<PAGE> 1
The information in this prospectus supplement is subject to completion or
amendment. We have filed a registration statement relating to these
securities with the Securities and Exchange Commission. No one may sell
these securities, or accept offers to buy, without the delivery of a final
prospectus supplement and accompanying prospectus. This prospectus
supplement and the accompanying prospectus are not an offer to sell or a
solicitation of an offer to buy these securities, nor may anyone sell
these securities in any state in which such an offer, solicitation or sale
would be unlawful, prior to the registration and qualification of these
securities under the securities laws of that state.
SUBJECT TO COMPLETION
DATED NOVEMBER 8, 1999
PROSPECTUS SUPPLEMENT DATED NOVEMBER _ , 1999
(TO PROSPECTUS DATED NOVEMBER 3, 1999)
$500,390,000
CLOSED-END HOME EQUITY LOAN ASSET BACKED CERTIFICATES, SERIES 1999-1
HOUSEHOLD HOME EQUITY LOAN TRUST 1999-1
ISSUER
HOUSEHOLD FINANCE CORPORATION
MASTER SERVICER
HFC REVOLVING CORPORATION
DEPOSITOR
<TABLE>
<S> <C>
Offered The trust will issue four classes of senior certificates and
Certificates two classes of subordinated certificates offered under this
prospectus supplement, backed by a pool of closed-end, first
or second lien fixed-rate home equity loans.
Credit Enhancement Credit enhancement for the certificates consists of excess
interest, overcollateralization and subordination of two
classes of offered certificates.
</TABLE>
Certain characteristics of the offered securities include:
<TABLE>
<CAPTION>
CLASS OF INITIAL PRINCIPAL PASS-THROUGH PRICE TO UNDERWRITING PROCEEDS TO
CERTIFICATES BALANCE RATE(1) PUBLIC(2) DISCOUNT(3) DEPOSITOR
- ------------ ----------------- ------------ --------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Class A-1........................ $237,000,000 % % % %
Class A-2........................ $ 62,000,000 % % % %
Class A-3........................ $ 90,000,000 % % % %
Class A-4........................ $ 42,920,000 % % % %
Class M-1........................ $ 35,550,000 % % % %
Class M-2........................ $ 32,920,000 % % % %
Total.................. $500,390,000
</TABLE>
(1) The pass-through rate on the Class M-1 and Class M-2 Certificates will be
the lesser of the related pass-through rate and the weighted average loan
rate on the home equity loans for the related Collection Period minus the
servicing fee rate.
(2) Plus accrued interest, if any, from November 1, 1999.
(3) Before deducting expenses, estimated to be approximately $ .
YOU SHOULD CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE S-10 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.
Merrill Lynch, Pierce, Fenner & Smith Incorporated, Banc of America
Securities LLC and Lehman Brothers Inc. are acting as underwriters for the
issuance of the offered certificates. Delivery of the offered certificates is
expected to be made in book entry form on or about November , 1999.
MERRILL LYNCH & CO.
BANC OF AMERICA SECURITIES LLC
LEHMAN BROTHERS
<PAGE> 2
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:
- the accompanying prospectus, which provides general information, some of
which may not apply to your series of certificates; and
- 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.
Some capitalized terms used in this prospectus supplement have the meanings
given below under "Glossary of Terms" or in the prospectus under "Glossary."
The depositor's principal offices are located at 2700 Sanders Road,
Prospect Heights, Illinois 60070 and its telephone number is (847) 564-6335.
S-2
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Summary..................................................... S-5
The Trust................................................. S-6
The Home Equity Loan Pool................................. S-6
Distributions on the Certificates......................... S-7
Credit Enhancement........................................ S-7
Optional Termination...................................... S-8
Ratings................................................... S-8
Legal Investment.......................................... S-8
Employee Benefit Plan Considerations...................... S-8
Tax Status................................................ S-9
Risk Factors................................................ S-10
Special Yield and Prepayment Considerations............... S-10
Risks Associated with the Home Equity Loans............... S-11
Loss Mitigation Practices................................. S-13
Limited Obligations....................................... S-13
Liquidity Risks........................................... S-14
Servicing Risks........................................... S-14
Risks Associated with the Certificates.................... S-15
Forward-Looking Statements................................ S-15
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
Home Equity Loan Pool Characteristics..................... S-18
Home Equity Loans......................................... S-19
Underwriting Standards.................................... S-23
Optional Purchase of Defaulted Home Equity Loans.......... S-24
The Subservicers.......................................... S-24
The Master Servicer....................................... S-24
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
Glossary of Terms......................................... S-29
Distributions............................................. S-33
Available Distribution Amount............................. S-33
Interest Distributions.................................... S-33
Principal Distributions................................... S-34
Allocation of Payments on the Home Equity Loans........... S-34
Overcollateralization Provisions.......................... S-36
Realized Losses........................................... S-36
Advances.................................................. S-37
The Preferred Stock....................................... S-37
Material Yield and Prepayment Considerations................ S-37
</TABLE>
S-3
<PAGE> 4
<TABLE>
<CAPTION>
<S> <C>
Pooling and Servicing Agreement............................. S-48
The Master Servicer....................................... S-48
Possession of Home Equity Loan Documents.................. S-48
Review of the Home Equity Loans........................... S-48
Servicing and Subservicing................................ S-49
Evidence as to Compliance................................. S-50
Collection and Liquidation Practices; Loss Mitigation..... S-50
Refinancing of Senior Lien................................ S-51
Termination............................................... S-51
Material Federal Income Tax Consequences.................... S-52
New Withholding Regulations............................... S-53
Method of Distribution...................................... S-54
Legal Matters............................................... S-55
Ratings..................................................... S-55
Legal Investment............................................ S-56
Employee Benefit Plan Considerations........................ S-56
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
<PAGE> 5
SUMMARY
The following summary is a 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, including documents that
are incorporated by reference.
Issuer or Trust............ Household Home Equity Loan Trust 1999-1.
Title of the offered
securities................. Closed-End Home Equity Loan Asset Backed
Certificates, Series 1999-1.
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.................... Bank One, National Association.
Home equity loan pool...... 7,875 closed-end, fixed-rate, fully-amortizing home
equity loans with an aggregate principal balance of
$530,285,828 as of the statistical cut-off date.
The home equity loans are secured by first or
second liens on one-to four-family residential
properties.
Cut-off date............... October 31, 1999.
Statistical cut-off date... October 28, 1999.
Closing date............... On or about November __, 1999.
Distribution dates......... Beginning in December 1999, on the 20th of each
month or, if the 20th is not a business day, on the
next business day.
<TABLE>
<CAPTION>
CLASS FINAL SCHEDULED DISTRIBUTION DATE
Final scheduled distribution date. ----- ---------------------------------
<S> <C> <C>
A-1 December 20, 2016
A-2 October 20, 2023
A-3 October 20, 2030
A-4 October 20, 2030
M-1 October 20, 2030
M-2 October 20, 2030
The actual final distribution date for each class of
the offered certificates could be substantially
earlier.
</TABLE>
Form of certificates....... Book-entry.
See "Description of the Certificates -- Book-Entry
Registration of the Offered Certificates" in this
prospectus supplement.
Minimum denominations...... Class A Certificates: $1,000.
Class M Certificates: $1,000.
Legal investment........... The offered 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 "Legal Investment Matters" in the
prospectus.
S-5
<PAGE> 6
ERISA Eligibility.......... The Class A-1, Class A-2, Class A-3 and Class A-4
Certificates are expected to be ERISA eligible. The
Class M-1 and Class M-2 Certificates are not
expected to be ERISA eligible.
See "Employee Benefit Plan Considerations" in this
prospectus supplement and in the prospectus.
OFFERED CERTIFICATES
<TABLE>
<CAPTION>
PASS-THROUGH INITIAL PRINCIPAL INITIAL RATING
CLASS RATE BALANCE MOODY'S/FITCH DESIGNATION
- ----- ------------ ----------------- -------------- -----------
<S> <C> <C> <C> <C>
Class A Certificates
A-1....................... % $237,000,000 Aaa/AAA Senior/Fixed-Rate/Sequential
A-2....................... % $ 62,000,000 Aaa/AAA Senior/Fixed-Rate/Sequential
A-3....................... % $ 90,000,000 Aaa/AAA Senior/Fixed-Rate/Sequential
A-4....................... % $ 42,920,000 Aaa/AAA Senior/Fixed-Rate/Lockout
Total Class A
Certificates: ... $431,920,000
Class M Certificates:
M-1....................... % $ 35,550,000 Aa2/AA Mezzanine/Fixed-Rate
M-2....................... % $ 32,920,000 A2/A Mezzanine/Fixed-Rate
Total Class M
Certificates:... $ 68,470,000
Total offered
certificates:... $500,390,000
</TABLE>
NON-OFFERED CERTIFICATES
<TABLE>
<S> <C> <C> <C> <C>
Class R Certificates........ $ 0 -- Residual
</TABLE>
The pass-through rate on the Class M-1 and Class M-2 Certificates will be
the lesser of the related pass-through rate and the weighted average loan rate
on the home equity loans for the related Collection Period minus the servicing
fee rate.
THE TRUST
The depositor will establish the Household Home Equity Loan Trust 1999-1 to
issue the Closed-End Home Equity Loan Asset Backed Certificates, Series 1999-1.
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 and related assets.
THE HOME EQUITY LOAN POOL
All of the home equity loans are secured by first or second liens or deeds
of trust. The home equity loans have 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 current principal balance........ $ 5,186.75
Maximum current principal balance........ $237,060.29
Average current principal balance........ $ 67,337.88
Range of loan rates...................... 8.000% to 20.176%
Weighted average loan rate............... 11.644%
Range of original terms to maturity...... 48 to 360 months
Weighted average original term to
maturity............................... 291.73 months
Range of remaining terms to maturity..... 14 to 359 months
Weighted average remaining term to
maturity............................... 277.77 months
Range of combined loan-to-value ratios... 8.81% to 115.00%
Weighted average combined loan-to-value
ratio.................................. 93.32%
</TABLE>
See "Description of the Home Equity Loan Pool" in this prospectus
supplement.
S-6
<PAGE> 7
DISTRIBUTIONS ON THE CERTIFICATES
Amount Available for Monthly Distribution. On each monthly distribution
date, the trustee will make distributions to certificateholders. The Available
Distribution Amount will consist of:
- collections of monthly principal and interest payments on the home equity
loans, including prepayments, plus
- if elected by the master servicer, other unscheduled collections, minus
- 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 the Available Distribution Amount in the following order:
- Class A Certificate interest
- Class M-1 Certificate interest
- Class M-2 Certificate interest
- Class A Certificate principal sequentially or based on Class A-4 Lockout
Percentage
- Class M-1 Certificate principal
- Class M-2 Certificate principal
- any remaining amount to the Class R Certificates
Interest and principal distributions on the certificates will be as described
under "Description of the Certificates -- Allocation of Payments on the Home
Equity Loans" in this prospectus supplement.
CREDIT ENHANCEMENT
The credit enhancement for the benefit of the offered certificates consists
of:
Excess Interest. Because more interest is expected to be paid by the
borrowers than is necessary to pay the related servicing fee and interest on the
offered certificates each month, there is expected to 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.
Overcollateralization. Although the aggregate initial principal balance of
the home equity loans is $526,733,171.22 as of the cut-off date, the trust is
issuing only $500,390,000 aggregate principal amount of offered certificates.
The excess principal balance of the home equity loans represents
overcollateralization, which may absorb some losses on the home equity loans, if
not covered by excess interest. The excess interest described above will also be
distributed to the offered certificates as principal. This will reduce the
principal balance of the offered certificates faster than the principal balance
of the home equity loans until the required overcollateralization is reached.
Subordination. Distribution of interest on the Class M-2 Certificates is
subordinate to distribution of interest on the Class A and Class M-1
Certificates and distribution of interest on the Class M-1 Certificates is
subordinate to distribution of interest on the Class A Certificates.
Distribution of principal on the Class M-2 Certificates is subordinate to
distribution of principal on the Class A and Class M-1 Certificates and
distribution of principal on the Class M-1 Certificates is subordinate to
distribution of principal on the Class A Certificates.
S-7
<PAGE> 8
OPTIONAL TERMINATION
Beginning on the distribution date on which the aggregate Certificate
Principal Balance is less than 15% of the aggregate initial Certificate
Principal Balance of the offered certificates, the master servicer will have the
option to purchase the remaining home equity loans from the trust. Under an
optional purchase, the outstanding principal balance of the offered certificates
will be paid in full with accrued interest.
If the master servicer does not exercise this purchase option, then on the
third distribution date after which the purchase option could first be
exercised, the trustee will begin an auction process to sell the home equity
loans and the other trust assets, but the trustee may not sell the trust assets
and liquidate the trust unless the proceeds of the auction are sufficient to pay
the aggregate unpaid principal balance of the offered certificates and all
accrued and unpaid interest thereon. If the first auction of the trust property
is not successful because the highest bid received is too low, then the trustee
will conduct an auction of the home equity loans every third month thereafter,
unless and until an acceptable bid is received for the trust property.
If the first auction of the trust property is not successful because the
highest bid received is too low, then on each distribution date thereafter, the
Class M-1 and Class M-2 Certificates will be entitled to receive, pro rata,
based on the then outstanding principal balance of those classes of
certificates, an additional principal distribution amount equal to the remaining
amount available after paying all interest and principal then due on the offered
certificates.
RATINGS
When issued, the offered certificates will receive the ratings listed on
page S-6 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 offered 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
offered certificates constitute legal investments for you.
EMPLOYEE BENEFIT PLAN CONSIDERATIONS
An employee benefit plan subject to the requirements of the fiduciary
responsibility provisions of ERISA, or the provisions of Section 4975 of the
Internal Revenue Code, contemplating the purchase of any of the Class A
Certificates should consult its counsel before making a purchase, and the
fiduciary and legal advisors should consider whether the Class A Certificates
will satisfy all of the requirements of the "publicly offered securities"
exception and the possible application of ERISA prohibited transaction
exemptions, both as described in this prospectus supplement under "Employee
Benefit Plan Considerations". Although the depositor expects that the "publicly
offered securities" exception and ERISA prohibited transaction exemptions will
apply to certain purchases of the Class A Certificates by employee benefit
plans, there can be no assurance that the exception or exemptions will apply to
all purchases of the Class A Certificates by these plans.
The Class M Certificates may not be purchased by or transferred to a plan
or a person acting on behalf of or investing the assets of a plan.
See "Employee Benefit Plan Considerations" in this prospectus supplement
and in the prospectus.
S-8
<PAGE> 9
TAX STATUS
For federal income tax purposes, the trust will be treated as a real estate
mortgage investment conduit, a REMIC. The offered certificates will represent
ownership of regular interests in the REMIC and will be treated as debt
instruments for federal income tax purposes. The trust itself will not be
subject to federal income tax.
See "Material Federal Income Tax Consequences" in this prospectus
supplement and in the prospectus.
S-9
<PAGE> 10
RISK FACTORS
The offered 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 offered
certificates.
The offered 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 offered 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:
- the amortization schedules of the home equity loans;
- the rate of principal prepayments, including partial prepayments and
prepayments resulting from refinancing by the borrowers;
- liquidations of defaulted home equity loans;
- the presence and enforceability of due-on-sale clauses;
- 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 master servicer of defaulted home equity loans;
- the optional purchase by the master servicer of all the home equity loans
in connection with the termination of the trust;
- the pass-through rate for a class of certificates; and
- 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.
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 home equity 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 home equity 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 home equity 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.
S-10
<PAGE> 11
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.
The sellers of the home equity loans in the home equity loan pool may
refinance the home equity loans, which will result in prepayment on the home
equity loans. Based upon the statistical cut-off date principal balance, 56.47%
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 terms 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.
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 principal 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 principal 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.
Class A-4 Certificates. It is not expected that the Class A-4 Certificates
will receive any distributions of principal until the distribution date in
December 2002. Until the distribution date in December 2005, the Class A-4
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 M Certificates. The rights of the holders of the Class M Certificates
to receive payments of principal and interest otherwise payable on their
certificates will be subordinated to such rights of the holders of the Class A
Certificates. The Class M Certificates 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.
See "Material Yield and Prepayment Considerations" and "Description of the
Certificates -- Allocation of Payments on the Home Equity Loans" in this
prospectus supplement.
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 some are second liens.
Based upon the statistical cut-off date principal balance, 14.22% of the
home equity loans included in the home equity loan pool are secured by second
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 liens that have high combined loan-to-value 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 93.32%.
S-11
<PAGE> 12
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. Accordingly, the excess cashflow that will be available on the related
distribution date will be reduced. The rate of delinquency and default on home
equity loans secured by second liens 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:
- regulate interest rates and other charges;
- require specific disclosures;
- require licensing of mortgage loan originators;
- prohibit discriminatory lending practices;
- prohibit unfair and deceptive practices;
- regulate the use of consumer credit information; and
- 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 loan 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.
The home equity loan pool will include High Cost Loans, which are subject
to special rules, disclosure requirements and other regulatory provisions.
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
S-12
<PAGE> 13
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 second lien home equity loans create greater
risks to you, compared to those for first lien home equity loans.
The standards under which the second lien 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. Because of the
relatively high combined loan-to-value ratios of the home equity loans and the
fact that 14.22% of the home equity loans are secured by second 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. Based upon
the statistical cut-off date principal balance, 16.15%, 8.71%, 7.24%, 5.85%,
5.38% and 5.25% of the home equity loans are located in California, New York,
Pennsylvania, Florida, Washington and Michigan, respectively. If the regional
economy or housing market weakens in any region having a significant
concentration of the properties underlying the home equity loans, the home
equity loans related to properties in that region may experience high rates of
delinquency and loss, which could result 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:
- are regulated by state laws and judicial rules;
- may be subject to delays; and
- 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.
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.
LIMITED OBLIGATIONS
Payments on the home equity loans are the sole source of payments on your
certificates.
Credit enhancement includes excess interest, overcollateralization and
subordination. 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
S-13
<PAGE> 14
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.
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 assigned ratings of at least "A3" by Moody's
Investors Service, Inc. and "A" by Fitch IBCA, Inc., the loan documents with
respect to each home equity loan will be retained by subservicers affiliated
with HFC and assignments of the related mortgage to the trustee will not be
recorded. 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:
- any creditors of a seller; or
- 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 the retention by a subservicer of
the documents relating to a home equity loan or the failure to record the
assignment of a home equity loan, 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 will have 90 days to record assignments of
the mortgages for each related home equity loan in favor of the trustee and 60
days to deliver the loan documents pertaining to each home equity loan to the
trustee, unless opinions of counsel satisfactory to the trustee 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 rated at least "P-1" by Moody's and "F-1" by Fitch or HFC
maintains a servicer credit enhancement acceptable to the rating agencies, 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 "Pooling and Servicing Agreement -- Collection and
Liquidation Practices; Loss Mitigation."
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
S-14
<PAGE> 15
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:
- 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 possession of a physical certificate; and
- 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, the credit enhancement and
the ability of the master servicer to service the loans. The rating by the
rating agencies of the certificates:
- is not a recommendation to purchase, hold or sell the certificates; and
- 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
S-15
<PAGE> 16
projected results. Those risks and uncertainties include, among others, general
economic and business conditions, regulatory initiatives and compliance with
governmental regulations, customer preferences, year 2000 issues, competition in
the home equity lending market 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.
