PROSPECTUS SUPPLEMENT
(To Prospectus dated December 26, 1996)
$140,000,000
[THE MONEY STORE LOGO]
CLASSNOTES TRUST 1995-I
(f/k/a Education Loan Alliance 1995-I)
SERIES 1996-2
ClassNotes Trust 1995-I (formerly known as Education Loan Alliance 1995-I)
(the "Trust") is offering an aggregate of $140,000,000 Series 1996-2 Asset
Backed Notes, Class A-9 (the "Series 1996-2 Notes" or the "Class A-9 Notes") in
one class (a "Class"). The Series 1996-2 Notes are secured primarily by a pool
of student loans, as further described herein and in the attached Prospectus,
purchased by or contributed to Dauphin Deposit Bank and Trust Company, as
eligible lender trustee on behalf of the Trust (the "Eligible Lender Trustee"),
from Trans-World Insurance Company, doing business as Educaid (the "Seller")
(such loans, together with any Additional Student Loans (as defined in the
attached Prospectus) purchased from the Seller by, or contributed by the Seller
to, the Eligible Lender Trustee on behalf of the Trust, the "Financed Student
Loans"), collections and other payments with respect to the
(cover continued on next page)
SEE "RISK FACTORS" ON PAGE 30 IN THE PROSPECTUS FOR A DISCUSSION OF
CERTAIN MATERIAL FACTORS WHICH SHOULD BE CONSIDERED IN CONNECTION WITH AN
INVESTMENT IN THE SERIES 1996-2 NOTES OFFERED HEREBY.
THE SERIES 1996-2 NOTES REPRESENT INTERESTS ONLY IN THE TRUST AND DO
NOT REPRESENT INTERESTS IN OR OBLIGATIONS OF THE MONEY STORE INC., THE SELLER,
THE ELIGIBLE LENDER TRUSTEE, THE INDENTURE TRUSTEE OR ANY OF THEIR RESPECTIVE
AFFILIATES OR SUBSIDIARIES. NO GOVERNMENTAL AGENCY HAS PASSED UPON THE ACCURACY
OF THE INFORMATION CONTAINED IN THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
==================================================================================================================================
Price to Underwriting Proceeds to the
Public Discount(1) Seller(2)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$140,000,000 LIBOR Rate Class A-9 Notes 100.00% 0.225% 99.775%
- ----------------------------------------------------------------------------------------------------------------------------------
Total................................. $140,000,000 $315,000 $139,685,000
==================================================================================================================================
(1) The Representative has agreed to indemnify the Underwriters against certain liabilities, including liabilities under
the Securities Act of 1933, as amended.
(2) Before deducting expenses, estimated at $200,000.
</TABLE>
The Series 1996-2 Notes are offered by Smith Barney Inc. and Credit Suisse
First Boston Corporation (the "Underwriters") subject to prior sale, when, as
and if issued to and accepted by the Underwriters, subject to approval of
certain legal matters by counsel for the Underwriters. The Underwriters reserve
the right to withdraw, cancel or modify such offer and to reject orders in whole
or in part. It is expected that delivery of the Series 1996-2 Notes will be made
in book-entry form only through the Same Day Funds Settlement System of The
Depository Trust Company on or about December 27, 1996.
SMITH BARNEY INC. CREDIT SUISSE FIRST BOSTON
The date of this Prospectus Supplement is December
26, 1996.
<PAGE>
(cover continued from previous page)
Financed Student Loans, monies on deposit in certain trust accounts, and a
surety bond with respect to the Series 1996- 2 Notes (the "Series 1996-2 Note
Surety Bond") to be issued by:
AMBAC
The initial interest rate (the "Class Interest Rate") for the Class A-9
Notes will be as set forth herein. Thereafter, the Class Interest Rate for the
Class A-9 Notes for each Interest Period will, subject to certain limitations,
equal the lesser of (i) the London interbank offered rate for one-month U.S.
dollar deposits ("LIBOR") plus 0.08% and (ii) the applicable Net Loan Rate.
Principal and interest on the Class A-9 Notes will be payable monthly on the
15th day of each month (or if such day is not a Business Day, on the next
succeeding Business Day), commencing in January 1997. However, no principal
payments with respect to the Class A-9 Notes will be made until each Class of
Notes issued by the Trust with an earlier Final Maturity Date is paid in full.
Interest on the Class A-9 Notes will accrue during the period (each, an
"Interest Period") initially beginning on the Closing Date and ending on January
14, 1997. After the initial Interest Period, each Interest Period for the Class
A-9 Notes will consist of the period beginning on the 15th day of each month and
ending on the 14th day of the following month.
The Final Maturity Date for the Class A-9 Notes is April 15, 2002. However,
payment in full of the Class A-9 Notes could occur earlier than such date as
described in the attached Prospectus.
The Class A-9 Notes offered by this Prospectus Supplement constitute a
separate Series and Class of Notes being offered pursuant to the Prospectus
dated December 26, 1996, of which this Prospectus Supplement is a part and which
accompanies this Prospectus Supplement. The Prospectus contains important
information regarding this offering which is not contained herein and
prospective investors are urged to read the Prospectus and the Prospectus
Supplement in full.
There is currently no secondary market for the Series 1996-2 Notes. The
Underwriters intend to make a secondary market for the Series 1996-2 Notes, but
have no obligation to do so. There can be no assurance that a secondary market
for the Series 1996-2 Notes will develop or, if one does develop, that it will
continue.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICES OF THE SERIES 1996-2
NOTES AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET.
SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
(end of cover page)
------------------------------
UNTIL 90 DAYS AFTER THE DATE HEREOF, ALL DEALERS EFFECTING TRANSACTIONS IN
THE SERIES 1996-2 NOTES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY
BE REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND THE PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS SUPPLEMENT AND
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
<PAGE>
TERMS OF THE SERIES 1996-2 NOTES
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in the attached Prospectus. Certain
capitalized terms used in this Prospectus Supplement and not defined herein have
the meaning ascribed to such terms in the attached Prospectus.
Securities Offered.......................... Series 1996-2 Asset
Backed Notes (the "Series 1996-2
Notes") to be issued in the
following class and initial
principal amount:
$140,000,000 LIBOR
Rate Class A-9 Notes.
The Trust will issue
the Series 1996-2 Notes pursuant to
the Indenture dated as of March 28,
1995 (as amended and supplemented
from time to time, the "Master
Indenture") and a Fourth Terms
Supplement dated as of December 27,
1996 authorizing such Notes (as
amended from time to time, the
"Terms Supplement" and, together
with the Master Indenture, the
"Indenture") between the Trust and
the Indenture Trustee.
The Class A-9 Notes
will be issued in minimum
denominations of $50,000 and
integral multiples of $1,000 in
excess thereof. On each Note
Distribution Date for which the
Class A-9 Notes are receiving a
payment of principal, such
principal will be distributed pro
rata among all owners of the Class
A-9 Notes as of the related Record
Date based on the amount of Class
A-9 Notes so owned, and such
distributions may be made in
amounts less than $50,000.
Initial Class Interest Rate................ 5.74406 % per annum
until January 15, 1997, the first
rate adjustment date for the Class
A-9 Notes.
Afterthe initial
Interest Period for the Class A-9
Notes, the Class Interest Rate for
the Class A-9 Notes will be reset
to equal the lesser of (i) LIBOR
plus 0.08% and (ii) the applicable
Net Loan Rate. Interest on the
Class A-9 Notes will be payable
monthly on the 15th day of each
month (or if such day is not a
Business Day, on the next
succeeding Business Day),
commencing in January 1997. The
date on which holders of the Class
A-9 Notes are entitled to receive a
distribution is referred to as the
"Note Distribution Date."
Distributions will be made to
holders of record of the Class A-9
Notes as of the second Business Day
preceding the related Note
Distribution Date.
Final Maturity Date..........................April 15, 2002.
Cut-off Dates................................ November 30, 1996
for the Financed Student Loans
pledged to the Indenture Trustee
prior to the Closing Date and
December 26, 1996 for the Financed
Student Loans expected to be
pledged to the Indenture Trustee on
the Closing Date.
Closing Date.................................December 27, 1996.
Servicing Fee................................ The Master Servicer
will receive, subject to the
limitations set forth in the
Prospectus under the heading
"Summary of Terms--Assets of the
Trust--Transfer and Servicing
Agreements," a monthly fee (the
"Servicing Fee") equal to the sum
of (i) 0.35% per annum of the
aggregate principal balance of
Financed Student Loans in the
Deferral Phase as of the last day
of the preceding calendar month,
(ii) 1.00% per annum of the
aggregate principal balance of
Financed Student Loans (other than
Consolidation Loans) in the
Repayment Phase as of the last day
of the preceding calendar month,
(iii) with respect to each
Consolidation Loan, the greater of
0.65% per annum of the principal
balance of each such Consolidation
Loan as of the last day of the
preceding calendar month and $3.00
per Consolidation Loan, and (iv) a
one-time fixed fee equal to $15 for
each Financed Student Loan for
which a guarantee claim was filed,
in each case subject to certain
adjustments, together with other
administrative fees and similar
charges.
Administration Fee........................... 0.015% per annum of
the outstanding principal amount of
the Notes and the Certificates.
Net Loan Date............................... For any Interest
Period, the Net Loan Rate will
equal the weighted average
Effective Interest Rate for the
Collection Period immediately
preceding such Interest Period,
less 1.60% per annum (or less 1.00%
per annum for the first Interest
Period).
Pool Balance................................. As of the Closing
Date, Financed Student Loans with
an aggregate Principal Balance of
approximately $520,000,000 already
will have been pledged to the
Indenture Trustee in connection
with the Trust's previous issuance
of Notes. The Seller has identified
additional Financed Student Loans
with an aggregate Principal Balance
of approximately $130,000,000 to be
transferred to the Trust and
pledged to the Indenture Trustee in
connection with the issuance of the
Class A-9 Notes (such Financed
Students Loans, the "New Financed
Student Loans"). On the Closing
Date, New Financed Student Loans
with an aggregate Principal Balance
exceeding $105,000,000 will be
pledged to the Indenture Trustee.
The Seller expects that the
remainder of the New Financed
Student Loans will be transferred
to the Trust and pledged to the
Indenture Trustee during the
Funding Period.
Pool Characteristics.................... A description as of the respective
Cut-off Dates of the Financed
Student Loans is attached hereto as
Annex A. This description includes
the New Financed Student Loans as
well as all Financed Student Loans
previously pledged to the Indenture
Trustee in connection with the
issuance by the Trust of all
previously issued Series of Notes
they are secured by the Financed
Student Loans. As stated above, it
is expected that certain of the New
Financed Student Loans will be
pledged to the Indenture Trustee
during the Funding Period.
As of the date of this Prospectus
Supplement, New Financed Student
Loans with an aggregate Principal
Balance of not more than
approximately $25,000,000 have not
been fully disbursed. It is
expected that these Financed
Student Loans will be fully
disbursed on or prior to December
31, 1996. The characteristics
reported on Annex A for such New
Financed Student Loans are based
upon the characteristics such New
Financed Student Loans are expected
to have following their full
disbursement. For any Financed
Student Loan that is not fully
disbursed, the related borrower may
determine prior to December 31,
1996 not to have the related loan
disbursed. In such event, the
Financed Student Loan will not be
pledged to the Indenture Trustee
Pre-Funding Account.........................On the Closing Date an amount will
be deposited into the PreFunding
Agreement equal to the difference
between $140,000,000 (i.e., the
original principal amount of the
Class A-9 Notes) and the aggregate
Principal Amount of the New
Financed Student Loans actually
transferred to the Trust and
pledged to the Indenture Trustee on
the Closing Date. Such amount will
be used, in part, to acquire the
New Financed Student Loans not
delivered on the Closing Date. The
balance will be available to
acquire Financed Student Loans
until the first to occur of (i) the
Note Distribution Date on which the
amount on deposit in the
Pre-Funding Account is less than
$200,000, (ii) an Event of Default
occurring under the Indenture, a
Servicer Default occurring under
the Sale and Servicing Agreement or
an Administrator Default occurring
under the Sale and Servicing
Agreement or the Administration
Agreement, (iii) certain events of
insolvency occurring with respect
to the Seller or (iv) the close of
business on April 1, 1997, or such
later date as may be agreed to by
AMBAC. Amounts in the Pre-Funding
Account will be applied as
described under the heading
"Description of the Transfer and
Servicing Agreements -- Additional
Funding" in the attached
Prospectus.
Capitalized Interest Account................. On the Closing Date
approximately $6,500,000 already
will be on deposit in the
Capitalized Interest Account. No
additional funds will be deposited
in the Capitalized Interest Account
on the Closing Date. Amounts in the
Capitalized Interest Account will
be applied as described under the
heading "Description of the
Transfer and Servicing Agreements
-- Capitalized Interest Account and
Capitalized Pre-Funding Account" in
the attached Prospectus.
Capitalized Pre-Funding Account............. No additional funds
will be deposited in the
Capitalized PreFunding Account on
the Closing Date.
Expense Account.............................. Amounts in the
Expense Account will be applied as
described under the heading
"Description of the Transfer and
Servicing Agreements --
Distributions" in the attached
Prospectus.
Reserve Account............................... No additional funds
will be deposited in the Reserve
Account on the Closing Date.
Additional Monthly
Payments................................... After the amount on
deposit in the Reserve Account
equals the greater of (i) 1% of the
then outstanding principal balance
of the Notes and the Certificates
and (ii) $1,500,000 (but in no
event an amount greater than the
then outstanding principal balance
of the Notes and the Certificates),
amounts otherwise required to be
deposited into the Reserve Account
may, at the option of the Master
Servicer, be applied as Additional
Principal Payments on the next Note
Distribution Date relating to the
Class of Notes with the earliest
Final Maturity Date (and, after all
the Notes have been paid in full,
the Certificates).
Surety Bond................................... A surety bond to be
issued by AMBAC will be obtained in
connection with the Series 1996-2
Notes (the "Series 1996- 2 Note
Surety Bond") in favor of the
Eligible Lender Trustee on behalf
of the Trust, will be pledged to
the Indenture Trustee and will
provide for coverage of timely
payment of all interest and
ultimate payment of all principal
on the Class A-9 Notes, subject to
the limitations described under the
heading "Description of the Surety
Bonds" in the attached Prospectus.
Use of Proceeds.............................. The net proceeds
from the offering of the Class A-9
Notes ultimately will be paid to
the Seller as consideration for the
Financed Student Loans contributed
to the Trust on the Closing Date
and during the Funding Period. Each
Financed Student Loan will be
acquired by the Trust at a price
equal to 103.70% of its unpaid
principal balance, plus accrued
interest. Such proceeds will be
used by the Seller and the
Representative for general
corporate purposes, including the
repayment of debt and the
origination and acquisition of
student loans.
Tax Considerations........................... In the opinion of
special federal and Pennsylvania
tax counsel for the Trust, the
Class A-9 Notes will be
characterized as debt for federal
and Pennsylvania state income tax
purposes, although there is no
specific authority with respect to
the characterization for federal or
Pennsylvania income tax purposes of
securities having the same terms as
the Class A-9 Notes.
In the opinion of
special federal tax counsel for the
Trust, for federal income tax
purposes the Trust will not be
characterized as an association (or
a publicly traded partnership)
taxable as a corporation. However,
there are no cases or rulings on
similar transactions involving a
trust that issues securities with
terms similar to those of the Class
A-9 Notes.
See "Certain Tax
Consequences" in the attached
Prospectus for additional
information concerning the
application of federal and
Pennsylvania state tax laws with
respect to the Notes.
ERISA Considerations.......................... Assuming that the
Class A-9 Notes should be treated
as indebtedness without substantial
equity features under the Plan
Asset Regulations issued by the
Department of Labor, the Class A-9
Notes are eligible for purchase by
or on behalf of employee benefit
plans, retirement arrangements,
individual retirement accounts and
Keogh Plans, subject to the
considerations discussed under
"ERISA Considerations -- The Notes"
in the attached Prospectus.
Rating of the Securities..................... It is a condition to
the issuance and sale of the Class
A-9 Notes that they be rated "AAA"
by Standard & Poor's Ratings
Services, a division of The
McGraw-Hill Companies, Inc.
("Standard & Poor's") and "Aaa" by
Moody's Investors Service, Inc.
("Moody's"). Each of Standard &
Poor's and Moody's is also referred
to herein as a "Rating Agency" and
collectively, as the "Rating
Agencies." A securities 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
Agency.
<PAGE>
PREVIOUSLY ISSUED SECURITIES
Set forth below is certain information concerning each outstanding
Class of Notes and certain other securities issued previously by the Trust and
outstanding as December 15, 1996. The Financed Student Loans and other assets
pledged to the Indenture Trustee will serve as collateral for such outstanding
Notes and other securities as well as the Series 1996-2 Notes being offered by
means of this Prospectus Supplement and the attached Prospectus.
<TABLE>
<CAPTION>
Outstanding
Original Principal Amount Final
Principal (As of December Maturity
Series Class Date Issued Amount 15, 1996) Date
<S> <C> <C> <C> <C> <C>
1995-1 Class A-1 March 28, 1995 $54,000,000 $44,400,000 April 1, 2013
1995-1 Class A-2 March 28, 1995 $54,000,000 $54,000,000 April 1, 2014
1995-1 Class A-3 March 28, 1995 $54,500,000 $54,500,000 April 1, 2015
1995-2 Class A-5 December 27, 1995 $93,000,000 $93,000,000 April 1, 2016
1995-2 Class A-6 December 27, 1995 $99,000,000 $99,000,000 April 1, 2017
1996-1 Class A-7 March 28, 1996 $152,000,000 $124,350,000 March 15, 2001
1996-1 Class A-8 March 28, 1996 $51,000,000 $51,000,000 April 1, 2018
Certificates N/A March 28, 1995 $24,000,000 $24,000,000 April 1, 2020
</TABLE>
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement
for the sale of the Series 1996-2 Notes, dated December 19, 1996, and a related
Terms Agreement dated December 24, 1996 (collectively, the "Underwriting
Agreement"), the Representative and the Seller have agreed on behalf of the
Trust to sell and the Underwriters have severally but not jointly agreed to
purchase the principal amount of the Series 1996-2 Notes set forth below:
Principal Amount of
Underwriter the Series 1996-2 Notes
Smith Barney Inc. $105,000,000
Credit Suisse First Boston Corporation $ 35,000,000
The Series 1996-2 Notes, initially, will be offered by the Underwriters to
the public at the offering price set forth on the cover page of this Prospectus
Supplement. After the initial public offering, the offering price and other
selling terms may be varied by the Underwriters. The Underwriters and any
dealers that participate with the Underwriters in the distribution of the Series
1996-2 Notes may be deemed to be underwriters and any commissions received by
them and any profit on the resale of the Series 1996-2 Notes by them may be
deemed to be underwriting discounts and commissions under the Securities Act of
1933, as amended.
The Representative has agreed to indemnify the Underwriters against certain
liabilities including liabilities under the Securities Act of 1933, as amended.
Each of the Underwriters may provide investment banking services for the
Representative for which it will receive additional compensation.
<PAGE>
<TABLE>
<CAPTION>
ANNEX A
CERTAIN CHARACTERISTICS OF THE
FINANCED STUDENT LOANS
Composition of the Financed Student Loans*
<S> <C>
Aggregate Outstanding Principal Balance.................................................. $650,126,988
Number of Borrowers...................................................................... 119,648
Average Outstanding Principal Balance Per Borrower....................................... $ 5,434
Number of Loans.......................................................................... 359,768
Average Outstanding Principal Balance Per Loan........................................... $ 1,807
Weighted Average Annual Interest Rate.................................................... 7.96%
Weighted Average Annual Effective Rate................................................... 7.96%
Weighted Average Remaining Term (months) (does not include the months
remaining for the in-school, grace, deferment or forbearance periods).................. 109
Weighted Average Remaining Term (months) (including the months
remaining for the in-school, grace, deferment or forbearance periods).................. 121
</TABLE>
Distribution of the Financed Student Loans by Loan Type
Percent of
Loans by
Number of Outstanding Outstanding
Loan Types Loans Balance Balance
Consolidated 1,540 $ 24,893,922 3.83%
PLUS 10,871 29,172,351 4.49%
SLS 141 248,588 0.04%
Stafford - Subsidized 263,960 443,060,245 68.15%
Stafford - Unsubsidized 83,256 152,751,882 23.50%
------- ----------- -----
Total 359,768 $650,126,988 100.00%
======= ============ =======
Distribution of the Financed Student Loans by Interest Rate
Percent of
Loans by
Number of Outstanding Outstanding
Interest Rate Loans Balance Balance
Less than 7.50% 17 $162,245 0.02%
7.50% to 8.49% 347,418 598,832,799 92.11%
8.50% to 9.49% 12,329 51,071,748 7.86%
9.50% or greater 4 60,197 0.01%
-------- ------------- ----
Total 359,768 $650,126,988 100.00%
======= ============ =======
- -----------------
* As described in the Prospectus Supplement, the composition of the
Financed Student Loans set forth in this Annex A consists of a
description (i) as of November 30, 1996 for the Financed Student Loans
pledged to the Indenture Trustee prior to the Closing Date, (ii) the
anticipated characteristics as of December 26, 1996 for certain of the
New Financed Student Loans and (iii) the anticipated characteristics as
of December 30, 1996 for the remainder of the New Financed Student
Loans.
<PAGE>
Composition of the Financed Student Loans
Distribution of the Financed Student Loans by Outstanding Balance
Percent of
Loans by
Number of Outstanding Outstanding
Outstanding Balance Borrowers Balance Balance
Less than $1,000 5,629 $3,442,113 0.53%
$1,000 - $1,999 12,393 18,230,988 2.80%
$2,000 - $2,999 26,902 68,395,062 10.52%
$3,000 - $3,999 13,629 47,415,403 7.29%
$4,000 - $4,999 9,254 40,387,542 6.21%
$5,000 - $5,999 16,311 88,146,182 13.56%
$6,000 - $6,999 5,908 37,542,411 5.77%
$7,000 - $7,999 4,282 31,768,198 4.89%
$8,000 - $8,999 6,700 56,448,052 8.68%
$9,000 - $9,999 3,319 30,953,181 4.76%
$10,000 - $10,999 3,778 39,037,612 6.00%
$11,000 - $11,999 2,782 31,148,571 4.79%
$12,000 - $12,999 1,048 13,076,680 2.01%
$13,000 - $13,999 955 12,869,800 1.98%
$14,000 - $14,999 859 12,366,507 1.90%
$15,000 or greater 5,899 118,898,686 18.29%
----- ----------- ------
Total 119,648 $650,126,988 100.00%
======= ============ =======
Distribution of the Financed Student Loans by Borrower Payment Status
Percent of
Loans by
Number of Outstanding Outstanding
Borrower Payment Status Loans Balance Balance
Claim 1,687 $2,436,597 0.37%
Default 17 46,086 0.01%
Deferment 7,333 11,689,933 1.80%
Forbearance 8,830 19,917,605 3.06%
Grace 22,854 40,384,795 6.21%
In School 259,227 451,868,466 69.50%
Repayment
First Year Repayment 57,106 117,573,913 18.08%
Second Year Repayment 1,957 5,575,292 0.86%
Third Year Repayment 331 390,151 0.06%
Fourth Year Repayment 426 244,150 0.04%
--------- ------------- -----
Total 359,768 $650,126,988 100.00%
======= ============ =======
<PAGE>
Composition of the Financed Student Loans
Geographic Distribution of the Financed Student Loans
Percent of
Loans by
Number of Outstanding Outstanding
Location * Loans Balance Balance
Alabama 471 $819,778 0.13%
Alaska 168 301,504 0.05%
American Samoa 7 18,500 0.00%
Arizona 3,012 6,294,782 0.97%
Arkansas 262 500,594 0.08%
California 122,996 226,089,179 34.78%
Colorado 924 2,032,986 0.31%
Connecticut 1,086 2,077,990 0.32%
Delaware 200 370,302 0.06%
District of Columbia 283 627,183 0.10%
Florida 83,135 144,147,716 22.17%
Foreign Country 669 2,662,877 0.41%
Georgia 3,163 4,984,440 0.77%
Guam 26 75,499 0.01%
Hawaii 343 759,685 0.12%
Idaho 196 379,253 0.06%
Illinois 1,644 3,400,142 0.52%
Indiana 1,191 1,885,151 0.29%
Iowa 316 589,590 0.09%
Kansas 557 1,080,808 0.17%
Kentucky 325 629,103 0.10%
Louisiana 665 1,342,852 0.21%
Maine 232 441,790 0.07%
Maryland 1,784 3,385,061 0.52%
Massachusetts 1,806 3,740,618 0.58%
Michigan 645 1,396,143 0.21%
Military Atlantic 20 30,205 0.00%
Military Europe 69 138,397 0.02%
Military Pacific 69 103,656 0.02%
Military Post 435 890,598 0.14%
Minnesota 394 896,537 0.14%
Missouri 2,324 4,289,180 0.66%
Montana 214 393,740 0.06%
Nebraska 653 1,402,520 022%
Nevada 530 1,281,971 0.20%
New Hampshire 390 719,126 0.11%
New Jersey 43,944 67,098,729 10.32%
New Mexico 401 867,657 0.13%
New York 17,299 36,393,903 5.60%
North Carolina 4,982 7,903,591 1.22%
North Dakota 24 48,677 0.01%
Ohio 1,609 2,820,345 0.43%
Oklahoma 452 986,930 0.15%
Oregon 3,788 7,272,265 1.12%
Pennsylvania 2,641 5,770,174 0.89%
Puerto Rico 397 1,255,676 0.19%
Rhode Island 175 380,957 0.06%
South Carolina 651 1,289,417 0.20%
South Dakota 40 90,205 0.01%
Tennessee 590 1,047,159 0.16%
Texas 37,753 73,477,324 11.30%
Utah 240 671,389 0.10%
Vermont 213 422,178 0.06%
Virgin Islands 126 198,796 0.03%
Virginia 9,891 15,612,920 2.40%
Washington 2,705 5,045,367 0.78%
West Virginia 246 419,319 0.06%
Wisconsin 329 696,464 0.11%
Wyoming 68 178,089 0.03%
--------- -------------- -----
TOTAL 359,768 $650,126,988 100.00%
======= ============ =======
- ------------------
* Based on the permanent billing addresses of the borrowers of the
Financed Student Loans shown on the Servicer's records.
<PAGE>
<TABLE>
<CAPTION>
Composition of the Financed Student Loans
Distribution of the Financed Student Loans by Date of Disbursement
Percent of
Loans by
Number of Outstanding Outstanding
Disbursement Date Loans Balance Balance
<S> <C> <C> <C>
Pre - October 1, 1993 533 $638,843 0.10%
Post October 1, 1993 and thereafter 359,235 649,488,145 99.90%
------- ----------- -------
Total 359,768 $650,126,988 100.00%
======= ============ =======
</TABLE>
<TABLE>
<CAPTION>
Distribution of the Financed Student Loans by Guarantor
Percent of
Loans by
Number of Outstanding Outstanding
Guarantors Loans Balance Balance
<S> <C> <C> <C>
Arizona Educational Loan Program 2,417 $4,993,037 0.77%
California Student Aid Commission ("CSAC") 115,437 201,304,453 30.96%
Florida Office of Student Financial Assistance ("FOSFA") 67,363 109,264,323 16.81%
Georgia Higher Education Assistance Corporation 2,563 3,544,930 0.55%
Great Lakes Higher Education Corporation ("GLHEC") 433 629,468 0.10%
Illinois Student Assistance Commission 232 376,899 0.06%
Missouri Student Loan Program 757 1,109,059 0.17%
Nebraska Student Loan Program ("NSLP") 819 1,954,074 0.30%
New Jersey Higher Education Assistance Authority ("NJHEAA") 44,566 65,807,278 10.12%
New York State Higher Education Services Corp. ("NYSHESC") 12,964 22,909,292 3.52%
Northwest Education Loan Association 4,336 7,161,142 1.10%
Pennsylvania Higher Education Assistance Authority ("PHEAA") 6,422 33,318,389 5.12%
Texas Guaranteed Student Loan Corporation ("TGSLC") 32,260 57,130,938 8.79%
United Student Aid Funds ("USAF") 58,133 123,688,023 19.03%
Virginia State Education Assistance Authority ("VSEAA")* 9,778 14,963,823 2.30%
Other 1,288 1,971,861 0.30%
----- --------- -----
Total 359,768 $650,126,988 100.00%
======= ============ =======
- --------
Pursuant to a recent agreement between the Commonwealth of Virginia and
the U.S. Department of Education, the operations of VSEAA currently are
managed by Educational Credit Management Corporation ("ECMC"). ECMC,
formerly known as the Transitional Guarantee Agency, is a guarantee
agency formed within the last two years by the U.S. Department of
Education to facilitate and support the consolidation of guarantee
agencies. It is anticipated that the obligations and operations of
VSEAA will be fully transferred to ECMC.
</TABLE>
<PAGE>
ANNEX B
CERTAIN INFORMATION RELATING
TO THE GUARANTORS
GUARANTORS FOR THE FEDERAL LOANS
Set forth below is certain historical information with respect to each
Guarantor of Federal Loans listed in Annex A above that is expected to guaranty
2% or more of the Financed Student Loans as of December 30, 1996 (the "Federal
Guarantors"). Pursuant to a recent agreement between the Commonwealth of
Virginia and the U.S. Department of Education, the operations of VSEAA currently
are managed by Educational Credit Management Corporation ("ECMC"). ECMC,
formerly known as the Transitional Guarantee Agency, is a guarantee agency
formed within the last two years by the U.S. Department of Education to
facilitate and support the consolidation of guarantee agencies. No information
comparable to that set forth below for the Guarantors is currently available for
ECMC. It is anticipated that the obligations and operations of VSEAA will be
fully transferred to ECMC. Except as otherwise indicated below, the information
regarding each Federal Guarantor has been obtained from the Department of
Education's Guaranteed Student Loan Programs Data Book for Federal Fiscal Years
1989 and 1991, and the Department of Education's Federal Fiscal Year 1993 Loan
Programs Data Books (each, a "DOE Data Book"). No independent verification has
been or will be made by the Seller or The Money Store Inc. of such information.
Guarantee Volume. For the Federal Fiscal Year ending September 30,
1993, of all the guarantors of student loans in the United States, CSAC, FOSFA,
NJHEAA, NYSHESC, PHEAA, TGSLC, USAF and VSEAA ranked 3rd, 11th, 19th, 4th, 2nd,
6th, 1st and 15th, respectively, as measured by volume of Federal Loans. The
following table sets forth the approximate aggregate principal amount of
federally reinsured education loans (excluding refinanced PLUS and SLS Loans)
that have first become committed to be guaranteed by each of the Federal
Guarantors and by all guarantors of Federal Loans in each of the five Federal
Fiscal Years 1989 through 1993.*
<TABLE>
<CAPTION>
STAFFORD, UNSUBSIDIZED STAFFORD, SLS, PLUS AND CONSOLIDATED LOANS GUARANTEED
Dollars in Millions
Federal
Fiscal
Year CSAC FOSFA NJHEAA NYSHESC PHEAA TGSLC USAF VSEAA ALL GUARANTORS
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1989 $1,244.4 $ 202.7 $206.3 $1,035.6 $1082.0 $ 838.1 $1,683.5 $177.7 $13,150.5
1990 1,146.1 175.2 216.2 977.0 1096.8 714.9 2,097.6 261.2 13,111.1
1991 1,193.4 250.8 250.2 1,068.4 1288.2 722.1 2,833.7 275.3 14,620.3
1992 1,333.7 314.1 268.0 1,186.0 1410.2 718.6 3,372.1 263.4 16,113.7
1993 1,507.4 437.9 289.3 1,338.2 1707.0 876.8 4,087.6 332.9 19,355.6
- ---------------------
* The information set forth in the table above has been obtained from the Federal Fiscal Years 1989, 1991
and 1993 DOE Data Books.
</TABLE>
Reserve Ratio. Each Federal Guarantor's reserve ratio is determined by
dividing its cumulative cash reserves by the original principal amount of the
outstanding loans it has agreed to guarantee. The term "cumulative cash
reserves" refers to cash reserves plus (i) sources of funds (including insurance
premiums, state appropriations, federal advances, federal reinsurance payments,
administrative cost allowances, collections on claims paid and investment
earnings) minus (ii) uses of funds (including claims paid to lenders, operating
expenses, lender fees, the Department's share of collections on claims paid,
returned advances and reinsurance fees). The "original principal amount of
outstanding loans" consists of the original principal amount of loans guaranteed
by such Federal Guarantor minus (i) the original principal amount of loans
canceled, claims paid, loans paid in full and loan guarantees transferred from
such Federal Guarantor to other guarantors, plus (ii) the original principal
amount of loan guarantees transferred to such Federal Guarantor from other
guarantors. The following table sets forth each Federal Guarantor's cumulative
cash reserves and their corresponding reserve ratios and the national average
reserve ratio for all guarantors for the five Federal Fiscal Years 1989 through
1993:*
<TABLE>
<CAPTION>
CSAC FOSFA NJHEAA NYSHESC
FEDERAL Cumulative Cumulative Cumulative Cumulative
FISCAL Cash Reserve Cash Reserve Cash Reserve Cash Reserve
YEAR Reserve Ratio Reserves Ratio Reserves Ratio Reserves Ratio
- -
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1989 $ 84.4 1.6% $ 22.6 1.5% $ 26.8 1.1% $ 26.3 0.3%
1990 115.9 1.9 10.4 0.7 27.6 1.1 63.8 0.7
1991 130.5 2.0 25.1 1.5 24.7 1.0 26.8 0.3
1992 183.4 2.5 27.8 1.6 28.7 1.1 71.3 0.8
1993 185.5 2.3 44.1 2.2 18.3 0.7 71.4 0.7
PHEAA TGSLC USAF VSEAA
National
FEDERAL Cumulative Cumulative Cumulative Cumulative Average
FISCAL Cash Reserve Cash Reserve Cash Reserve Cash Reserve Reserve
YEAR Reserves Ratio Reserves Ratio Reserves Ratio Reserves Ratio Ratio
1989 $ 74.1 1.3% $ 18.0 0.7% $ 24.6 0.5% $22.7 2.4% 0.7%
1990 77.1 1.2 14.5 0.5 13.8 0.2 17.4 1.6 1.0
1991 88.3 1.2 23.4 0.6 4.1 0.1 11.7 0.9 0.8
1992 162.6 2.1 41.8 1.0 100.1 1.0 12.6 0.9 1.5
1993 113.4 1.3 55.7 1.1 169.9 1.3 12.8 0.8 1.7
- -----------------
* The information set forth in the table above has been obtained from the Federal Fiscal Years 1991, 1992
and 1993 DOE Data Books. The cash reserves and the reserve ratio increased substantially between
Federal Fiscal Years 1991 and 1992. As described in the Federal Fiscal Year 1992 DOE Data Book, this
difference was caused, in part, because (i) approximately $300 million in reinsurance claims pending
during September 1991 (Federal Fiscal Year 1991) were not paid by the Department until October 1991
(Federal Fiscal Year 1992) due to the Department's computer systems modifications and (ii) default costs
were decreasing, while insurance premiums, administrative cost allowances, and investment income were
increasing. The cash reserves and the reserve ratio also increased substantially between Federal Fiscal
Years 1992 and 1993. As described in the Federal Fiscal Year 1993 DOE Data Book, this difference was
caused, in part, because default costs were decreasing, while insurance premiums, administrative costs
allowances, and investment income were increasing. According to the Department, available cash reserves
may not always be an accurate barometer of a guarantor's financial health.
** Dollars in millions.
</TABLE>
Recovery Rates. A Federal Guarantor's recovery rate, which provides a
measure of the effectiveness of the collection efforts against defaulting
borrowers after the guarantee claim has been satisfied, is determined by
dividing the amount recovered from borrowers by such Federal Guarantor by the
aggregate amount of default claims paid by such Federal Guarantor during the
applicable Federal Fiscal Year with respect to borrowers. The table below sets
forth the recovery rates for each Federal Guarantor and the national average
recovery rates for all guarantors with respect to Stafford Loans (the only type
of Student Loan for which the DOE Data Book discloses recovery rates) for the
five Federal Fiscal Years 1989 through 1993:*
<TABLE>
<CAPTION>
RECOVERY RATE
Federal
Fiscal National
Year CSAC FOSFA NJHEAA NYSHESC PHEAA TGSLC USAF VSEAA Average
- ------- ---- ----- ------ ------- ----- ---- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1989 26.8% 19.8% 43.6% 33.5% **% 13.5% 24.0% 33.2% 28.4%
1990 31.0 24.5 49.3 35.1 44.4 16.3 25.7 39.1 30.7
1991 30.7 29.3 51.1 36.5 44.4 17.7 26.0 38.9 31.9
1992 32.2 33.1 54.3 38.9 46.5 19.9 28.1 41.0 35.1
1993 33.3 39.0 56.0 44.1 49.5 27.6 30.7 43.6 38.1
- ----------------
* The information set forth in the table above has been obtained from the
Federal Fiscal Year 1990 DOE Data Book (with respect to Federal Fiscal
Years 1989 and 1990) and from the Department (with respect to Federal
Fiscal Years 1991, 1992 and 1993).
** Data not available.
</TABLE>
Loan Loss Reserve. The DOE Data Book does not disclose whether any
Federal Guarantor has established a segregated loan loss reserve with respect to
its student loan guarantee obligations. Accordingly, to the extent that a
Federal Guarantor has not established such a segregated loan loss reserve, in
the event that a Federal Guarantor receives less than full reimbursement of its
guarantee obligations from the Department, the Federal Guarantor would be forced
to look to its existing assets to satisfy any such guarantee obligations not so
reimbursed.
Claims Rate. For at least one of the five Federal Fiscal Years 1989
through 1993, CSAC, FOSFA, TGSLC and USAF experienced a claims rate in excess of
5%. For each Federal Fiscal Year that such Federal Guarantors' claims rate
exceeded 5%, the claims of such Federal Guarantors were not fully reimbursed by
the Department. No assurance can be made that any of the Federal Guarantors will
receive full reimbursement for reinsurance claims (or the full 98% maximum
reimbursement for loans first disbursed on or after October 1, 1993). The
following table sets forth the claims rate of each Federal Guarantor and the
national average for all guarantors of Federal Loans for the last five Federal
Fiscal Years 1989 through 1993:*
<TABLE>
<CAPTION>
Claims Rate
Federal
Fiscal National
Year CSAC FOSFA NJHEAA NYSHESC PHEAA TGSLC USAF VSEAA Average
- ------- ------ ----- ------ ------- ----- ------- ---- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1989 4.47% 2.60% 1.34% 3.47% **% 8.99% 8.37% 2.53% 4.78%
1990 5.31 5.02 1.25 4.15 2.0 11.13 4.98 2.09 5.06
1991 7.62 5.00 2.08 3.34 2.9 10.52 8.41 5.16 4.51
1992 5.93 4.93 2.01 3.71 2.8 8.85 5.00 6.28 4.15
1993 5.38 4.49 2.11 2.89 2.3 4.99 7.30 4.53 3.83
- ---------------
* The information set forth in the table above has been obtained from the Department.
** Data not available.
</TABLE>
Each Federal Guarantor has agreed that it will provide a copy of its
most recent financial statements to Noteholders, upon receipt of a written
request, directed: if to CSAC, to California Student Aid Commission, 1515 S
Street, Sacramento, CA 95814; if to FOSFA, to Florida Office of Student
Financial Assistance, 1344 Florida Education Center, Tallahassee, FL 32399; if
to NJHEAA, to New Jersey Higher Education Assistance Authority, 4 Quakerbridge
Plaza, Trenton, NJ 08625; if to NYSHESC, to New York State Higher Education
Services Corp., 99 Washington Avenue, Albany, NY 12256; if to PHEAA, to
Pennsylvania Higher Education Assistance Agency, 1200 N. 7th Street, Harrisburg,
PA 17102; if to TGSLC, to Texas Guaranteed Student Loan Corporation, Tower of
the Hills, 13809 N. Highway 183, Suite 400, Austin, TX 78730; if to USAF, to
United Student Aid Funds, P.O. Box 6180, Indianapolis, IN 46206; and if to
VSEAA, to Virginia State Education Assistance Authority, 411 E. Franklin Street,
Richmond VA 23219 or to Educational Credit Management Corporation, 101 East 5th
Street, Suite 2400, Saint Paul, Minnesota 55101.
