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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 3, 1999
REGISTRATION NO. 333-84611
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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HFC REVOLVING CORPORATION
(Exact name of registrant as specified in governing instruments)
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DELAWARE 36-3955292
(State of incorporation) (I.R.S. Employer Identification Number)
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2700 SANDERS ROAD, PROSPECT HEIGHTS, ILLINOIS 60070, (847) 564-5000
(Address and telephone number of Registrant's principal executive offices)
JOHN W. BLENKE, ESQ.
VICE PRESIDENT -- CORPORATE LAW AND
ASSISTANT SECRETARY
2700 SANDERS ROAD, PROSPECT HEIGHTS, ILLINOIS 60070, (847) 564-6150
(Name, address and telephone number of agent for service)
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Copies to:
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KURT W. FLORIAN, JR., ESQ. ALLAN KRINSMAN, ESQ.
KATTEN MUCHIN & ZAVIS BROWN & WOOD LLP
525 W. MONROE STREET ONE WORLD TRADE CENTER, 58TH FLOOR
CHICAGO, ILLINOIS 60661 NEW YORK, NEW YORK 10048
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time on or after the effective date of this Registration Statement, as
determined by market conditions.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, please check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED PROPOSED
MAXIMUM MAXIMUM
AMOUNT TO BE OFFERING PRICE PER AGGREGATE AMOUNT OF
TITLE OF SECURITIES BEING REGISTERED REGISTERED UNIT(1) OFFERING PRICE(1) REGISTRATION FEE
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Home Equity Loan Asset Backed
Certificates (Issuable in Series)... $3,000,000,000 100% $3,000,000,000 $834,000(2)
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(1) Estimated solely for the purpose of calculating the registration fee.
(2) $278.00 in filing fees was paid when this Registration Statement was
originally filed.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(a), MAY
DETERMINE.
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<PAGE> 2
This Registration Statement includes (1) a basic prospectus relating to
home equity loan asset backed certificates and (2) an illustrative form of
prospectus supplement for use in an offering of closed-end home equity loan
asset backed certificates.
<PAGE> 3
The information in this prospectus supplement is not complete and may be
changed. We may not sell these securities until the registration statement filed
with the SEC is effective. This prospectus supplement is not an offer to sell
these securities and it is not soliciting an offer to buy these securities in
any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION
DATED NOVEMBER 3, 1999
PROSPECTUS SUPPLEMENT DATED ________, 1999
(TO PROSPECTUS DATED ________, 1999)
$__________________
HFC REVOLVING CORPORATION
DEPOSITOR
HOUSEHOLD HOME EQUITY LOAN TRUST ____
ISSUER
HOUSEHOLD FINANCE CORPORATION
MASTER SERVICER
CLOSED-END HOME EQUITY LOAN ASSET BACKED CERTIFICATES, SERIES ______
Offered Certificates The trust will issue ______ classes of senior
certificates offered under this prospectus
supplement, backed by a pool of closed-end, primarily
first or second lien fixed rate home equity loans.
Credit Enhancement Credit enhancement for the certificates consists of:
o excess interest and overcollateralization; and
o a certificate guaranty insurance policy issued
by _________________.
YOU SHOULD CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE S-__ IN THIS
PROSPECTUS SUPPLEMENT.
Neither the SEC nor any state securities commission has approved or disapproved
of the offered certificates or determined that this prospectus supplement or the
prospectus is accurate or complete. Any representation to the contrary is a
criminal offense.
The Attorney General of the State of New York has not passed on or endorsed the
merits of this offering. Any representation to the contrary is unlawful.
_________ will offer the certificates to the public, at varying prices to be
determined at the time of sale. The proceeds to the depositor from the sale of
the certificates will be approximately _____% of the principal balance of the
certificates plus accrued interest, before deducting expenses.
[NAME OF UNDERWRITER]
Underwriter
<PAGE> 4
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS SUPPLEMENT AND
THE ACCOMPANYING PROSPECTUS
We provide information to you about the offered certificates in two separate
documents that provide progressively more detail:
o the accompanying prospectus, which provides general information, some of
which may not apply to your series of certificates; and
o this prospectus supplement, which describes the specific terms of your
series of certificates.
If the description of your certificates in this prospectus supplement differs
from the related description in the accompanying prospectus, you should rely on
the information in this prospectus supplement.
The depositor's principal offices are located at 2700 Sanders Road, Prospect
Heights, Illinois 60070 and its telephone number is (847) 564-6335.
S-2
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TABLE OF CONTENTS
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Summary ........................................................................................................... S-5
The Trust .................................................................................................... S-7
The Home Equity Loan Pool .................................................................................... S-7
Distributions on the Certificates ............................................................................ S-8
Credit Enhancement ........................................................................................... S-8
Optional Termination ......................................................................................... S-9
Ratings ...................................................................................................... S-9
Legal Investment ............................................................................................. S-9
Employee Benefit Plan Considerations ......................................................................... S-9
Tax Status ................................................................................................... S-9
Risk Factors ...................................................................................................... S-10
Special Yield and Prepayment Considerations .................................................................. S-10
Risks Associated with the Home Equity Loans .................................................................. S-12
Loss Mitigation Practices .................................................................................... S-14
Limited Obligations .......................................................................................... S-14
Liquidity Risks .............................................................................................. S-15
Servicing Risks .............................................................................................. S-15
Risks Associated with the Certificates ....................................................................... S-16
Forward-Looking Statements ................................................................................... S-17
Introduction ...................................................................................................... S-17
Description of the Home Equity Loan Pool .......................................................................... S-17
General ...................................................................................................... S-17
Payments on the Simple Interest Home Equity Loans ............................................................ S-18
Balloon Loans ................................................................................................ S-19
Home Equity Loan Pool Characteristics ........................................................................ S-19
Home Equity Loans ............................................................................................ S-20
Underwriting Standards ....................................................................................... S-24
Optional Purchase of Defaulted Home Equity Loans ............................................................. S-25
The Subservicers ............................................................................................. S-25
The Master Servicer .......................................................................................... S-25
Delinquency and Loss Experience of the Master Servicer's Portfolio ........................................... S-25
Additional Information ....................................................................................... S-26
Description of the Certificates ................................................................................... S-26
General ...................................................................................................... S-26
Book-Entry Registration of the Offered Certificates .......................................................... S-27
Distributions ................................................................................................ S-30
Available Distribution Amount ................................................................................ S-31
Interest Distributions ....................................................................................... S-31
Principal Distributions ...................................................................................... S-31
Overcollateralization Provisions ............................................................................. S-33
Excess Loss Amounts .......................................................................................... S-34
Certificate Guaranty Insurance Policy ........................................................................ S-35
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S-3
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The Credit Enhancer ............................................................................................... S-35
Material Yield and Prepayment Considerations ...................................................................... S-36
General ...................................................................................................... S-36
Fixed Strip Certificate Yield Considerations ................................................................. S-41
Pooling and Servicing Agreement ................................................................................... S-42
The Master Servicer .......................................................................................... S-42
Possession of Home Equity Loan Documents ..................................................................... S-43
Review of the Home Equity Loans .............................................................................. S-43
Servicing and Subserving ..................................................................................... S-44
Evidence as to Compliance .................................................................................... S-45
Collection and Other Servicing Procedures .................................................................... S-46
Refinancing of Senior Lien ................................................................................... S-46
Collection and Liquidation Practices; Loss Mitigation ........................................................ S-46
Voting Rights ................................................................................................ S-46
Termination .................................................................................................. S-47
Material Federal Income Tax Consequences .......................................................................... S-47
New Withholding Regulations .................................................................................. S-49
Method of Distribution ............................................................................................ S-49
Legal Opinions .................................................................................................... S-50
Experts ........................................................................................................... S-50
Ratings ........................................................................................................... S-51
Legal Investment .................................................................................................. S-51
Employee Benefit Plan Considerations .............................................................................. S-52
Glossary of Terms ................................................................................................. S-53
Annex I ........................................................................................................... I-1
Global Clearance, Settlement and Tax Documentation Procedures ..................................................... I-1
Initial Settlement ........................................................................................... I-1
Secondary Market Trading ..................................................................................... I-1
Material U.S. Federal Income Tax Documentation Requirements .................................................. I-3
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S-4
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SUMMARY
The following summary is a very general overview of the offered
certificates and does not contain all of the information that you should
consider in making your investment decision. To understand the terms of the
certificates, you should read carefully this entire document and the prospectus.
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Issuer or Trust.................................. Household Home Equity Loan Trust ___________.
Title of the offered securities.................. Closed-End Home Equity Loan Asset Backed Certificates,
Series ____________.
Depositor........................................ HFC Revolving Corporation, an affiliate of Household
Finance Corporation, which is located at 2700 Sanders
Road, Prospect Heights, Illinois 60070. Its telephone
number is (847) 564-6335.
Master servicer.................................. Household Finance Corporation, which is located at 2700
Sanders Road, Prospect Heights, Illinois 60070. Its
telephone number is (847) 564-5000.
Trustee.......................................... ______________.
Credit enhancer.................................. ______________.
Home equity loan pool............................ _____ closed end and fixed-rate, fully-amortizing and
balloon payment home equity loans with an aggregate
principal balance of approximately ______________ as of
the close of business on the day prior to the cut-off date.
The home equity loans are secured primarily by first or
second liens on one- to four-family residential properties.
Cut-off date..................................... ______________.
Statistical cut-off date......................... ______________.
Closing date..................................... On or about ______________.
Payment dates.................................... Beginning in ______________ on the ___ of each month
or, if the ___ is not a business day, on the next business
day.
Scheduled final distribution date................ ______________. The actual final distribution date could
be substantially earlier.
Form of certificates............................. Book-entry.
See "Description of the Certificates--Book-Entry Registration"
in this prospectus supplement.
Minimum denominations............................ Class A Certificates: $_____________.
Class IO Certificates: $____________ (notional balance).
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Legal investment................................. The certificates will not be "mortgage related securities"
for purposes of the Secondary Mortgage Market Enhancement
Act of 1984.
See "Legal Investment" in this prospectus supplement and
the prospectus.
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OFFERED CERTIFICATES
Pass-Through Initial Principal Initial Rating
Class Rate Balance ______/_____ Designation
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Class A Certificates
A-1 ______% $___________ AAA/AAA Senior/Fixed
Rate/Sequential
A-2 ______% $___________ AAA/AAA Senior/Lockout/Fixed
Rate
Total Class A Certificates: $___________
Class IO Certificates:
IO ______% AAA/AAAr Senior/Interest
Only/Fixed Rate
Total offered certificates: $___________
NON-OFFERED CERTIFICATES
Class R Certificates
R ______% $___________ NA/NA Subordinate/Residual
Total offered and non-offered
certificates: $___________
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THE TRUST
The depositor will establish the Household Home Equity Loan Trust
______ to issue the Closed-End Home Equity Loan Asset Backed Certificates,
Series _____. The trust will be established, and the certificates will be issued
by the trust under a pooling and servicing agreement. The assets of the trust
will consist of the home equity loans, the certificate guaranty insurance policy
and related assets.
THE HOME EQUITY LOAN POOL
Approximately ____% of the home equity loans are secured by first or
second liens or deeds of trust. The home equity loans had the following
characteristics as of the statistical cut-off date, the date as of which
information is provided with respect to the home equity loans in the home equity
loan pool:
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Minimum principal balance $_____
Maximum principal balance $_____
Average principal balance _____
Range of loan rates _____% to _____%
Weighted average loan rate _____%
Range of original terms to maturity _____ to _____ months
Weighted average original term to maturity _____ months
Range of remaining terms to maturity _____ to _____ months
Weighted average remaining term to maturity _____ months
Range of combined loan-to-value ratios _____% to _____%
Weighted average combined loan-to-value ratios _____%
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S-7
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See "Description of the Home Equity Loan Pool" in this prospectus
supplement.
DISTRIBUTIONS ON THE CERTIFICATES
Amount Available for Monthly Distribution. On each monthly distribution
date, the trustee will make distributions to holders of the offered
certificates. The amounts available for distribution include:
o collections of monthly payments on the home equity loans,
including prepayments and, if elected by the master servicer,
other unscheduled collections, plus
o draws upon the certificate guaranty insurance policy, if
necessary, minus
o fees and expenses of the subservicers and the master servicer.
See "Description of the Certificates--Available Distribution Amount" in this
prospectus supplement.
Distributions. Distributions to certificateholders will generally be
made from principal and interest collections as follows:
o Distribution of interest to the certificates
o Distribution of principal to the certificates
o Distribution of principal to the certificates to cover losses
o Payment to the credit enhancer of its premium for the policy
o Reimbursement to the credit enhancer for prior draws made on
the policy
o Distribution of additional principal to the certificates if
the level of overcollateralization falls below what is
required
o Payment to the credit enhancer for any other amounts owed
o Distribution of any remaining funds to the Residual
Certificates
Principal payments on the certificates will be as described under "Description
of the Certificates--Principal Distributions" in this prospectus supplement.
In addition, payments on the certificates will be made on each
distribution date from draws on the certificate guaranty insurance policy, if
necessary. Draws will cover shortfalls in amounts available to pay interest on
the certificates at the pass-through rates plus any unpaid losses allocated to
the certificates.
CREDIT ENHANCEMENT
The credit enhancement for the benefit of the certificates consists of:
Excess Interest. Because more interest is paid by the borrowers than is
necessary to pay the interest on the certificates each month, there will be
excess interest. Some of this excess interest may be used to protect the
certificates against some losses, by making an additional payment of principal
up to the amount of the losses.
S-8
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Overcollateralization. Although the aggregate principal balance of the
home equity loans is $__________, the trust is issuing only $__________
aggregate principal amount of certificates. The excess amount of the balance of
the home equity loans represents overcollateralization, which may absorb some
losses on the home equity loans, if not covered by excess interest. If the level
of overcollateralization falls below what is required, the excess interest
described above will also be paid to the certificates as principal. This will
reduce the principal balance of the certificates faster than the principal
balance of the home equity loans so that the required level of
overcollateralization is reached.
Policy. On the closing date, the credit enhancer will issue the
certificate guaranty insurance policy in favor of the trustee. The policy will
unconditionally and irrevocably guarantee interest on the certificates at the
related pass-through rates and will cover any losses allocated to the
certificates if not covered by excess interest or overcollateralizations.
OPTIONAL TERMINATION
On any payment date on which the aggregate principal balance of all of
the home equity loans is less than __% of the principal balance as of the
cut-off date, the master servicer will have the option to purchase the remaining
home equity loans.
Under an optional purchase, the outstanding principal balance of the
certificates will be paid in full with accrued interest.
RATINGS
When issued, the certificates will receive the ratings listed on page
S-__ of this prospectus supplement. A security rating is not a recommendation to
buy, sell or hold a security and may be changed or withdrawn at any time by the
assigning rating agency. The ratings also do not address the rate of principal
prepayments on the home equity loans. The rate of prepayments, if different than
originally anticipated, could adversely affect the yield realized by holders of
the certificates.
LEGAL INVESTMENT
The certificates will not be "mortgage related securities" for purposes
of the Secondary Mortgage Market Enhancement Act of 1984. You should consult
your legal advisors in determining whether and to what extent the certificates
constitute legal investments for you.
EMPLOYEE BENEFIT PLAN CONSIDERATIONS
The certificates may be eligible for purchase by persons investing
assets of employee benefit plans or individual retirement accounts if they have
determined that the purchase and the continued holding of the certificates will
not be violative of applicable fiduciary standards of conduct. As a result,
persons investing assets of employee benefit plans should consult with their
legal advisors before investing plan or IRA assets in the certificates and
should carefully review the "Employee Benefit Plan Considerations" provisions
provided for later in this prospectus supplement and in the accompanying
prospectus.
TAX STATUS
For federal income tax purposes, the trust will be treated as a real
estate mortgage investment conduit. The certificates will represent ownership of
regular interests in the trust and will be treated as debt for federal income
tax purposes. The trust itself will not be subject to tax.
S-9
<PAGE> 12
See "Material Federal Income Tax Consequences" in this prospectus
supplement and in the accompanying prospectus.
RISK FACTORS
The certificates are not suitable investments for all investors. In
particular, you should not purchase the certificates unless you understand the
prepayment, credit, liquidity and market risks associated with the certificates.
The certificates are complex securities. You should possess, either
alone or together with an investment advisor, the expertise necessary to
evaluate the information contained in this prospectus supplement and the
accompanying prospectus in the context of your financial situation and tolerance
for risk.
You should carefully consider, among other things, the following
factors in connection with the purchase of the certificates:
SPECIAL YIELD AND PREPAYMENT CONSIDERATIONS
THE YIELD TO MATURITY ON YOUR CERTIFICATES WILL VARY DEPENDING ON A
VARIETY OF FACTORS.
The yield to maturity of the certificates will depend on a variety of
factors, including:
o the amortization schedules of the home equity loans;
o the rate of principal prepayments, including partial
prepayments, and prepayments resulting from refinancing by the
borrowers;
o liquidations of defaulted home equity loans;
o the presence and enforceability of due-on-sale clauses;
o repurchase of home equity loans by the depositor as a result
of defective documentation or breaches of representations and
warranties and optional purchase by the depositor of defaulted
home equity loans;
o the optional purchase by the master servicer of all the home
equity loans in connection with the termination of the trust;
o the pass-through rate for a class of certificates; and
o the purchase price.
THE RATE OF PREPAYMENTS IS ONE OF THE MOST IMPORTANT AND LEAST PREDICTABLE
OF THESE FACTORS.
In general, if you purchase a certificate at a price higher than its
outstanding principal balance and principal payments occur faster than you
assumed at the time of purchase, your yield will be lower than anticipated.
Similarly, if you purchase a certificate at a price lower than its outstanding
principal balance and principal payments occur more slowly than you assumed at
the time of purchase, your yield will be lower than anticipated.
S-10
<PAGE> 13
THE RATE OF PREPAYMENTS ON THE HOME EQUITY LOANS WILL VARY DEPENDING ON
FUTURE MARKET CONDITIONS, AND OTHER FACTORS.
Since borrowers can generally prepay their mortgage loans at any time,
the rate and timing of principal payments on the certificates are highly
uncertain. Generally, when market interest rates increase, borrowers are less
likely to prepay their mortgage loans. This could result in a slower return of
principal to you at a time when you might have been able to reinvest those funds
at a higher rate of interest than the pass-through rate on your class of
certificates. On the other hand, when market interest rates decrease, borrowers
are generally more likely to prepay their mortgage loans. This could result in a
faster return of principal to you at a time when you might not be able to
reinvest those funds at an interest rate as high as the pass-through rate on
your class of certificates.
REFINANCING PROGRAMS, WHICH MAY INVOLVE SOLICITING ALL OR SOME OF THE
BORROWERS TO REFINANCE THEIR HOME EQUITY LOANS, MAY INCREASE THE RATE OF
PREPAYMENTS ON THE HOME EQUITY LOANS.
Sellers of home equity loans may refinance the home equity loans, which
will result in prepayment on the home equity loans. _____% of the home equity
loans provide for payment of a prepayment charge which may, or may not be,
enforced by the master servicer. Prepayment charges may reduce the rate of
prepayment on the home equity loans until the end of the related prepayment
period. See "Description of the Home Equity Loan Pool--Home Equity Loan Pool
Characteristics" in this prospectus supplement and "Yield and Prepayment
Considerations" in the prospectus.
THE YIELD ON YOUR CERTIFICATES WILL BE AFFECTED BY THE SPECIFIC FORMS THAT
APPLY TO THAT CLASS DISCUSSED BELOW.
The offered certificates of each class have different yield
considerations and different sensitivities to the rate and timing of principal
distributions. The following is a general discussion of some yield
considerations and prepayment sensitivities of each class.
See "Material Yield and Prepayment Considerations" in this prospectus
supplement.
Class A Certificates. The Class A Certificates are subject to various
priorities for payment of principal as described in this prospectus supplement.
Distributions of principal on the Class A Certificates which have an earlier
priority of payment will be affected by the rates of prepayment of the home
equity loans early in the life of the home equity loan pool. Those classes of
Class A Certificates with a later priority of payment will be affected by the
rates of prepayment of the home equity loans experienced both before and after
the commencement of principal distributions on those classes.
See "Description of the Certificates--Principal Distributions" in this
prospectus supplement.
Class A-2 Certificates. It is not expected that the Class A-2
Certificates will receive any distributions of principal until the distribution
date in _____________. Until the distribution date in ______________, the Class
A-2 Certificates may receive a portion of principal prepayments that is smaller
than its pro rata share of principal payments from the home equity loans.
Class IO Certificates. An extremely rapid rate of principal prepayments
on the home equity loans could result in the failure of holders of the offered
certificates in the Class IO Certificates to fully recover their initial
investments.
See "Material Yield and Prepayment Considerations" and especially
"--Fixed Strip Certificate Yield Considerations" in this prospectus supplement.
S-11
<PAGE> 14
RISKS ASSOCIATED WITH THE HOME EQUITY LOANS
THE RETURN ON YOUR CERTIFICATES MAY BE REDUCED BY LOSSES ON THE POOL OF
HOME EQUITY LOANS, WHICH ARE MORE LIKELY BECAUSE MANY ARE JUNIOR LIENS.
______% of the home equity loans included in the home equity loan pool
are secured by second or third mortgages or deeds of trust. Proceeds from
liquidation of the property will be available to satisfy the home equity loans
only if the claims of any senior mortgages have been satisfied in full. When it
is uneconomical to foreclose on the mortgaged property or engage in other loss
mitigation procedures, the master servicer may write off the entire outstanding
balance of the home equity loan as a bad debt. The foregoing risks are
particularly applicable to home equity loans secured by second or third liens
that have high combined loan-to-value ratios or low junior ratios because it is
comparatively more likely that the master servicer would determine foreclosure
to be uneconomical. As of the statistical cut-off date, the weighted average
combined loan-to-value ratio of the home equity loans is ______%, and
approximately ______% of the home equity loans will have combined loan-to-value
ratios in excess of ______%.
HOME EQUITY LOANS WITH BALLOON PAYMENT FEATURES MAY HAVE GREATER DEFAULT
RISK.
_____% of the home equity loans included in the home equity loan pool
are Balloon Loans that provide for the payment of a large remaining principal
balance in a single payment at maturity. The borrower on this type of loan may
not be able to pay the large payment, and may also be unable to refinance the
home equity loan at maturity. As a result, the default risk associated with
Balloon Loans may be greater than that associated with fully amortizing loans
because of the large payment due at maturity.
DELAYS IN PAYMENT ON YOUR CERTIFICATES MAY RESULT BECAUSE THE MASTER
SERVICER IS NOT REQUIRED TO ADVANCE DELINQUENT MONTHLY PAYMENTS ON THE HOME
EQUITY LOANS.
The master servicer is not obligated to advance scheduled monthly
payments of principal and interest on home equity loans that are delinquent or
in default. The rate of delinquency and default of second and third home equity
loans may be greater than that of home equity loans secured by first liens on
comparable properties.
THE RETURN ON YOUR CERTIFICATES MAY BE REDUCED IN AN ECONOMIC DOWNTURN.
The home equity loans included in the home equity loan pool were
originated during a period of generally favorable economic conditions nationally
and in most regions of the country. However, a deterioration in economic
conditions could adversely affect the ability and willingness of borrowers to
repay their loans. No prediction can be made as to the effect of an economic
downturn on the rate of delinquencies and losses on the home equity loans.
CONSUMER PROTECTION LAWS MAY LIMIT REMEDIES.
There are various federal and state laws, public policies and
principles of equity that protect borrowers under home equity loans. Among other
things, these laws, policies and principles:
o regulate interest rates and other charges;
o require specific disclosures;
o require licensing of mortgage loan originators;
o prohibit discriminatory lending practices;
o prohibit unfair and deceptive practices;
S-12
<PAGE> 15
o regulate the use of consumer credit information; and
o regulate debt collection practices.
Violations of provisions of these laws may limit the ability of the
master servicer to collect all or part of the principal of or interest on the
home equity loans, may entitle the borrower to a refund of amounts previously
paid and may subject the depositor, the master servicer or the trust to damages
and administrative enforcement. The depositor will be required to repurchase any
home equity loans which, at the time of origination, did not comply with these
federal laws or regulations.
THE ORIGINATION DISCLOSURE PRACTICES FOR THE HOME EQUITY LOANS COULD CREATE
LIABILITIES THAT MAY AFFECT YOUR CERTIFICATES.
______% of the home equity loans included in the home equity loan pool
are subject to special rules, disclosure requirements and other regulatory
provisions because they are High Cost Loans.
Purchasers or assignees of these home equity loans, including the
trust, could be exposed to all claims and defenses that the borrowers could
assert against the originators of the home equity loans. Remedies available to a
borrower include monetary penalties, as well as rescission rights if the
appropriate disclosures were not given as required. See "Legal Aspects of Home
Equity Loans and Related Matters" in the prospectus.
YOUR CERTIFICATES MAY BE ADVERSELY AFFECTED BY CHANGES IN BANKRUPTCY LAWS.
In October 1997, a bankruptcy review commission recommended that
Congress amend the Bankruptcy Code by treating a claim secured by a junior
security interest in a borrower's principal residence as protected only to the
extent that the claim was secured when the security interest was made.
Additionally, the commission recommended that a creditor's secured claim in real
property should be determined by the property's fair market value, less
hypothetical costs of sale. Congress adjourned in 1998 without passing any
legislation addressing these issues. However, Congress continues to consider
bankruptcy law changes that may affect future bankruptcies and therefore could
affect the rate and timing of payments on the home equity loans. Any changes to
the Bankruptcy Code could have a negative effect on the home equity loans and
the enforcement of rights under the mortgage.
THE UNDERWRITING STANDARDS FOR THE HOME EQUITY LOANS CREATE GREATER RISKS
TO YOU, COMPARED TO THOSE FOR FIRST LIEN LOANS.
The standards under which the home equity loans were underwritten were
based on the borrower's credit history and capacity to repay, in addition to the
value of the collateral upon foreclosure. The underwriting standards allow loans
to be approved with a combined LTV ratio of up to 110%. See "Description of the
Home Equity Loan Pool--Underwriting Standards" in this prospectus supplement.
Because of the relatively high combined LTV ratios of the home equity loans and
the fact that many of the home equity loans are secured by junior liens, losses
on the home equity loans will likely be higher than on a pool of exclusively
conventional first lien home equity loans.
THE RETURN ON YOUR CERTIFICATES MAY BE PARTICULARLY SENSITIVE TO CHANGES IN
REAL ESTATE MARKETS IN SPECIFIC AREAS.
One risk of investing in the certificates is created by concentration
of the related mortgaged properties in one or more geographic regions.
Approximately ____% of the statistical cut-off date principal balance of the
home equity loans are located in California. If the regional economy or housing
market weakens in California, or in any other region having a significant
concentration of the properties
S-13
<PAGE> 16
underlying the home equity loans, the home equity loans related to properties in
that region may experience high rates of loss and delinquency, resulting in
losses to certificateholders. A region's economic condition and housing market
may be adversely affected by a variety of events, including natural disasters
such as earthquakes, hurricanes, floods and eruptions, and civil disturbances
such as riots.
THE RELOADING OF DEBT COULD INCREASE YOUR RISK.
With respect to home equity loans which were used for debt
consolidation, there can be no assurance that the borrower will not incur
further debt. This reloading of debt could impair the ability of borrowers to
service their debts, which in turn could result in higher rates of delinquency
and loss on the home equity loans.
LOSS MITIGATION PRACTICES
NONPERFORMING HOME EQUITY LOANS MAY RESULT IN DISTRIBUTION DELAYS AND LEGAL
EXPENSES.
Foreclosure actions and actions to obtain deficiency judgments:
o are regulated by state laws and judicial rules;
o may be subject to delays; and
o may be expensive.
Because of these factors, if a borrower defaults, the master servicer
may have trouble foreclosing on a home equity loan or obtaining a deficiency
judgment.
If the certificate guaranty insurer does not make a required payment or
if other forms of credit enhancement are no longer outstanding, a delay or
inability of the master servicer to foreclose or obtain a deficiency judgment
may delay distributions on the certificates or result in a loss on the
certificates.
THE RELEASE OF A LIEN MAY INCREASE YOUR RISK.
The master servicer may use a wide variety of practices to limit losses
on the home equity loans. The pooling and servicing agreement permits the master
servicer to release the lien on a limited number of mortgaged properties
securing the home equity loans, if the home equity loan is current in payment.
See "Pooling and Servicing Agreement - Refinancing of Senior Lien" and "-
Collection and Liquidation Practices; Loss Mitigation" in this prospectus
supplement.
LIMITED OBLIGATIONS
PAYMENTS ON THE HOME EQUITY LOANS, TOGETHER WITH THE CERTIFICATE GUARANTY
INSURANCE POLICY, ARE THE SOLE SOURCE OF PAYMENTS ON YOUR CERTIFICATES.
Credit enhancement includes excess interest, overcollateralization and
the certificate guaranty insurance policy. None of the depositor, the trustee,
the master servicer, the sellers or any of their affiliates will have any
obligation to replace or supplement the credit enhancement, or to take any other
action to maintain any rating of the certificates. If any losses are incurred on
the home equity loans that are not covered by the credit enhancement, the
holders of the certificates will bear the risk of these losses.
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<PAGE> 17
LIQUIDITY RISKS
YOU MAY HAVE TO HOLD YOUR CERTIFICATES TO MATURITY IF THEIR MARKETABILITY
IS LIMITED.
A secondary market for your certificates may not develop. Even if a
secondary market does develop, it may not continue, or it may be illiquid.
Illiquidity means you may not be able to find a buyer to buy your securities
readily or at prices that will enable you to realize a desired yield.
Illiquidity can have an adverse effect on the market value of the certificates.
SERVICING RISKS
THE FAILURE TO DELIVER THE LOAN DOCUMENTS RELATING TO EACH HOME EQUITY
LOAN AND THE FAILURE TO RECORD THE ASSIGNMENTS OF EACH HOME EQUITY LOAN MAY
CAUSE A SALE TO THE DEPOSITOR TO BE INEFFECTIVE.
Under the terms of the pooling and servicing agreement, so long as
HFC's long-term senior unsecured debt is acceptable to the rating agencies and
to the certificate guaranty insurer, subservicers affiliated with HFC will
retain the loan documents with respect to each home equity loan and will not
record assignments of the related mortgage to the trustee. In most of the states
in which the documents are held, failure to deliver the documents to the
trustee, and in certain states in which the mortgaged properties are located,
failure to record the assignments of the home equity loans in favor of the
trustee will make the sale of the mortgaged properties potentially ineffective
against:
o any creditors of a seller; or
o a purchaser, in the event a seller fraudulently or
inadvertently resells a home equity loan to a purchaser who
had no notice of the prior sale to the trust and who perfects
his interest in the home equity loan by taking possession of
the loan documents.
The pooling and servicing agreement provides that if any loss is suffered in
respect of a home equity loan as a result of a subservicer's retention of the
documents relating to a home equity loan or the failure to record the assignment
of a home equity loan, the subservicer or HFC will purchase the home equity loan
from the trust. In the event that HFC's long-term senior unsecured debt rating
does not satisfy the above-described standards or any of the subservicers ceases
to be an HFC affiliate, the subservicer and the depositor will have ___ days to
record assignments of the mortgages for each related home equity loan in favor
of the trustee and ___ days to deliver the loan documents pertaining to each
home equity loan to the trustee, unless opinions of counsel satisfactory to the
trustee, and any certificate guaranty insurer to the effect that recordation of
the assignments or delivery of the documentation is not required in the relevant
jurisdiction to protect the interests of the depositor and the trustee in the
home equity loans.
THE COMMINGLING OF FUNDS CAN CREATE GREATER RISK TO YOU IF HFC GOES
INTO BANKRUPTCY.
Under the terms of the pooling and servicing agreement, so long as
HFC's short-term debt is acceptable to the rating agencies and to the
certificate guaranty insurer, while HFC is the master servicer, amounts
received in respect of the home equity loans may be commingled with the funds of
HFC prior to each distribution date and, in the event of bankruptcy of HFC, the
trust may not have a perfected interest in these collections. See "Description
of the Certificates -- Distributions."
S-15
<PAGE> 18
YEAR 2000 COMPUTER PROBLEMS COULD DISRUPT DISTRIBUTIONS ON
CERTIFICATES.
The master servicer and the subservicers are in the process of
addressing issues arising from the year 2000 issue that could impact the timely
payment of principal and interest on the certificates. The year 2000 issue is
the result of prior computer programs being written using two digits to define
the applicable year. Computer programs that have time-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. Any such
occurrence could result in major computer system failure or miscalculations.
Although the master servicer and the subservicers reasonably believe that their
servicing systems will be year 2000 compliant prior to the year 2000, they are
presently engaged in various procedures to determine if their computer systems
and software, and those of their material suppliers, customers and agents will
be year 2000 compliant.
DTC has informed its participants and other members of the financial
community that it has developed and is implementing a program so that its
systems, as the same relate to the timely payment of distributions, including
principal and income payments, to certificateholders, book-entry deliveries, and
settlement of trades within DTC, continue to function appropriately. This
program includes a technical assessment and a remediation plan, each of which is
complete. Additionally, DTC's plan includes a testing phase, which is expected
to be completed within appropriate time frames. However, DTC's ability to
perform properly its services is also dependent upon other parties, including
but not limited to issuers and their agents, as well as third party vendors from
whom DTC licenses software and hardware, and third party vendors on whom DTC
relies for information or the provision of services, including telecommunication
and electrical utility service providers, among others.
In the event that the master servicer, the subservicers, any of their
suppliers, customers or agents, or DTC do not successfully and timely achieve
year 2000 compliance, the master servicer's performance of its obligations under
the pooling and servicing agreement could be adversely affected. This could
result in delays in processing payments on the home equity loans and could cause
a delay in payments to you.
RISKS ASSOCIATED WITH THE CERTIFICATES
RIGHTS OF BENEFICIAL OWNERS MAY BE LIMITED BY BOOK-ENTRY SYSTEM.
The certificates will be held through the book-entry system of DTC and
transactions in the certificates generally can be effected only through DTC and
DTC participants. As a result:
o your ability to pledge certificates to entities that do not
participate in the DTC system, or to otherwise act with
respect to certificates, may be limited due to the lack of a
physical certificate for the certificates; and
o under a book-entry format, you may experience delays in the
receipt of payments, since distributions will be made by the
trustee to DTC, and not directly to you.
CERTIFICATE RATINGS ARE DEPENDENT ON ASSESSMENTS BY THE RATING AGENCIES.
The ratings of the certificates depend primarily on an assessment by
the rating agencies of the underlying home equity loans and the credit
enhancement. The rating by the rating agencies of the certificates:
o is not a recommendation to purchase, hold or sell the
certificates; and
S-16
<PAGE> 19
o does not comment as to the market price or suitability of the
certificates for a particular investor.
There is no assurance that the ratings will remain for any given period
of time or that the ratings will not be reduced, suspended or withdrawn by the
rating agencies.
FORWARD-LOOKING STATEMENTS
Some of the statements contained in or incorporated by reference in
this prospectus supplement and the accompanying prospectus consist of
forward-looking statements, within the meaning of Section 27A of the Securities
Act, relating to future economic performance or projections and other financial
items. These statements can be identified by the use of forward-looking words
such as "may," "will," "should," "expects," "believes," "anticipates,"
"estimates," or other comparable words. Forward-looking statements are subject
to a variety of risks and uncertainties that could cause actual results to
differ from the projected results. Those risks and uncertainties include, among
others, general economic and business conditions, regulatory initiatives and
compliance with governmental regulations, customer preferences and various other
matters, many of which are beyond our control. Because we cannot predict the
future, what actually happens may be very different from what we predict in our
forward-looking statements.
INTRODUCTION
The depositor will establish a trust with respect to Series _______ on
the closing date, under a pooling and servicing agreement among the depositor,
the master servicer and the trustee, dated as of the cut-off date. On the
closing date, the depositor will deposit into the trust the receivables relating
to a pool of home equity loans, that in the aggregate will constitute a home
equity loan pool, secured by closed end, fixed-rate, fully amortizing and
Balloon Loans.
Some capitalized terms used in this prospectus supplement have the
meanings given below under "Glossary of Terms" or in the prospectus under
"Glossary."
DESCRIPTION OF THE HOME EQUITY LOAN POOL
GENERAL
The home equity loan pool will consist of approximately _______ home
equity loans having an aggregate principal balance outstanding as of the close
of business on the day prior to the cut-off date of $_______. All percentages of
the home equity loans described in this prospectus supplement are approximate
percentages by aggregate statistical cut-off date balance unless otherwise
indicated. _______% of the home equity loans are secured by first or second
liens on fee simple or leasehold interests in one- to four-family residential
real properties. In each case, the property securing the home equity loan is
referred to as the mortgaged property. The home equity loans will consist of
fixed-rate, fully-amortizing and balloon payment home equity loans with terms to
maturity of approximately five, ten, fifteen, twenty, twenty-five or thirty
years with respect to __%, __%, __%, __%, __% and __% of the home equity loans,
respectively, from the date of origination or modification. With respect to home
equity loans which have been modified, references in this prospectus supplement
to the date of origination shall be deemed to be the date of the most recent
modification.
_________________, which are direct or indirect wholly-owned
subsidiaries of HFC that are licensed to make home equity loans in the states in
which the mortgaged properties are located, will sell
S-17
<PAGE> 20
and assign the home equity loans to the depositor, which will then sell and
assign the home equity loans to the trustee in exchange for the certificates.
These companies originate home equity revolving credit and closed-end loans and,
in some cases, other types of consumer loans and installment sales contracts
through branch offices, telemarketing and direct mail in the states in which
they are licensed to do business. All of the home equity loans were purchased by
the depositor from the sellers on a servicing released basis; however, all of
the home equity loans will be subserviced by the sellers. See "--The
Subservicers" below.
All of the home equity loans were underwritten in conformity with or in
a manner generally consistent with the HFC Home Equity Lending Program. See
"--Underwriting Standards" below.
The depositor will make some limited representations and warranties
regarding the home equity loans as of the closing date. The depositor will be
required to repurchase or substitute for any home equity loan as to which a
breach of its representations and warranties with respect to that home equity
loan occurs if the breach materially adversely affects the interests of the
certificateholders or the credit enhancer under "Description of the
Certificates-Certificate Guaranty Insurance Policy" in that home equity loan.
Each seller has made or will make some limited representations and warranties
regarding the related home equity loans, as of the date of their purchase by the
depositor. However, the representations and warranties will not be assigned to
the trustee for the benefit of the holders of the certificates, and therefore a
breach of the representations and warranties will not be enforceable on behalf
of the trust. See "HFC Home Equity Lending Program--Representations and
Warranties Concerning the Home Equity Loans" and "Description of the
Certificates--Review of Home Equity Loans" in the prospectus.
PAYMENTS ON THE SIMPLE INTEREST HOME EQUITY LOANS
__% of the home equity loans are Simple Interest Home Equity Loans,
which require that each monthly payment consist of an installment of interest
which is calculated according to the simple interest method on the basis of the
outstanding principal balance of that home equity loan multiplied by the
interest rate and further multiplied by a fraction, the numerator of which is
the number of days in the period elapsed since the preceding payment of interest
was made and the denominator of which is the number of days in the annual period
for which interest accrues on that home equity loan. As payments are received,
the amount received is applied first to interest accrued to the date of payment
and the balance is applied to reduce the unpaid principal balance.
Accordingly, if a borrower pays a fixed monthly installment before its
scheduled due date, the portion of the payment allocable to interest for the
period since the preceding payment was made will be less than it would have been
had the payment been made as scheduled, and the portion of the payment applied
to reduce the unpaid principal balance will be correspondingly greater. However,
the next succeeding payment will result in an allocation of a greater portion of
the payment allocated to interest if that payment is made on its scheduled due
date.
On the other hand, if a borrower pays a fixed monthly installment after
its scheduled due date, the portion of the payment allocable to interest for the
period since the preceding payment was made will be greater than it would have
been had the payment been made as scheduled, and the remaining portion, if any,
of the payment applied to reduce the unpaid principal balance will be
correspondingly less. If each scheduled payment is made on or prior to its
scheduled due date, the principal balance of the home equity loan will amortize
in the manner described in the preceding paragraph. However, if the borrower
consistently makes scheduled payments after the scheduled due date the home
equity loan will
S-18
<PAGE> 21
amortize more slowly than scheduled. Any remaining unpaid principal is payable
on the final maturity date of the home equity loan.
The remaining __% of the home equity loans are Actuarial Home Equity
Loans, on which 30 days of interest is owed each month irrespective of the day
on which the payment is received.
BALLOON LOANS
__% of the home equity loans are Balloon Loans, which require monthly
payments of principal based on a 30-year amortization schedule and have
scheduled maturity dates of approximately ______ years from the due date of the
first monthly payment, in each case leaving a balloon payment on the respective
scheduled maturity date. The existence of a balloon payment may require the
related borrower to refinance the home equity loan or to sell the mortgaged
property on or prior to the scheduled maturity date. The ability of a borrower
to accomplish either of these goals will be affected by a number of factors,
including the level of available interest rates at the time of sale or
refinancing, the borrower's equity in the related mortgaged property, the
financial condition of the borrower, tax laws, prevailing general economic
conditions and the terms of any related first lien mortgage loan. None of the
depositor, the master servicer or the trustee is obligated to refinance any
Balloon Loan. The policy issued by the credit enhancer will provide coverage on
any losses incurred upon liquidation of a Balloon Loan arising out of or in
connection with the failure of a borrower to make its balloon payment. See
"Description of the Certificates--Certificate Guaranty Insurance Policy" in this
prospectus supplement.
HOME EQUITY LOAN POOL CHARACTERISTICS
All of the home equity loans have principal, interest and fees, if
applicable, payable monthly on various days of each month as specified in the
mortgage note, each a due date.
In connection with each home equity loan that is secured by a leasehold
interest, the related seller will have represented to the depositor that, among
other things:
o the use of leasehold estates for residential properties is an
accepted practice in the area where the related mortgaged
property is located;
o residential property in the area consisting of leasehold estates
is readily marketable;
o the lease is recorded and no party is in any way in breach of any
provision of the lease;
o the leasehold is in full force and effect and is not subject to
any prior lien or encumbrance by which the leasehold could be
terminated or subject to any charge or penalty; and
o the remaining term of the lease does not terminate less than ten
years after the maturity date of that home equity loan.
__% of the home equity loans provide for payment of a prepayment
charge, if these loans prepay within a specified time period. The prepayment
charge generally is the maximum amount permitted under applicable state law. __%
of the home equity loans provide for payment of a prepayment charge for full
prepayments made within approximately three years of the origination of the home
equity loans in an amount calculated in accordance with the terms of the related
mortgage note. With respect to the remainder of the home equity loans with a
prepayment charge, the prepayment charge is calculated in a different manner. No
prepayment charges or late payment charges received on the home equity loans
will be available for payment on the certificates. The master servicer will be
S-19
<PAGE> 22
entitled to retain for its own account any prepayment charges and late payment
charges received on the home equity loans. The master servicer may waive any
prepayment charges and late payment charges.
As of the cut-off date, no home equity loan will be 30 days or more
delinquent in payment of principal and interest. For a description of the
methodology used to categorize home equity loans as delinquent, see
"--Delinquency and Loss Experience of the Master Servicer's Portfolio," below.
As of the cut-off date, __% of the home equity loans were High Cost
Loans. Purchasers or assignees of any High Cost Loan, including the trust, could
be liable for all claims and subject to all defenses that the borrower could
assert against the originator of the home equity loan. Remedies available to the
borrower include monetary penalties, as well as rescission rights if appropriate
disclosures were not given as required. See "Risk Factors--Risk of Loss" in this
prospectus supplement and "Material Legal Aspects of Home Equity Loans and
Related Matters--Anti-Deficiency Legislation and Other Limitations on Lenders"
in the prospectus.
No home equity loan provides for deferred interest, negative
amortization or future advances.
With respect to each home equity loan, the combined LTV ratio will be
the ratio, expressed as a percentage, of:
o the sum of (1) the original principal balance of the home
equity loan and (2) any outstanding principal balance, at the
time of origination of the home equity loan, of all other
mortgage loans, if any, secured by senior or subordinate liens
on the related mortgaged property, divided by
o the appraised value, a Statistical Valuation or the Stated
Value.
The appraised value for any home equity loan will be the appraised
value of the related mortgaged property determined in the appraisal used in the
origination of the home equity loan, which may have been obtained at an earlier
time; provided that if the home equity loan was originated simultaneously with
or not more than 12 months after a senior lien on the related mortgaged
property, the appraised value shall be the lesser of the appraised value at the
origination of the senior lien and the sales price for the mortgaged property.
__% of the home equity loans were originated under full documentation
underwriting programs.
HOME EQUITY LOANS
None of the home equity loans were originated prior to ____________ or
has a maturity date later than ____________. No home equity loan has a remaining
term to stated maturity as of the statistical cut-off date of less than __
months. The weighted average remaining term to stated maturity of the home
equity loans as of the statistical cut-off date is approximately __ months. The
weighted average original term to stated maturity of the home equity loans as of
the statistical cut-off date is approximately _____ months.
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<PAGE> 23
<TABLE>
<CAPTION>
ORIGINAL TERM
TYPE OF TO MATURITY WEIGHTED AVERAGE REMAINING PERCENT OF HOME
HOME EQUITY LOAN (IN YEARS) TERM TO STATED MATURITY (IN MONTHS) EQUITY LOANS
- -------------------------- -------------------- ---------------------------------- -------------------------
<S> <C> <C> <C>
Fully Amortizing 5 %
Fully Amortizing 10 %
Fully Amortizing 15 %
Fully Amortizing 20 %
Fully Amortizing 25 %
Fully Amortizing 30 %
Balloon 15 %
</TABLE>
Below is a description of some additional characteristics of the home
equity loans as of the statistical cut-off date, unless otherwise indicated.
Unless otherwise specified, all principal balances of the home equity loans are
approximate percentages by aggregate principal balance of the home equity loans
as of the statistical cut-off date and are rounded to the nearest dollar.
ORIGINAL HOME EQUITY LOAN PRINCIPAL BALANCES OF THE HOME EQUITY LOANS
<TABLE>
<CAPTION>
STATISTICAL
NUMBER OF HOME CUT-OFF DATE PERCENT OF HOME
ORIGINAL HOME EQUITY LOAN PRINCIPAL BALANCES EQUITY LOANS BALANCE EQUITY LOANS
- -------------------------------------------- -------------- ------------ ---------------
<S> <C> <C> <C>
$ -- $ $ %
$ -- $ $ %
$ -- $ $ %
$ -- $ $ %
$ -- $ $ %
$ -- $ $ %
$ -- $ $ %
$ -- $ $ %
$ -- $ $ %
-------------- ------------ ---------------
GREATER THAN $
TOTAL............................................ $ %
============== ============ ===============
</TABLE>
AS OF THE STATISTICAL CUT-OFF DATE, THE AVERAGE UNPAID PRINCIPAL
BALANCE OF THE HOME EQUITY LOANS WAS APPROXIMATELY $_____.
S-21
`
<PAGE> 24
INTEREST RATES OF THE HOME EQUITY LOANS
<TABLE>
<CAPTION>
STATISTICAL
NUMBER OF HOME CUT-OFF DATE PERCENT OF
INTEREST RATE (%) EQUITY LOANS BALANCE HOME EQUITY LOANS
- ---------------------------------------------------- -------------- ------------ -----------------
<S> <C> <C> <C>
-- $ %
-- $ %
-- $ %
-- $ %
-- $ %
-- $ %
-- $ %
-- $ %
-- $ %
-- $ %
</TABLE>
AS OF THE STATISTICAL CUT-OFF DATE, THE WEIGHTED AVERAGE INTEREST RATE
OF THE HOME EQUITY LOANS WAS APPROXIMATELY _____% PER ANNUM.
ORIGINAL COMBINED LTV RATIOS OF THE HOME EQUITY LOANS
<TABLE>
<CAPTION>
STATISTICAL
NUMBER OF HOME CUT-OFF DATE PERCENT OF
COMBINED LTV RATIO (%) EQUITY LOANS BALANCE HOME EQUITY LOANS
- ---------------------------------------------------- -------------- ------------ -----------------
<S> <C> <C> <C>
-- $ %
-- $ %
-- $ %
-- $ %
-- $ %
-- $ %
-- $ %
-- $ %
-- $ %
-- $ %
-------------- ------------ -----------------
TOTAL........................................... $
============== ============ =================
</TABLE>
THE WEIGHTED AVERAGE ORIGINAL COMBINED LTV RATIO OF THE HOME EQUITY
LOANS WAS APPROXIMATELY __% AS OF THE STATISTICAL CUT-OFF DATE.
S-22
<PAGE> 25
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES OF THE HOME EQUITY LOANS
<TABLE>
<CAPTION>
STATISTICAL
NUMBER OF HOME CUT-OFF DATE PERCENT OF
STATE EQUITY LOANS BALANCE HOME EQUITY LOANS
- ----- -------------- --------------- ------------------
<S> <C> <C> <C>
[--------] ......................................... $ %
[--------] ......................................... $ %
[--------] ......................................... $ %
[--------] ......................................... $ %
[--------] ......................................... $ %
[--------] ......................................... $ %
-------------- --------------- ------------------
TOTAL .......................................... $ %
============== =============== ==================
</TABLE>
MORTGAGED PROPERTY TYPES OF THE HOME EQUITY LOANS
<TABLE>
<CAPTION>
STATISTICAL
NUMBER OF HOME CUT-OFF DATE PERCENT OF
PROPERTY EQUITY LOANS BALANCE HOME EQUITY LOANS
- -------- -------------- --------------- ------------------
<S> <C> <C> <C>
_______________ .................................... $ %
_______________ .................................... $ %
_______________ .................................... $ %
_______________ .................................... $ %
_______________ .................................... $ %
_______________ .................................... $ %
_______________ .................................... $ %
_______________ .................................... $ %
-------------- --------------- ------------------
TOTAL .......................................... $ %
============== =============== ==================
</TABLE>
LIEN PRIORITY OF THE HOME EQUITY LOANS
<TABLE>
<CAPTION>
STATISTICAL
NUMBER OF HOME CUT-OFF DATE PERCENT OF
LIEN PROPERTY EQUITY LOANS BALANCE HOME EQUITY LOANS
- ------------- -------------- --------------- ------------------
<S> <C> <C> <C>
First Lien ......................................... $ %
SECOND LIEN ........................................
THIRD LIEN .........................................
-------------- --------------- ------------------
TOTAL .......................................... $ %
============== =============== ==================
</TABLE>
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<PAGE> 26
REMAINING TERM OF SCHEDULED MATURITY OF THE HOME EQUITY LOANS
<TABLE>
<CAPTION>
STATISTICAL
NUMBER OF HOME CUT-OFF DATE PERCENT OF
MONTHS REMAINING TO SCHEDULED MATURITY EQUITY LOANS BALANCE HOME EQUITY LOANS
- ------------------------------------------------- -------------- ------------ -----------------
<S> <C> <C> <C>
$ %
$ %
$ %
$ %
$ %
$ %
</TABLE>
THE WEIGHTED AVERAGE REMAINING TERM TO MATURITY OF THE HOME EQUITY
LOANS AS OF THE STATISTICAL CUT-OFF DATE WAS APPROXIMATELY ___ MONTHS.
YEAR OF ORIGINATION OF THE HOME EQUITY LOANS
<TABLE>
<CAPTION>
STATISTICAL
NUMBER OF CUT-OFF DATE PERCENT OF
YEAR OF ORIGINATION HOME EQUITY LOANS BALANCE HOME EQUITY LOANS
- ---------------------------------------------- --------------------- --------------- -------------------
<S> <C> <C> <C>
$ %
$ %
$ %
$ %
$ %
--------------------- --------------- -------------------
TOTAL......................................... $ %
===================== =============== ===================
</TABLE>
UNDERWRITING STANDARDS
The following is a brief description of HFC's underwriting procedures
for full documentation loan programs. All home equity loan applications received
by HFC or its subsidiaries are subjected to a direct credit investigation by the
related seller. This investigation generally includes:
o obtaining and reviewing an independent credit bureau report;
o verifying any senior mortgage balance and payment history,
which may be obtained from credit bureau information provided
it has been updated within two months of the application or,
if not, is obtained in writing or by telephone from the holder
of any senior mortgage;
o verification of employment, which normally includes obtaining
a W-2 form or pay stub, a minimum of two years of tax returns
for self-employed individuals, or other written or telephone
verification with employers;
o obtaining a title search, depending on the amount financed, to
ensure that all liens, except for any existing senior mortgage
liens, are paid off prior to, or at the time of, the funding
of the home equity loan; and
S-24
<PAGE> 27
o obtaining an appraisal (which may be an appraisal using a
statistical data base) of the property, which must be
substantiated by sales data on three comparable properties.
After this investigation is conducted, a decision is made to accept or
reject the loan application. Generally, all prospective borrowers must have a
debt-to-income ratio of no greater than 45%, but such requirement may be waived
by senior management. In no event may the debt-to-income ratio exceed 60%. For
purposes of calculating the debt-to-income ratio, debt is defined as the sum of
the senior mortgage payment, including escrow payments for the hazard insurance
premium, real estate taxes, mortgage insurance premium, owners association dues
and ground rents, plus payments on installment and revolving debt that extends
beyond 10 months, and alimony, child support or maintenance payments, and income
is defined as stable monthly gross income from the borrower's primary source of
employment, plus acceptable secondary income. An acceptable combined LTV ratio
is also a function of the real estate's quality, condition, appreciation history
and prospective marketing conditions; however, the combined LTV ratio generally
may not exceed 110%.
OPTIONAL PURCHASE OF DEFAULTED HOME EQUITY LOANS
Under the pooling and servicing agreement, the master servicer will
have the option to purchase from the trust any home equity loan that is __ days
or more delinquent at a purchase price equal to the unpaid principal balance of
the home equity loan plus its accrued interest.
THE SUBSERVICERS
The home equity loans will be subserviced by the related seller, if an
affiliate of HFC, on behalf of HFC as master servicer. The master servicer will
be entitled to retain, on behalf of itself and the subservicers, the servicing
fee.
THE MASTER SERVICER
HFC will be responsible for master servicing the home equity loans.
Responsibilities of HFC will include the receipt of funds from subservicers, the
reconciliation of servicing activity, investor reporting and remittances to the
trustee to accommodate distributions to certificateholders. HFC is not required
to make advances relating to delinquent payments of principal and interest on
the home equity loans.
For information regarding foreclosure procedures, see "Description of
the Certificates--Realization Upon Defaulted Home Equity Loans" in the
prospectus. Servicing and charge-off policies and collection practices may
change over time in accordance with HFC's business judgment, changes in HFC's
portfolio of real estate secured home equity loans that it services for its
clients and applicable laws and regulations, and other considerations.
DELINQUENCY AND LOSS EXPERIENCE OF THE MASTER SERVICER'S PORTFOLIO
The following tables summarize the delinquency and loss experience for
all retail originated closed-end home equity loans originated or acquired by the
United States retail operations of HFC, including loans sold with servicing
performed by HFC and its subsidiaries and real estate acquired through
foreclosures, but excluding the retail operations of Beneficial Corporation, an
affiliate of HFC. The data presented in the following tables are for
illustrative purposes only, and there is no assurance that the delinquency and
loss experience of the home equity loans will be similar to that described
below.
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As used in this prospectus supplement, a loan is considered to be "30
to 59 days" or "30 or more days" delinquent when a payment due on any due date
remains unpaid as of the close of business on the next following monthly due
date. However, since the determination as to whether a loan falls into this
category is made as of the close of business on the last business day of each
month, a loan with a payment due on July 1 that remained unpaid as of the close
of business on July 31 would still be considered current as of July 31. If that
payment remained unpaid as of the close of business on August 31, the loan would
then be considered to be 30 to 59 days delinquent. Delinquency information
presented in this prospectus supplement as of the statistical cut-off date is
determined and prepared as of the close of business on the last business day
immediately prior to the statistical cut-off date.
There can be no assurance that the delinquency experience described
below will be representative of the results that may be experienced with respect
to the home equity loans serviced by HFC.
[INSERT DELINQUENCY TABLES HERE]
ADDITIONAL INFORMATION
The description in this prospectus supplement of the home equity loan
pool and the mortgaged properties is based upon the home equity loan pool as
constituted at the close of business on the statistical cut-off date. Prior to
the issuance of the offered certificates, home equity loans may be removed from
the home equity loan pool as a result of incomplete documentation or otherwise,
if the depositor deems the removal necessary or appropriate. A limited number of
other home equity loans may be added to the home equity loan pool prior to the
issuance of the certificates offered by this prospectus supplement. The
depositor believes that the information in this prospectus supplement will be
substantially representative of the characteristics of the home equity loan pool
as it will be constituted at the time the certificates offered hereby are
issued. The range of interest rates and maturities and some other
characteristics of the home equity loans in the home equity loan pool may vary.
However, no more than five percent (5%) of the home equity loans, as they are
constituted as of the statistical cut-off date, by aggregate principal balance
as of the statistical cut-off date will have characteristics that deviate from
those characteristics described herein.
A current report on Form 8-K will be available to purchasers of the
certificates offered hereby and will be filed, together with the pooling and
servicing agreement, with the SEC within fifteen days after the initial issuance
of the certificates.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Closed-End Home Equity Loan Asset Backed Certificates, Series
______ will include the following ______ classes of Class A Certificates and
______ classes of Class IO Certificates:
o Class A-1 Certificates
o Class A-2 Certificates or the Lockout Certificates; and
together with the Class A-1 Certificates, the Class A
Certificates; and
o Class IO Certificates or the Fixed Strip Certificates.
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In addition to the offered certificates, the Closed-End Home Equity
Loan Asset Backed Certificates, Series ______ will include a single class of
subordinate certificates which are designated as the Class R Certificates, the
Residual Certificates. Only the Class A Certificates and the Class IO
Certificates are offered by this prospectus supplement.
The certificates will evidence the entire beneficial ownership interest
in the trust. The trust will consist of:
o the home equity loans;
o the assets as from time to time that are identified as
deposited in respect of the home equity loans in the
Collection Account and belonging to the trust;
o property acquired by foreclosure of the home equity loans or
deed in lieu of foreclosure;
o any applicable insurance policies;
o the policy;
o all proceeds of the foregoing; and
o the voting stock of HFC Revolving Corporation.
