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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 6, 1999
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT
Under
the Securities Act of 1933
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HFC REVOLVING CORPORATION
(Exact name of registrant as specified in governing instruments)
DELAWARE 36-3955292
(State of incorporation) (I.R.S. Employer Identification Number)
2700 SANDERS ROAD, PROSPECT HEIGHTS, ILLINOIS 60070, (847) 564-5000
(Address and telephone number of Registrant's principal executive offices)
JOHN W. BLENKE, ESQ.
VICE PRESIDENT - CORPORATE LAW AND
ASSISTANT SECRETARY
2700 SANDERS ROAD, PROSPECT HEIGHTS, ILLINOIS 60070, (847) 564-6150
(Name, address and telephone number of agent for service)
------------------------------------
COPIES TO:
KURT W. FLORIAN, JR., ESQ. ALLAN KRINSMAN, ESQ.
KATTEN MUCHIN & ZAVIS BROWN & WOOD
525 W. MONROE STREET ONE WORLD TRADE CENTER, 58TH FLOOR
CHICAGO, ILLINOIS 60661 NEW YORK, NEW YORK 10048
------------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From
time to time on or after the effective date of this Registration Statement, as
determined by market conditions.
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, please 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, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
==================================================================================================================================
Proposed Proposed
Maximum Maximum
Amount to be Offering Price Per Aggregate Amount of
Title of Securities being Registered Registered Unit (1) Offering Price(1) Registration Fee
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Home Equity Loan Asset Backed
Certificates (Issuable in Series).................. $1,000,000 100% $1,000,000 $278.00
==================================================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT 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 SECTION 8(a), MAY
DETERMINE.
This Registration Statement includes (1) a basic prospectus relating to
home equity loan asset backed certificates and (2) an illustrative form of
prospectus supplement for use in an offering of closed-end home equity loan
asset backed certificates.
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The information in this prospectus supplement is not complete and may be
changed. We may not sell these securities until the registration statement filed
with the SEC is effective. This prospectus supplement is not an offer to sell
these securities and it is not soliciting an offer to buy these securities in
any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION
DATED AUGUST 6, 1999
PROSPECTUS SUPPLEMENT DATED ________, 1999
(TO PROSPECTUS DATED ________, 1999)
$__________________
HFC REVOLVING CORPORATION
DEPOSITOR
HOUSEHOLD HOME EQUITY LOAN TRUST ____
ISSUER
HOUSEHOLD FINANCE CORPORATION
MASTER SERVICER
CLOSED-END HOME EQUITY LOAN ASSET BACKED CERTIFICATES, SERIES ______
Offered Certificates The trust will issue ______ classes of senior
certificates offered under this prospectus
supplement, backed by a pool of closed-end, primarily
first or second lien fixed rate home equity loans.
Credit Enhancement Credit enhancement for the certificates consists of:
o excess interest and overcollateralization; and
o a certificate guaranty insurance policy issued
by _________________.
YOU SHOULD CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE S-__ IN THIS
PROSPECTUS SUPPLEMENT.
Neither the SEC nor any state securities commission has approved or disapproved
of the offered certificates or determined that this prospectus supplement or the
prospectus is accurate or complete. Any representation to the contrary is a
criminal offense.
The Attorney General of the State of New York has not passed on or endorsed the
merits of this offering. Any representation to the contrary is unlawful.
_________ will offer the certificates to the public, at varying prices to be
determined at the time of sale. The proceeds to the depositor from the sale of
the certificates will be approximately _____% of the principal balance of the
certificates plus accrued interest, before deducting expenses.
[NAME OF UNDERWRITER]
Underwriter
<PAGE> 3
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS SUPPLEMENT AND
THE ACCOMPANYING PROSPECTUS
We provide information to you about the offered certificates in two separate
documents that provide progressively more detail:
o the accompanying prospectus, which provides general information, some of
which may not apply to your series of certificates; and
o this prospectus supplement, which describes the specific terms of your
series of certificates.
If the description of your certificates in this prospectus supplement differs
from the related description in the accompanying prospectus, you should rely on
the information in this prospectus supplement.
The depositor's principal offices are located at 2700 Sanders Road, Prospect
Heights, Illinois 60070 and its telephone number is (847) 564-6335.
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TABLE OF CONTENTS
<TABLE>
<S> <C>
Summary ........................................................................................................... S-5
The Trust .................................................................................................... S-7
The Home Equity Loan Pool .................................................................................... S-7
Distributions on the Certificates ............................................................................ S-8
Credit Enhancement ........................................................................................... S-8
Optional Termination ......................................................................................... S-9
Ratings ...................................................................................................... S-9
Legal Investment ............................................................................................. S-9
Employee Benefit Plan Considerations ......................................................................... S-9
Tax Status ................................................................................................... S-9
Risk Factors ...................................................................................................... S-10
Special Yield and Prepayment Considerations .................................................................. S-10
Risks Associated with the Home Equity Loans .................................................................. S-12
Loss Mitigation Practices .................................................................................... S-14
Limited Obligations .......................................................................................... S-14
Liquidity Risks .............................................................................................. S-15
Servicing Risks .............................................................................................. S-15
Risks Associated with the Certificates ....................................................................... S-16
Forward-Looking Statements ................................................................................... S-17
Introduction ...................................................................................................... S-17
Description of the Home Equity Loan Pool .......................................................................... S-17
General ...................................................................................................... S-17
Payments on the Simple Interest Home Equity Loans ............................................................ S-18
Balloon Loans ................................................................................................ S-19
Home Equity Loan Pool Characteristics ........................................................................ S-19
Home Equity Loans ............................................................................................ S-20
Underwriting Standards ....................................................................................... S-24
Optional Purchase of Defaulted Home Equity Loans ............................................................. S-25
The Subservicers ............................................................................................. S-25
The Master Servicer .......................................................................................... S-25
Delinquency and Loss Experience of the Master Servicer's Portfolio ........................................... S-25
Additional Information ....................................................................................... S-26
Description of the Certificates ................................................................................... S-26
General ...................................................................................................... S-26
Book-Entry Registration of the Offered Certificates .......................................................... S-27
Distributions ................................................................................................ S-30
Available Distribution Amount ................................................................................ S-31
Interest Distributions ....................................................................................... S-31
Principal Distributions ...................................................................................... S-31
Overcollateralization Provisions ............................................................................. S-33
Excess Loss Amounts .......................................................................................... S-34
Certificate Guaranty Insurance Policy ........................................................................ S-35
</TABLE>
S-3
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<TABLE>
<S> <C>
The Credit Enhancer ............................................................................................... S-35
Material Yield and Prepayment Considerations ...................................................................... S-36
General ...................................................................................................... S-36
Fixed Strip Certificate Yield Considerations ................................................................. S-41
Pooling and Servicing Agreement ................................................................................... S-42
The Master Servicer .......................................................................................... S-42
Possession of Home Equity Loan Documents ..................................................................... S-43
Review of the Home Equity Loans .............................................................................. S-43
Servicing and Subserving ..................................................................................... S-44
Evidence as to Compliance .................................................................................... S-45
Collection and Other Servicing Procedures .................................................................... S-46
Refinancing of Senior Lien ................................................................................... S-46
Collection and Liquidation Practices; Loss Mitigation ........................................................ S-46
Voting Rights ................................................................................................ S-46
Termination .................................................................................................. S-47
Material Federal Income Tax Consequences .......................................................................... S-47
New Withholding Regulations .................................................................................. S-49
Method of Distribution ............................................................................................ S-49
Legal Opinions .................................................................................................... S-50
Experts ........................................................................................................... S-50
Ratings ........................................................................................................... S-51
Legal Investment .................................................................................................. S-51
Employee Benefit Plan Considerations .............................................................................. S-52
Glossary of Terms ................................................................................................. S-53
Annex I ........................................................................................................... I-1
Global Clearance, Settlement and Tax Documentation Procedures ..................................................... I-1
Initial Settlement ........................................................................................... I-1
Secondary Market Trading ..................................................................................... I-1
Material U.S. Federal Income Tax Documentation Requirements .................................................. I-3
</TABLE>
S-4
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SUMMARY
The following summary is a very general overview of the offered
certificates and does not contain all of the information that you should
consider in making your investment decision. To understand the terms of the
certificates, you should read carefully this entire document and the prospectus.
<TABLE>
<S> <C>
Issuer or Trust.................................. Household Home Equity Loan Trust ___________.
Title of the offered securities.................. Closed-End Home Equity Loan Asset Backed Certificates,
Series ____________.
Depositor........................................ HFC Revolving Corporation, an affiliate of Household
Finance Corporation, which is located at 2700 Sanders
Road, Prospect Heights, Illinois 60070. Its telephone
number is (847) 564-6335.
Master servicer.................................. Household Finance Corporation, which is located at 2700
Sanders Road, Prospect Heights, Illinois 60070. Its
telephone number is (847) 564-5000.
Trustee.......................................... ______________.
Credit enhancer.................................. ______________.
Home equity loan pool............................ _____ closed end and fixed-rate, fully-amortizing and
balloon payment home equity loans with an aggregate
principal balance of approximately ______________ as of
the close of business on the day prior to the cut-off date.
The home equity loans are secured primarily by first or
second liens on one- to four-family residential properties.
Cut-off date..................................... ______________.
Statistical cut-off date......................... ______________.
Closing date..................................... On or about ______________.
Payment dates.................................... Beginning in ______________ on the ___ of each month
or, if the ___ is not a business day, on the next business
day.
Scheduled final distribution date................ ______________. The actual final distribution date could
be substantially earlier.
Form of certificates............................. Book-entry.
See "Description of the Certificates--Book-Entry Registration"
in this prospectus supplement.
Minimum denominations............................ Class A Certificates: $_____________.
Class IO Certificates: $____________ (notional balance).
</TABLE>
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<TABLE>
<S> <C>
Legal investment................................. The certificates will not be "mortgage related securities"
for purposes of the Secondary Mortgage Market Enhancement
Act of 1984.
See "Legal Investment" in this prospectus supplement and
the prospectus.
</TABLE>
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<TABLE>
<CAPTION>
OFFERED CERTIFICATES
Pass-Through Initial Principal Initial Rating
Class Rate Balance ______/_____ Designation
<S> <C> <C> <C> <C>
Class A Certificates
A-1 ______% $___________ AAA/AAA Senior/Fixed
Rate/Sequential
A-2 ______% $___________ AAA/AAA Senior/Lockout/Fixed
Rate
Total Class A Certificates: $___________
Class IO Certificates:
IO ______% AAA/AAAr Senior/Interest
Only/Fixed Rate
Total offered certificates: $___________
NON-OFFERED CERTIFICATES
Class R Certificates
R ______% $___________ NA/NA Subordinate/Residual
Total offered and non-offered
certificates: $___________
</TABLE>
THE TRUST
The depositor will establish the Household Home Equity Loan Trust
______ to issue the Closed-End Home Equity Loan Asset Backed Certificates,
Series _____. The trust will be established, and the certificates will be issued
by the trust under a pooling and servicing agreement. The assets of the trust
will consist of the home equity loans, the certificate guaranty insurance policy
and related assets.
THE HOME EQUITY LOAN POOL
Approximately ____% of the home equity loans are secured by first or
second liens or deeds of trust. The home equity loans had the following
characteristics as of the statistical cut-off date, the date as of which
information is provided with respect to the home equity loans in the home equity
loan pool:
<TABLE>
<S> <C>
Minimum principal balance $_____
Maximum principal balance $_____
Average principal balance _____
Range of loan rates _____% to _____%
Weighted average loan rate _____%
Range of original terms to maturity _____ to _____ months
Weighted average original term to maturity _____ months
Range of remaining terms to maturity _____ to _____ months
Weighted average remaining term to maturity _____ months
Range of combined loan-to-value ratios _____% to _____%
Weighted average combined loan-to-value ratios _____%
</TABLE>
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See "Description of the Home Equity Loan Pool" in this prospectus
supplement.
DISTRIBUTIONS ON THE CERTIFICATES
Amount Available for Monthly Distribution. On each monthly distribution
date, the trustee will make distributions to holders of the offered
certificates. The amounts available for distribution include:
o collections of monthly payments on the home equity loans,
including prepayments and, if elected by the master servicer,
other unscheduled collections, plus
o draws upon the certificate guaranty insurance policy, if
necessary, minus
o fees and expenses of the subservicers and the master servicer.
See "Description of the Certificates--Available Distribution Amount" in this
prospectus supplement.
Distributions. Distributions to certificateholders will generally be
made from principal and interest collections as follows:
o Distribution of interest to the certificates
o Distribution of principal to the certificates
o Distribution of principal to the certificates to cover losses
o Payment to the credit enhancer of its premium for the policy
o Reimbursement to the credit enhancer for prior draws made on
the policy
o Distribution of additional principal to the certificates if
the level of overcollateralization falls below what is
required
o Payment to the credit enhancer for any other amounts owed
o Distribution of any remaining funds to the Residual
Certificates
Principal payments on the certificates will be as described under "Description
of the Certificates--Principal Distributions" in this prospectus supplement.
In addition, payments on the certificates will be made on each
distribution date from draws on the certificate guaranty insurance policy, if
necessary. Draws will cover shortfalls in amounts available to pay interest on
the certificates at the pass-through rates plus any unpaid losses allocated to
the certificates.
CREDIT ENHANCEMENT
The credit enhancement for the benefit of the certificates consists of:
Excess Interest. Because more interest is paid by the borrowers than is
necessary to pay the interest on the certificates each month, there will be
excess interest. Some of this excess interest may be used to protect the
certificates against some losses, by making an additional payment of principal
up to the amount of the losses.
S-8
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Overcollateralization. Although the aggregate principal balance of the
home equity loans is $__________, the trust is issuing only $__________
aggregate principal amount of certificates. The excess amount of the balance of
the home equity loans represents overcollateralization, which may absorb some
losses on the home equity loans, if not covered by excess interest. If the level
of overcollateralization falls below what is required, the excess interest
described above will also be paid to the certificates as principal. This will
reduce the principal balance of the certificates faster than the principal
balance of the home equity loans so that the required level of
overcollateralization is reached.
Policy. On the closing date, the credit enhancer will issue the
certificate guaranty insurance policy in favor of the trustee. The policy will
unconditionally and irrevocably guarantee interest on the certificates at the
related pass-through rates and will cover any losses allocated to the
certificates if not covered by excess interest or overcollateralizations.
OPTIONAL TERMINATION
On any payment date on which the aggregate principal balance of all of
the home equity loans is less than __% of the principal balance as of the
cut-off date, the master servicer will have the option to purchase the remaining
home equity loans.
Under an optional purchase, the outstanding principal balance of the
certificates will be paid in full with accrued interest.
RATINGS
When issued, the certificates will receive the ratings listed on page
S-__ of this prospectus supplement. A security rating is not a recommendation to
buy, sell or hold a security and may be changed or withdrawn at any time by the
assigning rating agency. The ratings also do not address the rate of principal
prepayments on the home equity loans. The rate of prepayments, if different than
originally anticipated, could adversely affect the yield realized by holders of
the certificates.
LEGAL INVESTMENT
The certificates will not be "mortgage related securities" for purposes
of the Secondary Mortgage Market Enhancement Act of 1984. You should consult
your legal advisors in determining whether and to what extent the certificates
constitute legal investments for you.
EMPLOYEE BENEFIT PLAN CONSIDERATIONS
The certificates may be eligible for purchase by persons investing
assets of employee benefit plans or individual retirement accounts if they have
determined that the purchase and the continued holding of the certificates will
not be violative of applicable fiduciary standards of conduct. As a result,
persons investing assets of employee benefit plans should consult with their
legal advisors before investing plan or IRA assets in the certificates and
should carefully review the "Employee Benefit Plan Considerations" provisions
provided for later in this prospectus supplement and in the accompanying
prospectus.
TAX STATUS
For federal income tax purposes, the trust will be treated as a real
estate mortgage investment conduit. The certificates will represent ownership of
regular interests in the trust and will be treated as debt for federal income
tax purposes. The trust itself will not be subject to tax.
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See "Material Federal Income Tax Consequences" in this prospectus
supplement and in the accompanying prospectus.
RISK FACTORS
The certificates are not suitable investments for all investors. In
particular, you should not purchase the certificates unless you understand the
prepayment, credit, liquidity and market risks associated with the certificates.
The certificates are complex securities. You should possess, either
alone or together with an investment advisor, the expertise necessary to
evaluate the information contained in this prospectus supplement and the
accompanying prospectus in the context of your financial situation and tolerance
for risk.
You should carefully consider, among other things, the following
factors in connection with the purchase of the certificates:
SPECIAL YIELD AND PREPAYMENT CONSIDERATIONS
THE YIELD TO MATURITY ON YOUR CERTIFICATES WILL VARY DEPENDING ON A
VARIETY OF FACTORS.
The yield to maturity of the certificates will depend on a variety of
factors, including:
o the amortization schedules of the home equity loans;
o the rate of principal prepayments, including partial
prepayments, and prepayments resulting from refinancing by the
borrowers;
o liquidations of defaulted home equity loans;
o the presence and enforceability of due-on-sale clauses;
o repurchase of home equity loans by the depositor as a result
of defective documentation or breaches of representations and
warranties and optional purchase by the depositor of defaulted
home equity loans;
o the optional purchase by the master servicer of all the home
equity loans in connection with the termination of the trust;
o the pass-through rate for a class of certificates; and
o the purchase price.
THE RATE OF PREPAYMENTS IS ONE OF THE MOST IMPORTANT AND LEAST PREDICTABLE
OF THESE FACTORS.
In general, if you purchase a certificate at a price higher than its
outstanding principal balance and principal payments occur faster than you
assumed at the time of purchase, your yield will be lower than anticipated.
Similarly, if you purchase a certificate at a price lower than its outstanding
principal balance and principal payments occur more slowly than you assumed at
the time of purchase, your yield will be lower than anticipated.
S-10
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THE RATE OF PREPAYMENTS ON THE HOME EQUITY LOANS WILL VARY DEPENDING ON
FUTURE MARKET CONDITIONS, AND OTHER FACTORS.
Since borrowers can generally prepay their mortgage loans at any time,
the rate and timing of principal payments on the certificates are highly
uncertain. Generally, when market interest rates increase, borrowers are less
likely to prepay their mortgage loans. This could result in a slower return of
principal to you at a time when you might have been able to reinvest those funds
at a higher rate of interest than the pass-through rate on your class of
certificates. On the other hand, when market interest rates decrease, borrowers
are generally more likely to prepay their mortgage loans. This could result in a
faster return of principal to you at a time when you might not be able to
reinvest those funds at an interest rate as high as the pass-through rate on
your class of certificates.
REFINANCING PROGRAMS, WHICH MAY INVOLVE SOLICITING ALL OR SOME OF THE
BORROWERS TO REFINANCE THEIR HOME EQUITY LOANS, MAY INCREASE THE RATE OF
PREPAYMENTS ON THE HOME EQUITY LOANS.
Sellers of home equity loans may refinance the home equity loans, which
will result in prepayment on the home equity loans. _____% of the home equity
loans provide for payment of a prepayment charge which may, or may not be,
enforced by the master servicer. Prepayment charges may reduce the rate of
prepayment on the home equity loans until the end of the related prepayment
period. See "Description of the Home Equity Loan Pool--Home Equity Loan Pool
Characteristics" in this prospectus supplement and "Yield and Prepayment
Considerations" in the prospectus.
THE YIELD ON YOUR CERTIFICATES WILL BE AFFECTED BY THE SPECIFIC FORMS THAT
APPLY TO THAT CLASS DISCUSSED BELOW.
The offered certificates of each class have different yield
considerations and different sensitivities to the rate and timing of principal
distributions. The following is a general discussion of some yield
considerations and prepayment sensitivities of each class.
See "Material Yield and Prepayment Considerations" in this prospectus
supplement.
Class A Certificates. The Class A Certificates are subject to various
priorities for payment of principal as described in this prospectus supplement.
Distributions of principal on the Class A Certificates which have an earlier
priority of payment will be affected by the rates of prepayment of the home
equity loans early in the life of the home equity loan pool. Those classes of
Class A Certificates with a later priority of payment will be affected by the
rates of prepayment of the home equity loans experienced both before and after
the commencement of principal distributions on those classes.
See "Description of the Certificates--Principal Distributions" in this
prospectus supplement.
Class A-2 Certificates. It is not expected that the Class A-2
Certificates will receive any distributions of principal until the distribution
date in _____________. Until the distribution date in ______________, the Class
A-2 Certificates may receive a portion of principal prepayments that is smaller
than its pro rata share of principal payments from the home equity loans.
Class IO Certificates. An extremely rapid rate of principal prepayments
on the home equity loans could result in the failure of holders of the offered
certificates in the Class IO Certificates to fully recover their initial
investments.
See "Material Yield and Prepayment Considerations" and especially
"--Fixed Strip Certificate Yield Considerations" in this prospectus supplement.
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RISKS ASSOCIATED WITH THE HOME EQUITY LOANS
THE RETURN ON YOUR CERTIFICATES MAY BE REDUCED BY LOSSES ON THE POOL OF
HOME EQUITY LOANS, WHICH ARE MORE LIKELY BECAUSE MANY ARE JUNIOR LIENS.
______% of the home equity loans included in the home equity loan pool
are secured by second or third mortgages or deeds of trust. Proceeds from
liquidation of the property will be available to satisfy the home equity loans
only if the claims of any senior mortgages have been satisfied in full. When it
is uneconomical to foreclose on the mortgaged property or engage in other loss
mitigation procedures, the master servicer may write off the entire outstanding
balance of the home equity loan as a bad debt. The foregoing risks are
particularly applicable to home equity loans secured by second or third liens
that have high combined loan-to-value ratios or low junior ratios because it is
comparatively more likely that the master servicer would determine foreclosure
to be uneconomical. As of the statistical cut-off date, the weighted average
combined loan-to-value ratio of the home equity loans is ______%, and
approximately ______% of the home equity loans will have combined loan-to-value
ratios in excess of ______%.
HOME EQUITY LOANS WITH BALLOON PAYMENT FEATURES MAY HAVE GREATER DEFAULT
RISK.
_____% of the home equity loans included in the home equity loan pool
are Balloon Loans that provide for the payment of a large remaining principal
balance in a single payment at maturity. The borrower on this type of loan may
not be able to pay the large payment, and may also be unable to refinance the
home equity loan at maturity. As a result, the default risk associated with
Balloon Loans may be greater than that associated with fully amortizing loans
because of the large payment due at maturity.
DELAYS IN PAYMENT ON YOUR CERTIFICATES MAY RESULT BECAUSE THE MASTER
SERVICER IS NOT REQUIRED TO ADVANCE DELINQUENT MONTHLY PAYMENTS ON THE HOME
EQUITY LOANS.
The master servicer is not obligated to advance scheduled monthly
payments of principal and interest on home equity loans that are delinquent or
in default. The rate of delinquency and default of second and third home equity
loans may be greater than that of home equity loans secured by first liens on
comparable properties.
THE RETURN ON YOUR CERTIFICATES MAY BE REDUCED IN AN ECONOMIC DOWNTURN.
The home equity loans included in the home equity loan pool were
originated during a period of generally favorable economic conditions nationally
and in most regions of the country. However, a deterioration in economic
conditions could adversely affect the ability and willingness of borrowers to
repay their loans. No prediction can be made as to the effect of an economic
downturn on the rate of delinquencies and losses on the home equity loans.
CONSUMER PROTECTION LAWS MAY LIMIT REMEDIES.
There are various federal and state laws, public policies and
principles of equity that protect borrowers under home equity loans. Among other
things, these laws, policies and principles:
o regulate interest rates and other charges;
o require specific disclosures;
o require licensing of mortgage loan originators;
o prohibit discriminatory lending practices;
o prohibit unfair and deceptive practices;
S-12
<PAGE> 14
o regulate the use of consumer credit information; and
o regulate debt collection practices.
Violations of provisions of these laws may limit the ability of the
master servicer to collect all or part of the principal of or interest on the
home equity loans, may entitle the borrower to a refund of amounts previously
paid and may subject the depositor, the master servicer or the trust to damages
and administrative enforcement. The depositor will be required to repurchase any
home equity loans which, at the time of origination, did not comply with these
federal laws or regulations.
THE ORIGINATION DISCLOSURE PRACTICES FOR THE HOME EQUITY LOANS COULD CREATE
LIABILITIES THAT MAY AFFECT YOUR CERTIFICATES.
______% of the home equity loans included in the home equity loan pool
are subject to special rules, disclosure requirements and other regulatory
provisions because they are High Cost Loans.
Purchasers or assignees of these home equity loans, including the
trust, could be exposed to all claims and defenses that the borrowers could
assert against the originators of the home equity loans. Remedies available to a
borrower include monetary penalties, as well as rescission rights if the
appropriate disclosures were not given as required. See "Legal Aspects of Home
Equity Loans and Related Matters" in the prospectus.
YOUR CERTIFICATES MAY BE ADVERSELY AFFECTED BY CHANGES IN BANKRUPTCY LAWS.
In October 1997, a bankruptcy review commission recommended that
Congress amend the Bankruptcy Code by treating a claim secured by a junior
security interest in a borrower's principal residence as protected only to the
extent that the claim was secured when the security interest was made.
Additionally, the commission recommended that a creditor's secured claim in real
property should be determined by the property's fair market value, less
hypothetical costs of sale. Congress adjourned in 1998 without passing any
legislation addressing these issues. However, Congress continues to consider
bankruptcy law changes that may affect future bankruptcies and therefore could
affect the rate and timing of payments on the home equity loans. Any changes to
the Bankruptcy Code could have a negative effect on the home equity loans and
the enforcement of rights under the mortgage.
THE UNDERWRITING STANDARDS FOR THE HOME EQUITY LOANS CREATE GREATER RISKS
TO YOU, COMPARED TO THOSE FOR FIRST LIEN LOANS.
The standards under which the home equity loans were underwritten were
based on the borrower's credit history and capacity to repay, in addition to the
value of the collateral upon foreclosure. The underwriting standards allow loans
to be approved with a combined LTV ratio of up to 110%. See "Description of the
Home Equity Loan Pool--Underwriting Standards" in this prospectus supplement.
Because of the relatively high combined LTV ratios of the home equity loans and
the fact that many of the home equity loans are secured by junior liens, losses
on the home equity loans will likely be higher than on a pool of exclusively
conventional first lien home equity loans.
THE RETURN ON YOUR CERTIFICATES MAY BE PARTICULARLY SENSITIVE TO CHANGES IN
REAL ESTATE MARKETS IN SPECIFIC AREAS.
One risk of investing in the certificates is created by concentration
of the related mortgaged properties in one or more geographic regions.
Approximately ____% of the statistical cut-off date principal balance of the
home equity loans are located in California. If the regional economy or housing
market weakens in California, or in any other region having a significant
concentration of the properties
S-13
<PAGE> 15
underlying the home equity loans, the home equity loans related to properties in
that region may experience high rates of loss and delinquency, resulting in
losses to certificateholders. A region's economic condition and housing market
may be adversely affected by a variety of events, including natural disasters
such as earthquakes, hurricanes, floods and eruptions, and civil disturbances
such as riots.
THE RELOADING OF DEBT COULD INCREASE YOUR RISK.
With respect to home equity loans which were used for debt
consolidation, there can be no assurance that the borrower will not incur
further debt. This reloading of debt could impair the ability of borrowers to
service their debts, which in turn could result in higher rates of delinquency
and loss on the home equity loans.
LOSS MITIGATION PRACTICES
NONPERFORMING HOME EQUITY LOANS MAY RESULT IN DISTRIBUTION DELAYS AND LEGAL
EXPENSES.
Foreclosure actions and actions to obtain deficiency judgments:
o are regulated by state laws and judicial rules;
o may be subject to delays; and
o may be expensive.
Because of these factors, if a borrower defaults, the master servicer
may have trouble foreclosing on a home equity loan or obtaining a deficiency
judgment.
If the certificate guaranty insurer does not make a required payment or
if other forms of credit enhancement are no longer outstanding, a delay or
inability of the master servicer to foreclose or obtain a deficiency judgment
may delay distributions on the certificates or result in a loss on the
certificates.
THE RELEASE OF A LIEN MAY INCREASE YOUR RISK.
The master servicer may use a wide variety of practices to limit losses
on the home equity loans. The pooling and servicing agreement permits the master
servicer to release the lien on a limited number of mortgaged properties
securing the home equity loans, if the home equity loan is current in payment.
See "Pooling and Servicing Agreement - Refinancing of Senior Lien" and "-
Collection and Liquidation Practices; Loss Mitigation" in this prospectus
supplement.
LIMITED OBLIGATIONS
PAYMENTS ON THE HOME EQUITY LOANS, TOGETHER WITH THE CERTIFICATE GUARANTY
INSURANCE POLICY, ARE THE SOLE SOURCE OF PAYMENTS ON YOUR CERTIFICATES.
Credit enhancement includes excess interest, overcollateralization and
the certificate guaranty insurance policy. None of the depositor, the trustee,
the master servicer, the sellers or any of their affiliates will have any
obligation to replace or supplement the credit enhancement, or to take any other
action to maintain any rating of the certificates. If any losses are incurred on
the home equity loans that are not covered by the credit enhancement, the
holders of the certificates will bear the risk of these losses.
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<PAGE> 16
LIQUIDITY RISKS
YOU MAY HAVE TO HOLD YOUR CERTIFICATES TO MATURITY IF THEIR MARKETABILITY
IS LIMITED.
A secondary market for your certificates may not develop. Even if a
secondary market does develop, it may not continue, or it may be illiquid.
Illiquidity means you may not be able to find a buyer to buy your securities
readily or at prices that will enable you to realize a desired yield.
Illiquidity can have an adverse effect on the market value of the certificates.
SERVICING RISKS
THE FAILURE TO DELIVER THE LOAN DOCUMENTS RELATING TO EACH HOME EQUITY
LOAN AND THE FAILURE TO RECORD THE ASSIGNMENTS OF EACH HOME EQUITY LOAN MAY
CAUSE A SALE TO THE DEPOSITOR TO BE INEFFECTIVE.
Under the terms of the pooling and servicing agreement, so long as
HFC's long-term senior unsecured debt is acceptable to the rating agencies and
to the certificate guaranty insurer, subservicers affiliated with HFC will
retain the loan documents with respect to each home equity loan and will not
record assignments of the related mortgage to the trustee. In most of the states
in which the documents are held, failure to deliver the documents to the
trustee, and in certain states in which the mortgaged properties are located,
failure to record the assignments of the home equity loans in favor of the
trustee will make the sale of the mortgaged properties potentially ineffective
against:
o any creditors of a seller; or
o a purchaser, in the event a seller fraudulently or
inadvertently resells a home equity loan to a purchaser who
had no notice of the prior sale to the trust and who perfects
his interest in the home equity loan by taking possession of
the loan documents.
The pooling and servicing agreement provides that if any loss is suffered in
respect of a home equity loan as a result of a subservicer's retention of the
documents relating to a home equity loan or the failure to record the assignment
of a home equity loan, the subservicer or HFC will purchase the home equity loan
from the trust. In the event that HFC's long-term senior unsecured debt rating
does not satisfy the above-described standards or any of the subservicers ceases
to be an HFC affiliate, the subservicer and the depositor will have ___ days to
record assignments of the mortgages for each related home equity loan in favor
of the trustee and ___ days to deliver the loan documents pertaining to each
home equity loan to the trustee, unless opinions of counsel satisfactory to the
trustee, and any certificate guaranty insurer to the effect that recordation of
the assignments or delivery of the documentation is not required in the relevant
jurisdiction to protect the interests of the depositor and the trustee in the
home equity loans.
THE COMMINGLING OF FUNDS CAN CREATE GREATER RISK TO YOU IF HFC GOES
INTO BANKRUPTCY.
Under the terms of the pooling and servicing agreement, so long as
HFC's short-term debt is acceptable to the rating agencies and to the
certificate guaranty insurer, while HFC is the master servicer, amounts
received in respect of the home equity loans may be commingled with the funds of
HFC prior to each distribution date and, in the event of bankruptcy of HFC, the
trust may not have a perfected interest in these collections. See "Description
of the Certificates -- Distributions."
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<PAGE> 17
YEAR 2000 COMPUTER PROBLEMS COULD DISRUPT DISTRIBUTIONS ON
CERTIFICATES.
The master servicer and the subservicers are in the process of
addressing issues arising from the year 2000 issue that could impact the timely
payment of principal and interest on the certificates. The year 2000 issue is
the result of prior computer programs being written using two digits to define
the applicable year. Computer programs that have time-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. Any such
occurrence could result in major computer system failure or miscalculations.
Although the master servicer and the subservicers reasonably believe that their
servicing systems will be year 2000 compliant prior to the year 2000, they are
presently engaged in various procedures to determine if their computer systems
and software, and those of their material suppliers, customers and agents will
be year 2000 compliant.
DTC has informed its participants and other members of the financial
community that it has developed and is implementing a program so that its
systems, as the same relate to the timely payment of distributions, including
principal and income payments, to certificateholders, book-entry deliveries, and
settlement of trades within DTC, continue to function appropriately. This
program includes a technical assessment and a remediation plan, each of which is
complete. Additionally, DTC's plan includes a testing phase, which is expected
to be completed within appropriate time frames. However, DTC's ability to
perform properly its services is also dependent upon other parties, including
but not limited to issuers and their agents, as well as third party vendors from
whom DTC licenses software and hardware, and third party vendors on whom DTC
relies for information or the provision of services, including telecommunication
and electrical utility service providers, among others.
In the event that the master servicer, the subservicers, any of their
suppliers, customers or agents, or DTC do not successfully and timely achieve
year 2000 compliance, the master servicer's performance of its obligations under
the pooling and servicing agreement could be adversely affected. This could
result in delays in processing payments on the home equity loans and could cause
a delay in payments to you.
RISKS ASSOCIATED WITH THE CERTIFICATES
RIGHTS OF BENEFICIAL OWNERS MAY BE LIMITED BY BOOK-ENTRY SYSTEM.
The certificates will be held through the book-entry system of DTC and
transactions in the certificates generally can be effected only through DTC and
DTC participants. As a result:
o your ability to pledge certificates to entities that do not
participate in the DTC system, or to otherwise act with
respect to certificates, may be limited due to the lack of a
physical certificate for the certificates; and
o under a book-entry format, you may experience delays in the
receipt of payments, since distributions will be made by the
trustee to DTC, and not directly to you.
CERTIFICATE RATINGS ARE DEPENDENT ON ASSESSMENTS BY THE RATING AGENCIES.
The ratings of the certificates depend primarily on an assessment by
the rating agencies of the underlying home equity loans and the credit
enhancement. The rating by the rating agencies of the certificates:
o is not a recommendation to purchase, hold or sell the
certificates; and
S-16
<PAGE> 18
o does not comment as to the market price or suitability of the
certificates for a particular investor.
There is no assurance that the ratings will remain for any given period
of time or that the ratings will not be reduced, suspended or withdrawn by the
rating agencies.
FORWARD-LOOKING STATEMENTS
Some of the statements contained in or incorporated by reference in
this prospectus supplement and the accompanying prospectus consist of
forward-looking statements, within the meaning of Section 27A of the Securities
Act, relating to future economic performance or projections and other financial
items. These statements can be identified by the use of forward-looking words
such as "may," "will," "should," "expects," "believes," "anticipates,"
"estimates," or other comparable words. Forward-looking statements are subject
to a variety of risks and uncertainties that could cause actual results to
differ from the projected results. Those risks and uncertainties include, among
others, general economic and business conditions, regulatory initiatives and
compliance with governmental regulations, customer preferences and various other
matters, many of which are beyond our control. Because we cannot predict the
future, what actually happens may be very different from what we predict in our
forward-looking statements.
INTRODUCTION
The depositor will establish a trust with respect to Series _______ on
the closing date, under a pooling and servicing agreement among the depositor,
the master servicer and the trustee, dated as of the cut-off date. On the
closing date, the depositor will deposit into the trust the receivables relating
to a pool of home equity loans, that in the aggregate will constitute a home
equity loan pool, secured by closed end, fixed-rate, fully amortizing and
Balloon Loans.
Some capitalized terms used in this prospectus supplement have the
meanings given below under "Glossary of Terms" or in the prospectus under
"Glossary."
DESCRIPTION OF THE HOME EQUITY LOAN POOL
GENERAL
The home equity loan pool will consist of approximately _______ home
equity loans having an aggregate principal balance outstanding as of the close
of business on the day prior to the cut-off date of $_______. All percentages of
the home equity loans described in this prospectus supplement are approximate
percentages by aggregate statistical cut-off date balance unless otherwise
indicated. _______% of the home equity loans are secured by first or second
liens on fee simple or leasehold interests in one- to four-family residential
real properties. In each case, the property securing the home equity loan is
referred to as the mortgaged property. The home equity loans will consist of
fixed-rate, fully-amortizing and balloon payment home equity loans with terms to
maturity of approximately five, ten, fifteen, twenty, twenty-five or thirty
years with respect to __%, __%, __%, __%, __% and __% of the home equity loans,
respectively, from the date of origination or modification. With respect to home
equity loans which have been modified, references in this prospectus supplement
to the date of origination shall be deemed to be the date of the most recent
modification.
_________________, which are direct or indirect wholly-owned
subsidiaries of HFC that are licensed to make home equity loans in the states in
which the mortgaged properties are located, will sell
S-17
<PAGE> 19
and assign the home equity loans to the depositor, which will then sell and
assign the home equity loans to the trustee in exchange for the certificates.
These companies originate home equity revolving credit and closed-end loans and,
in some cases, other types of consumer loans and installment sales contracts
through branch offices, telemarketing and direct mail in the states in which
they are licensed to do business. All of the home equity loans were purchased by
the depositor from the sellers on a servicing released basis; however, all of
the home equity loans will be subserviced by the sellers. See "--The
Subservicers" below.
All of the home equity loans were underwritten in conformity with or in
a manner generally consistent with the HFC Home Equity Lending Program. See
"--Underwriting Standards" below.
The depositor will make some limited representations and warranties
regarding the home equity loans as of the closing date. The depositor will be
required to repurchase or substitute for any home equity loan as to which a
breach of its representations and warranties with respect to that home equity
loan occurs if the breach materially adversely affects the interests of the
certificateholders or the credit enhancer under "Description of the
Certificates-Certificate Guaranty Insurance Policy" in that home equity loan.
Each seller has made or will make some limited representations and warranties
regarding the related home equity loans, as of the date of their purchase by the
depositor. However, the representations and warranties will not be assigned to
the trustee for the benefit of the holders of the certificates, and therefore a
breach of the representations and warranties will not be enforceable on behalf
of the trust. See "HFC Home Equity Lending Program--Representations and
Warranties Concerning the Home Equity Loans" and "Description of the
Certificates--Review of Home Equity Loans" in the prospectus.
PAYMENTS ON THE SIMPLE INTEREST HOME EQUITY LOANS
__% of the home equity loans are Simple Interest Home Equity Loans,
which require that each monthly payment consist of an installment of interest
which is calculated according to the simple interest method on the basis of the
outstanding principal balance of that home equity loan multiplied by the
interest rate and further multiplied by a fraction, the numerator of which is
the number of days in the period elapsed since the preceding payment of interest
was made and the denominator of which is the number of days in the annual period
for which interest accrues on that home equity loan. As payments are received,
the amount received is applied first to interest accrued to the date of payment
and the balance is applied to reduce the unpaid principal balance.
Accordingly, if a borrower pays a fixed monthly installment before its
scheduled due date, the portion of the payment allocable to interest for the
period since the preceding payment was made will be less than it would have been
had the payment been made as scheduled, and the portion of the payment applied
to reduce the unpaid principal balance will be correspondingly greater. However,
the next succeeding payment will result in an allocation of a greater portion of
the payment allocated to interest if that payment is made on its scheduled due
date.
On the other hand, if a borrower pays a fixed monthly installment after
its scheduled due date, the portion of the payment allocable to interest for the
period since the preceding payment was made will be greater than it would have
been had the payment been made as scheduled, and the remaining portion, if any,
of the payment applied to reduce the unpaid principal balance will be
correspondingly less. If each scheduled payment is made on or prior to its
scheduled due date, the principal balance of the home equity loan will amortize
in the manner described in the preceding paragraph. However, if the borrower
consistently makes scheduled payments after the scheduled due date the home
equity loan will
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<PAGE> 20
amortize more slowly than scheduled. Any remaining unpaid principal is payable
on the final maturity date of the home equity loan.
The remaining __% of the home equity loans are Actuarial Home Equity
Loans, on which 30 days of interest is owed each month irrespective of the day
on which the payment is received.
BALLOON LOANS
__% of the home equity loans are Balloon Loans, which require monthly
payments of principal based on a 30-year amortization schedule and have
scheduled maturity dates of approximately ______ years from the due date of the
first monthly payment, in each case leaving a balloon payment on the respective
scheduled maturity date. The existence of a balloon payment may require the
related borrower to refinance the home equity loan or to sell the mortgaged
property on or prior to the scheduled maturity date. The ability of a borrower
to accomplish either of these goals will be affected by a number of factors,
including the level of available interest rates at the time of sale or
refinancing, the borrower's equity in the related mortgaged property, the
financial condition of the borrower, tax laws, prevailing general economic
conditions and the terms of any related first lien mortgage loan. None of the
depositor, the master servicer or the trustee is obligated to refinance any
Balloon Loan. The policy issued by the credit enhancer will provide coverage on
any losses incurred upon liquidation of a Balloon Loan arising out of or in
connection with the failure of a borrower to make its balloon payment. See
"Description of the Certificates--Certificate Guaranty Insurance Policy" in this
prospectus supplement.
HOME EQUITY LOAN POOL CHARACTERISTICS
All of the home equity loans have principal, interest and fees, if
applicable, payable monthly on various days of each month as specified in the
mortgage note, each a due date.
In connection with each home equity loan that is secured by a leasehold
interest, the related seller will have represented to the depositor that, among
other things:
o the use of leasehold estates for residential properties is an
accepted practice in the area where the related mortgaged
property is located;
o residential property in the area consisting of leasehold estates
is readily marketable;
o the lease is recorded and no party is in any way in breach of any
provision of the lease;
o the leasehold is in full force and effect and is not subject to
any prior lien or encumbrance by which the leasehold could be
terminated or subject to any charge or penalty; and
o the remaining term of the lease does not terminate less than ten
years after the maturity date of that home equity loan.
__% of the home equity loans provide for payment of a prepayment
charge, if these loans prepay within a specified time period. The prepayment
charge generally is the maximum amount permitted under applicable state law. __%
of the home equity loans provide for payment of a prepayment charge for full
prepayments made within approximately three years of the origination of the home
equity loans in an amount calculated in accordance with the terms of the related
mortgage note. With respect to the remainder of the home equity loans with a
prepayment charge, the prepayment charge is calculated in a different manner. No
prepayment charges or late payment charges received on the home equity loans
will be available for payment on the certificates. The master servicer will be
S-19
<PAGE> 21
entitled to retain for its own account any prepayment charges and late payment
charges received on the home equity loans. The master servicer may waive any
prepayment charges and late payment charges.
As of the cut-off date, no home equity loan will be 30 days or more
delinquent in payment of principal and interest. For a description of the
methodology used to categorize home equity loans as delinquent, see
"--Delinquency and Loss Experience of the Master Servicer's Portfolio," below.
As of the cut-off date, __% of the home equity loans were High Cost
Loans. Purchasers or assignees of any High Cost Loan, including the trust, could
be liable for all claims and subject to all defenses that the borrower could
assert against the originator of the home equity loan. Remedies available to the
borrower include monetary penalties, as well as rescission rights if appropriate
disclosures were not given as required. See "Risk Factors--Risk of Loss" in this
prospectus supplement and "Material Legal Aspects of Home Equity Loans and
Related Matters--Anti-Deficiency Legislation and Other Limitations on Lenders"
in the prospectus.
No home equity loan provides for deferred interest, negative
amortization or future advances.
With respect to each home equity loan, the combined LTV ratio will be
the ratio, expressed as a percentage, of:
o the sum of (1) the original principal balance of the home
equity loan and (2) any outstanding principal balance, at the
time of origination of the home equity loan, of all other
mortgage loans, if any, secured by senior or subordinate liens
on the related mortgaged property, divided by
o the appraised value, a Statistical Valuation or the Stated
Value.
The appraised value for any home equity loan will be the appraised
value of the related mortgaged property determined in the appraisal used in the
origination of the home equity loan, which may have been obtained at an earlier
time; provided that if the home equity loan was originated simultaneously with
or not more than 12 months after a senior lien on the related mortgaged
property, the appraised value shall be the lesser of the appraised value at the
origination of the senior lien and the sales price for the mortgaged property.
__% of the home equity loans were originated under full documentation
underwriting programs.
HOME EQUITY LOANS
None of the home equity loans were originated prior to ____________ or
has a maturity date later than ____________. No home equity loan has a remaining
term to stated maturity as of the statistical cut-off date of less than __
months. The weighted average remaining term to stated maturity of the home
equity loans as of the statistical cut-off date is approximately __ months. The
weighted average original term to stated maturity of the home equity loans as of
the statistical cut-off date is approximately _____ months.
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<PAGE> 22
<TABLE>
<CAPTION>
ORIGINAL TERM
TYPE OF TO MATURITY WEIGHTED AVERAGE REMAINING PERCENT OF HOME
HOME EQUITY LOAN (IN YEARS) TERM TO STATED MATURITY (IN MONTHS) EQUITY LOANS
- -------------------------- -------------------- ---------------------------------- -------------------------
<S> <C> <C> <C>
Fully Amortizing 5 %
Fully Amortizing 10 %
Fully Amortizing 15 %
Fully Amortizing 20 %
Fully Amortizing 25 %
Fully Amortizing 30 %
Balloon 15 %
</TABLE>
Below is a description of some additional characteristics of the home
equity loans as of the statistical cut-off date, unless otherwise indicated.
Unless otherwise specified, all principal balances of the home equity loans are
approximate percentages by aggregate principal balance of the home equity loans
as of the statistical cut-off date and are rounded to the nearest dollar.
ORIGINAL HOME EQUITY LOAN PRINCIPAL BALANCES OF THE HOME EQUITY LOANS
<TABLE>
<CAPTION>
STATISTICAL
NUMBER OF HOME CUT-OFF DATE PERCENT OF HOME
ORIGINAL HOME EQUITY LOAN PRINCIPAL BALANCES EQUITY LOANS BALANCE EQUITY LOANS
- -------------------------------------------- -------------- ------------ ---------------
<S> <C> <C> <C>
$ -- $ $ %
$ -- $ $ %
$ -- $ $ %
$ -- $ $ %
$ -- $ $ %
$ -- $ $ %
$ -- $ $ %
$ -- $ $ %
$ -- $ $ %
-------------- ------------ ---------------
GREATER THAN $
TOTAL............................................ $ %
============== ============ ===============
</TABLE>
AS OF THE STATISTICAL CUT-OFF DATE, THE AVERAGE UNPAID PRINCIPAL
BALANCE OF THE HOME EQUITY LOANS WAS APPROXIMATELY $_____.
S-21
`
<PAGE> 23
INTEREST RATES OF THE HOME EQUITY LOANS
<TABLE>
<CAPTION>
STATISTICAL
NUMBER OF HOME CUT-OFF DATE PERCENT OF
INTEREST RATE (%) EQUITY LOANS BALANCE HOME EQUITY LOANS
- ---------------------------------------------------- -------------- ------------ -----------------
<S> <C> <C> <C>
-- $ %
-- $ %
-- $ %
-- $ %
-- $ %
-- $ %
-- $ %
-- $ %
-- $ %
-- $ %
</TABLE>
AS OF THE STATISTICAL CUT-OFF DATE, THE WEIGHTED AVERAGE INTEREST RATE
OF THE HOME EQUITY LOANS WAS APPROXIMATELY _____% PER ANNUM.
ORIGINAL COMBINED LTV RATIOS OF THE HOME EQUITY LOANS
<TABLE>
<CAPTION>
STATISTICAL
NUMBER OF HOME CUT-OFF DATE PERCENT OF
COMBINED LTV RATIO (%) EQUITY LOANS BALANCE HOME EQUITY LOANS
- ---------------------------------------------------- -------------- ------------ -----------------
<S> <C> <C> <C>
-- $ %
-- $ %
-- $ %
-- $ %
-- $ %
-- $ %
-- $ %
-- $ %
-- $ %
-- $ %
-------------- ------------ -----------------
TOTAL........................................... $
============== ============ =================
</TABLE>
THE WEIGHTED AVERAGE ORIGINAL COMBINED LTV RATIO OF THE HOME EQUITY
LOANS WAS APPROXIMATELY __% AS OF THE STATISTICAL CUT-OFF DATE.
S-22
<PAGE> 24
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES OF THE HOME EQUITY LOANS
<TABLE>
<CAPTION>
STATISTICAL
NUMBER OF HOME CUT-OFF DATE PERCENT OF
STATE EQUITY LOANS BALANCE HOME EQUITY LOANS
- ----- -------------- --------------- ------------------
<S> <C> <C> <C>
[--------] ......................................... $ %
[--------] ......................................... $ %
[--------] ......................................... $ %
[--------] ......................................... $ %
[--------] ......................................... $ %
[--------] ......................................... $ %
-------------- --------------- ------------------
TOTAL .......................................... $ %
============== =============== ==================
</TABLE>
MORTGAGED PROPERTY TYPES OF THE HOME EQUITY LOANS
<TABLE>
<CAPTION>
STATISTICAL
NUMBER OF HOME CUT-OFF DATE PERCENT OF
PROPERTY EQUITY LOANS BALANCE HOME EQUITY LOANS
- -------- -------------- --------------- ------------------
<S> <C> <C> <C>
_______________ .................................... $ %
_______________ .................................... $ %
_______________ .................................... $ %
_______________ .................................... $ %
_______________ .................................... $ %
_______________ .................................... $ %
_______________ .................................... $ %
_______________ .................................... $ %
-------------- --------------- ------------------
TOTAL .......................................... $ %
============== =============== ==================
</TABLE>
LIEN PRIORITY OF THE HOME EQUITY LOANS
<TABLE>
<CAPTION>
STATISTICAL
NUMBER OF HOME CUT-OFF DATE PERCENT OF
LIEN PROPERTY EQUITY LOANS BALANCE HOME EQUITY LOANS
- ------------- -------------- --------------- ------------------
<S> <C> <C> <C>
First Lien ......................................... $ %
SECOND LIEN ........................................
THIRD LIEN .........................................
-------------- --------------- ------------------
TOTAL .......................................... $ %
============== =============== ==================
</TABLE>
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<PAGE> 25
REMAINING TERM OF SCHEDULED MATURITY OF THE HOME EQUITY LOANS
<TABLE>
<CAPTION>
STATISTICAL
NUMBER OF HOME CUT-OFF DATE PERCENT OF
MONTHS REMAINING TO SCHEDULED MATURITY EQUITY LOANS BALANCE HOME EQUITY LOANS
- ------------------------------------------------- -------------- ------------ -----------------
<S> <C> <C> <C>
$ %
$ %
$ %
$ %
$ %
$ %
</TABLE>
THE WEIGHTED AVERAGE REMAINING TERM TO MATURITY OF THE HOME EQUITY
LOANS AS OF THE STATISTICAL CUT-OFF DATE WAS APPROXIMATELY ___ MONTHS.
YEAR OF ORIGINATION OF THE HOME EQUITY LOANS
<TABLE>
<CAPTION>
STATISTICAL
NUMBER OF CUT-OFF DATE PERCENT OF
YEAR OF ORIGINATION HOME EQUITY LOANS BALANCE HOME EQUITY LOANS
- ---------------------------------------------- --------------------- --------------- -------------------
<S> <C> <C> <C>
$ %
$ %
$ %
$ %
$ %
--------------------- --------------- -------------------
TOTAL......................................... $ %
===================== =============== ===================
</TABLE>
UNDERWRITING STANDARDS
The following is a brief description of HFC's underwriting procedures
for full documentation loan programs. All home equity loan applications received
by HFC or its subsidiaries are subjected to a direct credit investigation by the
related seller. This investigation generally includes:
o obtaining and reviewing an independent credit bureau report;
o verifying any senior mortgage balance and payment history,
which may be obtained from credit bureau information provided
it has been updated within two months of the application or,
if not, is obtained in writing or by telephone from the holder
of any senior mortgage;
o verification of employment, which normally includes obtaining
a W-2 form or pay stub, a minimum of two years of tax returns
for self-employed individuals, or other written or telephone
verification with employers;
o obtaining a title search, depending on the amount financed, to
ensure that all liens, except for any existing senior mortgage
liens, are paid off prior to, or at the time of, the funding
of the home equity loan; and
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<PAGE> 26
o obtaining an appraisal (which may be an appraisal using a
statistical data base) of the property, which must be
substantiated by sales data on three comparable properties.
After this investigation is conducted, a decision is made to accept or
reject the loan application. Generally, all prospective borrowers must have a
debt-to-income ratio of no greater than 45%, but such requirement may be waived
by senior management. In no event may the debt-to-income ratio exceed 60%. For
purposes of calculating the debt-to-income ratio, debt is defined as the sum of
the senior mortgage payment, including escrow payments for the hazard insurance
premium, real estate taxes, mortgage insurance premium, owners association dues
and ground rents, plus payments on installment and revolving debt that extends
beyond 10 months, and alimony, child support or maintenance payments, and income
is defined as stable monthly gross income from the borrower's primary source of
employment, plus acceptable secondary income. An acceptable combined LTV ratio
is also a function of the real estate's quality, condition, appreciation history
and prospective marketing conditions; however, the combined LTV ratio generally
may not exceed 110%.
OPTIONAL PURCHASE OF DEFAULTED HOME EQUITY LOANS
Under the pooling and servicing agreement, the master servicer will
have the option to purchase from the trust any home equity loan that is __ days
or more delinquent at a purchase price equal to the unpaid principal balance of
the home equity loan plus its accrued interest.
THE SUBSERVICERS
The home equity loans will be subserviced by the related seller, if an
affiliate of HFC, on behalf of HFC as master servicer. The master servicer will
be entitled to retain, on behalf of itself and the subservicers, the servicing
fee.
THE MASTER SERVICER
HFC will be responsible for master servicing the home equity loans.
Responsibilities of HFC will include the receipt of funds from subservicers, the
reconciliation of servicing activity, investor reporting and remittances to the
trustee to accommodate distributions to certificateholders. HFC is not required
to make advances relating to delinquent payments of principal and interest on
the home equity loans.
For information regarding foreclosure procedures, see "Description of
the Certificates--Realization Upon Defaulted Home Equity Loans" in the
prospectus. Servicing and charge-off policies and collection practices may
change over time in accordance with HFC's business judgment, changes in HFC's
portfolio of real estate secured home equity loans that it services for its
clients and applicable laws and regulations, and other considerations.
DELINQUENCY AND LOSS EXPERIENCE OF THE MASTER SERVICER'S PORTFOLIO
The following tables summarize the delinquency and loss experience for
all retail originated closed-end home equity loans originated or acquired by the
United States retail operations of HFC, including loans sold with servicing
performed by HFC and its subsidiaries and real estate acquired through
foreclosures, but excluding the retail operations of Beneficial Corporation, an
affiliate of HFC. The data presented in the following tables are for
illustrative purposes only, and there is no assurance that the delinquency and
loss experience of the home equity loans will be similar to that described
below.