<PAGE>
PROSPECTUS
ClassNotes Trust 1995-I
(F/K/A EDUCATION LOAN ALLIANCE 1995-I)
$800,000,000 ASSET BACKED NOTES
(ISSUABLE IN SERIES)
TRANS-WORLD INSURANCE COMPANY D/B/A
EDUCAID, A WHOLLY-OWNED SUBSIDIARY OF
THE MONEY STORE INC.
SELLER
THE MONEY STORE INC.
REPRESENTATIVE
This Prospectus relates to ClassNotes Trust 1995-I (formerly known as
Education Loan Alliance 1995-I) (the "Trust") Asset Backed Notes (the "Notes")
to be issued in an aggregate principal amount of up to $800,000,000 in one or
more series (each, a "Series") and one or more classes (each, a "Class") on
terms determined at the time of sale and described in the related prospectus
supplement (each, a "Prospectus Supplement"). In conjunction with the offering
of the Notes, the Trust will offer Auction Rate Asset Backed Certificates (the
"Certificates" and together with the Notes, the "Securities") in one or more
transactions exempt from the registration requirements of the Securities Act of
1933, as Amended (the "Securities Act"). The assets of the Trust will include
primarily a pool of student loans as more fully described herein purchased and
to be purchased by, or to be contributed to, Dauphin Deposit Bank and Trust
Company, as eligible lender trustee on behalf of the Trust (the "Eligible Lender
Trustee"), from Trans-World Insurance Company, doing business as Educaid (the
"Seller") (such loans, together with any Additional Student Loans (as defined
herein) purchased from the Seller from time to time by, or contributed by the
Seller from time to time to, the Eligible Lender Trustee on behalf of the Trust,
the "Financed Student Loans"), collections and other payments with respect to
the Financed Student Loans, monies on deposit in certain trust accounts to be
established, one or more surety bonds with respect to each Series of Notes
(each, a "Note Surety Bond") and, solely for the benefit of the
Certificateholders, one or more surety bonds with respect to the Certificates
(each, a "Certificate Surety Bond"). Each Series of Notes will be collateralized
by the assets of the Trust (other than the Certificate Surety Bonds and the Note
Surety Bonds relating to other Series of Notes). The interests of the
Certificateholders in the assets of the Trust will be subordinated to payments
of principal due on the Notes to the extent described herein. Funds on deposit
in the Pre- Funding Account will be used from time to time during each Funding
Period to make Additional Fundings with respect to the Financed Student Loans.
Certain of the Financed Student Loans will have been originated by the Seller
and the remainder of the Financed Student Loans will have been originated by
independent third parties and subsequently sold to the Seller.
The per annum rate of interest for a Class of Notes for each Interest
Period will, subject to certain limitations described herein or in the
applicable Prospectus Supplement, equal the rate determined from time to time
for such Class pursuant to (i) the auction procedures described herein (such
Notes being referred to herein as "Auction Rate Notes"), (ii) the London
interbank offered rate for one-month U.S. dollar deposits ("LIBOR") plus the
amount set forth in the related Prospectus Supplement (such Notes being referred
to herein as "LIBOR Rate Notes") or (iii) such other procedures as may be
described in the applicable Prospectus Supplement. Interest on each Class of
Notes will be payable either (i) quarterly on the first Business Day following
the expiration of the first Interest Period for such Class ending in January,
April, July and October, commencing on the date set forth in the related
Prospectus Supplement, (ii) monthly or weekly on the first Business Day
following the expiration of each related Interest Period, or (iii) on such other
dates and for such other periods as may be set forth in the related Prospectus
Supplement. However, if provided in a Prospectus Supplement, interest accrued on
a Class of Notes may, instead of being paid currently, be capitalized and added
to the outstanding principal amount thereof until the date or event specified in
such Prospectus Supplement (such Notes are referred to herein as "Accrual
Notes"). The date on which a Class of Notes is entitled to receive a
distribution (or, for Accrual Notes, have accrued interest added to principal)
is referred to as the "Note Distribution Date" for such Class. Additionally, for
certain Note Distribution Dates relating to the Class of outstanding Notes with
the earliest First Maturity Date, certain payments received on or with respect
to the Financed Student Loans will be applied to redeem some or all of such
Class of Notes, without penalty or premium. The unpaid principal of each Class
of Notes is payable upon the related Final Maturity Date. No principal payments
with respect to any Class of Notes will be made until each Class of Notes with
an earlier Final Maturity Date is paid in full.
The per annum rate of interest for the Certificates for each Interest
Period will, subject to certain limitations described herein, equal the rate
determined from time to time pursuant to (i) the auction procedures described
herein (such Certificates being referred to herein as the "Auction Rate
Certificates"), (ii) LIBOR plus an applicable margin or (iii) such other
procedures as may be set forth at the time of issuance of a Class of
Certificates. Principal and interest on the Class of Certificates with the
earliest Final Maturity Date will be payable on the first Business Day following
the expiration of each Interest Period for the Certificates of such Class (each,
a "Certificate Distribution Date"); provided, however, that no principal
payments with respect to the Certificates will be made until each Series of
Notes is paid in full.
After the respective initial Interest Period, each Interest Period for
each Class of Auction Rate Notes, will consist of between 7 to 91 days, subject
to adjustment as described herein or in the related Prospectus Supplement. Each
Interest Period for each Class of LIBOR Rate Notes will, unless otherwise set
forth in a Prospectus Supplement, consist of the period beginning on the 15th
day of each month and ending on the 14th day of the following month. Each
Interest Period for each Class of Notes for which the interest rate is
determined in some other manner will be as set forth in the related Prospectus
Supplement. Each Interest Period for a Class of Certificates will be determined
at the time of issuance of each such Class.
On each date on which a Series of Notes is issued, (each, a "Closing
Date"), except as otherwise set forth in the related Prospectus Supplement,
AMBAC Indemnity Corporation ("AMBAC") will issue a Note Surety Bond, and on each
Closing Date on which a Class of Certificates is issued AMBAC will issue a
Certificate Surety Bond, each such Surety Bond to be available under the terms
described herein and in the related Prospectus Supplement. Noteholders will have
no interest in or benefit from the Certificate Surety Bonds and
Certificateholders will have no interest in or benefit from the Note Surety
Bonds.
The Final Maturity Date for each Class of Notes will be the Note
Distribution Date identified in the related Prospectus Supplement but, in no
instance, later than the Final Maturity Date for the Certificates. On the Final
Maturity Date applicable to a Class of Notes or the Certificates, to the extent
funds are not available to reduce the principal balance of such Notes or
Certificates to zero (including amounts transferred from the Reserve Account as
described herein) the applicable Surety Bond will be drawn upon as described
herein. However, payment in full of the Notes and the Certificates could occur
earlier than such dates as described herein. In addition, the Notes and
Certificates will be repaid on any Note Distribution Date or Certificate
Distribution Date, as applicable, on which the Seller exercises its option to
purchase the Financed Student Loans, exercisable when the aggregate principal
balance of the Financed Student Loans is reduced to 10% or less of the Aggregate
Pool Balance.
By purchasing a Class of Auction Rate Notes or Certificates, whether in
an Auction or otherwise, each prospective purchaser will be deemed to have
agreed: (i) to participate in Auctions on the terms described herein and in the
related Prospectus Supplement; and (ii) so long as the beneficial ownership of
the Auction Rate Notes or Auction Rate Certificates is maintained in book-entry
form to sell, transfer or otherwise dispose of the Auction Rate Notes or Auction
Rate Certificates only pursuant to a Bid or a Sell Order in an Auction, or to or
through a Broker-Dealer (as defined herein), provided that in the case of all
transfers other than those pursuant to an Auction, the owner of the Auction Rate
Notes or Auction Rate Certificates so transferred, its Participant or
Broker-Dealer advises the Auction Agent of such transfer.
It is expected that certain of the Financed Student Loans will be
guaranteed by private, non-profit corporations or state agencies, and are and
will be reinsured by the United States Department of Education (the
"Department") subject to the limitations described herein or in the related
Prospectus Supplement (such Financed Student Loans, the "Federal Loans"). This
obligation of the Department is, subject to compliance with the Higher Education
Act of 1965, as amended, supported by the full faith and credit of the United
States. It is also expected that (i) certain of the Financed Student Loans,
while guaranteed, may not be reinsured by the Department (such Financed Student
Loans, the "Private Loans") and (ii) certain Financed Student Loans may be
insured, subject to the limitations described herein or in the related
Prospectus Supplement, by the Secretary of Health and Human Services (the
"Secretary") (such Financed Student Loans, the "HEAL Loans"). The obligation of
the Secretary to insure HEAL Loans is, subject to compliance with the Public
Health Service Act, supported by the full faith and credit of the United States.
SEE "RISK FACTORS" ON PAGE 30 HEREIN FOR A DESCRIPTION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE
SECURITIES. IN ADDITION, SEE "RISK FACTORS" FOR CERTAIN FACTORS THAT SHOULD BE
CONSIDERED IN EVALUATING THE FINANCED STUDENT LOANS AS TO THE LIKELIHOOD OF
REALIZED LOSSES.
THE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS OR THE RELATED PROSPECTUS SUPPLEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE SECURITIES DO NOT REPRESENT AN OBLIGATION OF OR AN INTEREST IN THE
ELIGIBLE LENDER TRUSTEE, THE INDENTURE TRUSTEE OR THE SELLER OR ANY OF THEIR
RESPECTIVE AFFILIATES, OTHER THAN THE TRUST, AND , EXCEPT FOR THE SURETY BONDS,
THE SECURITIES ARE NOT INSURED BY ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY OR
ANY OTHER PERSON OR ENTITY, INCLUDING THE SELLER, THE TRUST, THE ELIGIBLE LENDER
TRUSTEE, THE INDENTURE TRUSTEE OR ANY AFFILIATE OF ANY OF THE FOREGOING.
Offers of the Notes may be made through one or more different methods,
including offerings through underwriters, as more fully described under "Plan of
Distribution" herein and in the related Prospectus Supplement. The intention of
any underwriter to make a secondary market in the Notes will be set forth in the
related Prospectus Supplement. There can be no assurance that a secondary market
for the Notes will develop, or if it does develop, that it will continue. This
Prospectus may not be used to consummate sales of a Series of Notes unless
accompanied by a Prospectus Supplement.
----------------------------------
The date of this Prospectus is December 23, 1996.
<PAGE>
Until 90 days after the date of each Prospectus Supplement, all dealers
effecting transactions in the securities covered by such Prospectus Supplement,
whether or not participating in the distribution thereof, may be required to
deliver such Prospectus Supplement and this Prospectus. This is in addition to
the obligation of dealers to deliver a Prospectus and Prospectus Supplement when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
PROSPECTUS SUPPLEMENT
The Prospectus Supplement relating to a Series of Notes to be offered
hereunder, among other things, will set forth with respect to such Series of
Notes: (i) the aggregate principal amount, Class Interest Rate or Rates or other
applicable rate or rates (or the manner of determining such rate or rates) and
authorized denominations of each Class of such Series of Notes; (ii) the length
of each Interest Period and the frequency of Note Distribution Dates for each
Class of such Series of Notes; (iii) certain information concerning the Financed
Student Loans; (iv) the original principal amount and current principal amount
of each previously issued Class of Notes, along with the applicable Final
Maturity Date, and (v) additional information with respect to the plan of sale
of such Notes.
AVAILABLE INFORMATION
The Representative has filed a Registration Statement under the
Securities Act of 1933, as amended (the "1933 Act"), with the Securities an
Exchange Commission (the "Commission") with respect to the Securities. The
Registration Statement and amendments thereof and to the exhibits thereto, as
well as such reports and other information, are available for inspection without
charge at the public reference facilities maintained by the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549; 7 World Trade Center, 13th Floor,
New York, New York 10048; and Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of the Registration
Statement and amendments thereof and exhibits thereto may be obtained from the
Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington,
D.C. 20549, at prescribed rates. The Commission maintains a Web site that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission. The address
of such site is http://www.sec.gov.
No person has been authorized to give any information or to make any
representation other than those contained in this Prospectus and any Prospectus
Supplement with respect hereto and, if given or made, such information or
representations must not be relied upon. This Prospectus and any Prospectus
Supplement with respect hereto do not constitute an offer to sell or a
solicitation of an offer to buy any securities other than the Securities offered
hereby and thereby nor an offer of the Securities to any person in any state or
other jurisdiction in which such offer would be unlawful. The delivery of this
Prospectus at any time does not imply that information herein is correct as of
any time subsequent to its date.
REPORTS TO SECURITYHOLDERS
Periodic and annual reports concerning the Securities and the Trust
will be provided to the Securityholders. See "Description of the
Securities--Reports to Securityholders." Unless otherwise set forth in the
related Prospectus Supplement, each Series of Notes and each Class of
Certificates will be issued in book-entry form and registered in the name of
Cede & Co., the nominee of The Depository Trust Company. All reports will be
provided to Cede & Co., which in turn will provide such reports to its
Participants and Indirect Participants (as defined herein). Such Participants
and Indirect Participants will then forward such reports to the beneficial
owners of Securities. See "Description of the Securities--Book-Entry
Registration."
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed by or on behalf of the Trust referred to in the
accompanying Prospectus Supplement with the Commission pursuant to Section
13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), subsequent to the date of this Prospectus and prior to the
termination of the offering of the Notes issued by such Trust shall be deemed to
be incorporated by reference in this Prospectus and to be a part of this
Prospectus from the date of the filing of such documents. Any statement
contained herein or in a document incorporated or deemed to be incorporated by
reference herein shall be deemed to be modified or superseded for purposes of
this Prospectus to the extent that a statement contained herein (or in the
accompanying Prospectus Supplement) or in any other subsequently filed document
which also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute part of this
Prospectus. The Representative will provide without charge to each person to
whom a copy of the Prospectus is delivered, on the written or oral request of
any such person, a copy of any or all of the documents incorporated herein by
reference, except the exhibits to such documents (unless such exhibits are
specifically incorporated by reference in such documents). Requests for such
copies should be directed to The Money Store Inc., 3301 C Street, Suite 100-M,
Sacramento, California 95816, Attention: Investor Relations, Telephone: (916)
446-5000.
SUMMARY OF TERMS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus and in the related
Prospectus Supplement prepared in connection with the offering of a series of
Notes (each, a "Prospectus Supplement"). Certain capitalized terms used in this
Prospectus are defined elsewhere herein on the pages indicated in the "Index of
Principal Terms."
Issuer......................ClassNotes Trust 1995-I (formerly known as Education
Loan Alliance 1995-I) (the "Trust").
Securities Offered..........Asset Backed Notes (the "Notes") issuable in one or
more series (each, a "Series") and one or
more classes (each a "Class"). The Notes will
be available for purchase in denominations of
$50,000 and integral multiples in excess
thereof in book-entry form only. Noteholders
will not be entitled to receive a Definitive
Security except in the event that Definitive
Securities are issued in the limited
circumstances described herein. See
"Description of the Securities--Definitive
Securities."
Other
Securities................In conjunction with the offering of the Notes,
the Trust will offer one or more Classes of
Certificates (the "Certificates" and
together with the Notes, the "Securities") in
one or more transactions exempt from the
registration requirements of the Securities Act
of 1933, as amended (the "Securities Act").
Certain of the originators of the Financed
Student Loans may receive, as part of the
consideration for such Financed Student Loans,
certificates in the Trust representing the
right to receive certain payments of interest
(such certificates are referred to herein as
the "Originators' Interests").
Neither the Certificates nor the Originators'
Interests are being offered hereby and any
information relating thereto in this
Prospectus and any Prospectus Supplement
is provided solely because of its potential
relevance to a prospective purchase of the
Notes.
Seller......................Trans-World Insurance Company, an Arizona
corporation doing business as Educaid (the
"Seller"). The Seller is a wholly-owned
subsidiary of The Money Store Inc., a New
Jersey corporation ("The Money Store"
or the "Representative"). The Money Store is
a financial services company headquartered
in Sacramento, California and Union, New
Jersey.
Master Servicer
and Servicer..............The Seller will act as Master Servicer with respect
to the Financed Student Loans (in such
capacity, the "Master Servicer") and
generally will service the Financed Student
Loans originated by the Seller during the
Deferral Phase. It is expected that
Pennsylvania Higher Education Assistance
Agency, an agency of the Commonwealth of
Pennsylvania ("PHEAA"), primarily
will service the Financed Student Loans
originated by the Seller during the Repayment
Phase. Certain of the Financed Student Loans
originated by the Seller also may be serviced
during the Repayment Phase by AFSA Data
Corporation ("AFSA") or such other parties as
may be approved by the Surety Provider. With
respect to those Financed Student Loans
originated by third parties and subsequently
purchased by the Seller (the "Purchased
Loans"), either the originators of the
Purchased Loans, the Seller or another party
will service such Purchased Loans during both
the Deferral Phase and the Repayment Phase.
The Seller, PHEAA, AFSA and each other
party who may, from time to time, be servicing
the Financed Student Loans are referred to
herein as a "Servicer" and collectively as the
"Servicers."
Eligible Lender Trustee.....Dauphin Deposit Bank and Trust Company, a
Pennsylvania bank and trust company, will act as
eligible lender trustee under the Trust
Agreement and holder of legal title to the
Financed Student Loans on behalf of the
Trust (the "Eligible Lender Trustee"). See
"Formation of the Trust--Eligible Lender
Trustee."
Indenture Trustee...........Bankers Trust Company, a New York banking
corporation (the "Indenture Trustee"), or such
other entity as may be named in the Prospectus
Supplement, will act as trustee under the
Indenture.
Auction Agent...............Bankers Trust Company, or such other entity as may
be named in the Prospectus Supplement, will act
as auction agent (in such capacity, the
"Auction Agent") under the Auction Agent
Agreement with respect to each Class of Auction
Rate Notes and the Certificates.
Administrator...............Trans-World Insurance Company, d/b/a Educaid, will
act as administrator (the "Administrator") on
behalf of the Trust pursuant to an
Administration Agreement (as amended and
supplemented from time to time, the
"Administration Agreement"), between the
Administrator, the Eligible Lender Trustee and
the Indenture Trustee.
Surety
Provider....................AMBAC Indemnity Corporation, a Wisconsin-domiciled
stock insurance company ("AMBAC"), will act as
provider of each Certificate Surety Bond and
each Note Surety Bond (the "Surety Provider"),
unless provided otherwise in a Prospectus
Supplement.
The Trust..................The Trust is a business trust established under the
laws of the Commonwealth of Pennsylvania by a
Trust Agreement (as amended and supplemented
from time to time, the "Trust Agreement"),
between the Seller, as depositor, and the
Eligible Lender Trustee. The activities of the
Trust and the Eligible Lender Trustee are
limited by the terms of the Trust Agreement
to acquiring, owning, selling and managing
the Financed Student Loans and the other
assets of the Trust as described herein,
issuing the Securities and the Originators'
Interests, collecting and making payments
thereon and other activities related thereto.
The Trust will be treated as a partnership for
Federal income tax purposes. TMS Student
Holdings, Inc., a wholly-owned subsidiary of
The Money Store, which will hold 1% of the
Certificates and each of the Originators'
Interests, will serve as general partner
("Student Holdings").
Assets of the Trust.........The assets of the Trust will include the following:
A. Financed Student
Loans................The "Financed Student Loans" will consist of loans
to students enrolled in accredited institutions
of higher education and will include rights to
receive payments made with respect to such
Financed Student Loans and the proceeds
thereof. On the Initial Closing Date and on each
additional Closing Date, the Seller will sell or
contribute Financed Student Loans to the
Eligible Lender Trustee on behalf of the Trust
pursuant to a Sale and Servicing Agreement
(as amended and supplemented from time to time,
the "Sale and Servicing Agreement"), among the
Seller, the Master Servicer, the Administrator,
The Money Store Inc. and the Eligible Lender
Trustee.
Certain of the Financed Student Loans will have been
originated by the Seller and the remainder of
the Financed Student Loans will have been
originated by independent third parties and
subsequently sold to the Seller. The Financed
Student Loans constituting the assets of the
Trust will vary from time to time and may
include some or all of the following: (A) (i)
Supplemental Loans for Students ("SLS Loans"),
(ii) Parental Loans for Undergraduate Students
("PLUS Loans"), (iii) Stafford Loans (formerly
known as Guaranteed Student Loans), (iv)
Unsubsidized Stafford Loans and (v)
Consolidation Loans, all of which loans
(collectively, the "Federal Loans") are
part of the federal government's Federal
Family Education Loan Program (the "Federal
Program") (B) health education assistance
loans ("HEAL Loans") for graduate students,
which loans are part of the program established
under the Public Health Service Act, as most
recently amended by the Health Professions
Education Extension Amendments of 1992
(collectively, the "Public Health Service Act"),
and (C) student loans (the "Private Loans")
originated under programs established by banks,
insurance companies, private non-profit
corporations and other non-governmental
entities.
It is expected that the Private Loans primarily will
be originated under one or more of the
following programs: (A) the Option 4 Loan
Program (the "Option 4 Program") established
by United Student Aid Funds, Inc., a private
non-profit corporation located in Indianapolis,
Indiana, (B) the TERI Alternative Loansm
program for undergraduate and graduate study
(the "TERI Alternative Program") and the
Professional Education Plan program for
graduate and professional study (the "PEP
Program") established by The Education Resources
Institute, a Massachusetts non-profit
corporation, and (C) the Private Access
Loan Program (the "PAL Program") established
by HEMAR Insurance Company of America
("HICA"). The Private Loans may, to a lesser
extent, be originated under other programs
that will be identified in the
related Prospectus Supplement. The various
programs under which the Private Loans may be
originated are referred to herein collectively
as the "Private Loan Programs." The
Financed Student Loans will be selected from
the student loans originated and
purchased by the Seller based on the
criteria specified in the Sale and Servicing
Agreement and described herein.
The payment of principal and interest on all SLS
Loans, PLUS Loans, Stafford Loans,
Unsubsidized Stafford Loans and Consolidation
Loans is guaranteed by private, non-profit
corporations or state agencies and is reinsured
by the United States Department of Education
(the "Department"). The payment of principal
and interest on all HEAL Loans is insured
by the Secretary of Health and Human
Services (the "Secretary"). The payment of
principal and interest on all Private Loans is
guaranteed by non-governmental agencies and is
not reinsured by the Department, the
Secretary or any other governmental agency.
Each entity guaranteeing payment of principal
and interest on a Financed Student Loan is
referred to herein as a "Guarantor." Each
Prospectus Supplement will identify each
Guarantor of more than 2% of the Financed
Student Loans then included in the Trust,
or expected to be included as of the related
Closing Date.
With respect to Federal Loans originated prior
to October 1, 1993, the entire principal
amount of such loans and accrued interest
are fully guaranteed; with respect to
Federal Loans originated on or after October 1,
1993, only 98% of the principal amount of such
loans and accrued interest are guaranteed. Such
Guarantors are, in turn, reinsured by the
Department. The federal guarantee of Federal
Loans is contingent upon compliance with a
variety of due diligence regulations, as further
described herein. With respect to HEAL Loans,
insurance by the Secretary is contingent upon
compliance with relevant provisions of the
Public Health Service Act as further described
herein.
With respect to substantially all of the Federal
Loans and the HEAL Loans, during the period in
which the related borrower is in school and for
certain authorized periods as described in the
Higher Education Act or the Public Health
Service Act, respectively (the "Deferral
Phase"), the borrower is not required to make
payments on his or her Financed Student Loan.
With respect to Federal Loans constituting
Stafford Loans, the Department will make all
interest payments during the related Deferral
Phase. For all other Federal Loans (other
than certain PLUS Loans) and HEAL Loans,
interest will not be paid during the related
Deferral Phase but, instead, will be capitalized
and added to the principal balance of such
Financed Student Loan. With respect to the
Private Loans, monthly payments of principal
and interest generally will be required to be
made shortly after the loan is disbursed.
However, certain of the Private Loans may
contain provisions permitting the obligor
to pay only interest while in school (and
during certain other periods) and defer
commencement of principal payments until after
graduation or withdrawal from school. It is
expected that the Trust will consist of Financed
Student Loans that are in the Deferral Phase
as well as Financed Student Loans for which the
related borrower is required to make payments of
principal and interest (the "Repayment Phase").
The proportions of such Financed Student Loans
will vary through the life of the Trust.
The "Pool Balance" at any time represents the
aggregate principal balance of theFinanced
Student Loans at the end of the preceding
Collection Period (including accrued interest
thereon for such Collection Period to
the extent such interest will be capitalized),
after giving effect to the following, without
duplication: (i) all payments in respect of
principal received by the Trust during such
Collection Period from or on behalf of
borrowers and Guarantors and, with respect to
certain payments on certain Financed Student
Loans, the Department or the Secretary
(collectively, "Obligors"), (ii) the principal
portion of all Purchase Amounts received by the
Trust for such Collection Period from the
Seller, The Money Store or the Master Servicer,
and (iii) the principal portion of all
Additional Fundings made from the
Pre-Funding Account with respect to such
Collection Period.
"Collection Period" means, initially, the period
beginning March 17, 1995 and ending on March 31,
1995 and thereafter, the Collection Period means
the calendar month immediately following the end
of the previous Collection Period.
B. Pre-Funding Account...An account will be maintained in the name of the
Indenture Trustee (the "Pre-Funding Account")
into which will be deposited out of the net
proceeds of the sale of each Series of Notes the
amount set forth in the related Prospectus
Supplement. Subject to the following sentence,
such amount (the "Pre- Funded Amount") will
remain in the Pre-Funding Account during the
period (the "Funding Period") from the related
Closing Date until the first to occur of (i) the
Note Distribution Date on which the amount on
deposit in the Pre-Funding Account is less than
$200,000, (ii) an Event of Default occurring
under the Indenture, a Servicer Default
occurring under the Sale and Servicing Agreement
or an Administrator Default occurring under the
Sale and Servicing Agreement or the
Administration Agreement, (iii) certain events
of insolvency occurring with respect to the
Seller or (iv) the date set forth in related
Prospectus Supplement. The Pre-Funded Amount
will be reduced from time to time by the amount
thereof used in connection with the Trust
obtaining additional Financed Student Loans
during the related Funding Period in accordance
with the Sale and Servicing Agreement (each, an
"Additional Funding"). The Seller expects that
the amount of the Additional Fundings will
approximate 100% of each Pre-Funded Amount by
the last day of the Collection Period preceding
the Note Distribution Date identified in the
related Prospectus Supplement. Any Pre-Funded
Amount remaining at the end of a Funding Period
will be distributed to holders of the Class of
Notes with the earliest Final Maturity Date as a
payment of principal (and, if such Class has
been paid in full, to the holders of the Class
of Notes with the next earliest Final Maturity
Date). See "Description of the Transfer and
Servicing Agreements--Additional Fundings."
C. Capitalized Interest
Account..........On each Closing Date, to the extent set forth
in the related Prospectus Supplement, the Seller
will make a cash deposit in an account (the
"Capitalized Interest Account") in the name of
the Indenture Trustee on behalf of the Trust.
The amount deposited therein will be used by the
Indenture Trustee on each Note Distribution Date
and Certificate Distribution Date to make
interest payments to Noteholders and
Certificateholders to the extent funds on
deposit in the Note Distribution Account and
Certificate Distribution Account, respectively,
are insufficient for such purpose. Any amounts
remaining in the Capitalized Interest Account
after the period set forth in the applicable
Terms Supplement will be transferred to the
Reserve Account or, with the consent of the
Surety Provider, applied as an Additional
Principal Payment as described below under
"--Collection Account; Note Distribution
Account; Certificate Distribution Account; and
Expense Account."
D. Capitalized Pre-Funding
Account.............On each Closing Date, to the extent set forth
in the related Prospectus Supplement, the Seller
will make a cash deposit in an account (the
"Capitalized Pre-Funding Account") in the name
of the Indenture Trustee on behalf of the Trust.
On each Note Distribution Date during the
applicable Funding Period, the Indenture Trustee
generally will transfer from the Capitalized
Pre-Funding Account to the Note Distribution
Account an amount equal to the applicable Class
of Notes pro rata portion (based upon
outstanding principal amount) of certain amounts
on deposit in the Pre-Funding Account as of the
first day of the prior Collection Period, such
amount being referred to herein as the
"Capitalized Pre-Funding Requirement." Any
amounts remaining in the Capitalized Pre-
Funding Account on the last Note Distribution
Date of a Funding Period and not used for such
purposes are required to be returned directly to
the Seller.
E. Collection Account;
Note Distribution
Account; Certificate
Distribution Account;
and Expense Account...The Master Servicer will be required to
remit all collections received with respect to
the Financed Student Loans for which it is
acting as primary servicer (i) within one
Business Day after it has received an aggregate
of $30,000 during any month and (ii) on the last
Business Day of each month, all other
collections received during such month to an
account in the name of the Indenture Trustee
(the "Collection Account"). The Master Servicer
shall cause each other Servicer to remit to the
Collection Account, within one Business Day of
receipt thereof, all collections received with
respect to the Financed Student Loans for which
it is acting as primary servicer. A "Business
Day" is any day other than a Saturday, a Sunday,
or a day on which banking institutions or trust
companies in California, New York, New Jersey or
Pennsylvania are authorized or obligated by law
to be closed. The Eligible Lender Trustee will
be required to remit Interest Subsidy Payments,
Special Allowance Payments and insurance
payments from the Secretary it receives within
two Business Days of receipt thereof to the
Collection Account. See "Description of the
Transfer and Servicing Agreements-- Payments on
Financed Student Loans."
Four Business Days prior to each Note
Distribution Date or Certificate Distribution
Date, as applicable (each, a "Determination
Date"), the Administrator will advise the
Indenture Trustee in writing of the applicable
Noteholders' Interest Distribution Amount or
Certificateholders' Interest Distribution
Amount. Additionally, no later than 16 days
prior to each Note Distribution Date for the
Class of Notes then entitled to receive payments
of principal (or, after all Notes have been paid
in full, no later than 16 days prior to each
Certificate Distribution Date) the Administrator
will advise the Indenture Trustee in writing of
the applicable Noteholders' Principal
Distribution Amount (or, after all the Notes
have been paid in full, the Certificateholders'
Principal Distribution Amount). Further, on the
Determination Date relating to the first
Certificate Distribution Date occurring each
month (or for each month in which a Note
Distribution Date occurs earlier than the
Certificate Distribution Date, on the
Determination Date relating to such earlier Note
Distribution Date), the Administrator will
advise the Indenture Trustee in writing of the
fees due to the Master Servicer, the
Administrator, the Auction Agent, the Indenture
Trustee, the Eligible Lender Trustee and the
Surety Provider (the "Servicing Fee,"
"Administration Fee," "Auction Agent Fee,"
"Indenture Trustee Fee," "Eligible Lender
Trustee Fee" and "Surety Provider Fee,"
respectively, and, collectively, the
"Transaction Fees") for the preceding month.
On each Note Distribution Date (other than those
relating to Accrual Notes during the period such
Notes are capitalizing interest (the "Accrual
Period")), the Indenture Trustee will transfer
from the Collection Account to a separate
account held with and in the name of the
Indenture Trustee for the benefit of the
Noteholders (the "Note Distribution Account"),
from payments received on or with respect to the
Financed Student Loans during the three
Collection Periods immediately preceding the
month of such Note Distribution Date (or, with
respect to a Class of Notes having Note
Distribution Dates occurring weekly, monthly or
such other period as may be set forth in the
related Prospectus Supplement, from payments
received on or with respect to such Financed
Student Loans during the Collection Period
immediately preceding the month of the related
Note Distribution Date or for such number of
Collection Periods as may be set forth in the
related Prospectus Supplement), an amount up to
the related Noteholders' Interest Distribution
Amount. For each Note Distribution Date relating
to a Class of Accrual Notes during the related
Accrual Period, the related Noteholders'
Interest Distribution Amount will be capitalized
and added to the principal amount of such Notes.
For the Class of Notes with the earliest Final
Maturity Date, on the first Note Distribution
Date for such Class occurring in January, April,
July and October (or, if a Class of Notes having
Distribution Dates occurring monthly or such
other period as may be set forth in the related
Prospectus Supplement has the earliest Final
Maturity Date, on each related Note Distribution
Date or such other Note Distribution Dates as
may be set forth in the related Prospectus
Supplement), after making the transfer set forth
above, the Indenture Trustee will transfer from
the Collection Account to the Note Distribution
Account from payments received on or with
respect to the Financed Student Loans during the
three Collection Periods immediately preceding
the month prior to the month of such Note
Distribution Date (or, with respect to a Class
of Notes having Distribution Dates occurring
weekly, monthly or such other period as may be
set forth in the related Prospectus Supplement,
from the Collection Period in the month second
preceding the month of the related Note
Distribution Date or for such Collection Periods
as may be set forth in the related Prospectus
Supplement), together with any Additional
Principal Payments to be made at the election of
the Master Servicer as described below, an
amount up to the Noteholders' Principal
Distribution Amount; provided, however, that for
each month in which the first Note Distribution
Date occurs prior to the Certificate
Distribution Date in such month, prior to
transferring amounts to the Note Distribution
Account, the Indenture Trustee will transfer to
a separate account held with and in the name of
the Indenture Trustee (the "Expense Account"),
from payments received on or with respect to the
Financed Student Loans during the immediately
preceding Collection Period, an amount up to the
Transaction Fees for the month preceding such
Note Distribution Date and all overdue
Transaction Fees from prior months.
On each Certificate Distribution Date, the
Indenture Trustee will transfer from the
Collection Account, from payments received on or
with respect to the Financed Student Loans
during the immediately preceding Collection
Period, (i) to the Expense Account, an amount up
to the excess, if any, of the Transaction Fees
for the month preceding such Certificate
Distribution Date and all overdue Transaction
Fees from prior months over the amount, if any,
previously transferred to the Expense Account
during the month of such Certificate
Distribution Date and (ii) by wire transfer no
later than 11:00 a.m., New York time, to a
separate account held with and in the name of
the Eligible Lender Trustee for the benefit of
the Certificateholders (the "Certificate
Distribution Account" and, together with the
Note Distribution Account, the "Distribution
Accounts"), an amount up to the related
Certificateholders' Interest Distribution
Amount. Additionally, after each Class of Notes
has been paid in full, on each Certificate
Distribution Date relating to the Class of
Certificates with the earliest Final Maturity
Date, the Indenture Trustee will transfer from
the Collection Account to the Eligible Lender
Trustee, by wire transfer no later than 11:00
a.m., New York time, for deposit in the
Certificate Distribution Account, from payments
received on or with respect to the Financed
Student Loans during the Collection Period
immediately preceding the month prior to such
Certificate Distribution Date, an amount up to
the applicable Certificateholders' Principal
Distribution Amount.
On the first Note Distribution Date occurring in
March, June, September and December, or in the
case of clause (iii) below, on the first Note
Distribution Date occurring in each month (or if
in any such month a Certificate Distribution
Date occurs prior to such first Note
Distribution Date, on such Certificate
Distribution Date), the Indenture Trustee will
distribute from the Expense Account (in addition
to any amounts transferred from the Reserve
Account as described herein) the following
amounts in the following order of priority: (i)
to the Master Servicer, the Servicing Fee and
all overdue Servicing Fees, (ii) to the
Administrator, the Administration Fee and all
overdue Administration Fees, (iii) to the
Auction Agent, the Auction Agent Fee and all
overdue Auction Agent Fees, (iv) to the
Indenture Trustee, the Indenture Trustee Fee and
all overdue Indenture Trustee Fees, (v) to the
Eligible Lender Trustee, the Eligible Lender
Trustee Fee and all overdue Eligible Lender
Trustee Fees and (vi) to the Surety Provider,
the Surety Provider Fee and all overdue Surety
Provider Fees.
On each Note Distribution Date, the Indenture
Trustee will distribute to the Noteholders of
the applicable Class as of the related Note
Record Date all amounts transferred to the Note
Distribution Account as set forth above (in
addition to any amounts transferred from the
Capitalized Interest Account, the Pre-Funding
Account, the Capitalized Pre-Funding Account,
the Reserve Account and the Monthly Advance
Account and amounts drawn under the applicable
Note Surety Bond, each as described herein). On
each Certificate Distribution Date, the Eligible
Lender Trustee will distribute to the
Certificateholders of the applicable Class as of
the related Certificate Record Date all amounts
transferred to the Certificate Distribution
Account as set forth above (in addition to any
amounts transferred from the Capitalized
Interest Account, the Reserve Account and the
Monthly Advance Account, and amounts drawn under
the Certificate Surety Bond, each as described
herein).
Notwithstanding the foregoing, unless otherwise
set forth in a Prospectus Supplement, principal
payments will be made to each Class of Notes and
the Certificates only in amounts equal to
$50,000 and integral multiples in excess
thereof. If the amount in the Note Distribution
Account or the Certificate Distribution Account
otherwise required to be applied as a payment of
principal either (i) is less than $50,000 or
(ii) exceeds an even multiple of $50,000, then,
in the case of (i), such entire amount or, in
the case of (ii), such excess amount, will not
be paid as principal on the upcoming Note
Distribution Date or Certificate Distribution
Date, as the case may be, but will be retained
in the Note Distribution Account or the
Certificate Distribution Account, as the case
may be, until the amount therein available for
payment of principal (including any amounts
transferred from the Reserve Account) equals
$50,000.
On the last Note Distribution Date occurring in
January, April, July and October (or if in any
such month a Certificate Distribution Date
occurs after such last Note Distribution Date,
on such Certificate Distribution Date), after
making all required transfers to the Note
Distribution Account and, if applicable, the
Certificate Distribution Account and the Expense
Account, the Indenture Trustee will transfer any
amounts remaining in the Collection Account
(other than amounts representing payments
received during such month or payments of or
with respect to principal received in the
immediately preceding month) in the following
order of priority: (i) to the Surety Provider,
the amount, if any, necessary to reimburse the
Surety Provider for prior Note and Certificate
Surety Bond Payments (which will generally be
equal to the aggregate amount of draws under the
Note Surety Bonds and Certificate Surety Bond on
prior Note or Certificate Distribution Dates, as
applicable), together with interest thereon,
(ii) to the Reserve Account, the amount, if any,
necessary to increase the balance thereof to the
Specified Reserve Account Balance, (iii) to the
Master Servicer, the aggregate unpaid amount of
the Servicing Fee Carryover, if any, (iv) to the
Note Distribution Account, the aggregate unpaid
amount of Noteholders' Interest Carryover, if
any, and (v) to the Certificate Distribution
Account, the aggregate unpaid amount of
Certificateholders' Interest Carryover, if any.
Any amounts remaining in the Collection Account
after such transfers (other than amounts
representing payments received during such
current month or payments of or with respect to
principal received in the immediately preceding
month) will be transferred to the Reserve
Account generally for distribution to holders of
the Originators' Interests and then to Student
Holdings. Amounts transferred to the Note
Distribution Account or the Certificate
Distribution Account pursuant to clauses (iv)
and (v) above, respectively, will be paid to the
applicable Class of Notes or Certificates on the
next Note Distribution Date or Certificate
Distribution Date relating to such Class of
Notes or Certificates. Notwithstanding the
foregoing, with the consent of the Surety
Provider, amounts otherwise required to be
deposited into the Reserve Account pursuant to
clause (ii) above may, instead, be applied as a
payment of principal on the next applicable Note
Distribution Date relating to the Class of Notes
with the earliest Final Maturity Date (or, after
all the Notes have been paid in full, on the
next Certificate Distribution Date). Amounts so
applied as principal payments are referred to
herein as "Additional Principal Payments."
Notwithstanding the foregoing, if there has been
an Event of Default with respect to payment of
the Notes, the Certificateholders will not be
entitled to any payments of principal or
interest until each outstanding Class of Notes
has been paid in full.