The Class A Certificates will be issued in minimum denominations of
$__________, or a $2,000,000 Notional Amount, in the case of the Fixed Strip
Certificates $_________ and integral multiples of $__ in excess thereof.
BOOK-ENTRY REGISTRATION OF THE OFFERED CERTIFICATES
General. Holders of the offered certificates, so long as the offered
certificates are registered in the name of Cede & Co., are collectively referred
to as the DTC registered certificateholders. The DTC registered
certificateholders may elect to hold their DTC registered certificates through
DTC in the United States, or Cedelbank, formerly Cedel Bank, societe anonyme, a
professional depository which holds securities for its participating
organizations, or Cedel customers, or Euroclear in Europe, if they are Euroclear
participants or Cedel customers, as applicable, of their systems, or indirectly
through organizations which are participants or customers, as applicable, in
their systems.
The DTC registered certificates will be issued in one or more
securities which equal the aggregate Certificate Principal Balance or Notional
Amount of the DTC registered certificates and will initially be registered in
the name of Cede & Co., the nominee of DTC. Cedelbank and Euroclear will hold
omnibus positions on behalf of their participants through customers' securities
accounts in Cedelbank's and Euroclear's names on the books of their respective
depositaries, in those capacities, individually referred to as the relevant
depositary and collectively referred to as the European depositaries, which in
turn will hold these positions in customers' securities accounts in the
depositories' names on the books of DTC. Except as described below, no DTC
registered certificateholder will be entitled to receive a physical certificate
in fully registered form, or a definitive certificate, representing that
security. Unless and until definitive certificates are issued for the DTC
registered certificates under the limited circumstances described in this
prospectus supplement, all references to actions by certificateholders with
respect to the DTC registered certificates shall refer to
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<PAGE> 30
actions taken by DTC upon instructions from its participants, and all references
in this prospectus supplement to distributions, notices, reports and statements
to certificateholders with respect to the DTC registered certificates shall
refer to distributions, notices, reports and statements to DTC or Cede & Co., as
the registered holder of the DTC registered certificates, for distribution to
beneficial owners by DTC in accordance with DTC procedures. DTC registered
certificateholders will not be "Holders" as that term is used in the pooling and
servicing agreement.
The DTC registered certificateholder's ownership of a DTC registered
certificate will be recorded on the records of the brokerage firm, bank, thrift
institution or other financial intermediary that maintains the DTC registered
certificateholder's account for that purpose. In turn, the financial
intermediary's ownership of the DTC registered certificates will be recorded on
the records of DTC, or of a firm that is a participant and acts as agent for the
financial intermediary, whose interest will in turn be recorded on the records
of DTC, if the DTC registered certificateholder's financial intermediary is not
a DTC participant and on the records of Cedelbank or Euroclear, as appropriate.
DTC registered certificateholders will receive all payments of
principal and interest on the DTC registered certificates from the trustee
through DTC and DTC participants. While the DTC registered certificates are
outstanding , except under the circumstances described below, under the rules,
regulations and procedures creating and affecting DTC and its operations, DTC is
required to make book-entry transfers among participants on whose behalf it acts
with respect to the DTC registered certificates and is required to receive and
transmit payments of principal and interest on the DTC registered certificates.
Participants and indirect participants with whom DTC registered
certificateholders have accounts with respect to DTC registered certificates are
similarly required to make book-entry transfers and receive and transmit the
payments on behalf of their respective DTC registered certificateholders.
Accordingly, although DTC registered certificateholders will not possess
physical certificates, the rules provide a mechanism by which DTC registered
certificateholders will receive payments and will be able to transfer their
interest.
Unless and until definitive certificates are issued, DTC registered
certificateholders who are not participants may transfer ownership of DTC
registered certificates only through participants and indirect participants by
instructing the participants and indirect participants to transfer the DTC
registered certificates, by book-entry transfer, through DTC for the account of
the purchasers of the DTC registered certificates, which account is maintained
with their respective participants. Under the rules and in accordance with DTC's
normal procedures, transfers of ownership of DTC registered certificates will be
executed through DTC and the accounts of the respective participants at DTC will
be debited and credited. Similarly, the participants and indirect participants
will make debits or credits, as the case may be, on their records on behalf of
the selling and purchasing DTC registered certificateholders.
Under a book-entry format, DTC registered certificateholders of the DTC
registered certificates may experience some delay in their receipt of payments,
since the payments will be forwarded by the trustee to Cede & Co. Payments with
respect to DTC registered certificates held through Cedelbank or Euroclear will
be credited to the cash accounts of Cedelbank customers or Euroclear
participants in accordance with the relevant system's rules and procedures, to
the extent received by the relevant depositary. The payments will be subject to
tax reporting in accordance with relevant United States tax laws and
regulations. Because DTC can only act on behalf of financial intermediaries, the
ability of a DTC registered certificateholder to pledge DTC registered
certificates to persons or entities that do not participate in the Depositary
system, or otherwise take actions relating to the DTC registered certificates,
may be limited due to the lack of physical certificates for the DTC registered
certificates. In addition, issuance of the DTC registered certificates in
book-entry form may
S-28
<PAGE> 31
reduce the liquidity of the DTC registered certificates in the secondary market
since some potential investors may be unwilling to purchase securities for which
they cannot obtain physical certificates.
DTC has advised the trustee that, unless and until definitive
certificates are issued, DTC will take any action permitted to be taken by the
holders of the DTC registered certificates under the pooling and servicing
agreement only at the direction of one or more financial intermediaries to whose
DTC accounts the DTC registered certificates are credited, to the extent that
the actions are taken on behalf of financial intermediaries whose holdings
include the DTC registered certificates. Cedelbank or the Euroclear operator, as
the case may be, will take any other action permitted to be taken by holders of
DTC registered certificates under the pooling and servicing agreement on behalf
of a Cedelbank customer or Euroclear participant only in accordance with its
relevant rules and procedures and subject to the ability of the relevant
depositary to effect the actions on its behalf through DTC. DTC may take
actions, at the direction of the related participants, with respect to some DTC
registered certificates which conflict with actions taken with respect to other
DTC registered certificates.
Definitive certificates will be issued to DTC registered
certificateholders of the DTC registered certificates, or their nominees, rather
than to DTC, if:
o the trustee determines that the DTC is no longer willing,
qualified or able to discharge properly its responsibilities
as nominee and depository with respect to the DTC registered
certificates and the trustee is unable to locate a qualified
successor;
o the trustee elects to terminate a book-entry system through
DTC; or
o after the occurrence of an event of default, under the pooling
and servicing agreement, DTC registered certificateholders of
any class aggregating at least a majority of the outstanding
voting rights of the DTC registered certificates advise DTC
through the financial intermediaries and DTC participants in
writing that the continuation of a book-entry system through
DTC, or a successor thereto, is no longer in the best
interests of the DTC registered certificateholders.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the trustee will be required to notify all DTC registered
certificateholders of the occurrence of the event and the availability through
DTC of definitive certificates. Upon surrender by DTC of the global certificate
or certificates representing the DTC registered certificates and instructions
for re-registration, the trustee will issue and authenticate definitive
certificates, and thereafter the trustee will recognize the holders of the
definitive certificates as holders under the pooling and servicing agreement.
Although DTC, Cedelbank and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of DTC registered certificates among
participants of DTC, Cedelbank and Euroclear, they are under no obligation to
perform or continue to perform the procedures and the procedures may be
discontinued at any time. See Annex I hereto and "Description of the
Certificates--Form of Certificates" in the prospectus.
DTC has advised the depositor that management of DTC is aware that some
computer applications, systems and the like for processing data that are
dependent upon calendar dates, including dates before, on and after January 1,
2000, may encounter Y2K problems. DTC has informed its participants and other
members of the financial community that it has developed and is implementing a
program so that its systems, as they relate to DTC services continue to function
appropriately. This
S-29
<PAGE> 32
program includes a technical assessment and a remediation plan, each of which is
complete. Additionally, DTC's plan includes a testing phase, which, DTC has
advised the industry, is expected to be completed within appropriate time
frames.
However, DTC's ability to perform properly its services is also
dependent upon other parties, including but not limited to issuers and their
agents, as well as DTC's participants and third party vendors from whom DTC
licenses software and hardware, and third party vendors on whom DTC relies for
information or the provision of services, including telecommunication and
electrical utility service providers, among others. DTC has informed the
industry that it is contacting and will continue to contact third party vendors
from whom DTC acquires services to
o impress upon them the importance of those services being Y2K
compliant; and
o determine the extent of their efforts for Y2K remediation and,
as appropriate, testing of their services. In addition, DTC is
in the process of developing any contingency plans as it deems
appropriate.
According to DTC, the foregoing information with respect to DTC has
been provided to the industry for informational purposes only and is not
intended to serve as a representation, warranty or contract modification of any
kind.
None of the depositor, the master servicer or the trustee will have any
liability for any actions taken by DTC or its nominee, including, without
limitation, actions for any aspect of the records relating to or payments made
on account of beneficial ownership interests in the DTC registered certificates
held by Cede & Co., as nominee for DTC, or for maintaining, supervising or
reviewing any records relating to the beneficial ownership interests.
For additional information regarding DTC and the DTC registered
certificates, see "Description of the Certificates--Form of Certificates" in the
prospectus.
DISTRIBUTIONS
Distributions on the certificates will be made by the trustee on the
____ day of each month or, if that day is not a business day, then the next
succeeding business day, commencing in _______. Distributions on the
certificates will be made to the persons in whose names the certificates are
registered at the close of business on the day prior to each distribution date
or, if the certificates are no longer DTC registered certificates, on the record
date. See "Description of the Certificates--Distributions" in the prospectus.
Distributions will be made by check or money order mailed, or upon the request
of a certificateholder owning certificates having denominations, by principal
balance or notional amount, aggregating at least $__________, by wire transfer
or otherwise, to the address of the person entitled to the distribution, which,
in the case of DTC registered certificates, will be DTC or its nominee, as it
appears on the trustee's register in amounts calculated as described in this
prospectus supplement on the determination date. However, the final distribution
relating to the certificates will be made only upon presentation and surrender
thereof at the office or the agency of the trustee specified in the notice to
certificateholders of the final distribution. A business day is any day other
than:
o a Saturday or Sunday; or
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o a day on which banking institutions in the State of New York,
Illinois or _________ are required or authorized by law to be
closed.
AVAILABLE DISTRIBUTION AMOUNT
The master servicer may elect to treat unscheduled collections, not
including borrower prepayments, as amounts included in the Available
Distribution Amount for the distribution date in the month of receipt, but is
not obligated to do so. As described in this prospectus supplement under
"--Principal Distributions," any amount with respect to which this election is
so made shall be treated as having been received on the last day of the related
collection period for the purposes of calculating the amount of principal and
interest distributions to any class of certificates. With respect to any
distribution date, the collection period is the calendar month preceding the
month in which that distribution date occurs.
INTEREST DISTRIBUTIONS
Holders of each class of offered certificates will be entitled to
receive interest distributions in an amount equal to the Accrued Certificate
Interest on that class on each distribution date to the extent described in this
prospectus supplement.
Prepayment Interest Shortfalls will result because interest on
prepayments in full is distributed only to the date of prepayment, and because
no interest is distributed on prepayments in part, as these prepayments in part
are applied to reduce the outstanding principal balance of the related home
equity loans as of the due date in the month of prepayment. However, with
respect to any distribution date, any Prepayment Interest Shortfalls during the
related collection period will be offset first by Excess Cash Flow to the extent
available and then by the policy.
The pass-through rates on all classes of offered certificates are fixed
and are listed on page S- __ hereof. The pass-through rates on all classes of
the Class A Certificates will increase by __% per annum for each distribution
date after the third distribution date on which the master servicer and the
depositor are permitted to exercise their option to purchase the home equity
loans from the trust as described under "Pooling and Servicing
Agreement--Termination," in this prospectus supplement. Notwithstanding the
foregoing, the pass-through rates on the Class A Certificates will not increase
as described above if proceeds for optional termination are available for
payment to the certificateholders on or prior to any distribution date. The
holders of the Fixed Strip Certificates will not be entitled to any
distributions of principal and will not be entitled to any distributions of
interest after the distribution date in _________.
PRINCIPAL DISTRIBUTIONS
Holders of the Class A Certificates will be entitled to receive on each
distribution date, in the priority described in this prospectus supplement and
to the extent of the portion of the Available Distribution Amount remaining
after the Senior Interest Distribution Amount for that distribution date is
distributed, the Class A Principal Distribution Amount.
On any distribution date, if:
o Realized Losses, other than Excess Loss Amounts, have occurred
during the related collection period that are not covered by
the Realized Loss Distribution Amount or the Outstanding
Overcollateralization Amount, or
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<PAGE> 34
o there is an Excess Loss Amount with respect to that
distribution date
a draw will be made on the policy and these amounts will be distributed to the
Class A
Certificateholders on that distribution date, in reduction of the Certificate
Principal Balances thereof, in the manner described below. In addition, if on
the distribution date in _______, the aggregate Stated Principal Balance of the
home equity loans is less than the aggregate Certificate Principal Balance of
the Certificates, after giving effect to distributions to be made on that
distribution date, the amount of the deficiency, or the undercollateralization
amount, will be drawn on the policy and will be distributed to the Class A
Certificateholders on that distribution date, in reduction of its Certificate
Principal Balances, in the manner described below.
On each distribution date, the credit enhancer shall be entitled to
receive, after payment to the Senior Certificateholders of the Senior Interest
Distribution Amount and the Class A Principal Distribution Amount for the
certificates, as applicable, for that distribution date ,but before application
of any Overcollateralization Increase Amount, from the Excess Cash Flow after
Prepayment Interest Shortfalls and some Realized Losses are allocated thereto,
the sum of:
o the premium payable to the credit enhancer with respect to the
policy on that distribution date and any previously unpaid
premiums with respect to the policy, together with its
interest, and
o the cumulative insurance payments by the credit enhancer under
the policy to the extent not previously reimbursed, plus its
interest.
On each distribution date, the amount of the premium payable to the
credit enhancer with respect to the policy is equal to one-twelfth of the
product of a percentage specified in the insurance and indemnity agreement,
dated ________, among the credit enhancer, the depositor, the master servicer
and the trustee, and the Certificate Principal Balance of the Class A
Certificates.
Distributions of principal on the Class A Certificates on each
distribution date will be made after distribution of the Senior Interest
Distribution Amount as described under "--Interest Distributions" above. The
Class A Principal Distribution Amount plus any amount drawn on the policy
relating to principal shall be distributed in accordance with the priorities
described below, until its Certificate Principal Balances have been reduced to
zero.
The Class A Principal Distribution Amount plus any amount drawn on the
policy relating to principal distributable to the Class A Certificates shall be
distributed as follows:
1. first, to the Lockout Certificates, in reduction of its
Certificate Principal Balance, an amount equal to the Lockout
Distribution Percentage of the Class A Principal Distribution
Amount distributable to the Class A Certificates, until its
Certificate Principal Balance has been reduced to zero;
2. second, to the Class A-1 Certificates, until its Certificate
Principal Balance has been reduced to zero; and
3. third, to the Lockout Certificates, until its Certificate
Principal Balance has been reduced to zero.
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<PAGE> 35
The master servicer may elect to treat Insurance Proceeds, Liquidation
Proceeds and other unscheduled collections, not including prepayments by the
borrowers, received in any calendar month as included in the Available
Distribution Amount and the Class A Principal Distribution Amount for the
distribution date in the month of receipt, but is not obligated to do so. If the
master servicer so elects, these amounts will be deemed to have been received,
and any related Realized Loss shall be deemed to have occurred, on the last day
of the month prior to its receipt.
OVERCOLLATERALIZATION PROVISIONS
On each distribution date, Excess Cash Flow, if any, is applied on that
distribution date as an accelerated payment of principal on the Class A
Certificates, but only in the manner and to the extent hereafter described. The
Excess Cash Flow for any distribution date will derive primarily from the amount
of interest collected on the home equity loans in excess of the sum of:
o the Senior Interest Distribution Amount,
o the premium payable on the policy and
o accrued servicing fees,
in each case relating to that distribution date. Excess Cash Flow will be
applied on any distribution date; first, to pay Prepayment Interest Shortfalls;
second, to pay the Realized Loss Distribution Amount for that distribution date;
third, to the payment of the premium fee with respect to that distribution date
and any previous distribution date, to the extent not previously paid, together
with its interest; fourth, to the payment of cumulative insurance payments plus
its interest; fifth, to pay any Overcollateralization Increase Amount; sixth, to
pay some other reimbursement amounts owed to the credit enhancer; and last, to
pay to the holder of the Class R Certificates.
The Excess Cash Flow, to the extent available as described above, will
be applied as an accelerated payment of principal on the Class A Certificates to
the extent that the Overcollateralization Amount Target exceeds the Outstanding
Overcollateralization Amount as of that distribution date.
As to any distribution date prior to the distribution date in ________,
the Overcollateralization Amount Target will be __% of the aggregate cut-off
date balance. As to any distribution date on or after the distribution date in
_________, the Overcollateralization Amount Target will be equal to the lesser
of:
o the Overcollateralization Amount Target as of the cut-off date
and
o __% of the aggregate Stated Principal Balance of the home
equity loans immediately preceding that distribution date,
but not lower than $________, __% of the aggregate cut-off date balance, plus
__% of the outstanding Stated Principal Balance of all of the home equity loans
that are 90 or more days delinquent as of that distribution date; provided,
however, that any scheduled reduction to the Overcollateralization Amount Target
described above shall not be made as of any distribution date unless:
o the outstanding Stated Principal Balance of the home equity
loans delinquent 90 days or more averaged over the last six
months as a percentage of the aggregate outstanding
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<PAGE> 36
Stated Principal Balance of all the home equity loans averaged
over the last six months does not exceed __%,
o the aggregate cumulative Realized Losses on the home equity
loans prior to any distribution date occurring during the
first year and the second year, or any year thereafter, after
the distribution date in ______ are less than __% and __%,
respectively, of the aggregate cut-off date balance and
o there has been no draw on the policy on that distribution date
that remains unreimbursed.
In addition, the Overcollateralization Amount Target may be reduced with the
prior written consent of the credit enhancer and the rating agencies.
In the event that the Overcollateralization Amount Target is permitted
to decrease or "step down" on a distribution date in the future, a portion of
the principal which would otherwise be distributed to the holders of the Class A
Certificates on that distribution date shall not be distributed to the holders
of the Class A Certificates on that distribution date. This has the effect of
decelerating the amortization of the Class A Certificates relative to the
amortization of the home equity loans, and of reducing the Outstanding
Overcollateralization Amount. If, on any distribution date, the Excess
Overcollateralization Amount is, or, after taking into account all other
distributions to be made on that distribution date would be, greater than zero,
i.e., the Outstanding Overcollateralization Amount is or would be greater than
the related Overcollateralization Amount Target, then any amounts relating to
principal which would otherwise be distributed to the holders of the Class A
Certificates on that distribution date shall instead be distributed to the
holders of the Class R Certificates in an amount equal to the
Overcollateralization Reduction Amount.
The aggregate cut-off date balance will be $_______ less than the
aggregate Certificate Principal Balance of the certificates. If, on the
distribution date in _____, after application of the Class A Principal
Distribution Amount and any amounts drawn on the policy to be distributed on
that distribution date, the Stated Principal Balance of the home equity loans
would be less than the Certificate Principal Balance of the Class A
Certificates, the credit enhancer will be required to deposit in the Certificate
Account the amount of that difference, unless available funds are on deposit in
the Certificate Account. These funds will be distributed to the Class A
Certificateholders entitled to receive a distribution of principal on that
distribution date, in proportion to the amount of the Class A Principal
Distribution Amount payable to the certificateholders on that distribution date,
in reduction of the their Certificate Principal Balances.
EXCESS LOSS AMOUNTS
Excess Loss Amounts will not be covered by any Realized Loss
Distribution Amount or by a reduction in the Outstanding Overcollateralization
Amount. Any Excess Loss Amounts, however, will be covered by the policy, and in
the event payments are not made as required under the policy, these losses will
be allocated to the certificates pro rata based on their outstanding Certificate
Principal Balances.
With respect to any defaulted home equity loan that is finally
liquidated, through foreclosure sale, disposition of the related mortgaged
property if acquired on behalf of the certificateholders by deed in lieu of
foreclosure, or otherwise, the amount of loss realized, if any, will equal the
portion of the Stated Principal Balance remaining, if any, plus its interest
through the last day of the month in
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which that home equity loan was finally liquidated, after application of all
amounts recovered, net of amounts reimbursable to the master servicer or the
subservicer for expenses, including attorneys' fees, towards interest and
principal owing on the home equity loan.
CERTIFICATE GUARANTY INSURANCE POLICY
On the closing date, __________, the credit enhancer, will issue its
certificate guaranty insurance policy, or policy, in favor of the trustee on
behalf of the certificateholders. The policy will unconditionally and
irrevocably guarantee some payments on the certificates. On each distribution
date, a draw will be made on the policy equal to the sum of:
o the amount by which accrued interest on the certificates at
the respective pass-through rates for that distribution date
exceeds the amount on deposit in the Certificate Account
available for interest distributions on that distribution
date,
o any Realized Losses, other than any Excess Loss Amount, for
that distribution date, to the extent not currently covered by
a Realized Loss Distribution Amount or a reduction in the
Outstanding Overcollateralization Amount and
o any Excess Loss Amount for that distribution date.
In addition, on the distribution date in _______, a draw will be made
on the policy to cover the undercollateralization amount, if any, if that amount
is not otherwise available in the Certificate Account.
In addition, the policy will guarantee the payment of the outstanding
Certificate Principal Balance of the certificates on the final distribution
date. In the absence of payments under the policy, certificateholders will
directly bear the credit risks associated with their investment to the extent
these risks are not covered by the Outstanding Overcollateralization Amount or
otherwise.
The policy is being issued under and pursuant to and shall be construed
under, the laws of the State of New York, without giving effect to its conflict
of laws principles.
The policy is not cancelable for any reason. The premium on the policy
is not refundable for any reason including payment, or provision being made for
payment, prior to maturity of the offered certificates.
THE CREDIT ENHANCER
The following information has been supplied by the credit enhancer for
inclusion in this prospectus supplement. No representation is made by the
depositor, ________ or any of their affiliates as to the accuracy or
completeness of this information.
[DESCRIPTION OF CREDIT ENHANCER]
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<PAGE> 38
MATERIAL YIELD AND PREPAYMENT CONSIDERATIONS
GENERAL
The yield to maturity and the aggregate amount of distributions on the
offered certificates will be affected by the rate and timing of principal
payments on the home equity loans and the amount and timing of borrower defaults
resulting in Realized Losses. The rate of default of home equity loans secured
by second liens may be greater than that of home equity loans secured by first
liens. In addition, the yields may be adversely affected by a higher or lower
than anticipated rate of principal payments on the home equity loans in the
trust. The rate of principal payments on the home equity loans will in turn be
affected by the amortization schedules of the home equity loans, the rate and
timing of principal prepayments on the home equity loans by the borrowers,
liquidations of defaulted home equity loans and repurchases of home equity loans
due to some breaches of representations.
The timing of changes in the rate of prepayments, liquidations and
repurchases of the home equity loans may, and the timing of Realized Losses
will, significantly affect the yield to an investor, even if the average rate of
principal payments experienced over time is consistent with an investor's
expectation. Since the rate and timing of principal payments on the home equity
loans will depend on future events and on a variety of factors, as described
more fully in this prospectus supplement and in the prospectus under "Yield and
Prepayment Considerations", no assurance can be given as to the rate or the
timing of principal payments on the Class A Certificates.
A subservicer may allow the refinancing of a home equity loan by
accepting prepayments on the home equity loan and permitting a new loan secured
by a mortgage on the same property, which may be originated by the subservicer
or the master servicer or any of their respective affiliates or by an unrelated
entity. In the event of such a refinancing, the new loan would not be included
in the trust and, therefore, the refinancing would have the same effect as a
prepayment in full of the related home equity loan. A subservicer or the master
servicer may, from time to time, implement refinancing or modification programs
designed to encourage refinancing. The programs may include, without limitation,
modifications of existing loans, general or targeted solicitations, the offering
of pre-approved applications, reduced origination fees or closing costs, or
other financial incentives. Targeted solicitations may be based on a variety of
factors, including the credit of the borrower or the location of the mortgaged
property. In addition, subservicers or the master servicer may encourage
assumptions of home equity loans, including defaulted home equity loans, under
which creditworthy borrowers assume the outstanding indebtedness of those home
equity loans which may be removed from the trust. As a result of these programs,
the rate of principal prepayments of the home equity loans may be higher than
would otherwise be the case, and, in some cases, the average credit or
collateral quality of the home equity loans remaining in the trust may decline.
The home equity loans in most cases may be prepaid by the borrowers at
any time. However, in some circumstances the prepayment of some of the home
equity loans will be subject to a prepayment penalty, which may discourage
borrowers from prepaying their home equity loans during the period during which
the prepayment penalty applies.
Most of the home equity loans contain due-on-sale clauses. As described
under "Description of the Certificates--Principal Distributions" in this
prospectus supplement, during specified periods all or a disproportionately
large percentage of principal collections on the home equity loans will be
allocated among the Class A Certificates, other than the Lockout Certificates,
and during some periods no principal collections or a disproportionately small
portion of principal collections will be distributed on the Lockout
Certificates. Prepayments, liquidations and purchases of the home equity loans
will result
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<PAGE> 39
in distributions to holders of the Class A Certificates of principal amounts
which would otherwise be distributed over the remaining terms of the home equity
loans. Factors affecting prepayment, including defaults and liquidations, of
home equity loans include changes in borrowers' housing needs, job transfers,
unemployment, borrowers' net equity in the mortgaged properties, changes in the
value of the mortgaged properties, mortgage market interest rates, solicitations
and servicing decisions. In addition, if prevailing interest rates fell
significantly below the interest rates on the home equity loans, the rate of
prepayments, including refinancings, would be expected to increase. On the other
hand, if prevailing interest rates rose significantly above the interest rates
on the home equity loans, the rate of prepayments on the home equity loans would
be expected to decrease. Furthermore, since mortgage loans secured by second
liens are not generally viewed by borrowers as permanent financing and generally
carry a high rate of interest, the home equity loans may experience a higher
rate of prepayments than traditional first lien mortgage loans. Prepayment of
the related first lien may also affect the rate of prepayments on the home
equity loans.
The Class A Certificates are subject to various priorities for payment
of principal as described in this prospectus supplement. Distributions of
principal on classes of Class A Certificates having an earlier priority of
payment will be affected by the rates of prepayment of the home equity loans
early in the life of the home equity loan pool. The timing of commencement of
principal distributions and the weighted average lives of classes of Class A
Certificates with a later priority of payment will be affected by the rates of
prepayment of the home equity loans both before and after the commencement of
principal distributions on those classes. In addition, the yield to maturity of
the Class A Certificates will depend on whether, to what extent, and the timing
with respect to which, Excess Cash Flow is used to accelerate payments of
principal on the Class A Certificates or any Overcollateralization Reduction
Amount is released. See "Description of the Certificates--Overcollateralization
Provisions" in this prospectus supplement.
The rate of defaults on the home equity loans will also affect the rate
and timing of principal payments on the home equity loans. In general, defaults
on home equity loans are expected to occur with greater frequency in their early
years. The rate of default of mortgage loans secured by second liens is likely
to be greater than that of mortgage loans secured by traditional first lien
mortgage loans, particularly in the case of mortgage loans with high combined
LTV ratios or low Junior Ratios. Furthermore, the rate and timing of
prepayments, defaults and liquidations on the home equity loans will be affected
by the general economic condition of the region of the country in which the
related mortgaged properties are located. The risk of delinquencies and loss is
greater and prepayments are less likely in regions where a weak or deteriorating
economy exists, as may be evidenced by, among other factors, increasing
unemployment or falling property values. See "Yield and Prepayment
Considerations" in the prospectus. In addition, because borrowers of Balloon
Loans are required to make a relatively large single payment upon maturity, it
is possible that the default risk associated with Balloon Loans is greater than
that associated with fully-amortizing mortgage loans. See "Risk Factors" in this
prospectus supplement.
To the extent that any losses are incurred on any of the home equity
loans that are not covered by the Realized Loss Distribution Amount, a reduction
in the Outstanding Overcollateralization Amount or the policy, holders of the
certificates will bear all risk of the losses resulting from default by
borrowers. Even where the policy covers all losses incurred on the home equity
loans, this coverage may accelerate principal payments on the Class A
Certificates, thus reducing the weighted average life of the Class A
Certificates.
Because the interest rates on the home equity loans and the
pass-through rates on the offered certificates are fixed, the rates will not
change in response to changes in market interest rates.
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<PAGE> 40
Accordingly, if market interest rates or market yields for securities similar to
the offered certificates were to rise, the market value of the offered
certificates may decline.
The rate and timing of principal payments on and the weighted average
lives of the certificates will be affected primarily by the rate and timing of
principal payments, including prepayments, defaults, liquidations and purchases,
on the home equity loans.
Sequentially Paying Classes: The Class A Certificates are subject to
various priorities for payment of principal as described in this prospectus
supplement. Distributions of principal on classes of Class A Certificates having
an earlier priority of payment will be affected by the rates of prepayment of
the home equity loans early in the life of the home equity loan pool. The timing
of commencement of principal distributions and the weighted average lives of
classes of Class A Certificates with a later priority of payment will be
affected by the rates of prepayment of the home equity loans experienced both
before and after the commencement of principal distributions on these classes.
Lockout Certificates: Investors in the Lockout Certificates should be
aware that because the Lockout Certificates do not receive any payments of
principal prior to the distribution date occurring in ________ and prior to the
distribution date occurring in ________ will receive a disproportionately small
portion of payments of principal, unless the Certificate Principal Balances of
the Class A Certificates, other than the Lockout Certificates, have been reduced
to zero, the weighted average lives of the Lockout Certificates will be longer
than would otherwise be the case, and the effect on the market value of the
Lockout Certificates of changes in market interest rates or market yields for
similar securities will be greater than for other classes of certificates
entitled to these distributions. However, beginning with the distribution date
occurring in _______, the Lockout Certificates may receive a disproportionately
large percentage of principal collections until their Certificate Principal
Balance is reduced to zero.
In addition, the yield to maturity on each class of the offered
certificates will depend on, among other things, the price paid by the holders
of the offered certificates and the related pass-through rate. The extent to
which the yield to maturity of an offered certificate is sensitive to
prepayments will depend, in part, upon the degree to which it is purchased at a
discount or premium. In general, if a class of offered certificates is purchased
at a premium and its principal distributions occur at a rate faster than assumed
at the time of purchase, the investor's actual yield to maturity will be lower
than that anticipated at the time of purchase. On the other hand, if a class of
offered certificates is purchased at a discount and principal distributions on
that class of offered certificates occur at a rate slower than that assumed at
the time of purchase, the investor's actual yield to maturity will be lower than
that anticipated at the time of purchase. For additional considerations relating
to the yield on the certificates, see "Yield and Prepayment Considerations" in
the prospectus.
Assumed Final Distribution Date: The assumed final distribution date
with respect to the Class A Certificates is __________,which date is __ months
after the distribution date immediately following the latest scheduled maturity
date for any home equity loan. No event of default, change in the priorities for
distribution among the various classes or other provisions under the pooling and
servicing agreement will arise or become applicable solely by reason of the
failure to retire the entire Certificate Principal Balance of any class of
certificates on or before its assumed final distribution date.
The actual final distribution date with respect to each class of Class
A Certificates could occur significantly earlier than the assumed final
distribution date for that class because:
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<PAGE> 41
o Excess Cash Flow will be used to make accelerated payments of
principal, i.e. Overcollateralization Increase Amounts, to the
holders of the Class A Certificates, which payments will have
the effect of shortening the weighted average lives of the
certificates of each class;
o prepayments are likely to occur, which will also have the
effect of shortening the weighted average lives of the
certificates of each class; and
o the master servicer or the depositor may cause a termination
of the trust when the aggregate Stated Principal Balance of
the home equity loans in the trust is less than ___ of the
aggregate cut-off date balance.
Weighted Average Life: Weighted average life refers to the average
amount of time that will elapse from the date of issuance of a security to the
date of distribution to the investor of each dollar distributed in reduction of
principal of that security, assuming no losses. The weighted average life of the
offered certificates will be influenced by, among other things, the rate at
which principal of the home equity loans is paid, which may be in the form of
scheduled amortization, prepayments or liquidations.
The prepayment model used in this prospectus supplement represents an
assumed rate of prepayment each month relative to the then outstanding principal
balance of a pool of home equity loans. A 100% prepayment assumption assumes a
constant prepayment rate of ____ per annum of the then outstanding principal
balance of the home equity loans in the first month of the life of the home
equity loans and an additional __________ per annum in each month thereafter
until the twelfth month. Beginning in the twelfth month and in each month
thereafter during the life of the home equity loans, a 100% prepayment
assumption assumes a CPR of ____ per annum each month. As used in the table
below, a 50% prepayment assumption assumes prepayment rates equal to 50% of the
prepayment assumption. Correspondingly, a 150% prepayment assumption assumes
prepayment rates equal to 150% of the prepayment assumption, and so forth. The
prepayment assumption does not purport to be a historical description of
prepayment experience or a prediction of the anticipated rate of prepayment of
any pool of home equity loans, including the home equity loans.
The table below entitled "Percent of Initial Principal Balance
Outstanding of the Class A Certificates at the Following Percentages of the
Prepayment Assumption" have been prepared on the basis of some assumptions as
described below regarding the weighted average characteristics of the home
equity loans that are expected to be included in the trust as described under
"Description of the Home Equity Loan Pool" in this prospectus supplement and
their performance. The tables assume, among other things, that:
o as of the date of issuance of the Class A Certificates, the
home equity loans have the following structuring assumptions:
HOME EQUITY LOANS
<TABLE>
<CAPTION>
RANGE OF ORIGINAL TERMS AGGREGATE ORIGINAL TERM REMAINING TERM
TO MATURITY PRINCIPAL TO MATURITY TO MATURITY
(IN YEARS) BALANCE INTEREST RATE (IN MONTHS) (IN MONTHS)
----------------------- --------- ------------- ------------- ---------------
<S> <C> <C> <C> <C>
$ %
$ %
$ %
$ %
$ %
$ %
</TABLE>
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<PAGE> 42
o with respect to each home equity loan, the aggregate servicing
fee rate and policy premium rate will be __% per annum;
o except with respect to the Balloon Loans, the scheduled
monthly payment for each home equity loan has been based on
its outstanding balance, interest rate and remaining term to
maturity, so that the home equity loan will amortize in
amounts sufficient for its repayment over its remaining term
to maturity;
o none of the sellers, the master servicer or the depositor will
repurchase any home equity loan, as described under "HFC Home
Equity Lending Program--Representations and Warranties
Concerning the Home Equity Loans" and "Description of the
Certificates--Assignment of Trust Fund Assets" in the
prospectus, and neither the master servicer nor the depositor
exercises any option to purchase the home equity loans and
thereby cause a termination of the trust;
o there are no delinquencies or Realized Losses on the home
equity loans, and principal payments on the home equity loans
will be timely received together with prepayments, if any, at
the respective constant percentages of the prepayment
assumption described in the table;
o there is no Prepayment Interest Shortfall or any other
interest shortfall in any month;
o payments on the certificates will be received on the ____ day
of each month, commencing ____________;
o payments on the home equity loans earn no reinvestment return;
o there are no additional ongoing trust expenses payable out of
the trust; and
o the certificates will be purchased on ____________.
The actual characteristics and performance of the home equity loans
will differ from the assumptions used in constructing the tables below, which
are hypothetical in nature and is provided only to give a general sense of how
the principal cash flows might behave under varying prepayment scenarios. For
example, it is very unlikely that the home equity loans will prepay at a
constant level of the prepayment assumption until maturity or that all of the
home equity loans will prepay at the same level of the prepayment assumption.
Moreover, the diverse remaining terms to maturity of the home equity loans could
produce slower or faster principal distributions than indicated in the tables at
the various constant percentages of the prepayment assumption specified, even if
the weighted average remaining term to maturity of the home equity loans is as
assumed. Any difference between the assumptions and the actual characteristics
and performance of the home equity loans, or actual prepayment or loss
experience, will affect the percentages of initial Certificate Principal
Balances outstanding over time and the weighted average lives of the classes of
Class A Certificates.
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<PAGE> 43
SUBJECT TO THE FOREGOING DISCUSSION AND ASSUMPTIONS, THE FOLLOWING
TABLES INDICATE THE WEIGHTED AVERAGE LIFE OF EACH CLASS OF CLASS A CERTIFICATES,
AND DESCRIBE THE PERCENTAGES OF THE INITIAL CERTIFICATE PRINCIPAL BALANCE OF
EACH CLASS OF CLASS A CERTIFICATES THAT WOULD BE OUTSTANDING AFTER EACH OF THE
DATES SHOWN AT VARIOUS PERCENTAGES OF THE PREPAYMENT ASSUMPTION.
[INSERT DEC TABLES HERE]
FIXED STRIP CERTIFICATE YIELD CONSIDERATIONS
Investors should note that the Fixed Strip Certificates are only
entitled to distributions prior to the Distribution Date in _________. The yield
to investors on the Fixed Strip Certificates will be extremely sensitive to the
rate and timing of principal payments on the home equity loans, including
prepayments, defaults and liquidations, under some extremely rapid rate of
prepayment scenarios. In addition, if prior to the distribution date in
_________, the master servicer or the depositor effects an optional termination
of the home equity loans, the Fixed Strip Certificates will receive no further
distributions. Investors in the Fixed Strip Certificates should fully consider
the risk that an extremely rapid rate of prepayments on the home equity loans
could result in the failure of these investors to fully recover their
investments.
The following table indicates the sensitivity of the pre-tax yield to
maturity on the Fixed Strip Certificates to various constant rates of prepayment
on the home equity loans by projecting the monthly aggregate payments of
interest on the Fixed Strip Certificates and computing the corresponding pre-tax
yields to maturity on a corporate bond equivalent basis, based on the
structuring assumptions, including the assumptions regarding the characteristics
and performance of the home equity loans which differ from the actual
characteristics and performance thereof and assuming the aggregate purchase
price described below. Any differences between the assumptions and the actual
characteristics and performance of the home equity loans and of the Fixed Strip
Certificates may result in yields being different from those shown in the table.
Discrepancies between assumed and actual characteristics and performance
underscore the hypothetical nature of the table, which is provided only to give
a general sense of the sensitivity of yields in varying prepayment scenarios.
PRE-TAX YIELD TO MATURITY OF THE FIXED STRIP CERTIFICATES
AT THE FOLLOWING PERCENTAGES OF THE PREPAYMENT ASSUMPTION
<TABLE>
<CAPTION>
ASSUMED PURCHASE PRICE % % % %
- ------------------------------------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
% % % %
</TABLE>
Each pre-tax yield to maturity described in the preceding table was
calculated by determining the monthly discount rate which, when applied to the
assumed stream of cash flows to be paid on the Fixed Strip Certificates, would
cause the discounted present value of that assumed stream of cash flows to equal
the assumed purchase price listed in the table. Accrued interest is included in
the assumed purchase price and is used in computing the corporate bond
equivalent yields shown. These yields do not take into account the different
interest rates at which investors may be able to reinvest funds
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<PAGE> 44
received by them as distributions on the Fixed Strip Certificates, and thus do
not reflect the return on any investment in the Fixed Strip Certificates when
any reinvestment rates other than the discount rates are considered.
Notwithstanding the assumed prepayment rates reflected in the preceding
table, it is highly unlikely that the home equity loans will be prepaid
according to one particular pattern. For this reason, and because the timing of
cash flows is critical to determining yields, the pre-tax yield to maturity on
the Fixed Strip Certificates may differ from those shown in the table, even if
all of the home equity loans prepay at the indicated constant percentages of the
prepayment assumption over any given time period or over the entire life of the
certificates.
There can be no assurance that the home equity loans will prepay at any
particular rate or that the yield on the Fixed Strip Certificates will conform
to the yields described in this prospectus supplement. Moreover, the various
remaining terms to maturity of the home equity loans could produce slower or
faster principal distributions than indicated in the preceding table at the
various constant percentages of the prepayment assumption specified, even if the
weighted average remaining term to maturity of the home equity loans is as
assumed. Investors are urged to make their investment decisions based on their
determinations as to anticipated rates of prepayment under a variety of
scenarios. Investors in the Fixed Strip Certificates should fully consider the
risk that an extremely rapid rate of prepayments on the home equity loans could
result in the failure of the investors to fully recover their investments.
For additional considerations relating to the yield on the
certificates, see "Yield and Prepayment Considerations" in the prospectus.
POOLING AND SERVICING AGREEMENT
GENERAL
The certificates will be issued under a pooling and servicing agreement
dated as of ________, among the depositor, the master servicer and the trustee.
Reference is made to the prospectus for important information in addition to
that described in this prospectus supplement regarding the terms and conditions
of the pooling and servicing agreement and the certificates. The trustee, or any
of its affiliates, in its individual or any other capacity, may become the owner
or pledgee of certificates with the same rights as it would have if it were not
trustee. The trustee will appoint _____________ to serve as custodian in
connection with the certificates. The certificates will be transferable and
exchangeable at the corporate trust office of the trustee, which will serve as
certificate registrar and paying agent. The depositor will provide a prospective
or actual certificateholder, without charge, on written request, a copy, without
exhibits, of the pooling and servicing agreement. Requests should be addressed
to Household Finance Corporation, 2700 Sanders Road, Prospect Heights, Illinois
60070. In addition to the circumstances described in the prospectus, the
depositor may terminate the trustee for cause under some circumstances. See "The
Pooling and Servicing Agreement--The Trustee" in the prospectus.
THE MASTER SERVICER
HFC, an affiliate of the depositor, will act as master servicer for the
certificates under the pooling and servicing agreement. HFC and its subsidiaries
have originated closed-end fixed and adjustable rate mortgages since 1972 and
have offered home equity revolving credit loans since 1977. As of June ____,
1999, HFC and its subsidiaries had approximately $____ billion aggregate
principal amount of outstanding closed-end home equity loans and approximately
$____billion aggregate
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<PAGE> 45
principal amount of outstanding home equity revolving credit loans, including
loans sold with servicing performed by HFC and its subsidiaries. As of June 30,
1999, HFC had approximately $________ billion in total assets, approximately
$_______ billion in total liabilities and approximately $_________ billion in
shareholder's equity. For a general description of HFC and its activities, see
"HFC Home Equity Lending Program -- General" in the prospectus and "Description
of the Home Equity Loan Pool--The Master Servicer" in this prospectus
supplement.
POSSESSION OF HOME EQUITY LOAN DOCUMENTS
Under the terms of the pooling and servicing agreement, so long as
HFC's long-term senior unsecured debt is acceptable to the rating agencies and
to the certificate guaranty insurer, subservicers affiliated with HFC will be
entitled to maintain possession of the loan documents with respect to each home
equity loan and will not be required to record assignments of the related
mortgage either to the depositor or any trustee. In the event, however, that
possession of any loan documents is required by the master servicer, the master
servicer will be entitled to request delivery of the loan documents and to
retain them for as long as necessary for servicing purposes. These loan
documents will be returned to the applicable subservicer, unless returned to the
related borrower in connection with the payment in full of the related home
equity loan or when possession of these documents is no longer required by the
master servicer. In the event that HFC does not satisfy the standards set forth
herein or any of the subservicers ceases to be an HFC affiliate, the subservicer
and the depositor will record assignments of the mortgages for each related home
equity loan in favor of the trustee and deliver the loan documents pertaining to
each home equity loan to the trustee, unless opinions of counsel satisfactory to
the trustee, the rating agencies and any credit enhancer are delivered to these
parties to the effect that recordation of the assignments or delivery of loan
documentation is not required in the relevant jurisdiction to protect the
interests of the depositor and the trustee in the home equity loans. Under each
pooling and servicing agreement, the trustee will be appointed attorney-in-fact
for the subservicers and the depositor with power to prepare, execute and record
assignments of the mortgages in the event that the subservicers and the
depositor fail to do so on a timely basis. In lieu of delivery of original
documentation, the master servicer may deliver documents which have been imaged
optically upon delivery of an opinion of counsel that the documents do not
impair the enforceability or the transfer to the trust of the home equity loans.
REVIEW OF THE HOME EQUITY LOANS
In the event the loan documents are required to be delivered to the
trustee, the trustee will in most cases be authorized to appoint one or more
custodians under a custodial agreement to maintain possession and review of
documents relating to the home equity loans as the agent of the trustee. The
custodian will initially be __________.
In the event the loan documents are delivered to the trustee with
regard to any home equity loan, the trustee or the custodian will hold the
documents in trust for the benefit of the certificateholders and, normally will
review the documents within 90 days after receipt. If any document is found to
be defective in any material respect, the trustee or the custodian shall notify
the master servicer and the depositor, and the master servicer, the subservicer
or the trustee shall notify HFC or the seller. If HFC or the seller cannot cure
the defect within 90 days or within any other period specified in the pooling
and servicing agreement, after notice of the defect is given to HFC or the
seller, HFC or the seller is required to, not later than 90 days after that
notice, or within any other period specified in the pooling and servicing
agreement, either repurchase the related home equity loan or any property
acquired in respect of it from the trustee, or if permitted, substitute for that
home equity loan a new home equity loan in accordance with the standards
described in the pooling and servicing agreement. The master servicer will be
obligated to enforce this obligation of HFC or the seller, but the obligation is
subject to the provisions described under "Description of the Certificates
- --Realization Upon Defaulted Home Equity Loans" in the prospectus. There can be
no assurance that
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<PAGE> 46
the applicable seller will fulfill its obligation to purchase any home equity
loan. In most cases, neither HFC, the master servicer nor the depositor will be
obligated to purchase or substitute for the home equity loan if the seller
defaults on its obligation to do so. The obligation to repurchase or substitute
for a home equity loan constitutes the sole remedy available to the
certificateholders or the trustee for a material defect in a constituent
document. Any home equity loan not purchased or substituted for shall remain in
the related trust.
The master servicer will make representations and warranties regarding
its authority to enter into, and its ability to perform its obligations under,
the pooling and servicing agreement. Upon a breach of any of these
representations of the master servicer which materially adversely affect the
interests of the certificateholders in a home equity loan, the master servicer
will be obligated either to cure the breach in all material respects or to
purchase the home equity loan at its purchase price, less unreimbursed advances,
if applicable, made by the master servicer with respect to the home equity loan,
or, to substitute the home equity loan with a qualified substitute home equity
loan. This purchase obligation will constitute the sole remedy available to
certificateholders or the trustee for a breach of this type of representation by
the master servicer. Any home equity loan not purchased or substituted for shall
remain in the related trust.
SERVICING AND SUBSERVING
The master servicer is required to service and administer the home
equity loans in accordance with the pooling and servicing agreement and in a
manner consistent with general industry practice using that degree of skill and
attention that the master servicer exercises with respect to comparable home
equity loans that it services for itself or others.
The duties of the master servicer include collecting and posting all
payments, responding to inquiries of borrowers or Federal, state or local
government authorities with respect to the home equity loans, investigating
delinquencies, reporting tax information to borrowers in accordance with its
customary practices, accounting for collections and furnishing monthly and
annual statements to the trustee with respect to distributions. The master
servicer is required to follow its customary standards, policies and procedures
in performing the duties as master servicer.
The master servicer (1) is authorized and empowered to execute and
deliver, on behalf of itself, the certificateholders and the trustee or any of
them, any and all instruments of satisfaction or cancellation, or of partial or
full release or discharge and all other comparable instruments, with respect to
the home equity loans and with respect to the related mortgaged properties; and
(2) may consent to any modification of the terms of any note not expressly
prohibited by the pooling and servicing agreement if the effect of any such
modification will not materially and adversely affect the security afforded by
the related mortgaged property, other than as permitted by the pooling and
servicing agreement. In certain circumstances, the master servicer will be
required to purchase the related home equity loan if it consents to any such
modification.
Compensation to the master servicer for its servicing activities under
the pooling and servicing agreement will be paid from collections on the home
equity loans on each distribution date. The amount of such compensation for each
collection period is equal to ____% per annum of the aggregate loan balances of
the home equity loans outstanding on the first day of such collection period.
The servicing fee will be paid to the master servicer before distributions are
made to the certificateholders.
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<PAGE> 47
In addition, the master servicer will retain any benefit from the investment of
funds in the collection account.
The master servicer will also be entitled under the pooling and
servicing agreement to additional servicing compensation in the form of
prepayment charges, release fees, bad check charges, assumption fees, late
payment charges or any other servicing-related fees and similar items.
The master servicer will pay certain ongoing expenses associated with
the trust or incurred in connection with its servicing responsibilities under
the pooling and servicing agreement. The master servicer will be entitled to
reimbursement for specified expenses incurred by it in connection with the
liquidation of any home equity loan, including any costs in restoring any
related mortgaged property in connection therewith and the payment of related
insurance premiums or taxes, this right of reimbursement being prior to the
rights of the certificateholders to receive net liquidation proceeds from the
related home equity loan.
The master servicer will be permitted under the pooling and servicing
agreement to enter into subservicing arrangements for any servicing and
administration of home equity loans with any affiliated institution which is in
compliance with the laws of each state necessary to enable it to perform its
obligations under such subservicing arrangement.
Notwithstanding any subservicing arrangement, the master servicer will
not be relieved of its obligations under the pooling and servicing agreement and
the master servicer will be obligated to the same extent and under the same
terms and conditions as if it alone were servicing and administering the home
equity loans.
EVIDENCE AS TO COMPLIANCE
The master servicer will be required to deliver to the trustee on or
before the last day of ___________ of each year commencing in ____, an officer's
certificate stating, as to each signer thereof, that (1) a review of the
activities of the master servicer during the preceding calendar year (or, in the
case of the first certificate, since the closing date) and of performance under
the pooling and servicing agreement has been made under the officer's
supervision, and (2) to the best of the officer's knowledge, based on his/her
review, the master servicer has fulfilled all its obligations under the pooling
and servicing agreement for that year, or, in the case of the first certificate,
since the closing date, or, if there has been a default in the fulfillment of
any obligations, specifying each default known to that officer and the nature
and status thereof including the steps being taken by the master servicer to
remedy the defaults.
On or before the last day of __________ of each year, commencing in
____, the master servicer will be required to cause to be delivered to the
trustee, a letter or letters of a firm of independent, nationally recognized
certified public accountants stating that the firm has examined, for the
preceding calendar year, or, in the case of the first that letter, since the
closing date, specified documents and records related to the servicing of home
equity loans under agreements, including the pooling and servicing agreement,
substantially similar to the pooling and servicing agreement and the examination
has disclosed no items of noncompliance with the provision of the pooling and
servicing agreement which, in the opinion of the firm, are material, except for
the items of noncompliance as shall be referred to in the report.
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COLLECTION AND OTHER SERVICING PROCEDURES
The master servicer may in its discretion (1) waive any assumption
fees, late payment charge, charges for checks returned for insufficient funds,
prepayment penalties, if any, or other fees which may be collected in the
ordinary course of servicing the home equity loans, or (2) arrange with a
borrower a schedule for the payment of delinquent payments on the related home
equity loan.
REFINANCING OF SENIOR LIEN
The master servicer may permit the refinancing of any existing lien
senior to a home equity loan, provided that some conditions described in the
pooling and servicing agreement are satisfied and the resulting combined LTV
ratio does not exceed ___%.
COLLECTION AND LIQUIDATION PRACTICES; LOSS MITIGATION
Under the terms of the pooling and servicing agreement, until the
business day prior to each distribution date on which amounts are required to be
deposited in the Collection Account, HFC may retain and commingle such amounts
with its own funds so long as (1) no event of default under the pooling and
servicing agreement shall have occurred and be continuing and (2) either (A) the
short-term debt obligations of HFC are acceptable to the rating agencies as
specified in the pooling and servicing agreement or (B) HFC arranges for and
maintains a servicer credit enhancement acceptable in form and substance to each
rating agency; provided, however, that amounts permitted to be retained and
commingled pursuant to this subclause (B) shall not exceed the amount available
under the servicer credit enhancement. In the event HFC is entitled to retain
and commingle the amounts referred to in the preceding sentence, it shall be
entitled to retain for its own account any investment income thereon, and any
such investment income shall not be subject to any claim of the trustee or
certificateholders. In the event that HFC is not permitted to retain and
commingle these amounts with its own funds, it shall deposit these amounts not
later than the second business day following receipt in the Collection Account.
The master servicer is authorized to engage in a wide variety of loss
mitigation practices with respect to the home equity loans, including waivers,
modifications, payment forbearances, partial forgiveness, entering into
repayment schedule arrangements, and capitalization of arrearages; provided in
any case that the master servicer determines that the action is not materially
adverse to the interests of the holder of the offered certificates or the credit
enhancer and is generally consistent with the master servicer's policies with
respect to similar loans; and provided further that some of the modifications,
including reductions in the interest rate, partial forgiveness or a maturity
extension, may only be taken if the home equity loan is in default or if default
is reasonably foreseeable. With respect to home equity loans that come into and
continue in default, the master servicer may take a variety of actions including
foreclosure on the mortgaged property, writing off the balance of the home
equity loan as bad debt, taking a deed in lieu of foreclosure, accepting a short
sale, permitting a short refinancing, arranging for a repayment plan,
modifications as described above, or taking an unsecured note. See "Description
of the Certificates--Collection and Other Servicing Procedures" and
"--Realization Upon Defaulted Home Equity Loans" in the prospectus.
VOTING RIGHTS
Some actions specified in the prospectus that may be taken by holders
of certificates evidencing a specified percentage of all undivided interests in
the trust. __% of all voting rights will be allocated among all holders of the
Class A Certificates in proportion to their then outstanding Certificate
Principal Balances, and __% and __% of all voting rights will be allocated among
holders of the Fixed Strip Certificates and the Class R Certificates in
proportion to the percentage interests evidenced by their respective
certificates. So long as there does not exist a failure by the credit enhancer
to make a
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required payment under the policy, a credit enhancer default, the credit
enhancer shall have the right to exercise all rights of the holders of the
offered certificates under the pooling and servicing agreement without any
consent of the holders, and the holders may exercise their rights only with the
prior written consent of the credit enhancer except as provided in the pooling
and servicing agreement.
TERMINATION
The circumstances under which the obligations created by the pooling
and servicing agreement will terminate relating to the offered certificates are
described in "The Pooling and Servicing Agreement--Termination; Retirement of
Certificates" in the prospectus. The master servicer or the depositor will have
the option on any distribution date on which the aggregate Stated Principal
Balance of the home equity loans is less than ____ of the aggregate cut-off date
balance:
o to purchase all remaining home equity loans and other assets
in the trust, except for the policy, thereby effecting early
retirement of the offered certificates, or
o to purchase in whole, but not in part, the certificates.
Any purchase of home equity loans and other assets of the trust shall
be made at a price equal to the sum of:
o 100% of the unpaid principal balance of each home equity loan,
or the fair market value of the related underlying mortgaged
properties with respect to defaulted home equity loans as to
which title to the mortgaged properties has been acquired if
the fair market value is less than the unpaid principal
balance, as of the date of repurchase plus
o accrued interest at the Net Mortgage Rate to, but not
including, the first day of the month in which the repurchase
price is distributed and
o any amounts due to the credit enhancer under the insurance and
indemnity agreement.
Distributions on the certificates relating to any optional termination
will be paid, first, to the offered certificates, in an amount equal to the
Certificate Principal Balance of each class plus one month's interest accrued on
those offered certificates at the related pass-through rate, plus any previously
unpaid Accrued Certificate Interest and second, except as described in the
pooling and servicing agreement, to the Residual Certificates. Any purchase of
home equity loans and termination of the trust requires the consent of the
credit enhancer if it would result in a draw on the policy. Any purchase of the
certificates, will be made at a price equal to 100% of its Certificate Principal
Balance plus the sum of one month's interest accrued on those certificates at
the applicable pass-through rate and any previously unpaid Accrued Certificate
Interest. Upon the purchase of the certificates or at any time thereafter, at
the option of the master servicer or the depositor, the home equity loans may be
sold, thereby effecting a retirement of the certificates and the termination of
the trust, or the certificates so purchased may be held or resold by the master
servicer or the depositor.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
Upon the issuance of the offered certificates, Katten Muchin & Zavis,
special tax counsel to the depositor, will deliver an opinion to the effect
that, assuming compliance with all provisions of the pooling and servicing
agreement, for federal income tax purposes, the trust will qualify as a REMIC
under the Internal Revenue Code.
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For federal income tax purposes:
o each class of offered certificates will represent ownership of
"regular interests" in the REMIC and will generally be treated
as debt instruments of the REMIC; and
o the Class R Certificates will constitute the sole class of
"residual certificates" in the REMIC.
See "Material Federal Income Tax Consequences--REMICS" in the
prospectus.
For federal income tax reporting purposes, the offered certificates,
other than the Class A-1 Certificates and Fixed Strip Certificates, will not and
the Class A-1 Certificates and Fixed Strip Certificates will be treated as
having been issued with original issue discount. The prepayment assumption that
will be used in determining the rate of accrual of original issue discount,
market discount and premium, if any, for federal income tax purposes will be
based on the assumption that, subsequent to the date of any determination the
home equity loans will prepay at a rate equal to __% of the prepayment
assumption. No representation is made that the home equity loans will prepay at
that rate or at any other rate. See "Material Federal Income Tax
Consequences--General" and "--REMICS--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount" in the prospectus.
If the method for computing original issue discount described in the
prospectus results in a negative amount for any period with respect to a
certificateholder, in particular the Fixed Strip Certificates, the amount of
original issue discount allocable to that period would be zero and the
certificateholder will be permitted to offset that negative amount only against
future original issue discount, if any, attributable to those certificates.
In some circumstances OID regulations permit the holder of a debt
instrument to recognize original issue discount under a method that differs from
that used by the issuer. Accordingly, it is possible that the holder of a
certificate may be able to select a method for recognizing original issue
discount that differs from that used by the master servicer in preparing reports
to the certificateholders and the IRS.