S-16
<PAGE> 17
INTRODUCTION
The depositor will establish a trust with respect to the Closed-End Home
Equity Loan Asset Backed Certificates, Series 1999-1 on the closing date, under
a pooling and servicing agreement among the depositor, the master servicer and
the trustee, dated as of November 1, 1999. 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, consisting
of closed-end, fixed-rate, fully amortizing home equity loans. ALL PERCENTAGES
OF THE HOME EQUITY LOANS DESCRIBED IN THIS PROSPECTUS SUPPLEMENT ARE APPROXIMATE
PERCENTAGES BY AGGREGATE STATISTICAL CUT-OFF DATE PRINCIPAL BALANCE UNLESS
OTHERWISE INDICATED.
DESCRIPTION OF THE HOME EQUITY LOAN POOL
GENERAL
The home equity loan pool will consist of 7,875 home equity loans having an
aggregate principal balance outstanding as of the close of business on the
statistical cut-off date of $530,285,828. Based upon the statistical cut-off
date principal balance, 97.02% of the home equity loans are secured by liens on
single family residential real properties and 85.78% of the home equity loans
are secured by first liens on fee simple interests in one- to four-family
residential real properties. The remainder of the home equity loans are secured
by second liens on such types of properties. In each case, the property securing
the home equity loan is referred to as the mortgaged property. Based upon the
statistical cut-off date principal balance, the home equity loan pool will
consist of fixed-rate, fully-amortizing home equity loans with original terms to
maturity of approximately five, ten, twelve, fifteen, twenty, twenty-five or
thirty years with respect to 0.24%, 3.81%, 0.51%, 19.88%, 12.71%, 1.89% and
58.22% 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.
The sellers, which are 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 and assign the unpaid principal balance of 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. The sellers will
also enter into a transfer agreement to assign and transfer to the trustee all
documents supporting the home equity loans. The sellers 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 in that home equity loan. Each seller has made or will make
to the depositor 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 of the sellers will not be enforceable by the
trust. See "HFC Home Equity Lending Program -- Representations and Warranties
Concerning the Home Equity Loans" in the prospectus.
S-17
<PAGE> 18
PAYMENTS ON THE SIMPLE INTEREST HOME EQUITY LOANS
All 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 fees and expenses, if any, then 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 amortize more slowly than scheduled. Any remaining unpaid
principal is payable on the final maturity date of the home equity loan.
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).
Based upon the statistical cut-off date principal balance, 56.47% 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. A majority of the home
equity loans having a prepayment charge 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 entitled to retain for its own account any prepayment
charges, late payment charges and other fees received on the home equity loans.
The master servicer may waive any prepayment charges, late payment charges or
other fees. The subservicer will generally waive any prepayment charge in cases
where the subservicer is refinancing the home equity loan.
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.
The home equity loan pool will include High Cost Loans, which are subject
to special rules, disclosure requirements and other regulatory provisions.
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 -- Risks Associated
with the Home Equity Loans" in this prospectus supplement and "HFC
S-18
<PAGE> 19
Home Equity Lending Program -- Representations and Warranties Concerning the
Home Equity Loans" and "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:
- the sum of (a) the original principal balance of the home equity loan and
(b) any outstanding principal balance, at the time of origination of the
home equity loan, of all other mortgage loans, if any, secured by senior
liens on the related mortgaged property, divided by
- the appraised value of the mortgaged property.
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.
HOME EQUITY LOANS
None of the home equity loans were originated prior to February 1990, or
has a maturity date later than September 2029. No home equity loan has a
remaining term to stated maturity as of the statistical cut-off date of less
than 14 months. The weighted average remaining term to stated maturity of the
home equity loans as of the statistical cut-off date is 277.77 months. The
weighted average original term to stated maturity of the home equity loans as of
the statistical cut-off date is approximately 291.73 months.
Below is a description of some additional characteristics of the home
equity loans as of the statistical cut-off date. Unless otherwise specified, all
percentages of the home equity loans are approximate percentages by aggregate
principal balance of the home equity loans as of the statistical cut-off date.
All principal balances of the home equity loans are rounded to the nearest
dollar.
S-19
<PAGE> 20
ORIGINAL PRINCIPAL BALANCES OF THE HOME EQUITY LOANS
<TABLE>
<CAPTION>
PERCENT OF
HOME EQUITY LOANS
NUMBER OF HOME AGGREGATE PRINCIPAL BY AGGREGATE PRINCIPAL
ORIGINAL PRINCIPAL BALANCES OF THE HOME EQUITY LOANS EQUITY LOANS BALANCE BALANCE
- ---------------------------------------------------- -------------- ------------------- ----------------------
<S> <C> <C> <C>
$ 5,000.01-$ 10,000.00........................ 15 $ 129,424 0.02%
10,000.01- 20,000.00........................ 508 7,313,899 1.38
20,000.01- 30,000.00........................ 771 18,481,360 3.49
30,000.01- 40,000.00........................ 977 32,657,487 6.16
40,000.01- 50,000.00........................ 921 39,983,868 7.54
50,000.01- 60,000.00........................ 857 45,925,082 8.66
60,000.01- 70,000.00........................ 731 46,424,183 8.75
70,000.01- 80,000.00........................ 614 45,033,331 8.49
80,000.01- 90,000.00........................ 497 41,494,492 7.82
90,000.01- 100,000.00........................ 397 36,935,540 6.97
100,000.01- 110,000.00........................ 321 33,408,138 6.30
110,000.01- 120,000.00........................ 295 33,319,272 6.28
120,000.01- 130,000.00........................ 221 27,335,805 5.15
130,000.01- 140,000.00........................ 166 22,259,301 4.20
140,000.01- 150,000.00........................ 137 19,558,273 3.69
150,000.01- 200,000.00........................ 340 57,192,239 10.79
200,000.01- 240,000.00........................ 107 22,834,134 4.31
----- ------------ ------
Total................................ 7,875 $530,285,828 100.00%
===== ============ ======
</TABLE>
The average original principal balance of the home equity loans was
$68,895.56.
CURRENT PRINCIPAL BALANCES OF THE HOME EQUITY LOANS
<TABLE>
<CAPTION>
PERCENT OF
HOME EQUITY LOANS
NUMBER OF HOME AGGREGATE PRINCIPAL BY AGGREGATE PRINCIPAL
CURRENT PRINCIPAL BALANCES OF THE HOME EQUITY LOANS EQUITY LOANS BALANCE BALANCE
- --------------------------------------------------- -------------- ------------------- ----------------------
<S> <C> <C> <C>
$ 5,000.01-$ 10,000.00....................... 82 $ 689,814 0.13%
10,000.01- 20,000.00....................... 555 8,667,614 1.63
20,000.01- 30,000.00....................... 799 20,204,366 3.81
30,000.01- 40,000.00....................... 993 34,761,805 6.56
40,000.01- 50,000.00....................... 882 39,661,717 7.48
50,000.01- 60,000.00....................... 857 47,097,780 8.88
60,000.01- 70,000.00....................... 717 46,505,352 8.77
70,000.01- 80,000.00....................... 582 43,606,492 8.22
80,000.01- 90,000.00....................... 489 41,505,642 7.83
90,000.01- 100,000.00....................... 369 34,997,410 6.60
100,000.01- 110,000.00....................... 326 34,263,294 6.46
110,000.01- 120,000.00....................... 281 32,161,268 6.06
120,000.01- 130,000.00....................... 212 26,450,617 4.99
130,000.01- 140,000.00....................... 173 23,378,888 4.41
140,000.01- 150,000.00....................... 121 17,503,541 3.30
150,000.01- 200,000.00....................... 338 57,560,356 10.85
200,000.01- 240,000.00....................... 99 21,269,873 4.01
----- ------------ ------
Total............................... 7,875 $530,285,828 100.00%
===== ============ ======
</TABLE>
The average current principal balance of the home equity loans was
$67,337.88.
S-20
<PAGE> 21
INTEREST RATES OF THE HOME EQUITY LOANS
<TABLE>
<CAPTION>
PERCENT OF
HOME EQUITY LOANS
NUMBER OF HOME AGGREGATE PRINCIPAL BY AGGREGATE PRINCIPAL
INTEREST RATE (%) EQUITY LOANS BALANCE BALANCE
- ----------------- -------------- ------------------- ----------------------
<S> <C> <C> <C>
8.000- 8.999............................. 85 $ 9,986,736 1.88%
9.000- 9.999............................. 653 67,710,201 12.77
10.000-10.999............................. 1,402 133,890,042 25.25
11.000-11.999............................. 2,676 185,385,584 34.96
12.000-12.999............................. 992 57,608,165 10.86
13.000-13.999............................. 794 34,057,366 6.42
14.000-14.999............................. 824 27,927,440 5.27
15.000-15.999............................. 270 8,456,738 1.59
16.000-16.999............................. 123 3,544,983 0.67
17.000-17.999............................. 51 1,637,701 0.31
18.000-18.999............................. 3 36,849 0.01
20.000-20.999............................. 2 44,024 0.01
----- ------------ ------
Total........................... 7,875 $530,285,828 100.00%
===== ============ ======
</TABLE>
The weighted average interest rate of the home equity loans was 11.644% per
annum.
ORIGINAL COMBINED LTV RATIOS OF THE HOME EQUITY LOANS
<TABLE>
<CAPTION>
PERCENT OF
HOME EQUITY LOANS
NUMBER OF HOME AGGREGATE PRINCIPAL BY AGGREGATE PRINCIPAL
ORIGINAL COMBINED LTV RATIO (%) EQUITY LOANS BALANCE BALANCE
- ------------------------------- -------------- ------------------- ----------------------
<S> <C> <C> <C>
8.01- 10.00............................. 4 $ 62,396 0.01%
10.01- 20.00............................. 36 904,349 0.17
20.01- 30.00............................. 74 2,075,026 0.39
30.01- 40.00............................. 148 4,660,193 0.88
40.01- 50.00............................. 195 7,479,963 1.41
50.01- 60.00............................. 277 12,182,134 2.30
60.01- 70.00............................. 428 21,697,039 4.09
70.01- 80.00............................. 685 38,648,893 7.29
80.01- 90.00............................. 1,304 82,064,384 15.48
90.01-100.00............................. 1,978 135,838,717 25.62
100.01-110.00............................. 2,390 196,167,756 36.99
110.01-115.00............................. 356 28,504,978 5.38
----- ------------ ------
Total........................... 7,875 $530,285,828 100.00%
===== ============ ======
</TABLE>
The weighted average original combined LTV ratio of the home equity loans
was 93.32%.
S-21
<PAGE> 22
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES OF THE HOME EQUITY LOANS
<TABLE>
<CAPTION>
PERCENT OF
HOME EQUITY LOANS
NUMBER OF HOME AGGREGATE PRINCIPAL BY AGGREGATE PRINCIPAL
STATE EQUITY LOANS BALANCE BALANCE
- ----- -------------- ------------------- ----------------------
<S> <C> <C> <C>
Alabama................................... 104 $ 7,202,872 1.36%
Arizona................................... 127 8,821,561 1.66
California................................ 1,214 85,662,516 16.15
Colorado.................................. 79 7,447,064 1.40
Connecticut............................... 82 6,731,261 1.27
Delaware.................................. 51 4,156,251 0.78
District of Columbia...................... 14 1,309,511 0.25
Florida................................... 496 31,011,055 5.85
Georgia................................... 180 10,761,417 2.03
Idaho..................................... 50 4,070,359 0.77
Illinois.................................. 227 13,527,350 2.55
Indiana................................... 130 7,013,147 1.32
Iowa...................................... 34 2,354,056 0.44
Kansas.................................... 97 4,961,601 0.94
Kentucky.................................. 43 2,927,555 0.55
Louisiana................................. 36 2,003,312 0.38
Maine..................................... 5 604,056 0.11
Maryland.................................. 332 20,443,454 3.86
Massachusetts............................. 146 11,349,804 2.14
Michigan.................................. 444 27,826,226 5.25
Minnesota................................. 36 3,181,477 0.60
Mississippi............................... 23 1,028,532 0.19
Missouri.................................. 313 19,185,254 3.62
Montana................................... 6 596,896 0.11
Nevada.................................... 68 6,216,112 1.17
New Hampshire............................. 31 3,037,049 0.57
New Jersey................................ 286 20,183,558 3.81
New Mexico................................ 20 2,188,696 0.41
New York.................................. 607 46,174,377 8.71
North Carolina............................ 213 13,796,544 2.60
North Dakota.............................. 1 88,620 0.02
Ohio...................................... 386 22,263,415 4.20
Oklahoma.................................. 43 2,698,445 0.51
Oregon.................................... 91 8,580,151 1.62
Pennsylvania.............................. 715 38,409,158 7.24
Rhode Island.............................. 13 1,478,741 0.28
South Carolina............................ 132 7,339,322 1.38
South Dakota.............................. 3 319,982 0.06
Tennessee................................. 112 8,929,929 1.68
Texas..................................... 165 6,347,256 1.20
Utah...................................... 43 5,290,586 1.00
Virginia.................................. 328 19,311,115 3.64
Washington................................ 284 28,510,069 5.38
West Virginia............................. 5 232,593 0.04
Wisconsin................................. 58 4,473,526 0.84
Wyoming................................... 2 239,999 0.05
----- ------------ ------
Total........................... 7,875 $530,285,828 100.00%
===== ============ ======
</TABLE>
S-22
<PAGE> 23
OCCUPANCY TYPE OF THE HOME EQUITY LOANS
<TABLE>
<CAPTION>
PERCENT OF
HOME EQUITY LOANS
NUMBER OF HOME AGGREGATE PRINCIPAL BY AGGREGATE PRINCIPAL
OCCUPANCY TYPE EQUITY LOANS BALANCE BALANCE
- -------------- -------------- ------------------- ----------------------
<S> <C> <C> <C>
Primary Residence......................... 7,646 $517,779,969 97.64%
Investor Property......................... 225 12,221,766 2.30
Second Residence.......................... 4 284,094 0.05
----- ------------ ------
Total........................... 7,875 $530,285,828 100.00%
===== ============ ======
</TABLE>
LIEN PRIORITY OF THE HOME EQUITY LOANS
<TABLE>
<CAPTION>
PERCENT OF
HOME EQUITY LOANS
NUMBER OF HOME AGGREGATE PRINCIPAL BY AGGREGATE PRINCIPAL
LIEN PRIORITY EQUITY LOANS BALANCE BALANCE
- ------------- -------------- ------------------- ----------------------
<S> <C> <C> <C>
First Lien................................ 5,861 $454,877,902 85.78%
Second Lien............................... 2,014 75,407,926 14.22
----- ------------ ------
Total........................... 7,875 $530,285,828 100.00%
===== ============ ======
</TABLE>
REMAINING TERM TO MATURITY OF THE HOME EQUITY LOANS
<TABLE>
<CAPTION>
PERCENT OF
HOME EQUITY LOANS
NUMBER OF HOME AGGREGATE PRINCIPAL BY AGGREGATE PRINCIPAL
REMAINING TERM TO MATURITY (MONTHS) EQUITY LOANS BALANCE BALANCE
- ----------------------------------- -------------- ------------------- ----------------------
<S> <C> <C> <C>
12- 60................................... 127 $ 2,410,385 0.45%
61-120................................... 722 26,078,802 4.92
121-180................................... 2,244 112,861,090 21.28
181-240................................... 1,014 67,919,269 12.81
241-300................................... 122 11,103,342 2.09
301-360................................... 3,646 309,912,940 58.44
----- ------------ ------
Total........................... 7,875 $530,285,828 100.00%
===== ============ ======
</TABLE>
The weighted average remaining term to maturity of the home equity loans
was 277.77 months.
YEAR OF ORIGINATION OF THE HOME EQUITY LOANS
<TABLE>
<CAPTION>
PERCENT OF
HOME EQUITY LOANS
NUMBER OF HOME AGGREGATE PRINCIPAL BY AGGREGATE PRINCIPAL
YEAR OF ORIGINATION EQUITY LOANS BALANCE BALANCE
- ------------------- -------------- ------------------- ----------------------
<S> <C> <C> <C>
1990 to 1995.............................. 157 $ 4,830,341 0.91%
1996...................................... 433 22,221,015 4.19
1997...................................... 1,463 76,952,050 14.51
1998...................................... 3,226 212,047,990 39.99
1999...................................... 2,596 214,234,432 40.40
----- ------------ ------
Total........................... 7,875 $530,285,828 100.00%
===== ============ ======
</TABLE>
UNDERWRITING STANDARDS
All of the home equity loans were originated under full documentation
underwriting programs. The following is a brief description of HFC's
underwriting procedures for full documentation loan programs. All
S-23
<PAGE> 24
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:
- obtaining and reviewing an independent credit bureau report;
- 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;
- 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;
- 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
- 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
based on compensating factors as deemed appropriate by HFC. 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. None of the home equity loans included in the home equity loan pool
have a combined LTV, including any financed points, insurance premiums and fees,
in excess of 115%.
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 90 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 sellers or other
affiliates 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.
S-24
<PAGE> 25
DELINQUENCY AND LOSS EXPERIENCE OF THE MASTER SERVICER'S PORTFOLIO
The following tables summarize the delinquency and loss experience for all
closed-end home equity loans originated by the United States consumer finance
branch business of HFC, including loans sold with servicing performed by HFC and
its subsidiaries, and real estate acquired through foreclosures, but excluding
the branch operations of Beneficial Corporation, a subsidiary of HFC, purchased
portfolios of home equity loans and any wholesale or correspondent operations.
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.
As used in this prospectus supplement, a loan is considered to be
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 one
payment past due.
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.
HFC CLOSED-END HOME EQUITY LOAN DELINQUENCY EXPERIENCE
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
--------------------------------------------------------------- SEPTEMBER 30,
1995 1996 1997 1998 1999
------------ -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Number of home equity loans managed.... 16,100 31,570 60,927 82,100 92,372
Aggregate principal balance of home
equity loans managed................. $654,375,963 $1,526,845,382 $3,231,795,779 $4,956,468,088 $6,262,967,134
Contractually delinquent principal
balances of the home equity loans
managed
One payment past due................. $ 26,815,208 $ 64,467,816 $ 181,715,413 $ 250,818,324 $ 276,810,306
Two payments past due................ $ 4,662,684 $ 14,100,790 $ 32,580,997 $ 40,101,780 $ 38,464,950
Three or more payments past due...... $ 16,092,436 $ 29,190,617 $ 65,976,003 $ 134,276,606 $ 149,145,467
Principal balance of home equity loans
managed three or more payments past
due as a percentage of the aggregate
principal balance of the home equity
loans managed........................ 2.46% 1.91% 2.04% 2.71% 2.38%
</TABLE>
In the foregoing table, "home equity loans managed" includes home equity
loans owned and serviced with limited recourse and "contractually delinquent
principal balances of the home equity loans managed" includes REO Home Equity
Loans.
HFC CLOSED-END HOME EQUITY LOAN LOSS EXPERIENCE
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
---------------------------------------------- SEPTEMBER 30,
1996 1997 1998 1999
------------ -------------- -------------- --------------
<S> <C> <C> <C> <C>
Number of home equity loans managed.................... 31,570 60,927 82,100 92,372
Average principal balance of home equity loans
managed.............................................. $989,886,431 $2,264,910,788 $4,097,089,002 $5,583,648,852
Gross charge-offs...................................... $ 5,920,264 $ 14,496,010 $ 18,271,402 $ 28,983,409
Ratio of gross charge-offs to average balance.......... 0.60% 0.64% 0.45% 0.69%
</TABLE>
In the foregoing table, "home equity loans managed" includes home equity
loans owned and serviced with limited recourse, "average principal balance of
home equity loans managed" is the average of the monthly average principal
balances and "gross charge-offs" excludes post charge-off recoveries.