F. Reserve Account........Pursuant to the Sale and Servicing Agreement, an
account in the name of the Indenture Trustee
(the "Reserve Account") will be established with
and maintained by the Indenture Trustee and will
be an asset of the Trust. In connection with the
sale of each Series of Notes, the Seller may be
required to make a deposit into the Reserve
Account on the related Closing Date of cash or
Eligible Investments equal to the amount set
forth in the related Prospectus Supplement (the
"Reserve Account Deposit"). The Reserve Account
Deposit will be augmented on the last Note
Distribution Date occurring in January, April,
July and October (or, if in any such month a
Certificate Distribution Date occurs after such
last Note Distribution Date, on such Certificate
Distribution Date) by the deposit into the
Reserve Account of any Available Funds remaining
after making all prior distributions on such
date; provided, however, that with the consent
of the Surety Provider, such Available Funds may
be applied as Additional Principal Payments. See
"Description of the Transfer and Servicing
Agreements-- Distributions".
Amounts, if any, on deposit in the Reserve
Account will be available on each Note or
Certificate Distribution Date to cover any
shortfalls in payments of the Transaction Fees,
the Noteholders' Distribution Amount and the
Certificateholders' Distribution Amount for such
applicable Note or Certificate Distribution Date
for which Available Funds are insufficient to
make such payments and distributions. Amounts,
if any, on deposit in the Reserve Account (other
than amounts in excess of the Specified Reserve
Account Balance) will not be available to cover
any unpaid Servicing Fee Carryover, Noteholders'
Interest Carryover or Certificateholders'
Interest Carryover.
Amounts, if any, in the Reserve Account on any
Note or Certificate Distribution Date (after
giving effect to all distributions to be made or
allocated on such Note or Certificate
Distribution Date) in excess of the then
applicable Specified Reserve Account Balance
generally will be distributed to the holders of
the Originators' Interests and then released to
Student Holdings. The "Specified Reserve Account
Balance" with respect to any Note or Certificate
Distribution Date will be as set forth in the
applicable Terms Supplement and in no event will
such balance exceed the sum of the aggregate
outstanding principal amount of the Notes and
the Certificate Balance. See "Description of the
Transfer and Servicing Agreements-- Credit
Enhancement--Reserve Account".
The funding and maintenance of the Reserve
Account is intended to enhance the likelihood of
timely payment to the Noteholders of the
Noteholders' Distribution Amount and to the
Certificateholders of the Certificateholders'
Distribution Amount. In certain circumstances,
however, the Reserve Account could be depleted
and shortfalls in distributions to the
Noteholders or the Certificateholders could
result. Further, as described above, amounts
otherwise required to be deposited into the
Reserve Account may, with the consent of the
Surety Provider, be applied, as Additional
Principal Payments. Notwithstanding the
depletion of the Reserve Account and shortfalls
in Available Funds, the Surety Provider will be
obligated to make Note Surety Bond payments on
each Note Distribution Date to cover any
shortfalls with respect to the Noteholders'
Interest Distribution Amount (but will have no
obligation with respect to any Noteholders
Interest Carryover) and, solely for the benefit
of Certificateholders, to make Certificate
Surety Bond Payments on each Certificate
Distribution Date to cover any shortfalls with
respect to the Certificateholders' Interest
Distribution Amount (but will have no obligation
with respect to any Certificateholders' Interest
Carryover) after application of such Available
Funds and any amounts on deposit in the Reserve
Account. See "Description of the Surety
Bonds--Certificate Surety Bond."
G. Surety Bonds..........It is expected that one or more surety bonds, which
will be noncancelable, will be obtained in
connection with each Series of Notes (each, a
"Note Surety Bond") in favor of the Eligible
Lender Trustee on behalf of the Trust, will be
pledged to the Indenture Trustee and will
provide for coverage of timely payment of all
interest and ultimate payment of all principal
on each Class of Notes of such Series. The
holders of a Series of Notes will have no right
to or claim on any Note Surety Bond relating to
a different Series of Notes or any amounts paid
or payable thereunder. The Certificateholders
will have no right to or claim on any Note
Surety Bond or any amounts payable or paid
thereunder. "Note Surety Bond Payment" means,
with respect to any Class of Notes (A) on each
Note Distribution Date the amount equal to the
excess, if any, of the Noteholders' Interest
Distribution Amount for the applicable Class of
Notes over the amount on deposit in the Note
Distribution Account, after taking into account
the required application of funds in the
remaining Trust Accounts (but excluding any
amounts on deposit in the Monthly Advance
Account if an automatic stay has been imposed
with respect to the Representative under Section
362(a) of the United States Bankruptcy Code of
1978 as amended, 11 U.S.C. ss.ss. 101 ET seq.),
including but not limited to the Reserve
Account, pursuant to the Sale and Servicing
Agreement, to the payment of the Noteholders'
Interest Distribution Amount on such Note
Distribution Date (an "Interest Deficiency") and
(B) the amount equal to the excess, if any, of
the unpaid principal balance of Notes of a Class
on the Final Maturity Date for such Class over
amounts on deposit in the Note Distribution
Account, after taking into account the required
application of funds in the remaining Trust
Accounts, including but not limited to the
Reserve Account, pursuant to the Sale and
Servicing Agreement, to the payment of principal
of such Class of Notes on such Final Maturity
Date (a "Principal Deficiency"); provided,
however, that "Note Surety Bond Payments" shall
not include any Noteholders' Interest Carryover
or any portion of any Interest Deficiency or
Principal Deficiency arising as a result of (i)
any tax liability, including any tax liability
imposed on or assessed with respect to the
Trust, the Trust assets, any Noteholder, or any
Certificateholder, or (ii) any tax withholding
requirement including any such requirement
applicable to Trust income or Trust
distributions. See "Description of the Surety
Bonds."
In connection with the sale of each Class of
Certificates, a separate surety bond (each, a
"Certificate Surety Bond" and, together with the
Note Surety Bonds, the "Surety Bonds"), which
will be noncancelable, will be obtained in favor
of the Eligible Lender Trustee solely on behalf
of the Certificateholders of such Class and will
provide for coverage of timely payment of all
interest and ultimate payment of all principal,
due on such Certificates. The Noteholders will
have no right to or claim on any Certificate
Surety Bond or any amounts payable or paid
thereunder. "Certificate Surety Bond Payment"
means with respect to any Class of Certificates,
(A) on each Certificate Distribution Date the
amount equal to the excess, if any, of the
Certificateholders' Interest Distribution Amount
for the applicable Class of Certificates over
the amount on deposit in the Certificate
Distribution Account, after taking into account
the required application of funds in the
remaining Trust Accounts (but excluding any
amounts on deposit in the Monthly Advance
Account if an automatic stay has been imposed
with respect to the Representative under Section
362(a) of the United States Bankruptcy Code of
1978, as amended, 11 U.S.C. ss.ss. 101 ET SEQ.),
including but not limited to the Reserve
Account, pursuant to the Sale and Servicing
Agreement, to the payment of the
Certificateholders' Interest Distribution Amount
on such Certificate Distribution Date (an
"Interest Deficiency") and (B) the amount equal
to the excess, if any, of the unpaid principal
balance of the Certificates of such Class on the
Certificate Final Maturity Date for such Class
over amounts on deposit in the Certificate
Distribution Account, after taking into account
the required application of funds in the
remaining Trust Accounts, including but not
limited to the Reserve Account, pursuant to the
Sale and Servicing Agreement, to the payment of
principal of such Class of Certificates on such
Certificate Final Maturity Date (a "Principal
Deficiency"); provided, however that
"Certificate Surety Bond Payment" shall not
include any Certificateholders' Interest
Carryover or any portion of any Interest
Deficiency or Principal Deficiency arising as a
result of (i) any tax liability, including any
tax liability imposed on or assessed with
respect to the Trust, the Trust assets, any
Noteholder, or any Certificateholder, or (ii)
any tax withholding requirement, including any
such requirement applicable to Trust income or
Trust distributions. See "Description of the
Transfer and Servicing Agreements--
Distributions." See also "Description of the
Surety Bonds- -Surety Provider" for a brief
description of the Surety Provider.
H. Transfer and Servicing
Agreements............Under the Sale and Servicing Agreement, the Seller
will sell or contribute from time to time
Financed Student Loans to the Trust, with the
Eligible Lender Trustee holding legal title
thereto. In addition, the Master Servicer will
agree with the Trust to be responsible for
servicing, managing, maintaining custody of and
making collections on the Financed Student
Loans. The obligations of the Seller and the
Master Servicer under the Sale and Servicing
Agreement include the following:
The Seller and the Master Servicer will be
obligated to purchase (which obligations also
will be obligations of The Money Store), any
Financed Student Loan if the interests of the
Noteholders, the Certificateholders or the
Surety Provider therein are materially adversely
affected by a breach of any representation,
warranty or covenant (including the Master
Servicer's covenant to service all the Financed
Student Loans in accordance with applicable
laws, restrictions and guidelines) made by the
Seller or the Master Servicer, as the case may
be, with respect to the Financed Student Loan,
if the breach has not been cured following the
discovery by or notice to the Seller or the
Master Servicer, as the case may be, of the
breach (it being understood that any such breach
that does not affect any Guarantor's or the
Secretary's obligation to guarantee payment of
such Financed Student Loan will not be
considered to have a material adverse effect for
this purpose). If the Seller is obligated to
purchase a Financed Student Loan as a result of
the Seller's or a third party's failure to
originate such Financed Student Loan in
accordance with the Higher Education Act, the
Public Health Service Act or a Private Loan
Program, as the case may be, and the applicable
Guarantee Agreement, it will reimburse the Trust
for the remaining principal balance of such
Financed Student Loan (plus certain unamortized
premiums) and any accrued but unpaid interest
thereon (including interest to be capitalized).
If the Master Servicer is obligated to purchase
a Financed Student Loan as a result of a failure
to service such Financed Student Loan in
accordance with the Higher Education Act, the
Public Health Service Act or a Private Loan
Program, as the case may be, and the applicable
Guarantee Agreement, it will reimburse the Trust
only up to the amount the related Guarantor or
the Secretary would be obligated to pay if not
for such breach. In addition, with respect to
Federal Loans, the Seller or the Master
Servicer, as the case may be, will be obligated
to reimburse the Trust for any accrued interest
amounts not guaranteed by a Guarantor due to, or
any lost Interest Subsidy Payments or Special
Allowance Payments as a result of, a breach of
the Seller's representations and warranties or
the Master Servicer's covenants, as the case may
be; provided, however, that such reimbursements
shall not exceed the amount that would have been
paid if not for such breach.
The Master Servicer will receive, subject to the
limitations set forth in the following
paragraph, a monthly fee (the "Servicing Fee")
equal to the amount set forth in the related
Prospectus Supplement. The Servicing Fee will be
allocated monthly out of Available Funds and
amounts on deposit in the Reserve Account and
will be payable quarterly on the first Note
Distribution Date occurring in March, June,
September and December (or, if in any such month
a Certificate Distribution Date occurs prior to
such First Note Distribution Date, on such
Certificate Distribution Date).
Notwithstanding the foregoing, if the fee
payable to the Master Servicer as described
above for any month would exceed 1.05% per annum
(or such other percentage as may be set forth in
the related Prospectus Supplement) of the Pool
Balance as of the last day of the preceding
calendar month (the "Capped Amount"), then the
"Servicing Fee" for such month will instead be
the Capped Amount for such month. The remaining
amount in excess of such Servicing Fee, together
with any such excess amounts from prior months
that remain unpaid (the "Servicing Fee
Carryover"), will be payable to the Master
Servicer on the dates and in the priority set
forth above under "--Collection Account; Note
Distribution Account; Certificate Distribution
Account; and Expense Account."
Pursuant to the Sale and Servicing Agreement,
the Master Servicer will agree with the Trust to
be responsible for, among other things,
preparing and filing with the Department, the
Secretary and the Guarantors all appropriate
claims forms and other documents and filings on
behalf of the Eligible Lender Trustee in order
to claim the Interest Subsidy Payments and
Special Allowance Payments from the Department,
the applicable insurance from the Secretary and
the Guarantee Payments from the Guarantors, in
respect of the Financed Student Loans entitled
thereto and preparing and providing periodic and
annual statements to the Eligible Lender Trustee
and the Indenture Trustee with respect to
distributions to Noteholders and
Certificateholders.
The Notes.................The Trust will issue each Series of Notes
pursuant to an Indenture (as amended and
supplemented from time to time, the "Master
Indenture") and a related Terms Supplement
authorizing such Series, (each as amended from
time to time, a "Terms Supplement" and, together
with the Master Indenture and each other Terms
Supplement, the "Indenture") between the Trust
and the Indenture Trustee. Each Series of Notes
will be secured by the assets of the Trust other
than the Certificate Surety Bonds and the Note
Surety Bonds relating to other Series of Notes.
A. Interest..............Each Class of Notes will bear interest at the rate per
annum (the "Class Interest Rate") set forth in
the related Prospectus Supplement until (i) with
respect to Auction Rate Notes, the first Auction
Date for such Class, at which time the related
Class Interest Rate will be reset pursuant to
the Auction Procedures described in Appendix I
or (ii) with respect to LIBOR Rate Notes, the
date set forth in the related Prospectus
Supplement at which time the related Class
Interest Rate will be reset based upon One-Month
LIBOR. If a Class of Notes bears interest based
upon another method, the related Prospectus
Supplement will describe such method. If
provided in a Prospectus Supplement, the Trust
may issue one or more Classes of Accrual Notes,
which Accrual Notes will not be entitled to
receive distributions of interest during the
related Accrual Period. Instead, interest
accrued on such Accrual Notes will be
capitalized and added to the outstanding
principal amount thereof.
Interest on the outstanding principal amount of
each Class of Notes will accrue initially from
and including the related Closing Date through
and including the date set forth in the related
Prospectus Supplement and, thereafter, except as
otherwise set forth in the related Prospectus
Supplement, for periods (each, an "Interest
Period") consisting of (i) with respect to
Auction Rate Notes, between 7 to 91 days,
subject to adjustment as set forth in the
Auction Procedures described in Appendix I or in
the related Prospectus Supplement, (ii) with
respect to LIBOR Rate Notes, the one-month
period beginning and ending on the dates set
forth in the related Prospectus Supplement or
(iii) with respect to Notes accruing interest
based on some other method, the period set forth
in the related Prospectus Supplement. Interest
on each Class of Notes will be payable either
(i) quarterly on the first Business Day
following the expiration of the first Interest
Period for such Class ending in January, April,
July and October, commencing on the date set
forth in the related Prospectus Supplement, (ii)
monthly or weekly on the first Business Day
following the expiration of each related
Interest Period, or (iii) on such other dates
and for such other periods as may be set forth
in the related Prospectus Supplement. The date
on which a Class of Notes is entitled to receive
a distribution (or, for Accrual Notes, have
accrued interest added to principal) is referred
to as the "Note Distribution Date" for such
Class. Distributions will be made to holders of
record of the related Class of Notes (the
"Noteholders") as of the second Business Day
preceding the related Note Distribution Date
(such day, the "Note Record Date"). Interest
will be calculated on the basis of the actual
number of days elapsed in each Interest Period
divided by 360.
Notwithstanding the foregoing, if the Class
Interest Rate with respect to a Class of Notes
for an Interest Period is greater than the Net
Loan Rate, then such Class Interest Rate for
such Notes for such Interest Period will be the
Net Loan Rate. However, in no event will the
Class Interest Rate exceed the rate set forth in
the related Prospectus Supplement. The "Net Loan
Rate" for any Interest Period will equal the
weighted average Effective Interest Rate for the
Collection Period immediately preceding such
Interest Period less the amount set forth in the
related Prospectus Supplement. The "Effective
Interest Rate" means, for any Financed Student
Loan and any Collection Period, the per annum
rate at which such Financed Student Loan accrues
interest during such Collection Period and, in
the case of a Federal Loan, after giving effect
to all applicable Interest Subsidy Payments and
Special Allowance Payments due with respect to
such Federal Loan.
If the Class Interest Rate for any Class of
Notes for any Interest Period is based on the
Net Loan Rate, the excess of (a) the amount of
interest on such Class of Notes that would have
accrued in respect of the related Interest
Period had interest been calculated based on the
applicable Auction Rate, LIBOR Rate or other
applicable rate, as the case may be, over (b)
the amount of interest on the Class of Notes
actually accrued in respect of such Interest
Period based on the Net Loan Rate (such excess,
together with the unpaid portion of any such
excess from prior Interest Periods (and interest
accrued thereon calculated based on One-Month
LIBOR), is referred to as the "Noteholders'
Interest Carryover") will be paid on the dates
and in the priority set forth above under
"--Collection Account; Note Distribution
Account; Certificate Distribution Account; and
Expense Account." The rating of each Series or
Class of Notes does not address the likelihood
of the payment of the amount of any Noteholders'
Interest Carryover.
B. Principal............Principal will be payable to the Class of Notes with
the earliest Final Maturity Date on each Note
Distribution Date for such Class (or such other
Note Distribution Dates for such Class as may be
described in the applicable Prospectus
Supplement) in an amount equal to the
Noteholders' Principal Distribution Amount for
such Note Distribution Date. The Noteholders'
Principal Distribution Amount generally will be
equal to (i) the amount of principal paid with
respect to the Financed Student Loans (plus any
Realized Losses thereon), (ii) proceeds realized
upon the sale of Financed Student Loans by the
Trust and (iii) Additional Principal Payments,
if any. Also, on the Final Maturity Date for a
Class of Notes, the Noteholders' Principal
Distribution Amount also will include the then
outstanding principal balance of such Class of
Notes. See "Description of the Transfer and
Servicing Agreements-- Distributions."
Principal of the Notes will be applied on each
applicable Note Distribution Date, first, to the
principal balance of the Class of Notes with the
earliest Final Maturity Date until such
principal balance is reduced to zero and then,
with respect to any additional Classes of Notes,
to the principal balance of each other Class,
sequentially in order of Final Maturity Date,
until the principal balance of each Class is
reduced to zero.
The Prospectus Supplement for each Series of
Notes will set forth the date on which the
outstanding principal amount of each Class of
such Series will be payable in full (each, a
"Final Maturity Date"). However, payment in full
of any Class of Notes is likely to occur sooner
than such Final Maturity Date as a result of a
variety of factors, including the sale by the
Trust of Financed Student Loans and borrowers
leaving school and commencing repayment of their
Financed Student Loans. Additionally, with the
consent of the Surety Provider, Additional
Principal Payments may be made on the Notes. See
"The Financed Student Loan Pool--Maturity and
Prepayment Assumptions."
On the Final Maturity Date of each Class of
Notes, the Surety Provider will be required to
provide for payment to the Trust pursuant to the
related Note Surety Bond of an amount equal to
the excess, if any, of the unpaid principal
balance of such Class of Notes on such Final
Maturity Date over amounts on deposit in the
Note Distribution Account, after taking into
account the required application of funds in the
remaining Trust Accounts, including but not
limited to the Reserve Account, pursuant to the
Sale and Servicing Agreement, to the payment of
principal on such Class of Notes on such Final
Maturity Date, subject to the exceptions
described herein under "Description of the
Surety Bonds --Note Surety Bonds." Any such
amount will be distributed to holders of such
Class of Notes on the related Final Maturity
Date. If, however, no required payments are made
under a Note Surety Bond in respect of a Class
of Notes, an Event of Default will then have
occurred under such Class of Notes and holders
of such Class would likely incur losses. In
addition, the maturity of many of the Financed
Student Loans may extend beyond the Final
Maturity Date of certain Classes of Notes.
C. Mandatory Redemption...The Class of Notes with the earliest Final Maturity
Date will be redeemed in part on the applicable
Note Distribution Date on or immediately
following the last day of each Funding Period in
the event that any amount remains on deposit in
the Pre-Funding Account after giving effect to
all Additional Fundings to be made on or prior
to such date. The aggregate principal amount of
Notes to be redeemed will be an amount equal to
the amount then on deposit in the Pre-Funding
Account.
The Certificates.........Concurrently with the issuance of each Series of Notes,
the Trust may issue one or more Classes of
Certificates pursuant to the Trust Agreement
and, after the issuance of the initial Class of
Certificates, a supplement thereto (each, a
"Trust Supplement"). The date of the initial
issuance of the Certificates is referred to
herein as the "Initial Closing Date." The
Certificates represent undivided participation
interests in the Trust. Student Holdings will
purchase a 1.0% interest in the Certificates.
See "Formation of the Trust -- The Trust."
A. Interest...........Each Class of Certificates will bear interest at the
rate per annum (the "Certificate Rate") set
forth in the Trust Agreement or the related
Trust Supplement until (i) with respect to
Auction Rate Certificates, the first Auction
Date for such Class, at which time the related
Certificate Rate will be reset pursuant to the
Auction Procedures described in Appendix I or
(ii) with respect to LIBOR Rate Certificates,
the date set forth in the related Trust
Supplement at which time the related Certificate
Rate will be reset based upon One-Month LIBOR.
If a Class of Certificates bears interest based
upon another method, the related Trust
Supplement will describe such method.
Interest on the outstanding principal balance of
each Class of Certificates will accrue initially
from and including the related Closing Date
through and including the date set forth in the
Trust Agreement or the related Trust Supplement
and thereafter, except as otherwise set forth in
a Trust Supplement, for Interest Periods
consisting of (i) with respect to Auction Rate
Certificates, periods of 28 days, subject to
adjustment as set forth in the Auction
Procedures described in Appendix I, (ii) with
respect to LIBOR Rate Certificates, the
one-month period beginning and ending on the
dates set forth in the related Trust Supplement
and (iii) with respect to Certificates accruing
interest based on some other method, the period
set forth in the related Trust Supplement.
Interest on the Certificates will be payable on
the first Business Day following the expiration
of each Interest Period, or on such other dates
and for such other periods as may be set forth
in the related Trust Supplement (each, a
"Certificate Distribution Date") to holders of
record of the Certificates (the
"Certificateholders" and, together with the
Noteholders, the "Securityholders") as of the
second Business Day preceding the related
Certificate Distribution Date (such day, the
"Certificate Record Date"). Interest will be
calculated on the basis of the actual number of
days elapsed in each Interest Period divided by
360.
Notwithstanding the foregoing, if the
Certificate Rate with respect to a Class of
Certificates for an Interest Period is greater
than the Net Loan Rate, then the Certificate
Rate for such Class of Certificates for such
Interest Period will be such Net Loan Rate.
However, in no event will the Certificate Rate
exceed 18.0% per annum, or such other rate as
may be set forth in a Trust Supplement.
As used herein, the term "Distribution Date"
refers to either a Note Distribution Date or a
Certificate Distribution Date, as the context
requires.
If the Certificate Rate for any Class of
Certificates for any Certificate Distribution
Date is based on the Net Loan Rate, the excess
of (a) the amount of interest on such Class of
Certif icates that would have accrued in respect
of the related Interest Period had interest been
calculated based on the applicable Auction Rate,
LIBOR Rate or other applicable rate, as the case
may be, over (b) the amount of interest on the
Class of Certificates actually accrued in
respect of such Interest Period based on the Net
Loan Rate (such excess, together with the unpaid
portion of any such excess from prior Interest
Periods (and interest accrued thereon calculated
based on One-Month LIBOR), is referred to as the
"Certificateholders' Interest Carryover") will
be paid on the dates and in the priority set
forth above under "--Collection Account; Note
Distribution Account; Certificate Distribution
Account; and Expense Account." The rating of
each Class of Certificates does not address the
likelihood of the payment of any
Certificateholders' Interest Carryover.
B. Principal...........Principal of the Class of Certificates with the
earliest Final Maturity Date will be payable on
each Certificate Distribution Date on and after
which each Series of Notes has been paid in full
in an amount generally equal to (i) the amount
of principal paid with respect to the Financed
Student Loans (plus any Realized Losses
thereon), (ii) proceeds realized upon the sale
of Financed Student Loans by the Trust and (iii)
Additional Principal Payments, if any. Also, on
the Final Maturity Date for a Class of
Certificates, the Certificateholders' Principal
Distribution Amount also will include the then
outstanding principal balance of such Class of
Certificates. See "Description of the Transfer
and Servicing Agreements-- Distributions."
The outstanding principal amount of a Class of
Certificates will be payable in full on the date
set forth in the Trust Agreement or a related
Trust Supplement (each, a "Certificate Final
Maturity Date"). However, payment in full of the
Certificates is likely to occur sooner than such
Certificate Final Maturity Date as a result of a
variety of factors, including the sale by the
Trust of Financed Student Loans and borrowers
leaving school and commencing repayment of their
Financed Student Loans. Additionally, with the
consent of the Surety Provider, Additional
Principal Payments may be made on the
Certificates. See "The Financed Student Loan
Pool--Maturity and Prepayment Assumptions."
On the Certificate Final Maturity Date for each
Class of Certificates, the Surety Provider will
be required to provide for payment to the Trust
pursuant to the related Certificate Surety Bond
of an amount equal to the excess, if any, of the
unpaid principal balance of such Class of
Certificates on such Certificate Final Maturity
Date over amounts on deposit in the Certificate
Distribution Account, after taking into account
the required application of funds in the
remaining Trust Accounts, including but not
limited to the Reserve Account, pursuant to the
Sale and Servicing Agreement, to the payment of
principal on such Class of Certificates on such
Certificate Final Maturity Date, subject to the
exceptions described herein under "Description
of the Surety Bonds -- Certificate Surety
Bonds." Any such amount will be distributed to
Certificateholders of such Class of Certificates
on the related Certificate Final Maturity Date.
If, however, no required payments are made under
a Certificate Surety Bond, holders of the
Certificates of such Class would likely incur
losses.
C. Subordination of the
Certificates........The rights of Certificateholders in the assets of the
Trust (other than with respect to the related
Certificate Surety Bond) to receive payments of
principal will be subordinated to the rights of
the Noteholders to the extent described herein.
See "Description of the Transfer and Servicing
Agreement--Credit Enhancement--Subordination of
the Certificates."
Monthly
Advances.................If the Master Servicer has applied for a Guarantee
Payment from a Guarantor, an Interest Subsidy
Payment or a Special Allowance Payment from the
Department or an insurance payment from the
Secretary, and the Master Servicer has not
received the related payment prior to the end of
the Collection Period immediately preceding the
Note Distribution Date or Certificate
Distribution Date on which such amount would be
required to be distributed as a payment of
interest, the Representative may, no later than
the Determination Date relating to such Note
Distribution Date or Certificate Distribution
Date, as the case may be, deposit into an
account in the name of the Indenture Trustee
(the "Monthly Advance Account") an amount up to
the amount of such payments applied for but not
received (such deposits by the Representative
are referred to herein as "Monthly Advances").
Monthly Advances will be distributed to the
Noteholders or Certificateholders on the
upcoming Note Distribution Date or Certificate
Distribution Date, as the case may be. Monthly
Advances are recoverable by the Representative
from the source for which such Monthly Advance
was made.
Optional
Purchase...................The Seller may, with the consent of the Surety
Provider, repurchase all remaining Financed
Student Loans, and thus effect the early
retirement of the Notes and the Certificates, on
any Certificate Distribution Date on or after
which the Pool Balance is equal to 10% or less
of the Aggregate Pool Balance, at a price equal
to, for each Financed Student Loan, the
outstanding principal balance of such Financed
Student Loan as of the end of the preceding
Collection Period, together with all accrued
interest thereon and certain unamortized
premiums. See "Description of the Transfer and
Servicing Agreements--Termination." The
"Aggregate Pool Balance" will equal the Pool
Balance as of the date set forth in the related
Prospectus Supplement (each, a "Cut-off Date")
of each Series of Notes issued by the Trust plus
the principal balance of each Additional Student
Loan pledged to the Indenture Trustee on behalf
of the Issuer on each Transfer Date through the
last Funding Period.
Tax
Considerations.............In the opinion of special Federal tax counsel
for the Trust and special Pennsylvania tax
counsel for the Trust, each Series of Notes will
be characterized as debt for Federal and
Pennsylvania state income tax purposes,
respectively, although there is no specific
authority with respect to the characterization
for Federal or Pennsylvania income tax purposes
of securities having the same terms as the
Notes.
In the opinion of special Federal tax counsel
for the Trust, for Federal income tax purposes
the Trust will not be characterized as an
association (or publicly traded partnership)
taxable as a corporation. The Certificateholders
will agree to treat the Trust as a partnership
in which they are partners for Federal income
tax purposes. However, there are no cases or
rulings on similar transactions involving a
trust that issues debt and equity interests with
terms similar to those of the Notes and the
Certificates. Alternative characterizations are
possible, but would not result in materially
adverse Federal tax consequences to
Certificateholders. In the opinion of special
Pennsylvania tax counsel for the Trust, the
Trust will not be taxable as a corporation for
Pennsylvania purposes if it is taxed as a
partnership for federal income tax purposes and
Certificateholders other than individuals not
otherwise subject to Pennsylvania tax will not
become subject to taxation in Pennsylvania
solely as a result of holding a Certificate.
Due to the method of allocation of Trust income
to the Certificateholders, cash basis holders
may, in effect, be required to report income
from the Certificates on an accrual basis. In
addition, because tax allocations and tax
reporting will be done on a uniform basis, but
Certificateholders may be purchasing
Certificates at different times and at different
prices, Certificateholders may be required to
report on their tax returns taxable income that
is greater or less than the amount reported to
them by the Trust.
See "Certain Tax Consequences" for additional
information concerning the application of
Federal and Pennsylvania state tax laws with
respect to the Notes, the Trust and the
Certificates.
ERISA Considerations........Each Prospectus Supplement will set forth the
extent, if any, to which Notes may be purchased
by or on behalf of employee benefit plans,
retirement arrangements, individual retirement
accounts and Keogh Plans. See "ERISA
Considerations."
The Certificates may not be acquired by or on
behalf of any employee benefit plan, retirement
arrangement, individual retirement account or
Keogh Plan subject to either Title I of the
Employee Retirement Income Security Act of 1974,
as amended ("ERISA"), or Section 4975 of the
Internal Revenue Code of 1986, as amended. See
"ERISA Considerations--The Certificates."
Registration of
Notes.................Securities may be represented by global certificates
registered in the name of Cede & Co. ("Cede"),
as nominee of The Depository Trust Company
("DTC"), or another nominee. In such case,
Securityholders will not be entitled to receive
definitive certificates representing such
Holders' interests, except in certain
circumstances described in the related
Prospectus Supplement. See "Description of the
Securities--Book-Entry Registration."
Rating of the
Securities............It is a condition to the issuance and sale of each
Series and Class of Notes and each Series of
Certificates that they each be rated "AAA" by
Standard & Poor's Ratings Services, a division
of The McGraw-Hill Companies ("Standard &
Poor's"), and "Aaa" by Moody's Investors
Service, Inc. ("Moody's") (or an equivalent
short-term rating for certain Classes of Notes
having a Final Maturity Date of no more than 13
months after the related Closing Date). Each of
Standard & Poor's and Moody's is also referred
to herein as a "Rating Agency" and collectively,
as the "Rating Agencies." A securities 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
agency.
<PAGE>
RISK FACTORS
Prospective purchasers of the Securities should consider carefully the
following discussion of certain risk factors associated with an investment in
the Securities.
Limited Liquidity. There can be no assurance that a secondary market
for the Securities will develop or, if a secondary market does develop, that it
will provide Securityholders with liquidity of investment or that it will
continue for the life of the Securities.
Failure to Comply with Loan Origination and Servicing Procedures for
Federal Loans and HEAL Loans. The Higher Education Act and the Public Health
Service Act, including the respective implementing regulations thereunder,
require lenders and their assignees making and servicing Federal Loans or HEAL
Loans, as the case may be, and guarantors guaranteeing Federal Loans to follow
specified procedures, including due diligence procedures, to ensure that the
Federal Loans and HEAL Loans are properly made and disbursed to, and repaid on a
timely basis by or on behalf of, borrowers. Certain of those procedures, which
are specifically set forth in the Higher Education Act and the Public Health
Service Act, are summarized herein. See "The Student Loan Financing Business"
and "Description of the Transfer and Servicing Agreements--Servicing
Procedures". Generally, those procedures require that completed loan
applications be processed, a determination of whether an applicant is an
eligible borrower attending an eligible institution under the Higher Education
Act or Public Health Service Act, as the case may be, be made, the borrower's
responsibilities under the loan be explained to him or her, the promissory note
evidencing the loan be executed by the borrower and then that the loan proceeds
be disbursed in a specified manner by the lender. After the loan is made, the
lender must establish repayment terms with the borrower, properly administer
deferrals and forbearances and credit the borrower for payments made. If a
borrower becomes delinquent in repaying a loan, a lender must perform certain
collection procedures (primarily telephone calls and demand letters) which vary
depending upon the length of time a loan is delinquent. The Master Servicer has
agreed pursuant to the Sale and Servicing Agreement to perform (or provide for
third party servicers to perform) servicing and collection procedures on behalf
of the Trust. However, failure to follow these procedures or failure of the
Seller or any other originator of the Purchased Loans to follow procedures
relating to the origination of any Federal Loans may result in the Department's
refusal to make reinsurance payments to the Guarantors or to make Interest
Subsidy Payments and Special Allowance Payments to the Eligible Lender Trustee
with respect to such Federal Loans or in the Guarantors' refusal to honor their
Guarantee Agreements with the Eligible Lender Trustee with respect to such
Federal Loans. Failure of the Guarantors to receive reinsurance payments from
the Department could adversely affect the Guarantors' ability or legal
obligation to make payments under the Guarantee Agreements ("Guarantee
Payments") to the Eligible Lender Trustee. Similarly, the failure to follow
required procedures in originating or servicing HEAL Loans may result in the
Secretary denying insurance coverage for such HEAL Loans. Loss of any such
Guarantee Payments, Interest Subsidy Payments or Special Allowance Payments with
respect to Federal Loans, or insurance payments from the Secretary with respect
to HEAL Loans, could adversely affect the amount of Available Funds
for any Collection Period and the Trust's ability to pay principal and interest
on the Notes and the Certificates. Under certain circumstances, pursuant to the
Sale and Servicing Agreement, the Seller is obligated to purchase, or the Master
Servicer is obligated to purchase (which obligations also will be obligations of
The Money Store), any Financed Student Loan if a breach of the representations,
warranties or covenants of the Seller or the Master Servicer, as the case may
be, with respect to such Financed Student Loan has a material adverse effect on
the interests of the Noteholders or the Certificateholders therein and such
breach is not cured within any applicable cure period (it being understood that
any such breach that does not affect any Guarantor's or the Secretary's
obligation to guarantee payment of such Financed Student Loans will not be
considered to have such a material adverse effect). In addition, under certain
circumstances pursuant to the Sale and Servicing Agreement, the Seller or the
Master Servicer, as the case may be, is obligated to reimburse the Trust (which
obligations also will be obligations of The Money Store) for any accrued
interest amounts not guaranteed by a Guarantor due to, or any lost Interest
Subsidy Payments or Special Allowance Payments as a result of, a breach of the
Seller's representations and warranties or the Master Servicer's covenants, as
the case may be, with respect to a Federal Loan. These purchase and
reimbursement obligations also will apply with respect to the Purchased Loans.
If the Seller is obligated to purchase a Financed Student Loan as a result of
the Seller's or a third party's failure to originate such Financed Student Loan
in accordance with the Higher Education Act and the applicable Guarantee
Agreement, the Public Health Service Act or the applicable Private Loan Program,
as the case may be, it will reimburse the Trust for the remaining principal
balance of such Financed Student Loan (plus certain unamortized premiums) and
any accrued but unpaid interest thereon. If the Master Servicer is obligated to
purchase a Financed Student Loan as a result of a failure to service such
Financed Student Loan in accordance with the Higher Education Act and the
applicable Guarantee Agreement, the Public Health Service Act or the applicable
Private Loan Program, as the case may be, it will reimburse the Trust only up to
the amount the related Guarantor or the Secretary would be obligated to pay if
not for such breach. See "Description of the Transfer and Servicing
Agreements--Sale of Financed Student Loans; Representations and Warranties" and
"--Servicer Covenants." There can be no assurance, however, that the Seller, the
Master Servicer or The Money Store will have the financial resources to do so.
The failure of the Seller to so purchase or the Master Servicer to so purchase a
Financed Student Loan would constitute a breach of the Sale and Servicing
Agreement, enforceable by the Eligible Lender Trustee on behalf of the Trust or
by the Indenture Trustee on behalf of the Noteholders, but would not constitute
an Event of Default under the Master Indenture or a Terms Supplement or permit
the exercise of remedies thereunder.
Failure to Comply with Loan Origination and Servicing Procedures for
Private Loans. Each Private Loan Program prescribes rules and procedures
applicable to originating and servicing Private Loans. Failure to make or
service properly a Private Loan pursuant to the applicable Private Loan Program
could adversely affect the Eligible Lender Trustee's ability to obtain a
Guarantee Payment from the applicable Guarantor. Loss of such Guarantee Payments
could adversely affect the amount of Available Funds for any Collection Period.
Changing Assets of the Trust. Upon each issuance of Notes, and during
the related Funding Periods, the Trust will purchase Financed Student Loans from
the Seller. Each Financed Student Loan acquired by the Trust will serve as
collateral for each outstanding Series of Notes. Also, the Trust may, from time
to time, sell to a third party Financed Student Loans. Therefore, the Financed
Student Loans constituting the assets of the Trust will vary during the term of
the Trust. Likewise, the percentage of the Financed Student Loans consisting of
Federal Loans, HEAL Loans and Private Loans also will vary.
Repayment of Principal. With the consent of the Surety Provider,
amounts otherwise required to be deposited into the Reserve Account may be
applied as an Additional Principal Payment on the Class of Notes with the
earliest Final Maturity Date (or, after all Notes have been paid in full, the
Certificates). Such Additional Principal Payments will result in accelerated
payments of principal on the Notes.
Also, payments of principal will be distributed to the Classes of
Notes in order of their Final Maturity Date, regardless of Series (and, after
all Notes have been paid in full, the Certificates in order of their Final
Maturity Date). A subsequently issued Series of Notes may contain one or more
Classes of Notes with an earlier Final Maturity Date, than one or more Classes
of Notes of a previously issued Series. Also a subsequently issued Class of
Certificates may have an earlier Final Maturity Date than one or more previously
issued Classes of Certificates. In such event, the Classes of Notes or
Certificates of the earlier issued Classes will receive no payments of principal
until each of the subsequently issued Notes or Certificates, as a the case may
be, with an earlier Final Stated Maturity have been paid in full.
Variability of Actual Cash Flows; Inability of Indenture Trustee to
Liquidate Financed Student Loans. Amounts received with respect to the Financed
Student Loans for a particular Collection Period may vary in both timing and
amount from the payments actually due on the Financed Student Loans as of such
Collection Period for a variety of economic, social and other factors, including
both individual factors, such as additional periods of deferral or forbearance
prior to or after a borrower's commencement of repayment, and general factors,
such as a general economic downturn which could increase the amount of defaulted
Financed Student Loans. Failures by borrowers to pay timely the principal and
interest on the Financed Student Loans will affect the amount of Available
Funds, which may reduce the amount of principal and interest paid to the
Securityholders. In addition, failures by borrowers of student loans generally
to pay timely the principal and interest due on such student loans could
obligate the Guarantors to make payments thereon, which could adversely affect
the solvency of the Guarantors and their ability to meet their guarantee
obligations (including with respect to the Financed Student Loans). The
inability of any Guarantor to meet its guarantee obligations could reduce the
amount of principal and interest paid to the Securityholders. The effect of such
factors, including the effect on a Guarantor's ability to meet its guarantee
obligations with respect to the Financed Student Loans or the Trust's ability to
pay principal and interest with respect to the Securities, is impossible to
predict. Pursuant to the 1992 Amendments, under Section 432(o) of the Higher
Education Act, if the Department has determined that a Guarantor of Federal
Loans is unable to meet its insurance obligations, the loan holder may submit
claims directly to the Department and the Department is required to pay the full
Guarantee Payment due with respect thereto in accordance with guarantee claim
processing standards no more stringent than those applied by a Guarantor of
Federal Loans. However, the Department's obligation to pay guarantee claims
directly in this fashion is contingent upon the Department making the
determination referred to above. There can be no assurance that the Department
would ever make such a determination with respect to a Guarantor or, if such a
determination was made, whether such determination or the ultimate payment of
such guarantee claims would be made in a timely manner.