Some classes of the offered certificates may be treated for federal
income tax purposes as having been issued at a premium. Whether any holder of
one of those classes of certificates will be treated as holding a certificate
with amortizable bond premium will depend on the certificateholder's purchase
price and the distributions remaining to be made on the certificate at the time
of its acquisition by the certificateholder. Holders of those classes of
certificates should consult their tax advisors regarding the possibility of
making an election to amortize the premium. See "Material Federal Income Tax
Consequences--REMICS--Taxation of Owners of REMIC Regular Certificates" and
"--Premium" in the prospectus.
The offered certificates will be treated as assets described in Section
7701(a)(19)(C) of the Internal Revenue Code and "real estate assets" under
Section 856(c)(4)(A), formerly Section 856(c)(5)(A), of the Internal Revenue
Code generally in the same proportion that the assets of the trust would be so
treated. In addition, interest on the offered certificates will be treated as
"interest on obligations secured by mortgages on real property" under Section
856(c)(3)(B) of the Internal Revenue Code generally to the extent that the
offered certificates are treated as "real estate assets" under Section
856(c)(4)(A) of the Internal Revenue Code. Moreover, the offered certificates
will be "qualified mortgages" within the meaning of Section 860G(a)(3) of the
Internal Revenue Code if transferred to
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another REMIC on its startup day in exchange for a regular or residual interest
therein. However, prospective investors in offered certificates that will be
generally treated as assets described in Section 860G(a)(3) of the Internal
Revenue Code should note that, notwithstanding that treatment, any repurchase of
a certificate under the right of the master servicer or the depositor to
repurchase the offered certificates may adversely affect any REMIC that holds
the offered certificates if the repurchase is made under circumstances giving
rise to a prohibited transaction tax. See "The Pooling and Servicing
Agreement--Termination" in this prospectus supplement and "Material Federal
Income Tax Consequences--REMICS--Characterization of Investments in REMIC
Certificates" in the prospectus.
HFC will be designated as the "tax matters person" with respect to the
REMIC as defined in the REMIC provisions, and in connection therewith will be
required to hold not less than 0.01% of each of the Class R Certificates.
NEW WITHHOLDING REGULATIONS
The Treasury Department has issued new regulations which make some
modifications to the withholding, backup withholding and information reporting
rules described above. The new regulations attempt to unify certification
requirements and modify reliance standards. The new regulations will generally
be effective for payments made after December 31, 1999, subject to some
transition rules. Prospective investors are urged to consult their own tax
advisors regarding the new regulations.
For further information regarding federal income tax consequences of
investing in the offered certificates, see "Material Federal Income Tax
Consequences--REMICS" in the prospectus.
METHOD OF DISTRIBUTION
Subject to the terms and conditions of an underwriting agreement, dated
________, __________ has agreed to purchase and the depositor has agreed to sell
the Class A Certificates and Class IO Certificates. It is expected that delivery
of the certificates will be made only in book-entry form through the Same Day
Funds Settlement System of DTC on or about _____________, against payment
therefor in immediately available funds.
In connection with the offered certificates, the underwriter has
agreed, subject to the terms and conditions of the underwriting agreement, to
purchase all of the offered certificates if any of its offered certificates are
purchased thereby.
The underwriting agreement provides that the obligations of the
underwriter to pay for and accept delivery of the offered certificates is
subject to, among other things, the receipt of legal opinions and to the
conditions, among others, that no stop order suspending the effectiveness of the
depositor's registration statement shall be in effect, and that no proceedings
for that purpose shall be pending before or threatened by the SEC.
The distribution of the offered certificates by the underwriter may be
effected from time to time in one or more negotiated transactions, or otherwise,
at varying prices to be determined at the time of sale. Proceeds to the
depositor from the sale of the offered certificates, before deducting expenses
payable by the depositor, will be approximately __% of the aggregate Certificate
Principal Balance of the offered certificates plus its accrued interest from the
cut-off date.
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The underwriter may effect these transactions by selling the offered
certificates to or through dealers, and those dealers may receive compensation
in the form of underwriting discounts, concessions or commissions from the
underwriter for whom they act as agent. In connection with the sale of the
offered certificates, the underwriter may be deemed to have received
compensation from the depositor in the form of underwriting compensation. The
underwriter and any dealers that participate with the underwriter in the
distribution of the offered certificates may be deemed to be underwriters and
any profit on the resale of the offered certificates positioned by them may be
deemed to be underwriting discounts and commissions under the Securities Act of
1933, as amended.
The underwriting agreement provides that the depositor will indemnify
the underwriter, and that under limited circumstances the underwriter will
indemnify the depositor, against some civil liabilities under the Securities
Act, or contribute to payments required to be made in respect thereof.
There is currently no secondary market for the offered certificates.
The underwriter intends to make a secondary market in the offered certificates
but is not obligated to do so. There can be no assurance that a secondary market
for the offered certificates will develop or, if it does develop, that it will
continue. The offered certificates will not be listed on any securities
exchange.
The primary source of information available to investors concerning the
offered certificates will be the monthly statements discussed in the prospectus
under "Description of the Certificates--Reports to Certificateholders," which
will include information as to the outstanding principal balance of the offered
certificates. There can be no assurance that any additional information
regarding the offered certificates will be available through any other source.
In addition, the depositor is not aware of any source through which price
information about the offered certificates will be available on an ongoing
basis. The limited nature of this information regarding the offered certificates
may adversely affect the liquidity of the offered certificates, even if a
secondary market for the offered certificates becomes available.
LEGAL OPINIONS
Certain legal matters relating to the certificates will be passed upon
for the depositor by John W. Blenke, Vice President - Corporate Law and
Assistant Secretary of Household International, Inc., the parent of the
depositor and the master servicer, and by Katten Muchin & Zavis, Chicago,
Illinois, special counsel to the depositor. Mr. Blenke is a full-time employee
and an officer of Household International, Inc. and beneficially owns, and holds
options to purchase, shares of Common Stock of Household International, Inc.
Certain legal matters will be passed upon for the underwriters by
_________.
EXPERTS
The consolidated financial statements of ____________ and subsidiaries,
as of December 31, ____ and ____ and for each of the years in the three-year
period ended December 31, ____ are incorporated by reference in this prospectus
supplement and in the registration statement in reliance upon the report of
__________, independent certified public accountants, incorporated by reference
in this prospectus supplement, and upon the authority of said firm as experts in
accounting and auditing.
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RATINGS
It is a condition to the issuance of the Class A Certificates that they
be rated ____ by _______________ and _________________. It is a condition to the
issuance of the Fixed Strip Certificates that they be rated "AAAr" by
_____________ and "AAA" by ______________.
The ratings assigned by _____________ to offered certificates address
the likelihood of the receipt by certificateholders of payments required under
the pooling and servicing agreement. ____________'s ratings take into
consideration the credit quality of the home equity loan pool, structural and
legal aspects associated with the offered certificates, and the extent to which
the payment stream in the home equity loan pool is adequate to make payments
required under the offered certificates. ___________'s rating on the offered
certificates does not, however, constitute a statement regarding frequency of
prepayments on the mortgages. See "Material Yield and Prepayment Considerations"
in this prospectus supplement. The "r" of the "AAAr" rating of the Fixed Strip
Certificates by ___________ is attached to highlight derivative, hybrid, and
some other obligations that _____________ believes may experience high
volatility or high variability in expected returns due to non-credit risks.
Examples of these obligations are:
o securities whose principal or interest return is indexed to
equities, commodities, or currencies; certain swaps and
options; and
o interest only and principal only mortgage securities.
The absence of an "r" symbol should not be taken as an indication that
an obligation will exhibit no volatility or variability in total return.
The ratings assigned by _____________ to offered certificates address
the likelihood of the receipt by certificateholders of all distributions to
which they are entitled under the transaction structure. __________'s ratings
reflect its analysis of the riskiness of the underlying home equity loans and
the structure of the transaction described in the operative documents.
___________'s ratings do not address the effect on the certificates' yield
attributable to prepayments or recoveries on the underlying home equity loans.
Further, the rating on the Fixed Strip Certificates does not address whether
investors therein will recoup their initial investments.
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each security rating should be evaluated
independently of any other security rating. The ratings of the Fixed Strip
Certificates do not address the possibility that the holders of those
certificates may fail to recover fully their initial investments. In the event
that the ratings initially assigned to the offered certificates are subsequently
lowered for any reason, no person or entity is obligated to provide any
additional support or credit enhancement with respect to the offered
certificates.
LEGAL INVESTMENT
The offered certificates will not constitute "mortgage related
securities" for purposes of SMMEA because the home equity loan pool includes
home equity loans that are secured by subordinate liens on the related mortgaged
properties. Institutions whose investment activities are subject to legal
investment laws and regulations or to review by regulatory authorities should
consult with their own legal advisors in determining whether and to what extent
the offered certificates are subject to restrictions on investment, capital
requirements or otherwise. See "Legal Investment Matters" in the prospectus.
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One or more classes of the offered certificates may be viewed as
"complex securities" under TB 13a, which applies to thrift institutions
regulated by the OTS.
The depositor makes no representations as to the proper
characterization of any class of the offered certificates for legal investment
or other purposes, or as to the ability of particular investors to purchase any
class of the offered certificates under applicable legal investment
restrictions. These uncertainties may adversely affect the liquidity of any
class of offered certificates. Accordingly, all institutions whose investment
activities are subject to legal investment laws and regulations, regulatory
capital requirements or review by regulatory authorities should consult with
their legal advisors in determining whether and to what extent any class of the
offered certificates constitutes a legal investment or is subject to investment,
capital or other restrictions.
See "Legal Investment Matters" in the prospectus.
EMPLOYEE BENEFIT PLAN CONSIDERATIONS
A fiduciary of any plan subject to ERISA or Section 4975 of the
Internal Revenue Code, or any insurance company, whether through its general or
separate accounts, or any other person investing plan assets of any plan (as
defined under "Employee Benefit Plan Considerations - Plan Asset Regulations" in
the prospectus) should carefully review with its legal advisors whether the
purchase or holding of offered certificates could give rise to a violation of
ERISA's fiduciary standards of care or a nonexempt prohibited transaction under
ERISA or Section 4975 of the Internal Revenue Code. Any fiduciary or other
investor of plan assets that proposes to acquire or hold the offered
certificates on behalf of or with plan assets should consult with its counsel
with respect to whether the specific and general conditions and the other
requirements of an Exemption are met. Here, since the underwriter is
__________________________, the specific individual underwriter exemption that
is applicable is Prohibited Transaction Exemption _______ (__ Fed. Reg.___,
19__) granted to the underwriter. This Exemption is [substantially similar] to
the Exemption described in the prospectus (see "Employee Benefit Plan
Considerations - Prohibited Transaction Exemptions" in the prospectus). As a
result, references in this Supplement to the Exemption shall specifically
include the terms and conditions of the underwriter's individual exemption and
the requirements set forth therein. Those requirements include a number of
conditions which must be met for the Exemption to apply, including the
requirements that the plan must be an "accredited investor" as defined in Rule
501(a)(1) of Regulation D issued by the Commission under the Securities Act,
that the plan invest only in the highest level of certificates and that the plan
not be sponsored by a member of the Restricted Group (as defined under "Employee
Benefit Plan Considerations - Prohibited Transaction Exemptions" in the
prospectus). See "Employee Benefit Plan Considerations" in the prospectus for a
more detailed list of the requirements and conditions of the Exemption as well
as a more general discussion of other employee benefit plan considerations. In
particular, if certificates other than the highest level of certificates are
purchased, the plan fiduciary will be required to deliver, at its expense, a
favorable opinion of counsel to the trustee and the master servicer to the
effect that the purchase and holding of such class of certificate will not
result in a nonexempt prohibited transaction under ERISA and Section 4975 of the
Internal Revenue Code and will not subject the trustee or the master servicer to
any obligation or liability as a result of the application of ERISA or the
prohibited transaction provisions of Section 4975 of the Internal Revenue Code.
Alternatively, an insurance company general account may, at its expense, deliver
to the trustee and the master servicer a representation that the transfer and
holding of such certificate are exempt under Section I and Section II of PTCE
95-60. Unless such opinion or representation is delivered, each person acquiring
a certificate other than the highest class of certificates will be deemed to
represent to the trustee and the master servicer that such person is not a
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plan, acting on behalf of a plan or investing plan assets subject to ERISA or
Section 4975 of the Internal Revenue Code.
The sale of any of the offered certificates to a plan is in no respect
a representation by the depositor, the seller, the trustee, the master servicer,
subservicer or the underwriter that such an investment meets all relevant legal
requirements relating to investments by plans generally or any particular plan
or plan assets, or that such an investment is appropriate for plans generally or
any particular plan or plan assets.
GLOSSARY OF TERMS
Accrued Certificate Interest -- With respect to any distribution date,
an amount equal to:
o in the case of each class of offered certificates, other than
the Fixed Strip Certificates, interest accrued during the
related Interest Accrual Period on the Certificate Principal
Balance of the certificates of that class immediately prior to
that distribution date at the per annum rate at which interest
accrues on that class, or pass-through rate; and
o in the case of the Fixed Strip Certificates, interest accrued
during the related Interest Accrual Period on the Notional
Amount thereof for that distribution date at the pass-through
rate on that class for that distribution date, in each case
less interest shortfalls from the home equity loans, if any,
allocated thereto for that distribution date, including:
o any Prepayment Interest Shortfall to the extent not
covered by Excess Cash Flow;
o the interest portions of Realized Losses; and
o any other interest shortfalls on the home equity
loans, including interest shortfalls relating to the
Soldiers' and Sailors' Civil Relief Act of 1940 or
similar legislation or regulations, all allocated as
described below;
provided, however, that in the event that any shortfall described in the
immediately preceding three clauses above is allocated to the offered
certificates, or the Available Distribution Amount on any distribution date is
less than the Senior Interest Distribution Amount for that date, the amount of
any shortfall will be drawn under the policy and distributed to the holders of
the offered certificates. Notwithstanding the foregoing, if payments are not
made as required under the policy, any interest shortfalls may be allocated to
the certificates as described above. See "--Certificate Guaranty Insurance
Policy" below. Accrued Certificate Interest on each class of offered
certificates will be distributed on a pro rata basis. Accrued Certificate
Interest on each class of certificates is calculated on the basis of a 360-day
year consisting of twelve 30-day months.
Available Distribution Amount -- For any distribution date, an amount
equal to:
o the aggregate amount of actual payments on the home equity
loans received during the related Collection Period after
deduction of the related servicing fees and any subservicing
fees and
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o some unscheduled collections, including borrower prepayments
on the home equity loans, Insurance Proceeds, Liquidation
Proceeds and proceeds from repurchases of, and some amounts
received in connection with any substitutions for, the home
equity loans, received during the related collection period.
Certificate Principal Balance -- For any class of Class A Certificates
as of any date of determination, the initial Certificate Principal Balance of
that certificate, reduced by the aggregate of:
o all amounts allocable to principal previously distributed with
respect to that certificate; and
o any reductions in the Certificate Principal Balance thereof
deemed to have occurred in connection with allocations of
Realized Losses in the manner described in this prospectus
supplement, unless these amounts have been paid under the
policy.
The Certificate Principal Balance of the Class R Certificates is equal
to $100.
Class A Principal Distribution Amount -- An amount equal to the lesser
of:
1. the excess of (A) the Available Distribution Amount over (B)
the Senior Interest Distribution Amount; and
2. the sum of:
A. the portion allocable to principal of all scheduled
monthly payments on the home equity loans received
with respect to the related collection period;
B. the principal portion of all proceeds of the
repurchase of any home equity loans, or, in the case
of a substitution, some amounts representing a
principal adjustment, as required by the pooling and
servicing agreement during the related collection
period;
C. the principal portion of all other unscheduled
collections received on the home equity loans during
the related collection period, or deemed to be
received during the related collection period,
including, without limitation, full and partial
principal prepayments made by the respective
borrowers, to the extent not previously distributed;
D. the amount of any Realized Loss Distribution Amount
for that distribution date; and
E. the amount of any Overcollateralization Increase
Amount for that distribution date;
minus
F. the amount of any Overcollateralization Reduction
Amount for that distribution date.
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In no event will the Class A Principal Distribution Amount with respect
to any distribution date be less than zero or greater than the then outstanding
Certificate Principal Balances of the Class A Certificates.
Excess Cash Flow -- For any distribution date, the excess of:
o the Available Distribution Amount for the distribution date
over
o the sum of:
o the Senior Interest Distribution Amount payable to
the Class A Certificateholders on that distribution
date and
o the sum of the amounts relating to the home equity
loans described in clauses (2)(A)-(C) of the
definition of Class A Principal Distribution Amount.
Excess Loss Amount -- On any distribution date, an amount equal to the
sum of:
o any Realized Losses, other than as described in the next three
succeeding clauses below, for the related collection period
which, when added to the aggregate of the Realized Losses for
all preceding collection periods exceed $________,
o any Special Hazard Losses;
o any Fraud Losses;
o any Bankruptcy Losses; and
o Extraordinary Losses.
Excess Overcollateralization Amount -- With respect to any distribution
date, the excess, if any, of:
o the Outstanding Overcollateralization Amount on that
distribution date over
o the Overcollateralization Amount Target.
Interest Accrual Period -- For all classes of certificates, the
calendar month preceding the month in which the distribution date occurs.
Lockout Certificate Percentage -- A percentage calculated for each
distribution date equal to the aggregate Certificate Principal Balance of the
Lockout Certificates divided by the sum of the aggregate Certificate Principal
Balances of the Class A Certificates.
Lockout Distribution Percentage -- For any distribution date occurring
prior to the distribution date in _________ , 0%. The Lockout Distribution
Percentage for any distribution date occurring after the first three years
following the closing date will be as follows:
o for any distribution date during the fourth year after the
closing date, 45%;
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o for any distribution date during the fifth year after the
closing date, 80%;
o for any distribution date during the sixth year after the
closing date, 100%; and
o for any distribution date thereafter, 300% of the Lockout
Certificate Percentage.
Notwithstanding the foregoing, if the Certificate Principal Balances of the
Class A Certificates, other than the Lockout Certificates, have been reduced to
zero, the Lockout Distribution Percentage will be equal to 100%.
Notional Amount -- With respect to the Fixed Strip Certificates as of
any distribution date prior to the distribution date in _______, the sum of:
o the lesser of:
o $________ and
o the aggregate Certificate Principal Balance of the
Class A Certificates on that distribution date and
o the lesser of:
o $_________ and
o the aggregate Certificate Principal Balance of the
_____ Certificates on that distribution date.
The Notional Amount of the Fixed Strip Certificates as of any
distribution date after the distribution date in ________ will be equal to $0.
References in this prospectus supplement to the Notional Amount are used solely
for some calculations and do not represent the right of the Fixed Strip
Certificates to receive distributions allocable to principal.
Outstanding Overcollateralization Amount -- With respect to any
distribution date, the excess, if any, of:
o the aggregate Stated Principal Balances of the home equity
loans immediately following that distribution date over
o the Certificate Principal Balance of the Class A Certificates
as of that date, after taking into account the payment to the
Class A Certificates of the amounts described in clauses
(2)(A)-(D) of the definition of Class A Principal Distribution
Amount on that distribution date.
Overcollateralization Amount Target -- The required level of the
Outstanding Overcollateralization Amount with respect to a distribution date.
Overcollateralization Increase Amount -- Any amount of Excess Cash Flow
actually applied as an accelerated payment of principal on the Class A
Certificates.
Overcollateralization Reduction Amount -- For any distribution date,
the lesser of:
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<PAGE> 59
o the Excess Overcollateralization Amount; and
o the amount available for distribution specified in clauses
(2)(A)-(C) of the definition of Class A Principal Distribution
Amount on that distribution date.
Realized Loss Distribution Amount -- For any distribution date, to the
extent covered by Excess Cash Flow for that distribution date, as described in
this prospectus supplement under "--Overcollateralization Provisions", (A) 100%
of the principal portion of any Realized Losses, other than Excess Loss Amounts,
incurred, or deemed to have been incurred, on any home equity loans in the
related collection period, plus (B) any Realized Losses, other than any Excess
Loss Amounts, remaining undistributed from any preceding distribution date,
together with interest from the date initially distributable to the date paid,
provided, that any Realized Losses shall not be required to be paid to the
extent that the Realized Losses were paid on the Class A Certificates by means
of a draw on the policy or were reflected in the reduction of the Outstanding
Overcollateralization Amount.
Senior Interest Distribution Amount -- On any distribution date, the
aggregate amount of Accrued Certificate Interest to be distributed to the
holders of the offered certificates for that distribution date.
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<PAGE> 60
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in some limited circumstances, the globally offered Household
Home Equity Loan Trust ________, Closed-End Home Equity Loan Asset Backed
Certificates, Series _______: Class A- 1, Class A-2 and Class IO Certificates,
or Global Securities, will be available only in book-entry form. Investors in
the Global Securities may hold these Global Securities through any of DTC,
Cedelbank or Euroclear. The Global Securities will be tradable as home market
instruments in both the European and U.S. domestic markets. Initial settlement
and all secondary trades will settle in same-day funds.
Secondary market trading between investors through Cedelbank and
Euroclear will be conducted in the ordinary way in accordance with the normal
rules and operating procedures of Cedelbank and Euroclear and in accordance with
conventional eurobond practice, i.e., seven calendar day settlement.
Secondary market trading between investors through DTC will be
conducted according to DTC's rules and procedures applicable to U.S. corporate
debt obligations.
Secondary cross-market trading between Cedelbank customers or Euroclear
and DTC participants holding the Global Securities will be effected on a
delivery-against-payment basis through the respective depositaries of Cedelbank
and Euroclear, in that capacity, and as DTC participants.
Beneficial owners of Global Securities that are Non-U.S. Persons will
be subject to U.S. withholding taxes unless the beneficial owners meet some
requirements and deliver appropriate U.S. tax documents to the securities
clearing organizations or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the
name of Cede & Co. as nominee of DTC. Investors' interests in the Global
Securities will be represented through financial institutions acting on their
behalf as participants and indirect participants in DTC. As a result, Cedelbank
and Euroclear will hold positions on behalf of their customers and participants,
respectively, through their relevant depositary which in turn will hold these
positions in their accounts as DTC participants.
Investors electing to hold their Global Securities through DTC will
follow DTC settlement practices. Investor securities custody accounts will be
credited with their holdings against payment in same-day funds on the settlement
date.
Investors electing to hold their Global Securities through Cedelbank or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
SECONDARY MARKET TRADING
Because the purchaser determines the place of delivery, it is important
to establish at the time of the trading of any Global Securities where both the
purchaser's and the seller's accounts are located to ensure that settlement can
be made on the desired value date.
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Trading between DTC Participants. Secondary market trading between DTC
participants will be settled using the procedures applicable to prior home
equity loan asset-backed certificates issues in same-day funds.
Trading between Cedelbank Customers and/or Euroclear Participants.
Secondary market trading between Cedelbank customers and/or Euroclear
participants will be settled using the procedures applicable to conventional
eurobonds in same-day funds.
Trading between DTC Participant Sellers and Cedelbank Customer
Purchasers or Euroclear Participant Purchasers. When Global Securities are to be
transferred from the account of a DTC participant to the account of a Cedelbank
customer or a Euroclear participant, the purchaser must send instructions to
Cedelbank or Euroclear through a Cedelbank customer or Euroclear participant at
least one business day prior to settlement. Cedelbank or Euroclear, as the case
may be, will instruct the relevant depositary, to receive the Global Securities
against payment. Payment will include interest accrued on the Global Securities
from and including the last coupon payment date to and excluding the settlement
date, on the basis of the actual number of days in the accrual period and a year
assumed to consist of 360 days. For transactions settling on the 31st of the
month, payment will include interest accrued to and excluding the first day of
the following month. Payment will then be made by the relevant depositary to the
DTC participant's account against delivery of the Global Securities. After
settlement has been completed, the Global Securities will be credited to the
respective clearing system and by the clearing system, in accordance with its
usual procedures, to the Cedelbank customer's or Euroclear participant's
account. The securities credit will appear the next day, European time, and the
cash debt will be back-valued to, and the interest on the Global Securities will
accrue from, the value date, which would be the preceding day when settlement
occurred in New York. If settlement is not completed on the intended value date,
i.e., the trade fails, the Cedelbank or Euroclear cash debt will be valued
instead as of the actual settlement date.
Cedelbank customers and Euroclear participants will need to provide the
funds necessary to process same-day funds settlement to the respective clearing
systems. The most direct means of providing the funds is to pre-position funds
for settlement, either from cash on hand or from existing lines of credit, as
would be done for any settlement occurring within Cedelbank or Euroclear. Under
this approach, a purchaser may take on credit exposure to Cedelbank or Euroclear
until the Global Securities are credited to its account one day later.
Alternatively, if Cedelbank or Euroclear has extended a line of credit to a
purchaser, Cedelbank customers or Euroclear participants can elect not to
pre-position funds and instead to finance settlement by drawing upon that line
of credit. Under this procedure, Cedelbank customers or Euroclear participants
purchasing Global Securities would incur overdraft charges for one day, assuming
they cleared the overdraft when the Global Securities were credited to their
accounts. However, interest on the Global Securities would accrue from the value
date. Therefore, in many cases the investment income on the Global Securities
earned during that one-day period may substantially reduce or offset the amount
of the overdraft charges, although the result will depend on each Cedelbank
customer's or Euroclear participant's particular cost of funds. Because
settlements occur during New York business hours, DTC participants can employ
their usual procedures for crediting Global Securities to the applicable
European depositary for the benefit of Cedelbank customers or Euroclear
participants. The sale proceeds will be available to the DTC seller on the
settlement date. Thus, to the DTC participants a cross-market transaction will
settle no differently than a trade between two DTC participants.
Trading between Cedelbank Customer Sellers or Euroclear Participant
Sellers and DTC Participant Purchasers. Due to time zone differences in their
favor, Cedelbank customers and Euroclear participants may employ their customary
procedures for transactions in which Global
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<PAGE> 62
Securities are to be transferred by the applicable clearing system, through the
applicable depositary, to a DTC participant. The seller must send instructions
to Cedelbank or Euroclear through a Cedelbank customer or Euroclear participant
at least one business day prior to settlement. Cedelbank or Euroclear will
instruct the applicable depositary, to credit the Global Securities to the DTC
participant's account against payment. Payment will include interest accrued on
the Global Securities from and including the last coupon payment to and
excluding the settlement date on the basis of the actual number of days in the
accrual period and a year assumed to consist to 360 days. For transactions
settling on the 31st of a given month, payment will include interest accrued to
and excluding the first day of the following month. Payment will be reflected in
the account of the Cedelbank customer or Euroclear participant the following
business day, and receipt of the cash proceeds in the Cedelbank customer's or
Euroclear participant's account will be back-valued to the value date, which
would be the preceding day, when settlement occurred in New York. If the
Cedelbank customer or Euroclear participant has a line of credit with its
clearing system and elects to draw on that line of credit in anticipation of
receipt of the sale proceeds in its account, the back-valuation may be
substantially reduce or offset any overdraft charges incurred during that
one-day period. If settlement is not completed on the intended value date,
receipt of the cash proceeds in the Cedelbank customer's or Euroclear
participant's account would instead be valued as of the actual settlement date.
Finally, day traders that use Cedelbank or Euroclear and purchase
Global Securities from DTC participants for delivery to Cedelbank customers or
Euroclear participants should note that these trades will automatically fail on
the sale side unless affirmative action is taken. At least three techniques
should be readily available to eliminate this potential problem:
o borrowing through Cedelbank or Euroclear for one day, until
the purchase side of the trade is reflected in their Cedelbank
or Euroclear accounts, in accordance with the clearing
system's customary procedures;
o borrowing the Global Securities in the U.S. from a DTC
participant no later than one day prior to settlement, which
would give the Global Securities sufficient time to be
reflected in the Cedelbank or Euroclear account in order to
settle the sale side of the trade; or
o staggering the value dates for the buy and sell sides of the
trade so that the value date for the purchase from the DTC
participant is at least one day prior to the value date for
the sale to the Cedelbank customer or Euroclear participant.
MATERIAL U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding these securities
through Cedelbank or Euroclear, or through DTC if the holder has an address
outside the U.S., will be subject to the 30% U.S. withholding tax that generally
applies to payments of interest, including original issue discount, on
registered debt issued by U.S. Persons, unless:
o each clearing system, bank or other financial institution that
holds customers' securities in the ordinary course of its
trade or business in the chain of intermediaries between the
beneficial owner and the U.S. entity required to withhold tax
complies with applicable certification requirements and
o the beneficial owner takes one of the following steps to
obtain an exemption or reduced tax rate:
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Exemption for Non-U.S. Persons (Form W-8). Beneficial owners of Global
Securities that are Non-U.S. Persons can obtain a complete exemption from the
withholding tax by filing a signed Form W-8 (Certificate of Foreign Status) or
any successor form. If the information shown on Form W-8 changes, a new Form W-8
must be filed within 30 days of the change.
Exemption for Non-U.S. Persons with effectively connected income (Form
4224). A Non-U.S. Person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its conduct
of a trade or business in the United States, can obtain an exemption from the
withholding tax by filing Form 4224 (Exemption from Withholding of Tax on Income
Effectively Connected with the Conduct of a Trade or Business in the United
States) or any successor form.
Exemption or reduced rate for Non-U.S. Persons resident in treaty
countries (Form 1001). A Non-U.S. Persons residing in a country that has a tax
treaty with the United States can obtain an exemption or reduced tax rate,
depending on the treaty terms, by filing Form 1001 (Holdership, Exemption or
Reduced Rate Certificate) or any successor form. If the treaty provides only for
a reduced rate, withholding tax will be imposed at that rate unless the filer
alternatively files Form W- 8 or any successor form. Form 1001 may be filed by
certificateholders or their agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a
complete exemption from the withholding tax by filing Form W-9 (Payer's Request
for Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The holder of a Global
Security or, in the case of a Form 1001 or a Form 4224 filer, his or her agent,
files by submitting the appropriate form to the person through whom it holds the
security, the clearing agency, in the case of persons holding directly on the
books of the clearing agency. Form W-8 and Form 1001 are effective for three
calendar years and Form 4224 is effective for one calendar year. The term "U.S.
Person" means:
o a citizen or resident of the United States,
o a corporation, partnership or other entity created or
organized in, or under the laws of, the United States, any
state thereof, or the District of Columbia, except in the case
of a partnership, to the extent provided in Treasury
regulations, or any political subdivision thereof, or
o an estate that is described in Section 7701(a)(30)(D) of the
Internal Revenue Code, or a trust that is described in Section
7701(a)(30)(E) of the Internal Revenue Code.
The term "Non-U.S. Person" means any person who is not a U.S. Person.
This summary does not address all aspects of U.S. Federal income tax withholding
that may be relevant to foreign beneficial owners of the Global Securities.
Investors are advised to consult their own tax advisors for specific tax advice
concerning their holding and disposing of the Global Securities.
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HFC REVOLVING CORPORATION
$_________________
Closed-End Home Equity Loan Asset Backed Certificates, Series _________
PROSPECTUS SUPPLEMENT
[Underwriter]
You should rely only on the information contained or incorporated by reference
in this prospectus supplement and the accompanying prospectus. We have not
authorized anyone to provide you with different information.
We are not offering the certificates offered in this prospectus supplement in
any state where the offer is not permitted.
Dealers will be required to deliver a prospectus supplement and prospectus when
acting as underwriters of the certificates offered hereby and with respect to
their unsold allotments or subscriptions. In addition, all dealers selling the
certificates, whether or not participating in this offering, may be required to
deliver a prospectus supplement and prospectus until _______________.
<PAGE> 65
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE
MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH
THE SEC IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE
SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN
ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION DATED NOVEMBER 3, 1999
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 , 1999
<PAGE> 66
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
<PAGE> 67
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........................ 96
Reporting and Disclosure.................................. 97
Exempt Plans.............................................. 98
Tax Exempt Investors...................................... 98
Consultation with Counsel................................. 98
Legal Investment Matters.................................... 98
Use of Proceeds............................................. 99
Methods of Distribution..................................... 99
Legal Matters............................................... 100
Financial Information....................................... 100
Additional Information...................................... 101
Reports to Certificateholders............................... 101
Incorporation of Certain Information by Reference........... 101
Glossary.................................................... 102
</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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<PAGE> 70
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.
6
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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.
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DESCRIPTION OF CREDIT ENHANCEMENT
Credit support with respect to each series of certificates may be comprised
of one or more of the components described below. Each component may have a
dollar limit and will generally provide coverage with respect to Realized
Losses, which may include Defaulted Mortgage Losses, Special Hazard Losses,
Bankruptcy Losses and Fraud Losses.
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.
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The descriptions of any insurance policies, bonds or other instruments
described in this prospectus or any prospectus supplement and the coverage
thereunder do not describe all terms thereof but will reflect all relevant terms
thereof material to an investment in the certificates. Copies of the instruments
will be included as exhibits to the Form 8-K to be filed with the SEC in
connection with the issuance of the related series of certificates.
FINANCIAL GUARANTY INSURANCE POLICY
If specified in the related prospectus supplement, a financial guaranty
insurance policy may be obtained and maintained for a class or series of
certificates. The issuer of the financial guaranty insurance policy will be
described in the related prospectus supplement and a copy of the form of
financial guaranty insurance policy will be filed with the related current
report on Form 8-K.
Unless specified in the related prospectus supplement, a financial guaranty
insurance policy will be unconditional and irrevocable and will guarantee to
holders of the applicable certificates that an amount equal to the full amount
of distributions due to these holders will be received by the trustee or its
agent on behalf of the holders for distribution on each distribution date. The
specific terms of any financial guaranty insurance policy will be described in
the related prospectus supplement. A financial guaranty insurance policy may
have limitations and generally will not insure the obligation of the 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,
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flood insurance on the property securing the home equity loan has been kept in
force and other protection and preservation expenses have been paid by the
master servicer.
To the extent described in the related prospectus supplement, coverage in
respect of Special Hazard Losses for a series of certificates may be provided,
in whole or in part, by a type of special hazard coverage other than a special
hazard insurance policy or by means of a representation of the depositor or HFC.
BANKRUPTCY BONDS
In the event of a personal bankruptcy of a borrower, a bankruptcy court may
establish a Deficient Valuation. The amount of the secured debt could then be
reduced to that value, and, thus, the holder of the first and junior loans would
become unsecured creditors to the extent the outstanding principal balance of
those loans exceeds the value assigned to the mortgaged property by the
bankruptcy court. In addition, Debt Service Reductions can result from a
bankruptcy proceeding. See "Legal Aspects of Home Equity Loans and Related
Matters -- Anti-Deficiency Legislation and Other Limitations on Lenders." Any
bankruptcy bond to provide coverage for Bankruptcy Losses resulting from
proceedings under the federal Bankruptcy Code obtained by the depositor for a
trust will be issued by an insurer named in the related prospectus supplement.
The level of coverage under each bankruptcy bond will be set forth in the
related prospectus supplement.
SUBORDINATION
A senior/subordinate series of certificates will consist of one or more
classes of senior certificates and one or more classes of subordinate
certificates, as described in the related prospectus supplement. With respect to
any senior/subordinate series, the total amount available for distribution on
each distribution date, as well as the method for allocating the available
amount among the various classes of certificates included in the series, will be
described in the related prospectus supplement. Generally, the amount available
for distribution will be allocated first to interest on the senior certificates
of the series, and then to principal of the senior certificates up to the
amounts described in the related prospectus supplement, prior to allocation of
any amounts to the subordinate certificates of the series.
Realized Losses will be allocated to the subordinate certificates of the
related series in the order specified in the related prospectus supplement until
the outstanding principal balance of each specified class has been reduced to
zero. Additional Realized Losses, if any, will be allocated to the senior
certificates. If the series includes more than one class of senior certificates,
the additional Realized 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
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interest evidenced by the subordinate certificates in the related trust, with a
corresponding decrease in the Senior Percentage. As a result, the availability
of the subordination provided by the subordinate certificates will be preserved.
In addition, as described above, certain Realized Losses generally will be
allocated first to subordinate certificates by reduction of the outstanding
principal balance thereof, which will have the effect of increasing the
respective ownership interest evidenced by the senior certificates in the
related trust.
If so provided in the pooling and servicing agreement, the master servicer
may be permitted, under some circumstances, to purchase any home equity loan or
the Trust Balance thereof, if applicable, that is three or more months
delinquent in payments of principal and interest at the purchase price. The
purchase price will be advanced by the master servicer to the trust, subject to
the right of the master servicer to reimbursement from the trust for any
Realized Losses subsequently incurred. Any Realized Loss incurred in connection
with any home equity loan or the Trust Balance thereof, if applicable, will be
allocated among the then outstanding certificateholders of the related series in
the same manner as Realized Losses on home equity loans that have not been
purchased.
To the extent provided in the related prospectus supplement, certain
amounts otherwise payable on any distribution date to holders of subordinate
certificates may be deposited into a reserve fund. Amounts held in any reserve
fund may be applied as described under "Description of Credit Enhancement --
Reserve Funds" in the related prospectus supplement.
With respect to any senior/subordinate series, the terms and provisions of
the subordination may vary from those described above. Any variation and any
additional credit enhancement will be described in the related prospectus
supplement.
OVERCOLLATERALIZATION
Excess Interest may be deposited into a reserve fund or applied as a
distribution of principal on the certificates. To the extent Excess Interest is
applied as principal distributions on the certificates, the effect will be to
reduce the principal balance of the certificates relative to the outstanding
balance of the 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.
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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 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
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and effect throughout the term of the applicable pooling and servicing
agreement, unless coverage thereunder has been exhausted through payment of
claims or otherwise, or a substitution is made, or as otherwise described below
under "-- Reduction or Substitution of Credit Enhancement." The master servicer,
on behalf of itself, the trustee and certificateholders, will provide the
trustee information required for the trustee to draw any applicable credit
enhancement.
If specified in the related prospectus supplement, the master servicer or
another entity specified in the related prospectus supplement may agree to pay
the premiums for each financial guaranty insurance policy, special hazard
insurance policy or bankruptcy bond, as applicable, on a timely basis. In the
event the related insurer ceases to be a "qualified insurer" because it ceases
to be qualified under applicable law to transact the insurance business or
coverage is terminated for any reason other than exhaustion of that coverage,
the master servicer will use its best reasonable efforts to obtain from another
qualified insurer a comparable replacement insurance policy or bond with a total
coverage equal to the then outstanding coverage of the original policy or bond.
If the cost of the replacement policy is greater than the cost of the policy or
bond, the coverage of the replacement policy or bond will, unless otherwise
agreed to by the depositor, be reduced to a level so that its premium rate does
not exceed the premium rate on the original insurance policy. Any losses in
market value of the certificates associated with any reduction or withdrawal in
rating by an applicable rating agency shall be borne by the certificateholders.
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
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portion of the assets in the reserve fund to the depositor, the master servicer
or any other person that is entitled thereto. Any released assets and any amount
by which the credit enhancement is reduced will not be available for
distributions in future periods.
OTHER FINANCIAL OBLIGATIONS RELATED TO THE CERTIFICATES
SWAPS AND YIELD SUPPLEMENT AGREEMENTS
The trustee on behalf of the trust may enter into Swaps and other Yield
Supplement Agreements.
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.
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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 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
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purchased with original issue discount, market discount or premium. See
"REMICS -- Taxation of Owners of REMIC Regular Certificates -- Original Issue
Discount, -- Market Discount, -- Premium."
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.
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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 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.
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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 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
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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.
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.
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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 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
investment discretion on behalf of a plan, taking into account the facts and
circumstances of such plan, should consider applicable fiduciary standards of
conduct, such as the prudence of the investment and diversification of the
plan's investment portfolio, as well as the requirement that the plan's
investment must be made in accordance with the plan's governing documents. For
these purposes, a fiduciary is a person who has or exercises discretionary
authority or control with respect to the management or disposition of plan
assets or any person who provides investment advice with respect to plan assets
for a fee.
Unless a statutory or administrative exemption is available, the prohibited
transaction provisions of ERISA and Section 4975 of the Internal Revenue Code
prohibit a broad range of transactions involving assets of plans and certain
related parties to those plans, so-called "parties in interest" under ERISA or
"disqualified persons" under the Internal Revenue Code (which are referred to in
this prospectus as "parties in interest"). The parties in interest to a plan
include the plan sponsor, plan fiduciaries and plan service providers (such as
trustees, investment managers and advisors, custodians and brokers), and certain
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of their affiliates. The range of potential prohibited transactions include
fiduciary self-dealing transactions and any purchase, sale, exchange or
extension of credit between a plan and a party in interest with respect to a
plan, and any transfer to, or use of plan assets by or for the benefit of, a
party in interest. Parties in interest that participate in a nonexempt
prohibited transaction may be subject to a penalty or an excise tax imposed
under Section 502(i) of ERISA or Section 4975 of the Internal Revenue Code,
respectively, and other adverse consequences.
PLAN ASSETS REGULATIONS
DOL has adopted regulations at 29 C.F.R. 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 is also
treated as a "plan asset," any person with discretionary authority or control
over the trust's assets will be a plan fiduciary and transactions involving the
trust's assets would also be subject to ERISA's fiduciary standards of conduct
and the prohibited transaction provisions of ERISA and the Internal Revenue
Code.
The Plan Assets Regulations contain certain exceptions which provide that a
plan's investment in an entity will not cause the assets of the entity to be
treated as ERISA plan assets. These exceptions include the following:
- 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, foreign plans
and any entity whose underlying assets include plan assets by reason of
plan investments in the entity.
While it is possible that one of these exceptions might apply to a trust
contemplated by this prospectus (for example, if less than 25% of each class of
equity in a trust were held by benefit plan investors), compliance with these
exceptions will not be monitored by the depositor, the seller, the trustee, the
master servicer or any subservicer. Therefore, fiduciaries or other persons
investing plan assets should not acquire or hold certificates in reliance upon
the availability of any exception to the Plan Assets Regulations.
Accordingly, if the Home Equity Loans or any other assets included in a
trust were to constitute plan assets, then any party exercising management or
discretionary control with respect to those plan assets may be deemed to be a
plan fiduciary, and thus subject to the fiduciary requirements of ERISA and the
prohibited transaction provisions of ERISA and Section 4975 of the Internal
Revenue Code with respect to plan investors. As a result, the acquisition or
holding of certificates by or on behalf of a plan or with plan assets, as well
as the operation of the trust, may constitute or involve a nonexempt prohibited
transaction under ERISA and the Internal Revenue Code. For example, the
prohibited transaction provisions of Section 406 of ERISA and Section 4975 of
the Internal Revenue Code may cause the
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depositor, the master servicer, any subservicer or the trustee (or affiliates of
those entities) to become parties in interest with respect to an investing plan.
Additionally, if the depositor, the seller, the master servicer, any
subservicer, the trustee, an obligor under any credit enhancement mechanism or
an affiliate thereof either:
- 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 or administrative exemptions. The DOL has issued a
series of at least 32 individual exemptions commonly referred to as the
"underwriter exemptions" which were collectively amended by PTE 97-34, 62 Fed.
Reg. 39021(1997) (hereinafter collectively referred to as the "Exemption") to a
number of brokers some of which may be utilized by the master servicer in
connection with the underwriting contemplated herein (the "Underwriter"). While
there may be some slight variations in the series of individual exemptions, the
Exemption generally exempts from the application of some of the prohibited
transaction provisions of Section 406 of ERISA and Section 4075 of the Internal
Revenue Code, various transactions, among others, relating to the servicing and
operation of home equity loan pools and the purchase, sale and holding of
pass-through certificates issued by the trust as to which:
- 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
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Service, Inc., Duff & Phelps Credit Rating Co. or Fitch IBCA, Inc., which
are collectively referred to as the "exemption rating agencies";
- 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);
- 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, certain aspects of the Exemption require that: (i) in the case
of the acquisition of certificates in connection with the initial issuance, at
least 50% of the highest level certificates are acquired by persons independent
of the Restricted Group (as defined above), (ii) the plan's investment in each
class of certificates does not exceed 25% of all of the certificates of that
class outstanding at the time of the acquisition and (iii) immediately after the
acquisition, no more than 25% of the assets of the plan are invested in
certificates representing an interest in one or more trusts containing assets
sold or serviced (other than as a subservicer) by the same entity.
If the specific conditions of the Exemption are met, the Exemption may
provide an exemption from the restrictions imposed by Sections 406(a) and 407(a)
of ERISA, and the excise taxes imposed by Section 4975(a) and (b) of the
Internal Revenue Code by reason of Section 4975(c)(1)(A) through (D) of the
Internal Revenue Code for the following transactions:
- 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.
If the specific conditions of the Exemption, described above, are
satisfied, the Exemption may provide an exemption from the restrictions imposed
by Sections 406(b)(1) and (b)(2) of ERISA, as well as the excise taxes imposed
by Section 4975(a) and (b) of the Internal Revenue Code by reason of Section
4975(c)(1)(E) of the Internal Revenue Code, in connection with:
- the direct or indirect sale, exchange or transfer of certificates in the
initial issuance of certificates between the master servicer or an
underwriter and a plan when the person who has discretionary
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authority or renders investment advice with respect to the investment of
the relevant plan assets in the certificates is:
- a borrower with respect to 5% or less of the fair market value of the
assets of a trust, or
- an affiliate of that type of person, provided that, with respect to the
acquisition of certificates in connection with the initial issuance of
the certificates, a number of restrictions described in the Exemption
are met,
- 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 are deemed to otherwise apply merely because a
person is deemed to be a party in interest with respect to an investing plan, or
the investing entity holding plan assets, by virtue of providing services to the
plan or by virtue of having certain specified relationships to such a person,
solely as a result of the plan's ownership of certificates.
Any fiduciary or other plan asset investor that proposes to purchase
certificates on behalf of a plan or with plan assets should consult with its
counsel with respect to the potential applicability of ERISA and the Internal
Revenue Code to that investment and the availability of the Exemption or any
other DOL prohibited transaction exemption in connection therewith. Before
purchasing a certificate, a fiduciary or other investor of plan assets should
itself confirm that the certificates constitute "certificates" for purposes of
the Exemption and that the specific and general conditions described in the
Exemption and the other requirements described in the Exemption would be
satisfied. In addition to making its own determination as to the availability of
the exemptive relief provided in the Exemption, the fiduciary or other plan
asset investor should consider its general fiduciary obligations under ERISA in
determining whether to purchase any certificates with plan assets, and whether
the investment is permitted under the plan's governing documents. In addition,
the fiduciary or other plan asset investor should consider the availability of
other exemptions granted by the DOL, which provide relief from a number of the
prohibited transaction provisions of ERISA and the related excise tax provisions
of Section 4975 of the Internal Revenue Code, including Sections I and III of
PTCE 95-60, regarding transactions by insurance company general accounts, PTCE
83-1, regarding certain home equity loan pool investment trusts, PTCE 84-14,
regarding qualified professional asset managers, PTCE 91-38, regarding
transactions by bank collective investment trusts, and PTCE 90-1, regarding
transactions by insurance company separate accounts. (The related prospectus
supplement may contain additional information regarding the application of the
Exemption, PTCE 83-1, PTCE 95-60 or another DOL exemption with respect to the
certificates offered thereby.) There can be no assurance that any of these
exemptions will apply with respect to any particular plan's or other plan asset
investor's investment in the certificates or, even if an exemption were deemed
to apply, that any exemption would apply to all potential prohibited
transactions that may occur in connection with this form of an investment.
AMENDMENT TO EXEMPTION FOR FUNDING ACCOUNTS
In 1997, the DOL published an amendment to the Exemption, which extends
exemptive relief to certain mortgage-backed and asset-backed securities
transactions using funding accounts for trusts issuing
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pass-through certificates for home equity loans or other secured receivables
(the "Obligations") supporting payments to certificate holders, and having a
value equal to no more than twenty-five percent (25%) of the total principal
amount of the certificates being offered by the trust to be transferred to the
trust within a 90-day or three-month period following the closing date (the
"Funding Period"), instead of requiring that all such Obligations be either
identified or transferred on or before the date the offering closes. The
following conditions are among the conditions that must be met for this relief
to be available:
- 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 (the "Additional
Obligations") must meet the same terms and conditions for eligibility as
the original Obligations used to create the trust, which terms and
conditions must have been approved by an exemption rating agency.
- The transfer of such Additional Obligations to the trust during the
Funding Period must not result in the certificates to be covered by the
Exemption receiving a lower credit rating from an exemption rating agency
upon termination of the Funding Period than the rating that was obtained
at the time of the initial issuance of the certificates by the trust.
- 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 may be invested only in cash
or in investments which are permitted by exemption rating agencies rating
the certificates and must be either:
- direct obligations of, or obligations fully guaranteed as to timely
payment of principal and interest by, the United States or any agency or
instrumentality thereof (provided that such obligations are backed by
the full faith and credit of the United States); or
- have been rated (or the obligor has been rated) in one of the three
highest generic rating categories by one of the exemption rating
agencies.
- 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 duties,
responsibilities and liabilities as a fiduciary under ERISA. The trustee,
as legal owner of a
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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 transactions
involving an insurance company general account. Under Section 401(c) of ERISA,
the DOL published proposed regulations on December 22, 1997, but the required
final regulations have not been issued as of the date hereof. The 401(c)
regulations are to provide guidance for the purpose of determining, in cases
where insurance policies or annuity contracts supported by an insurer's general
account are issued to or for the benefit of a plan on or before December 31,
1998, which general account assets constitute plan assets. Section 401(c) of
ERISA generally provides that, until the date which is 18 months after the
401(c) regulations become final, no person shall be subject to liability under
Part 4 of Title I of ERISA or Section 4975 of the Internal Revenue Code on the
basis of a claim that the assets of an insurance company general account
constitute plan assets, unless:
- 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 various breaches of
fiduciary duty which would also constitute a violation of federal or
state criminal law.
Any assets of an insurance company general account which support insurance
policies or annuity contracts issued to a plan after December 31, 1998 or issued
to plans on or before December 31, 1998 for which the insurance company does not
comply with the 401(c) regulations may be treated as plan assets. (Note that
Section 401(c) of ERISA does not relate to insurance company separate accounts.)
Insurance companies contemplating the investment of general account assets in
the certificates should consult with their legal counsel with respect to the
applicability of Sections I and III of PTCE 95-60 and Section 401(c) of ERISA,
including the general account's ability to continue to hold the certificates
after the date regulations become final.
REPRESENTATION FROM INVESTING PLANS IN CERTAIN INSTANCES
As a general matter only certificates that are at the highest level will be
considered eligible for investment by employee benefit plans. Thus, no transfer
of any class of certificates other than the highest class of certificates will
be permitted to be made to a plan or to any person acquiring such certificates
on behalf of or with the assets of a plan, unless such transferee, at its
expense, delivers to the trustee and the master servicer an opinion of counsel
(in form satisfactory to the trustee and the master servicer and as discussed
below) to the effect that the purchase or holding of another class of
certificates by the plan will not result in a nonexempt prohibited transaction
under ERISA and the Internal Revenue Code and will not subject the trustee or
the master servicer to any obligation or liability as a result of the
application of ERISA or the prohibited transaction provisions of Section 4975 of
the Internal Revenue Code. Alternatively, an insurance company general account
may, at its expense, deliver to the trustee and the master servicer a
representation that the transfer and holding of such a certificate are exempt
under Section I and Section III of PTCE 95-60. Unless such opinion or
representation is delivered, each person acquiring a class of certificate other
than the highest class of certificates will be deemed to represent to the
trustee and the master servicer that such person is not a plan or acting on
behalf of a plan or any plan assets.
Moreover, except as otherwise specified in the related prospectus
supplement, the exemptive relief afforded by the Exemption may not apply to (1)
any certificates where the related trust contains revolving
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credit loans, a Swap, Yield Supplement Agreement, mortgage securities or other
assets that are not specifically covered by the Exemption, (2) any certificates
where the related trust contains a Funding Account that does not meet the
requirements of the amendment to the Exemption, discussed above, (3) any
certificates where the related trust contains a Purchase Obligation that is not
specifically covered by the Exemption, or (4) the trustee or other authorized
plan fiduciary is a member of the Restricted Group or the plan is sponsored by a
member of the Restricted Group. Under any such circumstance, and except as
otherwise specified in the respective prospectus supplement, transfers of the
certificates to a plan, to a trustee or other person acting on behalf of any
plan, or to any other person using plan assets to effect the acquisition will
not be registered by the trustee unless the transferee provides the trustee and
the master servicer with an opinion of counsel satisfactory to the trustee and
the master servicer, which opinion will not be at the expense of the trustee or
the master servicer that the purchase of the certificates by or on behalf of the
plan:
- 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.
In lieu of an opinion of counsel, the transferee may provide a
certification of facts substantially to the effect that the purchase of
certificates by or on behalf of the plan:
- is permissible under applicable law,
- will not constitute or result in a non-exempt prohibited transaction
under ERISA or Section 4975 of the Internal Revenue Code,
- will not subject the trustee or the master servicer to any obligation in
addition to those undertaken in the pooling and servicing agreement, and
- the following conditions are met:
- the source of funds used to purchase that certificates is an "insurance
company general account," as that term is defined in PTCE 95-60, and
- the conditions described in Section I and Section III of PTCE 95-60 have
been satisfied as of the date of the acquisition of the certificates.
REPORTING AND DISCLOSURE
ERISA and the Internal Revenue Code require that a Form 5500 (Annual
Return/Report) be filed by certain employer-sponsored employee benefit plans
subject to ERISA. Pursuant to DOL regulations, 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.
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EXEMPT PLANS
Certain plans may be governmental or church plans. Governmental plans and
church plans are generally not subject to ERISA, nor do the above-described
prohibited transaction provisions apply. However, such plans are subject to
prohibitions against certain related-party transactions under Section 503 of the
Internal Revenue Code, which prohibitions are similar to the prohibited
transaction rules. In addition, the fiduciary of any governmental plan or church
plan must consider applicable state or local laws, if any, and the restrictions
and duties of common law, if any, imposed upon such plan.
No view is expressed on whether an investment in the certificates is
appropriate or permissible for any governmental or church plan under Section 503
of the Internal Revenue Code, or under any state, county, local, or other law
respecting such plan.
TAX EXEMPT INVESTORS
A plan that is a Tax-Exempt Investor nonetheless will be subject to federal
income taxation to the extent that its income is "unrelated business taxable
income", or UBTI, within the meaning of Section 512 of the Internal Revenue
Code. All "excess inclusions" of a REMIC allocated to a REMIC residual
certificate held by a Tax-Exempt Investor will be considered UBTI and thus will
be subject to federal income tax. See "Material Federal Income Tax
Consequences -- 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.
Before purchasing a certificate, a fiduciary of a plan should itself
confirm that all the specific and general conditions described in the Exemption
or in another applicable exemption would be satisfied, and, in the case of a
certificate purchased under the Exemption, the certificate constitutes a
"certificate" for purposes of the Exemption. In addition to making its own
determination as to the availability of the exemptive relief provided in the
Exemption or in any other exemption, the plan fiduciary should consider its
general fiduciary obligations under ERISA in determining whether to purchase a
certificate on behalf of a plan.
LEGAL INVESTMENT MATTERS
Each class of certificates offered hereby and by the related prospectus
supplement will be rated at the date of issuance in one of the four highest
rating categories by at least one rating agency. Unless 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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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION (ITEM 14 OF FORM S-3).
The expenses expected to be incurred in connection with the issuance and
distribution of the Certificates being registered, other than underwriting
compensation, are as set forth below. All such expenses, except for the filing
fee, are estimated.
<TABLE>
<S> <C>
Filing Fee for Registration Statement.................... $ 834,000
Legal Fees and Expenses.................................. 300,000
Accounting Fees and Expenses............................. 300,000
Trustee's Fees and Expenses (including counsel fees)..... 150,000
Blue Sky Fees............................................ 75,000
Printing and Engraving Fees.............................. 350,000
Rating Agency Fees....................................... 1,200,000
Miscellaneous............................................ 91,000
----------
Total.......................................... $3,300,000
==========
</TABLE>
INDEMNIFICATION OF DIRECTORS AND OFFICERS (ITEM 15 OF FORM S-3).
Any underwriters will agree to indemnify the Registrant's directors and its
officers who signed this Registration Statement against certain liabilities
which might arise under the Securities Act of 1933 from certain information
furnished to the Registrant by or on behalf of such indemnifying party.
Subsection (a) of Section 145 of the General Corporation Law of Delaware
empowers a corporation to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that he is or was a director, officer, employee or agent of the corporation
or is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, against expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by him in
connection with such action, suit or proceeding if he acted in good faith and in
a manner he reasonably believed to be in or not opposed to the best interests of
the corporation, and, with respect to any criminal action or proceeding, had no
cause to believe his conduct was unlawful.
Subsection (b) of Section 145 empowers a corporation to indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that such
person acted in any of the capacities set forth above, against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the corporation and except that no indemnification may be made
in respect to any claim, issue or matter as to which such person shall have been
adjudged to be liable to the corporation unless and only to the extent that the
Court of Chancery or the court in which such action or suit was brought shall
determine that despite the adjudication of liability such person is fairly and
reasonably entitled to indemnity for such expenses which the court shall deem
proper.
Section 145 further provides that to the extent a director, officer,
employee or agent of a corporation has been successful in the defense of any
action, suit or proceeding referred to in subsections (a) and (b) or in the
defense of any claim, issue or matter therein, he shall be indemnified against
expenses (including attorneys' fees) actually and reasonably incurred by him in
connection therewith; that indemnification or advancement of expenses provided
for by Section 145 shall not be deemed exclusive of any other rights to which
the indemnified party may be entitled; and empowers the corporation to purchase
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and maintain insurance on behalf of a director, officer, employee or agent of
the corporation against any liability asserted against him or incurred by him in
any such capacity or arising out of his status as such whether or not the
corporation would have the power to indemnify him against such liabilities under
Section 145.
The Certificate of Incorporation of the Registrant provides, in effect,
that to the extent and under the circumstances permitted by subsections (a) and
(b) of Section 145 of the General Corporation Law of the State of Delaware, the
Registrant (i) shall indemnify and hold harmless each person who was or is a
party or is threatened to be made a party to any action, suit or proceeding
described in subsections (a) and (b) by reason of the fact that he is or was a
director or officer, or his testator or intestate is or was a director or
officer of the Registrant, against expenses, judgments, fines and amounts paid
in settlement, and (ii) shall indemnify and hold harmless each person who was or
is a party or is threatened to be made a party to any such action, suit or
proceeding if such person is or was serving at the request of the Registrant as
a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise.