S-25
<PAGE> 26
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 prepayment in full, incomplete
documentation, delinquency or otherwise, if the depositor deems the removal
necessary or appropriate. Some amortization of the home equity loans may occur
between the statistical cut-off date and the cut-off date. 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 cut-off date, by aggregate principal balance as of the
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 offered
certificates and will be filed, together with the pooling and servicing
agreement, with the SEC within fifteen days after the initial issuance of the
offered certificates.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Closed-End Home Equity Loan Asset Backed Certificates, Series 1999-1
will include the following four classes of Class A Certificates and two classes
of Class M Certificates:
- Class A-1 Certificates;
- Class A-2 Certificates;
- Class A-3 Certificates;
- Class A-4 Certificates (the Lockout Certificates; and together with the
Class A-1, A-2 and A-3 Certificates, the Class A Certificates);
- Class M-1 Certificates; and
- Class M-2 Certificates (together with the Class M-1 Certificates, the
Class M Certificates).
In addition to the Class A and Class M Certificates, the Closed-End Home
Equity Loan Asset Backed Certificates, Series 1999-1, will include a single
class of residual certificates which are designated as the Class R Certificates
(the Residual Certificates). Only the Class A Certificates and the Class M
Certificates are offered by this prospectus supplement.
The certificates will evidence the entire beneficial ownership interest in
the trust. The trust will consist of:
- the home equity loans;
- 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;
- property acquired by foreclosure of the home equity loans or deed in lieu
of foreclosure;
- any applicable insurance policies;
- all proceeds of the foregoing; and
- one share of preferred stock of the depositor having limited voting
rights. See "Description of the Certificates -- The Preferred Stock" in
this prospectus supplement.
S-26
<PAGE> 27
The Class A Certificates and the Class M Certificates will be issued in
minimum denominations of $1,000 and integral multiples of $1,000 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, in 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 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 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
S-27
<PAGE> 28
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 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:
- the trustee determines that 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;
- the trustee elects to terminate a book-entry system through DTC; or
- 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.
S-28
<PAGE> 29
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 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:
- impress upon them the importance of those services being Y2K compliant;
and
- 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.
GLOSSARY OF TERMS
"Accrual Period," for all classes of offered certificates, is the calendar
month preceding the month in which the distribution date occurs.
"Applied Realized Loss Amount," with respect to any class of the
subordinated certificates and as to any distribution date, is the sum of the
Realized Losses with respect to home equity loans which have been applied in
reduction of the Certificate Principal Balance of such class.
"Certificate Principal Balance," for any class of offered certificates as
of any date of determination, is the initial Certificate Principal Balance of
that certificate, reduced by the aggregate of all amounts allocable to principal
previously distributed with respect to that certificate and 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.
"Class A Principal Distribution Amount," as of any distribution date, is
(a) prior to the Stepdown Date or with respect to which a Trigger Event is in
effect, the lesser of (1) 100% of the Principal
S-29
<PAGE> 30
Distribution Amount and (2) the aggregate Certificate Principal Balance of the
Class A Certificates and (b) on or after the Stepdown Date and as long as a
Trigger Event is not in effect, the excess, if any, of (1) the aggregate
Certificate Principal Balance of the Class A Certificates immediately prior to
such distribution date over (2) the lesser of (x) the product of (A) 57% and (B)
the aggregate Stated Principal Balance of the home equity loans as of the last
day of the related Collection Period and (y) the aggregate Stated Principal
Balance of the home equity loans as of the last day of the related Collection
Period minus $2,633,666.
"Class A-4 Lockout Distribution Amount," as of any distribution date, is
the product of (1) the applicable Class A-4 Lockout Percentage for such
distribution date and (2) the Class A-4 Lockout Pro Rata Distribution Amount for
such distribution date.
"Class A-4 Lockout Percentage," as of each distribution date, is as
follows:
<TABLE>
<CAPTION>
DISTRIBUTION DATES LOCKOUT PERCENTAGE
- ------------------ ------------------
<S> <C>
December 1999-November 2002......................... 0%
December 2002-November 2004......................... 45%
December 2004-November 2005......................... 80%
December 2005-November 2006......................... 100%
December 2006 and thereafter........................ 300%
</TABLE>
Notwithstanding the foregoing, if the Certificate Principal Balances of the
Class A Certificates, other than the Class A-4 Certificates, have been reduced
to zero, the Class A-4 Lockout Percentage will be equal to 100%.
"Class A-4 Lockout Pro Rata Distribution Amount," as of any distribution
date, is an amount equal to the product of (a) a fraction, the numerator of
which is the aggregate Certificate Principal Balance of the Class A-4
Certificates immediately prior to such distribution date and the denominator of
which is the aggregate Certificate Principal Balance of all classes of the Class
A Certificates immediately prior to such distribution date and (b) the Class A
Principal Distribution Amount for such distribution date.
"Class M-1 Principal Distribution Amount," as of any distribution date, is
the excess, if any, of (a) the sum of (1) the aggregate Certificate Principal
Balance of the Class A Certificates (after taking into account the payment of
the Class A Principal Distribution Amount on such distribution date) and (2) the
Class M-1 Certificate Principal Balance immediately prior to such distribution
date over (b) the lesser of (1) the product of (x) 68.50% and (y) the aggregate
Stated Principal Balance of the home equity loans as of the last day of the
related Collection Period and (2) the aggregate Stated Principal Balance of the
home equity loans as of the last day of the related Collection Period minus
$2,633,666.
"Class M-2 Principal Distribution Amount," as of any distribution date, is
the excess, if any, of (a) the sum of (1) the aggregate Certificate Principal
Balance of the Class A Certificates (after taking into account the payment of
the Class A Principal Distribution Amount on such distribution date), (2) the
Class M-1 Certificate Principal Balance (after taking into account the payment
of the related Class M-1 Principal Distribution Amount on such distribution
date), and (3) the Class M-2 Certificate Principal Balance immediately prior to
such distribution date over (b) the lesser of (1) the product of (x)81.00% and
(y) the aggregate Stated Principal Balance of the home equity loans as of the
last day of the related Collection Period and (2) the aggregate Stated Principal
Balance of the home equity loans as of the last day of the related Collection
Period minus $2,633,666.
"Collection Period," with respect to any distribution date, is the calendar
month immediately preceding the calendar month in which the distribution date
occurs.
"Current Interest," with respect to each class of offered certificates and
any distribution date, is the aggregate amount of interest accrued at the
pass-through rate during the preceding Accrual Period on the Certificate
Principal Balance of the related class of offered certificates.
S-30
<PAGE> 31
"Extra Principal Distribution Amount," is the lesser of (a) the Monthly
Excess Cashflow Amount and (b) the Overcollateralization Deficiency.
"Foreclosure Profit," as to any Liquidated Home Equity Loan, is the amount,
if any, by which (a) the aggregate of its Liquidation Proceeds less Liquidation
Expenses exceeds (b) the Stated Principal Balance of the home equity loan
immediately prior to the final recovery of its Liquidation Proceeds, together
with the sum of (1) accrued and unpaid interest thereon at the applicable home
equity loan rate from the date interest was last paid through the date of
receipt of the final Liquidation Proceeds and (2) the related Charge Off
Amounts.
"Interest Carry Forward Amount," with respect to any class of the offered
certificates for any distribution date, is the sum of (a) the amount, if any, by
which (1) the sum of the Current Interest and all prior unpaid Interest Carry
Forward Amounts for such class as of the immediately preceding distribution date
exceeded (2) the amount of the actual distribution with respect to interest made
to such class of offered certificates on such immediately preceding distribution
date plus (b) interest on such amount calculated for the related Accrual Period
at the related pass-through rate in effect with respect to such class of offered
certificates.
"Interest Collections," as of any distribution date, is the sum, without
duplication, of:
- the portion allocable to interest of all scheduled monthly payments on
the home equity loans received during the related Collection Period,
minus the servicing fee for the related Collection Period;
- all Net Liquidation Proceeds actually collected by the master servicer
during the related Collection Period (to the extent that Net Liquidation
Proceeds relate to interest);
- the interest portion of the purchase price for any home equity loan
repurchased from the trust pursuant to the terms of the pooling and
servicing agreement during the related Collection Period; and
- the interest portion of all Substitution Adjustment Amounts with respect
to the related Collection Period.
"Monthly Excess Cashflow Amount," as of any distribution date, is the
excess, if any, of (a) the Interest Collections over (b) the Current Interest
plus the Interest Carry Forward Amount, if any, of all classes of offered
certificates (after taking into account all distributions of interest on that
distribution date).
"Overcollateralization Amount," as of any distribution date, is the excess,
if any, of (a) the aggregate Stated Principal Balance of the home equity loans
as of the last day of the immediately preceding Collection Period over (b) the
aggregate Certificate Principal Balance of all classes of offered certificates
(after taking into account all distributions of principal on such distribution
date other than the Extra Principal Distribution Amount, but prior to taking
into account the application of any Applied Realized Loss Amount on that
distribution date).
"Overcollateralization Deficiency," as of any distribution date, is the
excess, if any, of (a) the Targeted Overcollateralization Amount over (b) the
Overcollateralization Amount, calculated for this purpose after taking into
account all distributions of principal on such distribution date (other than the
Extra Principal Distribution Amount), but prior to taking into account the
application of any Applied Realized Loss Amount on such distribution date.
"Principal Collections," as of any distribution date, is the sum, without
duplication, of:
- the principal portion of all scheduled monthly payments on the home
equity loans received by the master servicer during the related
Collection Period;
- the principal portion of the purchase price for any home equity loan
repurchased from the trust pursuant to the terms of the pooling and
servicing agreement during the related Collection Period;
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- the principal portion of all Substitution Adjustment Amounts with respect
to the related Collection Period;
- all Net Liquidation Proceeds (excluding Foreclosure Profits and Recovered
Charge Off Amounts) actually received by the master servicer during the
related Collection Period (to the extent such Net Liquidation Proceeds
relate to principal); and
- the principal portion of all other unscheduled collections on the home
equity loans received by the master servicer during the related
Collection Period (including, without limitation, full and partial
prepayments of principal made by the borrowers), to the extent not
previously distributed.
"Principal Distribution Amount," as of any distribution date, is the sum,
without duplication, of (a) the Principal Collections plus (b) the Extra
Principal Distribution Amount, if any, minus (c) for distribution dates
occurring on and after the Stepdown Date and for which a Trigger Event is not in
effect, the Overcollateralization Release Amount, if any.
"Senior Enhancement Percentage," as of any distribution date, is the
percentage obtained by dividing (a) the sum of (1) the aggregate Certificate
Principal Balance of the Class M Certificates and (2) the Overcollateralization
Amount, in each case after taking into account the distribution of the Principal
Distribution Amount on such distribution date by (b) the aggregate Stated
Principal Balance of the home equity loans on the last day of the related
Collection Period.
"Senior Specified Enhancement Percentage," as of any date of determination,
is 43.00%.
"60 Day Delinquency Percentage," as of any Collection Period, is (a) the
aggregate of the Stated Principal Balances of all home equity loans that are 60
or more days contractually delinquent, in bankruptcy, in foreclosure and REO
Home Equity Loans over (b) the aggregate Stated Principal Balance of the home
equity loans as of the end of such Collection Period.
"60 Day+ Rolling Average," as of any distribution date, is the average of
the applicable 60 Day Delinquency Percentage for each of the three (3)
immediately preceding Collection Periods.
"Stepdown Date," is the earlier to occur of (a) the later to occur of (1)
the distribution date in May 2002 and (2) the first distribution date on which
the Senior Enhancement Percentage (after taking into account distributions of
principal on such distribution date) is greater than or equal to the Senior
Specified Enhancement Percentage and (b) the distribution date on which the
aggregate Certificate Principal Balance of the Class A Certificates has been
reduced to zero.
"Stepped Up Enhancement Level," as of any distribution date, is two times
the 60 Day+ Rolling Average.
"Substitution Adjustment Amount," as to any defective home equity loan and
the date on which a substitution thereof occurs pursuant to the pooling and
servicing agreement, is the sum of:
- the excess, if any, of (a) the Stated Principal Balance of such defective
home equity loan plus any related Charge Off Amount as of the end of the
related Collection Period preceding the date of substitution (after the
application of any principal payments received on such defective home
equity loan on or before the date of the substitution of the applicable
eligible substitute home equity loan or loans) over (b) the aggregate
Stated Principal Balance of the applicable eligible substitute home
equity loan or loans, plus
- accrued and unpaid interest to the end of such Collection Period computed
on a daily basis at the Net Mortgage Rate on the Stated Principal Balance
of such defective home equity loan outstanding from time to time.
"Trigger Event," as of any distribution date, will have occurred if the 60
Day+ Rolling Average equals or exceeds one-half of the related Senior
Enhancement Percentage. Notwithstanding the foregoing, a Trigger Event will not
be in effect if the Senior Enhancement Percentage on the offered certificates
equals or exceeds the Stepped Up Enhancement Level.
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DISTRIBUTIONS
Distributions on the certificates will be made by the trustee on the 20th
day of each month or, if that day is not a business day, then the next
succeeding business day, commencing in December 1999. 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 wire transfer, check or money order mailed to the
address of the person entitled to the distribution as it appears on the
certificate register. In the case of DTC registered certificates, distributions
will be made by wire transfer to DTC or its nominee in amounts calculated as
described in this prospectus supplement. However, the final distribution
relating to the certificates (if the certificates are no longer DTC registered
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:
- a Saturday or Sunday; or
- a day on which banking institutions in the States of New York or Illinois
are required or authorized by law to be closed.
AVAILABLE DISTRIBUTION AMOUNT
The Available Distribution Amount, with respect to any distribution date,
will be an amount equal to the sum of (a) the aggregate amount of Principal
Collections and Interest Collections on the home equity loans received during
the related Collection Period after deduction of the related servicing fee and
(b) some unscheduled collections on and some amounts received in connection with
any substitutions for the home equity loans received during the related
Collection Period. The master servicer may elect to treat unscheduled
collections, other than borrower prepayments and Net Liquidation Proceeds, 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.
INTEREST DISTRIBUTIONS
Holders of each class of offered certificates will be entitled to receive
interest distributions at the pass-through rate on that class on each
distribution date in the priority and to the extent described in this prospectus
supplement. The pass-through rates on all classes of offered certificates are
fixed and are listed on page S-6 hereof. On any distribution date, the
pass-through rate on the Class M-1 and Class M-2 Certificates will be the lesser
of (a) the related pass-through rate and (b) the weighted average loan rate on
the home equity loans for the related Collection Period minus the servicing fee
rate.
Interest on the certificates relating to any distribution date will accrue
for the related Accrual Period on the related Certificate Principal Balance.
Interest for the certificates will accrue on the basis of a 30-day month and a
360-day year. Interest payments on the certificates will be funded from
principal and interest payments on the home equity loans.
PRINCIPAL DISTRIBUTIONS
Holders of each class of offered certificates will be entitled to receive
on each distribution date, in the priority and to the extent described in this
prospectus supplement, the Principal Distribution Amount.
Distributions of principal on the offered certificates on each distribution
date will be made after distribution of the Available Distribution Amount as
described under "-- Interest Distributions" above. The Principal Distribution
Amount shall be distributed in accordance with the priorities described below,
until the Certificate Principal Balances for each class of offered certificates
has been reduced to zero.
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The master servicer will include borrower prepayments on home equity loans
and Net Liquidation Proceeds in the Available Distribution Amount for the
distribution date in the month of receipt. The master servicer may elect to
treat Insurance Proceeds and other unscheduled collections, other than borrower
prepayments and Net Liquidation Proceeds, received in any calendar month as
included in the Available 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 related
Collection Period. On the final distribution date for each class of offered
certificates, principal will be due and payable on that class of offered
certificates in an amount equal to the related Certificate Principal Balance, if
any. In no event will principal payments on any class of offered certificates on
any distribution date exceed the related Certificate Principal Balance on that
date.
ALLOCATION OF PAYMENTS ON THE HOME EQUITY LOANS
The master servicer on behalf of the trust will establish a Collection
Account into which the master servicer will deposit Principal Collections and
Interest Collections on the home equity loans for each distribution date on the
business day prior to that distribution date. The Collection Account will be an
Eligible Account and amounts on deposit in the Collection Account will be
invested in Permitted Investments.
On each distribution date, the Available Distribution Amount will be
allocated from the Collection Account in the following order of priority:
(1) to the Class A Certificates, the Current Interest plus the
Interest Carry Forward Amount with respect to each class of Class A
Certificates without any priority among the Class A Certificates; provided,
that if the Available Distribution Amount is not sufficient to make a full
distribution of interest with respect to all classes of the Class A
Certificates, the Available Distribution Amount will be distributed among
the outstanding classes of Class A Certificates, pro rata, based on the
aggregate amount of interest due on each class, and the amount of the
shortfall will be carried forward with accrued interest;
(2) to the Class M-1 Certificates, the Current Interest plus the
Interest Carry Forward Amount with respect to the Class M-1 Certificates to
the extent of the Available Distribution Amount remaining in the Collection
Account after application with respect to the priorities set forth above;
and
(3) to the Class M-2 Certificates, the Current Interest plus the
Interest Carry Forward Amount with respect to the Class M-2 Certificates to
the extent of the Available Distribution Amount remaining in the Collection
Account after application with respect to the priorities set forth above.
On each distribution date (a) before the related Stepdown Date or (b) with
respect to which a Trigger Event is in effect, the classes of the offered
certificates will be entitled to receive distributions of principal up to the
Principal Distribution Amount for such distribution date, to the extent of the
remaining funds in the Collection Account after the distributions of interest
have been made pursuant to clauses (1) through (3) above, in the amounts set
forth below and in the following order of priority:
First, to the Class A-4 Certificates, in an amount equal to the Class
A-4 Lockout Distribution Amount, with the remainder paid sequentially to
the Class A Certificates, in the order of their numerical class designation
until the Certificate Principal Balance of each class of Class A
Certificates has been reduced to zero; provided, that if on any
distribution date the Class A-3 Certificate Principal Balance is zero, the
Class A-4 Certificates will be entitled to receive the entire Principal
Distribution Amount for such distribution date until the Certificate
Principal Balance thereof has been reduced to zero;
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Second, after the aggregate Certificate Principal Balance of the Class
A Certificates has been reduced to zero, to the Class M-1 Certificates,
until the Class M-1 Certificate Principal Balance has been reduced to zero;
Third, after the aggregate Certificate Principal Balance of the Class
A Certificates and the Class M-1 Certificates has been reduced to zero, to
the Class M-2 Certificates, until the Class M-2 Certificate Principal
Balance has been reduced to zero; and
Fourth, any remaining amount to the Class R Certificates.
On each distribution date (a) on or after the related Stepdown Date and (b)
as long as a Trigger Event is not in effect, the classes of the offered
certificates will be entitled to receive distributions of principal up to the
Principal Distribution Amount for such distribution date, to the extent of the
remaining funds in the Collection Account after the distributions of interest
have been made pursuant to clauses (1) through (3) above, in the amounts set
forth below and in the following order of priority:
First, up to the Class A Principal Distribution Amount, distributed
first to the Class A-4 Certificates, in an amount equal to the Class A-4
Lockout Distribution Amount, with the remainder paid sequentially to the
Class A Certificates, in the order of their numerical class designation
until the Certificate Principal Balance of each class of Class A
Certificates has been reduced to zero; provided, that if on any
distribution date the Class A-3 Certificate Principal Balance is zero, the
Class A-4 Certificates will be entitled to receive the entire Class A
Principal Distribution Amount for such distribution date until the
Certificate Principal Balance thereof has been reduced to zero;
Second, to the Class M-1 Certificates, the Class M-1 Principal
Distribution Amount, until the Class M-1 Certificate Principal Balance has
been reduced to zero;
Third, to the Class M-2 Certificates, the Class M-2 Principal
Distribution Amount, until the Class M-2 Certificate Principal Balance has
been reduced to zero; and
Fourth, any remaining amount to the Class R Certificates.
