, in the absence of an exemption, the purchase, sale or
holding of a Security by a Plan (including certain individual retirement
arrangements) subject to Section 406 of ERISA or Section 4975 of the Code might
result in prohibited transactions and the imposition of excise taxes and civil
penalties.
CERTIFICATES
The DOL has issued to various underwriters individual prohibited
transaction exemptions (the "Underwriter Exemptions"), which generally exempt
from the application of the prohibited transaction provisions of Section
406(a), Section 406(b)(1), Section 406(b)(2) and Section 407(a) of ERISA and
the excise taxes imposed pursuant to Sections 4975(a) and (b) of the Code,
certain transactions with respect to the initial purchase, the holding and the
subsequent resale by Plans of certificates in pass-through trusts that consist
of secured receivables, secured loans and other secured obligations that meet
the conditions and requirements of the Underwriter Exemptions. The Underwriter
Exemptions will only be available for Securities that are Certificates.
Among the conditions that must be satisfied in order for the
Underwriter Exemptions to apply to offered certificates are the following:
(1) the acquisition of the certificates by a Plan is on terms
(including the price for the certificates) that are at least as
favorable to the Plan as they would be in an arm's-length
transaction with an unrelated party;
(2) the rights and interests evidenced by the certificates acquired by
the Plan are not subordinated to the rights and interests evidenced
by other certificates of the trust;
(3) the certificates acquired by the Plan have received a rating at the
time of such acquisition that is one of the three highest generic
rating categories from Standard & Poor's, Moody's, Duff & Phelps
Credit Rating Co. ("D&P") or Fitch;
(4) the Trustee is not an affiliate of any other member of the
Restricted Group (as defined below);
(5) the sum of all payments made to and retained by the underwriters in
connection with the distribution of the certificates represents not
more than reasonable compensation for underwriting the
certificates; the sum of all payments made to and retained by the
originators and the sponsor pursuant to the assignment of the loans
to the trust estate represents not more than the fair market value
of such loans; the sum of all payments made to and retained by any
servicer represents not more than reasonable compensation for such
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person's services under the pooling and servicing agreement and
reimbursement of such person's reasonable expenses in connection
therewith;
(6) the Plan investing in the certificates is an "accredited investor"
as defined in Rule 501(a)(1) of Regulation D of the Commission
under the Securities Act of 1933; and
(7) in the event that all of the obligations used to fund the trust
have not been transferred to the trust on the closing date,
additional obligations of the types specified in the prospectus
supplement and/or pooling and servicing agreement having an
aggregate value equal to no more than 25% of the total principal
amount of the certificates being offered by the trust may be
transferred to the trust, in exchange for amounts credited to the
account funding the additional obligations, within a funding period
of no longer than 90 days or 3 months following the closing date.
The trust estate must also meet the following requirements:
(i) the corpus of the trust estate must consist solely of assets of
the type that have been included in other investment pools;
(ii) certificates in such other investment pools must have been rated
in one of the three highest rating categories of Standard &
Poor's, Moody's, Fitch or D&P for at least one year prior to the
Plan's acquisition of certificates; and
(iii) certificates evidencing interests in such other investment pools
must have been purchased by investors other than Plans for at
least one year prior to the Plan's acquisition of certificates.
Moreover, the Underwriter Exemptions provide relief from certain
self-dealing/conflict of interest prohibited transactions that may occur when
the Plan fiduciary causes a Plan to acquire certificates in a trust in which
the fiduciary (or its affiliate) is an obligor on the receivables held in the
trust; provided that, among other requirements, (i) in the case of an
acquisition in connection with the initial issuance of certificates, at least
fifty percent of each class of certificates in which Plans have invested is
acquired by persons independent of the Restricted Group and at least fifty
percent of the aggregate interest in the trust is acquired by persons
independent of the Restricted Group; (ii) such fiduciary (or its affiliate) is
an obligor with respect to five percent or less of the fair market value of the
obligations contained in the trust; (iii) the Plan's investment in certificates
of any class does not exceed twenty-five percent of all of the certificates of
that class outstanding at the time of the acquisition; and (iv) immediately
after the acquisition, no more than twenty-five percent of the assets of the
Plan with respect to which such person is a fiduciary are invested in
certificates representing an interest in one or more trusts containing assets
sold or serviced by the same entity. The Underwriter Exemptions do not apply to
Plans sponsored by the Sponsor, the Underwriters, the Trustee, the Master
Servicer, any other servicer, any obligor with respect to Mortgage Loans
included in the Trust Estate constituting more than five percent of the
aggregate unamortized principal balance of the assets in the Trust Estate, or
any affiliate of such parties (the "Restricted Group").
In addition to the Underwriter Exemptions, the DOL has issued
Prohibited Transaction Class Exemption ("PTCE") 83-1 which provides an
exemption for certain transactions involving the sale or exchange of certain
residential mortgage pool pass-through certificates by Plans and for
transactions in connection with the servicing and operation of the mortgage
pool.
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NOTES
The Underwriter Exemptions will not be available for Securities
which are Notes. However, if the Notes are treated as indebtedness without
substantial equity features, the Trust's assets would not be deemed assets of a
Plan. If the Notes are treated as having substantial equity features, the
purchase, holding and resale of the Notes could result in a transaction that is
prohibited under ERISA or the Code. The acquisition or holding of the Notes by
or on behalf of a Plan could nevertheless give rise to a prohibited
transaction, if such acquisition and holding of Notes by or on behalf of a Plan
were deemed to be a prohibited loan to a party in interest with respect to such
Plan. Certain exemptions from such prohibited transaction rules could be
applicable to the purchase and holding of Notes by a Plan, depending on the
type and circumstances of the plan fiduciary making the decision to acquire
such Notes. Included among these exemptions are: PTCE 84-14, regarding certain
transactions effected by "qualified professional asset managers"; PTCE 90-1,
regarding certain transactions entered into by insurance company pooled
separate accounts; PTCE 91-38, regarding certain transactions entered into by
bank collective investment funds; PTCE 95-60, regarding certain transactions
entered into by insurance company general accounts; and PTCE 96-23, regarding
certain transactions by "in-house asset managers". Each purchaser and each
transferee of a Note that is treated as debt for purposes of the Plan Assets
Regulation may be required to represent and warrant that its purchase and
holding of such Note will be covered by one of the exemptions listed above or
by another Department of Labor Class Exemption.
CONSULTATION WITH COUNSEL
The Prospectus Supplement for each series of Securities will provide
further information which Plans should consider before purchasing the offered
Securities. A Plan fiduciary considering the purchase of Securities should
consult its tax and/or legal advisors regarding whether the assets of the Trust
would be considered plan assets, the possibility of exemptive relief from the
prohibited transaction rules and other ERISA issues and their potential
consequences. Moreover, each Plan fiduciary should determine whether under the
general fiduciary standards of investment prudence and diversification, an
investment in the Securities is appropriate for the Plan, taking into account
the overall investment policy of the Plan and the composition of the Plan's
investment portfolio.
LEGAL INVESTMENT MATTERS
Certain classes of Securities offered hereby and by the related
Prospectus Supplement will constitute "mortgage related securities" for purposes
of the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA") so long as
they are rated in at least the second highest rating category by any Rating
Agency, and as such may 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
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 on or prior to October 3, 1991 specifically limiting the legal
investment authority of any such entities with respect to "mortgage related
securities," such securities will constitute legal investments for entities
subject to such legislation only to the extent provided therein. Certain States
have enacted legislation which overrides the preemption provisions of SMMEA.
SMMEA provides, however, that in no event will the enactment of any such
legislation affect the validity of any contractual commitment to purchase, hold
or invest in "mortgage related securities," or require the sale or other
disposition of such securities, so long as such contractual commitment was made
or such securities acquired prior to the enactment of such legislation.
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 "mortgage related securities" without limitation as to the percentage of
their assets represented thereby, federal credit unions may invest in such
securities, and national banks may purchase such 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.
The Federal Financial Institutions Examination Council has adopted a
supervisory policy statement (the "Policy Statement"), applicable to all
depository institutions, setting forth guidelines for and significant
restrictions on investments in "high-risk mortgage securities." The Policy
Statement has been adopted by the Federal Reserve Board, the Office of the
Comptroller of the Currency, the FDIC and the Office of Thrift Supervision with
an effective date of February 10, 1992. The Policy Statement generally indicates
that a mortgage derivative product will be deemed to be high risk if it exhibits
greater price volatility than a standard fixed rate thirty-year mortgage
security. According to the Policy Statement, prior to purchase, a depository
institution will be required to determine whether a mortgage derivative product
that it is considering acquiring is high-risk, and if so, that the proposed
acquisition would reduce the institution's overall interest rate risk. Reliance
on analysis and documentation obtained from a securities dealer or other outside
party without internal analysis by the institution would be unacceptable. There
can be no assurance as to which classes of Securities will be treated as
high-risk under the Policy Statement. In addition, the National Credit Union
Administration has issued regulations governing federal credit union investments
which prohibit investment in certain specified types of securities, which may
include certain classes of Securities. Similar policy statements have been
issued by regulators having jurisdiction over other types of depository
institutions.
There may be other restrictions on the ability of certain investors
either to purchase certain classes of Securities or to purchase any class of
Securities representing more than a specified percentage of the investors'
assets. The Sponsor will make no representations as to the proper
characterization of any class of Securities for legal investment or other
purposes, or as to the ability of particular investors to purchase any class of
Securities under applicable legal investment restrictions. These uncertainties
may adversely affect the liquidity of any class of Securities. Accordingly, all
investors whose investment activities are subject to legal investment laws and
regulations, regulatory capital requirements or review by regulatory authorities
should consult with their own legal advisors in determining whether and to what
extent the Securities of any class constitute legal investments under SMMEA or
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are subject to investment, capital or other restrictions, and whether SMMEA has
been overridden in any jurisdiction applicable to such investor.
USE OF PROCEEDS
Unless otherwise specified in the related Prospectus Supplement,
substantially all of the net proceeds to be received from the sale of Securities
will be applied by the Sponsor to finance the purchase of, or to repay
short-term loans incurred to finance the purchase of, the Mortgage Loans
underlying the Securities or will be used by the Sponsor for general corporate
purposes. The Sponsor expects that it will make additional sales of securities
similar to the Securities from time to time, but the timing and amount of any
such additional offerings will be dependent upon a number of factors, including
the volume of mortgage loans purchased by the Sponsor, prevailing interest
rates, availability of funds and general market conditions.
METHODS OF DISTRIBUTION
The Securities offered hereby and by the related Prospectus Supplements
will be offered in series through one or more of the methods described below.
The Prospectus Supplement prepared for each series will describe the method of
offering being utilized for that series and will state the public offering or
purchase price of such series and the net proceeds to the Sponsor from such
sale.
The Sponsor intends that Securities will be offered through the
following methods from time to time and that offerings may be made concurrently
through more than one of these methods or that an offering of a particular
series of Securities may be made through a combination of two or more of these
methods. Such methods are as follows:
1. By negotiated firm commitment or best efforts underwriting and
public re-offering by underwriters;
2. By placements by the Sponsor with institutional investors through
dealers; and
3. By direct placements by the Sponsor with institutional investors.
In addition, if specified in the related Prospectus Supplement, a
series of Securities may be offered in whole or in part in exchange for the
Mortgage Loans (and other assets, if applicable) that would comprise the
Mortgage Pool in respect of such Securities.
If underwriters are used in a sale of any Securities (other than in
connection with an underwriting on a best efforts basis), such Securities will
be acquired by the underwriters for their own account and may be resold from
time to time in one or more transactions, including negotiated transactions, at
fixed public offering prices or at varying prices to be determined at the time
of sale or at the time of commitment therefor. Such underwriters may be
broker-dealers affiliated with the Sponsor whose identities and relationships to
the Sponsor will be as set forth in the related Prospectus Supplement. The
managing underwriter or underwriters with respect to the offer and sale of a
particular series of Securities will be set forth on the cover of the Prospectus
Supplement relating to such series and the members of the underwriting
syndicate, if any, will be named in such Prospectus Supplement.