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As used in this prospectus supplement, a loan is considered to be "30
to 59 days" or "30 or more days" delinquent when a payment due on any due date
remains unpaid as of the close of business on the next following monthly due
date. However, since the determination as to whether a loan falls into this
category is made as of the close of business on the last business day of each
month, a loan with a payment due on July 1 that remained unpaid as of the close
of business on July 31 would still be considered current as of July 31. If that
payment remained unpaid as of the close of business on August 31, the loan would
then be considered to be 30 to 59 days delinquent. Delinquency information
presented in this prospectus supplement as of the statistical cut-off date is
determined and prepared as of the close of business on the last business day
immediately prior to the statistical cut-off date.
There can be no assurance that the delinquency experience described
below will be representative of the results that may be experienced with respect
to the home equity loans serviced by HFC.
[INSERT DELINQUENCY TABLES HERE]
ADDITIONAL INFORMATION
The description in this prospectus supplement of the home equity loan
pool and the mortgaged properties is based upon the home equity loan pool as
constituted at the close of business on the statistical cut-off date. Prior to
the issuance of the offered certificates, home equity loans may be removed from
the home equity loan pool as a result of incomplete documentation or otherwise,
if the depositor deems the removal necessary or appropriate. A limited number of
other home equity loans may be added to the home equity loan pool prior to the
issuance of the certificates offered by this prospectus supplement. The
depositor believes that the information in this prospectus supplement will be
substantially representative of the characteristics of the home equity loan pool
as it will be constituted at the time the certificates offered hereby are
issued. The range of interest rates and maturities and some other
characteristics of the home equity loans in the home equity loan pool may vary.
However, no more than five percent (5%) of the home equity loans, as they are
constituted as of the statistical cut-off date, by aggregate principal balance
as of the statistical cut-off date will have characteristics that deviate from
those characteristics described herein.
A current report on Form 8-K will be available to purchasers of the
certificates offered hereby and will be filed, together with the pooling and
servicing agreement, with the SEC within fifteen days after the initial issuance
of the certificates.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Closed-End Home Equity Loan Asset Backed Certificates, Series
______ will include the following ______ classes of Class A Certificates and
______ classes of Class IO Certificates:
o Class A-1 Certificates
o Class A-2 Certificates or the Lockout Certificates; and
together with the Class A-1 Certificates, the Class A
Certificates; and
o Class IO Certificates or the Fixed Strip Certificates.
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In addition to the offered certificates, the Closed-End Home Equity
Loan Asset Backed Certificates, Series ______ will include a single class of
subordinate certificates which are designated as the Class R Certificates, the
Residual Certificates. Only the Class A Certificates and the Class IO
Certificates are offered by this prospectus supplement.
The certificates will evidence the entire beneficial ownership interest
in the trust. The trust will consist of:
o the home equity loans;
o the assets as from time to time that are identified as
deposited in respect of the home equity loans in the
Collection Account and belonging to the trust;
o property acquired by foreclosure of the home equity loans or
deed in lieu of foreclosure;
o any applicable insurance policies;
o the policy;
o all proceeds of the foregoing; and
o the voting stock of HFC Revolving Corporation.
The Class A Certificates will be issued in minimum denominations of
$__________, or a $2,000,000 Notional Amount, in the case of the Fixed Strip
Certificates $_________ and integral multiples of $__ in excess thereof.
BOOK-ENTRY REGISTRATION OF THE OFFERED CERTIFICATES
General. Holders of the offered certificates, so long as the offered
certificates are registered in the name of Cede & Co., are collectively referred
to as the DTC registered certificateholders. The DTC registered
certificateholders may elect to hold their DTC registered certificates through
DTC in the United States, or Cedelbank, formerly Cedel Bank, societe anonyme, a
professional depository which holds securities for its participating
organizations, or Cedel customers, or Euroclear in Europe, if they are Euroclear
participants or Cedel customers, as applicable, of their systems, or indirectly
through organizations which are participants or customers, as applicable, in
their systems.
The DTC registered certificates will be issued in one or more
securities which equal the aggregate Certificate Principal Balance or Notional
Amount of the DTC registered certificates and will initially be registered in
the name of Cede & Co., the nominee of DTC. Cedelbank and Euroclear will hold
omnibus positions on behalf of their participants through customers' securities
accounts in Cedelbank's and Euroclear's names on the books of their respective
depositaries, in those capacities, individually referred to as the relevant
depositary and collectively referred to as the European depositaries, which in
turn will hold these positions in customers' securities accounts in the
depositories' names on the books of DTC. Except as described below, no DTC
registered certificateholder will be entitled to receive a physical certificate
in fully registered form, or a definitive certificate, representing that
security. Unless and until definitive certificates are issued for the DTC
registered certificates under the limited circumstances described in this
prospectus supplement, all references to actions by certificateholders with
respect to the DTC registered certificates shall refer to
S-27
<PAGE> 29
actions taken by DTC upon instructions from its participants, and all references
in this prospectus supplement to distributions, notices, reports and statements
to certificateholders with respect to the DTC registered certificates shall
refer to distributions, notices, reports and statements to DTC or Cede & Co., as
the registered holder of the DTC registered certificates, for distribution to
beneficial owners by DTC in accordance with DTC procedures. DTC registered
certificateholders will not be "Holders" as that term is used in the pooling and
servicing agreement.
The DTC registered certificateholder's ownership of a DTC registered
certificate will be recorded on the records of the brokerage firm, bank, thrift
institution or other financial intermediary that maintains the DTC registered
certificateholder's account for that purpose. In turn, the financial
intermediary's ownership of the DTC registered certificates will be recorded on
the records of DTC, or of a firm that is a participant and acts as agent for the
financial intermediary, whose interest will in turn be recorded on the records
of DTC, if the DTC registered certificateholder's financial intermediary is not
a DTC participant and on the records of Cedelbank or Euroclear, as appropriate.
DTC registered certificateholders will receive all payments of
principal and interest on the DTC registered certificates from the trustee
through DTC and DTC participants. While the DTC registered certificates are
outstanding , except under the circumstances described below, 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 DTC registered certificates and is required to receive and
transmit payments of principal and interest on the DTC registered certificates.
Participants and indirect participants with whom DTC registered
certificateholders have accounts with respect to DTC registered certificates are
similarly required to make book-entry transfers and receive and transmit the
payments on behalf of their respective DTC registered certificateholders.
Accordingly, although DTC registered certificateholders will not possess
physical certificates, the rules provide a mechanism by which DTC registered
certificateholders will receive payments and will be able to transfer their
interest.
Unless and until definitive certificates are issued, DTC registered
certificateholders who are not participants may transfer ownership of DTC
registered certificates only through participants and indirect participants by
instructing the participants and indirect participants to transfer the DTC
registered certificates, by book-entry transfer, through DTC for the account of
the purchasers of the DTC registered certificates, which account is maintained
with their respective participants. Under the rules and in accordance with DTC's
normal procedures, transfers of ownership of DTC registered certificates will be
executed through DTC and the accounts of the respective participants at DTC will
be debited and credited. Similarly, the participants and indirect participants
will make debits or credits, as the case may be, on their records on behalf of
the selling and purchasing DTC registered certificateholders.
Under a book-entry format, DTC registered certificateholders of the DTC
registered certificates may experience some delay in their receipt of payments,
since the payments will be forwarded by the trustee to Cede & Co. Payments with
respect to DTC registered certificates held through Cedelbank or Euroclear will
be credited to the cash accounts of Cedelbank customers or Euroclear
participants in accordance with the relevant system's rules and procedures, to
the extent received by the relevant depositary. The payments will be subject to
tax reporting in accordance with relevant United States tax laws and
regulations. Because DTC can only act on behalf of financial intermediaries, the
ability of a DTC registered certificateholder to pledge DTC registered
certificates to persons or entities that do not participate in the Depositary
system, or otherwise take actions relating to the DTC registered certificates,
may be limited due to the lack of physical certificates for the DTC registered
certificates. In addition, issuance of the DTC registered certificates in
book-entry form may
S-28
<PAGE> 30
reduce the liquidity of the DTC registered certificates in the secondary market
since some potential investors may be unwilling to purchase securities for which
they cannot obtain physical certificates.
DTC has advised the trustee that, unless and until definitive
certificates are issued, DTC will take any action permitted to be taken by the
holders of the DTC registered certificates under the pooling and servicing
agreement only at the direction of one or more financial intermediaries to whose
DTC accounts the DTC registered certificates are credited, to the extent that
the actions are taken on behalf of financial intermediaries whose holdings
include the DTC registered certificates. Cedelbank or the Euroclear operator, as
the case may be, will take any other action permitted to be taken by holders of
DTC registered certificates under the pooling and servicing agreement on behalf
of a Cedelbank customer or Euroclear participant only in accordance with its
relevant rules and procedures and subject to the ability of the relevant
depositary to effect the actions on its behalf through DTC. DTC may take
actions, at the direction of the related participants, with respect to some DTC
registered certificates which conflict with actions taken with respect to other
DTC registered certificates.
Definitive certificates will be issued to DTC registered
certificateholders of the DTC registered certificates, or their nominees, rather
than to DTC, if:
o the trustee determines that the DTC is no longer willing,
qualified or able to discharge properly its responsibilities
as nominee and depository with respect to the DTC registered
certificates and the trustee is unable to locate a qualified
successor;
o the trustee elects to terminate a book-entry system through
DTC; or
o after the occurrence of an event of default, under the pooling
and servicing agreement, DTC registered certificateholders of
any class aggregating at least a majority of the outstanding
voting rights of the DTC registered certificates advise DTC
through the financial intermediaries and DTC participants in
writing that the continuation of a book-entry system through
DTC, or a successor thereto, is no longer in the best
interests of the DTC registered certificateholders.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the trustee will be required to notify all DTC registered
certificateholders of the occurrence of the event and the availability through
DTC of definitive certificates. Upon surrender by DTC of the global certificate
or certificates representing the DTC registered certificates and instructions
for re-registration, the trustee will issue and authenticate definitive
certificates, and thereafter the trustee will recognize the holders of the
definitive certificates as holders under the pooling and servicing agreement.
Although DTC, Cedelbank and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of DTC registered certificates among
participants of DTC, Cedelbank and Euroclear, they are under no obligation to
perform or continue to perform the procedures and the procedures may be
discontinued at any time. See Annex I hereto and "Description of the
Certificates--Form of Certificates" in the prospectus.
DTC has advised the depositor that management of DTC is aware that some
computer applications, systems and the like for processing data that are
dependent upon calendar dates, including dates before, on and after January 1,
2000, may encounter Y2K problems. DTC has informed its participants and other
members of the financial community that it has developed and is implementing a
program so that its systems, as they relate to DTC services continue to function
appropriately. This
S-29
<PAGE> 31
program includes a technical assessment and a remediation plan, each of which is
complete. Additionally, DTC's plan includes a testing phase, which, DTC has
advised the industry, is expected to be completed within appropriate time
frames.
However, DTC's ability to perform properly its services is also
dependent upon other parties, including but not limited to issuers and their
agents, as well as DTC's participants and third party vendors from whom DTC
licenses software and hardware, and third party vendors on whom DTC relies for
information or the provision of services, including telecommunication and
electrical utility service providers, among others. DTC has informed the
industry that it is contacting and will continue to contact third party vendors
from whom DTC acquires services to
o impress upon them the importance of those services being Y2K
compliant; and
o determine the extent of their efforts for Y2K remediation and,
as appropriate, testing of their services. In addition, DTC is
in the process of developing any contingency plans as it deems
appropriate.
According to DTC, the foregoing information with respect to DTC has
been provided to the industry for informational purposes only and is not
intended to serve as a representation, warranty or contract modification of any
kind.
None of the depositor, the master servicer or the trustee will have any
liability for any actions taken by DTC or its nominee, including, without
limitation, actions for any aspect of the records relating to or payments made
on account of beneficial ownership interests in the DTC registered certificates
held by Cede & Co., as nominee for DTC, or for maintaining, supervising or
reviewing any records relating to the beneficial ownership interests.
For additional information regarding DTC and the DTC registered
certificates, see "Description of the Certificates--Form of Certificates" in the
prospectus.
DISTRIBUTIONS
Distributions on the certificates will be made by the trustee on the
____ day of each month or, if that day is not a business day, then the next
succeeding business day, commencing in _______. Distributions on the
certificates will be made to the persons in whose names the certificates are
registered at the close of business on the day prior to each distribution date
or, if the certificates are no longer DTC registered certificates, on the record
date. See "Description of the Certificates--Distributions" in the prospectus.
Distributions will be made by check or money order mailed, or upon the request
of a certificateholder owning certificates having denominations, by principal
balance or notional amount, aggregating at least $__________, by wire transfer
or otherwise, to the address of the person entitled to the distribution, which,
in the case of DTC registered certificates, will be DTC or its nominee, as it
appears on the trustee's register in amounts calculated as described in this
prospectus supplement on the determination date. However, the final distribution
relating to the certificates will be made only upon presentation and surrender
thereof at the office or the agency of the trustee specified in the notice to
certificateholders of the final distribution. A business day is any day other
than:
o a Saturday or Sunday; or
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<PAGE> 32
o a day on which banking institutions in the State of New York,
Illinois or _________ are required or authorized by law to be
closed.
AVAILABLE DISTRIBUTION AMOUNT
The master servicer may elect to treat unscheduled collections, not
including borrower prepayments, as amounts included in the Available
Distribution Amount for the distribution date in the month of receipt, but is
not obligated to do so. As described in this prospectus supplement under
"--Principal Distributions," any amount with respect to which this election is
so made shall be treated as having been received on the last day of the related
collection period for the purposes of calculating the amount of principal and
interest distributions to any class of certificates. With respect to any
distribution date, the collection period is the calendar month preceding the
month in which that distribution date occurs.
INTEREST DISTRIBUTIONS
Holders of each class of offered certificates will be entitled to
receive interest distributions in an amount equal to the Accrued Certificate
Interest on that class on each distribution date to the extent described in this
prospectus supplement.
Prepayment Interest Shortfalls will result because interest on
prepayments in full is distributed only to the date of prepayment, and because
no interest is distributed on prepayments in part, as these prepayments in part
are applied to reduce the outstanding principal balance of the related home
equity loans as of the due date in the month of prepayment. However, with
respect to any distribution date, any Prepayment Interest Shortfalls during the
related collection period will be offset first by Excess Cash Flow to the extent
available and then by the policy.
The pass-through rates on all classes of offered certificates are fixed
and are listed on page S- __ hereof. The pass-through rates on all classes of
the Class A Certificates will increase by __% per annum for each distribution
date after the third distribution date on which the master servicer and the
depositor are permitted to exercise their option to purchase the home equity
loans from the trust as described under "Pooling and Servicing
Agreement--Termination," in this prospectus supplement. Notwithstanding the
foregoing, the pass-through rates on the Class A Certificates will not increase
as described above if proceeds for optional termination are available for
payment to the certificateholders on or prior to any distribution date. The
holders of the Fixed Strip Certificates will not be entitled to any
distributions of principal and will not be entitled to any distributions of
interest after the distribution date in _________.
PRINCIPAL DISTRIBUTIONS
Holders of the Class A Certificates will be entitled to receive on each
distribution date, in the priority described in this prospectus supplement and
to the extent of the portion of the Available Distribution Amount remaining
after the Senior Interest Distribution Amount for that distribution date is
distributed, the Class A Principal Distribution Amount.
On any distribution date, if:
o Realized Losses, other than Excess Loss Amounts, have occurred
during the related collection period that are not covered by
the Realized Loss Distribution Amount or the Outstanding
Overcollateralization Amount, or
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<PAGE> 33
o there is an Excess Loss Amount with respect to that
distribution date
a draw will be made on the policy and these amounts will be distributed to the
Class A
Certificateholders on that distribution date, in reduction of the Certificate
Principal Balances thereof, in the manner described below. In addition, if on
the distribution date in _______, the aggregate Stated Principal Balance of the
home equity loans is less than the aggregate Certificate Principal Balance of
the Certificates, after giving effect to distributions to be made on that
distribution date, the amount of the deficiency, or the undercollateralization
amount, will be drawn on the policy and will be distributed to the Class A
Certificateholders on that distribution date, in reduction of its Certificate
Principal Balances, in the manner described below.
On each distribution date, the credit enhancer shall be entitled to
receive, after payment to the Senior Certificateholders of the Senior Interest
Distribution Amount and the Class A Principal Distribution Amount for the
certificates, as applicable, for that distribution date ,but before application
of any Overcollateralization Increase Amount, from the Excess Cash Flow after
Prepayment Interest Shortfalls and some Realized Losses are allocated thereto,
the sum of:
o the premium payable to the credit enhancer with respect to the
policy on that distribution date and any previously unpaid
premiums with respect to the policy, together with its
interest, and
o the cumulative insurance payments by the credit enhancer under
the policy to the extent not previously reimbursed, plus its
interest.
On each distribution date, the amount of the premium payable to the
credit enhancer with respect to the policy is equal to one-twelfth of the
product of a percentage specified in the insurance and indemnity agreement,
dated ________, among the credit enhancer, the depositor, the master servicer
and the trustee, and the Certificate Principal Balance of the Class A
Certificates.
Distributions of principal on the Class A Certificates on each
distribution date will be made after distribution of the Senior Interest
Distribution Amount as described under "--Interest Distributions" above. The
Class A Principal Distribution Amount plus any amount drawn on the policy
relating to principal shall be distributed in accordance with the priorities
described below, until its Certificate Principal Balances have been reduced to
zero.
The Class A Principal Distribution Amount plus any amount drawn on the
policy relating to principal distributable to the Class A Certificates shall be
distributed as follows:
1. first, to the Lockout Certificates, in reduction of its
Certificate Principal Balance, an amount equal to the Lockout
Distribution Percentage of the Class A Principal Distribution
Amount distributable to the Class A Certificates, until its
Certificate Principal Balance has been reduced to zero;
2. second, to the Class A-1 Certificates, until its Certificate
Principal Balance has been reduced to zero; and
3. third, to the Lockout Certificates, until its Certificate
Principal Balance has been reduced to zero.
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<PAGE> 34
The master servicer may elect to treat Insurance Proceeds, Liquidation
Proceeds and other unscheduled collections, not including prepayments by the
borrowers, received in any calendar month as included in the Available
Distribution Amount and the Class A Principal Distribution Amount for the
distribution date in the month of receipt, but is not obligated to do so. If the
master servicer so elects, these amounts will be deemed to have been received,
and any related Realized Loss shall be deemed to have occurred, on the last day
of the month prior to its receipt.
OVERCOLLATERALIZATION PROVISIONS
On each distribution date, Excess Cash Flow, if any, is applied on that
distribution date as an accelerated payment of principal on the Class A
Certificates, but only in the manner and to the extent hereafter described. The
Excess Cash Flow for any distribution date will derive primarily from the amount
of interest collected on the home equity loans in excess of the sum of:
o the Senior Interest Distribution Amount,
o the premium payable on the policy and
o accrued servicing fees,
in each case relating to that distribution date. Excess Cash Flow will be
applied on any distribution date; first, to pay Prepayment Interest Shortfalls;
second, to pay the Realized Loss Distribution Amount for that distribution date;
third, to the payment of the premium fee with respect to that distribution date
and any previous distribution date, to the extent not previously paid, together
with its interest; fourth, to the payment of cumulative insurance payments plus
its interest; fifth, to pay any Overcollateralization Increase Amount; sixth, to
pay some other reimbursement amounts owed to the credit enhancer; and last, to
pay to the holder of the Class R Certificates.
The Excess Cash Flow, to the extent available as described above, will
be applied as an accelerated payment of principal on the Class A Certificates to
the extent that the Overcollateralization Amount Target exceeds the Outstanding
Overcollateralization Amount as of that distribution date.
As to any distribution date prior to the distribution date in ________,
the Overcollateralization Amount Target will be __% of the aggregate cut-off
date balance. As to any distribution date on or after the distribution date in
_________, the Overcollateralization Amount Target will be equal to the lesser
of:
o the Overcollateralization Amount Target as of the cut-off date
and
o __% of the aggregate Stated Principal Balance of the home
equity loans immediately preceding that distribution date,
but not lower than $________, __% of the aggregate cut-off date balance, plus
__% of the outstanding Stated Principal Balance of all of the home equity loans
that are 90 or more days delinquent as of that distribution date; provided,
however, that any scheduled reduction to the Overcollateralization Amount Target
described above shall not be made as of any distribution date unless:
o the outstanding Stated Principal Balance of the home equity
loans delinquent 90 days or more averaged over the last six
months as a percentage of the aggregate outstanding
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<PAGE> 35
Stated Principal Balance of all the home equity loans averaged
over the last six months does not exceed __%,
o the aggregate cumulative Realized Losses on the home equity
loans prior to any distribution date occurring during the
first year and the second year, or any year thereafter, after
the distribution date in ______ are less than __% and __%,
respectively, of the aggregate cut-off date balance and
o there has been no draw on the policy on that distribution date
that remains unreimbursed.
In addition, the Overcollateralization Amount Target may be reduced with the
prior written consent of the credit enhancer and the rating agencies.
In the event that the Overcollateralization Amount Target is permitted
to decrease or "step down" on a distribution date in the future, a portion of
the principal which would otherwise be distributed to the holders of the Class A
Certificates on that distribution date shall not be distributed to the holders
of the Class A Certificates on that distribution date. This has the effect of
decelerating the amortization of the Class A Certificates relative to the
amortization of the home equity loans, and of reducing the Outstanding
Overcollateralization Amount. If, on any distribution date, the Excess
Overcollateralization Amount is, or, after taking into account all other
distributions to be made on that distribution date would be, greater than zero,
i.e., the Outstanding Overcollateralization Amount is or would be greater than
the related Overcollateralization Amount Target, then any amounts relating to
principal which would otherwise be distributed to the holders of the Class A
Certificates on that distribution date shall instead be distributed to the
holders of the Class R Certificates in an amount equal to the
Overcollateralization Reduction Amount.
The aggregate cut-off date balance will be $_______ less than the
aggregate Certificate Principal Balance of the certificates. If, on the
distribution date in _____, after application of the Class A Principal
Distribution Amount and any amounts drawn on the policy to be distributed on
that distribution date, the Stated Principal Balance of the home equity loans
would be less than the Certificate Principal Balance of the Class A
Certificates, the credit enhancer will be required to deposit in the Certificate
Account the amount of that difference, unless available funds are on deposit in
the Certificate Account. These funds will be distributed to the Class A
Certificateholders entitled to receive a distribution of principal on that
distribution date, in proportion to the amount of the Class A Principal
Distribution Amount payable to the certificateholders on that distribution date,
in reduction of the their Certificate Principal Balances.
EXCESS LOSS AMOUNTS
Excess Loss Amounts will not be covered by any Realized Loss
Distribution Amount or by a reduction in the Outstanding Overcollateralization
Amount. Any Excess Loss Amounts, however, will be covered by the policy, and in
the event payments are not made as required under the policy, these losses will
be allocated to the certificates pro rata based on their outstanding Certificate
Principal Balances.
With respect to any defaulted home equity loan that is finally
liquidated, through foreclosure sale, disposition of the related mortgaged
property if acquired on behalf of the certificateholders by deed in lieu of
foreclosure, or otherwise, the amount of loss realized, if any, will equal the
portion of the Stated Principal Balance remaining, if any, plus its interest
through the last day of the month in
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<PAGE> 36
which that home equity loan was finally liquidated, after application of all
amounts recovered, net of amounts reimbursable to the master servicer or the
subservicer for expenses, including attorneys' fees, towards interest and
principal owing on the home equity loan.
CERTIFICATE GUARANTY INSURANCE POLICY
On the closing date, __________, the credit enhancer, will issue its
certificate guaranty insurance policy, or policy, in favor of the trustee on
behalf of the certificateholders. The policy will unconditionally and
irrevocably guarantee some payments on the certificates. On each distribution
date, a draw will be made on the policy equal to the sum of:
o the amount by which accrued interest on the certificates at
the respective pass-through rates for that distribution date
exceeds the amount on deposit in the Certificate Account
available for interest distributions on that distribution
date,
o any Realized Losses, other than any Excess Loss Amount, for
that distribution date, to the extent not currently covered by
a Realized Loss Distribution Amount or a reduction in the
Outstanding Overcollateralization Amount and
o any Excess Loss Amount for that distribution date.
In addition, on the distribution date in _______, a draw will be made
on the policy to cover the undercollateralization amount, if any, if that amount
is not otherwise available in the Certificate Account.
In addition, the policy will guarantee the payment of the outstanding
Certificate Principal Balance of the certificates on the final distribution
date. In the absence of payments under the policy, certificateholders will
directly bear the credit risks associated with their investment to the extent
these risks are not covered by the Outstanding Overcollateralization Amount or
otherwise.
The policy is being issued under and pursuant to and shall be construed
under, the laws of the State of New York, without giving effect to its conflict
of laws principles.
The policy is not cancelable for any reason. The premium on the policy
is not refundable for any reason including payment, or provision being made for
payment, prior to maturity of the offered certificates.
THE CREDIT ENHANCER
The following information has been supplied by the credit enhancer for
inclusion in this prospectus supplement. No representation is made by the
depositor, ________ or any of their affiliates as to the accuracy or
completeness of this information.
[DESCRIPTION OF CREDIT ENHANCER]
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<PAGE> 37
MATERIAL YIELD AND PREPAYMENT CONSIDERATIONS
GENERAL
The yield to maturity and the aggregate amount of distributions on the
offered certificates will be affected by the rate and timing of principal
payments on the home equity loans and the amount and timing of borrower defaults
resulting in Realized Losses. The rate of default of home equity loans secured
by second liens may be greater than that of home equity loans secured by first
liens. In addition, the yields may be adversely affected by a higher or lower
than anticipated rate of principal payments on the home equity loans in the
trust. The rate of principal payments on the home equity loans will in turn be
affected by the amortization schedules of the home equity loans, the rate and
timing of principal prepayments on the home equity loans by the borrowers,
liquidations of defaulted home equity loans and repurchases of home equity loans
due to some breaches of representations.
The timing of changes in the rate of prepayments, liquidations and
repurchases of the home equity loans may, and the timing of Realized Losses
will, significantly affect the yield to an investor, even if the average rate of
principal payments experienced over time is consistent with an investor's
expectation. Since the rate and timing of principal payments on the home equity
loans will depend on future events and on a variety of factors, as described
more fully in this prospectus supplement and in the prospectus under "Yield and
Prepayment Considerations", no assurance can be given as to the rate or the
timing of principal payments on the Class A Certificates.
A subservicer may allow the refinancing of a home equity loan by
accepting prepayments on the home equity loan and permitting a new loan secured
by a mortgage on the same property, which may be originated by the subservicer
or the master servicer or any of their respective affiliates or by an unrelated
entity. In the event of such a refinancing, the new loan would not be included
in the trust and, therefore, the refinancing would have the same effect as a
prepayment in full of the related home equity loan. A subservicer or the master
servicer may, from time to time, implement refinancing or modification programs
designed to encourage refinancing. The programs may include, without limitation,
modifications of existing loans, general or targeted solicitations, the offering
of pre-approved applications, reduced origination fees or closing costs, or
other financial incentives. Targeted solicitations may be based on a variety of
factors, including the credit of the borrower or the location of the mortgaged
property. In addition, subservicers or the master servicer may encourage
assumptions of home equity loans, including defaulted home equity loans, under
which creditworthy borrowers assume the outstanding indebtedness of those home
equity loans which may be removed from the trust. As a result of these programs,
the rate of principal prepayments of the home equity loans may be higher than
would otherwise be the case, and, in some cases, the average credit or
collateral quality of the home equity loans remaining in the trust may decline.
The home equity loans in most cases may be prepaid by the borrowers at
any time. However, in some circumstances the prepayment of some of the home
equity loans will be subject to a prepayment penalty, which may discourage
borrowers from prepaying their home equity loans during the period during which
the prepayment penalty applies.
Most of the home equity loans contain due-on-sale clauses. As described
under "Description of the Certificates--Principal Distributions" in this
prospectus supplement, during specified periods all or a disproportionately
large percentage of principal collections on the home equity loans will be
allocated among the Class A Certificates, other than the Lockout Certificates,
and during some periods no principal collections or a disproportionately small
portion of principal collections will be distributed on the Lockout
Certificates. Prepayments, liquidations and purchases of the home equity loans
will result
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in distributions to holders of the Class A Certificates of principal amounts
which would otherwise be distributed over the remaining terms of the home equity
loans. Factors affecting prepayment, including defaults and liquidations, of
home equity loans include changes in borrowers' housing needs, job transfers,
unemployment, borrowers' net equity in the mortgaged properties, changes in the
value of the mortgaged properties, mortgage market interest rates, solicitations
and servicing decisions. In addition, if prevailing interest rates fell
significantly below the interest rates on the home equity loans, the rate of
prepayments, including refinancings, would be expected to increase. On the other
hand, if prevailing interest rates rose significantly above the interest rates
on the home equity loans, the rate of prepayments on the home equity loans would
be expected to decrease. Furthermore, since mortgage loans secured by second
liens are not generally viewed by borrowers as permanent financing and generally
carry a high rate of interest, the home equity loans may experience a higher
rate of prepayments than traditional first lien mortgage loans. Prepayment of
the related first lien may also affect the rate of prepayments on the home
equity loans.
The Class A Certificates are subject to various priorities for payment
of principal as described in this prospectus supplement. Distributions of
principal on classes of Class A Certificates having an earlier priority of
payment will be affected by the rates of prepayment of the home equity loans
early in the life of the home equity loan pool. The timing of commencement of
principal distributions and the weighted average lives of classes of Class A
Certificates with a later priority of payment will be affected by the rates of
prepayment of the home equity loans both before and after the commencement of
principal distributions on those classes. In addition, the yield to maturity of
the Class A Certificates will depend on whether, to what extent, and the timing
with respect to which, Excess Cash Flow is used to accelerate payments of
principal on the Class A Certificates or any Overcollateralization Reduction
Amount is released. See "Description of the Certificates--Overcollateralization
Provisions" in this prospectus supplement.
The rate of defaults on the home equity loans will also affect the rate
and timing of principal payments on the home equity loans. In general, defaults
on home equity loans are expected to occur with greater frequency in their early
years. The rate of default of mortgage loans secured by second liens is likely
to be greater than that of mortgage loans secured by traditional first lien
mortgage loans, particularly in the case of mortgage loans with high combined
LTV ratios or low Junior Ratios. Furthermore, the rate and timing of
prepayments, defaults and liquidations on the home equity loans will be affected
by the general economic condition of the region of the country in which the
related mortgaged properties are located. The risk of delinquencies and loss is
greater and prepayments are less likely in regions where a weak or deteriorating
economy exists, as may be evidenced by, among other factors, increasing
unemployment or falling property values. See "Yield and Prepayment
Considerations" in the prospectus. In addition, because borrowers of Balloon
Loans are required to make a relatively large single payment upon maturity, it
is possible that the default risk associated with Balloon Loans is greater than
that associated with fully-amortizing mortgage loans. See "Risk Factors" in this
prospectus supplement.
To the extent that any losses are incurred on any of the home equity
loans that are not covered by the Realized Loss Distribution Amount, a reduction
in the Outstanding Overcollateralization Amount or the policy, holders of the
certificates will bear all risk of the losses resulting from default by
borrowers. Even where the policy covers all losses incurred on the home equity
loans, this coverage may accelerate principal payments on the Class A
Certificates, thus reducing the weighted average life of the Class A
Certificates.
Because the interest rates on the home equity loans and the
pass-through rates on the offered certificates are fixed, the rates will not
change in response to changes in market interest rates.
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Accordingly, if market interest rates or market yields for securities similar to
the offered certificates were to rise, the market value of the offered
certificates may decline.
The rate and timing of principal payments on and the weighted average
lives of the certificates will be affected primarily by the rate and timing of
principal payments, including prepayments, defaults, liquidations and purchases,
on the home equity loans.
Sequentially Paying Classes: The Class A Certificates are subject to
various priorities for payment of principal as described in this prospectus
supplement. Distributions of principal on classes of Class A Certificates having
an earlier priority of payment will be affected by the rates of prepayment of
the home equity loans early in the life of the home equity loan pool. The timing
of commencement of principal distributions and the weighted average lives of
classes of Class A Certificates with a later priority of payment will be
affected by the rates of prepayment of the home equity loans experienced both
before and after the commencement of principal distributions on these classes.
Lockout Certificates: Investors in the Lockout Certificates should be
aware that because the Lockout Certificates do not receive any payments of
principal prior to the distribution date occurring in ________ and prior to the
distribution date occurring in ________ will receive a disproportionately small
portion of payments of principal, unless the Certificate Principal Balances of
the Class A Certificates, other than the Lockout Certificates, have been reduced
to zero, the weighted average lives of the Lockout Certificates will be longer
than would otherwise be the case, and the effect on the market value of the
Lockout Certificates of changes in market interest rates or market yields for
similar securities will be greater than for other classes of certificates
entitled to these distributions. However, beginning with the distribution date
occurring in _______, the Lockout Certificates may receive a disproportionately
large percentage of principal collections until their Certificate Principal
Balance is reduced to zero.
In addition, the yield to maturity on each class of the offered
certificates will depend on, among other things, the price paid by the holders
of the offered certificates and the related pass-through rate. The extent to
which the yield to maturity of an offered certificate is sensitive to
prepayments will depend, in part, upon the degree to which it is purchased at a
discount or premium. In general, if a class of offered certificates is purchased
at a premium and its principal distributions occur at a rate faster than assumed
at the time of purchase, the investor's actual yield to maturity will be lower
than that anticipated at the time of purchase. On the other hand, if a class of
offered certificates is purchased at a discount and principal distributions on
that class of offered certificates occur at a rate slower than that assumed at
the time of purchase, the investor's actual yield to maturity will be lower than
that anticipated at the time of purchase. For additional considerations relating
to the yield on the certificates, see "Yield and Prepayment Considerations" in
the prospectus.
Assumed Final Distribution Date: The assumed final distribution date
with respect to the Class A Certificates is __________,which date is __ months
after the distribution date immediately following the latest scheduled maturity
date for any home equity loan. No event of default, change in the priorities for
distribution among the various classes or other provisions under the pooling and
servicing agreement will arise or become applicable solely by reason of the
failure to retire the entire Certificate Principal Balance of any class of
certificates on or before its assumed final distribution date.
The actual final distribution date with respect to each class of Class
A Certificates could occur significantly earlier than the assumed final
distribution date for that class because:
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o Excess Cash Flow will be used to make accelerated payments of
principal, i.e. Overcollateralization Increase Amounts, to the
holders of the Class A Certificates, which payments will have
the effect of shortening the weighted average lives of the
certificates of each class;
o prepayments are likely to occur, which will also have the
effect of shortening the weighted average lives of the
certificates of each class; and
o the master servicer or the depositor may cause a termination
of the trust when the aggregate Stated Principal Balance of
the home equity loans in the trust is less than ___ of the
aggregate cut-off date balance.
Weighted Average Life: Weighted average life refers to the average
amount of time that will elapse from the date of issuance of a security to the
date of distribution to the investor of each dollar distributed in reduction of
principal of that security, assuming no losses. The weighted average life of the
offered certificates will be influenced by, among other things, the rate at
which principal of the home equity loans is paid, which may be in the form of
scheduled amortization, prepayments or liquidations.
The prepayment model used in this prospectus supplement represents an
assumed rate of prepayment each month relative to the then outstanding principal
balance of a pool of home equity loans. A 100% prepayment assumption assumes a
constant prepayment rate of ____ per annum of the then outstanding principal
balance of the home equity loans in the first month of the life of the home
equity loans and an additional __________ per annum in each month thereafter
until the twelfth month. Beginning in the twelfth month and in each month
thereafter during the life of the home equity loans, a 100% prepayment
assumption assumes a CPR of ____ per annum each month. As used in the table
below, a 50% prepayment assumption assumes prepayment rates equal to 50% of the
prepayment assumption. Correspondingly, a 150% prepayment assumption assumes
prepayment rates equal to 150% of the prepayment assumption, and so forth. The
prepayment assumption does not purport to be a historical description of
prepayment experience or a prediction of the anticipated rate of prepayment of
any pool of home equity loans, including the home equity loans.
The table below entitled "Percent of Initial Principal Balance
Outstanding of the Class A Certificates at the Following Percentages of the
Prepayment Assumption" have been prepared on the basis of some assumptions as
described below regarding the weighted average characteristics of the home
equity loans that are expected to be included in the trust as described under
"Description of the Home Equity Loan Pool" in this prospectus supplement and
their performance. The tables assume, among other things, that:
o as of the date of issuance of the Class A Certificates, the
home equity loans have the following structuring assumptions:
HOME EQUITY LOANS
<TABLE>
<CAPTION>
RANGE OF ORIGINAL TERMS AGGREGATE ORIGINAL TERM REMAINING TERM
TO MATURITY PRINCIPAL TO MATURITY TO MATURITY
(IN YEARS) BALANCE INTEREST RATE (IN MONTHS) (IN MONTHS)
----------------------- --------- ------------- ------------- ---------------
<S> <C> <C> <C> <C>
$ %
$ %
$ %
$ %
$ %
$ %
</TABLE>
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<PAGE> 41
o with respect to each home equity loan, the aggregate servicing
fee rate and policy premium rate will be __% per annum;
o except with respect to the Balloon Loans, the scheduled
monthly payment for each home equity loan has been based on
its outstanding balance, interest rate and remaining term to
maturity, so that the home equity loan will amortize in
amounts sufficient for its repayment over its remaining term
to maturity;
o none of the sellers, the master servicer or the depositor will
repurchase any home equity loan, as described under "HFC Home
Equity Lending Program--Representations and Warranties
Concerning the Home Equity Loans" and "Description of the
Certificates--Assignment of Trust Fund Assets" in the
prospectus, and neither the master servicer nor the depositor
exercises any option to purchase the home equity loans and
thereby cause a termination of the trust;
o there are no delinquencies or Realized Losses on the home
equity loans, and principal payments on the home equity loans
will be timely received together with prepayments, if any, at
the respective constant percentages of the prepayment
assumption described in the table;
o there is no Prepayment Interest Shortfall or any other
interest shortfall in any month;
o payments on the certificates will be received on the ____ day
of each month, commencing ____________;
o payments on the home equity loans earn no reinvestment return;
o there are no additional ongoing trust expenses payable out of
the trust; and
o the certificates will be purchased on ____________.
The actual characteristics and performance of the home equity loans
will differ from the assumptions used in constructing the tables below, which
are hypothetical in nature and is provided only to give a general sense of how
the principal cash flows might behave under varying prepayment scenarios. For
example, it is very unlikely that the home equity loans will prepay at a
constant level of the prepayment assumption until maturity or that all of the
home equity loans will prepay at the same level of the prepayment assumption.
Moreover, the diverse remaining terms to maturity of the home equity loans could
produce slower or faster principal distributions than indicated in the tables at
the various constant percentages of the prepayment assumption specified, even if
the weighted average remaining term to maturity of the home equity loans is as
assumed. Any difference between the assumptions and the actual characteristics
and performance of the home equity loans, or actual prepayment or loss
experience, will affect the percentages of initial Certificate Principal
Balances outstanding over time and the weighted average lives of the classes of
Class A Certificates.
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<PAGE> 42
SUBJECT TO THE FOREGOING DISCUSSION AND ASSUMPTIONS, THE FOLLOWING
TABLES INDICATE THE WEIGHTED AVERAGE LIFE OF EACH CLASS OF CLASS A CERTIFICATES,
AND DESCRIBE THE PERCENTAGES OF THE INITIAL CERTIFICATE PRINCIPAL BALANCE OF
EACH CLASS OF CLASS A CERTIFICATES THAT WOULD BE OUTSTANDING AFTER EACH OF THE
DATES SHOWN AT VARIOUS PERCENTAGES OF THE PREPAYMENT ASSUMPTION.
[INSERT DEC TABLES HERE]
FIXED STRIP CERTIFICATE YIELD CONSIDERATIONS
Investors should note that the Fixed Strip Certificates are only
entitled to distributions prior to the Distribution Date in _________. The yield
to investors on the Fixed Strip Certificates will be extremely sensitive to the
rate and timing of principal payments on the home equity loans, including
prepayments, defaults and liquidations, under some extremely rapid rate of
prepayment scenarios. In addition, if prior to the distribution date in
_________, the master servicer or the depositor effects an optional termination
of the home equity loans, the Fixed Strip Certificates will receive no further
distributions. Investors in the Fixed Strip Certificates should fully consider
the risk that an extremely rapid rate of prepayments on the home equity loans
could result in the failure of these investors to fully recover their
investments.
The following table indicates the sensitivity of the pre-tax yield to
maturity on the Fixed Strip Certificates to various constant rates of prepayment
on the home equity loans by projecting the monthly aggregate payments of
interest on the Fixed Strip Certificates and computing the corresponding pre-tax
yields to maturity on a corporate bond equivalent basis, based on the
structuring assumptions, including the assumptions regarding the characteristics
and performance of the home equity loans which differ from the actual
characteristics and performance thereof and assuming the aggregate purchase
price described below. Any differences between the assumptions and the actual
characteristics and performance of the home equity loans and of the Fixed Strip
Certificates may result in yields being different from those shown in the table.
Discrepancies between assumed and actual characteristics and performance
underscore the hypothetical nature of the table, which is provided only to give
a general sense of the sensitivity of yields in varying prepayment scenarios.
PRE-TAX YIELD TO MATURITY OF THE FIXED STRIP CERTIFICATES
AT THE FOLLOWING PERCENTAGES OF THE PREPAYMENT ASSUMPTION
<TABLE>
<CAPTION>
ASSUMED PURCHASE PRICE % % % %
- ------------------------------------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
% % % %
</TABLE>
Each pre-tax yield to maturity described in the preceding table was
calculated by determining the monthly discount rate which, when applied to the
assumed stream of cash flows to be paid on the Fixed Strip Certificates, would
cause the discounted present value of that assumed stream of cash flows to equal
the assumed purchase price listed in the table. Accrued interest is included in
the assumed purchase price and is used in computing the corporate bond
equivalent yields shown. These yields do not take into account the different
interest rates at which investors may be able to reinvest funds
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<PAGE> 43
received by them as distributions on the Fixed Strip Certificates, and thus do
not reflect the return on any investment in the Fixed Strip Certificates when
any reinvestment rates other than the discount rates are considered.
Notwithstanding the assumed prepayment rates reflected in the preceding
table, it is highly unlikely that the home equity loans will be prepaid
according to one particular pattern. For this reason, and because the timing of
cash flows is critical to determining yields, the pre-tax yield to maturity on
the Fixed Strip Certificates may differ from those shown in the table, even if
all of the home equity loans prepay at the indicated constant percentages of the
prepayment assumption over any given time period or over the entire life of the
certificates.
There can be no assurance that the home equity loans will prepay at any
particular rate or that the yield on the Fixed Strip Certificates will conform
to the yields described in this prospectus supplement. Moreover, the various
remaining terms to maturity of the home equity loans could produce slower or
faster principal distributions than indicated in the preceding table at the
various constant percentages of the prepayment assumption specified, even if the
weighted average remaining term to maturity of the home equity loans is as
assumed. Investors are urged to make their investment decisions based on their
determinations as to anticipated rates of prepayment under a variety of
scenarios. Investors in the Fixed Strip Certificates should fully consider the
risk that an extremely rapid rate of prepayments on the home equity loans could
result in the failure of the investors to fully recover their investments.
For additional considerations relating to the yield on the
certificates, see "Yield and Prepayment Considerations" in the prospectus.
POOLING AND SERVICING AGREEMENT
GENERAL
The certificates will be issued under a pooling and servicing agreement
dated as of ________, among the depositor, the master servicer and the trustee.
Reference is made to the prospectus for important information in addition to
that described in this prospectus supplement regarding the terms and conditions
of the pooling and servicing agreement and the certificates. The trustee, or any
of its affiliates, in its individual or any other capacity, may become the owner
or pledgee of certificates with the same rights as it would have if it were not
trustee. The trustee will appoint _____________ to serve as custodian in
connection with the certificates. The certificates will be transferable and
exchangeable at the corporate trust office of the trustee, which will serve as
certificate registrar and paying agent. The depositor will provide a prospective
or actual certificateholder, without charge, on written request, a copy, without
exhibits, of the pooling and servicing agreement. Requests should be addressed
to Household Finance Corporation, 2700 Sanders Road, Prospect Heights, Illinois
60070. In addition to the circumstances described in the prospectus, the
depositor may terminate the trustee for cause under some circumstances. See "The
Pooling and Servicing Agreement--The Trustee" in the prospectus.
THE MASTER SERVICER
HFC, an affiliate of the depositor, will act as master servicer for the
certificates under the pooling and servicing agreement. HFC and its subsidiaries
have originated closed-end fixed and adjustable rate mortgages since 1972 and
have offered home equity revolving credit loans since 1977. As of June ____,
1999, HFC and its subsidiaries had approximately $____ billion aggregate
principal amount of outstanding closed-end home equity loans and approximately
$____billion aggregate
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principal amount of outstanding home equity revolving credit loans, including
loans sold with servicing performed by HFC and its subsidiaries. As of June 30,
1999, HFC had approximately $________ billion in total assets, approximately
$_______ billion in total liabilities and approximately $_________ billion in
shareholder's equity. For a general description of HFC and its activities, see
"HFC Home Equity Lending Program -- General" in the prospectus and "Description
of the Home Equity Loan Pool--The Master Servicer" in this prospectus
supplement.
POSSESSION OF HOME EQUITY LOAN DOCUMENTS
Under the terms of the pooling and servicing agreement, so long as
HFC's long-term senior unsecured debt is acceptable to the rating agencies and
to the certificate guaranty insurer, subservicers affiliated with HFC will be
entitled to maintain possession of the loan documents with respect to each home
equity loan and will not be required to record assignments of the related
mortgage either to the depositor or any trustee. In the event, however, that
possession of any loan documents is required by the master servicer, the master
servicer will be entitled to request delivery of the loan documents and to
retain them for as long as necessary for servicing purposes. These loan
documents will be returned to the applicable subservicer, unless returned to the
related borrower in connection with the payment in full of the related home
equity loan or when possession of these documents is no longer required by the
master servicer. In the event that HFC does not satisfy the standards set forth
herein or any of the subservicers ceases to be an HFC affiliate, the subservicer
and the depositor will record assignments of the mortgages for each related home
equity loan in favor of the trustee and deliver the loan documents pertaining to
each home equity loan to the trustee, unless opinions of counsel satisfactory to
the trustee, the rating agencies and any credit enhancer are delivered to these
parties to the effect that recordation of the assignments or delivery of loan
documentation is not required in the relevant jurisdiction to protect the
interests of the depositor and the trustee in the home equity loans. Under each
pooling and servicing agreement, the trustee will be appointed attorney-in-fact
for the subservicers and the depositor with power to prepare, execute and record
assignments of the mortgages in the event that the subservicers and the
depositor fail to do so on a timely basis. In lieu of delivery of original
documentation, the master servicer may deliver documents which have been imaged
optically upon delivery of an opinion of counsel that the documents do not
impair the enforceability or the transfer to the trust of the home equity loans.
REVIEW OF THE HOME EQUITY LOANS
In the event the loan documents are required to be delivered to the
trustee, the trustee will in most cases be authorized to appoint one or more
custodians under a custodial agreement to maintain possession and review of
documents relating to the home equity loans as the agent of the trustee. The
custodian will initially be __________.
In the event the loan documents are delivered to the trustee with
regard to any home equity loan, the trustee or the custodian will hold the
documents in trust for the benefit of the certificateholders and, normally will
review the documents within 90 days after receipt. If any document is found to
be defective in any material respect, the trustee or the custodian shall notify
the master servicer and the depositor, and the master servicer, the subservicer
or the trustee shall notify HFC or the seller. If HFC or the seller cannot cure
the defect within 90 days or within any other period specified in the pooling
and servicing agreement, after notice of the defect is given to HFC or the
seller, HFC or the seller is required to, not later than 90 days after that
notice, or within any other period specified in the pooling and servicing
agreement, either repurchase the related home equity loan or any property
acquired in respect of it from the trustee, or if permitted, substitute for that
home equity loan a new home equity loan in accordance with the standards
described in the pooling and servicing agreement. The master servicer will be
obligated to enforce this obligation of HFC or the seller, but the obligation is
subject to the provisions described under "Description of the Certificates
- --Realization Upon Defaulted Home Equity Loans" in the prospectus. There can be
no assurance that
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<PAGE> 45
the applicable seller will fulfill its obligation to purchase any home equity
loan. In most cases, neither HFC, the master servicer nor the depositor will be
obligated to purchase or substitute for the home equity loan if the seller
defaults on its obligation to do so. The obligation to repurchase or substitute
for a home equity loan constitutes the sole remedy available to the
certificateholders or the trustee for a material defect in a constituent
document. Any home equity loan not purchased or substituted for shall remain in
the related trust.
The master servicer will make representations and warranties regarding
its authority to enter into, and its ability to perform its obligations under,
the pooling and servicing agreement. Upon a breach of any of these
representations of the master servicer which materially adversely affect the
interests of the certificateholders in a home equity loan, the master servicer
will be obligated either to cure the breach in all material respects or to
purchase the home equity loan at its purchase price, less unreimbursed advances,
if applicable, made by the master servicer with respect to the home equity loan,
or, to substitute the home equity loan with a qualified substitute home equity
loan. This purchase obligation will constitute the sole remedy available to
certificateholders or the trustee for a breach of this type of representation by
the master servicer. Any home equity loan not purchased or substituted for shall
remain in the related trust.
SERVICING AND SUBSERVING
The master servicer is required to service and administer the home
equity loans in accordance with the pooling and servicing agreement and in a
manner consistent with general industry practice using that degree of skill and
attention that the master servicer exercises with respect to comparable home
equity loans that it services for itself or others.
The duties of the master servicer include collecting and posting all
payments, responding to inquiries of borrowers or Federal, state or local
government authorities with respect to the home equity loans, investigating
delinquencies, reporting tax information to borrowers in accordance with its
customary practices, accounting for collections and furnishing monthly and
annual statements to the trustee with respect to distributions. The master
servicer is required to follow its customary standards, policies and procedures
in performing the duties as master servicer.
The master servicer (1) is authorized and empowered to execute and
deliver, on behalf of itself, the certificateholders 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 home equity loans and with respect to the related mortgaged properties; and
(2) 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 will not materially and adversely affect the security afforded by
the related mortgaged property, other than as permitted by the pooling and
servicing agreement. In certain circumstances, the master servicer will be
required to purchase the related home equity loan if it consents to any such
modification.
Compensation to the master servicer for its servicing activities under
the pooling and servicing agreement will be paid from collections on the home
equity loans on each distribution date. The amount of such compensation for each
collection period is equal to ____% per annum of the aggregate loan balances of
the home equity loans outstanding on the first day of such collection period.
The servicing fee will be paid to the master servicer before distributions are
made to the certificateholders.
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<PAGE> 46
In addition, the master servicer will retain any benefit from the investment of
funds in the collection account.
The master servicer will also be entitled under the pooling and
servicing agreement to 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 and similar items.
The master servicer will pay certain ongoing expenses associated with
the trust or incurred in connection with its servicing responsibilities under
the pooling and servicing agreement. The master servicer will be entitled to
reimbursement for specified expenses incurred by it in connection with the
liquidation of any home equity loan, including any costs in restoring any
related mortgaged property in connection therewith and the payment of related
insurance premiums or taxes, this right of reimbursement being prior to the
rights of the certificateholders to receive net liquidation proceeds from the
related home equity loan.
The master servicer will be permitted under the pooling and servicing
agreement to enter into subservicing arrangements for any servicing and
administration of home equity loans with any affiliated institution which is in
compliance with the laws of each state necessary to enable it to perform its
obligations under such subservicing arrangement.
Notwithstanding any subservicing arrangement, the master servicer will
not be relieved of its obligations under the pooling and servicing agreement and
the master servicer will be obligated to the same extent and under the same
terms and conditions as if it alone were servicing and administering the home
equity loans.
EVIDENCE AS TO COMPLIANCE
The master servicer will be required to deliver to the trustee on or
before the last day of ___________ of each year commencing in ____, an officer's
certificate stating, as to each signer thereof, that (1) a review of the
activities of the master servicer during the preceding calendar year (or, in the
case of the first certificate, since the closing date) and of performance under
the pooling and servicing agreement has been made under the officer's
supervision, and (2) to the best of the officer's knowledge, based on his/her
review, the master servicer has fulfilled all its obligations under the pooling
and servicing agreement for that year, or, in the case of the first certificate,
since the closing date, or, if there has been a default in the fulfillment of
any obligations, specifying each default known to that officer and the nature
and status thereof including the steps being taken by the master servicer to
remedy the defaults.
On or before the last day of __________ of each year, commencing in
____, the master servicer will be required to cause to be delivered to the
trustee, a letter or letters of a firm of independent, nationally recognized
certified public accountants stating that the firm has examined, for the
preceding calendar year, or, in the case of the first that letter, since the
closing date, specified documents and records related to the servicing of home
equity loans under agreements, including the pooling and servicing agreement,
substantially similar to the pooling and servicing agreement and the examination
has disclosed no items of noncompliance with the provision of the pooling and
servicing agreement which, in the opinion of the firm, are material, except for
the items of noncompliance as shall be referred to in the report.
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COLLECTION AND OTHER SERVICING PROCEDURES
The master servicer may in its discretion (1) waive any assumption
fees, late payment charge, charges for checks returned for insufficient funds,
prepayment penalties, if any, or other fees which may be collected in the
ordinary course of servicing the home equity loans, or (2) arrange with a
borrower a schedule for the payment of delinquent payments on the related home
equity loan.
REFINANCING OF SENIOR LIEN
The master servicer may permit the refinancing of any existing lien
senior to a home equity loan, provided that some conditions described in the
pooling and servicing agreement are satisfied and the resulting combined LTV
ratio does not exceed ___%.
COLLECTION AND LIQUIDATION PRACTICES; LOSS MITIGATION
Under the terms of the pooling and servicing agreement, until the
business day prior to each distribution date on which amounts are required to be
deposited in the Collection Account, HFC may retain and commingle such amounts
with its own funds so long as (1) no event of default under the pooling and
servicing agreement shall have occurred and be continuing and (2) either (A) the
short-term debt obligations of HFC are acceptable to the rating agencies as
specified in the pooling and servicing agreement or (B) HFC arranges for and
maintains a servicer credit enhancement acceptable in form and substance to each
rating agency; provided, however, that amounts permitted to be retained and
commingled pursuant to this subclause (B) shall not exceed the amount available
under the servicer credit enhancement. In the event HFC is entitled to retain
and commingle the amounts referred to in the preceding sentence, it shall be
entitled to retain for its own account any investment income thereon, and any
such investment income shall not be subject to any claim of the trustee or
certificateholders. In the event that HFC is not permitted to retain and
commingle these amounts with its own funds, it shall deposit these amounts not
later than the second business day following receipt in the Collection Account.
The master servicer is authorized to engage in a wide variety of loss
mitigation practices with respect to the home equity loans, including waivers,
modifications, payment forbearances, partial forgiveness, entering into
repayment schedule arrangements, and capitalization of arrearages; provided in
any case that the master servicer determines that the action is not materially
adverse to the interests of the holder of the offered certificates or the credit
enhancer and is generally consistent with the master servicer's policies with
respect to similar loans; and provided further that some of the modifications,
including reductions in the interest rate, partial forgiveness or a maturity
extension, may only be taken if the home equity loan is in default or if default
is reasonably foreseeable. With respect to home equity loans that come into and
continue in default, the master servicer may take a variety of actions including
foreclosure on the mortgaged property, writing off the balance of the home
equity loan as bad debt, taking a deed in lieu of foreclosure, accepting a short
sale, permitting a short refinancing, arranging for a repayment plan,
modifications as described above, or taking an unsecured note. See "Description
of the Certificates--Collection and Other Servicing Procedures" and
"--Realization Upon Defaulted Home Equity Loans" in the prospectus.