On each Closing Date, the aggregate initial principal amount of the
Notes and the principal balance of the Certificates may be greater than the then
applicable Pool Balance of the Financed Student Loans and the Pre-Funded Amount.
Each Financed Student Loan (including those purchased during the applicable
Funding Period) may be purchased by the Trust for an amount greater than the
principal balance thereof (including any accrued interest thereon expected to be
capitalized upon repayment) as of the applicable Cut-off Date.
If an Event of Default occurs under the Master Indenture or any
applicable Terms Supplement, subject to certain conditions, the Indenture
Trustee, at the request of the Surety Provider, is authorized, without the
consent of the Noteholders and the Certificateholders, to sell the Financed
Student Loans. There can be no assurance, however, that the Indenture Trustee
will be able to find a purchaser for the Financed Student Loans in a timely
manner or that the market value of such Financed Student Loans would, at any
time, be equal to the aggregate outstanding principal amount of the Securities
and accrued interest thereon. If the net proceeds of any such sale, together
with amounts then on deposit in the Reserve Account, do not exceed the aggregate
outstanding principal amount of Notes and accrued interest thereon, holders of
any Class of Notes not paid in full will not be entitled to payments of
principal under the applicable Note Surety Bond until the related Final Maturity
Date. In such circumstances, the Certificateholders would not be entitled to
receive any portion of such proceeds. Also, Certificateholders will not be
entitled to payments of principal under the related Certificate Surety Bond
until the Final Maturity Date of the applicable Class of Certificates. In
addition, the amount of principal required to be distributed to Noteholders
under the Indenture is generally limited to amounts available to be so
distributed. Therefore, the failure to pay principal on any Class or Series of
Notes may not result in the occurrence of an Event of Default until the Final
Maturity Date of such Class or Series of Notes. See "Description of the Transfer
and Servicing Agreements--Credit Enhancement."
Unsecured Nature of Financed Student Loans; Financial Status of
Guarantors. The Higher Education Act, the Public Health Service Act and each
Private Loan Program require all Financed Student Loans to be unsecured. As a
result, the only security for payment of the Financed Student Loans are the
Guarantee Agreements between the Eligible Lender Trustee and the Guarantors or,
in the case of HEAL Loans, insurance payments from the Secretary. A
deterioration in the financial status of the Guarantors and their ability to
honor guarantee claims with respect to the Financed Student Loans could result
in a delay in making or a failure to make Guarantee Payments to the Eligible
Lender Trustee. One of the primary causes of a possible deterioration in a
Guarantor's financial status is directly related to the amount and percentage of
defaulting Financed Student Loans guaranteed by a Guarantor. Moreover, with
respect to Federal Loans, to the extent that the Department pays reimbursement
claims submitted by a Guarantor for any fiscal year exceeding certain specified
levels, the Department's obligation to reimburse the Guarantor for losses will
be reduced on a sliding scale from 100% (98% for loans made on or after October
1, 1993) to a minimum of 80% (78% for loans made on or after October 1, 1993).
The Private Loans will not be reinsured by the Department, the Secretary or any
other governmental agency. Therefore, the failure of a Guarantor of a Private
Loan to make a required Guarantee Payment could adversely affect the amount of
Available Funds for any Collection Period.
Changes in Legislation. There can be no assurance that the Higher
Education Act, the Public Health Service Act, the Private Programs or other
relevant federal or state laws, rules and regulations and the programs
implemented thereunder will not be amended or modified in the future in a manner
that will adversely impact the programs described herein and the loans made
thereunder, including the Financed Student Loans, or the Guarantors. In
addition, existing legislation and future measures to reduce the federal budget
deficit may adversely affect the amount and nature of federal financial
assistance available with respect to these programs. In recent years, federal
budget legislation has provided for the recovery of certain funds held by
guarantee agencies in order to achieve reductions in federal spending. There can
be no assurance that future federal budget legislation or administrative actions
will not adversely affect expenditures by the Department, the Secretary or the
financial condition of the Guarantors.
Under the Omnibus Budget Reconciliation Act of 1993, Congress made a
number of changes that may adversely affect the financial condition of the
Guarantors of Federal Loans, including reducing to 98% the maximum percentage of
Guarantee Payments the Department will reimburse for loans first disbursed on or
after October 1, 1993, reducing substantially the premiums and default
collections that Guarantors of Federal Loans are entitled to receive and/or
retain and giving the Department broad powers over Guarantors of Federal Loans
and their reserves. These powers include the authority to require a Guarantor of
Federal Loans to return all reserve funds to the Department if the Department
determines such action is necessary to ensure an orderly termination of such
Guarantor, to serve the best interests of the Federal Programs or to ensure the
proper maintenance of such Guarantor's funds or assets. The Department is also
now authorized to direct a Guarantor of Federal Loans to return a portion of its
reserve funds which the Department determines is unnecessary to pay the program
expenses and contingent liabilities of such Guarantor and/or to cease any
activities involving the use of such Guarantor's reserve funds or assets which
the Department determines is a misapplication or otherwise improper. The
Department may also terminate the reinsurance agreement of a Guarantor of
Federal Loans if the Department determines that such action is necessary to
protect the federal fiscal interest or to ensure an orderly transition to full
implementation of direct federal lending. In such event, however, the Department
is required to assume the functions of such Guarantor as described herein under
the heading "The Financed Student Loan Pool--Insurance of Student Loans;
Guarantors of Federal Loans." These various changes create a significant risk
that the resources available to the Guarantors of Federal Loans to meet their
guarantee obligations will be significantly reduced. In addition, this
legislation greatly expands the Federal Direct Student Loan Program volume to a
target of approximately 60% of student loan demand in academic year 1998-1999,
which could result in increasing reductions in the volume of loans made under
the Federal Programs. As the Federal Direct Student Loan Program expands, the
Servicer may experience increased costs due to reduced economies of scale to the
extent the volume of new loans serviced by the Servicer is reduced. Such cost
increases could affect the ability of the Servicer to satisfy its obligations to
service the Financed Student Loans or to purchase Financed Student Loans in the
event of certain breaches of covenants. See "Description of the Transfer and
Servicing Agreements--Servicer Covenants". Such volume reductions could further
reduce revenues received by the Guarantors of Federal Loans available to pay
claims on defaulted Federal Loans. Finally, the level of competition currently
in existence in the secondary market for loans made under the Federal Programs
could be reduced, resulting in fewer potential buyers of the Federal Loans and
lower prices available in the secondary market for those loans. Further, the
Department is implementing a direct consolidation loan program, which program
may further reduce the volume of loans made under the Federal Programs.
Proposed federal budget legislation being considered by Congress could
modify many of the provisions of the Higher Education Act and the Public Health
Service Act. Until final legislation is adopted, the impact on the Financed
Student Loans, if any, is impossible to determine. During the 105th session of
the United States Congress, the reauthorization of the Higher Education Act will
be considered. The potential impacts on the Financed Student Loans resulting
from the reauthorization process, if any, cannot be determined at this time.
Subordination; Limited Assets. The rights of Certificateholders to
receive payments of principal (other than with respect to the Certificate Surety
Bond) will be subordinated to those of the Noteholders as described herein. If
amounts otherwise allocable to the Certificates are used to fund payments of
principal on the Notes, distributions with respect to the Certificates may be
delayed or reduced to the extent the Surety Provider fails for any reason to
satisfy its obligation under the Certificate Surety Bond. Notwithstanding the
foregoing, distributions to Certificateholders of amounts representing the
Certificateholders' Distribution Amount will not be subordinated to the payment
of any Noteholders' Interest Carryover that may exist from time to time. The
Certificateholders bear directly, subject to the protection provided by the
related Certificate Surety Bond, the credit and other risks associated with an
undivided interest in the Trust. See "Description of the Securities- -The
Certificates--Subordination of the Certificates," "Description of the Transfer
and Servicing Agreements--Distributions" and "--Credit
Enhancement--Subordination of the Certificates."
Moreover, the Trust does not have, nor is it permitted or expected to
have, any significant assets or sources of funds other than the Financed Student
Loans (and the related Guarantee Agreements to the extent assigned to the Trust
by the Seller ("Assigned Rights"), the Collection Account, the Distribution
Accounts, the Pre-Funding Account, the Capitalized Interest Account, the
Capitalized Pre-Funding Account, the Reserve Account, any Note Surety Bonds and,
solely for the benefit of Certificateholders, the Certificate Surety Bonds. Each
Series of Notes represents obligations solely of the Trust, and the Certificates
represent interests solely in the Trust and its assets, and neither any Series
of Notes nor the Certificates will be insured or guaranteed by the Seller, the
Master Servicer, the Guarantors, the Eligible Lender Trustee, any of their
affiliates or the Department. Consequently, holders of each Series of Notes and
the Certificates must rely for repayment upon proceeds realized upon the sale
of, or payments with respect to, the Financed Student Loans and, if and to the
extent available under the circumstances described herein, amounts on deposit in
the Pre-Funding Account, the Capitalized Interest Account, the Capitalized
Pre-Funding Account, and the Reserve Account and amounts available under any
Note Surety Bonds and, with respect to Certificateholders only, the related
Certificate Surety Bond. The Pre-Funding Account, the Capitalized Interest
Account and the Capitalized Pre-Funding Account will only be available to cover
obligations of the Trust relating to Additional Fundings and interest payments,
and are not intended to cover losses on the Financed Student Loans. Similarly,
amounts to be deposited in the Reserve Account are limited in amount and will be
reduced, subject to a specified minimum, as the Pool Balance is reduced. If the
Reserve Account is exhausted, the Trust will depend solely on payments with
respect to the Financed Student Loans and amounts made available under the
applicable Surety Bond to make payments on the Notes and the Certificates. See
"Description of the Sale and Servicing Agreements--Distributions" and "--Credit
Enhancement."
The Financed Student Loans and the Pre-Funding Account. On each
Closing Date, the Eligible Lender Trustee on behalf of the Trust will own the
outstanding principal amount of Financed Student Loans and the Pre-Funded
Amount, as set forth in the related Prospectus Supplement, on deposit in the
Pre-Funding Account together with the outstanding principal amount of Financed
Student Loans previously obtained. If the aggregate principal amount of eligible
Financed Student Loans sold or contributed by the Seller to the Trust during the
related Funding Period, net of the principal amount of the Financed Student
Loans sold or contributed to the Seller during such Funding Period in connection
with the Seller's making of Consolidation Loans, is less than the Pre-Funded
Amount, the Trust will have insufficient opportunities to make Additional
Fundings, thereby resulting in a prepayment of principal to Noteholders as
described in the following paragraph. In addition, any conveyance of Additional
Student Loans is subject to the following conditions, among others: (i) each
such Additional Student Loan must satisfy the eligibility criteria specified in
the Sale and Servicing Agreement and the Insurance Agreement; and (ii) the
Seller will not select such Additional Student Loans in a manner that it
believes is adverse to the interests of the Noteholders, the Certificateholders
or the Surety Provider.
To the extent that amounts on deposit in the Pre-Funding Account have
not been fully applied to Additional Fundings by the Trust by the end of the
related Funding Period, the holders of the Class of Notes with the earliest
Final Maturity Date will receive as a prepayment of principal an amount equal to
the Pre-Funded Amount remaining in the Pre-Funding Account following any
Additional Fundings on the last Distribution Date in the Funding Period. The
Seller expects that the amount of the Additional Fundings will approximate 100%
of each Pre-Funded Amount by the last day of the Collection Period preceding the
Distribution Date identified in the related Prospectus Supplement. See also
"--Maturity and Prepayment Assumptions" regarding the risk to Noteholders and
Certificateholders of prepayment in the event that Consolidation Loans are made
with respect to the Financed Student Loans by the Seller after the Funding
Period or by another lender at any time.
Maturity and Prepayment Assumptions. Financed Student Loans may be
prepaid by borrowers at any time. (For this purpose the term "prepayments"
includes prepayments in full or in part (including pursuant to Consolidation
Loans or Serial Loans) and liquidations due to default (including receipt of
Guarantee Payments).) The rate of prepayments on the Financed Student Loans may
be influenced by a variety of economic, social and other factors affecting
borrowers, including interest rates, the availability of alternative financing
and the general job market for graduates of institutions of higher education. In
addition, under certain circumstances, the Seller will be obligated to
repurchase, or the Master Servicer will be obligated to purchase, which
obligations also will be obligations of the Money Store, Financed Student Loans
from the Trust pursuant to the Sale and Servicing Agreement as a result of
breaches of their respective representations, warranties or covenants. See
"Description of the Transfer and Servicing Agreements--Sale of Financed Student
Loans; Representations and Warranties" and "--Servicer Covenants." Moreover, to
the extent borrowers of Financed Student Loans elect to borrow money through
Consolidation Loans with respect to such Financed Student Loans from the Seller
or from another lender, or to the extent the Trust sells a Financed Student Loan
to serialize the ownership of such Financed Student Loan and other loans to the
same borrower (each, a "Serial Loan"), holders of the Class of Notes with the
earliest Final Maturity Date (and after each Class of Notes been paid in full,
holders of the Certificates with the earliest Final Maturity Date) will
collectively receive as a prepayment of principal the aggregate principal amount
of such Financed Student Loans. There can be no assurance that borrowers with
Financed Student Loans will not seek to obtain Consolidation Loans with respect
to such Financed Student Loans or when Serial Loans will be sold. An agreement
has been entered into with a third party pursuant to which such third party has
agreed to purchase all Financed Student Loans entering the Repayment Phase that
are serial to student loans owned by such third party. However, the Master
Servicer is unable to determine the amount or timing of any such purchases. See
"The Student Loan Financing Business" and "The Financed Student Loan
Pool--Maturity and Prepayment Assumptions."
Scheduled payments with respect to, and maturities of, the Financed
Student Loans may be extended, including pursuant to the applicable Deferral
Phase certain other grace periods authorized by the Higher Education Act, the
Public Health Service Act or the applicable Private Loan Program ("Grace
Periods") and, under certain circumstances, periods of forbearance ("Forbearance
Periods") or as a result of refinancings through Consolidation Loans having
longer maturities, which may lengthen the remaining term of the Financed Student
Loans and the average life of each Class of Notes and Certificates. See "The
Student Loan Financing Business" and "The Financed Student Loan Pool--Maturity
and Prepayment Assumptions". Any reinvestment risks resulting from a faster or
slower incidence of prepayment of Financed Student Loans will be borne entirely
by the Noteholders and the Certificateholders. See also "Description of the
Transfer and Servicing Agreements--Additional Fundings" regarding the prepayment
of principal to Noteholders as a result of a Pre-Funded Amount remaining at the
end of the Funding Period, "--Insolvency Event" regarding the sale of the
Financed Student Loans if a Seller Insolvency Event occurs and "--Termination"
regarding the Seller's option to purchase the Financed Student Loans.
Certain Differences between Classes of Notes and Certificates. Because
the Classes of Notes with a later Final Maturity Date will receive no payment of
principal until the Classes of Notes with an earlier Final Maturity Date have
been paid in full, the Classes of Notes with an earlier Final Maturity Date bear
relatively greater risk than each Class with a later Final Maturity Date of an
increased rate of (i) principal repayments with respect to the Financed Student
Loans (whether as a result of voluntary prepayments, Consolidation Loans or
liquidations due to default or breach), (ii) Financed Student Loans entering the
Repayment Phase, or (iii) Financed Student Loans being sold by the Trust. In
addition, the Class of Notes with the earliest Final Maturity Date will
generally bear the risk of principal prepayments as a result of any remaining
Pre-Funded Amount at the end of each Funding Period. On the other hand, absent
the Surety Bonds, Certificateholders (particularly those with a later Final
Maturity Date) and, to a lesser extent, holders of Notes with a later Final
Maturity Date would bear a greater risk of loss of principal than do holders of
Notes with an earlier Final Maturity Date in the event of a shortfall in
Available Funds and amounts on deposit in the Reserve Account because the
Certificates do not receive principal distributions until each Class of Notes is
paid in full and no Class of Notes or certificates will receive principal
payments until each Class of Notes or Certificates, as the case may be, with an
earlier Final Maturity Date is paid in full.
Basis Risk. The Class Interest Rate for any Class of Auction Rate
Notes and the Certificate Rate for any Class of Auction Rate Certificates will
be based generally on the outcome of each Auction of such Notes or Certificates,
as the case may be, and the Class Interest Rate for any Class of LIBOR Rate
Notes and the Certificate Rate for any Class of LIBOR Rate Certificates will be
based generally on the level of LIBOR. The Class Interest Rate for other Classes
of Notes may be based on the index, formula or other method described in the
related Prospectus Supplement. Financed Student Loans, however, generally bear
interest at an effective rate (taking into account any Special Allowance
Payments) equal to the average bond equivalent rates of weekly auctions of
91-day Treasury bills for each quarter (the "T-Bill Rate") (or, in certain
circumstances, 52-week Treasury bills) plus margins specified for such Financed
Student Loans under "The Student Loan Financing Business." As a result, if in
respect of any Distribution Date, there does not exist a positive spread between
(a) the Net Loan Rate and (b) the Class Interest Rate or the Certificate Rate,
as the case may be, the Class Interest Rate or the Certificate Rate, as
applicable, for such Note Distribution Date or Certificate Distribution Date
will be the Net Loan Rate. See "Description of the Securities--The
Notes--Distributions of Interest" and "--The Certificates--Distributions of
Interest." Any Noteholders' Interest Carryover or Certificateholders' Interest
Carryover arising as a result of the applicable Class Interest Rate or
Certificate Rate being determined on the basis of the Net Loan Rate will be paid
on the following Note Distribution Date or Certificate Distribution Date, as
applicable, or on any succeeding Note Distribution Date or Certificate
Distribution Date to the extent funds are allocated and available therefor after
making all required prior distributions and deposits with respect to such date.
Payment of such amounts, however, will not be covered, in the case of the Notes,
by amounts on deposit in the Reserve Account (other than amounts in excess of
the Specified Reserve Account Balance) or by subordination of distributions of
the Certificateholders' Distribution Amount in respect of the Certificates
(although distributions of any Certificateholders' Interest Carryover will be
subordinated to payment of any Noteholders' Interest Carryover) and, in the case
of the Certificates, by amounts on deposit in the Reserve Account (other than
amounts in excess of the Specified Reserve Account Balance) or by the
Certificate Surety Bonds. The Note Surety Bonds will not cover payment of any
Noteholders' Interest Carryover. See "Description of the Transfer and Servicing
Agreements--Distributions."
Servicer Default; Administrator Default. In the event a Servicer
Default or an Administrator Default occurs, the Surety Provider, the Indenture
Trustee or the Noteholders, as described under "Description of the Transfer and
Servicing Agreements--Rights upon Servicer Default and Administrator Default,"
may remove the Master Servicer or the Administrator, as the case may be, without
the consent of the Eligible Lender Trustee or any of the Certificateholders.
Moreover, until such time as each Class of Notes has been paid in full, only the
Surety Provider, the Indenture Trustee or the Noteholders, and not the Eligible
Lender Trustee or the Certificateholders, have the ability to remove the Master
Servicer or the Administrator, as the case may be, if a Servicer Default or an
Administrator Default occurs. In addition, the Noteholders have the ability,
with certain specified exceptions, to waive defaults by the Master Servicer and
the Administrator, including defaults that could materially adversely affect the
Certificateholders. See "Description of the Transfer and Servicing
Agreements--Waiver of Past Defaults."
Certain Legal Aspects. The Seller intends that the transfer of the
Financed Student Loans by it to the Eligible Lender Trustee on behalf of the
Trust under the Sale and Servicing Agreement constitutes a valid sale or
contribution and assignment of such Financed Student Loans. However, a court
could treat the transfer of the Financed Student Loans to the Eligible Lender
Trustee as an assignment of collateral as security for the benefit of the
Noteholders and the Certificateholders. If the transfer of the Financed Student
Loans to the Eligible Lender Trustee is deemed to create a security interest
therein, a tax or government lien on property of the Seller arising before the
Financed Student Loans came into existence may have priority over the Eligible
Lender Trustee's interest in such Financed Student Loans. If the Seller becomes
subject to an insolvency proceeding under applicable law, to the extent that the
transfer of the Financed Student Loans is deemed to create a security interest,
and that interest was validly perfected before the Seller's insolvency and was
not taken in contemplation of insolvency or with the intent to hinder, delay or
defraud the Seller or its creditors, such security interest should not be
subject to avoidance and payments to the Trust with respect to the Financed
Student Loans should not be subject to recovery by the Seller's creditors. No
assurance can be given, however, that delays in receipt of funds with respect to
the Financed Student Loans will occur in such circumstances.
Numerous federal and state consumer protection laws and related
regulations impose substantial requirements upon lenders and servicers involved
in consumer finance. Also, some state laws impose finance charge ceilings and
other restrictions on certain consumer transactions and require contract
disclosures in addition to those required under federal law. Although these
state laws are, to a large part, pre-empted by the Higher Education Act and the
Public Health Service Act, they are applicable to the Private Loans. These
requirements impose specific statutory liability that would affect an assignee's
ability to enforce consumer finance contracts such as the Private Loans.
Ratings of the Securities. It is a condition to the issuance and sale
of each Series and Class of Notes and of each Class of Certificates that they
each be rated "AAA" by Standard & Poor's and "Aaa" by Moody's (or an equivalent
short-term rating). A rating is not a recommendation to purchase, hold or sell
Securities, inasmuch as such rating does not comment as to market price or
suitability for a particular investor. The ratings of the Securities address the
likelihood of the ultimate payment of principal of and interest on the
Securities pursuant to their terms. However, the Rating Agencies do not
evaluate, and the ratings of the Securities do not address, the likelihood of
payment of any Noteholders' Interest Carryover or the Certificateholders'
Interest Carryover. There can be no assurance that a rating will remain for any
given period of time or that a rating will not be lowered or withdrawn entirely
by a Rating Agency if in its judgment circumstances in the future so warrant.
Book-Entry Registration. It is expected that each Class of Notes and
the Certificates (except for the Certificates sold to Student Holdings) will
each be initially represented by one or more certificates registered in the name
of Cede & Co. ("Cede"), the nominee for DTC, and will not be registered in the
names of the holders of such Securities or their nominees. Because of this,
unless and until Definitive Securities are issued, holders of such Securities
will not be recognized by the Indenture Trustee or the Eligible Lender Trustee
as "Noteholders" or "Certificateholders," as the case may be (as such terms are
used in the Indenture and Trust Agreement, respectively). Hence, until
Definitive Securities are issued, holders of such Securities will only be able
to exercise the rights of Securityholders indirectly through DTC and its
participating organizations. See "Description of the Securities--Book-Entry
Registration" and "--Definitive Securities."
FORMATION OF THE TRUST
THE TRUST
ClassNotes Trust 1995-I (formerly known as Education Loan Alliance
1995-I) is a business trust formed under the laws of the Commonwealth of
Pennsylvania pursuant to the Trust Agreement for the transactions described in
this Prospectus and each Prospectus Supplement. After its formation, the Trust
will not engage in any activity other than (i) acquiring, holding, selling and
managing the Financed Student Loans and the other assets of the Trust and
proceeds therefrom, (ii) issuing the Certificates, Notes and the Originators'
Interests, (iii) making payments thereon and (iv) engaging in other activities
that are necessary, suitable or convenient to accomplish the foregoing or are
incidental thereto or connected therewith.
The Trust was initially capitalized with equity, excluding amounts
deposited in the Reserve Account, Pre-Funding Account, Capitalized Investment
Account and Capitalized Pre-Funding Account on the Initial Closing Date,
representing the initial principal balance of the Certificates being issued on
the Initial Closing Date. Approximately 1% of the Certificates were sold to
Student Holdings and the remaining Certificates were offered for sale in
transactions exempt from the registration requirements of the Securities Act.
The equity of the Trust, together with the proceeds from the sale of each Series
of Notes, will be used by the Eligible Lender Trustee in connection with its
acquisition, on behalf of the Trust, of the Financed Student Loans from the
Seller pursuant to the Sale and Servicing Agreement and to fund each deposit of
the Pre-Funding Account. A portion of the net proceeds received from each
transfer of Financed Student Loans may be used to make a Reserve Account
Deposit. Upon the consummation of each such transaction, the property of the
Trust will consist of (a) a pool of Financed Student Loans, legal title to which
is held by the Eligible Lender Trustee on behalf of the Trust, (b) all funds
collected in respect thereof on or after each Cut-off Date, (c) all moneys and
investments on deposit in the Collection Account, the Pre-Funding Account, the
Capitalized Interest Account, the Capitalized Pre-Funding Account, the
Certificate Distribution Account, the Note Distribution Account, the Expense
Account, the Monthly Advance Account and the Reserve Account, (d) the Note
Surety Bonds and (e) the Certificate Surety Bond issued solely for the benefit
of the Certificateholders. The Notes will be collateralized by the property of
the Trust (other than the Certificate Surety Bond). The Collection Account, the
Pre-Funding Account, the Capitalized Interest Account, the Capitalized
Pre-Funding Account, the Note Distribution Account, the Expense Account, the
Reserve Account and the Monthly Advance Account will be maintained with and in
the name of the Indenture Trustee. The Certificate Distribution Account will be
maintained with and in the name of the Eligible Lender Trustee. To facilitate
servicing and to minimize administrative burden and expense, either the Master
Servicer or the related Servicer will be appointed custodian of the promissory
notes representing the Financed Student Loans by the Eligible Lender Trustee.
The Trust will use funds on deposit in the Pre-Funding Account during
each Funding Period to acquire Additional Student Loans, which will constitute
property of the Trust. See "Description of the Transfer and Servicing
Agreements- -Additional Fundings." The Pool Balance will be increased during
each Funding Period by the principal amount of Additional Student Loans conveyed
to the Eligible Lender Trustee on behalf of the Trust, less the principal amount
of Financed Student Loans sold. Any such conveyance of Additional Student Loans
is conditioned on compliance with the procedures described in the Sale and
Servicing Agreement and the Insurance Agreement. The Seller expects that the
amount of Additional Fundings will approximate 100% of the Pre-Funded Amount by
the last day of the Funding Period identified in the related Prospectus
Supplement; however, there can be no assurance that a sufficient amount of
Additional Fundings will be made by such date. If the Pre-Funded Amount has not
been reduced to zero by the end of the Funding Period, the holders of the Class
of Notes with the earliest Final Maturity Date will receive any amounts
remaining in the Pre-Funding Account as a payment of principal (and, if such
Class has been paid in full, to the holders of the Class of Notes with the next
earliest Final Maturity Date). See "Description of the Sale and Servicing
Agreements--Additional Fundings."
The Trust's principal offices are in Carlisle, Pennsylvania, in care
of Dauphin Deposit Bank and Trust Company as Eligible Lender Trustee, at the
address listed below.
ELIGIBLE LENDER TRUSTEE
Dauphin Deposit Bank and Trust Company, the Eligible Lender Trustee
for the Trust under the Trust Agreement, is a bank and trust company organized
under the laws of the Commonwealth of Pennsylvania with its chief executive
office in Harrisburg, Pennsylvania. The office of the Eligible Lender Trustee
for purposes of administering the Trust is located at 8 West High Street,
Carlisle, Pennsylvania 17013. The Eligible Lender Trustee will acquire on behalf
of the Trust legal title to all the Financed Student Loans acquired from time to
time pursuant to the Sale and Servicing Agreement. The Eligible Lender Trustee
on behalf of the Trust will enter into a Guarantee Agreement with each of the
Guarantors with respect to such Financed Student Loans. The Eligible Lender
Trustee qualifies, or prior to taking title to Financed Student Loans for which
additional qualifications are necessary, will qualify, as an eligible lender and
owner of all Financed Student Loans for all purposes under the Higher Education
Act, the Public Health Service Act, the applicable Private Loan Programs and the
Guarantee Agreements. Failure of the Financed Student Loans to be owned by an
eligible lender would result in the loss of Guarantee Payments, Federal
Assistance and insurance payments from the Secretary, as the case may be, with
respect to such Financed Student Loans. See "The Financed Student Loan
Pool--Insurance of Student Loans; Guarantors of Student Loans."
USE OF PROCEEDS
After making the deposit of the Pre-Funded Amount to the Pre-Funding
Account, the balance of the net proceeds from the sale of the Certificates and
each Series of Notes ultimately will be paid to the Seller on the related
Closing Date as consideration for the Financed Student Loans being sold or
conveyed on such date. The Seller and the Representative will use such proceeds
to make each Reserve Account Deposit, deposits into certain other Trust Accounts
and for general corporate purposes, including the repayment of debt and the
origination and/or purchase of Additional Financed Student Loans.
THE SELLER AND THE MONEY STORE
The Seller is a wholly-owned subsidiary of The Money Store Inc., a New
Jersey corporation ("The Money Store"). The Money Store is a financial services
company engaged, through its subsidiaries, in the business of originating,
purchasing, selling and servicing consumer and commercial loans of specified
types and offering related services. Loans originated by The Money Store and its
subsidiaries primarily consist of home equity loans, loans (the "SBA Loans")
guaranteed in part by the United States Small Business Administration (the
"SBA") and government guaranteed student loans. The Money Store began providing
financing for new and used vehicles in early 1995.
Since 1967, The Money Store and its subsidiaries have been active in
the development of the residential home equity lending industry in the United
States. In 1979, The Money Store and its subsidiaries began to originate SBA
Loans and, based upon statistics compiled by the SBA, The Money Store believes
that during each of the last 12 SBA fiscal years it originated a greater
principal amount of SBA Loans than any other originator of such loans in the
United States. In 1984, The Money Store and the Seller entered into the
government guaranteed student loan origination market.
For the year ended December 31, 1995 and the nine months ended
September 30, 1996, The Money Store and its subsidiaries originated or purchased
approximately $3.8 billion and $4.0 billion of loans, respectively. Of those
loans, approximately 75% and 74%, respectively, by principal amount were home
equity loans, approximately 12% and 11%, respectively, by principal amount were
SBA Loans, approximately 10% and 8%, respectively, by principal amount were
student loans and approximately 3% and 7%, respectively, by principal amount
were auto loans. The business strategy of The Money Store has been to identify
and pursue niche lending opportunities which management believes have had
widespread unsatisfied demand.
At September 30, 1996, The Money Store and its subsidiaries operated
out of 206 locations and were doing business in 50 states, the District of
Columbia and the Commonwealth of Puerto Rico.
The Seller's executive offices are located at 3301 C Street, Suite
100-A, Sacramento, California 95816. Its telephone number is (916) 446-1626.
PENNSYLVANIA HIGHER EDUCATION ASSISTANCE AGENCY
PHEAA is a public corporation and a government instrumentality of the
Commonwealth of Pennsylvania. PHEAA was founded in 1964 and is located in
Harrisburg, Pennsylvania. In addition to servicing student loans, PHEAA
guarantees loans under the federal Title IV programs, administers certain state
scholarship and financial aid programs, and issues tax-exempt and taxable notes
to finance its direct lending and secondary market purchases of student loan
portfolios. As of September 30, 1996, PHEAA had total assets of approximately
$2.2 billion. As of that date, PHEAA serviced approximately 2 million student
loan borrower accounts, with an aggregate principal balance of over $10.6
billion. PHEAA is one of the largest servicers of education loans in the nation.
PHEAA has approximately 2,100 employees. The information included herein
relating to PHEAA has been obtained from it and is not guaranteed as to accuracy
or completeness by the Seller or The Money Store and is not to be construed as a
representation by the Seller or The Money Store.
Pursuant to the Sub-Servicing Agreement and except as otherwise
expressly assumed by the Administrator, PHEAA has agreed to service, and perform
all other related tasks with respect to, substantially all Financed Student
Loans originated by the Seller and acquired by the Eligible Lender Trustee on
behalf of the Trust generally after they have entered the Repayment Phase. PHEAA
is required to perform all services and duties customary to the servicing of
such Financed Student Loans in the same manner as the Master Servicer has
serviced Financed Student Loans and otherwise in compliance with all applicable
standards and procedures. See "Description of the Transfer and Servicing
Agreements--Servicing Procedures."
The above information relating to PHEAA has been obtained from PHEAA
and neither the Seller nor The Money Store has conducted any independent
verification of such information. PHEAA has agreed that it will provide a copy
of its most recent audited financial statements to Noteholders upon receipt of a
written request directed to Mr. Tim Guenther, Chief Financial Officer Financial
Management, 1200 North Seventh Street, Harrisburg, Pennsylvania 17102.
AFSA DATA CORPORATION
AFSA Data Corporation ("AFSA") is a wholly-owned subsidiary of Fleet
Holding Corporation, which is a wholly- owned subsidiary of Fleet Financial
Group. AFSA has three servicing centers located in Utica, New York;c Long Beach,
California and Lombard, Illinois. AFSA has been providing student loan portfolio
management services to the higher education communities since 1967. AFSA also
services loans for the federal government. As of September 30, 1996, AFSA had
total assets of approximately $35 million. As of that date, AFSA serviced
approximately 4.5 million student loan borrower accounts, with an aggregate
principal balance of over $23 billion. AFSA has approximately 1,500 employees.
The information included herein relating to AFSA has been obtained from it and
is not guaranteed as to accuracy or completeness by the Seller or The Money
Store and is not to be construed as a representation by the Seller or The Money
Store.
Pursuant to a sub-servicing agreement and except as otherwise
expressly assumed by the Administrator, AFSA has agreed to service, and perform
all other related tasks with respect to, certain of Financed Student Loans
originated by the Seller and acquired by the Eligible Lender Trustee on behalf
of the Trust generally after they have entered the Repayment Phase. AFSA is
required to perform all services and duties customary to the servicing of such
Financed Student Loans in the same manner as the Master Servicer has serviced
Financed Student Loans and otherwise in compliance with all applicable standards
and procedures. See "Description of the Transfer and Servicing Agreements -
Servicing Procedures."
The above information relating to AFSA has been obtained from AFSA and
neither the Seller nor The Money Store has conducted any independent
verification of such information. AFSA has agreed that it will provide a copy of
its most recent audited financial statements to Noteholders upon receipt of a
written request directed to Mr. Steve Allen, Vice President and Controller, AFSA
Data Corporation, 2277 E. 220th Street, Long Beach, California 90810-1690.
THE STUDENT LOAN FINANCING BUSINESS
GENERAL
The Financed Student Loans to be sold or contributed by the Seller to
the Eligible Lender Trustee on behalf of the Trust pursuant to the Sale and
Servicing Agreement will be selected from Financed Student Loans originated or
purchased by the Seller and made to students enrolled in or recently graduated
from accredited institutions of higher education within the meaning of the
Higher Education Act, the Public Health Service Act and the applicable Private
Loan Programs. The proceeds of these loans are used by students to finance a
portion of the costs of school and, in the case of certain of the Private Loan
Programs, specified related costs.
Federal Loans. Payment of principal and interest with respect to the
Federal Loans is guaranteed against default, death, bankruptcy or disability of
the applicable borrower by a Guarantor pursuant to a guarantee agreement between
the applicable Guarantor and the Eligible Lender Trustee (such agreements, each
as amended or supplemented from time to time, the "Federal Guarantee
Agreements"). Each Guarantor of Federal Loans is entitled, subject to certain
conditions, to be reimbursed for all or substantially all Federal Guarantee
Payments it makes by the Department pursuant to a program of federal reinsurance
under the Higher Education Act of 1965, as amended (such Act, together with all
rules and regulations promulgated thereunder by the Department and/or the
Guarantors, the "Higher Education Act"). In addition, the Eligible Lender
Trustee, as a holder of the Federal Loans on behalf of the Trust, is entitled to
receive from the Department certain Interest Subsidy Payments and Special
Allowance Payments with respect to certain of such Federal Loans as described
herein. See "--Types of Federal Loans Under the Program" and "The Financed
Student Loan Pool--Insurance of Student Loans; Guarantors of Student Loans."
HEAL Loans. The Public Health Service Act provides that the Secretary
may issue a certificate of comprehensive insurance coverage to any eligible
lender who so applies, which will insure all insurable HEAL Loans made by that
eligible lender after the date the certificate is issued until a specified
cut-off date and within limits of an aggregate maximum amount stated in the
certificate. The rights of an eligible lender under a certificate of insurance
may be assigned to another eligible lender under the Public Health Service Act
(including a public entity in the business of purchasing student loans). See "--
The HEAL Program."
Private Loans. Payment of principal and interest with respect to the
Private Loans is guaranteed against default, death, bankruptcy or disability of
the applicable borrower by a Guarantor pursuant to a guarantee agreement between
the applicable Guarantor and the Eligible Lender Trustee (such agreements, as
amended or supplemented from time to time, together with the Federal Guarantee
Agreements, the "Guarantee Agreements"). The Guarantors of the Private Loans are
not entitled to reimbursement from, and the Private Loans are not insured by,
the Department, the Secretary or any other governmental agency. See "The Private
Loan Programs."
Legal title to all the Financed Student Loans that from time to time
comprise assets of the Trust will be held by the Eligible Lender Trustee, as
trustee on behalf of the Trust. See "Formation of the Trust--Eligible Lender
Trustee."
The description and summaries of the Higher Education Act, the Federal
Programs, the Public Health Service Act, the Private Loan Programs, the
Guarantee Agreements and the other statutes, regulations and documents referred
to in this Prospectus do not purport to be comprehensive, and are qualified in
their entirety by reference to each such statute, regulation or document. There
can be no assurance that future amendments or modifications will not materially
change any of the terms or provisions of the programs described in this
Prospectus or of the statutes and regulations implementing these programs.
However, any such amendments or modifications will be described in each
Prospectus Supplement relating to a Series of Notes to be offered after the
dates of such amendments or modifications. See "Risk Factors--Possible Changes
in Legislation."
THE FEDERAL LOAN PROGRAM
General. The Seller's loan program for Federal Loans (the "Program"),
provides educational financing to students (or their parents) enrolled in or
recently graduated from accredited institutions of higher education. The Seller
has been originating loans under the Program since 1984 and has, as of September
30, 1996, originated loans under the Program in an aggregate principal amount of
approximately $2.064 billion. The Program consists of certain Federal Loans
which are guaranteed by a Guarantor and are reinsured by the Department. As
described below, Federal Loans include "Stafford Loans," "SLS Loans," "PLUS
Loans", "Unsubsidized Stafford Loans" and "Consolidation Loans." The loan
programs under which the Purchased Loans constituting Federal Loans will be
originated are substantially similar to the Seller's Program.
Eligibility. To be eligible to obtain a loan under the Program, a
student must, among other things, (i)(a) be enrolled in, or be admitted for
enrollment in, a school that is an accredited institution of higher education
and be enrolled in, or enroll in, an undergraduate or graduate degree program,
be attending at least half-time and be making satisfactory progress toward the
completion of such program according to the standards of the school, or (b) be
enrolled in, or admitted for enrollment in, a Proprietary School (I.E., a
privately-owned school offering post-secondary education and operating on a for
profit basis), (ii) be a U.S. citizen, U.S. national or eligible noncitizen,
(iii) not have borrowed, together with the loan being requested, more than the
applicable annual and aggregate limits specified from time to time under the
Program, (iv) meet the applicable "needs" requirements and agree to notify
promptly the holder of the loan of any address change and (v) not be in default
on any education loan or owe a refund on an educational grant (each such
student, an "Eligible Student").
Origination Process. The Higher Education Act specifies rules
regarding loan origination practices, which lenders must comply with in order
for their loans to be guaranteed and to be eligible to receive Federal
assistance. Lenders are prohibited from offering points, premiums, payments or
other inducements, directly or indirectly, to any educational institution,
guarantee agency or individual in order to secure loan applications, and no
lender may conduct unsolicited mailings of student loan applications to students
who have not previously received student loans from that lender.
With respect to all Federal Loans made under the Program (other than
Consolidation Loans discussed below), the Seller or its agent receives from a
borrower an application for a Federal Loan (which includes an executed
promissory note). The Seller or its agent reviews each application to confirm
its completeness, to confirm that the applicant is an Eligible Student and that
such loan complies with certain other conditions of the Program. The Seller
forwards a copy of each application (or electronically transmits the data from
such application) that satisfies the foregoing reviews to the respective
Guarantor, who reviews such application to determine that such application
satisfies all applicable conditions, including the foregoing, for the loan to be
eligible to receive Guarantee Payments, subject to compliance with the terms of
the respective Guarantee Agreements, including the proper servicing of the loan.