In connection with the sale of the Securities, underwriters may receive
compensation from the Sponsor or from purchasers of the Securities in the form
of discounts, concessions or commissions. Underwriters and dealers participating
in the distribution of the Securities may be deemed to be underwriters in
connection with such Securities, and any discounts or commissions received by
them from the Sponsor and any profit on the resale of Securities by them may be
deemed to be underwriting discounts and commissions under the Securities Act of
1933, as amended. The Prospectus Supplement will describe any such compensation
paid by the Sponsor.
It is anticipated that the underwriting agreement pertaining to the
sale of any series of Securities will provide that the obligations of the
underwriters will be subject to certain conditions precedent, that the
underwriters will be obligated to purchase all such Securities if any are
purchased (other than in connection with an underwriting on a best efforts
basis) and that, in limited circumstances, the Sponsor will indemnify the
several underwriters and the
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underwriters will indemnify the Sponsor against certain civil liabilities,
including liabilities under the Securities Act of 1933, as amended, or will
contribute to payments required to be made in respect thereof.
The Prospectus Supplement with respect to any series offered by
placements through dealers will contain information regarding the nature of such
offering and any agreements to be entered into between the Sponsor and
purchasers of Securities of such series.
The Sponsor anticipates that the Securities offered hereby 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 Securities Act of 1933, as
amended, 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 will be passed upon for the Sponsor by Dewey
Ballantine, LLP, New York, New York and by the office of the general counsel of
the Sponsor.
FINANCIAL INFORMATION
The Sponsor has determined that its financial statements are not
material to the offering made hereby. However, any prospective purchaser who
desires to review financial information concerning the Sponsor will be provided
by the Sponsor upon request with a copy of the most recent financial statements
of the Sponsor.
A Prospectus Supplement may contain the financial statements of the
related Credit Enhancer, if any.
ADDITIONAL INFORMATION
This Prospectus, together with the Prospectus Supplement for each
series of Securities, contains a summary of the material terms of the applicable
exhibits to the Registration Statement and the documents referred to herein and
therein. Copies of such exhibits are on file at the offices of the Securities
and Exchange Commission in Washington, D.C., and may be obtained at rates
prescribed by the Commission upon request to the Commission and may be
inspected, without charge, at the Commission's offices.
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INDEX OF PRINCIPAL DEFINITIONS
Page
Accounts................................................................ 43
Accrual Securities...................................................... 6
Actuarial Loans......................................................... 21
ADVANTA Parent.......................................................... 58
Affiliated Originators.................................................. 4
Approved Guidelines..................................................... 9
APR..................................................................... 22
ARM Loans............................................................... 18
Balloon Amount.......................................................... 27
Balloon Loans........................................................... 15
Balloon payments........................................................ 20
Bankruptcy Bond......................................................... 54
Bankruptcy Loss......................................................... 52
Bankruptcy Loss Amount.................................................. 51
Base Servicing Fee...................................................... 58
Book-Entry Securities................................................... 38
Bulk Acquisition........................................................ 9
Bulk Guidelines......................................................... 29
Buydown Account......................................................... 20
Buydown Agreement....................................................... 44
Buydown Funds........................................................... 20
Buydown Mortgage Loans.................................................. 20
Buydown Period.......................................................... 20
Cede.................................................................... 12
Certificates............................................................ 5
Closing Date............................................................ 41
CLTV.................................................................... 22
Code.................................................................... 74
Compensating Interest................................................... 47
Conduit Participants.................................................... 32
Contracts............................................................... 25
Conventional Loans...................................................... 20
Convertible Mortgage Loan............................................... 28
Cooperative Loans....................................................... 26
Cooperative Notes....................................................... 26
Credit Enhancement...................................................... 43
Credit Enhancer......................................................... 19
Cut-Off Date............................................................ 22
D&P..................................................................... 87
Date of Payment Loans................................................... 21
Debt Securities......................................................... 12
Debt Service Reduction.................................................. 54
Defaulted Mortgage Loss................................................. 52
Deferred Interest....................................................... 15
Deficient Valuation..................................................... 54
Deleted Mortgage Loan................................................... 34
Delinquency Advances.................................................... 46
Designated Depository Institution....................................... 43
Detailed Description.................................................... 19
Determination Date...................................................... 46
Direct or Indirect Participants......................................... 18
Distribution Account.................................................... 43
DTC..................................................................... 12
Due Date................................................................ 42
Eligible Investments.................................................... 43
Equity Securities....................................................... 6
ERISA................................................................... 12
Exchange Act............................................................ 12
Exemptions.............................................................. 87
Extraordinary Losses.................................................... 52
FDIC.................................................................... 32
FHA..................................................................... 25
FHLMC................................................................... 15
Financial Guaranty Insurance Policy..................................... 54
Financial Guaranty Insurer.............................................. 54
Fixed-Income Securities................................................. 6
FNMA.................................................................... 15
Forward Purchase Agreement.............................................. 9
Fraud Loss.............................................................. 52
Fraud Loss Amount....................................................... 51
Funding Period.......................................................... 41
Garn-St. Germain Act.................................................... 72
Graduated payments...................................................... 20
Grantor Trust Estate.................................................... 74
Grantor Trust Fractional Interest Security.............................. 75
Grantor Trust Securities................................................ 12
Grantor Trust Strip Security............................................ 75
Holder.................................................................. 74
Home Improvement Loans.................................................. 25
Indenture............................................................... 5
Indenture Trustee....................................................... 5
Index................................................................... 27
Indirect Participant.................................................... 38
Insurance Paying Agent.................................................. 54
Insurance Proceeds...................................................... 42
Insured Payment......................................................... 54
Interest Rate........................................................... 6
Investment Company Act.................................................. 8
IRS..................................................................... 76
Junior Lien Loans....................................................... 23
Letter of Credit........................................................ 53
Letter of Credit Bank................................................... 53
Liquidated Mortgage Loan................................................ 16
Liquidation Proceeds.................................................... 16
Loan Purchase Price..................................................... 33
Lockout periods......................................................... 21
LTV..................................................................... 22
Manufactured Homes...................................................... 25
Manufacturer's Invoice Price............................................ 23
Master Commitments...................................................... 31
Master Servicer......................................................... 2
Master Servicing Fee.................................................... 58
Modified Loans.......................................................... 27
Monthly pay............................................................. 20
Mortgage Asset Schedule ................................................ 20
Mortgage Assets......................................................... 19
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Mortgage Loans.......................................................... 1
Mortgage Notes.......................................................... 26
Mortgage Pool........................................................... 1
Mortgage Pool Insurance Policy.......................................... 53
Mortgage Rate........................................................... 20
Mortgaged Properties.................................................... 20
Mortgages............................................................... 9
Mortgagor............................................................... 15
Multi-family Loans...................................................... 24
Net Liquidation Proceeds................................................ 42
Net Mortgage Rate....................................................... 64
Note Margin............................................................. 27
Notes................................................................... 5
Originator's Retained Yield............................................. 26
Originators............................................................. 1
Participants............................................................ 38
Partnership Interests................................................... 12
Pass-Through Rate....................................................... 45
Paying Agent............................................................ 45
Payment Date............................................................ 7
Percentage Interest..................................................... 45
Physical Certificates................................................... 38
Plan..................................................................12, 86
Plan Assets Regulation.................................................. 87
Policy Statement........................................................ 89
Pool Factor............................................................. 48
Pool Insurer............................................................ 44
Pooling and Servicing Agreement......................................... 5
Pre-Funding Account..................................................... 10
Premium Security........................................................ 85
Prepayment Assumption................................................... 78
Principal Prepayments................................................... 42
Purchase Obligation..................................................... 14
Qualified Replacement Mortgage.......................................... 34
Rating Agencies......................................................... 12
Realized Loss........................................................... 51
Record Date............................................................. 7
Relief Act.............................................................. 19
REMIC................................................................... 2
REMIC Regular Securities................................................ 12
REMIC Regulations....................................................... 76
REMIC Residual Securities............................................... 12
REMIC Securities........................................................ 74
REMIC Trust............................................................. 76
Remittance Date......................................................... 43
Remittance Period....................................................... 7
REO Property............................................................ 50
Reserve Fund............................................................ 54
Restricted Group........................................................ 88
Revolving Credit Line Loans............................................. 21
Rule of 78's............................................................ 22
Rule of 78's Loan....................................................... 21
Securities.............................................................. 1
Security Registrar...................................................... 38
Securityholders......................................................... 1
Senior Lien............................................................. 22
Senior Securities....................................................... 6
Servicer................................................................ 58
Servicing Advance....................................................... 47
Servicing Agreement..................................................... 5
Servicing Fee........................................................... 58
Settlement Date......................................................... 77
Single Family Loans..................................................... 24
SMMEA................................................................... 11
Special Hazard Amount................................................... 51
Special Hazard Insurance Policy......................................... 53
Special Hazard Insurer.................................................. 53
Special Hazard Loss..................................................... 52
Sponsor................................................................. 1
Sponsor's Guidelines.................................................... 9
Sponsor's Originator Guide.............................................. 9
Statistic Calculation Date.............................................. 22
Strip Securities........................................................ 6
Sub-Servicing Account................................................... 41
Sub-Servicing Agreement................................................. 33
Subordinate Amount...................................................... 52
Subordinate Securities.................................................. 6
Subsequent Mortgage Loans............................................... 9
Subservicer(s).......................................................... 2
Title V................................................................. 73
Title VIII.............................................................. 73
Trust................................................................... 1
Trust Agreement......................................................... 5
Trust Estate............................................................ 1
Trustee................................................................. 4
U.S. Person............................................................. 86
UCC..................................................................... 38
Unaffiliated Originators................................................ 4
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ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION
PROCEDURES
Except in certain limited circumstances, the globally offered Securities
(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 between investors through CEDEL and Euroclear
will be conducted in the ordinary way in accordance with the normal rules and
operating procedures of CEDEL and Euroclear and in accordance with conventional
eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors through DTC will be conducted
according to DTC's 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 & Co. as nominee of DTC. Investors' interests in the Global Securities
will be represented through financial institutions acting on their behalf as
direct and indirect Participants in DTC. As a result, CEDEL and Euroclear will
hold positions on behalf of their participants through their Relevant Depository
which in turn will hold such positions in their accounts as DTC Participants.
Investors electing to hold their Global Securities through DTC will follow
DTC settlement practices. Investor securities custody accounts will be credited
with their holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through CEDEL or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC Participants. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior home
equity loan asset-backed certificates issues in same-day funds.
Trading between CEDEL and/or Euroclear Participants. Secondary market
trading between CEDEL Participants or Euroclear Participants will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
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Trading between DTC, Seller and CEDEL or Euroclear Participants. 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 Relevant Depository, as the case may be, to receive
the Global Securities against payment. Payment will include interest accrued on
the Global Securities from and including the last coupon payment date to and
excluding the settlement date, on the basis of the actual number of days in such
accrual period and a year assumed to consist of 360 days. For transactions
settling on the 31st of the month, payment will include interest accrued to and
excluding the first day of the following month. Payment will then be made by the
Relevant Depository to 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 account 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 to 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 the 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 crediting Global Securities
to the respective European Depository 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 Depository, to a DTC Participant. The seller will send instructions
to CEDEL or Euroclear through a CEDEL Participant or Euroclear Participant at
least one business day prior to settlement. In these cases CEDEL or Euroclear
will instruct the respective Depository, as appropriate, to credit 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 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). In the event that the CEDEL Participant or Euroclear Participant has a
line of credit with its respective clearing system and elects 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.
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Finally, day traders that use CEDEL or Euroclear and that purchase Global
Securities from DTC Participants for delivery to CEDEL Participants or Euroclear
Participants should note that these trades would automatically fail on the sale
side unless affirmative action is 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 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 (as defined below), 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 (as defined below) 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 (as defined below), 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 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 Certificate
Owners or their 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.
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On April 22, 1996, the IRS proposed regulations relating to withholding,
backup withholding and information reporting that, if adopted in their current
form would, among other things, unify current certification procedures and forms
and clarify certain reliance standards. The regulations are proposed to be
effective for payments made after December 31, 1997 but provide that
certificates issued on or before the date that is 60 days after the proposed
regulations are made final will continue to be valid until they expire. Proposed
regulations, however, are subject to change prior to their adoption in final
form.