The Class A Certificates, other than the Class A-4 Certificates, are
"sequential pay" classes such that the Class A-3 Certificates will receive no
payments of principal until the Class A-2 Certificate Principal Balance has been
reduced to zero and the Class A-2 Certificates will receive no payments of
principal until the Class A-1 Certificate Principal Balance has been reduced to
zero; provided, however, that on any distribution date on which the sum of the
Certificate Principal Balance of the Class M Certificates and the
Overcollateralization Amount is zero, any amounts of principal payable to the
Class A Certificates on such distribution date shall be distributed pro rata and
not sequentially.
The Class A-4 Certificates are entitled to receive payments of the Class
A-4 Lockout Distribution Amount specified herein; provided, that if on any
distribution date the Class A-3 Certificate Principal Balance is zero, the Class
A-4 Certificates will be entitled to receive the entire Class A Principal
Distribution Amount for such distribution date, until the Class A-4 Certificate
Principal Balance has been reduced to zero.
OVERCOLLATERALIZATION PROVISIONS
On each distribution date, the Extra Principal Distribution Amount, if any,
is applied on that distribution date as an accelerated payment of principal on
the offered certificates in the manner and to the extent hereafter described.
The Extra Principal Distribution Amount will consist of the lesser of (a) the
Monthly Excess Cashflow Amount and (b) the Overcollateralization Deficiency.
The Monthly Excess Cashflow Amount for any distribution date will derive
primarily from the amount of interest collected on the home equity loans in
excess of the amount of interest needed to pay the Current Interest plus any
Interest Carry Forward Amount with respect to such distribution date.
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The Overcollateralization Release Amount for any distribution date is the
amount (but not in excess of the Principal Collections for such distribution
date) equal to the excess of (a) the Overcollateralization Amount for such
distribution date, assuming that 100% of the Principal Collections is applied on
such distribution date to the distribution of principal on the offered
certificates over (b) the Targeted Overcollateralization Amount.
The Targeted Overcollateralization Amount, as of any distribution date,
will be:
- prior to the Stepdown Date, 9.50% of the initial Stated Principal Balance
of the home equity loans, and
- on and after the Stepdown Date and assuming a Trigger Event is not in
effect, the greater of (a) 19.00% of the aggregate Stated Principal
Balance of the home equity loans, as of the last day of the related
Collection Period and (b) $2,633,666.
If a Trigger Event is in effect on or after the Stepdown Date, the Targeted
Overcollateralization Amount will be equal to the Targeted Overcollateralization
Amount for the immediately preceding distribution date.
In the event that the Targeted Overcollateralization Amount 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 offered
certificates on that distribution date will not be distributed to the holders of
the offered certificates on that distribution date. This has the effect of
decelerating the amortization of the offered certificates relative to the
amortization of the home equity loans, and of reducing the Overcollateralization
Amount.
REALIZED LOSSES
If on any distribution date, after giving effect to any Extra Principal
Distribution Amount, the aggregate Certificate Principal Balance of the offered
certificates exceeds the aggregate Stated Principal Balance of the home equity
loans, the Certificate Principal Balances of the subordinated certificates will
be reduced by an amount equal to such excess, which is an Applied Realized Loss
Amount, in inverse order of seniority (first, to the Class M-2 Certificates,
until the Certificate Principal Balance thereof has been reduced to zero; and
second, the Class M-1 Certificates, until the Certificate Principal Balance
thereof has been reduced to zero). If the Certificate Principal Balance of a
class of subordinated certificates is reduced, that class thereafter will be
entitled to distributions of interest and principal only with respect to the
Certificate Principal Balance so reduced. Although the Certificate Principal
Balance of the Class A Certificates will not be reduced on account of Realized
Losses even if the Certificate Principal Balances of all the subordinated
certificates have been reduced to zero, the amount available to be distributed
to the Class A Certificates as principal may be less than the Certificate
Principal Balances of the Class A Certificates.
ADVANCES
The master servicer is not obligated to make Advances relating to
delinquent payments of principal and interest with respect to any home equity
loan included in the home equity pool.
THE PREFERRED STOCK
The trust assets include one share of preferred stock of the depositor. The
preferred stock has a par value of $1.00 and is designated the Class SV
Preferred Stock. Issuance of the preferred stock to the trust is intended to
prevent the depositor from abusing the protections of the bankruptcy laws and
will have no impact on the bankruptcy remoteness of the trust. Under the
Articles of Incorporation of the depositor, the rights of the holders of the
preferred stock are limited to (a) voting in the event the depositor desires to
institute proceedings to be adjudicated insolvent, consent to the institution of
any bankruptcy or insolvency case or petition, make an assignment for the
benefit of creditors, or admit in writing its inability to pay its
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debts as they become due, and (b) receiving $1.00 upon liquidation of the
depositor. The depositor has issued similar shares of preferred stock to other
trusts. The unanimous affirmative vote of the holders of the preferred stock and
such similar shares of preferred stock is required to approve any of the
depositor's bankruptcy initiatives. Holders of any shares of preferred stock of
the depositor have no other rights, such as the right to receive dividends or to
vote on any other matter.
Under the pooling and servicing agreement, the trustee has the exclusive
authority to vote the interest of the trust in the preferred stock. In the
pooling and servicing agreement, the trustee covenants that it will not consent
to any of the depositor's voluntary bankruptcy initiatives unless approved by a
majority of the certificateholders. Because unanimous consent of all the holders
of preferred stock of the depositor is required to approve any of the
depositor's bankruptcy initiatives, a majority of the certificateholders will be
able to unilaterally prevent the implementation of the depositor's voluntary
bankruptcy initiatives.
MATERIAL YIELD AND PREPAYMENT CONSIDERATIONS
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 on the home equity loans. 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 on
the home equity loans 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 any class of
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.
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Most of the home equity loans contain due-on-sale clauses. As described
under "Description of the Certificates -- Allocation of Payments on the Home
Equity Loans" 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 and the Class M Certificates. Prepayments, liquidations
and purchases of the home equity loans will result 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 and Class M Certificates 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, any Monthly Excess Cashflow Amount is used
to accelerate distributions of principal on the Class A Certificates or any
Overcollateralization Release Amount is used to slow the distributions of
principal on the Class A Certificates. 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. 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.
To the extent that any losses are incurred on any of the home equity loans
that are not covered by the Monthly Excess Cashflow Amount or reduction in the
Overcollateralization Amount, holders of the certificates will bear all risk of
the losses resulting from default by borrowers.
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. 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.
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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 and Class M
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 and Class M Certificates 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 December 2002 and prior to the
distribution date occurring in December 2005 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. 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 December 2006, 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-1, Class A-2, Class A-3, Class A-4, Class M-1 and Class
M-2 Certificates is December 20, 2016, October 20, 2023, October 20, 2030,
October 20, 2030, October 20, 2030 and October 20, 2030, respectively. 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:
- the Monthly Excess Cashflow Amount will be used to make accelerated
payments of principal 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;
- prepayments are likely to occur, which will also have the effect of
shortening the weighted average lives of the certificates of each class;
and
- the master servicer may cause a termination of the trust when the
aggregate Certificate Principal Balance is less than 15% of the aggregate
initial Certificate Principal Balance of the offered certificates.
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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 ("CPR") of 0% 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 1.57895% (precisely 30/19%) per annum in
each month thereafter until the twentieth month. Beginning in the twentieth
month and in each month thereafter during the life of the home equity loans, a
100% prepayment assumption assumes a CPR of 30% 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 tables below 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:
- as of the date of issuance of the offered certificates, the home equity
loans have the following structuring assumptions:
HOME EQUITY LOANS
<TABLE>
<CAPTION>
ORIGINAL TERM REMAINING TERM
GROSS TO MATURITY TO MATURITY
POOL PRINCIPAL BALANCE LOAN RATE (MONTHS) (MONTHS)
- ---- ----------------- --------- ------------- --------------
<S> <C> <C> <C> <C>
1 $ 28,409,948.51 12.370% 116 97
2 112,278,560.72 12.084 180 164
3 67,551,621.08 11.654 239 226
4 11,010,729.65 11.204 299 287
5 307,482,311.26 11.425 360 347
</TABLE>
- with respect to each home equity loan, the aggregate servicing fee rate
will be 0.50% per annum;
- 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;
- 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
Assets" in the prospectus;
- 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;
- there is no Prepayment Interest Shortfall or any other interest shortfall
in any month;
- payments on the certificates will be received on the 20th day of each
month, commencing in December 1999;
S-40
<PAGE> 41
- payments on the home equity loans earn no reinvestment return;
- there are no additional ongoing trust expenses payable out of the trust;
- the certificates will be purchased on November 18, 1999; and
- the pass-through rate for the Class A-1, Class A-2, Class A-3, Class A-4,
Class M-1 and Class M-2 Certificates is 6.83%, 6.99%, 7.16%, 7.34%,
7.25%, 8.14% and 8.63%, respectively.
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
the offered certificates.
Subject to the foregoing discussion and assumptions, the following tables
indicate the weighted average life of each class of offered certificates, and
describe the percentages of the initial Certificate
S-41
<PAGE> 42
Principal Balance of each class of offered certificates that would be
outstanding after each of the dates shown at various percentages of the
prepayment assumption.
PERCENTAGE OF THE INITIAL CERTIFICATE PRINCIPAL BALANCE OF THE CLASS A-1
CERTIFICATES
AT THE FOLLOWING PREPAYMENT ASSUMPTION PERCENTAGES
<TABLE>
<CAPTION>
DISTRIBUTION DATE 0% 50% 100% 150% 200% 250%
----------------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Initial Percentage...................................... 100 100 100 100 100 100
November 20, 2000....................................... 87 57 27 0 0 0
November 20, 2001....................................... 83 25 0 0 0 0
November 20, 2002....................................... 78 0 0 0 0 0
November 20, 2003....................................... 74 0 0 0 0 0
November 20, 2004....................................... 68 0 0 0 0 0
November 20, 2005....................................... 63 0 0 0 0 0
November 20, 2006....................................... 56 0 0 0 0 0
November 20, 2007....................................... 51 0 0 0 0 0
November 20, 2008....................................... 46 0 0 0 0 0
November 20, 2009....................................... 41 0 0 0 0 0
November 20, 2010....................................... 35 0 0 0 0 0
November 20, 2011....................................... 27 0 0 0 0 0
November 20, 2012....................................... 18 0 0 0 0 0
November 20, 2013....................................... 10 0 0 0 0 0
November 20, 2014....................................... 5 0 0 0 0 0
November 20, 2015....................................... 0 0 0 0 0 0
November 20, 2016....................................... 0 0 0 0 0 0
November 20, 2017....................................... 0 0 0 0 0 0
November 20, 2018....................................... 0 0 0 0 0 0
November 20, 2019....................................... 0 0 0 0 0 0
November 20, 2020....................................... 0 0 0 0 0 0
November 20, 2021....................................... 0 0 0 0 0 0
November 20, 2022....................................... 0 0 0 0 0 0
November 20, 2023....................................... 0 0 0 0 0 0
November 20, 2024....................................... 0 0 0 0 0 0
November 20, 2025....................................... 0 0 0 0 0 0
Weighted Average Life (years)(1)(2)..................... 7.97 1.35 0.74 0.52 0.39 0.31
Weighted Average Life to Maturity (years)(1)............ 7.97 1.35 0.74 0.52 0.39 0.31
</TABLE>
- -------------------------
(1) The weighted average life is determined by (a) multiplying the amount of
each distribution of principal by the number of months from the date of
issuance of such certificate to the related distribution date, (b) adding
the results and (c) dividing the sum by the initial Certificate Principal
Balance of such certificate and dividing the results by 12.
(2) Assumes the master servicer exercises its option to purchase the home equity
loans when the aggregate Certificate Principal Balance is less than 15% of
the aggregate initial Certificate Principal Balance of the offered
certificates. See "Pooling and Servicing Agreement -- Termination" in this
prospectus supplement.
S-42
<PAGE> 43
PERCENTAGE OF THE INITIAL CERTIFICATE PRINCIPAL BALANCE OF THE CLASS A-2
CERTIFICATES
AT THE FOLLOWING PREPAYMENT ASSUMPTION PERCENTAGES
<TABLE>
<CAPTION>
DISTRIBUTION DATE 0% 50% 100% 150% 200% 250%
----------------- ----- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Initial Percentage..................................... 100 100 100 100 100 100
November 20, 2000...................................... 100 100 100 89 0 0
November 20, 2001...................................... 100 100 10 0 0 0
November 20, 2002...................................... 100 95 0 0 0 0
November 20, 2003...................................... 100 30 0 0 0 0
November 20, 2004...................................... 100 0 0 0 0 0
November 20, 2005...................................... 100 0 0 0 0 0
November 20, 2006...................................... 100 0 0 0 0 0
November 20, 2007...................................... 100 0 0 0 0 0
November 20, 2008...................................... 100 0 0 0 0 0
November 20, 2009...................................... 100 0 0 0 0 0
November 20, 2010...................................... 100 0 0 0 0 0
November 20, 2011...................................... 100 0 0 0 0 0
November 20, 2012...................................... 100 0 0 0 0 0
November 20, 2013...................................... 100 0 0 0 0 0
November 20, 2014...................................... 100 0 0 0 0 0
November 20, 2015...................................... 100 0 0 0 0 0
November 20, 2016...................................... 86 0 0 0 0 0
November 20, 2017...................................... 71 0 0 0 0 0
November 20, 2018...................................... 54 0 0 0 0 0
November 20, 2019...................................... 43 0 0 0 0 0
November 20, 2020...................................... 30 0 0 0 0 0
November 20, 2021...................................... 15 0 0 0 0 0
November 20, 2022...................................... 0 0 0 0 0 0
November 20, 2023...................................... 0 0 0 0 0 0
November 20, 2024...................................... 0 0 0 0 0 0
November 20, 2025...................................... 0 0 0 0 0 0
Weighted Average Life (years)(1)(2).................... 19.54 3.75 1.80 1.17 0.86 0.65
Weighted Average Life to Maturity (years)(1)........... 19.54 3.75 1.80 1.17 0.86 0.65
</TABLE>
- -------------------------
(1) The weighted average life is determined by (a) multiplying the amount of
each distribution of principal by the number of months from the date of
issuance of such certificate to the related distribution date, (b) adding
the results and (c) dividing the sum by the initial Certificate Principal
Balance of such certificate and dividing the results by 12.
(2) Assumes the master servicer exercises its option to purchase the home equity
loans when the aggregate Certificate Principal Balance is less than 15% of
the aggregate initial Certificate Principal Balance of the offered
certificates. See "Pooling and Servicing Agreement -- Termination" in this
prospectus supplement.
S-43
<PAGE> 44
PERCENTAGE OF THE INITIAL CERTIFICATE PRINCIPAL BALANCE OF THE CLASS A-3
CERTIFICATES
AT THE FOLLOWING PREPAYMENT ASSUMPTION PERCENTAGES
<TABLE>
<CAPTION>
DISTRIBUTION DATE 0% 50% 100% 150% 200% 250%
----------------- ----- ----- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Initial Percentage.................................... 100 100 100 100 100 100
November 20, 2000..................................... 100 100 100 100 82 2
November 20, 2001..................................... 100 100 100 2 0 0
November 20, 2002..................................... 100 100 64 0 0 0
November 20, 2003..................................... 100 100 36 0 0 0
November 20, 2004..................................... 100 96 0 0 0 0
November 20, 2005..................................... 100 78 0 0 0 0
November 20, 2006..................................... 100 64 0 0 0 0
November 20, 2007..................................... 100 60 0 0 0 0
November 20, 2008..................................... 100 53 0 0 0 0
November 20, 2009..................................... 100 0 0 0 0 0
November 20, 2010..................................... 100 0 0 0 0 0
November 20, 2011..................................... 100 0 0 0 0 0
November 20, 2012..................................... 100 0 0 0 0 0
November 20, 2013..................................... 100 0 0 0 0 0
November 20, 2014..................................... 100 0 0 0 0 0
November 20, 2015..................................... 100 0 0 0 0 0
November 20, 2016..................................... 100 0 0 0 0 0
November 20, 2017..................................... 100 0 0 0 0 0
November 20, 2018..................................... 100 0 0 0 0 0
November 20, 2019..................................... 100 0 0 0 0 0
November 20, 2020..................................... 100 0 0 0 0 0
November 20, 2021..................................... 100 0 0 0 0 0
November 20, 2022..................................... 99 0 0 0 0 0
November 20, 2023..................................... 86 0 0 0 0 0
November 20, 2024..................................... 72 0 0 0 0 0
November 20, 2025..................................... 0 0 0 0 0 0
Weighted Average Life (years)(1)(2)................... 25.39 7.91 3.49 1.68 1.19 0.88
Weighted Average Life to Maturity (years)(1).......... 26.31 10.40 4.36 1.68 1.19 0.88
</TABLE>
- -------------------------
(1) The weighted average life is determined by (a) multiplying the amount of
each distribution of principal by the number of months from the date of
issuance of such certificate to the related distribution date, (b) adding
the results and (c) dividing the sum by the initial Certificate Principal
Balance of such certificate and dividing the results by 12.
(2) Assumes the master servicer exercises its option to purchase the home equity
loans when the aggregate Certificate Principal Balance is less than 15% of
the aggregate initial Certificate Principal Balance of the offered
certificates. See "Pooling and Servicing Agreement -- Termination" in this
prospectus supplement.
S-44
<PAGE> 45
PERCENTAGE OF THE INITIAL CERTIFICATE PRINCIPAL BALANCE OF THE CLASS A-4
CERTIFICATES
AT THE FOLLOWING PREPAYMENT ASSUMPTION PERCENTAGES
<TABLE>
<CAPTION>
DISTRIBUTION DATE 0% 50% 100% 150% 200% 250%
----------------- ----- ----- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Initial Percentage.................................... 100 100 100 100 100 100
November 20, 2000..................................... 100 100 100 100 100 100
November 20, 2001..................................... 100 100 100 100 0 0
November 20, 2002..................................... 100 100 100 0 0 0
November 20, 2003..................................... 99 89 84 0 0 0
November 20, 2004..................................... 97 81 0 0 0 0
November 20, 2005..................................... 94 70 0 0 0 0
November 20, 2006..................................... 89 57 0 0 0 0
November 20, 2007..................................... 74 30 0 0 0 0
November 20, 2008..................................... 63 17 0 0 0 0
November 20, 2009..................................... 52 0 0 0 0 0
November 20, 2010..................................... 42 0 0 0 0 0
November 20, 2011..................................... 32 0 0 0 0 0
November 20, 2012..................................... 22 0 0 0 0 0
November 20, 2013..................................... 16 0 0 0 0 0
November 20, 2014..................................... 13 0 0 0 0 0
November 20, 2015..................................... 10 0 0 0 0 0
November 20, 2016..................................... 8 0 0 0 0 0
November 20, 2017..................................... 7 0 0 0 0 0
November 20, 2018..................................... 5 0 0 0 0 0
November 20, 2019..................................... 4 0 0 0 0 0
November 20, 2020..................................... 3 0 0 0 0 0
November 20, 2021..................................... 3 0 0 0 0 0
November 20, 2022..................................... 2 0 0 0 0 0
November 20, 2023..................................... 1 0 0 0 0 0
November 20, 2024..................................... 1 0 0 0 0 0
November 20, 2025..................................... 0 0 0 0 0 0
Weighted Average Life (years)(1)(2)................... 10.91 6.91 4.59 2.39 1.59 1.16
Weighted Average Life to Maturity (years)(1).......... 10.91 7.00 5.70 3.13 1.59 1.16
</TABLE>
- -------------------------
(1) The weighted average life is determined by (a) multiplying the amount of
each distribution of principal by the number of months from the date of
issuance of such certificate to the related distribution date, (b) adding
the results and (c) dividing the sum by the initial Certificate Principal
Balance of such certificate and dividing the results by 12.