In addition, the Pooling and Servicing Agreements will provide that no
director, officer, employee or agent of the Registrant is liable to the Trust
Fund or the Certificateholders, except for such person's own willful
misfeasance, bad faith, gross negligence in the performance of duties or
reckless disregard of obligations and duties. The Pooling and Servicing
Agreements will further provide that, with the exceptions stated above, a
director, officer, employee or agent of the Registrant is entitled to be
indemnified against any loss, liability or expense incurred in connection with
legal action relating to such Pooling and Servicing Agreements and related
Certificates other than such expenses related to particular Home Equity Loans.
EXHIBITS (ITEM 16 OF FORM S-3).
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
1.1 -- Form of Underwriting Agreement for the home equity loan
asset backed certificates
3.1 -- Certificate of Incorporation of HFC Revolving
Corporation*
3.2 -- By-Laws of HFC Revolving Corporation*
4.1 -- Form of Pooling and Servicing Agreement
5.1 -- Opinion of Katten Muchin & Zavis with respect to legality
relating to the home equity loan asset backed
certificates
8.1 -- Opinion of Katten Muchin & Zavis with respect to certain
tax matters relating to the home equity loan asset backed
certificates (included as part of Exhibit 5.1)
23.1 -- Consent of Katten Muchin & Zavis relating to the home
equity loan asset backed certificates (included as part
of Exhibit 5.1)
</TABLE>
- ---------------
* Incorporated herein by reference to the corresponding exhibit to the
Registrant's registration statement on Form S-11, as amended (Registration No.
333-12483).
UNDERTAKINGS (ITEM 17 OF FORM S-3).
A. Undertakings Pursuant to Rule 415.
The Registrant hereby undertakes:
(a)(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement;
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually
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or in the aggregate, represent a fundamental change in the information
set forth in this Registration Statement; and
(iii) to include any material information with respect to the plan
of distribution not previously disclosed in this Registration Statement
or any material change to such information in this Registration
Statement;
Provided however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed with or furnished to the
Commission by the Registrant pursuant to Section 13 or Section 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in this
Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) The Registrant hereby undertakes that, for purposes of determining any
liability under the Securities Act of 1933, each filing of the Registrant's
annual report pursuant to Section 13(a) or Section 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in this Registration Statement shall be
deemed to be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
B. Undertaking in Respect of Indemnification.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the SEC such indemnification is against
public policy as expressed in the Securities Act of 1933 and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act of 1933, as amended, and will be
governed by the final adjudication of such issue.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, HFC Revolving
Corporation certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-3, reasonably believes that the
security rating requirement contained in Transaction Requirement B.5 of Form S-3
will be met by the time of the sale of the securities registered hereunder, and
has duly caused this Amendment No. 1 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Prospect Heights, State of Illinois, as of the 3rd day of November, 1999.
HFC REVOLVING CORPORATION
By: /s/ G.D. GILMER
----------------------------------
G.D. Gilmer
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed below by the following
persons in the capacities indicated on November 3, 1999:
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ G.D. GILMER President, Chief Executive Officer and
- ----------------------------------------------------- Director
G.D. Gilmer
/s/ B.B. MOSS, JR. Senior Vice President, Treasurer and Chief
- ----------------------------------------------------- Financial Officer
B.B. Moss, Jr.
/s/ S.L. MCDONALD Senior Vice President, Controller and Chief
- ----------------------------------------------------- Accounting Officer
S.L. McDonald
/s/ J.W. BLENKE Director
- -----------------------------------------------------
J.W. Blenke
/s/ S.H. SMITH Director
- -----------------------------------------------------
S.H. Smith
</TABLE>
II-4
<PAGE> 1
EXHIBIT 1.1
HOUSEHOLD HOME EQUITY LOAN TRUST ____
HFC REVOLVING CORPORATION
(Depositor)
HOUSEHOLD FINANCE CORPORATION
(Master Servicer)
Closed-End Home Equity Loan Asset Backed Certificates,
Series _____,
$____________ Class A Certificates
$____________ Class M Certificates
UNDERWRITING AGREEMENT
----------------------
_________, 1999
[NAME OF UNDERWRITER]
[UNDERWRITER'S ADDRESS]
Ladies and Gentlemen:
HFC Revolving Corporation, a Delaware corporation (the "Depositor"),
has authorized the issuance by Household Home Equity Loan Trust ______ (the
"Trust") of the aggregate principal amounts set forth above of Closed-End Home
Equity Loan Asset Backed Certificates, Series 1999-1, Class A (the "Class A
Certificates") and Class M (the "Class M Certificates"), and has authorized the
sale of the Class A and Class M Certificates (collectively, the "Underwritten
Certificates") to the several underwriters named in Schedule I hereto
(collectively, the "Underwriters"), for whom you are acting as representative
(the "Representative"). Each Class A and Class M Certificate will represent a
fractional undivided interest in the Trust. The assets of the Trust will
include, among other things, a pool of closed-end, fixed-rate home equity loans
conveyed to the Trust at the Closing Time (as defined herein) and any eligible
home equity loan substituted for a defective loan pursuant to the Pooling and
Servicing Agreement (as defined below) (each, an "Eligible Substitute Home
Equity Loan" and, together with the home equity loans conveyed to the Trust at
the Closing Time, the "Home Equity Loans"), secured primarily by first and
second mortgages on residential properties that are primarily one- to
four-family properties and certain monies due thereunder. The Depositor will
acquire the Home Equity Loans pursuant to the Home Equity Loan Purchase
Agreement, as described below. Simultaneously with the issuance of the
Underwritten Certificates and the sale of such certificates to the Underwriters
as contemplated herein, the Trust will also issue the Closed-End Home Equity
Loan Asset Backed Certificates, Series ______, Class R (the "Residual
Certificates" and, together with the Class A and Class M Certificates, the
"Certificates"), evidencing the remaining interest in the Trust not evidenced
by the
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<PAGE> 2
Class A and Class M Certificates. The Certificates will be issued pursuant
to a Pooling and Servicing Agreement to be dated as of _________, 1999 (the
"Pooling and Servicing Agreement"), among the Depositor, Household Finance
Corporation, as master servicer (the "Master Servicer" or "HFC") and ________,
(the "Trustee"). The Depositor is a subsidiary of HFC.
The Depositor will enter into a Home Equity Loan Purchase Agreement
dated as of __________, 1999 (the "Home Equity Loan Purchase Agreement"),
between the Depositor, as purchaser, and certain originators, each of which is a
subsidiary of HFC (collectively, the "Sellers" and each individually, a
"Seller"). Pursuant to the Home Equity Loan Purchase Agreement, the Sellers will
sell to the Depositor all of their right, title and interest in and to the
unpaid principal balance of the Home Equity Loans, including all interest and
principal payments in respect thereof received on or after the Cut-Off Date, and
certain other rights with respect to the collateral supporting the Home Equity
Loans. Pursuant to the Pooling and Servicing Agreement, the Depositor will
assign and grant to the Trust all of its right, title and interest in and to the
Home Equity Loan Purchase Agreement. In addition, the Sellers have entered into
an agreement dated as of __________, 1999 ( the "Transfer Agreement"), between
the Trustee and each Seller, pursuant to which the Sellers will assign to the
Trust all of their right, title and interest in and to the collateral supporting
the Home Equity Loans, including the loan agreement and mortgage notes relating
thereto (collectively, the "Transferred Assets") not otherwise transferred
pursuant to the Home Equity Loan Purchase Agreement.
The Depositor has filed with the Securities and Exchange Commission
(the "Commission") a registration statement on Form S-3 (File No. 333-_____)
relating to the Underwritten Certificates, and the offering thereof from time to
time in accordance with Rule 415 under the Securities Act of 1933, as amended
(the "1933 Act"), and has filed, and proposes to file, such amendments thereto
as may have been required to the date hereof pursuant to the 1933 Act and the
rules of the Commission thereunder (the "1933 Act Regulations"). Such
registration statement, as amended at the time when it became effective under
the 1933 Act and at the Closing Time defined below, is referred to herein as the
"Registration Statement". The Depositor proposes to file with the Commission
pursuant to Rule 424(b)(5) under the 1933 Act Regulations a supplement (the
"Prospectus Supplement") to the prospectus (as it may be amended in connection
with such Prospectus Supplement, the "Basic Prospectus"; the Basic Prospectus,
together with the Prospectus Supplement, the "Prospectus"). Any preliminary form
of the Prospectus that has heretofore been filed pursuant to Rule 424(b) is
hereinafter called the "preliminary prospectus".
For purposes of this Agreement, all references to the Registration
Statement, any preliminary prospectus, the Prospectus or any amendment or
supplement to any of the foregoing shall be deemed to include the copy filed
with the Commission pursuant to its Electronic Data Gathering, Analysis and
Retrieval system ("EDGAR").
All references in this Agreement to financial statements and schedules
and other information which is "contained," "included" or "stated" in the
Registration Statement, any preliminary
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<PAGE> 3
prospectus or the Prospectus (or other references of like import) shall be
deemed to mean and include all such financial statements and schedules and other
information which are incorporated by reference in the Registration Statement,
any preliminary prospectus or the Prospectus, as the case may be; and all
references in this Agreement to amendments or supplements to the Registration
Statement, any preliminary prospectus or the Prospectus shall be deemed to mean
and include the filing of any document under the Securities Exchange Act of
1934, as amended (the "1934 Act"), which is incorporated by reference in the
Registration Statement, such preliminary prospectus or the Prospectus, as the
case may be.
Capitalized terms used but not otherwise defined herein shall have the
meanings assigned thereto in the Pooling and Servicing Agreement or the
Prospectus, as applicable.
SECTION 1. Representations and Warranties.
(a) The Depositor represents and warrants to, and agrees with, each
Underwriter as set forth in this Section 1(a):
(i) The Depositor meets the requirements for use of Form S-3
under the 1933 Act. The Registration Statement has become effective
under the 1933 Act and no stop order suspending the effectiveness of
the Registration Statement has been issued under the 1933 Act and no
proceedings for that purpose have been instituted or are pending or, to
the knowledge of the Depositor, are contemplated by the Commission, and
any request on the part of the Commission for additional information
has been complied with. At the time the Registration Statement became
effective and at the Closing Time, the Registration Statement and any
amendments and supplements thereto, including documents incorporated or
deemed to be incorporated by reference in the Registration Statement,
complied and will comply in all material respects with the requirements
of the 1933 Act and the 1933 Act Regulations and the , 1934 Act and the
rules and regulations of the Commission thereunder (the "1934 Act
Regulations"), and did not and will not contain any untrue statement of
a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading.
Neither the Prospectus nor any amendments or supplements thereto, at
the time the Prospectus or any such amendment or supplement was filed
with the Commission and at the Closing Time, included or will include
an untrue statement of a material fact or omitted or will omit to state
a material fact necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not
misleading; provided, however, that the Depositor makes no
representations or warranties as to (i) any statements in, or omissions
from, the Registration Statement or the Prospectus made in reliance
upon and in conformity with information furnished to the Depositor in
writing by the Underwriters expressly for use in the Registration
Statement or the Prospectus or (ii) information in any "Computational
Materials", "Collateral Term Sheets"or "Structural Term Sheets" (each
as hereinafter defined) provided by the Underwriters except to the
extent that the information set forth therein is "Pool Information". As
used herein, Pool Information means information with respect to the
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<PAGE> 4
financial characteristics of the Home Equity Loans set forth in the
Prospectus Supplement.
(ii) Each preliminary prospectus and the prospectus filed as part
of the Registration Statement as originally filed or as part of any
amendment thereto, or filed pursuant to Rule 424(b) under the 1933 Act,
complied when so filed in all material respects with the 1933 Act
Regulations and each preliminary prospectus and the Prospectus
delivered to the Underwriters for use in connection with this offering
was, in all material respects, identical to the electronically
transmitted copies thereof filed with the Commission pursuant to EDGAR,
except to the extent permitted by Regulation S-T.
(iii) Since the respective dates as of which information is given
in the Prospectus, or the Prospectus as amended and supplemented at the
Closing Time, there has not been any material adverse change in the
general affairs, management, financial condition, or results of
operations of any of the Sellers or the Depositor or of their
subsidiaries, otherwise than as set forth or contemplated in the
Prospectus or the Prospectus as amended and supplemented at the Closing
Time.
(iv) Each of the Sellers and the Depositor has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of its respective jurisdiction of incorporation, with
the full right, power and authority (corporate and other) to own, lease
and operate its properties and conduct its business as described in the
Prospectus and to enter into and perform its obligations under this
Agreement, the Pooling and Servicing Agreement, the Transfer Agreement
and the Home Equity Loan Purchase Agreement, as applicable, and to
cause the Certificates to be issued; each of the Sellers and the
Depositor is duly qualified as a foreign corporation to transact
business and is in good standing in each jurisdiction which requires
such qualification, except where failure to be so qualified would not
have a material adverse effect on the business or financial condition
of any such Seller or the Depositor; and each Seller is duly authorized
under the statutes that regulate the business of making loans or of
financing the sale of goods (commonly called "small loan laws,"
"consumer finance laws," or "sales finance laws"), or is permitted
under the general interest statutes and related laws and court
decisions, to conduct in the various jurisdictions in which any of them
do business the businesses as currently conducted therein by any of
them.
(v) There are no legal or governmental proceedings pending to
which any Seller or the Depositor is a party or of which any property
of any Seller or the Depositor is the subject, other than proceedings
which are not reasonably expected, individually or in the aggregate, to
have a material adverse effect on the financial position, shareholders'
equity or results of operations of such Seller or the Depositor; and to
the best knowledge of the Depositor, no such proceedings are threatened
or contemplated by governmental authorities or threatened by others.
(vi) This Agreement has been duly authorized, executed and
delivered
5
<PAGE> 5
by the Depositor, and the Pooling and Servicing Agreement and the Home
Equity Loan Purchase Agreement, when executed and delivered as
contemplated hereby and thereby, will have been duly authorized,
executed and delivered by the Depositor, and the Home Equity Loan
Purchase Agreement, and the Transfer Agreement when executed and
delivered as contemplated hereby and thereby, will have been duly
authorized, executed and delivered by each Seller. This Agreement
constitutes, and the Pooling and Servicing Agreement, the Transfer
Agreement and the Home Equity Loan Purchase Agreement when executed and
delivered as contemplated herein and therein will constitute, legal,
valid and binding instruments enforceable against the Depositor or the
Sellers, as applicable, in accordance with their respective terms,
subject as to enforceability (A) to applicable bankruptcy,
reorganization, insolvency, moratorium or other similar laws affecting
creditors' rights generally, (B) to general principles of equity
(regardless of whether enforcement is sought in a proceeding in equity
or at law) and (C) with respect to rights of indemnity under this
Agreement, to limitations of public policy under applicable securities
laws.
(vii) The issuance and delivery of the Certificates, the
consummation of any other of the transactions contemplated herein or in
the Pooling and Servicing Agreement, the Transfer Agreement and the
Home Equity Loan Purchase Agreement, the Transfer Agreement and the
fulfillment of the terms of this Agreement, the Home Equity Loan
Purchase Agreement and the Pooling and Servicing Agreement, do not and
will not conflict with or violate any term or provision of the
Certificate or Articles of Incorporation or Bylaws of any of the
Sellers or the Depositor, any statute, order or regulation applicable
to any of the Sellers or the Depositor of any court, regulatory body,
administrative agency or governmental body having jurisdiction over any
of the Sellers or the Depositor and do not and will not conflict with,
result in a breach or violation or the acceleration of, or constitute a
default under, or result in the creation or imposition of any lien,
charge or encumbrance upon any of the property or assets of any of the
Sellers or the Depositor pursuant to the terms of, any indenture,
mortgage, deed of trust, loan agreement or other agreement or
instrument to which any of the Sellers or the Depositor is a party or
by which any of the Sellers or the Depositor may be bound or to which
any of the property or assets of any of the Sellers or the Depositor
may be subject, except for conflicts, violations, breaches,
accelerations and defaults which would not, individually or in the
aggregate, be materially adverse to any of the Sellers or the Depositor
or materially adverse to the transactions contemplated by this
Agreement.
(viii) Arthur Andersen LLP is an independent public accountant
with respect to the Sellers and the Depositor as required by the 1933
Act and 1933 Act Regulations.
(ix) The direction by the Depositor to the Trustee to execute,
countersign, issue and deliver the Certificates has been duly
authorized by the Depositor, and assuming the Trustee has been duly
authorized to do so, when executed, countersigned, issued and delivered
by the Trustee in accordance with the Pooling and Servicing
6
<PAGE> 6
Agreement, the Certificates will be validly issued and outstanding and
will be entitled to the benefits provided by the Pooling and Servicing
Agreement.
(x) No consent, approval, authorization, order, registration or
qualification of or with any court or governmental agency or body of
the United States is required for the issuance or sale of the
Underwritten Certificates, or the consummation by any of the Sellers or
the Depositor of the other transactions contemplated by this Agreement,
the Pooling and Servicing Agreement, the Transfer Agreement or the Home
Equity Loan Purchase Agreement, except for (A) the registration under
the 1933 Act of the Underwritten Certificates, or (B) such consents,
approvals, authorizations, orders, registrations, filings,
qualifications, licenses or permits as have been obtained or as may be
required under State securities or Blue Sky laws in connection with the
issuance of the Underwritten Certificates and the subsequent purchase
and distribution of the Underwritten Certificates by the Underwriters
(C) where the failure to obtain such consents, approvals,
authorizations, orders, registrations, filings, qualifications,
licenses or permits would not have a material adverse effect on the
business or consolidated financial condition of HFC and its
subsidiaries taken as a whole or the transactions contemplated by such
agreements.
(xi) Each of the Sellers and the Depositor possesses all material
licenses, certificates, authorities or permits issued by the
appropriate state, federal or foreign regulatory agencies or bodies
necessary to conduct the business now conducted by it and as described
in the Prospectus, and none of the Sellers or the Depositor has
received notice of proceedings relating to the revocation or
modification of any such license, certificate, authority or permit
which, singly or in the aggregate, if the subject of an unfavorable
decision, ruling or finding, would materially and adversely affect the
conduct of its business, operations or financial condition.
(xii) At the time of execution and delivery of the Home Equity
Loan Purchase Agreement, and the Transfer Agreement each Seller (A)
will have good and marketable title to the unpaid principal balance of
the Home Equity Loans and the Transferred Assets being transferred by
it to the Depositor, or Trustee, as the case may be, free and clear of
any lien, mortgage pledge, charge, encumbrance, adverse claim or other
security interest (collectively "Liens"), (B) will not have assigned to
any person any of its right, title or interest in or to the unpaid
principal balance of the Home Equity Loans under the Home Equity Loan
Purchase Agreement or the Transferred Assets under the Transfer
Agreement, and (C) will have the power and authority to sell the unpaid
principal balance of the Home Equity Loans to the Depositor and
transfer and assign the Transferred Assets to the Trustee; and upon the
consummation of the sale, transfer and assignment provided for pursuant
to the terms of the Home Equity Loan Purchase Agreement, the Depositor
will have acquired beneficial ownership of all the related Seller's
right, title and interest in and to the unpaid principal balance of the
Home Equity Loans.
(xiii) At the time of execution and delivery of the Pooling and
Servicing
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<PAGE> 7
Agreement, the Depositor (A) will have good and marketable title to the
unpaid principal balance of the Home Equity Loans being transferred by
it to the Trustee pursuant to the Pooling and Servicing Agreement, free
and clear of Liens, (B) will not have assigned to any person any of its
right, title or interest in or to the unpaid principal balance of the
Home Equity Loans under the Home Equity Loan Purchase Agreement, the
Pooling and Servicing Agreement or the Certificates being issued
pursuant thereto and (C) will have the power and authority to sell the
unpaid principal balance of the Home Equity Loans to the Trustee and to
sell the Underwritten Certificates to the Underwriters; and upon
execution and delivery of the Pooling and Servicing Agreement by the
Trustee, the Trustee will have acquired beneficial ownership of all of
the Depositor's right, title and interest in and to the unpaid
principal balance of the Home Equity Loans; and upon delivery to the
Underwriters of the Underwritten Certificates in return for the agreed
upon consideration the Underwriters will have good and marketable title
to the Underwritten Certificates, in each case free of Liens, except to
the extent disclosed in the Prospectus.
(xiv) As of the Cut-Off Date, each of the Home Equity Loans will
meet the eligibility criteria described in the Prospectus and as of the
related Cut-Off Date for any Eligible Substitute Home Equity Loan, the
Eligible Substitute Home Equity Loan will meet the eligibility criteria
applicable thereto described in the Pooling and Servicing Agreement.
(xv) None of the Sellers, the Depositor or the Trust created by
the Pooling and Servicing Agreement will conduct their operations while
any of the Underwritten Certificates are outstanding in a manner that
would require any Seller, the Depositor or the Trust to be registered
as an "investment company" under the Investment Company Act of 1940, as
amended (the "1940 Act"), as in effect on the date hereof.
(xvi) At the Closing Time, the Certificates and the Pooling and
Servicing Agreement will conform in all material respects to the
descriptions thereof contained in the Prospectus.
(xvii) At the Closing Time, each class of the Underwritten
Certificates shall have been rated in the applicable rating category
described in the Prospectus.
(xviii) Any taxes, fees and other governmental charges in
connection with the execution, delivery and issuance of this Agreement,
the Pooling and Servicing Agreement, the Transfer Agreement, the Home
Equity Loan Purchase Agreement and the Certificates have been paid or
will be paid at or prior to the Closing Time.
(xix) At the Closing Time, each of the representations and
warranties of the Depositor with respect to the Home Equity Loans set
forth in the Pooling and Servicing Agreement will be true and correct
in all material respects.
(b) HFC represents and warrants to, and agrees with, each Underwriter
as set forth in this Section 1(b):
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<PAGE> 8
(i) HFC is a corporation duly organized and validly existing and
in good standing under the laws of its jurisdiction of incorporation.
HFC has all requisite power and authority to own its properties and
conduct its business as presently conducted and is duly qualified as a
foreign corporation to transact business and is in good standing in
each jurisdiction which requires such qualification, except where the
failure to have such power and authority or to be so qualified would
not have a material adverse effect on the business or consolidated
financial condition of HFC and its subsidiaries taken as a whole.
(ii) HFC is not in violation of its restated articles of
incorporation or in default in the performance or observance of any
obligation, agreement, covenant or condition contained in any contract,
indenture, mortgage, loan agreement, note, lease or other instrument
material to the business HFC and its subsidiaries, taken as a whole, to
which HFC is a party or by which it may be bound, or to which any of
the property or assets of HFC is subject.
(iii) The execution, delivery and performance by HFC of this
Agreement and the Pooling and Servicing Agreement, and the consummation
of the transactions contemplated hereby and thereby have been duly and
validly authorized by all necessary action or proceedings and will not
conflict with or constitute a breach of, or default under, or result in
the creation or imposition of any lien, charge or encumbrance upon any
property or assets of HFC pursuant to, any contract, indenture,
mortgage, loan agreement, note, lease or other instrument to which HFC
is a party or by which it may be bound, or to which any of the property
or assets of HFC is subject, nor will such action result in any
violation of the provisions of the charter or by-laws of HFC or any
applicable law, administrative regulation or administrative or court
decree, except where any such conflict, breach, default, encumbrance or
violation would not have a material adverse effect on the transactions
contemplated by this Agreement.
(iv) This Agreement and the Pooling and Servicing Agreement have
been duly executed and delivered by HFC; and this Agreement and the
Pooling and Servicing Agreement constitute legal, valid and binding
instruments enforceable against HFC in accordance with their respective
terms, subject as to enforceability (A) to applicable bankruptcy,
reorganization, insolvency, moratorium or other similar laws affecting
creditors' rights generally, (B) to general principles of equity
(regardless of whether enforcement is sought in a proceeding in equity
or at law) and (C) with respect to rights of indemnity under this
Agreement, to limitations of public policy under applicable securities
laws.
(v) Except as set forth in or contemplated in reports filed by
HFC with the Commission pursuant to the 1934 Act and the 1934 Act
Regulations, there has been no material adverse change in the
consolidated financial condition of HFC and its subsidiaries taken as a
whole since the respective dates as of which any information is
relating to HFC given in the Prospectus.
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<PAGE> 9
(vi) There are no legal or governmental proceedings pending, or
to the knowledge of HFC threatened, to which HFC is a party or of which
any of its property is the subject, other than proceedings which are
not reasonably expected, individually or in the aggregate, to have a
material adverse effect on the shareholder's equity or consolidated
financial position of HFC and its subsidiaries taken as a whole or
which would have a material adverse effect upon the consummation of
this Agreement.
(vii) No consent, approval, authorization, order, registration,
filing, qualification, license or permit of or with any court or
governmental agency or body of the United States is required for the
consummation by HFC of the transactions contemplated by this Agreement
and the Pooling and Servicing Agreement, except for (A) the
registration under the 1933 Act of the Underwritten Certificates, (B)
such consents, approvals, authorizations, orders, registrations,
filings, qualifications, licenses or permits as have been obtained or
as may be required under state securities or Blue Sky laws in
connection with the issuance of the Underwritten Certificates and the
subsequent purchase and distribution of the Underwritten Certificates
by the Underwriters or (C) where the failure to obtain such consents,
approvals, authorizations, orders, registrations, filings,
qualifications, licenses or permits would not have a material adverse
effect on the business or consolidated financial condition of HFC and
its subsidiaries taken as a whole or the transactions contemplated by
such agreements.
(viii) Arthur Andersen LLP is an independent public accountant
with respect to HFC.
(c) Any certificate signed by an officer of the Depositor or HFC and
delivered to you or your counsel in connection with the offering of the
Underwritten Certificates shall be deemed, and shall state that it is, a
representation and warranty as to the matters covered thereby to each person to
whom the representations and warranties in this Section 1 are made.
(d) The Underwriters represent and warrant to, and agree with, the
Depositor and HFC as of the date hereof and as of the Closing Time that the
Underwriters have complied and will comply with all of their obligations arising
hereunder and in accordance with the 1933 Act, 1934 Act, the 1933 Act
Regulations and the 1934 Act Regulations and, with respect to the Computational
Materials, Collateral Term Sheets and Structural Term Sheets provided by the
Representative, such Computational Materials, Collateral Term Sheets and
Structural Term Sheets are accurate in all material respects (taking into
account the assumptions explicitly set forth in the Computational Materials,
Collateral Term Sheets and Structural Term Sheets, except for any errors therein
attributable to errors or mistakes in the Pool Information). The Computational
Materials, Collateral Term Sheets and Structural Term Sheets provided by the
Representative to the Depositor constitute a complete set of all Computational
Materials, Collateral Term Sheets and Structural Term Sheets required to be
filed with the Commission pursuant to the No-Action Letters.
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<PAGE> 10
SECTION 2. Purchase and Sale.
(a) Subject to the terms and conditions and in reliance upon the
covenants, representations and warranties herein set forth, the Depositor agrees
to sell to each of the Underwriters, and each of the Underwriters agrees,
severally and not jointly, to purchase from the Depositor the principal amount
of Class A Certificates set forth opposite such Underwriter's name in Schedule I
pursuant to the terms of this Agreement at a purchase price equal to ______% of
the aggregate principal amount represented by the Class A Certificates.
(b) Subject to the terms and conditions and in reliance upon the
covenants, representations and warranties herein set forth, the Depositor agrees
to sell to each of the Underwriters, and each of the Underwriters agrees,
severally and not jointly, to purchase from the Depositor the principal amount
of Class M Certificates set forth opposite such Underwriter's name in Schedule I
pursuant to the terms of this Agreement at a purchase price equal to _____% of
the aggregate principal amount represented by the Class M Certificates.
SECTION 3. Delivery and Payment. Payment of the purchase price for,
and delivery of, the Underwritten Certificates to be purchased by the
Underwriters shall be made at the offices of Katten Muchin & Zavis, 525 West
Monroe Street, Chicago, Illinois 60661, or at such other place as shall be
agreed upon by you, the Depositor and HFC, at 10:00 A.M. New York City time on
___________, 1999, which date, time or place may be postponed or changed by
agreement between you, the Depositor and HFC (such date and time of delivery and
payment for the Certificates being herein referred to as the "Closing Time").
Delivery of one or more global certificates representing the Underwritten
Certificates shall be made to the accounts of the several Underwriters against
payment by them of the purchase price therefor, to or upon the order of the
Depositor by one or more wire transfers in immediately available funds. The
global certificates to be so delivered shall be registered in the name of Cede &
Co., as nominee for The Depository Trust Company ("DTC"). The interests of
beneficial owners of the Underwritten Certificates will be represented by book
entries on the records of DTC and participating members thereof. Definitive
Certificates representing the Underwritten Certificates will be available only
under limited circumstances as described in the Pooling and Servicing Agreement.
SECTION 4. Offering by the Underwriters. It is understood that the
Underwriters propose to offer the Underwritten Certificates for sale to the
public as set forth in the Prospectus.
SECTION 5. Covenants of the Depositor. The Depositor covenants with
each of the Underwriters as follows:
(a) The Depositor will notify the Underwriters immediately, and confirm
the notice in writing, (i) when any post-effective amendment to the Registration
Statement shall become effective, or any supplement to the Prospectus or any
amended Prospectus shall have been filed, (ii) of the receipt of any comments
from the Commission with respect to the Prospectus, (iii) of any request by the
Commission for any amendment to the Registration Statement or any amendment or
supplement to the Prospectus or for additional information, and (iv) of the
issuance by the Commission of any stop order suspending the effectiveness of the
Registration Statement or of any order preventing or
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<PAGE> 11
suspending the use of the preliminary prospectus, or of the suspension of the
qualification of the Underwritten Certificates for offering or sale in any
jurisdiction, or of the initiation or threatening of any proceedings for any of
such purposes. The Depositor will promptly effect the filings necessary pursuant
to Rule 424(b) and will take such steps as it deems necessary to ascertain
promptly whether the form of prospectus transmitted for filing under Rule 424(b)
was received for filing by the Commission and, in the event that it was not, it
will promptly file such prospectus. The Depositor will make every reasonable
effort to prevent the issuance of any stop order and, if any stop order is
issued, to obtain the lifting thereof at the earliest possible moment.
(b) The Depositor will give the Underwriters notice of its intention to
file or prepare any amendment to the Registration Statement or any amendment,
supplement or revision to either the Basic Prospectus or to the Prospectus,
whether pursuant to the 1933 Act, the 1934 Act or otherwise (other than reports
to be filed pursuant to the 1934 Act), will furnish the Representative with
copies of any such documents other than Computational Materials, Collateral Term
Sheets and Structural Term Sheets a reasonable amount of time prior to such
proposed filing or use, as the case may be, and will not file or use any such
document to which the Representative or counsel for the Underwriters shall
object.
(c) The Depositor has furnished or will deliver to the Representative
and counsel for the Underwriters, without charge, signed copies of the
Registration Statement as originally filed and of each amendment thereto
(including exhibits filed therewith or incorporated by reference therein and
documents incorporated or deemed to be incorporated by reference therein) and
signed copies of all consents and certificates of experts, and will also deliver
to the Underwriters without charge, a conformed copy of the Registration
Statement as originally filed and of each amendment thereto (without exhibits).
The copies of the Registration Statement and each amendment thereto furnished to
the Underwriters will be identical, in all material respects, to the
electronically transmitted copies thereof filed with the Commission pursuant to
EDGAR, except to the extent permitted by Regulation S-T.
(d) The Depositor has delivered to the Underwriters, without charge, as
many copies of the preliminary prospectus as the Underwriters reasonably
requested, and the Depositor hereby consents to the use of such copies for
purposes permitted by the 1933 Act. The Depositor will furnish to the
Underwriters, without charge, during the period when the Prospectus is required
to be delivered under the 1933 Act or the 1934 Act, such number of copies of the
Prospectus (as amended or supplemented) as the Underwriters may reasonably
request. The Prospectus and any amendments or supplements thereto furnished to
the Underwriters will be identical, in all material respects, to the
electronically transmitted copies thereof filed with the Commission pursuant to
EDGAR, except to the extent permitted by Regulation S-T.
(e) The Depositor will comply with the 1933 Act and the 1933 Act
Regulations, the 1934 Act and the 1934 Act Regulations so as to permit the
completion of the distribution of the Underwritten Certificates as contemplated
in this Agreement and in the Prospectus. If at any time when a prospectus is
required by the 1933 Act to be delivered in connection with sales of the
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Underwritten Certificates, any event shall occur or condition shall exist as a
result of which it is necessary, in the opinion of counsel for the Underwriters
or for the Depositor, to amend the Registration Statement or amend or supplement
the Prospectus in order that the Prospectus will not include any untrue
statements of a material fact or omit to state a material fact necessary in
order to make the statements therein not misleading in the light of the
circumstances existing at the time it is delivered to a purchaser, or if it
shall be necessary, in the opinion of such counsel, at any such time to amend
the Registration Statement or amend or supplement the Prospectus in order to
comply with the requirements of the 1933 Act or the 1933 Act Regulations, the
Depositor will promptly prepare and file with the Commission, subject to Section
5(b), such amendment or supplement as may be necessary to correct such statement
or omission or to make the Registration Statement or the Prospectus comply with
such requirements, and the Depositor will furnish to the Underwriters such
number of copies of such amendment or supplement as the Underwriters may
reasonably request.
(f) Upon the request of and in cooperation with the Underwriters, the
Depositor will use its best efforts to qualify the Underwritten Certificates for
offering and sale under the applicable securities laws of such states and other
jurisdictions as the Representative may designate and to maintain such
qualifications in effect for a period of not less than one year from the later
of the effective date of the Registration Statement; provided, however, that the
Depositor or the Trust shall not be obligated to file any general consent to
service of process or to qualify as a foreign corporation or as a dealer in
securities in any jurisdiction in which it is not so qualified or to subject
itself to taxation in respect of doing business in any jurisdiction in which it
is not otherwise so subject. Upon the request of and in cooperation with the
Underwriters, the Depositor will also supply the Representative with such
information as is reasonably necessary for the determination of the legality of
the Underwritten Certificates for investment under the laws of such
jurisdictions as the Underwriters may request.
(g) The Depositor, during the period when the Prospectus is required to
be delivered under the 1933 Act or the 1934 Act, will file all documents
required to be filed with the Commission pursuant to the 1934 Act within the
time periods required by the 1934 Act and the 1934 Act Regulations.
(h) The Depositor will, at the expense of the Underwriters, file the
Computational Materials and Structural Term Sheets provided to it by the
Representative under Section 6 with the Commission pursuant to a Current Report
on Form 8-K not later than 5:00 p.m. on the day the Prospectus is delivered to
the Underwriters or, in the case of any Collateral Term Sheet required to be
filed pursuant to the No-Action Letters, not later than the second business day
following the first day on which the Collateral Term Sheet has been sent to a
prospective investor; provided, however, that as a condition to the filing of
the Computational Materials, Collateral Term Sheets and Structural Term Sheets
by the Depositor, the Depositor must receive a letter from a firm of independent
certified public accountants reasonably acceptable to the Depositor, which
letter shall be satisfactory in form and substance to the Depositor, HFC and
their counsel, to the effect that such accountants have performed certain
specified procedures, all of which have been agreed to by
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<PAGE> 13
the Depositor, as a result of which they have determined the accuracy in all
material respects of the numerical and financial information included in the
Computational Materials and Structural Term Sheets provided by the
Representative to the Depositors for filing with the Commission.
(i) The Depositor shall take all reasonable action necessary to enable
____________________ and ______________________________ (the "Rating
Agencies") to provide their respective credit ratings of the Underwritten
Certificates as described in the Prospectus.
(j) The Depositor will not, without your prior written consent,
publicly offer or sell in the United States any mortgage pass-through
certificates, mortgage pass-through notes or collateralized mortgage obligations
or other similar securities representing interests in or secured by other
mortgage-related assets originated or owned by the Depositor or HFC for a period
of five days following the commencement of the offering of the Underwritten
Certificates to the public.
(k) The Depositor will cooperate with the Underwriters and use its best
efforts to permit the Underwritten Certificates to be eligible for clearance and
settlement through the facilities of DTC.
(l) If, between the date hereof and the Closing Time, to the knowledge
of the Depositor there are any legal or governmental proceedings instituted or
threatened against HFC or the Depositor, other than proceedings which are not
reasonably expected, individually or in the aggregate, to have a material
adverse effect on the financial condition, shareholders' equity or results of
operations of HFC or the Depositor, the Depositor will give prompt written
notice thereof to the Underwriters.
SECTION 6. Computational Materials, Collateral Term Sheets and
Structural Terms Sheets. It is understood that the Underwriters may prepare and
provide to prospective investors certain Computational Materials, Collateral
Term Sheets and Structural Term Sheets in connection with their offering of the
Underwritten Certificates, subject to the following conditions:
(a) The Underwriters shall comply with all applicable laws and
regulations in connection with the use of Computational Materials, including the
No-Action letter of May 20, 1994 issued by the Commission to Kidder, Peabody
Acceptance Corporation I, Kidder, Peabody & Co. Incorporated and Kidder
Structured Asset Corporation as made applicable to other issuers and
underwriters by the Commission in response to the request of the Public
Securities Association dated May 24, 1994 (collectively, the "Kidder/PSA
Letter"), as well as the PSA Letter referred to below. The Underwriters shall
comply with all applicable laws and regulations in connection with the use of
Collateral Terms Sheets and Structural Term Sheets, including the No-Action
Letter of February 17, 1995 issued by the Commission to the Public Securities
Association (the "PSA Letter" and, together with the Kidder/PSA Letter, the
"No-Action Letters").
(b) As used herein, "Computational Materials" shall have the meaning
given such
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<PAGE> 14
term in the No-Action Letters, but shall include only those Computational
Materials that have been prepared and delivered to prospective investors by or
at the direction of the Underwriters. As used herein, "Structural Term Sheets"
and "Collateral Term Sheets" shall have the meanings given such terms in the PSA
Letter, but shall include (i) only those Structural Term Sheets that have been
prepared and delivered to prospective investors by or at the direction of the
Underwriters and (ii) only those Collateral Term Sheets that have been prepared
by the Depositor or the Underwriters and delivered to prospective investors by
or at the direction of the Underwriters.
(c) The Representative shall provide to the Depositor copies (in such
format as required by the Depositor) of all Computational Materials, Collateral
Term Sheets and Structural Term Sheets that are required to be filed with the
Commission pursuant to the No-Action Letters. The Representative may provide to
the Depositor copies of the foregoing in a consolidated or aggregated form,
including all information required to be filed. All Computational Materials,
Collateral Term Sheets and Structural Term Sheets must be provided to the
Depositor by the Representative not later than 10:00 a.m. on the first business
day prior to the day on which the filing of such materials is to be made with
the Commission. The Underwrites shall be responsible for all costs and expenses
incurred by the Depositor in filing the Computational Materials, Collateral Term
Sheets and Structural Term Sheets with the Commission, including the fees of the
independent auditor who provides the letter required by Section 5(h).
(d) (i) All Computational Materials and Structural Term Sheets provided
to prospective investors by the Underwriters that are required to be filed
pursuant to the No-Action Letters shall bear a legend on each page substantially
in the following form:
"Recipients must read the information contained in the attached
statement. Do not use or rely on this information if you have not
received and reviewed the statement. If you have not received the
statement, call your [Underwriter] account executive for another copy."
The statement referenced in the above paragraph shall be substantially
in the following form:
"The attached tables and other statistical analyses (the "Computational
Materials") are privileged and confidential and are intended for use by
the addressee only. These Computational Materials are furnished to you
solely by [Underwriter] ("[Underwriter]") and not by the issuer of the
securities or any of its affiliates. The issuer of these securities has
not prepared or taken part in the preparation of these materials.
Neither [Underwriter], the issuer of the securities nor any of its
affiliates makes any representation as to the accuracy or completeness
of the information herein. The information herein is preliminary, and
will be superseded by the applicable Prospectus Supplement and by any
other information subsequently filed
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<PAGE> 15
with the Securities and Exchange Commission. They may not be provided
to any third party other than the addressee's legal, tax, financial
and/or accounting advisors for the purposes of evaluating said
material.
Numerous assumptions were used in preparing the Computational Materials
which may or may not be stated therein. As such, no assurance can be
given as to the accuracy, appropriateness or completeness of the
Computational Materials in any particular context; or as to whether the
Computational Materials and/or the assumptions upon which they are
based reflect present market conditions or future market performance.
These Computational Materials should not be construed as either
projections or predictions or as legal, tax, financial or accounting
advice.
Any yields or weighted average lives shown in the Computational
Materials are based on prepayment assumptions and actual prepayment
experience may dramatically affect such yields or weighted average
lives. In addition, it is probable that prepayments on the underlying
assets will occur at rates slower or faster than the rates assumed in
the attached Computational Materials. Furthermore, unless otherwise
provided, the Computational Materials assume no losses on the
underlying assets and no interest shortfall. The specific
characteristics of the securities may differ from those shown in the
Computational Materials due to differences between the actual
underlying assets and the hypothetical assets used in preparing the
Computational Materials. The principal amount and structure of any
security described in the Computational Materials are subject to change
prior to issuance.
Although a registration statement (including the prospectus) relating
to the securities discussed in this communication has been filed with
the Securities and Exchange Commission and is effective, the final
prospectus supplement relating to the securities discussed in this
communication has not been filed with the Securities and Exchange
Commission. This communication shall not constitute an offer to sell or
the solicitation of any offer to buy nor shall there be any sale of the
securities discussed in this communication in any state in which such
offer, solicitations or sale would be unlawful prior to registration or
qualification under the securities laws of any such state. Prospective
purchasers are referred to the final prospectus and prospectus
supplement relating to the securities discussed in this communication
for definitive Computational Materials on any matter discussed in this
communication. The information contained in these Computational
Materials will be superseded by the description of the mortgage loans
and the other information contained in the final prospectus supplement
and prospectus relating to the securities discussed in this
communication. A final prospectus and prospectus supplement may be
obtained by contacting the [Underwriter] Trading Desk at (212)
___-_____.
Please be advised that asset-backed securities may not be appropriate
for all investors. Potential investors must be willing to assume, among
other things, market
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<PAGE> 16
price volatility, prepayments, yield curve and interest rate risk.
Investors should fully consider the risk of an investment in these
securities.
If you have received this communication in error, please notify the
sending party immediately by telephone and return the original to such
party by mail."
(ii) In the case of Collateral Term Sheets, such legend shall
also include a statement in substantially the following form:
"THE INFORMATION CONTAINED HEREIN WILL BE SUPERSEDED BY THE
DESCRIPTION OF THE COLLATERAL POOL CONTAINED IN THE PROSPECTUS
SUPPLEMENT RELATING TO THE SECURITIES AND SUPERSEDES ALL
INFORMATION CONTAINED IN ANY COLLATERAL TERM SHEETS RELATING TO
THE COLLATERAL POOL PREVIOUSLY PROVIDED BY [UNDERWRITER]."
Notwithstanding the foregoing legends, this subsection (d) shall be
satisfied if all Computational Materials, Structural Term Sheets and
Collateral Term Sheets bear a legend in a form or forms previously
approved in writing by the Depositor.
(e) The Depositor shall not be obligated to file any
Computational Materials, Collateral Term Sheets or Structural Term
Sheets that have been determined to contain any material errors or
omissions; provided, however, that, at the request of the
Representative, the Depositor shall file Computational Materials,
Collateral Term Sheets or Structural Term Sheets containing material
errors or omissions if clearly marked "superseded by materials dated
____________" and accompanied by corrected Computational Materials,
Collateral Term Sheets or Structural Term Sheets that are marked "these
materials supersede and correct the materials dated ____________."]
Section 7. Conditions to the Underwriters' Obligations. The
obligations of the Underwriters to purchase the Underwritten Certificates
pursuant to this Agreement are subject to the accuracy on and as of the Closing
Time of the representations and warranties on the part of the Depositor and HFC
herein contained, to the material accuracy of the statements of officers of the
Depositor and HFC, respectively, made pursuant hereto, to the performance by the
Depositor and HFC of all of their respective obligations hereunder and to the
following conditions at the Closing Time:
(a) At the Closing Time no stop order suspending the effectiveness of
the Registration Statement shall have been issued under the 1933 Act or
proceedings therefor initiated or threatened by the Commission, and any request
on the part of the Commission for additional information shall have been
complied with to the reasonable satisfaction of counsel to the Underwriters.
(b) All corporate proceedings and other legal matters relating to the
authorization,
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<PAGE> 17
form and validity of this Agreement, the Pooling and Servicing Agreement, the
Transfer Agreement, the Home Equity Loan Purchase Agreement, the Certificates,
the Registration Statement and the Prospectus, and all other legal matters
relating to this Agreement and the transactions contemplated hereby shall be
satisfactory in all respects to counsel for the Underwriters.
(c) The Underwriters shall have received the favorable opinion, dated
the date of the Closing Time, of Katten Muchin & Zavis, as special counsel to
the Depositor and HFC, in form and substance satisfactory to the Underwriters,
to the effect that:
(i) The Pooling and Servicing Agreement is not required to be
qualified under the Trust Indenture Act of 1939, as amended.
(ii) Neither the Depositor nor the Trust is an "investment
company" or under the control of an "investment company" as such terms
are defined in the 1940 Act.
(iii) The Underwritten Certificates and the Pooling and Servicing
Agreement each conforms in all material respects to the respective
description thereof contained in the Prospectus.
(iv) The statements in the base Prospectus under the headings
["Legal Aspects of Home Equity Loans and Related Matters"], "Employee
Benefit Plan Considerations", "State Tax Considerations" and "Material
Federal Income Tax Consequences", and the statements in the Prospectus
Supplement under the headings "Summary--Tax Status", and "--Employee
Benefit Considerations", "Material Federal Income Tax Consequences",
and "Employee Benefit Plan Considerations", to the extent that they
constitute matters of federal law or legal conclusions with respect
thereto, have been reviewed by such counsel and are correct in all
material respects with respect to those consequences or aspects that
are discussed.
(v) The Trust as described in the Prospectus Supplement and the
Pooling and Servicing Agreement will qualify to be treated as a "real
estate mortgage investment conduit" (the "REMIC") as defined in the
Internal Revenue Code of 1986, as amended (the "Code"), the Class A and
Class M Certificates will be treated as "regular interests" in the
REMIC and the Residual Certificates will be treated as the single class
of "residual interests" in the REMIC assuming: (i) an election is made
to treat the Trust as a REMIC, (ii) compliance with the Pooling and
Servicing Agreement and (iii) compliance with changes in the law,
including any amendments to the Code or applicable Treasury regulations
thereunder.
Such opinion may express its reliance as to factual matters on the
representations and warranties made by the parties hereto, and on certificates
or other documents furnished by officers of such parties to the instruments and
documents referred to therein. No opinion need be expressed as to the effect of
the compliance or noncompliance of the Depositor, HFC or the Trustee with any
state or federal laws or regulations applicable to them because of their legal
or regulatory status or
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<PAGE> 18
the nature of their respective businesses, or to the due authorization,
execution and delivery of this Agreement and the Certificates. As to such
matters, such opinion may rely upon the opinion of John W. Blenke, Esq., Vice
President, Corporate Law and Assistant Secretary of Household International,
Inc., delivered pursuant to Section 7(d) of this Agreement, and such counsel
need make no independent investigation of the matters referred to in such
opinion.
(d) The Underwriters shall have received the favorable opinion, dated
the date of the Closing Time, of John W. Blenke, Esq., Vice President -
Corporate Law and Assistant Secretary of Household International, Inc., the
parent company of HFC, in form and substance satisfactory to the Underwriters,
to the effect that:
(i) HFC has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of Delaware,
with corporate power to own its properties, to conduct its business as
described in the Prospectus and to enter into and perform its
obligations under this Agreement and the Pooling and Servicing
Agreement.
(ii) The Depositor has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State
of Delaware, with corporate power to own its properties, to conduct its
business as described in the Prospectus and to enter into and perform
its obligations under this Agreement, the Pooling and Servicing
Agreement and the Home Equity Loan Purchase Agreement.
(iii) Each of the Sellers has been duly incorporated and is
validly existing as a corporation in good standing under the laws of
its jurisdiction of incorporation, with corporate power to own its
properties, to conduct its business as described in the Prospectus and
to enter into and perform its obligations under the Home Equity Loan
Purchase Agreement and the Transfer Agreement.
(iv) HFC has full corporate power and authority to serve in the
capacity of master servicer of the Home Equity Loans as contemplated in
the Pooling and Servicing Agreement.
(v) Each of the Sellers, the Depositor and HFC is duly authorized
under relevant statutes, laws and court decisions, to conduct in the
various jurisdictions in which they do business the respective
businesses therein currently conducted by them, except where failure to
be so permitted or failure to be so authorized will not have a material
adverse effect on the business or financial condition of the Sellers,
the Depositor or HFC, and the Sellers are duly authorized under the
statutes which regulate the business of making loans or of financing
the sale of goods (commonly called "small loan laws," "consumer finance
laws" or "sales finance laws"), or are permitted under the general
interest statutes and related laws and court decisions, to conduct in
the various jurisdictions in which any of them do business the
businesses as currently conducted therein by any of them.
(vi) None of the Sellers, the Depositor or HFC is in violation
of its
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Certificate or Articles of Incorporation or Bylaws or, to the best of
such counsel's knowledge, in default in the performance or observance
of any obligation, agreement, covenant or condition contained in any
contract, indenture, mortgage, loan agreement, note, lease or other
instrument known to such counsel which is material to the business of
the Sellers, the Depositor or HFC and which any of the Sellers, the
Depositor or HFC is a party or by which it or its properties may be
bound.
(vii) This Agreement and the Pooling and Servicing Agreement have
been duly authorized, executed and delivered by the Depositor and HFC,
and, assuming the due authorization, execution and delivery of such
agreements by the other parties thereto, such agreements constitute the
valid and binding obligation of each of the Depositor and HFC,
enforceable against each of the Depositor and HFC, in accordance with
their respective terms, and the Home Equity Loan Purchase Agreement and
Transfer Agreement has been duly authorized, executed and delivered by
the Depositor and the Sellers, as the case may be, and such agreements
constitute the valid and binding obligation of each of the Depositor
and the Sellers, as applicable, enforceable against the Depositor or
the Sellers in accordance with its terms, except that in each case as
to enforceability (A) such enforcement may be subject to bankruptcy,
insolvency, reorganization, moratorium or other similar laws now or
hereafter in effect relating to creditors' rights generally, (B) the
remedy of specific performance and injunctive and other forms of
equitable relief may be subject to equitable defenses and to the
discretion of the court before which any proceeding therefor may be
brought and (C) the enforceability as to rights to indemnification
under this Agreement may be subject to limitations of public policy
under applicable securities laws.
(viii) The issuance and delivery of the Certificates, the
consummation of any other of the transactions contemplated herein or in
the Pooling and Servicing Agreement or the Home Equity Loan Purchase
Agreement, or the fulfillment of the terms of this Agreement or the
Pooling and Servicing Agreement do not and will not conflict with or
violate any term or provision of the Certificate or Articles of
Incorporation or Bylaws of the Depositor or, to the best of such
counsel's knowledge, any statute, order or regulation applicable to the
Depositor of any court, regulatory body, administrative agency or
governmental body having jurisdiction over the Depositor and do not and
will not conflict with, result in a breach or violation or the
acceleration of, or constitute a default under, or result in the
creation or imposition of any lien, charge or encumbrance upon any of
the property or assets of the Depositor pursuant to the terms of, any
indenture, mortgage, deed of trust, loan agreement or other agreement
or instrument known to such counsel to which the Depositor is a party
or by which the Depositor may be bound or to which any of the property
or assets of the Depositor may be subject except for conflicts,
violations, breaches, accelerations and defaults which would not,
individually or in the aggregate, be materially adverse to the
Depositor or materially adverse to the transactions contemplated by
this Agreement.
(ix) The consummation of any of the transactions contemplated
in the
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Home Equity Loan Purchase Agreement and the Transfer Agreement, and the
fulfillment of the terms of the Home Equity Loan Purchase Agreement and
the Transfer Agreement, do not and will not conflict with or violate
any terms or provision of the Certificate or Articles of Incorporation
or Bylaws of any of the Sellers or, to the best of such counsel's
knowledge, any statute, order or regulation applicable to any of the
Sellers and do not and will not conflict with, result in a breach or
violation or the acceleration of, or constitute a default under or
result in the creation or imposition of any lien, charge or encumbrance
upon any of the property or assets of any of the Sellers pursuant to
the terms of, any indenture, mortgage, deed of trust, loan agreement or
other agreement or instrument known to such counsel to which any of the
Sellers may be bound or to which any of the property or assets of any
of the Sellers may be subject except for conflicts, violations,
breaches, accelerations and defaults which would not, individually or
in the aggregate, be materially adverse to the applicable Sellers or
materially adverse to the transactions contemplated by this Agreement.
(x) The consummation of any of the transactions contemplated
herein or in the Pooling and Servicing Agreement, or the fulfillment of
the terms of this Agreement or the Pooling and Servicing Agreement, do
not and will not conflict with or violate any term or provision of the
Certificate or Articles of Incorporation or Bylaws of HFC or, to the
best of such counsel's knowledge, any statute, order or regulation
applicable to HFC, and do not and will not conflict with, result in a
breach or violation or the acceleration of, or constitute a default
under, or result in the creation or imposition of any lien, charge or
encumbrance upon any of the property or assets of HFC pursuant to the
terms of, any indenture, mortgage, deed of trust, loan agreement or
other agreement or instrument known to such counsel to which HFC is a
party or by which HFC may be bound or to which any of the property or
assets of HFC may be subject except for conflicts, violations,
breaches, accelerations and defaults which would not, individually or
in the aggregate, be materially adverse to HFC or materially adverse to
the transactions contemplated by this Agreement.
(xi) The direction by the Depositor to the Trustee to execute,
issue, countersign and deliver the Certificates has been duly
authorized by the Depositor and, assuming that the Trustee has been
duly authorized to do so and when executed and countersigned and
delivered by the Trustee against payment of the agreed upon
consideration therefor in accordance with the Pooling and Servicing
Agreement, the Certificates will be validly issued and outstanding and
will be entitled to the benefits of the Pooling and Servicing
Agreement.
(xii) To the best of such counsel's knowledge, no consent,
approval, authorization, order, registration or qualification of or
with any court or governmental agency or body of the United States is
required for the issuance of the Underwritten Certificates and the sale
of the Underwritten Certificates to the Underwriters, or the
consummation by the Sellers, the Depositor and HFC of the other
transactions contemplated by this Agreement, the Pooling and Servicing
Agreement the Transfer Agreement and the Home Equity Loan Purchase
Agreement, except the registration under the 1933 Act of the
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<PAGE> 21
Underwritten Certificates and such consents, approvals, authorizations,
registrations or qualifications as have been obtained or as may be
required under State securities or Blue Sky laws in connection with the
issuance of the Underwritten Certificates and the subsequent purchase
and distribution of the Underwritten Certificates by the Underwriters.
(xiii) The Registration Statement and any amendments thereto have
become effective under the 1933 Act; to the best of such counsel's
knowledge, no stop order suspending the effectiveness of the
Registration Statement has been issued and not withdrawn and no
proceedings for that purpose have been instituted or threatened and not
terminated.
(xiv) The conditions to the use by the Depositor and the Trust of
a registration statement on Form S-3 under the 1933 Act, as set forth
in the General Instructions to Form S-3, have been satisfied with
respect to the Registration Statement and the Prospectus. To the best
of such counsel's knowledge, there are no material contracts,
indentures or other documents of a character required to be described
or referred to in the Registration Statement or the Prospectus or to be
filed as exhibits to the Registration Statement other than those
described or referred to therein or filed or incorporated by reference
as exhibits thereto. The statements in the Prospectus under the caption
"Legal Aspects of the Home Equity Loans and Related Matters" and the
statements in the Prospectus Supplement under the caption "Legal
Investment", to the extent that statements in such sections constitute
matters of law or legal conclusions with respect thereto, have been
reviewed by attorneys under such counsel's supervision and are complete
and correct in all material respects.
(xv) There are no actions, proceedings or investigations pending
before or, to the best knowledge of such counsel, threatened by any
court, administrative agency or other tribunal to which any of the
Sellers, HFC or the Depositor is a party or of which any of their
respective properties is the subject (A) other than actions,
proceedings or investigations which are not reasonably expected to have
a material adverse effect on the business or financial condition of any
of the Sellers, HFC or the Depositor, (B) asserting the invalidity of
the Pooling and Servicing Agreement, the Transfer Agreement, the Home
Equity Loan Purchase Agreement or the Certificates, (C) seeking to
prevent the issuance of the Certificates or the consummation by any of
the Sellers, HFC or the Depositor of any of the transactions
contemplated by the Pooling and Servicing Agreement, the Transfer
Agreement and the Home Equity Loan Purchase Agreement and this
Agreement, as the case may be, or (D) which might materially and
adversely affect the performance by any of the Sellers, HFC or the
Depositor of their respective obligations under, or the validity or
enforceability of, the Pooling and Servicing Agreement, the Home Equity
Loan Purchase Agreement, this Agreement, or the Certificates.
(xvi) The Registration Statement, the Prospectus and each
amendment or supplement thereto, as of their respective effective or
issue dates complied as to form in
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all material respects with the applicable requirements of the 1933 Act
and the 1933 Act Regulations.
(xvii) Such counsel has no reason to believe that (A) the
Registration Statement and the Prospectus, as of the date the
Registration Statement became effective, or the Registration Statement
(excluding the exhibits thereto) as of the date that the most recent
post-effective amendment thereto became effective, contained or
contains any untrue statement of a material fact or omitted or omits to
state any material fact required to be stated therein or necessary in
order to make the statements therein not misleading or (B) the
Prospectus, as of its date and the date of such opinion, contained or
contains any untrue statement of a material fact or omitted or omits to
state any material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made,
not misleading (it being understood that such counsel need express no
opinion as to information included in Computational Materials,
Collateral Term Sheets or Structural Term Sheets and the financial
statements or other financial and statistical data contained or
incorporated by reference in the Registration Statement).