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation, partnership or other entity organized in or under
the laws of the United States or any political subdivision thereof, (iii) an
estate that is subject to U.S. federal income tax regardless of the source of
its income or (iv) a trust if a court within the United States can exercise
primary supervision over its administration and at least one United States
fiduciary has the authority to control all substantial decisions of the trust.
The term "Non-U.S. Person" means any person who is not a U.S. Person. 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.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Set forth below is an estimate of the amount of fees and expenses (other
than underwriting discounts and commissions) to be incurred in connection with
the issuance and distribution of the Offered Certificates.
SEC Filing Fee............................... $1,045,455
Trustee's Fees and Expenses*................. 75,000
Legal Fees and Expenses*..................... 300,000
Accounting Fees and Expenses*................ 105,000
Printing and Engraving Expenses*............. 120,000
Blue Sky Qualification and Legal 30,000
Investment Fees and Expenses*................
Rating Agency Fees*.......................... 300,000
Certificate Insurer's Fee*................... 450,000
Miscellaneous*............................... 100,000
----------
TOTAL $2,525,455
==========
- ----------
* Estimated in accordance with Item 511 of Regulation S-K.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Indemnification. Under the laws which govern the organization of
each of the registrants, each registrant has the power and in some instances may
be required to provide an agent, including an officer or director, who was or is
a party or is threatened to be made a party to certain proceedings, with
indemnification against certain expenses, judgments, fines, settlements and
other amounts under certain circumstances.
Article VII of the By-Laws of Advanta Mortgage Conduit Services,
Inc. provides that the corporation shall indemnify any director, officer,
employee or agent of the corporation against expenses (including legal fees),
judgments, fines and amounts paid in settlement, actually and reasonably
incurred by him, to the fullest extent now, or, if greater, hereafter permitted
under applicable law in connection with any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative, brought or threatened to be brought against him by reason of his
performance as a director, officer, employee or agent of the corporation, its
parent or any of its subsidiaries, or in any other capacity on behalf of the
corporation, its parent or any of its subsidiaries.
Article XI of the By-Laws of Advanta Conduit Receivables Inc.
provides that the corporation shall indemnify any person (or the estate of any
person) against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement, to the fullest extent permitted under applicable law
in connection with any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative, brought or
threatened to be brought against him by reason of the fact that he is or was a
director, officer, employee or agent of the corporation or is or was serving at
the request of the corporation as a director, officer, employee or agent of
another corporation or of a partnership, joint venture, trust or other
enterprise.
The forms of the Underwriting Agreement, incorporated by reference
as Exhibit 1.1 and Exhibit 1.2 to this Registration Statement, provide that
Advanta Mortgage Conduit Services, Inc. will indemnify and reimburse the
underwriter(s) and each director, officer and controlling person of the
underwriter(s) with respect to certain expenses and liabilities, including
liabilities under the 1933 Act or other federal or state regulations or under
the common law, which arise out of or are based on certain material
misstatements or omissions in the Registration Statement. In addition, the
Underwriting Agreements provide that the underwriter(s) will similarly indemnify
and reimburse Advanta Mortgage Conduit Services, Inc. and each director, officer
and controlling person of Advanta Mortgage Conduit Services, Inc. with respect
to certain material misstatements or omission in the Registration
II-1
<PAGE> 99
Statement which are based on certain written information furnished by the
underwriter(s) for use in connection with the preparation of the Registration
Statement.
Insurance. As permitted under the laws which govern the organization
of the Sponsor, the Sponsor has adopted by-laws which permit the board of
directors to purchase and maintain insurance on behalf of the Sponsor's agents,
including its officers and directors, against any liability asserted against
them in such capacity or arising out of such agents' status as such, whether or
not the Sponsor would have the power to indemnify them against such liability
under applicable law. Advanta Mortgage Conduit Services, Inc. has a general
liability policy which insures its agents, including directors and officers, for
general liability exposures.
As permitted by the Employee Retirement Security Act of 1974,
Advanta Mortgage Conduit Services, Inc. has obtained insurance covering all
employees entrusted with fiduciary responsibilities under certain of its
employee welfare or benefit plans. The maximum coverage provided by this policy
is an aggregate of $5,000,000 per year, subject to a maximum $100,000 deductible
amount with respect to each claim.
As permitted under the laws which govern the organization of the
Transferor, the Transferor has adopted by-laws which permit the board of
directors to purchase and maintain insurance on behalf of any person indemnified
under Article XI of the Transferor's by-laws against any liability which may be
asserted against such person.
Limitation of Liability. Article Tenth of the Certificate of
Incorporation of Advanta Mortgage Conduit Services, Inc. and Article Seventh of
the Certificate of Incorporation of Advanta Conduit Receivables Inc. limit the
personal liability of directors to Advanta Mortgage Conduit Services, Inc. and
Advanta Conduit Receivables Inc., respectively, and their respective
stockholders for monetary damages resulting from breaches of fiduciary duty.
Such provisions do not eliminate or limit a director's liability for (i)
breaches of fiduciary duty of loyalty, (ii) acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of law, (iii) any
unlawful payment of dividends, stock repurchase or redemption or (iv) any
transaction from which the director derived an improper personal benefit.
II-2
<PAGE> 100
ITEM 16. EXHIBITS.
1.1 - Form of Underwriting Agreement (single class) (incorporated
by reference to Exhibit 1.1 to the Registrant's Registration
Statement on Form S-3 (Reg. No. 33-78642)).
1.2 - Form of Underwriting Agreement (multi class) (incorporated
by reference to Exhibit 1.2 to the Registrants' Registration
Statement on Form S-3 (Reg. No. 33-78642)).
1.3 - Form of Purchase Agreement (incorporated by reference to
Exhibit 1.3 to the Registrants' Registration Statement on
Form S-3 (Reg. No. 33-78642)).
3.1 - -Certificate of Incorporation of the Sponsor (incorporated
by reference to Exhibit 3.1 to the Registrants' Registration
Statement on Form S-3 (Reg. No. 33-78642)).
3.2 - By-Laws of the Sponsor (incorporated by reference to Exhibit
3.2 to the Registrants' Registration Statement on Form S-3
(Reg. No. 33-78642)).
3.3 ** - Certificate of Incorporation of the Transferor.
3.4 ** - By-Laws of the Transferor.
4.1 - Form of Pooling and Servicing Agreement (senior and
subordinated certificate classes) among the Master Servicer
and the Trustee (incorporated by reference to Exhibit 4.1 to
the Registrants' Registration Statement on Form S-3 (Reg. No.
33-78642)).
4.2 - Form of Pooling and Servicing Agreement (single or multi
class) (credit support) among the Sponsor, the Master
Servicer and the Trustee (incorporated by reference to
Exhibit 4.2 to the Registrants' Registration Statement on
Form S-3 (Reg. No. 33-78642)).
4.3 - Form of Advanta Mortgage Holding Company Guaranty is included
in the Form of Underwriting Agreement (single class)
incorporated by reference as Exhibit 1.1 hereto.
5.1* - Opinion of Dewey Ballantine LLP with respect to validity.
8.1* - Opinion of Dewey Ballantine LLP with respect to tax matters.
10.1 - Form of Special Hazard Insurance Policy (incorporated by
reference to Exhibit 10.1 to the Registrants' Registration
Statement on Form S-3 (Reg. No. 33-78642)).
10.2 - Form of Letter of Credit (incorporated by reference to
Exhibit 10.2 to the Registrants' Registration Statement on
Form S-3 (Reg. No. 33-78642)).
10.3 - Form of Bankruptcy Surety Bond (incorporated by reference
to Exhibit 10.3 to the Registrants' Registration Statement
on Form S-3 (Reg. No. 33-78642)).
10.4 - Form of Contribution Agreement between the Sponsor and the
Transferor (incorporated by reference to Exhibit 10.4 to the
Registrants' Registration Statement on Form S-3 (Reg. No.
33-78642)).
24.1* - Consents of Dewey Ballantine LLP are included in its opinions
filed as Exhibit 5.1 and 8.1 hereof.
99.1 - The registrants hereby incorporate by reference all of the
forms of the Prospectus Supplement previously filed in the
registrants' Registration Statement on Form S-3 (Reg. No.
33-78642).
- -------------------------
* Previously filed.
** Filed Herewith
II-3
<PAGE> 101
ITEM 17. UNDERTAKINGS.
A. Undertaking in respect of indemnification
Insofar as indemnification for liabilities arising under the 1933
Act may be permitted to directors, officers or persons controlling either
registrant pursuant to the foregoing provisions in Item 15, or otherwise, each
registrant has been informed that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by a registrant of expenses
incurred or paid by a director, officer or controlling person of such registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, each registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of whether such indemnification by such
registrant is against public policy as expressed in the 1933 Act and will be
governed by the final adjudication of such issue.
B. Undertaking pursuant to Rule 415.
The Registrants hereby undertake:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) to include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) to reflect in the Prospectus any facts or events arising
after the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the Registration
Statement;
(iii) to include any material information with respect to the
plan of distribution not previously disclosed in the Registration Statement or
any material change of such information in the Registration Statement; provided,
however, that paragraphs (i) and (ii) do not apply if the information required
to be included in the post-effective amendment is contained in periodic reports
filed by the Issuer pursuant to Section 13 or Section 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in the Registration
Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
C. Undertaking pursuant to Rule 430A.
The Registrants hereby undertake:
(1) For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as part
of a registration statement in Reliance upon Rule 430A and contained in the form
of prospectus filed by the Registrants pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 102
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, each of the
registrants certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-3 and has duly caused this
Pre-Effective Amendment No. 1 to the Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the Town of Fort
Washington, State of Pennsylvania on the 28th day of October, 1997.
ADVANTA MORTGAGE CONDUIT SERVICES, INC.
By: /s/ Milton Riseman
--------------------------------
Milton Riseman
President
ADVANTA CONDUIT RECEIVABLES INC.
By: /s/ Milton Riseman
--------------------------------
Milton Riseman
President
Pursuant to the requirements of the Securities Act of 1933, this
Pre-Effective Amendment No. 1 to the Registration Statement has been signed
below by the following persons on the 28th day of October, 1997 in the
capacities indicated.
SIGNATURE CAPACITY
/s/ Milton Riseman President (Principal Executive Officer) and
Milton Riseman the Sole Director of Advanta Mortgage
Conduit Services, Inc. and Advanta Conduit
Receivables Inc.
/s/ Mark T. Dunsheath Vice President and Treasurer (Principal
Mark T. Dunsheath Financial Officer and Principal Accounting
Officer) of Advanta Mortgage Conduit
Services, Inc. and Advanta Conduit
Receivables Inc.
<PAGE> 103
EXHIBIT INDEX
===============================================================================
Ex.
No. Description of Document
===============================================================================
1.1 Form of Underwriting Agreement (single class) (incorporated by
reference to Exhibit 1.1 to the Registrant's Registration Statement
on Form S-3 (Reg. No. 33-78642)).
===============================================================================
1.2 Form of Underwriting Agreement (multi class) (incorporated by
reference to Exhibit 1.2 to the Registrants' Registration Statement
on Form S-3 (Reg. No. 33-78642)).
===============================================================================
1.3 Form of Purchase Agreement (incorporated by reference to Exhibit 1.3
to the Registrants' Registration Statement on Form S-3 (Reg. No.
33-78642)).
===============================================================================
3.1 Certificate of Incorporation of the Sponsor (incorporated by
reference to Exhibit 3.1 to the Registrants' Registration Statement
on Form S-3 (Reg. No. 33-78642)).
===============================================================================
3.2 By-Laws of the Sponsor (incorporated by reference to Exhibit 3.2 to
the Registrants' Registration Statement on Form S-3 (Reg. No.
33-78642)).
===============================================================================
3.3** Certificate of Incorporation of the Transferor.
===============================================================================
3.4** By-Laws of the Transferor.
===============================================================================
4.1 Form of Pooling and Servicing Agreement (senior and subordinated
certificate classes) among the Master Servicer and the Trustee
(incorporated by reference to Exhibit 4.1 to the Registrants'
Registration Statement on Form S-3 (Reg. No. 33-78642)).