(2) Assumes the master servicer exercises its option to purchase the home equity
loans when the aggregate Certificate Principal Balance is less than 15% of
the aggregate initial Certificate Principal Balance of the offered
certificates. See "Pooling and Servicing Agreement -- Termination" in this
prospectus supplement.
S-45
<PAGE> 46
PERCENTAGE OF THE INITIAL CERTIFICATE PRINCIPAL BALANCE OF THE CLASS M-1
CERTIFICATES
AT THE FOLLOWING PREPAYMENT ASSUMPTION PERCENTAGES
<TABLE>
<CAPTION>
DISTRIBUTION DATE 0% 50% 100% 150% 200% 250%
----------------- ----- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Initial Percentage..................................... 100 100 100 100 100 100
November 20, 2000...................................... 100 100 100 100 100 100
November 20, 2001...................................... 100 100 100 100 0 0
November 20, 2002...................................... 100 100 57 0 0 0
November 20, 2003...................................... 100 83 39 0 0 0
November 20, 2004...................................... 100 69 0 0 0 0
November 20, 2005...................................... 100 57 0 0 0 0
November 20, 2006...................................... 100 47 0 0 0 0
November 20, 2007...................................... 100 38 0 0 0 0
November 20, 2008...................................... 100 31 0 0 0 0
November 20, 2009...................................... 100 0 0 0 0 0
November 20, 2010...................................... 100 0 0 0 0 0
November 20, 2011...................................... 100 0 0 0 0 0
November 20, 2012...................................... 100 0 0 0 0 0
November 20, 2013...................................... 100 0 0 0 0 0
November 20, 2014...................................... 100 0 0 0 0 0
November 20, 2015...................................... 98 0 0 0 0 0
November 20, 2016...................................... 83 0 0 0 0 0
November 20, 2017...................................... 78 0 0 0 0 0
November 20, 2018...................................... 71 0 0 0 0 0
November 20, 2019...................................... 67 0 0 0 0 0
November 20, 2020...................................... 62 0 0 0 0 0
November 20, 2021...................................... 57 0 0 0 0 0
November 20, 2022...................................... 51 0 0 0 0 0
November 20, 2023...................................... 44 0 0 0 0 0
November 20, 2024...................................... 37 0 0 0 0 0
November 20, 2025...................................... 0 0 0 0 0 0
Weighted Average Life (years)(1)(2).................... 22.17 6.74 3.71 3.01 1.76 1.33
Weighted Average Life to Maturity (years)(1)........... 22.42 7.08 3.95 4.08 2.42 2.05
</TABLE>
- -------------------------
(1) The weighted average life is determined by (a) multiplying the amount of
each distribution of principal by the number of months from the date of
issuance of such certificate to the related distribution date, (b) adding
the results and (c) dividing the sum by the initial Certificate Principal
Balance of such certificate and dividing the results by 12.
(2) Assumes the master servicer exercises its option to purchase the home equity
loans when the aggregate Certificate Principal Balance is less than 15% of
the aggregate initial Certificate Principal Balance of the offered
certificates. See "Pooling and Servicing Agreement -- Termination" in this
prospectus supplement.
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<PAGE> 47
PERCENTAGE OF THE INITIAL CERTIFICATE PRINCIPAL BALANCE OF THE CLASS M-2
CERTIFICATES
AT THE FOLLOWING PREPAYMENT ASSUMPTION PERCENTAGES
<TABLE>
<CAPTION>
DISTRIBUTION DATE 0% 50% 100% 150% 200% 250%
----------------- ----- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Initial Percentage..................................... 100 100 100 100 100 100
November 20, 2000...................................... 100 100 100 100 100 100
November 20, 2001...................................... 100 100 100 100 0 0
November 20, 2002...................................... 100 100 67 0 0 0
November 20, 2003...................................... 100 98 46 0 0 0
November 20, 2004...................................... 100 81 0 0 0 0
November 20, 2005...................................... 100 67 0 0 0 0
November 20, 2006...................................... 100 55 0 0 0 0
November 20, 2007...................................... 100 44 0 0 0 0
November 20, 2008...................................... 100 36 0 0 0 0
November 20, 2009...................................... 100 0 0 0 0 0
November 20, 2010...................................... 100 0 0 0 0 0
November 20, 2011...................................... 100 0 0 0 0 0
November 20, 2012...................................... 100 0 0 0 0 0
November 20, 2013...................................... 100 0 0 0 0 0
November 20, 2014...................................... 100 0 0 0 0 0
November 20, 2015...................................... 100 0 0 0 0 0
November 20, 2016...................................... 98 0 0 0 0 0
November 20, 2017...................................... 91 0 0 0 0 0
November 20, 2018...................................... 84 0 0 0 0 0
November 20, 2019...................................... 79 0 0 0 0 0
November 20, 2020...................................... 73 0 0 0 0 0
November 20, 2021...................................... 67 0 0 0 0 0
November 20, 2022...................................... 60 0 0 0 0 0
November 20, 2023...................................... 52 0 0 0 0 0
November 20, 2024...................................... 44 0 0 0 0 0
November 20, 2025...................................... 0 0 0 0 0 0
Weighted Average Life (years)(1)(2).................... 23.19 7.25 3.81 3.00 1.76 1.34
Weighted Average Life to Maturity (years)(1)........... 23.47 7.64 4.08 3.51 2.52 1.81
</TABLE>
- -------------------------
(1) The weighted average life is determined by (a) multiplying the amount of
each distribution of principal by the number of months from the date of
issuance of such certificate to the related distribution date, (b) adding
the results and (c) dividing the sum by the initial Certificate Principal
Balance of such certificate and dividing the results by 12.
(2) Assumes the master servicer exercises its option to purchase the home equity
loans when the aggregate Certificate Principal Balance is less than 15% of
the aggregate initial Certificate Principal Balance of the offered
certificates. See "Pooling and Servicing Agreement -- Termination" in this
prospectus supplement.
For additional considerations relating to the yield on the certificates,
see "Yield and Prepayment Considerations" in the prospectus.
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<PAGE> 48
POOLING AND SERVICING AGREEMENT
GENERAL
The certificates will be issued under a pooling and servicing agreement
dated as of November 1, 1999, 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 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 HFC Revolving Corporation, 2700 Sanders Road, Prospect Heights, Illinois
60070, Attention: Corporate Secretary.
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 30, 1999,
HFC and its subsidiaries had approximately $22.6 billion home equity loan
receivables owned and receivables serviced with limited recourse. As of June 30,
1999, HFC had approximately $45.7 billion in total assets, approximately $40.0
billion in total liabilities and approximately $5.7 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 assigned ratings of at least "A3" by Moody's
and "A" by Fitch, 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 to the 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 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 above or any of the subservicers ceases to be an HFC
affiliate, HFC will cause the subservicer, within 90 days, to record assignments
of the mortgages for each related home equity loan in favor of the trustee and,
within 60 days, to deliver the loan documents pertaining to each home equity
loan to the trustee, unless opinions of counsel satisfactory to the trustee and
the rating agencies 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 the pooling and servicing agreement, the
trustee will be appointed attorney-in-fact for the subservicers with power to
prepare, execute and record assignments of the mortgages in the event that the
subservicers fail to do so on a timely basis. In lieu of delivery of original
documentation, the subservicers 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 itself or in most cases be authorized to appoint one
or more custodians under a custodial agreement to maintain
S-48
<PAGE> 49
possession and review of documents relating to the home equity loans as the
agent of the trustee, which custodian may be the master servicer.
In the event the loan documents are delivered to the trustee with regard to
any home equity loan, the trustee 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 shall notify the master servicer and the depositor. If the
subservicer 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 the depositor, the depositor 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 the depositor, 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 the depositor will fulfill its obligation to
purchase any home equity loan. 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 any unreimbursed servicing 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 SUBSERVICING
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.
S-49
<PAGE> 50
Compensation to the master servicer for its servicing activities under the
pooling and servicing agreement will be paid from Interest Collections on the
home equity loans on each distribution date. The amount of such compensation for
each Collection Period is equal to 0.50% 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. 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 March of each year commencing in 2001, 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 March of each year, commencing in 2001, 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 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 provisions 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.
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
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pooling and servicing agreement shall have occurred and be continuing and (2)
either (A) the short-term debt obligations of HFC are rated at least "P-1" by
Moody's and "F-1" by Fitch or (B) HFC arranges for and maintains a servicer
credit enhancement that would not result in a downgrading of the current ratings
on the offered certificates; 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 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.
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 holders of the offered certificates and is
generally consistent with the master servicer's policies with respect to similar
loans; and provided further that certain modifications 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.
REFINANCING OF SENIOR LIEN
The master servicer may permit the refinancing of any existing lien senior
to a home equity loan, provided that the conditions set forth in the pooling and
servicing agreement are satisfied.
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. Beginning on the distribution date on which the
aggregate Certificate Principal Balance is less than 15% of the aggregate
initial Certificate Principal Balance of the offered certificates, the master
servicer will have the option to purchase all remaining home equity loans and
other assets in the trust, thereby effecting early retirement of the offered
certificates.
Any purchase of home equity loans and other assets of the trust shall be
made at a price equal to the greater of:
(1) the sum of:
- 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
- one month's interest accrued at the Net Mortgage Rate on the Stated
Principal Balance; and
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(2) the sum of:
- 100% of the Certificate Principal Balance of the offered certificates,
plus
- one month's interest accrued on those certificates at the applicable
pass-through rate and any previously unpaid accrued certificate
interest.
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 Class R Certificates.
If the master servicer does not exercise this purchase option within three
months of such distribution date, then the trustee will begin an auction process
to sell the home equity loans and the other trust assets at the highest possible
price, but the trustee may not sell the trust assets and liquidate the trust
unless at least two bids are received and the highest bid would be sufficient to
pay the aggregate unpaid principal balance of the offered certificates and all
accrued and unpaid interest thereon. If the first auction of the trust property
is not successful because the highest bid received is too low, then the trustee
will conduct an auction of the home equity loans every third month thereafter,
until an acceptable bid is received for the trust property. The first auction
and subsequent auctions may not be successful. The master servicer may exercise
its purchase option on any distribution date after the first distribution date
described above, unless the trustee has accepted a qualifying bid for the trust
property.
If the first auction of the trust property is not successful because the
highest bid received is too low, then on each distribution date thereafter the
Class M-1 and Class M-2 Certificates will be entitled to receive, pro rata based
on the principal balance of those classes of certificates, an additional
principal distribution amount for that distribution date, equal to the remaining
amount available after paying all interest and principal then due on the offered
certificates.
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.
For federal income tax purposes:
- 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
- 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 will
not 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, the amount of original issue discount allocable to
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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 another REMIC on its startup day in
exchange for a regular or residual interest therein.
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 0.000001% 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, 2000, 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.
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METHOD OF DISTRIBUTION
Subject to the terms and conditions of an underwriting agreement, dated
November __, 1999, the underwriters named below have agreed to purchase and the
depositor has agreed to sell the Class A Certificates and Class M 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 November
__, 1999, against payment therefor in immediately available funds.
<TABLE>
<CAPTION>
CLASS A-1 CLASS A-2 CLASS A-3 CLASS A-4 CLASS M-1 CLASS M-2
UNDERWRITER CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES
----------- ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...............
Banc of America Securities LLC.........
Lehman Brothers Inc. ..................
Total.............................
</TABLE>
In connection with the offered certificates, the underwriters have agreed,
subject to the terms and conditions of the underwriting agreement, to purchase
all of the offered certificates if any of the offered certificates are purchased
thereby.
The underwriting agreement provides that the obligations of the
underwriters 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 and the trust's registration statement shall be in effect, and that
no proceedings for that purpose shall be pending before or threatened by the
SEC.
The depositor has been advised that the underwriters propose initially to
offer the offered certificates to the public at the respective offering prices
set forth on the cover hereof and to certain dealers at such prices less a
selling concession not to exceed the percentage of the offered certificates'
denomination set forth below, and that the underwriters may allow and such
dealers may reallow a reallowance discount not to exceed the percentage of the
offered certificates' denomination set forth below.
<TABLE>
<CAPTION>
CLASS OF CERTIFICATE SELLING CONCESSION REALLOWANCE DISCOUNT
-------------------- ------------------ --------------------
<S> <C> <C>
Class A-1.................................................. % %
Class A-2.................................................. % %
Class A-3.................................................. % %
Class A-4.................................................. % %
Class M-1.................................................. % %
Class M-2.................................................. % %
</TABLE>
Until the distribution of the offered certificates is completed, the rules
of the SEC may limit the ability of the underwriters to bid for and purchase the
offered certificates. As an exception to these rules, the underwriters are
permitted to engage in certain transactions that stabilize the price of the
offered certificates. These transactions may consist of bids and purchases for
the purpose of pegging, fixing or maintaining the price of such classes of
offered certificates.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases.
Neither the depositor nor the underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the prices of the offered certificates. In addition,
neither the depositor nor the underwriters makes any representation that the
underwriters will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
The underwriting agreement provides that the depositor will indemnify the
underwriters, and that under limited circumstances the underwriters will
indemnify the depositor, against some civil liabilities under the Securities
Act, or contribute to payments required to be made in respect thereof.
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There is currently no secondary market for the offered certificates. The
underwriters intend to make a secondary market in the offered certificates but
are 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 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 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 Brown & Wood LLP.
RATINGS
It is a condition to the issuance of the Class A Certificates that they be
rated "Aaa" by Moody's and "AAA" by Fitch. It is a condition to the issuance of
the Class M-1 Certificates and the Class M-2 Certificates that they be rated
"Aa2" and "A2", respectively, by Moody's and "AA" and "A," respectively, by
Fitch.
The ratings assigned by Moody's and Fitch to home equity loan pass-through
certificates address the likelihood of the receipt by certificateholders of all
distributions to which such certificateholders are entitled. Moody's and Fitch's
ratings address the structural and legal aspects associated with the
certificates, including the nature of the underlying home equity loans. Moody's
and Fitch's ratings on home equity loan pass-through certificates do not
represent any assessment of the likelihood or rate of principal prepayments. The
ratings do not address the possibility that certificateholders might suffer a
lower-than-anticipated yield. See "Material Yield and Prepayment Considerations"
in this prospectus supplement.
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. 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.
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.
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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, any insurance company, whether through its general or separate
accounts, and 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 Class A 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.
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 underwriters 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.
Section 406 of ERISA and Section 4975 of the Internal Revenue Code
prohibit, in the absence of an applicable exemption, certain pension,
profit-sharing or other employee benefit plans from engaging in transactions
involving "plan assets" with persons that are "parties in interest" under ERISA
or "disqualified persons" under the Internal Revenue Code with respect to the
plan. A violation of these "prohibited transaction" rules may generate excise
tax and other liabilities under ERISA and the Internal Revenue Code for that
person and other adverse consequences for the parties involved. For example, a
prohibited transaction could occur, unless an exemption were available, if the
depositor or master servicer were a disqualified person or party in interest
with respect to any plan that acquired the Class A Certificates. There are at
least five exemptions issued by the Department of Labor that may apply in this
event to certain transactions involving the trust's assets:
- Department of Labor Prohibited Transaction Exemption 84-14 (Class
Exemption for Plan Asset Transactions Determined by Independent Qualified
Professional Asset Managers),
- Department of Labor Prohibited Transaction Exemption 91-38 (Class
Exemption for Certain Transactions Involving Bank Collective Investment
Funds),
- Department of Labor Prohibited Transaction Exemption 90-1 (Class
Exemption for Transactions Involving Insurance Company Pooled Separate
Accounts),
- Department of Labor Prohibited Transaction Exemption 95-60 (Class
Exemption for Transactions Involving Insurance Company General Accounts)
and
- Department of Labor Prohibited Transaction Exemption 96-23 (Class
Exemption for Transactions Involving House Asset Mangers).
The potential for additional prohibited transactions could arise if the
assets of the trust were deemed to constitute assets of any plan that owned
Class A Certificates. The Department of Labor has issued a final regulation
defining what constitutes "plan assets" of an employee benefit plan subject to
ERISA or of a plan or IRA subject to the prohibited transaction provisions of
the Internal Revenue Code. Under these regulations, the assets and properties of
some trusts and other entities in which one or more benefit plans acquire an
"equity interest" could be deemed to be assets of the benefit plan unless an
exception applies.
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Accordingly, if benefit plans purchase the Class A Certificates, and the Class A
Certificates were characterized as equity, or debt with substantial equity
features, the trust could be deemed to hold plan assets of these benefit plans
unless one of the exceptions under these regulations is applicable to the trust.
One of the exceptions included in the "plan assets" regulations issued by
the Department of Labor is the Publicly Offered Securities Exception that
generally provides that an issuer of a security is not deemed to hold plan
assets if a benefit plan acquires a "publicly offered security." A publicly
offered security includes a security that is:
- freely transferable,
- part of a class of securities that is owned by 100 or more investors
independent of the issuer and
- either is a part of a class of securities registered under Section 12(b)
or 12(g) of the Exchange Act or sold to the benefit plan as a part of an
offering of securities to the public pursuant to an effective
registration statement under the Securities Act and the class of
securities of which the security is a part is registered under the
Exchange Act within 120 days after the end of the fiscal year of the
issuer during which the offering of the securities to the public occurred
or a later time as may be allowed by the SEC.
It is anticipated that one or more classes of the Class A Certificates may
meet the criteria of the Publicly Offered Securities Exception set forth above.
Although no assurance can be given, the underwriters expect that one or more
classes of the Class A Certificates will be held by at least 100 persons
independent of the trust and of each other at the conclusion of the offering;
and there are no restrictions imposed on the transfer of the Class A
Certificates. Further, the Class A Certificates will be sold as a part of an
offering pursuant to an effective registration statement under the Securities
Act, and then will be timely registered under the Exchange Act under Section
12(b) or Section 12(g) of the Exchange Act. The underwriters will notify the
trustee as to whether or not one or more classes of the Class A Certificates
will be held by 100 independent persons at the conclusion of the offering.
Neither the depositor nor the master servicer will, however, determine whether
the 100-investor requirement of the Publicly Offered Securities Exception is
satisfied for any class of the Class A Certificates.
If one or more classes of the Class A Certificates fail to meet the
criteria of the Publicly Offered Securities Exception and the trust's assets are
deemed to include assets of benefit plans, as described above, transactions
involving the trust and "parties in interest" or "disqualified persons" with
respect to the benefit plans holding Class A Certificates that do not meet the
criteria of the Publicly Offered Securities Exception might be prohibited under
Section 406 of ERISA and Section 4975 of the Internal Revenue Code unless
another ERISA prohibited transaction exemption is applicable.