VOTING RIGHTS
Some actions specified in the prospectus that may be taken by holders
of certificates evidencing a specified percentage of all undivided interests in
the trust. __% of all voting rights will be allocated among all holders of the
Class A Certificates in proportion to their then outstanding Certificate
Principal Balances, and __% and __% of all voting rights will be allocated among
holders of the Fixed Strip Certificates and the Class R Certificates in
proportion to the percentage interests evidenced by their respective
certificates. So long as there does not exist a failure by the credit enhancer
to make a
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required payment under the policy, a credit enhancer default, the credit
enhancer shall have the right to exercise all rights of the holders of the
offered certificates under the pooling and servicing agreement without any
consent of the holders, and the holders may exercise their rights only with the
prior written consent of the credit enhancer except as provided in the pooling
and servicing agreement.
TERMINATION
The circumstances under which the obligations created by the pooling
and servicing agreement will terminate relating to the offered certificates are
described in "The Pooling and Servicing Agreement--Termination; Retirement of
Certificates" in the prospectus. The master servicer or the depositor will have
the option on any distribution date on which the aggregate Stated Principal
Balance of the home equity loans is less than ____ of the aggregate cut-off date
balance:
o to purchase all remaining home equity loans and other assets
in the trust, except for the policy, thereby effecting early
retirement of the offered certificates, or
o to purchase in whole, but not in part, the certificates.
Any purchase of home equity loans and other assets of the trust shall
be made at a price equal to the sum of:
o 100% of the unpaid principal balance of each home equity loan,
or the fair market value of the related underlying mortgaged
properties with respect to defaulted home equity loans as to
which title to the mortgaged properties has been acquired if
the fair market value is less than the unpaid principal
balance, as of the date of repurchase plus
o accrued interest at the Net Mortgage Rate to, but not
including, the first day of the month in which the repurchase
price is distributed and
o any amounts due to the credit enhancer under the insurance and
indemnity agreement.
Distributions on the certificates relating to any optional termination
will be paid, first, to the offered certificates, in an amount equal to the
Certificate Principal Balance of each class plus one month's interest accrued on
those offered certificates at the related pass-through rate, plus any previously
unpaid Accrued Certificate Interest and second, except as described in the
pooling and servicing agreement, to the Residual Certificates. Any purchase of
home equity loans and termination of the trust requires the consent of the
credit enhancer if it would result in a draw on the policy. Any purchase of the
certificates, will be made at a price equal to 100% of its Certificate Principal
Balance plus the sum of one month's interest accrued on those certificates at
the applicable pass-through rate and any previously unpaid Accrued Certificate
Interest. Upon the purchase of the certificates or at any time thereafter, at
the option of the master servicer or the depositor, the home equity loans may be
sold, thereby effecting a retirement of the certificates and the termination of
the trust, or the certificates so purchased may be held or resold by the master
servicer or the depositor.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
Upon the issuance of the offered certificates, Katten Muchin & Zavis,
special tax counsel to the depositor, will deliver an opinion to the effect
that, assuming compliance with all provisions of the pooling and servicing
agreement, for federal income tax purposes, the trust will qualify as a REMIC
under the Internal Revenue Code.
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For federal income tax purposes:
o each class of offered certificates will represent ownership of
"regular interests" in the REMIC and will generally be treated
as debt instruments of the REMIC; and
o the Class R Certificates will constitute the sole class of
"residual certificates" in the REMIC.
See "Material Federal Income Tax Consequences--REMICS" in the
prospectus.
For federal income tax reporting purposes, the offered certificates,
other than the Class A-1 Certificates and Fixed Strip Certificates, will not and
the Class A-1 Certificates and Fixed Strip Certificates will be treated as
having been issued with original issue discount. The prepayment assumption that
will be used in determining the rate of accrual of original issue discount,
market discount and premium, if any, for federal income tax purposes will be
based on the assumption that, subsequent to the date of any determination the
home equity loans will prepay at a rate equal to __% of the prepayment
assumption. No representation is made that the home equity loans will prepay at
that rate or at any other rate. See "Material Federal Income Tax
Consequences--General" and "--REMICS--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount" in the prospectus.
If the method for computing original issue discount described in the
prospectus results in a negative amount for any period with respect to a
certificateholder, in particular the Fixed Strip Certificates, the amount of
original issue discount allocable to that period would be zero and the
certificateholder will be permitted to offset that negative amount only against
future original issue discount, if any, attributable to those certificates.
In some circumstances OID regulations permit the holder of a debt
instrument to recognize original issue discount under a method that differs from
that used by the issuer. Accordingly, it is possible that the holder of a
certificate may be able to select a method for recognizing original issue
discount that differs from that used by the master servicer in preparing reports
to the certificateholders and the IRS.
Some classes of the offered certificates may be treated for federal
income tax purposes as having been issued at a premium. Whether any holder of
one of those classes of certificates will be treated as holding a certificate
with amortizable bond premium will depend on the certificateholder's purchase
price and the distributions remaining to be made on the certificate at the time
of its acquisition by the certificateholder. Holders of those classes of
certificates should consult their tax advisors regarding the possibility of
making an election to amortize the premium. See "Material Federal Income Tax
Consequences--REMICS--Taxation of Owners of REMIC Regular Certificates" and
"--Premium" in the prospectus.
The offered certificates will be treated as assets described in Section
7701(a)(19)(C) of the Internal Revenue Code and "real estate assets" under
Section 856(c)(4)(A), formerly Section 856(c)(5)(A), of the Internal Revenue
Code generally in the same proportion that the assets of the trust would be so
treated. In addition, interest on the offered certificates will be treated as
"interest on obligations secured by mortgages on real property" under Section
856(c)(3)(B) of the Internal Revenue Code generally to the extent that the
offered certificates are treated as "real estate assets" under Section
856(c)(4)(A) of the Internal Revenue Code. Moreover, the offered certificates
will be "qualified mortgages" within the meaning of Section 860G(a)(3) of the
Internal Revenue Code if transferred to
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another REMIC on its startup day in exchange for a regular or residual interest
therein. However, prospective investors in offered certificates that will be
generally treated as assets described in Section 860G(a)(3) of the Internal
Revenue Code should note that, notwithstanding that treatment, any repurchase of
a certificate under the right of the master servicer or the depositor to
repurchase the offered certificates may adversely affect any REMIC that holds
the offered certificates if the repurchase is made under circumstances giving
rise to a prohibited transaction tax. See "The Pooling and Servicing
Agreement--Termination" in this prospectus supplement and "Material Federal
Income Tax Consequences--REMICS--Characterization of Investments in REMIC
Certificates" in the prospectus.
HFC will be designated as the "tax matters person" with respect to the
REMIC as defined in the REMIC provisions, and in connection therewith will be
required to hold not less than 0.01% of each of the Class R Certificates.
NEW WITHHOLDING REGULATIONS
The Treasury Department has issued new regulations which make some
modifications to the withholding, backup withholding and information reporting
rules described above. The new regulations attempt to unify certification
requirements and modify reliance standards. The new regulations will generally
be effective for payments made after December 31, 1999, subject to some
transition rules. Prospective investors are urged to consult their own tax
advisors regarding the new regulations.
For further information regarding federal income tax consequences of
investing in the offered certificates, see "Material Federal Income Tax
Consequences--REMICS" in the prospectus.
METHOD OF DISTRIBUTION
Subject to the terms and conditions of an underwriting agreement, dated
________, __________ has agreed to purchase and the depositor has agreed to sell
the Class A Certificates and Class IO Certificates. It is expected that delivery
of the certificates will be made only in book-entry form through the Same Day
Funds Settlement System of DTC on or about _____________, against payment
therefor in immediately available funds.
In connection with the offered certificates, the underwriter has
agreed, subject to the terms and conditions of the underwriting agreement, to
purchase all of the offered certificates if any of its offered certificates are
purchased thereby.
The underwriting agreement provides that the obligations of the
underwriter to pay for and accept delivery of the offered certificates is
subject to, among other things, the receipt of legal opinions and to the
conditions, among others, that no stop order suspending the effectiveness of the
depositor's registration statement shall be in effect, and that no proceedings
for that purpose shall be pending before or threatened by the SEC.
The distribution of the offered certificates by the underwriter may be
effected from time to time in one or more negotiated transactions, or otherwise,
at varying prices to be determined at the time of sale. Proceeds to the
depositor from the sale of the offered certificates, before deducting expenses
payable by the depositor, will be approximately __% of the aggregate Certificate
Principal Balance of the offered certificates plus its accrued interest from the
cut-off date.
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The underwriter may effect these transactions by selling the offered
certificates to or through dealers, and those dealers may receive compensation
in the form of underwriting discounts, concessions or commissions from the
underwriter for whom they act as agent. In connection with the sale of the
offered certificates, the underwriter may be deemed to have received
compensation from the depositor in the form of underwriting compensation. The
underwriter and any dealers that participate with the underwriter in the
distribution of the offered certificates may be deemed to be underwriters and
any profit on the resale of the offered certificates positioned by them may be
deemed to be underwriting discounts and commissions under the Securities Act of
1933, as amended.
The underwriting agreement provides that the depositor will indemnify
the underwriter, and that under limited circumstances the underwriter will
indemnify the depositor, against some civil liabilities under the Securities
Act, or contribute to payments required to be made in respect thereof.
There is currently no secondary market for the offered certificates.
The underwriter intends to make a secondary market in the offered certificates
but is not obligated to do so. There can be no assurance that a secondary market
for the offered certificates will develop or, if it does develop, that it will
continue. The offered certificates will not be listed on any securities
exchange.
The primary source of information available to investors concerning the
offered certificates will be the monthly statements discussed in the prospectus
under "Description of the Certificates--Reports to Certificateholders," which
will include information as to the outstanding principal balance of the offered
certificates. There can be no assurance that any additional information
regarding the offered certificates will be available through any other source.
In addition, the depositor is not aware of any source through which price
information about the offered certificates will be available on an ongoing
basis. The limited nature of this information regarding the offered certificates
may adversely affect the liquidity of the offered certificates, even if a
secondary market for the offered certificates becomes available.
LEGAL OPINIONS
Certain legal matters relating to the certificates will be passed upon
for the depositor by John W. Blenke, Vice President - Corporate Law and
Assistant Secretary of Household International, Inc., the parent of the
depositor and the master servicer, and by Katten Muchin & Zavis, Chicago,
Illinois, special counsel to the depositor. Mr. Blenke is a full-time employee
and an officer of Household International, Inc. and beneficially owns, and holds
options to purchase, shares of Common Stock of Household International, Inc.
Certain legal matters will be passed upon for the underwriters by
_________.
EXPERTS
The consolidated financial statements of ____________ and subsidiaries,
as of December 31, ____ and ____ and for each of the years in the three-year
period ended December 31, ____ are incorporated by reference in this prospectus
supplement and in the registration statement in reliance upon the report of
__________, independent certified public accountants, incorporated by reference
in this prospectus supplement, and upon the authority of said firm as experts in
accounting and auditing.
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RATINGS
It is a condition to the issuance of the Class A Certificates that they
be rated ____ by _______________ and _________________. It is a condition to the
issuance of the Fixed Strip Certificates that they be rated "AAAr" by
_____________ and "AAA" by ______________.
The ratings assigned by _____________ to offered certificates address
the likelihood of the receipt by certificateholders of payments required under
the pooling and servicing agreement. ____________'s ratings take into
consideration the credit quality of the home equity loan pool, structural and
legal aspects associated with the offered certificates, and the extent to which
the payment stream in the home equity loan pool is adequate to make payments
required under the offered certificates. ___________'s rating on the offered
certificates does not, however, constitute a statement regarding frequency of
prepayments on the mortgages. See "Material Yield and Prepayment Considerations"
in this prospectus supplement. The "r" of the "AAAr" rating of the Fixed Strip
Certificates by ___________ is attached to highlight derivative, hybrid, and
some other obligations that _____________ believes may experience high
volatility or high variability in expected returns due to non-credit risks.
Examples of these obligations are:
o securities whose principal or interest return is indexed to
equities, commodities, or currencies; certain swaps and
options; and
o interest only and principal only mortgage securities.
The absence of an "r" symbol should not be taken as an indication that
an obligation will exhibit no volatility or variability in total return.
The ratings assigned by _____________ to offered certificates address
the likelihood of the receipt by certificateholders of all distributions to
which they are entitled under the transaction structure. __________'s ratings
reflect its analysis of the riskiness of the underlying home equity loans and
the structure of the transaction described in the operative documents.
___________'s ratings do not address the effect on the certificates' yield
attributable to prepayments or recoveries on the underlying home equity loans.
Further, the rating on the Fixed Strip Certificates does not address whether
investors therein will recoup their initial investments.
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each security rating should be evaluated
independently of any other security rating. The ratings of the Fixed Strip
Certificates do not address the possibility that the holders of those
certificates may fail to recover fully their initial investments. In the event
that the ratings initially assigned to the offered certificates are subsequently
lowered for any reason, no person or entity is obligated to provide any
additional support or credit enhancement with respect to the offered
certificates.
LEGAL INVESTMENT
The offered certificates will not constitute "mortgage related
securities" for purposes of SMMEA because the home equity loan pool includes
home equity loans that are secured by subordinate liens on the related mortgaged
properties. Institutions whose investment activities are subject to legal
investment laws and regulations or to review by regulatory authorities should
consult with their own legal advisors in determining whether and to what extent
the offered certificates are subject to restrictions on investment, capital
requirements or otherwise. See "Legal Investment Matters" in the prospectus.
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One or more classes of the offered certificates may be viewed as
"complex securities" under TB 13a, which applies to thrift institutions
regulated by the OTS.
The depositor makes no representations as to the proper
characterization of any class of the offered certificates for legal investment
or other purposes, or as to the ability of particular investors to purchase any
class of the offered certificates under applicable legal investment
restrictions. These uncertainties may adversely affect the liquidity of any
class of offered certificates. Accordingly, all institutions whose investment
activities are subject to legal investment laws and regulations, regulatory
capital requirements or review by regulatory authorities should consult with
their legal advisors in determining whether and to what extent any class of the
offered certificates constitutes a legal investment or is subject to investment,
capital or other restrictions.
See "Legal Investment Matters" in the prospectus.
EMPLOYEE BENEFIT PLAN CONSIDERATIONS
A fiduciary of any plan subject to ERISA or Section 4975 of the
Internal Revenue Code, or any insurance company, whether through its general or
separate accounts, or any other person investing plan assets of any plan (as
defined under "Employee Benefit Plan Considerations - Plan Asset Regulations" in
the prospectus) should carefully review with its legal advisors whether the
purchase or holding of offered certificates could give rise to a violation of
ERISA's fiduciary standards of care or a nonexempt prohibited transaction under
ERISA or Section 4975 of the Internal Revenue Code. Any fiduciary or other
investor of plan assets that proposes to acquire or hold the offered
certificates on behalf of or with plan assets should consult with its counsel
with respect to whether the specific and general conditions and the other
requirements of an Exemption are met. Here, since the underwriter is
__________________________, the specific individual underwriter exemption that
is applicable is Prohibited Transaction Exemption _______ (__ Fed. Reg.___,
19__) granted to the underwriter. This Exemption is [substantially similar] to
the Exemption described in the prospectus (see "Employee Benefit Plan
Considerations - Prohibited Transaction Exemptions" in the prospectus). As a
result, references in this Supplement to the Exemption shall specifically
include the terms and conditions of the underwriter's individual exemption and
the requirements set forth therein. Those requirements include a number of
conditions which must be met for the Exemption to apply, including the
requirements that the plan must be an "accredited investor" as defined in Rule
501(a)(1) of Regulation D issued by the Commission under the Securities Act,
that the plan invest only in the highest level of certificates and that the plan
not be sponsored by a member of the Restricted Group (as defined under "Employee
Benefit Plan Considerations - Prohibited Transaction Exemptions" in the
prospectus). See "Employee Benefit Plan Considerations" in the prospectus for a
more detailed list of the requirements and conditions of the Exemption as well
as a more general discussion of other employee benefit plan considerations. In
particular, if certificates other than the highest level of certificates are
purchased, the plan fiduciary will be required to deliver, at its expense, a
favorable opinion of counsel to the trustee and the master servicer to the
effect that the purchase and holding of such class of certificate will not
result in a nonexempt prohibited transaction under ERISA and Section 4975 of the
Internal Revenue Code and will not subject the trustee or the master servicer to
any obligation or liability as a result of the application of ERISA or the
prohibited transaction provisions of Section 4975 of the Internal Revenue Code.
Alternatively, an insurance company general account may, at its expense, deliver
to the trustee and the master servicer a representation that the transfer and
holding of such certificate are exempt under Section I and Section II of PTCE
95-60. Unless such opinion or representation is delivered, each person acquiring
a certificate other than the highest class of certificates will be deemed to
represent to the trustee and the master servicer that such person is not a
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plan, acting on behalf of a plan or investing plan assets subject to ERISA or
Section 4975 of the Internal Revenue Code.
The sale of any of the offered certificates to a plan is in no respect
a representation by the depositor, the seller, the trustee, the master servicer,
subservicer or the underwriter that such an investment meets all relevant legal
requirements relating to investments by plans generally or any particular plan
or plan assets, or that such an investment is appropriate for plans generally or
any particular plan or plan assets.
GLOSSARY OF TERMS
Accrued Certificate Interest -- With respect to any distribution date,
an amount equal to:
o in the case of each class of offered certificates, other than
the Fixed Strip Certificates, interest accrued during the
related Interest Accrual Period on the Certificate Principal
Balance of the certificates of that class immediately prior to
that distribution date at the per annum rate at which interest
accrues on that class, or pass-through rate; and
o in the case of the Fixed Strip Certificates, interest accrued
during the related Interest Accrual Period on the Notional
Amount thereof for that distribution date at the pass-through
rate on that class for that distribution date, in each case
less interest shortfalls from the home equity loans, if any,
allocated thereto for that distribution date, including:
o any Prepayment Interest Shortfall to the extent not
covered by Excess Cash Flow;
o the interest portions of Realized Losses; and
o any other interest shortfalls on the home equity
loans, including interest shortfalls relating to the
Soldiers' and Sailors' Civil Relief Act of 1940 or
similar legislation or regulations, all allocated as
described below;
provided, however, that in the event that any shortfall described in the
immediately preceding three clauses above is allocated to the offered
certificates, or the Available Distribution Amount on any distribution date is
less than the Senior Interest Distribution Amount for that date, the amount of
any shortfall will be drawn under the policy and distributed to the holders of
the offered certificates. Notwithstanding the foregoing, if payments are not
made as required under the policy, any interest shortfalls may be allocated to
the certificates as described above. See "--Certificate Guaranty Insurance
Policy" below. Accrued Certificate Interest on each class of offered
certificates will be distributed on a pro rata basis. Accrued Certificate
Interest on each class of certificates is calculated on the basis of a 360-day
year consisting of twelve 30-day months.
Available Distribution Amount -- For any distribution date, an amount
equal to:
o the aggregate amount of actual payments on the home equity
loans received during the related Collection Period after
deduction of the related servicing fees and any subservicing
fees and
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o some unscheduled collections, including borrower prepayments
on the home equity loans, Insurance Proceeds, Liquidation
Proceeds and proceeds from repurchases of, and some amounts
received in connection with any substitutions for, the home
equity loans, received during the related collection period.
Certificate Principal Balance -- For any class of Class A Certificates
as of any date of determination, the initial Certificate Principal Balance of
that certificate, reduced by the aggregate of:
o all amounts allocable to principal previously distributed with
respect to that certificate; and
o any reductions in the Certificate Principal Balance thereof
deemed to have occurred in connection with allocations of
Realized Losses in the manner described in this prospectus
supplement, unless these amounts have been paid under the
policy.
The Certificate Principal Balance of the Class R Certificates is equal
to $100.
Class A Principal Distribution Amount -- An amount equal to the lesser
of:
1. the excess of (A) the Available Distribution Amount over (B)
the Senior Interest Distribution Amount; and
2. the sum of:
A. the portion allocable to principal of all scheduled
monthly payments on the home equity loans received
with respect to the related collection period;
B. the principal portion of all proceeds of the
repurchase of any home equity loans, or, in the case
of a substitution, some amounts representing a
principal adjustment, as required by the pooling and
servicing agreement during the related collection
period;
C. the principal portion of all other unscheduled
collections received on the home equity loans during
the related collection period, or deemed to be
received during the related collection period,
including, without limitation, full and partial
principal prepayments made by the respective
borrowers, to the extent not previously distributed;
D. the amount of any Realized Loss Distribution Amount
for that distribution date; and
E. the amount of any Overcollateralization Increase
Amount for that distribution date;
minus
F. the amount of any Overcollateralization Reduction
Amount for that distribution date.
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In no event will the Class A Principal Distribution Amount with respect
to any distribution date be less than zero or greater than the then outstanding
Certificate Principal Balances of the Class A Certificates.
Excess Cash Flow -- For any distribution date, the excess of:
o the Available Distribution Amount for the distribution date
over
o the sum of:
o the Senior Interest Distribution Amount payable to
the Class A Certificateholders on that distribution
date and
o the sum of the amounts relating to the home equity
loans described in clauses (2)(A)-(C) of the
definition of Class A Principal Distribution Amount.
Excess Loss Amount -- On any distribution date, an amount equal to the
sum of:
o any Realized Losses, other than as described in the next three
succeeding clauses below, for the related collection period
which, when added to the aggregate of the Realized Losses for
all preceding collection periods exceed $________,
o any Special Hazard Losses;
o any Fraud Losses;
o any Bankruptcy Losses; and
o Extraordinary Losses.
Excess Overcollateralization Amount -- With respect to any distribution
date, the excess, if any, of:
o the Outstanding Overcollateralization Amount on that
distribution date over
o the Overcollateralization Amount Target.
Interest Accrual Period -- For all classes of certificates, the
calendar month preceding the month in which the distribution date occurs.
Lockout Certificate Percentage -- A percentage calculated for each
distribution date equal to the aggregate Certificate Principal Balance of the
Lockout Certificates divided by the sum of the aggregate Certificate Principal
Balances of the Class A Certificates.
Lockout Distribution Percentage -- For any distribution date occurring
prior to the distribution date in _________ , 0%. The Lockout Distribution
Percentage for any distribution date occurring after the first three years
following the closing date will be as follows:
o for any distribution date during the fourth year after the
closing date, 45%;
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o for any distribution date during the fifth year after the
closing date, 80%;
o for any distribution date during the sixth year after the
closing date, 100%; and
o for any distribution date thereafter, 300% of the Lockout
Certificate Percentage.
Notwithstanding the foregoing, if the Certificate Principal Balances of the
Class A Certificates, other than the Lockout Certificates, have been reduced to
zero, the Lockout Distribution Percentage will be equal to 100%.
Notional Amount -- With respect to the Fixed Strip Certificates as of
any distribution date prior to the distribution date in _______, the sum of:
o the lesser of:
o $________ and
o the aggregate Certificate Principal Balance of the
Class A Certificates on that distribution date and
o the lesser of:
o $_________ and
o the aggregate Certificate Principal Balance of the
_____ Certificates on that distribution date.
The Notional Amount of the Fixed Strip Certificates as of any
distribution date after the distribution date in ________ will be equal to $0.
References in this prospectus supplement to the Notional Amount are used solely
for some calculations and do not represent the right of the Fixed Strip
Certificates to receive distributions allocable to principal.
Outstanding Overcollateralization Amount -- With respect to any
distribution date, the excess, if any, of:
o the aggregate Stated Principal Balances of the home equity
loans immediately following that distribution date over
o the Certificate Principal Balance of the Class A Certificates
as of that date, after taking into account the payment to the
Class A Certificates of the amounts described in clauses
(2)(A)-(D) of the definition of Class A Principal Distribution
Amount on that distribution date.
Overcollateralization Amount Target -- The required level of the
Outstanding Overcollateralization Amount with respect to a distribution date.
Overcollateralization Increase Amount -- Any amount of Excess Cash Flow
actually applied as an accelerated payment of principal on the Class A
Certificates.
Overcollateralization Reduction Amount -- For any distribution date,
the lesser of:
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<PAGE> 58
o the Excess Overcollateralization Amount; and
o the amount available for distribution specified in clauses
(2)(A)-(C) of the definition of Class A Principal Distribution
Amount on that distribution date.
Realized Loss Distribution Amount -- For any distribution date, to the
extent covered by Excess Cash Flow for that distribution date, as described in
this prospectus supplement under "--Overcollateralization Provisions", (A) 100%
of the principal portion of any Realized Losses, other than Excess Loss Amounts,
incurred, or deemed to have been incurred, on any home equity loans in the
related collection period, plus (B) any Realized Losses, other than any Excess
Loss Amounts, remaining undistributed from any preceding distribution date,
together with interest from the date initially distributable to the date paid,
provided, that any Realized Losses shall not be required to be paid to the
extent that the Realized Losses were paid on the Class A Certificates by means
of a draw on the policy or were reflected in the reduction of the Outstanding
Overcollateralization Amount.
Senior Interest Distribution Amount -- On any distribution date, the
aggregate amount of Accrued Certificate Interest to be distributed to the
holders of the offered certificates for that distribution date.
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ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in some limited circumstances, the globally offered Household
Home Equity Loan Trust ________, Closed-End Home Equity Loan Asset Backed
Certificates, Series _______: Class A- 1, Class A-2 and Class IO Certificates,
or Global Securities, will be available only in book-entry form. Investors in
the Global Securities may hold these Global Securities through any of DTC,
Cedelbank or Euroclear. The Global Securities will be tradable 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 Cedelbank and
Euroclear will be conducted in the ordinary way in accordance with the normal
rules and operating procedures of Cedelbank 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 Cedelbank customers or Euroclear
and DTC participants holding the Global Securities will be effected on a
delivery-against-payment basis through the respective depositaries of Cedelbank
and Euroclear, in that capacity, and as DTC participants.
Beneficial owners of Global Securities that are Non-U.S. Persons will
be subject to U.S. withholding taxes unless the beneficial owners meet some
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 participants and indirect participants in DTC. As a result, Cedelbank
and Euroclear will hold positions on behalf of their customers and participants,
respectively, through their relevant depositary which in turn will hold these
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 Cedelbank 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
Because the purchaser determines the place of delivery, it is important
to establish at the time of the trading of any Global Securities where both the
purchaser's and the seller's accounts are located to ensure that settlement can
be made on the desired value date.
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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 Cedelbank Customers and/or Euroclear Participants.
Secondary market trading between Cedelbank customers and/or Euroclear
participants will be settled using the procedures applicable to conventional
eurobonds in same-day funds.
Trading between DTC Participant Sellers and Cedelbank Customer
Purchasers or Euroclear Participant Purchasers. When Global Securities are to be
transferred from the account of a DTC participant to the account of a Cedelbank
customer or a Euroclear participant, the purchaser must send instructions to
Cedelbank or Euroclear through a Cedelbank customer or Euroclear participant at
least one business day prior to settlement. Cedelbank or Euroclear, as the case
may be, will instruct the relevant depositary, 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 the 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 depositary 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 Cedelbank customer'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 Cedelbank or Euroclear cash debt will be valued
instead as of the actual settlement date.
Cedelbank customers and Euroclear participants will need to provide the
funds necessary to process same-day funds settlement to the respective clearing
systems. The most direct means of providing the funds is to pre-position funds
for settlement, either from cash on hand or from existing lines of credit, as
would be done for any settlement occurring within Cedelbank or Euroclear. Under
this approach, a purchaser may take on credit exposure to Cedelbank or Euroclear
until the Global Securities are credited to its account one day later.
Alternatively, if Cedelbank or Euroclear has extended a line of credit to a
purchaser, Cedelbank customers or Euroclear participants can elect not to
pre-position funds and instead to finance settlement by drawing upon that line
of credit. Under this procedure, Cedelbank customers 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 the overdraft charges, although the result will depend on each Cedelbank
customer's or Euroclear participant's particular cost of funds. Because
settlements occur during New York business hours, DTC participants can employ
their usual procedures for crediting Global Securities to the applicable
European depositary for the benefit of Cedelbank customers 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 Cedelbank Customer Sellers or Euroclear Participant
Sellers and DTC Participant Purchasers. Due to time zone differences in their
favor, Cedelbank customers and Euroclear participants may employ their customary
procedures for transactions in which Global
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<PAGE> 61
Securities are to be transferred by the applicable clearing system, through the
applicable depositary, to a DTC participant. The seller must send instructions
to Cedelbank or Euroclear through a Cedelbank customer or Euroclear participant
at least one business day prior to settlement. Cedelbank or Euroclear will
instruct the applicable depositary, 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 the
accrual period and a year assumed to consist to 360 days. For transactions
settling on the 31st of a given month, payment will include interest accrued to
and excluding the first day of the following month. Payment will be reflected in
the account of the Cedelbank customer or Euroclear participant the following
business day, and receipt of the cash proceeds in the Cedelbank customer's or
Euroclear participant's account will be back-valued to the value date, which
would be the preceding day, when settlement occurred in New York. If the
Cedelbank customer or Euroclear participant has a line of credit with its
clearing system and elects to draw on that line of credit in anticipation of
receipt of the sale proceeds in its account, the back-valuation may be
substantially reduce or offset any overdraft charges incurred during that
one-day period. If settlement is not completed on the intended value date,
receipt of the cash proceeds in the Cedelbank customer's or Euroclear
participant's account would instead be valued as of the actual settlement date.
Finally, day traders that use Cedelbank or Euroclear and purchase
Global Securities from DTC participants for delivery to Cedelbank customers or
Euroclear participants should note that these trades will automatically fail on
the sale side unless affirmative action is taken. At least three techniques
should be readily available to eliminate this potential problem:
o borrowing through Cedelbank or Euroclear for one day, until
the purchase side of the trade is reflected in their Cedelbank
or Euroclear accounts, in accordance with the clearing
system's customary procedures;
o 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 the Cedelbank or Euroclear account in order to
settle the sale side of the trade; or
o 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 Cedelbank customer or Euroclear participant.
MATERIAL U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding these securities
through Cedelbank or Euroclear, or through DTC if the holder has an address
outside the U.S., will be subject to the 30% U.S. withholding tax that generally
applies to payments of interest, including original issue discount, on
registered debt issued by U.S. Persons, unless:
o 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 the
beneficial owner and the U.S. entity required to withhold tax
complies with applicable certification requirements and
o the beneficial owner takes one of the following steps to
obtain an exemption or reduced tax rate:
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Exemption for Non-U.S. Persons (Form W-8). Beneficial owners of Global
Securities that are Non-U.S. Persons can obtain a complete exemption from the
withholding tax by filing a signed Form W-8 (Certificate of Foreign Status) or
any successor form. If the information shown on Form W-8 changes, a new Form W-8
must be filed within 30 days of the change.
Exemption for Non-U.S. Persons with effectively connected income (Form
4224). A Non-U.S. Person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its conduct
of a trade or business in the United States, can obtain an exemption from the
withholding tax by filing Form 4224 (Exemption from Withholding of Tax on Income
Effectively Connected with the Conduct of a Trade or Business in the United
States) or any successor form.
Exemption or reduced rate for Non-U.S. Persons resident in treaty
countries (Form 1001). A 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 (Holdership, Exemption or
Reduced Rate Certificate) or any successor form. 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 or any successor form. Form 1001 may be filed by
certificateholders 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 holder of a Global
Security or, in the case of a Form 1001 or a Form 4224 filer, his or her agent,
files by submitting the appropriate form to the person through whom it holds the
security, the clearing agency, in the case of persons holding directly on the
books of the clearing agency. Form W-8 and Form 1001 are effective for three
calendar years and Form 4224 is effective for one calendar year. The term "U.S.
Person" means:
o a citizen or resident of the United States,
o a corporation, partnership or other entity created or
organized in, or under the laws of, the United States, any
state thereof, or the District of Columbia, except in the case
of a partnership, to the extent provided in Treasury
regulations, or any political subdivision thereof, or
o an estate that is described in Section 7701(a)(30)(D) of the
Internal Revenue Code, or a trust that is described in Section
7701(a)(30)(E) of the Internal Revenue Code.
The term "Non-U.S. Person" means any person who is not a U.S. Person.
This summary does not address all aspects of U.S. Federal income tax withholding
that may be relevant to foreign beneficial owners 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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HFC REVOLVING CORPORATION
$_________________
Closed-End Home Equity Loan Asset Backed Certificates, Series _________
PROSPECTUS SUPPLEMENT
[Underwriter]
You should rely only on the information contained or incorporated by reference
in this prospectus supplement and the accompanying prospectus. We have not
authorized anyone to provide you with different information.
We are not offering the certificates offered in this prospectus supplement in
any state where the offer is not permitted.
Dealers will be required to deliver a prospectus supplement and prospectus when
acting as underwriters of the certificates offered hereby and with respect to
their unsold allotments or subscriptions. In addition, all dealers selling the
certificates, whether or not participating in this offering, may be required to
deliver a prospectus supplement and prospectus until _______________.
<PAGE> 64
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the SEC is
effective. This prospectus is not an offer to sell these securities and it is
not soliciting an offer to buy these securities in any state where the offer or
sale is not permitted.
SUBJECT TO COMPLETION, DATED AUGUST 6, 1999
PROSPECTUS
HOME EQUITY LOAN ASSET BACKED CERTIFICATES
HFC REVOLVING CORPORATION
DEPOSITOR
HOUSEHOLD FINANCE CORPORATION
MASTER SERVICER
The depositor may periodically form separate trusts to issue certificates in
series, backed by the assets of that trust.
Offered Certificates The certificates of any series will represent
interests in a trust and will be paid only
from the assets of that trust. Each series may
include multiple classes of certificates with
differing payment terms and priorities. Credit
enhancement may be provided for one or more series of
certificates.
Collateral Assets Each trust will consist primarily of:
o home equity loans secured by first or junior liens on one-to
four-family properties originated or acquired under the home equity
program;
o securities and whole or partial participations in these home equity
loans; and
o other types of assets, as described in the related prospectus
supplement.
Neither the SEC nor any state securities commission has approved or disapproved
of these certificates or determined that this prospectus is accurate or
complete. Any representation to the contrary is a criminal offense.
______________________, 1999
<PAGE> 65
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS
PROSPECTUS AND THE ACCOMPANYING PROSPECTUS SUPPLEMENT
We provide information to you about the certificates in two separate documents
that provide progressively more detail:
o this prospectus, which provides general information, some of
which may not apply to your series of certificates; and
o the accompanying prospectus supplement, which describes the
specific terms of your series of certificates.
If the description of your certificates in the accompanying prospectus
supplement differs from the related description in this prospectus, you should
rely on the information in that prospectus supplement.
You should rely only on the information provided in this prospectus and the
accompanying prospectus supplement, including the information incorporated by
reference. See "Additional Information," "Reports to Certificateholders" and
"Incorporation of Certain Information by Reference" in this Prospectus. Unless
otherwise specified in the related prospectus supplement, you can request
information incorporated by reference from HFC Revolving Corporation by calling
us at (847) 564- 6335 or writing to us at 2700 Sanders Road, Prospect Heights,
Illinois 60070, attn: corporate secretary. We have not authorized anyone to
provide you with different information. We are not offering the certificates in
any state where the offer is not permitted.
Some capitalized terms used in this prospectus are defined in the attached
Glossary.
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TABLE OF CONTENTS
<TABLE>
<S> <C>
Introduction...........................................................................................................6
The Trusts.............................................................................................................6
General...........................................................................................................6
Home Equity Loan Information......................................................................................8
Closed-End Loans.................................................................................................11
Home Equity Revolving Credit Loans...............................................................................13
HFC Home Equity Lending Program.......................................................................................16
General..........................................................................................................16
Underwriting Standards ..........................................................................................16
HFC's Underwriting Procedures Relating to Home Equity Loans......................................................17
Representations and Warranties Concerning the Home Equity Loans..................................................18
HFC Servicing Procedures..............................................................................................19
Description of the Certificates.......................................................................................20
General..........................................................................................................20
Form of Certificates.............................................................................................21
Assignment of Trust Assets.......................................................................................23
Excess Spread and Excluded Spread................................................................................25
Payments on Home Equity Loans; Deposits to Collection Account....................................................25
Withdrawals from the Collection Account..........................................................................27
Distributions....................................................................................................28
Principal and Interest on the Certificates.......................................................................29
Advances.........................................................................................................30
Funding Account..................................................................................................30
Reports to Certificateholders....................................................................................31
Collection and Other Servicing Procedures .......................................................................32
Special Servicing and Special Servicing Agreements...............................................................34
Realization Upon Defaulted Home Equity Loans.....................................................................35
Hazard Insurance and Related Claims..............................................................................36
Description of Credit Enhancement.....................................................................................37
Financial Guaranty Insurance Policy..............................................................................39
Letter of Credit.................................................................................................39
Special Hazard Insurance Policies................................................................................39
Bankruptcy Bonds.................................................................................................40
Subordination....................................................................................................40
Overcollateralization............................................................................................41
Cross Support....................................................................................................42
Corporate Guaranties.............................................................................................42
Reserve Funds....................................................................................................42
Maintenance of Credit Enhancement................................................................................43
Reduction or Substitution of Credit Enhancement..................................................................44
Other Financial Obligations Related to the Certificates...............................................................44
</TABLE>
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<TABLE>
<S> <C>
Swaps and Yield Supplement Agreements............................................................................44
Purchase Obligations.............................................................................................45
The Depositor.........................................................................................................45
Household Finance Corporation.........................................................................................46
The Pooling and Servicing Agreement...................................................................................46
Servicing and Administration.....................................................................................47
Evidence as to Compliance........................................................................................47
Certain Matters Regarding the Master Servicer and the Depositor..................................................48
Events of Default................................................................................................49
Rights Upon Event of Default.....................................................................................49
Amendment........................................................................................................50
Termination; Retirement of Certificates..........................................................................52
The Trustee......................................................................................................53
Yield and Prepayment Considerations...................................................................................53
Legal Aspects of Home Equity Loans and Related Matters................................................................59
General..........................................................................................................59
Cooperative Loans................................................................................................60
Tax Aspects of Cooperative Ownership.............................................................................61
Foreclosure on Home Equity Loans.................................................................................62
Foreclosure on Shares of Cooperatives............................................................................63
Rights of Redemption.............................................................................................65
Anti-Deficiency Legislation and Other Limitations on Lenders.....................................................65
Environmental Legislation........................................................................................66
Enforceability of Certain Provisions.............................................................................68
Applicability of Usury Laws......................................................................................69
Alternative Mortgage Instruments.................................................................................69
Soldiers' and Sailors' Civil Relief Act of 1940..................................................................70
Forfeitures in Drug and RICO Proceedings.........................................................................70
Junior Mortgages; Rights of Senior Mortgagees....................................................................71
Negative Amortization Loans......................................................................................72
Material Federal Income Tax Consequences..............................................................................73
General..........................................................................................................73
REMICs...........................................................................................................73
FASIT............................................................................................................93
State and Other Tax Consequences......................................................................................97
Employee Benefit Plan Considerations..................................................................................97
Plan Assets Regulations..........................................................................................97
Prohibited Transaction Exemptions................................................................................99
Amendment to Exemption for Funding Accounts.....................................................................102
Insurance Company General Accounts..............................................................................103
Reporting and Disclosure........................................................................................105
Exempt Plans....................................................................................................106
</TABLE>
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<TABLE>
<S> <C>
Tax Exempt Investors............................................................................................106
Consultation with Counsel.......................................................................................106
Legal Investment Matters.............................................................................................106
Use of Proceeds......................................................................................................107
Methods of Distribution..............................................................................................107
Legal Matters........................................................................................................109
Financial Information................................................................................................109
Additional Information...............................................................................................109
Reports to Certificateholders........................................................................................109
Incorporation of Certain Information by Reference....................................................................110
Glossary ............................................................................................................111
</TABLE>
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INTRODUCTION
The home equity loan asset backed certificates offered by this
prospectus may be sold from time to time in series, as described in the related
supplement to this prospectus, each, a prospectus supplement. Each series of
certificates will represent in the aggregate the entire beneficial ownership
interest, excluding any interest retained by the depositor or any other entity
specified in the related prospectus supplement, in a trust consisting primarily
of a segregated pool of one- to four-family, first or junior lien home equity
loans, acquired from one or more institutions affiliated or unaffiliated with
Household Finance Corporation ("HFC"). Each series of certificates will be
issued under a pooling and servicing agreement among HFC, the depositor and the
trustee specified in the related prospectus supplement.
THE TRUSTS
GENERAL
The home equity loans and other assets described below and in the
related prospectus supplement will be held in a trust for the benefit of the
holders of the related series of certificates under a pooling and servicing
agreement as described in this section and in the related prospectus supplement.
As specified in the accompanying prospectus supplement, each series of
certificates in the aggregate will represent the entire beneficial ownership
interest in a pool of home equity loans that is referred to as the home equity
loan pool. The home equity loan pool will consist primarily of the home equity
loans, or certain balances thereof, excluding any interest retained by the
depositor or any other entity specified in the related prospectus supplement,
evidenced by promissory notes, or mortgage notes, secured by mortgages or deeds
of trust or other similar security instruments creating a first or junior lien
on one- to four-family properties, or interests in the home equity loans, which
may include mortgage pass-through certificates, or mortgage securities,
evidencing interests in home equity loans.
The home equity loans will either be:
o loans where the principal amount is advanced in full at
origination, or closed-end loans; or
o home equity revolving lines of credit, or revolving credit
loans.
As specified in the related prospectus supplement, each trust will
consist primarily of:
o attached or detached one-family dwelling units;
o two- to four-family dwelling units;
o condominiums;
o townhouses;
o row houses;
o individual units in planned-unit developments and modular
pre-cut/panelized housing, or modular housing;
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o manufactured homes which are permanently affixed to the real
property on which they are located, or manufactured homes; and
o the fee, leasehold or other interests in the underlying real
property.
The mortgaged properties will be located in any of the fifty states,
the District of Columbia or the commonwealth of Puerto Rico and may include
vacation and second homes. As specified in the related prospectus supplement
relating to a series of certificates, a home equity loan pool may contain
Cooperative Loans evidenced by 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. As used in this prospectus, unless the context
indicates otherwise, "home equity loans" includes Cooperative Loans, "mortgaged
properties" includes shares in the related Cooperative and the related
proprietary leases or occupancy agreements securing Cooperative Notes, "mortgage
notes" includes Cooperative Notes and "mortgages" includes a security agreement
with respect to a Cooperative Note. In connection with a series of certificates
backed by home equity revolving credit loans, if the related prospectus
supplement indicates that the home equity loan pool consists of certain balances
of the home equity revolving credit loans, then the term "home equity loans" in
this prospectus refers only to those balances.
The prospectus supplement for a series of certificates will describe
the specific manner in which certificates of that series issued under a
particular pooling and servicing agreement will evidence specified beneficial
ownership interests in a separate trust created under that pooling and servicing
agreement. A trust will consist of:
o the home equity loans, and the related mortgage documents, or
interests in them, including any mortgage securities,
underlying a particular series of certificates that are
subject to the pooling and servicing agreement, exclusive of,
if specified in the related prospectus supplement, any
Excluded Spread or other interest retained by the depositor or
any of its affiliates in each home equity loan;
o assets, including all payments and collections derived from
the home equity loans or mortgage securities due after the
related cut-off date, as from time to time are identified as
deposited in the Collection Account;
o property acquired by foreclosure of the home equity loans or
deed in lieu of foreclosure;
o hazard insurance policies as described in this prospectus, if
any, and portions of the related proceeds; and
o any combination, if applicable, of a letter of credit,
financial guaranty insurance policy, special hazard insurance
policy, bankruptcy bond, certificate insurance policy,
derivative products, surety bond or other type of credit
enhancement as described under "Description of Credit
Enhancement."
The related prospectus supplement will describe the material terms and
conditions of certificates of interest or participations in home equity loans to
the extent they are included in the related trust.
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<PAGE> 71
HOME EQUITY LOAN INFORMATION
Each home equity loan will be selected by the depositor for inclusion
in a home equity loan pool from among those transferred by the sellers to the
depositor, and then by the depositor to the trust, either directly or through
its affiliates, or from banks, savings and loan associations, mortgage bankers,
investment banking firms, the FDIC and other home equity loan originators or the
depositor, all as described below under "HFC Home Equity Lending Program." If a
home equity loan pool is composed of home equity loans acquired by the depositor
directly from unaffiliated sellers, the related prospectus supplement will
specify the extent of home equity loans so acquired. The characteristics of the
home equity loans are as described in the related prospectus supplement. No more
than five percent (5%) of the home equity loans, as they are constituted as of
the cut-off date, by aggregate principal balance as of the cut-off date will
have characteristics that deviate from those characteristics described in the
related prospectus supplement. Other home equity loans available for acquisition
by the depositor may have characteristics which would make them eligible for
inclusion in a home equity loan pool but were not selected for inclusion in a
home equity loan pool at that time.
Any seller or HFC may retain or acquire any Excluded Balances with
respect to any related home equity revolving credit loans, or any loan secured
by a mortgage senior or subordinate to any home equity loan included in any home
equity loan pool.
If specified in the related prospectus supplement, the trust underlying
a series of certificates may include mortgage securities. The mortgage
securities may have been issued previously by the depositor or an affiliate, a
financial institution or other entity engaged in the business of mortgage
lending or a limited purpose corporation organized for the purpose of, among
other things, acquiring and depositing home equity loans into trusts, and
selling beneficial interests in trusts. The mortgage securities will typically
be similar to certificates offered under this prospectus. As to any series of
certificates, the related prospectus supplement will include a description of
any mortgage securities and any related credit enhancement, and the home equity
loans underlying the mortgage securities will be described together with any
other home equity loans included in the home equity loan pool relating to the
series. As to any series of certificates, as used in this prospectus the term
"home equity loan pool" includes the home equity loans underlying the mortgage
securities. Notwithstanding any other reference in this prospectus to the master
servicer, with respect to a series of certificates as to which the trust
includes mortgage securities, the entity that services and administers the
mortgage securities on behalf of the holders of the certificates may be referred
to as the "manager." The manager, if any, will be identified in the related
prospectus supplement. References in this prospectus to advances to be made and
other actions to be taken by the master servicer in connection with the home
equity loans may include advances made and other actions taken under the terms
of the mortgage securities.
The prospectus supplement for each series of certificates will contain
information appropriate to describe the type of home equity loans which will be
included in the related home equity loan pool. Each prospectus supplement
applicable to a series of certificates will include information, to the extent
then available to the depositor, as of the cut-off date, on an approximate
basis. The information may include, if applicable:
o the aggregate principal balance of the home equity loans;
o the type of property securing the home equity loans and
related lien priority;
o the original or modified and/or remaining terms to maturity of
the home equity loans;
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o the range of principal balances of the closed-end loans at
origination or modification;
o the earliest origination or modification date and latest
maturity date of the home equity loans;
o the loan-to-value ratios, or LTV ratios, or combined LTV
ratios of the home equity loans, as applicable;
o the interest rate or range of interest rates borne by the home
equity loans;
o if the home equity loans are adjustable rate mortgage loans,
or ARM loans, the applicable index, the range of gross
margins, the weighted average gross margin, the frequency of
adjustments and maximum loan rate;
o the geographical distribution of the mortgaged properties;
o the percent of ARM loans; and
o if the home equity loans are revolving credit loans, the
aggregate credit limits and the Credit Utilization Rates of
the related credit line agreements.
A current report on Form 8-K will be available upon request to holders
of the related series of certificates and will be filed, together with the
related pooling and servicing agreement, with the SEC within fifteen days after
the initial issuance of the certificates. The composition and characteristics of
a home equity loan pool containing home equity revolving credit loans may change
from time to time as a result of any Draws made after the related cut-off date
under the related credit line agreements that are included in the home equity
loan pool.
As to each home equity loan, the combined LTV ratio generally will be
the ratio, expressed as a percentage, of:
o the sum of (1) the original principal balance or the credit
limit, as applicable, and (2) the principal balance of any
related senior mortgage loan at origination of the home equity
loan together with any mortgage loan subordinate thereto,
divided by
o the appraised value of the related mortgaged property, a
Statistical Valuation or the Stated Value.
The appraised value for any home equity loan will be the appraised
value of the related mortgaged property determined in the appraisal used in the
origination of the home equity loan, which may have been obtained at an earlier
time; provided that if the home equity loan was originated simultaneously with
or not more than 12 months after a senior lien on the related mortgaged
property, the appraised value will be the lesser of the appraised value at the
origination of the senior lien and the sales price for the mortgaged property.
Mortgaged properties consisting of modular housing--also known as
pre-assembled, prefabricated, sectional or pre-built homes--are factory built
and constructed in two or more three dimensional sections, including interior
and exterior finish, plumbing, wiring and mechanical systems. Upon completion,
the modular home is transported to the property site to be joined together on a
permanent foundation.
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Mortgaged properties consisting of manufactured homes must be legally
classified as real estate, have the wheels and axles removed and be attached to
a permanent foundation and may not be located in a mobile home park. The
manufactured homes will also have certain other characteristics as specified in
the related prospectus supplement.
A home equity loan pool may include home equity loans that have been
modified. The modifications may include conversions from an adjustable to a
fixed interest rate or other changes in the related mortgage note. If a home
equity loan is a modified home equity loan, references to origination shall be
deemed to be references to the date of modification.
The depositor will cause the home equity loans or their Trust Balances
constituting each home equity loan pool, or mortgage securities evidencing
interests therein, to be assigned to the trustee named in the related prospectus
supplement, for the benefit of the holders of all of the certificates of a
series. The master servicer will service the home equity loans, either directly
or through other mortgage servicing institutions, or subservicers, which may be
an affiliate of the master servicer, under a pooling and servicing agreement and
will receive a fee for its services. See "HFC Home Equity Lending Program" and
"Description of the Certificates" in this prospectus. 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 the home
equity loans. In addition to or in place of the master servicer for a series of
certificates, the related prospectus supplement may identify a certificate
administrator for the trust. The certificate administrator may be an affiliate
of the depositor. All references in this prospectus to "master servicer" and any
discussions of the servicing and administration functions of the master servicer
will also apply to the certificate administrator to the extent applicable.
The depositor's assignment of the home equity loans or the Trust
Balances to the trustee will be without recourse. See "Description of the
Certificates -- Assignment of Trust Assets." The master servicer's obligations
with respect to the home equity loans will consist principally of its
contractual servicing obligations under the related pooling and servicing
agreement. These include its obligation to enforce purchase obligations of the
depositor and other obligations of subservicers, as described in this prospectus
under "HFC Home Equity Lending Program -- Representations and Warranties
Concerning the Home Equity Loans," and " HFC Servicing Procedures" and
"Description of the Certificates --Assignment of Trust Assets," and its option
to make certain Advances, if applicable, in the event of delinquencies in
payments on or with respect to the home equity loans in amounts described in
this prospectus under "Description of the Certificates -- Advances," or under
the terms of any mortgage securities, as specified in the related prospectus
supplement. With respect to home equity revolving credit loans, the master
servicer, or any other entity specified in the related prospectus supplement,
may advance funds to borrowers in respect of Draws made after the related
cut-off date. The option of the master servicer to make Advances on the
closed-end loans will be limited to amounts which the master servicer believes
ultimately would be reimbursable out of the proceeds of liquidation of the home
equity loans or any other amounts that would otherwise be payable to
certificateholders. See "Description of the Certificates -- Advances."
The proceeds of the home equity loans may be used by the borrower to
purchase or improve the related mortgaged properties, may be retained by the
related borrowers or may be used for purposes unrelated to the mortgaged
properties.
A mortgaged property securing a home equity loan may be subject to the
senior liens of one or more conventional mortgage loans at the time of
origination and may be subject to one or more junior liens at the time of
origination or thereafter. Home equity loans will not be required by the
depositor
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to be covered by a primary mortgage guaranty insurance policy insuring against
default on the home equity loan.
CLOSED-END LOANS
Unless specified below or in the related prospectus supplement, all of
the closed-end loans in a home equity loan pool will be secured by mortgaged
properties located in any of the 50 states, the District of Columbia or the
Commonwealth of Puerto Rico and be of one or more types of the following types
of home equity loans described below:
o fixed-rate, fully-amortizing closed-end loans providing for
level monthly payments of principal and interest and terms to
maturity of generally 5, 10, 15, 20, 25 or 30 years at
origination or modification as specified in the related
prospectus supplement;
o fully-amortizing ARM loans having an original or modified term
to maturity of not more than 30 years with a related interest
rate which usually adjusts initially after a specified period
subsequent to the initial payment date and thereafter at
either one- month, three-month, six-month, one-year or other
intervals, with corresponding adjustments in the amount of
monthly payments, over the term of the home equity loan to
equal the sum of a fixed percentage described in the related
mortgage note, or gross margin, and an index. The related
prospectus supplement will describe the relevant index and the
highest, lowest and weighted average gross margin with respect
to the ARM loans in the related home equity loan pool. The
related prospectus supplement will also indicate any periodic
or lifetime limitations on changes in any per annum interest
rate at the time of any adjustment. An ARM loan may include a
provision that allows the borrower to convert the adjustable
mortgage rate to a fixed rate at specified times during the
term of the ARM loan. The index for a particular home equity
loan pool will be specified in the related prospectus
supplement and may include one of the following indices:
o the weekly average yield on U.S. Treasury securities
adjusted to a constant maturity of either six months
or one year;
o the weekly auction average investment yield of U.S.
Treasury bills of six months;
o the daily Bank Prime Loan rate made available by the
Federal Reserve Board;
o the cost of funds of member institutions for a
specified Federal Home Loan Bank ___________________;
o the interbank offered rates for U.S. dollar deposits
in the London market, each calculated as of a date
prior to each scheduled interest rate adjustment date
which will be specified in the related prospectus
supplement; or
o the weekly average of secondary market interest rates
on six-month negotiable certificates of deposit;
o Balloon Loans;
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o convertible home equity loans, Cooperative Loans or modified
home equity loans; or
o similar home equity loans with other payment characteristics
as described in the related prospectus supplement.
As specified in the related prospectus supplement, a portion of the
closed-end loans underlying a series of certificates may be Simple Interest Home
Equity Loans. Other closed-end loans may be Actuarial Home Equity Loans.
A Simple Interest Home Equity Loan provides the amortization of the
amount financed under the home equity loan over a series of equal monthly
payments, except, in the case of a Balloon Loan, the final payment. Each monthly
payment consists of an installment of interest which is calculated on the basis
of the outstanding principal balance of the home equity loan multiplied by the
stated interest rate and further multiplied by a fraction, with the numerator
equal to the number of days in the period elapsed since the preceding payment of
interest was made and the denominator equal to the number of days in the annual
period for which interest accrues on the home equity loan. As payments are
received under a Simple Interest Home Equity Loan, the amount received is
applied first to interest accrued to the date of payment and then the remaining
amount is applied to pay any unpaid fees and then to reduce the unpaid principal
balance. Accordingly, if a borrower pays a fixed monthly installment on a Simple
Interest Home Equity Loan before its scheduled due date, the portion of the
payment allocable to interest for the period since the preceding payment was
made will be less than it would have been had the payment been made as
scheduled, and the portion of the payment applied to reduce the unpaid principal
balance will be correspondingly greater. Conversely, if a borrower pays a fixed
monthly installment after its scheduled due date, the portion of the payment
allocable to interest for the period since the preceding payment was made will
be greater than it would have been had the payment been made as scheduled, and
the remaining portion, if any, of the payment applied to reduce the unpaid
principal balance will be correspondingly less. If each scheduled payment under
a Simple Interest Home Equity Loan is made on or prior to its scheduled due
date, the principal balance of the home equity loan will amortize more quickly
than scheduled. However, if the borrower consistently makes scheduled payments
after the scheduled due date, the home equity loan will amortize more slowly
than scheduled. If a Simple Interest Home Equity Loan is prepaid, the borrower
is required to pay interest only to the date of prepayment. The variable
allocations among principal and interest of a Simple Interest Home Equity Loan
may effect the distributions of principal and interest on the certificates, as
described in the related prospectus supplement.