===============================================================================
4.2 Form of Pooling and Servicing Agreement (single or multi class)
(credit support) among the Sponsor, the Master Servicer and the
Trustee (incorporated by reference to Exhibit 4.2 to the Registrants'
Registration Statement on Form S-3 (Reg. No. 33-78642)).
===============================================================================
4.3 Form of Advanta Mortgage Holding Company Guaranty is included in the
Form of Underwriting Agreement (single class) incorporated by reference
as Exhibit 1.1 hereto.
===============================================================================
5.1* Opinion of Dewey Ballantine LLP with respect to validity.
===============================================================================
8.1* Opinion of Dewey Ballantine LLP with respect to tax matters.
===============================================================================
10.1 Form of Special Hazard Insurance Policy (incorporated by reference to
Exhibit 10.1 to the Registrants' Registration Statement on Form S-3
(Reg. No. 33-78642)).
===============================================================================
10.2 Form of Letter of Credit (incorporated by reference to Exhibit 10.2
to the Registrants' Registration Statement on Form S-3 (Reg. No.
33-78642)).
===============================================================================
10.3 Form of Bankruptcy Surety Bond (incorporated by reference to Exhibit
10.3 to the Registrants' Registration Statement on Form S-3 (Reg. No.
33-78642)).
===============================================================================
10.4 Form of Contribution Agreement between the Sponsor and the Transferor
(incorporated by reference to Exhibit 10.4 to the Registrants'
Registration Statement on Form S-3 (Reg. No. 33-78642)).
===============================================================================
24.1* Consents of Dewey Ballantine LLP are included in its opinions filed as
Exhibit 5.1 and 8.1 hereof.
===============================================================================
99.1 The registrants hereby incorporate by reference all of the forms of
the Prospectus Supplement previously filed in the registrants'
Registration Statement on Form S-3 (Reg. No. 33-78642).
===============================================================================
* Previously Filed.
** Filed herewith.
<PAGE> 1
ARTICLES OF INCORPORATION
OF
ADVANTA CONDUIT RECEIVABLES,INC.
I, the person hereinafter named as incorporator, for the
purpose of establishing a corporation under the provisions and subject to the
requirements of Title 7, chapter 78 of the Nevada Revised Statutes and the acts
amendatory thereof, and hereinafter sometimes referred to as the General
Corporation Law of the State of Nevada, do hereby adopt and make the following
Articles of Incorporation:
ARTICLE FIRST
The name of this corporation is ADVANTA CONDUIT
RECEIVABLES, INC. (the "Corporation").
ARTICLE SECOND
The address of the Corporation's resident office in the State
of Nevada is as follows:
1325 Airmotive Way
Suite 130
Reno, Nevada 89502
The resident at the foregoing address is Griffin Corporate Services, located in
Washoe County.
ARTICLE THIRD
The total number of shares which this Corporation is
authorized to issue is one-thousand (1,000), all of which are of a par value of
One Cent ($0.01) per share. All of said shares are of one class and are
designated as common stock.
No holder of any of the shares of any class of the Corporation
shall be entitled as a right to subscribe for, purchase or otherwise acquire any
shares of any class of the Corporation which the Corporation proposes to issue,
or any rights to options which the Corporation propose to grant for the purchase
of shares of any class of the Corporation or for the purchase of any shares,
bonds, securities, or obligations of the Corporation which are convertible into
or exchangeable for, or which carry any rights to subscribe for, purchase or
<PAGE> 2
otherwise acquire shares of any class of the Corporation; and any and all of
such shares, bonds, securities or obligations of the Corporation, whether now or
hereafter authorized or created, may be issued or may be reissued or transferred
if the same have been reacquired and have treasury status, and any and all of
such rights and options may be granted by the Board of Directors to such
persons, firms, corporations and associations for such lawful consideration and
on such terms as the Board of Directors in its discretion may determine, without
first offering the same, or any thereof, to any said holder.
The capital stock of the Corporation, after the amount of the
consideration for the issuance of shares, as determined by the Board of
Directors, has been paid, is not subject to assessment to pay the debts of the
Corporation and no stock issued as fully paid up may ever be assessed, and the
Articles of Incorporation cannot be amended in this respect.
ARTICLE FOURTH
(a) The governing board of the Corporation shall be styled as
a "Board of Directors", and any member of said Board shall be styled as a
"Director" except as provided by statute.
(b) The number of members constituting the first Board of
Directors of the Corporation is five; and the name and post office box or street
address, either residence or business, of each of said members is as follows:
<TABLE>
<CAPTION>
NAME ADDRESS
- ---- -------
<S> <C>
John J. Calamari 200 Tournament Drive
Horsham, PA 19044
Mark Casale 500 Office Center Drive
Fort Washington, PA 19034
James L. Sheero 500 Office Center Drive
Fort Washington, PA 19034
Janice C. George 1325 Airmotive Way
Suite 130
Reno, Nevada 89502
Francis B. Jacobs II c/o Delaware Trust Capital
Management
900 Market Street
Wilmington, DE 19801
</TABLE>
The number of directors of the corporation may be increased or
decreased in the manner provided in the By-laws of the Corporation, provided,
that the number of directors
2
<PAGE> 3
shall never be less than one, and provided, further that the sole remaining
director must be an Independent Director. The Corporation shall at all times
have at least two independent directors, (each an "Independent Director") except
where there is only one remaining director.
At least one Independent Director shall satisfy the following
conditions:
(i) Such Independent Director shall be an
individual who is not, and never was,
(A) a stockholder, director, officer, employee,
affiliate, associate, customer or supplier of, or any person
that has received any benefit (excluding, however, any
compensation received by the director, in such person's
capacity as director as required by this Article FOURTH) in
any form whatever from, or any person that has provided any
service (excluding, however, any service provided by the
director, in such person's capacity as director as required by
this Article FOURTH) in any form whatever to, Advanta Corp.,
Advanta Mortgage Corp. USA or any of their affiliates,
subsidiaries, parents or associates, or
(B) (i) any person owning beneficially, directly or
indirectly, any outstanding shares of common stock of Advanta
Corp., Advanta Mortgage Corp. USA or any of their affiliates,
subsidiaries, parents or (ii) a stockholder, director,
officer, employee, affiliate, associate, customer or supplier
of, or any person that has received any benefit (excluding,
however, any compensation received by the director, in such
person's capacity as director as required by this Article
FOURTH) in any form whatever from, or any person that has
provided any service (excluding, however, any service provided
by the director, in such person's capacity as director as
required by this Article FOURTH) in any form whatever to, such
beneficial owner or any of such beneficial owner's affiliates
or associates; provided, that, the ownership of up to 5% of
any class of stock (other than stock of the Corporation)
listed on a national securities exchange shall not prevent an
individual from meeting the requirements of this Article
FOURTH;
provided, that, such Independent Director may act as a director or
officer of other special purpose corporations or special purpose
entities.
3
<PAGE> 4
Each Independent Director shall satisfy the following
conditions:
(i) No director serving pursuant to the requirements of
this Article FOURTH shall, with regard to any act, or failure to act,
in connection with any matter referred to in clause (iv) of Article
EIGHTH, owe a fiduciary duty or other obligation to the stockholders
(except as may specifically be required by the statutory law of any
applicable jurisdiction); instead, such director's fiduciary duty and
other obligations with regard to such act, or failure to act, in
connection with any matter referred to in clause (iv) of Article EIGHTH
shall be owed to the Corporation, including, without limitation, the
creditors of the Corporation. Every stockholder shall be deemed to have
consented to the foregoing by virtue of such stockholder's purchase of
shares of capital stock of the Corporation, no further act or deed of
any stockholder being required to evidence such consent;
(ii) As used in this Article FOURTH, the term "person"
means a natural person, corporation or other entity, government, or
political subdivision, agency, or instrumentality of a government; an
"affiliate" of a person is a person that directly, or indirectly
through one of more intermediaries, controls or is controlled by, or is
under common control with, or owns, directly or indirectly, 50% or more
of, the person specified; and the term "associate," when used to
indicate a relationship with any person, means (1) a corporation or
organization of which such person is an officer, director or partner or
is, directly or indirectly, the beneficial owner of 10% or more of any
class of equity securities, (2) any trust or other estate in which such
person serves as trustee or in a similar capacity, and (3) any relative
or spouse of such person, or any relative of such spouse, who has the
same home as such person;
(iii) When voting on matters subject to the vote of the
Board of Directors, including those matters specified in clause (iv) of
Article EIGHTH hereof, notwithstanding that the Corporation is not then
insolvent, the directors serving pursuant to the requirements of this
Article FOURTH shall take into account the interests of the creditors
of the Corporation as well as the interests of the Corporation.
(C) In the interim between elections of directors by
stockholders entitled to vote, all vacancies, including vacancies caused by an
increase in the number of directors and including vacancies resulting from the
removal of directors by the stockholders entitled to vote which are not filled
by said
4
<PAGE> 5
stockholders, may be filled by the remaining directors or the sole remaining
director, though less than a quorum.
ARTICLE FIFTH
The name and address of the incorporator is as follows:
Susan M. Giusti
Five Horsham Business Center
300 Welsh Road
Horsham, PA 19044
ARTICLE SIXTH
The business in which the Corporation may engage and the
powers which the Corporation may exercise are restricted exclusively to the
following:
(a) to acquire from time to time all right,
title and interest in and to Mortgage Loans secured by first or second Mortgages
or deeds of trust on one-to-four family residential or mixed-use properties,
including, without limitation, monies due thereunder, proceeds from claims on
insurance policies related thereto, and related rights and other property
appurtenant thereto (collectively, the "Mortgage Loans");
(b) to acquire, own, hold, service, sell,
assign, pledge and otherwise deal with the Mortgage Loans, collateral securing
all or a portion of the Mortgage Loans, related insurance policies, agreements
with other originators or servicers of all or a portion of the Mortgage Loans
and any proceeds or further rights associated with any of the foregoing;
(c) to enter from time to time into interim
arrangements relating to all or a portion of the Mortgage Loans, whereby all or
a portion of the Mortgage Loans are transferred to a custodian on behalf of the
entity providing financing, pursuant to one or more repurchase agreements or
other agreements (each, an "Interim Agreement") to be entered into by, among
others, the Corporation, the entity providing financing, the custodian named
therein and any entity acting as servicer of all or a portion of the Assets;
provided, however, that there may be only one Interim Agreement at one time;
(d) to transfer from time to time all or a
portion of the Mortgage Loans to trusts (the "Trusts")
5
<PAGE> 6
pursuant to one or more pooling and servicing agreements or other agreements
("Securitization Agreements"), or to sell all or a portion of the Mortgage Loans
to whole-loan purchasers pursuant to one or more whole-loan sale agreements
("Whole-Loan Sale Agreements") (Securitization Agreements and Whole-Loan Sale
Agreements, together, "Disposition Agreements"), to be entered into by, among
others, the Corporation, the trustee named therein (the "Trustee"), the
whole-loan purchaser, as appropriate, and any entity acting as servicer of all
or a portion of the Mortgage Loans.
(e) to authorize, sell and deliver any class
of certificates or other securities issued by the Trusts under
the related Securitization Agreements;
(f) to acquire from the Trustee certificates
issued by Trusts to which the Corporation transferred all or
a portion of the Mortgage Loans;
(g) to authorize, issue, sell and deliver one
or more series and classes of bonds, notes or other evidences of indebtedness
(other than contingent indebtedness) secured or collateralized by one or more
pools of Mortgage Loans and issued under an indenture or similar agreement
(each, an "Indenture") or by certificates of any class issued by any Trust
established by the Corporation (collectively, the "Notes"), provided that the
Corporation shall have no liability under any Notes except to the extent of the
Mortgage Loans or the certificates securing or collateralizing such Notes;
(h) to enter from time to time into financing
agreements ("Residual Financing Agreements") for any subordinate or residual
certificates, participation interests or notes issued under Disposition
Agreements or Indentures ("Mortgage Loan Pool Equity Interests"), provided that
the Corporation shall have no liability under any such Residual Financing
Agreements except to the extent of the related Mortgage Loan Pool Equity
Interests securing or collateralizing the related financing;
(i) to hold and enjoy all of the rights and
privileges of any Mortgage Loan Pool Equity Interests;
(j) to sell all or a portion of the Mortgage
Loans to any Person, including any Affiliate (which Person or Affiliate shall
then be considered a whole-loan purchaser as described above) and to loan money
to any Affiliate; and
(k) to perform its obligations under each
Interim Agreement, each Disposition Agreement, each Indenture and each Residual
Financing Agreement (collectively hereinafter referred to as the "Obligations");
and
6
<PAGE> 7
(l) to engage in or transact any lawful
activity or business for which corporations may be incorporated under the Nevada
General Corporation Law and to exercise any powers permitted to corporations
under the laws of the State of Nevada but only to the extent incidental to and
necessary or convenient to accomplish the purposes set forth in paragraphs (a)
through (k) of this Article Sixth.