Such opinion may express its reliance as to factual matters on the
representations and warranties made by the parties hereto, and on certificates
or other documents furnished by public officials or officers of such parties to
the instruments and documents referred to therein. Such opinion may be
qualified, insofar as it concerns the enforceability of the documents referred
to therein, to the extent that such enforceability may be limited by bankruptcy,
insolvency, reorganization or other similar laws affecting the enforcement of
creditors' rights in general, or by general principles of equity (regardless of
whether such enforcement is considered in a proceeding in equity or at law) and
no opinion need be given as to the enforceability of Section 9 or the legends
set forth in Section 6 of this Agreement.
(e) The Underwriters shall have received the favorable opinion of
counsel to the Trustee, dated the date of the Closing Time, addressed to the
Underwriters and in form and scope satisfactory to counsel to the Underwriters,
to the effect that:
(i) The Trustee has duly authorized, executed and delivered the
Pooling and Servicing Agreement which constitutes the valid and legally
binding agreement of the Trustee, is enforceable against the Trustee in
accordance with its terms, subject, as to enforcement of remedies, (A)
to applicable bankruptcy, insolvency, reorganization, and other similar
laws affecting the rights of creditors generally and (B) to general
principles of equity (regardless of whether such enforceability is
considered in a proceeding in equity or at law).
(ii) The Trustee has duly executed and countersigned the
Certificates issued on the date thereof on behalf of the Trust.
(iii) The execution and delivery by the Trustee of the Pooling
and Servicing Agreement and the Transfer Agreement and the performance
by the Trustee of its obligations thereunder do not conflict with or
result in a violation of the Organization
23
<PAGE> 23
Certificate or Bylaws of the Trustee.
(iv) The Trustee has full power and authority to execute and
deliver the Pooling and Servicing Agreement and the Transfer Agreement
and to perform its obligations thereunder.
(v) To the best of such counsel's knowledge, there are no
actions, proceedings or investigations pending or threatened against or
affecting the Trustee before or by any court, arbitrator,
administrative agency or other governmental authority which, if
adversely decided, would materially and adversely affect the ability of
the Trustee to carry out the transactions contemplated in the Pooling
and Servicing Agreement and the Transfer Agreement.
(vi) No consent, approval or authorization of, or registration,
declaration or filing with, any court or governmental agency or body of
the United States of America or any state thereof is required for the
execution, delivery or performance by the Trustee of the Pooling and
Servicing Agreement and the Transfer Agreement.
(f) The Underwriters shall have received the favorable opinion or
opinions, dated the date of the Closing Time, of Brown & Wood LLP, as counsel
for the Underwriters, with respect to the issuance of the Underwritten
Certificates and the sale of the Underwritten Certificates to the Underwriters,
the Registration Statement, this Agreement, the Prospectus and such other
related matters as the Underwriters may require.
(g) The Underwriters shall have received an opinion, dated the date of
the Closing Time, of Katten Muchin & Zavis, as special counsel to the Depositor
and HFC, addressed to the Depositor, and satisfactory to Fitch and Moody's
relating to the sale of the principal balance of the Home Equity Loans by the
Sellers to the Depositor and by the Depositor to the Trust, and such counsel
shall have consented to reliance by Fitch and Moody's and the Underwriters on
such opinion as though such opinion had been addressed to each such party.
(h) Each of the Depositor and HFC shall have furnished to the
Underwriters a certificate signed on behalf of the Depositor and HFC by an
accounting or financial officer thereof, dated the date of the Closing Time, as
to (A) the accuracy of the representations and warranties of the Depositor and
HFC herein at and as of the Closing Time, (B) there being no legal or
governmental proceedings pending, other than those, if any, referred to in the
Prospectus or the Prospectus as amended or supplemented or the 34 Act filings of
HFC, as the case may be, to which any of the Depositor or HFC is a party or of
which any property of any of the Depositor or HFC is the subject, which, in the
judgment of any of the Depositor or HFC, as applicable, have a reasonable
likelihood of resulting in a material adverse change in the financial condition,
shareholders' equity or results of operations of the Depositor or HFC; and to
the best knowledge of each of the Depositor or HFC, as applicable, no such
proceedings are threatened or contemplated by governmental authorities or
threatened by others, (C) the performance by the Depositor and HFC of all of
their respective obligations hereunder to be performed at or prior to the
Closing Time, and (D) such other
24
<PAGE> 24
matters as you may reasonably request.
(i) The Trustee shall have furnished to the Underwriters a certificate
of the Trustee, signed by one or more duly authorized officers of the Trustee,
dated the date of the Closing Time, as to the due authorization, execution and
delivery of the Pooling and Servicing Agreement and the Transfer Agreement by
the Trustee and the acceptance by the Trustee of the trust created by the
Pooling and Servicing Agreement and the due execution and delivery of the
Certificates by the Trustee thereunder and such other matters as you shall
reasonably request.
(j) The Class A Certificates shall have been rated ___ by _____ and
___ by _______, the Class M-1 Certificates shall have been rated __ by _____
and ___ by _______ and the Class M-2 Certificates shall have been rated _ by
_____ and __ by _______.
(k) Counsel and special counsel to HFC and the Depositor shall have
furnished to the Underwriters any opinions supplied to the rating agencies
relating to certain matters with respect to the Underwritten Certificates.
(l) The Underwriters shall have received from Arthur Andersen LLP, or
other independent certified public accountants acceptable to the Underwriters, a
letter, dated as of the Closing Time in the form heretofore agreed to.
(m) Prior to the Closing Time, Brown & Wood LLP, as counsel for the
Underwriters, shall have been furnished with such documents and opinions as they
may reasonably require for the purpose of enabling them to pass upon the
issuance of the Underwritten Certificates and the sale of the Underwritten
Certificates to the Underwriters as herein contemplated and related proceedings
or in order to evidence the accuracy and completeness of any of the
representations and warranties, or the fulfillment of any of the conditions,
herein contained; and all proceedings taken by the Depositor and HFC in
connection with the issuance of the Underwritten Certificates and the sale of
the Underwritten Certificates to the Underwriters as herein contemplated shall
be satisfactory in form and substance to the Underwriters and Brown & Wood LLP.
(n) Since the respective dates as of which information is given in the
Prospectus, there shall not have been any change, or any development involving a
prospective change, in or affecting the general affairs, management, financial
condition, stockholders' equity or results of operations of the Depositor, any
of the Sellers or HFC otherwise than as set forth or contemplated in the
Prospectus, the effect of which is in the reasonable judgment of the
Underwriters, after consultation with the Depositor and HFC, so material and
adverse as to make it impracticable or inadvisable to proceed with the public
offering or the delivery of the Underwritten Certificates on the terms and in
the manner contemplated in the Prospectus.
If any condition specified in this Section 7 shall not have been
fulfilled when and as required to be fulfilled, this Agreement may be terminated
by you by notice to the Depositor at any time at or prior to the Closing Time,
and such termination shall be without liability of any party to any other party
except as provided in Section 8.
25
<PAGE> 25
SECTION 8. Payment of Expenses. The Depositor and HFC jointly and
severally agree to pay all expenses incident to the performance of their
obligations under this Agreement, including without limitation those related to
(i) the filing of the Registration Statement and all amendments thereto, (ii)
the preparation, issuance and delivery of the Certificates, (iii) the fees and
disbursements of Katten Muchin & Zavis, as special counsel for the Depositor and
HFC, and Arthur Andersen LLP, accountants of the Depositor and HFC, (iv) any
qualification of the Underwritten Certificates under securities and Blue Sky
laws and the determination of the eligibility of the Underwritten Certificates
for investment in accordance with the provisions of subsection 5(f) including
filing fees (except for filing fees related to the filing of Computational
Materials which Underwriters agree to pay), and the fees and disbursements of
Brown & Wood LLP, as counsel for the Underwriters (not to exceed $__,000, in
connection therewith and in connection with the preparation of any Blue Sky
Survey, (v) the printing and delivery to the Underwriters, in such quantities as
you may reasonably request, of copies of the Registration Statement and
Prospectus (except for expenses related to overnight delivery of copies of the
Prospectus which Underwriters agree to pay) and all amendments and supplements
thereto, and of any Blue Sky Survey, (vi) the delivery to the Underwriters, in
such quantities as you may reasonably request, of copies of the Pooling and
Servicing Agreement, (vii) the fees charged by nationally recognized statistical
rating agencies for rating the Underwritten Certificates and (viii) the fees and
expenses of the Trustee and its counsel.
If this Agreement is terminated by you in accordance with the
provisions of Section 7, the Depositor, the Sellers and HFC shall reimburse you
for all reasonable out-of-pocket expenses, including the fees and disbursements
of Brown & Wood LLP, as counsel for the Underwriters.
SECTION 9. Indemnification. (a) HFC and the Depositor jointly and
severally agree to indemnify and hold harmless the Underwriters and each person,
if any, who controls the Underwriters within the meaning of Section 15 of the
1933 Act or Section 20 of the 1934 Act as follows:
(i) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, arising out of any untrue statement or
alleged untrue statement of a material fact contained in the
Registration Statement (or any amendment thereto), or the omission or
alleged omission therefrom of a material fact required to be stated
therein or necessary to make the statements therein not misleading or
arising out of any untrue statement or alleged untrue statement of a
material fact contained in any preliminary prospectus or the Prospectus
(or any amendment or supplement thereto) or the omission or alleged
omission therefrom of a material fact necessary in order to make the
statements therein, in light of the circumstances under which they were
made, not misleading, unless (A) such untrue statement or omission or
alleged untrue statement or omission was made in reliance upon and in
conformity with written information furnished to the Depositor or HFC,
or information electronically transmitted to the Depositor or HFC or by
the Underwriters expressly for use in the Registration Statement (or
any amendment thereto), (B) such untrue statement or omission or
alleged untrue statement or omission relates to information in any
26
<PAGE> 26
Computational Materials, Collateral Term Sheets or Structural Term
Sheets (a) not provided by the Representative to the Depositor pursuant
to Section 6, or (b) provided by the Underwriters to a prospective
investor regardless of whether such Computational Materials, Collateral
Term Sheets or Structural Term Sheets are filed with the Commission
(except to the extent that such untrue statements contained therein are
Pool Information) or (C) such untrue statement or omission or alleged
untrue statement or omission was made in any preliminary prospectus and
corrected in the Prospectus and (1) any such loss, claim, damage or
liability suffered or incurred by an Underwriter resulted from an
action, claim or suit by any person who purchased the Underwritten
Certificates from such Underwriter in the offering and (2) such
Underwriter failed to deliver or provide a copy of the Prospectus (or
the Prospectus as supplemented) to such person at or prior to the
confirmation of the sale of such Underwritten Certificates in any case
where such delivery is required by the 1933 Act;
(ii) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, to the extent of the aggregate amount
paid in settlement of any litigation, or investigation or proceeding by
any governmental agency or body, commenced or threatened, or of any
claim whatsoever based upon any such untrue statement or omission, or
any such alleged untrue statement or omission, if such settlement is
effected with the written consent of the Depositor; and
(iii) against any and all expense whatsoever (including the fees
and disbursements of counsel chosen by you and reasonably acceptable to
Depositor and HFC) as reasonably incurred in investigating, preparing
to defend or defending against or appearing as a third party witness
with respect to any litigation, or investigation or proceeding by any
governmental agency or body, commenced or threatened, or any claim
whatsoever based upon any such untrue statement or omission, as such
expense is incurred and to the extent that any such expense is not paid
under (i) or (ii) above. This indemnity agreement will be in addition
to any liability which the Depositor may otherwise have.
(b) Each of the Underwriters severally agrees to indemnify and hold
harmless the Depositor, each of its directors, each of its officers who signed
the Registration Statement, and each person, if any, who controls the Depositor
within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act
(each, an "Indemnified Party") against any and all loss, liability, claim,
damage and expense, as incurred, described in the indemnity contained in
subsection (a) of this Section 9, but only with respect to (i) untrue statements
or omissions, or alleged untrue statements or omissions, made in the
Registration Statement (or any amendment thereto) or the Prospectus (or any
amendment or supplement thereto) in reliance upon and in conformity with written
information furnished to the Depositor or HFC by such Underwriter expressly for
use in the Registration Statement (or any amendment thereto) or the Prospectus
(or any amendment or supplement thereto) or (ii) information in any
Computational Materials, Collateral Term Sheets or Structural Term Sheets
provided by such Underwriter (except to the extent that such untrue statements
or errors contained therein are Pool Information). The parties hereto
acknowledge that the only information supplied to the Depositor by the
Underwriters expressly for use in the Registration Statement or the
27
<PAGE> 27
Prospectus is limited to the information set forth in the [last paragraph on the
cover page and the first sentence of the first paragraph and the second sentence
of the seventh paragraph under the caption "Method of Distribution"] in the
Prospectus Supplement. This indemnity agreement will be in addition to any
liability that the Underwriters may otherwise have.
(c) Each indemnified party shall give prompt notice to each
indemnifying party of any action commenced against it with respect to which
indemnity may be sought hereunder, but failure to so notify an indemnifying
party shall not relieve it from any liability which it may have hereunder unless
it has been materially prejudiced by such failure to notify or from any
liability which it may have otherwise than on account of this indemnity
agreement. An indemnifying party may participate at its own expense in the
defense of such action. In no event shall the indemnifying parties be liable for
the fees and expenses of more than one counsel for all indemnified parties in
connection with any one action or separate but similar or related actions in the
same jurisdiction arising out of the same general allegations or circumstances,
unless (i) if the defendants in any such action include one or more of the
indemnified parties and the indemnifying party, and one or more of the
indemnified parties shall have employed separate counsel after having reasonably
concluded that there may be legal defenses available to it or them that are
different from or additional to those available to the indemnifying party or to
one or more of the other indemnified parties or (ii) the indemnifying party
shall not have employed counsel reasonably satisfactory to the indemnified party
to represent the indemnified party within a reasonable time after notice of the
commencement of the action.
SECTION 10. Contribution. In order to provide for just and equitable
contribution in circumstances in which the indemnity agreement provided for in
Section 9 is for any reason held to be unenforceable by the indemnified parties
although applicable in accordance with its terms, HFC and the Depositor on the
one hand, and the Underwriters, on the other, shall contribute to the aggregate
losses, liabilities, claims, damages and expenses of the nature contemplated by
said indemnity agreement incurred by the Depositor and one or more of the
Underwriters (i) in such proportion as shall be appropriate to reflect the
relative benefits to HFC and the Depositor on the one hand and the Underwriters
on the other hand from the offering of the Underwritten Certificates pursuant to
this Agreement or (ii) if the allocation provided by clause (i) above is not
permitted by applicable law or otherwise prohibited hereby, in such proportion
as is appropriate to reflect not only the relative benefits referred to in
clause (i) above but also the relative fault of HFC and the Depositor on the one
hand and the Underwriters or Underwriter, as applicable, on the other in
connection with the actions, statements or omissions that resulted in such
losses, claims, damages or liabilities, or actions in respect thereof, as well
as any other relevant equitable considerations; provided, however, that no
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the 1933 Act) shall be entitled to contribution from any person who was
not guilty of such fraudulent misrepresentation.
The relative benefits received by HFC and the Depositor on the one hand
and the Underwriters on the other hand in connection with the offering of the
Underwritten Certificates pursuant to this Agreement shall be deemed to be in
the same respective proportions as the total net proceeds from the offering of
the Underwritten Certificates pursuant to this Agreement (before
28
<PAGE> 28
deducting expenses) received by HFC and the Depositor and the total underwriting
discount received by the Underwriters, in each case as set forth in the
Prospectus, bear to the aggregate initial public offering price of the
Underwritten Certificates as set forth in the Prospectus. The relative fault of
HFC and the Depositor on the one hand and the Underwriters on the other hand
shall be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged omission
to state a material fact relates to information supplied by HFC or the
Depositor, on the one hand, or the Underwriters, on the other hand, and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such untrue statement or omission.
HFC, the Depositor and the Underwriters agree that it would not be just
and equitable if contributions pursuant to this Section 10 were to be determined
by pro rata allocation (even if the Underwriters were treated as one entity for
such purpose) or by any other method of allocation which does not take into
account the equitable considerations referred to in the first sentence of this
Section 10. The amount paid by an indemnified party as a result of the losses,
claims, damages or liabilities (or actions in respect thereof) referred to in
the first sentence of this Section 10 shall be deemed to include any legal or
other expenses reasonably incurred by such indemnified party in connection with
investigating, preparing to defend or defending against any action or claim that
is the subject of this Section 10. Notwithstanding the provisions of this
Section 10, no Underwriter shall be required to contribute any amount in excess
of the amount by which the total price at which the Underwritten Certificates
underwritten by such Underwriter and distributed to the public were offered to
the public exceeds the amount of any damages which such Underwriter has
otherwise been required to pay in respect of such losses, liabilities, claims,
damages and expenses. The Underwriters' obligations in this Section 10 to
contribute are several in proportion to their respective underwriting
obligations and not joint. Each party entitled to contribution agrees that upon
the service of a summons or other initial legal process upon it in any action
instituted against it in respect to which contribution may be sought, it shall
promptly give written notice of such service to the party or parties from whom
contribution may be sought, but the omission so to notify such party or parties
of any such service shall not relieve the party from whom contribution may be
sought for any obligation it may have hereunder or otherwise (except as
specifically provided in Section 9 hereof). For purposes of this Section 10,
each person, if any, who controls any Underwriter within the meaning of Section
15 of the 1933 Act or Section 20 of the 1934 Act shall have the same rights to
contribution as such Underwriter, and each respective director of the Depositor,
each respective officer of the Depositor who signed the Registration Statement,
and each person, if any, who controls the Depositor within the meaning of
Section 15 of the 1933 Act or Section 20 of the 1934 Act shall have the same
rights to contribution as the Depositor.
SECTION 11. Representations, Warranties and Agreements to Survive
Delivery. All representations, warranties and agreements contained in this
Agreement or contained in certificates of officers of the Depositor or HFC
submitted pursuant hereto shall remain operative and in full force and effect,
regardless of any investigation made by or on behalf of the Underwriters or
controlling person thereof, or by or on behalf of the Depositor or HFC and shall
survive delivery of any Underwritten Certificates to the Underwriters.
29
<PAGE> 29
SECTION 12. Termination of Agreement. You, as Representative, may
terminate this Agreement after consultation with the Depositor and HFC,
immediately upon notice to the Depositor and HFC, at any time at or prior to the
Closing Time (i) if there has been an outbreak or material escalation of
hostilities involving the United States of America where armed conflict appears
imminent, or the declaration by the United States of America of a national
emergency or war, if the effect of any such event in the Underwriters'
reasonable judgment makes it impracticable or inadvisable to proceed with the
public offering of the Underwritten Certificates or (ii) if trading generally on
the New York Stock Exchange has been suspended (other than normal trading
restrictions resulting from the total number of trades on the NYSE), or minimum
prices have been established by the exchange or by order of the Commission or
any other governmental authority, or if a banking moratorium has been declared
by either federal or New York State authorities. In the event of any such
termination, the covenant set forth in subsection 5(b), the provisions of
Section 8, the indemnity agreement set forth in Section 9, and the provisions of
Sections 10 and 15 shall remain in effect.
SECTION 13. Default by One or More of the Underwriters. If one or
more of the Underwriters participating in the public offering of the
Underwritten Certificates shall fail at the Closing Time to purchase the
Underwritten Certificates which it is (or they are) obligated to purchase
hereunder (the "Defaulted Certificates"), then such of the non-defaulting
Underwriters shall have the right, within 24 hours thereafter, to make
arrangements for one or more of the non-defaulting Underwriters, or any other
underwriters, to purchase all, but not less than all, of the Defaulted
Certificates in such amounts as may be agreed upon and upon the terms herein set
forth. If, however, you have not completed such arrangements within such 24-hour
period, then:
(i) if the aggregate principal amount of Defaulted Certificates
does not exceed 10% of the aggregate principal amount of the
Underwritten Certificates to be purchased pursuant to this Agreement,
the non-defaulting Underwriters named in this Agreement shall be
obligated to purchase the full amount thereof in the proportions that
their respective underwriting obligations hereunder bear to the
underwriting obligations of all such non-defaulting Underwriters, or
(ii) if the aggregate principal amount of Defaulted Certificates
exceeds 10% of the aggregate principal amount of the Underwritten
Certificates to be purchased pursuant to this Agreement, this Agreement
shall terminate, without any liability on the part of any
non-defaulting Underwriters.
No action taken pursuant to this Section 13 shall relieve any
defaulting Underwriter from the liability with respect to any default of such
Underwriter under this Agreement.
In the event of a default by any Underwriters as set forth in this
Section 13, either you or the Depositor shall have the right to postpone the
Closing Time for a period not exceeding five (5) Business Days in order that any
required changes in the Registration Statement or Prospectus or in any other
documents or arrangements may be effected.
30
<PAGE> 30
SECTION 14. Notices. All notices and other communications hereunder
shall be in writing and shall be deemed to have been duly given if mailed or
transmitted by any standard form of telecommunication. Notices to the
Underwriters shall be directed to the Representative at the address set forth on
the first page hereof and by facsimile to the attention of _______________, at
______________. Notices to the Depositor or HFC shall be directed to Household
Finance Corporation, 2700 Sanders Road, Prospect Heights, Illinois 60070, to the
attention of the Secretary, with a copy to the Treasurer and by facsimile to the
attention of _________________, at ______________.
SECTION 15. Parties. This Agreement shall inure to the benefit of
and be binding upon the Underwriters, the Depositor and HFC, and their
respective successors. Nothing expressed or mentioned in this Agreement is
intended nor shall it be construed to give any person, firm or corporation,
other than the parties hereto and their respective successors and the
controlling persons and officers and directors referred to in Sections 9 and 10
and their heirs and legal representatives, any legal or equitable right, remedy
or claim under or with respect to this Agreement or any provision herein
contained. This Agreement and all conditions and provisions hereof are intended
to be for the sole and exclusive benefit of the parties and their respective
successors and said controlling persons and officers and directors and their
heirs and legal representatives (to the extent of their rights as specified
herein) and except as provided above for the benefit of no other person, firm or
corporation. No purchaser of Underwritten Certificates from the Underwriters
shall be deemed to be a successor by reason merely of such purchase.
SECTION 16. Governing Law and Time. This Agreement shall be governed
by the law of the State of New York and shall be construed in accordance with
such law. Specified times of day refer to New York City time.
SECTION 17. Counterparts. This Agreement may be executed in
counterparts, each of which shall constitute an original of any party whose
signature appears on it, and all of which shall together constitute a single
instrument.
* * *
31
<PAGE> 31
If the foregoing is in accordance with the Underwriters' understanding of
our agreement, please sign and return to us a counterpart hereof, whereupon this
instrument along with all counterparts will become a binding agreement among the
Underwriters, the Depositor and HFC in accordance with its terms.
Very truly yours,
HFC REVOLVING CORPORATION
By:
----------------------------------
Name:
Title:
HOUSEHOLD FINANCE CORPORATION
By:
----------------------------------
Name:
Title:
CONFIRMED AND ACCEPTED, as of the date
first above written:
[NAME OF UNDERWRITER]
as Representative of the Underwriters
By:
----------------------------------
Name:
Title:
32
<PAGE> 32
Schedule I
CLASS A CERTIFICATES
Principal Amount
----------------
Name of [Underwriter] . . . . . . . . . . . . . . . . . . . . . $
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
----------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
================
CLASS M CERTIFICATES
Principal Amount
----------------
Name of [Underwriter] . . . . . . . . . . . . . . . . . . . . . $
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
----------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
================
A-1
<PAGE> 1
EXHIBIT 4.1
HFC REVOLVING CORPORATION,
as Depositor,
and
HOUSEHOLD FINANCE CORPORATION,
as Master Servicer,
and
BANK ONE, NATIONAL ASSOCIATION,
as Trustee
-----------------------
POOLING AND SERVICING AGREEMENT
Dated as of ________, 1999
-----------------------
Closed-End Home Equity Loan Asset Backed Certificates,
Series ______
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
ARTICLE I.
Definitions
<S> <C> <C>
Section 1.01. Definitions............................................................................6
Section 1.02. Interest Calculations.................................................................23
Section 1.03. Usage of Terms........................................................................24
ARTICLE II.
Conveyance of Home Equity Loans; Original Issuance of Certificates; Tax Treatment
Section 2.01. Acknowledgment; Conveyance of Home Equity Loans; Custody of Mortgage Files............25
Section 2.02. Acceptance by Trustee; Repurchase of Home Equity Loans; Conveyance of Eligible
Substitute Home Equity Loans..........................................................28
Section 2.03. Representations, Warranties and Covenants of the Master Servicer......................30
Section 2.04. Representations and Warranties of the Depositor Regarding this Agreement and the Home
Equity Loans; Repurchases and Substitutions...........................................31
Section 2.05. Execution and Authentication of Certificates..........................................36
Section 2.06. Designation of Interests in the REMIC.................................................36
Section 2.07. Designation of Start-up Day...........................................................36
Section 2.08. REMIC Certificate Maturity Date.......................................................36
Section 2.09. Miscellaneous REMIC Provisions........................................................36
ARTICLE III.
Administration and Servicing of Home Equity Loans
Section 3.01. The Master Servicer...................................................................38
Section 3.02. Collection of Certain Home Equity Loan Payments.......................................40
Section 3.03. Withdrawals from the Collection Account...............................................42
Section 3.04. Maintenance of Hazard Insurance; Property Protection Expenses.........................43
Section 3.05. Assumption and Modification Agreements................................................44
Section 3.06. Realization Upon Defaulted Home Equity Loans..........................................44
Section 3.07. Optional Purchase of Defaulted Home Equity Loans......................................45
Section 3.08. Trustee to Cooperate..................................................................46
Section 3.09. Servicing Compensation; Payment of Certain Expenses by Master Servicer................46
Section 3.10. Annual Statement as to Compliance.....................................................47
Section 3.11. Annual Servicing Report...............................................................47
Section 3.12. Access to Certain Documentation and Information Regarding the Home Equity Loans.......47
Section 3.13. Maintenance of Certain Servicing Insurance Policies...................................48
Section 3.14. Reports to the Securities and Exchange Commission.....................................48
Section 3.15. Taxpayer Identification Number........................................................48
Section 3.16. Information Required by the Internal Revenue Service Generally and Reports of
Foreclosures and Abandonments of Mortgaged Property...................................48
Section 3.17. Additional Covenants of HFC...........................................................49
</TABLE>
<PAGE> 3
<TABLE>
ARTICLE IV.
Servicing Certificate
<S> <C> <C>
Section 4.01. Servicing Certificate.................................................................50
ARTICLE V.
Distributions and Statements to Certificateholders; Rights of Certificateholders
Section 5.01. Distributions.........................................................................52
Section 5.02. Statements to Certificateholders......................................................54
ARTICLE VI.
The Certificates
Section 6.01. The Certificates......................................................................57
Section 6.02. Registration of Transfer and Exchange of Certificates.................................57
Section 6.03. Mutilated, Destroyed, Lost or Stolen Certificates.....................................62
Section 6.04. Persons Deemed Owners.................................................................63
Section 6.05. Appointment of Paying Agent...........................................................63
Section 6.06. Actions of Certificateholders.........................................................63
ARTICLE VII.
The Master Servicer and the Depositor
Section 7.01. Liability of the Master Servicer and the Depositor....................................65
Section 7.02. Merger or Consolidation of, or Assumption of the Obligations of, the Master Servicer
or the Depositor......................................................................65
Section 7.03. Limitation on Liability of the Master Servicer, the Depositor and Others..............65
Section 7.04. Master Servicer Not to Resign.........................................................66
Section 7.05. Delegation of Duties..................................................................66
ARTICLE VIII.
Events of Default
Section 8.01. Events of Default.....................................................................68
Section 8.02. Trustee to Act; Appointment of Successor..............................................69
Section 8.03. Notification to Certificateholders....................................................70
</TABLE>
<PAGE> 4
<TABLE>
ARTICLE IX.
The Trustee
<S> <C> <C>
Section 9.01. Duties of Trustee.....................................................................71
Section 9.02. Certain Matters Affecting the Trustee.................................................72
Section 9.03. Trustee Not Liable for Certificates or Home Equity Loans..............................73
Section 9.04. Trustee May Own Certificates..........................................................74
Section 9.05. Master Servicer to Pay Trustee's Fees and Expenses....................................74
Section 9.06. Eligibility Requirements for Trustee..................................................75
Section 9.07. Resignation or Removal of Trustee.....................................................75
Section 9.08. Successor Trustee.....................................................................75
Section 9.09. Merger or Consolidation of Trustee....................................................76
Section 9.10. Appointment of Co-Trustee or Separate Trustee.........................................76
Section 9.11. Trustee May Enforce Claims Without Possession of Certificates.........................77
Section 9.12. Inspection of Mortgage Files..........................................................78
Section 9.13. Tax Returns...........................................................................78
ARTICLE X.
Termination
Section 10.01. Termination...........................................................................79
Section 10.02. Additional Termination Requirements...................................................81
Section 10.03. Termination Upon Loss of REMIC Status.................................................81
ARTICLE XI.
Miscellaneous Provisions
Section 11.01. Amendment.............................................................................83
Section 11.02. Recordation of Agreement..............................................................84
Section 11.03. Limitation on Rights of Certificateholders............................................84
Section 11.04. Governing Law.........................................................................85
Section 11.05. Notices...............................................................................85
Section 11.06. Severability of Provisions............................................................86
Section 11.07. Assignment............................................................................86
Section 11.08. Certificates Nonassessable and Fully Paid.............................................86
Section 11.09. Third-Party Beneficiaries.............................................................86
Section 11.10. Counterparts..........................................................................86
Section 11.11. Effect of Headings and Table of Contents..............................................86
Section 11.12. Limitation on Voting of Preferred Stock...............................................86
EXHIBIT A Form of Class A-1 Certificate.............................................................A-1
EXHIBIT B Form of Class A-2 Certificate.............................................................B-1
EXHIBIT C Form of Class A-3 Certificate.............................................................C-1
EXHIBIT D Form of Class A-4 Certificate.............................................................D-1
EXHIBIT E Form of Class A-5 Certificate.............................................................E-1
EXHIBIT F Form of Class M-1 Certificate.............................................................G-1
EXHIBIT G Form of Class M-2 Certificate.............................................................H-1
EXHIBIT H Form of Class R Certificate...............................................................I-1
EXHIBIT I MORTGAGE LOAN SCHEDULE....................................................................K-1
EXHIBIT J FORM OF INVESTMENT LETTER.................................................................M-1
</TABLE>
<PAGE> 5
This Pooling and Servicing Agreement, dated as of __________, 1999,
among HFC Revolving Corporation, as Depositor, Household Finance Corporation, as
Master Servicer, and Bank One, National Association, as Trustee,
WITNESSETH THAT:
In consideration of the mutual agreements herein contained, the parties
hereto agree as follows:
ARTICLE I
Definitions
Section 1.01. Definitions. Whenever used in this Agreement, the following
words and phrases, unless the context otherwise requires, shall have the
meanings specified in this Article.
Accrual Period: As to any Class and Distribution Date, the calendar
month preceding the month in which such Distribution Date occurs.
Affiliate: As to any Person, any other Person controlling, controlled
by or under common control with such Person. For purposes of this definition,
"control" means the power to direct the management and policies of a Person,
directly or indirectly, whether through ownership of voting securities, by
contract or otherwise, and "controlling" and "controlled" shall have meanings
correlative to the foregoing.
Agreement: This Pooling and Servicing Agreement and all amendments
hereof and supplements hereto.
Applied Realized Loss Amount: As to any Class of Class M Certificates
and Distribution Date, the aggregate Realized Losses, if any, applied in
reduction of the Certificate Principal Balance of such Class on such
Distribution Date.
Appraised Value: As to any Home Equity Loan, the appraised value of the
related Mortgaged Property based upon the appraisal made by or on behalf of the
Sellers at the time of origination of such Home Equity Loan; provided, that if
the Mortgage Loan was originated simultaneously with or not more than 12 months
after a senior lien on the related Mortgaged Property, the lesser of the
Appraised Value at origination of the senior lien and the sales price of the
related Mortgaged Property.
Authorized Newspaper: A newspaper of general circulation in the Borough
of Manhattan, The City of New York, printed in the English language and
customarily published on each Business Day, whether or not published on
Saturdays, Sundays and holidays.
Available Distribution Amount: As to any Distribution Date, the sum,
without duplication, of all amounts described in clauses (i) through (iv),
inclusive, of Section 3.02(b) received by the Master Servicer with respect to
the related Collection Period and deposited in the Collection Account.
BIF: The Bank Insurance Fund, as from time to time constituted, created
under the Financial Institutions Reform, Recovery and Enhancement Act of 1989
or, if at any time after the execution of this instrument the Bank Insurance
Fund is not existing and performing duties now
<PAGE> 6
assigned to it, the body performing such duties on such date.
Book-Entry Certificate: Any Class A or Class M Certificate registered
in the name of the Depository or its nominee, ownership of which is reflected on
the books of the Depository or on the books of a person maintaining an account
with such Depository (directly or as an indirect participant in accordance with
the rules of such Depository).
Business Day: Any day other than (i) a Saturday or a Sunday or (ii) a
day on which banking institutions in the State of New York or Illinois are
required or authorized by law to be closed.
Certificate: A Class A Certificate, Class M Certificate or Class R
Certificate.
Certificate Owner: The Person who is the beneficial owner of a
Book-Entry Certificate.
Certificate Principal Balance: As to any Class (other than the Class R
Certificates) and any Determination Date, the Original Class Certificate Balance
thereof reduced by (i) all amounts previously distributed to the holders of such
Class and allocable to principal and (ii) in the case of each Class of Class M
Certificates, all Applied Realized Loss Amounts previously allocated to such
Class. The Class R Certificates have no Certificate Principal Balance.
Certificate Register and Certificate Registrar: The register maintained
and the registrar appointed pursuant to Section 6.02.
Certificateholder or Holder: The Person in whose name a Certificate is
registered in the Certificate Register, except that, solely for the purpose of
giving any consent, direction, waiver or request pursuant to this Agreement, (i)
any Certificate registered in the name of the Depositor (unless to the knowledge
of a Responsible Officer of the Trustee the Depositor is acting as trustee or
nominee for a Person who is not an Affiliate of the Depositor and who makes the
voting decision with respect to such Certificate) or the Master Servicer or any
Person known to a Responsible Officer of the Trustee to be an Affiliate of
either the Depositor or the Master Servicer and (ii) any Certificate for which
the Depositor (unless to the knowledge of a Responsible Officer of the Trustee
(A) the Depositor is acting as trustee or nominee for a Person who is not an
Affiliate of the Depositor and who makes the voting decision with respect to
such Certificate or (B) the Depositor is the owner of all the Certificates) or
the Master Servicer or any Person known to a Responsible Officer of the Trustee
to be an Affiliate (other than an Affiliate that has purchased any Certificate
on the Closing Date) of either the Depositor or the Master Servicer is the
Certificate Owner shall be deemed not to be outstanding and the Percentage
Interest evidenced thereby shall not be taken into account in determining
whether the requisite amount of Percentage Interests necessary to effect any
such consent, direction, waiver or request has been obtained.
Charge Off Amount: As to any Charged Off Home Equity Loan and
Collection Period, an amount equal to the amount of the Principal Balance that
the Master Servicer has charged off on its servicing records during such
Collection Period.
<PAGE> 7
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 Principal Balance.
Class: Any of the Class A-1, Class A-2, Class A-3, Class A-4, Class
A-5, Class M-1, Class M-2 and Class R Certificates.
Class A-1 Certificate: Any Certificate designated as a Class A-1
Certificate on the face thereof, substantially in the form of Exhibit A hereto.
Class A-2 Certificate: Any Certificate designated as a Class A-2
Certificate on the face thereof, substantially in the form of Exhibit B hereto.
Class A-3 Certificate: Any Certificate designated as a Class A-3
Certificate on the face thereof, substantially in the form of Exhibit C hereto.
Class A-4 Certificate: Any Certificate designated as a Class A-4
Certificate on the face thereof, substantially in the form of Exhibit D hereto.
Class A-5 Certificate: Any Certificate designated as a Class A-5
Certificate on the face thereof, substantially in the form of Exhibit E hereto.
Class A-5 Lockout Distribution Amount: As to any Distribution Date, the
product of (i) the Class A-5 Lockout Percentage for such Distribution Date and
(ii) the Class A-5 Lockout Pro Rata Distribution Amount for such Distribution
Date.
Class A-5 Lockout Percentage: As to each Distribution Date, shall be as
follows:
<TABLE>
<CAPTION>
Distribution Dates Lockout Percentage
- ------------------ ------------------
<S> <C>
______ - _______ 0%
______ - _______ 45%
______ - _______ 80%
______ - _______ 100%
______ and thereafter 300%
</TABLE>
Notwithstanding the foregoing, if the aggregate Certificate Principal
Balance of the Class A Certificates has been reduced to zero, the Lockout
Percentage shall be 100%.
Class A-5 Lockout Pro Rata Distribution Amount: As to any Distribution
Date, an amount equal to the product of (x) a fraction, the numerator of which
is the aggregate Certificate Principal Balance of the Class A-5 Certificates
immediately prior to such Distribution Date and the denominator of which is the
aggregate Certificate Principal Balance of the Class A Certificates immediately
prior to such Distribution Date and (y) the Class A Principal Distribution
Amount for such Distribution Date.
<PAGE> 8
Class A Pass-Through Rate: With respect to each Class of Class A
Certificates, the per annum rate set forth below:
<TABLE>
<CAPTION>
CLASS PASS-THROUGH RATE
- --------------------------- ---------------------------------------------
<S> <C>
A-1 ____%
A-2 ____%
A-3 ____%
A-4 ____%
A-5 ____%
</TABLE>
Class A Certificateholder: A Holder of a Class A Certificate.
Class A Certificates: Any of the Class A-1, Class A-2, Class A-3, Class
A-4 or Class A-5 Certificates.
Class A Principal Distribution Amount: As to any Distribution Date (a)
prior to the Stepdown Date or with respect to which a Trigger Event is in
effect, the lesser of (i) 100% of the Principal Distribution Amount and (ii) the
aggregate Certificate Principal Balance of the Class A Certificates immediately
prior to such Distribution Date and (b) on or after the Stepdown Date and as
long as a Trigger Event is not in effect, the excess, if any, of (x) the
aggregate Certificate Principal Balance of the Class A Certificates immediately
prior to such Distribution Date over (y) the lesser of (i) the product of (A)
[__]% and (B) the Pool Balance as of the last day of the related Collection
Period and (ii) the Pool Balance as of the last day of the related Collection
Period minus [$_____,000].
Class M-1 Certificate: Any Certificate designated as a Class M-1
Certificate on the face thereof, substantially in the form of Exhibit G hereto.
Class M-2 Certificate: Any Certificate designated as a Class M-2
Certificate on the face thereof, substantially in the form of Exhibit H hereto.
Class M-1 Principal Distribution Amount: As to any Distribution Date,
the excess, if any, of (a) the sum of (i) the aggregate Certificate Principal
Balance of the Class A Certificates (after taking into account the distribution
of the Class A Principal Distribution Amount on such Distribution Date) and (ii)
the aggregate Certificate Principal Balance of the Class M-1 Certificates
immediately prior to such Distribution Date, over (b) the lesser of (i) the
product of (A) [___%] and (B) the Pool Balance as of the last day of the related
Collection Period and (ii) the Pool Balance as of the last day of the related
Collection Period minus [$____,000].
Class M-2 Principal Distribution Amount: As to any Distribution Date,
the excess, if any, of (a) the sum of (i) 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), (ii) the
aggregate Certificate Principal Balance of the Class M-1 Certificates
<PAGE> 9
(after taking into account the payment of the related Class M-1 Principal
Distribution Amount on such Distribution Date), and (iii) the aggregate
Certificate Principal Balance of the Class M-2 Certificates immediately prior to
such Distribution Date, over (b) the lesser of (i) the product of (A) [__%] and
(B) the Pool Balance as of the last day of the related Collection Period and
(ii) the Pool Balance as of the last day of the related Collection Period minus
[$____,000].
Class M Certificateholder: A Holder of a Class M Certificate.
Class M Certificates: The Class M-1 and the Class M-2 Certificates.
Class M Pass-Through Rate: With respect to each Class of Class M
Certificates, the per annum rate set forth below:
<TABLE>
<CAPTION>
CLASS PASS-THROUGH RATE
- --------------------------- ---------------------------------------------
<S> <C>
M-1 ____%
M-2 ____%
</TABLE>
Class R Certificate: Any Certificate designated as a Class R
Certificate on the face thereof, substantially in the form of Exhibit I hereto.
Closing Date: ________, 1999.
Code: The Internal Revenue Code of 1986, as the same may be amended
from time to time (or any successor statute thereto).
Collection Account: The custodial account or accounts created and
maintained for the benefit of the Certificateholders pursuant to Section
3.02(b). The Collection Account shall be an Eligible Account.
Collection Period: As to any Distribution Date and Home Equity Loan,
the calendar month preceding the month in which such Distribution Date occurs.
Combined Loan-to-Value Ratio or CLTV: As to each Home Equity Loan, a
ratio, expressed as a percentage, the numerator of which is the sum of (a) the
original Principal Balance of the Home Equity Loan and (b) the aggregate unpaid
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, and the denominator of which is the Appraised Value of the Mortgaged
Property.
Corporate Trust Office: The principal office of the Trustee at which at
any particular time its corporate trust business shall be administered, which
office on the Closing Date is located at the address set forth in Section 11.05.
Current Interest: As to each Class of Class A and Class M Certificates
and any
<PAGE> 10
Distribution Date, (i) the interest accrued at the applicable Pass-Through Rate
during the Accrual Period on the aggregate Certificate Principal Balance of such
Class of Certificates.
Cut-Off Date: As to each Home Equity Loan, the close of business on
October 31, 1999.
Cut-Off Date Pool Balance: The aggregate of the Cut-Off Date Principal
Balances of the Home Equity Loans.
Cut-Off Date Principal Balance: As to any Home Equity Loan, the unpaid
principal balance thereof as of the Cut-Off Date or, as to any Eligible
Substitute Home Equity Loan, as of the date of substitution of such Eligible
Substitute Home Equity Loan.
Defective Home Equity Loan: A Home Equity Loan subject to repurchase
pursuant to Section 2.02 or 2.04.
Definitive Certificates: As defined in Section 6.02(c).
Delinquent Home Equity Loan: Any Home Equity Loan in respect of which
any payment due thereunder has not been made for [_____] days or greater, from
the date such payment was due.
Deposit Event: The lowering of the Master Servicer's short-term debt
rating below "P-1" by Moody's or "___ by Fitch.
Depositor: HFC Revolving Corporation, a Delaware corporation, and its
successors in interest.
Depository: The initial Depository shall be The Depository Trust
Company, the nominee of which is Cede & Co., as the registered Holder of Class A
and Class M Certificates. The Depository shall at all times be a "clearing
corporation" as defined in Section 8-102(3) of the UCC of the State of New York.
Depository Participant: A broker, dealer, bank or other financial
institution or other Person for whom from time to time the Depository effects
book-entry transfers and pledges of securities deposited with the Depository.
Determination Date: As to any Distribution Date, the fifth Business Day
prior to such Distribution Date.
Distribution Date: The 20th day of each month (or if such 20th day is
not a Business Day, then the next succeeding Business Day), commencing [_______]
20, 1999.
Electronic Ledger: The electronic master record of home equity loans
(including the Home Equity Loans) maintained by the Master Servicer.
Eligible Account: An account that is either (i) maintained with a
depository institution
<PAGE> 11
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, (ii) 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 BIF or the SAIF, (iii) a segregated trust account maintained on the
corporate trust side with the Trustee in its fiduciary capacity, or (iv) 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 Class A or Class M Certificates.
Eligible Substitute Home Equity Loan: A Home Equity Loan substituted by
the Depositor for a Defective Home Equity Loan pursuant to Section 2.02 or 2.04,
which on the date of such substitution must
(i) have a Principal Balance not substantially
greater or less than the Principal Balance of such Defective Home
Equity Loan;
(ii) have a Loan Rate of not less than the Loan Rate
of the Defective Home Equity Loan and not more than [___] basis points
in excess thereof;
(iii) have a remaining term to maturity not more than
six months earlier or later than the remaining term to maturity of the
Defective Home Equity Loan;
(iv) comply with the representations and warranties
set forth in Section 2.04(b), to the extent such representations and
warranties do not pertain exclusively to the Home Equity Loans
transferred on the Closing Date;
(v) have a Combined Loan-to-Value Ratio that is not
greater than the Combined Loan-to-Value Ratio of the Defective Home
Equity Loan as of the date of origination of such Defective Home Equity
Loan;
(vi) have a lien position at least equal to the lien
position of the Mortgage relating to the Defective Home Equity Loan;
and
(vii) be the obligation of a Mortgagor whose credit
profile is substantially similar to that of the Mortgagor under the
Defective Home Equity Loan,
provided, however, that with respect to (i) through (vii) above, a home equity
loan may qualify as an Eligible Substitute Home Equity Loan if each of the
Rating Agencies consents to such substitution.
Event of Default: As defined in Section 8.01.
Extra Principal Distribution Amount: As to any Distribution Date, the
lesser of (x) the Monthly Excess Cashflow and (y) the Overcollateralization
Deficiency.
<PAGE> 12
Fannie Mae: Fannie Mae, formerly known as The Federal National Mortgage
Association, or any successor thereto.
FDIC: The Federal Deposit Insurance Corporation or any successor
thereto.
Fitch: Fitch IBCA, Inc. or its successors in interest.
Foreclosure Profit: As to any Liquidated Home Equity Loan, the amount,
if any, by which (i) the aggregate of its Liquidation Proceeds less Liquidation
Expenses exceeds (ii) the Principal Balance thereof immediately prior to the
final recovery of its Liquidation Proceeds, together with the sum of (x) accrued
and unpaid interest thereon at the applicable Loan Rate from the date interest
was last paid through the date of receipt of the final Liquidation Proceeds and
(y) the related Charge Off Amounts.
Freddie Mac: Freddie Mac, formerly known as The Federal Home Loan
Mortgage Corporation, or any successor thereto.
HFC: Household Finance Corporation, a Delaware corporation, and its
successors.
Home Equity Loan: Such of the home equity loans (together with the
related Mortgage Notes and Mortgages) transferred and assigned to the Trustee
pursuant to Section 2.01 as from time to time are held as a part of the Trust,
the home equity loans originally so held being identified in the Home Equity
Loan Schedule delivered on the Closing Date. As applicable, the term Home Equity
Loan shall be deemed to refer to the Mortgaged Property that has been converted
to ownership by the Master Servicer prior to the final recovery of related
Liquidation Proceeds.
Home Equity Loan Schedule: As to any date, the schedule of Home Equity
Loans, including any Eligible Substitute Home Equity Loans, included in the
Trust on such date. The initial Home Equity Loan Schedule is the schedule
delivered by the Depositor to the Trustee on the Closing Date, which schedule
sets forth as to each Home Equity Loan (i) the Cut-Off Date Principal Balance,
(ii) the Loan Rate, (iii) the lien position of the related Mortgage, (iv) the
CLTV, and (v) the name and address of the Mortgagor. The Home Equity Loan
Schedule will be amended from time to time to reflect the removal of Home Equity
Loans and the addition of any Eligible Substitute Home Equity Loans to the
Trust, and when so amended shall include the information set forth above with
respect to each Eligible Substitute Home Equity Loan as of its related date of
substitution.
Initial Home Equity Loan: Each Home Equity Loan transferred and
assigned to the Trust on the Closing Date.
Insurance Proceeds: Proceeds paid by any insurer pursuant to any
insurance policy covering a Home Equity Loan, or by the Master Servicer pursuant
to the last sentence of Section 3.04, 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
<PAGE> 13
thereof that is applied to the restoration or repair of the related Mortgaged
Property, released to the Mortgagor 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.
Interest Carry Forward Amount: As to any Class of Class A or Class M
Certificates and any Distribution Date, the sum of (x) the amount, if any, by
which (i) 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 (ii) the amount of the actual distribution with respect to interest
made to such Class on such Distribution Date plus (y) interest on such amount
calculated for the related Accrual Period at the related Pass-Through Rate in
effect with respect to such Class.
Interest Collections: As to any Distribution Date, the sum, without
duplication of:
(i) 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;
(ii) all Net Liquidation Proceeds actually collected by the
Master Servicer during the related Collection Period (to the extent
such Net Liquidation Proceeds relate to interest);
(iii) the interest portion of the Purchase Price for any Home
Equity Loan repurchased from the Trust pursuant to the terms of this
Agreement during the related Collection Period;
(iv) the interest portion of all Substitution Adjustment
Amounts with respect to the related Collection Period; and
(v) all Recovered Charge Off Amounts, whether or not any
portions thereof may be considered principal pursuant to the terms of
the related Mortgage Note.
Lien: Any mortgage, deed of trust, pledge, conveyance, hypothecation,
assignment, participation, deposit arrangement, encumbrance, lien (statutory or
other), preference, priority right or interest or other security agreement or
preferential arrangement of any kind or nature whatsoever, including, without
limitation, any conditional sale or other title retention agreement, any
financing lease having substantially the same economic effect as any of the
foregoing or the filing of any financing statement under the UCC (other than any
such financing statement filed for informational purposes only) or comparable
law of any jurisdiction to evidence any of the foregoing; provided, however,
that any assignment pursuant to Section [6.05 or 7.02] hereof shall not be
deemed to constitute a Lien.
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
<PAGE> 14
recovered (exclusive of any possibility of a deficiency judgement).
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 pursuant to Section 3.06 (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.
Loan Rate: As to any Home Equity Loan and day, the per annum rate of
interest applicable under the related Mortgage Note to the calculation of
interest for such day on the Principal Balance.
Master Servicer: Household Finance Corporation, a Delaware corporation,
or its successor in interest, or any successor master servicer appointed as
herein provided.
Monthly Excess Cashflow: As to any Distribution Date, the excess, if
any, of (x) Interest Collections over (y) the Current Interest plus the Interest
Carry Forward Amount, if any, of all Classes of Class A and Class M Certificates
(after taking into account all distributions of interest on such Distribution
Date).
Moody's: Moody's Investors Service, Inc., or its successor in interest.
Mortgage: The mortgage, deed of trust or other instrument creating a
first, second or third lien on an estate in fee simple interest in real property
securing a Home Equity Loan.
Mortgage File: The mortgage documents (including without limitation the
related Mortgage Note) listed in Section 2.01 pertaining to a particular Home
Equity Loan and any additional documents required to be added to the Mortgage
File pursuant to this Agreement, which documents may be physical documents or,
pursuant to the terms of Section 2.01, may be optical images or other
representations thereof.
Mortgage Note: As to a Home Equity Loan, the mortgage note or other
evidence of indebtedness under which the related Mortgagor agrees to pay the
indebtedness evidenced thereby and secured by the related Mortgage.
Mortgaged Property: The underlying property securing a Home Equity
Loan.
<PAGE> 15
Mortgagor: The obligor or obligors under a Mortgage.
Net Liquidation Proceeds: As to any Liquidated Home Equity Loan,
Liquidation Proceeds less Liquidation Expenses.
Net Loan Rate: As to any Home Equity Loan, the Loan Rate less the
Servicing Fee Rate.
Officer's Certificate: A certificate signed by the President, a Senior
Vice President, a Vice President, the Treasurer, Assistant Treasurer, Controller
or Assistant Controller of the Depositor or the Master Servicer, as the case may
be, and delivered to the Trustee.
Opinion of Counsel: A written opinion of counsel acceptable to the
Trustee, who may be internal counsel for the Master Servicer or the Depositor.
Original Class Certificate Balance: With respect to each Class of Class
A and Class M Certificates, the amount set forth below:
<TABLE>
<CAPTION>
CLASS ORIGINAL CLASS CERTIFICATE BALANCE
- --------------------------- ---------------------------------------------
<S> <C>
A-1 $_______,000
A-2 $_______,000
A-3 $_______,000
A-4 $_______,000
A-5 $_______,000
M-1 $_______,000
M-2 $_______,000
</TABLE>
Overcollateralization Amount: As to any Distribution Date, the excess,
if any, of (x) the Pool Balance as of the last day of the preceding Collection
Period over (y) the aggregate Certificate Principal Balance of all Classes of
Class A and Class M Certificates, calculated 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.
Overcollateralization Deficiency: As to any Distribution Date, the
excess, if any, of (x) the Targeted Overcollateralization Amount over (y) the
Overcollateralization Amount, calculated 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.
Overcollateralization Release Amount: As to any Distribution Date, the
amount (but not in excess of the Principal Collections for such Distribution
Date) equal to the excess of (i) the Overcollateralization Amount (assuming that
100% of the Principal Collections are applied on such Distribution Date to the
distribution of principal on the Class A and Class M Certificates) over (ii) the
Targeted Overcollateralization Amount.
<PAGE> 16
Ownership Interest: As to any Certificate, any ownership or security
interest in such Certificate, including any interest in such Certificate as the
Holder thereof and any other interest therein, whether direct or indirect, legal
or beneficial, as owner or as pledgee.
Pass-Through Rate: Either the Class A Pass-Through Rate or the Class M
Pass-Through Rate, as the context requires.
Paying Agent: Any Person appointed as paying agent pursuant to Section
6.06.
Percentage Interest: For purposes of making distributions among
Certificates of the same Class of Class A or Class M Certificates, the
percentage obtained by dividing the principal denomination of such Certificate
by the aggregate of the principal denominations of all Certificates of such
Class. In the case of any Class R Certificate, the percentage interest set forth
on the face of such Class R Certificate.
Permitted Investments: One or more of the following (excluding any
callable investments purchased at a premium):
(i) direct obligations of, or obligations fully guaranteed as
to timely payment of principal and interest by, the United States or
any agency or instrumentality thereof, provided that such obligations
are backed by the full faith and credit of the United States;
(ii) repurchase agreements on obligations specified in clause
(i) maturing not more than three months from the date of acquisition
thereof, provided that the short-term unsecured debt obligations of the
party agreeing to repurchase such obligations are at the date of
acquisition rated by each Rating Agency in its highest short-term
rating category (which is ["A-1+"] for Fitch and "P-1" for Moody's);
(iii) certificates of deposit, time deposits and bankers'
acceptances (which, if Moody's is a Rating Agency, shall each have an
original maturity of not more than 90 days and, in the case of bankers'
acceptances, shall in no event have an original maturity of more than
365 days) of any U.S. depository institution or trust company
incorporated under the laws of the United States or any state thereof
and subject to supervision and examination by federal and/or state
banking authorities, provided that the unsecured short-term debt
obligations of such depository institution or trust company at the date
of acquisition thereof have been rated by each of Moody's and Fitch in
its highest unsecured short-term debt rating category;
(iv) commercial paper (having original maturities of not more
than 270 days) of any corporation incorporated under the laws of the
United States or any state thereof which on the date of acquisition has
been rated by Fitch and Moody's in their highest short-term rating
categories;
(v) short term investment funds sponsored by any trust company
or national banking association incorporated under the laws of the
United States or any state thereof
<PAGE> 17
which on the date of acquisition has been rated by Fitch and Moody's in
their respective highest rating category for long-term unsecured debt,
or any other short-term investment fund the funds in which are invested
in securities rated in the highest rating category by Fitch and Moody's
and which mature on or prior to the next Distribution Date;
(vi) interests in any money market fund which at the date of
acquisition has a rating of "Aaa" by Moody's and ["AAAm" or "AAAm-G"]
by Fitch or such lower rating as will not result in the qualification,
downgrading or withdrawal of the then-current rating assigned to the
Class A Certificates by each Rating Agency; and
(vii) other obligations or securities that are acceptable to
each Rating Agency as a Permitted Investment hereunder and will not
result in a reduction in the then-current rating of the Class A or
Class M Certificates, as evidenced by a letter to such effect from such
Rating Agency;
provided that no instrument described hereunder shall evidence either the right
to receive (a) only interest with respect to the obligations underlying such
instrument or (b) both principal and interest payments derived from obligations
underlying such instrument if such interest and principal payments provide a
yield to maturity at par greater than 120% of the yield to maturity at par of
the underlying obligations; and provided, further, that no instrument described
hereunder may be purchased at a price greater than par if such instrument may be
prepaid or called at a price less than its purchase price prior to its stated
maturity.
Permitted Transferee: Any Person other than (i) the United States, any
State or any political subdivision thereof or any agency or instrumentality of
any of the foregoing, (ii) a foreign government, international organization or
any agency or instrumentality of either of the foregoing, (iii) an organization
which is exempt from tax imposed by Chapter 1 of the Code (including the tax
imposed by Code section 511 on unrelated business taxable income) (except
certain farmers' cooperatives described in Code section 521) on any excess
inclusions (as defined in Code section 860E(c)(1)) with respect to any Class R
Certificate, (iv) rural electric and telephone cooperatives described in Code
section 1381(a)(2)(C), (v) a Person that is not a citizen or resident of the
United States, a corporation or partnership (including an entity treated as a
corporation or partnership for U.S. federal income tax purposes) created or
organized in or under the laws of the United States, any state thereof or the
District of Columbia, or an estate whose income from sources without the United
States is includible in gross income for United States federal income tax
purposes regardless of its connection with the conduct of a trade or business
within the United States, 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 and (vi) any other Person so designated by the Trustee
based on an Opinion of Counsel to the effect that any transfer to such Person
may cause the Trust to fail to qualify as a REMIC at any time the Certificates
are outstanding. The terms "United States", "State" and "international
organization" shall have the meanings set forth in Code section 7701 or
successor provisions. A corporation will not be treated as an instrumentality of
the United States or of any State or political subdivision thereof if all of its
activities are subject to tax
<PAGE> 18
and, with the exception of the Freddie Mac, a majority of its board of directors
is not selected by such governmental unit.
Person: Any individual, corporation, partnership, joint venture,
association, limited liability company, joint-stock company, trust,
unincorporated organization, or government or any agency or political
subdivision thereof.
Pool Balance: As to any date, the aggregate of the outstanding
Principal Balances of all Home Equity Loans as of such date.
Pool Factor: As to any Distribution Date, the percentage, carried to
seven places, obtained by dividing the aggregate Certificate Principal Balance
of the Class A and Class M Certificates for such Distribution Date by the
aggregate Original Class Certificate Balance of the Class A and Class M
Certificates.
Preferred Stock: As defined in Section 11.12.