Upon approval of an application by both the Seller and the respective Guarantor
and receipt of evidence from such Guarantor that the applicable loan is
guaranteed, the Seller causes the proceeds of such loan to be disbursed in one
or more installments. For each loan that is made, the Seller forwards the
completed loan application and executed promissory note to the Master Servicer,
which serves as custodian for such materials.
With respect to borrower inquiries concerning Consolidation Loans, the
Servicer will contact the borrower and prepare and send to the borrower an
application (which includes a promissory note) for a Consolidation Loan for the
borrower's review and signature. Although the borrower is permitted to choose
any lender from whom he or she currently has federally guaranteed education
loans (including undergraduate loans) to make such Consolidation Loan, borrowers
typically express no preference as to the identity of the lender. In that event,
the Servicer will choose a lender based on multiple considerations, which may
include the lender that has the highest balance of the loans to be consolidated
or, if there is no such lender, the lender that has made the most recent loan to
the borrower to be consolidated. Pursuant to the Program, the Servicer will be
required to obtain certifications from the lenders of the loans to be
consolidated and to review the loan application and the certifications to
confirm that the borrower is eligible for a Consolidation Loan. Upon approval of
an application for a Consolidation Loan, the applicable lender will cause the
proceeds of such Consolidation Loan to be disbursed to each lender of the loans
being consolidated in amounts sufficient to retire each of such loans. For each
Consolidation Loan that is made by the Seller, the Servicer will retain the
completed loan application and executed promissory note as custodian.
Servicing and Collections Process. The Higher Education Act, the
Federal Program and the applicable Guarantee Agreements require the holder of
Federal Loans to cause specified procedures, including due diligence procedures
and the taking of specific steps at specific intervals, to be performed with
respect to the servicing of the Federal Loans that are designed to ensure that
such Federal Loans are repaid on a timely basis by or on behalf of borrowers.
The Master Servicer will perform such procedures and has agreed, pursuant to the
Sale and Servicing Agreement, to perform, or cause to be performed, specified
and detailed servicing and collection procedures with respect to the Federal
Loans on behalf of the Trust. Such procedures generally include periodic
attempts to contact any delinquent borrower by telephone and by mail, commencing
with a written notice at the tenth day of delinquency and including multiple
written notices and telephone calls to the borrower thereafter at specified
times during any such delinquency. All telephone calls and letters are
automatically registered, and a synopsis of each call or the mailing of each
letter is noted in the Master Servicer's loan file for the borrower. The Master
Servicer is also required to perform, or cause to be performed, skip tracing
procedures on delinquent borrowers whose current location is unknown, including
contacting such borrowers' schools and references. Failure to comply with the
established procedures could adversely affect the ability of the Eligible Lender
Trustee, as holder of legal title to the Federal Loans on behalf of the Trust,
to realize the benefits of any Guarantee Agreement or to receive the benefits of
Federal assistance from the Department with respect thereto. Failure to comply
with certain of the established procedures with respect to a Federal Loan may
also result in the denial of coverage under a Guarantee Agreement for certain
accrued interest amounts, in circumstances where such failure has not caused the
loss of the guarantee of the principal of such Federal Loan. See "Risk
Factors--Failure to Comply with Loan Origination and Servicing Procedures for
Federal Loans".
At prescribed times prior to submitting a claim for payment under a
Guarantee Agreement for a delinquent Federal Loan, the Master Servicer is
required to notify the applicable Guarantor of the existence of such
delinquency. These requests notify the Guarantors of seriously delinquent
accounts and allow the Guarantors to make additional attempts to collect on such
loans prior to the filing of claims. If a loan is delinquent for 180 days, the
Master Servicer is required to file a default claim with the respective
Guarantor. Failure to file a claim within 270 days (or 225 days once certain
final regulations take effect) of delinquency may result in denial of the
guarantee claim with respect to such Federal Loan. The failure by the Master
Servicer to file a guarantee claim in a timely fashion would constitute a breach
of its covenants and create an obligation of the Master Servicer to purchase the
applicable Federal Loan. See "Description of the Transfer and Servicing
Agreements-- Servicer Covenants."
TYPES OF FEDERAL LOANS UNDER THE PROGRAM
General. The following descriptions of the Stafford Student Loan
Program, the Unsubsidized Stafford Loan Program, the Supplemental Loans for
Students Program, the Parental Loans for Undergraduate Students Program and the
Consolidation Loan Program (such programs being collectively referred to herein
as the "Federal Programs") as authorized under the Higher Education Act are
qualified in their entirety by reference to the Higher Education Act. Since its
original enactment in 1965, the Higher Education Act has been amended and
reauthorized several times, including by the Higher Education Amendments of 1992
(the "1992 Amendments"), the Student Loan Reform Act of 1993 (the "1993
Amendments") and the Higher Education Technical Amendments Act of 1993 (the
"1993 Technical Amendments"). The 1992 Amendments extended the principal
provisions of the Federal Programs through October 1, 1998 (or, in the case of
borrowers who have received Federal Loans prior to that date, September 30,
2002).
There can be no assurance that the Higher Education Act or other
relevant federal or state laws, rules and regulations and the programs
implemented thereunder will not be amended or modified in the future in a manner
that will adversely impact the programs described in this Prospectus and the
Federal Loans made thereunder, or the Guarantors. In addition, existing
legislation and future measures to reduce the federal budget deficit may
adversely affect the amount and nature of federal financial assistance available
with respect to these programs. In recent years, federal budget legislation has
provided for the recovery of certain funds held by guarantee agencies in order
to achieve reductions in federal spending. There can be no assurance that future
federal budget legislation or administrative actions will not adversely affect
expenditures by the Department or the financial condition of the Guarantors.
Stafford Loans. "Stafford Loans" are loans made by eligible lenders in
accordance with the Higher Education Act to Eligible Students, based on
financial need, to finance a portion of the costs of attending an eligible
institution of higher education or a vocational school. The Higher Education Act
limits the amount of Stafford Loans that may be made to a student in any given
academic year and the amount of Stafford Loans that a student may have
outstanding in the aggregate and specifies certain payment terms, including the
interest rates that may be charged on Stafford Loans. Holders of Stafford Loans
complying with these limitations and the other conditions specified in the
Higher Education Act will be entitled to the benefits of: (i) a guarantee of the
payment of principal and interest with respect to such Stafford Loans by a
guarantee agency, which guarantee will be supported by federal reinsurance of
all or most of such guaranteed amounts as described herein; (ii) federal
interest subsidy payments equal to the interest payable on such Stafford Loans
prior to the time the borrower begins repayment of such Stafford Loans and
during any applicable Deferral Periods, together with interest on any such
amounts not paid by the Department when due ("Interest Subsidy Payments"), and
(iii) federal special allowance payments, together with interest on any such
amounts not paid by the Department when due ("Special Allowance Payments"),
during the term of such Stafford Loans in varying amounts to ensure that
interest payable on such Stafford Loans, together with these payments,
approximates current market interest rates (such federal reinsurance
obligations, together with those obligations referred to in clauses (ii) and
(iii) above, being collectively referred to herein as "Federal Assistance").
(1) Eligibility Requirements. Subject to the annual and aggregate
limits on the amount of Stafford Loans that a student can borrow discussed
below, Stafford Loans are available to eligible students in amounts not
exceeding their unmet need for financing as determined in accordance with the
provisions of the Higher Education Act.
In addition to complying with the borrower's eligibility requirements
set forth above under the caption "--The Loan Program," each Stafford Loan (i)
must be unsecured, (ii) must provide for deferral of the obligation of the
borrower to make (x) interest payments for as long as the Department makes
Interest Subsidy Payments and (y) principal payments so long as the borrower
remains an Eligible Student and thereafter during any applicable Grace Periods,
Deferral Periods or Forbearance Periods and (iii) must provide for repayment
over a period generally not to exceed 10 years (excluding any Deferral Periods
or Forbearance Periods) from the date repayment commences.
(2) Loan Limits. In order to qualify for Federal Assistance under the
Stafford Federal Student Loan Program, the Higher Education Act imposes an
annual limit on the amount of Stafford Loans and other Federal Loans that may be
made to any single student and an aggregate limit on the amount of such Federal
Loans such student may have outstanding. Under the 1992 Amendments, the annual
Stafford limit for first year students is $2,625 (except that lower limits apply
to certain short-term courses of study), increasing to $3,500 for second year
students, $5,500 for third and fourth year students, and $8,500 for graduate and
professional students. The aggregate limit is $23,000 for undergraduates and
$65,600 for graduate and professional students.
(3) Interest. Stafford Loans made to students with respect to periods
of enrollment in school commencing prior to July 1, 1988 (or thereafter to
students who had Federal Loans outstanding on such date), bear interest at
either 7%, 8% or 9% per annum, depending on the date of issuance and the
interest rate applicable to such student's outstanding Federal Loans. For the
time periods applicable to the Financed Student Loans, Stafford Loans made on or
after July l, 1988, to students with no outstanding Federal Loans on the date
such Stafford Loan is made ("new borrowers"), bear interest at rates of 8% per
annum from disbursement through four years after repayment commences and 10% per
annum thereafter, subject to a provision requiring annual discharge of principal
or rebate to the borrower to the extent that, for each quarter, the interest due
at the 10% rate (or, for Stafford Loans to such borrowers which are first
disbursed after July 23, 1992, the interest rate then applicable thereto)
exceeds the interest that would be payable at a rate per annum equal to the sum
of the average of the bond equivalent rates of 91-day Treasury bills auctioned
for that quarter (the "T-Bill Rate") plus 3.25% (or, for Stafford Loans to such
borrowers which are first disbursed after July 23, 1992, and from the date of
disbursement, 3.10%). Notwithstanding the foregoing, no such discharge of
principal or rebate to a borrower will be payable if such borrower is more than
30 days delinquent in making payments on such Stafford Loan. However, under the
1993 Technical Amendments, lenders must convert all loans subject to this
provision to a variable rate equal to the 91-day Treasury bill rate plus 3.25%
or, in the case of a loan made to a borrower with outstanding Federal Loans
under the Federal Programs after October 1, 1993, the 91-day Treasury bill rate
plus 3.1%, such conversion to take place before January 1, 1995. The converted
loans will not thereafter be subject to the rebate requirements described above.
A Stafford Loan made on or after October 1, 1992, to a student with no
outstanding Federal Loans on the date such Stafford Loan is made, bears interest
at a variable rate based on 91-day Treasury bills plus 3.10%. A Stafford Loan
made on or after July 1, 1994 (regardless of whether the student has outstanding
Federal Loans on the date such Stafford Loan is made) will bear interest at a
variable rate equal to the sum of the T-Bill Rate plus 3.10%, or 8.25%,
whichever is less.
Interest is payable on each Stafford Loan monthly in arrears until the
principal amount thereof is paid in full. However, prior to the date the
borrower begins repaying the principal of such Stafford Loan and during any
applicable Deferral Period or Grace Period, the borrower has no obligation to
make interest payments. Instead, the Department makes quarterly Interest Subsidy
Payments to the holder of the Stafford Loan on behalf of the borrower during
such periods, in amounts equal to the accrued and unpaid interest for the
previous quarter with respect to such Stafford Loan. During a Forbearance
Period, the Department will not make any Interest Subsidy Payments; instead, at
the borrower's option, interest on each Stafford Loan may be paid currently or
capitalized and added to the outstanding principal balance of such Stafford Loan
at the end of such Forbearance Period. See "--(6) Interest Subsidy Payments."
(4) Repayment. No principal and/or interest payments with respect to a
Stafford Loan are required to be made during the time a borrower remains an
Eligible Student and during the existence of an applicable Grace Period,
Deferral Period or Forbearance Period. In general, a borrower must repay each
Stafford Loan in monthly installments over a period generally not to exceed 10
years (excluding any Deferral Period or Forbearance Period) after commencement
of repayment. Any borrower may voluntarily prepay without premium or penalty any
Federal Loan and in connection therewith may waive any Grace Period or Deferral
Period. The Higher Education Act presently requires a minimum annual principal
and interest payment with respect to a Stafford Loan of $600 in the aggregate
(but in no event less than accrued interest), unless the borrower and the lender
agree to a lesser amount. The 1992 Amendments adopted several provisions that
affect loan terms. These include, among others, provisions to grant new
borrowers with respect to loans for which the first disbursement is on or after
July 1, 1993, the right to receive income-sensitive repayment schedules.
(5) Grace Periods, Deferral Periods, Forbearance Periods. Borrowers of
Stafford Loans must generally commence repaying the loans following a period of
(a) not less than 9 months nor more than 12 months (with respect to loans for
which the applicable interest rate is 7% per annum) and (b) not more than 6
months (with respect to loans for which the applicable interest rate is in
excess of 7% per annum and for loans to first time borrowers on or after July 1,
1988) (a "Grace Period") after the borrower ceases to be an Eligible Student.
However, subject to certain conditions, no principal repayments need be made
with respect to Stafford Loans during periods when the borrower has returned to
an eligible educational institution on at least a half-time basis or is pursuing
studies pursuant to an approved graduate fellowship program and during certain
other periods (varying from six months to three years) when the borrower has
joined the military or certain volunteer organizations (for all loans made after
July 1, 1993, or loans made after such date to borrowers with loans already
outstanding on such date), for periods when the borrower is unable to secure
employment (up to three years) or for periods during which the borrower is
experiencing economic hardship (for loans made after July 1, 1993, to borrowers
with no outstanding loans on such date) (each a "Deferral Period"). The lender
may also allow, in accordance with standards and guidelines approved by the
applicable guarantor and the Department, periods of forbearance during which the
borrower may defer principal and/or interest payments because of temporary
financial hardship (a "Forbearance Period").
(6) Interest Subsidy Payments. Interest Subsidy Payments are payments
made quarterly to the holder of a qualifying Stafford Loan by the Department
with respect to those Stafford Loans as to which the applicable conditions of
the Higher Education Act have been satisfied, in an amount equal to the accrued
and unpaid interest on the outstanding principal amount of each Stafford Loan
for such quarter, commencing from the date such Stafford Loan is made until the
end of the applicable Grace Period after the borrower ceases to be an eligible
student and during any applicable Deferral Period. The Department will not make
Interest Subsidy Payments during any Forbearance Period. The Higher Education
Act provides that the holder of such a qualifying Stafford Loan has a
contractual right, as against the United States, to receive Interest Subsidy
Payments from the Department (including the right to receive interest on any
Interest Subsidy Payments not timely paid). Receipt of Interest Subsidy Payments
is conditioned on compliance with the requirements of the Higher Education Act,
including satisfaction of certain need-based criteria (and the delivery of
sufficient information by the borrower and the lender to the Department to
confirm the foregoing) and continued eligibility of the Stafford Loan for
federal reinsurance. Such eligibility may be lost, however, if the loans are not
originated and serviced, or are not held by an eligible lender, in accordance
with the requirements of the Higher Education Act and the applicable guarantee
agreements. See "--(1) Eligibility Requirements"; "Risk Factors--Failure to
Comply With Loan Origination and Servicing Procedures for Federal Loans";
"Formation of the Trust--Eligible Lender Trustee" and "Description of the
Transfer and Servicing Agreements--Servicing Procedures." The Seller expects
that each of the Stafford Loans that are part of the pool of Financed Student
Loans will be eligible to receive Interest Subsidy Payments.
(7) Special Allowance Payments. The Higher Education Act requires,
subject to certain conditions, the Department to make quarterly Special
Allowance Payments to holders of qualifying Federal Loans (including Stafford
Loans) in an amount equal to a specified percentage of the average outstanding
principal amount of each such Federal Loan during each quarter.
The percentage or rate used to determine the Special Allowance
Payments for a particular loan varies based on a number of factors, including
when the loan was disbursed and the period of enrollment with respect to which
it was made. Generally, the Special Allowance Payment with respect to a loan
such as any Federal Loan for a quarter will be equal to the excess, if any, of
(i) the amount of interest that would be payable on such loan at a rate per
annum equal to the T-Bill Rate plus 3.10% (3.25% for loans first disbursed
before October 1, 1992 and 2.50% while the borrower is in school, grace or
deferment status for loans made on or after July 1, 1995) over (ii) the stated
amount of interest payable on such loan. The rate of Special Allowance Payments
is subject to reduction by the amount of certain origination fees charged to
borrowers and may be reduced as a result of certain federal budget deficit
reduction measures.
The Higher Education Act provides that a holder of a qualifying loan
who is entitled to receive Special Allowance Payments has a contractual right
against the United States to receive those Special Allowance Payments (including
the right to receive interest on any Special Allowance Payments not timely
paid). Receipt of Special Allowance Payments, however, is conditioned on
compliance with the requirements of the Higher Education Act, including
satisfaction of certain need-based criteria (and the delivery of sufficient
information by the borrower and the lender to the Department to confirm the
foregoing) and continued eligibility for federal reinsurance. Such eligibility
may be lost, however, if the loans are not originated and serviced, or are not
held by an eligible lender, in accordance with the requirements of the Higher
Education Act and the applicable guarantee agreement. See "--(1) Eligibility
Requirements"; "Risk Factors --Failure to Comply With Loan Origination and
Servicing Procedures for Federal Loans"; "Formation of the Trust--Eligible
Lender Trustee" and "Description of the Transfer and Servicing
Agreements--Servicing Procedures." The Seller expects that each of the Stafford
Loans that are part of the pool of Financed Student Loans will be eligible to
receive Special Allowance Payments, if any are payable from time to time.
Interest Subsidy Payments and Special Allowance Payments are generally
received within 45 to 60 days after submission to the Department of the
applicable claims forms for any given calendar quarter, although there can be no
assurance that such payments will in fact be received from the Department within
that period. See "Risk Factors--Variability of Actual Cash Flows; Inability of
Indenture Trustee to Liquidate Financed Student Loans." The Administrator has
agreed to prepare and file with the Department all such claims forms and any
other required documents or filings on behalf of the Eligible Lender Trustee as
owner of the Financed Student Loans on behalf of the Trust. The Administrator
has also agreed to assist the Eligible Lender Trustee in monitoring, pursuing
and obtaining such Interest Subsidy Payments and Special Allowance Payments, if
any, with respect to such Federal Loans. Except under certain conditions
described herein, the Eligible Lender Trustee will be required to remit to the
Indenture Trustee, for deposit in the Collection Account, Interest Subsidy
Payments and Special Allowance Payments it receives with respect to the Federal
Loans within two Business Days of receipt thereof.
Unsubsidized Stafford Loans. The Federal Loans also may include
Stafford Loans that do not qualify for Interest Subsidy Payments but otherwise
qualify for all other forms of Federal Assistance ("Unsubsidized Stafford
Loans"). These loans are identical to Stafford Loans in all material respects,
except that interest accruing thereon during periods when the borrower is in
school or in a Deferral Period or Grace Period is either paid periodically by
the borrower during such periods or added periodically to the principal balance
of the loan by the holder thereof. A borrower qualifies for an Unsubsidized
Stafford Loan if, and to the extent that, the borrower's need for a Stafford
Loan, as calculated pursuant to the Higher Education Act, is less than the
maximum Stafford Loan authorized by statute due to the borrower's expected
family contribution as calculated thereunder. As discussed below, no SLS Loans
may be made on or after July 1, 1994. As a result of this change, on July 1,
1994, the maximum amount a single borrower may receive under the Unsubsidized
Stafford Loan program will be increased by the amount such borrower could have
obtained under the SLS Program.
SLS Loans. In addition to the Stafford Student Loan Program, the
Higher Education Act provides a separate program to facilitate additional loans
to graduate and professional students and independent undergraduate students.
This program is referred to as the "Supplemental Loans for Students Program"
(the "SLS Program"). The basic framework and principal provisions of the
Stafford Student Loan Program as described above are similar in many respects to
those that are applicable to loans under the SLS Program, ("SLS Loans"). In
particular, SLS Loans are subject to similar eligibility requirements and,
provided that such requirements are satisfied, are entitled to the same
guarantee and federal reinsurance arrangements. SLS Loans differ significantly
from Stafford Loans, however, in the context of the Interest Subsidy Payments
and Special Allowance Payments discussed above.
The annual and aggregate limitations that are applicable to SLS Loans
are as follows: SLS Loans to a single borrower cannot exceed $4,000 per academic
year for first year and second year students, increasing to $5,000 for third
year and fourth year students, and to $10,000 for graduate and professional
students, with aggregate limits of $23,000 for undergraduate students ($20,000
for loans first disbursed on or before July 1, 1993) and $73,000 for graduate
and professional students (exclusive of any capitalized interest) at any one
time outstanding. SLS Loans are also limited, generally, to the cost of
attendance minus other financial aid for which the borrower is eligible. A
determination of a borrower's eligibility for the Stafford Student Loan Program,
among other programs, is a condition to the making of an SLS Loan.
As specified by the Higher Education Act, the applicable interest rate
for an SLS Loan depends upon the date of issuance of the loan and the period of
enrollment for which the loan is made. The interest rate per annum for SLS Loans
made and disbursed on or after July 1, 1987 is fixed each July 1 for each
succeeding 12-month period at a rate equal to the sum of (i) the bond equivalent
rate of 52-week Treasury bills auctioned at the final auction held prior to the
preceding June 1 and (ii) 3.10% (3.25% for loans first disbursed before October
1, 1992), with a maximum rate of 11% per annum (12% for loans first disbursed
before October 1, 1992).
Although holders of SLS Loans are not entitled to receive Interest
Subsidy Payments with respect thereto, interest on such SLS Loans accrues from
the date each such SLS Loan is made and may either be paid currently by a
borrower or may be capitalized and added to the outstanding principal amount of
such SLS Loan at the time the borrower begins repayment. SLS Loans are eligible
for Special Allowance Payments only if and to the extent that the interest rate
for such SLS Loans calculated based on the 52-week Treasury bill rate referred
to above would exceed 12% per annum. Because the basis for determining the
amount, if any, of Special Allowance Payments due to lenders is based on the
91-day T-Bill Rate while the interest rate for SLS Loans is based on the 52-week
Treasury bill rate (which may differ from the 91-day T-Bill Rate), there can be
no assurance that any Special Allowance Payments will be due and payable with
respect to SLS Loans even though such SLS Loans are deemed to be eligible
therefor. See "--(7) Special Allowance Payments."
A borrower of an SLS Loan is required to begin repayment of the
principal of such SLS Loan within 60 days after the date the last installment of
such SLS Loan is advanced, subject to deferral so long as such borrower remains
an Eligible Student or as a result of any applicable Deferral Period or
Forbearance Period. In addition, any borrower of an SLS Loan made and advanced
after July 23, 1992, who also has Stafford Loans outstanding may defer
commencing repayment of such SLS Loan for the Grace Period applicable to such
Stafford Loans. Pursuant to the Omnibus Budget Reconciliation Act of 1993, no
SLS Loans may be made on or after July 1, 1994.
PLUS Loans. The Higher Education Act authorizes PLUS Loans to be made
to parents of eligible dependent students. The basic provisions applicable to
PLUS Loans are similar to those of Stafford Loans with respect to the
involvement of guaranty agencies and the Department in providing federal
insurance on the loans. However, PLUS Loans differ significantly from Stafford
Loans, particularly because Interest Subsidy Payments are not available and
Special Allowance Payments are more restricted.
Parents of dependent students are eligible to receive PLUS Loans and
may borrow up to $4,000 per academic year per student with a maximum aggregate
amount of $20,000 per student. Pursuant to the 1992 Amendments, with respect to
PLUS Loans originated after July 1, 1993, there are no annual loan limits for
PLUS Loans. PLUS Loans, however, are limited by a formula whereby the amount
borrowed annually, when combined with the student's other loans and grants for
that year, may not exceed the student's estimated educational costs. The 1992
Amendments prohibit origination of PLUS Loans to borrowers determined, pursuant
to regulations of the Department, to have adverse credit histories for loans
with first disbursement on or after July 1, 1993.
The interest rates on a PLUS Loan depend upon the date of issuance of
the loan and the period of enrollment for which the loan is to apply. PLUS Loans
disbursed or refinanced on or after July 1, 1987 bear interest at a variable
rate which is in effect from each July 1 through June 30, which is determined on
the June 1 preceding the commencement of the interest rate period and which is
equal to the bond equivalent rate of 52-week Treasury bills auctioned at the
final auction held prior to such June 1 plus 3.10% (3.25% for PLUS Loans
disbursed before October 1, 1992), except that such rate cannot exceed 10% (or
12% for PLUS Loans disbursed before October 1, 1992). The 1993 Amendments reduce
this interest rate ceiling to 9% for PLUS Loans made to new borrowers on or
after July 1, 1994. PLUS Loans made on or after July 1, 1998 are to bear a rate
equal to the bond equivalent rate of the U.S. Treasury security with a
comparable maturity, as established by the Department, plus 2.1% (not to exceed
9%).
Lenders are required to charge a 5% origination fee, payable to the
Department, to any borrower of a PLUS Loan made on or after October 1, 1992.
Repayment of the principal of PLUS Loans is required to commence no
later than 60 days after the date of final disbursement of such loan, subject to
certain deferment provisions. A parent borrower may defer principal payments for
periods during which the borrower has a dependent student for whom the parent
borrowed a PLUS Loan, if such student is engaged in a qualifying educational
program, graduate fellowship program or rehabilitation training program and the
PLUS Loan was originated before July 1, 1993; a parent borrower of a PLUS Loan
made thereafter may defer principal payments only if such parent borrower is
engaged in a qualifying educational program, graduate fellowship program or
rehabilitation training program.
Interest Subsidy Payments are not available with respect to PLUS
Loans. However, the capitalization of interest is allowed during deferral
periods. Thus, the borrower and lender may agree either to capitalize interest
or to have the borrower make the interest payments during an authorized period.
The annual loan limits are not violated by any decision to capitalize interest.
Consolidation Loans. The Higher Education Act established a program to
facilitate the ability of eligible borrowers of Stafford Loans, SLS Loans and
PLUS Loans (each an "Underlying Federal Loan") to consolidate such Federal
Loans, together with such borrowers' other education loans that are made or
guaranteed by the federal government (including HEAL Loans), into a single loan
(a "Consolidation Loan"). Subject to the satisfaction of certain conditions set
forth in the Higher Education Act, including limitations on the timing and
payment of principal and interest with respect to Consolidation Loans and a
requirement that the proceeds of Consolidation Loans are to be used to repay the
respective Underlying Federal Loans (and any other loans consolidated
thereunder) of any borrower, each holder of a Consolidation Loan will be
entitled to the same guarantee and federal reinsurance arrangements as are
available on Stafford Loans, SLS Loans and PLUS Loans. Consolidation Loans, like
Stafford Loans, are also eligible for Interest Subsidy Payments and Special
Allowance Payments; however, for Consolidation Loan applications received by
lenders on or after August 10, 1993, the Department will no longer make Interest
Subsidy Payments on Consolidation Loans other than those loans which consolidate
only subsidized Stafford Loans. Also, as described below under "--The HEAL
Program--Consolidation of HEAL Loans," any HEAL Loan consolidated pursuant to
the provisions of the Higher Education Act will not be eligible for Special
Allowance Payments or Interest Subsidy Payments. Under this program, an eligible
borrower of Consolidation Loans means a borrower who has begun repaying, who is
in a grace period preceding repayment of, or who is a delinquent or defaulted
borrower who will, through such loan consolidation, recommence repayment of such
Underlying Federal Loans. A married couple, each of whom has outstanding
Underlying Federal Loans, may apply for and obtain a single Consolidation Loan
so long as both individuals agree to be held jointly and severally liable on
such Consolidation Loan.
Under this program, a lender may make a Consolidation Loan to an
eligible borrower at the request of the borrower if the lender holds an
outstanding Underlying Federal Loan of the borrower or the borrower certifies
that he or she has been unable to obtain a Consolidation Loan from any of the
holders of the outstanding Underlying Federal Loans of the borrower. The lender
making any Consolidation Loan will pay the amount thereof to the various lenders
of the respective Underlying Federal Loans and other loans being consolidated
thereby.
The Trust may be affected by Consolidation Loans in the following way.
The Trust may own Underlying Federal Loans with respect to which an institution
other than the Seller (or the Seller, if the Pre-Funded Amount has been reduced
to less than the amount of the Consolidation Loan) makes the Consolidation Loan,
in which case such Underlying Federal Loans will be prepaid in full and such
prepayment amount will constitute Available Funds for the applicable Collection
Period. See "Description of the Transfer and Servicing
Agreements--Distributions."
In accordance with the Higher Education Act, Consolidation Loans may
bear interest at a rate per annum equal to the weighted average of the interest
rates on the Underlying Federal Loans (rounded up to the nearest whole percent).
In general, a borrower must repay each Consolidation Loan in scheduled monthly
installments over a period of not more than 10 to 30 years (excluding any
Deferral Period and any Forbearance Period), depending on the original principal
amount of such Consolidation Loan. The repayment schedules for Consolidation
Loans will not exceed: 12 years for loans greater than or equal to $7,500, but
less than $10,000; 15 years for loans greater than or equal to $10,000, but less
than $20,000; 20 years for loans greater than or equal to $20,000, but less than
$40,000; 25 years for loans greater than or equal to $40,000, but less than
$60,000; and not more than 30 years for loans in excess of $60,000. Effective
July 1, 1994, Consolidation Loans for less than $7,500 will have a repayment
schedule of not more than 10 years. Borrowers may voluntarily prepay all or a
portion of any Consolidation Loan without premium or penalty. Repayment of a
Consolidation Loan must commence within 60 days after all holders of Underlying
Federal Loans have discharged the liability of the borrower thereon; provided,
however, that such repayment obligation is deferred for as long as the borrower
remains an Eligible Student and during any applicable Deferral Phase and
Forbearance Phase.
The 1993 Amendments made a number of changes to the Consolidation Loan
Program, including requiring holders of Consolidation Loans made on or after
October 1, 1993, to pay to the Department a monthly fee equal to 1.05% per
annum.
Proposed federal budget legislation being considered by Congress could
modify many of the provisions of the Higher Education Act. Until final
legislation is adopted, the impact on the Financed Student Loans, if any, is
impossible to determine.
THE HEAL PROGRAM
General. The Public Health Service Act sets forth provisions
establishing a program to provide insured health education assistance loans
("HEAL Loans") for eligible graduate students in schools of medicine,
osteopathy, dentistry, veterinary medicine, optometry, podiatry, public health,
pharmacy, chiropractic medicine or in programs in health administration,
clinical psychology or allied health. The Public Health Service Act provides for
direct federal insurance, backed by the full faith and credit of the United
States, to holders of HEAL Loans (the "HEAL Program").
The maximum amount of new loans made under the HEAL Program during
fiscal years 1993, 1994, and 1995 may not exceed $350,000,000, $375,000,000 and
$425,000,000, respectively. Any unused ceiling during a fiscal year carries over
and is added to the ceiling established for the following fiscal year. After
fiscal year 1995, unless the HEAL Program is otherwise extended by federal law,
only those students who have previously received a HEAL Loan may receive
additional HEAL Loans for purposes of continuing or completing their educational
program or to pay interest on prior HEAL Loans received by the borrower, and the
Secretary may not insure any HEAL Loan made or installment paid after September
30, 1998. Students who had not received a HEAL Loan prior to October 1, 1995 are
not eligible to borrow under the HEAL Program. Such students may be eligible for
an increased loan limited with respect to the amount of Unsubsidized Stafford
Loans they may receive.
The Public Health Service Act is found at 42 U.S.C. Section 201, et
seq. Most provisions relating to the HEAL Program are found at 42 U.S.C.
Sections 292 through 292p. Regulations relating to the HEAL Program are found at
42 CFR Sections 60.1 through 60.61 (the "Regulations").
Proposed federal budget legislation being considered by Congress could
modify many of the provisions of the Public Health Service Act. Until final
legislation is adopted, the impact on the Financed Student Loans, if any, is
impossible to determine.
Eligible Borrowers. A student loan is eligible for insurance by the
Secretary under the Public Health Service Act if it is made to a student who (i)
is a citizen, national, or lawful permanent resident of the United States or
permanent resident of certain territories of the United States, (ii) has been
accepted for enrollment or is enrolled in good standing at an "eligible
institution" (defined in the Public Health Service Act as a school of medicine,
osteopathic medicine, dentistry, veterinary medicine, optometry, podiatric
medicine, pharmacy, public health, allied health or chiropractic, or a graduate
program in health administration or clinical psychology), (iii) is or will be a
full-time student, (iv) has agreed that all loan proceeds received shall be used
solely for tuition, other reasonable educational expenses, including fees,
books, supplies and equipment, and laboratory expenses, and reasonable living
and transportation expenses, (v) has presented himself and submitted to
registration under the Military Selective Service Act, if required by such act,
(vi) needs the loan to pursue his or her course of study at the eligible
institution, and (vii) in the case of a pharmacy student, has satisfactorily
completed three years of training. HEAL Loans also may be made to certain
nonstudents (such as doctors who are serving as interns or residents) who (A)
previously had a HEAL Loan, (B) is in a period of deferment (as described herein
under "--Deferment Periods") during which no principal is required to be paid,
(C) has agreed that all funds received under the proposed HEAL Loan will be used
solely to repay interest due on a previous HEAL Loan, and (D) has presented
himself and submitted to registration under the Military Selective Service Act,
if required by such act. Beginning on January 1, 1996, a student is NOT eligible
to obtain a HEAL Loan for attendance at an institution that has a default rate
in excess of 20 percent. (See "--Risk- Based Premiums" below.)
Eligible Institutions. In order to participate in the HEAL Program, a
school must enter into a written agreement with the Secretary in which the
school agrees to comply with the provisions of the Public Health Service Act and
the Regulations. The school must be legally authorized within a State, the
District of Columbia or certain territories of the United States to conduct a
course of study leading to one of the following degrees: (i) doctor of medicine,
osteopathic medicine, dentistry, optometry, veterinary medicine, podiatric
medicine, chiropractic, or clinical psychology, (ii) Bachelor or Master of
Science in pharmacy, (iii) Masters or doctoral degree in health administration,
or (iv) graduate or equivalent degree in public health. The school must also be
accredited by a recognized agency approved for that course of study by the
Secretary of Education, except where a school is not eligible for accreditation
solely because it is too new. A new school is eligible if the Secretary of
Education determines that it can reasonably expect to be accredited before the
beginning of the academic year following the normal graduation date of its first
entering class.
Eligible Lenders. The following types of organizations are eligible to
apply to the Secretary to be eligible lenders of HEAL Loans: (i) a financial or
credit institution (including a bank, savings and loan association, credit
union, or insurance company) which is subject to examination and supervision in
its capacity as a lender by an agency of the United States or of the State in
which it has its principal place of business; (ii) a pension fund approved by
the Secretary; (iii) an agency or instrumentality of a State; (iv) an eligible
institution under the HEAL Program; and (v) a private nonprofit entity,
designated by the State, regulated by the State, and approved by the Secretary.
In addition, the following types of organizations are eligible to apply to the
Secretary to be holders of HEAL Loans: (i) public entities in the business of
purchasing student loans; (ii) the Student Loan Marketing Association; and (iii)
other eligible lenders. If an application is approved by the Secretary, eligible
lenders enter into a comprehensive contract (as described further in the
following subsections) with the Secretary pursuant to which the lender agrees to
comply with all of the laws, regulations and other requirements applicable to
its participation in the HEAL Program and the Secretary agrees to insure each
HEAL Loan held by the lender.
Certificate of Loan Insurance. The Public Health Service Act provides
that the Secretary may issue a certificate of comprehensive insurance coverage
to any eligible lender who so applies, which will insure all insurable loans
made by that eligible lender after the date the certificate is issued until a
specified cutoff date and within the limits of an aggregate maximum amount
stated in the certificate. If the Secretary determines that the eligible lender
has failed to (i) exercise reasonable care and diligence in the making and
collection of loans, (ii) make reports and statements required by the Public
Health Service Act, or (iii) pay required federal loan insurance premiums, the
Secretary is required to disqualify that lender from obtaining further insurance
on HEAL Loans until the Secretary is satisfied that such failure has ceased and
the eligible lender will comply with such requirements. The rights of an
eligible lender under a certificate of insurance may be assigned to another
eligible lender (including a public entity in the business of purchasing student
loans) or the Student Loan Marketing Association.
Annual and Aggregate Loan Limits. The total principal amount of HEAL
Loans which may be made to a student enrolled in a school of medicine,
osteopathic medicine, dentistry, veterinary medicine, optometry, or podiatric
medicine may not exceed $20,000 during any academic year and may not at any time
exceed $80,000 in the aggregate. The total principal amount of HEAL Loans which
may be made to a student enrolled in a school of pharmacy, public health, allied
health, or chiropractic, or a graduate program in health administration or
clinical psychology may not exceed $12,500 during any academic year and may not
at any time exceed $50,000 in the aggregate. Checks for the proceeds of HEAL
Loans are made payable jointly to the borrower and the eligible institution in
which the borrower is enrolled.
Interest Rate. The interest rate on HEAL Loans may be calculated on a
fixed rate or variable rate basis. Whichever method is selected must continue
over the life of the loan unless the loan is consolidated (see "Consolidation of
HEAL Loans" herein). The interest rate may not exceed an annual rate equal to
the average of the bond equivalent rates of the 91-day Treasury bills auctioned
for the previous quarter plus 3%, rounded to the next higher one-eighth of 1%.
Interest that is calculated on a fixed rate basis is determined for the life of
the loan during the calendar quarter in which the loan is executed, but the rate
may not exceed the maximum rate described in the preceding sentence as
determined by the Secretary for such calendar quarter. Interest that is
calculated on a variable rate basis may change every calendar quarter as the
market price of U.S. Treasury bills changes, but the rate may not exceed the
maximum rate described above.
Interest accrues from the date the loan is disbursed until the loan is
paid in full. Unpaid accrued interest may be compounded not more frequently than
semiannually and added to principal; however, a lender may postpone the
compounding of interest before the beginning of the repayment period or during
periods of deferment or forbearance and add interest to principal at the time
repayment of principal begins or resumes.
The interest rate on HEAL Loans is not subject to any federal or state
usury laws that limit the rate or amount of interest payable on loans.
Repayment Terms. HEAL Loans must provide for repayment of the
principal amount, except during a deferment period described in the following
subsection, in installments over a period of not less than 10 years (unless
sooner repaid at the borrower's option) nor more than 25 years beginning not
earlier than 9 months nor later than 12 months after (i)(a) the date on which
the borrower ceases to be a participant in an accredited internship or residency
program of not more than four years in duration, (b) the borrower completes the
fourth year of an accredited internship or residency program of more than four
years in duration, or (c) the borrower, if not a participant in a program
described in clause (a) or (b) above, ceases to carry the normal full-time
academic workload as determined by the eligible institution, or (ii) the date on
which a borrower who is a graduate of an eligible institution ceases to be a
participant in a fellowship training program not in excess of two years or a
participant in a full-time educational activity not in excess of two years,
which (a) is directly related to the health profession for which the borrower
prepared at an eligible institution, as determined by the Secretary, and (b) may
be engaged in by the borrower during such a two-year period which begins within
12 months after the completion of the borrower's participation in a program
described in clauses (i)(a) or (b) above or prior to the completion of the
borrower's participation in such program. Except for deferment periods (as
described in the following subsection), the payments made on all outstanding
HEAL Loans by a borrower during any year must be at least equal to the annual
interest on the outstanding principal (unless the borrower agrees in writing to
make payments during any year or any repayment period in a lesser amount), and
lenders and holders of HEAL Loans must offer borrowers graduated loan repayment
schedules that, during the first five years of loan repayment, are based on the
borrower's debt-to-income ratio.
Any deferment period (as described in the following subsection) is not
included in the maximum 25 year total loan repayment period, but in no event may
the period of the loan exceed 33 years from the date of execution of the note or
written agreement evidencing the loan.