ARTICLE SEVENTH
No Director or, to the extent specified from time to time by
the Board of Directors, officer of the Corporation will be liable to the
Corporation or its stockholders for damages for breach of fiduciary duty as a
director or officer, excepting only (a) acts or omissions which involve
intentional misconduct, fraud or a knowing violation of law or (b) the payment
of dividends in violation of 78.300 of the Nevada Revised Statutes. No amendment
or repeal of this Article SEVENTH applies to or has any effect on the liability
or alleged liability of any Director or officer of this Corporation for or with
respect to any acts or omissions of the Director or officer occurring prior to
the amendment or repeal, except as otherwise required by law. In the event that
Nevada law is amended to authorize the further elimination or limitation of
liability of directors or officers, then this Article SEVENTH shall also be so
amended to provide for the elimination or limitation of liability to the fullest
extent permitted by Nevada law.
The Corporation shall indemnify the officers and directors of
the Corporation to the fullest extent permitted by the Nevada Private
Corporations Law as the same exists or may hereafter be amended. In the event
that the Nevada Private Corporations Law is amended, after the filing of these
Articles of Incorporation, to authorize corporate action further eliminating or
limiting the personal liability of an officer or director, then the liability of
an officer or director of the Corporation shall be eliminated or limited to the
fullest extent permitted by the Nevada Private Corporations Law, as so amended.
The Corporation shall pay the expenses incurred by an officer
or director in defending any civil, criminal, administrative, or investigative
action, suit or proceeding in advance of the final disposition of such action,
suit or proceeding upon receipt of an undertaking by or on behalf of such
officer or director to repay such amount if it should be ultimately determined
that he/she is not entitled to be indemnified by the Corporation as authorized
by Nevada Private Corporations Law.
7
<PAGE> 8
Any amendment to or repeal of any of the provisions in this
Article SEVENTH shall not adversely affect any right or protection of an officer
or director of the Corporation for or with respect to any act or omissions of
such director occurring prior to such amendment or repeal.
ARTICLE EIGHTH
Notwithstanding any other provision of these Articles of
Incorporation and any provision of law that otherwise so empowers the
Corporation, the Corporation shall not, without the prior written consent of the
Trustee under any applicable Securitization Agreement (and any supplements
thereto), do any of the following:
(i) (x) consolidate or merge with or into any other
entity or convey, transfer or assign any residual or subordinate
interest to any Related Company (as defined below), or dissolve or
transfer its properties and assets substantially as an entirety to any
entity (other than to a trust formed pursuant to a pooling and
servicing agreement or similar agreement and only to the extent that
the trust is deemed to be a subsidiary of the Corporation), or lend or
advance any moneys to, or make an investment in, any person or amend or
repeal its bylaws or these Articles of Incorporation or (y) engage in
any other action that bears on whether the separate legal identity of
the Corporation and any Related Company will be respected, including,
without limitation (a) holding itself out as being liable for the debts
of any other party; (b) forming, or causing to be formed, any
subsidiaries; (c) acting other than in its corporate name and through
its duly authorized officers or agents; (d) failing to hold appropriate
meetings of the Board of Directors at least three times per annum and
otherwise as necessary to authorize all corporate action; and (e)
failing to hold meetings of the stockholders at least one time per
annum;
(ii) incur any indebtedness, or assume or guaranty any
indebtedness of any other entity, other than Notes and any Indebtedness
to ADVANTA Mortgage Corp. USA, a Delaware corporation, or any affiliate
thereof in connection with the acquisition of Assets;
(iii) consolidate or merge with or into any other entity
or convey or transfer its properties and assets substantially as an
entirety to any entity, unless
(A) the entity (if other than the Corporation) formed
or surviving the consolidation or merger or which acquires the
properties and
8
<PAGE> 9
assets of the Corporation is organized and existing under the
laws of the State of Nevada, expressly assumes the due and
punctual payment of all obligations of the Corporation,
including those obligations of the Corporation under each
Securitization Agreement and has Articles of Incorporation
containing provisions substantially identical to the
provisions of Articles FOURTH, SIXTH and this Article EIGHTH;
and
(B) immediately after giving effect to the
transaction, no default or event of default has occurred and
is continuing under any Securitization Agreement, any
indebtedness of the Corporation or any agreements relating to
such indebtedness; or
(iv) without (A) the affirmative vote of 100% of
the members of the Board of Directors of the Corporation (including an
affirmative vote of each Independent Director required by Article FOURTH) and
(B) the affirmative vote of the holders of 100% of the common stock outstanding
of the Corporation, make an assignment for the benefit of creditors, file a
petition in bankruptcy, petition or apply to any tribunal for the appointment of
a custodian, receiver or any trustee for it or for a substantial part of its
property, commence any proceeding under any bankruptcy, reorganization,
arrangement, readjustment of debt, dissolution or liquidation law or statute of
any jurisdiction, whether now or hereinafter in effect, consent or acquiesce to
the entry of an order for relief, or in the filing of any such petition,
application, proceeding or appointment of or taking possession by the custodian,
receiver, liquidator, assignee, trustee, sequestrator (or other similar
official) of the Corporation or any substantial part of its property, or admit
its inability to pay its debts generally as they become due or authorize any of
the foregoing to be done or taken on behalf of the Corporation; provided that if
there shall not be two directors required by Article FOURTH (b) of these
Articles of Incorporation then in office and acting, a vote upon any matter set
forth in this Article EIGHTH shall not be taken unless and until two directors
meeting the requirements of Article FOURTH (b) of these Articles of
Incorporation shall have been elected.
For purpose of this Certificate, "Related Company" means the
stockholder or stockholders of this Corporation or any entity other than this
Corporation now or hereafter controlled directly or indirectly by, or under
direct or indirect common control with, the stockholders of this Corporation.
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ARTICLE NINTH
In furtherance and not in limitation of the powers conferred
by statute, the Board of Directors of the Corporation is expressly authorized:
(a) To make, alter, amend or repeal the By-laws of the
Corporation, except that such By-laws or any alteration,
amendment or repeal thereof shall not in any manner impair the
intent of, Article SIXTH, Article EIGHTH or this Article NINTH
of these Articles of Incorporation.
(b) To take, lease, purchase or otherwise acquire, and to own,
use, hold, sell, convey, exchange, lease, mortgage or
otherwise encumber, work, improve, develop, divide and
otherwise handle, deal in, and dispose of real estate, real
and personal property and any interest or right therein.
(c) To determine the use and disposition of any surplus
and net profits of the Corporation, including the
determination of the amount of working capital
required, to set apart out of any of the funds of
the Corporation, whether or not available for
dividends, a reserve or reserves for any proper
purpose and to abolish any such reserve in the
manner in which it was created.
(d) By a majority of the Board of Directors, to
designate one or more committees, each committee to
consist of one or more of the directors of the
Corporation. The Board of Directors may designate
one or more directors as alternate members of any
committee, who may replace any absent or
disqualified member at any meeting of the
committee. The By-laws may provide that in the
absence or disqualification of a member of a
committee, the member or members thereof present at
any meeting and not disqualified from voting,
whether or not he or they constitute a quorum, may
unanimously appoint another member of the Board of
Directors to act at the meeting in the place of any
such absent or disqualified member. Any such
committee, to the extent provided in the resolution
of the Board of Directors, or in the By-laws of the
Corporation, shall have and may exercise all the
powers and authority of the Board of Directors in
the management of the business and affairs of the
Corporation, and may authorize the seal of the
Corporation to be affixed to all papers which may
require it; and no such committee shall have the
power or authority in reference to amending the
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Articles of Incorporation, to authorize or take any action
described in Article SIXTH, Article EIGHTH and this Article
NINTH, adopting an agreement of merger or consolidation,
recommending to the stockholders the sale, lease, or exchange
of all or substantially all of the Corporation's property and
assets, recommending to the stockholders a dissolution of the
Corporation or a revocation of a dissolution, or amending the
By-laws of the Corporation; and no such committee shall have
the power or authority to declare a dividend or to authorize
the issuance of stock.
(e) When and as authorized by the stockholders in
accordance with statute, to sell, lease or exchange
all or substantially all of the property and assets
of the Corporation, including its good will and its
corporate franchise, upon such terms and conditions
and for such consideration, which may consist in
whole or in part of money or property including
shares of stock in, and/or other securities of, any
other corporation or corporations, as the Board of
Directors shall deem expedient for the best
interests of the Corporation.
(f) To exercise, in addition to the powers and
authorities hereinbefore or by law conferred upon
it, any such powers and authorities and do all such
acts and things as may be exercised or done by the
Corporation, subject, nevertheless, to the
provisions of the laws of the State of Nevada and
of these Articles of Incorporation and of the By-
laws of the Corporation.
In addition to the foregoing, the Corporation shall conduct
its affairs in the following manner:
(i) it shall not commingle the Corporation's assets with those
of any direct or ultimate parent of the Corporation or any subsidiary
or affiliate of any such parent;
(ii) it shall maintain separate corporate records and books of
account from those of any direct or ultimate parent of the Corporation
or any subsidiary or affiliate of any such parent;
(iii) it shall conduct its business from an office separate
from any direct or ultimate parent of the Corporation or any subsidiary
or affiliate of any such parent;
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(iv) it shall maintain its assets separately from the accounts
of any other Person (including through the maintenance of a separate
bank account); and
(v) it shall pay from its assets all obligations and
indebtedness of any kind incurred by it, and shall not pay from its
assets any obligations or indebtedness of any other entity or person.
ARTICLE TENTH
Without (i) the prior written consent of each Trustee under
any Securitization Agreement (and any supplements thereto), (ii) the affirmative
vote of 100% of the members of the Board of Directors of the Corporation,
including, without limitation, the affirmative vote of each of the directors
required by Article FOURTH (b) of these Articles of Incorporation, and (iii) the
affirmative vote of the holders of 100% of the Common Stock outstanding, the
Corporation shall not amend, alter, change or repeal Article FOURTH, Article
SIXTH, Article EIGHTH, Article NINTH or this Article TENTH; provided, however,
that if the two directors required by Article FOURTH (b) of these Articles of
Incorporation are not then in office and acting, a vote upon any matter set
forth in this Article TENTH shall not be taken unless and until two directors
meeting the requirements of Article FOURTH (b) of these Articles of
Incorporation shall have been elected and shall be present and acting at such
vote.
ARTICLE ELEVENTH
The Corporation is to have perpetual existence.
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I, THE UNDERSIGNED, being the incorporator hereinbefore named,
for the purpose of forming a corporation pursuant to the laws of the State of
Nevada, as amended, do make this certificate, hereby declaring and certifying
that this is my act and deed and that the facts herein stated are true and that
I have accordingly hereunto affixed my signature this 6th day of May, 1996.
/s/ Susan M. Giusti
-----------------------------
Susan M. Giusti
Incorporator
On this 6th day of May, 1996, before me personally came Susan
M. Giusti, to me known, who, being by me duly sworn, did depose and say that she
is an employee of Advanta Corp. and authorized to act as Incorporator of Advanta
Conduit Receivables, Inc.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my
official seal the day and year first above written.