Each of the exemptions has, however, unique conditions that will likely not
apply to all plan investors in the trust. Furthermore, if the trust's assets are
considered to include assets of benefit plans, there is no assurance that any
exemption will apply to all transactions involving the trust's assets.
Due to the complexity of these rules and penalties imposed upon persons
involved in prohibited transactions, it is especially important that any benefit
plan fiduciary who proposes to cause a benefit plan to purchase Class A
Certificates should consult with its own counsel with respect to the potential
consequences under ERISA and the Internal Revenue Code of the benefit plan's
acquisition and ownership of the Class A Certificates. In addition, prospective
benefit plan investors should consult with their legal advisor concerning the
impact of ERISA and the Internal Revenue Code, the applicability of the Publicly
Offered Securities Exception, and the potential consequences in their specific
circumstances, prior to making an investment in the Class A Certificates. Assets
of a benefit plan should not be invested in the Class A Certificates unless it
is clear that the assets of the trust will not be plan assets or unless it is
clear that a prohibited transaction class exemption will apply and exempt all
potential prohibited transactions.
Moreover, each benefit plan fiduciary should determine whether under the
general fiduciary standards of investment prudence and diversification, an
investment in the Class A Certificates is appropriate for the
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benefit plan, taking into account the overall investment policy of the benefit
plan and the composition of the benefit plan's investment portfolio.
Additionally, with respect to transfers of the Class A 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 such transferee shall be
deemed to represent that the purchase of the Class A Certificates by or on
behalf of the plan: (a) is permissible under applicable law, (b) will not
constitute or result in any non-exempt prohibited transaction under ERISA or
Section 4975 of the Internal Revenue Code, and (c) will not subject the trustee
and the master servicer to any obligation in addition to those undertaken in the
pooling and servicing agreement.
The Class M Certificates may not be purchased by or transferred to a plan
or a person acting on behalf of or investing the assets of a plan. Consequently,
transfers of the Class M Certificates will not be registered by the trust unless
the trustee receives: (a) a representation from the transferee of such
certificate, acceptable to and in form and substance satisfactory to the
trustee, to the effect that such transferee is not an employee benefit plan
subject to Section 406 of ERISA or a plan or arrangement subject to Section 4975
of the Internal Revenue Code, nor a person acting on behalf of any such plan or
arrangement nor using the assets of any such plan or arrangement to effect such
transfer; or (b) an opinion of counsel satisfactory to the trustee that the
purchase or holding of such certificate by a plan, any person acting on behalf
of a plan or using such plan's assets, will not result in the assets of the
trust being deemed to be "plan assets" and subject to the prohibited transaction
requirements of ERISA and the Internal Revenue Code and will not subject the
trustee to any obligation in addition to those undertaken in the pooling and
servicing agreement. Such representation as described above shall be deemed to
have been made to the trustee by a beneficial owner's acceptance of a Class M
Certificate in book-entry form. In the event that such representation is
violated, or any attempt to transfer to a plan or person acting on behalf of a
plan or using such plan's assets is attempted without such opinion of counsel,
such attempted transfer or acquisition shall be void and of no effect.
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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 1999-1, Closed-End Home Equity Loan Asset Backed Certificates,
Series 1999-1: Class A Certificates and Class M 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.
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
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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 distribution 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 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 substantially reduce or offset any overdraft
charges incurred during that one-day period. If settlement is
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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:
- 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;
- 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
- 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:
- 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
- the beneficial owner takes one of the following steps to obtain an
exemption or reduced tax rate:
Exemption for Non-U.S. Persons (Form W-8). Beneficial owners of Global
Securities that are Non-U.S. Persons can obtain a complete exemption from the
withholding tax by filing a signed Form W-8 (Certificate of Foreign Status) 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. Person 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
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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:
- a citizen or resident of the United States,
- a corporation, partnership or other entity created or organized in, or
under the laws of, the United States, 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
- 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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PROSPECTUS
HOME EQUITY LOAN ASSET BACKED CERTIFICATES
HOUSEHOLD FINANCE CORPORATION
MASTER SERVICER
HFC REVOLVING CORPORATION
DEPOSITOR
The depositor may periodically form separate trusts to issue certificates
in series, backed by the assets of that trust.
<TABLE>
<S> <C>
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 or
classes of a series of certificates.
Collateral Assets Each trust will consist primarily of:
</TABLE>
- home equity loans secured by first or junior liens on one- to four-family
properties originated or acquired under the home equity program;
- securities and whole or partial participations in these home equity
loans; and
- 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.
November 3, 1999
<PAGE> 64
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:
- this prospectus, which provides general information, some of which may
not apply to your series of certificates; and
- 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.
2
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Introduction................................................ 5
The Trusts.................................................. 5
General................................................... 5
Home Equity Loan Information.............................. 6
Closed-End Loans.......................................... 9
Revolving Credit Loans.................................... 11
HFC Home Equity Lending Program............................. 13
General................................................... 13
General Underwriting Standards............................ 13
HFC's Underwriting Procedures Relating to Home Equity
Loans.................................................. 14
Representations and Warranties Concerning the Home Equity
Loans.................................................. 15
HFC Servicing Procedures.................................... 16
Description of the Certificates............................. 16
General................................................... 16
Form of Certificates...................................... 17
Assignment of Trust Assets................................ 19
Excess Spread and Excluded Spread......................... 21
Payments on Home Equity Loans; Deposits to Collection
Account................................................ 21
Withdrawals from the Collection Account................... 23
Distributions............................................. 24
Principal and Interest on the Certificates................ 24
Advances.................................................. 25
Funding Account........................................... 26
Reports to Certificateholders............................. 26
Collection and Other Servicing Procedures................. 27
Special Servicing and Special Servicing Agreements........ 29
Realization Upon Defaulted Home Equity Loans.............. 29
Hazard Insurance and Related Claims....................... 31
Description of Credit Enhancement........................... 32
Financial Guaranty Insurance Policy....................... 33
Letter of Credit.......................................... 33
Special Hazard Insurance Policies......................... 33
Bankruptcy Bonds.......................................... 34
Subordination............................................. 34
Overcollateralization..................................... 35
Cross Support............................................. 35
Corporate Guarantees...................................... 36
Reserve Funds............................................. 36
Maintenance of Credit Enhancement......................... 36
Reduction or Substitution of Credit Enhancement........... 37
Other Financial Obligations Related to the Certificates..... 38
Swaps and Yield Supplement Agreements..................... 38
Purchase Obligations...................................... 38
The Depositor............................................... 39
Household Finance Corporation............................... 39
The Pooling and Servicing Agreement......................... 40
Servicing and Administration.............................. 40
Evidence as to Compliance................................. 40
Certain Matters Regarding the Master Servicer and the
Depositor.............................................. 41
Events of Default......................................... 42
</TABLE>
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<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Rights Upon Event of Default................................ 42
Amendment................................................. 43
Termination; Retirement of Certificates................... 44
The Trustee............................................... 45
Yield and Prepayment Considerations......................... 45
Legal Aspects of Home Equity Loans and Related Matters...... 51
General................................................... 51
Cooperative Loans......................................... 51
Tax Aspects of Cooperative Ownership...................... 52
Foreclosure on Home Equity Loans.......................... 53
Foreclosure on Shares of Cooperatives..................... 54
Rights of Redemption...................................... 55
Anti-Deficiency Legislation and Other Limitations on
Lenders................................................ 56
Environmental Legislation................................. 57
Enforceability of Certain Provisions...................... 58
Applicability of Usury Laws............................... 59
Alternative Mortgage Instruments.......................... 59
Soldiers' and Sailors' Civil Relief Act of 1940........... 60
Forfeitures in Drug and RICO Proceedings.................. 60
Junior Mortgages; Rights of Senior Mortgagees............. 61
Negative Amortization Loans............................... 62
Material Federal Income Tax Consequences.................... 63
General................................................... 63
REMICs.................................................... 63
FASIT..................................................... 80
Grantor Trust Certificates................................ 84
Discount and Premium...................................... 85
Debt Certificates......................................... 85
Certificates Classified as Partnership Interests.......... 86
Foreign Investors......................................... 88
State Tax Considerations.................................... 90
Employee Benefit Plan Considerations........................ 90
Plan Assets Regulations................................... 91
Prohibited Transaction Exemptions......................... 92
Amendment to Exemption for Funding Accounts............... 94
Insurance Company General Accounts........................ 95
Reporting and Disclosure.................................. 96
Exempt Plans.............................................. 96
Tax Exempt Investors...................................... 96
Consultation with Counsel................................. 97
Legal Investment Matters.................................... 97
Use of Proceeds............................................. 98
Methods of Distribution..................................... 98
Legal Matters............................................... 99
Financial Information....................................... 99
Additional Information...................................... 100
Reports to Certificateholders............................... 100
Incorporation of Certain Information by Reference........... 100
Glossary.................................................... 101
</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 the
depositor and 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 prospectus 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:
- loans where the principal amount is advanced in full at origination, or
closed-end loans; or
- home equity revolving lines of credit, or revolving credit loans.
As specified in the related prospectus supplement, each trust will consist
primarily of home equity loans secured by first or junior liens on:
- attached or detached one-family dwelling units;
- two- to four-family dwelling units;
- condominiums;
- Cooperatives;
- townhouses;
- row houses;
- individual units in planned-unit developments and modular
pre-cut/panelized housing, or modular housing;
- manufactured homes which are permanently affixed to the real property on
which they are located, or manufactured homes; and
- 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, a home
equity loan pool may contain Cooperative Loans evidenced by Cooperative
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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 revolving credit loans, if the related
prospectus supplement indicates that the home equity loan pool consists of
certain balances of the 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:
- 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;
- 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;
- property acquired by foreclosure of the home equity loans or deed in lieu
of foreclosure;
- hazard insurance policies as described in this prospectus, if any, and
portions of the related proceeds;
- 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;"
- one share of preferred stock of the depositor having limited voting
rights; and
- other types of assets, as described in the related prospectus supplement.
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.
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.
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Any seller or HFC may retain or acquire any Excluded Balances with respect
to any related 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.
Mortgaged properties consisting of modular housing -- also known as
pre-assembled, pre-fabricated, 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.
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 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 or a statistical cut-off
date, on an approximate basis. The information may include, if applicable:
- the aggregate principal balance of the home equity loans;
- the type of property securing the home equity loans and related lien
priority;
- the original or modified and/or remaining terms to maturity of the home
equity loans;
- the range of principal balances of the closed-end loans at origination or
modification;
- the earliest origination or modification date and latest maturity date of
the home equity loans;
- the loan-to-value ratios, or LTV ratios, or combined LTV ratios of the
home equity loans, as applicable;
- the interest rate or range of interest rates borne by the home equity
loans;
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- 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;
- the geographical distribution of the mortgaged properties;
- the percentage of ARM loans included in the home equity loan pool; and
- if the home equity loans are revolving credit loans, the aggregate credit
limits and the Credit Utilization Rates of the related credit line
agreements.
The composition and characteristics of a home equity loan pool containing
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:
- 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, divided by
- 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.
The depositor will cause the home equity loans or the 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 the 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
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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 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 of the following types of home
equity loans:
- fixed-rate, fully-amortizing loans;
- fully-amortizing ARM loans, which may contain convertible home equity
loans;
- Balloon Loans;
- Cooperative Loans or modified home equity loans; or
- similar home equity loans with other payment characteristics as described
in the related prospectus supplement.
Fixed-rate, fully-amortizing closed-end loans will generally provide for
level monthly payments of principal and interest and terms to maturity of 5, 10,
12, 15, 20, 25 or 30 years at origination or modification as specified in the
related prospectus supplement.
Fully-amortizing ARM loans will generally have 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:
- the weekly average yield on U.S. Treasury securities adjusted to a
constant maturity of either six months or one year;
- the weekly auction average investment yield of U.S. Treasury bills of six
months;
- the daily Bank Prime Loan rate made available by the Federal Reserve
Board;
- the cost of funds of member institutions for a specified Federal Home
Loan Bank;
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- 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
- the weekly average of secondary market interest rates on six-month
negotiable certificates of deposit.
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 or
precomputed loans, both of which provide for fixed monthly payments of principal
and interest, which are determined at origination of the home equity loan.
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 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 affect 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. An ARM 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. An ARM loan
may allow the borrower 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
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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 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.
REVOLVING CREDIT LOANS
The revolving credit loans will be originated under credit line agreements
subject to a maximum amount or credit limit. Interest on each 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 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.
The index for a particular home equity loan pool will be specified in the
related prospectus supplement and may include one of the indices described above
under "-- Closed-End Loans." Notwithstanding the foregoing, a home equity loan
may be a teaser loan having 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.
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 revolving
credit loan will be secured by mortgaged properties located in any of the 50
states, the District of Columbia or the Commonwealth of Puerto Rico and have a
term to maturity from the date of origination of not more than 30 years. The
borrower for each 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
revolving credit loan, if the Draw Period is less than the full term of the
revolving credit loan, the related borrower will not be permitted to make any
Draw during the Repayment Period. The borrower for each revolving credit loan
will be obligated to make monthly payments on the revolving credit loan in a
minimum amount as specified in the related mortgage note, which usually will be
the greatest of:
- 1% of the outstanding principal balance of the home equity loan;
- the accrued interest; or
- $100.
The borrower for each revolving credit 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
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.
Unless specified in the related prospectus supplement, with respect to each
revolving credit loan:
- 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;
- the account balance on any day generally will be the aggregate of the
unpaid principal of the revolving credit loan outstanding at the
beginning of the day, plus all related Draws funded on that
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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
- 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 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 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 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 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 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 revolving credit loan will
usually contain a customary "due-on-sale" clause.
As to each revolving credit 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 material adverse
change in the borrower's financial circumstances or a non-payment default by the
borrower. However, as to each revolving credit loan, the suspension or reduction
usually will not affect the payment terms for previously drawn balances. In the
event of default under a revolving credit loan, at the discretion of the master
servicer, the revolving credit loan may be terminated and declared immediately
due and payable in full. For this purpose, a default includes:
- the borrower's failure to make any payment as required;
- any action or inaction by the borrower that materially and adversely
affects the mortgaged property or the rights in the mortgaged property;
or
- 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 revolving credit
loans, the related trust may include either:
- the entire principal balance of each revolving credit loan outstanding at
any time, including balances attributable to Draws made after the related
cut-off date; or
- the Trust Balance of each revolving credit loan.
The related prospectus supplement will describe the specific provisions by
which payments and losses on any revolving credit loan will be allocated between
the Trust Balance and any Excluded Balance. Typically, the provisions:
- may provide that principal payments made by the borrower will be
allocated between the Trust Balance and any Excluded Balance either:
- on a pro rata basis;
- first to the Trust Balance until reduced to zero, then to the Excluded
Balance;
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- first to the Excluded Balance, then to the Trust Balance until reduced
to zero; or
- in accordance with other specified priorities; and
- 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:
- on a pro rata basis;
- first to the Trust Balance until reduced to zero, then to the Excluded
Balance; or
- in accordance with other specified priorities.
Even where a trust initially includes the entire principal balance of the
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.
HFC HOME EQUITY LENDING PROGRAM
GENERAL
HFC and its subsidiaries have originated closed-end fixed and adjustable
rate home equity loans 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, from the 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 "General Underwriting
Standards" or as described in the related prospectus supplement.
GENERAL UNDERWRITING 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 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
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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:
- factors relating to the experience and status of the seller; and
- 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:
- obtaining and reviewing an independent credit bureau report;
- 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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- 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;
- 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
- 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 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
based on compensating factors as deemed appropriate by HFC. 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 loan computed, in the case of a revolving credit loan, 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, excluding any financed points, insurance premiums and fees, 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 original principal balance or credit
limit, as applicable, is $25,000 or less. Generally, title insurance is obtained
for all home equity loans that constitute a first mortgage or have an original
principal balance or credit limit, as applicable, 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
certificateholders 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.
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 fails to honor the obligation. The foregoing
will constitute the sole remedy available to certificateholders or the trustee
for a breach of representation.
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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:
- a drive-by appraisal;
- a full interior/exterior appraisal;
- an opinion rendered by a local real estate broker chosen by HFC; or
- 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.
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. 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.
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Each series of certificates may consist of a single class of certificates
or any combination of the following:
- a single class of certificates;
- 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;
- 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;
- one or more classes of certificates, which are referred to as strip
certificates, which will be entitled to:
- principal distributions, with disproportionate, nominal or no interest
distributions; or
- interest distributions, with disproportionate, nominal or no principal
distributions;
- 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
- 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:
- The Depository Trust Company, or DTC;
- Cedelbank; or
- the Euroclear System, or Euroclear (in Europe).
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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 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,
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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 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
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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 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:
- 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;
- 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;
- 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
- 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 to the 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 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 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 with power to prepare, execute and record assignments of
the mortgages in the event that the subservicers fail to do so on a timely
basis. In lieu of delivery of original documentation, the subservicers 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:
- payments on account of principal of the home equity loans or on the
mortgage securities comprising a trust;
- payments on account of interest on the home equity loans or on the
mortgage securities comprising a trust, net of the portion of each
payment retained by the master servicer, if any, as its servicing or
other compensation;
- 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
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restoration of the related property or released to the borrower in
accordance with the master servicer's normal servicing procedures;
- 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
- 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 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
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:
- maintained with a depository institution whose short-term debt
obligations at the time of any deposit therein are rated in the highest
short-term debt rating category by the rating agencies;
- an account or accounts maintained with a depository institution with a
long-term unsecured debt rating by each rating agency that is at least
investment grade, provided that the deposits in such account or accounts
are fully insured by either the Bank Insurance Fund or the Savings
Association Insurance Fund;
- a segregated trust account maintained on the corporate trust side with
the trustee in its fiduciary capacity; or
- an account otherwise acceptable to each rating agency, as evidenced by a
letter to such effect from each such rating agency to the trustee,
without reduction or withdrawal of the then-current ratings of the
certificates.
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:
- the amount of any Advances on closed-end loans, if applicable, made by
the master servicer as described in this prospectus under "-- Advances";
- 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;
- 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
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hazard losses on the home equity loans as described under "-- Hazard
Insurance and Related Claims" below;
- any distributions received on any mortgage securities included in the
trust; and
- 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:
- 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;
- 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;
- 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;
- 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;
- 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;
- 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;
- 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;
- to withdraw any amount deposited in the Collection Account that was not
required to be deposited in the Collection Account;
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- to pay to itself or any subservicer for the funding of any Draws made on
the revolving credit loans, if applicable;
- to make deposits to the Funding Account in the amounts and in the manner
provided in the pooling and servicing agreement, if applicable; and
- 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 distribution 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 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. Unless otherwise specified 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
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payment of principal under the related form of credit enhancement. To the extent
the trust contains Balloon Loans that require no monthly payments of principal
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 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.
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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 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:
- the aggregate amount of interest collections and principal collections;
- the amount, if any, of the distribution allocable to principal;
- 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;
- 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;
- the outstanding principal balance or notional amount of each class of
certificates after giving effect to the distribution of principal on the
distribution date;
- 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;
- the book value of any property acquired by the trust through foreclosure
or grant of a deed in lieu of foreclosure;
- the balance of the reserve fund, if any, at the close of business on the
distribution date;
- the percentage of the outstanding principal balance of the senior
certificates, if applicable, after giving effect to the distributions on
the distribution date;
- 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;
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- 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;
- 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
- 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 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:
- a new appraisal is obtained;
- the new combined LTV ratio is less than or equal to the original combined
LTV ratio;
- verification of employment, which may be verbal, is obtained; and
- 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 revolving credit loan, provided that the combined
LTV ratio of the revolving credit loan following the credit limit increase will
be limited to 100% and at no time shall the aggregate principal balance of the
revolving credit loans whose credit lines were increased exceed 10% of the
current pool balance; provided further, however, that for 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 revolving credit loans whose credit lines were increased and whose
combined LTV ratios are in excess of 80% 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
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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.