Deferment Periods. All HEAL Loans must provide that periodic
installments of principal and interest need not be paid, but interest will
accrue and be added to principal if not paid, during any "deferment period"
which is described in the Public Health Service Act as any period (i) during
which the borrower is pursuing a full-time course of study at an eligible
institution under the Public Health Service Act (or at an institution defined by
section 481(a) of the Higher Education Act); (ii) not in excess of four years
during which the borrower is a participant in an accredited internship or
residency program (including any period in such program in which the borrower
ceases to be a participant or the borrower completes the fourth year of such
program which has a duration of greater than four years); (iii) not in excess of
three years during which the borrower is (a) a member of the Armed Forces of the
United States, (b) in service as a volunteer under the Peace Corps Act, (c) a
member of the National Health Service Corps, (d) in service as a full-time
volunteer under Title I of the Domestic Volunteer Service Act of 1973, or (c)
practicing primary care and has completed an accredited internship or residency
training program in osteopathic general practice, family medicine, general
internal medicine, preventive medicine, or general pediatrics; (iv) not in
excess of one year for borrowers who are graduates of chiropractic schools; (v)
any period not in excess of two years which is described in clause (ii) of the
first paragraph of the preceding subsection.
Forbearance. Forbearance is defined in the Regulations as "an
extension of time for making loan payments or the acceptance of smaller payments
than were previously scheduled to prevent a borrower from defaulting on his or
her payment obligations". Provided that the borrower and the lender execute a
written agreement of forbearance, a lender or holder must grant forbearance
whenever the borrower is temporarily unable to make scheduled payments on a HEAL
Loan and the borrower continues to repay the loan in an amount commensurate with
his or her ability to repay the loan. Each forbearance period may not exceed six
months, and the total period of forbearance (with or without interruption) may
not exceed two years (except under certain circumstances approved by the
Secretary).
No Endorsement or Security Permitted. All HEAL Loans are made directly
to the student without security and without endorsement (unless the student is a
minor and applicable law requires an endorsement to create a binding
obligation). Endorsement is defined in the Regulations to mean the signature of
anyone other than the borrower who is to assume either primary or secondary
liability on the note.
Consolidation of HEAL Loans. HEAL Loans may be consolidated, but the
lender or holder must first inform the borrower of the effect of the
consolidation on the interest rate (as described in the following sentence) and
explain to the borrower that he or she is not required to agree to the
consolidation. The maximum interest rate on a consolidation loan may not exceed
the maximum rate as determined by the Secretary (and described herein under
"--Interest Rate") for the calendar quarter during which the consolidation loan
is made. HEAL Loans also may be consolidated with a borrower's outstanding
Federal Loans; however, unlike most Federal Loans, HEAL Loans consolidated
pursuant to the provisions of the Higher Education Act will not be eligible for
Special Allowance Payments or Interest Subsidy Payments.
Default of Borrower. Upon default by the borrower of a HEAL Loan and
after substantial collection efforts (including the commencement and prosecution
of an action against the borrower unless the amount of such loan was made in an
amount less than $2,500 or the Secretary determines that the eligible lender or
holder of the loan has made reasonable efforts to serve process on the borrower
and has been unsuccessful with respect to such efforts or the prosecution of
such an action would be fruitless because of the financial or other
circumstances of the borrower), the Secretary is required to pay to the
beneficiary the amount of the loss sustained by the insured. The United States
is subrogated for all of the rights of the holder of the defaulted obligation
and is entitled to an assignment of the note or other evidence of the insured
loan by the beneficiary. Any federal or state statutes of limitations do not
apply to any HEAL Loan which has been assigned to the Secretary.
The Regulations define default as "the persistent failure of the
borrower to make a payment when due or to comply with other terms of the note or
other written agreement evidencing a loan under circumstances where the
Secretary finds it reasonable to conclude that the borrower no longer intends to
honor the obligation to repay the loan." In the case of loans payable in monthly
installments, such failure to pay must have persisted for at least 120 days. In
the case of loans payable in less frequent installments, such failure to pay
must have persisted for at least 180 days. If the lender or holder determines
that it is not appropriate to commence and prosecute an action against a default
borrower, it must file a default claim with the Secretary within 30 days after a
loan has been determined to be in default. The lender must also have requested
preclaim assistance from the Public Health Service before the Secretary will pay
a default claim.
In an effort to collect on defaulted HEAL Loans, payments to a
borrower under any federal law (i.e. Medicare and Medicaid) for health services
rendered by a borrower in default on an outstanding HEAL Loan are required to be
reduced, after notice and opportunity for a hearing, up to the amount of the
remaining balance on such defaulted HEAL Loans.
Death or Disability of Borrower. The Secretary will pay the
outstanding balance on any HEAL Loan of a borrower who dies or becomes
permanently and totally disabled. The Regulations state that a borrower is
permanently and totally disabled if the borrower is "unable to engage in any
substantial gainful activity because of a medically determinable impairment
which the Secretary expects to continue for a long and indefinite period of time
or to result in death". A lender or holder must file a death or disability claim
with the Secretary within 30 days after such lender or holder receives
documentation of the borrower's death or 30 days after the lender or holder has
been notified that the Secretary has determined the borrower to be permanently
and totally disabled.
Discharge in Bankruptcy. A HEAL Loan may be released by a discharge in
bankruptcy under the U.S. Bankruptcy Code but only if such discharge is granted
(i) after the expiration of the seven-year period beginning on the first date
the borrower of the HEAL Loan is required to commence repayment, (ii) upon a
finding of the Bankruptcy Court that not discharging such debt would be
unconscionable, and (iii) upon the condition that the Secretary has not waived
his rights to reduce payments made to a borrower for health services rendered
under any federal law as further described in the second paragraph of the
subsection entitled "Default of Borrower".
Risk-Based Premiums. The Secretary assesses a risk-based premium to an
eligible borrower and, in certain circumstances, an eligible institution, on all
HEAL Loans based on the "default rate" (as defined below) of the eligible
institution the eligible borrower attends. The Public Health Service Act
establishes three rate levels known as the "low-risk rate", the "medium-risk
rate", and the "high-risk rate" which are further described as follows:
Low-Risk Rate: Applies to an eligible borrower seeking a HEAL Loan
for attendance at an eligible institution with a
default rate of not greater than five percent. The
premium assessed to such eligible borrower is equal
to six percent of the principal amount of the loan.
No premium is assessed to the eligible institution.
Medium-Risk Rate: Applies to an eligible borrower seeking a HEAL Loan
for attendance at an eligible institution with a
default rate grater than five percent but not
greater than ten percent. The premium assessed to
such eligible borrower is equal to eight percent of
the principal amount of the loan, and the premium
assessed to the eligible institution is equal to
five percent of the principal amount of the loan.
High-Risk Rate: Applies to an eligible borrower seeking a HEAL Loan
for attendance at an eligible institution with a
default rate greater than ten percent but not
greater than 20 percent. The premium assessed to
such eligible borrower is equal to eight percent of
the principal amount of the loan, and the premium
assessed to the eligible institution is equal to ten
percent of the principal amount of the loan.
The risk-based premium to any eligible borrower is reduced by 50
percent if a credit worthy parent or other responsible party co-signs the loan
note.
Any eligible institution in which the medium-risk rate or the
high-risk rate applies is required to submit to the Secretary for approval an
annual default management plan that specifies the short-term and long-term
procedures the institution will incorporate to minimize defaults on HEAL Loans.
Students attending eligible institutions with a default rate greater than 20
percent are not eligible to receive a HEAL Loan. The Secretary may consider
mitigating circumstances prior to making such institution ineligible for the
HEAL Program.
The "default rate" is defined in the Public Health Service Act to mean
the percentage determined by the ratio of (i) the principal amount of HEAL Loans
(A) that are made with respect to such eligible institution and that entered
repayment status after April 7, 1987; AND (B) for which amounts have been paid
to insurance beneficiaries due to the default of the borrower, excluding any
loan which has been discharged in bankruptcy or for which the borrower begins
payments to the Secretary after the loan has been assigned to the Secretary as a
result of the Secretary making an insurance payment on such loan, by (ii) the
total principal amount of HEAL Loans that are made with respect to such eligible
institution and that entered repayment status after April 7, 1987.
Insurance Account. The Public Health Service Act established an
insurance account, which is available without fiscal year limitation to the
Secretary for making payments in connection with the collection and default of
HEAL Loans. All amounts received by the Secretary as premium charges for
insurance and as receipts, earning, or proceeds derived from any claim or other
assets acquired by the Secretary in connection with the HEAL Program are
deposited in such account. All payments in connection with the default of HEAL
Loans are paid from such account. The Public Health Service Act also provides
that in the event moneys in such account are insufficient to make payments in
connection with the collection or default of any HEAL Loan, the Secretary of the
Treasury may lend such amounts as may be necessary to make the payments in such
insurance account, subject to the Federal Credit Reform Act of 1990.
THE PRIVATE LOAN PROGRAMS
General. It is expected that the Private Loans primarily will be
originated under one or more of the following Private Loan Programs: (i) the
Option 4 Program, (ii) the TERI Alternative Program and the PEP Program and
(iii) the PAL Program. The Private Loans may, to a lesser extent, be originated
under other Private Loan Programs that will be identified in the related
Prospectus Supplement. As of the date of this Prospectus, the Seller does not
originate loans under a Private Loan Program. Therefore, until such time, if
any, as the Seller originates loans under one or more Private Loan Programs, all
Private Loans sold to the Trust by the Seller will be Purchased Loans. The
following is a brief description of the Private Loan Programs identified above.
Option 4 Program. The Option 4 Program is a private loan program
established by United Student Aid Funds, Inc. ("USAF") and designed to help full
time students from families who are not eligible for Federal Loans, HEAL Loans
or other federal grants or loans or, if eligible, need to borrow additional
funds to finance their college educations. USAF is a private non-profit
corporation located in Indianapolis, Indiana.
Parents of full-time students enrolled or accepted for enrollment at
an accredited college or university are eligible to apply for a loan under the
Option 4 Program ("Option 4 Loans"). In general, applicants are required to have
an annual income of at least $15,000 and a monthly debt burden, including the
Option 4 Loan, of no greater than 40% of all monthly income. Eligible borrowers
of an Option 4 Loan may borrow from $2,000 up to $10,000 per academic year for
up to five years. However, the amount of the Option 4 Loan plus other financial
aid received by a student may not exceed the cost of education, as determined by
the school. A 4% guarantee fee is deducted from the loan proceeds.
The interest rate on Option 4 Loans varies and is indexed to the
average quarterly bond equivalent rate of the 91 day U.S. Treasury Bills plus
3.50%, subject to a maximum rate of 18%. The interest rate is adjusted on the
first day of February, May, August and November of each year.
Borrowers of Option 4 Loans may elect between two repayment plans.
Under the standard plan, borrowers begin repayment of principal and interest
within 45 days of disbursement of the loan. Under the deferred principal
repayment plan, borrowers may defer principal payments and make interest only
payments while the student is in school. Principal and interest payments will
begin 45 days after the student graduates or leaves school, or earlier if
requested by the borrower. Borrowers may take up to 15 years to repay. The
minimum monthly payment, once principal and interest payments begin, is the
greater of $50 or the amount that will result in loan repayment within the 15
year limit. Option 4 Loans may be prepaid at any time without penalty.
Each Option 4 Loan is funded by a lender selected by USAF and is
guaranteed by USAF. Currently, all Option 4 Loans are serviced by Educational
Loan Servicing Center, Inc., an affiliate of USAF.
TERI Alternative Program. The TERI Alternative Program is a private
loan program established by The Education Resources Institute ("TERI") and
designed to offer loans to students enrolled in nationally or regionally
accredited 2- to 4- year degree-granting institutions in the United States and
Canada. TERI is a private non-profit corporation headquartered in Boston,
Massachusetts. To be eligible for a loan under the TERI Alternative Program
("TERI Alternative Loans"), a student must be deemed creditworthy or provide a
creditworthy co-borrower with a two-year credit history and a debt-to-income
ratio not to exceed 40%. Also at least one applicant must be a U.S. citizen or a
certified permanent resident of the United States.
In determining whether a student or co-borrower is creditworthy, a
credit bureau report is obtained for each applicant, including the student. A
satisfactory credit history is defined as making continuous and prompt payment
on all credit obligations such as mortgages, personal loans, credit cards, auto
loans, and especially, education loans. There should be no record of charged off
loans within the past five years nor a record of foreclosure, repossession, open
judgment or suit, unpaid tax lien, unpaid prior education loan defaults or other
negative public record items in the past seven years. There should not be a
record of bankruptcy within the past 10 years (exceptions may be granted where
the applicant provides written documentation demonstrating that the
circumstances leading up to the bankruptcy were beyond the applicant's control).
Eligible borrowers of a TERI Alternative Loan may borrow from $2,000
up to the cost of education, less any financial aid received per academic year.
A 5% guarantee fee is deducted from the loan proceeds.
The interest rate on TERI Alternative Loans varies depending upon the
lender. Several lenders currently offer a fixed rate. The remaining lenders
offer variable rates ranging from the prime rate plus 1.5% to the prime rate
plus 2.0%.
The TERI Alternative loan may be repaid in up to 25 years, depending
on the total amount borrowed. Repayment of the TERI Alternative Loan begins
within 45 days after the disbursement date. However, deferment of principal is
allowed for up to four years, with only interest being paid, while the student
is in school. Payment of principal and interest begins within 45 days of
graduation or withdrawal from school. Once principal payments commence, the
monthly principal and interest payment remains fixed throughout the life of the
loan. Therefore, for variable rate loans fluctuations in the interest rate are
reflected in the length of the repayment term, not the monthly amount, unless an
increase in the monthly amount is needed to keep the repayment period within 25
years. TERI Alternative Loans may be prepaid at any time without penalty.
Each TERI Alternative Loan is funded by one of the banks participating
in the TERI Alternative Program and is guaranteed by TERI. TERI guarantees
payment of 100% of the principal (including any interest or fees capitalized
from time to time) and accrued interest for each TERI Alternative Loan as to
which any one of the following events has occurred:
(a) failure by the borrower thereof to make monthly principal
or interest payments on such TERI Alternative Loan when due,
provided such failure continues for a period of 120 days;
(b) any filing by or against the borrower thereof of
a petition in bankruptcy pursuant to any chapter of
the Federal bankruptcy code, as amended;
(c) the death of the borrower thereof; or
(d) the total and permanent disability of the borrower thereof
to be employed on a full-time basis, as certified by two
qualified physicians.
TERI's guarantee obligations with respect to any TERI Alternative Loan
is conditioned upon certain conditions, including, but not limited to, the
following: (i) the origination and servicing of the such TERI Alternative Loans
being performed in accordance with the TERI Alternative Program and other
applicable requirements, (ii) the timely payment to TERI of all guarantee fees
payable with respect to such TERI Alternative Loan, (iii) the timely submission
to TERI of all required pre-claim delinquency status notifications and of the
claim with respect to such TERI Alternative Loan and (iv) the transfer and
endorsement of the promissory note evidencing such TERI Alternative Loan to TERI
upon and in connection with making a claim to receive guarantee payments
thereon. Failure to comply with any of the applicable conditions, including the
foregoing, may result in the refusal of TERI to honor its guarantee obligations
with respect to such TERI Alternative Loan. In addition, in the event that any
TERI Alternative Loan is determined to be unenforceable because the terms of
such TERI Alternative Loan or the forms of the application or promissory note
related thereto violate any provisions of applicable state law, TERI's guarantee
obligation is reduced to 50% of principal (including capitalized interest and
fees) and accrued interest with respect to such TERI Alternative Loan. Under the
Sale and Servicing Agreement, such failure to comply or such unenforceability
would constitute a breach of the Seller's covenants, representation and/or
warranties, as the case may be, and would create an obligation of the Seller to
purchase such TERI Alternative Loan. See "Description of the Transfer and
Servicing Agreements -- Sale of Financed Student Loans; Representations and
Warranties" and "--Master Servicer Covenants".
TERI, as a guarantor of Private Loans, is not entitled to any federal
reinsurance or assistance from the Department. Although TERI maintains a loan
loss reserve intended to absorb losses arising from its guarantee commitments,
there can be no assurance that the amount of such reserve will be sufficient to
cover the obligations of TERI over the term of the TERI Alternative Loans.
PEP Program. The PEP Program is a private loan program established by
TERI and designed to offer loans ("PEP Loans") to graduate and professional
school students enrolled at least half-time in an accredited 2- to 4-year
degree-granting institution in the United States and Canada. The underwriting
standards for the PEP Program are substantially the same as described above for
the TERI Alternative Program.
Eligible borrowers of PEP Loans may borrow up to $7,500 or $20,000 on
a student's good credit history, or up to $20,000 with a creditworthy
co-borrower. Law students can borrow up to $12,000 on their own signature. The
aggregate total amount of borrowings is based on future income projections, with
an aggregate total of $80,000 with a co-borrower. A 9% guarantee fee (6% with a
co-borrower) is deducted from the loan proceeds.
The interest rates on PEP Loans vary by lender, but does not currently
exceed the prime rate plus 2.0% PEP loans may be repaid in up to 20 years,
depending on the total amount borrowed. Repayment of the PEP Loan begins within
45 days after the disbursement date. Further, both principal and interest may be
deferred for up to 4 1/2 years while the student is in school (any such deferred
interest will be capitalized and added to principal). Medical students may
request a second deferment on the new principal balance while completing their
internship or residency (with a maximum deferment of 8 1/2 years). Once
principal payments commence, the monthly principal and interest payment remains
fixed throughout the life of the loan. Therefore, for variable rate loans
fluctuations in the interest rate are reflected in the length of the repayment
term, not the monthly amount, unless an increase in the monthly amount is needed
to keep the repayment period within 20 years. PEP Alternative Loans may be
prepaid at any time without penalty.
Each PEP Loan is funded by one of the banks participating in the PEP
Program and is guaranteed by TERI. TERI's guarantee obligations under the PEP
Program are substantially the same as its guarantee obligations described above
for the TERI Alternative Program.
PAL Program. The PAL Program is a private loan program established by
HEMAR Insurance Corporation of America ("HICA") designed to offer loans ("PAL
Loans") to meet the educational financing needs of students enrolled in a
four-year collegiate or graduate degree granting educational institution which
has been approved for participation in the PAL Program by HICA. The underwriting
standards for the PAL Program are substantially the same as described above for
the TERI Alternative Program.
Eligible borrowers of PAL Loans may borrow from $1,000 up to a maximum
annual limit of the lesser of (i) the student's estimated cost of attendance for
the loan period less the estimated amount of assistance that a school is aware a
student has been or will be awarded in federal, state or private scholarships or
loan programs and (ii) the amount of allowable debt after a credit analysis is
performed. A 6% guarantee fee is deducted from the loan proceeds.
The interest rate on PAL Loans varies depending on the lender. PAL
Loans may be repaid in up to 20 years. Repayment of the PAL Loan may begin
immediately after the disbursement date. Both principal and interest may be
deferred for up to the earlier of (i) six months after the date the borrower
ceases to be at least a half-time student or (ii) 5 years after the borrower's
first disbursement of a PAL Loan (any such deferred interest will be capitalized
and added to principal). PAL Loans may be prepaid at any time without penalty.
Each PAL Loan is funded by one of the banks participating in the PAL
Program and is guaranteed by HICA. If a borrower defaults on a PAL Loan, HICA
will pay the lender 100% of the unpaid principal (including any interest or fees
capitalized from time to time) and accrued interest. However, HICA's guarantee
obligations with respect to any PAL Loan is conditioned upon certain conditions,
including, but not limited to, the following: (i) the timely payment to HICA of
all guarantee fees payable with respect to such PAL Loan, (ii) the origination,
servicing and collection of such PAL Loan being performed in accordance with the
PAL Program, (iii) the timely submission to HICA of the executed surety
certificate, a complete payment history and a complete collection efforts
history, and (iv) the transfer and endorsement of the original executed note
evidencing such PAL Loan. Failure to comply with any of the applicable
conditions, including the foregoing, may result in the refusal of HICA to honor
its guarantee obligations with respect to such PAL Loan.
THE FINANCED STUDENT LOAN POOL
The pool of Financed Student Loans will include the Financed Student
Loans acquired by the Eligible Lender Trustee on behalf of the Trust from time
to time as of the applicable Cut-off Date and any Additional Student Loans
acquired by the Eligible Lender Trustee on behalf of the Trust from the Seller
during the applicable Funding Period.
The Financed Student Loans will be selected from the Seller's
portfolio of Federal Loans, HEAL Loans and Private Loans (including Purchased
Loans) by several criteria, including the following: each Financed Student Loan
(i) was or will be originated in the United States or its territories or
possessions under and in accordance with the Federal Program, the HEAL Program
or the applicable Private Loan Program, as the case may be, to or on behalf of a
student who has graduated or is expected to graduate from an accredited
institution of higher education within the meaning of the Higher Education Act
or a Proprietary School, (ii) contains terms in accordance with those required
by the applicable Program, the Guarantee Agreements and other applicable
requirements, and (iii) is not more than 90 days past due as of the related
Cut-off Date. The relative percentages of each type of Financed Student Loan, as
well as the relative percentages of Financed Student Loans originated by the
Seller and Purchased Loans, to be included in the pool of Financed Student Loans
will be determined from time to time by the Seller. No selection procedures
believed by the Seller to be adverse to the Securityholders will be used in
selecting the Financed Student Loans.
The Additional Student Loans to be conveyed to the Eligible Lender
Trustee on behalf of the Trust during each Funding Period are required to comply
with the criteria set forth above. See "Description of the Transfer and
Servicing Agreements--Additional Fundings."
In addition to the criteria described in the preceding paragraphs, the
Surety Provider may require certain other characteristics for the Additional
Student Loans. However, following each transfer of Additional Student Loans to
the Eligible Lender Trustee on behalf of the Trust, the aggregate
characteristics of the entire pool of Financed Student Loans, including the
composition and type of the Financed Student Loans, the distribution by weighted
average interest rate and the distribution by principal amount to be described
in tables included in each Prospectus Supplement, may vary significantly from
those of the Financed Student Loans, if any, previously transferred to the
Trust. In addition, the distribution by weighted average interest rate
applicable to the Financed Student Loans on any date following the related
Cut-off Date may vary significantly from that set forth in the tables included
in the related Prospectus Supplement as a result of variations in the effective
rates of interest applicable to the Financed Student Loans. Moreover, the
information included in the related Prospectus Supplement with respect to the
original term to maturity and remaining term to maturity of Financed Student
Loans as of the related Cut-off Date may vary significantly from the actual term
to maturity of any of the Financed Student Loans as a result of the granting of
deferral and forbearance periods with respect thereto.
Each Prospectus Supplement will set forth, as of the related Cut-off
Date, with respect to the Pool Balance upon the issuance of the related Series
of Notes, the composition of the Financed Student Loans, the distribution by
loan type, the distribution by interest rates, the distribution by outstanding
principal balance, the distribution by remaining term to scheduled maturity and
the distribution by borrower payment status.
Each of the Federal Loans and HEAL Loans provides or will provide for
the amortization of the outstanding principal balance of such Financed Student
Loan over a series of regular payments. Each regular payment consists of an
installment of interest which is calculated on the basis of the outstanding
principal balance of such Financed Student Loan multiplied by the applicable
interest rate and further multiplied by the period elapsed (as a fraction of a
calendar year) since the preceding payment of interest was made. As payments are
received in respect of such Financed Student Loan, 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 regular 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. Conversely, if a borrower pays a 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 portion of the
payment applied to reduce the unpaid principal balance will be correspondingly
less. In either case, subject to any applicable Deferral Periods or Forbearance
Periods, the borrower pays a regular installment until the final scheduled
payment date, at which time the amount of the final installment is increased or
decreased as necessary to repay the then outstanding principal balance of such
Financed Student Loan. The Private Loans may contain different amortization
provisions.
MATURITY AND PREPAYMENT ASSUMPTIONS
The rate of payment of principal of the Notes and the Certificates and
the yield on the Notes and the Certificates will be affected by (i) prepayments
of the Financed Student Loans that may occur as described below, (ii) the sale
by the Trust of Financed Student Loans and (iii) the application of Additional
Principal Payments, if any. All the Financed Student Loans are prepayable in
whole or in part by the borrowers at any time (including by means of
Consolidation Loans as discussed below) and may be prepaid as a result of a
borrower default, death, disability or bankruptcy and subsequent liquidation or
collection of Guarantee Payments with respect thereto. The rate of such
prepayments cannot be predicted and may be influenced by a variety of economic,
social and other factors, including those described below. In general, the rate
of prepayments may tend to increase to the extent that alternative financing
becomes available at prevailing interest rates which fall significantly below
the interest rates applicable to the Financed Student Loans. However, because
many of the Financed Student Loans bear interest at a rate that either actually
or effectively is floating, it is impossible to determine whether changes in
prevailing interest rates will be similar to or vary from changes in the
interest rates on the Financed Student Loans. To the extent borrowers of
Financed Student Loans elect to borrow Consolidation Loans, or the Trust sells
Serial Loans, such Financed Student Loans will be prepaid; provided, however,
that if the Seller makes any such Consolidation Loan during the Funding Period
(in which event the Seller will then sell that Consolidation Loan to the
Eligible Lender Trustee, to the extent that funds are available in the
Pre-Funding Account for the purchase thereof), the aggregate outstanding
principal balance of Financed Student Loans (after giving effect to the addition
of such Consolidation Loan) will be at least equal to and in most cases greater
than such balance prior to such prepayment. See "The Student Loan Financing
Business--Federal Loans Under the Program--Consolidation Loans." There can be no
assurance that the Seller rather than another institution will make any
particular Consolidation Loan with respect to borrowers with Financed Student
Loans. In addition, the Seller is obligated to purchase any Financed Student
Loan pursuant to the Sale and Servicing Agreement as a result of a breach of any
of its representations and warranties, and the Master Servicer is obligated to
purchase any Financed Student Loan pursuant to the Sale and Servicing Agreement
as a result of a breach of certain covenants with respect to such Financed
Student Loan, in each case where such breach materially adversely affects the
interests of the Certificateholders or the Noteholders in that Financed Student
Loan and is not cured within the applicable cure period (it being understood
that any such breach that does not affect any Guarantor's obligation to
guarantee payment of such Financed Student Loan will not be considered to have a
material adverse effect for this purpose). See "Description of the Transfer and
Servicing Agreements--Sale of Financed Student Loans; Representations and
Warranties" and "--Servicer Covenants." See also "--Termination" regarding the
Seller's option to purchase the Financed Student Loans when the aggregate Pool
Balance is less than or equal to 10% of the Maximum Pool Balance and
"--Insolvency Event" regarding the sale of Financed Student Loans if a Seller
Insolvency Event occurs.
Scheduled payments with respect to, and maturities of, the Financed
Student Loans may be extended, including pursuant to Grace Periods, Deferral
Periods and, under certain circumstances, Forbearance Periods or as a result of
refinancings through Consolidation Loans to the extent such Consolidation Loans
are sold to the Eligible Lender Trustee on behalf of the Trust as described
above. In that event, the fact that such Consolidation Loans will likely have
longer maturities than the Financed Student Loans they are replacing may
lengthen the remaining term of the Financed Student Loans and the average life
of the Notes and the Certificates. The rate of payment of principal of the Notes
and the Certificates and the yield on the Notes and the Certificates may also be
affected by the rate of defaults resulting in losses on Financed Student Loans,
by the severity of those losses and by the timing of those losses, which may
affect the ability of the Guarantors to make Guarantee Payments with respect
thereto.
If consented to by the Surety Provider, amounts otherwise required to
be deposited into the Reserve Account may be applied as an Additional Principal
Payment to the Class of Notes with the earliest Final Maturity Date (or, after
all Classes of Notes have been paid in full, the Certificates).
The Surety Provider is required on the Final Maturity Date relating to
a Class of Notes or the Certificates (after giving effect to all distributions
to be made on each such date), pursuant to the applicable Note Surety Bond or
Certificate Surety Bond, to provide an amount equal to all unpaid principal and
interest payable in respect of the related Class of Notes or the Certificates
(other than Noteholders' Interest Carryover and Certificateholders' Interest
Carryover). If the Surety Provider fails to satisfy such obligations, the
affected Securityholders would likely incur losses. In addition, the maturity of
many of the Financed Student Loans will extend well beyond the final Maturity
Date of certain Classes of Notes.
The rate of prepayment on the Financed Student Loans cannot be
predicted, and any reinvestment risks resulting from a faster or slower
incidence of prepayment of Financed Student Loans or a faster or slower
incidence of sales by the Trust will be borne entirely by the Securityholders.
Such reinvestment risks may include the risk that interest rates and the
relevant spreads above particular interest rate bases are lower at the time
Securityholders receive payments from the Trust than such interest rates and
such spreads would otherwise have been had such prepayments not been made or had
such prepayments been made at a different time.
INSURANCE OF STUDENT LOANS; GUARANTORS OF FEDERAL LOANS
General. Each Federal Loan is required to be guaranteed as to
principal and interest by a Guarantor and reinsured by the Department under the
Higher Education Act and must be eligible for Special Allowance Payments and,
with respect to each Financed Student Loan that is not an SLS Loan, PLUS Loan or
Unsubsidized Stafford Loan, Interest Subsidy Payments paid by the Department.
Federal Reinsurance. Under the Higher Education Act, each Guarantor is
reimbursed by the Department pursuant to certain agreements between the
Department and such Guarantor for amounts paid under its Guarantee Agreement.
The amount of reimbursement by the Department for Federal Loans for each fiscal
year commencing October 1 varies for each Guarantor depending on the annual
claims rate for that Guarantor (i.e., the dollar amount of reimbursement claims
filed by that Guarantor during that fiscal year as a percentage of the
outstanding aggregate principal amount at the end of the preceding fiscal year
of those Federal Loans it guarantees whose borrowers were repaying such Federal
Loans at the end of the preceding fiscal year) as follows:
CLAIMS RATE REIMBURSEMENT TO GUARANTOR BY THE
OF GUARANTOR DEPARTMENT OF EDUCATION(1)
0% to and including 5% 100%
Greater than 5% to and including 9% 100% of claims to and
including 5%; 90% of claims
greater than 5%
Greater than 9% 100% of claims to and
including 5%; 90% of claims
greater than 5% to and
including 9%; and 80% of
claims greater than 9%
(1) Each of the reimbursement percentages listed above is
reduced by two percentage points for a loan made on
or after October 1, 1993.
The claims experience for any Guarantor is not accumulated from year
to year for purposes of this test but is determined solely on the basis of
claims filed in any one federal fiscal year. The Higher Education Act provides
that the obligation of the Department to reimburse each such Guarantor as
described above is, subject to compliance with the Higher Education Act,
supported by the full faith and credit of the United States and that Guarantors
are deemed to have a contractual right against the United States to receive
reinsurance in accordance with its provisions.
Under the 1993 Amendments, Congress made a number of changes that may
adversely affect the financial condition of the Guarantors, including reducing
to 98% the maximum percentage of Guarantee Payments the Department will
reimburse for loans first disbursed on or after October 1, 1993, reducing
substantially the premiums and default collections that Guarantors are entitled
to receive and/or retain and giving the Department broad powers over Guarantors
and their reserves. The 1993 Amendments also reduced Guarantors default
collection retention rate from 30% to 27%, reduced the maximum insurance premium
charged by a Guarantor from 3% to 1% and authorized the Secretary to terminate a
Guarantor's reinsurance agreement if the Secretary determines such action is
necessary to protect federal fiscal interests or ensure an orderly transition to
full implementation of the FDSLP. The Administrative Cost Allowance ("ACA") was
eliminated; however, legislative history suggests that Congress intended that
Guarantors will continue to receive a 1% ACA. For Stafford Loans disbursed on or
after July 1, 1995, the Lender yield on student loans during in school, grace
and deferment periods is reduced from the 91-day Treasury bill rate plus 3.1% to
91-day Treasury bill rate plus 2.5% (not to exceed 8.25%, before giving effect
to any applicable Special Allowance Payments). Lenders will also be required to
pay a 1.05% annual fee to the Secretary on the principal plus accrued but unpaid
interest of all Consolidation Loans made on or after October 1, 1993 and such
loans bear interest at the 91-day Treasury bill rate plus 3.1% with no floor
applicable. Also, effective for student loans first disbursed after October 1,
1993, Lenders will be assessed an up-front, user/origination fee equal to .5% of
the principal amount of the student loan. The Department's powers over
Guarantors include the authority to require a Guarantor to return all reserve
funds to the Department if the Department determines such action is necessary to
ensure an orderly termination of the Guarantor, to serve the best interests of
the Federal Programs or to ensure the proper maintenance of such Guarantor's
funds or assets. The Department is also now authorized to direct a Guarantor to
return a portion of its reserve funds which the Department determines is
unnecessary to pay the program expenses and contingent liabilities of the
Guarantor and/or to cease any activities involving the use of the Guarantor's
reserve funds or assets which the Department determines is a misapplication or
otherwise improper. Subject to the requirements described in the following
paragraphs, the Department may also terminate a Guarantor's reinsurance
agreement if the Department determines that such action is necessary to protect
the federal fiscal interest or to ensure an orderly transition to full
implementation of direct federal lending. These various changes create a
significant risk that the resources available to the Guarantors to meet their
guarantee obligations will be significantly reduced. In addition, this
legislation greatly expands the Federal Direct Student Loan Program volume to a
target of approximately 60% of student loan demand in academic year 1998-1999,
which could result in increasing reductions in the volume of loans made under
the Program. Such changes could have an adverse effect on the financial
condition of the Guarantors and on the ability of a Guarantor to satisfy its
obligations under its Guarantee Agreement with respect to the Federal Loans. See
"Risk Factors--Changes in Legislation."
In issuing guarantees with respect to Federal Loans, each Guarantor is
required by the Higher Education Act to review loan applications to verify the
completion of required information and to make a determination that the
applicant has not borrowed amounts in excess of any applicable annual and
aggregate limits imposed by the Higher Education Act.
Pursuant to the 1992 Amendments, each Guarantor is required to
maintain a current minimum reserve level of at least 0.5% of the aggregate
principal amount of all outstanding Federal Loans guaranteed by such Guarantor
for the fiscal year that begins in 1993, with such minimum increasing to 0.7%
and 0.9% for fiscal years beginning in 1994 and 1995, respectively, and 1.1% for
fiscal years beginning on or after January 1, 1996. Annually, the Department
will collect information from each Guarantor to determine the amount of such
Guarantor's reserves and other information regarding its solvency. If a
Guarantor's current reserve level falls below the required minimum for any two
consecutive years, that Guarantor's annual claims rate exceeds 9% or the
Department determines that a Guarantor's administrative or financial condition
jeopardizes that Guarantor's continued ability to perform its responsibilities,
then that Guarantor must submit and implement a management plan acceptable to
the Department. The 1992 Amendments also provide that under certain
circumstances the Department is authorized, on terms and conditions satisfactory
to the Department, but is not obligated, to terminate its reimbursement
agreement with any Guarantor. In that event, however, the Department is required
to assume the functions of such Guarantor and in connection therewith is
authorized to do one or more of the following: to assume the guarantee
obligations of, to assign to other guarantors the guarantee obligations of, or
to make advances to, a Guarantor in order to assist such Guarantor in meeting
its immediate cash needs and to ensure uninterrupted payment of default claims
to lenders or to take any other action the Department deems necessary to ensure
the continued availability of student loans and the full honoring of guarantee
claims thereunder. In addition, the 1992 Amendments provide that if the
Department determines that a Guarantor is unable to meet its guarantee
obligations, holders of Federal Loans covered thereby may submit guarantee
claims directly to the Department until such time as such guarantee obligations
are transferred to a new guarantor capable of meeting such obligations or until
a successor guarantor assumes such obligations. There can be no assurance,
however, that the Department would under any given circumstances assume such
obligation to ensure satisfaction of a guarantee obligation by exercising its
right to terminate a reimbursement agreement with a Guarantor or by making a
determination that such Guarantor is unable to meet its guarantee obligations.
Amounts received or receivable from the Department for reimbursement
for claims paid are subject to periodic audit and adjustment by the Department.
Any disallowed claims, including amounts already collected, may constitute a
liability of the respective Guarantor. Although federal audit reports as of this
date have raised several compliance issues relating to the California Student
Aid Commission, one of the Guarantors, the Seller and The Money Store believe
that it is not possible to determine as of the date of this Prospectus the
number of claims, if any, which might ultimately be disallowed by the
Department.
Guarantors for the Financed Student Loans. The Higher Education Act
requires every state to designate a guarantee agency, either by establishing its
own or by designating another guarantee agency. A Guarantor who has been
designated by a particular state is obligated to guarantee loans for students
who reside or attend school in such state and must agree to provide loans to any
such students who are otherwise unable to obtain a loan from any other lender.
Guarantee agencies may guarantee a loan made to any eligible borrower and are
not limited to guaranteeing loans for students attending institutions in their
particular state or region or for their residents attending schools in another
state or region. The Eligible Lender Trustee has entered, or will enter, into a
Guarantee Agreement with each Guarantor guaranteeing the Federal Loans acquired,
or to be acquired, by the Trust.
Pursuant to its respective Guarantee Agreement, each Guarantor
guarantees payment of 98% (except that such guarantee against defaults will be
100% of principal and accrued interest for loans first disbursed prior to
October 1, 1993); of the principal (including any interest capitalized from time
to time) and accrued interest for each Federal Loan guaranteed by it as to which
any one of the following events has occurred:
(a) failure by the borrower thereof to make monthly principal or
interest payments on such Federal Loan when due, provided such failure
continues for a period of 180 days;
(b) any filing by or against the borrower thereof of a petition
in bankruptcy pursuant to any chapter of the Federal bankruptcy code,
as amended;
(c) the death of the borrower thereof; or
(d) the total and permanent disability of the borrower thereof to
work and earn money or attend school, as certified by a qualified
physician.
When these conditions are satisfied, the Higher Education Act requires
the Guarantor generally to pay the claim within 90 days of its submission by the
lender. The obligations of the Guarantors pursuant to their respective Guarantee
Agreements are obligations solely of the applicable Guarantor, and are not
supported by the full faith and credit of any state government, except loans
guaranteed by the New York State Higher Education Services Corporation.
Each Guarantor's guarantee obligations with respect to any Federal
Loan are conditioned upon the satisfaction of all the conditions set forth in
the applicable Guarantee Agreement. These conditions include, but are not
limited to, the following: (i) the origination and servicing of such Federal
Loan being performed in accordance with the Program, the Higher Education Act
and other applicable requirements, (ii) the timely payment to the applicable
Guarantor of the guarantee fee payable with respect to such Federal Loan, (iii)
the timely submission to the applicable Guarantor of all required preclaim
delinquency status notifications and of the claim with respect to such Federal
Loan and (iv) the transfer and endorsement of the promissory note evidencing
such Federal Loan to the applicable Guarantor upon and in connection with making
a claim to receive Guarantee Payments thereon. Failure to comply with any of the
applicable conditions, including the foregoing, may result in the refusal of the
applicable Guarantor to honor its Guarantee Agreement with respect to such
Federal Loan, in the denial of guarantee coverage with respect to certain
accrued interest amounts with respect thereto or in the loss of certain Interest
Subsidy Payments and Special Allowance Payments with respect thereto. Under the
Sale and Servicing Agreement, such failure to comply would constitute a breach
of the Master Servicer's covenants or the Seller's representations and
warranties, as the case may be, and would create an obligation of the Seller or
the Master Servicer, as the case may be, to repurchase or purchase such Federal
Loan or to reimburse the Trust for such non-guaranteed interest amounts or such
lost Interest Subsidy Payments and Special Allowance Payments with respect
thereto. See "Description of the Transfer and Servicing Agreements--Sale of
Financed Student Loans; Representations and Warranties" and "--Servicer
Covenants."
Certain historical information concerning the Guarantors guaranteeing
the Federal Loans will be set forth in the related Prospectus Supplement. Such
information will include for the periods presented the related Guarantor's
guarantee volume, reserve ratios, recovery rates, loan loss reserves and claims
rate. It is expected that such information will be obtained from the Department
of Education's Guaranteed Student Loan Program Books or from the applicable
Guarantor. Neither the Seller nor The Money Store will independently verify such
information.
DESCRIPTION OF THE SECURITIES
GENERAL
Each Series of Notes will be issued pursuant to the terms of the
Master Indenture and the related Terms Supplement and each Class of Certificates
will be issued pursuant to the terms of the Trust Agreement and, except for the
initial Class of Certificates, the related Trust Supplement. The following
summary describes certain terms of the Notes, the Certificates, the Master
Indenture, each Terms Supplement and the Trust Agreement. The summary does not
purport to be complete and is qualified in its entirety by reference to the
provisions of each Series of Notes, each Class of Certificates, the Master
Indenture, each Terms Supplement and the Trust Agreement.