-------------------------------
Notary Public
[Notarial Seal]
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ADVANTA MORTGAGE RECEIVABLES CORP. II
Bylaws
ARTICLE I
Meetings of Stockholders
Section 1.1 Annual Meetings. The annual meeting of the
stockholders for the election of directors and for the transaction of such other
business as properly may come before such meeting shall be held each year on
such date, and at such time and place within or out of the State of Nevada, as
may be designated by the Board of Directors.
Section 1.2 Special Meetings. Special meetings of the
stockholders for any proper purpose or purposes may be called at any time by the
Board of Directors, the President, any Vice President, to be held on such date,
and at such time and place within or out of the State of Nevada, as the Board of
Directors, the President, any Vice President, whichever has called the meeting,
shall direct. A special meeting of the stockholders shall be called by the
President, any Vice President whenever stockholders owning a majority of the
shares of the Corporation then issued and outstanding and entitled to vote on
matters to be submitted to stockholders of the Corporation shall make
application therefor in writing. Any such written request shall state a proper
purpose or purposes of the meeting and shall be delivered to the President or
any Vice President.
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Section 1.3 Notice of Meeting. Written notice, signed by the
President, any Vice President, the Secretary or any Assistant Secretary, of
every meeting of stockholders stating the date and time when, and the place
where, such meeting is to be held, shall be delivered either personally or by
mail to each stockholder entitled to vote at such meeting not less than ten nor
more than sixty days before the date of such meeting, except as otherwise
provided by law. The purpose or purposes for which such meeting is called may,
in the case of an annual meeting, and shall in the case of a special meeting,
also be stated in such notice. If mailed, such notice shall be directed to a
stockholder at such Stockholder's address as it shall appear on the stock books
of the Corporation, unless such Stockholder shall have filed with the Secretary
a written request that notices intended for such Stockholder be mailed to some
other address, in which case it shall be mailed to the address designated in
such request. Whenever any notice is required to be given under the provisions
of the General Corporation Law of the State of Nevada, the Articles of
Incorporation or these Bylaws, a waiver thereof, signed by the stockholder
entitled to such notice, whether before or after the time stated therein, shall
be deemed equivalent thereto. Attendance of a stockholder at the meeting shall
not be deemed equivalent to a written waiver of notice of such meeting; a
written waiver is required.
Section 1.4 Quorum. The presence at any meeting
of stockholders, in person or by proxy, of the holders of
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record of a majority of the shares then issued and outstanding and entitled to
vote shall be necessary and sufficient to constitute a quorum for the
transaction of business.
Section 1.5 Adjournments. In the absence of a quorum, a
majority in interest of the stockholders entitled to vote, present in person or
by proxy, or, if no stockholder entitled to vote is present in person or by
proxy, any officer entitled to preside at or act as secretary of a meeting of
stockholders, may adjourn such meeting from time to time until a quorum shall be
present.
Section 1.6 Voting. Directors shall be chosen by a plurality
of the votes cast at the election, and, except as otherwise provided by law or
by the Articles of Incorporation, including provisions regarding Independent
Directors, all other questions shall be determined by a majority of the votes
cast on such question.
Section 1.7 Proxies. Any stockholder entitled to vote may vote
by proxy, provided that the instrument authorizing such proxy to act shall have
been executed in writing (which shall include telegraphing or cabling) by the
stockholder himself or by such Stockholder's duly authorized attorney and
delivered to the Secretary.
Section 1.8 Judges of Election. The Board of Directors may
appoint judges of election to serve at any election of directors and at
balloting on any other matter that may properly come before a meeting of
stockholders. If no such appointment shall be made, or if any of the judges so
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appointed shall fail to attend, or refuse or be unable to serve, then such
appointment may be made by the presiding officer at the meeting.
ARTICLE II
Board of Directors
Section 2.1 Number. The number of directors which shall
constitute the whole Board of Directors shall be fixed from time to time by
resolution of the Board of Directors or stockholders (any such resolution of
either the Board of Directors or stockholders being subject to any later
resolution of either of them). The first Board of Directors and subsequent
Boards of Directors shall consist of five directors, including two Independent
Directors, until changed as herein provided and subject to the provisions of the
Articles of Incorporation regarding Independent Directors.
Section 2.2 Election and Term of Office. Directors shall be
elected at the annual meeting of the stockholders, except as provided in Section
2.3 and subject to the provisions of the Articles of Incorporation regarding
Independent Directors. Each director (whether elected at an annual meeting or to
fill a vacancy or otherwise) shall continue in office until such Director's
successor shall have been elected and qualified or until such Director's earlier
death, resignation or removal in the manner hereinafter provided.
Section 2.3 Vacancies and Additional Directorships. If any
vacancy shall occur among the directors
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by reason of death, resignation or removal, or as the result of an increase in
the number of directorships, a majority of the directors then in office, or the
remaining directors, or sole remaining director, though less than a quorum, may
fill any such vacancy subject to the provisions of the Articles of Incorporation
regarding Independent Directors.
Section 2.4 Regular Meetings. A regular meeting of the Board
of Directors shall be held for organization, for the election of officers and
for the transaction of such other business as may properly come before such
meeting, within thirty days after each annual meeting of stockholders. The Board
of Directors by resolution may provide for the holding of other regular meetings
and may fix the times and places at which such meetings shall be held. Notice of
regular meetings shall not be required to be given, provided that whenever the
time or place of regular meetings shall be fixed or changed, notice of such
action shall be mailed promptly to each director who shall not have been present
at the meeting at which such action was taken, addressed to such Director at
such Director's residence or usual place of business.
Section 2.5 Special Meetings. Special meetings of the Board of
Directors shall be held upon call by or at the direction of the President, any
Vice President or any two directors, except that when the Board of Directors
consists of one director, then the one director may call a special meeting.
Except as otherwise required by law, notice of each special meeting shall be
mailed to each director, addressed to
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such Director at such Director's residence or usual place of business, at least
two days before the day on which the meeting is to be held, or shall be sent to
such Director at such place by telex, facsimile transmission, telegram, radio or
cable, or telephoned or delivered to him personally, not later than the day
before the day on which the meeting is to be held. Such notice shall state the
time and place of such meeting, but need not state the purposes thereof, unless
otherwise required by law, the Articles of Incorporation or these Bylaws.
Section 2.6 Waiver of Notice. Whenever any notice is required
to be given under the provisions of the General Corporation Law of the State of
Nevada, the Articles of Incorporation or these Bylaws, a waiver thereof, signed
by the director entitled to such notice, whether before or after the time stated
therein, shall be deemed equivalent thereto. Attendance of a director at a
meeting shall not be deemed equivalent to a written waiver of notice of such
meeting; a written waiver is required.
Section 2.7 Quorum and Manner of Acting. At each meeting of
the Board of Directors the presence of a majority of the total number of members
of the Board of Directors as constituted from time to time, shall be necessary
and sufficient to constitute a quorum for the transaction of business, except
that when the Board of Directors consists of one director, then the one director
shall constitute a quorum, provided that such director must be an Independent
Director.
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Meetings may be held by telephone. In the absence of a quorum, a majority of
those present at the time and place of any meeting may adjourn the meeting from
time to time until a quorum shall be present and the meeting may be held as so
adjourned without further notice or waiver. A majority of those present at any
meeting at which a quorum is present may decide any question brought before such
meeting, except as otherwise provided by law, the Articles of Incorporation,
including the provisions regarding Independent Directors, or these Bylaws. The
Board of Directors may also act without a meeting so long as such action is
taken with the unanimous written consent of the Board of Directors.
Section 2.8 Resignation of Directors. Any director may resign
at any time by giving written notice of such resignation to the Board of
Directors, the President, any Vice President or the Secretary, subject to the
provisions of the Articles of Incorporation regarding Independent Directors.
Unless otherwise specified in such notice, such resignation shall take effect
upon receipt thereof by the Board of Directors or any such officer, and the
acceptance of such resignation shall not be necessary to make it effective.
Section 2.9 Removal of Directors. At any special meeting of
the stockholders, duly called as provided in these Bylaws, any director or
directors may be removed from office, either with or without cause, by a
two-third majority vote of the shareholders. At such meeting a successor or
successors may be elected by a plurality of the votes cast, or if any
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such vacancy is not so filled, it may be filled by the Board of Directors as
provided in Section 2.3, subject to the provisions of the Articles of
Incorporation regarding Independent Directors.
Section 2.10 Compensation of Directors. Directors
shall receive such reasonable compensation for their services
as such, whether in the form of salary or a fixed fee for
attendance at meetings, with expenses, if any, as the Board of
Directors may from time to time determine. Nothing herein
contained shall be construed to preclude any director from
serving the Corporation in any other capacity and receiving
compensation therefor.
Section 2.11 General Powers. The Board of Directors shall have
all powers necessary or appropriate to the management of the business and
affairs of the Corporation, and, in addition to the power and authority
conferred by these Bylaws, may exercise all powers of the Corporation and do all
such lawful acts and things as are not by statute, these Bylaws or the Articles
of Incorporation directed or required to be exercised or done by the
stockholders.
Notwithstanding anything in these Bylaws to the contrary,
except to the extent prohibited by law, the Board of Directors shall have the
right (which, to the extent exercised, shall be exclusive) to establish the
rights, powers, duties, rules and procedures that from time to time shall govern
the Board of Directors and each of its members, including without limitation,
the vote required for any action
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by the Board of Directors, and that from time to time shall affect the
Directors' power to manage the business and affairs of the Company; and no Bylaw
shall be adopted by stockholders which shall impair or impede the implementation
of the foregoing, and provided further, that no right, duty, rule or procedure
established by the Board of Directors, and no Bylaw adopted by the stockholders
shall have the effect of amending, altering or changing Article TENTH of the
Articles of Incorporation.
Section 2.12 Specific Powers. Without limiting the general
powers conferred by the last preceding clause and the powers conferred by the
Articles of Incorporation and Bylaws of the Corporation, but subject to the
limitations set forth in Section 2.13, it is hereby expressly declared that the
Board of Directors shall have the following powers to engage in the following
activities:
A. to acquire from time to time all right, title and
interest in and to installment sale or lease contracts or promissory
notes arising out of or relating to the purchase or lease of motor
vehicles, monies due thereunder, the motor vehicles financed thereby or
security interests therein, proceeds from claims on insurance policies
related thereto, and related rights and other property appurtenant
thereto (collectively, "Assets");
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B. to acquire, own, hold, sell, assign, pledge and
otherwise deal with the Assets, collateral securing the Assets, related
insurance policies, agreements with motor vehicle dealers or lessors or
other originators or servicers of Assets and any proceeds or further
rights associated with any of the foregoing;
C. to transfer from time to time Assets to trusts
(the "Trusts") pursuant to one or more pooling and servicing agreements
or other agreements ("Securitization Agreements"), to be entered into
by, among others, the Corporation, the trustee named therein (the
"Trustee"), and any entity acting as servicer of the Assets;
D. to authorize, sell and deliver any class of
certificates or other securities issued by the Trusts under the related
Securitization Agreements, including, without limitation, to sell Asset
Pool Equity Interests (defined below) to a Related Company for a
purchase price that (i) is in part deferred and (ii) is not recourse to
such Related Company but is payable only from monies related to such
Asset Pool Equity Interests; provided, however, that such Corporation
shall have no liability under any such sale or other transfer
agreements; provided, further, that if required by Financial Security
Assurance Inc. ("FSA") (i) such Related Company and each other party to
such agreement shall enter into a non- petition covenant with respect
to the Corporation in form and substance acceptable to FSA and (ii) in
connection
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with each such sale, the Corporation shall cause to be delivered to FSA
an opinion of counsel acceptable to FSA and in form and substance
acceptable to FSA that such sale (x) will not render the Corporation
insolvent and (y) will not result in the substantive consolidation of
the assets of the Corporation with the assets of any affiliate of the
Corporation under any proceeding under Title 11, United States Code (or
any similar state or federal law) with respect to any such affiliate;
E. to acquire from the Trustee certificates
issued by Trusts to which the Corporation transferred
Assets;
F. to enter from time to time into financing
agreements ("Residual Financing Agreements") for any subordinate or
residual certificates issued under Securitization Agreements ("Asset
Pool Equity Interests"); provided that the Corporation shall have no
liability under any such Residual Financing Agreements except to the
extent of the related Asset Pool Equity Interests securing or
collateralizing the related financing;
G. to hold and enjoy all of the rights and
privileges of any Asset Pool Equity Interests;
H. to purchase Assets from any Related
Company as defined in Article EIGHTH in connection with
Securitization Agreements;
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I. to perform its obligations under each
Securitization Agreement and each Residual Financing
Agreement; and
J. to engage in any acts and activities and exercise
any powers permitted to corporations under the laws of the State of
Nevada which are incidental to, or connected with, the foregoing, and
necessary, suitable or convenient to accomplish any of the foregoing.