A home equity loan pool may contain ARM loans which allow the borrowers
to convert the adjustable rates on the home equity loans to a fixed rate at some
point during the life of such home equity loans, usually, not later than six to
ten years subsequent to the date of origination, depending upon the length of
the initial adjustment period. If specified in the related prospectus
supplement, upon any conversion, the depositor or HFC will purchase the
converted home equity loan as and to the extent described in the related
prospectus supplement. Alternatively, if specified in the related prospectus
supplement, the depositor, HFC or another party specified therein may agree to
act as remarketing agent with respect to the converted home equity loans and, in
its capacity, use its best efforts to arrange for the sale of converted home
equity loans under specified conditions. Upon the failure of any party so
obligated to purchase any converted home equity loan, the inability of any
remarketing agent to arrange for the sale of the converted home equity loan and
the unwillingness of the remarketing agent to exercise any election to purchase
the converted home equity loan for its own account, the related home equity loan
pool will thereafter include both fixed rate and adjustable rate home equity
loans. If specified in the related prospectus supplement, the inclusion of a
converted home equity loan in a home equity loan pool may adversely affect the
certificateholders by restricting the
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ability of the related pass-through rate or rates to adjust to the extent
intended by the adjustable pass-through rate.
The closed-end loans may provide for payment of a prepayment charge if
the related borrower prepays the closed-end loan within a specified time period
and for the payment of other fees, which may be waived by the master servicer.
HOME EQUITY REVOLVING CREDIT LOANS
The home equity revolving credit loans will be originated under credit
line agreements subject to a maximum amount or credit limit. Interest on each
home equity revolving credit loan will be calculated based on the average daily
balance outstanding during the billing cycle and the billing cycle generally
will be the calendar month preceding a due date. Each home equity revolving
credit loan will have an interest rate that is either fixed or subject to
adjustment on the day specified in the related mortgage note, which may be daily
or monthly, equal to the sum of the index on the day specified in the related
prospectus supplement, and the gross margin specified in the related mortgage
note, which may vary under circumstances if specified in the related prospectus
supplement, subject to the maximum rate specified in the mortgage note and the
maximum rate permitted by applicable law. Notwithstanding the foregoing, a home
equity loan may have an introductory rate that is lower than the rate that would
be in effect if the applicable index and gross margin were used to determine the
interest rate and as a result of the introductory rate, interest distributions
on the certificates may initially be lower than expected. This type of loan is
known as a teaser loan. Commencing on their first adjustment date, the interest
rates on the teaser loans will be based on the applicable index and gross
margin.
Unless specified in the related prospectus supplement, each home equity
revolving credit loan will have a term to maturity from the date of origination
of not more than 30 years. The borrower for each home equity revolving credit
loan may make a Draw under the related credit line agreement at any time during
the Draw Period. Unless specified in the related prospectus supplement, the Draw
Period will not be more than 15 years. Unless specified in the related
prospectus supplement, with respect to each home equity revolving credit loan,
if the Draw Period is less than the full term of the home equity revolving
credit loan, the related borrower will not be permitted to make any Draw during
the Repayment Period. The borrower for each home equity revolving credit loan
will be obligated to make monthly payments on the home equity revolving credit
loan in a minimum amount as specified in the related mortgage note, which
usually will be the greatest of:
o 1% of the outstanding principal balance of the home equity
loan;
o the accrued interest; or
o $100.
The borrower for each home equity loan will be obligated to pay off the
remaining account balance on the related maturity date, which may be a
substantial principal amount. The maximum amount of any Draw with respect to any
home equity revolving credit loan is equal to the excess, if any, of the credit
limit over the principal balance outstanding under the mortgage note at the time
of the Draw. Unless specified in the related prospectus supplement, Draws made
after the related cut-off date will be excluded from the home equity loan pool.
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Unless specified in the related prospectus supplement, with respect to
each home equity revolving credit loan:
o the finance charge for any billing cycle generally will be
equal to interest accrued on the average daily principal
balance of the home equity loan for the billing cycle at the
related interest rate;
o the account balance on any day generally will be the aggregate
of the unpaid principal of the home equity revolving credit
loan outstanding at the beginning of the day, plus all related
Draws funded on that day and outstanding at the beginning of
such day, plus the sum of any unpaid finance charges and fees,
insurance premiums and other charges--collectively, additional
charges, that are due on the home equity loan minus the
aggregate of all payments and credits that are applied to the
repayment of any Draws on such day; and
o the "principal balance" on any day usually will be the related
account balance minus the sum of any unpaid finance charges
and additional charges that are due on the home equity
revolving credit loan.
Payments made by or on behalf of the borrower for each home equity loan
generally will be applied, first, to any unpaid finance charges that are due on
the home equity revolving credit loan, second, to any unpaid additional fees and
charges that are due thereon, and third, to any related principal outstanding.
The mortgaged property securing each home equity revolving credit loan
will be subject to the lien created by the related mortgage in respect of the
outstanding principal balance of each related Draw or portion thereof that is
not included in the related home equity loan pool, whether made on or prior to
the related cut-off date or thereafter. The lien will be the same rank as the
lien created by the mortgage in respect of the home equity revolving credit
loan. The depositor, an affiliate of the depositor or an unaffiliated seller may
have an interest in any Draw or portion thereof excluded from the home equity
loan pool.
Each home equity revolving credit loan may be prepaid in full or in
part at any time, and the related borrower will have the right during the
related Draw Period to make a Draw in the amount of any prepayment made with
respect to the home equity loan. The mortgage note or mortgage related to each
home equity revolving credit loan will usually contain a customary "due-on-sale"
clause.
As to each home equity loan, the borrower's rights to receive Draws
during the Draw Period may be suspended, or the credit limit may be reduced, for
cause under a limited number of circumstances, including a materially adverse
change in the borrower's financial circumstances or a non-payment default by the
borrower. However, as to each home equity loan, the suspension or reduction
usually will not affect the payment terms for previously drawn balances. In the
event of default under a home equity loan, at the discretion of the master
servicer, the home equity loan may be terminated and declared immediately due
and payable in full. For this purpose, a default includes:
o the borrower's failure to make any payment as required;
o any action or inaction by the borrower that materially and
adversely affects the mortgaged property or the rights in the
mortgaged property; or
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o fraud or material misrepresentation by a borrower in
connection with the loan.
ALLOCATION OF REVOLVING CREDIT LOAN BALANCES
With respect to any series of certificates backed by home equity
revolving credit loans, the related trust may include either:
o the entire principal balance of each home equity revolving
credit loan outstanding at any time, including balances
attributable to Draws made after the related cut-off date; or
o the Trust Balance of each home equity revolving credit loan.
The related prospectus supplement will describe the specific provisions
by which payments and losses on any home equity revolving credit loan will be
allocated between the Trust Balance and any Excluded Balance. Typically, the
provisions:
o may provide that principal payments made by the borrower will
be allocated between the Trust Balance and any Excluded
Balance either:
o on a pro rata basis;
o first to the Trust Balance until reduced to zero,
then to the Excluded Balance;
o first to the Excluded Balance, then to the Trust
Balance until reduced to zero; or
o in accordance with other specified priorities; and
o will provide that interest payments, as well as liquidation
proceeds or similar proceeds following a default and any
Realized Losses, will be allocated between the Trust Balance
and any Excluded Balance either:
o on a pro rata basis;
o first to the Excluded Balance, then to the Trust
Balance until reduced to zero; or
o in accordance with other specified priorities.
Even where a trust initially includes the entire principal balance of
the home equity revolving credit loans, the pooling and servicing agreement may
provide that after a specified date or upon the occurrence of specified events,
the trust may not include balances attributable to additional Draws made
thereafter. The related prospectus supplement will describe these provisions as
well as the related allocation provisions that would be applicable.
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HFC HOME EQUITY LENDING PROGRAM
GENERAL
HFC and its subsidiaries have originated closed-end fixed and
adjustable rate mortgages since 1972 and have offered home equity revolving
credit loans since 1977.
The home equity loans will have been purchased by the depositor, either
directly or indirectly through HFC, from sellers. The home equity loans will
typically have been originated in accordance with HFC's underwriting standards
or alternative underwriting criteria as described below under "Underwriting
Standards" or as described in the related prospectus supplement.
UNDERWRITING STANDARDS
GENERAL STANDARDS
HFC's underwriting standards are continuously revised based on
opportunities and prevailing conditions in the residential mortgage market, the
consumer lending market and the market for mortgage securities. The home equity
loans may be underwritten by HFC, an affiliate of HFC or a designated third
party. In some circumstances, however, the home equity loans may be underwritten
only by the seller with little or no review performed by HFC. HFC or a
designated third party may perform only sample quality assurance reviews to
determine whether the home equity loans in any home equity loan pool were
underwritten in accordance with applicable standards.
HFC's underwriting standards, as well as any other underwriting
standards that may be applicable to any home equity loans, include a set of
specific criteria under which the underwriting evaluation is made. However, the
application of the underwriting standards does not imply that each specific
criterion was satisfied individually. Rather, a home equity revolving credit
loan will be considered to be originated in accordance with a given set of
underwriting standards if, based on an overall qualitative evaluation, the loan
is in substantial compliance with the underwriting standards. For example, a
home equity loan may be considered to comply with a set of underwriting
standards, even if one or more specific criteria included in the underwriting
standards were not satisfied, if other factors compensated for the criteria that
were not satisfied.
In addition, the depositor may purchase home equity loans which do not
conform to HFC's underwriting standards. A portion of the home equity loans may
be purchased in negotiated transactions, and those negotiated transactions may
be governed by agreements or master commitments relating to ongoing purchases of
home equity loans by HFC from sellers who will represent that the home equity
loans have been originated in accordance with underwriting standards agreed to
by HFC. HFC, on behalf of the depositor or a designated third party, will
normally review only a limited portion of the home equity loans in any delivery
of home equity loans from the related seller for conformity with the applicable
underwriting standards. A portion of the home equity loans may be purchased from
sellers who will represent that the home equity loans were originated under
underwriting standards acceptable to HFC.
The level of review, if any, by HFC or the depositor of any home equity
loan for conformity with the applicable underwriting standards will vary
depending on any one of a number of factors, including:
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o factors relating to the experience and status of the seller;
and
o factors relating to the specific home equity loan, including
the original principal balance or credit limit, as applicable,
the combined LTV ratio, the loan type or loan program, and the
applicable Credit Score of the related borrower used in
connection with the origination of the home equity loan, as
determined based on a credit scoring model acceptable to the
depositor.
Credit scoring models provide a means for evaluating the information
about a prospective borrower that is available from a credit reporting agency.
The underwriting criteria applicable to any program under which the home equity
loans may be originated may provide that qualification for the loan, the level
of review of the loan's documentation, or the availability of various loan
features, including maximum loan amount, maximum LTV ratio, property type and
use and documentation level, may depend on the borrower's Credit Score.
The underwriting standards utilized in negotiated transactions and
master commitments and the underwriting standards applicable to home equity
loans underlying mortgage securities may vary substantially from HFC's
underwriting standards. Those underwriting standards are generally intended to
provide an underwriter with information to evaluate the borrower's repayment
ability and the value of the mortgaged property as collateral. Due to the
variety of underwriting standards and review procedures that may be applicable
to the home equity loans included in any home equity loan pool, the related
prospectus supplement usually will not distinguish among the various
underwriting standards applicable to the home equity loans nor describe any
review for compliance with applicable underwriting standards performed by the
depositor or HFC. Moreover, there can be no assurance that every home equity
loan was originated in conformity with the applicable underwriting standards in
all material respects, or that the quality or performance of home equity loans
underwritten under varying standards will be equivalent under all circumstances.
The depositor may also purchase home equity loans from its affiliates
in accordance with HFC's underwriting standards or as otherwise agreed to by the
depositor. However, in some limited circumstances, the home equity loans may be
employee or preferred customer loans with respect to which, in accordance with
the affiliate's home equity loan programs, income, asset and employment
verifications and appraisals may not have been required. With respect to home
equity loans made under any employee loan program maintained by HFC or its
affiliates, in limited circumstances, preferential interest rates may be
allowed. Neither the depositor nor HFC will review any affiliate's home equity
loans for conformity with HFC's underwriting standards.
HFC'S UNDERWRITING PROCEDURES RELATING TO HOME EQUITY LOANS
The following is a brief description of HFC's underwriting procedures
for full documentation loan programs. All home equity loan applications received
by HFC or its subsidiaries are subjected to a direct credit investigation by the
related seller. This investigation generally includes:
o obtaining and reviewing an independent credit bureau report;
o verifying any senior mortgage balance and payment history,
which may be obtained from credit bureau information provided
it has been updated within two months of the application or,
if not, is obtained in writing or by telephone from the holder
of any senior mortgage;
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o verification of employment, which normally includes obtaining
a W-2 form or pay stub, a minimum of two years of tax returns
for self-employed individuals, or other written or telephone
verification with employers;
o obtaining a title search, depending on the amount financed, to
ensure that all liens, except for any existing senior mortgage
liens, are paid off prior to, or at the time of, the funding
of the home equity loan; and
o obtaining an appraisal (which may be an appraisal using a
statistical data base) of the property, which must be
substantiated by sales data on three comparable properties.
After this investigation is conducted, a decision is made to accept or
reject the loan application. With respect to home equity revolving credit loans,
a credit limit is assigned based on the borrower's ability to pay and an
acceptable combined LTV ratio. Generally, all prospective borrowers must have a
debt-to-income ratio of no greater than 45%, but such requirement may be waived
by senior management. In no event may the debt-to-income ratio exceed 60%. For
purposes of calculating the debt-to-income ratio, debt is defined as the sum of
the senior mortgage payment, including escrow payments for the hazard insurance
premium, real estate taxes, mortgage insurance premium, owners association dues
and ground rents, plus payments on installment and revolving debt that extends
beyond 10 months, including payments on the home equity revolving credit loan
computed based on the credit limit applied for at the then-current loan rate,
and alimony, child support or maintenance payments, and income is defined as
stable monthly gross income from the borrower's primary source of employment,
plus any acceptable secondary income. The determination of an acceptable
combined LTV ratio is based solely upon the credit limit and does not include
certain fees which may be added to the principal balance of the loan. An
acceptable combined LTV ratio is also a function of the real estate's quality,
condition, appreciation history and prospective marketing conditions; however,
the combined LTV ratio generally may not exceed 110%.
HFC and its subsidiaries will not make mortgages behind a negatively
amortizing senior mortgage, except when the senior mortgage is subject to a
maximum permitted indebtedness or the credit limit is $25,000 or less.
Generally, title insurance is obtained for all home equity loans that constitute
a first mortgage or have a credit limit over $50,000.
REPRESENTATIONS AND WARRANTIES CONCERNING THE HOME EQUITY LOANS
The depositor will make a number of representations and warranties to
the trustee regarding the home equity loans. The assignment of the home equity
loans to the trustee will be without recourse, except in the event of a breach
of one of these representations or warranties. The material representations and
warranties state that the schedule of home equity loans is correct, all material
loan documentation exists and is available for inspection, not more than a
specified amount of loans are delinquent, and that the home equity loans were
originated in accordance with applicable law.
If a breach of any representation or warranty occurs in respect of a
home equity loan that materially and adversely affects the interests of the
securityholders in the home equity loan, the depositor may be obligated to
purchase, or cause to be purchased, the unqualified home equity loan from the
trust.
To a limited extent, the depositor may substitute a qualifying
replacement home equity loan for an unqualified home equity loan rather than
repurchase it.
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The master servicer will be required to enforce the purchase or
substitution obligations for the benefit of the trustee and the
certificateholders, following the practices it would employ in its good faith
business judgment if it were the owner of the home equity loan. This purchase or
substitution obligation will not, however, become an obligation of the master
servicer in the event the depositor or the seller fails to honor the obligation.
The foregoing will constitute the sole remedy available to certificateholders or
the trustee for a breach of representation.
HFC SERVICING PROCEDURES
HFC, as master servicer, will be responsible for servicing the home
equity loans as agent for the trust. Certain affiliates of the master servicer
may perform the servicing activities of the master servicer in accordance with
the master servicer's policies and procedures for servicing home equity loans.
Ultimately, however, HFC will remain responsible for the servicing of the home
equity loans, irrespective of any arrangements with affiliates.
With respect to home equity loans, HFC's general policy is to initiate
foreclosure on the mortgaged property only after the home equity loan is more
than two months delinquent, any notices required by law have been sent to the
borrower and the foreclosure is authorized by operating management. Foreclosure
proceedings may be terminated if the delinquency is cured. However, under
certain circumstances, HFC may elect not to commence foreclosure if the
borrower's default is due to special circumstances which are temporary and are
not expected to last beyond a specified period. Similarly, HFC may treat as
current, home equity loans of a borrower if the customer has made the equivalent
of 95% of two standard payments in two consecutive months and has demonstrated
an ability to pay in the future. All delinquent amounts, however, will remain
due and owing by the borrower. Home equity loans of borrowers in bankruptcy
proceedings will be restructured in accordance with law and with a view to
maximize recovery of the remaining home equity loan balance including any
deficiencies. HFC's policy with respect to charged-off amounts is to generally
recognize losses on past due accounts when HFC takes title to the property in
foreclosure proceedings. The charge-off period for the remaining balance may be
extended for up to twenty-four months if HFC determines the remaining loan
balance is collectible from the sale of the property.
Amounts of the loan balance which HFC may charge off will generally be
computed by comparing the estimated fair market property value of the related
mortgaged property to the amount of any senior indebtedness and any unpaid
property taxes, realized or forecasted foreclosure expenses and other related
expenses (the "Senior Indebtedness Expenses"). Property value may be determined
by:
o a drive-by appraisal;
o a full interior/exterior appraisal;
o an opinion rendered by a local real estate broker chosen by
HFC; or
o HFC's internal appraisal.
To the extent the property value less the Senior Indebtedness Expenses
(the "Net Property Value") is less than the amount of the loan balance, HFC may,
but is not required to, write-down the loan balance to the Net Property Value.
Further charge-offs may be taken from time-to-time based upon HFC's current
estimate of Net Property Value. Once the mortgaged property has been liquidated,
any final charge-off or recovery of a previous charge-off is recognized.
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DESCRIPTION OF THE CERTIFICATES
GENERAL
The certificates will be issued in series. Each series of certificates,
or, in some instances, two or more series of certificates, will be issued under
a pooling and servicing agreement, similar to one of the forms filed as an
exhibit to the registration statement under the Securities Act of 1933, as
amended, with respect to the certificates of which this prospectus is a part.
Each pooling and servicing agreement will be filed with the SEC as an exhibit to
a Form 8-K. The following summaries, together with additional summaries under
"The Pooling and Servicing Agreement" below as well as other pertinent
information included elsewhere in this prospectus, and subject to the related
prospectus supplement, do not describe all terms of the certificates but reflect
the material provisions relating to the certificates common to each pooling and
servicing agreement.
Each series of certificates may consist of a single class of
certificates or any combination of the following:
o a single class of certificates;
o two or more classes of certificates, of which one or more
classes of certificates may be senior in right of payment to
any other class or classes of certificates and as to which
some classes of senior or subordinate certificates may be
senior to other classes of senior or subordinate certificates,
as described in the related prospectus supplement--any of
these series is referred to as a senior/subordinate series;
o one or more classes of mezzanine certificates, which are
subordinate certificates but which are senior to certain other
classes of subordinate certificates in respect of
distributions or losses;
o one or more classes of certificates, which are referred to as
strip certificates, which will be entitled to:
o principal distributions, with disproportionate,
nominal or no interest distributions; or
o interest distributions, with disproportionate,
nominal or no principal distributions;
o two or more classes of certificates which differ as to the
timing, sequential order, rate, pass-through 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, including "planned
amortization classes" and "targeted amortization classes" and
"very accurately defined maturity classes," or on the basis of
collections from designated portions of the home equity loan
pool, which series may include one or more classes of
certificates with respect to which certain accrued interest
will not be distributed but rather will be added to the
principal balance thereof--accrual certificates--on each
distribution date, commencing in the month following the month
in which the cut-off date occurs; or
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o other types of classes of certificates, as described in the
related prospectus supplement.
Credit support for each series of certificates may be provided by a
financial guaranty insurance policy, derivative products, special hazard
insurance policy, bankruptcy bond, letter of credit, reserve fund, surety bond,
by the subordination of one or more classes of certificates,
overcollateralization or other credit enhancement as described under
"Description of Credit Enhancement," or by any combination of the foregoing.
FORM OF CERTIFICATES
As specified in the related prospectus supplement, the certificates of
each series will be issued either as physical certificates or in book-entry
form. If issued as physical certificates, the certificates will be in fully
registered form only in the denominations specified in the related prospectus
supplement, and will be transferrable and exchangeable at the corporate trust
office of the person appointed certificate registrar under the related pooling
and servicing agreement to register the certificates. No service charge will be
made for any registration of exchange or transfer of certificates, but the
trustee may require payment of a sum sufficient to cover any tax or other
governmental charge. The term "certificateholder" as used in this prospectus
refers to the entity whose name appears on the records of the certificate
registrar, or, if applicable, a transfer agent as the registered holder of a
certificate.
If issued in book-entry form, the classes of a series of certificates
will be initially issued through the book-entry facilities of:
o The Depository Trust Company, or DTC;
o Cedelbank; or
o the Euroclear System, or Euroclear (in Europe).
Certificateholders may hold book-entry certificates directly through
these facilities if they are participants of those systems, or indirectly
through organizations which are participants in those systems, or through any
other depository or facility as may be specified in the related prospectus
supplement. Any class of certificates issued in book-entry form via one of the
facilities described above will list DTC's nominee as the record holder.
Cedelbank and Euroclear will hold omnibus positions on behalf of their
participants through customers' securities accounts in Cedelbank's and
Euroclear's names on the books of their respective depositaries, which in turn
will hold those positions in customers' securities accounts in the depositaries'
names on the books of DTC.
DTC is a limited-purpose trust company organized under the laws of the
State of New York, which holds securities for its participating organizations
and facilitates the clearance and settlement of securities transactions between
participants through electronic book-entry changes in the accounts of
participants. Participants include securities brokers and dealers, banks, trust
companies and clearing corporations and may include other organizations. Other
institutions that are not participants but clear through or maintain a custodial
relationship with participants have indirect access to DTC's clearance system
and are referred to as indirect participants.
Generally, a person acquiring an interest in any book-entry
certificate, or beneficial owner, will not be entitled to receive a certificate
representing that interest in registered, certificated form, unless either DTC
ceases to act as depository for that certificate and a successor depository is
not
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obtained, or the trustee elects in its sole discretion to discontinue the
registration of the certificates through DTC. Prior to this happening,
beneficial owners will not be recognized by the trustee or the master servicer
as holders of the related certificates for purposes of the pooling and servicing
agreement, and beneficial owners will be able to exercise their rights as owners
of their certificates only indirectly through DTC, participants and indirect
participants. Any beneficial owner that desires to purchase, sell or otherwise
transfer any interest in book-entry certificates may do so only through DTC,
either directly if the beneficial owner is a participant or indirectly through
participants and, if applicable, indirect participants. Under the procedures of
DTC, transfers of the beneficial ownership of any book-entry certificates will
be required to be made in minimum denominations specified in the related
prospectus supplement. The ability of a beneficial owner to pledge book-entry
certificates to persons or entities that are not participants in the DTC system,
or to otherwise act with respect to the certificates, may be limited because of
the lack of physical certificates evidencing the certificates and because DTC
may act only on behalf of participants.
Because of time zone differences, the securities account of a Cedelbank
or Euroclear participant as a result of a transaction with a DTC participant,
other than a depositary holding on behalf of Cedelbank or Euroclear, will be
credited during the subsequent securities settlement processing day immediately
following the DTC settlement date, which must be a business day for Cedelbank or
Euroclear, as the case may be. Credits or any transactions in those securities
settled during this processing will be reported to the relevant Euroclear
participant or Cedelbank participant on that business day. Cash received in
Cedelbank or Euroclear as a result of sales of securities by or through a
Cedelbank participant or Euroclear participant to a DTC participant, other than
the depositary for Cedelbank or Euroclear, will be received with value on the
DTC settlement date, but will be available in the relevant Cedelbank or
Euroclear cash account only as of the business day following settlement in DTC.
Transfers between participants will occur in accordance with DTC rules.
Transfers between Cedelbank participants and Euroclear participants will occur
in accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Cedelbank
participants or Euroclear participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the relevant depositaries; however, these cross-market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in that system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to its
depositary to take action to effect final settlement on its behalf by delivering
or receiving securities in DTC, and making or receiving payment in accordance
with normal procedures for same day funds settlement applicable to DTC.
Cedelbank participants and Euroclear participants may not deliver instructions
directly to the depositaries.
Cedelbank, as a professional depository, holds securities for its
participating organizations and facilitates the clearance and settlement of
securities transactions between Cedelbank participants through electronic
book-entry changes in accounts of Cedelbank participants, thereby eliminating
the need for physical movement of certificates. As a professional depository,
Cedelbank is subject to regulation by the Luxembourg Monetary Institute.
Euroclear was created to hold securities for participants of Euroclear
and to clear and settle transactions between Euroclear participants through
simultaneous electronic book-entry delivery against
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payment, thereby eliminating the need for physical movement of certificates and
any risk from lack of simultaneous transfers of securities and cash. Euroclear
is operated by the Brussels, Belgium office of Morgan Guaranty Trust Company of
New York, or the Euroclear operator, under contract with Euroclear Clearance
Systems S.C., or the Clearance Cooperative, a Belgian co-operative corporation.
All operations are conducted by the Euroclear operator, and all Euroclear
securities clearance accounts and Euroclear cash accounts are accounts with the
Euroclear operator, not the Clearance Cooperative. The Clearance Cooperative
establishes policy for Euroclear on behalf of Euroclear participants. The
Euroclear operator is the Belgian branch of a New York banking corporation which
is a member bank of the Federal Reserve System. As a result, it is regulated and
examined by the Board of Governors of the Federal Reserve System and the New
York State Banking Department, as well as the Belgian Banking Commission.
Securities clearance accounts and cash accounts with the Euroclear operator are
governed by the Terms and Conditions Governing Use of Euroclear and the related
Operating Procedures of the Euroclear System and applicable Belgian law. The
Terms and Conditions govern transfers of securities and cash within Euroclear,
withdrawals of securities and cash from Euroclear, and receipts of payments with
respect to securities in Euroclear. All securities in Euroclear are held on a
fungible basis without attribution of specific certificates to specific
securities clearance accounts.
Distributions on the book-entry certificates will be forwarded by the
trustee to DTC, and DTC will be responsible for forwarding those payments to
participants, each of which will be responsible for disbursing the payments to
the beneficial owners it represents or, if applicable, to indirect participants.
Accordingly, beneficial owners may experience delays in the receipt of payments
in respect of their certificates. Under DTC's procedures, DTC will take actions
permitted to be taken by holders of any class of book-entry certificates under
the pooling and servicing agreement only at the direction of one or more
participants to whose account the book-entry certificates are credited and whose
aggregate holdings represent no less than any minimum amount of percentage
interests or voting rights required therefor. DTC may take conflicting actions
with respect to any action of certificateholders of any class to the extent that
participants authorize those actions. None of the master servicer, the
depositor, the trustee or any of their respective affiliates will have any
liability for any aspect of the records relating to or payments made on account
of beneficial ownership interests in the book-entry certificates, or for
maintaining, supervising or reviewing any records relating to those beneficial
ownership interests.
ASSIGNMENT OF TRUST ASSETS
At the time of issuance of a series of certificates, the depositor will
cause the home equity loans, or Trust Balances thereof, if applicable, or
mortgage securities and any other assets being included in the related trust to
be assigned without recourse to the trustee or its nominee, which may be the
custodian. If specified in the related prospectus supplement, all principal and
interest received on or with respect to the home equity loans, or Trust Balances
thereof, if applicable, or mortgage securities after the cut-off date, other
than principal and interest due on or before the cut-off date, any Excluded
Spread and additional fees and charges, will also be assigned. The trustee will,
concurrently with the assignment, deliver a series of certificates to the
depositor in exchange for the home equity loans, or Trust Balances thereof, if
applicable, or mortgage securities. Each home equity loan, Trust Balance, or
mortgage security will be identified in a schedule appearing as an exhibit to
the related pooling and servicing agreement. The schedule will include, among
other things, information as to the principal balance of each home equity loan
as of the cut-off date, as well as information respecting the interest rate, the
maturity of the mortgage note and the combined LTV ratio at origination or
modification.
If specified in the related prospectus supplement, and subject to the
rules of membership of Merscorp, Inc. and/or Mortgage Electronic Registration
Systems, Inc., which are referred to together as MERS, assignments of the
mortgages for the home equity loans in the related trust will be registered
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electronically through Mortgage Electronic Registration Systems, Inc., or the
MERS(R) System. With respect to home equity loans registered through the MERS(R)
System, MERS shall serve as mortgagee of record solely as a nominee in an
administrative capacity on behalf of the trustee and shall not have any interest
in any of those home equity loans.
The legal documents relating to the home equity loan may include:
o the mortgage note, and any modification or amendment made to
the mortgage note, endorsed without recourse either in blank
or to the order of the trustee or its nominee;
o the mortgage, except for any mortgage not returned from the
public recording office, with evidence of recording indicated
thereon or, in the case of a Cooperative Loan, the respective
security agreements and any applicable UCC financing
statements;
o an assignment in recordable form of the mortgage, or evidence
that the mortgage is held for the trustee through the MERS(R)
System or, with respect to a Cooperative Loan, an assignment
of the respective security agreements, any applicable UCC
financing statements, recognition agreements, relevant stock
certificates, related blank stock powers and the related
proprietary leases or occupancy agreements; and
o if applicable, any riders or modifications to the mortgage
note and mortgage, together with any other documents at such
times as described in the related pooling and servicing
agreement.
As provided in the related prospectus supplement, subservicers
affiliated with HFC will be entitled to maintain possession of the loan
documents with respect to each home equity loan and will not be required to
record assignments of the related mortgage either to the depositor or any
trustee. In the event, however, that possession of any loan documents is
required by the master servicer, the master servicer will be entitled to request
delivery of the loan documents and to retain them for as long as necessary for
servicing purposes. These loan documents will be returned to the applicable
subservicer, unless returned to the related borrower in connection with the
payment in full of the related home equity loan or when possession of these
documents is no longer required by the master servicer. In the event that HFC
does not satisfy the standards set forth in the related prospectus supplement or
any of the subservicers ceases to be an HFC affiliate, the subservicer and the
depositor will record assignments of the mortgages for each related home equity
loan in favor of the trustee and deliver the loan documents pertaining to each
home equity loan to the trustee, unless opinions of counsel satisfactory to the
trustee, the rating agencies and any credit enhancer are delivered to these
parties to the effect that recordation of the assignments or delivery of loan
documentation is not required in the relevant jurisdiction to protect the
interests of the depositor and the trustee in the home equity loans. Under each
pooling and servicing agreement, the trustee will be appointed attorney-in-fact
for the subservicers and the depositor with power to prepare, execute and record
assignments of the mortgages in the event that the subservicers and the
depositor fail to do so on a timely basis. In lieu of delivery of original
documentation, the master servicer may deliver documents which have been imaged
optically upon delivery of an opinion of counsel that the documents do not
impair the enforceability or the transfer to the trust of the home equity loans.
The assignments may be blanket assignments covering mortgages secured
by mortgaged properties located in the same county, if permitted by law. If
specified in the related prospectus supplement, the depositor may not be
required to deliver one or more of the documents if the documents are missing
from the files of the party from whom the home equity loans were purchased.
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In the event that the depositor cannot deliver the mortgage or any
assignment with evidence of recording concurrently with the execution and
delivery of the related pooling and servicing agreement because of a delay
caused by the public recording office, the depositor will deliver or cause to be
delivered to the trustee or the custodian a true and correct photocopy of the
mortgage or assignment. The depositor will deliver or cause to be delivered to
the trustee or the custodian the mortgage or assignment with evidence of
recording indicated on the mortgage or assignment after receipt from the public
recording office or from the related subservicer.
Except as provided above, assignments of the home equity loans to the
trustee will be recorded in the appropriate public recording office, except for
mortgages held under the MERS(R) System or in states where, in the opinion of
counsel acceptable to the trustee, the recording is not required to protect the
trustee's interests in the home equity loan against the claim of any subsequent
transferee or any successor to or creditor of the depositor or the originator of
the home equity loan, or except as otherwise specified in the related prospectus
supplement.
Notwithstanding the preceding three paragraphs, and except as provided
in the related prospectus supplement, with respect to any series of certificates
backed by home equity loans, the foregoing documents generally will have been
delivered to an entity specified in the related prospectus supplement which may
be the trustee, a custodian or another entity appointed by the trustee. That
entity shall hold those documents as or on behalf of the trustee for the benefit
of the certificateholders, with respect to the Trust Balances thereof, and on
behalf of any other applicable entity with respect to any Excluded Balance
thereof, as their respective interests may appear.
EXCESS SPREAD AND EXCLUDED SPREAD
The depositor, the master servicer or any of their affiliates, or any
other entity as may be specified in the related prospectus supplement may retain
or be paid a portion of interest due with respect to the related home equity
loans or mortgage securities. The payment of any portion of interest in this
manner will be disclosed in the related prospectus supplement. This payment may
be in addition to any other payment, including a servicing fee, that any
specified entity is otherwise entitled to receive with respect to the home
equity loans or mortgage securities. Any of these payments generated from the
home equity loans or mortgage securities will represent Excess Spread or
Excluded Spread. The interest portion of a Realized Loss or Extraordinary Loss
and any partial recovery of interest in respect of the home equity loans or
mortgage securities will be allocated between the owners of any Excess Spread or
Excluded Spread and the certificateholders entitled to payments of interest as
provided in the applicable pooling and servicing agreement.
PAYMENTS ON HOME EQUITY LOANS; DEPOSITS TO COLLECTION ACCOUNT
The master servicer will deposit or will cause to be deposited into the
Collection Account payments and collections received by it subsequent to the
cut-off date, other than payments due on or before the cut-off date, as
specifically contained in the related pooling and servicing agreement, which
generally will include the following:
o payments on account of principal of the home equity loans or
on the mortgage securities comprising a trust;
o payments on account of interest on the home equity loans or on
the mortgage securities comprising the trust, net of the
portion of each payment retained by the subservicer, if any,
as its servicing or other compensation;
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o Liquidation Proceeds, net of unreimbursed liquidation expenses
and insured expenses incurred, and unreimbursed Servicing
Advances, if any, made by the related subservicer, including
Insurance Proceeds or proceeds from any alternative
arrangements established in lieu of any 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 borrower in accordance with the
master servicer's normal servicing procedures;
o proceeds of any home equity loan in the trust purchased, or,
in the case of a substitution, certain amounts representing a
principal adjustment, by the master servicer, the depositor,
any subservicer or seller or any other person under the terms
of the pooling and servicing agreement. See "HFC Home Equity
Lending Program --Representations and Warranties Concerning
the Home Equity Loans," and "Description of the Certificates
-- Assignment of Trust Assets" above; and
o any amount required to be deposited by the master servicer in
connection with losses realized on investments of funds held
in the Collection Account, as described below.
Notwithstanding the foregoing, until the business day prior to each
distribution date on which amounts are required to be deposited in the
Collection Account, HFC may retain and commingle such amounts with its own funds
so long as (1) no Event of Default shall have occurred and be continuing and (2)
either (A) the short-term debt obligations of HFC are acceptable to the rating
agencies, as specified in the related prospectus supplement or (B) HFC arranges
for and maintains a servicer credit enhancement acceptable in form and substance
to each rating agency; provided, however, that amounts permitted to be retained
and commingled pursuant to this subclause (B) shall not exceed the amount
available under the servicer credit enhancement. In the event HFC is entitled to
retain and commingle the amounts referred to in the preceding sentence, it shall
be entitled to retain for its own account any investment income thereon, and any
investment income shall not be subject to any claim of the trustee or
certificateholders. In the event that HFC is not permitted to retain and
commingle these amounts with its own funds, it shall deposit these amounts not
later than the second business day following receipt in the Collection Account.
The Collection Account must be one of the following:
o maintained with a depository institution whose debt
obligations at the time of any deposit in the account are
rated by any rating agency that rated any certificates of the
related series not less than a specified level comparable to
the rating category of those certificates;
o an account or accounts the deposits in which are fully insured
to the limits established by the FDIC, provided that any
deposits not so insured shall be otherwise maintained so that,
as evidenced by an opinion of counsel, the certificateholders
have a claim with respect to the funds in the accounts or a
perfected first priority security interest in any collateral
securing the funds that is superior to the claims of any other
depositors or creditors of the depository institution with
which the accounts are maintained;
o a trust account or accounts maintained in either the corporate
trust department or the corporate asset services department of
a financial institution which has debt obligations that meet
specific rating criteria;
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o a trust account or accounts maintained with the trustee; and
o in the case of any other Eligible Account, the collateral that
is eligible to secure amounts in an Eligible Account is
limited to certain Permitted Investments.
Unless otherwise set forth in the related prospectus supplement, not
later than the business day preceding each distribution date, the master
servicer will deposit into the applicable Collection Account, in immediately
available funds, the amount to be distributed to certificateholders on the
distribution date. The master servicer or the trustee will also deposit or cause
to be deposited into the Collection Account:
o the amount of any Advances on closed-end loans, if applicable,
made by the master servicer as described in this prospectus
under " -- Advances";
o any payments under any letter of credit, financial guaranty
insurance policy, credit derivative and any amounts required
to be transferred to the Collection Account from a reserve
fund, as described under "Description of Credit Enhancement"
below;
o 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 insurance policy maintained by the master servicer
to cover hazard losses on the home equity loans as described
under "Description of the Certificates -- Hazard Insurance and
Related Claims" below;
o any distributions received on any mortgage securities included
in the trust; and
o any other amounts as described in the related pooling and
servicing agreement.
The portion of any payment received by the master servicer in respect
of a home equity loan that is allocable to Excess Spread will generally be
deposited into the Collection Account; however any Excluded Spread will not be
deposited in the Collection Account for the related series of certificates and
will be distributed as provided in the related pooling and servicing agreement.
Funds on deposit in the Collection Account may be invested in Permitted
Investments maturing, in general, not later than the business day preceding the
next distribution date. Unless otherwise specified in the related prospectus
supplement, all income and gain realized from any investment will be for the
account of the master servicer as additional servicing compensation. The amount
of any loss incurred in connection with any investment must be deposited in the
Collection Account by the master servicer out of its own funds upon realization
of the loss.
WITHDRAWALS FROM THE COLLECTION ACCOUNT
The master servicer may, from time to time, make withdrawals from the
Collection Account for certain purposes, as specifically contained in the
related pooling and servicing agreement, which will include the following:
o to reimburse itself or any subservicer for Advances, if
applicable, or for Servicing Advances as to any mortgaged
property out of late payments, Insurance Proceeds, Liquidation
Proceeds or collections on the home equity loan with respect
to which those Advances or Servicing Advances were made;
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o to pay to itself or any subservicer unpaid servicing fees and
subservicing fees out of payments or collections of interest
on each home equity loan;
o to pay to itself as additional servicing compensation any
investment income on funds deposited in the Collection
Account, any amounts remitted by subservicers as interest in
respect of partial prepayments on the home equity loans, and,
if so provided in the pooling and servicing agreement, any
profits realized upon disposition of a mortgaged property
acquired by deed in lieu of foreclosure or repossession or
otherwise allowed under the pooling and servicing agreement;
o to pay to itself, a subservicer, HFC, the depositor or the
seller all amounts received with respect to each home equity
loan purchased, repurchased or removed under the terms of the
pooling and servicing agreement and not required to be
distributed as of the date on which the related purchase price
is determined;
o to pay the depositor or its assignee, or any other party named
in the related prospectus supplement all amounts allocable to
the Excluded Spread, if any, out of collections or payments
which represent interest on each home equity loan, including
any home equity loan as to which title to the underlying
mortgaged property was acquired;
o to reimburse itself or any subservicer for any Nonrecoverable
Advance, subject to any limitations set forth in the pooling
and servicing agreement as described in the related prospectus
supplement;
o to reimburse itself or the depositor for certain other
expenses incurred for which it or the depositor is entitled to
reimbursement, or against which it or the depositor is
indemnified under the pooling and servicing agreement;
o to withdraw any amount deposited in the Collection Account
that was not required to be deposited in the Collection
Account;
o to pay to itself or any subservicer for the funding of any
Draws made on the home equity revolving credit loans, if
applicable;
o to make deposits to the Funding Account in the amounts and in
the manner provided in the pooling and servicing agreement, if
applicable; and
o to clear the Collection Account of amounts relating to the
corresponding home equity loans in connection with the
termination of the trust under the pooling and servicing
agreement.
DISTRIBUTIONS
Distributions of principal and/or interest, as applicable, on each
class of certificates entitled thereto will be made on each distribution date
either by the trustee, the master servicer acting on behalf of the trustee or a
paying agent appointed by the trustee. Payments will be made to the persons who
are registered as the holders of the certificates at the close of business on
the day prior to each payment date or, if the certificates are no longer
book-entry, to the persons in whose names the certificates are registered at the
close of business on the last business day of the preceding month, or the record
date. Distributions will be made in immediately available funds, by wire
transfer or otherwise, to the account
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of a certificateholder at a bank or other entity having appropriate facilities
therefor, if the certificateholder has so notified the trustee, the master
servicer or the paying agent, as the case may be, and the applicable pooling and
servicing agreement provides for that form of payment, or by check mailed to the
address of the person entitled thereto as it appears on the certificate
register. The final distribution in retirement of the certificates will be made
only upon presentation and surrender of the certificates at the office or agency
of the trustee specified in the notice to certificateholders. Distributions will
be made to each certificateholder in accordance with the holder's percentage
interest in a particular class, which will be equal to the percentage obtained
by dividing the initial principal balance or notional amount of the certificate
by the aggregate initial amount or notional balance of all the certificates of
that class.
PRINCIPAL AND INTEREST ON THE CERTIFICATES
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 certificates will be described in the related
prospectus supplement. Distributions of interest on each class of certificates
will be made prior to distributions of principal on each class. Each class of
certificates, other than certain classes of strip certificates, may have a
different specified interest rate or pass-through rate, which may be a fixed,
variable or adjustable pass-through rate, or any combination of two or more
pass-through rates. The related prospectus supplement will specify the
pass-through rate or rates for each class, or the initial pass-through rate or
rates and the method for determining the pass-through rate or rates. Unless
otherwise specified in the related prospectus supplement, interest on the
certificates will be calculated on the basis of either a 360-day year consisting
of twelve 30-day months or the actual number of days in the related interest
period and a 360-day year.
On each distribution date for a series of certificates, the trustee or
the master servicer on behalf of 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 certificates, an amount equal to the percentage interest
represented by the certificate held by the holder multiplied by such class's
Distribution Amount.
In the case of a series of certificates which includes two or more
classes of certificates, the timing, sequential order, priority of payment or
amount of distributions in respect of principal, and any schedule or formula or
other provisions applicable to the determination of principal distributions,
including distributions among multiple classes of senior certificates or
subordinate certificates, shall be as described in the related prospectus
supplement. Distributions in respect of principal of any class of certificates
will be made on a pro rata basis among all of the certificates of that class
unless otherwise described in the related prospectus supplement. In addition,
unless otherwise specified in the related prospectus supplement, distributions
of principal on the certificates will be limited to monthly principal payments
on the home equity loans, any Excess Interest applied as principal distributions
on the certificates and any amount distributed as a payment of principal under
the related form of credit enhancement. To the extent the trust contains Balloon
Loans that require no monthly payments and non-amortizing home equity loans that
require only small principal payments in proportion to the principal balance of
the home equity loan, the amount of principal distributions on the certificates
generally will be less than the amount that would otherwise be distributable on
a similar pool of conventional loans.
On the day of the month specified in the related prospectus supplement
as the determination date, the master servicer will determine the amounts of
principal and interest which will be passed through to certificateholders on the
succeeding distribution date. Prior to the close of business on the business day
succeeding each determination date, the master servicer will furnish a statement
to the
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trustee setting forth, among other things, the amount to be distributed on the
next succeeding distribution date. The information in the statement will be made
available to certificateholders by the master servicer on request.
ADVANCES
If specified in the related prospectus supplement, the master servicer
may agree to make Advances, either out of its own funds, funds advanced to it by
subservicers or funds being held in the Collection Account for future
distribution, for the benefit of the certificateholders, on or before each
distribution date, which were delinquent as of the close of business on the
business day preceding the determination date on the home equity loans in the
related home equity loan pool, but only to the extent that the Advances would,
in the judgment of the master servicer, be recoverable out of late payments by
the borrowers, Liquidation Proceeds, Insurance Proceeds or otherwise. As
specified in the related prospectus supplement with respect to any series of
certificates as to which the trust includes mortgage securities, the master
servicer's advances will be under the terms of the mortgage securities, as may
be supplemented by the terms of the applicable pooling and servicing agreement,
and may differ from the provisions relating to Advances described in this
prospectus.
Advances are intended to maintain a regular flow of payments to related
certificateholders. Advances do not represent an obligation of the master
servicer to guarantee or insure against losses. If Advances have been made by
the master servicer from cash being held for future distribution to
certificateholders, those funds will be required to be replaced on or before any
future distribution date to the extent that funds in the Collection Account on
that distribution date would be less than payments required to be made to
certificateholders. Any Advance will be reimbursable to the master servicer out
of recoveries on the related home equity loans for which those amounts were
advanced, including, for example, late payments made by the related borrower,
any related Liquidation Proceeds and Insurance Proceeds, proceeds of any
applicable form of credit enhancement or proceeds of any home equity loan
purchased by the depositor, HFC, a subservicer or a seller under the
circumstances described above. These Advances will also be reimbursable from
cash otherwise distributable to certificateholders, including the holders of
senior certificates, if applicable, to the extent that the master servicer shall
determine that any Advances previously made are not ultimately recoverable as
described above. With respect to any senior/subordinate series, so long as the
related subordinate certificates remain outstanding and subject to limitations
with respect to Special Hazard Losses, Fraud Losses, Bankruptcy Losses and
Extraordinary Losses, the Advances may also be reimbursable out of amounts
otherwise distributable to holders of the subordinate certificates, if any. The
master servicer may also make Servicing Advances, to the extent recoverable out
of Liquidation Proceeds or otherwise, in respect of certain taxes and insurance
premiums not paid by borrowers on a timely basis. Funds so advanced will be
reimbursable to the master servicer to the extent permitted by the pooling and
servicing agreement.
The master servicer's option to make Advances may be supported by
another entity, the trustee, a financial guaranty insurance policy, a letter of
credit or other method as may be described in the related pooling and servicing
agreement. In the event that the short-term or long-term obligations of the
provider of the support are downgraded by a rating agency rating the related
certificates or if any collateral supporting that obligation is not performing
or is removed under the terms of any agreement described in the related
prospectus supplement, the certificates may also be downgraded.
FUNDING ACCOUNT
If specified in the related prospectus supplement, a pooling and
servicing agreement or other agreement may provide for the transfer by the
sellers of additional home equity loans to the related trust after the closing
date for the related certificates. Additional home equity loans will be required
to
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conform to the requirements contained in the related pooling and servicing
agreement or other agreement providing for the transfer. As specified in the
related prospectus supplement, the transfer may be funded by the establishment
of a Funding Account. If a Funding Account is established, all or a portion of
the proceeds of the sale of one or more classes of certificates of the related
series or a portion of collections on the home equity loans in respect of
principal will be deposited in the Funding Account to be released to the
depositor as additional home equity loans are transferred. Unless otherwise
specified in the related prospectus supplement, a Funding Account will be
required to be maintained as an Eligible Account, all amounts in the Funding
Account will be required to be invested in Permitted Investments and the amount
held in the Funding Account shall at no time exceed 25% of the aggregate
outstanding principal balance of the certificates. All transfers as to amounts
representing proceeds of the sale of the certificates and as to amounts
representing principal collections on the home equity loans will be made as
specified in the related prospectus supplement. Amounts set aside to fund those
transfers, whether in a Funding Account or otherwise, and not so applied within
the period of time as described in the related prospectus supplement will be
deemed to be principal prepayments and applied in the manner described in the
related prospectus supplement.
REPORTS TO CERTIFICATEHOLDERS
On each distribution date, the master servicer will forward or cause to
be forwarded to each certificateholder of record a statement or statements with
respect to the related trust setting forth the information described in the
related pooling and servicing agreement. Except as otherwise provided in the
related pooling and servicing agreement, this information will include the
following, as applicable:
o the aggregate amount of interest collections and principal
collections;
o the amount, if any, of the distribution allocable to
principal;
o the amount, if any, of the distribution allocable to interest,
and the amount, if any, of any shortfall in the amount of
interest and principal;
o the aggregate unpaid principal balance of the home equity
loans or, if applicable, the Trust Balances thereof after
giving effect to the distribution of principal on the
distribution date;
o the outstanding principal balance or notional amount of each
class of certificates after giving effect to the distribution
of principal on the distribution date;
o based on the most recent reports furnished by subservicers,
the number of home equity loans in the related home equity
loan pool that are delinquent one month, two months and three
months or more, which includes home equity loans that are in
foreclosure, and the aggregate principal balances of these
groups of home equity loans or, if applicable, the Trust
Balances thereof;
o the book value of any property acquired by the trust through
foreclosure or grant of a deed in lieu of foreclosure;
o the balance of the Reserve Fund, if any, at the close of
business on the distribution date;
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o the percentage of the outstanding principal balance of the
senior certificates, if applicable, after giving effect to the
distributions on the distribution date;
o the amount of coverage under any letter of credit 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;
o if applicable, the Realized Loss amount as of the close of
business on the applicable distribution date and a description
of any change in the calculation of those amounts;
o in the case of certificates benefitting from alternative
credit enhancement arrangements described in a prospectus
supplement, the amount of coverage under those alternative
arrangements as of the close of business on the applicable
determination date; and
o with respect to any series of certificates as to which the
trust includes mortgage securities, any additional information
as required under the related pooling and servicing agreement.
Each amount set forth in the first two items in the list above will be
expressed as a dollar amount per single certificate. As to a particular class of
certificates, a "single certificate" will evidence a percentage interest
obtained by dividing $1,000 by the initial principal balance or notional balance
of all the certificates of that class, except as otherwise provided in the
related pooling and servicing agreement. In addition to the information
described above, reports to certificateholders will contain any other
information as is described in the applicable pooling and servicing agreement,
which may include, without limitation, information as to Advances,
reimbursements to subservicers and the master servicer and losses borne by the
related trust.
In addition, to the extent described in the pooling and servicing
agreement, within a reasonable period of time after the end of each calendar
year, the master servicer will furnish a report to each person that was a holder
of record of any class of certificates at any time during that calendar year.
The report will include information as to the aggregate of amounts reported
under the first two items in the list above for that calendar year.
COLLECTION AND OTHER SERVICING PROCEDURES
The master servicer will have the option to allow an increase in the
credit limit applicable to any home equity revolving credit loan in certain
limited circumstances. The master servicer will have an unlimited ability to
obtain increases provided that the following conditions are met:
o a new appraisal is obtained;
o the new combined LTV ratio is less than or equal to the
original combined LTV ratio;
o verbal verification of employment is obtained; and
o the payment history of the related borrower is within HFC's
underwriting parameters.
If a new appraisal is not obtained and the other conditions in the
preceding sentence are met, the master servicer will have the option to allow a
credit limit increase for any home equity revolving
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credit loan, provided that the combined LTV ratio of the home equity revolving
credit loan following the credit limit increase will be limited to 100% and at
no time shall the aggregate principal balance of the home equity revolving
credit loans exceed 10% of the current pool balance; provided further, however,
that for home equity revolving credit loans with original combined LTV ratios in
excess of 80%, the combined LTV ratio resulting from the credit limit increase
must be less than or equal to the original combined LTV ratio and at no time
shall the aggregate principal balance of the home equity revolving credit loans
whose credit lines were increased exceed 5% of the current pool balance.
The master servicer, directly or through subservicers, as the case may
be, will make reasonable efforts to collect all payments called for under the
home equity loans and will, consistent with the related pooling and servicing
agreement and any applicable insurance policy or other credit enhancement,
follow the collection procedures which shall be normal and usual in its general
mortgage servicing activities with respect to home equity loans comparable to
the home equity loans in the home equity loan pool. Consistent with the
foregoing, the master servicer may in its discretion waive any prepayment charge
in connection with the prepayment of a home equity loan or extend the due dates
for payments due on a mortgage note, provided that the insurance coverage for
the home equity loan or any coverage provided by any alternative credit
enhancement will not be adversely affected by any waiver or extension. With
respect to any series of certificates as to which the trust includes mortgage
securities, the master servicer's servicing and administration obligations will
be governed by the terms of those mortgage securities.
The master servicer, in its discretion, may, or may allow a subservicer
to extend relief to borrowers whose payments become delinquent. The master
servicer or subservicer, without the prior approval of the master servicer, may
grant a period of temporary indulgence, in most cases up to three months, to a
borrower or may enter into a liquidating plan providing for repayment by the
borrower of delinquent amounts within six months from the date of execution of
the plan, in each case without the prior approval of the master servicer. Most
other types of forbearance require master servicer approval. Neither indulgence
nor forbearance with respect to a home equity loan will affect the pass-through
rate or rates used in calculating distributions to certificateholders. See " --
Distributions."
In instances in which a home equity loan is in default or if default is
reasonably foreseeable, and if determined by the master servicer to be in the
best interests of the related certificateholders, the master servicer may engage
in a wide variety of loss mitigation practices including waivers, modifications,
payment forbearances, partial forgiveness, entering into repayment schedule
arrangements, and capitalization of arrearages rather than proceeding with
foreclosure. In making this determination, the estimated Realized Loss that
might result if the home equity loan were liquidated would be taken into
account. These modifications may have the effect of reducing the interest rate
or extending the final maturity date of the home equity loan. Any modified home
equity loan may remain in the related trust, and the reduction in collections
resulting from a modification may result in reduced distributions of interest or
other amounts on, or may extend the final maturity of, one or more classes of
the related certificates.
In connection with any significant partial prepayment of a home equity
loan, the master servicer, to the extent not inconsistent with the terms of the
mortgage note and local law and practice, may permit the home equity loan to be
re-amortized so that the monthly payment is recalculated as an amount that will
fully amortize its remaining principal amount by the original maturity date
based on the original interest rate, provided that the re-amortization shall not
be permitted if it would constitute a modification of the home equity loan for
federal income tax purposes.