It is expected that each Class of Notes and each Class of Certificates
(except for the Certificates being sold to Student Holdings) will initially be
represented by one or more Notes and Certificates, respectively, in each case
registered in the name of the nominee of DTC (together with any successor
depository selected by the Administrator, the "Depository") except as set forth
below. The Notes will be available for purchase in denominations of $50,000 and
integral multiples in excess thereof in book-entry form only. As a result of the
Internal Revenue Service recently adopting regulations concerning publicly
traded partnerships, the Trust Agreement was amended to provide that the
Certificates will be available for purchase in denominations equal to the lesser
of $1,000,000 or 1/24th of the Certificate Balance, and integral multiples of
$50,000 in excess thereof. The Trust has been informed by DTC that DTC's nominee
will be Cede. Accordingly, Cede is expected to be the holder of record of the
Securities. Unless and until Definitive Notes or Definitive Certificates are
issued under the limited circumstances described herein, no Noteholder or
Certificateholder will be entitled to receive a physical certificate
representing a Note or Certificate. All references herein to actions by
Noteholders or Certificateholders refer to actions taken by DTC upon
instructions from its participating organizations (the "Participants") and all
references herein to distributions, notices, reports and statements to
Noteholders or Certificateholders refer to distributions, notices, reports and
statements to DTC or Cede, as the registered holder of the Notes or
Certificates, as the case may be, for distribution to Noteholders or
Certificateholders in accordance with DTC's procedures with respect thereto. See
"--Book-Entry Registration" and "-- Definitive Securities."
THE NOTES
Distributions of Interest. Interest will accrue on the principal
balance of each Class of Notes at a rate per annum (calculated as provided below
or in the related Prospectus Supplement) equal to the related Class Interest
Rate. Interest may accrue initially from and including the Closing Date on which
the related Series was issued through and including the date set forth in the
related Prospectus Supplement and, thereafter, except as otherwise set forth in
the related Prospectus Supplement, for periods (each, an "Interest Period")
consisting of (i) with respect to Auction Rate Notes, as set forth in the
related Prospectus Supplement, (ii) with respect to LIBOR Rate Notes, the
one-month period beginning and ending on the dates set forth in the related
Prospectus Supplement or (iii) with respect to Notes accruing interest based on
some other method, the period set forth in the related Prospectus Supplement.
Interest on each Class of Notes will be payable (or with respect to Accrual
Notes during the related Accrual Period, added to the principal amount thereof)
on the related Note Distribution Date. Interest distributions due on any Class
of Notes for any Note Distribution Date but not distributed on such Note
Distribution Date will be due on the next Note Distribution Date for such Class,
increased by an amount equal to interest on such amount at the applicable Class
Interest Rate for the period from the Note Distribution Date for which such
interest was first due until the Note Distribution Date such interest is paid.
Interest payments on the Notes will generally be funded from Available Funds,
Monthly Advances and amounts, if any, on deposit in the Reserve Account (and,
when applicable, amounts on deposit in the Capitalized Interest Account and the
Capitalized Pre-Funding Account) remaining after the deposit of the Transaction
Fees in the Expense Account. Interest will be paid pro rata to the holders of
each Class of Notes outstanding. See "Description of the Transfer and Servicing
Agreements Distributions" and "--Credit Enhancement." If insufficient funds are
available to pay the Noteholders' Interest Distribution Amount on a Note
Distribution Date, such shortfall will be paid from draws on the Note Surety
Bonds to the extent described herein under "Description of the Surety
Bonds--Note Surety Bonds."
Until the date of an Auction Period adjustment, if any, the interest
rate on each Class of Auction Rate Notes for each Interest Period will be the
Class Interest Rate based on an Auction Period, subject to adjustment as
described herein. The Class Interest Rate on each Class of Auction Rate Notes
for each Auction Period will be the lesser of (i) the Net Loan Rate in effect
for such Auction Period and (ii) the Auction Rate in effect for such Auction
Period, as determined by the Auction Agent pursuant to the Auction Procedures
described in Appendix I hereto and in the related Prospectus Supplement;
provided that if on any Rate Determination Date, an Auction for a Class of Notes
is not held for any reason, then the Class Interest Rate for such Class of Notes
will be the Net Loan Rate. The Class Interest Rate on each Class of LIBOR Rate
Notes for each Interest Period will be the lesser of (i) the Net Loan Rate in
effect for such Interest Period and (ii) LIBOR plus the margin set forth in the
applicable Prospectus Supplement (the "LIBOR Rate"). However, no Class Interest
Rate will exceed the rate per annum set forth in the related Prospectus
Supplement, and will be subject to other limitations described herein and
therein.
For each Class of Notes, the applicable Initial Rate, Initial Rate
Adjustment Date and last day of the Initial Period will be set forth in the
related Prospectus Supplement. Thereafter, interest will accrue as set forth
above.
Auction Period Adjustment. With respect to Auction Rate Notes, the
Administrator may, from time to time, change the length of one or more Auction
Periods to conform with then current market practice or accommodate other
economic or financial factors that may affect or be relevant to the length of
the Auction Period or any Class Interest Rate (an "Auction Period Adjustment").
An Auction Period Adjustment will not cause an Auction Period to be less than 7
days nor more than 91 days and will not be allowed unless certain conditions
described in the Auction Procedures in Appendix I are satisfied. If an Auction
Period Adjustment is made, the intervals between Note Distribution Dates will be
adjusted accordingly.
Noteholders' Interest Carryover. If, with respect to any Class of
Notes, for any Interest Period the Auction Rate or the LIBOR Rate, as
applicable, exceeds the Net Loan Rate, the applicable Class Interest Rate for
such Interest Period will be the Net Loan Rate, and the excess of the amount of
interest on such Class of Notes that would have accrued at a rate equal to the
Auction Rate or the LIBOR Rate, as applicable, over the amount of interest on
such Class actually accrued at the Net Loan Rate will accrue as the Noteholders'
Interest Carryover with respect to such Class of Notes. Such determination of
the Noteholders' Interest Carryover will be made separately for each Class of
Notes. The Noteholders' Interest Carryover on any Class of Notes will bear
interest at a rate equal to One-month LIBOR from the Note Distribution Date for
the Interest Period for which the Noteholders' Interest Carryover was calculated
until paid.
Any Noteholders' Interest Carryover that may exist on any Note
Distribution Date will be paid as described herein under "Description of the
Transfer and Servicing Agreements--Distributions."
Distributions of Principal. Principal payments will be made to the
Class of Notes with the earliest Final Maturity Date on each Note Distribution
Date for such Class (or such other Note Distribution Dates for such Class as may
be described in the applicable Prospectus Supplement) in an amount equal to the
Noteholders' Principal Distribution Amount for such Note Distribution Date
(provided, however, that except as otherwise set forth in a Prospectus
Supplement, principal payments will be made only in amounts equal to $50,000 and
integral multiples in excess thereof), until the principal balance of the Notes
of such Class is reduced to zero. Principal payments on a Class of Notes will
generally be derived from Available Funds and amounts, if any, on deposit in the
Reserve Account remaining after the Indenture Trustee has deposited in the
Expense Account the Transaction Fees for the month preceding such Note
Distribution Date and all overdue Transaction Fees from prior months, deposited
in the Note Distribution Account the Noteholders Interest Distribution Amount,
and, unless there has been an Event of Default under a Series of Notes,
deposited in the Certificateholder Distribution Account, the Certificateholders
Interest Distribution Amount. Additionally, with the consent of the Surety
Provider, amounts otherwise required to be deposited into the Reserve Account
may be applied as Additional Principal Payments. See "Description of the
Transfer and Servicing Agreements--Distributions" and "--Credit Enhancement." If
such sources are insufficient to pay the Noteholders' Principal Distribution
Amount for such Note Distribution Date, such shortfall will be added to the
principal payable to the Noteholders on subsequent Note Distribution Dates.
Principal payments on the Notes will be applied on each applicable
Note Distribution Date, first, to the principal balance of the Class of Notes
with the earliest Final Maturity Date until such principal balance is reduced to
zero and then to the principal balance of each other Class of Notes, in order of
Final Maturity Date, until the principal balance of each Class is reduced to
zero. The aggregate outstanding principal amount of each Class of Notes will be
payable in full on the Note Distribution Date identified in the related
Prospectus Supplement (the "Final Maturity Date"). The actual date on which the
aggregate outstanding principal and accrued interest of any Class of Notes are
paid may be earlier than its respective Final Maturity Date, based on a variety
of factors, including those described above under "Risk Factors--Maturity and
Prepayment Assumptions" and "The Financed Student Loan Pool--Maturity and
Prepayment Assumptions."
On the Final Maturity Date relating to a Class of Notes, the Surety
Provider will be required to provide for payment to the Trust pursuant to the
applicable Note Surety Bond of an amount equal to the excess, if any, of the
unpaid principal balance of the Notes of such Class on such Final Maturity Date
over amounts on deposit in the Note Distribution Account, after taking into
account the required application of funds in the remaining Trust Accounts,
including but not limited to the Reserve Account, pursuant to the Sale and
Servicing Agreement, to the payment of principal of such Class of Notes on such
final Note Distribution Date, subject to the exceptions described hereunder
"Discretion of the Surety Bonds--Note Surety Bonds." Any such amount will be
distributed to holders of the applicable Class of Notes on the related Final
Maturity Date.
Mandatory Redemption. The Class of Notes with the earliest Final
Maturity Date will be redeemed in part on the applicable Note Distribution Date
on or immediately following the last day of each Funding Period, in the event
that any amount remains on deposit in the Pre-Funding Account after giving
effect to all Additional Fundings on or prior to such date, in an aggregate
principal amount equal to the amount then on deposit in the Pre-Funding Account.
THE CERTIFICATES
Distributions of Interest. On each Certificate Distribution Date,
Certificateholders of the related Class will be entitled to distributions in an
amount equal to the amount of interest accrued during the related Interest
Period on the principal amount of such Class at the applicable Certificate Rate.
Interest on the Certificates will accrue initially from and including the
Closing Date on which the related Class was issued through and including the
date set forth in the Trust Agreement or the related Trust Supplement and,
thereafter, except as otherwise provided in the related Trust Supplement, for
Interest Periods consisting of, (i) with respect to Auction Rate Certificates,
28 days, subject to adjustment as set forth in the Auction Procedures described
in Appendix I, (ii) with respect to LIBOR Rate Certificates, the one-month
period beginning and ending on the dates set forth in the related Trust
Supplement and (iii) with respect to Certificates accruing interest based on
some other method, the period set forth in the related Trust Supplement.
Interest distributions due for any Class of Certificates on any Certificate
Distribution Date but not distributed on such Certificate Distribution Date will
be due on the next Certificate Distribution Date for such Class increased by an
amount equal to interest on such amount at the applicable Certificate Rate for
the period from the Certificate Distribution Date for which such interest was
first due until the Certificate Distribution Date such interest is paid.
Interest distributions with respect to the Certificates will generally be funded
from Available Funds, Monthly Advances and the amounts, if any, on deposit in
the Reserve Account remaining after the Indenture Trustee has transferred to the
Expense Account an amount, up to the excess, if any, of the Transaction Fees for
the month preceding such Certificate Distribution Date and all overdue
Transaction Fees for the month preceding such Certificate Distribution Date over
the amount, if any, previously transferred to the Expense Account during the
month of such Certificate Distribution Date, provided, however, that
Certificateholders will not be entitled to any distributions if there has been
an Event of Default under any Series of Notes until each Class of Notes has been
paid in full. See "Description of the Transfer and Servicing
Agreements--Distributions" and "--Credit Enhancement--Reserve Account." If
insufficient funds are available to pay the Certificateholders' Interest
Distribution Amount for such Certificate Distribution Date, then amounts may be
drawn under the Certificate Surety Bonds to cover such shortfalls. See
"Description of the Surety Bonds--Certificate Surety Bonds."
Until the date of an Auction Period Adjustment, if any, the interest
rate on each Class of Auction Rate Certificates for each Interest Period will be
the Certificate Rate based on an Auction Period, subject to adjustment as
described herein. The Certificate Rate on each Class of Auction Rate
Certificates for each Auction Period will be the lesser of (i) the Net Loan Rate
in effect for such Auction Period and (ii) the Auction Rate in effect for such
Auction Period, as determined by the Auction Agent generally pursuant to the
Auction Procedures described in Appendix I hereto; provided that if on any Rate
Determination Date, an Auction for a Class of Auction Rate Certificates is not
held for any reason, then the Certificate Rate for such Certificates will be the
Net Loan Rate. The Certificate Rate on each Class of LIBOR Rate Notes for each
Interest Period will be the lesser of (i) the Net Loan Rate in effect for such
Interest Period and (ii) the applicable LIBOR Rate. However, no Certificate Rate
will exceed 18.0% per annum, or such other rate as may be set forth in a Trust
Supplement, and will be subject to other limitations described herein.
Auction Period Adjustment. With respect to Auction Rate Certificates,
the Administrator may, from time to time, change the length of one or more
Auction Periods to conform with then current market practice or to accommodate
other economic or financial factors that may affect or be relevant to the length
of the Auction Period or any Certificate Rate. An Auction Period Adjustment with
respect to the Certificates will not cause an Auction Period to be less than 7
days nor more than 91 days and will not be allowed unless certain conditions
described in the Auction Procedures in Appendix I are satisfied.
Certificateholders' Interest Carryover. If, with respect to any Class
of Certificates, for any Interest Period the Auction Rate or the LIBOR Rate (or
any other related rate), as applicable, exceeds the Net Loan Rate, the
applicable Certificate Rate for such Interest Period will be the Net Loan Rate,
and the excess of the amount of interest on such Class of Certificates that
would have accrued at a rate equal to the Auction Rate or the LIBOR Rate, as
applicable, over the amount of interest actually accrued at the Net Loan Rate
will accrue as the Certificateholders' Interest Carryover with respect to such
Class of Certificates. The Certificateholders' Interest Carryover on any Class
of Certificates will bear interest at a rate equal to One-Month LIBOR from the
Certificate Distribution Date for the Interest Period for which the
Certificateholders' Interest Carryover Amount was calculated until paid.
Any Certificateholders' Interest Carryover that may exist on any
Certificateholders' Distribution Date will be paid as described herein under
"Description of the Transfer and Servicing Agreement--Distributions."
Distributions of Principal. Certificateholders of the Class of
Certificates with the earliest Final Maturity Date will be entitled to
distributions on each Certificate Distribution Date on and after which each
Class of Notes has been paid in full in an amount generally equal to the
Principal Distribution Amount for such Certificate Distribution Date (provided,
however, that principal payments will be made only in amounts equal to $50,000
and integral multiples in excess thereof). Distributions with respect to
principal payments on the Certificates for such Certificate Distribution Date
will generally be funded from the portion of Available Funds and amounts, if
any, on deposit in the Reserve Account remaining after the transfer by the
Indenture Trustee to the Expense Account of the Transaction Fees and the
transfer to the Certificate Distribution Account of the Certificateholder
Interest Distribution Amount. Additionally, with the consent of the Surety
Provider, amounts otherwise required to be deposited into the Reserve Account
may be applied as Additional Principal Payments. See "Description of the
Transfer and Servicing Agreements--Distributions" and "--Credit
Enhancement--Reserve Account." If such sources are insufficient to pay the
Certificateholders' Principal Distribution Amount for such Certificate
Distribution Date, such shortfall will be added to the principal payable to
Certificateholders on subsequent Certificate Distribution Dates.
Principal payments on the Certificates will be applied on each
applicable Certificate Distribution Date, first, to the principal balance of the
Class of Certificates with the earliest Final Maturity Date until such principal
balance is reduced to zero and then to the principal balance of each other Class
of Certificates, in order of Final Maturity Date, until the principal balance of
each Class is reduced to zero. The aggregate outstanding principal amount of
each Class of Certificates will be payable in full on the Final Maturity Date
set forth in the Trust Agreement or the related Trust Supplement. The actual
date on which the aggregate outstanding principal and accrued interest of any
Class of Certificates will be paid may be earlier than its respective
Certificate Final Maturity Date, however, based on a variety of factors,
including those described above under "Risk Factors--Maturity and Prepayment
Assumptions" and "The Financed Student Loan Pool--Maturity and Prepayment
Assumptions."
On the Final Maturity Date related to a Class of Certificates, the
Surety Provider will be required to provide for payment to the Trust pursuant to
the applicable Certificate Surety Bond of an amount equal to the excess, if any,
of the unpaid principal balance of the Certificates of such Class on such
Certificate Final Maturity Date over amounts on deposit in the Certificate
Distribution Account, after taking into account the required application of
funds in the remaining Trust Accounts, including but not limited to the Reserve
Account, pursuant to the Sale and Servicing Agreement, to be applied to the
payment of principal on the Certificates of such Class on such Certificate Final
Maturity Dates, subject to the exceptions described herein under "Description of
the Surety Bonds--Certificate Surety Bonds." Any such amount will be distributed
to holders of the applicable Class of Certificates on the related Certificate
Final Maturity Date.
Subordination of the Certificates. No distributions in respect of
principal of any Class of Certificates will be made until the Certificate
Distribution Date on or after which each Class of Notes has been paid in full.
DETERMINATION OF LIBOR
Pursuant to the Auction Agent Agreement, the Auction Agent will
determine One-Month LIBOR for purposes of calculating the interest due on the
LIBOR Rate Notes, the LIBOR Rate Certificates, the Noteholders' Interest
Carryover and the Certificateholders' Interest Carryover for each given Interest
Period on the Business Day prior to the commencement of each Interest Period
(each, a "LIBOR Determination Date"). For purposes of calculating One-Month
LIBOR, a Business Day is any day on which banks in London and New York City are
open for the transaction of business. Interest due for any Interest Period will
be determined based on the actual number of days in such Interest Period over a
360-day year.
"One-Month LIBOR" means the London interbank offered rate for deposits
in U.S. dollars having a maturity of one month commencing on the related LIBOR
Determination Date (the "Index Maturity") which appears on Telerate Page 3750 as
of 11:00 a.m., London time, on such LIBOR Determination Date. If such rate does
not appear on Telerate Page 3750, the rate for that day will be determined on
the basis of the rates at which deposits in U.S. dollars, having the Index
Maturity and in a principal amount of not less than U.S. $1,000,000, are offered
at approximately 11:00 a.m., London time, on such LIBOR Determination Date to
prime banks in the London interbank market by the Reference Banks. The Auction
Agent will request the principal London office of each of such Reference Banks
to provide a quotation of its rate. If at least two such quotations are
provided, the rate for that day will be the arithmetic mean of the quotations.
If fewer than two quotations are provided, the rate for that day will be the
arithmetic mean of the rates quoted by major banks in New York City, selected by
the Auction Agent, at approximately 11:00 a.m., New York City time, on such
LIBOR Determination Date for loans in the U.S. dollars to leading European banks
having the Index Maturity and in a principal amount equal to an amount of not
less than U.S. $1,000,000; provided that if the banks selected as aforesaid are
not quoting as mentioned in this sentence, One-Month LIBOR in effect for the
applicable LIBOR Reset Period will be One-Month LIBOR in effect for the previous
LIBOR Reset Period.
"Telerate Page 3750" means the display page so designated on the Dow
Jones Telerate Service (or such other page as may replace that page on that
service for the purpose of displaying comparable rates or prices).
"Reference Bank" means a leading bank (i) engaged in transaction in
Eurodollar deposits in the international Eurocurrency market, (ii) not
controlling, controlled by or under common control with the Administrator or The
Money Store and (iii) having an established place of business in London.
THE INDENTURE
Modification of the Master Indenture. With the consent of the Surety
Provider and the holders of a majority of the outstanding Notes (or, with
respect to any change affecting only certain Series of Notes, the holders of a
majority of the Notes of such Series), the Indenture Trustee and the Trust may
execute a supplemental indenture to add provisions to, or change in any manner
or eliminate any provisions of, the Master Indenture with respect to the Notes,
or to modify (except as provided below) in any manner the rights of the
Noteholders.
Modification of a Terms Supplement. With the consent of the Surety
Provider and the holders of a majority of outstanding Notes of the related
Series, the Indenture Trustee and the Trust may execute a supplemental indenture
to add provisions to, or change in any manner or eliminate any provisions of, a
Terms Supplement with respect to the related Series of Notes, or to modify
(except as provided below) in any manner the rights of the related Noteholders.
Without the consent of the holder of each outstanding Note affected
thereby, however, no supplement to the Master Indenture or any Terms Supplement
will (i) change the due date of any installment of principal of or interest on
any Note or reduce the principal amount thereof or the interest rate specified
thereon, change the provisions relating to the application of collections on, or
the proceeds of the sale of, the assets of the Trust to payment of principal of
or interest on the Notes, or change any place of payment where, or the coin or
currency in which, any Note or any interest thereon is payable, (ii) impair the
right to institute suit for the enforcement of certain provisions of the
Indenture regarding payment, (iii) reduce the percentage of the aggregate amount
of the outstanding Notes the consent of the holders of which is required for any
such supplemental indenture or the consent of the holders of which is required
for any waiver of compliance with certain provisions of the Master Indenture or
Terms Supplement, as the case may be, or of certain defaults thereunder and
their consequences as provided for in the Master Indenture, (iv) modify or alter
the provisions of the Master Indenture regarding the voting of Notes held by the
Trust, the Seller, an affiliate of either of them or any obligor on the Notes,
(v) reduce the percentage of the aggregate outstanding amount of the Notes the
consent of the holders of which is required to direct the Eligible Lender
Trustee on behalf of the Trust to sell or liquidate the Financed Student Loans
if the proceeds of such sale would be insufficient to pay the principal amount
and accrued but unpaid interest on the outstanding Notes, (vi) decrease the
percentage of the aggregate principal amount of the Notes required to amend the
sections of the Master Indenture which specify the applicable percentage of
aggregate principal amount of the Notes necessary to amend the Master Indenture
or certain other related agreements, (vii) modify any of the provisions of the
Master Indenture in such manner as to affect the calculation of the amount of
any payment of interest or principal due on any Note, or (viii) permit the
creation of any lien ranking prior to or on a parity with the lien of the Master
Indenture with respect to any of the collateral for the Notes or, except as
otherwise permitted or contemplated in the Master Indenture, terminate the lien
of the Master Indenture on any such collateral or deprive the holder of any Note
of the security afforded by the lien of the Master Indenture.
The Trust and the Indenture Trustee may also enter into supplemental
indentures, with the consent of the Surety Provider but without obtaining the
consent of Noteholders, for the purpose of adding any provisions to or changing
in any manner or eliminating any of the provisions of the Master Indenture or of
modifying in any manner the rights of Noteholders so long as such action will
not, in the opinion of counsel satisfactory to the Indenture Trustee, materially
and adversely affect the interest of any Noteholder.
Events of Default; Rights Upon Event of Default. An "Event of Default"
with respect to the Notes is defined in the Master Indenture as consisting of
the following (except as described in the remaining sentences of this
paragraph): (i) a default for two business days or more in the payment of any
interest on any Note after the same becomes due and payable; (ii) a default for
two business days in the payment of the principal of or any installment of the
principal of any Note when the same becomes due and payable; (iii) a default in
the observance or performance of any covenant or agreement of the Trust made in
the Master Indenture and the continuation of any such default for a period of
thirty days after notice thereof is given to the Trust by the Indenture Trustee
or to the Trust and the Indenture Trustee by the holders of at least 25% in
principal amount of the Notes then outstanding; (iv) any representation or
warranty made by the Trust in the Indenture or in any certificate delivered
pursuant thereto or in connection therewith having been incorrect in a material
respect as of the time made, and such breach not having been cured within thirty
days after notice thereof is given to the Trust by the Indenture Trustee or to
the Trust and the Indenture Trustee by the holders of at least 25% in principal
amount of the Notes then outstanding or (v) certain events of bankruptcy,
insolvency, receivership or liquidation of the Trust. However, the amount of
principal required to be distributed to Noteholders under the Master Indenture
on any Note Distribution Date is limited to the amount of Available Funds and
amounts on deposit in the Reserve Account after payment of the Transaction Fees,
the Noteholders' Interest Distribution Amount and the Certificateholder's
Interest Distribution Amount. Any such shortfalls on any Note Distribution Date
will be carried over as a Noteholders' Principal Carryover Shortfall to be paid
on succeeding Note Distribution Dates. Therefore, the failure to pay principal
on any Class of Notes may not result in the occurrence of an Event of Default
until the Final Maturity Date of such Class of Notes. In addition, the failure
to pay the aggregate amount of Noteholders' Interest Carryover as a result of
insufficient Available Funds will not result in the occurrence of an Event of
Default.
If an Event of Default should occur and be continuing with respect to
any Series of Notes, the Surety Provider may or, with the consent of the Surety
Provider, the Indenture Trustee or holders of a majority in principal amount of
the Notes then outstanding may, declare the principal of the Notes to be
immediately due and payable. With the consent of the Surety Provider, such
declaration may be rescinded by the holders of a majority in principal amount of
the Notes then outstanding at any time prior to the entry of judgment in a court
of competent jurisdiction for the payment of such amount if (i) the Trust has
paid to the Indenture Trustee a sum equal to all amounts then due with respect
to the Notes (without giving effect to such acceleration) and (ii) all Events of
Default (other than nonpayment of amounts due solely as a result of such
acceleration) have been cured or waived.
If the Notes have been declared to be due and payable following an
Event of Default with respect thereto, the Indenture Trustee may, in its
discretion, either require the Eligible Lender Trustee to sell the Financed
Student Loans or elect to have the Eligible Lender Trustee maintain possession
of the Financed Student Loans and continue to apply collections with respect to
such Financed Student Loans as if there had been no declaration of acceleration.
In addition, the Indenture Trustee is prohibited from directing the Eligible
Lender Trustee to sell the Financed Student Loans following an Event of Default,
other than a default in the payment of any principal or a default for five days
or more in the payment of any interest on any Note, unless (i) the Surety
Provider and the holders of all outstanding Notes consent to such sale, (ii) the
proceeds of such sale are sufficient to pay in full the principal of and the
accrued interest on the outstanding Notes at the date of such sale or (iii) the
Indenture Trustee determines that the collections on the Financed Student Loans
and other assets of the Trust would not be sufficient on an ongoing basis to
make all payments on the Notes as such payments would have become due if such
obligations had not been declared due and payable, and the Indenture Trustee
obtains the consent of the Surety Provider and the holders of 66-2/3% of the
aggregate principal amount of the Notes then outstanding.
Notwithstanding any declaration of the Notes to be due and payable,
the Surety Provider has no obligation to pay in full the principal of any Class
of outstanding Notes until the Final Maturity Date of such Class.
Subject to the provisions of the Master Indenture relating to the
duties of the Indenture Trustee, if an Event of Default should occur and be
continuing with respect to the Notes, the Indenture Trustee will be under no
obligation to exercise any of the rights or powers under the Indenture at the
request or direction of the Surety Provider or any of the holders of Notes, if
the Indenture Trustee reasonably believes it will not be adequately indemnified
against the costs, expenses and liabilities which might be incurred by it in
complying with such request. Subject to such provisions for indemnification and
certain limitations contained in the Indenture, the holders of a majority in
principal amount of the outstanding Notes, with the consent of the Surety
Provider, will have the right to direct the time, method and place of conducting
any proceeding or any remedy available to the Indenture Trustee and the holders
of a majority in principal amount of the Notes then outstanding, with the
consent of the Surety Provider, may, in certain cases, waive any default with
respect thereto, except a default in the payment of principal or interest or a
default in respect of a covenant or provision of the Indenture that cannot be
modified without the waiver or consent of all the holders of the outstanding
Notes.
No holder of any Note will have the right to institute any proceeding
with respect to the Master Indenture, unless (i) such holder previously has
given to the Indenture Trustee written notice of a continuing Event of Default,
(ii) the holders of not less than 25% in principal amount of the outstanding
Notes have requested in writing that the Indenture Trustee institute such
proceeding in its own name as Indenture Trustee, (iii) such holder or holders
have offered the Indenture Trustee reasonable indemnity, (iv) the Indenture
Trustee has for 60 days failed to institute such proceeding and (v) no direction
inconsistent with such written request has been given to the Indenture Trustee
during such 60-day period by the holders of a majority in principal amount of
the outstanding Notes.
In addition, the Indenture Trustee and the Noteholders will covenant
that they will not at any time institute against the Trust any bankruptcy,
reorganization or other proceeding under any Federal or state bankruptcy or
similar law.
None of the Indenture Trustee, the Seller, the Administrator, the
Master Servicer, the Servicer or the Eligible Lender Trustee in its individual
capacity, nor any holder of a Certificate representing an ownership interest in
the Trust, nor any of their respective owners, beneficiaries, agents, officers,
directors, employees, successors or assigns will, in the absence of an express
agreement to the contrary, be personally liable for the payment of the principal
of or interest on the Notes or for the agreements of the Trust contained in the
Master Indenture.
Certain Covenants. The Trust may not consolidate with or merge into
any other entity, unless (i) the entity formed by or surviving such
consolidation or merger is organized under the laws of the United States, any
state or the District of Columbia, (ii) such entity expressly assumes the
Trust's obligation to make due and punctual payments upon the Notes and the
performance or observance of every agreement and covenant of the Trust under the
Master Indenture and any Terms Supplement, (iii) no Event of Default has
occurred and is continuing immediately after such merger or consolidation, (iv)
the Trust has been advised that the rating of any Class or Series of Notes or
Certificates would not be reduced or withdrawn by the Rating Agencies as a
result of such merger or consolidation and (v) the Trust has received an opinion
of counsel to the effect that such consolidation or merger would have no
material adverse federal or Pennsylvania state tax consequence to the Trust or
to any Certificateholder or Noteholder.
The Trust will not, among other things, (i) except as expressly
permitted by the Master Indenture, the Transfer and Servicing Agreements or
certain related documents (collectively, the "Related Documents"), sell,
transfer, exchange or otherwise dispose of any of the assets of the Trust, (ii)
claim any credit on or make any deduction from the principal and interest
payable in respect of any Class or Series of Notes (other than amounts withheld
under the Code or applicable state law) or assert any claim against any present
or former holder of Notes because of the payment of taxes levied or assessed
upon the Trust, (iii) except as contemplated by the Related Documents, dissolve
or liquidate in whole or in part, (iv) permit the validity or effectiveness of
the Master Indenture to be impaired, or permit the lien of the Master Indenture
to be amended, hypothecated, subordinated, terminated or discharged, or permit
any person to be released from any covenants or obligations with respect to any
Class or Series of Notes under the Master Indenture except as may be expressly
permitted thereby or (v) permit any lien, charge, excise, claim, security
interest, mortgage or other encumbrance to be created on or extend to or
otherwise arise upon or burden the assets of the Trust or any part thereof, or
any interest therein or the proceeds thereof, except as expressly permitted by
the Related Documents.
The Trust may not engage in any activity other than financing,
purchasing, owning, selling and managing the Financed Student Loans and the
other assets of the Trust and making Additional Fundings, in each case in the
manner contemplated by the Related Documents and activities incidental thereto.
After each Funding Period, the Trust may not make any Additional Fundings with
respect to the related Series of Notes.
The Trust will not incur, assume or guarantee any indebtedness other
than indebtedness incurred pursuant to the Notes and the Indenture or otherwise
in accordance with the Related Documents.
Annual Compliance Statement. The Administrator, on behalf of the Trust
will be required to file annually with the Indenture Trustee a written statement
as to the fulfillment of its obligations under the Indenture.
Satisfaction and Discharge of Indenture. The Indenture will be
discharged with respect to the collateral securing the Notes upon the delivery
to the Indenture Trustee for cancellation of all the Notes or, with certain
limitations, upon deposit with the Indenture Trustee of funds sufficient for the
payment in full of all the Notes.
The Indenture Trustee. Bankers Trust Company, a New York banking
corporation, will be the Indenture Trustee under the Indenture.
BOOK-ENTRY REGISTRATION
The Depository Trust Company ("DTC") is a limited purpose trust
company organized under the laws of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the New
York UCC and a "clearing agency" registered pursuant to Section 17A of the
Exchange Act. DTC was created to hold securities for its Participants and to
facilitate the clearance and settlement of securities transactions between
Participants through electronic book-entries, thereby eliminating the need for
physical movement of certificates. Participants include securities brokers and
dealers, banks, trust companies and clearing corporations. Indirect access to
the DTC system also is available to others such as banks, brokers, dealers and
trust companies that clear through or maintain a custodial relationship with a
Participant, either directly or indirectly ("Indirect Participants").
Securityholders that are not Participants or Indirect Participants but
desire to purchase, sell or otherwise transfer ownership of, or other interests
in, Securities may do so only through Participants and Indirect Participants. In
addition, Securityholders will receive all distributions of principal and
interest from the Indenture Trustee or the Eligible Lender Trustee, as
applicable (the "Applicable Trustee"), through Participants and Indirect
Participants. Under a book-entry format, Securityholders may experience some
delay in their receipt of payments, since such payments will be forwarded by the
Applicable Trustee to Cede, as nominee for DTC. DTC will forward such payments
to its Participants, which thereafter will forward them to Indirect Participants
or Securityholders. It is anticipated that the only "Securityholder,"
"Certificateholder" and "Noteholder" will be Cede, as nominee for DTC.
Securityholders will not be recognized by the Indenture Trustee or the Eligible
Lender Trustee as Noteholders or Certificateholders, as such terms are used in
the Indenture and the Trust Agreement, respectively, and Securityholders will be
permitted to exercise the rights of Securityholders only indirectly through DTC
and its Participants.
Under the rules, regulations and procedures creating and affecting DTC
and its operations (the "Rules"), DTC is required to make book-entry transfers
of Securities among Participants on whose behalf it acts with respect to the
Securities and to receive and transmit distributions of principal of, and
interest on, the Securities. Participants and Indirect Participants with which
Securityholders have accounts with respect to the Securities similarly are
required to make book-entry transfers and receive and transmit such payments on
behalf of their respective Securityholders. Accordingly, although
Securityholders will not possess Securities, the Rules provide a mechanism by
which Participants will receive payments and will be able to transfer their
interests.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a
Securityholder to pledge Securities to persons or entities that do not
participate in the DTC system, or to otherwise act with respect to such
Securities, may be limited due to the lack of a physical certificate for such
Securities.
DTC has advised the Administrator that it will take any action
permitted to be taken by a Securityholder under the Indenture or the Trust
Agreement, as the case may be, only at the direction of one or more Participants
to whose accounts with DTC the Securities are credited. DTC may take conflicting
actions with respect to other undivided interests to the extent that such
actions are taken on behalf of Participants whose holdings include such
undivided interests.
Except as required by law, neither the Administrator nor the
Applicable Trustee will have any liability for any aspect of the records
relating to or payments made on account of beneficial ownership interests of the
Securities held by Cede, as nominee for DTC, or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests.
DEFINITIVE SECURITIES
The Notes and the Certificates (other than the Certificate being sold
to Student Holdings) will be issued in fully registered, certificated form
("Definitive Notes" and "Definitive Certificates," respectively, and
collectively referred to herein as "Definitive Securities") to Noteholders or
Certificateholders or their respective nominees, rather than to DTC or its
nominee, only if (i) the Administrator advises the Applicable Trustee in writing
that DTC is no longer willing or able to discharge properly its responsibilities
as depository with respect to the Securities and the Administrator is unable to
locate a qualified successor, (ii) the Administrator, at its option, elects to
terminate the book-entry system through DTC or (iii) after the occurrence of an
Event of Default, a Servicer Default or an Administrator Default,
Securityholders representing at least a majority of the outstanding principal
amount of the Notes or the Certificates, as the case may be, advise the
Applicable Trustee through DTC in writing that the continuation of a book-entry
system through DTC (or a successor thereto) with respect to such Notes or
Certificates is no longer in the best interest of the holders of such
Securities.
Upon the occurrence of any event described in the immediately
preceding paragraph, the Applicable Trustee will be required to notify all
applicable Securityholders through Participants of the availability of
Definitive Securities. Upon surrender by DTC of the definitive security
representing the corresponding Securities and receipt of instructions for
re-registration, the Applicable Trustee will reissue such Securities as
Definitive Securities to such Securityholders.
Distributions of principal of, and interest on, such Definitive
Securities will thereafter be made by the Applicable Trustee in accordance with
the procedures set forth in the Indenture or the Trust Agreement, as the case
may be, directly to holders of Definitive Securities in whose names the
Definitive Securities were registered at the close of business on the Record
Date. Such distributions will be made by check mailed to the address of such
holder as it appears on the register maintained by the Applicable Trustee. The
final payment on any such Definitive Security, however, will be made only upon
presentation and surrender of such Definitive Security at the office or agency
specified in the notice of final distribution to Securityholders.
Definitive Securities will be transferable and exchangeable at the
offices of the Applicable Trustee or of a registrar named in a notice delivered
to holders of Definitive Securities. No service charge will be imposed for any
registration of transfer or exchange, but the Applicable Trustee may require
payment of a sum sufficient to cover any tax or other governmental charge
imposed in connection therewith.
LIST OF SECURITYHOLDERS
Three or more Noteholders or one or more holders of Notes evidencing
not less than 25% of the aggregate outstanding principal balance of the Notes
may, by written request to the Indenture Trustee, obtain access to the list of
all Noteholders maintained by the Indenture Trustee for the purpose of
communicating with other Noteholders with respect to their rights under the
Indenture or the Notes. The Indenture Trustee may elect not to afford the
requesting Noteholders access to the list of Noteholders if it agrees to mail
the desired communication or proxy, on behalf and at the expense of the
requesting Noteholders, to all Noteholders.
Three or more Certificateholders, Student Holdings or one or more
holders of Certificates evidencing not less than 25% of the Certificate Balance
may, by written request to the Eligible Lender Trustee, obtain access to the
list of all Certificateholders for the purpose of communicating with other
Certificateholders with respect to their rights under the Trust Agreement or
under the Certificates.
REPORTS TO SECURITYHOLDERS
On each Note Distribution Date, the Indenture Trustee will provide to
the applicable Noteholders of record as of the related Record Date, and on each
Certificate Distribution Date the Eligible Lender Trustee will provide to the
Certificateholders of the related Record Date, a statement setting forth
substantially the same information as is required to be provided on the report
provided to the Indenture Trustee and the Trust described under "Description of
Transfer and Servicing Agreements--Statements to Indenture Trustee and Trust."
Within the prescribed period of time for tax reporting purposes after
the end of each calendar year during the term of the Indenture or the Trust
Agreement, as the case may be, the Applicable Trustee will mail to each person
who at any time during such calendar year was a Securityholder and received any
payment thereon, a statement containing certain information for the purposes of
such Securityholder's preparation of federal income tax returns. See "Certain
Tax Consequences."
DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS
GENERAL
The following is a summary of certain terms of the Sale and Servicing
Agreement, pursuant to which the Eligible Lender Trustee on behalf of the Trust
will obtain, the Master Servicer will service and the Administrator will perform
certain administrative functions with respect to the Financed Students Loans;
the Administration Agreement, pursuant to which the Administrator will undertake
certain other administrative duties with respect to the Trust, the Financed
Student Loans and the Trust Agreement, pursuant to which the Trust will be
created and the Certificates will be issued (collectively, the "Transfer and
Servicing Agreements"). However, the summary does not purport to be complete and
is qualified in its entirety by reference to the provisions of the Transfer and
Servicing Agreements.
CONVEYANCE OF FINANCED STUDENT LOANS; REPRESENTATIONS AND
WARRANTIES
On each Closing Date for the sale of a Series of Notes, the Seller
will sell or contribute and assign to the Eligible Lender Trustee on behalf of
the Trust, without recourse, its entire interest in the Financed Student Loans
described in the related Sale and Servicing Agreement, all collections received
and to be received with respect thereto for the period on and after the related
Cut-off Date for such Financed Student Loans and all the Assigned Rights
pursuant to the Sale and Servicing Agreement. Each Financed Student Loan will be
identified in schedules appearing as an exhibit to the related supplement to the
Sale and Servicing Agreement. The Eligible Lender Trustee will, concurrently
with such sale or contribution and assignment, execute, authenticate and deliver
the related Series of Notes and, on the Initial Closing Date, the Certificates.