Section 2.13 Forbidden Actions. So long as the Corporation
owns (i) any Assets pursuant to any agreement or (ii) is liable for any
obligations under any such or a related agreement, notwithstanding any other
provision of the Articles of Incorporation and any provision of law which
otherwise so empowers the Corporation, the Corporation shall not perform any act
in contravention of any of the following:
(a) The Corporation shall not (i) consolidate or merge with or
into any other entity or convey, transfer or assign any residual or subordinate
interest to any Related Company, or dissolve or transfer its properties and
assets substantially as an entirety to any entity (other than to a trust formed
pursuant to a Pooling and Servicing Agreement or similar agreement and only to
the extent that the trust is deemed to be a subsidiary of the Corporation), or
lend or advance any moneys to, or make an investment in, any person or amend or
repeal these bylaws or its Articles of Incorporation or (ii) engage in any other
action that bears on whether the separate legal identity of the Corporation and
Advanta Auto
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Finance Corporation will be respected including, without limitation (a) holding
itself out as being liable for the debts of any other part; (b) forming, or
causing to be formed, any subsidiaries; (c) acting other than in its corporate
name and through its duly authorized officers or agents; (d) failing to hold
appropriate meetings of the Board of Directors at least three times per annum
and otherwise as necessary to authorize all corporate action; (e) failing to
hold meetings of the stockholders at least one time per annum;
(b) incur any indebtedness, or assume or guaranty any
indebtedness of any other entity, other than Notes and any indebtedness to
Advanta Auto Finance Corporation, a Nevada corporation, or other affiliate
thereof in connection with the
acquisition of Assets.
(c) consolidate or merge with or into any other entity or
convey or transfer its properties and assets substantially as an entirety to any
entity, unless
(i) the entity (if other than the Corporation) formed or
surviving the consolidation or merger or which acquires the properties
and assets of the Corporation is organized and existing under the laws
of the State of Nevada, expressly assumes the due and punctual payment
of all obligations of the Corporation, including those obligations of
the Corporation under each Securitization Agreement; and
(ii) immediately after giving effect to the transaction, no
default or event of default has occurred
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and is continuing under any indebtedness of the Corporation,
any Securitization Agreement;
(d) without the affirmative vote of 100% of the members of the
Board of Directors of the Corporation (including the Independent Directors, as
set forth in the Articles of Incorporation) institute proceedings to be
adjudicated bankrupt or insolvent, or consent to the institution of bankruptcy
or insolvency proceedings against it, or consent to, or file a petition seeking,
reorganization or relief under applicable federal or state law relating to
bankruptcy, or consent to the appointment of a receiver, liquidator, assignee,
trustee, sequestrator (or other similar official) of the Corporation or a
substantial part of its property, or make any assignment for the benefit of
creditors, or admit in writing its inability to pay its debts generally as they
become due, or take corporate action in furtherance of any such action, provided
that if there shall not be two directors required by Article FOURTH (b) of the
Articles of Incorporation then in office and acting, a vote upon any matter set
forth in this Section 2.13(d) shall not be taken unless and until two directors
meeting the requirements of Article FOURTH of the Articles of Incorporation
shall have been elected and shall be present and acting at such vote;
(e) commingle the Corporation's assets with those of any
direct or ultimate parent of the Corporation or any subsidiary or affiliate of
any such parent;
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(f) fail to maintain separate corporate records and books of
account from those of any direct or ultimate parent of the Corporation or any
subsidiary or affiliate of any such parent;
(g) fail to conduct its business from an office separate from
any direct or ultimate parent of the Corporation or any subsidiary or affiliate
of any such parent;
(h) fail to maintain its assets separately from the accounts
of any other person (including through maintenance of a separate bank account);
and
(i) fail to pay from its assets all obligations and
indebtedness of any kind incurred by it, nor pay from its assets any obligations
or indebtedness of any other entity or person.
For purpose of this Section 2.13, "Related Company" means the
stockholder or stockholders of this Corporation or any entity other than this
Corporation now or hereafter controlled directly or indirectly by, or under
direct or indirect common control with, the stockholders of this Corporation.
ARTICLE III
Committees of the Board
Section 3.1 Designation, Power, Alternate Members and Term of
Office. The Board of Directors may, by resolution passed by a majority of the
whole Board of Directors, designate one or more committees, including but not
limited to an Executive Committee, each committee to consist of one or
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more of the directors of the Corporation. Any such committee, to the extent
provided in such resolution and permitted by law, shall have and may exercise
all the powers and authority of the Board of Directors in the management of the
business and affairs of the Corporation, and may authorize the seal of the
Corporation or a facsimile thereof to be affixed to or reproduced on all such
papers as said committee shall designate; but no such committee shall have power
or authority in reference to amending the Articles of Incorporation, adopting an
agreement of merger of consolidation, recommending to the stockholders the sale,
lease or exchange of all or substantially all of the Corporation's property and
assets, recommending to the stockholders a dissolution of the Corporation or a
revocation of a dissolution, amending the Bylaws of the Corporation, declaring a
dividend or authorizing the issuance of stock. The Board of Directors may
designate one or more directors as alternate members of any committee who, in
the order specified by the Board of Directors, may replace any absent or
disqualified member at any meeting of such committee. If at a meeting of any
committee one or more of the members thereof should be absent or disqualified,
and if either the Board of Directors has not so designated any alternate member
or members, or the number of absent or disqualified members exceeds the number
of alternate members who are present at such meeting, then the member or members
of such committee (including alternates) present at any meeting and not
disqualified from voting, whether or not he or they
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constitute a quorum, may unanimously appoint another director to act at such
meeting in the place of any such absent or disqualified member. The term of
office of the members of each committee shall be as fixed from time to time by
the Board of Directors, subject to these Bylaws; provided, however, that any
committee member who ceases to be a member of the Board of Directors shall ipso
facto cease to be a committee member. Each committee shall appoint a secretary,
who may be a Director or an officer of the Corporation.
Section 3.2 Meetings, Notices and Records. Each committee may
provide for the holding of regular meetings, with or without notice, and may fix
the times and places at which such meetings shall be held. Special meetings of
each committee shall be held upon call by or at the direction of its chairman
or, if there be no chairman, by or at the direction of any one of its members.
Except as otherwise provided by law, notice of each special meeting of a
committee shall be mailed to each member of such committee, addressed to such
member at such member's residence or usual place of business, at least two days
before the day on which the meeting is to be held, or shall be sent to him at
such place by telex, facsimile transmission, telegram, radio or cable, or
telephoned or delivered to such member personally, not later than the day before
the day on which the meeting is to be held. Such notice shall state the time and
place of such meeting, but need not state the purposes thereof, unless
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otherwise required by law, the Articles of Incorporation of
the Corporation or these Bylaws.
Notice of any meeting of a committee need not be given to any
member thereof who shall attend such meeting in person or who shall waive notice
thereof, before or after such meeting, in a signed writing. Each committee shall
keep a record of its proceedings.
Section 3.3 Quorum and Manner of Acting. At each meeting of
any committee the presence of a majority of its members then in office shall be
necessary and sufficient to constitute a quorum for the transaction of business,
except that when a committee consists of one member, then the one member shall
constitute a quorum. In the absence of a quorum, a majority of the members
present at the time and place of any meeting may adjourn the meeting from time
to time until a quorum shall be present and the meeting may be held as so
adjourned without further notice or waiver. The act of a majority of the members
present at any meeting at which a quorum is present shall be the act of such
committee. Subject to the foregoing and other provisions of these Bylaws and
except as otherwise determined by the Board of Directors, each committee may
make rules for the conduct of its business.
Section 3.4 Resignations. Any member of a committee may resign
at any time by giving written notice of such resignation to the Board of
Directors, the President, any Vice President or the Secretary. Unless otherwise
specified in such notice, such resignation shall take effect upon
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receipt thereof by the Board of Directors or any such officer, and the
acceptance of such resignation shall not be necessary to make it effective.
Section 3.5 Removal. Any member of any committee
may be removed at any time with or without cause by the Board
of Directors.
Section 3.6 Vacancies. If any vacancy shall occur in any
committee by reason of death, resignation, disqualification, removal or
otherwise, the remaining member or members of such committee, so long as a
quorum is present, may continue to act until such vacancy is filled by the Board
of Directors.
Section 3.7 Compensation. Committee members shall receive such
reasonable compensation for their services as such, whether in the form of
salary or a fixed fee for attendance at meetings, with expenses, if any, as the
Board of Directors may from time to time determine. Nothing herein contained
shall be construed to preclude any committee member from serving the Corporation
in any other capacity and receiving compensation therefor.
ARTICLE IV
Officers
Section 4.1 Officers. The officers of the Corporation shall be
a President, one or more Vice Presidents, a Secretary, a Treasurer, and such
other officers as may be appointed in accordance with the provisions of Section
4.3.
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Section 4.2 Election, Term of Office and Qualifications. Each
officer (except such officers as may be appointed in accordance with the
provisions of Section 4.3) shall be elected by the Board of Directors. Each such
officer shall hold such office until such officer's successor shall have been
elected and shall qualify, or until such officer's death, or until such officer
shall have resigned in the manner provided in Section 4.4 or shall have been
removed in the manner provided in Section 4.5.
Section 4.3 Subordinate Officers and Agents. The Board of
Directors from time to time may appoint other officers or agents (including one
or more Assistant Vice Presidents, one or more Assistant Secretaries and one or
more Assistant Treasurers), to hold office for such periods, have such authority
and perform such duties as are provided in these Bylaws or as may be provided in
the resolutions appointing them. The Board of Directors may delegate to any
officer or agent the power to appoint any such subordinate officers or agents
and to prescribe their respective terms of office, authorities and duties.
Section 4.4 Resignations. Any officer may resign at any time
by giving written notice of such resignation to the Board of Directors, the
President, any Vice President or the Secretary. Unless otherwise specified in
such written notice, such resignation shall take effect upon receipt thereof by
the Board of Directors or any such officer, and the
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acceptance of such resignation shall not be necessary to make
it effective.
Section 4.5 Removal. Any officer specifically designated in
Section 4.1 may be removed with or without cause at any meeting of the Board of
Directors by affirmative vote of a majority of the directors then in office. Any
officer or agent appointed in accordance with the provisions of Section 4.3 may
be removed with or without cause at any meeting of the Board of Directors by
affirmative vote of a majority of the directors present at such meeting, or at
any time by any superior officer or agent upon whom such power of removal shall
have been conferred by the Board of Directors.
Section 4.6 Vacancies. A vacancy in any office by reason of
death, resignation, removal, disqualification or any other cause shall be filled
for the unexpired portion of the term in the manner prescribed by these Bylaws
for regular election or appointment to such office.
Section 4.7 The President. The President shall be the chief
executive officer of the Corporation, subject to the direction of the Board of
Directors, shall have general charge of the business, affairs and property of
the Corporation and general supervision over its officers and agents. If
present, the President shall preside at all meetings of stockholders and the
President shall see that all orders and resolutions of the Board of Directors
are carried into effect. The President may sign, with any other officer
thereunto duly authorized, certificates representing stock of
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the Corporation the issuance of which shall have been duly authorized (the
signature to which may be a facsimile signature), and may sign and execute in
the name of the Corporation deeds, mortgages, bonds, contracts, agreements or
other instruments duly authorized by the Board of Directors, except in cases
where the signing and execution thereof shall be expressly delegated by the
Board of Directors to some other officer or agent or shall be required by law to
be otherwise executed. From time to time President shall report to the Board of
Directors all matters within the President's knowledge which the interests of
the Corporation may require to be brought to their attention. The President
shall have such other powers and perform such other duties as may from time to
time be prescribed by the Board of Directors or these Bylaws. If no Treasurer
shall have been appointed by the Board of Directors the President shall have, in
addition to and not in limitation of the foregoing, the powers afforded the
Treasurer pursuant to Section 4.10 hereof.