Principal Balance: As to any Home Equity Loan (other than a Liquidated
Home Equity Loan) and date, the related Cut-Off Date Principal Balance, 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 Principal Balance equal to
the Principal Balance of the related Home Equity Loan immediately prior to the
final recovery of related Liquidation Proceeds and a Principal Balance of zero
thereafter.
Principal Collections: As to any Distribution Date, the sum, without
duplication, of:
(i) the principal portion of all scheduled monthly payments on
the Home Equity Loans received by the Master Servicer during the
related Collection Period;
(ii) the principal portion of the Purchase Price for any Home
Equity Loan repurchased from the Trust pursuant to the terms of this
Agreement during the related Collection Period;
(iii) the principal portion of all Substitution Adjustment
Amounts with respect to the related Collection Period;
(iv) 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
(v) 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
<PAGE> 19
Mortgagors), to the extent not previously distributed.
Principal Distribution Amount: As to any Distribution Date, (i) the
sum, without duplication, of (x) the Principal Collections and (y) the Extra
Principal Distribution Amount, if any, minus (ii) 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.
Purchase Agreement: The purchase agreement dated as of November 1,
1999, between the Depositor and the Sellers pursuant to which the Sellers convey
to the Depositor all of their right, title and interest in and to the Home
Equity Loans.
Purchase Price: As to any Home Equity Loan purchased from the Trust on
any date pursuant to Section 2.02, 2.04 or 3.01 an amount equal to the sum of
(i) the Principal Balance thereof plus any related Charge Off Amount as of the
end of the related Collection Period preceding the date of repurchase, (ii)
accrued and unpaid interest to the end of such Collection Period computed on a
daily basis at the Net Loan Rate on the Principal Balance outstanding from time
to time and (iii) with respect to any Home Equity Loan the Master Servicer or
the related Seller, as the case may be, elects to repurchase or replace pursuant
to this Agreement, an amount sufficient so that after paying any taxes pursuant
to Section 860F(a)(l) or Section 860G(d)(l) of the Code with respect to such
purchase (including any taxes imposed on the Trust with respect to such
additional purchase price), the Trust will retain an amount equal to the sum of
clauses (i) and (ii).
Rating Agencies: Moody's and Fitch or their respective successors. If
such agency or a successor is no longer in existence, "Rating Agency" shall be
such statistical credit rating agency, or other comparable Person, designated by
the Depositor, notice of which designation shall be given to the Trustee.
References herein to the highest short term unsecured rating category of a
Rating Agency shall mean "P-1" or better in the case of Moody's and "______" in
the case of Fitch and in the case of any other Rating Agency shall mean such
equivalent ratings. References herein to the highest long-term rating category
of a Rating Agency shall mean "____" in the case of Fitch and "Aaa" in the case
of Moody's and in the case of any other Rating Agency, such equivalent rating.
Realized Losses: 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 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.
Record Date: The last day preceding the related Distribution Date;
provided, however, that following the date on which Definitive Certificates are
available pursuant to Section 6.02(c) the Record Date shall be the last day of
the month preceding the month in which the related Distribution Date occurs.
<PAGE> 20
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
(i) its Net Liquidation Proceeds that are allocable to principal in accordance
with the related Mortgage Note exceeds (ii) its Principal Balance immediately
prior to foreclosure up to an amount of all related Charge Off Amounts, but in
no event less than zero.
Regular Certificates: The Class A and Class M Certificates.
Related Documents: As such term is defined in the Purchase Agreement.
REMIC: A "real estate mortgage investment conduit" within the meaning
of Section 860D of the Code.
REMIC Certificate Maturity Date: The "latest possible maturity date" of
the Regular Certificates as that term is defined in Section [2.08] hereof.
REMIC Change of Law: Any proposed, temporary or final regulation,
revenue ruling, revenue procedure or other official announcement or
interpretation relating to the REMIC and the REMIC Provisions issued after the
Closing Date.
REMIC Provisions: Provisions of the Federal income tax law relating to
real estate mortgage investment conduits, which appear at Section 860A through
860G of Subchapter M of Chapter 1 of the Code, and related provisions, and
regulations promulgated thereunder, as the foregoing may be in effect from time
to time.
REO: A Mortgaged Property that is acquired by the Trust in a
foreclosure or by grant of deed in lieu of foreclosure.
Responsible Officer: When used with respect to the Trustee, any officer
in the Corporate Trustee Administration Department of the Trustee with direct
responsibility for the administration of this Agreement.
SAIF: The Savings Association Insurance Fund, as from time to time
constituted, created under the Financial Institutions Reform, Recovery and
Enhancement Act of 1989, or if at any time after the execution of this
instrument the Savings Association Insurance Fund is not existing and performing
duties now assigned to it, the body performing such duties on such date.
Sellers: [Household Realty Corporation, Household Finance Corporation
of California, Household Finance Corporation II, Household Finance Corporation
III, Household Finance Industrial Loan Company, Household Finance Realty
Corporation of New York, Household Financial Center Inc., Household Finance
Realty Corporation of Nevada, Household Industrial Loan Company of Kentucky,
Household Finance Industrial Loan Company of Iowa, Household Finance Consumer
Discount Company, Household Industrial Finance Company and Mortgage One
Corporation.]
<PAGE> 21
Senior Enhancement Percentage: As to any Distribution Date, the
percentage obtained by dividing (x) the sum of (i) the aggregate Certificate
Principal Balance of the Class M Certificates and (ii) the Overcollateralization
Amount, in each case after taking into account the distribution of the Principal
Distribution Amount on such Distribution Date, by (y) the Pool Balance as of the
last day of the related Collection Period.
Senior Specified Enhancement Percentage: As to any Distribution Date
means [__]%.
Servicer: As to each Home Equity Loan, the related Seller that sold
such Home Equity Loan to the Depositor pursuant to the Purchase Agreement.
Servicing Certificate: A certificate completed by and executed on
behalf of the Master Servicer in accordance with Section 4.01.
Servicing Fee: The fee payable to the Master Servicer pursuant to
Section ____.
Servicing Fee Rate: A rate equal to ____% per annum.
Servicing Officer: Any officer of the Master Servicer or other
individual designated by an officer of the Master Servicer involved in, or
responsible for, the administration and servicing of the Home Equity Loans,
whose name and specimen signature appear on a list of servicing officers
furnished to the Trustee on the Closing Date by the Master Servicer, as such
list may be amended from time to time.
60 Day Delinquent Amount: As to any Collection Period, the aggregate of
the Principal Balances of all Home Equity Loans that are 60 or more days
contractually delinquent, in bankruptcy, in foreclosure or REO as of the end of
such Collection Period.
60 Day+ Rolling Average: As to any Distribution Date, the average of
the applicable 60 Day Delinquency Amounts for each of the six (6) immediately
preceding Collection Periods.
Stepdown Date: The earlier to occur of:
(i) the later to occur of (x) the Distribution Date in
[November 2002] and (y) 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
(ii) 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 to any Distribution Date, two (2)
times the amount of the 60 Day+ Rolling Average.
<PAGE> 22
Substitution Adjustment Amount: As to any Defective Home Equity Loan
and the date on which a substitution thereof occurs pursuant to Sections 2.02 or
2.04, the sum of:
(i) the excess, if any, of (a) the 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 Principal Balance of the applicable Eligible Substitute
Home Equity Loan or Loans, plus
(ii) accrued and unpaid interest to the end of such Collection
Period computed on a daily basis at the Net Loan Rate on the Principal
Balance of such Defective Home Equity Loan outstanding from time to
time.
Targeted Overcollateralization Amount: As to any Distribution Date, (x)
prior to the Stepdown date, [__.00%] of the Cut-Off Date Pool Balance, and (y)
on and after the Stepdown Date and assuming a Trigger Event is not in effect,
the greater of (i) [__%] of the Pool Balance as of the last day of the related
Collection Period and (ii) [$____,000]. If a Trigger Event is in effect on and
after the Stepdown Date, the Targeted Overcollateralization Amount shall be
equal to the Targeted Overcollateralization Amount for the immediately preceding
Distribution Date.
Tax Matters Person Residual Interest: A 0.000001% interest in the Class
R Certificates, which shall be issued to and held by the Master Servicer
throughout the term hereof.
Transfer: Any direct or indirect transfer, sale, pledge, hypothecation
or other form of assignment of any Ownership Interest in a Certificate.
Transfer Date: As to any Home Equity Loan transferred to or
retransferred from the Trust hereunder, the date on which such transfer or
retransfer is made under the terms hereof, which date shall be (i) in the case
of the Home Equity Loans originally listed on the Home Equity Loan Schedule, the
Closing Date, and (ii) in the case of any Eligible Substitute Home Equity Loan,
the date on which such Eligible Substitute Home Equity Loan is conveyed to the
Trust under the terms hereof.
Trigger Event: Any Distribution Date on which the 60 Day+ Rolling
Average equals or exceeds 50% of the Senior Enhancement Percentage; provided,
that if the aggregate Certificate Principal Balance of the Class A Certificates
has been reduced to zero, a Trigger Event shall be in effect only if the 60 Day+
Rolling Average equals or exceeds [___%]; provided, further, a Trigger Event
shall not be in effect if the Senior Enhancement Percentage equals or exceeds
the Stepped Up Enhancement Level.
Trust: The trust created by this Agreement and designated "Household
Home Equity Loan Trust 1999-1", the corpus of which consists of the Home Equity
Loans, such assets as shall from time to time be identified as deposited in the
Collection Account (exclusive of net earnings thereon), the Mortgage Notes and
other Mortgage File documents for the Home Equity Loans,
<PAGE> 23
any property that secured a Home Equity Loan and that has become REO, the
interest of the Depositor in certain hazard insurance policies maintained by the
Mortgagors or the Master Servicer in respect of the Home Equity Loans, the
Collection Account, the proceeds of each of the foregoing and one share of
Preferred Stock of the Depositor.
Trustee: Bank One, National Association, a national banking
association, or any successor Trustee appointed in accordance with this
Agreement that has accepted such appointment in accordance with this Agreement.
UCC: The Uniform Commercial Code, as amended from time to time, as in
effect in any specified jurisdiction.
Section 1.02. Interest Calculations. All calculations of interest hereunder that
are made in respect of the Principal Balance of a Home Equity Loan shall be made
based on the number of days elapsed between the date that interest was last paid
on such Home Equity Loan and the date of receipt of the related Mortgagor's most
current payment. All calculations of interest on the Class A and Class M
Certificates shall be made on the basis of a 360-day year consisting of twelve
30-day months. The calculation of the Servicing Fee shall be made on the basis
of a 360-day year consisting of twelve 30-day months.
Section 1.03. Usage of Terms. As to all terms in this Agreement the singular
includes the plural and the plural the singular; words importing any gender
include the other gender; references to "writing" include printing, typing,
lithography, optical imaging, and other means of reproducing words in a visible
form; references to agreements and other contractual instruments include all
subsequent amendments thereto or changes therein entered into in accordance with
their respective terms and not prohibited by this Agreement; references to
Persons include their permitted successors and assigns; and the term "including"
means "including without limitation." The term "related Collection Period" as
used herein with respect to any Distribution Date shall mean the Collection
Period immediately preceding such Distribution Date and the term "preceding
Collection Period" as used herein with respect to any Distribution Date shall
mean the Collection Period preceding the related Collection Period for such
Distribution Date.
<PAGE> 24
ARTICLE II
Conveyance of Home Equity Loans; Original Issuance of Certificates; Tax
Treatment
Section 2.01. Acknowledgment; Conveyance of Home Equity Loans; Custody of
Mortgage Files.
(a) The Depositor, concurrently with the execution and delivery of this
Agreement, does hereby irrevocably transfer, assign, sell, set over and
otherwise convey to the Trustee for the benefit of the Certificateholders
without recourse (subject to Sections 2.02 and 2.04) (i) all of its right, title
and interest in and to each Home Equity Loan, including its Cut-Off Date
Principal Balance, and all collections in respect thereof received on or after
the Cut-Off Date; (ii) property which secured such Home Equity Loan and which
has been acquired by foreclosure or deed in lieu of foreclosure; and (iii) its
interest in any insurance policies in respect of the Home Equity Loans; (iv) all
proceeds of any of the foregoing.
(b) The Depositor agrees to take, or to cause to be taken, such actions and
to execute such documents (including without limitation the filing of all
necessary continuation statements for the UCC-1 financing statement filed in the
State of Illinois (which shall have been filed as promptly as practicable, but
in no event later than 15 days following the Closing Date) describing the Home
Equity Loans and naming the Depositor as debtor and the Trustee as secured
party, and any amendments or other filings to the UCC-1 financing statement
required to reflect a change in the UCC of the name or corporate structure of
the Depositor, or the filing of any additional UCC-1 financing statement due to
any change in the principal office of the Depositor) as are necessary to perfect
and protect the Certificateholders' interests in each Home Equity Loan and the
proceeds thereof (other than delivering to the Trustee possession of the
Mortgage Files, which possession will, subject to the terms hereof, be
maintained by the Servicers on behalf of the Master Servicer as custodian and
bailee for the Trustee). With respect to the Home Equity Loans sold by each
Seller to the Depositor, the Master Servicer shall cause such Seller to file as
promptly as practicable, but in no event later than 15 days following the
Closing Date, in the appropriate public filing office or offices UCC-1 financing
statements and continuation statements describing such Home Equity Loans and
naming such Seller as seller and the Depositor as buyer, to file appropriate
continuation statements thereto, to file amendments thereto in the case of a
name change or change in corporate structure and to file appropriate additional
UCC-1 financing statements, if any, if such Seller changes its principal office.
(c) In connection with such transfer and assignment by the Depositor, the
Master Servicer, acting through the Servicers, acknowledges hereby that it is
holding, with respect to the Home Equity Loans transferred on the Closing Date,
and will hold, with respect to each Eligible Substitute Home Equity Loan, on and
from the applicable Transfer Date, as custodian and bailee for the Trustee the
following documents or instruments with respect to each such Home Equity Loan:
(i) the original Mortgage Note, endorsed in blank, with all intervening
endorsements showing a complete chain of title from the originator of such Home
Equity Loan to the Seller or a copy of such original Mortgage Note with an
accompanying lost note affidavit;
<PAGE> 25
(ii) the original Mortgage, with evidence of recording thereon,
provided that if the original Mortgage has been delivered for recording to the
appropriate public recording office of the jurisdiction in which the Mortgaged
Property is located but has not yet been returned to the Seller by such
recording office, the Seller may hold a copy of such original Mortgage; and
(iii) originals of any amendments to the Mortgage Note or Mortgage,
any modification or assumption agreements and any previous assignments of such
Home Equity Loan;
provided, however, that as to any Home Equity Loan, if, as evidenced by
an Opinion of Counsel delivered to and in form and substance satisfactory to the
Trustee, (x) an optical image or other representation of the related documents
specified in clauses (i) through (iii) above are enforceable in the relevant
jurisdictions to the same extent as the original of such document and (y) such
optical image or other representation does not impair the ability of an owner of
such Home Equity Loan to transfer its interest in such Home Equity Loan, such
optical image or other representation may be held by the Master Servicer, acting
through the Servicers, as custodian and bailee for the Trustee in lieu of the
physical documents specified above.
(d) Except as hereinafter provided, the Master Servicer, acting through the
Servicers, shall be entitled to maintain possession of all of the foregoing
documents and instruments and shall not be required to deliver any of them to
the Trustee. In the event, however, that possession of any of such documents or
instruments is required by any Person (including the Trustee) acting as
successor master servicer pursuant to [Section 7.04 or 8.02] in order to carry
out the duties of Master Servicer hereunder, then such successor shall be
entitled to request delivery, at the expense of the Master Servicer, of such
documents or instruments by the Master Servicer and to retain such documents or
instruments for servicing purposes; provided that the Trustee or such servicers
shall maintain such documents at such offices as may be required by any
regulatory body having jurisdiction over such Home Equity Loans.
(e) The Master Servicer's right to maintain possession, directly or through
the Servicers, of the documents enumerated above shall continue so long as (i)
the long-term senior unsecured debt of HFC is assigned ratings of at least "A"
by Fitch and "A-3" by Moody's, or such lower ratings as shall be acceptable to
the Rating Agencies in order to maintain their current ratings of the Class A
and Class M Certificates, and (ii) each of the Servicers remains an Affiliate of
HFC. At such time as either of the conditions specified in the preceding
sentence is not satisfied, as promptly as practicable, but in no event more than
90 days thereafter in the case of clause (i) below and 60 days in the case of
clause (ii) below, the Master Servicer shall cause each Servicer, at such
Servicer's expense or, at the Master Servicer's discretion, the Master
Servicer's expense, to (i) either (x) record an assignment of Mortgage in favor
of the Trustee (which may be a blanket assignment if permitted by applicable
law) with respect to each of the Home Equity Loans being serviced by such
Servicer in the appropriate real property or other records or (y) deliver to the
Trustee the assignment of such Mortgage in favor of the Trustee in form for
recordation, together with an Opinion of Counsel addressed to the Trustee to the
effect that recording is not required to protect the Trustee's right, title and
interest in and to the related Home Equity Loan or to perfect a first priority
security interest in favor of the Trustee in the related Home Equity Loan, which
Opinion of Counsel also shall be reasonably acceptable to each of the Rating
Agencies (as evidenced in writing), and (ii) unless an Opinion of Counsel,
reasonably acceptable to the Trustee and the Rating Agencies (as
<PAGE> 26
evidenced in writing), is delivered to the Trustee to the effect that delivery
of the Mortgage Files is not necessary to protect the Trustee's right, title and
interest in and to the related Home Equity Loans or to perfect a first priority
security interest in favor of the Trustee in the related Home Equity Loans,
deliver the related Mortgage Files to the Trustee to be held by the Trustee in
trust, upon the terms herein set forth, for the use and benefit of all present
and future Certificateholders, and the Trustee shall retain possession thereof
except to the extent the Master Servicer or Servicers require any Mortgage Files
for normal servicing as contemplated by [Section 3.07]. The Master Servicer
shall cause the Servicers to appoint the Trustee their attorney-in-fact to
prepare, execute and record any assignments of Mortgages required under this
Section 2.01 in the event that the Servicers should fail to do so on a timely
basis.
(f) Within 90 days following delivery, if any, of the Mortgage Files to the
Trustee pursuant to the preceding subsection, the Trustee shall review each such
Mortgage File to ascertain that all required documents set forth in this Section
2.01 have been executed and received and that such documents relate to the Home
Equity Loans identified on the Home Equity Loan Schedule, and in so doing the
Trustee may rely on the purported due execution and genuineness of any signature
thereon. If within such 90-day period the Trustee finds any document
constituting a part of a Mortgage File not to have been executed or received or
to be unrelated to the Home Equity Loans identified in said Home Equity Loan
Schedule or, if in the course of its review, the Trustee determines that such
Mortgage File is otherwise defective in any material respect, the Trustee shall
promptly upon the conclusion of its review notify the Depositor and the Master
Servicer, and the Depositor and the Master Servicer shall have a period of 90
days after such notice within which to correct or cure any such defect;
provided, however, that if such defect shall not have been corrected or cured
within such 90-day period due to the failure of the related office of real
property or other records to return any document constituting a part of a
Mortgage File, the Depositor or the Master Servicer shall so notify the Trustee
and the period during which such defect may be corrected or cured shall be
extended for one additional 90-day period.
(g) The Trustee shall have no responsibility for reviewing any Mortgage
File except as expressly provided in this Section 2.01. In reviewing any
Mortgage File pursuant to this Section 2.01, the Trustee shall have no
responsibility for determining whether any document is valid and binding,
whether the text of any assignment or endorsement is in proper or recordable
form (except, if applicable, to determine if the Trustee is the assignee or
endorsee), whether any document has been recorded in accordance with the
requirements of any applicable jurisdiction, or whether a blanket assignment is
permitted in any applicable jurisdiction, whether any Person executing any
document is authorized to do so or whether any signature thereon is genuine, but
shall only be required to determine whether a document has been executed, that
it appears to be what it purports to be and, where applicable, that it purports
to be recorded.
(h) The Master Servicer hereby confirms to the Trustee that on or prior to
the Closing Date and on or prior to the applicable Transfer Date with respect to
any Eligible Substitute Home Equity Loan, the portions of the Electronic Ledger
relating to such Home Equity Loans have been or will have been clearly and
unambiguously marked, and the appropriate entries have been or will have been
<PAGE> 27
made in its general accounting records, to indicate that such Home Equity Loans
have been transferred to the Trustee and constitute part of the Trust in
accordance with the terms hereof.
Section 2.02. Acceptance by Trustee; Repurchase of Home Equity Loans; Conveyance
of Eligible Substitute Home Equity Loans.
(a) The Trustee hereby acknowledges receipt of all the right, title and
interest of the Depositor in and to the Home Equity Loans pursuant to Section
2.01, including but not limited to the transfer and assignment of the Mortgage
Notes and the Mortgages, and declares that it holds and will hold such documents
and interests and all amounts received by it in trust, upon the terms herein set
forth, for the use and benefit of all present and future Certificateholders. If
the time to cure any defect of which the Trustee has notified the Depositor and
the Master Servicer following the Trustee's review of the Home Equity Loan Files
pursuant to Section 2.01 has expired or if any loss is suffered by the Trustee,
on behalf of the Certificateholders, in respect of any Home Equity Loan as a
result of (i) a defect in any document constituting a part of a Mortgage File or
(ii) the related Seller's retention of such Mortgage File or an assignment of
Mortgage not having been recorded, the Depositor shall, in the case of a defect
in such document, or the Master Servicer shall, in the case of a loss resulting
from such Seller's retention of a Mortgage File or assignment of Mortgage not
having been recorded, on the Business Day next preceding the Distribution Date
in the month following the end of the Collection Period in which the time to
cure such defect expired or such loss occurred, either (i) repurchase the
related Home Equity Loan (a "Defective Home Equity Loan") (including any
property acquired in respect thereof and any insurance policy or insurance
proceeds with respect thereto) from the Trust at a price equal to the Purchase
Price which shall be accomplished by deposit by the Depositor or the Master
Servicer, as applicable, in the Collection Account pursuant to Section 3.02 on
such next preceding Business Day, or (ii) so long as such Distribution Date
occurs within two (2) years following the Closing Date, remove such Defective
Home Equity Loan from the Trust and substitute in its place an Eligible
Substitute Home Equity Loan or Loans.
(b) As to any Eligible Substitute Home Equity Loan or Loans, the Master
Servicer shall cause the related Seller to deliver to the Trustee with respect
to such Eligible Substitute Home Equity Loan or Loans an acknowledgment that the
related Seller is holding as custodian for the Trustee such documents and
agreements, if any, as are permitted to be held by the related Seller in
accordance with Section 2.01. An assignment of Mortgage in favor of the Trustee
with respect to such Eligible Substitute Home Equity Loan or Loans shall be
required to be recorded in the appropriate real property or other records or
delivered to the Trustee with the Opinion of Counsel referred to in Section 2.01
under the same circumstances that all other assignments of Mortgage are required
to be recorded hereunder. For any Collection Period during which the Depositor
or the Master Servicer substitutes one or more Eligible Substitute Home Equity
Loans, the Master Servicer shall determine the Substitution Adjustment Amount.
The Depositor or the Master Servicer, as applicable, shall deposit the
Substitution Adjustment Amount in the Collection Account no later than the
Business Day next preceding the Distribution Date in the month following the end
of the Collection Period in which such substitution occurs. The Master Servicer
shall amend the Home Equity Loan Schedule to reflect the removal of the
Defective Home Equity
<PAGE> 28
Loan from the terms of this Agreement and the substitution of the Eligible
Substitute Home Equity Loan or Loans. Upon such substitution, the Eligible
Substitute Home Equity Loan or Loans shall be subject to the terms of this
Agreement in all respects, and the Depositor shall be deemed to have made with
respect to such Eligible Substitute Home Equity Loan or Loans, as of the date of
substitution, the covenants, representations and warranties set forth in Section
2.04. The Trustee shall upon satisfaction of the conditions in this subsection
immediately effect the reconveyance of such Defective Home Equity Loan so
removed from the Trust to the Depositor or the Master Servicer, as applicable.
The procedures applied by the Depositor or the Master Servicer in selecting each
Eligible Substitute Home Equity Loan shall not be adverse to the interests of
the Certificateholders and shall be comparable to the selection procedures
applicable to the Home Equity Loans originally conveyed hereunder.
(c) Upon receipt by the Trustee of (i) in the case of a repurchase, written
notification signed by a Servicing Officer to the effect that the Purchase Price
for any such Defective Home Equity Loan has been so deposited in the Collection
Account or (ii) in the case of a substitution, (A) written notification signed
by a Servicing Officer to the effect that the Substitution Adjustment Amount, if
any, has been so deposited in the Collection Account and (B) an Officer's
Certificate reciting the transfer and assignment of the Eligible Substitute Home
Equity Loan(s) to the Trustee and, if required at such time, that the related
Mortgage File(s) for such Eligible Substitute Home Equity Loan(s) have been
delivered to the Trustee and the assignment(s) of Mortgage have been recorded,
the Trustee shall execute and deliver such instrument of transfer or assignment
presented to it by the Master Servicer, in each case without recourse, as shall
be necessary to vest in the Depositor or the Master Servicer, as the case may
be, legal and beneficial ownership of such Defective Home Equity Loan (including
any property acquired in respect thereof or proceeds of any insurance policy
with respect thereto). It is understood and agreed that the obligation of the
Depositor or the Master Servicer to repurchase or substitute for (to the extent
permitted herein) any Defective Home Equity Loan shall constitute the sole
remedy respecting such defect available to Certificateholders or the Trustee
against the Depositor or the Master Servicer, and such obligation on the part of
the Master Servicer shall survive any resignation or termination of the Master
Servicer hereunder.
(d) In connection with any Defective Home Equity Loan required to be
purchased or substituted for, the Master Servicer shall deliver to the Trustee
an Opinion of Counsel to the effect that such purchase or substitution will not
cause (i) any federal tax to be imposed on the Trust, including, without
limitation, any Federal tax imposed on "prohibited transactions" under Section
860F(a)(1) of the Code or on "contributions after the start-up day" under
Section 860G(d)(1) of the Code or (ii) the Trust to fail to qualify as a REMIC
at any time that any Certificate is outstanding. In the event that such opinion
indicates that a purchase or substitution will result in the imposition of a
prohibited transaction tax, give rise to net taxable income or be deemed a
contribution to the REMIC after the "start-up day" of the REMIC within the
meaning of Section 860G(a)(9) of the Code, the Depositor or the Master Servicer
shall not be required to repurchase or substitute for any such Defective Home
Equity Loan unless and until the Master Servicer has determined there is an
actual or imminent default with respect thereto or that such defect or breach
adversely affects the enforceability of such Defective Home Equity Loan.
<PAGE> 29
Section 2.03. Representations, Warranties and Covenants of the Master Servicer.
The Master Servicer represents, warrants and covenants that as of the Closing
Date:
(i) The Master Servicer is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware and has
the corporate power to own its assets and to transact the business in which it
is currently engaged. The Master Servicer is duly qualified to do business as a
foreign corporation and is in good standing in each jurisdiction in which the
character of the business transacted by it or properties owned or leased by it
require such qualification and in which the failure to so qualify would have a
material adverse effect on the business, properties, assets, or condition
(financial or other) of the Master Servicer;
(ii) The Master Servicer has the power and authority to make, execute,
deliver and perform its obligations under this Agreement and to perform its
obligations with respect to all of the transactions contemplated under this
Agreement, and has taken all necessary corporate action to authorize the
execution, delivery and performance of its obligations under this Agreement.
When executed and delivered, this Agreement will constitute the legal, valid and
binding obligation of the Master Servicer enforceable in accordance with its
terms, except as enforcement of such terms may be limited by bankruptcy,
insolvency or similar laws affecting the enforcement of creditors' rights
generally and by the availability of equitable remedies (whether in a proceeding
at law or in equity);
(iii) The Master Servicer is not required to obtain the consent of any
other Person or any consent, license, approval or authorization from, or
registration or declaration with, any governmental authority, bureau or agency
in connection with the execution, delivery, performance, validity or
enforceability of this Agreement, except for such consents, licenses, approvals
or authorizations, or registrations or declarations, as shall have been obtained
or filed, as the case may be;
(iv) The execution and delivery of this Agreement and the performance
of the transactions contemplated hereby by the Master Servicer will not violate
any provision of any existing law or regulation or any order or decree of any
court applicable to the Master Servicer or any provision of the Certificate of
Incorporation or Bylaws of the Master Servicer, or constitute a material breach
of any mortgage, indenture, contract or other agreement to which the Master
Servicer is a party or by which the Master Servicer may be bound; and
(v) No litigation or administrative proceeding of or before any court,
tribunal or governmental body is currently pending, or to the knowledge of the
Master Servicer threatened, against the Master Servicer or any of its properties
or with respect to this Agreement or the Certificates which in the opinion of
the Master Servicer has a reasonable likelihood of resulting in a material
adverse effect on the transactions contemplated by this Agreement.
The representations and warranties set forth in this Section 2.03 shall
survive the sale and assignment of the Home Equity Loans to the Trust. Upon
discovery of a breach of any representations and warranties which materially and
adversely affects the interests of the Certificateholders, the Person
discovering such breach shall give prompt written notice to the other parties.
Within 60 days (or such longer period as permitted by prior written consent of a
Responsible Officer of the Trustee) of its discovery or its receipt of notice of
such breach, the Master Servicer shall cure such breach in all material
respects.
<PAGE> 30
Section 2.04. Representations and Warranties of the Depositor Regarding this
Agreement and the Home Equity Loans; Repurchases and Substitutions.
(a) The Depositor represents and warrants that as of the Closing Date:
(i) The Depositor is a corporation duly organized, validly existing and
in good standing under the laws of the State of Delaware and has the corporate
power to own its assets and to transact the business in which it is currently
engaged. The Depositor is duly qualified to do business as a foreign corporation
and is in good standing in each jurisdiction in which the character of the
business transacted by it or properties owned or leased by it require such
qualification and in which the failure to so qualify would have a material
adverse effect on the business, properties, assets or condition (financial or
other) of the Depositor;
(ii) The Depositor has the power and authority to make, execute,
deliver and perform its obligations under this Agreement and to perform its
obligations with respect to all of the transactions contemplated under this
Agreement, and has taken all necessary corporate action to authorize the
execution, delivery and performance of its obligations under this Agreement.
When executed and delivered, this Agreement will constitute the legal, valid and
binding obligation of the Depositor enforceable in accordance with its terms,
except as enforcement of such terms may be limited by bankruptcy, insolvency or
similar laws affecting the enforcement of creditors' rights generally and by the
availability of equitable remedies (whether in a proceeding at law or in
equity);
(iii) The Depositor is not required to obtain the consent of any other
Person or any consent, license, approval or authorization from, or registration
or declaration with, any governmental authority, bureau or agency in connection
with the execution, delivery, performance, validity or enforceability of this
Agreement, except for such consents, licenses, approvals or authorizations, or
registrations or declarations, as shall have been obtained or filed, as the case
may be;
(iv) The execution and delivery of this Agreement and the performance
of the transactions contemplated hereby by the Depositor will not violate any
provision of any existing law or regulation or any order or decree of any court
applicable to the Depositor or any provision of the Certificate of Incorporation
or Bylaws of the Depositor, or constitute a material breach of any mortgage,
indenture, contract or other agreement to which the Depositor is a party or by
which the Depositor may be bound; and
(v) No litigation or administrative proceeding of or before any court,
tribunal or governmental body is currently pending, or to the knowledge of the
Depositor threatened, against the Depositor or any of its properties or with
respect to this Agreement or the Certificates which in the opinion of the
Depositor has a reasonable likelihood of resulting in a material adverse effect
on the transactions contemplated by this Agreement.
(b) The Depositor represents and warrants with respect to each Home Equity
Loan that as of the Closing Date (or to the extent expressly stated herein as of
such other time):
(i) This Agreement constitutes either (A) a valid transfer and
assignment to the Trustee of all right,
<PAGE> 31
title and interest of the Depositor in and to the Home Equity Loans, all monies
due or to become due with respect thereto, all proceeds thereof, such funds as
are from time to time deposited in the Collection Account (excluding any
investment earnings thereon) and all other property specified in the definition
of "Trust" as being part of the corpus of the Trust conveyed to the Trust by the
Depositor, or (B) a grant of a security interest (as defined in the UCC as in
effect in Illinois) in such property to the Trustee on behalf of the
Certificateholders, which is enforceable with respect to the Home Equity Loans,
all monies due or to become due with respect thereto, all proceeds thereof and
such funds as are from time to time deposited in the Collection Account
(excluding any investment earnings thereon). If this Agreement constitutes the
grant of a security interest to the Trust in such property, and if the Trustee
obtains and maintains possession of the Mortgage File for each Home Equity Loan,
the Trust shall have a first priority perfected security interest in such
property, subject to the effect of Section 9-306 of the UCC with respect to
collections on the Home Equity Loans that are deposited in the Collection
Account in accordance with Section 3.02;
(ii) The information set forth in the Home Equity Loan Schedule with
respect to such Home Equity Loan is true and correct in all material respects;
(iii) Immediately prior to the transfer and assignment by the related
Seller to the Depositor pursuant to the Purchase Agreement, the Home Equity Loan
has not been assigned or pledged, and the related Seller has good and marketable
title thereto, and the related Seller is the sole owner and holder of such Home
Equity Loan free and clear of any and all liens, claims, encumbrances,
participation interests, equities, pledges, charges or security interests of any
nature, and has full right and authority, under all governmental and regulatory
bodies having jurisdiction over the ownership of such Home Equity Loan, to
transfer and assign the same pursuant to the Purchase Agreement;
(iv) Immediately prior to the transfer and assignment by the Depositor
to the Trustee pursuant to this Agreement, the Home Equity Loan has not been
assigned or pledged, and the Depositor has good and marketable title thereto,
and the Depositor is the sole owner and holder of such Home Equity Loan free and
clear of any and all liens, claims, encumbrances, participation interests,
equities, pledges, charges or security interests of any nature, and has full
right and authority, under all governmental and regulatory bodies having
jurisdiction over the ownership of such Home Equity Loan, to transfer and assign
the same pursuant to this Agreement;
(v) The related Mortgage is a valid and subsisting first, second or
third lien, as set forth on the Home Equity Loan Schedule with respect to such
Home Equity Loan, on the property therein described, and the related Mortgaged
Property is free and clear of all encumbrances and liens having priority over
the first, second or third lien, as applicable, of such Mortgage except for
liens for (a) real estate taxes and special assessments not yet delinquent; (b)
any first and if applicable, second mortgage loan secured by such Mortgaged
Property and specified on the Home Equity Loan Schedule; (c) covenants,
conditions and restrictions, rights of way, easements and other matters of
public record as of the date of recording that are acceptable to mortgage
lending institutions generally; and (d) other matters to which like properties
are commonly subject which do not materially interfere with the benefits of the
security intended to be provided by such Mortgage;
(vi) To the best knowledge of the Depositor, there is no valid offset,
defense or counterclaim of any obligor under the Mortgage;
<PAGE> 32
(vii) To the best knowledge of the Depositor, there is no delinquent
recording or other tax or fee or assessment lien against the related Mortgaged
Property;
(viii) To the Depositor's knowledge, there is no proceeding pending or
threatened for the total or partial condemnation of the related Mortgaged
Property, and such property is free of material damage and is in good repair;
(ix) There are no mechanics' or similar liens or claims which have been
filed for work, labor or material affecting the related Mortgaged Property which
are, or may be, liens prior or equal to the lien of the related Mortgage, except
liens which are fully insured against by the title insurance policy referred to
in clause (xiii);
(x) As of the Cut-Off Date for the Initial Home Equity Loans or as of
the applicable Transfer Date for any Eligible Substitute Home Equity Loan, no
scheduled monthly payment is more than ___ days delinquent (measured on a
contractual basis); and with respect to the Initial Home Equity Loans, no more
than ____% (by Cut-Off Date Pool Balance) were 30-59 days delinquent (measured
on a contractual basis) and no more than ____% (by Cut-Off Date Pool Balance)
were 60-89 days delinquent (measured on a contractual basis);
(xi) The related Mortgage File contains each of the documents and
instruments specified to be included therein (including an appraisal (which may
be an appraisal prepared using a statistical data base));
(xii) The related Mortgage Note and the related Mortgage at the time
they were made complied in all material respects with applicable state and
federal laws, including, without limitation, usury, truth-in-lending, real
estate settlement procedures, consumer credit protection, equal credit
opportunity or disclosure laws applicable to the Home Equity Loan;
(xiii) A lender's title insurance policy or binder was issued on the
date of origination of each Home Equity Loan for home equity loans in excess of
$50,000, and each such policy is valid and remains in full force and effect, and
a title search or other assurance of title customary in the relevant
jurisdiction was obtained with respect to each Home Equity Loan as to which no
title insurance policy or binder was issued;
(xiv) The related Mortgaged Property is not a mobile home or a
manufactured housing unit that is not permanently attached to its foundation;
(xv) As of the Cut-Off Date for the Initial Home Equity Loans, no more
than ___% of such Home Equity Loans (by Cut-Off Date Pool Balance) are secured
by Mortgaged Properties located in one United States postal zip code;
(xvi) As of the Cut-Off Date, the Combined Loan-to-Value Ratio for each
Initial Home Equity Loan was not in excess of _____%;
(xvii) No selection procedure reasonably believed by the Depositor to
be adverse to the interests of the Certificateholders was utilized in selecting
the Home Equity Loan;
<PAGE> 33
(xviii) The Depositor has not transferred the Home Equity Loans to the
Trust with any intent to hinder, delay or defraud any of its creditors;
(xix) Each Mortgage Note and each Mortgage is in substantially the form
previously provided to the Trustee by the Depositor and each Home Equity Loan is
an enforceable obligation of the related Mortgagor;
(xx) The Depositor has not received a notice of default of any senior
mortgage loan with respect to the related Mortgaged Property that has not been
cured by a party other than the related Servicer;
(xxi) The Home Equity Loan does not have an original term to maturity
in excess of [360] months. As of the Cut-Off Date for the Initial Home Equity
Loans, the weighted average remaining term to maturity of the Home Equity Loans
on a contractual basis is approximately ____ months.
(xxii) The related Mortgaged Property consists of a single parcel of
real property with a one-to-four unit single family residence erected thereon,
or an individual condominium unit, planned unit development unit or townhouse,
generally approvable by Fannie Mae;
(xxiii) As of the Cut-Off Date, (a) no more than _____% (by Cut-Off
Date Pool Balance) of the Initial Home Equity Loans are secured by real property
improved by individual condominium units, planned unit developments, townhouses
or two-to-four family residences erected thereon, and (b) at least _____% (by
Cut-Off Date Pool Balance) of the Initial Home Equity Loans are secured by real
property with a detached one-family residence erected thereon;
(xxiv) As of the Cut-Off Date, the minimum Principal Balance of any
Initial Home Equity Loan was $_______, the maximum Principal Balance was
$_________ and the weighted average Principal Balance was $___________;
(xxv) As of the Cut-Off Date, approximately _____% (by Cut-Off Date
Pool Balance) and _____% (by Cut-Off Date Pool Balance) of the Initial Home
Equity Loans are first and second liens, respectively; and
(xxvi) The related Mortgage is a "qualified mortgage" under the REMIC
Provisions.
(c) It is understood and agreed that the representations and warranties set
forth in this Section 2.04 shall survive the transfer and assignment of the Home
Equity Loans to the Trustee. Upon discovery by the Depositor, the Master
Servicer or the Trustee of a breach of any of the foregoing representations and
warranties, without regard to any limitation set forth in such representation or
warranty concerning the knowledge of the Depositor as to the facts stated
therein, which materially and adversely affects the interests of the
Certificateholders in the related Home Equity Loan, the person discovering such
breach shall give prompt written notice to the other parties. Within 60 days of
its discovery or its receipt of notice of such breach, or, with the prior
written consent of a Responsible Officer of the Trustee, such longer period not
to exceed 90 days specified in such consent, the Depositor or, as necessary, the
Master Servicer shall cure such breach in all material respects. With regard to
any such breach of the representations and warranties set forth in Section
2.04(b), unless, at the expiration of such 60 day or longer period,
<PAGE> 34
such breach has been cured in all material respects or otherwise does not exist
or continue to exist, the Depositor or the Master Servicer shall, not later than
the Business Day next preceding the Distribution Date in the month following the
end of the Collection Period in which any such cure period expired, either (i)
repurchase such Defective Home Equity Loan (including any property acquired in
respect thereof and any insurance policy or insurance proceeds with respect
thereto) or (ii) remove such Home Equity Loan from the Trust and substitute in
its place an Eligible Substitute Home Equity Loan or Loans, in the same manner
and subject to the same conditions as set forth in Section 2.02. Upon making any
such repurchase or substitution the Depositor or the Master Servicer, as
applicable, shall be entitled to receive an instrument of assignment or transfer
from the Trustee to the same extent as set forth in Section 2.02 with respect to
the repurchase or replacement of Home Equity Loans under that Section. It is
understood and agreed that the obligation of the Depositor or the Master
Servicer to purchase or substitute for any such Defective Home Equity Loan (or
property acquired in respect thereof) shall constitute the sole remedy against
the Depositor or the Master Servicer respecting such breach of the foregoing
representations or warranties available to Certificateholders or the Trustee
against the Depositor or the Master Servicer, and such obligation shall on the
part of the Master Servicer shall survive any resignation or termination of the
Master Servicer hereunder.
Section 2.05. Execution and Authentication of Certificates. The Trustee on
behalf of the Trust shall cause to be executed, authenticated and delivered on
the Closing Date to or upon the order of the Depositor, in exchange for the Home
Equity Loans, concurrently with the assignment and conveyance to the Trustee of
the Home Equity Loans, each Class of Class A and Class M Certificates in
authorized denominations and the Class R Certificates, together evidencing the
ownership of the entire Trust.
Section 2.06. Designation of Interests in the REMIC. Each Class of Class A and
Class M Certificates is hereby designated as a "regular interest" in the REMIC
and the Class R Certificates are hereby designated as the single "residual
interest" in the REMIC.
Section 2.07. Designation of Start-up Day. The Closing Date is hereby designated
as the "start-up day" of the REMIC within the meaning of Section 860G(a)(9) of
the Code.
Section 2.08. REMIC Certificate Maturity Date. Solely for purposes of satisfying
Section 1.860G-1(a)(4)(iii) of the Treasury Regulations, the "latest possible
maturity date" of the REMIC is the Distribution Date in _______.
Section 2.09. Miscellaneous REMIC Provisions.
(a) The parties intend that the Trust formed hereunder shall constitute,
and that the affairs of the Trust shall be conducted so as to qualify it as a
"real estate mortgage investment conduit" as defined in and in accordance with
the REMIC Provisions. In furtherance of such intention, the Master Servicer
covenants and agrees that it shall, to the extent permitted by applicable law,
act as agent (and the Master Servicer is hereby appointed to act as agent) on
behalf of the Trust and that in such capacity it shall:
(i) prepare, or cause to be prepared, for the Trustee's signature and
file, or cause to be filed, all
<PAGE> 35
required federal and state tax returns for the REMIC using a calendar year as
the taxable year for the Trust when and as required by the REMIC Provisions and
other applicable federal income tax laws;
(ii) prepare and forward, or cause to be prepared and forwarded, to the
Certificateholders all information reports as and when required to be provided
to them in accordance with the REMIC Provisions and other applicable Federal
income tax laws;
(iii) conduct the affairs of the Trust at all times that any
Certificates are outstanding so as to maintain the status thereof as a REMIC
under the REMIC Provisions;
(iv) notwithstanding any other provision of this Agreement (other than
as expressly provided in Article X) not knowingly or intentionally take any
action that would cause, or omit to take any action that would or might
reasonably prevent, the termination of the REMIC status of the Trust;
(v) so long as it holds the Tax Matters Person Residual Interest, serve
as Tax Matters Person pursuant to Treasury Regulation Section 1.860F-4(d) for
the Trust;
(vi) notwithstanding any other provisions of the Agreement (other than
Sections 2.02, 2.04 and 3.01(a) with respect to the purchase of Home Equity
Loans under certain circumstances) knowingly or intentionally take any action
that would cause or would create a material risk of causing, the Trust to be
subject to tax under Sections 860F(a)(l) or 860G(d)(l) of the Code; and
(vii) pay (if permitted by applicable law) on the REMIC's behalf the
amount of any federal income tax, including prohibited transaction penalty taxes
or taxes on contributions to the REMIC after the startup day, imposed on the
Trust when and as the same shall be due and payable (but such obligation shall
not prevent the Master Servicer or any other appropriate Person from contesting
at its own expense any such tax in appropriate proceedings and shall not prevent
the Master Servicer from withholding payment of such tax, if permitted by law,
pending the outcome of such proceedings); provided, that, if any such tax shall
be paid by the Master Servicer, it shall thereafter be reimbursed from amounts
otherwise distributable to the Holders of the Class R Certificates, on a pro
rata basis, and the Master Servicer is hereby authorized to retain from amounts
otherwise distributable to the Holders of the Class R Certificates on any
Distribution Date sufficient funds to reimburse the Master Servicer for the
payment of any such tax (to the extent that the Master Servicer has not been
previously reimbursed or indemnified therefor).
(b) If the Master Servicer is not permitted, by applicable law, to fulfill
any of its duties described in this Section 2.09, the Trustee shall carry out
such duties pursuant to the instructions of the Master Servicer. The Trustee
covenants and agrees that it shall make an election, on behalf of the Trust, to
be treated as a REMIC on Internal Revenue Service Form 1066 of the Trust for its
first taxable year, in accordance with the REMIC Provisions.
<PAGE> 36
ARTICLE III
Administration and Servicing of Home Equity Loans
SECTION 3.01. The Master Servicer.
(a) The Master Servicer shall, or shall cause the Servicers to, service and
administer the Home Equity Loans in a manner consistent with the terms of this
Agreement and with general industry practice and shall have full power and
authority, acting alone or through the Servicers, to do any and all things in
connection with such servicing and administration which it may deem necessary or
desirable, it being understood, however, that the Master Servicer shall at all
times remain responsible to the Trustee and the Certificateholders for the
performance of its duties and obligations hereunder in accordance with the terms
hereof. Any amounts received by the related Servicer in respect of a Home Equity
Loan shall be deemed to have been received by the Master Servicer whether or not
actually received by it. Without limiting the generality of the foregoing, the
Master Servicer shall continue, and is hereby authorized and empowered by the
Trustee, 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 Mortgaged Properties. Upon the written request of the Master Servicer,
the Depositor and the Trustee shall furnish the Master Servicer with any powers
of attorney and other documents necessary or appropriate to enable the Master
Servicer to carry out its servicing and administrative duties hereunder. The
Master Servicer in such capacity may also consent to the placing of a proposed
lien senior to that of the Mortgage on the related Mortgaged Property, provided
that such proposed lien is not secured by a note providing for negative
amortization and:
(x) (i) the Mortgage relating to the Home Equity Loan was in a
first lien position as of the Cut-Off Date and was in a first lien
position immediately prior to the placement of the proposed senior
lien, and (ii) the ratio of (a) the sum of the Principal Balance of the
Home Equity Loan and the principal balance of the mortgage loan to be
secured by the proposed senior lien to (b) the Appraised Value of the
Mortgaged Property at the time the Home Equity Loan was originated is
not greater than (1) with respect to Home Equity Loans with an original
CLTV of [85]% or less, [85]% or (2) with respect to Home Equity Loans
with an original CLTV in excess of [85]% and not greater than [95]%,
[95]%;
(y) (i) the Mortgage relating to the Home Equity Loan was in a
first or second lien position at the time the related Home Equity Loan
was conveyed to the Trust and, immediately following the placement of
such proposed senior lien, such Mortgage will be in a second or, if
such Mortgage was in a second lien position at the time the related
Home Equity Loan was conveyed to the Trust, a third lien position and
(ii) the principal balance of the mortgage loan to be secured by the
proposed senior lien and the rate at which interest accrues thereon are
no greater than those of the related Home Equity Loan as of the date it
was first conveyed to the Trust; or
<PAGE> 37
(z) the Mortgage relating to the Home Equity Loan was in a
second or third lien position as of the Cut-Off Date and the proposed
senior lien secures a mortgage loan that refinances an existing first
or second mortgage loan and the outstanding principal amount of such
mortgage loan immediately following such refinancing and the rate at
which interest accrues thereon are not greater than that of such
existing first or second mortgage loan at the date of such refinancing;
(b) If (i) foreclosure proceedings are commenced with respect to any Home
Equity Loan with respect to which the Master Servicer has consented to the
placing of a subsequent senior lien pursuant to clause (x) in Section 3.01(a),
or (ii) any loss is suffered by the Trustee on behalf of the Certificateholders
in respect of any Home Equity Loan as a result of (x) a failure to file on or
within 15 days following the Closing Date the UCC-l financing statements
referred to in Section 2.01 or (y) a failure to publish on or prior to the
Closing Date such notices reflecting the sale of the Home Equity Loans as are
described in Section 3440.1(h) of the California Civil Code, then the Master
Servicer shall repurchase or substitute for any adversely affected Home Equity
Loan on the Business Day preceding the next Distribution Date following the end
of the Collection Period during which such foreclosure proceedings were
commenced or such losses were suffered. Such repurchase or substitution shall be
accomplished in the same manner and subject to the same conditions as set forth
in Section 2.02. Upon making any such repurchase or substitution the Master
Servicer shall be entitled to receive an instrument of assignment or transfer
from the Trustee to the same extent as set forth in Section 2.02.
(c) Upon the request of a Mortgagor or at the Master Servicer's own
initiative, the Master Servicer (or the related Servicer on behalf of the Master
Servicer) may waive, modify or vary any term of any Home Equity Loan or consent
to the postponement of strict compliance with any such term or in any manner
grant indulgence to any Mortgagor if in the Master Servicer's (or such
Servicer's) good faith determination such waiver, modification, postponement or
indulgence is not materially adverse to the interests of the Certificateholders.
Notwithstanding the foregoing, unless:
(i) the Mortgagor is in default with respect to the Home Equity Loan,
or such default is, in the judgment of the Master Servicer (or such Servicer),
imminent; and
(ii) such waiver, modification, postponement or indulgence would not
cause the Trust to be disqualified as a REMIC or otherwise cause a tax to be
imposed on the Trust);
the Master Servicer (or the related Servicer on behalf of the Master Servicer)
may not permit any such waiver, modification, postponement or indulgence that
would constitute a significant modification of the Loan Rate (except as required
by law or as contemplated by the Mortgage Note), constitute a cancellation or
discharge of the Principal Balance (unless in connection with the liquidation of
the related Home Equity Loan), or constitute an extension of the scheduled
maturity date of the Home Equity Loan.
(d) The Master Servicer, upon receipt of a certificate from the Sellers to
the effect that in order to
<PAGE> 38
maintain their competitive positions in the home equity loan industry prudent
business practice requires a modification to the terms of the Mortgage Notes, as
well as the agreements governing all comparable loans in their respective
portfolios pursuant to the provision designated "Termination and Changes in the
Agreement" or "Changes in the Agreement", as the case may be, of the forms
thereof, will deliver to the Trustee and each of the Rating Agencies, prior to
the effectiveness of any such modifications, an Opinion of Counsel to the effect
that such modifications will not (i) be materially adverse to the interests of
the Certificateholders, and (ii) affect the status of the Trust Fund as a REMIC
or otherwise cause a tax to be imposed on the Trust. Following the delivery of
such opinion the proposed modifications may be made to the Mortgage Notes. In
the event such opinion is not delivered prior to the time such modifications
would be effective, the Master Servicer shall cause the Sellers to refrain from
making any such modifications.
(e) Notwithstanding anything to the contrary contained herein, any other
changes to the terms of a Home Equity Loan that may adversely affect the status
of the Trust Fund as a REMIC or otherwise cause a tax to be imposed on the
Trust, may be agreed to by the Master Servicer (or the related Servicer on
behalf of the Master Servicer) if the Master Servicer (i) has determined that
such changes are necessary to avoid prepayment of the Home Equity Loan as a
result of refinancing provided by another lender and that such changes are
consistent with prudent business practice as evidenced by an Officer's
Certificate signed by a Servicing Officer to such effect and (ii) repurchases
such Home Equity Loan on the Business Day next preceding the Distribution Date
following the end of the Collection Period during which such determination was
made and prior to the effectiveness of such changes. In the event that such
repurchase does not occur, no changes may be made to the terms of such Home
Equity Loan. Such repurchase shall be accomplished in the same manner and
subject to the same conditions set forth in Section 2.02. Upon making any such
repurchase, the Master Servicer shall be entitled to receive an instrument of
assignment or transfer from the Trustee to the same extent as set forth in
Section 2.02.
(f) The relationship of the Master Servicer (and of any successor to the
Master Servicer as servicer under this Agreement) to the Trustee under this
Agreement is intended by the parties to be that of an independent contractor and
not that of a joint venturer, partner or agent.
(g) In the event that the rights, duties and obligations of the Master
Servicer are terminated hereunder, any successor to the Master Servicer in its
sole discretion may, to the extent permitted by applicable law, terminate the
existing subservicer arrangements with any Servicer or assume the terminated
Master Servicer's rights under such subservicing arrangements which termination
or assumption will not violate the terms of such arrangements.
Section 3.02. Collection of Certain Home Equity Loan Payments.
(a) The Master Servicer shall make reasonable efforts to collect all
payments called for under the terms and provisions of the Home Equity Loans, and
shall, to the extent such procedures shall be consistent with this Agreement,
follow such collection procedures as it follows with respect to home equity
loans in its servicing portfolio comparable to the Home Equity Loans. Consistent
with, and without limiting the generality of, the foregoing, the Master Servicer
may in its
<PAGE> 39
discretion (i) waive any late payment charge or any assumption fees or other
fees that may be collected in the ordinary course of servicing the Home Equity
Loans, (ii) arrange with a Mortgagor a schedule for the payment of delinquent
amounts, so long as such arrangement is consistent with the Master Servicer's
policies with respect to the home equity loans it owns or services, and (iii)
and treat a Home Equity Loan as current if the Mortgagor has made one scheduled
payment to cure the delinquency status of such Home Equity Loan.
(b) The Master Servicer shall establish and maintain with the Trustee a
separate trust account (the "Collection Account") titled "Bank One, National
Association, as Trustee, in trust for the registered holders of Closed-End Home
Equity Loan Asset Backed Certificates, Series 1999-1". In the event that a
successor Trustee is appointed as provided in Section 9.07, a new Collection
Account shall be promptly established at and maintained by such successor
Trustee, and the title of the new Collection Account shall be "[Successor
Trustee], as Trustee, in trust for the registered holders of Closed-End Home
Equity Loan Asset Backed Certificates, Series 1999-1", and any amounts in the
old Collection Account shall be transferred to the new Collection Account. The
Collection Account shall be an Eligible Account. No later than 12:00 noon New
York time one (1) Business Day prior to each Distribution Date (or, if a Deposit
Event has occurred, within two (2) Business Days following receipt thereof), the
Master Servicer shall deposit or cause to be deposited into the Collection
Account the following payments and collections received or made by it with
respect to the Home Equity Loans (without duplication):
(i) Interest Collections on the Home Equity Loans;
(ii) Principal Collections on the Home Equity Loans;
(iii) Insurance Proceeds (including, for this purpose, any amount
required to be paid by the Master Servicer pursuant to Section 3.04 and
excluding any portion thereof constituting Principal Collections); and
(iv) amounts required to be paid by the Depositor in connection with
the termination of the Trust pursuant to Section 10.01.
The foregoing requirements respecting deposits to the Collection Account are
exclusive, it being understood that, without limiting the generality of the
foregoing, fees (including annual fees) or late charge penalties payable by
Mortgagors, or amounts received by the Master Servicer or a Servicer for the
accounts of Mortgagors for application towards the payment of taxes, insurance
premiums, assessments and similar items for the account of the related Servicer,
if any, need not be deposited in the Collection Account.
(c) The Trustee shall hold amounts deposited in the Collection Account as
trustee for the Certificateholders. In addition, the Master Servicer shall
notify the Trustee in writing on each Determination Date of the amount of
payments and collections to be deposited in the Collection Account with respect
to the related Distribution Date.
(d) The Master Servicer may cause the institution maintaining the
Collection Account to invest any funds in the Collection Account in Permitted
Investments (including obligations of the Master
<PAGE> 40
Servicer or of any of its affiliates, if such obligations otherwise qualify as
Permitted Investments), which shall mature or otherwise be available not later
than the Business Day next preceding the Distribution Date or, with the approval
of the Rating Agencies, on the Distribution Date next following the date of such
investment (except that any investment in an obligation of the institution with
which the Collection Account is maintained may mature on or before 12:00 noon,
Chicago time, on such Distribution Date) and shall not be sold or disposed of
prior to its maturity. In the event the Trustee is at any time maintaining the
Collection Account, any request by the Master Servicer to invest funds on
deposit in the Collection Account shall be in writing, shall be delivered to the
Trustee at or before 10:30 A.M., Chicago time, if such investment is to be made
on such day, and shall certify that the requested investment is a Permitted
Investment that matures at or prior to the time required hereby. Any such
investment shall be registered in the name of the Trustee as trustee hereunder
or in the name of its nominee and to the extent such investments are
certificated they shall be maintained in the possession of the Trustee in the
state of its Corporate Trust Office. Except as provided above, all income and
gain realized from any such investment shall be for the benefit of the Master
Servicer and shall be subject to its withdrawal or order from time to time. The
amount of any losses incurred in respect of the principal amount of any such
investments shall be deposited in the Collection Account by the Master Servicer
out of its own funds immediately as realized.
(e) The Trustee is hereby authorized to execute purchases and sales of
Permitted Investments as directed by the Master Servicer through the facilities
of its own trading or capital markets operations. The Trustee shall send to the
Master Servicer statements reflecting the monthly activity for each such
purchase and sale made for the preceding month. Although the Master Servicer
recognizes that it may obtain a broker confirmation or written monthly statement
containing comparable information at no additional cost, the Master Servicer
hereby agrees that confirmations of investments are not required to be issued by
the Trustee for each month in which a monthly statement is rendered. No
statement need be rendered pursuant to the provision of this subsection if no
activity occurred in the account for such month.
Section 3.03. Withdrawals from the Collection Account.