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
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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:
- 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 are less than
they otherwise may have been had the master servicer acted under its
normal servicing procedures;
- 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;
- 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
- 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
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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.
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 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
"-- 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
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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
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:
- 100% of the insurable value of the improvements, or guaranteed
replacement; or
- 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
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with respect to Realized Losses, which may include Defaulted Mortgage Losses,
Special Hazard Losses, Bankruptcy Losses and Fraud Losses.
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:
- a reserve fund to cover the losses;
- subordination of one or more classes of subordinate certificates to
provide credit support to one or more classes of senior certificates;
- 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
- 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 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 "The Trusts -- Revolving Credit Loans" in this
prospectus.
Each prospectus supplement will include a description of:
- the amount payable under the credit enhancement arrangement, if any,
provided with respect to a series;
- any conditions to payment under the related credit enhancement not
otherwise described in this prospectus;
- 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
- 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
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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 depositor
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:
- 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
- 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.
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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 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
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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 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 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 GUARANTEES
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 guarantees provided by one or more corporate entities, which may be
affiliated with HFC. These guarantees may cover timely distributions of
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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.
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
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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.
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:
- 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
- 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.
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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.
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.
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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 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 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 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.
- ---------------
* Visa and MasterCard are registered trademarks of VISA USA, Inc. and MasterCard
International Incorporated, respectively.
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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.
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, 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 matters
relating to the direct servicing of home equity loans by
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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 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.
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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:
- 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 51% of the aggregate percentage interests constituting that
class;
- 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;
- 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
- 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 the appointment of an approved mortgage servicing institution
with a net worth of at least $50,000,000 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.
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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:
- the holder previously has given to the trustee written notice of default
and the continuance thereof;
- the holders of certificates of any class evidencing not less than 51% of
the aggregate percentage interests constituting that class:
- have made written request upon the trustee to institute the proceeding
in its own name as trustee thereunder; and
- have offered to the trustee reasonable indemnity; and
- 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:
- to cure any ambiguity;
- to correct or supplement any provision which may be inconsistent with any
other provision or to correct any error;
- 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:
- deposits to the Collection Account may not occur later than the related
distribution date;
- the change may not adversely affect in any material respect the
interests of any certificateholder, as evidenced by an opinion of
counsel; and
- 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;
- 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
- 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 the action is necessary or desirable to
maintain the qualification or to avoid or minimize the risk; and
- the action will not have a greater adverse effect upon the interests of
any related certificateholder than if no action were taken;
- 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;
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- 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
- 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:
- 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;
- impair the right of any certificateholder to institute suit for the
enforcement of the provisions of the pooling and servicing agreement; or
- 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:
- 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
- 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. In addition, if so specified and as described in the
related prospectus supplement, the pooling and servicing agreement may
provide for one or more auctions of the trust property if the purchase
option is not exercised. Written notice of termination of the pooling and
servicing agreement will be given to each certificateholder, and the
final
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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 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. 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 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.
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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 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 mortgage
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, 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 or under which a Draw will result in an extension of the
maturity date and the related amortization period, 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 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 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
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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 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
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, 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 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
revolving credit loans with the former provisions, because of the relative ease
of making new Draws. Additionally, hybrid amortizing revolving credit loans may
provide that future Draws will result in an extension for a predetermined period
of the maturity date and the related amortization period of the home equity
loan. A pool of hybrid amortizing revolving credit loans may be likely to remain
outstanding for a longer period of time with a higher aggregate principal
balance than a pool of revolving credit loans with a fixed term to maturity.
Furthermore, 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 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.
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
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accelerate the distribution of principal on the certificates. For any series of
certificates backed by revolving credit loans, provisions governing whether
future Draws on the 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
revolving credit loans, the specific provisions applicable to the allocation of
payments, Draws and losses on the 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 "The
Trusts -- Revolving Credit Loans" in this prospectus.
For a series of certificates backed by 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 revolving credit loans included in a home equity loan pool may exceed
the aggregate payments with respect to principal on the revolving credit loans
for the related period.
Unless otherwise specified in the related prospectus supplement, all
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.
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:
- 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;
- the average credit or collateral quality of the home equity loans
remaining in the home equity loan pool may decline; and
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- the 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 revolving credit loans and ARM loans will be
subject to periodic adjustments, these adjustments typically:
- as to ARM loans will not increase or decrease the interest rates by more
than a fixed percentage amount on each adjustment date;
- will not increase the interest rates over a fixed maximum rate during the
life of any revolving credit loan or ARM loan; and
- 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.
As a result, the interest rates on the 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 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 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."
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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 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:
- the trustor, who is the borrower-homeowner;
- the beneficiary, who is the lender; and
- a third-party grantee called the trustee.
Under a deed of trust, the borrower grants the property, irrevocably until
the debt is paid, in trust, 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.
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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 mortgage 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:
- 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
- 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
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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 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 preserve its right
against a
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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 "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 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.
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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-stockholder'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
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.
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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 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
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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.
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.
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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 home equity 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 the 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 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
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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 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
mortgage 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, the
depositor will represent that each 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
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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:
- 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;
- state-chartered credit unions may originate alternative mortgage
instruments in accordance with regulations promulgated by the National
Credit Union Administration with respect to origination of alternative
mortgage instruments by federal credit unions; and
- all other non-federally chartered housing creditors, including
state-chartered savings and loan associations, state-chartered savings
banks and mutual savings banks and mortgage banking companies, may
originate alternative mortgage instruments in accordance with the
regulations promulgated by the Federal Home Loan Bank Board, predecessor
to the 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 proceeding and may give notice to all parties
"known to have an alleged interest in the property," including the holders of
mortgage loans.
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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.
The form of credit line trust deed or mortgage used by most institutional
lenders which make 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
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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 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 or 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, dealers in securities, 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:
- 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
- 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.
The following discussion addresses certificates of five general types:
- REMIC certificates,
- FASIT certificates,
- grantor trust certificates,
- debt certificates, and
- partnership interests.
The prospectus supplement for each series of certificates will indicate
whether a REMIC or FASIT election or elections will be made for the trust and,
if a REMIC or FASIT election is to be made, will identify all regular interests
and residual interests in the REMIC or all regular interests, high-yield
interests or ownership interests in the FASIT.
The Taxpayer Relief Act of 1997 adds provisions to the Internal Revenue
Code that require the recognition of gain upon the constructive sale of an
appreciated financial position. A constructive sale of an appreciated financial
position occurs if a taxpayer enters into transactions involving a financial
instrument that have the effect of substantially eliminating the taxpayer's risk
of loss and opportunity for gain. These provisions apply only to classes of
certificates that do not have a principal balance.
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
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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 Internal
Revenue 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, 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 such 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)(4)(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
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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 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 property and
account balances, 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, special tax 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.
Original Issue Discount. 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
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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 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 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.
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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:
- 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
- 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:
- the sum of:
- 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
- the distributions made on the REMIC regular certificate during the
accrual period of amounts included in the stated redemption price, over
- 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
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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 such 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 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 Internal
Revenue 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. 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
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accrual period market discount on REMIC regular certificates should accrue, at
the certificateholder's option:
- on the basis of a constant yield method;
- 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
- 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 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 Internal Revenue 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 Internal Revenue 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
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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 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.
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 rules
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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"
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 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" 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.
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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."
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 that will be taxable because their bases in the REMIC residual
certificates at that time will not be sufficiently large for the distributions
to be treated 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
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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:
- the sum of the daily portions of REMIC taxable income allocable to the
REMIC residual certificate over
- 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."
For REMIC residual certificateholders, an excess inclusion:
- will not be permitted to be offset by deductions, losses or loss
carryovers from other activities
- will be treated as "unrelated business taxable income" to an otherwise
tax-exempt organization and
- 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:
- excess inclusions will not be permitted to be offset by the alternative
tax net operating loss deduction and
- 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
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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:
- 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
- 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" 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.
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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:
- 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
- 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 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:
- 3% of the excess of the individual's adjusted gross income over that
amount or
- 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.
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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:
- 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
- the amount of ordinary income actually includible in the seller's income
prior to the sale.
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 Internal Revenue 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
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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 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:
- 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
- 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:
- residual interests in the entity are not held by disqualified
organizations; and
- 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:
- 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
- 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:
- 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 Internal Revenue Code or the
Federal Home Loan Mortgage Corporation;
- 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
- 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 "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
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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.
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
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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 recently issued regulations,
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.
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, 2000, 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 holders of FASIT
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.
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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 underlying a series of certificates (or one or more designated
pools of assets held in the trust) 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 is not a regulated investment company as defined in
Section 851(a) of the Internal Revenue Code.
Asset Composition
In order for a trust (or one or more designated pools of assets held by a
trust) to be eligible for FASIT status, substantially all of the assets of the
trust (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 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
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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.
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 taxable 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.
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. 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 or reductions 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
In addition to the foregoing rules for FASIT regular certificates,
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
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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 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.
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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.
GRANTOR TRUST CERTIFICATES
With respect to each series of certificates for which no REMIC or FASIT
election is made and which are not subject to partnership treatment or debt
treatment (without reference to the REMIC provisions of the Internal Revenue
Code and the FASIT provisions of the Internal Revenue Code), Katten Muchin &
Zavis, special tax counsel to the depositor, will deliver its opinion (unless
otherwise limited by the related prospectus supplement) generally to the effect
that the arrangements pursuant to which the related trust will be administered
and such certificates will be issued will not be classified as an association
taxable as a corporation or as a taxable mortgage pool, and that each such trust
will be classified as a "grantor trust" governed by the provisions of subpart E,
Part I, of subchapter J of the Internal Revenue Code. Accordingly, each
beneficial owner of a grantor trust certificate will generally be treated as the
owner of an interest in the loans included in the grantor trust. For purposes of
the following discussion, a grantor trust certificate representing an undivided
equitable ownership interest in the principal of the mortgage loans together
with interest at a pass-through rate will be referred to as a grantor trust
fractional interest certificate. A grantor trust certificate representing
ownership of all or a portion of the difference between interest paid on the
mortgage loans and interest paid on grantor trust fractional interest
certificates will be referred to as a grantor trust strip certificate.
Special Tax Attributes
Katten Muchin & Zavis, special tax counsel to the depositor, will deliver
its opinion to the depositor that (a) grantor trust fractional interest
certificates will represent interests in (1) loans secured by an interest in
real property within the meaning of section 7701(a)(19)(C)(v) of the Internal
Revenue Code; and (2) obligations, including any participation or certificate of
beneficial ownership, which are principally secured by an interest in real
property within the meaning of section 860G(a)(3)(A) of the Internal Revenue
Code; and (b) interest on grantor trust fractional interest certificates will be
considered interest on obligations secured by mortgages on real property or on
interests in real property within the meaning of section 856(c)(3)(B) of the
Internal Revenue Code. In addition, the grantor trust strip certificates will be
obligations, including any participation or certificate of beneficial ownership
therein, principally secured by an interest in real property within the meaning
of section 860G(a)(3)(A) of the Internal Revenue Code.
Taxation of Beneficial Owners of Grantor Trust Certificates
Beneficial owners of grantor trust fractional interest certificates
generally will be required to report on their federal income tax returns their
respective shares of the income from the loans, including amounts used to pay
reasonable servicing fees and other expenses but excluding amounts payable to
beneficial owners of any corresponding grantor trust strip certificates, and
will be entitled to deduct their shares of any reasonable servicing fees and
other related expenses. If a beneficial owner acquires a grantor trust
fractional interest certificate for an amount that differs from its outstanding
principal amount, the amount includible in income on a grantor trust fractional
interest certificate may differ from the amount of interest distributable.
Individuals holding a grantor trust fractional interest certificate directly or
through pass-through entities will be allowed a deduction for reasonable
servicing fees and expenses only to the extent that the aggregate of the
beneficial owner's miscellaneous itemized deductions exceeds 2% of the
beneficial owner's adjusted gross income. Further, beneficial owners, other than
corporations, subject to the alternative minimum tax may not deduct
miscellaneous itemized deductions in determining alternative minimum taxable
income.
Beneficial owners of grantor trust strip certificates generally will be
required to treat the certificates as stripped coupons under section 1286 of the
Internal Revenue Code. Accordingly, the beneficial owner will
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be required to treat the excess of the total amount of payments on the
certificate over the amount paid for the certificate as original issue discount
and to include the discount in income as it accrues over the life of the
certificate.
Grantor trust fractional interest certificates may also be subject to the
coupon stripping rules if a class of grantor trust strip certificates is issued
as part of the same series of certificates. The consequences of the application
of the coupon stripping rules would appear to be that any discount arising upon
the purchase of the certificate, and perhaps all stated interest, would be
classified as original issue discount and includible in the beneficial owner's
income as it accrues, regardless of the beneficial owner's method of accounting.
The coupon stripping rules will not apply, however, if (1) the pass-through rate
is no more than 100 basis points lower than the gross rate of interest payable
on the underlying loans and (2) the difference between the outstanding principal
balance on the certificate and the amount paid for the certificate is less than
0.25% of the principal balance times the weighted average remaining maturity of
the certificate. See "-- Discount and Premium."
Discount and Premium
A certificate purchased for an amount other than its outstanding principal
amount will be subject to the rules governing original issue discount, market
discount or premium. In addition, all grantor trust strip certificates and
grantor trust fractional interest certificates will be treated as having
original issue discount by virtue of the coupon stripping rules in section 1286
of the Internal Revenue Code. The tax treatment of original issue discount,
market discount and premium will generally be the same as applicable to holders
of REMIC regular certificates. See "REMICS -- Taxation of Owners of REMIC
Regular Certificates -- Original Issue Discount, -- Market
Discount, -- Premium."
Sales of Grantor Trust Certificates
Any gain or loss recognized on the sale of a grantor trust certificate,
which is equal to the difference between the amount realized on the sale and the
adjusted basis of the grantor trust certificate, will be capital gain or loss,
except to the extent of accrued and unrecognized market discount, which will be
treated as ordinary income, and in the case of banks and other financial
institutions except as provided under section 582(c) of the Internal Revenue
Code. The adjusted basis of a grantor trust certificate will generally equal its
cost, increased by any income reported by the seller, including original issue
discount and market discount income, and reduced, but not below zero, by any
previously reported losses, any amortized premium and by any distributions of
principal.
Grantor Trust Reporting
The trustee will furnish to each beneficial owner of a grantor trust
fractional interest certificate with each distribution a statement detailing the
amount of the distribution allocable to principal on the underlying loans and to
interest, based on the interest rate on the certificate. In addition, within a
reasonable time after the end of each calendar year, based on information
provided by the master servicer, the trustee will furnish to each beneficial
owner during the year the customary factual information that the master servicer
deems necessary or desirable to enable beneficial owners of grantor trust
securities to prepare their tax returns and will furnish comparable information
to the IRS as and when required to do so by law.
Debt Certificates
For each series of debt certificates, Katten Muchin & Zavis, special tax
counsel to the depositor, will deliver its opinion to the depositor that the
certificates will be classified as debt of the depositor secured by the mortgage
loans. Consequently, debt certificates will not be treated as ownership
interests in the loans or the trust. Beneficial owners will be required to
report income received on debt certificates in accordance with their normal
method of accounting. For additional tax consequences relating to debt
certificates purchased with original issue discount, market discount or premium.
See "REMICS -- Taxation of Owners of REMIC Regular Certificates -- Original
Issue Discount, -- Market Discount, -- Premium."
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Special Tax Attributes
As described above, grantor trust certificates will possess special tax
attributes by virtue of their being ownership interests in the mortgage loans.
Similarly, REMIC regular and residual interests will possess similar attributes
by virtue of the REMIC provisions of the Internal Revenue Code. In general, debt
certificates will not possess these special tax attributes. Investors to whom
such attributes are important may wish to consult their own tax advisors
regarding investment in debt certificates.
Sale or Exchange of Debt Certificates
If a beneficial owner of a debt certificate sells or exchanges the
certificate, the beneficial owner will recognize gain or loss equal to the
difference, if any, between the amount received and the beneficial owner's
adjusted basis in the certificate. The adjusted basis in the certificate
generally will equal its initial cost, increased by any original issue discount
or market discount previously included in the seller's gross income from the
certificate and reduced by the payments previously received on the certificate,
other than payments of qualified stated interest, and by any amortized premium.
In general, except for certain financial institutions subject to section
582(c) of the Internal Revenue Code, any gain or loss on the sale or exchange of
a debt certificate recognized by an investor who holds the certificate as a
capital asset within the meaning of section 1221 of the Internal Revenue Code,
will be capital gain or loss and will be long-term or short-term depending on
whether the certificate has been held for more than one year.
Debt Certificates Reporting
The trustee will furnish to each beneficial owner of a debt certificate
with each distribution a statement setting forth the amount of the distribution
allocable to principal on the underlying loans and to interest at the interest
rate. In addition, within a reasonable time after the end of each calendar year,
based on information provided by the servicer, the trustee will furnish to each
beneficial owner during the year the customary factual information that the
master servicer deems necessary or desirable to enable beneficial owners of debt
certificates to prepare their tax returns and will furnish comparable
information to the IRS as and when required to do so by law.
Certificates Classified as Partnership Interests
Certain arrangements may be treated as partnerships for federal income tax
purposes. In such event, the related certificates will be characterized, for
federal income tax purposes, as partnership interests as discussed in the
related prospectus supplement. With respect to certificates classified as
partnership interests, Katten Muchin & Zavis, special tax counsel to the
depositor, will deliver their opinion (unless otherwise limited in the related
prospectus supplement) generally to the effect that the arrangement pursuant to
which such certificates are issued will be characterized as a partnership and
not as an association taxable as a corporation for federal income tax purposes.
Taxation Of Certificates Classified as Partnership Interests
Certain trusts may be treated as partnerships for federal income tax
purposes. In such event, the trusts may issue certificates characterized as
partnership interests as discussed in the related prospectus supplement. With
respect to such series of partnership interests, Katten Muchin & Zavis, special
tax counsel to the depositor, will deliver their opinion (unless otherwise
limited by the related prospectus supplement) generally to the effect that the
trust will be characterized as a partnership and not an association taxable as a
corporation or taxable mortgage pool for federal income tax purposes.
If the trust is treated as a partnership for federal income tax purposes,
the trust will not be subject to federal income tax. Instead, each beneficial
owner of a partnership interest will be required to separately take into account
its allocable share of income, gains, losses, deductions, credits and other tax
items of the
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trust. These partnership allocations are made in accordance with the Internal
Revenue Code, Treasury regulations and the partnership agreement.
The trust's assets will be the assets of the partnership. The trust's
income will consist primarily of interest and finance charges earned on the
underlying loans. The trust's deductions will consist primarily of interest
accruing on any indebtedness issued by the trust, servicing and other fees, and
losses or deductions upon collection or disposition of the trust's assets. Your
taxable income from a partnership interest in any year may exceed your cash
distributions from the trust for such year.
In some instances, the trust could have an obligation to make payments of
withholding tax on behalf of a beneficial owner of a partnership interest. See
"-- Backup Withholding" and "Foreign Investors" below.