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In any case in which property subject to a home equity loan, other than
an ARM loan described below, is being conveyed by the borrower, the master
servicer, directly or through a subservicer, shall in most cases be obligated,
to the extent it has knowledge of the conveyance, to exercise its rights to
accelerate the maturity of the home equity loan under any due-on-sale clause,
but only if the exercise of the rights is permitted by applicable law and only
to the extent it would not adversely affect or jeopardize coverage under any
applicable credit enhancement arrangements. If the master servicer or
subservicer is prevented from enforcing the due-on-sale clause under applicable
law or if the master servicer or subservicer determines that it is reasonably
likely that a legal action would be instituted by the related borrower to avoid
enforcement of the due-on-sale clause, the master servicer or subservicer will
enter into an assumption and modification agreement with the person to whom that
property has been or is about to be conveyed, under which that person becomes
liable under the mortgage note subject to certain specified conditions. The
original borrower may be released from liability on a home equity loan if the
master servicer or subservicer shall have determined in good faith that the
release will not adversely affect the collectability of the home equity loan. An
ARM loan may be assumed if that ARM loan is by its terms assumable and if, in
the reasonable judgment of the master servicer or the subservicer, the proposed
transferee of the related mortgaged property establishes its ability to repay
the loan and the security for the ARM loan would not be impaired by the
assumption. If a borrower transfers the mortgaged property subject to an ARM
loan without consent, the ARM loan may be declared due and payable. Any fee
collected by the master servicer or subservicer for entering into an assumption
or substitution of liability agreement will be retained by the master servicer
or subservicer as additional servicing compensation unless otherwise set forth
in the related prospectus supplement. See "Legal Aspects of Home Equity Loans
and Related Matters -- Enforceability of Certain Provisions" in this prospectus.
In connection with any such assumption, the interest rate borne by the related
mortgage note may not be altered. Borrowers may, from time to time, request
partial releases of the mortgaged properties, easements, consents to alteration
or demolition and other similar matters. The master servicer or the related
subservicer may approve this type of request if it has determined, exercising
its good faith business judgment in the same manner as it would if it were the
owner of the related home equity loan, that the approval will not adversely
affect the security for, and the timely and full collectability of, the related
home equity loan. Any fee collected by the master servicer or the subservicer
for processing this type of request will be retained by the master servicer or
subservicer as additional servicing compensation.
SPECIAL SERVICING AND SPECIAL SERVICING AGREEMENTS
The pooling and servicing agreement for a series of certificates may
name a special servicer, which will be responsible for the servicing of certain
delinquent home equity loans. The special servicer may have discretion to extend
relief to certain borrowers whose payments become delinquent. The special
servicer may be permitted to grant a period of temporary indulgence to a
borrower or may enter into a repayment plan providing for repayment of
arrearages by the borrower, in each case without the prior approval of the
master servicer or the subservicer. Other types of forbearance may require the
approval of the master servicer or subservicer, as applicable.
In addition, the master servicer may enter into various agreements with
holders of one or more classes of subordinate certificates or of a class of
securities representing interests in one or more classes of subordinate
certificates. Under the terms of these agreements, the holder may, with respect
to certain delinquent home equity loans:
o instruct the master servicer to commence or delay foreclosure
proceedings, provided that the holder deposits a specified
amount of cash with the master servicer which will be
available for distribution to certificateholders in the event
that liquidation proceeds
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are less than they otherwise may have been had the master
servicer acted under its normal servicing procedures;
o instruct the master servicer to purchase the home equity loans
from the trust prior to the commencement of foreclosure
proceedings at the purchase price and to resell the home
equity loans to the holder, in which case any subsequent loss
with respect to the home equity loans will not be allocated to
the certificateholders;
o become, or designate a third party to become, a subservicer
with respect to the home equity loans so long as the master
servicer has the right to transfer the subservicer rights and
obligations of the home equity loans to another subservicer at
any time, or the holder or its servicing designee is required
to service the home equity loans according to the master
servicer's servicing guidelines; or
o the related prospectus supplement may provide for the other
types of special servicing arrangements.
REALIZATION UPON DEFAULTED HOME EQUITY LOANS
With respect to a home equity loan in default, the master servicer or
the related subservicer may take a variety of actions including foreclosing upon
the mortgaged property, write off the balance of the home equity loan or the
Trust Balance as bad debt, take a deed in lieu of foreclosure, accept a short
sale, permit a short refinancing, arrange for a repayment plan or a modification
as described above. In connection with this decision, the master servicer or the
related subservicer will, following usual practices in connection with senior
and junior mortgage servicing activities, estimate the proceeds expected to be
received and the expenses expected to be incurred in connection with the
foreclosure to determine whether a foreclosure proceeding is appropriate. To the
extent that a home equity loan is a junior mortgage loan, following any default
thereon, unless foreclosure proceeds for that home equity loan are expected to
at least satisfy the related senior mortgage loan in full and to pay foreclosure
costs, it is likely that the home equity loan will be written off as bad debt
with no foreclosure proceeding. In the event that title to any mortgaged
property is acquired in foreclosure or by deed in lieu of foreclosure, the deed
or certificate of sale will be assigned to the trustee or to its nominee on
behalf of certificateholders and held by the subservicer, if an affiliate of
HFC. Notwithstanding any acquisition of title and cancellation of the related
home equity loan, the home equity loan, or REO Home Equity Loan, will be
considered for most purposes to be a Liquidated Home Equity Loan.
For purposes of calculations of amounts distributable to
certificateholders in respect of an REO Home Equity Loan, the amortization
schedule in effect at the time of any acquisition of title, before any
adjustment thereto by reason of any bankruptcy or any similar proceeding or any
moratorium or similar waiver or grace period, will be deemed to have continued
in effect, and, in the case of an ARM loan, the amortization schedule will be
deemed to have adjusted in accordance with any interest rate changes occurring
on any adjustment date, so long as the REO Home Equity Loan is considered to
remain in the trust. If a REMIC election has been made, any mortgaged property
so acquired by the trust must be disposed of in accordance with applicable
federal income tax regulations and consistent with the status of the trust as a
REMIC. To the extent provided in the related pooling and servicing agreement,
any income, net of expenses and other than gains described below received by the
subservicer or the master servicer on the mortgaged property prior to its
disposition will be deposited in the Collection Account upon receipt and will be
available at that time to the extent provided in the related pooling and
servicing agreement, for making payments to certificateholders.
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With respect to a home equity loan in default, the master servicer may
pursue foreclosure or similar remedies subject to any senior loan positions and
certain other restrictions pertaining to junior loans as described under "Legal
Aspects of Home Equity Loans and Related Matters -- Foreclosure on Home Equity
Loans" concurrently with pursuing any remedy for a breach of a representation
and warranty. However, the master servicer is not required to continue to pursue
both of these remedies if it determines that one of the remedies is more likely
to result in a greater recovery. Upon the first to occur of final liquidation
and a repurchase or substitution under a breach of a representation and
warranty, the home equity loan will be removed from the related trust. The
master servicer may elect to treat a defaulted home equity loan as having been
finally liquidated if substantially all amounts expected to be received in
connection therewith have been received. Any additional liquidation expenses
relating to that home equity loan thereafter incurred will be reimbursable to
the master servicer, or any subservicer, from any amounts otherwise
distributable to the related certificateholders, or may be offset by any
subsequent recovery related to the home equity loan. Alternatively, for purposes
of determining the amount of related Liquidation Proceeds to be distributed to
certificateholders, the amount of any Realized Loss or the amount required to be
drawn under any applicable form of credit enhancement, the master servicer may
take into account minimal amounts of additional receipts expected to be
received, as well as estimated additional liquidation expenses expected to be
incurred in connection with the defaulted home equity loan. Upon foreclosure of
a home equity revolving credit loan, the related Liquidation Proceeds will be
allocated among the Trust Balances and Excluded Balances as described in the
prospectus supplement.
If so provided in the related prospectus supplement, the applicable
form of credit enhancement may provide, to the extent of coverage thereunder,
that a defaulted home equity loan or REO Home Equity Loan will be removed from
the trust prior to the final liquidation thereof in which case any estimated
loss may be covered by any applicable form of credit enhancement or other
insurance or the certificateholders may bear the loss. If a defaulted home
equity loan or REO Home Equity Loan is not removed from the trust, then, upon
the final liquidation thereof, if a loss is realized which is not covered by any
applicable form of credit enhancement or other insurance, the certificateholders
will bear the loss. However, if a gain results from the final liquidation of an
REO Home Equity Loan which is not required by law to be remitted to the related
borrower, the master servicer will be entitled to retain that gain as additional
servicing compensation unless otherwise specified in the related prospectus
supplement. 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 home equity loans, see "Description of Credit Enhancement" and
"Description of the Certificates -- Hazard Insurance and Related Claims."
The master servicer is required to maintain a fidelity bond and errors
and omissions policy with respect to its employees and other persons acting on
behalf of the master servicer in connection with its activities under the
pooling and servicing agreement. The master servicer may be subject to
restrictions under the pooling and servicing agreement with respect to the
refinancing of a lien senior to a home equity loan on the related mortgaged
property.
HAZARD INSURANCE AND RELATED CLAIMS
Unless specified in the related prospectus supplement, each home equity
loan, other than a Cooperative Loan, will be required to be covered by a hazard
insurance policy, as described below. The following summary, as well as other
pertinent information included elsewhere in this prospectus, does not describe
all terms of a hazard insurance policy but will reflect all material terms
relevant to an investment in the certificates. The insurance is subject to
underwriting and approval of individual home equity loans by the respective
insurers. The descriptions of any insurance policies described in this
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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
forms of policies.
Unless otherwise specified in the related prospectus supplement, the
pooling and servicing agreement may require the master servicer to cause to be
maintained for each mortgaged property a hazard insurance policy providing for
no less than the coverage of the standard form of fire insurance policy with
extended coverage customary in the state in which the property is located.
Coverage generally will be in an amount equal to the lesser of:
o 100% of the insurable value of the improvements, or guaranteed
replacement; or
o the sum of the outstanding balance of the home equity loan
plus the outstanding balance on any mortgage loan senior to
the home equity loan.
The ability of the master servicer to ensure that hazard insurance
proceeds are appropriately applied may be dependent on its being named as an
additional insured under any hazard insurance policy or upon the extent to which
information in this regard is furnished to the master servicer by borrowers or
subservicers.
As described above, all amounts collected by the master servicer under
any hazard policy, except for amounts to be applied to the restoration or repair
of the mortgaged property or released to the borrower in accordance with the
master servicer's normal servicing procedures, will be deposited in the
Collection Account. The pooling and servicing agreement provides that the master
servicer may satisfy its obligation to cause hazard policies to be maintained by
maintaining a blanket policy insuring against losses on the home equity loans.
If the blanket policy contains a deductible clause, the master servicer will
deposit in the Collection Account all amounts which would have been deposited
therein but for such clause.
Unless otherwise specified in the related prospectus supplement, the
master servicer may also cause to be maintained on property acquired upon
foreclosure, or deed in lieu of foreclosure, of any home equity loan, fire
insurance with extended coverage in an amount which is at least equal to the
amount necessary to avoid the application of any co-insurance clause contained
in the related hazard insurance policy.
Since the amount of hazard insurance that borrowers are required to
maintain on the improvements securing the home equity loans may decline as the
principal balances owing decrease, and since residential properties have
historically appreciated in value over time, hazard insurance proceeds could be
insufficient to restore fully the damaged property in the event of a partial
loss. See "Description of Credit Enhancement -- Special Hazard Insurance
Policies" for a description of the limited protection afforded by any special
hazard insurance policy against losses occasioned by hazards which are otherwise
uninsured against, including losses caused by the application of the
co-insurance clause described in the preceding paragraph.
DESCRIPTION OF CREDIT ENHANCEMENT
Credit support with respect to each series of certificates may be
comprised of one or more of the components described below. Each component may
have a dollar limit and will generally provide coverage with respect to Realized
Losses, which may include Defaulted Mortgage Losses, Special Hazard Losses,
Bankruptcy Losses and Fraud Losses.
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Most forms of credit support will not provide protection against all
risks of loss and will not guarantee repayment of the entire outstanding
principal balance of the certificates and interest thereon. If losses occur
which exceed the amount covered by credit support or which are not covered by
the credit support, certificateholders will bear their allocable share of
deficiencies. In particular, Defaulted Mortgage Losses, Special Hazard Losses,
Bankruptcy Losses and Fraud Losses in excess of the amount of coverage provided
therefor and Extraordinary Losses will not be covered. To the extent that the
credit enhancement for any series of certificates is exhausted, the
certificateholders will bear all further non-insured risks.
If specified in the related prospectus supplement, in lieu of or in
addition to any or all of the foregoing arrangements, credit enhancement may be
in the form of:
o a Reserve Fund to cover the losses;
o subordination of one or more classes of subordinate
certificates to provide credit support to one or more classes
of senior certificates;
o overcollateralization, letters of credit, surety bonds,
financial guaranty insurance policies, derivative products,
bankruptcy bonds, special hazard insurance policies, special
hazard instruments, mortgage repurchase bonds, or other types
of insurance policies, certain other secured or unsecured
corporate guarantees or in any other form as may be described
in the related prospectus supplement, or in the form of a
combination of two or more of the foregoing; or
o other types of credit enhancement, as described in the related
prospectus supplement.
The credit support may be provided by an assignment of the right to
receive cash amounts, a deposit of cash into a reserve fund or other pledged
assets, or by banks, insurance companies, guarantees or any combination thereof
identified in the related prospectus supplement.
With respect to a home equity loan the principal balance of which has
been reduced in connection with bankruptcy proceedings, the amount of the
reduction will be treated as a Realized Loss.
For any series of certificates backed by Trust Balances of home equity
revolving credit loans, the credit enhancement provided with respect to the
certificates will cover any portion of any Realized Losses allocated to the
Trust Balances, subject to any limitations described in this prospectus and in
the related prospectus supplement. See "Allocation of Revolving Credit Loan
Balances" in this prospectus.
Each prospectus supplement will include a description of:
o the amount payable under the credit enhancement arrangement,
if any, provided with respect to a series;
o any conditions to payment under the related credit enhancement
not otherwise described in this prospectus;
o the conditions under which the amount payable under the credit
support may be reduced and under which the credit support may
be terminated or replaced; and
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o the material provisions of any agreement relating to the
credit support.
Additionally, the accompanying prospectus supplement will describe
information with respect to the issuer of any third-party credit enhancement.
The pooling and servicing agreement or other documents may provide for
reimbursement rights, control rights or other provisions that may be required by
the credit enhancer.
The descriptions of any insurance policies, bonds or other instruments
described in this prospectus or any prospectus supplement and the coverage
thereunder do not describe all terms thereof but will reflect all relevant terms
thereof material to an investment in the certificates. Copies of the instruments
will be included as exhibits to the Form 8-K to be filed with the SEC in
connection with the issuance of the related series of certificates.
FINANCIAL GUARANTY INSURANCE POLICY
If specified in the related prospectus supplement, a financial guaranty
insurance policy may be obtained and maintained for a class or series of
certificates. The issuer of the financial guaranty insurance policy will be
described in the related prospectus supplement and a copy of the form of
financial guaranty insurance policy will be filed with the related current
report on Form 8-K.
Unless specified in the related prospectus supplement, a financial
guaranty insurance policy will be unconditional and irrevocable and will
guarantee to holders of the applicable certificates that an amount equal to the
full amount of distributions due to these holders will be received by the
trustee or its agent on behalf of the holders for distribution on each
distribution date. The specific terms of any financial guaranty insurance policy
will be described in the related prospectus supplement. A financial guaranty
insurance policy may have limitations and generally will not insure the
obligation of the sellers or the master servicer to purchase or substitute for a
defective home equity loan and will not guarantee any specific rate of principal
prepayments or cover specific interest shortfalls. Unless specified in the
related prospectus supplement, the insurer will be subrogated to the rights of
each holder to the extent the insurer makes payments under the financial
guaranty insurance policy.
LETTER OF CREDIT
If any component of credit enhancement as to any series of certificates
is to be provided by a letter of credit, 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 home equity loans. The letter of credit
bank, the amount available under the letter of credit with respect to each
component of credit enhancement, the expiration date of the letter of credit,
and a more detailed description of the letter of credit will be specified in the
related prospectus supplement. On or before each distribution date, the letter
of credit bank will be required to make payments after notification from the
trustee, to be deposited in the related Collection Account with respect to the
coverage provided thereby. The letter of credit may also provide for the payment
of Advances.
SPECIAL HAZARD INSURANCE POLICIES
Any insurance policy covering Special Hazard Losses obtained by the
depositor for a trust 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, if any, protect the
related certificateholders from Special Hazard Losses which are:
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o 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
o losses from partial damage caused by reason of the application
of the co-insurance clauses contained in hazard insurance
policies. See "Description of the Certificates -- Hazard
Insurance and Related Claims."
A special hazard insurance policy will not cover losses occasioned by
war, civil insurrection, certain governmental actions, errors in design, faulty
workmanship or materials, except under certain circumstances, nuclear reaction,
chemical contamination or waste by the borrower. Aggregate claims under a
special hazard insurance policy will be limited to the amount contained in the
related pooling and servicing agreement and will be subject to reduction as
contained in the related pooling and servicing agreement. A special hazard
insurance policy will provide that no claim may be paid unless hazard and, if
applicable, flood insurance on the property securing the home equity loan has
been kept in force and other protection and preservation expenses have been paid
by the master servicer.
To the extent described in the related prospectus supplement, coverage
in respect of Special Hazard Losses for a series of certificates may be
provided, in whole or in part, by a type of special hazard coverage other than a
special hazard insurance policy or by means of a representation of the depositor
or HFC.
BANKRUPTCY BONDS
In the event of a personal bankruptcy of a borrower, a bankruptcy court
may establish a Deficient Valuation. The amount of the secured debt could then
be reduced to that value, and, thus, the holder of the first and junior loans
would become unsecured creditors to the extent the outstanding principal balance
of those loans exceeds the value assigned to the mortgaged property by the
bankruptcy court. In addition, Debt Service Reductions can result from a
bankruptcy proceeding. See "Legal Aspects of Home Equity Loans and Related
Matters -- Anti-Deficiency Legislation and Other Limitations on Lenders." Any
bankruptcy bond to provide coverage for Bankruptcy Losses resulting from
proceedings under the federal Bankruptcy Code obtained by the depositor for a
trust 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
related prospectus supplement.
SUBORDINATION
A senior/subordinate series of certificates will consist of one or more
classes of senior certificates and one or more classes of subordinate
certificates, as described in the related prospectus supplement. With respect to
any senior/subordinate series, the total amount available for distribution on
each distribution date, as well as the method for allocating the available
amount among the various classes of certificates included in the series, will be
described in the related prospectus supplement. Generally, the amount available
for distribution will be allocated first to interest on the senior certificates
of the series, and then to principal of the senior certificates up to the
amounts described in the related prospectus supplement, prior to allocation of
any amounts to the subordinate certificates of the series.
Realized Losses will be allocated to the subordinate certificates of
the related series in the order specified in the related prospectus supplement
until the outstanding principal balance of each specified class has been reduced
to zero. Additional Realized Losses, if any, will be allocated to the senior
certificates. If the series includes more than one class of senior certificates,
the additional Realized
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Losses will be allocated either on a pro rata basis among all of the senior
certificates in proportion to their respective outstanding principal balances or
as otherwise described in the related prospectus supplement. The respective
amounts of specified types of losses, including certain Special Hazard Losses,
Fraud Losses and Bankruptcy Losses, that may be borne solely by the subordinate
certificates may be limited to an amount described in the related prospectus
supplement. In this case, losses in excess of these amounts would be allocated
on a pro rata basis among all outstanding classes of certificates. Generally,
any allocation of a Realized Loss to a certificate will be made by reducing the
outstanding principal balance thereof as of the distribution date following the
calendar month in which the Realized Loss was incurred.
As described above, the rights of holders of the various classes of
certificates of any series to receive distributions of principal and interest is
determined by the aggregate outstanding principal balance of each class or, if
applicable, the related notional amount. The outstanding principal balance of
any certificate will be reduced by all amounts previously distributed on that
certificate in respect of principal and by any Realized Losses allocated
thereto. If there are no Realized Losses or prepayments of principal on any of
the home equity loans, the respective rights of the holders of certificates of
any series to future distributions generally would not change. However, to the
extent described in the related prospectus supplement, holders of senior
certificates may be entitled to receive a disproportionately larger amount of
prepayments received during specified periods, which will have the effect,
absent offsetting losses, of accelerating the amortization of the senior
certificates and increasing the respective percentage ownership interest
evidenced by the subordinate certificates in the related trust, with a
corresponding decrease in the Senior Percentage. As a result, the availability
of the subordination provided by the subordinate certificates will be preserved.
In addition, as described above, certain Realized Losses generally will be
allocated first to subordinate certificates by reduction of the outstanding
principal balance thereof, which will have the effect of increasing the
respective ownership interest evidenced by the senior certificates in the
related trust.
If so provided in the pooling and servicing agreement, the master
servicer may be permitted, under some circumstances, to purchase any home equity
loan or the Trust Balance thereof, if applicable, that is three or more months
delinquent in payments of principal and interest at the purchase price. The
purchase price will be advanced by the master servicer to the trust, subject to
the right of the master servicer to reimbursement from the trust for any
Realized Losses subsequently incurred. Any Realized Loss incurred in connection
with any home equity loan or the Trust Balance thereof, if applicable, will be
allocated among the then outstanding certificateholders of the related series in
the same manner as Realized Losses on home equity loans that have not been
purchased.
To the extent provided in the related prospectus supplement, certain
amounts otherwise payable on any distribution date to holders of subordinate
certificates may be deposited into a reserve fund. Amounts held in any reserve
fund may be applied as described under "Description of Credit Enhancement --
Reserve Funds" in the related prospectus supplement.
With respect to any senior/subordinate series, the terms and provisions
of the subordination may vary from those described above. Any variation and any
additional credit enhancement will be described in the related prospectus
supplement.
OVERCOLLATERALIZATION
Excess Interest may be deposited into a reserve fund or applied as a
distribution of principal on the certificates. To the extent Excess Interest is
applied as principal distributions on the certificates, the effect will be to
reduce the principal balance of the certificates relative to the outstanding
balance of the
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home equity loans, thereby creating overcollateralization and additional
protection to the certificateholders, as specified in the related prospectus
supplement. In addition, the initial outstanding balance of the home equity
loans held in any trust may exceed the initial principal balance of any related
series of certificates, thereby creating overcollateralization and additional
protection to the certificateholders, as specified in the related prospectus
supplement. Furthermore, if specified in the related prospectus supplement,
Draws made after the related cut-off date under a home equity revolving credit
loan may be included in the home equity loan pool relating to a series of
certificates, thereby creating overcollateralization and additional protection
to the certificateholders.
CROSS SUPPORT
If specified in the related prospectus supplement, the beneficial
ownership of separate groups of assets included in a trust may be evidenced by
separate classes of the related series of certificates. In that case, credit
support may be provided by a cross support feature that requires that
distributions be made on certificates evidencing a beneficial ownership interest
in other asset groups within the same trust. The related prospectus supplement
for a series that includes a cross support feature will describe the manner and
conditions for applying the cross support feature.
If specified in the related prospectus supplement, the coverage
provided by one or more forms of credit support may apply concurrently to two or
more related trusts. If applicable, the related prospectus supplement will
identify the trusts to which the credit support relates and the manner of
determining the amount of the coverage provided by it and of the application of
the coverage to the identified trusts.
CORPORATE GUARANTIES
If specified in the related prospectus supplement, deficiencies in
amounts otherwise payable on the certificates or certain of their classes may be
covered by corporate guaranties provided by one or more corporate entities,
which may be affiliated with HFC. These guaranties may cover timely
distributions of interest or full distributions of principal or both on the
basis of a schedule of principal distributions set forth in or determined in the
manner specified in the related prospectus supplement.
RESERVE FUNDS
If specified in the related prospectus supplement, the depositor will
deposit or cause to be deposited in an account or reserve fund any combination
of cash or Permitted Investments in specified amounts, 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 the related
prospectus supplement and related pooling and servicing agreement. In the
alternative or in addition to that deposit and 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 certificates,
from the Excess Spread, Excluded Spread or otherwise. A reserve fund for a
series of certificates which is funded over time by depositing therein a portion
of the interest payment on each home equity loan may be referred to as a "spread
account" in the related prospectus supplement and pooling and servicing
agreement. To the extent that the funding of the reserve fund is dependent on
amounts otherwise payable on related certificates, Excess Spread, Excluded
Spread or other cash flows attributable to the related home equity loans or on
reinvestment income, the reserve fund may provide less coverage than initially
expected if the cash flows or reinvestment income on which the funding is
dependent are lower than anticipated. With respect to any series of certificates
as to which credit enhancement includes a letter of credit, if specified in the
related prospectus supplement, under specified circumstances the remaining
amount of the letter of credit may be drawn by the trustee and deposited in a
reserve fund.
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Amounts in a reserve fund may be distributed to certificateholders, 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. Unless otherwise provided in the related
prospectus supplement, any of this type of reserve fund will not be deemed to be
part of the related trust. A reserve fund may provide coverage to more than one
series of certificates if described in the related prospectus supplement. If
specified in the related prospectus supplement, reserve funds may be established
to provide limited protection against only certain types of losses and
shortfalls. Following each distribution date, amounts in a reserve fund in
excess of any amount required to be maintained may be released from the reserve
fund under the conditions and to the extent specified in the related prospectus
supplement and will not be available for further application to the
certificates.
The trustee will have a perfected security interest for the benefit of
the certificateholders in the assets in the reserve fund. However, to the extent
that the depositor, any affiliate thereof or any other entity has an interest in
any reserve fund, in the event of the bankruptcy, receivership or insolvency of
that entity, there could be delays in withdrawals from the reserve fund and the
corresponding payments to the certificateholders. These delays could adversely
affect the yield to investors on the related certificates.
Amounts deposited in any reserve fund for a series will be invested in
Permitted Investments by, or at the direction of, and for the benefit of the
master servicer or any other person named in the related prospectus supplement.
Unless otherwise specified in the related prospectus supplement, any
reinvestment income or other gain from those investments will be credited to the
related reserve fund for the series, and any loss resulting from those
investments will be charged to the reserve fund. However, the reinvestment
income may be payable to the master servicer or another service provider as
additional compensation.
MAINTENANCE OF CREDIT ENHANCEMENT
If credit enhancement has been obtained for a series of certificates,
the master servicer will be obligated to exercise its reasonable efforts to keep
or cause to be kept the credit enhancement 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 a
substitution is made, or as otherwise described below under " -- Reduction or
Substitution of Credit Enhancement." The master servicer, on behalf of itself,
the trustee and certificateholders, will provide the trustee information
required for the trustee to draw any applicable credit enhancement.
If specified in the related prospectus supplement, the master servicer
or another entity specified in the related prospectus supplement may agree to
pay the premiums for each financial guaranty insurance policy, special hazard
insurance policy or bankruptcy bond, as applicable, on a timely basis. In the
event the related insurer ceases to be a "qualified insurer" because it ceases
to be qualified under applicable law to transact the insurance business or
coverage is terminated for any reason other than exhaustion of that coverage,
the master servicer will use its best reasonable efforts to obtain from another
qualified insurer a comparable replacement insurance policy or bond with a total
coverage equal to the then outstanding coverage of the original policy or bond.
If the cost of the replacement policy is greater than the cost of the policy or
bond, the coverage of the replacement policy or bond will, unless otherwise
agreed to by the depositor, be reduced to a level so that its premium rate does
not exceed the premium rate on the original insurance policy. Any losses in
market value of the certificates associated with any reduction or withdrawal in
rating by an applicable rating agency shall be borne by the certificateholders.
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If any property securing a defaulted home equity loan is damaged and
the proceeds from the related hazard insurance policy or any applicable special
hazard insurance policy are insufficient to restore the damaged property to a
condition sufficient to permit recovery under any letter of credit, the master
servicer is not required to expend its own funds to restore the damaged property
unless it determines that:
o the restoration will increase the proceeds to one or more
classes of certificateholders on liquidation of the home
equity loan after reimbursement of the master servicer for its
expenses; and
o the expenses will be recoverable by it through Liquidation
Proceeds or Insurance Proceeds.
If recovery under any letter of credit or other credit enhancement is
not available because the master servicer has been unable to make the above
determinations, has made the determinations incorrectly or recovery is not
available for any other reason, the master servicer is nevertheless obligated to
follow whatever normal practices and procedures, subject to the preceding
sentence, as it deems necessary or advisable to realize upon the defaulted home
equity loan and in the event this determination has been incorrectly made, is
entitled to reimbursement of its expenses in connection with the restoration.
REDUCTION OR SUBSTITUTION OF CREDIT ENHANCEMENT
The amount of credit support provided with respect to any series of
certificates and relating to various types of losses incurred may be reduced
under specified circumstances. In most cases, the amount available as credit
support will be subject to periodic reduction on a non-discretionary basis in
accordance with a schedule or formula described in the related pooling and
servicing agreement. Additionally, in most cases, the credit support may be
replaced, reduced or terminated, and the formula used in calculating the amount
of coverage with respect to Bankruptcy Losses, Special Hazard Losses or Fraud
Losses may be changed, without the consent of the certificateholders but upon
the written assurance from each applicable rating agency that the then-current
rating of the related series of certificates 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 each class of
the related certificates may be downgraded to a corresponding level, and, unless
specified in the related prospectus supplement, neither the master servicer nor
the depositor will be obligated to obtain replacement credit support in order to
restore the rating of the certificates. The master servicer will also be
permitted to replace any credit support with other credit enhancement
instruments issued by obligors whose credit ratings are equivalent to the
downgraded level and in lower amounts which would satisfy the downgraded level,
provided that the then-current rating of each class of the related series of
certificates 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 depositor,
the master servicer or any other person that is entitled thereto. Any released
assets and any amount by which the credit enhancement is reduced will not be
available for distributions in future periods.
OTHER FINANCIAL OBLIGATIONS RELATED TO THE CERTIFICATES
SWAPS AND YIELD SUPPLEMENT AGREEMENTS
The trustee on behalf of the trust may enter into Swaps and other Yield
Supplement Agreements.
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An interest rate Swap is an agreement between two counterparties to
exchange a stream of interest payments on an agreed hypothetical or "notional"
principal amount. No principal amount is exchanged between the counterparties to
an interest rate swap. In the typical swap, one party agrees to pay a fixed rate
on a notional principal amount, while the counterparty pays a floating rate
based on one or more reference interest rates including the London Interbank
Offered Rate, or LIBOR, a specified bank's prime rate or U.S. Treasury Bill
rates. Interest rate Swaps also permit counterparties to exchange a floating
rate obligation based upon one reference interest rate, such as LIBOR, for a
floating rate obligation based upon another referenced interest rate, such as
U.S. Treasury Bill rates.
Yield Supplement Agreements may be entered into to supplement the
interest rate or other rates on one or more classes of the certificates of any
series. Additionally, agreements relating to other types of derivative products
that are designed to provide credit enhancement to the related series may be
entered into by a trust and one or more counterparties. The terms of any
derivative product agreement and any counterparties will be described in the
related prospectus supplement.
There can be no assurance that the trust will be able to enter into or
offset Swaps or enter into Yield Supplement Agreements or derivative product
agreements at any specific time or at prices or on other terms that are
advantageous. In addition, although the terms of the Swaps and Yield Supplement
Agreements may provide for termination under certain circumstances, there can be
no assurance that the trust will be able to terminate a Swap or Yield Supplement
Agreement when it would be economically advantageous for the trust to do so.
PURCHASE OBLIGATIONS
Some types of home equity loans and some classes of certificates of any
series, as specified in the related prospectus supplement, may be subject to a
purchase obligation that would become applicable on one or more specified dates,
upon the occurrence of one or more specified events, or on demand made by or on
behalf of the applicable certificateholders. A purchase obligation may be in the
form of a conditional or unconditional purchase commitment, liquidity facility,
remarketing agreement, maturity guaranty, put option or demand feature. The
terms and conditions of each purchase obligation, including the purchase price,
timing and payment procedure will be described in the related prospectus
supplement. A purchase obligation with respect to home equity loans may apply to
those home equity loans or to the related certificates. Each purchase obligation
may be a secured or unsecured obligation of the provider thereof, which may
include a bank or other financial institution or an insurance company. Each
purchase obligation will be evidenced by an instrument delivered to the trustee
for the benefit of the applicable certificateholders of the related series.
Unless otherwise specified in the related prospectus supplement, each purchase
obligation with respect to home equity loans will be payable solely to the
trustee for the benefit of the certificateholders of the related series. Other
purchase obligations may be payable to the trustee or directly to the holders of
the certificates to which that obligation relates.
THE DEPOSITOR
The depositor was incorporated under the laws of the State of Delaware
on May 5, 1994 and is a wholly-owned special purpose subsidiary of HFC. The
depositor was organized for the limited purposes of engaging in the type of
transactions described herein and other similar transactions (some of which have
already been entered into by the depositor) and any activities incidental to and
necessary or convenient for the accomplishment of such purposes. Neither HFC's
nor the depositor's board of directors intends to change the business purpose of
the depositor. The depositor does not have, nor is
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it expected in the future to have, any significant assets. The depositor's
principal executive office is located at 2700 Sanders Road, Prospect Heights,
Illinois 60070. The certificates do not represent an interest in or an
obligation of the depositor. The depositor's only obligations with respect to a
series of certificates will be limited to representations and warranties made by
the depositor or as otherwise provided in the related prospectus supplement.
HOUSEHOLD FINANCE CORPORATION
Household Finance Corporation will act as the master servicer for the
home equity loans. The master servicer was incorporated in Delaware in 1925, as
successor to an enterprise which was established by the same ownership in 1878.
The address of its principal executive office is 2700 Sanders Road, Prospect
Heights, Illinois 60070. The master servicer is a subsidiary of Household
International, Inc.
The master servicer and its subsidiaries offer a diversified range of
financial services. The principal product of the master servicer's consumer
financial services business is the making or purchasing of cash loans and sales
finance contracts, including home equity loans secured by first or second liens,
auto loans and unsecured loans to middle-income consumers in the United States.
Loans are made through branch lending offices under the brands "HFC" and
"Beneficial," and through direct mail and telemarketing efforts. The master
servicer also acquires portfolios of open-end and closed-end, secured and
unsecured loans.
Through banking subsidiaries, the master servicer also offers both
MasterCard* and VISA* credit cards to residents throughout the United States.
Through its subsidiaries, the master servicer also purchases and services
revolving charge card accounts originated by merchants. The accounts result from
consumer purchases of goods and services from the originating merchant.
Closed-end sales contracts are also directly originated.
Where permitted by law, the master servicer offers credit life and
credit accident, health and disability insurance to its customers. This
insurance is generally written directly by, or reinsured with, one of the
master servicer's insurance affiliates.
The master servicer also operates a cooperative program with H&R Block
Tax Services, Inc. and some of its franchises and independent tax preparers to
provide loans to borrowers who electronically file their income tax returns
with the IRS and are entitled to tax refunds.
The master servicer is not subject to legal proceedings which are
expected to have a material impact on its business or financial condition,
taken as a whole.
The subservicers may be wholly-owned subsidiaries of HFC that are
licensed to make home equity revolving credit loans in the states in which the
home equity loans are originated and may transfer certain rights to the home
equity loans to the depositor. These companies originate home equity revolving
credit loans and, in some cases, other types of consumer loans from branch
offices located in the states in which they are licensed to do business.
THE POOLING AND SERVICING AGREEMENT
As described above under "Description of the Certificates -- General,"
each series of certificates will be issued under a pooling and servicing
agreement. The following summaries describe certain additional provisions common
to each pooling and servicing agreement and are qualified entirely by reference
to the actual terms of the pooling and servicing agreement for a series of
certificates.
- --------
* VISA and MasterCard are registered trademarks of VISA USA, Inc. and
MasterCard International Incorporated, respectively.
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SERVICING AND ADMINISTRATION
The principal servicing compensation to be paid to the master servicer
in respect of its master servicing activities for each series of certificates
will be equal to the percentage per annum described in the related prospectus
supplement. As compensation for its servicing duties, a subservicer or, if there
is no subservicer, the master servicer will be entitled to a monthly servicing
fee as described in the related prospectus supplement, which may vary under
certain circumstances from the amounts described in the prospectus supplement.
Some subservicers may also receive additional compensation in the amount of all
or a portion of the interest due and payable on the applicable home equity loan
which is over and above the interest rate specified at the time the depositor or
HFC, as the case may be, committed to purchase the home equity loan. See "HFC
Servicing Procedures." In addition, the master servicer or a subservicer will
retain all prepayment charges, assumption fees and late payment charges, to the
extent collected from borrowers, and any benefit which may accrue as a result of
the investment of funds in the Collection Account, unless specified in the
related prospectus supplement or in a subservicing account, as the case may be.
In addition, certain reasonable duties of the master servicer may be performed
by an affiliate of the master servicer who will be entitled to reasonable
compensation therefor from the trust.
The master servicer, or, if specified in the related pooling and
servicing agreement, the trustee on behalf of the applicable trust, will pay or
cause to be paid certain ongoing expenses associated with each trust 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 certain credit enhancement arrangements, payment of
the fees and disbursements of the trustee, any custodian appointed by the
trustee, the certificate registrar and any paying agent, and payment of expenses
incurred in enforcing the obligations of subservicers. The master servicer will
be entitled to reimbursement of expenses incurred in enforcing the obligations
of subservicers under 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 Home Equity Loans
and in connection with the restoration of mortgaged properties, this right of
reimbursement being prior to the rights of certificateholders to receive any
related Liquidation Proceeds including Insurance Proceeds.
EVIDENCE AS TO COMPLIANCE
Each pooling and servicing agreement will provide for delivery on or
before a specified date in each year to the trustee of an annual statement
signed by an officer of the master servicer to the effect that the master
servicer has fulfilled in all material respects the minimum servicing standards
set forth in the pooling and servicing agreement throughout the preceding year
or, if there has been a material default in the fulfillment of any obligation,
the statement shall specify each known default and the nature and status. The
statement may be provided as a single form making the required statements as to
more than one pooling and servicing agreement.
Each pooling and servicing agreement will also provide that on or
before a specified date in each year, a firm of independent public accountants
will furnish a statement to the depositor and the trustee to the effect that, on
the basis of an examination by that firm conducted substantially in compliance
with the standards established by the American Institute of Certified Public
Accountants, the servicing of home equity loans under agreements, including the
related pooling and servicing agreement, was conducted substantially in
compliance with the minimum servicing standards described in the related audit
guide--to the extent that procedures in that audit guide are applicable to the
servicing obligations described in those agreements--except for significant
exceptions or errors in records that shall be reported in the statement. In
rendering its statement the firm may rely, as to the
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matters relating to the direct servicing of home equity loans by subservicers,
upon comparable statements for examinations conducted substantially in
compliance with the related audit guide described above, rendered within one
year of the statement, of firms of independent public accountants with respect
to those subservicers which also have been the subject of that type of
examination.
Copies of the annual statement of an officer of the master servicer may
be obtained by certificateholders without charge upon written request to the
master servicer, at the address indicated in the monthly statement to
certificateholders.
CERTAIN MATTERS REGARDING THE MASTER SERVICER AND THE DEPOSITOR
The pooling and servicing agreement for each series of certificates
will provide that the master servicer may not resign from its obligations and
duties except upon a determination that performance of its duties is no longer
permissible under applicable law or except in connection with a permitted
transfer of servicing. No resignation will become effective until the trustee or
a successor servicer has assumed the master servicer's obligations and duties
under the pooling and servicing agreement.
Each pooling and servicing agreement will also provide that, except as
described below, neither the master servicer, the depositor nor any director,
officer, employee or agent of the master servicer or the depositor will be under
any liability to the trust or the certificateholders for any action taken or for
refraining from the taking of any action in good faith under the pooling and
servicing agreement, or for errors in judgment; provided, however, that neither
the master servicer, the depositor nor any person will be protected against any
liability which would otherwise be imposed by reason of willful misfeasance, bad
faith or gross negligence in the performance of duties or by reason of reckless
disregard of obligations and duties thereunder. Each pooling and servicing
agreement will further provide that the master servicer, the depositor and any
director, officer, employee or agent of the master servicer or the depositor is
entitled to indemnification by the trust and will be held harmless against any
loss, liability or expense incurred in connection with any legal action relating
to the pooling and servicing agreement or the related series of certificates,
other than any loss, liability or expense incurred by reason of willful
misfeasance, bad faith or gross negligence in the performance of duties or by
reason of reckless disregard of obligations and duties thereunder. In addition,
each pooling and servicing agreement will provide that the master servicer and
the depositor will not be under any obligation to appear in, prosecute or defend
any legal or administrative action that is not incidental to its respective
duties under the pooling and servicing agreement and which in its opinion may
involve it in any expense or liability. The master servicer or the depositor
may, however, in their discretion undertake any of these actions which it may
deem necessary or desirable with respect to the pooling and servicing agreement
and the rights and duties of the parties thereto and the interests of the
certificateholders thereunder. In this event, the legal expenses and costs of an
action and any liability resulting therefrom will be expenses, costs and
liabilities of the trust and the master servicer or the depositor, as the case
may be, will be entitled to reimbursement out of funds otherwise distributable
to certificateholders.
Any person into which the master servicer may be merged or
consolidated, any person resulting from any merger or consolidation to which the
master servicer is a party or any person succeeding to the business of the
master servicer will be the successor of the master servicer under the pooling
and servicing agreement, provided that the person meets the requirements set
forth in the pooling and servicing agreement. In addition, notwithstanding the
prohibition on its resignation, the master servicer may assign its rights and
delegate its duties and obligations under a pooling and servicing agreement to
any person reasonably satisfactory to the depositor and the trustee and meeting
the requirements set forth in the related pooling and servicing agreement. In
the case of any
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assignment, the master servicer will be released from its obligations under such
pooling and servicing agreement, exclusive of liabilities and obligations
incurred by it prior to the time of assignment.
EVENTS OF DEFAULT
Events of default under the pooling and servicing agreement in respect
of a series of certificates, unless specified in the related prospectus
supplement, generally will include:
o any failure by the master servicer to make a required deposit
to the Collection Account, if the master servicer is the
paying agent, to distribute to the holders of any class of
certificates of the series any required payment which
continues unremedied for five business days after the giving
of written notice of the failure to the master servicer by the
trustee or the depositor, or to the master servicer, the
depositor and the trustee by the holders of certificates of
that class evidencing not less than 25% of the aggregate
percentage interests constituting that class;
o any failure by the master servicer duly to observe or perform
in any material respect any other of its covenants or
agreements in the pooling and servicing agreement with respect
to that series of certificates which continues unremedied for
60 days after the giving of written notice of the failure to
the master servicer by the trustee or the depositor, or to the
master servicer, the depositor and the trustee by the holders
of any class of certificates of that series evidencing not
less than 51% of the aggregate percentage interests
constituting that class;
o some events of insolvency, readjustment of debt, marshaling 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;
and
o any other event of default as contained in the related
prospectus supplement.
A default under the terms of any mortgage securities included in any
trust will not constitute an event of default under the related pooling and
servicing agreement.
RIGHTS UPON EVENT OF DEFAULT
So long as an event of default remains unremedied, either the depositor
or the trustee may, except as otherwise provided for in the related pooling and
servicing agreement with respect to the credit enhancer, if applicable, and, at
the direction of the holders of certificates evidencing not less than 51% of the
aggregate voting rights in the related trust, the trustee shall, except as
otherwise provided for in the related pooling and servicing agreement with
respect to the credit enhancer, by written notification to the master servicer,
the depositor or the trustee, as applicable, terminate all of the rights and
obligations of the master servicer under the pooling and servicing agreement,
other than any right of the master servicer as certificateholder and other than
the right to receive servicing compensation, expenses for servicing the home
equity loans during any period prior to the date of termination and any other
reimbursements, of amounts the master servicer is entitled to withdraw from the
Collection Account, covering the trust and in and to the home equity loans and
the proceeds thereof, whereupon the trustee will succeed to all
responsibilities, duties and liabilities of the master servicer under the
pooling and servicing agreement, other than the obligation to purchase home
equity loans under some circumstances, and will be entitled to similar
compensation arrangements. In the event that the trustee would be obligated to
succeed the master servicer but is unwilling so to act, it may appoint, or if it
is unable so to act, it shall appoint, or petition a court of competent
jurisdiction for
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the appointment of an approved mortgage servicing institution with a net worth
of at least $10,000,000 to act as successor to the master servicer under the
pooling and servicing agreement, unless otherwise set forth in the pooling and
servicing agreement. Pending this appointment, the trustee is obligated to act
in this capacity. The trustee and its successor may agree upon the servicing
compensation to be paid, which in no event may be greater than the compensation
to the initial master servicer under the pooling and servicing agreement.
No certificateholder will have any right under a pooling and servicing
agreement to institute any proceeding with respect to the pooling and servicing
agreement unless:
o the holder previously has given to the trustee written notice
of default and the continuance thereof;
o the holders of certificates of any class evidencing not less
than 50% of the aggregate percentage interests constituting
that class:
o have made written request upon the trustee to
institute the proceeding in its own name as trustee
thereunder; and
o have offered to the trustee reasonable indemnity; and
o the trustee has neglected or refused to institute any
proceeding of this sort for 60 days after receipt of the
request and indemnity, except as otherwise provided for in the
related pooling and servicing agreement with respect to the
credit enhancer. However, the trustee will be under no
obligation to exercise any of the trusts or powers vested in
it by the pooling and servicing agreement or to institute,
conduct or defend any litigation thereunder or in relation
thereto at the request, order or direction of any of the
holders of certificates covered by the pooling and servicing
agreement, unless the certificateholders have offered to the
trustee reasonable security or indemnity against the costs,
expenses and liabilities which may be incurred.
AMENDMENT
Each pooling and servicing agreement may be amended by the depositor,
the master servicer and the trustee, without the consent of the related
certificateholders:
o to cure any ambiguity;
o to correct or supplement any provision which may be
inconsistent with any other provision or to correct any error;
o to change the timing and/or nature of deposits in the
Collection Account or to change the name in which the
Collection Account is maintained, except that:
o deposits to the Collection Account may not occur
later than the related distribution date;
o the change may not adversely affect in any material
respect the interests of any certificateholder, as
evidenced by an opinion of counsel; and
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o the change may not adversely affect the then-current
rating of any rated classes of certificates, as
evidenced by a letter from each rating agency as
specified in the related prospectus supplement;
o if an election to treat the related trust as a "real estate
mortgage investment conduit," REMIC or FASIT has been made, to
modify, eliminate or add to any of its provisions
o to the extent necessary to maintain the qualification
of the trust as a REMIC or FASIT or to avoid or
minimize the risk of imposition of any tax on the
related trust, provided that the trustee has received
an opinion of counsel to the effect that
o the action is necessary or desirable to
maintain the qualification or to avoid or
minimize the risk; and
o the action will not have a greater adverse effect
upon the interests of any related certificateholder
than if no action were taken; or
o to restrict the transfer of the REMIC residual certificates,
provided that the depositor has determined that the change
would not adversely affect the then-current ratings of the
certificates, as evidenced by a letter from each rating agency
as specified in the related prospectus supplement, and that
any amendment will not give rise to any tax with respect to
the transfer of the REMIC residual certificates to a
non-permitted transferee;
o to make any other provisions with respect to matters or
questions arising under the pooling and servicing agreement
which are not materially inconsistent with the provisions
thereof, so long as the action will not adversely affect in
any material respect the interests of any certificateholder;
or
o to amend any provision that is not material to holders of any
class of related certificates.
The pooling and servicing agreement may also be amended by the
depositor, the master servicer and the trustee, except as otherwise provided for
in the related pooling and servicing agreement with respect to the credit
enhancer, with the consent of the holders of certificates of each class affected
thereby evidencing, in each case, not less than 51% of the aggregate percentage
interests constituting that class for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions of the pooling and
servicing agreement or of modifying in any manner the rights of the related
certificateholders, except that no amendment of this type may:
o reduce in any manner the amount of, or delay the timing of,
payments received on home equity loans which are required to
be distributed on a certificate of any class without the
consent of the holder of that certificate;
o impair the right of any certificateholder to institute suit
for the enforcement of the provisions of the pooling and
servicing agreement; or
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o reduce the percentage of certificates of any class the holders
of which are required to consent to any amendment of this type
unless the holders of all certificates of that class have
consented to the change in percentage.
Notwithstanding the foregoing, if a REMIC or FASIT election has been
made with respect to the related trust, the trustee will not be entitled to
consent to any amendment to a pooling and servicing agreement without having
first received an opinion of counsel to the effect that the amendment or the
exercise of any power granted to the master servicer, the depositor or the
trustee in accordance with the amendment will not result in the imposition of a
tax on the related trust or cause the trust to fail to qualify as a REMIC or
FASIT, as the case may be.
TERMINATION; RETIREMENT OF CERTIFICATES
The primary obligations created by the pooling and servicing agreement
for each series of certificates, other than certain limited payment and notice
obligations of the trustee and the depositor, respectively, will terminate upon
the payment to the related certificateholders of all amounts held in the
Collection Account or by the master servicer and required to be paid to these
certificateholders following the earlier of:
o the final payment or other liquidation or disposition, or any
advance with respect thereto, of the last home equity loan
subject thereto and all property acquired upon foreclosure or
deed in lieu of foreclosure of any home equity loan; and
o the purchase, as specified in the related prospectus
supplement, by the master servicer, the depositor or the
holder of the REMIC residual certificates -- see "Material
Federal Income Tax Consequences" below -- from the trust for a
series of all remaining home equity loans and all property
acquired in respect of the home equity loans. In addition to
the foregoing, the master servicer or the depositor may have
the option to purchase, in whole but not in part, the
certificates specified in the related prospectus supplement in
the manner described in the related prospectus supplement.
Upon the purchase of the certificates or at any time
thereafter, at the option of the master servicer or the
depositor, the home equity loans may be sold, thereby
effecting a retirement of the certificates and the termination
of the trust, or the certificates so purchased may be held or
resold by the master servicer or the depositor. Written notice
of termination of the pooling and servicing agreement will be
given to each certificateholder, and the final distribution
will be made only upon surrender and cancellation of the
certificates at an office or agency appointed by the trustee
which will be specified in the notice of termination. If the
certificateholders are permitted to terminate the trust under
the applicable pooling and servicing agreement, a penalty may
be imposed upon the certificateholders based upon the fee that
would be foregone by the master servicer because of the
termination.
Any purchase of home equity loans and property acquired from the home
equity loans evidenced by a series of certificates shall be made at the option
of the master servicer, the depositor or, if applicable, the holder of the REMIC
residual certificates at the price specified in the related prospectus
supplement. The exercise of that right will effect early retirement of the
certificates of that series, but the right of any entity to purchase the home
equity loans and related property will be subject to the criteria, and will be
at the price set forth in the related prospectus supplement. Any early
termination may adversely affect the yield to holders of certain classes of
those certificates. If a REMIC or FASIT election has been made, the termination
of the related trust will be effected in a
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manner consistent with applicable federal income tax regulations and its status
as a REMIC or FASIT, as the case may be.
THE TRUSTEE
The trustee under each pooling and servicing agreement will be named in
the related prospectus supplement. The commercial bank or trust company serving
as trustee may have normal banking relationships with the depositor and/or its
affiliates, including HFC.
The trustee may resign at any time, in which event the depositor will
be obligated to appoint a successor trustee. The depositor may also remove the
trustee if the trustee ceases to be eligible to continue as trustee under the
pooling and servicing agreement or if the trustee becomes insolvent. Upon
becoming aware of these circumstances, the depositor will be obligated to
appoint a successor trustee. The trustee may also be removed at any time by the
holders of certificates evidencing not less than 51% of the aggregate voting
rights in the related trust. Any resignation or removal of the trustee and
appointment of a successor trustee will not become effective until acceptance of
the appointment by the successor trustee.
YIELD AND PREPAYMENT CONSIDERATIONS
The yield to maturity of a certificate will depend on the price paid by
the holder for the certificate, the pass-through rate on any certificate
entitled to payments of interest, which pass-through rate may vary if specified
in the related prospectus supplement, and the rate and timing of principal
payments, including payments in excess of required installments, prepayments or
terminations, liquidations and repurchases, on the home equity loans and the
rate and timing of Draws in the case of home equity revolving credit loans and
the allocation of principal payments to reduce the principal balance of the
certificate or notional amount thereof, if applicable.
The amount of interest payments on a home equity loan distributed, or
accrued in the case of deferred interest or accrual certificates, monthly to
holders of a class of certificates entitled to payments of interest will be
calculated on the basis of that class's specified percentage of each payment of
interest, or accrual in the case of accrual certificates, and will be expressed
as a fixed, adjustable or variable pass-through rate payable on the outstanding
principal balance or notional amount of that certificate, or any combination of
the pass-through rates, calculated as described in this prospectus and in the
related prospectus supplement. See "Description of the Certificates
- --Distributions." Holders of strip certificates or a class of certificates
having a pass-through rate that varies based on the weighted average interest
rate of the underlying home equity loans will be affected by disproportionate
prepayments and repurchases of home equity loans having higher Net Mortgage
Rates or rates applicable to the strip certificates, as applicable.
The effective yield to maturity to each holder of certificates entitled
to payments of interest will be below that otherwise produced by the applicable
pass-through rate and purchase price of the certificate to the extent that
interest accrues on each home equity loan during the calendar month or a period
preceding a distribution date instead of through the day immediately preceding
the distribution date.
A class of certificates may be entitled to payments of interest at a
variable or adjustable pass-through rate, or any combination of those
pass-through rates, as specified in the related prospectus supplement. A
variable pass-through rate may be calculated based on the Net Mortgage Rate of
the related home equity loans or certain balances thereof for the month
preceding the distribution date, by
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reference to an index or otherwise. The aggregate payments of interest on a
class of certificates, and the yield to maturity, will be affected by the rate
of payment of principal on the certificates, or the rate of reduction in the
notional amount of certificates entitled to payments of interest only and, in
the case of certificates evidencing interests in ARM loans, by changes in the
Net Mortgage Rates on the ARM loans. The yield on the certificates will also be
affected by liquidations of home equity loans following borrower defaults and by
purchases of home equity loans in the event of certain breaches of
representations made in respect of the home equity loans, or conversions of ARM
loans to fixed rate loans. See "HFC Home Equity Lending Program --
Representations and Warranties Concerning the Home Equity Loans" and
"Description of the Certificates -- Assignment of Trust Assets" above. In
addition, if the index used to determine the pass-through rate for the
certificates is different than the index applicable to the interest rates, the
yield on the certificates will be sensitive to changes in the index related to
the pass-through rate and the yield on the certificates may be reduced by
application of a cap on the pass-through rate based on the weighted average of
the Net Mortgage Rates or any other formulas as may be described in the related
prospectus supplement.
In general, if a certificate is purchased at a premium over its face
amount and distributions of principal on the certificate 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 certificate is purchased at a discount from its face amount and distributions
of principal on the certificate 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. If strip certificates are issued evidencing a right
to payments of interest only or disproportionate payments of interest, a faster
than expected rate of principal payments on the home equity loans, net of Draws
if applicable, will negatively affect the total return to investors in any
certificates. The yield on a class of strip certificates that is entitled to
receive payments of interest only will nevertheless be affected by any losses on
the related home equity loans because of the effect on the timing and amount of
payments. In some circumstances, rapid principal payments on the home equity
loans, net of Draws if applicable, may result in the failure of their holders to
recoup their original investment. If strip certificates are issued evidencing a
right to payments of principal only or disproportionate payments of principal, a
slower than expected rate of principal payments on the home equity loans, net of
Draws if applicable, could negatively affect the anticipated yield on those
strip certificates. In addition, the total return to investors of certificates
evidencing a right to distributions of interest at a rate that is based on the
weighted average Net Mortgage Rate of the home equity loans from time to time
will be adversely affected by principal payments on home equity loans with
interest rates higher than the weighted average interest rate on the home equity
loans. In general, home equity loans with higher interest rates or gross margins
are likely to prepay at a faster rate than home equity loans with lower interest
rates or gross margins. In addition, the yield to maturity on other types of
classes of certificates, including accrual certificates, certificates with a
pass-through rate that fluctuates inversely with or at a multiple of an index or
certain other classes in a series including more than one class of certificates,
may be relatively more sensitive to the rate of principal payments on the
related home equity loans, net of Draws if applicable, than other classes of
certificates.