(a) The Trustee shall withdraw or cause to be withdrawn funds from the
Collection Account for the following purposes:
(i) On each Distribution Date, to make distributions and payments to
Certificateholders pursuant to Section [5.01];
(ii) From time to time, to make investments in Permitted Investments
and to pay to the Master Servicer all income and gain earned in respect of
Permitted Investments or on funds deposited in the Collection Account;
(iii) To reimburse the Master Servicer to the extent permitted by
Section 7.03;
(iv) To withdraw any funds deposited in the Collection Account that
were not required to be deposited therein or were deposited therein in error and
to pay such funds to the appropriate Person;
<PAGE> 41
(v) To pay to the party legally entitled by a final order of a court of
competent jurisdiction in an insolvency proceeding an amount equal to any
preference claim made with respect to amounts paid with respect to the Home
Equity Loans; provided that, if any such amount is later determined not to be a
preference by such court of competent jurisdiction and is returned to the Master
Servicer or any Servicer, such amount shall be redeposited into the Collection
Account by the Master Servicer; and
(vi) to clear and terminate the Collection Account upon the termination
of this Agreement and to pay any amounts remaining therein to the Class R
Certificateholders.
(b) If the Master Servicer deposits in the Collection Account any amount
not required to be deposited therein or credited thereto or any amount in
respect of payments by Mortgagors made by checks subsequently returned for
insufficient funds or other reason for non-payment, it may at any time withdraw
such amount from the Collection Account pursuant to Section 3.03(a)(iv), and any
such amounts shall not be included in Interest Collections and Principal
Collections, any provision herein to the contrary notwithstanding. Any
withdrawal or debit permitted by Section 3.03(a) may be accomplished by
delivering an Officer's Certificate to the Trustee which describes the purpose
of such withdrawal (including, without limitation, that any such amount was
deposited in the Collection Account in error or, in the case of returned checks,
that such amounts were properly debited, respectively). Upon receipt of any such
Officer's Certificate, the Trustee shall withdraw such amount for the account of
the Master Servicer. All funds deposited by the Master Servicer in the
Collection Account shall be held by the Trustee in trust for the
Certificateholders, until disbursed in accordance with [Section 5.01] or
withdrawn or debited in accordance with this Section.
Section 3.04. Maintenance of Hazard Insurance; Property Protection Expenses.
The Master Servicer shall cause to be maintained for each Home Equity Loan
hazard insurance naming the Master Servicer or the related Servicer as loss
payee thereunder providing extended coverage in an amount which is at least
equal to the lesser of (i) the maximum insurable value of the Mortgaged Property
or (ii) the combined principal balance owing on such Home Equity Loan and any
mortgage loan senior to such Home Equity Loan from time to time. The Master
Servicer shall also maintain on property acquired upon foreclosure, or by grant
of deed in lieu of foreclosure, hazard insurance with extended coverage in an
amount which is at least equal to the lesser of (i) the maximum insurable value
of the Mortgaged Property or (ii) the combined unpaid principal balance owing on
such Home Equity Loan and any mortgage loans senior to such Home Equity Loans at
the time of such foreclosure or grant of deed in lieu of foreclosure plus
accrued interest thereon. Amounts collected by the Master Servicer under any
such policies shall be either deposited in the Collection Account to the extent
called for by Section 3.02. In cases in which any Mortgaged Property is located
in a federally designated flood area, the hazard insurance to be maintained for
the related Home Equity Loan shall include flood insurance. All such flood
insurance shall be in such amounts as are required under applicable guidelines
of Fannie Mae. The Master Servicer shall be under no obligation to require that
any Mortgagor maintain earthquake or other additional insurance and shall be
under no obligation itself to maintain any such additional insurance on property
acquired in respect of a Home Equity Loan, other than pursuant to such
applicable laws and regulations as shall at any time be in force and as shall
require such additional insurance. As
<PAGE> 42
to Mortgaged Properties acquired by the Master Servicer as provided herein, the
Master Servicer may satisfy its obligation set forth in the first sentence of
this Section 3.04 by self insuring Mortgaged Properties for which the aggregate
unpaid principal balance of the related Home Equity Loans plus the outstanding
balance of any mortgage loans senior to such Home Equity Loans at the time title
was acquired, plus accrued interest (the "Combined Exposure"), was less than
$500,000 (or such other amount as the Master Servicer may in good faith
determine from time to time) and by causing hazard policies to be maintained
with respect to Mortgaged Properties for which the Combined Exposure equals or
exceeds the self insurance threshold established from time to time by the Master
Servicer by maintaining a blanket policy consistent with prudent industry
standards insuring against hazard losses on the Mortgaged Properties. Such
policy may contain a deductible clause, in which case the Master Servicer shall,
in the event that there shall not have been maintained on the related Mortgaged
Property a policy complying with the first sentence of this Section 3.04, and
there shall have been a loss which would have been covered by such policy,
deposit in the Collection Account the amount not otherwise payable under the
blanket policy because of such deductible clause.
Section 3.05. Assumption and Modification Agreements. In any case in which a
Mortgaged Property has been or is about to be conveyed by the Mortgagor, the
Master Servicer shall exercise or refrain from exercising its right to
accelerate the maturity of such Home Equity Loan consistent with the
then-current practice of the Master Servicer and without regard to the inclusion
of such Home Equity Loan in the Trust and not in the Master Servicer's
portfolio. If it elects not to enforce its right to accelerate or if it is
prevented from doing so by applicable law, the Master Servicer (so long as such
action conforms with the Master Servicer's underwriting standards at the time
for new originations) is authorized to take or enter into an assumption and
modification agreement from or with the Person to whom such Mortgaged Property
has been or is about to be conveyed, pursuant to which such Person becomes
liable under the Mortgage Note, to the extent permitted by applicable law, the
Mortgagor remains liable thereon. The Master Servicer shall notify the Trustee
that any assumption and modification agreement has been completed by delivering
to the Trustee an Officer's Certificate certifying that such agreement is in
compliance with this Section 3.05 and by forwarding to the applicable Servicer
on behalf of the Depositor or the Trustee, as applicable, the original copy of
such assumption and modification agreement. Any such assumption and modification
agreement shall, for all purposes, be considered a part of the related Mortgage
File to the same extent as all other documents and instruments constituting a
part thereof. No change in the terms of the related Mortgage Note may be made by
the Master Servicer in connection with any such assumption to the extent that
such change would not be permitted to be made in respect of the original
Mortgage Note pursuant to Section 3.01 unless the conditions specified in
Section 3.01 are satisfied. Any fee collected by the Master Servicer for
entering into any such agreement will be retained by the Master Servicer as
additional servicing compensation.
Section 3.06. Realization Upon Defaulted Home Equity Loans.
(a) The Master Servicer (or the Master Servicer together with the related
Seller as called for by the Purchase Agreement) shall foreclose upon or
otherwise comparably convert to ownership
<PAGE> 43
Mortgaged Properties securing such of the Home Equity Loans as come into and
continue in default when, in the opinion of the Master Servicer based upon the
practices and procedures referred to in the following sentence, no satisfactory
arrangements can be made for collection of delinquent payments pursuant to
[Section 3.02]; provided that if the Master Servicer has actual knowledge or
reasonably believes that any Mortgaged Property is affected by hazardous or
toxic wastes or substances and that the acquisition of such Mortgaged Property
would not be commercially reasonable, then the Master Servicer will not cause
the Trust to acquire title to such Mortgaged Property in a foreclosure or
similar proceeding. In connection with such foreclosure or other conversion, the
Master Servicer shall follow such practices (including, in the case of any
default on a related senior mortgage loan, the advancing of funds to correct
such default) and procedures as it shall deem necessary or advisable and as
shall be normal and usual in its general mortgage servicing activities. The
foregoing is subject to the proviso that the Master Servicer shall not be
required to expend its own funds in connection with any foreclosure or towards
the correction of any default on a related senior mortgage loan or restoration
of any property unless it shall determine that such expenditure will increase
Net Liquidation Proceeds. The Master Servicer will be reimbursed out of
Liquidation Proceeds for advances of its own funds to pay Liquidation Expenses
before any Net Liquidation Proceeds are deposited in the Collection Account.
(b) 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
shall (i) so long as the long-term unsecured debt of the Master Servicer is
assigned ratings of at least [__] by Fitch and A-3 by Moody's, be issued in the
name of the related Servicer or (ii) if the rating requirements in clause (i)
are not satisfied, be issued to the Trustee, or to its nominee on behalf of
Certificateholders. In the event that the Trust acquires any Mortgaged Property
as aforesaid or otherwise in connection with a default or imminent default on a
Home Equity Loan, such Mortgaged Property shall be disposed of by or on behalf
of the Trust within three (3) years after its acquisition by the Trust unless
the Trustee shall have received an Opinion of Counsel to the effect that the
holding by the Trust of such Mortgaged Property subsequent to three years after
its acquisition will not result in the imposition of taxes on "prohibited
transactions" of the Trust as defined in Section 860F of the Code or cause the
Trust to fail to qualify as a REMIC at any time that any Certificates are
outstanding. If the Trustee has not otherwise disposed of any such Mortgaged
Property after its acquisition by the Trust, the Master Servicer may purchase
such Mortgaged Property prior to the third anniversary of the date on which it
was acquired at a price equal to its fair market value as established by an
appraisal conducted by an independent appraiser, such appraisal to be at the
expense of the Master Servicer.
Section 3.07. Optional Purchase of Defaulted Home Equity Loans. The Master
Servicer, in its sole discretion, shall have the right, but not the obligation,
to elect (by written notice sent to the Trustee) to purchase for its own account
from the Trust any Home Equity Loan which is 90 days or more contractually
delinquent. The Master Servicer shall not purchase an aggregate amount of
defaulted Home Equity Loans in excess of [___]% of the Cut-Off Date Pool
Balance. The Purchase Price for any Home Equity Loan purchased under this
Section shall be paid by a deposit in the Collection Account on the Business Day
preceding the Distribution Date next following the
<PAGE> 44
end of the Collection Period during which such defaulted Home Equity Loan became
90 days or more contractually delinquent. Such purchase shall be accomplished in
the same manner and subject to the same conditions as set forth in Section 2.02.
Upon making any such purchase the Master Servicer shall be entitled to receive
an instrument of assignment or transfer from the Trustee to the same extent as
set forth in Section 2.02.
Section 3.08. Trustee to Cooperate.
(a) Upon any payment in full of the Principal Balance of the Home Equity
Loan, the Master Servicer is authorized to execute, pursuant to the
authorization contained in Section 3.01, if the assignments of Mortgage have
been recorded as required hereunder, an instrument of satisfaction regarding the
related Mortgage, which instrument of satisfaction shall be recorded by the
Master Servicer if required by applicable law and be delivered to the Person
entitled thereto. It is understood and agreed that no expenses incurred in
connection with such instrument of satisfaction or transfer shall be reimbursed
from amounts deposited in the Collection Account. If the Trustee is holding the
Mortgage Files, from time to time and as appropriate for the servicing or
foreclosure of any Home Equity Loan, the Trustee shall, upon request of the
Master Servicer and delivery to the Trustee of a trust receipt signed by a
Servicing Officer, release the related Mortgage File to the Master Servicer, and
the Trustee shall execute such documents as shall be necessary to the
prosecution of any such proceedings or the taking of other servicing actions.
Such trust receipt shall obligate the Master Servicer to return the Mortgage
File to the Trustee when the need therefor by the Master Servicer no longer
exists unless the Home Equity Loan shall be liquidated, in which case, upon
receipt of an Officer's Certificate of the Master Servicer, the trust receipt
shall be released by the Trustee to the Master Servicer.
(b) In order to facilitate the foreclosure of the Mortgage securing any
Home Equity Loan that is in default following recordation of the assignments of
Mortgage in accordance with the provisions hereof, the Trustee shall, if the
Master Servicer so requests in writing and supplies the Trustee with appropriate
forms therefor, assign such Home Equity Loan for the purpose of collection to
the Master Servicer or to the related Servicer (any such assignment shall
unambiguously indicate that the assignment is for the purpose of collection
only), and, upon such assignment, such assignee for collection will thereupon
bring all required actions in its own name and otherwise enforce the terms of
the Home Equity Loan and deposit or credit the Net Liquidation Proceeds received
with respect thereto in the Collection Account. In the event that all delinquent
payments due under any such Home Equity Loan are paid by the Mortgagor and any
other defaults are cured then the assignee for collection shall promptly
reassign such Home Equity Loan to the Trustee and return it to the place where
the related Mortgage File was being maintained.
Section 3.09. Servicing Compensation; Payment of Certain Expenses by Master
Servicer. The Master Servicer shall be entitled to receive the Servicing Fee as
compensation for its services in connection with servicing the Home Equity
Loans. The Servicing Fee for each Collection Period shall be paid to the Master
Servicer out of Interest Collections prior to their deposit in the Collection
Account and shall not be the responsibility or liability of the Trust, the
Trustee or the Class A or Class M Certificateholders. Additional servicing
compensation in the form of late payment charges or
<PAGE> 45
other receipts not required to be deposited in the Collection Account shall be
retained by the Master Servicer. The Master Servicer shall be required to pay
all expenses incurred by it in connection with its activities hereunder
(including payment of Trustee fees and all other fees and expenses not expressly
stated hereunder to be for the account of the Certificateholders) and shall not
be entitled to reimbursement therefor except as specifically provided herein.
Section 3.10. Annual Statement as to Compliance.
(a) The Master Servicer will deliver to the Trustee and a copy to each of
the Rating Agencies, on or before March 31 of each year, beginning March 31,
2001, an Officer's Certificate stating that (i) a review of the activities of
the Master Servicer during the preceding calendar year (or in the case of the
Officer's Certificate delivered in 2001, from the Closing Date) and of its
performance under this Agreement has been made under such officer's supervision
and (ii) to the best of such officer's knowledge, based on such review, the
Master Servicer has fulfilled all its material obligations under this Agreement
throughout such year (or in the case of the Officer's Certificate delivered in
2001, from the Closing Date), or, if there has been a default in the fulfillment
of any such obligation, specifying each such default known to such officer and
the nature and status thereof.
(b) The Master Servicer shall deliver to the Trustee and a copy to each of
the Rating Agencies, promptly after having obtained knowledge thereof, but in no
event later than five Business Days thereafter, written notice by means of an
Officer's Certificate of any event which with the giving of notice or the lapse
of time or both, would become an Event of Default.
Section 3.11. Annual Servicing Report. On or before March 31 of each year,
beginning March 31, 2001, the Master Servicer at its expense shall cause a firm
of nationally recognized independent public accountants (who may also render
other services to the Master Servicer) to furnish a report to the Trustee and a
copy to each of the Rating Agencies to the effect that such firm has [examined
certain documents and records relating to the servicing of home equity loans by
the Master Servicer during the most recent calendar year (or in the case of the
report delivered in 2001, from the Closing Date) then ended under pooling and
servicing agreements (including this Agreement) substantially similar to this
Agreement and that such examination, which has been conducted substantially in
compliance with the audit guide for audits of non-supervised mortgagees approved
by the Department of Housing and Urban Development for use by independent public
accountants (to the extent that the procedures in such audit guide are
applicable to the servicing obligations set forth in such agreements), has
disclosed no items of noncompliance with the provisions of this Agreement which,
in the opinion of such firm, are material, except for such items of
noncompliance as shall be set forth in such report][, with respect to the Master
Servicer's overall servicing operations, examined such operations in accordance
with the requirements of the Uniform Single Attestation Program for Mortgage
Bankers, and stating such firm's conclusions relating thereto].
<PAGE> 46
Section 3.12. Access to Certain Documentation and Information Regarding the
Home Equity Loans.
(a) The Master Servicer and the Servicers shall provide to the Trustee,
Class A or Class M Certificateholders that are federally insured savings and
loan associations, the Office of Thrift Supervision, the successor to the
Federal Home Loan Bank Board, the FDIC and the supervisory agents and examiners
of the Office of Thrift Supervision access to the documentation regarding the
Home Equity Loans required by applicable regulations of the Office of Thrift
Supervision and the FDIC (acting as operator of the SAIF or the BIF), such
access being afforded without charge but only upon reasonable request and during
normal business hours at the offices of the Master Servicer or the Servicers.
Nothing in this Section shall derogate from the obligation of the Master
Servicer to observe any applicable law prohibiting disclosure of information
regarding the Mortgagors, and the failure of the Master Servicer to provide
access as provided in this Section as a result of such obligation shall not
constitute a breach of this Section.
(b) The Master Servicer shall supply information in such form as the
Trustee shall reasonably request to the Trustee and the Paying Agent, on or
before the start of the third Business Day preceding the related Distribution
Date, as is required in the Trustee's reasonable judgment to enable the Paying
Agent or the Trustee, as the case may be, to make the required distributions and
to furnish the required reports to Certificateholders.
Section 3.13. Maintenance of Certain Servicing Insurance Policies. The Master
Servicer shall during the term of its service as master servicer maintain in
force (i) a policy or policies of insurance covering errors and omissions in the
performance of its obligations as master servicer hereunder and (ii) a fidelity
bond in respect of its officers, employees or agents. Each such policy or
policies and bond shall, together, comply with the requirements from time to
time of Fannie Mae for Persons performing servicing for mortgage loans purchased
by such Association.
Section 3.14. Reports to the Securities and Exchange Commission. The Master
Servicer shall, on behalf of the Trust, cause to be filed with the Securities
and Exchange Commission any periodic reports required to be filed under the
provisions of the Securities Exchange Act of 1934, as amended, and the rules and
regulations of the Securities and Exchange Commission thereunder.
Section 3.15. Taxpayer Identification Number. The Master Servicer shall prepare
for the Trustee's signature and file, or the Trustee shall prepare and file,
with the Internal Revenue Service, on behalf of the Trust, an application on IRS
Form SS-4. The Trustee or the Master Servicer, as the case may be, upon receipt
from the Internal Revenue Service of the Notice of Taxpayer Identification
Number Assigned, shall promptly forward a copy of such notice to the other
party.
Section 3.16. Information Required by the Internal Revenue Service Generally
and Reports of Foreclosures and Abandonments of Mortgaged Property. The Master
Servicer shall prepare and deliver, or cause to be prepared and delivered, to
the Trustee all federal and state information reports when and as required by
all applicable state and federal income tax laws including, to the extent
applicable, returns reporting a cancellation of indebtedness as prescribed by
Section 6050P of the Code. In particular, with respect to the requirement under
Section 6050J of the Code to the effect that the Trustee shall make reports of
foreclosures and abandonments of any mortgaged property for each year beginning
in 1999, the Master Servicer, in order to facilitate this reporting process,
shall
<PAGE> 47
provide to the Trustee in a timely fashion each year as required by law reports
relating to each instance occurring during the previous calendar year in which
the Master Servicer or any Servicer (i) on behalf of the Trustee acquired an
interest in any Mortgaged Property through foreclosure or other comparable
conversion in full or partial satisfaction of a Home Equity Loan or (ii) knew or
had reason to know that any Mortgaged Property has been abandoned. The reports
from the Master Servicer shall be in form and substance sufficient to enable the
Trustee to meet the reporting requirements imposed by Section 6050J of the Code.
Section 3.17. Additional Covenants of HFC. HFC hereby agrees that:
(i) it will maintain its books and records to clearly note the separate
corporate existence of the Depositor, each Servicer and the Master Servicer;
(ii) the Depositor, the Servicers and HFC will share certain overhead
expenses, although the amount the Depositor will be charged for such use will be
based on actual use to the extent practicable and, to the extent such allocation
is not practicable, on a basis reasonably related to use;
(iii) separate financial records will be maintained to reflect the
assets and liabilities of the Depositor, HFC and each Servicer, which financial
records are and will be subject to audit by independent public accountants at
the reasonable request of the Board of Directors of the Depositor, HFC or such
Servicer, as the case may be;
(iv) except as permitted hereunder, there will be no commingling of the
assets of the Depositor with the assets of HFC or any Servicer. All demand
deposit accounts and other bank accounts of the Depositor will be maintained
separately from those of HFC and the Servicers. Monetary transactions between
the Depositor and HFC or any Servicer are and will continue to be properly
reflected in their respective financial records;
(v) HFC at all times will recognize, and will take all steps within its
power to maintain, the corporate existence of the Depositor and Servicers as
being separate and apart from its own corporate existence and will not refer to
the Depositor or any Servicer as a department or division of HFC; and
(vi) Except as otherwise expressly provided herein, HFC will not
guaranty any obligations of the Depositor.
<PAGE> 48
ARTICLE IV
Servicing Certificate
Section 4.01. Servicing Certificate. Not later than each Determination Date, the
Master Servicer shall deliver to the Trustee, the Paying Agent and each Rating
Agency a Servicing Certificate (in written form or the form of computer readable
media or such other form as may be agreed to by the Trustee and the Master
Servicer), together with an Officer's Certificate to the effect that such
Servicing Certificate is true and correct in all material respects, stating the
related Collection Period, Distribution Date, the series number of the
Certificates, the date of this Agreement, and:
(i) the Available Distribution Amount for such Distribution Date,
separately stating the amount of Interest Collections and Principal Collections;
(ii) the amount of the distributions to Holders of each Class of Class
A and Class M Certificates for such Distribution Date, separately stating the
portions thereof allocable to interest and allocable to principal;
(iii) the amount of any Interest Carry Forward Amount for each Class
paid on such Distribution Date and the amount of any Interest Carry Forward
Amount for each Class remaining after giving effect to the distributions on such
Distribution Date;
(iv) the amount of any Extra Principal Distribution Amount for such
Distribution Date;
(v) the Principal Distribution Amount for such Distribution Date,
separately stating the components thereof;
(vi) the number and aggregate Principal Balance of any Home Equity
Loans purchased by the Depositor or the Master Servicer with respect to the
related Collection Period pursuant to [Section 2.02, 2.04, 3.01 and 3.07];
(vii) the amount of any Substitution Adjustment Amounts for such
Distribution Date;
(viii) the Servicing Fee for such Collection Period and any accrued
amounts thereof that remain unpaid for previous Collection Periods;
(ix) the Realized Losses for such Collection Period and the amount of
such losses, if any, constituting Applied Realized Loss Amounts;
(x) the amount, if any, to be distributed to the Class R
Certificateholders on such Distribution Date;
(xi) The Overcollateralization Amount, Overcollateralization
Deficiency, the Overcollateralization Release Amount, the Targeted
Overcollateralization Amount and the Monthly Excess Cashflow for such
Distribution Date;
(xii) The number of Home Equity Loans outstanding at the beginning and
end of such Collection Period;
(xiii) The Pool Balance as of the end of such Collection Period;
<PAGE> 49
(xiv) the Certificate Principal Balance of each Class of Certificates
and the Pool Factor after giving effect to the distribution on such Distribution
Date;
(xv) the number and aggregate Principal Balances of Home Equity Loans
(x) as to which the scheduled monthly payment is delinquent for 30-59 days,
60-89 days and 90 or more days, respectively, and (y) that have become REO, in
each case as of the end of such Collection Period;
(xvi) The unpaid principal amount of all Home Equity Loans that became
Liquidated Home Equity Loans during such Due Period;
(xvii) The book value (within the meaning of 12 C.F.R. ss. 571.13 or
comparable provision) of any real estate acquired through foreclosure or grant
of a deed in lieu of foreclosure;
(xviii) Whether a Trigger Event has occurred or is continuing;
(xix) Such other information as is required by the Code and regulations
thereunder to be made available to Holders of the Regular Certificates; and
(xx) whether an Event of Default has occurred since the prior
Determination Date, specifying each such Event of Default if one has occurred.
The Trustee shall conclusively rely upon the information contained in a
Servicing Certificate for purposes of making distributions pursuant to Section
5.01, shall have no duty to inquire into such information and shall have no
liability in so relying. The format and content of the Servicing Certificate may
be modified by the mutual agreement of the Master Servicer and the Trustee. The
Master Servicer shall give notice of any such change to the Rating Agencies.
<PAGE> 50
ARTICLE V
Distributions and Statements to Certificateholders; Rights of Certificateholders
Section 5.01. Distributions. (a) On each Distribution Date, the Trustee shall
withdraw an amount equal to the Available Distribution Amount from the
Collection Account and make distributions thereof as described below (to the
extent of the Available Distribution Amount) to Holders of the Certificates in
the following order of priority:
I. from the Available Distribution Amount in the following order of
priority:
(i) 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 such Class A Certificates;
provided, that if amount available is not sufficient to make a full
distribution of interest with respect to all Classes of the Class A
Certificates, the amount available will be distributed among the
outstanding Classes of Class A Certificates pro rata based on the
aggregate amount of interest due on each such Class, and the amount of
the shortfall will be carried forward with accrued interest;
(ii) to the Class M-1 Certificates, the Current Interest plus the
Interest Carry Forward Amount with respect to the Class M-1
Certificates; and
(iii) to the Class M-2 Certificates, the Current Interest plus the
Interest Carry Forward Amount with respect to the Class M-2
Certificates.
II. On each distribution date (a) before the related Stepdown Date or
with respect to which a Trigger Event is in effect, the 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 paragraph (a)I.(i) through (iii) above, in the amounts set forth below and in
the following order of priority:
(i) to the Class A-5 Certificates, the Class A-5 Lockout
Distribution Amount, and then sequentially to each Class of the Class A
Certificates, in the order of their numerical class designation until
the Certificate Principal Balance of each such Class of Class A
Certificates has been reduced to zero; provided, that if on any
distribution date the Class A-4 Certificate Principal Balance is zero,
to the Class A-5 Certificates, without regard to the Class A-5 Lockout
Distribution Amount, until the Certificate Principal Balance thereof
has been reduced to zero;
(ii) 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;
(iii) after the aggregate Certificate Principal Balance of the Class
A Certificates
<PAGE> 51
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
(iv) any remaining amount to the Class R Certificates.
III. 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 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 paragraph (a)I.(i) through (iii) above, in the amounts set
forth below and in the following order of priority:
(i) to the Class A Certificates, the Class A Principal Distribution
Amount shall be distributed as follows: first, to the Class A-5
Certificates, the Class A-5 Lockout Distribution Amount, and then
sequentially to each Class of the Class A Certificates, in the order of
their numerical class designation until the Certificate Principal
Balance of each such Class of Class A Certificates has been reduced to
zero; provided, that if on any distribution date the Class A-4
Certificate Principal Balance is zero, to the Class A-5 Certificates,
without regard to the Class A-5 Lockout Distribution Amount, until the
Certificate Principal Balance thereof has been reduced to zero;
(ii) 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;
(iii) 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
(iv) any remaining amount to the Class R Certificates.
(b) Method of Distribution. The Trustee shall make distributions in respect
of a Distribution Date to each Certificateholder of record on the related Record
Date (other than as provided in Section 10.01 respecting the final distribution)
by check or money order mailed to such Certificateholder at the address
appearing in the Certificate Register, or upon written request by a
Certificateholder delivered to the Trustee at least five Business Days prior to
such Record Date, by wire transfer (but only if such Certificateholder is the
Depository or such Certificateholder owns of record one or more Class of
Certificates having principal denominations aggregating at least $5,000,000), or
by such other means of payment as such Certificateholder and the Trustee shall
agree. Distributions among Certificateholders shall be made in proportion to the
Percentage Interests evidenced by the Certificates held by such
Certificateholders.
(c) Distributions on Book-Entry Certificates. Each distribution with
respect to a Book-Entry Certificate shall be paid to the Depository, which shall
credit the amount of such distribution to the accounts of its Depository
Participants in accordance with its normal procedures. Each Depository
Participant shall be responsible for disbursing such distribution to the
Certificate Owners that it represents and to each indirect participating
brokerage firm (a "brokerage firm" or
<PAGE> 52
"indirect participating firm") for which it acts as agent. Each brokerage firm
shall be responsible for disbursing funds to the Certificate Owners that it
represents. All such credits and disbursements with respect to a Book-Entry
Certificate are to be made by the Depository and the Depository Participants in
accordance with the provisions of the Class A or Class M Certificates. None of
the Trustee, the Paying Agent, the Certificate Registrar, the Depositor or the
Master Servicer shall have any responsibility therefor except as otherwise
provided by applicable law.
Section 5.02. Statements to Certificateholders. (a) On each Determination Date,
the Master Servicer shall forward to the Trustee and the Paying Agent for
mailing to each Certificateholder, and concurrently with each distribution to
Certificateholders the Trustee shall mail to them a statement with respect to
their distribution setting forth:
(i) the amount of the distributions to Holders of each Class of Class A
and Class M Certificates for such Distribution Date, separately stating the
portions thereof allocable to interest and allocable to principal;
(ii) the amount of any Interest Carry Forward Amount for each Class
paid on such Distribution Date and the amount of any Interest Carry Forward
Amount for each Class remaining after giving effect to the distributions on such
Distribution Date;
(iii) the amount of any Extra Principal Distribution Amount for such
Distribution Date;
(iv) the Principal Distribution Amount for such Distribution Date,
separately stating the components thereof;
(v) the number and aggregate Principal Balance of any Home Equity Loans
purchased by the Depositor or the Master Servicer with respect to the related
Collection Period pursuant to [Section 2.02, 2.04, 3.01 and 3.07];
(vi) the amount of any Substitution Adjustment Amounts for such
Distribution Date;
(vii) the Servicing Fee for such Collection Period and any accrued
amounts thereof that remain unpaid for previous Collection Periods;
(viii) the Realized Losses for such Collection Period and the amount of
such losses, if any, constituting Applied Realized Loss Amounts;
(ix) the amount, if any, to be distributed to the Class R
Certificateholders on such Distribution Date;
(x) The Overcollateralization Amount, Overcollateralization Deficiency,
the Overcollateralization Release Amount, the Targeted Overcollateralization
Amount and the Monthly Excess Cashflow for such Distribution Date;
(xi) The number of Home Equity Loans outstanding at the beginning and
end of such Collection Period;
(xii) The Pool Balance as of the end of such Collection Period;
<PAGE> 53
(xiii) the Certificate Principal Balance of each Class of Certificates
and the Pool Factor after giving effect to the distribution on such Distribution
Date;
(xiv) the number and aggregate Principal Balances of Home Equity Loans
(x) as to which the scheduled monthly payment is delinquent for 30-59 days,
60-89 days and 90 or more days, respectively, and (y) that have become REO, in
each case as of the end of such Collection Period;
(xv) The unpaid principal amount of all Home Equity Loans that became
Liquidated Home Equity Loans during such Due Period;
(xvi) The book value (within the meaning of 12 C.F.R. ss. 571.13 or
comparable provision) of any real estate acquired through foreclosure or grant
of a deed in lieu of foreclosure;
(xvii) Whether a Trigger Event has occurred or is continuing;
(xviii) Such other information as is required by the Code and
regulations thereunder to be made available to Holders of the Regular
Certificates; and
(xix) whether an Event of Default has occurred since the prior
Determination Date, specifying each such Event of Default if one has occurred;
(b) In the case of information furnished pursuant to clauses (i) and (ii)
above, the amounts shall be expressed as a dollar amount per Class A Certificate
or Class M Certificate, as applicable, with a $1,000 denomination.
(c) The Master Servicer shall also give such statement to each Rating
Agency at the time it gives such statement to the Trustee and the Paying Agent.
(d) Within 60 days after the end of each calendar year, the Master Servicer
shall prepare or cause to be prepared and shall forward to the Trustee the
information set forth in clauses (i) and (ii) above aggregated for such calendar
year. Such obligation of the Master Servicer shall be deemed to have been
satisfied to the extent that substantially comparable information shall be
provided by the Master Servicer pursuant to any requirements of the Code.
(e) On each Distribution Date, the Master Servicer shall forward to the
Trustee for mailing to each Holder of a Class R Certificate a copy of the report
forwarded to the Holders of Class A Certificates and Class M Certificates on
such Distribution Date. The Master Servicer shall also forward to the Trustee
for mailing to Holders of Class R Certificates a statement setting forth the
amount of the distribution to Holders of Class R Certificates expressed as a
dollar amount per Class R Certificate with a 10% Percentage Interest, together
with such other information as the Master Servicer deems necessary or
appropriate.
(f) Within 90 days after the end of each calendar year, the Master Servicer
shall forward to the Trustee for mailing to each Person who at any time during
the calendar year was the Holder of a Class R Certificate a statement containing
the applicable distribution information provided pursuant to this Section
aggregated for such calendar year or applicable portion thereof during which
such Person was the Holder of a Class R Certificate together with any other
information relating to the Trust
<PAGE> 54
reasonably required in order to enable a Class R Certificateholder to prepare
its federal income tax return. Such obligation of the Master Servicer shall be
deemed to have been satisfied to the extent that substantially comparable
information shall be provided by the Master Servicer to the Trustee pursuant to
any requirements of the Code.
<PAGE> 55
ARTICLE VI
The Certificates
Section 6.01. The Certificates.
(a) The Class A, Class M and Class R Certificates shall be substantially in
the forms set forth in Exhibit A through Exhibit G, and shall, on original
issue, be executed by the Trustee on behalf of the Trust and authenticated and
delivered by the Trustee to or upon the order of the Depositor concurrently with
the sale and assignment to the Trustee of the Trust. The Class A and Class M
Certificates shall be initially evidenced by one or more certificates
representing the entire Original Class Certificate Balance, and shall be held in
minimum dollar denominations of $1,000 and dollar multiples in excess thereof
(except that one Certificate of each Class of Regular Certificates may be in a
different denomination). Except for the Class R Certificate representing the Tax
Matters Person Residual Interest, the Class R Certificates shall be issuable in
a minimum denomination of a 10% Percentage Interest and integral multiples of
10% in excess thereof (except that one of such Class R Certificates shall be
issuable in a denomination that is not an integral multiple of 10%).
(b) The Certificates shall be executed on behalf of the Trust by manual or
facsimile signature of any officer of the Trustee duly authorized to execute
such Certificates on behalf of the Trust. Certificates bearing the manual or
facsimile signatures of individuals who were, at the time when such signatures
were affixed, authorized to sign on behalf of the Trustee shall bind the
Trustee, notwithstanding that such individuals or any of them have ceased to be
so authorized prior to the authentication and delivery of such Certificates or
did not hold such offices at the date of such Certificate. No Certificate shall
be entitled to any benefit under this Agreement, or be valid for any purpose,
unless such Certificate shall have been manually authenticated by the Trustee
substantially in the form provided for herein, and such authentication upon any
Certificate shall be conclusive evidence, and the only evidence, that such
Certificate has been duly authenticated and delivered hereunder. All
Certificates shall be dated the date of their authentication. Subject to Section
6.02, the Class A and Class M Certificates shall be Book-Entry Certificates. The
Class R Certificates shall not be Book-Entry Certificates.
Section 6.02. Registration of Transfer and Exchange of Certificates.
(a) The Certificate Registrar shall cause to be kept at its corporate trust
office (which shall be the Corporate Trust Office if the Trustee is the
Certificate Registrar) a Certificate Register in which, subject to such
reasonable regulations as it may prescribe, the Certificate Registrar shall
provide for the registration of the Certificates and of transfers and exchanges
of the Certificates as herein provided. The Trustee shall initially serve as
Certificate Registrar for the purpose of registering the Certificates and
transfers and exchanges of Certificates as herein provided.
(b) Upon surrender for registration of transfer of any Certificate at any
office or agency of the Certificate Registrar maintained for such purpose
pursuant to the foregoing paragraph, and in the case of the Class M and Class R
Certificates, upon satisfaction of the conditions applicable to such
<PAGE> 56
Certificates set forth below, the Trustee shall execute on behalf of the Trust
and shall authenticate and deliver in the name of the designated transferee or
transferees, one or more new Certificates of a like Class and of the same
aggregate Percentage Interest.
(c) At the option of the Certificateholders, Certificates may be exchanged
for other Certificates of like Class in authorized denominations and the same
aggregate Percentage Interests, upon surrender of the Certificates to be
exchanged at any such office or agency. Whenever any Certificates are so
surrendered for exchange, the Trustee shall execute on behalf of the Trust and
shall authenticate and deliver the Certificates of such Class which the
Certificateholder making the exchange is entitled to receive. Every Certificate
presented or surrendered for registration of transfer or exchange shall (if so
required by the Trustee or the Certificate Registrar) be duly endorsed by, or be
accompanied by a written instrument of transfer in form satisfactory to the
Trustee and the Certificate Registrar duly executed by, the Holder thereof or
such Holder's attorney duly authorized in writing.
(d) Except as provided in Section 6.02(f), the Book-Entry Certificates
shall at all times remain registered in the name of the Depository or its
nominee and at all times: (i) transfers of the Book-Entry Certificates may not
be registered by the Trustee except to another Depository; (ii) the Depository
shall maintain book-entry records with respect to the Certificate Owners and
with respect to ownership and registration of transfers of such Certificates;
(iii) ownership and registration of transfers of the Book-Entry Certificates on
the books of the Depository shall be governed by applicable rules established by
the Depository; (iv) the Depository may collect its usual and customary fees,
charges and expenses from its Depository Participants; (v) the Trustee shall
deal with the Depository as representative of the Certificate Owners of the
Book-Entry Certificates for purposes of exercising the rights of Holders under
this Agreement, and requests and directions for and votes of such representative
shall not be deemed to be inconsistent if they are made with respect to
different Certificate Owners; and (vi) the Trustee may rely and shall be fully
protected in relying upon information furnished by the Depository with respect
to its Depository Participants and furnished by the Depository Participants with
respect to indirect participating firms and Persons shown on the books of such
indirect participating firms as direct or indirect Certificate Owners.
(e) All transfers by Certificate Owners of Book-Entry Certificates shall be
made in accordance with the procedures established by the Depository Participant
or brokerage firm representing such Certificate Owners. Each Depository
Participant shall only transfer ownership interests represented by Book-Entry
Certificates of Certificate Owners that it represents or of brokerage firms for
which it acts as agent in accordance with the Depository's normal procedures.
The parties hereto are hereby authorized to execute a letter of representations
with the Depository or take such other action as may be necessary or desirable
to register a Book-Entry Certificate to the Depository. In the event of any
conflict between the terms of any such Letter of Representation and this
Agreement the terms of this Agreement shall control.
(f) If (i) (x) the Depository or the Depositor advises the Trustee in
writing that the Depository is no longer willing or able to discharge properly
its responsibilities as Depository and (y) the Trustee
<PAGE> 57
or the Depositor is unable to locate a qualified successor, (ii) the Depositor,
at its sole option, with the consent of the Trustee, elects to terminate the
book-entry system through the Depository or (iii) after the occurrence of an
Event of Default, the Certificate Owners of each Class of Regular Certificates
representing Percentage Interests aggregating not less than 51% advises the
Trustee and Depository through the Financial Intermediaries and the Depository
Participants in writing that the continuation of a book-entry system through the
Depository to the exclusion of definitive, fully registered certificates (the
"Definitive Certificates") to Certificate Owners is no longer in the best
interests of the Certificate Owners, upon surrender to the Certificate Registrar
of each Class of Regular Certificates by the Depository, accompanied by
registration instructions from the Depository for registration, the Trustee
shall, at the Master Servicer's expense, execute on behalf of the Trust and
authenticate the Definitive Certificates. None of the Depositor, the Master
Servicer or the Trustee shall be liable for any delay in delivery of such
instructions and may conclusively rely on, and shall be protected in relying on,
such instructions. Upon the issuance of Definitive Certificates, all references
herein to obligations imposed upon or to be performed by the Depository shall be
deemed to be imposed upon and performed by the Trustee, to the extent applicable
with respect to such Definitive Certificates, and the Trustee, the Certificate
Registrar, the Master Servicer and the Depositor shall recognize the Holders of
the Definitive Certificates as Certificateholders hereunder.
(g) No service charge shall be made for any Transfer or exchange of
Certificates of any Class, but the Trustee may require payment of a sum
sufficient to cover any tax or governmental charge that may be imposed in
connection with any Transfer or exchange of Certificates.
(h) All Certificates surrendered for Transfer and exchange shall be
destroyed by the Certificate Registrar.
(i) Except in the case of the initial Transfer to Household Finance
Corporation, no Transfer of a Class R Certificate shall be made unless such
Transfer is exempt from the registration requirements of the Securities Act of
1933, as amended, and any applicable state securities laws or is made in
accordance with said Act and laws. Except in the case of the initial Transfer to
Household Finance Corporation, as a condition to any Transfer of Class R
Certificate, (i) the Trustee may require a written Opinion of Counsel acceptable
to and in form and substance satisfactory to the Trustee that such Transfer may
be made pursuant to an exemption, describing the applicable exemption and the
basis therefor, from said Act and laws or is being made pursuant to said Act and
laws, which Opinion of Counsel shall not be an expense of the Trustee, the
Master Servicer, the Trust and (ii) the Trustee may require the Transferee to
execute an investment letter acceptable to and in form and substance
satisfactory to the Trustee certifying to the Master Servicer, the Sellers and
the Trustee the facts surrounding such Transfer, which investment letter shall
not be an expense of the Trustee, the Master Servicer or the Trust Fund except
to the extent any of such parties is the transferor of such Certificate. The
Holder of a Class R Certificate desiring to effect such Transfer shall, and does
hereby agree to, indemnify the Trustee, the Master Servicer and the Trust
against any liability that may result if the Transfer is not so exempt or is not
made in accordance with such federal and state laws.
(j) Except in the case of the initial Transfer to Household Finance
Corporation, no Transfer of a Class M Certificate or Class R Certificate shall
be made to an employee benefit plan subject to ERISA, and to
<PAGE> 58
Section 4975 of the Code (or comparable provisions of any subsequent
enactments), or a trustee of any such plan, unless the Trustee shall have
received an Opinion of Counsel satisfactory to the Trustee to the effect that
the purchase or holding of such Class M or Class R Certificate will not result
in the assets of the Trust being deemed to be "plan assets" and subject to the
prohibited transaction provisions of ERISA and the Code and will not subject the
Trustee, the Master Servicer, the Sellers or the Trust to any obligation in
addition to those undertaken in this Agreement, which Opinion of Counsel shall
not be an expense of the Trustee, the Master Servicer, the Sellers or the Trust
except to the extent any of such parties is the transferor of such Certificate.
Unless such Opinion of Counsel is delivered, each Transferee shall be deemed to
represent to the Trustee, the Sellers and the Master Servicer that such
Transferee is neither an employee benefit plan subject to Section 406 of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and
Section 4975 of the Code, nor a person acting on behalf of any such plan.
(k) Each Person who has or who acquires any Ownership Interest in a Class R
Certificate shall be deemed by the acceptance or acquisition of such Ownership
Interest to have agreed to be bound by the following provisions and to have
irrevocably appointed the Trustee designee as its attorney-in-fact to negotiate
the terms of any mandatory sale under clause (vi) below and to execute all
instruments of Transfer and to do all other things necessary in connection with
any such sale, and the rights of each Person acquiring any Ownership Interest in
a Class R Certificate are expressly subject to the following provisions:
(i) Each Person holding or acquiring any Ownership Interest in a Class
R Certificate shall be a Permitted Transferee, shall not be holding or acquiring
such Ownership Interest on behalf of any Person that is not a Permitted
Transferee and shall promptly notify the Trustee of any change or impending
change in its status or the status of any beneficial owner as a Permitted
Transferee.
(ii) No Person shall acquire an Ownership Interest in a Class R
Certificate unless such Ownership Interest is a pro rata undivided interest.
(iii) No Ownership Interest in a Class R Certificate may be transferred
without the express written consent of the Trustee. In connection with any
proposed Transfer of any Ownership Interest in a Class R Certificate, the
Trustee shall as a condition to such consent, require delivery to it, in form
and substance satisfactory to it, of each of the following:
A. an affidavit from the proposed Transferee in the form attached
as Exhibit __ (a "Transfer Affidavit") to the effect that (a) such Transferee is
a Permitted Transferee and that it is not acquiring its Ownership Interest in
the Class R Certificate that is the subject of the proposed Transfer as a
nominee, trustee or agent for any Person who is not a Permitted Transferee; (b)
the proposed Transferee does not have the intention to impede the assessment or
collection of tax legally required to be paid with respect to any Ownership
Interest in a Class R Certificate and the Proposed Transferee acknowledges that
the Class R Certificate may generate tax liabilities in excess of the cash flow
associated with the Class R Certificate and intends to pay such taxes associated
with the Class R Certificate when they become due, (c) it has no present
knowledge or
<PAGE> 59
expectation that it will become insolvent or subject to a bankruptcy proceeding
for so long as it holds any Ownership Interest in a Class R Certificate, (d) it
is not a Non-U.S. Person or is a Non-U.S. Person and has furnished to the
transferor and the Trustee (i) an Internal Revenue Service Form 4224 or (ii) an
opinion of a nationally recognized tax counsel to the effect that such transfer
of a Class R Certificate will not be disregarded for federal income tax purposes
and (e) it will abide by the provisions of this Section 6.02(c); and
B. a covenant of the proposed Transferee to the effect that the
proposed Transferee agrees to be bound by and to abide by the Transfer
restrictions applicable to the Class R Certificates
(iv) Notwithstanding the delivery of a Transfer Affidavit by a proposed
Transferee under clause (iii) above, if the Trustee has actual knowledge that
the proposed Transferee is not a Permitted Transferee, no Transfer of any
Ownership Interest in a Class R Certificate to such proposed Transferee shall be
effected.
(v) Any attempted or purported Transfer of any Ownership Interest in a
Class R Certificate in violation of the provisions of this Section 6.02 shall be
absolutely null and void and shall vest no rights in the purported Transferee.
If any purported Transferee shall, in violation of the provisions of this
Section 6.02, become a Holder of a Class R Certificate, then the prior Holder of
such Certificate that is a Permitted Transferee shall, upon discovery that the
registration of Transfer of such Class R Certificate was not in fact permitted
by this Section 6.02, be restored to all rights as Holder thereof retroactive to
the date of registration of Transfer of such Class R Certificate. The Trustee
shall be under no liability to any Person for any registration of Transfer of a
Class R Certificate that is in fact not permitted by this Section 6.02 or for
making any distributions due on such Certificate to the Holder thereof or taking
any other action with respect to such Holder under the provisions of the
Agreement so long as the Transfer was not registered upon the express written
consent of the Trustee. The Trustee shall be entitled to recover from any Holder
of a Class R Certificate that was in fact not a Permitted Transferee at the time
such distributions were made all distributions made on such Class R Certificate.
Any such distributions so recovered by the Trustee shall be distributed and
delivered by the Trustee to the prior Holder of such Certificate that is a
Permitted Transferee.
(vi) If any Person other than a Permitted Transferee acquires any
Ownership Interest in a Class R Certificate in violation of the restrictions in
this Section 6.02(k), then the Trustee shall have the right, without notice to
the Holder of such Class R Certificate or any other Person having an Ownership
Interest therein, to sell such Class R Certificate to a purchaser selected by
the Trustee on such terms as the Trustee may choose. Such purchaser may be the
Trustee itself or any affiliate of the Trustee. The proceeds of such sale, net
of commissions (which may include commissions payable to the Trustee or its
affiliates), expenses and taxes due, if any, will be remitted by the Trustee to
the previous Holder of such Class R Certificate that is a Permitted Transferee,
except that in the event that the Trustee determines that the Holder of such
Class R Certificate may be liable for any amount due under this Section 6.02(k)
or any other provisions of this Agreement, the Trustee may withhold a
corresponding amount from such remittance as security for such claim. The terms
and conditions of any sale under this clause (vi) shall be
<PAGE> 60
determined in the sole discretion of the Trustee, and it shall not be liable to
any Person having an Ownership Interest in a Class R Certificate as a result of
its exercise of such discretion.
(vii) Each Person holding or acquiring any Ownership Interest in a
Class R Certificate shall agree (A) to require a Transfer Affidavit from any
other Person to whom such person attempts to transfer any Ownership Interest in
a Class R Certificate and (B) not to transfer any Ownership Interest in, or to
cause the transfer of any Ownership Interest in, a Class R Certificate if it has
actual knowledge that such Person is not a Permitted Transferee or will be
holding any Ownership Interest in a Class R Certificate on behalf of a Person
that is not a Permitted Transferee.
(l) Upon notice to the Trustee that any Ownership Interest in a Class R
Certificate has been transferred, either directly or indirectly, to any Person
that is not a Permitted Transferee or an agent thereof (including a broker,
nominee or middleman) in contravention of the foregoing restrictions, or that is
a pass-through entity as defined in Section 860E(e)(6) of the Code an interest
of which is held of record by a Person that is not a Permitted Transferee, the
Trustee agrees to furnish to the Internal Revenue Service, the transferor of
such Class R Certificate or such agent or pass-through entity such information
necessary to the application of Section 860E(e) of the Code as may be required
by the Code, including but not limited to the present value of the total
anticipated excess inclusions with respect to such Class R Certificate (or
portion thereof) for periods after such transfer and the total excess inclusions
for any taxable year allocable to any holder of an interest in such pass-through
entity that is not a Permitted Transferee. The Trustee shall require the Master
Servicer to make all necessary computations under this paragraph; provided,
however, that the Trustee shall in no event be excused from furnishing such
information to the Internal Revenue Service.
(m) The foregoing provisions of Section 6.02(k)-(l) shall cease to apply to
Transfers occurring on or after the date on which there shall have been
delivered to the Trustee, in form and substance satisfactory to the Trustee, (i)
written notification from each Rating Agency that the removal of the
restrictions on Transfer set forth in Section 6.02(k)-(l) will not cause such
Rating Agency to downgrade its rating of the Certificates and (ii) an Opinion of
Counsel to the effect that such removal will not cause the Trust to fail to
qualify as a REMIC. The affidavit referred to in clause (k)(iii) A. above shall
not be required in the case of the initial Transfer to Household Finance
Corporation.
Section 6.03. Mutilated, Destroyed, Lost or Stolen Certificates. If (i) any
mutilated Certificate is surrendered to the Certificate Registrar or the
Certificate Registrar receives evidence to its satisfaction of the destruction,
loss or theft of any Certificate, and (ii) there is delivered to the Trustee,
the Master Servicer and the Certificate Registrar such security or indemnity as
may be required by them to save each of them harmless, then, in the absence of
notice to the Trustee or the Certificate Registrar that such Certificate has
been acquired by a bona fide purchaser, the Trustee shall execute on behalf of
the Trust and shall authenticate and deliver, in exchange for or in lieu of any
such mutilated, destroyed, lost or stolen Certificate, a new Certificate of like
Class, tenor and Percentage Interest. Upon the issuance of any new Certificate
under this Section 6.03, the Trustee or the Certificate Registrar may require
the payment of a sum sufficient to cover any tax or other governmental charge
that may be imposed in relation thereto and any other expenses (including the
fees and expenses of the Trustee and the Certificate Registrar) connected
therewith.
<PAGE> 61
Any duplicate Certificate issued pursuant to this Section 6.03 shall constitute
complete and indefeasible evidence of ownership in the Trust, as if originally
issued, whether or not the lost, stolen or destroyed Certificate shall be found
at any time.
Section 6.04. Persons Deemed Owners. Prior to due presentation of a Certificate
for registration of transfer, the Master Servicer, the Depositor, the Trustee,
the Certificate Registrar and any agent of the Master Servicer, the Depositor,
the Trustee or the Certificate Registrar may treat the Person in whose name any
Certificate is registered as the owner of such Certificate for the purpose of
receiving distributions pursuant to Section 5.01 and for all other purposes
whatsoever, and none of the Master Servicer, the Depositor, the Trustee, the
Certificate Registrar or any agent of any of them shall be affected by notice to
the contrary.
Section 6.05. Appointment of Paying Agent.
(a) The Paying Agent shall make distributions to Certificateholders from
the Collection Account pursuant to Section 5.01 and shall report the amounts of
such distributions to the Trustee. The duties of the Paying Agent may include
the obligation (i) to withdraw funds from the Collection Account pursuant to
Section 3.03 for the purpose of making the distributions referred to above and
(ii) to distribute statements and provide information to Certificateholders as
required hereunder. The Paying Agent hereunder shall at all times be a
corporation duly incorporated and validly existing under the laws of the United
States of America or any state thereof, authorized under such laws to exercise
corporate trust powers and subject to supervision or examination by federal or
state authorities. The Paying Agent shall initially be the Trustee. The Trustee
may appoint a successor to act as Paying Agent, which appointment shall be
reasonably satisfactory to the Depositor.
(b) The Trustee shall cause the Paying Agent (if other than the Trustee) to
execute and deliver to the Trustee an instrument in which such Paying Agent
shall agree with the Trustee that such Paying Agent shall hold all sums, if any,
held by it for payment to the Certificateholders in trust for the benefit of the
Certificateholders entitled thereto until such sums shall be paid to such
Certificateholders and shall agree that it shall comply with all requirements of
the Code regarding the withholding of payments in respect of federal income
taxes due from Certificate Owners and otherwise comply with the provisions of
this Agreement applicable to it.
Section 6.06. Actions of Certificateholders.
(a) Any request, demand, authorization, direction, notice, consent, waiver
or other action provided by this Agreement to be given or taken by
Certificateholders may be embodied in and evidenced by one or more instruments
of substantially similar tenor signed by such Certificateholders in person or by
their agents duly appointed in writing; and except as herein otherwise expressly
provided, such action shall become effective when such instrument or instruments
are delivered to the Trustee and, when required, to the Depositor or the Master
Servicer. Proof of execution of any such instrument or of a writing appointing
any such agent shall be sufficient for any purpose of this Agreement and
conclusive in favor of the Trustee, the Depositor and the Master Servicer, if
made in the manner provided in this Section.
<PAGE> 62
(b) The fact and date of the execution by any Certificateholder of any such
instrument or writing may be proved in any reasonable manner which the Trustee
deems sufficient.
(c) Any request, demand, authorization, direction, notice, consent, waiver
or other act by a Certificateholder shall bind every Holder of every Certificate
issued upon the registration of transfer thereof or in exchange therefor or in
lieu thereof, in respect of anything done, or omitted to be done, by the
Trustee, the Depositor or the Master Servicer in reliance therein, whether or
not notation of such action is made upon such Certificate.
(d) The Trustee may require such additional proof of any matter referred to
in this Section 6.06 as it shall deem necessary.
<PAGE> 63
ARTICLE VII
The Master Servicer and the Depositor
Section 7.01. Liability of the Master Servicer and the Depositor. The Master
Servicer shall be liable in accordance herewith only to the extent of the
obligations specifically imposed upon and undertaken by the Master Servicer
herein. The Depositor shall be liable in accordance herewith only to the extent
of the obligations specifically imposed upon and undertaken by the Depositor
herein.
Section 7.02. Merger or Consolidation of, or Assumption of the Obligations of,
the Master Servicer or the Depositor. Any corporation into which the Master
Servicer or Depositor may be merged or consolidated, or any corporation
resulting from any merger, conversion or consolidation to which the Master
Servicer or the Depositor shall be a party, or any corporation succeeding to the
business of the Master Servicer or the Depositor, shall be the successor of the
Master Servicer or the Depositor, as the case may be, hereunder, without the
execution or filing of any paper or any further act on the part of any of the
parties hereto, anything herein to the contrary notwithstanding.
Section 7.03. Limitation on Liability of the Master Servicer, the Depositor and
Others. None of the Master Servicer, the Depositor, or any director, officer,
employee or agent of the Master Servicer or the Depositor shall be under any
liability to the Trust or the Certificateholders for any action taken or for
refraining from the taking of any action by the Master Servicer or the
Depositor, as applicable, in good faith pursuant to this Agreement, or for
errors in judgment; provided, however, that this provision shall not protect the
Master Servicer, the Depositor or any such person 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 hereunder, and that this provision shall not be construed
to entitle the Master Servicer to indemnity in the event that amounts advanced
by the Master Servicer to retire any senior Lien exceed Net Liquidation Proceeds
realized with respect to the related Home Equity Loan. The Master Servicer, the
Depositor and any director, officer, employee or agent of the Master Servicer or
the Depositor may rely in good faith on any document of any kind prima facie
properly executed and submitted by any Person respecting any matters arising
hereunder. The Master Servicer, the Depositor and any director, officer,
employee or agent of the Master Servicer or the Depositor shall be indemnified
by the Trust and held harmless against any loss, liability or expense incurred
in connection with any legal action relating to this Agreement or the
Certificates, other than any loss, liability or expense related to any specific
Home Equity Loan or Home Equity Loans (except as any such loss, liability or
expense shall be otherwise reimbursable pursuant to this Agreement) and any
loss, liability or expense incurred by reason of willful misfeasance, bad faith
or gross negligence in the performance of duties hereunder or by reason of
reckless disregard of obligations and duties hereunder. Neither the Master
Servicer nor the Depositor shall be under any obligation to appear in, prosecute
or defend any legal action which is not incidental to its respective duties
under this Agreement, and which in its opinion may involve it in any expense or
liability; provided, however, that the Master Servicer or the Depositor may, in
<PAGE> 64
its sole discretion, undertake any such action which it may deem necessary or
desirable in respect of this Agreement and the rights and duties of the parties
hereto and the interests of the Certificateholders hereunder. In such event, the
reasonable legal expenses and costs of such action and any liability resulting
therefrom and any claims by the Master Servicer or the Depositor hereunder for
indemnification shall be expenses, costs and liabilities of the Trust, and the
Master Servicer or the Depositor, as the case may be, shall be entitled to be
reimbursed therefor and indemnified pursuant to the terms hereof from amounts
deposited in the Collection Account as provided by Section 3.03. The Master
Servicer's and the Depositor's right to indemnity or reimbursement pursuant to
this Section 7.03 shall survive any resignation or termination of the Master
Servicer pursuant to Section 7.04 or 8.01 with respect to any losses, expenses,
costs or liabilities arising prior to such resignation or termination (or
arising from events that occurred prior to such resignation or termination). The
Master Servicer shall have no claim (whether by subrogation or otherwise) or
other action against any Certificateholder for any amounts paid by the Master
Servicer pursuant to any provision of this Agreement.