Commonly, trusts classified as partnerships for federal income tax purposes
will also be issuing debt securities. Under the rules for "acquisition
indebtedness" applicable to many types of tax-exempt organizations,
substantially all of the taxable income allocated to a beneficial owner of a
partnership interest in such trusts that is a pension, profit sharing or
employee benefit plan or other tax-exempt entity, including an individual
retirement account, will constitute unrelated business taxable income generally
taxable to a holder under the Internal Revenue Code.
Under Section 708 of the Internal Revenue Code, the trust will be deemed to
terminate for federal income tax purposes if 50% or more of the capital and
profits interests in the trust are sold or exchanged within a 12-month period.
Under Treasury regulations issued on May 9, 1997 if this termination occurs, the
trust is deemed to contribute all of its assets and liabilities to a newly
formed partnership in exchange for a partnership interest. Immediately
thereafter, the terminated partnership distributes interests in the new
partnership to the purchasing partner and remaining partners in proportion to
their interests in liquidation of the terminated partnership.
Sale or Exchange of Partnership Interests
In most cases, capital gain or loss will be recognized on a sale or
exchange of partnership interests in an amount equal to the difference between
the amount realized and the seller's tax basis in the partnership interests
sold. A beneficial owner's tax basis in a partnership interest will generally
equal the beneficial owner's cost increased by the beneficial owner's share of
trust income and decreased by any distributions received on this partnership
interest. In addition, both the tax basis in the partnership interest and the
amount realized on a sale of a partnership interest would take into account the
beneficial owner's share of any indebtedness of the trust. A beneficial owner
acquiring partnership interests at different prices may be required to maintain
a single aggregate adjusted tax basis in the partnership interest, and upon sale
or other disposition of some of the partnership interests, allocate a portion of
the aggregate tax basis to the partnership interests sold, rather than
maintaining a separate tax basis in each partnership interest for purposes of
computing gain or loss on a sale of that partnership interest.
Any gain on the sale of a partnership interest attributable to the
beneficial owner's share of unrecognized accrued market discount on the assets
of the trust would generally be treated as ordinary income to the holder and
would give rise to special tax reporting requirements. If a beneficial owner of
a partnership interest is required to recognize an aggregate amount of income
over the life of the partnership interest that exceeds the aggregate cash
distributions with respect thereto, this excess will generally give rise to a
capital loss upon the retirement of the partnership interest. If a beneficial
owner sells its partnership interest at a profit or loss, the transferee will
have a higher or lower basis in the partnership interests than the transferor
had. The tax basis of the trust's assets will not be adjusted to reflect that
higher or lower basis unless the trust files an election under Section 754 of
the Internal Revenue Code.
Partnership Reporting
The trustee is required to (1) keep complete and accurate books of the
trust, (2) file IRS form 1065, a partnership information return, with the IRS
for each taxable year of the trust and (3) report each
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beneficial owner's allocable share of items of trust income and expense to
beneficial owners and the IRS on Schedule K-1. The trust will provide the
Schedule K-1 information to nominees that fail to provide the trust with the
information statement described in the next paragraph and the nominees will be
required to forward the information to the beneficial owners of the partnership
interests. Generally, beneficial owners of a partnership interest must file tax
returns that are consistent with the information return filed by the trust or be
subject to penalties unless the beneficial owner of a partnership interest
notifies the IRS of all inconsistencies.
Under Section 6031 of the Internal Revenue Code, any person that holds
partnership interests as a nominee at any time during a calendar year is
required to furnish the trust with a statement containing information on the
nominee, the beneficial owners and the partnership interests so held. This
information includes (1) the name, address and taxpayer identification number of
the nominee and (2) as to each beneficial owner (x) the name, address and
identification number of the person, (y) whether the person is a United States
person, a tax-exempt entity or a foreign government, an international
organization, or any wholly owned agency or instrumentality of either of the
foregoing, and (z) information on partnership interests that were held, bought
or sold on behalf of the person throughout the year. In addition, brokers and
financial institutions that hold partnership interests through a nominee are
required to furnish directly to the trust information as to themselves and their
ownership of partnership interests. A clearing agency registered under Section
17A of the Securities Exchange Act is not required to furnish any information
statement to the trust. Nominees, brokers and financial institutions that fail
to provide the trust with the information described above may be subject to
penalties.
The Internal Revenue Code provides for administrative examination of a
partnership as if the partnership were a separate and distinct taxpayer.
Generally, the statute of limitations for partnership items does not expire
before three years after the date the partnership information return is filed.
Any adverse determination following an audit of the return of the trust by the
appropriate taxing authorities could result in an adjustment of the returns of
the beneficial owner of a partnership interests, and, under some circumstances,
a beneficial owner of a partnership interest may be precluded from separately
litigating a proposed adjustment to the items of the trust. An adjustment could
also result in an audit of the beneficial owner of a partnership interest's
returns and adjustments of items not connected with the trust.
BACKUP WITHHOLDING
Distributions of interest and principal, as well as distributions of
proceeds from the sale of 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 the distributions fail to furnish to the payor required
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 distributions that is required to supply information but that does
not do so in the proper manner.
The IRS recently issued final withholding regulations, which change a
number of the rules relating to the presumptions currently available relating to
information reporting and backup withholding. The withholding regulations would
provide alternative methods of satisfying the beneficial ownership certification
requirement. The withholding regulations are effective January 1, 2001, although
valid withholding certificates that are held on December 31, 2000 remain valid
until the earlier of December 31, 2001 or the date of expiration of the
certificate under the rules as currently in effect.
FOREIGN INVESTORS
The withholding regulations would require, in the case of certificates held
by a foreign partnership, that the certification described above be provided by
the partners rather than by the foreign partnership and the partnership provide
required information, including a United States taxpayer identification number.
A look-through rule would apply in the case of tiered partnerships. Non-U.S.
persons may wish to consult their own tax advisors regarding the application to
them of the withholding regulations.
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Grantor Trust Certificates and REMIC Regular Interests
Distributions made on a grantor trust certificate or a REMIC regular
interest to, or on behalf of, a beneficial owner that is not a U.S. person
generally will be exempt from U.S. federal income and withholding taxes. A U.S.
person means a citizen or resident of the United States, a corporation,
partnership or other entity created or organized in or under the laws of the
United States or any political subdivision thereof, an estate that is subject to
U.S. federal income tax regardless of the source of its income, or a trust if a
court within the United States can exercise primary supervision over its
administration and at least one United States fiduciary has the authority to
control all substantial decisions of the trust. This exemption is applicable if
- the beneficial owner is not subject to U.S. tax as a result of a
connection to the United States other than ownership of the certificate,
- the beneficial owner signs a statement under penalties of perjury that
certifies that the beneficial owner is not a U.S. person, and provides
the name and address of the beneficial owner, and
- the last U.S. person in the chain of payment to the beneficial owner
receives the statement from the beneficial owner or a financial
institution holding on its behalf and does not have actual knowledge that
the statement is false.
The IRS might take the position that this exemption does not apply to a
beneficial owner that also owns 10% or more of the REMIC residual certificates
of any REMIC trust, or to a beneficial owner that is a controlled foreign
corporation described in section 881(c)(3)(C) of the Internal Revenue Code
related to such a holder of residual certificates.
REMIC Residual Certificates
Amounts distributed to a beneficial owner of a REMIC residual interest that
is a not a U.S. person generally will be treated as interest for purposes of
applying the 30%, or lower treaty rate, withholding tax on income that is not
effectively connected with a U.S. trade or business. Temporary Treasury
Regulations clarify that amounts not constituting excess inclusions that are
distributed on a REMIC residual interest to a beneficial owner that is not a
U.S. person generally will be exempt from U.S. federal income and withholding
tax, subject to the same conditions applicable to distributions on grantor trust
certificates and REMIC regular interests, as described above, but only to the
extent that the mortgage loans underlying the REMIC trust that issued the REMIC
residual interest were issued after July 18, 1984. REMIC income that constitutes
an excess inclusion is not entitled to any exemption from the withholding tax or
a reduced treaty rate for withholding. See "REMICS -- Taxation of Owners of
REMIC Residual Certificates -- Excess Inclusions."
FASIT Regular Interests
High-yield FASIT regular interests may not be sold to or beneficially owned
by non-U.S. persons. Any purported transfer will be null and void and, upon the
trustee's discovery of any purported transfer in violation of this requirement,
the last preceding owner of the high-yield FASIT regular interests will be
restored to ownership. The last preceding owner will, in any event, be taxable
on all income on the high-yield FASIT regular certificates for federal income
tax purposes. The agreements will provide that, as a condition to transfer of a
high-yield FASIT regular certificate, the proposed transferee must furnish an
affidavit as to its status as a U.S. person and otherwise as a permitted
transferee.
Partnership Interests
A trust may be considered to be engaged in a trade or business in the
United States for purposes of non-U.S. persons subject to federal withholding
taxes. If the trust is considered to be engaged in a trade or business in the
United States for these purposes and the trust is treated as a partnership, the
income of the trust distributable to a non-U.S. person would be subject to
federal withholding tax and the holder could
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be required to file federal and state tax returns in the United States. Also, in
these cases, a non-U.S. beneficial owner of a partnership interest that is a
corporation may be subject to the branch profits tax. If the trust is notified
that a beneficial owner of a partnership interest is a foreign person, the trust
may withhold as if it were engaged in a trade or business in the United States
in order to protect the trust from possible adverse consequences of a failure to
withhold. If the trust were not so engaged, a foreign holder generally would be
entitled to file with the IRS a claim for refund for withheld taxes, taking the
position that no taxes were due because the trust was not in a U.S. trade or
business. Foreign individuals may also be subject to United States estate taxes
at their death upon the value of their trust certificates if they are deemed to
hold interests in a partnership engaged in a trade or business in the United
States for federal income tax purposes.
STATE TAX CONSIDERATIONS
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 the
certificates offered hereunder. 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 the certificates offered
hereunder.
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
respect to a plan must meet certain requirements when investing the plan's
assets, including the requirements of 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, regulatory 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 parties related 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
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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
The Department of Labor has adopted regulations at 29 C.F.R.
sec. 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
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's assets are also treated as "plan assets," 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 Internal Revenue Code.
The Plan Assets Regulations contain certain exceptions under which 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:
- 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),
- where a plan's investment is in qualifying debt which does not have
substantial equity features,
- 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
- 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, and foreign
plans, and include 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 investments. 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, under the
prohibited transaction provisions of Section 406 of ERISA and Section 4975 of
the Internal Revenue Code, the depositor, the master servicer, any subservicer
or the trustee (or affiliates of those entities) may be parties in interest
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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:
- has investment discretion with respect to the investment of plan assets,
or
- 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, regulatory 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"). 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 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:
- the Underwriter or any of its affiliates is either
- the sole underwriter or the manager or co-manager of the underwriting
syndicate, or
- a selling or placement agent.
For purposes of the exemption, the term "underwriter" includes:
- the Underwriter and certain of its affiliates,
- any person directly or indirectly, through one or more intermediaries,
controlling, controlled by or under common control with the Underwriter,
- 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
- any entity which has received an exemption from the DOL relating to
certificates which is similar to the Exemption.
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:
- 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;
- 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;
- 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";
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- 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);
- to qualify for exemption from self-dealing/conflict of interest
prohibited transactions, the plan can not be sponsored by any member of
the Restricted Group;
- 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
- 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, the Exemption generally provides relief from certain
self-dealing/conflict of interest prohibited transactions that may arise when a
plan fiduciary causes a plan to acquire certificates in a trust holding
receivables on which the fiduciary (or an affiliate) is obligor, provided that:
(i) in the case of the acquisition of certificates in connection with the
initial issuance, at least 50% of each class of certificates in which plans have
invested and of the aggregate interest in the trust are acquired by persons
independent of the Restricted Group (as defined above), (ii) a 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, (iii) immediately after
the acquisition, no more than 25% of the assets of a plan with respect to which
the person is a fiduciary 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 and (iv) the fiduciary (or its affiliate) is
obligor with respect to 5% or less of the fair market value of receivables held
in the trust.
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:
- 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,
- the direct or indirect acquisition or disposition in the secondary market
of certificates by a plan or with plan assets, and
- 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 would otherwise apply merely because a person is
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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 a service
provider, solely as a result of the plan's ownership of certificates.
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 amendment generally
allows mortgage loans or other secured 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:
- 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%).
- All obligations transferred after the closing date 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.
- The transfer of 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.
- 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 more than 100 basis points lower
than the average interest rate for the Obligations transferred to the
trust on the closing date.
- In order to insure that the characteristics of the additional obligations
are substantially similar to the original obligations which were
transferred to the trust:
- the characteristics of the additional obligations must be monitored by
an insurer or other credit support provider that is independent of the
depositor; or
- 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.
- 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.
- Amounts transferred to any funding account and/or capitalized interest
account used in connection with the funding account may be invested only
in cash or in certain permitted investments.
- 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.
- 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
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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 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 certain
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, except:
- as otherwise provided by the Secretary of Labor in the 401(c) regulations
to prevent avoidance of the regulations or
- an action is brought by the Secretary of Labor for 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 highly rated and not
subordinated will be considered eligible for investment by employee benefit
plans. Thus, no transfer of any subordinated class of certificates to a plan or
to any person acquiring such certificates on behalf of or with the assets of a
plan will be permitted, 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 such 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 in addition to those undertaken in the pooling and
servicing agreement. 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
investing any plan assets.
Moreover, the exemptive relief afforded by the Exemption may not apply to
(1) any certificates issued by a trust containing a Swap or other assets that
are not specifically covered by the Exemption,
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(2) any certificates issued by a trust containing a Funding Account that does
not meet the requirements of the amendment to the Exemption, discussed above,
(3) a plan for which the trustee or other authorized plan fiduciary is a member
of the Restricted Group or which 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:
- is permissible under applicable law,
- will not constitute or result in any non-exempt prohibited transaction
under ERISA or Section 4975 of the Internal Revenue Code, and
- will not subject the trustee and the master servicer to any obligation in
addition to those undertaken in the pooling and servicing agreement.
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, 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 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
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income tax. See "Material Federal Income Tax Consequences -- REMICs -- 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.
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
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, and PTCE 96-23, regarding
in-house asset managers. (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, particularly in circumstances in
which the trust assets are deemed to be plan assets.
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 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.
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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.
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:
- by negotiated firm commitment or best efforts underwriting and public
re-offering by underwriters;
- by placements by the depositor with institutional investors through
dealers; and
- 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
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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
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 tax
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.
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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.
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 -- Home equity 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
longer amortization schedule.
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.
Charge Off Amount -- As to any Charged Off Home Equity Loan and collection
period, an amount equal to the amount of the Stated Principal Balance that the
master servicer has charged off on its servicing records during such collection
period.
Charged Off Home Equity Loan -- A defaulted home equity loan that is not a
Liquidated Home Equity Loan and as to which (i) collection procedures are
ongoing and (ii) the master servicer has charged off all or a portion of the
related Stated Principal Balance.
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 revolving credit loan, the cut-off date
principal balance of the 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.
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.
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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:
- 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;
- 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
- 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 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 revolving credit loan may make a Draw.
Eligible Account -- An account that is either:
- maintained with a depository institution whose short-term debt
obligations at the time of any deposit therein are rated in the highest
short-term debt rating category by the rating agencies;
- an account or accounts maintained with a depository institution with a
long-term unsecured debt rating by each rating agency that is at least
investment grade, provided that the deposits in such account or accounts
are fully insured by either the Bank Insurance Fund or the Savings
Association Insurance Fund;
- a segregated trust account maintained on the corporate trust side with
the trustee in its fiduciary capacity; or
- an account otherwise acceptable to each rating agency, as evidenced by a
letter to such effect from each such rating agency to the trustee,
without reduction or withdrawal of the then-current ratings of the
certificates.
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 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 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.
Excluded Spread -- The portion of interest payable on the home equity
loans, excluded from the assets transferred to the related trust.
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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 -- Proceeds paid by any insurer pursuant to any
insurance policy covering a home equity loan, net of any component thereof
covering any expenses incurred by or on behalf of the master servicer in
connection with obtaining such Insurance Proceeds and exclusive of any portion
thereof that is applied to the restoration or repair of the related mortgaged
property, released to the borrower in accordance with the master servicer's
normal servicing procedures or required to be paid to any holder of a mortgage
senior to such home equity loan.
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:
- the original principal balance or the credit limit, as applicable, of the
home equity loan, divided by
- the sum of:
- the original principal balance or the credit limit, as applicable, of
the home equity loan and
- the principal balance of any related senior mortgage loan at origination
of the mortgage loan.
Liquidated Home Equity Loan -- As to any distribution date, any home equity
loan in respect of which the master servicer has determined as of the end of the
related collection period that all Liquidation Proceeds which it expects to
recover on such home equity loan have been recovered (exclusive of any
possibility of a deficiency judgment).
Liquidation Expenses -- Out-of-pocket expenses (exclusive of overhead) that
are incurred by the master servicer in connection with the liquidation of any
home equity loan and not recovered under any insurance policy, such expenses
including, without limitation, reasonable legal fees and expenses, any
unreimbursed amount expended (including, without limitation, amounts advanced to
correct defaults on any mortgage loan that is senior to such home equity loan
and amounts advanced to keep current or pay off a mortgage loan that is senior
to such home equity loan) with respect to the related home equity loan and any
related and unreimbursed expenditures for real estate property taxes or for
property restoration, preservation or insurance against casualty loss or damage.
Liquidation Proceeds -- Proceeds (including Insurance Proceeds) received in
connection with the liquidation of any home equity loan, whether through
trustee's sale, foreclosure sale 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.
Net Liquidation Proceeds -- As to any Liquidated Home Equity Loan,
Liquidation Proceeds less Liquidation Expenses.
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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 -- As to any (i) Charged Off Home Equity Loan and any
collection period (other than the collection period in which all or a portion of
such Charged Off Home Equity Loan becomes a Liquidated Home Equity Loan), the
related Charge Off Amount and (ii) Liquidated Home Equity Loan, the excess of
the related Stated Principal Balance at the end of the collection period in
which such Liquidated Home Equity Loan became a Liquidated Home Equity Loan over
the portion of related Net Liquidation Proceeds that are allocable to principal
in accordance with the related mortgage note.
Recovered Charge Off Amount -- As to any home equity loan that became a
Liquidated Home Equity Loan in a collection period, the amount, if any, by which
(1) its Net Liquidation Proceeds that are allocable to principal in accordance
with the related mortgage note exceeds (2) its Stated Principal Balance
immediately prior to foreclosure up to an amount of all related Charge Off
Amounts, but in no event less than zero.
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 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:
- 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
- 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 (other than a
Liquidated Home Equity Loan) as of any date of determination, the principal
balance thereof as of the cut-off date, minus the sum of (x) all collections
credited against the principal balance of such home equity loan in accordance
with the terms of the related mortgage note and (y) any related Charge Off
Amounts credited against the principal balance of such home equity loan prior to
such date. For purposes of this definition, a Liquidated Home Equity Loan shall
be deemed to have a Stated Principal Balance equal to the Stated Principal
Balance of the related home equity loan immediately prior to the final recovery
of related Liquidation Proceeds and a Stated Principal Balance of zero
thereafter.
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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
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 a date specified in the related prospectus supplement.
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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HOUSEHOLD HOME EQUITY LOAN TRUST 1999-1
$500,390,000
CLOSED-END HOME EQUITY LOAN ASSET BACKED CERTIFICATES, SERIES 1999-1
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PROSPECTUS SUPPLEMENT
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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 90 days after the date
of the prospectus supplement.
MERRILL LYNCH & CO.
BANC OF AMERICA SECURITIES LLC
LEHMAN
BROTHERS
NOVEMBER , 1999
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