The timing of changes in the rate of principal distributions on a
certificate may significantly affect an investor's actual yield to maturity,
even if the average rate of principal distributions experienced over time is
consistent with an investor's expectation. In general, the earlier a
distribution of principal on a certificate, 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 distributions 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 certificates would not be fully offset by a subsequent like
reduction or increase in the rate of principal distributions.
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Unless otherwise specified in the related prospectus supplement,
prepayments in full or final liquidations of closed-end loans will reduce the
amount of interest distributed in the following month to holders of certificates
entitled to distribution of interest. See "Description of the Certificates
- --Principal and Interest on the Certificates." Unless otherwise specified in the
related prospectus supplement, a partial prepayment of principal of a closed-end
loan is applied to reduce the outstanding principal balance thereof as of the
first day of the month in which the partial prepayment is received. As a result,
the effect of a partial prepayment on a closed-end loan will usually be to
reduce the amount of interest distributed to holders of certificates in the
month following the receipt of the partial prepayment by an amount equal to one
month's interest at the applicable pass-through rate or Net Mortgage Rate, as
the case may be, on the prepaid amount. See "Description of the Certificates
- --Payments on Home Equity Loans; Deposits to Collection Account." Neither full
nor partial principal prepayments on closed-end loans will be distributed until
the distribution date in the month following receipt.
The rate and timing of defaults on the home equity loans will also
affect the rate and timing of principal payments on the home equity loans and
thus the yield on the related certificates. There can be no assurance as to the
rate of losses or delinquencies on any of the home equity loans, however, those
losses and delinquencies may be expected to be higher than those of traditional
first lien mortgage loans. To the extent that any losses are incurred on any of
the home equity loans that are not covered by the applicable credit enhancement,
holders of certificates of the series evidencing interests in the related home
equity loan pool or certain classes thereof will bear all risk of those losses
resulting from default by borrowers. Even where the applicable credit
enhancement covers all losses incurred on the home equity loans, the effect of
losses may be to increase prepayment experience on the home equity loans, thus
reducing average weighted life and affecting yield to maturity.
With respect to some home equity loans, including ARM loans, the
interest rate at origination may be below the rate that would result from the
sum of the then-applicable index and gross margin. Under the applicable
underwriting standards, borrowers under home equity loans typically will be
qualified on the basis of the interest rate in effect at origination, and are
usually qualified based on an assumed payment which reflects a rate
significantly lower than the maximum rate. The repayment of any home equity loan
may thus be dependent on the ability of the borrower to make larger interest
payments following the adjustment of the interest rate.
With respect to some closed-end loans that permit negative
amortization, during a period of rising interest rates as well as immediately
after origination, that portion of the interest currently accruing thereon but
not currently payable will become deferred interest which will be added to the
principal balance thereof and will bear interest at the applicable interest
rate. The addition of any deferred interest to the principal balance of any
related class of certificates will lengthen the weighted average life thereof
and may adversely affect yield to their holders. Unless otherwise specified in
the related prospectus supplement, home equity revolving credit loans will not
be subject to negative amortization.
Except for certain programs under which the Draw Period is less than
the full term thereof, required minimum monthly payments are generally equal to
or not significantly larger than the amount of interest currently accruing
thereon, and therefore are not expected to significantly amortize the
outstanding principal amounts of those home equity loans prior to maturity,
which amounts may include substantial Draws recently made. As a result, a
borrower will generally be required to pay a substantial principal amount at the
maturity of a home equity revolving credit loan. Alternatively, a pool of
closed-end home equity loans may include Balloon Loans which require a single
payment at maturity. These home equity loans pose a greater risk of default than
fully-amortizing home equity
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loans, because the borrower's ability to make such a substantial payment at
maturity will generally depend on the borrower's ability to obtain refinancing
of the home equity loans 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, the borrower's personal economic circumstances, the
borrower's equity in the related mortgaged property, real estate values,
prevailing market interest rates, tax laws and national and regional economic
conditions. Neither the depositor nor any of its affiliates will be obligated to
refinance or repurchase any home equity loan or to sell any mortgaged property,
unless that obligation is specified in the related prospectus supplement.
For any home equity loans secured by junior mortgages, any inability of
the borrower to pay off its balance may also affect the ability of the borrower
to obtain refinancing at any time of any related senior mortgage loan, thereby
preventing a potential improvement in the borrower's circumstances. Furthermore,
if specified in the related prospectus supplement, under the applicable pooling
and servicing agreement the master servicer may be restricted or prohibited from
consenting to any refinancing of any related senior mortgage loan, which in turn
could adversely affect the borrower's circumstances or result in a prepayment or
default under the corresponding junior home equity loan.
In addition to the borrower's personal economic circumstances, a number
of factors, including homeowner mobility, job transfers, changes in the
borrower's housing needs, the borrower's net equity in the mortgaged property,
changes in the value of the mortgaged property, national and regional economic
conditions, enforceability of due-on-sale clauses, prevailing market interest
rates, servicing decisions, solicitations and the availability of mortgage
funds, seasonal purchasing and payment habits of borrowers or changes in the
deductibility for federal income tax purposes of interest payments on home
equity loans, may affect the rate and timing of principal payments or Draws, if
applicable, on the home equity loans. There can be no assurance as to the rate
of principal payments on the home equity loans, and there can be no assurance of
the rate of Draws on home equity revolving credit loans. The rate of principal
payments and the rate of Draws, if applicable, may fluctuate substantially from
time to time. In most cases, home equity loans are not viewed by borrowers as
permanent financing. Accordingly, closed-end home equity loans may experience a
higher rate of prepayment than conventional mortgage loans. On the other hand,
for home equity revolving credit loans, due to the unpredictable nature of both
principal payments and Draws, the rates of principal payments net of Draws for
those loans may be much more volatile than for typical closed-end home equity
loans.
The yield to maturity of the certificates of any series, or the rate
and timing of principal payments or Draws, if applicable, on the related home
equity loans, may also be affected by a wide variety of specific terms and
conditions applicable to the respective programs under which the home equity
loans were originated. For example, home equity revolving credit loans may
provide for future Draws to be made only in specified minimum amounts, or
alternatively may permit Draws to be made by check or through a credit card in
any amount. A pool of home equity revolving credit loans subject to the latter
provisions may be likely to remain outstanding longer with a higher aggregate
principal balance than a pool of home equity revolving credit loans with the
former provisions, because of the relative ease of making new Draws.
Furthermore, home equity revolving credit loans may provide for interest rate
changes on a daily or monthly basis, or may have gross margins that may vary
under certain circumstances over the term of the loan. In extremely high market
interest rate scenarios, certificates backed by home equity revolving credit
loans with adjustable rates subject to substantially higher maximum rates than
typically apply to adjustable rate first mortgage loans may experience rates of
default and liquidation substantially higher than those that have been
experienced on other adjustable rate closed-end home equity loan pools.
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The yield to maturity of the certificates of any series, or the rate
and timing of principal payments, or Draws if applicable, on the related home
equity loans and corresponding distributions on the certificates, will also be
affected by the specific terms and conditions applicable to the certificates.
For example, if the index used to determine the pass-through rates for a series
of certificates is different from the index applicable to the interest rates of
the underlying home equity loans, the yield on the certificates may be reduced
by application of a cap on the pass-through rates based on the weighted average
of the interest rates. Depending on applicable cash flow allocation provisions,
changes in the relationship between the two indexes may also affect the timing
of certain principal distributions on the certificates, or may affect the amount
of any overcollateralization or the amount on deposit in any reserve fund, which
could in turn accelerate the distribution of principal on the certificates. For
any series of certificates backed by home equity revolving credit loans,
provisions governing whether future Draws on the home equity revolving credit
loans will be included in the trust will have a significant effect on the rate
and timing of principal distributions on the certificates. For a series of
certificates backed by the Trust Balances of home equity revolving credit loans,
the specific provisions applicable to the allocation of payments, Draws and
losses on the home equity revolving credit loans between the Trust Balances and
the Excluded Balances thereof will also have a significant effect on the rate
and timing of principal distributions on the certificates. See "Allocation of
Revolving Credit Loan Balances" in this prospectus.
For a series of certificates backed by home equity revolving credit
loans, as a result of the payment terms of the home equity loans or of the
certificate provisions relating to future Draws, there may be no principal
distributions on those certificates in any given month. In addition, it is
possible that the aggregate Draws on home equity revolving credit loans included
in a home equity loan pool may exceed the aggregate payments with respect to
principal on the home equity revolving credit loans for the related period.
Unless otherwise specified in the related prospectus supplement, all
home equity revolving credit loans and all closed-end loans, other than ARM
loans, will contain due-on-sale provisions permitting the mortgagee to
accelerate the maturity of the home equity loan upon sale or certain transfers
by the borrower of the underlying mortgaged property. 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. An ARM loan is generally assumable under
specific conditions if the proposed transferee of the related mortgaged property
establishes its ability to repay the home equity loan and, in the reasonable
judgment of the master servicer or the related subservicer, the security for the
ARM loan would not be impaired by the assumption. The extent to which ARM loans
are assumed by purchasers of the mortgaged properties rather than prepaid by the
related borrowers in connection with the sales of the mortgaged properties may
affect the weighted average life of the related series of certificates. See
"Description of the Certificates -- Collection and Other Servicing Procedures"
and "Legal Aspects of Home Equity Loans and Related Matters -- Enforceability of
Certain Provisions" for a description of provisions of the pooling and servicing
agreement and legal developments that may affect the prepayment experience on
the home equity loans.
In addition, certain mortgage securities included in a home equity loan
pool may be backed by underlying home equity loans having differing interest
rates. Accordingly, the rate at which principal payments are received on the
related certificates will, to a certain extent, depend on the interest rates on
the underlying home equity loans.
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A subservicer or the master servicer may, from time to time, implement
refinancing or modification programs designed to encourage refinancing. A
subservicer or the master servicer, including an affiliate of the master
servicer, may also aggressively pursue refinancing or loan modification programs
that could require little or no cost and significantly decrease documentation
from the borrower. These programs may include, without limitation, general or
targeted solicitations, the offering of pre-approved applications, reduced
origination fees or closing costs, or other financial incentives. Targeted
solicitations may be based on a variety of factors, including the credit of the
borrower, the location of the mortgaged property, or the subservicer's or master
servicer's judgment as to the likelihood of a borrower refinancing. In addition,
subservicers or the master servicer may encourage assumptions of home equity
loans, including defaulted home equity loans, under which creditworthy borrowers
assume the outstanding indebtedness of the home equity loans which may be
removed from the related home equity loan pool. As a result of these programs,
with respect to the home equity loan pool underlying any trust:
o the rate of principal prepayments of the home equity loans in
the home equity loan pool may be higher than would otherwise
be the case;
o the average credit or collateral quality of the home equity
loans remaining in the home equity loan pool may decline; and
o weighted average interest rate on the home equity loans that
remain in the trust may be lower, thus reducing the rate of
prepayments on the home equity loans in the future.
In addition, a subservicer may allow the refinancing of a home equity
loan by accepting prepayments and permitting a new loan or contract secured by a
mortgage on the same property, which may be originated by the subservicer or the
master servicer or any of their respective affiliates or by an unrelated entity.
In the event of this type of refinancing, the new loan or contract would not be
included in the related trust and, therefore, the refinancing would have the
same effect as a prepayment in full of the related home equity loan.
If the pooling and servicing agreement for a series of certificates
provides for a Funding Account or other means of funding the transfer of
additional home equity loans to the related trust, as described under
"Description of the Certificates -- Funding Account" in this prospectus, and the
trust is unable to acquire the additional home equity loans within any
applicable time limit, the amounts set aside for this purpose may be applied as
principal distributions on one or more classes of certificates of that series.
Although the interest rates on home equity revolving credit loans and
ARM loans will be subject to periodic adjustments, these adjustments typically:
o as to ARM loans will not increase or decrease the interest
rates by more than a fixed percentage amount on each
adjustment date;
o will not increase the interest rates over a fixed maximum rate
during the life of any home equity revolving credit loan or
ARM loan; and
o will be based on an index, which may not rise and fall
consistently with prevailing market interest rates, plus the
related gross margin, which may vary under some circumstances,
and which may be different from margins being used at the time
for newly originated adjustable rate home equity loans.
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As a result, the interest rates on the home equity revolving credit
loans or ARM loans in any home equity loan pool at any time may not equal the
prevailing rates for similar, newly originated adjustable rate home equity loans
or lines of credit, and accordingly, the rate of principal payments and Draws,
if applicable, may be lower or higher than would otherwise be anticipated. In
certain rate environments, the prevailing rates on fixed-rate home equity loans
may be sufficiently low in relation to the then-current interest rates on home
equity revolving credit loans or ARM loans that the rate of prepayment may
increase as a result of refinancings. There can be no certainty as to the rate
of principal payments or Draws, if applicable, on the home equity loans during
any period or over the life of any series of certificates.
With respect to any index used in determining the pass-through rates
for a series of certificates or interest rates of the underlying home equity
loans, a number of factors affect the performance of the index and may cause the
index to move in a manner different from other indices. To the extent that the
index may reflect changes in the general level of interest rates less quickly
than other indices, in a period of rising interest rates, increases in the yield
to certificateholders due to the rising interest rates may occur later than that
which would be produced by other indices, and in a period of declining rates,
the index may remain higher than other market interest rates which may result in
a higher level of prepayments on the home equity loans, which adjust in
accordance with the index, than of home equity loans which adjust in accordance
with other indices.
Under some circumstances, the master servicer, the depositor or the
holders of the REMIC residual certificates may have the option to purchase the
home equity loans in a trust, thus resulting in the early retirement of the
related certificates. See "The Pooling and Servicing Agreement --Termination;
Retirement of Certificates."
LEGAL ASPECTS OF HOME EQUITY LOANS AND RELATED MATTERS
The following discussion contains summaries of various legal aspects of
home equity loans that are general in nature. Because those legal aspects are
governed in part by state law, and laws may differ substantially from state to
state, the summaries do not purport to be complete, to reflect the laws of any
particular state or 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 home equity
loans.
GENERAL
The home equity loans, other than Cooperative Loans, will be secured by
deeds of trust, mortgages or deeds to secure debt depending upon the prevailing
practice in the state in which the related mortgaged property is located. In
some states, a mortgage, deed of trust or deed to secure debt creates a lien
upon the real property encumbered by the mortgage, deed of trust or deed to
secure debt. Those instruments are not prior to the lien for real estate taxes
and assessments and other charges imposed under governmental police powers.
Priority with respect to those instruments depends on their terms and in some
cases on the terms of separate subordination or inter-creditor agreements, and
on the order of recordation of the mortgage in the appropriate recording office.
There are two parties to a mortgage, the borrower, who is the borrower and
homeowner, and the mortgagee, who is the lender. Under the mortgage instrument,
the borrower delivers to the mortgagee a note or bond and the mortgage. In some
states, three parties may be involved in a mortgage financing when title to the
property is held by a land trustee who is the land trustee under a land trust
agreement of which the borrower is the beneficiary; at origination of a home
equity loan, the land trustee, as fee owner of the
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property, executes the mortgage and the borrower executes a separate undertaking
to make payments on the mortgage note and an assignment of leases and rents.
Although a deed of trust is similar to a mortgage, a deed of trust has three
parties:
o the trustor, who is the borrower-homeowner;
o the beneficiary, who is the lender; and
o a third-party grantee called the trustee.
Under a deed of trust, the borrower grants the property, irrevocably
until the debt is paid, in trust, typically with a power of sale, to the trustee
to secure payment of the obligation. A deed to secure debt typically has two
parties, under which the borrower, or grantor, conveys title to the real
property to the grantee, or lender, typically with a power of sale, until the
time when the debt is repaid. The trustee's authority under a deed of trust, the
grantee's authority under a deed to secure debt and the mortgagee's authority
under a mortgage are governed by the law of the state in which the real property
is located, the express provisions of the deed of trust, mortgage or deed to
secure debt and, in certain deed of trust transactions, the directions of the
beneficiary.
COOPERATIVE LOANS
The home equity loans for a specific series of certificates may include
Cooperative Loans. Each Cooperative Note evidencing a Cooperative Loan will be
secured by a security interest in shares issued by the related corporation, or
Cooperative, that owns the related apartment building, which is a corporation
entitled to be treated as a housing cooperative under federal tax law, and in
the related proprietary lease or occupancy agreement granting exclusive rights
to occupy a specific dwelling unit in the Cooperative's building. The security
agreement will create a lien upon, or grant a security interest in, the
Cooperative shares and proprietary leases or occupancy agreements, the priority
of which will depend on, among other things, the terms of the particular
security agreement as well as the order of recordation and/or filing of the
agreement, or the filing of the financing statements related thereto, in the
appropriate recording office or the taking of possession of the Cooperative
shares, depending on the law of the state in which the Cooperative is located.
This type of lien or security interest is not, in general, prior to liens in
favor of the cooperative corporation for unpaid assessments or common charges.
Generally, 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 in the building. 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 an
underlying mortgage, or mortgages, on the Cooperative's building or underlying
land, as is typically the case, or an underlying lease of the land, as is the
case in some instances, the Cooperative, as borrower or lessee, as the case may
be, is also responsible for fulfilling the mortgage or rental obligations.
An underlying home equity loan is ordinarily obtained by the
Cooperative in connection with either the construction or purchase of the
Cooperative's 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 is generally subordinate to the interest
of the holder of an underlying mortgage and to the interest of the holder of a
land lease. If the Cooperative is unable to meet the payment obligations:
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o arising under an underlying mortgage, the mortgagee holding an
underlying mortgage could foreclose on that mortgage and
terminate all subordinate proprietary leases and occupancy
agreements; or
o 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.
In addition, an underlying 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 the 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 an underlying 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 shares of the Cooperative or, in the case of the home
equity loans, the collateral securing the Cooperative Loans.
Each Cooperative is owned by shareholders, referred to as
tenant-stockholders, who, through ownership of stock or shares in the
Cooperative, receive proprietary leases or occupancy agreements which confer
exclusive rights to occupy specific dwellings. Generally, a tenant-stockholder
of a Cooperative must make a monthly rental payment to the Cooperative under the
proprietary lease, which rental payment represents the tenant-stockholder's pro
rata share of the Cooperative's payments for its underlying mortgage, real
property taxes, maintenance expenses and other capital or ordinary expenses. An
ownership interest in a Cooperative and accompanying occupancy rights may be
financed through a Cooperative Loan evidenced by a Cooperative 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 shares of the related
Cooperative. The lender typically 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 Cooperative 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.
TAX ASPECTS OF COOPERATIVE OWNERSHIP
In general, a "tenant-stockholder", as defined in Section 216(b)(2) of
the Internal Revenue Code, of a corporation that qualifies as a "cooperative
housing corporation" within the meaning of Section 216(b)(1) of the Internal
Revenue Code is allowed a deduction for amounts paid or accrued within his
taxable year to the corporation representing his proportionate share of various
interest expenses and real estate taxes allowable as a deduction under Section
216(a) of the Internal Revenue Code to the corporation under Sections 163 and
164 of the Internal Revenue Code. In order for a corporation to qualify under
Section 216(b)(1) of the Internal Revenue Code for its taxable year in which
those items are allowable as a deduction to the corporation, the section
requires, among other things, that at least 80% of the gross income of the
corporation be derived from its tenant-stockholders. By virtue of this
requirement, the status of a corporation for purposes of Section 216(b)(1) of
the
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Internal Revenue Code must be determined on a year-to-year basis. Consequently,
there can be no assurance that Cooperatives relating to the Cooperative Loans
will qualify under this section for any particular year. In the event that this
type of Cooperative fails to qualify for one or more years, the value of the
collateral securing any related Cooperative Loans could be significantly
impaired because no deduction would be allowable to tenant-stockholders under
Section 216(a) of the Internal Revenue Code with respect to those years. In view
of the significance of the tax benefits accorded tenant-stockholders of a
corporation that qualifies under Section 216(b)(1) of the Internal Revenue Code,
the likelihood that this type of failure would be permitted to continue over a
period of years appears remote.
FORECLOSURE ON HOME EQUITY LOANS
Although a deed of trust or a deed to secure debt may also be
foreclosed by judicial action, foreclosure of a deed of trust or a deed to
secure debt is typically accomplished by a non-judicial trustee's or grantee's,
as applicable, sale under a specific provision in the deed of trust or a deed to
secure debt which authorizes the trustee or grantee, as applicable, to sell the
property upon any default by the borrower under the terms of the note or deed of
trust or deed to secure debt. In addition to any notice requirements contained
in a deed of trust or a deed to secure debt, in some states, prior to a sale the
trustee, or grantee, as applicable, must record a notice of default and send a
copy to the borrower/trustor and to any person who has recorded a request for a
copy of notice of default and notice of sale. In addition, in some states, prior
to the sale, the trustee or grantee, as applicable, must provide notice to any
other individual having an interest of record in the real property, including
any junior lienholders. If the deed of trust or deed to secure debt 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 newspapers in a specified manner prior to the date of trustee's sale. In
addition, some states' 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.
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 those 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.
Foreclosure of a mortgage generally is accomplished by judicial action.
In most cases, 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 and serving necessary parties, including borrowers located outside the
jurisdiction in which the mortgaged property is located. If the mortgagee's
right to foreclose is contested, the legal proceedings necessary to resolve the
issue can be time-consuming.
In the case of foreclosure under a mortgage, a deed of trust or a deed
to secure debt, the sale by the referee or other designated officer or by the
trustee or grantee, as applicable, is a public sale. However, because of the
difficulty a potential third-party buyer at the sale might have in determining
the exact status of title, and because the physical condition of the property
may have deteriorated during the foreclosure proceedings, it is uncommon for a
third party to purchase the property at a foreclosure sale. Rather, it is common
for the lender to purchase the property from the trustee or referee, or grantee,
as applicable, for a credit bid less than or equal to the unpaid principal
amount of note plus the accrued and unpaid interest and the expense of
foreclosure, in which case the borrower's debt will be extinguished unless the
lender purchases the property for a lesser amount in order to
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preserve its right against a borrower to seek a deficiency judgment and the
remedy is available under state law and the related loan documents. In the same
states, there is a statutory minimum purchase price which the lender may offer
for the property and in most cases, 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, paying taxes and
making repairs at its own expense that are necessary to render the property
suitable for sale. In most cases, the lender will 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. In some cases, a
deficiency judgment may be pursued in lieu of foreclosure. Any loss may be
reduced by the receipt of any mortgage insurance proceeds or other forms of
credit enhancement for a series of certificates. See "Description of Credit
Enhancement."
A junior mortgagee may not foreclose on the property securing a junior
mortgage unless it forecloses subject to the senior mortgages, in which case it
must either pay the entire amount due on the senior mortgages to the senior
mortgagees prior to or at the time of the foreclosure sale or undertake the
obligation to make payments on the senior mortgages in the event the borrower is
in default thereunder, in either event adding the amounts expended to the
balance due on the junior loan, and may be subrogated to the rights of the
senior mortgagees. In addition, in the event that the foreclosure by a junior
mortgagee triggers the enforcement of a due-on-sale clause in a senior mortgage,
the junior mortgagee may be required to pay the full amount of the senior
mortgages to the senior mortgagees to avoid foreclosure. Accordingly, with
respect to those home equity loans which are junior home equity loans, if the
lender purchases the property, the lender's title will be subject to all senior
liens and claims and some governmental liens. The proceeds received by the
referee or trustee from the sale are applied first to the costs, fees and
expenses of sale and then in satisfaction of the indebtedness secured by the
mortgage or deed of trust under which the sale was conducted. Any remaining
proceeds are payable to the holders of junior mortgages or deeds of trust and
other liens and claims in order of their priority, whether or not the borrower
is in default. Any additional proceeds are payable to the borrower or trustor.
The payment of the proceeds to the holders of junior mortgages may occur in the
foreclosure action of the senior mortgagee or may require the institution of
separate legal proceedings. See "Risk Factors -- Special Features of the Home
Equity Loans" and "Description of the Certificates -- Realization Upon Defaulted
Home Equity Loans" in this prospectus.
FORECLOSURE ON SHARES OF COOPERATIVES
The Cooperative shares owned by the tenant-stockholder, together with
the rights of the tenant-stockholder under the proprietary lease or occupancy
agreement, are pledged to the lender and are, in almost all cases, subject to
restrictions on transfer as described 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 canceled by the Cooperative for failure by the tenant-stockholder to pay rent
or other obligations or charges owed by the tenant-stockholder, including
mechanics' liens against the Cooperative's building incurred by the
tenant-stockholder.
In most cases, rent and other obligations and charges arising under a
proprietary lease or occupancy agreement which 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 the lease or agreement in the event the
borrower defaults in the performance of covenants thereunder. Typically, the
lender and the
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Cooperative enter into a recognition agreement which, together with any lender
protection provisions contained in the proprietary lease or occupancy agreement,
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 proprietary
lease or occupancy agreement will usually constitute a default under the
security agreement between the lender and the tenant-stockholder.
The recognition agreement 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 the 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 shares and the
proprietary lease or occupancy agreement allocated to the dwelling, subject,
however, to the Cooperative's right to sums due under the proprietary lease or
occupancy agreement or which 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 typically 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 also provide that in the event the lender
succeeds to the tenant-shareholder's shares and proprietary lease or occupancy
agreement as the result of realizing upon its collateral for a Cooperative Loan,
the lender must obtain the approval or consent of the board of directors of the
Cooperative as required by the proprietary lease before transferring the
Cooperative shares and/or assigning the proprietary lease. This approval or
consent is usually based on the prospective purchaser's income and net worth,
among other factors, and may significantly reduce the number of potential
purchasers, which could limit the ability of the lender to sell and realize upon
the value of the collateral. In most cases, the lender is not limited in any
rights it may have to dispossess the tenant-stockholder.
Because of the nature of Cooperative Loans, lenders do not require the
tenant-stockholder (i.e., the borrower) to obtain title insurance of any type.
Consequently, the existence of any prior liens or other imperfections of title
affecting the Cooperative's building or real estate also may adversely affect
the marketability of the shares allocated to the dwelling unit in the event of
foreclosure.
In New York, foreclosure on the Cooperative shares is accomplished by
public sale in accordance with the provisions of Article 9 of the New York
Uniform Commercial Code, or 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 in the same area 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, 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
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responsible for the deficiency. See "-- Anti-Deficiency Legislation and Other
Limitations on Lenders' below.
RIGHTS OF REDEMPTION
In some states, after sale under a deed of trust or a deed to secure
debt or foreclosure of a mortgage, the borrower and foreclosed junior lienors or
other parties are given a statutory period, typically ranging from six months to
two years, 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. In some states, the right to redeem is an equitable right. The equity
of redemption, which is a non-statutory right that must be exercised prior to a
foreclosure sale, should be distinguished from statutory rights of redemption.
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 or a deed to secure debt. 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.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Some states have imposed statutory prohibitions which limit the
remedies of a beneficiary under a deed of trust, a mortgagee under a mortgage or
a grantee under a deed to secure debt. In some states, including California,
statutes limit the right of the beneficiary, mortgagee or grantee 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 net amount realized upon the public sale of the
real property and the amount due to the lender. In the case of a home equity
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 or deed to secure debt, even if
obtainable under applicable law, may be of little value to the beneficiary,
grantee or mortgagee, if there are no trust assets against which the deficiency
judgment may be executed. Some state statutes require the beneficiary, grantee
or mortgagee to exhaust the security afforded under a deed of trust, deed to
secure debt or mortgage by foreclosure in an attempt to satisfy the full debt
before bringing a personal action against the borrower.
In other states, the lender has the option of bringing a personal
action against the borrower on the debt without first exhausting the security;
however, in some of these states, the lender, following judgment on the 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 this election, is
that lenders will usually proceed against the security first rather than
bringing a personal action against the borrower.
Finally, in other states, statutory provisions limit any deficiency
judgment against the borrower following a foreclosure to the excess of the
outstanding debt over the fair market value of the property at the time of the
public sale. The purpose of these statutes is generally to prevent a
beneficiary, grantee, or mortgagee from obtaining a large deficiency judgment
against the former borrower as a result of low or no bids at the judicial sale.
Generally, Article 9 of the UCC governs foreclosure on Cooperative
shares and the related proprietary lease or occupancy agreement. Some courts
have interpreted Article 9 to prohibit or limit a deficiency award in various
circumstances, including circumstances where the disposition of the
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collateral, which, in the case of a Cooperative Loan, would be the shares of the
Cooperative and the related proprietary lease or occupancy agreement, was not
conducted in a commercially reasonable manner.
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 its
collateral and/or enforce a deficiency judgment. For example, under the federal
bankruptcy law, all actions against the debtor, the debtor's property and any
co-debtor are automatically stayed upon the filing of a bankruptcy petition.
Moreover, a court having federal bankruptcy jurisdiction may permit a debtor
through its Chapter 11 or Chapter 13 rehabilitative plan to cure a monetary
default relating to a home equity loan on the debtor's residence by paying
arrearages within a reasonable time period and reinstating the original home
equity loan payment schedule, even though the lender accelerated the home equity
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 home equity loan default by permitting the borrower to pay
arrearages over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that
the terms of a home equity loan secured by property which is not the principal
residence 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. In most
cases, however, the terms of a home equity loan secured only by a mortgage on
real property that is the debtor's principal residence may not be modified under
a plan confirmed under Chapter 13 except with respect to mortgage payment
arrearages, which may be cured within a reasonable time period. Courts with
federal bankruptcy jurisdiction similarly may be able to modify the terms of a
Cooperative Loan.
A number of tax liens arising under the Internal Revenue Code may, in
some circumstances, have priority over the lien of a mortgage, deed to secure
debt, or deed of trust. This may have the effect of delaying or interfering with
the enforcement of rights with respect to a defaulted home equity loan. In
addition, substantive requirements are imposed upon mortgage lenders in
connection with the origination and the servicing of home equity loans by
numerous federal and some state consumer protection laws. These laws include the
federal Truth-in-Lending Act, Real Estate Settlement Procedures Act, Equal
Credit Opportunity Act, Fair Credit Billing Act, Fair Credit Reporting Act and
related statutes. These federal laws impose specific statutory liabilities upon
lenders who originate home equity loans and who fail to comply with the
provisions of the law. In some cases, this liability may affect assignees of the
home equity loans.
Some of the home equity loans originated on or after October 1, 1995,
may be High Cost Loans. Purchasers or assignees of any High Cost Loan, including
any trust, could be liable for all claims and subject to all defenses arising
under these provisions that the borrower could assert against the originator of
the High Cost Loan. Remedies available to the borrower include monetary
penalties, as well as rescission rights if the appropriate disclosures were not
given as required.
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ENVIRONMENTAL LEGISLATION
Under CERCLA, and under state law in some states, a secured party which
takes a deed-in-lieu of foreclosure, purchases a mortgaged property at a
foreclosure sale, or operates a mortgaged property may become liable in some
circumstances for the costs of cleaning up hazardous substances regardless of
whether they have contaminated the property. CERCLA imposes strict, as well as
joint and several, liability on several classes of potentially responsible
parties, including current owners and operators of the property who did not
cause or contribute to the contamination. Furthermore, liability under CERCLA is
not limited to the original or unamortized principal balance of a loan or to the
value of the property securing a loan. Lenders may be held liable under CERCLA
as owners or operators unless they qualify for the secured creditor exemption to
CERCLA. This exemption exempts from the definition of owners and operators those
who, without participating in the management of a facility, hold evidence of
ownership primarily to protect a security interest in the facility.
The Asset Conservation, Lender Liability and Deposit Insurance Act of
1996, or Conservation Act, amended, among other things, the provisions of CERCLA
with respect to lender liability and the secured creditor exemption. The
Conservation Act offers substantial protection to lenders by defining the
activities in which a lender can engage and still have the benefit of the
secured creditor exemption. In order for a lender to be deemed to have
participated in the management of a mortgaged property, the lender must actually
participate in the operational affairs of the mortgaged property. The
Conservation Act provides that merely having the capacity to influence, or
unexercised right to control operations does not constitute participation in
management. A lender will lose the protection of the secured creditor exemption
only if it exercises decision-making control over the borrower's environmental
compliance and hazardous substance handling and disposal practices, or assumes
day-to-day management of substantially all of the operational functions of the
mortgaged property. The Conservation Act also provides that a lender will
continue to have the benefit of the secured creditor exemption even if it
forecloses on a mortgaged property, purchases it at a foreclosure sale or
accepts a deed-in-lieu of foreclosure provided that the lender seeks to sell the
mortgaged property at the earliest practicable commercially reasonable time on
commercially reasonable terms.
Other federal and state laws in some circumstances may impose liability
on a secured party which takes a deed-in-lieu of foreclosure, purchases a
mortgaged property at a foreclosure sale, or operates a mortgaged property on
which contaminants other than CERCLA hazardous substances are present, including
petroleum, agricultural chemicals, hazardous wastes, asbestos, radon, and
lead-based paint. These cleanup costs may be substantial. It is possible that
these cleanup costs could become a liability of a trust and reduce the amounts
otherwise distributable to the holders of the related series of certificates.
Moreover, a number of federal statutes and some states by statute impose an
Environmental Lien. All subsequent liens on that property usually are
subordinated to this type of Environmental Lien and, in some states, even prior
recorded liens are subordinated to Environmental Liens. In the latter states,
the security interest of the trustee in a related parcel of real property that
is subject to this type of Environmental Lien could be adversely affected.
Traditionally, many residential mortgage lenders have not taken steps
to evaluate whether contaminants are present with respect to any mortgaged
property prior to the origination of the home equity loan or prior to
foreclosure or accepting a deed-in-lieu of foreclosure. Accordingly, the
depositor has not made and will not make any of these evaluations prior to the
origination of the secured contracts. Neither the depositor nor any replacement
master servicer will be required by any agreement to undertake any of these
evaluations prior to foreclosure or accepting a deed-in-lieu of foreclosure. The
depositor does not make any representations or warranties or assume any
liability with respect to the absence or effect of contaminants on any related
real property or any casualty resulting from the presence or effect of
contaminants. However, the depositor will not be obligated to foreclose on
related real property or accept a deed-in-lieu of foreclosure if it knows or
reasonably believes that
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there are material contaminated conditions on the property. A failure so to
foreclose may reduce the amounts otherwise available to certificateholders of
the related series.
ENFORCEABILITY OF CERTAIN PROVISIONS
The home equity loans in most cases 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 without the prior consent of the
mortgagee. The enforceability of these clauses has been the subject of
legislation or litigation in many states, and in some cases the enforceability
of these clauses has been limited or denied. However, the Garn-St Germain
Depository Institutions Act of 1982, or Garn-St Germain Act, subject to a number
of exceptions, 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. 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, various 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 under a
due-on-sale clause.
The inability to enforce a due-on-sale clause may result in a home
equity loan bearing an interest rate below the current market rate being assumed
by a new home buyer rather than being paid off, which may have an impact upon
the average life of the home equity loans and the number of home equity loans
which may be outstanding until maturity.
Forms of notes and mortgages used by lenders may contain provisions
obligating the borrower to pay a late charge or additional interest if payments
are not timely made, and in some circumstances may provide for prepayment fees
or yield maintenance penalties if the obligation is paid prior to maturity. In a
number of states, there are or may be specific limitations upon the late charges
which a lender may collect from a borrower for delinquent payments. Some states
also limit the amounts that a lender may collect from a borrower as an
additional charge if the loan is prepaid. In addition, the enforceability of
provisions that provide for prepayment fees or penalties upon an involuntary
prepayment is unclear under the laws of many states. Most conventional
single-family mortgage loans may be prepaid in full or in part without penalty.
The regulations of the Federal Home Loan Bank Board, as succeeded by the Office
of Thrift Supervision, or OTS, prohibit the imposition of a prepayment penalty
or equivalent fee for or in connection with the acceleration of a loan by
exercise of a due-on-sale clause. A mortgagee to whom a prepayment in full has
been tendered may be compelled to give either a release of the mortgage or an
instrument assigning the existing mortgage. The absence of a restraint on
prepayment, particularly with respect to home equity loans having higher
interest rates, may increase the likelihood of refinancing or other early
retirements of the home equity loans.
In foreclosure actions, courts have imposed general equitable
principles. These equitable principles are designed to relieve the borrower from
the legal effect of its 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 required that lenders reinstate
loans or recast payment schedules in order to accommodate
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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, deeds to secure debt, 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 a grantee under a deed to secure debt or a
mortgagee having a power of sale, does not involve sufficient state action to
afford constitutional protections to the borrower.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980, provides that state usury limitations shall not apply to
various types of residential first mortgage loans, including cooperative loans
originated by various 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 OTS is authorized to issue rules and regulations and to publish
interpretations governing implementation of Title V. The statute authorized any
state to impose 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
interest loans covered by Title V. Some states have taken action to reimpose
interest rate limits or to limit discount points or other charges.
Usury limits apply to junior home equity loans in many states. Any
applicable usury limits in effect at origination will be reflected in the
maximum interest rates for home equity loans as set forth in the related
prospectus supplement.
Unless otherwise described in the related prospectus supplement, each
seller of a home equity loan will have represented that the home equity loan was
originated in compliance with then applicable state laws, including usury laws,
in all material respects. However, the interest rates on the home equity loans
will be subject to applicable usury laws as in effect from time to time.
ALTERNATIVE MORTGAGE INSTRUMENTS
Alternative mortgage instruments, including adjustable rate home equity
loans and adjustable rate cooperative loans, and early ownership home equity
loans originated by non-federally chartered lenders have historically been
subjected to a variety of restrictions. These 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 provides that, notwithstanding any state law to the contrary:
o state-chartered banks may originate alternative mortgage
instruments in accordance with regulations promulgated by the
Comptroller of the Currency with respect to the origination of
alternative mortgage instruments by national banks;
o state-chartered credit unions may originate alternative
mortgage instruments in accordance with regulations
promulgated by the National Credit Union Administration
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with respect to origination of alternative mortgage
instruments by federal credit unions; and
o 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 OTS, with respect to
origination of alternative mortgage instruments by federal
savings and loan associations.
Title VIII also 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 these
provisions. Some states have taken this action.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the terms of the Soldiers' and Sailors' Civil Relief Act of 1940,
as amended, or the Relief Act, a borrower who enters military service after the
origination of the borrower's mortgage loan, including a borrower 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 the borrower's active duty status, unless a
court orders otherwise upon application of the lender. The Relief Act applies to
borrowers who are members of the Air Force, Army, Marines, Navy, 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 borrowers 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 those home equity 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 home equity loans, would result in a reduction of the amounts
distributable to the holders of the related certificates, and would not be
covered by Advances and may not be covered by the applicable form of credit
enhancement provided in connection with the related series of certificates. In
addition, the Relief Act imposes limitations that would impair the ability of
the master servicer to foreclose on an affected home equity loan during the
borrower's period of active duty status, and, under a number of circumstances,
during an additional three month period thereafter. Thus, in the event that the
Relief Act or similar legislation or regulations applies to any home equity loan
which goes into default, there may be delays in payment and losses on the
related certificates in connection therewith. Any other interest shortfalls,
deferrals or forgiveness of payments on the home equity loans resulting from
similar legislation or regulations may result in delays in payments or losses to
certificateholders of the related series.
FORFEITURES IN DRUG AND RICO PROCEEDINGS
Federal law provides that property owned by persons convicted of
drug-related crimes or of criminal violations of the Racketeer Influenced and
Corrupt Organizations, or RICO, statute can be seized by the government if the
property was used in, or purchased with the proceeds of, those crimes. Under
procedures contained in the Comprehensive Crime Control Act of 1984, the
government may seize the property even before conviction. The government must
publish notice of the forfeiture
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proceeding and may give notice to all parties "known to have an alleged interest
in the property," including the holders of mortgage loans.
A lender may avoid forfeiture of its interest in the property if it
establishes that its mortgage was executed and recorded before commission of the
crime upon which the forfeiture is based, or the lender was, at the time of
execution of the mortgage, "reasonably without cause to believe" that the
property was used in, or purchased with the proceeds of, illegal drug or RICO
activities.
JUNIOR MORTGAGES; RIGHTS OF SENIOR MORTGAGEES
The home equity loans or mortgage securities included in the trust for
a series will be secured by mortgages or deeds of trust which may be junior to
other mortgages or deeds of trust held by other lenders or institutional
investors. The rights of the trust, and therefore the certificateholders, as
mortgagee under a junior mortgage, are subordinate to those of the mortgagee
under the senior mortgage, including the prior rights of the senior mortgagee to
receive hazard insurance and condemnation proceeds and to cause the property
securing the home equity loan to be sold upon default of the borrower, which may
extinguish the junior mortgagee's lien unless the junior mortgagee asserts its
subordinate interest in the property in foreclosure litigation and, in a number
of cases, either reinitiates or satisfies the defaulted senior loan or loans. A
junior mortgagee may satisfy a defaulted senior loan in full or, in some states,
may cure the default and bring the senior loan current thereby reinstating the
senior loan, in either event usually adding the amounts expended to the balance
due on the junior loan. In most states, absent a provision in the mortgage or
deed of trust, no notice of default is required to be given to a junior
mortgagee. Where applicable law or the terms of the senior mortgage or deed of
trust do not require notice of default to the junior mortgagee, the lack of
notice may prevent the junior mortgagee from exercising any right to reinstate
the loan which applicable law may provide.
The standard form of the mortgage or deed of trust used by most
institutional lenders confers on the mortgagee the right both to receive all
proceeds collected under any hazard insurance policy and all awards made in
connection with condemnation proceedings, and to apply the proceeds and awards
to any indebtedness secured by the mortgage or deed of trust, in the order as
the mortgagee may determine. Thus, in the event improvements on the property are
damaged or destroyed by fire or other casualty, or in the event the property is
taken by condemnation, the mortgagee or beneficiary under underlying senior
mortgages 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 senior
mortgages. Proceeds in excess of the amount of senior mortgage indebtedness, in
most cases, may be applied to the indebtedness of junior mortgages in the order
of their priority.
Another provision sometimes found in the form of the mortgage or deed
of trust used by institutional lenders obligates the borrower to pay before
delinquency all taxes and assessments on the property and, when due, all
encumbrances, charges and liens on the property which are prior to the mortgage
or deed of trust, to provide and maintain fire insurance on the property, to
maintain and repair the property and not to commit or permit any waste thereof,
and to appear in and defend any action or proceeding purporting to affect the
property or the rights of the mortgagee under the mortgage. Upon a failure of
the borrower to perform any of these obligations, the mortgagee or beneficiary
is given the right under some mortgages or deeds of trust to perform the
obligation itself, at its election, with the borrower agreeing to reimburse the
mortgagee for any sums expended by the mortgagee on behalf of the borrower. All
sums so expended by a senior mortgagee become part of the indebtedness secured
by the senior mortgage.
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The form of credit line trust deed or mortgage used by most
institutional lenders which make home equity revolving credit loans typically
contains a "future advance" clause, which provides, in essence, that additional
amounts advanced to or on behalf of the borrower by the beneficiary or lender
are to be secured by the deed of trust or mortgage. The priority of the lien
securing any advance made under the clause may depend in most states on whether
the deed of trust or mortgage is designated as a credit line deed of trust or
mortgage. If the beneficiary or lender advances additional amounts, the advance
is entitled to receive the same priority as amounts initially advanced under the
trust deed or mortgage, notwithstanding the fact that there may be junior trust
deeds or mortgages and other liens which intervene between the date of recording
of the trust deed or mortgage and the date of the future advance, and
notwithstanding that the beneficiary or lender had actual knowledge of these
intervening junior trust deeds or mortgages and other liens at the time of the
advance. In most states, the trust deed or mortgage lien securing home equity
loans of the type which includes home equity revolving credit loans applies
retroactively to the date of the original recording of the trust deed or
mortgage, provided that the total amount of advances under the credit limit does
not exceed the maximum specified principal amount of the recorded trust deed or
mortgage, except as to advances made after receipt by the lender of a written
notice of lien from a judgment lien creditor of the trustor.
NEGATIVE AMORTIZATION LOANS
A recent case decided by the United States Court of Appeals, First
Circuit, held that state restrictions on the compounding of interest are not
preempted by the provisions of the Depository Institutions Deregulation and
Monetary Control Act of 1980, or DIDMC, and as a result, a mortgage loan that
provided for negative amortization violated New Hampshire's requirement that
first mortgage loans provide for computation of interest on a simple interest
basis. The holding was limited to the effect of DIDMC on state laws regarding
the compounding of interest and the court did not address the applicability of
the Alternative Mortgage Transaction Parity Act of 1982, which authorizes a
lender to make residential mortgage loans that provide for negative
amortization. As a result, the enforceability of compound interest on mortgage
loans that provide for negative amortization is unclear. The First Circuit's
decision is binding authority only on Federal District Courts in Maine, New
Hampshire, Massachusetts, Rhode Island and Puerto Rico.
TEXAS HOME EQUITY LOANS
Generally, any "cash-out" refinance or other non-purchase money
transaction, except for rate/term refinance loans and certain other narrow
exceptions, secured by a Texas resident's principal residence is subject to the
provisions set forth in Section 50(a)(6) of Article XVI of the Constitution of
Texas (the "Texas Home Equity Laws"). The Texas Home Equity Laws provide for
certain disclosure requirements, caps on allowable fees, required loan closing
procedures and other restrictions. Failure, inadvertent or otherwise, to comply
with any requirement may render the home equity loan unenforceable and/or the
lien on the mortgaged property invalid. Because home equity loans which are
subject to the Texas Home Equity Laws can be foreclosed only pursuant to court
order, rather than non-judicial foreclosure as is available for other types of
home equity loans in Texas, delays and increased losses may result in connection
with foreclosures of such home equity loans. If a court were to find that any
requirement of the Texas Home Equity Laws was not complied with, the court could
refuse to allow foreclosure to proceed, declare the lien on the mortgaged
property to be invalid, and/or require the originating lender of the holder of
the note to forfeit some or all principal and interest of the related home
equity loan. Title insurance generally available on the home equity loans may
exclude coverage for some of the risks of the Texas Home Equity Laws.
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MATERIAL FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following is a general discussion of anticipated material federal
income tax consequences of the purchase, ownership and disposition of the
certificates offered by this prospectus. This discussion has been prepared with
the advice of Katten Muchin & Zavis, special tax counsel to the depositor. This
discussion is directed solely to certificateholders that hold the certificates
as capital assets within the meaning of Section 1221 of the Internal Revenue
Code and does not purport to discuss all federal income tax consequences that
may be applicable to particular categories of investors, some of which,
including banks, insurance companies and foreign investors, may be subject to
special rules. Further, the authorities on which this discussion, and the
opinion referred to below, are based are subject to change or differing
interpretations, which could apply retroactively. Taxpayers and preparers of tax
returns, including those filed by any REMIC or other issuer, should be aware
that under applicable Treasury regulations a provider of advice on specific
issues of law is not considered an income tax return preparer unless the advice:
o is given with respect to events that have occurred at the time
the advice is rendered and is not given with respect to the
consequences of contemplated actions; and
o is directly relevant to the determination of an entry on a tax
return.
Accordingly, taxpayers should consult their tax advisors and tax return
preparers regarding the preparation of any item on a tax return, even where the
anticipated tax treatment has been discussed in this prospectus. In addition to
the federal income tax consequences described in this prospectus, potential
investors should consider the state and local tax consequences, if any, of the
purchase, ownership and disposition of the certificates. See "State and Other
Tax Consequences." Certificateholders are advised to consult their tax advisors
concerning the federal, state, local or other tax consequences to them of the
purchase, ownership and disposition of the certificates offered by this
prospectus.
REMICS
GENERAL
Unless otherwise specified in the related prospectus supplement, as to
each series of certificates, the master servicer will cause an election to be
made to have the related trust treated as a REMIC under Sections 860A through
860G of the Internal Revenue Code. If a REMIC election or elections will be made
for the related trust, the related prospectus supplement for each series of
certificates will identify all "regular interests" and "residual interests" in
the REMIC. If a REMIC election will not be made for a trust, or if a FASIT
election or elections will be made, the federal income tax consequences of the
purchase, ownership and disposition of the related certificates will be
described in the related prospectus supplement. For purposes of this tax
discussion, references to a "certificateholder" or a "holder" are to the
beneficial owner of a certificate.
The following discussion is based in part upon the rules governing
original issue discount that are described in Sections 1271-1273 and 1275 of the
Code and in the Treasury regulations issued thereunder, which are referred to in
this prospectus as the OID regulations, and in part upon the REMIC provisions
and the Treasury regulations issued thereunder, or the REMIC regulations. The
OID regulations, which are effective with respect to debt instruments issued on
or after April 4, 1994,
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do not adequately address various issues relevant to, and in some instances
provide that they are not applicable to, securities like the certificates.
CLASSIFICATION OF REMICS
Upon the issuance of each series of REMIC certificates, Katten Muchin &
Zavis, special tax counsel to the depositor, will deliver its opinion to the
effect that, assuming compliance with all provisions of the related pooling and
servicing agreement, the related trust, or each applicable portion thereof, will
qualify as a REMIC and the REMIC certificates offered with respect thereto will
be considered to evidence ownership of "regular interests" or "residual
interests" in that REMIC within the meaning of the REMIC provisions.
If an entity electing to be treated as a REMIC fails to comply with one
or more of the ongoing requirements of the Internal Revenue Code for this status
during any taxable year, the Internal Revenue Code provides that the entity will
not be treated as a REMIC for that year and thereafter. In that event, the
entity may be taxable as a separate corporation under Treasury regulations, and
the related REMIC certificates may not be accorded the status or given the tax
treatment described below. Although the Internal Revenue Code authorizes the
Treasury Department to issue regulations providing relief in the event of an
inadvertent termination of REMIC status, no regulations have been issued. Any
relief, moreover, may be accompanied by sanctions, such as the imposition of a
corporate tax on all or a portion of the trust's income for the period in which
the requirements for that status are not satisfied. The pooling and servicing
agreement with respect to each REMIC will include provisions designed to
maintain the trust's status as a REMIC under the REMIC provisions. It is not
anticipated that the status of any trust as a REMIC will be terminated.
In general, a Swap or Yield Supplement Agreement may not be an asset of
a REMIC. If a trust of a particular series contains a Swap or Yield Supplement
Agreement, the related prospectus supplement will disclose the tax treatment of
such an arrangement.
CHARACTERIZATION OF INVESTMENTS IN REMIC CERTIFICATES
In general, the REMIC certificates will be "real estate assets" within
the meaning of Section 856(c)(5)(A) of the Internal Revenue Code and assets
described in Section 7701(a)(19)(C) of the Internal Revenue Code in the same
proportion that the assets of the REMIC underlying the certificates would be so
treated. Moreover, if 95% or more of the assets of the REMIC qualify for any of
the foregoing treatments at all times during a calendar year, the REMIC
certificates will qualify for the corresponding status in their entirety for
that calendar year. Interest, including original issue discount, on the REMIC
regular certificates and income allocated to the class of REMIC residual
certificates will be interest described in Section 856(c)(3)(B) of the Internal
Revenue Code to the extent that those certificates are treated as "real estate
assets" within the meaning of Section 856(c)(4)(A) of the Internal Revenue Code.
In addition, the REMIC regular certificates will be "qualified mortgages" within
the meaning of Section 860G(a)(3) of the Internal Revenue Code if transferred to
another REMIC on its startup day in exchange for regular or residual interests
in that REMIC. The determination as to the percentage of the REMIC's assets that
constitute assets described in the foregoing sections of the Internal Revenue
Code will be made with respect to each calendar quarter based on the average
adjusted basis of each category of the assets held by the REMIC during that
calendar quarter. The master servicer will report those determinations to
certificateholders in the manner and at the times required by applicable
Treasury regulations.
The assets of the REMIC will include, in addition to home equity loans,
payments on home equity loans held pending distribution on the REMIC
certificates and property acquired by foreclosure
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held pending sale, and may include amounts in reserve accounts. It is unclear
whether property acquired by foreclosure held pending sale and amounts in
reserve accounts would be considered to be part of the home equity loans, or
whether the assets, to the extent not invested in assets described in the
foregoing sections, otherwise would receive the same treatment as the home
equity loans for purposes of all of the foregoing sections. In addition, in some
instances home equity loans may not be treated entirely as assets described in
the foregoing sections. The REMIC regulations do provide, however, that payments
on home equity loans held pending distribution are considered part of the home
equity loans for purposes of Section 856(c)(4)(A) of the Internal Revenue Code.
Furthermore, foreclosure property will qualify as "real estate assets" under
Section 856(c)(4)(A) of the Internal Revenue Code.
TIERED REMIC STRUCTURES
For some series of REMIC certificates, two or more separate elections
may be made to treat designated portions of the related trust as REMICs, or
tiered REMICs, for federal income tax purposes. Upon the issuance of this type
of series of REMIC certificates, Katten Muchin & Zavis, counsel to the
depositor, will deliver their opinion to the effect that, assuming compliance
with all provisions of the related pooling and servicing agreement, the tiered
REMICs will each qualify as a REMIC and the REMIC certificates issued by the
tiered REMICs, respectively, will be considered to evidence ownership of REMIC
regular certificates or REMIC residual certificates in the related REMIC within
the meaning of the REMIC provisions.
Solely for purposes of determining whether the REMIC certificates will
be "real estate assets" within the meaning of Section 856(c)(4)(A) of the
Internal Revenue Code, and "loans secured by an interest in real property" under
Section 7701(a)(19)(C) of the Internal Revenue Code, and whether the income on
the certificates is interest described in Section 856(c)(3)(B) of the Internal
Revenue Code, the tiered REMICs will be treated as one REMIC.
TAXATION OF OWNERS OF REMIC REGULAR CERTIFICATES
Except as otherwise stated in this discussion, REMIC regular
certificates will be treated for federal income tax purposes as debt instruments
issued by the REMIC and not as ownership interests in the REMIC or its assets.
Moreover, holders of REMIC regular certificates that otherwise report income
under a cash method of accounting will be required to report income with respect
to REMIC regular certificates under an accrual method.
Some REMIC regular certificates may be issued with "original issue
discount" within the meaning of Section 1273(a) of the Internal Revenue Code.
Any holders of REMIC regular certificates issued with original issue discount
typically will be required to include original issue discount in income as it
accrues, in accordance with the method described below, in advance of the
receipt of the cash attributable to that income. In addition, Section 1272
(a)(6) of the Internal Revenue Code provides special rules applicable to REMIC
regular certificates and various other debt instruments issued with original
issue discount. Regulations have not been issued under that section.
The Internal Revenue Code requires that a prepayment assumption be used
with respect to home equity loans held by a REMIC in computing the accrual of
original issue discount on REMIC regular certificates issued by that REMIC, and
that adjustments be made in the amount and rate of accrual of the discount to
reflect differences between the actual prepayment rate and the prepayment
assumption. The prepayment assumption is to be determined in a manner prescribed
in Treasury regulations; as noted above, those regulations have not been issued.
The Conference Committee Report accompanying the Tax Reform Act of 1986,
indicates that the regulations will provide that the prepayment assumption used
with respect to a REMIC regular certificate must be the same as that used
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in pricing the initial offering of the REMIC regular certificate. The prepayment
assumption used by the master servicer in reporting original issue discount for
each series of REMIC regular certificates will be consistent with this standard
and will be disclosed in the related prospectus supplement. However, neither the
depositor nor the master servicer will make any representation that the home
equity loans will in fact prepay at a rate conforming to the prepayment
assumption or at any other rate.