Section 4.8 The Vice Presidents. At the request of the
President or in the absence or disability of the President, the Vice President
designated by the Board of Directors shall perform all the duties of the
President and, when so acting, shall have all the powers of and be subject to
all restrictions upon the President. Any Vice President may also sign, with any
other officer thereunto duly authorized, certificates representing stock of the
Corporation the issuance of which shall have been duly authorized (the
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signature to which may be a facsimile signature), and may sign and execute in
the name of the Corporation deeds, mortgages, bonds, contracts, agreements or
other instruments duly authorized by the Board of Directors, except in cases
where the signing and execution thereof shall be expressly delegated by the
Board of Directors to some other officer or agent or shall be required by law to
be otherwise executed. Each Vice President shall have such other powers and
perform such other duties as may from time to time be prescribed by the Board of
Directors, the President or these Bylaws.
Section 4.9 The Secretary. The Secretary shall:
(a) record all the proceedings of the meetings of
the stockholders, the Board of Directors, and any
committees of the Board of Directors in a book or books
to be kept for that purpose;
(b) cause all notices to be duly given in
accordance with the provisions of these Bylaws and as
required by law;
(c) whenever any committee shall be appointed in pursuance of
a resolution of the Board of Directors, furnish the chairman of such
committee with a copy of such resolution;
(d) be custodian of the records and of the seal of the
Corporation, and cause such seal to be affixed to or a facsimile to be
reproduced on all certificates representing stock of the Corporation
prior to the issuance thereof and to all instruments the execution of
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which on behalf of the Corporation under its seal shall
have been duly authorized;
(e) see that its lists, books, reports, statements,
certificates and other documents and records required by law are
properly kept and filed;
(f) have charge of the stock and transfer books of the
Corporation, and exhibit such stock book at all reasonable times to
such persons as are entitled by law to have access thereto;
(g) sign certificates representing stock of the Corporation
the issuance of which shall have been duly authorized (the signature to
which may be a facsimile signature); and
(h) in general, perform all duties incident to the office of
Secretary and have such other powers and perform such other duties as
may from time to time be prescribed by the Board of Directors, the
President or these Bylaws.
Section 4.10 The Treasurer. The Treasurer shall
be the chief financial officer of the Corporation and shall:
(a) have charge of and supervision over and be
responsible for the funds, securities, receipts and
disbursements of the Corporation;
(b) cause the moneys and other valuable effects of the
Corporation to be deposited in the name and to the credit of the
Corporation in such banks or trust companies or with such bankers or
other depositaries as
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shall be selected in accordance with Section 5.3 or to be otherwise
dealt with in such manner as the Board of Directors may direct;
(c) cause the funds of the Corporation to be disbursed by
checks or drafts upon the authorized depositaries of the Corporation,
and cause to be taken and preserved proper vouchers for all moneys
disbursed;
(d) render to the Board of Directors or the President,
whenever requested, a statement of the financial condition of the
Corporation and of all his transactions as Treasurer;
(e) cause to be kept at the Corporation's principal office
correct books of account of all its business and transactions and such
duplicate books of account as the Treasurer shall determine and upon
application cause such books or duplicates thereof to be exhibited to
any director;
(f) be empowered, from time to time, to require from the
officers or agents of the Corporation reports or statements giving such
information as the Treasurer may desire with respect to any and all
financial transactions of the Corporation;
(g) sign certificates representing stock of the Corporation
the issuance of which shall have been duly authorized (the signature to
which may be a facsimile signature); and
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(h) in general, perform all duties incident to the office of
Treasurer and have such other powers and perform such other duties as
may from time to time be prescribed by the Board of Directors, the
President or these Bylaws.
Section 4.11 Salaries. The salaries of the officers of the
Corporation shall be fixed from time to time by the Board of Directors, except
that the Board of Directors may delegate to any person the power to fix the
salaries or other compensation of any officers or agents appointed in accordance
with the provisions of Section 4.3. No officer shall be prevented from receiving
such salary by reason of the fact that such officer is also a director of the
Corporation.
ARTICLE V
Execution of Instruments and
Deposit of Corporate Funds
Section 5.1 Execution of Instruments Generally. Subject to the
restrictions set forth in Sections 2.12 and 2.13 hereof, which such Sections
shall control, the President, any Vice President or the Secretary or the Chief
Financial Officer, subject to the approval of the Board of Directors, may enter
into any contract or execute and deliver any instrument in the name and on
behalf of the Corporation. Subject to the restrictions set forth in Sections
2.12 and 2.13 hereof, which such Sections shall control, the Board of Directors
may authorize any officer or officers, or agent or agents, to enter into any
contract or execute and deliver any
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instrument in the name and on behalf of the Corporation, and such authorization
may be general or confined to specific instances.
Section 5.2 Borrowing. Subject to the restrictions set forth
in Sections 2.12 and 2.13 hereof, which such Sections shall control, no loans or
advance shall be obtained or contracted for, by or on behalf of the Corporation
and no negotiable paper shall be issued in its name, unless and except as
authorized by the Board of Directors. Such authorization may be general or
confined to specific instances. Subject to the restrictions set forth in
Sections 2.12 and 2.13 hereof, which such Sections shall control, any officer or
agent of the Corporation thereunto so authorized may obtain loans and advances
for the Corporation, and for such loans and advances may make, execute and
deliver promissory notes, bonds, or other evidences of indebtedness of the
Corporation. Subject to the restrictions set forth in Sections 2.12 and 2.13
hereof, which such Sections shall control, any officer or agent of the
Corporation thereunto so authorized may pledge, hypothecate or transfer as
security for the payment of any and all loans, advances, indebtedness and
liabilities of the Corporation, any and all stocks, bonds, other securities and
other personal property at any time held by the Corporation, and to that end may
endorse, assign and deliver the same and do every act and thing necessary or
proper in connection therewith.
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Section 5.3 Deposits. All funds of the Corporation not
otherwise employed shall be deposited from time to time to its credit in such
banks or trust companies or with such bankers or other depositaries as the Board
of Directors may select, or as may be selected by any officer or officers or
agent or agents authorized so to do by the Board of Directors. Endorsements for
deposit to the credit of the Corporation in any of its duly authorized
depositaries shall be made in such manner as the Board of Directors from time to
time may determine.
Section 5.4 Checks, Drafts, etc. All checks, drafts or other
orders for the payment of money, and all notes or other evidences of
indebtedness issued in the name of the Corporation, shall be signed by such
officer or officers or agent or agents of the Corporation, and in such manner,
as from time to time shall be determined by the Board of Directors.
Section 5.5 Proxies. Proxies to vote with respect to shares of
stock of other Corporations owned by or standing in the name of the Corporation
may be executed and delivered from time to time on behalf of the Corporation by
the President or any Vice President or by any other person or persons thereunto
authorized by the Board of Directors.
ARTICLE VI
Record Dates
Section 6.1 Record Dates. In order that the Corporation may
determine the stockholders entitled to notice
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of or to vote at any meeting of stockholders or any adjournment thereof, or to
express consent to corporate action in writing without a meeting, or entitled to
receive payment of any dividend or other distribution or allotment of any
rights, or entitled to exercise any rights in respect of any change, conversion
or exchange of stock or for the purpose of any other lawful action, the Board of
Directors may fix, in advance, a record date, which shall be not more than sixty
nor less than ten days before the date of such meeting, nor more than sixty days
prior to any other action. Only those stockholders of record on the date so
fixed shall be entitled to any of the foregoing rights, notwithstanding the
transfer of any such stock on the books of the Corporation after any such record
date fixed by the Board of Directors.
ARTICLE VII
Corporate Seal
Section 7.1 Corporate Seal. The corporate seal shall be
circular in form and shall bear the name of the Corporation and words and
figures denoting its organization under the laws of the State of Nevada and the
year thereof and otherwise shall be in such form as shall be approved from time
to time by the Board of Directors.
ARTICLE VIII
Fiscal Year
Section 8.1 Fiscal Year. The fiscal year of the Corporation
shall be as designated by the Board of Directors.
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ARTICLE IX
Amendments
Section 9.1 Amendments. All Bylaws of the Corporation may be
amended or repealed, and new Bylaws may be made, by an affirmative majority of
the votes cast at any annual or special stockholders' meeting by holders of
outstanding shares of stock of the Corporation entitled to vote, or by an
affirmative vote of a majority of the directors present at any organizational,
regular, or special meeting of the Board of Directors.
ARTICLE X
Action Without A Meeting
Section 10.1 Action Without A Meeting. Any action which might
have been taken under these Bylaws by a vote of the stockholders at a meeting
thereof may be taken without a meeting, without prior notice and without a vote,
if a consent in writing setting forth the action so taken, shall be individually
signed and dated by the holders of outstanding shares of stock of the
Corporation having not less than the minimum number of votes that would be
necessary to authorize or take such action at a meeting at which all shares
entitled to vote thereon were present and voted, provided that no written
consent will be effective unless the necessary number of written consents is
delivered to the Corporation within sixty days of the earliest delivered consent
to the Corporation, and provided further that prompt notice shall be given to
those stockholders who have not so consented if less
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than unanimous written consent is obtained. Any action which might have been
taken under these Bylaws by vote of the directors at any meeting of the Board of
Director or any committee thereof may be taken without a meeting if all the
members of the Board of Directors or such committee, as the case may be, consent
thereto in writing, and the writing or writings are filed with the minutes of
the Board of Directors or such committee.
ARTICLE XI
Indemnification
Section 11.1 Indemnification. The Corporation shall indemnify,
in the manner and to the full extent permitted by law, any person (or the estate
of any person) who was or is a party to, or is threatened to be made a party to,
any threatened, pending or completed action, suit or proceeding, whether or not
by or in the right of the Corporation, and whether civil, criminal,
administrative, investigative or otherwise, by reason of the fact that such
person is or was a director, officer, employee or agent of the Corporation, or
is or was serving at the request of the Corporation as a director, officer,
employee or agent or another Corporation, partnership, joint venture, trust or
other enterprise. Where required by law, the indemnification provided for herein
shall be made only as authorized in the specific case upon a determination, in
the manner provided by law, that indemnification of the director, officer,
employee or agent is proper in the circumstances. The Corporation may,
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to the full extent permitted by law, purchase and maintain insurance on behalf
of any such person against any liability which may be asserted against such
person. To the full extent permitted by law, the indemnification provided herein
shall include expenses (including attorneys' fees), judgments, fines and amounts
paid in settlement, and, in the manner provided by law, any such expenses may be
paid by the Corporation in advance of the final disposition of such action, suit
or proceeding. The indemnification provided herein shall not be deemed to limit
the right of the Corporation to indemnify any other person for any such expenses
to the full extent permitted by law, nor shall it be deemed exclusive of any
other rights to which any person seeking indemnification from the Corporation
may be entitled under any agreement, vote of stockholders or disinterested
directors or otherwise, both as to action in his official capacity and as to
action in another capacity while holding such office. Such indemnification shall
continue as to a person who has ceased to be a director, officer, employee or
agent and shall inure to the benefit of the heirs, executors and administrators
of such person.
Section 11.2 No director shall be personally liable to the
Corporation or any of its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for acts or omissions
which involve intentional misconduct, fraud, or a knowing violation of law, or
(ii) for the payment of distributions in violation of the Section 78.300 of the
Nevada Revised Statutes. Any repeal or
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modification of this Section 11.2 by the stockholders of the Corporation shall
not adversely affect any right or protection of a director of the Corporation
existing at the time of such repeal or modification with respect to acts or
omissions occurring prior to such repeal or modification.
ARTICLE XII
Offices
Section 12.1 Resident Office and Resident. The Corporation
shall maintain a resident office and resident within the State of Nevada, which
may be changed by the Board of Directors from time to time.
Section 12.2 Other Offices. The Corporation may also have
offices at such other place, within or without the State of Nevada, as the Board
of Directors may from time to time determine.
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