Section 7.04. Master Servicer Not to Resign. Subject to the provisions of
Section 7.02, the Master Servicer shall not resign from the obligations and
duties hereby imposed on it except (i) upon determination that the performance
of its obligations or duties hereunder are no longer permissible under
applicable law or are in material conflict by reason of applicable law with any
other activities carried on by it or its subsidiaries or Affiliates, the other
activities of the Master Servicer so causing such a conflict being of a type and
nature carried on by the Master Servicer or its subsidiaries or Affiliates at
the date of this Agreement or (ii) upon satisfaction of the following
conditions: (a) the Master Servicer has proposed a successor servicer to the
Trustee in writing and such proposed successor servicer is reasonably acceptable
to the Trustee; (b) each Rating Agency shall have delivered a letter to the
Trustee stating that the appointment of such proposed successor servicer as
Master Servicer hereunder will not result in the reduction or withdrawal of the
then-current rating of the Class A or Class M Certificates; and (c) such
proposed successor servicer has agreed in writing to assume the obligations of
Master Servicer hereunder and the Master Servicer has delivered to the Trustee
an Opinion of Counsel to the effect that all conditions precedent to the
resignation of the Master Servicer and the appointment of and acceptance by the
proposed successor servicer have been satisfied; provided, however, that in the
case of clause (i) above no such resignation by the Master Servicer shall become
effective until the Trustee shall have assumed the Master Servicer's
responsibilities and obligations hereunder or the Trustee shall have designated
a successor servicer in accordance with Section 8.02. Any such resignation shall
not relieve the Master Servicer of responsibility for any of the obligations
specified in Sections 8.01 and 8.02 as obligations that survive the resignation
or termination of the Master Servicer. Any such determination permitting the
resignation of the Master Servicer pursuant to clause (i) above shall be
evidenced by an Opinion of Counsel to such effect delivered to the Trustee.
Section 7.05. Delegation of Duties. In the ordinary course of business, the
Master Servicer at any time may delegate any of its duties hereunder to any
Person, including any of its Affiliates, who agrees to conduct such duties in
accordance with standards comparable to those with which the Master Servicer
complies pursuant to Section 3.01. Such delegation shall not relieve the Master
Servicer
<PAGE> 65
of its liabilities and responsibilities with respect to such duties and shall
not constitute a resignation within the meaning of Section 7.04. The Master
Servicer shall provide each Rating Agency and the Trustee with written notice
prior to the delegation of any of its duties to any Person other than any of the
Master Servicer's Affiliates or their respective successors and assigns.
<PAGE> 66
ARTICLE VIII
Events of Default
Section 8.01. Events of Default. If any one of the following events ("Events of
Default") shall occur and be continuing:
(i) Any failure by the Master Servicer to deposit in the Collection
Account any deposit required to be made under the terms of this Agreement which
continues unremedied for a period of five (5) Business Days after the date upon
which written notice of such failure shall have been given to the Master
Servicer by the Trustee, or to the Master Servicer and the Trustee by Holders of
Certificates evidencing not less than 51% of the aggregate Percentage Interests
of the Regular Certificates; or
(ii) Any failure on the part of the Master Servicer duly to observe or
perform in any material respect any other covenants or agreements of the Master
Servicer set forth in the Certificates or in this Agreement, which failure (A)
materially and adversely affects the interests of Certificateholders and (B)
continues unremedied for a period of sixty (60) days after the date on which
written notice of such failure, requiring the same to be remedied, shall have
been given to the Master Servicer by the Trustee, or to the Master Servicer and
the Trustee by Holders of Certificates evidencing not less than 51% of the
aggregate Percentage Interests of the Regular Certificates; or
(iii) The entry against the Master Servicer of a decree or order by a
court or agency or supervisory authority having jurisdiction in the premises for
the appointment of a trustee, conservator, receiver or liquidator in any
insolvency, conservatorship, receivership, readjustment of debt, marshalling of
assets and liabilities or similar proceedings, or for the winding up or
liquidation of its affairs, and the continuance of any such decree or order
unstayed and in effect for a period of 60 consecutive days; or
(iv) The consent by the Master Servicer to the appointment of a
trustee, conservator, receiver or liquidator in any insolvency, conservatorship,
receivership, readjustment of debt, marshalling of assets and liabilities or
similar proceedings of or relating to the Master Servicer or of or relating to
substantially all of its property; or the Master Servicer shall admit in writing
its inability to pay its debts generally as they become due, file a petition to
take advantage of any applicable insolvency or reorganization statute, make an
assignment for the benefit of its creditors, or voluntarily suspend payment of
its obligations;
then, and in each and every case, so long as an Event of Default shall not have
been remedied by the Master Servicer, either the Trustee or the Holders of
Certificates evidencing not less than 51% of the aggregate Percentage Interests
of the Regular Certificates, by notice then given in writing to the Master
Servicer (and to the Trustee if given by the Regular Certificateholders) may
terminate all of the rights and obligations of the Master Servicer as servicer
under this Agreement; provided, however, that the responsibilities and duties of
the initial Master Servicer with respect to the purchase of Home Equity Loans
pursuant to Section 3.01 shall not terminate. Any such notice to the Master
Servicer shall also be given to each Rating Agency. On or after the receipt
<PAGE> 67
by the Master Servicer of such written notice, all authority and power of, and
all benefits accruing to, the Master Servicer under this Agreement, whether with
respect to the Certificates or the Home Equity Loans or otherwise, shall pass to
and be vested in the Trustee or, if a successor Master Servicer has been
appointed under Section 8.02, such successor Master Servicer pursuant to and
under this Section 8.01; and, without limitation, the Trustee is hereby
authorized and empowered to execute and deliver, on behalf of the Master
Servicer, as attorney-in-fact or otherwise, any and all documents and other
instruments, and to do or accomplish all other acts or things necessary or
appropriate to effect the purposes of such notice of termination, whether to
complete the transfer and endorsement of each Home Equity Loan and related
documents, or otherwise. The Master Servicer agrees to cooperate with the
Trustee in effecting the termination of the responsibilities and rights of the
Master Servicer hereunder, including, without limitation, the transfer to the
Trustee for the administration by it of all cash amounts that shall at the time
be held by the terminated Master Servicer and to be deposited by it in the
Collection Account, or that have been deposited by the terminated Master
Servicer in the Collection Account or thereafter received by the terminated
Master Servicer with respect to the Home Equity Loans.
Notwithstanding the foregoing, a delay in or failure of performance
under Section 8.01(i) for a period of five (5) Business Days or under Section
8.01(ii) for a period of sixty (60) days, shall not constitute an Event of
Default if such delay or failure could not be prevented by the exercise of
reasonable diligence by the Master Servicer and such delay or failure was caused
by an act of God, acts of declared or undeclared war, public disorder, rebellion
or sabotage, epidemics, landslides, lightning, fire, hurricanes, earthquakes,
floods or similar causes. The preceding sentence shall not relieve the Master
Servicer from using its best efforts to perform its obligations in a timely
manner in accordance with the terms of this Agreement, and the Master Servicer
shall provide the Trustee, the Depositor and the Regular Certificateholders with
an Officers' Certificate giving prompt notice of such failure or delay by it,
together with a description of its efforts to so perform its obligations. The
Master Servicer shall immediately notify the Trustee in writing of any Events of
Default.
Section 8.02 Trustee to Act; Appointment of Successor.
(a) On and after the time the Master Servicer receives a notice of
termination pursuant to Section 8.01 or 7.04, the Trustee shall be the successor
in all respects to the Master Servicer in its capacity as servicer under this
Agreement and the transactions set forth or provided for herein and shall be
subject to all the responsibilities, duties and liabilities relating thereto
placed on the Master Servicer by the terms and provisions hereof; provided,
however, that the responsibilities and duties of HFC as Master Servicer with
respect to the purchase of the Home Equity Loans pursuant to Section 3.01 shall
not terminate. As compensation therefor, the Trustee shall be entitled to such
compensation as the Master Servicer would have been entitled to hereunder if no
such notice of termination had been given. Notwithstanding the above, (i) if the
Trustee is unwilling to act as successor Master Servicer, or (ii) if the Trustee
is legally unable so to act, the Trustee may (in the situation described in
clause (i)) or shall (in the situation described in clause (ii)) appoint, or
petition a court of competent jurisdiction to appoint, any housing and home
finance institution or other mortgage loan or home equity loan servicer having
all licenses and
<PAGE> 68
permits required in order to perform its obligations hereunder and a net worth
of not less than $50,000,000 as the successor to the Master Servicer hereunder
in the assumption of all or any part of the responsibilities, duties or
liabilities of the Master Servicer hereunder; provided that the appointment of
any such successor Master Servicer will not result in the qualification,
reduction or withdrawal of the then-current ratings assigned to the either the
Class A or Class M Certificates by the Rating Agencies, as evidenced by a
writing to such effect delivered to the Trustee. Pending appointment of a
successor to the Master Servicer hereunder, unless the Trustee is prohibited by
law from so acting, the Trustee shall act in such capacity as hereinabove
provided. In connection with such appointment and assumption, the successor
shall be entitled to receive compensation out of payments on Home Equity Loans
in an amount equal to the compensation which the Master Servicer would otherwise
have received pursuant to Section 3.08 (or such lesser compensation as the
Trustee and such successor shall agree). The Trustee and such successor shall
take such action, consistent with this Agreement, as shall be necessary to
effectuate any such succession.
(b) Any successor, including the Trustee, to the Master Servicer as master
servicer shall during the term of its service as master servicer (i) continue to
service and administer the Home Equity Loans for the benefit of
Certificateholders and (ii) maintain in force a policy or policies of insurance
covering errors and omissions in the performance of its obligations as Master
Servicer hereunder and a fidelity bond in respect of its officers, employees and
agents to the same extent as the Master Servicer is so required pursuant to
Section 3.13. The appointment of a successor Master Servicer shall not affect
any liability of the predecessor Master Servicer which may have arisen under
this Agreement prior to its termination as Master Servicer (including, without
limitation, any deductible under an insurance policy pursuant to Section 3.04),
nor shall any successor Master Servicer be liable for any acts or omissions of
the predecessor Master Servicer or for any breach by such Master Servicer or the
Depositor of any of their representations or warranties contained herein or in
any related document or agreement.
Section 8.03. Notification to Certificateholders. Upon any termination or
appointment of a successor to the Master Servicer pursuant to this Article VIII,
the Trustee shall give prompt written notice thereof to the Certificateholders
at their respective addresses appearing in the Certificate Register and each
Rating Agency.
<PAGE> 69
ARTICLE IX
The Trustee
Section 9.01 Duties of Trustee. The Trustee, prior to the occurrence of an
Event of Default and after the curing of all Events of Default which may have
occurred, undertakes to perform such duties and only such duties as are
specifically set forth in this Agreement. If an Event of Default of which a
Responsible Officer of the Trustee shall have actual knowledge has occurred
(which has not been cured), the Trustee shall exercise such rights and powers
vested in it by this Agreement, and use the same degree of care and skill in
their exercise, as a prudent person would exercise or use under the
circumstances in the conduct of his own affairs.
The Trustee, upon receipt of all resolutions, certificates, statements,
opinions, reports, documents, orders or other instruments furnished to the
Trustee which are specifically required to be furnished pursuant to any
provision of this Agreement, shall examine them to determine whether they
conform to the requirements of this Agreement.
No provision of this Agreement shall be construed to relieve the
Trustee from liability for its own negligent action, its own negligent failure
to act or its own misconduct; provided, however, that:
(i) prior to the occurrence of an Event of Default of which a
Responsible Officer of the Trustee shall have actual knowledge, and after the
curing of all such Events of Default which may have occurred, the duties and
obligations of the Trustee shall be determined solely by the express provisions
of this Agreement, the Trustee shall not be liable except for the performance of
such duties and obligations as are specifically set forth in this Agreement, no
implied covenants or obligations shall be read into this Agreement against the
Trustee and, in the absence of bad faith on the part of the Trustee, the Trustee
may conclusively rely, as to the truth of the statements and the correctness of
the opinions expressed therein, upon any certificates or opinions furnished to
the Trustee and conforming to the requirements of this Agreement;
(ii) the Trustee shall not be personally liable for an error of
judgment made in good faith by a Responsible Officer of the Trustee, unless it
shall be proved that the Trustee was negligent in performing its duties in
accordance with the terms of this Agreement;
(iii) the Trustee shall not be personally liable with respect to any
action taken, suffered or omitted to be taken by it in good faith in accordance
with the consent or in accordance with the direction of the Holders of Regular
Certificates evidencing not less than 51% of the aggregate Percentage Interests
of the Regular Certificates relating to the time, method and place of conducting
any proceeding for any remedy available to the Trustee, or exercising any trust
or power conferred upon the Trustee, under this Agreement; and
(iv) the Trustee shall not be charged with knowledge of any failure by
the Master Servicer to comply with the obligations of the Master Servicer
referred to in clauses (i) and (ii) of Section 8.01 unless a Responsible Officer
of the Trustee obtains actual knowledge of such failure or the Trustee
<PAGE> 70
receives written notice of such failure from the Master Servicer or the Holders
of Regular Certificates evidencing not less than 51% of the aggregate Percentage
Interests of the Regular Certificates.
The Trustee shall not be required to expend or risk its own funds or
otherwise incur financial liability in the performance of any of its duties
hereunder, or in the exercise of any of its rights or powers, if there is
reasonable ground for believing that the repayment of such funds or adequate
indemnity against such risk or liability is not reasonably assured to it, and
none of the provisions contained in this Agreement shall in any event require
the Trustee to perform, or be responsible for the manner of performance of, any
of the obligations of the Master Servicer under this Agreement, except during
such time, if any, as the Trustee shall be the successor to, and be vested with
the rights, duties, powers and privileges of, the Master Servicer in accordance
with the terms of this Agreement.
Section 9.02. Certain Matters Affecting the Trustee. Except as otherwise
provided in Section 9.01:
(i) the Trustee may request and rely upon, and shall be protected in
acting or refraining from acting upon, any resolution, Officer's Certificate,
certificate of auditors or any other certificate, statement, instrument,
opinion, report, notice, request, consent, order, appraisal, bond or other paper
or document reasonably believed by it to be genuine and to have been signed or
presented by the proper party or parties;
(ii) the Trustee may consult with counsel and any written advice or
opinion of counsel shall be full and complete authorization and protection in
respect of any action taken or suffered or omitted by it hereunder in good faith
and in accordance with such advice or Opinion of Counsel;
(iii) the Trustee shall be under no obligation to exercise any of the
rights or powers vested in it by this Agreement, or to institute, conduct or
defend any litigation hereunder or in relation hereto, at the request, order or
direction of any of the Certificateholders, pursuant to the provisions of this
Agreement, unless such Certificateholders shall have offered to the Trustee
reasonable security or indemnity against the costs, expenses and liabilities
which may be incurred therein or thereby; nothing contained herein shall,
however, relieve the Trustee of the obligations, upon the occurrence of an Event
of Default of which a Responsible Officer of the Trustee has actual knowledge
(which has not been cured), to exercise such of the rights and powers vested in
it by this Agreement, and to use the same degree of care and skill in their
exercise as a prudent person would exercise or use under the circumstances in
the conduct of his own affairs;
(iv) the Trustee shall not be personally liable for any action taken,
suffered or omitted by it in good faith and believed by it to be authorized or
within the discretion or rights or powers conferred upon it by this Agreement;
(v) prior to the occurrence of an Event of Default of which a
Responsible Officer of the Trustee has actual knowledge and after the curing of
all Events of Default which may have occurred, the Trustee shall not be bound to
make any investigation into the facts or matters stated in any resolution,
certificate, statement, instrument, opinion, report, notice, request, consent,
order, approval, bond
<PAGE> 71
or other paper or documents, unless requested in writing to do so by Holders of
Regular Certificates evidencing not less than 51% of the aggregate Percentage
Interests of the Regular Certificates; provided, however, that if the payment
within a reasonable time to the Trustee of the costs, expenses or liabilities
likely to be incurred by it in the making of such investigation is, in the
opinion of the Trustee, not reasonably assured to the Trustee by the security
afforded to it by the terms of this Agreement, the Trustee may require
reasonable indemnity against such cost, expense or liability as a condition to
such proceeding. The reasonable expense of every such examination shall be paid
by the Master Servicer or, if paid by the Trustee, shall be reimbursed by the
Master Servicer upon demand. Nothing in this clause (v) shall derogate from the
obligation of the Master Servicer to observe any applicable law prohibiting
disclosure of information regarding the Mortgagors; and
(vi) the Trustee may execute any of the trusts or powers hereunder or
perform any duties hereunder either directly or by or through agents or
attorneys or a custodian (except that the Trustee shall not be responsible for
selecting the Master Servicer as custodian and bailee).
Section 9.03. Trustee Not Liable for Certificates or Home Equity Loans. The
recitals contained herein and in the Certificates (other than the authentication
of the Trustee on the Certificates) shall be taken as the statements of the
Master Servicer, and the Trustee assumes no responsibility for the correctness
of the same. The Trustee makes no representations as to the validity or
sufficiency of this Agreement or of the Certificates (other than the signature
and authentication of the Trustee on the Certificates) or of any Home Equity
Loan or related document. The Trustee shall not be accountable for the use or
application by the Master Servicer of any of the Certificates or of the proceeds
of such Certificates, or for the use or application of any funds paid to the
Depositor or the Master Servicer in respect of the Home Equity Loans or
deposited in or withdrawn from the Collection Account by the Master Servicer.
The Trustee shall at no time have any responsibility or liability for or with
respect to the legality, validity and enforceability of any Mortgage or any Home
Equity Loan, or the perfection and priority of any Mortgage or the maintenance
of any such perfection and priority, or for or with respect to the sufficiency
of the Trust or its ability to generate the payments to be distributed to
Certificateholders under this Agreement, including, without limitation: the
existence, condition and ownership of any Mortgaged Property; the existence and
enforceability of any hazard insurance thereon (other than if the Trustee shall
assume the duties of the Master Servicer pursuant to Section 8.02); the
existence and contents of any Home Equity Loan on any computer or other record
thereof (other than if the Trustee shall assume the duties of the Master
Servicer pursuant to Section 8.02); the validity of the assignment of any Home
Equity Loan to the Trust or of any intervening assignment; the completeness of
any Home Equity Loan; the performance or enforcement of any Home Equity Loan
(other than if the Trustee shall assume the duties of the Master Servicer
pursuant to Section 8.02); the compliance by the Depositor or the Master
Servicer with any warranty or representation made under this Agreement or in any
related document or the accuracy of any such warranty or representation prior to
the Trustee's receipt of notice or other discovery of any non-compliance
therewith or any breach thereof; any investment of monies by or at the direction
of the Master Servicer or any loss resulting therefrom, it being understood that
the Trustee shall remain responsible for any Trust property that it may hold in
its individual capacity; the acts or omissions of the Depositor, the
<PAGE> 72
Master Servicer (other than if the Trustee shall assume the duties of the Master
Servicer pursuant to Section 8.02), any Servicer (other than if the Trustee
shall assume the duties of the Master Servicer pursuant to Section 8.02 and
shall engage such Servicer as its subservicer) or any Mortgagor; any action of
the Master Servicer (other than if the Trustee shall assume the duties of the
Master Servicer pursuant to Section 8.02), or any Servicer (other than if the
Trustee shall assume the duties of the Master Servicer pursuant to Section 8.02
and shall engage such Servicer as its subservicer) taken in the name of the
Trustee; or any action by the Trustee taken at the instruction of the Master
Servicer in accordance with the terms of this Agreement (other than if the
Trustee shall assume the duties of the Master Servicer pursuant to Section
8.02); provided, however, that the foregoing shall not relieve the Trustee of
its obligation to perform its duties under this Agreement. The Trustee shall
have no responsibility for filing any financing or continuation statement in any
public office at any time or to otherwise perfect or maintain the perfection of
any security interest or lien granted to it hereunder (unless the Trustee shall
have become the successor Master Servicer) or to prepare or file any Securities
and Exchange Commission filing for the Trust or to record this Agreement.
Section 9.04. Trustee May Own Certificates. The Trustee 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.
Section 9.05. Master Servicer to Pay Trustee's Fees and Expenses. The Master
Servicer covenants and agrees to pay to the Trustee from time to time, and the
Trustee shall be entitled to, reasonable compensation (which shall not be
limited by any provision of law in regard to the compensation of a trustee of an
express trust) for all services rendered by it in the execution of the trusts
hereby created and in the exercise and performance of any of the powers and
duties hereunder of the Trustee, and the Master Servicer will pay or reimburse
the Trustee upon its request for all reasonable expenses, disbursements and
advances incurred or made by the Trustee in accordance with any of the
provisions of this Agreement (including the reasonable compensation and the
expenses and disbursements of its counsel and of all persons not regularly in
its employ) except any such expense, disbursement or advance as may arise from
its negligence or bad faith. In addition, the Master Servicer and the Depositor,
jointly and severally, covenant and agree to indemnify the Trustee from, and
hold it harmless against, any and all losses, liabilities, damages, claims or
expenses other than those resulting from the Trustee's willful malfeasance, bad
faith or gross negligence or by reason of the Trustee's reckless disregard of
its obligations and duties hereunder.
Section 9.06. Eligibility Requirements for Trustee. The Trustee hereunder shall
at all times be a corporation duly incorporated and validly existing under the
laws of the United States of America or any state thereof, authorized under such
laws to exercise corporate trust powers, having a combined capital and surplus
of at least $50,000,000 and subject to supervision or examination by federal or
state authority. If such corporation publishes reports of condition at least
annually, pursuant to law or to the requirements of the aforesaid supervising or
examining authority, then for the purposes of this Section 9.06, the combined
capital and surplus of such corporation shall be deemed to be its combined
capital and surplus as set forth in its most recent report of condition so
published. The principal office of the Trustee (other than the initial Trustee)
shall be in a state with respect to
<PAGE> 73
which an Opinion of Counsel has been delivered to such Trustee at the time such
Trustee is appointed Trustee to the effect that the Trust will not be a taxable
entity under the laws of such state. In case at any time the Trustee shall cease
to be eligible in accordance with the provisions of this Section 9.06, the
Trustee shall resign immediately in the manner and with the effect specified in
Section 9.07.
Section 9.07. Resignation or Removal of Trustee. The Trustee may at any time
resign and be discharged from the trusts hereby created by giving written notice
thereof to the Depositor, the Master Servicer and each Rating Agency. Upon
receiving such notice of resignation, the Depositor shall promptly appoint a
successor Trustee by written instrument, in duplicate, one copy of which
instrument shall be delivered to the resigning Trustee and one copy to the
successor Trustee; provided, however, that any such successor Trustee shall be
subject to the prior written approval of the Master Servicer. If no successor
Trustee shall have been so appointed and have accepted appointment within 30
days after the giving of such notice of resignation, the resigning Trustee may
petition any court of competent jurisdiction for the appointment of a successor
Trustee.
If at any time the Trustee shall cease to be eligible in accordance
with the provisions of Section 9.06 and shall fail to resign after written
request therefor by the Depositor, or if at any time the Trustee shall be
legally unable to act, or shall be adjudged a bankrupt or insolvent, or a
receiver of the Trustee or of its property shall be appointed, or any public
officer shall take charge or control of the Trustee or of its property or
affairs for the purpose of rehabilitation, conservation or liquidation, then the
Depositor may remove the Trustee. If the Depositor removes the Trustee under the
authority of the immediately preceding sentence, the Depositor shall promptly
appoint a successor Trustee by written instrument, in duplicate, one copy of
which instrument shall be delivered to the Trustee so removed and one copy to
the successor Trustee.
Any resignation or removal of the Trustee and appointment of a
successor Trustee pursuant to any of the provisions of this Section 9.07 shall
not become effective until acceptance of appointment by the successor Trustee as
provided in Section 9.08.
Section 9.08. Successor Trustee. Any successor Trustee appointed as provided in
Section 9.07 shall execute, acknowledge and deliver to the Depositor and to its
predecessor Trustee an instrument accepting such appointment hereunder, and
thereupon the resignation or removal of the predecessor Trustee shall become
effective and such successor Trustee, without any further act, deed or
conveyance, shall become fully vested with all the rights, powers, duties and
obligations of its predecessor hereunder, with like effect as if originally
named as Trustee. The Depositor, the Master Servicer and the predecessor Trustee
shall execute and deliver such instruments and do such other things as may
reasonably be required for fully and certainly vesting and confirming in the
successor Trustee all such rights, powers, duties and obligations.
No successor Trustee shall accept appointment as provided in this
Section 9.08 unless at the time of such acceptance (i) such successor Trustee
shall be eligible under the provisions of Section 9.06, (ii) the unsecured
long-term debt of such successor Trustee is rated at least "A-3" by Moody's or
(iii) such successor Trustee is consented to by each Rating Agency. The
<PAGE> 74
predecessor Trustee shall notify the Rating Agency of the appointment of any
successor Trustee.
Upon acceptance of appointment by a successor Trustee as provided in
this Section 9.08, the Master Servicer shall mail notice of the succession of
such Trustee hereunder to all Holders of Certificates at their addresses as
shown in the Certificate Register and to each Rating Agency. If the Master
Servicer fails to mail such notice within 30 days after acceptance of
appointment by the successor Trustee, the successor Trustee shall cause such
notice to be mailed at the expense of the Master Servicer.
Section 9.09. Merger or Consolidation of Trustee. Any corporation into which the
Trustee may be merged or converted or with which it may be consolidated, or any
corporation resulting from any merger, conversion or consolidation to which the
Trustee shall be a party, or any corporation succeeding to all or substantially
all of the business of the Trustee, shall be the successor of the Trustee
hereunder, provided that such corporation shall be eligible under the provisions
of Section 9.06, without the execution or filing of any paper or any further act
on the part of any of the parties hereto, anything herein to the contrary
notwithstanding.
Section 9.10. Appointment of Co-Trustee or Separate Trustee. Notwithstanding any
other provisions of this Agreement, at any time, for the purpose of meeting any
legal requirements of any jurisdiction in which any part of the Trust or any
Mortgaged Property may at the time be located, the Depositor and the Trustee
acting jointly shall have the power and shall execute and deliver all
instruments to appoint one or more Persons approved by the to act as co-trustee
or co-trustees, jointly with the Trustee, or separate trustee or separate
trustees, of all or any part of the Trust, and to vest in such Person or
Persons, in such capacity and for the benefit of the Certificateholders, such
title to the Trust, or any part thereof, and, subject to the other provisions of
this Section 9.10, such powers, duties, obligations, rights and trusts as the
Master Servicer and the Trustee may consider necessary or desirable. Any such
co-trustee or separate trustee shall be subject to the written approval of the
Master Servicer. If the Master Servicer shall not have joined in such
appointment within 15 days after the receipt by it of a request so to do, or in
the case an Event of Default shall have occurred and be continuing, the Trustee
alone shall have the power to make such appointment. No co-trustee or separate
trustee hereunder shall be required to meet the terms of eligibility as a
successor Trustee under Section 9.06 and no notice to Certificateholders of the
appointment of any co-trustee or separate trustee shall be required under
Section 9.08.
Every separate trustee and co-trustee shall, to the extent permitted by
law, be appointed and act subject to the following provisions and conditions:
(i) all rights, powers, duties and obligations conferred or imposed
upon the Trustee shall be conferred or imposed upon and exercised or performed
by the Trustee and such separate trustee or co-trustee jointly (it being
understood that such separate trustee or co-trustee is not authorized to act
separately without the Trustee joining in such act), except to the extent that
under any law of any jurisdiction in which any particular act or acts are to be
performed (whether as Trustee hereunder or as successor to the Master Servicer
hereunder), the Trustee shall be incompetent or unqualified to perform such act
or acts, in which event such rights, powers, duties and obligations
<PAGE> 75
(including the holding of title to the Trust or any portion thereof in any such
jurisdiction) shall be exercised and performed singly by such separate trustee
or co-trustee, but solely at the direction of the Trustee;
(ii) no trustee hereunder shall be held personally liable by reason of
any act or omission of any other trustee hereunder; and
(iii) the Master Servicer and the Trustee acting jointly may at any
time accept the resignation of or remove any separate trustee or co-trustee,
except that following the occurrence of an Event of Default which has not been
cured, the Trustee acting alone may accept the resignation of or remove any
separate trustee or co-trustee.
Any notice, request or other writing given to the Trustee shall be
deemed to have been given to each of the then-separate trustees and co-trustees,
as effectively as if given to each of them. Every instrument appointing any
separate trustee or co-trustee shall refer to this Agreement and the conditions
of this Article IX. Each separate trustee and co-trustee, upon its acceptance of
the trusts conferred, shall be vested with the estates or property specified in
its instrument of appointment, either jointly with the Trustee or separately, as
may be provided therein, subject to all the provisions of this Agreement,
specifically including every provision of this Agreement relating to the conduct
of, affecting the liability of, or affording protection to, the Trustee. Every
such instrument shall be filed with the Trustee and a copy thereof given to the
Depositor and the Master Servicer.
Any separate trustee or co-trustee may, at any time, constitute the
Trustee, its agent or attorney-in-fact, with full power and authority, to the
extent not prohibited by law, to do any lawful act under or in respect of this
Agreement on its behalf and in its name. If any separate trustee or co-trustee
shall die, become incapable of acting, resign or be removed, all of its estates,
properties, rights, remedies and trusts shall vest in and be exercised by the
Trustee, to the extent permitted by law, without the appointment of a new or
successor Trustee.
Section 9.11. Trustee May Enforce Claims Without Possession of Certificates. All
rights of action and claims under this Agreement or the Certificates may be
prosecuted and enforced by the Trustee without the possession of any of the
Certificates or the production thereof in any proceeding relating thereto. Any
such proceeding instituted by the Trustee shall be brought in its own name or in
its capacity as Trustee. Any recovery of judgment shall, after provision for the
payment of the reasonable compensation, expenses, disbursements and advances of
the Trustee, its agents and counsel, be for the benefit of the
Certificateholders.
Section 9.12. Inspection of Mortgage Files. Following the time that the Mortgage
Files have been delivered to the Trustee upon reasonable prior notice and during
regular business hours, the Trustee shall permit representatives of applicable
state regulatory to inspect the Mortgage Files on the Trustee's premises or
shall provide such documents at such places required by state regulations,
including the offices of the Servicers. Any loss incurred by the Trustee in
fulfilling such obligations shall be paid by the Master Servicer.
<PAGE> 76
Section 9.13. Tax Returns. The Trustee, upon request, will furnish the Master
Servicer with all such information as may be reasonably required in connection
with the preparation of all tax returns of the Trust, and shall, upon request,
execute such returns.
<PAGE> 77
ARTICLE X
Termination
Section 10.01 Termination.
(a) Subject to Section 10.02, the respective obligations and
responsibilities of the Master Servicer, the Depositor and the Trustee created
hereby (other than the obligation of the Trustee to make certain payments to
Certificateholders after the final Distribution Date, the obligations of the
Depositor and the Master Servicer under Section 9.05 and the obligation of the
Master Servicer to send certain notices as hereinafter set forth) shall
terminate upon the last action required to be taken by the Trustee pursuant to
this Article X on the earliest of (i) the repurchase by the Master Servicer or
the Depositor of all Home Equity Loans and all property acquired in respect of
any Home Equity Loan remaining in the Trust at a price (the "Termination Price")
equal to the greater of (A) the sum of (x) 100% of the Principal Balance of each
Home Equity Loan (other than any Home Equity Loan as to which title to the
underlying Mortgaged Property has been acquired and whose fair market value is
included pursuant to clause (y) below) as of the first day of the Collection
Period preceding the Distribution Date upon which the proceeds of any repurchase
are to be distributed and (y) the fair market value of such acquired property
(as determined by the Master Servicer as of the close of business on the third
Business Day next preceding the date upon which notice of any such termination
is furnished to Certificateholders pursuant to Section 10.01(d)) plus, in each
case, one month's interest at the applicable Net Loan Rate on the Principal
Balance of each Home Equity Loan (including any Home Equity Loan as to which
title to the underlying Mortgaged Property has been acquired), (B) the aggregate
fair market value (as determined by the Master Servicer as of the close of
business on such third preceding Business Day) of all of the assets of the
Trust, or (C) the sum of the Certificate Principal Balance of the Class A and
Class M Certificates, together with any unpaid Interest Carry Forward Amounts
allocable to such Classes, plus one month's interest on such Certificate
Principal Balance and any unpaid Interest Carry Forward Amounts at the related
Pass-Through Rates, or (ii) the final payment or other liquidation of the
Principal Balance of the last Home Equity Loan remaining in the Trust or the
disposition of all property acquired upon foreclosure or deed in lieu of
foreclosure of any Home Equity Loan or (iii) the disposition of the Home Equity
Loans and Mortgaged Property pursuant to the provisions of Section 10.03 or (iv)
the Distribution Date in _________; provided that in no event shall the Trust
created hereby continue beyond the expiration of 21 years from the death of the
last survivor of the descendants of Joseph P. Kennedy, the late Ambassador of
the United States to the Court of St. James, living on the date hereof. Upon
termination in accordance with clause (i), (ii) or (iv) of this Section 10.01,
the Trustee shall execute such documents and instruments of transfer, in each
case without recourse, representation or warranty, presented by the Depositor
and take such other actions as the Depositor may reasonably request to effect
the retransfer of the Home Equity Loans to the Depositor.
(b) The right of the Master Servicer and the Depositor to repurchase all
Home Equity Loans pursuant to clause (i) of Section 10.01(a) above is
conditioned upon the Pool Balance as of the final
<PAGE> 78
Distribution Date being less than fifteen (15%) percent of the initial aggregate
Certificate Principal Balance of the Regular Certificates and receipt by the
Trustee of an Opinion of Counsel to the effect that such repurchase will give
rise neither to any tax on prohibited transactions under Section 860(F)(a)(l) of
the Code nor to any tax on contributions to the REMIC after the startup day
under Section 860G(d) of the Code. If such right is exercised, the Master
Servicer or Depositor, as the case may be, shall provide to the Trustee the
certification required by [Section 3.07] and the Trustee shall, promptly
following payment of the repurchase price, execute proper instruments
acknowledging termination and discharge of this Agreement.
(c) Notice of any termination, specifying the Distribution Date (which
shall be a date that would otherwise be a Distribution Date) upon which the
Certificateholders may surrender their Certificates to the Trustee for payment
of the final distribution and cancellation, shall be given promptly by the
Trustee (upon receipt of written directions from the Master Servicer, if the
Depositor is exercising its right to retransfer the Home Equity Loans) by letter
to Certificateholders mailed not earlier than the 15th day and not later than
the 25th day of the month next preceding the month of such final distribution
specifying (i) the Distribution Date upon which final distribution of the
Certificates will be made upon presentation and surrender of the Certificates at
the office or agency of the Trustee therein designated, (ii) the amount of any
such final distribution and (iii) that the Record Date otherwise applicable to
such Distribution Date is not applicable, distributions being made only upon
presentation and surrender of the Certificates at the office or agency of the
Trustee therein specified. In the event written directions are delivered by the
Master Servicer to the Trustee as described in the preceding sentence, the
Depositor shall deposit in the Collection Account on or before the Distribution
Date for such final distribution in immediately available funds an amount which,
when added to the funds on deposit in the Collection Account that are payable to
the related Certificateholders, will be equal to the purchase price for the
assets of the Trust computed as above provided.
(d) Upon presentation and surrender of the Certificates, the Trustee shall
cause to be distributed to the Certificateholders on the Distribution Date for
such final distribution, in proportion to their respective Percentage Interests,
an amount equal to (i) as to each Class of Class A or Class M Certificates, such
Class' appropriate share of the Principal Distribution Amount, any Interest
Carry Forward Amounts and one month's interest at the related Pass-Through Rate
on such Certificate Principal Balance and (ii) as to Class R Certificates the
amount which remains on deposit in the Certificate Account (other than the
amounts retained to meet claims) after application pursuant to clause (i) above.
The distribution on such final Distribution Date shall be in lieu of the
distribution otherwise required to be made on such Distribution Date in respect
of each Class of Certificates.
(e) In the event that all of the Certificateholders shall not surrender
their Certificates for final payment and cancellation on or before such
final Distribution Date, the Trustee shall on such date cause all funds in the
Collection Account not distributed in final distribution to Certificateholders
to be withdrawn therefrom and credited to the remaining Certificateholders by
depositing such funds in a separate escrow account for the benefit of such
Certificateholders and the Depositor (if the Depositor has exercised its right
to retransfer the Home Equity Loans) or the Trustee (in any other case) and the
Trustee shall give a second written notice to the remaining Certificateholders
<PAGE> 79
to surrender their Certificates for cancellation and receive the final
distribution with respect thereto. If within one year after the second notice
all the Certificates shall not have been surrendered for cancellation, any funds
deposited in such escrow account and remaining unclaimed shall be paid by the
Trustee to the Master Servicer and thereafter Certificateholders shall look only
to the Master Servicer with respect to any claims in respect of such funds.
Section 10.02. Additional Termination Requirements.
(a) In the event that the Master Servicer exercises its repurchase option
as provided in Section 10.01, the Trust shall be terminated in accordance with
the following additional requirements, unless the Trustee has received an
Opinion of Counsel to the effect that the failure of the Trust to comply with
the requirements of this Section 10.02 will not (i) result in the imposition of
taxes on "prohibited transactions" of the Trust as defined in Section 860F of
the Code or contributions to the REMIC after the startup day as defined in
Section 860G(d) of the Code, or (ii) cause the Trust to fail to qualify as a
REMIC at any time that any Certificates are outstanding:
(i) Within 90 days prior to the final Distribution Date set forth in
the notice given by the Master Servicer under Section 10.09 1, the Trustee, at
the direction of the Master Servicer, shall adopt a plan of complete liquidation
of the Trust;
(ii) At or after the time of adoption of such a plan of complete
liquidation and at or prior to the Distribution Date for the final distribution,
the Trustee shall sell all of the assets of the Trust to the Master Servicer,
for cash; provided, however, that in the event that a calendar quarter ends
after the time of adoption of such a plan of complete liquidation but prior to
the such final Distribution Date, the Trustee shall not sell any of the assets
of the Trust prior to the close of that calendar quarter; and
(iii) The Trustee shall make the distributions specified in Section
10.01(d) hereof on or before the final Distribution Date referred to in clause
(i) above.
(b) The Trustee hereby agrees to adopt such a plan of complete liquidation
upon the written request of the Master Servicer and to take such other action in
connection therewith as may be reasonably requested by the Master Servicer.
Section 10.03. Termination Upon Loss of REMIC Status.
(a) Following a final determination by the Internal Revenue Service, or by
a court of competent jurisdiction, in either case from which no appeal is taken
within the permitted time for such appeal, or if any appeal is taken, following
a final determination of such appeal from which no further appeal can be taken,
to the effect that the Trust does not qualify as a REMIC pursuant to Section
860D of the Code (the "Final Determination") and such failure to qualify cannot
reasonably be rectified, as soon as practical but in any event within 30
calendar days following such Final Determination, the Holders of a majority in
interest of the Class R Certificates then outstanding or the Master Servicer may
direct the Trustee on behalf of the Trust to adopt a plan of complete
liquidation. Upon receipt of such direction from the Holders of the Class R
Certificates or the Master Servicer, the Trustee shall notify all
Certificateholders of such election
<PAGE> 80
to liquidate (the "Termination Notice"). The Trustee shall sell all (but not
fewer than all) the Home Equity Loans, all Mortgaged Property and all other
assets (other than cash) then remaining in the Trust, and distribute the
proceeds of the liquidation of the Trust Fund, each in accordance with the plan
of complete liquidation and in the order specified in Section 10.01 (d) hereof,
such that, if so directed, the liquidation of the Trust, the distribution of the
proceeds of the liquidation (and any other cash assets of the Trust) and the
termination of this Agreement occur no later than the close of the 30th day
after the date of the Termination Notice.
(b) Alternatively, following a Final Determination, the Holders
representing a majority in interest of the Class R Certificates then outstanding
may, at their option and upon delivery to the Holders of the Class A
Certificates and Class M Certificates of an opinion of counsel experienced in
Federal income tax matters selected by the Holders of the Class R Certificates,
which opinion shall be reasonably satisfactory in form and substance to the
Trustee, to the effect that the effect of the Final Determination is to increase
substantially the probability that the gross income of the Trust will be subject
to Federal taxation, purchase from the Trust Fund all (but not fewer than all)
the Home Equity Loans, all Mortgaged Property and all other assets (other than
cash) remaining in the Trust at a purchase price equal to the Termination Price.
<PAGE> 81
ARTICLE XI
Miscellaneous Provisions
Section 11.01. Amendment. This Agreement may be amended from time to time by the
Master Servicer, the Depositor and the Trustee, in each case without the consent
of any of the Certificateholders, (i) to cure any ambiguity, (ii) to correct any
defective provisions or to correct or supplement any provisions herein that may
be inconsistent with any other provisions herein, (iii) to add to the duties of
the Depositor or the Master Servicer, (iv) to modify, eliminate or add to any of
its provisions to such extent as shall be necessary to maintain the
qualification of the Trust as a REMIC and to comply with the requirements of the
Code and the REMIC provisions, (v) to add any other provisions with respect to
matters or questions arising under this Agreement, which shall not be
inconsistent with this Agreement, or (vi) to add or amend any provisions of this
Agreement as required by any Rating Agency or any other nationally recognized
statistical rating agency in order to maintain or improve any rating of the
Regular Certificates (it being understood that, after obtaining the ratings in
effect on the Closing Date, neither the Trustee, the Depositor nor the Master
Servicer is obligated to obtain, maintain or improve any such rating); provided,
however, that as evidenced by an Opinion of Counsel (a copy of which shall be
delivered to the Trustee) (at the expense of the requesting party), in each case
such action shall not materially and adversely affect the interests of any
Regular Certificateholder; and provided, further, that the amendment shall not
be deemed to adversely affect in any material respect the interests of the
Regular Certificateholders and no Opinion of Counsel to that effect shall be
required if the Person requesting the amendment obtains a letter from each
Rating Agency stating that the amendment would not result in the downgrading or
withdrawal of the respective ratings then assigned to the Regular Certificates.
This Agreement also may be amended from time to time by the Master
Servicer, the Depositor and the Trustee, in each case with the consent of the
Holders of each Class of Regular Certificates which is affected by such
amendment, evidencing Percentage Interests aggregating not less than 51% in
Percentage Interests of such Class or in the case of an amendment which affects
all classes, evidencing Percentage Interests aggregating not less than 51% of
all Classes, for the purpose of adding any provisions to or changing in any
manner or eliminating any of the provisions of this Agreement or of modifying in
any manner the rights of the Certificateholders; provided, however, that no such
amendment shall (i) reduce in any manner the amount of, or delay the timing of,
collections of payments on Home Equity Loans, or (ii) reduce the aforesaid
percentage required to consent to any such amendment, or (iii) adversely affect
the status of the Trust as a REMIC or create a material risk of the Trust
incurring taxes imposed under Section 860F(a)(1) or 860(d)(1) of the Code, or
(iv) result in a downgrading of the ratings of the Regular Certificates without,
in each case, the consent of the Holders of all Classes of Certificates then
outstanding or each Class of Certificates affected thereby.
Prior to the solicitation of consent of Certificateholders in
connection with any such amendment, the party seeking such amendment shall
furnish the Trustee with an Opinion of Counsel stating whether such amendment
would adversely affect the qualification of the Trust as
<PAGE> 82
a REMIC or create a material risk of the Trust incurring taxes imposed under
860F(a)(1) or 860G(d)(1) of the Code and notice of the conclusion expressed in
such Opinion of Counsel shall be included with any such solicitation. An
amendment made with the consent of all Certificateholders and executed in
accordance with this Section 11.01 shall be permitted or authorized by this
Agreement notwithstanding that such Opinion of Counsel may conclude that such
amendment would adversely affect the qualification of the Trust as a REMIC or
create a material risk of the Trust incurring taxes imposed under 860F(a)(1) or
860G(d)(l) of the Code.
Prior to the execution of any such amendment made with the consent of
Certificateholders, the Master Servicer shall furnish written notification of
the substance of such amendment to each Rating Agency. In addition, promptly
after the execution of any such amendment made with the consent of the
Certificateholders, the Trustee shall furnish written notification of the
substance of such amendment to each Certificateholder.
It shall not be necessary for the consent of Certificateholders under
this Section to approve the particular form of any proposed amendment or
consent, but it shall be sufficient if such consent shall approve the substance
thereof. The manner of obtaining such consents and of evidencing the
authorization of the execution thereof by Certificateholders shall be subject to
such reasonable requirements as the Trustee may prescribe.
Prior to the execution of any amendment to this Agreement, the Trustee
shall be entitled to receive and rely upon an Opinion of Counsel stating that
the execution of such amendment is authorized or permitted by this Agreement.
The Trustee may, but shall not be obligated to, enter into any such amendment
which affects the Trustee's own rights, duties or immunities under this
Agreement.
Section 11.02. Recordation of Agreement. This Agreement is subject to
recordation in all appropriate public offices for real property records in all
the counties or other comparable jurisdictions in which any or all of the
Mortgaged Properties are situated, and in any other appropriate public recording
office or elsewhere, such recordation to be effected by the Master Servicer and
at its expense on direction by the Trustee (which shall not have any duty to
determine whether such recordation should be made), but only upon direction of
the Trustee or the Master Servicer accompanied by an Opinion of Counsel to the
effect that such recordation materially and beneficially affects the interests
of Certificateholders.
For the purpose of facilitating the recordation of this Agreement as
herein provided and for other purposes, this Agreement may be executed
simultaneously in any number of counterparts, each of which counterparts shall
be deemed to be an original, and such counterparts shall constitute but one and
the same instrument.
Section 11.03. Limitation on Rights of Certificateholders. The death or
incapacity of any Certificateholder shall not operate to terminate this
Agreement or the Trust, nor entitle such Certificateholder's legal
representatives or heirs to claim an accounting or to take any action or
commence any proceeding in any court for a partition or winding up of the Trust,
nor otherwise affect the rights, obligations and liabilities of the parties
hereto or any of them.
<PAGE> 83
No Certificateholder shall have any right to vote (except as provided
in Section 11.01) or in any manner otherwise control the operation and
management of the Trust, or the obligations of the parties hereto, nor shall
anything herein set forth, or contained in the terms of the Certificates, be
construed so as to constitute the Certificateholders from time to time as
partners or members of an association; nor shall any Certificateholder be under
any liability to any third person by reason of any action taken by the parties
to this Agreement pursuant to any provision hereof.
No Certificateholder shall have any right by virtue or by availing
itself of any provisions of this Agreement to institute any suit, action or
proceeding in equity or at law upon or under or with respect to this Agreement,
unless such Holder previously shall have given to the Trustee a written notice
of default and of the continuance thereof, as hereinbefore provided, and unless
also the Holders of Certificates evidencing not less than 51% of the aggregate
Percentage Interests of the Regular Certificates shall have made written request
upon the Trustee to institute such action, suit or proceeding in its own name as
Trustee hereunder and shall have offered to the Trustee such reasonable
indemnity as it may require against the costs, expenses and liabilities to be
incurred therein or thereby, and the Trustee, for 60 days after its receipt of
such notice, request and offer of indemnity, shall have neglected or refused to
institute any such action, suit or proceeding; it being understood and intended,
and being expressly covenanted by each Certificateholder with every other
Certificateholder and the Trustee, that no one or more Holders of Certificates
shall have any right in any manner whatever by virtue or by availing itself or
themselves of any provisions of this Agreement to affect, disturb or prejudice
the rights of the Holders of any other of the Certificates, or to obtain or seek
to obtain priority over or preference to any other such Holder, or to enforce
any right under this Agreement, except in the manner herein provided and for the
equal, ratable and common benefit of all Certificateholders. For the protection
and enforcement of the provisions of this Section, each and every
Certificateholder and the Trustee shall be entitled to such relief as can be
given either at law or in equity.
Section 11.04. Governing Law. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF ILLINOIS AND THE OBLIGATIONS, RIGHTS AND REMEDIES
OF THE PARTIES HEREUNDER SHALL BE DETERMINED IN ACCORDANCE WITH SUCH LAWS.
Section 11.05. Notices. All demands, notices (whether or not any notice is
referred to herein as a notice, a written notice or a notice in writing) and
communications hereunder shall be in writing and shall be deemed to have been
duly given if personally delivered at or mailed by certified mail, return
receipt requested, or telecopied to (a) in the case of the Depositor or the
Master Servicer, c/o Household Finance Corporation, 2700 Sanders Road, Prospect
Heights, Illinois 60070, Attention: Treasurer, (b) in the case of the Trustee,
at the Corporate Trust Office, 1 Bank One, Suite IL1-0126, Chicago, Illinois
60670-0126, Attn: Corporate Trust Administration, (c) in the case of Moody's,
Home Equity Loan Monitoring Group, 4th Floor, 99 Church Street, New York, New
York 10007, and (d) in the case of Fitch, One State Street Plaza, 33rd Floor,
New York, New York 10004, Attention: _____________, or, as to each party, at
such other address as shall be
<PAGE> 84
designated by such party in a written notice to each other party. Any notice
required or permitted to be mailed to a Certificateholder shall be given by
first class mail, postage prepaid, at the address of such Holder as shown in the
Certificate Register. Any notice so mailed within the time prescribed in this
Agreement shall be conclusively presumed to have been duly given, whether or not
the Certificateholder receives such notice.
Section 11.06. Severability of Provisions. If any one or more of the covenants,
agreements, provisions or terms of this Agreement shall be for any reason
whatsoever held invalid, then such covenants, agreements, provisions or terms
shall be deemed severable from the remaining covenants, agreements, provisions
or terms of this Agreement and shall in no way affect the validity or
enforceability of the other provisions of this Agreement or of the Certificates
or the rights of the Holders thereof.
Section 11.07. Assignment. Notwithstanding anything to the contrary contained
herein, except as provided in [Sections 6.05, 7.02 and 7.04], this Agreement may
not be assigned by the Depositor or the Master Servicer without the prior
written consent of Holders of Certificates of each Class, voting as a Class,
evidencing, as to each such Class, Percentage Interests aggregating not less
than 66-2/3%.
Section 11.08. Certificates Nonassessable and Fully Paid. The parties agree
that the Certificateholders shall not be personally liable for obligations of
the Trust, that the beneficial ownership interests represented by the
Certificates shall be nonassessable for any losses or expenses of the Trust or
for any reason whatsoever, and that the Certificates upon execution by the
Trustee on behalf of the Trust and the authentication and delivery thereof by
the Trustee pursuant to [Sections 2.08 or 6.01] are and shall be deemed fully
paid.
Section 11.09. Third-Party Beneficiaries. This Agreement will inure to the
benefit of and be binding upon the parties hereto, the Certificateholders and
their respective successors and permitted assigns. Except as otherwise provided
in this Agreement, no other person will have any right or obligation hereunder.
Section 11.10. Counterparts. This instrument may be executed in any number of
counterparts, each of which so executed shall be deemed to be an original, but
all such counterparts shall together constitute but one and the same instrument.
Section 11.11. Effect of Headings and Table of Contents. The Article and
Section headings herein and the Table of Contents are for convenience only and
shall not affect the construction hereof.
Section 11.12. Limitation on Voting of Preferred Stock. The Trustee shall hold
all of the preferred stock ("Preferred Stock") of the Depositor in trust, for
the benefit of the Certificateholders, and shall vote such stock only pursuant
to the written instructions of Holders of Certificates evidencing not less than
51% of the aggregate Percentage Interests of the Regular Certificates.
Concurrently with any retransfer of the Home Equity Loans to the Depositor
pursuant to Section 10.01, the Trustee shall transfer to the Depositor for
cancellation all shares of Preferred Stock held by the Trustee.
<PAGE> 85
IN WITNESS WHEREOF, the Depositor, the Master Servicer and the Trustee have
caused this Agreement to be duly executed by their respective officers all as of
the day and year first above written.
HFC REVOLVING CORPORATION,
as Depositor
By:
---------------------------------
Name:
Title:
HOUSEHOLD FINANCE CORPORATION,
as Master Servicer
By:
---------------------------------
Name:
Title:
[NAME OF TRUSTEE],
as Trustee
By:
---------------------------------
Name:
Title:
<PAGE> 86
State of Illinois }
} ss.:
County of Cook }
On this _____ day of November, 1999 before me, a notary public in and
for the State of Illinois, personally appeared, known to me who, being by me
duly sworn, did depose and say that ____________________________________________
he resides at; that he is the _________________________________________________
of HFC Revolving Corporation, a Delaware corporation, one of the parties that
executed the foregoing instrument; that he knows the seal of said corporation;
that the seal affixed to said instrument is such corporate seal; that it was so
affixed by order of the Board of Directors of said corporation; and that he
signed his name thereto by like order.
Notary Public
[Seal]
State of Illinois }
} ss.:
County of Cook }
On this _____ day of November, 1999 before me, a notary public in and
for the State of Illinois, personally appeared
______________________________________, known to me who, being by me duly sworn,
did depose and say that he resides at _________________________________________;
that he is the of Household Finance Corporation, a Delaware corporation, one of
the parties that executed the foregoing instrument; that he knows the seal of
said corporation; that the seal affixed to said instrument is such corporate
seal; that it was so affixed by order of the Board of Directors of said
corporation; and that he signed his name thereto by like order.
Notary Public
[Seal]
<PAGE> 87
State of Illinois }
} ss.:
County of Cook }
On this _____ day of November, 1999 before me, a notary public in and
for the State of Illinois, personally appeared ________________________________,
known to me who, being by me duly sworn, did depose and say that he resides at
______________________________; that he is the _________________________________
of Bank One, National Association of Chicago, a national banking association,
one of the parties that executed the foregoing instrument; and that he signed
his name thereto by order of the Board of Directors of said association.
Notary Public
[Seal]
<PAGE> 1
EXHIBIT 5.1
November 3, 1999
HFC Revolving Corporation
2700 Sanders Road
Prospect Heights, Illinois 60070
Ladies and Gentlemen:
We are counsel to HFC Revolving Corporation, a Delaware corporation (the
"Depositor"), in connection with the registration under the Securities Act of
1933, as amended (the "1933 Act"), of up to $3,000,000,000 aggregate principal
amount of home equity loan asset-backed certificates (the "Certificates"), and
the related preparation and filing of a Registration Statement on Form S-3 (the
"Registration Statement"). As set forth in the Registration Statement, each
series of Certificates will be issued under and pursuant to the conditions of a
separate pooling and servicing agreement (each, an "Agreement") among the Master
Servicer, the Depositor and the trustee (the "Trustee"), each to be identified
in the prospectus supplement for such series of Certificates. Each agreement
will be substantially in the form filed as an exhibit to the registration
statement.
In rendering the opinions expressed herein, we have examined the prospectus
(the "Prospectus") and form of prospectus supplement (the "Prospectus
Supplement") related thereto contained in the Registration Statement. We have
also examined such other records, documents and instruments as we have deemed
necessary for purposes of this opinion.
In rendering this opinion letter, as to questions of fact material to this
opinion, we have relied to the extent we have deemed such reliance appropriate,
without investigation, on certificates and other communications from public
officials and from officers of the Depositor, the Master Servicer and the
Trustee for the Certificates.
In connection with this opinion, we have assumed the legal capacity of all
natural persons, the accuracy and completeness of all documents and records that
we have reviewed, the genuineness of all signatures, the authenticity of the
documents submitted to us as originals and the conformity to authentic original
documents of all documents submitted to us as certified, conformed or reproduced
copies. In making our examination of documents executed by parties other than
the Depositor and the Master Servicer, we have assumed that such parties had the
power, corporate or other, to enter into and perform all obligations thereunder
and have also
<PAGE> 2
HFC Revolving Corporation
November 3, 1999
Page 2
assumed the due authorization by all requisite action, corporate or other, and
execution and delivery by such parties of such documents and the validity and
binding effect thereof.
Based upon and subject to the foregoing, and subject to the penultimate
paragraph of this letter, it is our opinion that:
1. Each Agreement, when duly authorized, executed and delivered
by the Master Servicer, the Depositor, the Trustee, and any
other party thereto, will constitute a legal, valid and
binding agreement of the Master Servicer and the Depositor,
enforceable against the Master Servicer and the Depositor in
accordance with its terms, except as such enforceability may
be limited by general principles of equity or applicable
bankruptcy, insolvency, reorganization, moratorium,
liquidation or similar laws relating to, or affecting
generally, the enforcement of creditors' rights and remedies.
2. When a series of Certificates has been duly authorized by all
necessary action on the part of the Master Servicer and the
Depositor (subject to the terms thereof being otherwise in
compliance with applicable law at such time), duly executed
and authenticated by the Trustee for such series in accordance
with the terms of the related Agreement and issued and
delivered against payment therefor as described in the
Registration Statement and the related Prospectus Supplement,
such series of Certificates will be legally and validly
issued, fully paid and nonassessable, and the holders thereof
will be entitled to the benefits of the related Agreement.
3. The description of federal income tax consequences appearing
under the heading "Material Federal Income Tax Consequences"
in the Prospectus contained in the Registration Statement,
while not purporting to discuss all possible federal income
tax consequences of an investment in the Certificates, is
accurate in all material respects with respect to those tax
consequences which are discussed.
4. To the extent that the description referred to in Paragraph 3
above expressly states our opinion or states that our opinion
will be provided as to any series of Certificates, we hereby
confirm and adopt such opinion herein, as such opinion may be
supplemented as described in the related Prospectus
Supplement.
Please note that Paragraph 4 above applies only to those series of Certificates
for which our firm is named as counsel to the Depositor in the related
Prospectus Supplement.
Our opinions expressed above are limited to the laws of the State of
Illinois and the laws of the United States of America and we do not express any
opinion herein concerning any other law. In addition, we express no opinion
concerning any
<PAGE> 3
HFC Revolving Corporation
November 3, 1999
Page 3
statutes, ordinances, administrative decisions, rules or regulations of any
county, town, municipality or special political subdivision (whether created or
enabled through legislative action at the federal, state or regional level).
This opinion is given as of the date hereof and we assume no obligation to
advise you of changes that may hereafter be brought to our attention. This
opinion is solely for the information of the addressee hereof and is not to be
quoted in whole or in part or otherwise referred to, nor is it to be filed with
any governmental agency or any other person, without our prior written consent.
No one other than the addressee hereof is entitled to rely on this opinion. This
opinion is rendered solely for purposes of the transactions described in the
Registration Statement and should not be relied on for any other purpose.
We hereby consent to the filing of this opinion letter as an Exhibit to
the Registration Statement and to the use of our name in the Prospectus and
Prospectus Supplement included in the Registration Statement under the headings
"Material Federal Income Tax Consequences" and "Legal Matters," without
admitting that we are "persons" within the meaning of Section 7(a) or 11(a)(4)
of the 1933 Act, or "experts" within the meaning of Section 11 thereof with
respect to any portion of the Registration Statement.
Very truly yours,
KATTEN MUCHIN & ZAVIS