The original issue discount, if any, on a REMIC regular certificate
will be the excess of its stated redemption price at maturity over its issue
price. The issue price of a particular class of REMIC regular certificates will
be the first cash price at which a substantial amount of REMIC regular
certificates of that class is sold, excluding sales to bond houses, brokers and
underwriters. If less than a substantial amount of a particular class of REMIC
regular certificates is sold for cash on or prior to the date of their initial
issuance, the issue price for the class will be treated as the fair market value
of that class on the closing date. Under the OID regulations, the stated
redemption price of a REMIC regular certificate is equal to the total of all
payments to be made on that certificate other than "qualified stated interest."
"Qualified stated interest" includes interest that is unconditionally payable at
least annually at a single fixed rate, or in the case of a variable rate debt
instrument, at a "qualified floating rate," an "objective rate," a combination
of a single fixed rate and one or more "qualified floating rates" or one
"qualified inverse floating rate," or a combination of "qualified floating
rates" that generally does not operate in a manner that accelerates or defers
interest payments on a REMIC regular certificate.
In the case of REMIC regular certificates bearing adjustable interest
rates, the determination of the total amount of original issue discount and the
timing of the inclusion of the original issue discount will vary according to
the characteristics of the REMIC regular certificates. In general terms,
original issue discount is accrued by treating the interest rate of the
certificates as fixed and making adjustments to reflect actual interest rate
adjustments.
Some classes of the REMIC regular certificates may provide for the
first interest payment with respect to their certificates to be made more than
one month after the date of issuance, a period which is longer than the
subsequent monthly intervals between interest payments. Assuming the "accrual
period" for original issue discount is each monthly period that ends on a
distribution date, in some cases, as a consequence of this "long first accrual
period," some or all interest payments may be required to be included in the
stated redemption price of the REMIC regular certificate and accounted for as
original issue discount. Because interest on REMIC regular certificates must in
any event be accounted for under an accrual method, applying this analysis would
result in only a slight difference in the timing of the inclusion in income of
the yield on the REMIC regular certificates.
In addition, if the accrued interest to be paid on the first
distribution date is computed with respect to a period that begins prior to the
closing date, a portion of the purchase price paid for a REMIC regular
certificate will reflect the accrued interest. In these cases, information
returns to the certificateholders and the Internal Revenue Service, or IRS, will
be based on the position that the portion of the purchase price paid for the
interest accrued with respect to periods prior to the closing date is treated as
part of the overall purchase price of the REMIC regular certificate, and not as
a separate asset the purchase price of which is recovered entirely out of
interest received on the next distribution date, and that portion of the
interest paid on the first distribution date in excess of interest accrued for a
number of days corresponding to the number of days from the closing date to the
first distribution date should be included in the stated redemption price of the
REMIC regular certificate. However, the OID regulations state that all or some
portion of the accrued interest may be treated as a separate asset the cost of
which is recovered entirely out of interest paid on the first distribution date.
It
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is unclear how an election to do so would be made under the OID regulations and
whether that election could be made unilaterally by a certificateholder.
Notwithstanding the general definition of original issue discount,
original issue discount on a REMIC regular certificate will be considered to be
de minimis if it is less than 0.25% of the stated redemption price of the REMIC
regular certificate multiplied by its weighted average maturity. For this
purpose, the weighted average maturity of the REMIC regular certificate is
computed as the sum of the amounts determined, as to each payment included in
the stated redemption price of the REMIC regular certificate, by multiplying:
o the number of complete years, rounding down for partial years,
from the issue date until the payment is expected to be made,
presumably taking into account the prepayment assumption, by
o a fraction, the numerator of which is the amount of the
payment, and the denominator of which is the stated redemption
price at maturity of the REMIC regular certificate.
Under the OID regulations, original issue discount of only a de minimis
amount, other than de minimis original issue discount attributable to a
so-called "teaser" interest rate or an initial interest holiday, will be
included in income as each payment of stated principal is made, based on the
product of the total amount of the de minimis original issue discount and a
fraction, the numerator of which is the amount of the principal payment and the
denominator of which is the outstanding stated principal amount of the REMIC
regular certificate. The OID regulations also would permit a certificateholder
to elect to accrue de minimis original issue discount into income currently
based on a constant yield method. See "Taxation of Owners of REMIC Regular
Certificates -- Market Discount" for a description of that election under the
OID regulations.
If original issue discount on a REMIC regular certificate is in excess
of a de minimis amount, the holder of the certificate must include in ordinary
gross income the sum of the "daily portions" of original issue discount for each
day during its taxable year on which it held the REMIC regular certificate,
including the purchase date but excluding the disposition date. In the case of
an original holder of a REMIC regular certificate, the daily portions of
original issue discount will be determined as follows:
As to each "accrual period," that is, unless otherwise stated in the
related prospectus supplement, each period that ends on a date that corresponds
to a distribution date and begins on the first day following the immediately
preceding accrual period, or in the case of the first accrual period, begins on
the closing date, a calculation will be made of the portion of the original
issue discount that accrued during that accrual period. The portion of original
issue discount that accrues in any accrual period will equal the excess, if any,
of:
o the sum of:
o the present value, as of the end of the accrual
period, of all of the distributions remaining to be
made on the REMIC regular certificate, if any, in
future periods and
o the distributions made on the REMIC regular
certificate during the accrual period of amounts
included in the stated redemption price, over
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o the adjusted issue price of the REMIC regular certificate at
the beginning of the accrual period.
The present value of the remaining distributions referred to in the
preceding sentence will be calculated assuming that distributions on the REMIC
regular certificate will be received in future periods based on the home equity
loans being prepaid at a rate equal to the prepayment assumption and using a
discount rate equal to the original yield to maturity of the certificate. For
these purposes, the original yield to maturity of the certificate will be
calculated based on its issue price and assuming that distributions on the
certificate will be made in all accrual periods based on the home equity loans
being prepaid at a rate equal to the prepayment assumption. The adjusted issue
price of a REMIC regular certificate at the beginning of any accrual period will
equal the issue price of the certificate, increased by the aggregate amount of
original issue discount that accrued with respect to that certificate in prior
accrual periods, and reduced by the amount of any distributions made on that
REMIC regular certificate in prior accrual periods of amounts included in its
stated redemption price. The original issue discount accruing during any accrual
period, computed as described above, will be allocated ratably to each day
during the accrual period to determine the daily portion of original issue
discount for that day.
A subsequent purchaser of a REMIC regular certificate that purchases
the certificate at a price, excluding any portion of that price attributable to
accrued qualified stated interest, less than its remaining stated redemption
price will also be required to include in gross income the daily portions of any
original issue discount with respect to that certificate. However, each daily
portion will be reduced, if the cost is in excess of its "adjusted issue price,"
in proportion to the ratio excess bears to the aggregate original issue discount
remaining to be accrued on the REMIC regular certificate. The adjusted issue
price of a REMIC regular certificate on any given day equals the sum of the
adjusted issue price, or, in the case of the first accrual period, the issue
price, of the certificate at the beginning of the accrual period which includes
that day, and the daily portions of original issue discount for all days during
the accrual period prior to that day.
MARKET DISCOUNT
A certificateholder that purchases a REMIC regular certificate at a
market discount, that is, in the case of a REMIC regular certificate issued
without original issue discount, at a purchase price less than its remaining
stated principal amount, or in the case of a REMIC regular certificate issued
with original issue discount, at a purchase price less than its adjusted issue
price will recognize income upon receipt of each distribution representing
stated redemption price. In particular, under Section 1276 of the Internal
Revenue Code, the certificateholder will be required to allocate the portion of
each distribution representing stated redemption price first to accrued market
discount not previously included in income, and to recognize ordinary income to
that extent.
A certificateholder may elect to include market discount in income
currently as it accrues rather than including it on a deferred basis in
accordance with the foregoing. If made, the election will apply to all market
discount bonds acquired by the certificateholder on or after the first day of
the first taxable year to which the election applies. In addition, the OID
regulations permit a certificateholder to elect to accrue all interest,
discount, including de minimis market or original issue discount, and premium in
income as interest, based on a constant yield method. If the election were made
with respect to a REMIC regular certificate with market discount, the
certificateholder would be deemed to have made an election to include market
discount in income currently with respect to all other debt instruments having
market discount that the certificateholder acquires during the taxable year of
the election or thereafter, and possibly previously acquired instruments.
Similarly, a certificateholder that
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made this election for a certificate that is acquired at a premium would be
deemed to have made an election to amortize bond premium with respect to all
debt instruments having amortizable bond premium that the certificateholder owns
or acquires. See "Taxation of Owners of REMIC Regular Certificates -- Premium."
Each of these elections to accrue interest, discount and premium with respect to
a certificate on a constant yield method or as interest would be irrevocable.
However, market discount with respect to a REMIC regular certificate
will be considered to be de minimis for purposes of Section 1276 of the Code if
the market discount is less than 0.25% of the remaining stated redemption price
of the REMIC regular certificate multiplied by the number of complete years to
maturity remaining after the date of its purchase. In interpreting a similar
rule with respect to original issue discount on obligations payable in
installments, the OID regulations refer to the weighted average maturity of
obligations, and it is likely that the same rule will be applied with respect to
market discount, presumably taking into account the prepayment assumption. If
market discount is treated as de minimis under this rule, it appears that the
actual discount would be treated in a manner similar to original issue discount
of a de minimis amount. See "Taxation of Owners of REMIC Regular Certificates --
Original Issue Discount." This treatment would result in discount being included
in income at a slower rate than discount would be required to be included in
income using the method described above.
Internal Revenue Code Section 1276(b)(3) specifically authorizes the
Treasury Department to issue regulations providing for the method for accruing
market discount on debt instruments, the principal of which is payable in more
than one installment. Until regulations are issued by the Treasury Department, a
number of rules described in the Committee Report apply. The Committee Report
indicates that in each accrual period market discount on REMIC regular
certificates should accrue, at the certificateholder's option:
o on the basis of a constant yield method;
o in the case of a REMIC regular certificate issued without
original issue discount, in an amount that bears the same
ratio to the total remaining market discount as the stated
interest paid in the accrual period bears to the total amount
of stated interest remaining to be paid on the REMIC regular
certificate as of the beginning of the accrual period; or
o in the case of a REMIC regular certificate issued with
original issue discount, in an amount that bears the same
ratio to the total remaining market discount as the original
issue discount accrued in the accrual period bears to the
total original issue discount remaining on the REMIC regular
certificate at the beginning of the accrual period.
Moreover, the prepayment assumption used in calculating the accrual of
original issue discount is to be used in calculating the accrual of market
discount. Because the regulations referred to in the preceding paragraph have
not been issued, it is not possible to predict what effect those regulations
might have on the tax treatment of a REMIC regular certificate purchased at a
discount in the secondary market.
To the extent that REMIC regular certificates provide for monthly or
other periodic distributions throughout their term, the effect of these rules
may be to require market discount to be includible in income at a rate that is
not significantly slower than the rate at which the discount would accrue if it
were original issue discount. Moreover, in any event a holder of a REMIC regular
certificate generally will be required to treat a portion of any gain on the
sale or exchange of that
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certificate as ordinary income to the extent of the market discount accrued to
the date of disposition under one of the foregoing methods, less any accrued
market discount previously reported as ordinary income.
Further, under Section 1277 of the Code a holder of a REMIC regular
certificate may be required to defer a portion of its interest deductions for
the taxable year attributable to any indebtedness incurred or continued to
purchase or carry a REMIC regular certificate purchased with market discount.
For these purposes, the de minimis rule referred to above applies. Any deferred
interest expense would not exceed the market discount that accrues during that
taxable year and is, in general, allowed as a deduction not later than the year
in which the market discount is includible in income. If the holder elects to
include market discount in income currently as it accrues on all market discount
instruments acquired by that holder in that taxable year or thereafter, the
interest deferral rule described above will not apply.
PREMIUM
A REMIC regular certificate purchased at a cost, excluding any portion
of that cost attributable to accrued qualified stated interest, greater than its
remaining stated redemption price will be considered to be purchased at a
premium. The holder of a REMIC regular certificate may elect under Section 171
of the Code to amortize that premium under the constant yield method over the
life of the certificate. If this election is made, it will apply to all debt
instruments having amortizable bond premium that the holder owns or subsequently
acquires. Amortizable premium will be treated as an offset to interest income on
the related REMIC regular certificate, rather than as a separate interest
deduction. The OID regulations also permit certificateholders to elect to
include all interest, discount and premium in income based on a constant yield
method, further treating the certificateholder as having made the election to
amortize premium generally. See "Taxation of Owners of REMIC Regular
Certificates -- Market Discount." The Committee Report states that the same
rules that apply to accrual of market discount, which rules will require use of
a prepayment assumption in accruing market discount with respect to REMIC
regular certificates without regard to whether those certificates have original
issue discount, will also apply in amortizing bond premium under Section 171 of
the Internal Revenue Code.
REALIZED LOSSES
Under Internal Revenue Code Section 166 both corporate holders of the
REMIC regular certificates and noncorporate holders of the REMIC regular
certificates that acquire those certificates in connection with a trade or
business should be allowed to deduct, as ordinary losses, any losses sustained
during a taxable year in which their certificates become wholly or partially
worthless as the result of one or more realized losses on the home equity loans.
However, it appears that a noncorporate holder that does not acquire a REMIC
regular certificate in connection with a trade or business will not be entitled
to deduct a loss under Section 166 of the Internal Revenue Code until the
holder's certificate becomes wholly worthless (i.e., until its outstanding
principal balance has been reduced to zero) and that the loss will be
characterized as a short-term capital loss.
Each holder of a REMIC regular certificate will be required to accrue
interest and original issue discount with respect to that certificate, without
giving effect to any reductions in distributions attributable to defaults or
delinquencies on the home equity loans or the underlying certificates until it
can be established that any reduction ultimately will not be recoverable. As a
result, the amount of taxable income reported in any period by the holder of a
REMIC regular certificate could exceed the amount of economic income actually
realized by the holder in that period. Although the holder of a REMIC regular
certificate eventually will recognize a loss or reduction in income attributable
to
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previously accrued and included income that, as the result of a realized loss,
ultimately will not be realized, the law is unclear with respect to the timing
and character of the loss or reduction in income.
TAXATION OF OWNERS OF REMIC RESIDUAL CERTIFICATES
General. As residual interests, the REMIC residual certificates will be
subject to tax rules that differ significantly from those that would apply if
the REMIC residual certificates were treated for federal income tax purposes as
direct ownership interests in the home equity loans or as debt instruments
issued by the REMIC.
A holder of a REMIC residual certificate typically will be required to
report its daily portion of the taxable income or, subject to the limitations
noted in this discussion, the net loss of the REMIC for each day during a
calendar quarter that the holder owned the REMIC residual certificate. For this
purpose, the taxable income or net loss of the REMIC will be allocated to each
day in the calendar quarter ratably using a "30 days per month/90 days per
quarter/360 days per year" convention unless otherwise disclosed in the related
prospectus supplement. The daily amounts will then be allocated among the REMIC
residual certificateholders in proportion to their respective ownership
interests on that day. Any amount included in the gross income or allowed as a
loss of any REMIC residual certificateholder by virtue of this allocation will
be treated as ordinary income or loss. The taxable income of the REMIC will be
determined under the rules described below in "Taxable Income of the REMIC" and
will be taxable to the REMIC residual certificateholders without regard to the
timing or amount of cash distributions by the REMIC. Ordinary income derived
from REMIC residual certificates will be "portfolio income" for purposes of the
taxation of taxpayers subject to limitations under Section 469 of the Internal
Revenue Code on the deductibility of "passive losses."
A holder of a REMIC residual certificate that purchased the certificate
from a prior holder of that certificate also will be required to report on its
federal income tax return amounts representing its daily portion of the taxable
income or net loss of the REMIC for each day that it holds the REMIC residual
certificate. These daily portions will equal the amounts of taxable income or
net loss determined as described above. The Committee Report indicates that
modifications of the general rules may be made, by regulations, legislation or
otherwise, to reduce, or increase, the income or loss of a holder of a REMIC
residual certificateholder that purchased the REMIC residual certificate from a
prior holder of the certificate at a price greater than, or less than, the
adjusted basis, the REMIC residual certificate would have had in the hands of an
original holder of the certificate. The REMIC regulations, however, do not
provide for any modifications.
Any payments received by a holder of a REMIC residual certificate in
connection with the acquisition of that REMIC residual certificate will be taken
into account in determining the income of the holder for federal income tax
purposes. Although it appears likely that the payment would be includible in
income immediately upon its receipt, the IRS might assert that the payment
should be included in income over time according to an amortization schedule or
according to some other method. Because of the uncertainty concerning the
treatment of these payments, holders of REMIC residual certificates should
consult their tax advisors concerning the treatment of these payments for income
tax purposes.
The amount of income REMIC residual certificateholders will be required
to report, or the tax liability associated with that income, may exceed the
amount of cash distributions received from the REMIC for the corresponding
period. Consequently, REMIC residual certificateholders should have other
sources of funds sufficient to pay any federal income taxes due as a result of
their ownership of REMIC residual certificates or unrelated deductions against
which income may be offset, subject to the
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rules relating to "excess inclusions," residual interests without "significant
value" and "noneconomic" residual interests discussed below. The fact that the
tax liability associated with the income allocated to REMIC residual
certificateholders may exceed the cash distributions received by the REMIC
residual certificateholders for the corresponding period may significantly
adversely affect the REMIC residual certificateholders' after-tax rate of
return.
Taxable Income of the REMIC. The taxable income of the REMIC will equal
the income from the home equity loans and other assets of the REMIC plus any
cancellation of indebtedness income due to the allocation of realized losses to
REMIC regular certificates, less the deductions allowed to the REMIC for
interest, including original issue discount and reduced by the amortization of
any premium received on issuance, on the REMIC regular certificates, and any
other class of REMIC certificates constituting "regular interests" in the REMIC
not offered by this prospectus, amortization of any premium on the home equity
loans, bad debt deductions with respect to the home equity loans and, except as
described below, for servicing, administrative and other expenses.
For purposes of determining its taxable income, the REMIC will have an
initial aggregate basis in its assets equal to their fair market value
immediately after their transfer to the REMIC. For this purpose, the master
servicer intends to treat the fair market value of the home equity loans as
being equal to the aggregate issue prices of the REMIC regular certificates and
REMIC residual certificates. The aggregate basis will be allocated among the
home equity loans collectively and the other assets of the REMIC in proportion
to their respective fair market values. The issue price of any REMIC
certificates offered by this prospectus will be determined in the manner
described above under " --Taxation of Owners of REMIC Regular Certificates --
Original Issue Discount." Accordingly, if one or more classes of REMIC
certificates are retained initially rather than sold, the master servicer may be
required to estimate the fair market value of those interests in order to
determine the basis of the REMIC in the home equity loans and other property
held by the REMIC.
Subject to the possible application of the de minimis rules, the method
of accrual by the REMIC of original issue discount income and market discount
income with respect to home equity loans that it holds will be equivalent to the
method of accruing original issue discount income for REMIC regular
certificateholders, that is, under the constant yield method taking into account
the prepayment assumption. However, a REMIC that acquires loans at a market
discount must include the discount in income currently, as it accrues, on a
constant interest basis. See " --Taxation of Owners of REMIC Regular
Certificates" above, which describes a method of accruing discount income that
is analogous to that required to be used by a REMIC as to home equity loans with
market discount that it holds.
A home equity loan will be deemed to have been acquired with discount,
or premium, to the extent that the REMIC's basis in the home equity loan,
determined as described in the preceding paragraph, is less than, or greater
than, its stated redemption price. Any discount will be includible in the income
of the REMIC as it accrues, in advance of receipt of the cash attributable to
that income, under a method similar to the method described above for accruing
original issue discount on the REMIC regular certificates. It is anticipated
that each REMIC will elect under Section 171 of the Internal Revenue Code to
amortize any premium on the home equity loans. Premium on any home equity loan
to which the election applies may be amortized under a constant yield method,
presumably taking into account a prepayment assumption.
A REMIC will be allowed deductions for interest, including original
issue discount, on the REMIC regular certificates, including any other class of
REMIC certificates constituting "regular interests" in the REMIC not offered by
this prospectus, equal to the deductions that would be allowed
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if the REMIC regular certificates, including any other class of REMIC
certificates constituting "regular interests" in the REMIC not offered by this
prospectus, were indebtedness of the REMIC. Original issue discount will be
considered to accrue for this purpose as described above under " -- Taxation of
Owners of REMIC Regular Certificates -- Original Issue Discount," except that
the de minimis rule and the adjustments for subsequent holders of REMIC regular
certificates, including any other class of certificates constituting "regular
interests" in the REMIC not offered by this prospectus, described in that
section will not apply.
If a class of REMIC regular certificates is issued at an Issue Premium,
the REMIC will have an additional item of income in an amount equal to the
portion of the Issue Premium that is considered to be amortized or repaid in
that year. Although the matter is not entirely certain, it is likely that Issue
Premium would be amortized under a constant yield method in a manner analogous
to the method of accruing original issue discount described above under " --
Taxation of Owners of REMIC Regular Certificates -- Original Issue Discount."
As a general rule, the taxable income of the REMIC is required to be
determined in the same manner as if the REMIC were an individual having the
calendar year as its taxable year and using the accrual method of accounting.
However, no item of income, gain, loss or deduction allocable to a prohibited
transaction will be taken into account. See " -- Prohibited Transactions and
Other Possible REMIC Taxes" below. Further, the limitation on miscellaneous
itemized deductions imposed on individuals by Section 67 of the Internal Revenue
Code, which allows those deductions only to the extent they exceed in the
aggregate two percent of the taxpayer's adjusted gross income, will not be
applied at the REMIC level so that the REMIC will be allowed deductions for
servicing, administrative and other non-interest expenses in determining its
taxable income. All of these expenses will be allocated as a separate item to
the holders of REMIC certificates, subject to the limitation of Section 67 of
the Internal Revenue Code and the rules relating to the alternative minimum tax.
See " -- Possible Pass-Through of Miscellaneous Itemized Deductions." If the
deductions allowed to the REMIC exceed its gross income for a calendar quarter,
the excess will be the net loss for the REMIC for that calendar quarter.
Basis Rules, Net Losses and Distributions. The adjusted basis of a
REMIC residual certificate will be equal to the amount paid for that REMIC
residual certificate, increased by amounts included in the income of the REMIC
residual certificateholder and decreased, but not below zero, by distributions
made, and by net losses allocated, to the REMIC residual certificateholder.
A REMIC residual certificateholder is not allowed to take into account
any net loss for any calendar quarter to the extent the net loss exceeds the
REMIC residual certificateholder's adjusted basis in its REMIC residual
certificate as of the close of that calendar quarter, determined without regard
to the net loss. Any loss that is not currently deductible 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 certificate. The ability of REMIC residual certificateholders to deduct
net losses may be subject to additional limitations under the Internal Revenue
Code, as to which REMIC residual certificateholders should consult their tax
advisors.
Any distribution on a REMIC residual certificate will be treated as a
non-taxable return of capital to the extent it does not exceed the holder's
adjusted basis in the REMIC residual certificate. To the extent a distribution
on a REMIC residual certificate exceeds the adjusted basis, it will be treated
as gain from the sale of the REMIC residual certificate. Holders of REMIC
residual certificates may be entitled to distributions early in the term of the
related REMIC under circumstances in which their bases in the REMIC residual
certificates will not be sufficiently large that distributions will be treated
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as nontaxable returns of capital. Their bases in the REMIC residual certificates
will initially equal the amount paid for the REMIC residual certificates and
will be increased by their allocable shares of taxable income of the trust.
However, their basis increases may not occur until the end of the calendar
quarter, or perhaps the end of the calendar year, with respect to which the
REMIC taxable income is allocated to the REMIC residual certificateholders. To
the extent the REMIC residual certificateholders' initial bases are less than
the distributions to the REMIC residual certificateholders, and increases in the
initial bases either occur after the distributions or, together with their
initial bases, are less than the amount of the distributions, gain will be
recognized to the REMIC residual certificateholders on those distributions and
will be treated as gain from the sale of their REMIC residual certificates.
The effect of these rules is that a Residual certificateholder may not
amortize its basis in a REMIC residual certificate, but may only recover its
basis through distributions, through the deduction of its share of any net
losses of the REMIC or upon the sale of its REMIC residual certificate. See "
- --Sales of REMIC Certificates." For a discussion of possible modifications of
these rules that may require adjustments to income of a holder of a REMIC
residual certificate other than an original holder in order to reflect any
difference between the cost of the REMIC residual certificate to the holder and
the adjusted basis the REMIC residual certificate would have had in the hands of
the original holder, see " -- Taxation of Owners of REMIC Residual Certificates
- -- General."
Excess Inclusions. Any "excess inclusions" with respect to a REMIC
residual certificate will be subject to federal income tax in all events.
In general, the "excess inclusions" with respect to a REMIC residual
certificate for any calendar quarter will be the excess, if any, of:
o the sum of the daily portions of REMIC taxable income
allocable to the REMIC residual certificate over
o the sum of the "daily accruals" for each day during that
quarter that the REMIC residual certificate was held by the
REMIC residual certificateholder.
The daily accruals of a REMIC residual certificateholder will be
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
certificate at the beginning of the calendar quarter and 120% of the "long-term
Federal rate" in effect on the closing date. For this purpose, the adjusted
issue price of a REMIC residual certificate as of the beginning of any calendar
quarter will be equal to the issue price of the REMIC residual certificate,
increased by the sum of the daily accruals for all prior quarters and decreased,
but not below zero, by any distributions made with respect to the REMIC residual
certificate before the beginning of that quarter. The issue price of a REMIC
residual certificate is the initial offering price to the public, excluding bond
houses, brokers and underwriters, at which a substantial amount of the REMIC
residual certificates were sold. If less than a substantial amount of REMIC
residual certificates is sold for cash on or prior to the closing date, the
issue price for those REMIC residual certificates will be treated as the fair
market value of those REMIC residual certificates on the closing date. The
"long-term Federal rate" is an average of current yields on Treasury securities
with a remaining term of greater than nine years, computed and published monthly
by the IRS. Although it has not done so, the Treasury has authority to issue
regulations that would treat the entire amount of income accruing on a REMIC
residual certificate as an excess inclusion if the REMIC residual certificates
are considered not to have "significant value."
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For REMIC residual certificateholders, an excess inclusion:
o will not be permitted to be offset by deductions, losses or
loss carryovers from other activities
o will be treated as "unrelated business taxable income" to an
otherwise tax-exempt organization and
o will not be eligible for any rate reduction or exemption under
any applicable tax treaty with respect to the 30% United
States withholding tax imposed on distributions to REMIC
residual certificateholders that are foreign investors. See,
however, " --Foreign Investors in REMIC Certificates," below.
Furthermore, for purposes of the alternative minimum tax:
o excess inclusions will not be permitted to be offset by the
alternative tax net operating loss deduction and
o alternative minimum taxable income may not be less than the
taxpayer's excess inclusions; provided, however, that for
purposes of this clause, alternative minimum taxable income is
determined without regard to the special rule that taxable
income cannot be less than excess inclusions. The latter rule
has the effect of preventing nonrefundable tax credits from
reducing the taxpayer's income tax to an amount lower than the
alternative minimum tax on excess inclusions.
In the case of any REMIC residual certificates held by a real estate
investment trust, the aggregate excess inclusions with respect to the REMIC
residual certificates, reduced, but not below zero, by the real estate
investment trust taxable income, within the meaning of Section 857(b)(2) of the
Internal Revenue Code, excluding any net capital gain, will be allocated among
the shareholders of the trust in proportion to the dividends received by the
shareholders from the trust, and any amount so allocated will be treated as an
excess inclusion with respect to a REMIC residual certificate as if held
directly by the shareholder. Treasury regulations yet to be issued could apply a
similar rule to regulated investment companies, common trust funds and a number
of cooperatives; the REMIC Regulations currently do not address this subject.
Noneconomic REMIC Residual Certificates. Under the REMIC Regulations,
transfers of "noneconomic" REMIC residual certificates will be disregarded for
all federal income tax purposes if "a significant purpose of the transfer was to
enable the transferor to impede the assessment or collection of tax." If the
transfer is disregarded, the purported transferor will continue to remain liable
for any taxes due with respect to the income on the "noneconomic" REMIC residual
certificate. The REMIC regulations provide that a REMIC residual certificate is
noneconomic unless, based on the prepayment assumption and on any required or
permitted clean up calls, or required qualified liquidation provided for in the
REMIC's organizational documents:
o the present value of the expected future distributions,
discounted using the "applicable Federal rate" for obligations
whose term ends on the close of the last quarter in which
excess inclusions are expected to accrue with respect to the
REMIC residual certificate, which rate is computed and
published monthly by the IRS, on the REMIC residual
certificate equals at least the present value of the expected
tax on the anticipated excess inclusions, and
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o the transferor reasonably expects that the transferee will
receive distributions with respect to the REMIC residual
certificate at or after the time the taxes accrue on the
anticipated excess inclusions in an amount sufficient to
satisfy the accrued taxes.
Accordingly, all transfers of REMIC residual certificates that may
constitute noneconomic residual interests will be subject to restrictions under
the terms of the related pooling and servicing agreement that are intended to
reduce the possibility of any transfer being disregarded. The restrictions will
require each party to a transfer to provide an affidavit that no purpose of the
transfer is to impede the assessment or collection of tax, including
representations as to the financial condition of the prospective transferee, as
to which the transferor also is required to make a reasonable investigation to
determine the transferee's historic payment of its debts and ability to continue
to pay its debts as they come due in the future. Prior to purchasing a REMIC
residual certificate, prospective purchasers should consider the possibility
that a purported transfer of the REMIC residual certificate by this type of a
purchaser to another purchaser at some future date may be disregarded in
accordance with the above-described rules which would result in the retention of
tax liability by that purchaser.
The related prospectus supplement will disclose whether offered REMIC
residual certificates may be considered "noneconomic" residual interests under
the REMIC Regulations. Any disclosure that a REMIC residual certificate will not
be considered "noneconomic" will be based upon a number of assumptions, and the
depositor will make no representation that a REMIC residual certificate will not
be considered "noneconomic" for purposes of the above-described rules. See " --
Foreign Investors in REMIC Certificates -- REMIC Residual Certificates" below
for additional restrictions applicable to transfers of REMIC residual
certificates to foreign persons.
Mark-to-Market Rules. On December 24, 1996, the IRS released the
Mark-to-Market Regulations. The mark-to-market requirement applies to all
securities owned by a dealer, except to the extent that the dealer has
specifically identified a security as held for investment. The Mark-to-Market
Regulations provide that for purposes of this mark-to-market requirement, a
REMIC residual certificate acquired after January 4, 1995 is not treated as a
security and thus may not be marked to market. Prospective purchasers of a REMIC
residual certificate should consult their tax advisors regarding the possible
application of the mark-to-market requirement to REMIC residual certificates.
Possible Pass-Through of Miscellaneous Itemized Deductions. Fees and
expenses of a REMIC typically will be allocated to the holders of the related
REMIC residual certificates. The applicable Treasury regulations indicate,
however, that in the case of a REMIC that is similar to a single class grantor
trust, all or a portion of those fees and expenses should be allocated to the
holders of the related REMIC regular certificates. Unless otherwise stated in
the related prospectus supplement, fees and expenses will be allocated to
holders of the related REMIC residual certificates in their entirety and not to
the holders of the related REMIC regular certificates.
With respect to REMIC residual certificates or REMIC regular
certificates the holders of which receive an allocation of fees and expenses in
accordance with the preceding discussion, if any holder thereof is an
individual, estate or trust, or a "pass-through entity" beneficially owned by
one or more individuals, estates or trusts:
o an amount equal to the individual's, estate's or trust's share
of fees and expenses will be added to the gross income of that
holder and
o the individual's, estate's or trust's share of fees and
expenses will be treated as a miscellaneous itemized deduction
allowable subject to the limitation of Section 67 of
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the Internal Revenue Code, which permits those deductions only
to the extent they exceed in the aggregate two percent of a
taxpayer's adjusted gross income.
In addition, Section 68 of the Internal Revenue Code provides that the
amount of itemized deductions otherwise allowable for an individual whose
adjusted gross income exceeds a specified amount will be reduced by the lesser
of:
o 3% of the excess of the individual's adjusted gross income
over that amount or
o 80% of the amount of itemized deductions otherwise allowable
for the taxable year.
The amount of additional taxable income reportable by REMIC
certificateholders that are subject to the limitations of either Section 67 or
Section 68 of the Internal Revenue Code may be substantial. Furthermore, in
determining the alternative minimum taxable income of this type of holder of a
REMIC certificate that is an individual, estate or trust, or a "pass-through
entity" beneficially owned by one or more individuals, estates or trusts, no
deduction will be allowed for the holder's allocable portion of servicing fees
and other miscellaneous itemized deductions of the REMIC, even though an amount
equal to the amount of fees and other deductions will be included in the
holder's gross income. Accordingly, the REMIC certificates may not be
appropriate investments for individuals, estates, or trusts, or pass-through
entities beneficially owned by one or more individuals, estates or trusts. Any
prospective investors should consult with their tax advisors prior to making an
investment in these certificates.
SALES OF REMIC CERTIFICATES
If a REMIC certificate is sold, the selling certificateholder will
recognize gain or loss equal to the difference between the amount realized on
the sale and its adjusted basis in the REMIC certificate. The adjusted basis of
a REMIC regular certificate typically will equal the cost of that REMIC regular
certificate to that certificateholder, increased by income reported by the
certificateholder with respect to that REMIC regular certificate, including
original issue discount and market discount income, and reduced, but not below
zero, by distributions on the REMIC regular certificate received by the
certificateholder and by any amortized premium. The adjusted basis of a REMIC
residual certificate will be determined as described under " -- Taxation of
Owners of REMIC Residual Certificates -- Basis Rules, Net Losses and
Distributions." Except as described below, any gain or loss in most cases will
be capital gain or loss.
Gain from the sale of a REMIC regular certificate that might otherwise
be capital gain will be treated as ordinary income to the extent the gain does
not exceed the excess, if any, of:
o the amount that would have been includible in the seller's
income with respect to the REMIC regular certificate had
income accrued thereon at a rate equal to 110% of the
"applicable Federal rate", which is typically a rate based on
an average of current yields on Treasury securities having a
maturity comparable to that of the certificate, which rate is
computed and published monthly by the IRS, determined as of
the date of purchase of the REMIC regular certificate, over
o the amount of ordinary income actually includible in the
seller's income prior to the sale.
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In addition, gain recognized on the sale of a REMIC regular certificate
by a seller who purchased the REMIC regular certificate at a market discount
will be taxable as ordinary income to the extent of any accrued and previously
unrecognized market discount that accrued during the period the certificate was
held. See " -- Taxation of Owners of REMIC Regular Certificates -- Market
Discount."
REMIC certificates will be "evidences of indebtedness" within the
meaning of Section 582(c)(1) of the Internal Revenue Code, so that gain or loss
recognized from the sale of a REMIC certificate by a bank or thrift institution
to which that section applies will be ordinary income or loss.
A portion of any gain from the sale of a REMIC regular certificate that
might otherwise be capital gain may be treated as ordinary income to the extent
that the certificate is held as part of a "conversion transaction" within the
meaning of Section 1258 of the Internal Revenue Code. A conversion transaction
generally is one in which the taxpayer has taken two or more positions in
certificates or similar property that reduce or eliminate market risk, if
substantially all of the taxpayer's return is attributable to the time value of
the taxpayer's net investment in the transaction. The amount of gain so realized
in a conversion transaction that is recharacterized as ordinary income in most
cases will not exceed the amount of interest that would have accrued on the
taxpayer's net investment at 120% of the appropriate "applicable Federal rate",
which rate is computed and published monthly by the IRS, at the time the
taxpayer enters into the conversion transaction, subject to appropriate
reduction for prior inclusion of interest and other ordinary income items from
the transaction.
Finally, a taxpayer may elect to have net capital gain taxed at
ordinary income rates rather than capital gains rates in order to include any
net capital gain in total net investment income for the taxable year, for
purposes of the limitation on the deduction of interest on indebtedness incurred
to purchase or carry property held for investment to a taxpayer's net investment
income.
If the seller of a REMIC residual certificate reacquires the
certificate, any other residual interest in a REMIC or any similar interest in a
"taxable mortgage pool", as defined in Section 7701(i) of the Internal Revenue
Code, within six months of the date of the sale, the sale will be subject to the
"wash sale" rules of Section 1091 of the Internal Revenue Code. In that event,
any loss realized by the REMIC residual certificateholder on the sale will not
be deductible, but instead will be added to the REMIC residual
certificateholder's adjusted basis in the newly-acquired asset.
PROHIBITED TRANSACTIONS AND OTHER POSSIBLE REMIC TAXES
The Code imposes a tax on REMICs equal to 100% of the net income
derived from "prohibited transactions". In general, subject to specified
exceptions a prohibited transaction means the disposition of a home equity loan,
the receipt of income from a source other than a home equity loan or other
permitted investments, the receipt of compensation for services, or gain from
the disposition of an asset purchased with the payments on the home equity loans
for temporary investment pending distribution on the REMIC certificates. It is
not anticipated that any REMIC will engage in any prohibited transactions in
which it would recognize a material amount of net income.
In addition, some types of contributions to a REMIC made after the day
on which the REMIC issues all of its interests could result in the imposition of
a tax on the REMIC equal to 100% of the value of the contributed property. Each
pooling and servicing agreement will include provisions designed to prevent the
acceptance of any contributions that would be subject to the tax.
REMICs also are subject to federal income tax at the highest corporate
rate on "net income from foreclosure property," determined by reference to the
rules applicable to real estate investment
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trusts. "Net income from foreclosure property" generally means gain from the
sale of a 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. Unless otherwise disclosed in the related
prospectus supplement, it is not anticipated that any REMIC will recognize "net
income from foreclosure property" subject to federal income tax.
Unless otherwise stated in the related prospectus supplement, and to
the extent permitted by then applicable laws, any prohibited transactions tax,
contributions tax, tax on "net income from foreclosure property" or state or
local income or franchise tax that may be imposed on the REMIC will be borne by
the related master servicer or trustee in either case out of its own funds,
provided that the master servicer or the trustee, as the case may be, has
sufficient assets to do so, and provided further that the tax arises out of a
breach of the master servicer's or the trustee's obligations, as the case may
be, under the related pooling and servicing agreement and relating to compliance
with applicable laws and regulations. Any tax not borne by the master servicer
or the trustee will be payable out of the related trust resulting in a reduction
in amounts payable to holders of the related REMIC certificates.
TAX AND RESTRICTIONS ON TRANSFERS OF REMIC RESIDUAL CERTIFICATES TO
CERTAIN ORGANIZATIONS
If a REMIC residual certificate is transferred to a "disqualified
organization", a tax would be imposed in an amount, determined under the REMIC
Regulations, equal to the product of:
o the present value, discounted using the "applicable Federal
rate" for obligations whose term ends on the close of the last
quarter in which excess inclusions are expected to accrue with
respect to the certificate, which rate is computed and
published monthly by the IRS, of the total anticipated excess
inclusions with respect to the REMIC residual certificate for
periods after the transfer and
o the highest marginal federal income tax rate applicable to
corporations.
The anticipated excess inclusions must be determined as of the date
that the REMIC residual certificate is transferred and must be based on events
that have occurred up to the time of transfer, the prepayment assumption and any
required or permitted clean up calls or required liquidation provided for in the
REMIC's organizational documents. This tax generally would be imposed on the
transferor of the REMIC residual certificate, except that where the transfer is
through an agent for a disqualified organization, the tax would instead be
imposed on that agent. However, a transferor of a REMIC residual certificate
would in no event be liable for the tax with respect to a transfer if the
transferee furnishes to the transferor an affidavit that the transferee is not a
disqualified organization and, as of the time of the transfer, the transferor
does not have actual knowledge that the affidavit is false. Moreover, an entity
will not qualify as a REMIC unless there are reasonable arrangements designed to
ensure that:
o residual interests in the entity are not held by disqualified
organizations; and
o information necessary for the application of the tax described
in this prospectus will be made available.
Restrictions on the transfer of REMIC residual certificates and a
number of other provisions that are intended to meet this requirement will be
included in the pooling and servicing agreement, and will be discussed more
fully in any prospectus supplement relating to the offering of any REMIC
residual certificate.
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In addition, if a "pass-through entity" includes in income excess
inclusions with respect to a REMIC residual certificate, and a disqualified
organization is the record holder of an interest in that entity, then a tax will
be imposed on it equal to the product of:
o the amount of excess inclusions on the REMIC residual
certificate that are allocable to the interest in the
pass-through entity held by the disqualified organization and
o the highest marginal federal income tax rate imposed on
corporations.
A pass-through entity will not be subject to this tax for any period,
however, if each record holder of an interest in that pass-through entity
furnishes to that pass-through entity the holder's social security number and a
statement under penalties of perjury that the social security number is that of
the record holder, or a statement under penalties of perjury that the record
holder is not a disqualified organization.
For these purposes, a "disqualified organization" means:
o the United States, any State or political subdivision thereof,
any foreign government, any international organization, or any
agency or instrumentality of the foregoing, but would not
include instrumentalities described in Section 168(h)(2)(D) of
the Code or the Federal Home Loan Mortgage Corporation;
o any organization, other than a cooperative described in
Section 521 of the Internal Revenue Code, that is exempt from
federal income tax, unless it is subject to the tax imposed by
Section 511 of the Internal Revenue Code; or
o any organization described in Section 1381 (a)(2)(C) of the
Internal Revenue Code.
For these purposes, a "pass-through entity" means any regulated
investment company, real estate investment trust, trust, partnership or other
entities described in Section 860E (e)(6) of the Internal Revenue Code. In
addition, a person holding an interest in a pass-through entity as a nominee for
another person will, with respect to that interest, be treated as a pass-through
entity.
TERMINATION
A REMIC will terminate immediately after the distribution date
following receipt by the REMIC of the final payment from of the home equity
loans or upon a sale of the REMIC's assets following the adoption by the REMIC
of a plan of complete liquidation. The last distribution on a REMIC regular
certificate will be treated as a payment in retirement of a debt instrument. In
the case of a REMIC residual certificate, if the last distribution on the REMIC
residual certificate is less than the REMIC residual certificateholder's
adjusted basis in the certificate, the REMIC residual certificateholder should
be treated as realizing a loss equal to the amount of the difference. The loss
may be subject to the "wash sale" rules of Section 1091 of the Internal Revenue
Code. See " -- Sales of REMIC Certificates." The character of this loss as
ordinary or capital is uncertain.
REPORTING AND OTHER ADMINISTRATIVE MATTERS
Solely for purposes of the administrative provisions of the Internal
Revenue Code, the REMIC will be treated as a partnership and REMIC residual
certificateholders will be treated as partners. Unless otherwise stated in the
related prospectus supplement, the master servicer will file REMIC federal
income tax returns on behalf of the related REMIC, will be designated as and
will act as the
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"tax matters person" with respect to the REMIC in all respects, and will hold at
least a nominal amount of REMIC residual certificates.
As the tax matters person, the master servicer will have the authority
to act on behalf of the REMIC and the REMIC residual certificateholders in
connection with the administrative and judicial review of items of income,
deduction, gain or loss of the REMIC, as well as the REMIC's classification.
REMIC residual certificateholders will be required to report the REMIC items
consistently with their treatment on the related REMIC's tax return and may in
some circumstances be bound by a settlement agreement between the master
servicer, as tax matters person, and the IRS concerning the REMIC item.
Adjustments made to the REMIC tax return may require a REMIC residual
certificateholder to make corresponding adjustments on its return, and an audit
of the REMIC's tax return, or the adjustments resulting from an audit, could
result in an audit of a REMIC residual certificateholder's return. No REMIC will
be registered as a tax shelter under Section 6111 of the Internal Revenue Code
because it is not anticipated that any REMIC will have a net loss for any of the
first five taxable years of its existence. Any person that holds a REMIC
residual certificate as a nominee for another person may be required to furnish
to the related REMIC, in a manner to be provided in Treasury regulations, the
name and address of that person and other information.
Reporting of interest income, including any original issue discount,
with respect to REMIC regular certificates is required annually, and may be
required more frequently under Treasury regulations. These information reports
are required to be sent to individual holders of REMIC regular interests and the
IRS; holders of REMIC regular certificates that are corporations, trusts,
securities dealers and other non-individuals will be provided interest and
original issue discount income information and the information set forth in the
following paragraph upon request in accordance with the requirements of the
applicable regulations. The information must be provided by the later of 30 days
after the end of the quarter for which the information was requested, or two
weeks after the receipt of the request. The REMIC must also comply with rules
requiring a REMIC regular certificate issued with original issue discount to
disclose on its face information including the amount of original issue discount
and the issue date, and requiring this information to be reported to the IRS.
Reporting with respect to the REMIC residual certificates, including income,
excess inclusions, investment expenses and relevant information regarding
qualification of the REMIC's assets will be made as required under the Treasury
regulations, typically on a quarterly basis.
As applicable, the REMIC regular certificate information reports will
include a statement of the adjusted issue price of the REMIC regular certificate
at the beginning of each accrual period. In addition, the reports will include
information required by regulations with respect to computing the accrual of any
market discount. Because exact computation of the accrual of market discount on
a constant yield method requires information relating to the holder's purchase
price that the master servicer will not have, the regulations only require that
information pertaining to the appropriate proportionate method of accruing
market discount be provided. See "Taxation of Owners of REMIC Regular
Certificates -- Market Discount."
The responsibility for complying with the foregoing reporting rules
will be borne by the master servicer. Certificateholders may request any
information with respect to the returns described in Section 1.6049-7(e)(2) of
the Treasury regulations. Any request should be directed to the master servicer
at Household Finance Corporation, 2700 Sanders Road, Prospect Heights, Illinois
60070.
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BACKUP WITHHOLDING WITH RESPECT TO REMIC CERTIFICATES
Payments of interest and principal, as well as payments of proceeds
from the sale of REMIC certificates, may be subject to the "backup withholding
tax" under Section 3406 of the Internal Revenue Code at a rate of 31% if
recipients of payments fail to furnish to the payor information, including their
taxpayer identification numbers, or otherwise fail to establish an exemption
from the tax. Any amounts deducted and withheld from a distribution to a
recipient would be allowed as a credit against the recipient's federal income
tax. Furthermore, penalties may be imposed by the IRS on a recipient of payments
that is required to supply information but that does not do so in the proper
manner.
FOREIGN INVESTORS IN REMIC CERTIFICATES
A REMIC regular certificateholder that is not a "United States person"
and is not subject to federal income tax as a result of any direct or indirect
connection to the United States in addition to its ownership of a REMIC regular
certificate will not be subject to United States federal income or withholding
tax on a distribution on a REMIC regular certificate, provided that the holder
complies to the extent necessary with identification requirements, including
delivery of a statement, signed by the certificateholder under penalties of
perjury, certifying that the certificateholder is not a United States person and
providing the name and address of the certificateholder. For these purposes,
"United States person" means a citizen or resident of the United States, a
corporation, partnership, including an entity treated as a corporation or
partnership for federal income tax purposes, created or organized in, or under
the laws of, the United States or any state thereof or the District of Columbia
except, in the case of a partnership, to the extent provided in regulations, or
an estate whose income is subject to United States federal income tax regardless
of its source, or a trust if a court within the United States is able to
exercise primary supervision over the administration of the trust and one or
more United States persons have the authority to control all substantial
decisions of the trust. To the extent prescribed in regulations by the Secretary
of the Treasury, which have not yet been issued, a trust which was in existence
on August 20, 1996, other than a trust treated as owned by the grantor under
subpart E of part I of subchapter J of chapter 1 of the Internal Revenue Code,
and which was treated as a United States person on August 20, 1996 may elect to
continue to be treated as a United States person notwithstanding the previous
sentence. It is possible that the IRS may assert that the foregoing tax
exemption should not apply with respect to a REMIC regular certificate held by a
REMIC residual certificateholder that owns directly or indirectly a 10% or
greater interest in the REMIC residual certificates. If the holder does not
qualify for exemption, distributions of interest, including distributions of
accrued original issue discount, to the holder may be subject to a tax rate of
30%, subject to reduction under any applicable tax treaty.
In addition, the foregoing rules will not apply to exempt a United
States shareholder of a controlled foreign corporation from taxation on the
United States shareholder's allocable portion of the interest income received by
the controlled foreign corporation.
Further, it appears that a REMIC regular certificate would not be
included in the estate of a non-resident alien individual and would not be
subject to United States estate taxes. However, certificateholders who are
non-resident alien individuals should consult their tax advisors concerning this
question.
Unless otherwise stated in the related prospectus supplement, transfers
of REMIC residual certificates to investors that are not United States persons
will be prohibited under the related pooling and servicing agreement.
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NEW WITHHOLDING REGULATIONS
The Treasury Department has issued new regulations which make
modifications to the withholding, backup withholding and information reporting
rules described above. The new withholding regulations attempt to unify
certification requirements and modify reliance standards. The new withholding
regulations will generally be effective for payments made after December 31,
1999, subject to transition rules. Prospective investors are urged to consult
their tax advisors regarding the new withholding regulations.
FASIT
GENERAL
The FASIT provisions of the Internal Revenue Code were enacted by the
Small Business Job Protection Act of 1996 and create a new elective statutory
vehicle for the issuance of mortgage-backed and asset-backed securities.
Although the FASIT provisions of the Internal Revenue Code became effective on
September 1, 1997, no Treasury regulations or other administrative guidance has
been issued with respect to those provisions. Accordingly, definitive guidance
cannot be provided with respect to many aspects of the tax treatment of FASIT
holders of certificates. Investors also should note that the FASIT discussion
contained herein constitutes only a summary of the federal income tax
consequences to holders of FASIT certificates. With respect to each series of
FASIT certificates, the related prospectus supplement will provide a detailed
discussion regarding the federal income tax consequences associated with the
particular transaction.
FASIT certificates will be classified as either FASIT certificates,
which generally will be treated as debt for federal income tax purposes, or
FASIT ownership certificates, which generally are not treated as debt for such
purposes, but rather as representing rights and responsibilities with respect to
the taxable income or loss of the related series FASIT. The prospectus
supplement for each series of certificates will indicate whether one or more
FASIT elections will be made for that series and which FASIT certificates of
such series will be designated as regular certificates, and which, if any, will
be designated as FASIT ownership certificates.
QUALIFICATION AS A FASIT
The trust fund underlying a series of certificates (or one or more
designated pools of assets held in the trust fund) will qualify under the
Internal Revenue Code as a FASIT in which the FASIT regular certificates and the
FASIT ownership certificates will constitute the "regular interests" and the
"ownership interests," respectively, if (i) a FASIT election is in effect, (ii)
certain tests concerning (A) the composition of the FASIT's assets and (B) the
nature of the holders of certificates' interests in the FASIT are met on a
continuing basis, and (iii) the trust fund is not a regulated investment company
as defined in Section 851(a) of the Internal Revenue Code.
ASSET COMPOSITION
In order for a trust fund (or one or more designated pools of assets
held by a trust fund) to be eligible for FASIT status, substantially all of the
assets of the trust fund (or the designated pool) must consist of "permitted
assets" as of the close of the third month beginning after the closing date and
at all times thereafter (the "FASIT Qualification Test"). Permitted assets
include (i) cash or cash equivalents, (ii) debt instruments with fixed terms
that would qualify as REMIC regular interests if issued by a REMIC (generally,
instruments that provide for interest at a fixed rate, a qualifying variable
rate, or a qualifying interest-only ("IO") type rate, (iii) foreclosure
property, (iv) certain hedging instruments (generally, interest and currency
rate swaps and credit enhancement contracts) that
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are reasonably required to guarantee or hedge against the FASIT's risks
associated with being the obligor on FASIT interests, (v) contract rights to
acquire qualifying debt instruments or qualifying hedging instruments, (vi)
FASIT regular interests, and (vii) REMIC regular interests. Permitted assets do
not include any debt instruments issued by the holder of the FASIT's ownership
interest or by any person related to such holder.
INTERESTS IN A FASIT
In addition to the foregoing asset qualification requirements, the
interests in a FASIT also must meet certain requirements. All of the interests
in a FASIT must belong to either of the following: (i) one or more classes of
regular interests or (ii) a single class of ownership interest that is held by a
fully taxable domestic C corporation. In the case of series that include FASIT
ownership certificates, the ownership interest will be represented by the FASIT
ownership certificates.
A FASIT interest generally qualifies as a regular interest if (i) it is
designated as a regular interest, (ii) it has a stated maturity no greater than
thirty years, (iii) it entitles its holder to a specified principal amount, (iv)
the issue price of the interest does not exceed 125% of its stated principal
amount, (v) the yield to maturity of the interest is less than the applicable
Treasury rate published by the IRS plus 5%, and (vi) if it pays interest, such
interest is payable at either (A) a fixed rate with respect to the principal
amount of the regular interest or (B) a permissible variable rate with respect
to such principal amount. Permissible variable rates for FASIT regular interests
are the same as those for REMIC regular interests (i.e., certain qualified
floating rates and weighted average rates).
If a FASIT certificate fails to meet one or more of the requirements
set out in clauses (iii), (iv), or (v), but otherwise meets the above
requirements, it may still qualify as a type of regular interest known as a
high-yield interest. In addition, if a FASIT certificate fails to meet the
requirement of clause (vi), but the interest payable on the certificate consists
of a specified portion of the interest payments on permitted assets and that
portion does not vary over the life of the certificate, the certificate also
will qualify as a high-yield interest. A high-yield interest may be held only by
domestic C corporations that are fully subject to corporate income tax, or
eligible corporations, other FASITs, and dealers in securities who acquire such
interests as inventory, rather than for investment. In addition, holders of
high-yield interests are subject to limitations on offset of income derived from
such interest.
CONSEQUENCES OF DISQUALIFICATION
If a series FASIT fails to comply with one or more of the Internal
Revenue Code's ongoing requirements for FASIT status during any taxable year,
the Internal Revenue Code provides that its FASIT status may be lost for that
year and thereafter. If FASIT status is lost, the treatment of the former FASIT
and the interests therein for federal income tax purposes is uncertain. The
former FASIT might be treated as a grantor trust, as a separate association
taxation, as a corporation, or as a partnership. The FASIT regular certificates
could be treated as debt instruments for federal income tax purposes or as
equity interests. Although the Internal Revenue Code authorizes the Treasury to
issue regulations that address situations where a failure to meet the
requirements for FASIT status occurs inadvertently and in good faith, such
regulations have not yet been issued. It is possible that disqualification
relief might be accompanied by sanctions, such as the imposition of a corporate
tax on all or a portion of the FASIT's income for the period of time in which
the requirements for FASIT status are not satisfied.
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TAX TREATMENT OF FASIT REGULAR CERTIFICATES
Payments received by holders of FASIT regular certificates generally
should be accorded the same tax treatment under the Internal Revenue Code as
payments received on other taxable corporate debt instruments and on REMIC
regular certificates. As in the case of holders of REMIC regular certificates,
holders of FASIT regular certificates must report income from such certificates
under an accrual method of accounting, even if they otherwise would have used
the cash receipts and disbursements method. Except in the case of FASIT regular
certificates issued with original issue discount or acquired with market
discount or premium, interest paid or accrued on a FASIT regular certificate
generally will be treated as ordinary income to the certificateholder and a
principal payment on such certificate will be treated as a return of capital to
the extent that the certificateholder's basis is allocable to that payment.
FASIT regular certificates issued with original issue discount or acquired with
market discount or premium generally will treat interest and principal payments
on such certificates in the same manner described for REMIC regular
certificates. High-yield certificates may be held only by fully taxable domestic
C corporations, other FASITs and certain securities dealers. Holders of
high-yield certificates are subject to limitations on their ability to use
current losses or net operating loss carryforwards or carrybacks to offset any
income derived from those certificates. If a FASIT regular certificate is sold
or exchanged, the certificateholder generally will recognize gain or loss upon
the sale in the manner described above for REMIC regular certificates. In
addition, if a FASIT regular certificate becomes wholly or partially worthless
as a result of default and delinquencies on the underlying assets, the holder of
such certificate should be allowed to deduct the loss sustained (or
alternatively, be able to report a lesser amount of income). However, the timing
and character of such losses in income are uncertain.
FASIT regular certificates held by a REIT will qualify as "real estate
assets" within the meaning of section 856(c)(5) of the Internal Revenue Code,
and interest on such certificates will be considered qualifying REIT interest to
the same extent that REMIC certificates would be so considered. FASIT regular
certificates held by a thrift institution taxed as a "domestic building and loan
association" will represent qualifying assets for purposes of the qualification
requirements set forth in Internal Revenue Code Section 7701(a)(19) to the same
extent that REMIC certificates would be so considered. In addition, FASIT
regular certificates held by a financial institution to which Section 585 of the
Internal Revenue Code applies will be treated as evidences of indebtedness for
purposes of Section 582(c)(1) of the Internal Revenue Code. FASIT certificates
will not qualify as "Government securities" for either REIT or RIC qualification
purposes.
TREATMENT OF HIGH-YIELD INTERESTS
High-yield interests are subject to special rules regarding the
eligibility of holders of such interests, and the ability of such holders to
offset income derived from their FASIT certificate with losses. High-yield
interests may be held only by eligible corporations, other FASITs and dealers in
securities who acquire such interests as inventory. If a securities dealer
(other than an eligible corporation) initially acquires a high-yield interest as
inventory, but later begins to hold it for investment, the dealer will be
subject to an excise tax equal to the income from the high-yield interest
multiplied by the highest corporate income tax rate. In addition, transfers of
high-yield interests to disqualified holders will be disregarded for federal
income tax purposes, and the transferor still will be treated as the holder of
the high-yield interest.
The holder of a high-yield interest may not use non-FASIT current
losses or net operating loss carryforwards or carrybacks to offset any income
derived from the high-yield interest, for either regular federal income tax
purposes or for alternative minimum tax purposes. In addition, the FASIT
provisions contain an anti-abuse rule that imposes corporate income tax on
income derived from a
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FASIT regular certificate that is held by a pass-through entity (other than
another FASIT) that issues debt or equity securities backed by the FASIT regular
certificate and that have the same features as high-yield interests.
TAX TREATMENT OF FASIT OWNERSHIP CERTIFICATES
A FASIT ownership certificate represents the residual equity interest
in a FASIT. As such, the holder of a FASIT ownership certificate determines its
taxable income by taking into account all assets, liabilities, and items of
income, gain, deduction, loss, and credit of a FASIT. In general, the character
of the income to the holder of a FASIT ownership interest will be the same as
the character of such income to the FASIT, except that any tax-exempt interest
income taken into account by the holder of a FASIT ownership interest is treated
as ordinary income. In determining that taxable income, the holder of a FASIT
ownership certificate must determine the amount of interest, original issue
discount, market discount, and premium recognized with respect to the FASIT's
assets and the FASIT regular certificates issued by the FASIT according to a
constant yield methodology and under an accrual method of accounting. In
addition, holders of FASIT ownership certificates are subject to the same
limitations on their ability to use losses to offset income from their FASIT
certificate as are the holders of high-yield interests.
Rules similar to the wash sale rules applicable to REMIC residual
certificates also will apply to FASIT ownership certificates. Accordingly,
losses on dispositions of a FASIT ownership certificate generally will be
disallowed where, within six months before or after the disposition, the seller
of such certificate acquires any other FASIT ownership certificate or, in the
case of a FASIT holding mortgage assets, any interest in a taxable mortgage
pool, that is economically comparable to a FASIT ownership certificate. In
addition, if any security that is sold or contributed to a FASIT by the holder
of the related FASIT ownership certificate was required to be marked-to-market
under Internal Revenue Code section 475 by such holder, then section 475 will
continue to apply to such securities, except that the amount realized under the
mark-to-market rules will be the greater of the securities value under present
law or the securities value after applying special valuation rules contained in
the FASIT provisions. Those special valuation rules generally require that the
value of debt instruments that are not traded on an established securities
market be determined by calculating the present value of the reasonably expected
payments under the instrument using a discount rate of 120% of the applicable
Federal rate, compounded semiannually.
The holder of a FASIT ownership certificate will be subject to a tax
equal to 100% of the net income derived by the FASIT from any "prohibited
transactions." Prohibited transactions include (i) the receipt of income derived
from assets that are not permitted assets, (ii) certain dispositions of
permitted assets, (iii) the receipt of any income derived from any loan
originated by a FASIT, and (iv) in certain cases, the receipt of income
representing a servicing fee or other compensation. Any series for which a FASIT
election is made generally will be structured in order to avoid application of
the prohibited transaction tax.
BACKUP WITHHOLDING, REPORTING AND TAX ADMINISTRATION
Holders of FASIT certificates will be subject to backup withholding to
the same extent holders of REMIC certificates would be subject. For purposes of
reporting and tax administration, holders of record of FASIT certificates
generally will be treated in the same manner as holders of REMIC certificates.
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STATE AND OTHER TAX CONSEQUENCES
In addition to the federal income tax consequences described in
"Material Federal Income Tax Consequences," potential investors should consider
the state and local tax consequences of the acquisition, ownership, and
disposition of any series of offered certificates. State tax law may differ
substantially from the corresponding federal tax law, and the discussion above
does not purport to describe any aspect of the tax laws of any state or other
jurisdiction. Therefore, prospective investors should consult their tax advisors
with respect to the various tax consequences of investments in any series of
offered certificates.
EMPLOYEE BENEFIT PLAN CONSIDERATIONS
ERISA and the Internal Revenue Code impose restrictions on investments
by certain types of employee benefit plans. The restrictions include the
fiduciary and prohibited transaction provisions of ERISA and the prohibited
transaction provisions of Section 4975 of the Internal Revenue Code. Covered
employee benefit plans or "plans" include employee pension and welfare benefit
plans subject to ERISA, various other retirement plans and arrangements, such as
individual retirement accounts and annuities and Keogh plans, and pooled or
collective investment vehicles that include ERISA plan assets, such as bank
collective investment funds, insurance company pooled separate accounts and
insurance company general account assets. Other employee benefit plans,
including governmental plans, as defined in Section 3(32) of ERISA, and certain
church plans, as defined in Section 3(33) of ERISA (for which no election has
been made under Section 414(d) of the Internal Revenue Code), are not subject to
these requirements but may be subject to different restrictions. See "Exempt
Plans," below.
The fiduciary provisions of ERISA generally require that a fiduciary
with investment discretion on behalf of a plan, taking into account the facts
and circumstances of such plan, should consider applicable fiduciary standards
of conduct, such as the prudence of the investment and diversification of the
plan's investment portfolio, as well as the requirement that the plan's
investment must be made in accordance with the plan's governing documents. For
these purposes, a fiduciary is a person who has or exercises discretionary
authority or control with respect to the management or disposition of plan
assets or any person who provides investment advice with respect to plan assets
for a fee.
Unless a statutory or administrative exemption is available, the
prohibited transaction provisions of ERISA and Section 4975 of the Internal
Revenue Code prohibit a broad range of transactions involving assets of plans
and certain related parties to those plans, so-called "parties in interest"
under ERISA or "disqualified persons" under the Internal Revenue Code (which are
referred to in this prospectus as "parties in interest"). The parties in
interest to a plan include the plan sponsor, plan fiduciaries and plan service
providers (such as trustees, investment managers and advisors, custodians and
brokers), and certain of their affiliates. The range of potential prohibited
transactions include fiduciary self-dealing transactions and any purchase, sale,
exchange or extension of credit between a plan and a party in interest with
respect to a plan, and any transfer to, or use of plan assets by or for the
benefit of, a party in interest. Parties in interest that participate in a
nonexempt prohibited transaction may be subject to a penalty or an excise tax
imposed under Section 502(i) of ERISA or Section 4975 of the Internal Revenue
Code, respectively, and other adverse consequences.
PLAN ASSETS REGULATIONS
DOL has adopted regulations at 29 C.F.R. Section 2510.3-101 (the "Plan
Assets Regulations") that set forth guidelines to determine when an equity
investment in an entity by a plan will cause the assets
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of the entity to be treated as assets of the benefit plan (or "plan assets"). If
the assets of the entity are considered plan assets, then the general fiduciary
responsibility provisions of ERISA, as well as the prohibited transaction
provisions of ERISA and the Internal Revenue Code, will apply not only to a
plan's investment in the entity, but also to the underlying assets of the entity
and its operation and administration. Thus, if a plan invests in an entity, such
as a trust, these rules will apply to the fiduciary's decision to invest in
trust certificates and the continued holding of such certificates. Moreover, if
the trust is also treated as a "plan asset," any person with discretionary
authority or control over the trust's assets will be a plan fiduciary and
transactions involving the trust's assets would also be subject to ERISA's
fiduciary standards of conduct and the prohibited transaction provisions of
ERISA and the Code.
The Plan Assets Regulations contain certain exceptions which provide
that a plan's investment in an entity will not cause the assets of the entity to
be treated as ERISA plan assets. These exceptions include the following:
o where the entity is an "operating company", including a "real
estate operating company" or a "venture capital operating
company" (as defined in the Plan Assets Regulations),
o where a plan's investment is in qualifying debt which does not
have substantial equity features,
o where the equity investment made by the plan is in either a
"publicly-offered security" that is "widely held" and "freely
transferable" (as defined in the Plan Assets Regulations), or
a security issued by an investment company registered under
the Investment Company Act of 1940, as amended, or
o where "benefit plan investors" do not own 25% or more of any
class of equity interest issued by the entity. For this
purpose, "benefit plan investors" include plans, as well as
any "employee benefit plan" as defined in Section 3(3) or
ERISA which is not subject to Title I of ERISA, such as
governmental plans and certain church plans, foreign plans and
any entity whose underlying assets include plan assets by
reason of plan investments in the entity.
While it is possible that one of these exceptions might apply to a trust
contemplated by this prospectus (for example, if less than 25% of each class of
equity in a trust were held by benefit plan investors), compliance with these
exceptions will not be monitored by the depositor, the seller, the trustee, the
master servicer or any subservicer. Therefore, fiduciaries or other persons
investing plan assets should not acquire or hold certificates in reliance upon
the availability of any exception to the Plan Assets Regulations.
Accordingly, if the Home Equity Loans or any other assets included in a
trust were to constitute plan assets, then any party exercising management or
discretionary control with respect to those plan assets may be deemed to be a
plan fiduciary, and thus subject to the fiduciary requirements of ERISA and the
prohibited transaction provisions of ERISA and Section 4975 of the Internal
Revenue Code with respect to plan investors. As a result, the acquisition or
holding of certificates by or on behalf of a plan or with plan assets, as well
as the operation of the trust, may constitute or involve a nonexempt prohibited
transaction under ERISA and the Internal Revenue Code. For example, the
prohibited transaction provisions of Section 406 of ERISA and Section 4975 of
the Internal Revenue Code may cause the depositor, the master servicer, any
subservicer or the trustee (or affiliates of those
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entities) to become parties in interest with respect to an investing plan.
Additionally, if the depositor, the seller, the master servicer, any
subservicer, the trustee, an obligor under any credit enhancement mechanism or
an affiliate thereof either:
o has investment discretion with respect to the investment of
plan assets, or
o has authority or responsibility to give, or regularly gives,
investment advice with respect to plan assets for a fee under
an agreement or understanding that this advice will serve as a
primary basis for investment decisions with respect to the
plan assets,
such investment could violate the fiduciary self-dealing prohibitions of Section
406(b) of ERISA and Section 4975(c) of the Internal Revenue Code.
PROHIBITED TRANSACTION EXEMPTIONS
While a broad range of transactions may potentially give rise to
prohibited transaction concerns where plan assets are involved, at least some
relief may be provided through statutory or administrative exemptions. The DOL
has issued a series of at least 32 individual exemptions commonly referred to as
the "underwriter exemptions" which were collectively amended by PTE 97-34, 62
Fed. Reg. 39021(1997) (hereinafter collectively referred to as the "Exemption")
to a number of brokers some of which may be utilized by the master servicer in
connection with the underwriting contemplated herein (the "Underwriter"). While
there may be some slight variations in the series of individual exemptions, the
Exemption generally exempts from the application of some of the prohibited
transaction provisions of Section 406 of ERISA and Section 4075 of the Internal
Revenue Code, various transactions, among others, relating to the servicing and
operation of home equity loan pools and the purchase, sale and holding of
pass-through certificates issued by the trust as to which:
o the Underwriter or any of its affiliates is either
o the sole underwriter or the manager or co-manager of
the underwriting syndicate, or
o a selling or placement agent.
For purposes of the exemption, the term "underwriter" includes:
o the Underwriter and certain of its affiliates,
o any person directly or indirectly, through one or more
intermediaries, controlling, controlled by or under common
control with the Underwriter,
o any member of the underwriting syndicate or selling group of
which a person described in the first two clauses above is a
manager or co-manager with respect to a class of certificates,
or
o any entity which has received an exemption from the DOL
relating to certificates which is similar to the Exemption.
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The Exemption sets forth seven general conditions which must be
satisfied for a transaction involving the purchase, sale and holding of
certificates to be eligible for exemptive relief thereunder:
o the acquisition of the certificates by a plan or with plan
assets must be on terms (including the certificate price) that
are at least as favorable to the plan as they would be in an
arm's-length transaction with an unrelated party;
o the rights and interests evidenced by the certificates
acquired by the plan may not be subordinated to the rights and
interests evidenced by other certificates of the same trust;
o the certificates, at the time of acquisition by a plan or with
plan assets, must be rated in one of the three highest generic
rating categories by Standard & Poor's Corporation, Moody's
Investors Service, Inc., Duff & Phelps Credit Rating Co. or
Fitch IBCA, Inc., which are collectively referred to as the
"exemption rating agencies";
o the trustee of the trust cannot be a member (or an affiliate
of any member) of the "Restricted Group" which includes any
underwriter, the depositor, the seller, the master servicer,
any subservicer, the insurer and any borrower with respect to
assets of a trust that constitute more than 5% of the
aggregate unamortized principal balance of the trusts assets
(determined as of the date of initial issuance of the
certificates and their affiliates);
o the plan can not be sponsored by any member of the Restricted
Group;
o the sum of all payments made to and retained by the
underwriters for underwriting the certificates must represent
not more than reasonable compensation; the sum of all payments
made to and retained by the master servicer under the
assignment of the assets to the related trust must represent
not more than the fair market value of those obligations, and
the sum of all payments made to and retained by the master
servicer and any subservicer must represent not more than
reasonable compensation for that person's services under the
related pooling and servicing agreement and reimbursement of
that person's reasonable expenses in connection therewith; and
o each plan investing in the certificates must be an accredited
investor as defined in Rule 501(a)(1) of Regulation D of the
Commission under the Securities Act.
In addition, certain aspects of the Exemption require that: (i) in the
case of the acquisition of certificates in connection with the initial issuance,
at least 50% of the highest level certificates are acquired by persons
independent of the Restricted Group (as defined above), (ii) the plan's
investment in each class of certificates does not exceed 25% of all of the
certificates of that class outstanding at the time of the acquisition and (iii)
immediately after the acquisition, no more than 25% of the assets of the plan
are invested in certificates representing an interest in one or more trusts
containing assets sold or serviced (other than as a subservicer) by the same
entity.
If the specific conditions of the Exemption are met, the Exemption may
provide an exemption from the restrictions imposed by Sections 406(a) and 407(a)
of ERISA, and the excise taxes imposed by Section 4975(a) and (b) of the
Internal Revenue Code by reason of Section 4975(c)(1)(A) through (D) of the
Internal Revenue Code for the following transactions:
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o the direct or indirect sale, exchange or transfer of
certificates in the initial issuance of certificates between
the master servicer or an underwriter and a plan when the
master servicer, trustee, insurer, underwriter or a borrower
is a party in interest with respect to the plan,
o the direct or indirect acquisition or disposition in the
secondary market of certificates by a plan or with plan
assets, and
o the holding of certificates by a plan or with plan assets.
If the specific conditions of the Exemption, described above, are
satisfied, the Exemption may provide an exemption from the restrictions imposed
by Sections 406(b)(1) and (b)(2) of ERISA, as well as the excise taxes imposed
by Section 4975(a) and (b) of the Internal Revenue Code by reason of Section
4975(c)(1)(E) of the Internal Revenue Code, in connection with:
o the direct or indirect sale, exchange or transfer of
certificates in the initial issuance of certificates between
the master servicer or an underwriter and a plan when the
person who has discretionary authority or renders investment
advice with respect to the investment of the relevant plan
assets in the certificates is:
o a borrower with respect to 5% or less of the fair
market value of the assets of a trust, or
o an affiliate of that type of person, provided that,
with respect to the acquisition of certificates in
connection with the initial issuance of the
certificates, a number of restrictions described in
the Exemption are met,
o the direct or indirect acquisition or disposition in the
secondary market of certificates by a plan or with plan
assets, and
o the holding of certificates by a plan or with plan assets.
Additionally, if the specific conditions of the Exemption are
satisfied, the Exemption may provide an exemption from the restrictions imposed
by Sections 406(a), 406(b) and 407(a) of ERISA, as well as the taxes imposed by
Sections 4975(a) and (b) of the Internal Revenue Code by reason of Section
4975(c) of the Internal Revenue Code, for transactions in connection with the
servicing, management and operation of the home equity loan pools if the
transactions are carried out in accordance with a binding pooling and servicing
arrangement, the terms of which are provided to or described in all material
respects to plans prior to their investment in certificates. The Exemption also
may provide an exemption from the restrictions imposed by Sections 406(a) and
407(a) of ERISA, as well as the taxes imposed by Section 4975(a) and (b) of the
Internal Revenue Code by reason of Sections 4975(c)(1)(A) through (D) of the
Internal Revenue Code, if those restrictions are deemed to otherwise apply
merely because a person is deemed to be a party in interest with respect to an
investing plan, or the investing entity holding plan assets, by virtue of
providing services to the plan or by virtue of having certain specified
relationships to such a person, solely as a result of the plan's ownership of
certificates.
Any fiduciary or other plan asset investor that proposes to purchase
certificates on behalf of a plan or with plan assets should consult with its
counsel with respect to the potential applicability of ERISA and the Internal
Revenue Code to that investment and the availability of the Exemption or any
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other DOL prohibited transaction exemption in connection therewith. Before
purchasing a certificate, a fiduciary or other investor of plan assets should
itself confirm that the certificates constitute "certificates" for purposes of
the Exemption and that the specific and general conditions described in the
Exemption and the other requirements described in the Exemption would be
satisfied. In addition to making its own determination as to the availability of
the exemptive relief provided in the Exemption, the fiduciary or other plan
asset investor should consider its general fiduciary obligations under ERISA in
determining whether to purchase any certificates with plan assets, and whether
the investment is permitted under the plan's governing documents. In addition,
the fiduciary or other plan asset investor should consider the availability of
other exemptions granted by the DOL, which provide relief from a number of the
prohibited transaction provisions of ERISA and the related excise tax provisions
of Section 4975 of the Internal Revenue Code, including Sections I and III of
PTCE 95-60, regarding transactions by insurance company general accounts, PTCE
83-1, regarding certain home equity loan pool investment trusts, PTCE 84-14,
regarding qualified professional asset managers, PTCE 91-38, regarding
transactions by bank collective investment trusts, and PTCE 90-1, regarding
transactions by insurance company separate accounts. (The related prospectus
supplement may contain additional information regarding the application of the
Exemption, PTCE 83-1, PTCE 95-60 or another DOL exemption with respect to the
certificates offered thereby.) There can be no assurance that any of these
exemptions will apply with respect to any particular plan's or other plan asset
investor's investment in the certificates or, even if an exemption were deemed
to apply, that any exemption would apply to all potential prohibited
transactions that may occur in connection with this form of an investment.
AMENDMENT TO EXEMPTION FOR FUNDING ACCOUNTS
In 1997, the DOL published an amendment to the Exemption, which extends
exemptive relief to certain mortgage-backed and asset-backed securities
transactions using funding accounts for trusts issuing pass-through certificates
for home equity loans or other secured receivables (the "Obligations")
supporting payments to certificate holders, and having a value equal to no more
than twenty-five percent (25%) of the total principal amount of the certificates
being offered by the trust to be transferred to the trust within a 90-day or
three-month period following the closing date (the "Funding Period"), instead of
requiring that all such Obligations be either identified or transferred on or
before the date the offering closes. The following conditions are among the
conditions that must be met for this relief to be available:
o The ratio of the amount allocated to the funding account to
the total principal amount of the certificates being offered
(the "Funding Limit") must not exceed twenty-five percent
(25%).
o All Obligations transferred after the closing date (the
"Additional Obligations") must meet the same terms and
conditions for eligibility as the original Obligations used to
create the trust, which terms and conditions must have been
approved by an exemption rating agency.
o The transfer of such Additional Obligations to the trust
during the Funding Period must not result in the certificates
to be covered by the Exemption receiving a lower credit rating
from an exemption rating agency upon termination of the
Funding Period than the rating that was obtained at the time
of the initial issuance of the certificates by the trust.
o Solely as a result of the use of funding, the weighted average
annual percentage interest rate for all of the Obligations in
the trust at the end of the Funding Period must not be
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more than 100 basis points lower than the average interest
rate for the Obligations transferred to the trust on the
closing date.
o In order to insure that the characteristics of the Additional
Obligations are substantially similar to the original
Obligations which were transferred to the trust:
o the characteristics of the Additional Obligations
must be monitored by an insurer or other credit
support provider that is independent of the
depositor; or
o an independent accountant retained by the depositor
must provide the depositor with a letter (with copies
provided to each exemption rating agency rating the
certificates, the related underwriter and the related
trustee) stating whether or not the characteristics
of the Additional Obligations conform to the
characteristics described in the related prospectus
or prospectus supplement and/or pooling and servicing
agreement. In preparing such letter, the independent
accountant must use the same type of procedures as
were applicable to the Obligations transferred to the
trust as of the closing date.
o The period of funding must end no later than three months or
90 days after the closing date or earlier in certain
circumstances if the funding account falls below the minimum
level specified in the pooling and servicing agreement or an
event of default occurs.
o Amounts transferred to any funding account and/or capitalized
interest account used in connection with the funding may be
invested only in cash or in investments which are permitted by
exemption rating agencies rating the certificates and must be
either:
o direct obligations of, or obligations fully
guaranteed as to timely payment of principal and
interest by, the United States or any agency or
instrumentality thereof (provided that such
obligations are backed by the full faith and credit
of the United States); or
o have been rated (or the obligor has been rated) in
one of the three highest generic rating categories by
one of the exemption rating agencies.
o In addition, the related prospectus or prospectus supplement
and the pooling and servicing agreements must describe certain
aspects of the funding and/or capitalized interest
arrangement.
o The trustee (or any agent with which the trustee contracts to
provide trust services) must be a substantial financial
institution or trust company experienced in trust activities
and familiar with its duties, responsibilities and liabilities
as a fiduciary under ERISA. The trustee, as legal owner of a
trust, must enforce all the rights created in favor of
certificateholders of the trust, including the employee
benefit plans or plan assets subject to ERISA.
INSURANCE COMPANY GENERAL ACCOUNTS
In addition to any exemptive relief that may be available under PTCE
95-60 for the purchase and holding of the certificates by an insurance company
general account, the Small Business Job Protection Act of 1996 added a new
Section 401(c) to ERISA, which provides exemptive relief from
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the provisions of Part 4 of Title I of ERISA and Section 4975 of the Internal
Revenue Code, including the prohibited transaction restrictions imposed by ERISA
and the related excise taxes imposed by Section 4975 of the Internal Revenue
Code, for transactions involving an insurance company general account. Under
Section 401(c) of ERISA, the DOL published proposed regulations on December 22,
1997, but the required final regulations have not been issued as of the date
hereof. The 401(c) regulations are to provide guidance for the purpose of
determining, in cases where insurance policies or annuity contracts supported by
an insurer's general account are issued to or for the benefit of a plan on or
before December 31, 1998, which general account assets constitute plan assets.
Section 401(c) of ERISA generally provides that, until the date which is 18
months after the 401(c) regulations become final, no person shall be subject to
liability under Part 4 of Title I of ERISA or Section 4975 of the Internal
Revenue Code on the basis of a claim that the assets of an insurance company
general account constitute plan assets, unless:
o as otherwise provided by the Secretary of Labor in the 401(c)
regulations to prevent avoidance of the regulations or
o an action is brought by the Secretary of Labor for various
breaches of fiduciary duty which would also constitute a
violation of federal or state criminal law.
Any assets of an insurance company general account which support
insurance policies or annuity contracts issued to a plan after December 31, 1998
or issued to plans on or before December 31, 1998 for which the insurance
company does not comply with the 401(c) regulations may be treated as plan
assets. (Note that Section 401(c) of ERISA does not relate to insurance company
separate accounts.) Insurance companies contemplating the investment of general
account assets in the certificates should consult with their legal counsel with
respect to the applicability of Sections I and III of PTCE 95-60 and Section
401(c) of ERISA, including the general account's ability to continue to hold the
certificates after the date regulations become final.
REPRESENTATION FROM INVESTING PLANS IN CERTAIN INSTANCES
As a general matter only certificates that are at the highest level
will be considered eligible for investment by employee benefit plans. Thus, no
transfer of any class of certificates other than the highest class of
certificates will be permitted to be made to a plan or to any person acquiring
such certificates on behalf of or with the assets of a plan, unless such
transferee, at its expense, delivers to the trustee and the master servicer an
opinion of counsel (in form satisfactory to the trustee and the master servicer
and as discussed below) to the effect that the purchase or holding of another
class of certificates by the plan will not result in a nonexempt prohibited
transaction under ERISA and the Internal Revenue Code and will not subject the
trustee or the master servicer to any obligation or liability as a result of the
application of ERISA or the prohibited transaction provisions of Section 4975 of
the Internal Revenue Code. Alternatively, an insurance company general account
may, at its expense, deliver to the trustee and the master servicer a
representation that the transfer and holding of such a certificate are exempt
under Section I and Section III of PTCE 95-60. Unless such opinion or
representation is delivered, each person acquiring a class of certificate other
than the highest class of certificates will be deemed to represent to the
trustee and the master servicer that such person is not a plan or acting on
behalf of a plan or any plan assets.
Moreover, except as otherwise specified in the related prospectus
supplement, the exemptive relief afforded by the Exemption may not apply to (1)
any certificates where the related trust contains home equity revolving credit
loans, a Swap, Yield Supplement Agreement, mortgage securities or other assets
that are not specifically covered by the Exemption, (2) any certificates where
the related
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trust contains a Funding Account that does not meet the requirements of the
amendment to the Exemption, discussed above, (3) any certificates where the
related trust contains a Purchase Obligation that is not specifically covered by
the Exemption, or (4) the trustee or other authorized plan fiduciary is a member
of the Restricted Group or the plan is sponsored by a member of the Restricted
Group. Under any such circumstance, and except as otherwise specified in the
respective prospectus supplement, transfers of the certificates to a plan, to a
trustee or other person acting on behalf of any plan, or to any other person
using plan assets to effect the acquisition will not be registered by the
trustee unless the transferee provides the trustee and the master servicer with
an opinion of counsel satisfactory to the trustee and the master servicer, which
opinion will not be at the expense of the trustee or the master servicer that
the purchase of the certificates by or on behalf of the plan:
o is permissible under applicable law,
o will not constitute or result in any non-exempt prohibited
transaction under ERISA or Section 4975 of the Internal
Revenue Code, and
o will not subject the trustee and the master servicer to any
obligation in addition to those undertaken in the pooling and
servicing agreement.
In lieu of an opinion of counsel, the transferee may provide a
certification of facts substantially to the effect that the purchase of
certificates by or on behalf of the plan:
o is permissible under applicable law,
o will not constitute or result in a non-exempt prohibited
transaction under ERISA or Section 4975 of the Internal
Revenue Code,
o will not subject the trustee or the master servicer to any
obligation in addition to those undertaken in the pooling and
servicing agreement, and
o the following conditions are met:
o the source of funds used to purchase that
certificates is an "insurance company general
account," as that term is defined in PTCE 95-60, and
o the conditions described in Section I and Section III
of PTCE 95-60 have been satisfied as of the date of
the acquisition of the certificates.
REPORTING AND DISCLOSURE
ERISA and the Internal Revenue Code require that a Form 5500 (Annual
Return/Report) be filed by certain employer-sponsored employee benefit plans
subject to ERISA. Pursuant to DOL regulations, such plans which invest in pooled
investment vehicles (such as common/ collective trusts) which are treated as
ERISA plan assets must complete the Form 5500 and attach either: (1) the most
recent statement of the assets and liabilities of the pooled investment vehicle
or (2) a certification that (a) the statement of the assets and liabilities of
the pooled investment account has been submitted directly to the DOL by the
financial institution; (b) the plan has received a copy of the statement; and
(c) includes the EIN and the other numbers used by the financial institution to
identify the trusts or accounts, and the name and address provided in the direct
filing made with the DOL. The master servicer does not intend to directly submit
such
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information with respect to this investment to the DOL. Thus, it will be the
plan's responsibility to provide the most recent statement of assets and
liabilities. If the plan's fiscal year differs from the trust's fiscal year,
such plan investor may not be able to obtain valuation information on its
certificates as of the last day of the plan's fiscal year.
Also, any prohibited transaction must be reported on the Form 5500 and
any disqualified person involved in a prohibited transaction is subject to
self-reporting on Form 5330.
EXEMPT PLANS
Certain plans may be governmental or church plans. Governmental plans
and church plans are generally not subject to ERISA, nor do the above-described
prohibited transaction provisions apply. However, such plans are subject to
prohibitions against certain related-party transactions under Section 503 of the
Internal Revenue Code, which prohibitions are similar to the prohibited
transaction rules. In addition, the fiduciary of any governmental plan or church
plan must consider applicable state or local laws, if any, and the restrictions
and duties of common law, if any, imposed upon such plan.
No view is expressed on whether an investment in the certificates is
appropriate or permissible for any governmental or church plan under Section 503
of the Internal Revenue Code, or under any state, county, local, or other law
respecting such plan.
TAX EXEMPT INVESTORS
A plan that is a Tax-Exempt Investor nonetheless will be subject to
federal income taxation to the extent that its income is "unrelated business
taxable income", or UBTI, within the meaning of Section 512 of the Internal
Revenue Code. All "excess inclusions" of a REMIC allocated to a REMIC residual
certificate held by a Tax-Exempt Investor will be considered UBTI and thus will
be subject to federal income tax. See "Material Federal Income Tax Consequences
- -- Taxation of Owners of REMIC Residual Certificates -- Excess Inclusions."
CONSULTATION WITH COUNSEL
There can be no assurance that the Exemption or any other DOL exemption
will apply with respect to any particular plan that acquires the certificates
or, even if all the conditions specified in the Exemption were satisfied, that
the exemption would apply to all transactions involving a trust. Prospective
plan investors should consult with their legal counsel concerning the impact of
ERISA and the Internal Revenue Code and the potential consequences to their
specific circumstances prior to making an investment in the certificates.
Before purchasing a certificate, a fiduciary of a plan should itself
confirm that all the specific and general conditions described in the Exemption
or in another applicable exemption would be satisfied, and, in the case of a
certificate purchased under the Exemption, the certificate constitutes a
"certificate" for purposes of the Exemption. In addition to making its own
determination as to the availability of the exemptive relief provided in the
Exemption or in any other exemption, the plan fiduciary should consider its
general fiduciary obligations under ERISA in determining whether to purchase a
certificate on behalf of a plan.
LEGAL INVESTMENT MATTERS
Each class of certificates offered hereby and by the related prospectus
supplement will be rated at the date of issuance in one of the four highest
rating categories by at least one rating agency. Unless
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otherwise specified in the related prospectus supplement, each class of
certificates will evidence an interest in home equity loans which may be secured
by a significant number of second or more junior liens, and therefore will not
constitute "mortgage related securities" for purposes of the Secondary Mortgage
Market Enhancement Act of 1984, as amended, or SMMEA. Accordingly, investors
whose investment authority is subject to legal restrictions should consult their
legal advisors to determine whether and to what extent the certificates
constitute legal investments for them.
All depository institutions considering an investment in the
certificates should review the Federal Financial Institutions Examination
Council's Supervisory Policy Statement on the Selection of Securities Dealers
and Unsuitable Investment Practices, to the extent adopted by their respective
regulators, setting forth, in relevant part, a number of investment practices
deemed to be unsuitable for an institution's investment portfolio, as well as
guidelines for investing in various types of mortgage related securities.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements governing
investments made by a particular investor, including, but not limited to,
"prudent investor" provisions, percentage-of-assets limits and provisions which
may restrict or prohibit investment in securities which are not "interest
bearing" or "income paying."
There may be other restrictions on the ability of some investors either
to purchase some classes of certificates or to purchase any class of
certificates representing more than a specified percentage of the investors'
assets. The depositor will make no representations as to the proper
characterization of any class of certificates for legal investment or other
purposes, or as to the ability of particular investors to purchase any class of
certificates under applicable legal investment restrictions. These uncertainties
may adversely affect the liquidity of any class of certificates. 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 legal advisors in determining whether and
to what extent the certificates of any class constitute legal investments or are
subject to investment, capital or other restrictions.
USE OF PROCEEDS
Substantially all of the net proceeds to be received from the sale of
certificates will be applied by the depositor to finance the purchase of, or to
repay short-term loans incurred to finance the purchase of, the home equity
loans or mortgage securities underlying the certificates or will be used by the
depositor for general corporate purposes. The depositor expects that it will
make additional sales of securities similar to the certificates from time to
time, but the timing and amount of any additional offerings will be dependent
upon a number of factors, including the volume of home equity loans purchased by
the depositor, prevailing interest rates, availability of funds and general
market conditions.
METHODS OF DISTRIBUTION
The certificates 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 net proceeds to the depositor from that sale.
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The depositor intends that certificates 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 certificates may be made through a combination of two or more of the
following methods:
o by negotiated firm commitment or best efforts underwriting and
public re-offering by underwriters;
o by placements by the depositor with institutional investors
through dealers; and
o by direct placements by the depositor with institutional
investors.
In addition, if specified in the related prospectus supplement, a
series of certificates may be offered in whole or in part to the seller of the
related home equity loans, and other assets, if applicable, that would comprise
the home equity loan pool securing the certificates.
If underwriters are used in a sale of any certificates, other than in
connection with an underwriting on a best efforts basis, the certificates 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. These underwriters may be
broker-dealers affiliated with the depositor whose identities and relationships
to the depositor will be as described in the related prospectus supplement. The
managing underwriter or underwriters with respect to the offer and sale of a
particular series of certificates will be described on the cover of the
prospectus supplement relating to that series and the members of the
underwriting syndicate, if any, will be named in the related prospectus
supplement.
In connection with the sale of the certificates, underwriters may
receive compensation from the depositor or from purchasers of the certificates
in the form of discounts, concessions or commissions. Underwriters and dealers
participating in the distribution of the certificates may be deemed to be
underwriters in connection with the certificates, and any discounts or
commissions received by them from the depositor and any profit on the resale of
certificates by them may be deemed to be underwriting discounts and commissions
under the Securities Act.
It is anticipated that the underwriting agreement pertaining to the
sale of any series of certificates will provide that the obligations of the
underwriters will be subject to conditions precedent, that the underwriters will
be obligated to purchase all of the certificates if any are purchased, other
than in connection with an underwriting on a best efforts basis, and that, in
limited circumstances, the depositor will indemnify the several underwriters and
the underwriters will indemnify the depositor against a number of civil
liabilities, including liabilities under the Securities Act, or will contribute
to payments required to be made.
The prospectus supplement with respect to any series offered by
placements through dealers will contain information regarding the nature of the
offering and any agreements to be entered into between the depositor and
purchasers of certificates of that series.
The depositor anticipates that the certificates offered hereby will be
sold primarily to institutional investors or sophisticated non-institutional
investors. Purchasers of certificates, including dealers, may, depending on the
facts and circumstances of the purchases, be deemed to be "underwriters" within
the meaning of the Securities Act, in connection with reoffers and sales by them
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of certificates. Holders of certificates should consult with their legal
advisors in this regard prior to any reoffer or sale.
LEGAL MATTERS
Certain legal matters relating to the certificates will be passed upon
for the depositor by John W. Blenke, Vice-President - Corporate Law and
Assistant Secretary of Household International, Inc., the parent of the
depositor and the master servicer, and Katten Muchin & Zavis, Chicago, Illinois,
special counsel to the depositor. Mr. Blenke is a full time employee and an
officer of Household International, Inc. and beneficially owns, and holds
options to purchase, shares of Common Stock of Household International, Inc.
FINANCIAL INFORMATION
The depositor has determined that its financial statements are not
material to the offering made hereby. The certificates do not represent an
interest in or an obligation of the depositor. The depositor's only obligations
with respect to a series of certificates will be to repurchase home equity loans
or mortgage securities upon any breach of the limited representations and
warranties made by the depositor, or as otherwise provided in the applicable
prospectus supplement.
ADDITIONAL INFORMATION
The depositor has filed the registration statement with the Commission.
The depositor is also subject to some of the information requirements of the
Securities Exchange Act of 1934, as amended, and, accordingly, will file reports
thereunder with the Commission. The registration statement and its exhibits, and
reports and other information filed by the depositor under the Exchange Act can
be inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at some of its
Regional Offices located as follows: Chicago Regional Office, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511; and Northeast Regional Office,
7 World Trade Center, Suite 1300, New York, New York 10048 and electronically
through the Commission's Electronic Data Gathering, Analysis and Retrieval
System at the SEC's Web Site (http://www.sec.gov).
REPORTS TO CERTIFICATEHOLDERS
Monthly reports which contain information concerning the trust for a
series of certificates will be sent by or on behalf of the depositor or the
trustee to each holder of record of the certificates of the related series. See
"Description of the Certificates--Reports to Certificateholders." Reports
forwarded to holders will contain financial information that has not been
examined or reported upon by an independent certified public accountant. The
depositor will file with the Commission the periodic reports with respect to the
trust for a series of certificates as are required under the Exchange Act.
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INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
With respect to each series of certificates offered by this prospectus,
there are incorporated in this prospectus and in the related prospectus
supplement by reference all documents and reports filed or caused to be filed by
the depositor under Section 13(a), 13(c), 14 or 15(d) of the Exchange Act, prior
to the termination of the offering of the related series of certificates, that
relate specifically to the related series of certificates. The depositor will
provide or cause to be provided without charge to each person to whom this
prospectus and related prospectus supplement is delivered in connection with the
offering of one or more classes of that series of certificates, upon written or
oral request of the person, a copy of any or all reports incorporated in this
prospectus by reference, in each case to the extent those reports relate to one
or more of those classes of that series of certificates, other than the exhibits
to the documents, unless the exhibits are specifically incorporated by reference
in the documents. Requests should be directed in writing to HFC Revolving
Corporation, 2700 Sanders Road, Prospect Heights, Illinois 60070, or by
telephone at (847) 564-6335, attn: Corporate Secretary.
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GLOSSARY
Actuarial Home Equity Loan -- A home equity loan that provides for
payments in monthly installments including interest equal to one-twelfth of the
applicable interest rate times the unpaid principal balance, with any remainder
of the payment applied to principal.
Additional Balance -- A Draw.
Advance -- As to any home equity loan and any distribution date, an
amount advanced which is equal to the aggregate of all or a portion of scheduled
payments of principal and interest.
Balloon Amount -- The full outstanding principal balance on a Balloon
Loan due and payable on the maturity date.
Balloon Loans -- Fixed-rate closed-end loans having original or
modified terms to maturity of generally [15] years as described in the related
prospectus supplement, with level monthly payments of principal and interest
based on a [30-]year amortization schedule. The amount of the monthly payment
will remain constant until the maturity date, when the Balloon Amount will be
due and payable.
Bankruptcy Loss -- A Realized Loss attributable to some actions which
may be taken by a bankruptcy court in connection with a home equity loan,
including a reduction by a bankruptcy court of the principal balance of or the
interest rate on a home equity loan or an extension of its maturity.
Collection Account -- An account established and maintained by the
master servicer, in the name of the trustee for the benefit of the holders of
each series of certificates, for the disbursement of payments on the home equity
loans evidenced by each series of certificates.
Cooperative --With respect to a Cooperative Loan, the corporation that
owns the related apartment building.
Cooperative Loans -- Cooperative apartment loans evidenced by
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.
Cooperative Notes --A promissory note with respect to a Cooperative
Loan.
Credit Scores --A measurement of the relative degree of risk a borrower
represents to a lender obtained from credit reports utilizing, among other
things, payment history, delinquencies on accounts, levels of outstanding
indebtedness, length of credit history, types of credit, and bankruptcy
experience.
Credit Utilization Rate -- For any home equity revolving credit loan,
the cut-off date principal balance of the home equity revolving credit loan
divided by the credit limit of the related credit line agreement.
Debt Service Reduction -- Modifications of the terms of a home equity
loan resulting from a bankruptcy proceeding, including a reduction in the amount
of the monthly payment on the related home equity loan, but not any permanent
forgiveness of principal. Together with Deficient Valuations, Debt Service
Reductions are referred to in this prospectus as Bankruptcy Losses.
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Defaulted Mortgage Loss -- A Realized Loss attributable to the
borrower'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.
Deficient Valuation -- In connection with the personal bankruptcy of a
borrower, as established by the bankruptcy court, the difference between the
then outstanding principal balance of the first loan secured by the mortgaged
property and the junior loans secured by the mortgaged property.
Distribution Amount -- For a class of certificates for any distribution
date, the portion, if any, of the amount to be distributed to that class for
that distribution date of principal, plus, if that class is entitled to payments
of interest on the distribution date, one month's interest at the applicable
pass-through rate on the principal balance or notional amount of that class
specified in the applicable prospectus supplement, less certain interest
shortfalls, which will include:
o any deferred interest added to the principal balance of the
home equity loans and/or the outstanding balance of one or
more classes of certificates on the related due date
o any other interest shortfalls, including, without limitation,
shortfalls resulting from application of the Relief Act or
similar legislation or regulations as in effect from time to
time, allocable to certificateholders which are not covered by
advances or the applicable credit enhancement and
o Prepayment Interest Shortfalls in collections of interest on
closed-end loans resulting from borrower prepayments during
the month preceding the month of distribution, in each case in
the amount that is allocated to the class on the basis
contained in the prospectus supplement.
Draw -- Money drawn by the borrower on a home equity revolving credit
loan under the related credit line agreement at any time during the Draw Period.
Draw Period -- The period specified in the related credit line
agreement when a borrower on a home equity revolving credit loan may make a
Draw.
Eligible Account -- An account acceptable to any applicable rating
agency.
Environmental Lien -- A lien imposed by federal or state statute, for
any cleanup costs incurred by that state on the property that is the subject of
the cleanup costs.
Excess Interest -- The extent by which interest collections on the home
equity loans, or the Trust Balances of the related home equity revolving credit
loans, as applicable, exceed interest distributions on the certificates for the
related distribution date.
Excess Spread -- A specified portion of the interest payable on the
home equity loans and transferred as part of the assets to the related trust.
Excluded Balance -- That portion of the principal balance of any home
equity revolving credit loan not included in the Trust Balance at any time,
which will include balances attributable to Draws after the cut-off date and may
include a portion of the principal balance outstanding as of the cut-off date.
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Excluded Spread -- The portion of interest payable on the home equity
loans, excluded from the assets transferred to the related trust.
Extraordinary Loss -- A Realized Loss occasioned by war, civil
insurrection, some governmental actions, nuclear reaction and certain other
risks.
Fraud Loss -- A Realized Loss incurred on defaulted home equity loans
as to which there was fraud in the origination of the home equity loans.
Funding Account -- An account established, if specified in the related
prospectus supplement, a pooling and servicing agreement or other agreement, to
allow for the transfer by the sellers of additional home equity loans to the
related trust after the closing date for the related certificates.
High Cost Loans -- Mortgage loans that are subject to special rules,
disclosure requirements and other provisions that were added to the federal
Truth-in-Lending Act by the Homeownership and Equity Protection Act of 1994,
which were originated on or after October 1, 1995, and are not home equity loans
made to finance the purchase of the mortgaged property and do not have interest
rates or origination costs in excess of prescribed levels.
Insurance Proceeds -- All proceeds of any special hazard insurance
policy, bankruptcy bond, hazard or other insurance policy or guaranty covering
any home equity loan in the home equity loan pool, together with any payments
under any letter of credit.
Issue Premium -- As to a class of REMIC regular certificates, a price
in excess of the stated redemption price of that class.
Junior Ratio -- As to each home equity loan, the ratio, expressed as a
percentage, of:
o the original principal balance or the credit limit, as
applicable, of the home equity loan, divided by
o the sum of:
o the original principal balance or the credit limit,
as applicable, of the home equity loan and
o the principal balance of any related senior mortgage
loan at origination of the mortgage loan.
Liquidated Home Equity Loan -- A defaulted home equity loan for which
the related mortgaged property has been sold by the related trust and all
recoverable Liquidation Proceeds and Insurance Proceeds have been received.
Liquidation Proceeds -- Amounts received and retained in connection
with the liquidation of any defaulted home equity loan, by foreclosure or
otherwise.
Mark-to-Market Regulations -- The final regulations of the IRS,
released on December 24, 1996, relating to the requirement that a securities
dealer mark-to-market securities held for sale to customers.
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Net Mortgage Rate -- As to any home equity loan, the interest rate net
of servicing fees and any Excess Spread or Excluded Spread.
Nonrecoverable Advance --Any Advance previously made which the master
servicer has determined to not be ultimately recoverable from Liquidation
Proceeds, Insurance Proceeds or otherwise.
Permitted Investments -- United States government securities and other
investments that are rated, at the time of acquisition, in one of the categories
permitted by the related pooling and servicing agreement.
Prepayment Interest Shortfall--With respect to a home equity loan that
is subject to a mortgage prepayment or liquidation, the amount that equals the
difference between a full month's interest due with respect to that home equity
loan and the amount of interest paid or recovered with respect thereto.
Realized Loss -- With respect to any defaulted home equity loan, at the
time the home equity loan is charged off, the amount of loss realized, if any
(as described in the related pooling and servicing agreement), equal to the
portion of the Stated Principal Balance remaining after application of all
Liquidation Proceeds, net of amounts reimbursable to the master servicer for
related Advances, if applicable, and expenses allocable to the trust, towards
interest and principal owing on the home equity loan.
REO Home Equity Loan--A home equity loan where title to the related
mortgaged property has been obtained by the trustee or its nominee on behalf of
certificateholders of the related series.
Repayment Period -- With respect to a home equity revolving credit
loan, the period from the end of the related Draw Period to the related maturity
date.
Senior Percentage -- At any given time, the percentage of the
outstanding principal balances of all of the certificates evidenced by the
senior certificates, determined in the manner described in the related
prospectus supplement.
Servicing Advances -- Amounts advanced on any defaulted home equity
loan to cover taxes, insurance premiums or similar expenses.
Simple Interest Home Equity Loan -- A home equity loan that provides
for payments that are allocated to principal and interest according to the daily
simple interest method.
Special Hazard Loss -- A Realized Loss incurred, to the extent that the
loss was attributable to:
o 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
o any shortfall in insurance proceeds for partial damage due to
the application of the co-insurance clauses contained in
hazard insurance policies.
Stated Principal Balance -- As to any home equity loan as of any date
of determination, the principal balance thereof as of the cut-off date, after
application of all scheduled principal payments due on or before the cut-off
date whether received or not, reduced by all amounts allocable to principal
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that are distributed to certificateholders on or before the date of
determination, and further reduced to the extent that any Realized Loss thereon
has been allocated to any certificates on or before that date.
Stated Value -- The value of the mortgaged property as stated by the
related borrower in his or her application.
Statistical Valuation -- The value of the mortgaged property as
determined by a form of appraisal which uses a statistical model to estimate the
value of a property.
Swaps --Interest rate swaps and related caps, floors and collars
utilized to minimize the risk of certificateholders from adverse changes in
interest rates.
Tax-Exempt Investor -- A tax-qualified retirement plan exempt from
federal income taxation under Section 501 of the Internal Revenue Code.
Trust Balance -- A specified portion of the total principal balance of
each home equity revolving credit loan outstanding at any time, which will
consist of the principal balance thereof as of the cut-off date minus the
portion of all payments and losses thereafter that are allocated to the Trust
Balance, and will not include any portion of the principal balance attributable
to Draws made after the cut-off date.
Yield Supplement Agreements -- Collectively, agreements which provide
credit enhancement for a series of certificates and supplement the interest rate
or other rates on those series of certificates. Yield Supplement Agreements may
relate to, but are not limited to, derivative products that are designed to
provide credit enhancement for a series of certificates.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION (ITEM 14 OF FORM S-3).
The expenses expected to be incurred in connection with the issuance
and distribution of the Securities being registered, other than underwriting
compensation, are as set forth below. All such expenses, except for the filing
fee, are estimated.
<TABLE>
<S> <C>
Filing Fee for Registration Statement........................ $ 278
Legal Fees and Expenses...................................... 300,000
Accounting Fees and Expenses................................. 100,000
Trustee's Fees and Expenses (including counsel fees)......... 75,000
Blue Sky Fees................................................ 30,000
Printing and Engraving Fees.................................. 120,000
Rating Agency Fees........................................... 300,000
Miscellaneous................................................ 100,000
----------------
Total........................................................ $ 1,025,278
================
</TABLE>
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INDEMNIFICATION OF DIRECTORS AND OFFICERS (ITEM 15 OF FORM S-3).
Any underwriters who execute one of the Underwriting Agreements in the
form filed as an exhibit to this Registration Statement will agree to indemnify
the Registrant's directors and its officers who signed this Registration
Statement against certain liabilities which might arise under the Securities Act
of 1933 from certain information furnished to the Registrant by or on behalf of
such indemnifying party.
Subsection (a) of Section 145 of the General Corporation Law of
Delaware empowers a corporation to indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) 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, partnership, joint venture, trust or
other enterprise, against expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by him in
connection with such action, suit or proceeding if he acted in good faith and in
a manner he reasonably believed to be in or not opposed to the best interests of
the corporation, and, with respect to any criminal action or proceeding, had no
cause to believe his conduct was unlawful.
Subsection (b) of Section 145 empowers a corporation to indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that such
person acted in any of the capacities set forth above, against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the corporation and except that no indemnification may be made
in respect to any claim, issue or matter as to which such person shall have been
adjudged to be liable to the corporation unless and only to the extent that the
Court of Chancery or the court in which such action or suit was brought shall
determine that despite the adjudication of liability such person is fairly and
reasonably entitled to indemnity for such expenses which the court shall deem
proper.
Section 145 further provides that to the extent a director, officer,
employee or agent of a corporation has been successful in the defense of any
action, suit or proceeding referred to in subsections (a) and (b) or in the
defense of any claim, issue or matter therein, he shall be indemnified against
expenses (including attorneys' fees) actually and reasonably incurred by him in
connection therewith; that indemnification or advancement of expenses provided
for by Section 145 shall not be deemed exclusive of any other rights to which
the indemnified party may be entitled; and empowers the corporation to purchase
and maintain insurance on behalf of a director, officer, employee or agent of
the corporation against any liability asserted against him or incurred by him in
any such capacity or arising out of his status as such whether or not the
corporation would have the power to indemnify him against such liabilities under
Section 145.
The By-Laws of the Registrant provide, in effect, that to the extent
and under the circumstances permitted by subsections (a) and (b) of Section 145
of the General Corporation Law of the State of Delaware, the Registrant (i)
shall indemnify and hold harmless each person who was or is a party or is
threatened to be made a party to any action, suit or proceeding described in
subsections (a) and (b) by reason of the fact that he is or was a director or
officer, or his testator or intestate is or was a director or officer of the
Registrant, against expenses, judgments, fines and amounts paid in settlement,
and (ii) shall indemnify and hold harmless each person who was or is a party or
is threatened to be made a party to any such action, suit or proceeding if such
person is or was serving at
<PAGE> 181
the request of the Registrant as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise.
In addition, the Pooling and Servicing Agreements and the Indentures
and Trust Agreements, as the case may be, will provide that no director,
officer, employee or agent of the Registrant is liable to the Trust Fund or the
Securityholders, except for such person's own willful misfeasance, bad faith,
gross negligence in the performance of duties or reckless disregard of
obligations and duties. The Pooling and Servicing Agreements and the Indentures,
as the case may be, will further provide that, with the exceptions stated above,
a director, officer, employee or agent of the Registrant is entitled to be
indemnified against any loss, liability or expense incurred in connection with
legal action relating to such Pooling and Servicing Agreements and Indentures
and related Securities other than such expenses related to particular Home
Equity Loans.
<PAGE> 182
EXHIBITS (ITEM 16 OF FORM S-3).
Exhibits--
1.1-- Form of Underwriting Agreement for the Home equity loan asset backed
certificates*
3.1-- Certificate of Incorporation of HFC Revolving Corporation*
3.2-- By-Laws of HFC Revolving Corporation*
4.1-- Form of Pooling and Servicing Agreement for Closed-End Loans*
4.2-- Form of Pooling and Servicing Agreement for Revolving Credit Loans*
5.1-- Opinion of Katten Muchin & Zavis with respect to legality relating to
the Home equity loan asset backed certificates*
8.1-- Opinion of Katten Muchin & Zavis with respect to certain tax matters
relating to the Home equity loan asset backed certificates (included as
part of Exhibit 5.1)*
23.1-- Consent of Katten Muchin & Zavis relating to the Home equity loan asset
backed certificates (included as part of Exhibit 5.1)*
* to be filed by amendment.
UNDERTAKINGS (ITEM 17 OF FORM S-3).
A. UNDERTAKINGS PURSUANT TO RULE 415.
The Registrant hereby undertakes:
(a)(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 this Registration Statement; and
(iii) to include any material information with respect to the
plan of distribution not previously disclosed in this Registration
Statement or any material change to such information in this
Registration Statement;
Provided however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed with or furnished to the
Commission by the Registrant pursuant to Section 13 or Section 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in this
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.
<PAGE> 183
(b) The Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in this
Registration Statement shall be deemed to be a new Registration Statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
B. UNDERTAKING IN RESPECT OF INDEMNIFICATION.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the SEC such
indemnification is against public policy as expressed in the Securities Act of
1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933, as amended, and will be governed by the final adjudication of such
issue.
<PAGE> 184
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, HFC Revolving
Corporation certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-3, reasonably believes that the
security rating requirement contained in Transaction Requirement B.5 of Form S-3
will be met by the time of the sale of the securities registered hereunder, and
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Prospect Heights, State
of Illinois, as of the 5th day of August, 1999.
HFC REVOLVING CORPORATION
By: /s/ G.D. Gilmer
-------------------------------------
G.D. Gilmer
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities indicated on August 5, 1999:
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------------- -----------------------------------------------
<S> <C>
/s/ G.D. Gilmer President, Chief Executive Officer and Director
- -------------------------------------
G.D. Gilmer
/s/ B.B. Moss, Jr. Senior Vice President, Treasurer and Chief
- ------------------------------------- Financial Officer
B.B. Moss, Jr.
Senior Vice President, Controller and Chief
/s/ S.L. McDonald Accounting Officer
- -------------------------------------
S.L. McDonald
/s/ J.W. Blenke Director
- -------------------------------------
J.W. Blenke
/s/ S.H. Smith Director
- -------------------------------------
S.H. Smith
</TABLE>