The net proceeds received from the sale of the Notes and the Certificates will
be applied in connection with the Trust's acquisition of the Financed Student
Loans and to the deposit of the Pre-Funded Amount in the Pre-Funding Account.
See "--Additional Fundings" for a description of the application of funds on
deposit in the Pre-Funding Account during the Funding Period.
In the Sale and Servicing Agreement, the Seller and The Money Store
will make certain representations and warranties with respect to the Financed
Student Loans to the Trust for the benefit of the Certificateholders and the
Noteholders, including, among other things, that (i) each Financed Student Loan,
at the time of transfer to the Trust, is free and clear of all security
interests, liens, charges and encumbrances and no offsets, defenses or
counterclaims have been asserted or threatened; (ii) the information provided
with respect to the Financed Student Loans is true and correct as of the related
Cut-off Date and Closing Date and (iii) each Financed Student Loan, at the time
it was originated, complied and, at the applicable Closing Date, complies in all
material respects with applicable federal and state laws (including, without
limitation, the Higher Education Act or the Public Health Service Act, if
applicable, consumer credit, truth-in-lending, equal credit opportunity and
disclosure laws) and applicable restrictions imposed by the applicable Program
or under any Guarantee Agreement.
Following the discovery by or notice to the Seller or The Money Store
of a breach of any such representation or warranty with respect to any Financed
Student Loan that materially and adversely affects the interests of the
Certificateholders, the Noteholders or the Surety Provider in such Financed
Student Loan (it being understood that any such breach that does not affect any
Guarantor's or the Secretary's obligation to guarantee payment of such Financed
Student Loan will not be considered to have such a material adverse effect), the
Seller will, unless such breach is cured within 60 days, purchase such Financed
Student Loan from the Eligible Lender Trustee, as of the first day following the
end of such 60-day period that is the last day of a Collection Period, at a
price equal to the applicable Purchase Amount (as defined below). If the Seller
fails to purchase within the above-described time period any Financed Student
Loan it is required to purchase, The Money Store will remit, or cause to be
remitted, to the Collection Account no later than the date the Seller would be
required to remit such amount, the Purchase Amount for such Financed Student
Loan. In addition, the Seller will reimburse the Trust for any accrued interest
amounts that a Guarantor refuses to pay pursuant to its Guarantee Agreement, or
for any Interest Subsidy Payments and Special Allowance Payments that are lost
or that must be repaid to the Department, or any insurance payments that the
Secretary refuses to pay, with respect to a Financed Student Loan as a result of
a breach of any such representation or warranty by the Seller. If the Seller
fails to reimburse the Trust such amount, The Money Store will reimburse the
Trust such amount no later than the date the Seller would be required to remit
such amount. The purchase and reimbursement obligations of the Seller and The
Money Store will constitute, together with the right to receive certain amounts
from the Reserve Account, the sole remedy available to or on behalf of the
Trust, the Certificateholders, the Noteholders or the Surety Provider for any
such uncured breach. The Seller's purchase and reimbursement obligations are
contractual obligations pursuant to the Sale and Servicing Agreement that may be
enforced against the Seller, but the breach of which will not constitute an
Event of Default.
"Purchase Amount" means, as to any Financed Student Loan on any date
of determination, the sum of (i) the amount required to prepay in full the
outstanding principal balance of such Financed Student Loan as of the last day
of the most recently completed Collection Period, including all accrued but
unpaid interest thereon (including interest to be capitalized) through the last
day of the Collection Period in which such Financed Student Loan is being
purchased (or, with respect to certain Serial Loans, through the last day of the
Collection Period in which such Serial Loan is transferred to the Seller's
designee) plus (ii) certain unamortized premiums, if any; provided, however,
that with respect to any Financed Student Loan required to be purchased due to a
breach by the Master Servicer of certain representations and warranties
concerning the servicing of such Financed Student Loan, the Purchase Amount will
not exceed the amount the related Guarantor would have been obligated to pay the
Trust but for such breach.
ACCOUNTS
The Indenture Trustee will establish and maintain the Collection
Account, the Pre-Funding Account, the Capitalized Interest Account, the
Capitalized Pre-Funding Account, the Note Distribution Account, the Expense
Account, the Reserve Account and the Monthly Advance Account. The Eligible
Lender Trustee will establish and maintain the Certificate Distribution Account
in the name of the Eligible Lender Trustee on behalf of the Certificateholders.
The foregoing accounts are referred to collectively as the "Trust Accounts" in
the name of the Indenture Trustee on behalf of the Noteholders and the
Certificateholders.
Funds in the Trust Accounts will be invested as provided in the Sale
and Servicing Agreement in Eligible Investments. "Eligible Investments" are
generally limited to investments acceptable to the Surety Provider and the
Rating Agencies as being consistent with the rating of the Notes. Eligible
Investments are limited to obligations or securities that mature not later than
the Business Day immediately preceding the day on which funds in the applicable
Pledged Account may be required to be withdrawn. If the amount required to be
withdrawn from the Reserve Account to cover shortfalls in the amount of
Available Funds exceeds the amount of cash in the Reserve Account, a temporary
shortfall in the amounts distributed to the Noteholders or to the
Certificateholders could result. This could, in turn, increase the average life
of the Notes and the Certificates. Investment earnings on funds deposited in the
Trust Accounts, net of losses and investment expenses (collectively, "Investment
Earnings"), will be deposited in the Collection Account and will be treated as
collections of interest on the Financed Student Loans.
The Trust Accounts will be maintained as Eligible Deposit Accounts.
"Eligible Deposit Account" means either (a) a segregated account with an
Eligible Institution or (b) a segregated trust account with the corporate trust
department of a depository institution organized under the laws of the United
States of America or any one of the states thereof or the District of Columbia
(or any domestic branch of a foreign bank), having corporate trust powers and
acting as trustee for funds deposited in such account, so long as any of the
securities of such depository institution have a credit rating from each Rating
Agency in one of its generic rating categories which signifies investment grade.
"Eligible Institution" means a depository institution organized under the laws
of the United States of America or any one of the states thereof or the District
of Columbia (or any domestic branch of a foreign bank), (i) which has a
long-term unsecured debt rating and/or a short-term unsecured debt rating
acceptable to Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's
Ratings Services ("Standard & Poor's") and the Surety Provider and (ii) whose
deposits are insured by the Federal Deposit Insurance Corporation.
ADDITIONAL FUNDINGS
The Trust will distribute funds on deposit in the Pre-Funding Account
from time to time during each Funding Period in an amount equal to the aggregate
principal balance (plus certain premiums) and accrued interest thereon of the
additional Financed Student Loans (the "Additional Student Loans") conveyed by
the Seller to the Trust during such Funding Period (the expenditures referred to
above being referred to herein as "Additional Fundings"). The Seller expects
that the amount of the Additional Fundings will approximate 100% of the
Pre-Funded Amount by the last day of the Funding Period identified in the
related Prospectus Supplement; however, there can be no assurance that a
sufficient amount of Additional Fundings will be made during such time.
Additional Student Loans may include Federal Loans, HEAL Loans and/or Private
Loans in such amounts as may be determined by the Seller and satisfying any
conditions imposed by the Surety Provider.
Pursuant to the Sale and Servicing Agreement, during each Funding
Period, the Seller may convey to the Eligible Lender Trustee on behalf of the
Trust, Additional Student Loans having an aggregate principal balance up to the
amount then on deposit in the Pre-Funding Account. The obligation to accept any
Additional Student Loan by the Eligible Lender Trustee on behalf of the Trust is
subject to the following conditions, among others: (i) such Additional Student
Loan must satisfy all applicable origination requirements and all other
requirements specified in the Sale and Servicing Agreement and the Insurance
Agreement and (ii) the Seller will not select such Additional Student Loan in a
manner that it believes is adverse to the interests of the Securityholders or
the Surety Provider. On such dates as may from time to time be designated by the
Seller during a Funding Period (each, a "Transfer Date"), the Seller may sell or
contribute and assign, without recourse, to the Eligible Lender Trustee on
behalf of the Trust, its entire interest in Additional Student Loans (each, a
"Subsequent Cut-off Date"). Subject to the satisfaction of the foregoing
conditions, the Seller will convey the Additional Student Loans to the Eligible
Lender Trustee on behalf of the Trust on each such Transfer Date pursuant to the
Sale and Servicing Agreement and the applicable Transfer Agreement (a "Transfer
Agreement") executed by the Seller, on such Transfer Date. Each such Transfer
Agreement will include as an exhibit a schedule identifying each Additional
Student Loan transferred on such Transfer Date. Upon such conveyance of
Additional Student Loans to the Eligible Lender Trustee on behalf of the Trust,
the Pool Balance will increase in an amount equal to the aggregate principal
balances of the Additional Student Loans and an amount equal to the aggregate
principal balance of such Additional Student Loans (plus certain premiums) and
accrued interest thereon will be withdrawn from the Pre-Funding Account on such
date and ultimately be transferred to the Seller.
Any amounts remaining in the Pre-Funding Account at the end of the
related Funding Period will be distributed on the next applicable Note
Distribution Date to the holders of the Class of Notes with the earliest Final
Maturity Date.
CAPITALIZED INTEREST ACCOUNT AND CAPITALIZED PRE-FUNDING ACCOUNT
On each Closing Date, to the extent set forth in the related
Prospectus Supplement, the Seller will make a cash deposit in the Capitalized
Interest Account in the name of the Indenture Trustee on behalf of the Trust.
The amount deposited therein will be used on each Note Distribution Date and
Certificate Distribution Date to make interest payments to Noteholders and
Certificateholders to the extent amounts deposited in the Note Distribution
Account or the Certificate Distribution Account, as the case may be, plus
amounts in the Reserve Account and, in the case of the Notes, the Capitalized
Pre-Funding Account, are insufficient for such purpose. Any amounts remaining in
the Capitalized Interest Account after the period set forth in the applicable
Terms Supplement will be transferred to the Reserve Account or, with the consent
of the Surety Provider, applied as an Additional Principal Payment.
On each Closing Date, to the extent set forth in the related
Prospectus Supplement, the Seller will make a cash deposit in the Capitalized
Pre-Funding Account in the name of the Indenture Trustee on behalf of the Trust.
The amount deposited therein will be used by the Indenture Trustee on each Note
Distribution Date during the applicable Funding Period to fund the excess, if
any, of (i) the amount of interest accrued for each such Note Distribution Date
at the Class Interest Rate of the applicable Class of Notes on its pro rata
portion of the amount on deposit in the Pre-Funding Account over (ii) the amount
of any earnings on funds in the Pre-Funding Account that are available to pay
interest on the Notes of such Class on each such Note Distribution Date. Any
amounts remaining in the Capitalized Pre-Funding Account on the last Note
Distribution Date of a Funding Period and not used for such purposes are
required to be paid directly to the Depositor on such Note Distribution Date.
All funds in the Capitalized Interest Account and the Capitalized
Pre-Funding Account are required to be held (i) uninvested, up to the limits
insured by the Federal Deposit Insurance Corporation or (ii) invested in
Eligible Investments. Any investment earnings on funds in the Capitalized
Interest Account and the Capitalized Pre-Funding Account will be applied to
payment of interest on the Notes and the Certificates.
SERVICING PROCEDURES
Pursuant to the Sale and Servicing Agreement, the Master Servicer has
agreed to service, and perform all other related tasks with respect to, all the
Financed Student Loans acquired from time to time. The Master Servicer is
required pursuant to the Sale and Servicing Agreement to perform all services
and duties customary to the servicing of Financed Student Loans (including all
collection practices), and to do so in the same manner as the Master Servicer
has serviced student loans on its own behalf and in compliance with all
standards and procedures provided for in the Higher Education Act, the Public
Health Service Act, the Guarantee Agreements, the Private Loan Programs, and all
other applicable federal and state laws.
Without limiting the foregoing, the duties of the Master Servicer
under the Sale and Servicing Agreement include, but are not limited to, the
following: collecting and depositing into the Collection Account all payments
with respect to the Financed Student Loans, including claiming and obtaining any
Guarantee Payments with respect thereto and with respect to Interest Subsidy
Payments and Special Allowance Payments, claiming and obtaining insurance
payments from the Secretary with respect to HEAL Loans, responding to inquiries
from borrowers on the Financed Student Loans, investigating delinquencies and
sending out statements, payment coupons and tax reporting information to
borrowers. In addition, the Master Servicer will keep ongoing records with
respect to such Financed Student Loans and collections thereon and will furnish
monthly and annual statements to the Administrator with respect to such
information, in accordance with the Master Servicer's customary practices and as
otherwise required in the Sale and Servicing Agreement.
The Master Servicer may enter into sub-servicing agreements with
sub-servicers pursuant to which some or all of the Financed Student Loans may be
serviced on behalf of the Master Servicer. No such sub-servicing arrangement
will relieve the Master Servicer of its duties and obligations under the Sale
and Servicing Agreement. It is anticipated that PHEAA primarily will sub-service
Financed Student Loans originated by the Seller in the Repayment Phase. Certain
of the Financed Student Loans originated by the Seller also may be serviced
during the Repayment Phase by AFSA or such other parties as may be approved by
the Surety Provider. It is anticipated that the Purchased Loans will be serviced
during both the Deferral Phase and the Repayment Phase either by the originators
of such Purchased Loans, the Seller or another party.
PAYMENTS ON FINANCED STUDENT LOANS
The Master Servicer will deposit all payments on Financed Student
Loans for which it is acting as primary servicer (from whatever source) and all
proceeds of such Financed Student Loans collected by it during each Collection
Period into the Collection Account (i) within one Business Day after it has
received an aggregate of $30,000 during any month and (ii) on the last Business
Day of each month, all other collections received during such month. The Master
Servicer shall cause each other Servicer to deposit in the Collection Account,
within one Business Day of receipt thereof, all payments on Financed Student
Loans for which it is acting as primary servicer (from whatever source) and all
proceeds of such Financed Student Loans collected by it during each Collection
Period. The Eligible Lender Trustee will deposit all Interest Subsidy Payments,
all Special Allowance Payments and all insurance payments from the Secretary
with respect to the Financed Student Loans received by it during each Collection
Period into the Collection Account within two Business Days of receipt thereof.
MASTER SERVICER COVENANTS
In the Sale and Servicing Agreement, the Master Servicer covenants
that: (a) it will duly satisfy or cause to be duly satisfied all obligations on
its part to be fulfilled under or in connection with the Financed Student Loans,
maintain in effect all qualifications required in order to service the Financed
Student Loans and comply in all material respects with all requirements of law
in connection with servicing the Financed Student Loans, the failure to comply
with which would have a materially adverse effect on the Certificateholders or
the Noteholders; (b) it will not permit any rescission or cancellation of a
Financed Student Loan except as ordered by a court of competent jurisdiction or
other government authority or as otherwise consented to by the Eligible Lender
Trustee and the Indenture Trustee; (c) it will do nothing to impair the rights
of the Certificateholders and the Noteholders in the Financed Student Loans and
(d) it will not reschedule, revise, defer or otherwise compromise with respect
to payments due on any Financed Student Loan except pursuant to any applicable
deferral or forbearance periods or otherwise in accordance with its guidelines
with respect to the servicing of the Financed Student Loans (notwithstanding the
foregoing, the Master Servicer may, in its sole discretion, without having to
obtain the consent or approval of any other party, waive amounts owing under a
Financed Student Loan up to and including $50.00); provided, however, that the
Master Servicer may agree to a decrease of the interest rate of a Financed
Student Loan in accordance with the terms of its interest reduction program for
borrowers with a steady history of timely payments of interest and principal.
Under the terms of the Sale and Servicing Agreement, if The Money
Store or the Master Servicer discovers, or receives written notice, that any
covenant of the Master Servicer set forth above has not been complied with in
all material respects and such noncompliance has not been cured within 60 days
thereafter and has a materially adverse effect on the interest of the
Certificateholders, the Noteholders or the Surety Provider in any Financed
Student Loan (it being understood that any such breach that does not affect any
Guarantor's or the Secretary's obligation to guarantee payment of such Financed
Student Loan will not be considered to have such a material adverse effect),
unless such breach is cured, the Master Servicer will purchase such Financed
Student Loan as of the first day following the end of such 60-day period that is
the last day of a Collection Period. In that event, the Master Servicer will be
obligated to deposit into the Collection Account an amount equal to the Purchase
Amount of such Financed Student Loan and the Trust's interest in any such
purchased Financed Student Loan will be automatically assigned to the Master
Servicer. If the Master Servicer fails to purchase within the above-described
time period any Financed Student Loan it is required to purchase, The Money
Store will remit, or cause to be remitted, no later than the date the Master
Servicer would be required to remit such amount, the Purchase Amount for such
Financed Student Loan. Notwithstanding the above, if the Master Servicer is
obligated to purchase a Financed Student Loan as a result of a failure to
service such Financed Student Loan in accordance with the Higher Education Act,
the Public Health Service Act, the applicable Private Loan Program and the
applicable Guarantee Agreement, the Purchase Amount will not exceed the amount
the related Guarantor or the Secretary would be obligated to pay if not for such
breach. In addition, the Master Servicer or The Money Store will reimburse the
Trust for any accrued interest amounts that a Guarantor refuses to pay pursuant
to its Guarantee Agreement, or for any Interest Subsidy Payments and Special
Allowance Payments that are lost or that must be repaid to the Department or for
any insurance payments that the Secretary refuses to pay, with respect to a
Financed Student Loan as a result of a breach of any such covenant of the Master
Servicer; provided, however, that such reimbursements shall not exceed the
amount the Guarantor or the Secretary would have paid if not for such breach.
Notwithstanding the above, with respect to any purchase obligation arising as a
result of a Guarantor denying a Guarantee Payment on a Financed Student Loan,
neither the Master Servicer nor The Money Store will be required to purchase
such Financed Student Loan until the last day of the Collection Period following
the date a Realized Loss on such Financed Student Loan is allocated.
SERVICING COMPENSATION
The Master Servicer will be entitled to receive, subject to the
limitations set forth in the following paragraph, the Servicing Fee monthly in
the amount set forth in the related Prospectus Supplement. To the extent the
Master Servicer engages a sub-servicer, including but not limited to PHEAA or
AFSA, the Master Servicer will direct a portion of the Servicing Fee to the
applicable sub-servicer as compensation for its services. The Servicing Fee
(together with any portion of the Servicing Fee that remains unpaid from prior
Note Distribution Dates) will be allocated monthly out of Available Funds and
amounts on deposit in the Reserve Account and will be payable quarterly on the
first Note Distribution Date occurring in March, June, September and December
(or, if in any such month a Certificate Distribution Date occurs prior to such
first Note Distribution Date, on such Certificate Distribution Date).
Notwithstanding the foregoing, except as otherwise set forth in a
Prospectus Supplement, in the event that the fee payable to the Master Servicer
as defined above for any month would exceed 1.05% per annum (or such other
percentage as may be set forth in the related Prospectus Supplement) of the Pool
Balance as of the last day of the preceding calendar month (the "Capped
Amount"), then the "Servicing Fee" for such month will instead be the Capped
Amount for such month. The remaining amount in excess of such Servicing Fee,
together with any such excess amounts from prior months that remain unpaid (the
"Servicing Fee Carryover"), will be payable to the Master Servicer on each
succeeding Distribution Date out of Available Funds remaining, if any, after
payment or allocation on the dates and in the priority set forth below under
"Distributions--Distributions from Collection Account."
The Servicing Fee and the Servicing Fee Carryover will compensate the
Master Servicer for performing the functions of a third party servicer of
student loans as an agent for their beneficial owner, including collecting and
posting all payments, responding to inquiries of borrowers on the Financed
Student Loans, investigating delinquencies, pursuing, filing and collecting any
Guarantee Payments and any insurance payments from the Secretary, accounting for
collections and furnishing monthly and annual statements to the Administrator.
The Servicing Fee and the Servicing Fee Carryover also will reimburse the Master
Servicer for certain taxes, accounting fees, outside auditor fees, data
processing costs and other costs incurred in connection with administering the
Financed Student Loans.
DISTRIBUTIONS
Deposits to Collection Account. On or before the 16th day of each
month, the Administrator will provide the Indenture Trustee and the Eligible
Lender Trustee a report setting forth by component the Available Funds for the
immediately preceding Collection Period.
For purposes hereof, the term "Available Funds" means the sum of the
following amounts with respect to the related Collection Period: (i) all
collections received by the Master Servicer or any Servicer on the Financed
Student Loans (including any Guarantee Payments received with respect to the
Financed Student Loans); (ii) any payments, including without limitation
Interest Subsidy Payments, Special Allowance Payments and any insurance payments
from the Secretary received by the Eligible Lender Trustee during such
Collection Period with respect to the Financed Student Loans; (iii) all proceeds
of any sales of Financed Student Loans by the Trust during such Collection
Period; (iv) any payments of or with respect to interest received by the Master
Servicer or a Servicer during such Collection Period with respect to a Financed
Student Loan for which a Realized Loss was previously allocated; (v) that
portion of amounts released from the Pre-Funding Account at the end of a Funding
Period to be applied as a payment of principal; (vi) amounts released from the
Capitalized Interest Account and the Capitalized Pre-Funding Account to cover
shortfalls in interest; (vii) the aggregate Purchase Amounts received for those
Financed Student Loans repurchased by the Seller or purchased by the Master
Servicer or by or on behalf of The Money Store under an obligation which arose
during the related Collection Period; (viii) the aggregate amounts, if any,
received from the Seller, The Money Store or the Master Servicer as
reimbursement of non-guaranteed interest amounts, or lost Interest Subsidiary
Payments, Special Allowance Payments and insurance payments from the Secretary,
with respect to the Financed Student Loans pursuant to the Sale and Servicing
Agreement and (ix) Investments Earnings for such Collection Period; provided,
however, that Available Funds will exclude all payments and proceeds of any
Financed Student Loans the Purchase Amount of which has been included in
Available Funds for a prior Collection Period.
Distributions from Collection Account. On each Determination Date, the
Administrator will advise the Indenture Trustee in writing of the applicable
Noteholders' Interest Distribution Amount or Certificateholders' Interest
Distribution Amount. Additionally, no later than 16 days prior to each Note
Distribution Date for the Class of Notes then entitled to receive payments of
principal (or, after all Notes have been paid in full, no later than 16 days
prior to each Certificate Distribution Date) the Administrator will advise the
Indenture Trustee in writing of the applicable Noteholders' Principal
Distribution Amount (or, after all the Notes have been paid in full, the
Certificateholders' Principal Distribution Amount). Further, on the
Determination Date relating to the first Certificate Distribution Date occurring
each month (or for each month in which a Note Distribution Date occurs earlier
than the Certificate Distribution Date, on the Determination Date relating to
such earlier Note Distribution Date), the Administrator will advise the
Indenture Trustee in writing of the Servicing Fee, Administration Fee, Auction
Agent Fee, Indenture Trustee Fee, Eligible Lender Trustee Fee and Surety
Provider Fee (collectively, the "Transaction Fees") for the preceding month.
On each Note Distribution Date (other than those relating to Accrual
Notes during the related Accrual Period), the Indenture Trustee will transfer
from the Collection Account to the Note Distribution Account, from payments
received on or with respect to the Financed Student Loans during the three
Collection Periods immediately preceding the month of such Note Distribution
Date (or, with respect to a Class of Notes having Note Distribution Dates
occurring weekly, monthly or such other period as may be set forth in the
related Prospectus Supplement, from payments received on or with respect to such
Financed Student Loans during the Collection Period immediately preceding the
month of such Note Distribution Date or for such number of Collection Periods as
may be set forth in the related Prospectus Supplement), an amount up to the
related Noteholders' Interest Distribution Amount. For each Note Distribution
Date relating to a Class of Accrual Notes during the related Accrual Period, the
related Noteholders' Interest Distribution Amount will be added to the principal
amount of such Notes. For the Class of Notes with the earliest Final Maturity
Date, on the first Note Distribution Date for such Class occurring in January,
April, July and October (or, if a Class of Notes having Distribution Dates
occurring monthly or such other period as may be set forth in the related
Prospectus Supplement has the earliest Final Maturity Date, on each related Note
Distribution Date or such other Note Distribution Dates as may be set forth in
the related Prospectus Supplement), after making the transfer set forth in the
prior sentence, the Indenture Trustee will transfer from the Collection Account
to the Note Distribution Account from payments received on or with respect to
the Financed Student Loans during the three Collection Periods immediately
preceding the month prior to the month of such Note Distribution Date (or, with
respect to a Class of Notes having Distribution Dates occurring monthly or such
other period as may be set forth in the related Prospectus Supplement, from the
Collection Period in the month second preceding the month of the related Note
Distribution Date or for such Collection Periods as may be set forth in the
related Prospectus Supplement), together with any Additional Principal Payments
to be made at the election of the Master Servicer as described below, an amount
up to the Noteholders' Principal Distribution Amount; provided, however, that
for each month in which the first Note Distribution Date occurs prior to the
Certificate Distribution Date in such month, prior to transferring amounts to
the Note Distribution Account, the Indenture Trustee will transfer to the
Expense Account, from payments received on or with respect to the Financed
Student Loans during the immediately preceding Collection Period, an amount up
to the Transaction Fees for the month preceding such Note Distribution Date and
all overdue Transaction Fees from prior months.
On each Certificate Distribution Date, the Indenture Trustee will
transfer from the Collection Account, from payments received on or with respect
to the Financed Student Loans during the immediately preceding Collection
Period, (i) to the Expense Account, an amount up to the excess, if any, of the
Transaction Fees for the month preceding such Certificate Distribution Date and
all overdue Transaction Fees from prior months over the amount, if any,
previously transferred to the Expense Account during the month of such
Certificate Distribution Date and (ii) by wire transfer no later than 11:00
a.m., New York time, to the Certificate Distribution Account, an amount up to
the related Certificateholders' Interest Distribution Amount. Additionally,
after each Class of Notes has been paid in full, on each Certificate
Distribution Date the Indenture Trustee will transfer from the Collection
Account to the Eligible Lender Trustee, by wire transfer no later than 11:00
a.m., New York time, for deposit in the Certificate Distribution Account, from
payments received on or with respect to the Financed Student Loans during the
Collection Period immediately preceding the month prior to such Certificate
Distribution Date, an amount up to the applicable Certificateholders' Principal
Distribution Amount.
On the first Note Distribution Date occurring in March, June,
September and December, or in the case of clause (iii) below on the first Note
Distribution Date occurring in each month (or if in any such month a Certificate
Distribution Date occurs prior to such first Note Distribution Date, on such
Certificate Distribution Date), the Indenture Trustee will distribute from the
Expense Account (in addition to any amounts transferred from the Reserve
Account) the following amounts in the following order of priority: (i) to the
Master Servicer, the Servicing Fee and all overdue Servicing Fees, (ii) to the
Administrator, the Administration Fee and all overdue Administration Fees, (iii)
to the Auction Agent, the Auction Agent Fee and all overdue Auction Agent Fees,
(iv) to the Indenture Trustee, the Indenture Trustee Fee and all overdue
Indenture Trustee Fees, (v) to the Eligible Lender Trustee, the Eligible Lender
Trustee Fee and all overdue Eligible Lender Trustee Fees and (vi) to the Surety
Provider, the Surety Provider Fee and all overdue Surety Provider Fees.
On each Note Distribution Date, the Indenture Trustee will distribute
to the Noteholders of the applicable Class as of the related Note Record Date
all amounts transferred to the Note Distribution Account as set forth above (in
addition to any amounts transferred from the Capitalized Interest Account, the
Capitalized Pre-Funding Account, the Pre-Funding Account, the Reserve Account
and the Monthly Advance Account and amounts drawn under the applicable Note
Surety Bond). On each Certificate Distribution Date, the Eligible Lender Trustee
will distribute to the Certificateholders of the applicable Class as of the
related Certificate Record Date all amounts transferred to the Certificate
Distribution Account as set forth above (in addition to any amounts transferred
from the Capitalized Interest Account, the Reserve Account and the Monthly
Advance Account and amounts drawn under the Certificate Surety Bond).
Notwithstanding the foregoing, unless otherwise set forth in a
Prospectus Supplement, principal payments will be made to each Class of Notes
and the Certificates only in amounts equal to $50,000 and integral multiples in
excess thereof. If the amount in the Note Distribution Account or the
Certificate Distribution Account otherwise required to be applied as a payment
of principal either (i) is less than $50,000 or (ii) exceeds an even multiple of
$50,000, then, in the case of (i), such entire amount or, in the case of (ii),
such excess amount, will not be paid as principal on the upcoming Note
Distribution Date or Certificate Distribution Date, as the case may be, but will
be retained in the Note Distribution Account or the Certificate Distribution
Account, as the case may be, until the amount therein available for payment of
principal (including any amounts transferred from the Reserve Account) equals
$50,000.
With respect to the Class of Notes entitled to receive payments of
principal (or, after each Class of Notes has been paid in full, the Class of
Certificates entitled to receive payments of principal), unless otherwise set
forth in a Prospectus Supplement, the actual Notes or Certificates of such
Class, as the case may be, that will receive payments of principal on each
applicable Note Distribution Date or Certificate Distribution Date will be
selected no later than 15 days prior to the related Note Distribution Date or
Certificate Distribution Date, as the case may be, by the Indenture Trustee
(with respect to the Notes) or the Eligible Lender Trustee (with respect to the
Certificates) by lot in such manner as the Indenture Trustee or the Eligible
Lender Trustee, as the case may be, in its discretion may determine and which
may provide for the selection for payment of principal in minimum denominations
of $50,000, and integral multiples in excess thereof.
Notice of the specific Notes or Certificates, as the case may be, to
receive payments of principal is to be given by the Indenture Trustee or the
Eligible Lender Trustee, as the case may be, by first-class mail, postage
prepaid, mailed not less than 15 days but no more than 30 days before the
applicable Note Distribution Date or Certificate Distribution Date at the
address of the applicable Securityholder appearing on the registration books.
Any defect in or failure to give such mailed notice shall not affect the
validity of proceedings for the payment of any other Notes or Certificates not
affected by such failure or defect. All notices of payment are to state: (i) the
applicable Note Distribution Date or Certificate Distribution Date; (ii) the
amount of principal to be paid, and (iii) the Class of the Notes or Certificates
to be paid.
On the last Note Distribution Date occurring in January, April, July
and October (or if in any such month a Certificate Distribution Date occurs
after such last Note Distribution Date, on such Certificate Distribution Date),
after making all required transfers to the Note Distribution Account and, if
applicable, the Certificate Distribution Account and the Expense Account, the
Indenture Trustee will transfer any amounts remaining in the Collection Account
(other than amounts representing payments received during such month or payments
of or with respect to principal received in the immediately preceding month) in
the following order of priority: (i) to the Surety Provider, the amount, if any,
necessary to reimburse the Surety Provider for prior Note and Certificate Surety
Bond Payments (which will generally be equal to the aggregate amount of draws
under the Note Surety Bonds and Certificate Surety Bond on prior Note or
Certificate Distribution Dates, as applicable), together with interest thereon,
(ii) to the Reserve Account, the amount, if any, necessary to increase the
balance thereof to the Specified Reserve Account Balance, (iii) to the Master
Servicer, the aggregate unpaid amount of the Servicing Fee Carryover, if any,
(iv) to the Note Distribution Account, the aggregate unpaid amount of
Noteholders' Interest Carryover, if any, and (v) to the Certificate Distribution
Account, the aggregate unpaid amount of Certificateholders' Interest Carryover,
if any. Any amounts remaining in the Collection Account after such transfers
(other than amounts representing payments received during such current month or
payments of or with respect to principal received in the immediately preceding
month) will be transferred to the Reserve Account generally for distribution to
the holders of the Originators' Interests and then to Student Holdings. Amounts
transferred to the Note Distribution Account or the Certificate Distribution
Account pursuant to clauses (iv) and (v) above, respectively, will be paid to
the applicable Class of Notes or Certificates on the next Note Distribution Date
or Certificate Distribution Date relating to such Class of Notes or
Certificates. Notwithstanding the foregoing, with the consent of the Surety
Provider, amounts otherwise required to be deposited into the Reserve Account
pursuant to clause (ii) above may, instead, be applied as a payment of principal
on the next Note Distribution Date relating to the Class of Notes with the
earliest Final Maturity Date (or, after all the Notes have been paid in full, on
the next Certificate Distribution Date). Amounts so applied as principal
payments are referred to herein as "Additional Principal Payments."
Notwithstanding the foregoing, if there has been an Event of Default
with respect to payment of the Notes, the Certificateholders will not be
entitled to any payments of principal or interest until each outstanding Class
of Notes has been paid in full.
"Certificate Balance" equals the original principal balance of each
Class of Certificates issued reduced by all amounts allocable to principal
previously distributed to Certificateholders.
"Certificateholders' Distribution Amount" means, as to any Class of
Certificates, with respect to any Certificate Distribution Date relating to such
Certificates, the Certificateholders' Interest Distribution Amount for such
Certificate Distribution Date plus, for each Certificate Distribution Date on
and after which the Notes have been paid in full, the Certificateholders'
Principal Distribution Amount for such Certificate Distribution Date.
"Certificateholders' Interest Carryover Shortfall" means, as to any
Class of Certificates, with respect to any Certificate Distribution Date
relating to such Certificates, the excess, if any, of (i) the sum of the related
Certificateholders' Interest Distribution Amount on the preceding Certificate
Distribution Date relating to such Certificates and any outstanding
Certificateholders' Interest Carryover Shortfall on such preceding Certificate
Distribution Date over (ii) the amount of interest actually distributed to the
Certificateholders of such Class on such preceding Certificate Distribution
Date, plus interest on the amount of such excess interest due to the
Certificateholders of such Class, to the extent permitted by law, at the related
Certificate Rate from such preceding Certificate Distribution Date to the
current Certificate Distribution Date.
"Certificateholders' Interest Distribution Amount" means, as to any
Class of Certificates, with respect to any Certificate Distribution Date
relating to such Certificates, the sum of (i) the amount of interest accrued at
the related Certificate Rate for the related Interest Period on the outstanding
principal amount of such Certificates on the immediately preceding Certificate
Distribution Date relating to such Certificates, after giving effect to all
distributions of principal to Certificateholders of such Class on such
Certificate Distribution Date (or, in the case of the first Certificate
Distribution Date, on the Initial Closing Date) and (ii) the Certificateholders'
Interest Carryover Shortfall relating to such Certificates for such Certificate
Distribution Date; provided, however, that the Certificateholders' Interest
Distribution Amount will not include any Certificateholders' Interest Carryover.
"Certificateholders' Principal Carryover Shortfall" means, as of the
close of any Certificate Distribution Date relating to a Class of Certificates
on or after which the Notes have been paid in full, the excess, if any, of (i)
the sum of the Certificateholders' Principal Distribution Amount on such
Certificate Distribution Date and any outstanding Certificateholders' Principal
Carryover Shortfall for the preceding Certificate Distribution Date over (ii)
the amount of principal actually distributed to the Certificateholders on such
Certificate Distribution Date.
"Certificateholders' Principal Distribution Amount" means, on each
Certificate Distribution Date relating to the Class of Certificates with the
earliest Final Maturity Date on and after which the principal balance of the
Notes has been paid in full, the sum of (a) the Principal Distribution Amount
for the Collection Period in the month second preceding such Certificate
Distribution Date, (b) any Additional Principal Payments to be made on such
Certificate Distribution Date and (c) the Certificateholders' Principal
Carryover Shortfall as of the close of the preceding Certificate Distribution
Date; provided, however, that the Certificateholders' Principal Distribution
Amount will in no event exceed the outstanding principal balance of such Class
of Certificates. Further, on the first Certificate Distribution Date occurring
after the Note Distribution Date on which the principal balance of the Class of
Notes with the last Final Maturity Date is paid in full, the Certificateholders'
Principal Distribution Amount also will include the excess, if any, of the
amount of principal available to be distributed on such Note Distribution Date
over the amount of principal paid on the Notes on such date. In addition, with
respect to each Class of Certificates, on the related Final Maturity Date the
Certificateholders' Principal Distribution Amount will include the amount
required to reduce the outstanding principal balance of such Certificates to
zero.
"Noteholders' Distribution Amount" means, as to any Class of Notes,
with respect to any Distribution Date relating to such Notes, the sum of related
Noteholders' Interest Distribution Amount and the Noteholders' Principal
Distribution Amount for such Note Distribution Date.
"Noteholders' Interest Carryover Shortfall" means, as to any Class of
Notes, with respect to any Note Distribution Date relating to such Notes, the
excess of (i) the sum of the related Noteholders' Interest Distribution Amount
on the preceding Note Distribution Date relating to such Notes and any
Noteholders' Interest Carryover Shortfall on such preceding Note Distribution
Date over (ii) the amount of interest actually allocated to such Noteholders on
such preceding Note Distribution Date, plus interest on the amount of such
excess interest due to the Noteholders, to the extent permitted by law, at the
related Class Interest Rate from such preceding Note Distribution Date to the
current Note Distribution Date.
"Noteholders' Interest Distribution Amount" means, as to any Class of
Notes, with respect to any Note Distribution Date, the sum of (i) the amount of
interest accrued at the respective Class Interest Rate for each related Interest
Period since the last Note Distribution Date relating to such Notes (or, in the
case of the first Note Distribution Date following the issuance of a Class of
Notes, the applicable Closing Date) on the outstanding principal balance of such
Class of Notes on the immediately preceding Note Distribution Date relating to
such Notes after giving effect to all principal distributions to holders of
Notes of such Class on such date (or, in the case of the first Note Distribution
Date for such Class, on the related Closing Date) and (ii) the Noteholders'
Interest Carryover Shortfall for such Class for such Note Distribution Date;
provided, however, that the Noteholders' Interest Distribution Amount will not
include any Noteholders' Interest Carryover.
"Noteholders' Principal Carryover Shortfall" means, as of the close of
any Note Distribution Date relating to a Class of Notes, the excess of (i) the
sum of the Noteholders' Principal Distribution Amount on such Note Distribution
Date and any outstanding Noteholders' Principal Carryover Shortfall for the
preceding Note Distribution Date over (ii) the amount of principal actually
allocated to the Noteholders on such Note Distribution Date.
"Noteholders' Principal Distribution Amount" means, as to the Class of
Notes with the earliest Final Maturity Date on each applicable Note Distribution
Date, the sum of (i) the Principal Distribution Amount for the three Collection
Periods immediately preceding the month prior to the month of such Note
Distribution Date (or, with respect to a Class of Notes having Note Distribution
Dates occurring monthly or such other period as may be set forth in the related
Prospectus Supplement, from the Collection Period in the month second preceding
the month of the related Note Distribution Date or for such Collection Periods
as may be set forth in the related Prospectus Supplement), (ii) any Additional
Principal Payments to be made on such Note Distribution Date and (iii) the
Noteholders' Principal Carryover Shortfall as of the close of the preceding Note
Distribution Date relating to such Notes; provided, however, that the
Noteholders' Principal Distribution Amount will not exceed the outstanding
principal balance of such Class of Notes. In addition, with respect to each
Class of Notes, on the related Final Maturity Date the Noteholders' Principal
Distribution Amount will include the amount required to reduce the outstanding
principal balance of such Notes to zero.
"Principal Distribution Amount" means, with respect to any Collection
Period, the sum of the following amounts: (i) that portion of all collections
received by the Master Servicer or any Servicer on the Financed Student Loans
that is allocable to principal (including the portion of any Guarantee Payments
received that is allocable to principal of the Financed Student Loans); (ii) the
portion of the proceeds allocable to principal from the sale of Financed Student
Loans by the Trust during such Collection Period; (iii) all Realized Losses
incurred during the related Collection Period; (iv) to the extent attributable
to principal, the Purchase Amount received with respect to each Financed Student
Loan repurchased by the Seller or purchased by the Master Servicer or The Money
Store under an obligation which arose during the related Collection Period; and
(v) amounts, if any, transferred from the Pre-Funding Account at the end of the
applicable Funding Period; provided, however, that the Principal Distribution
Amount will exclude all payments and proceeds of any Financed Student Loans the
Purchase Amount of which has been included in Available Funds for a prior
Collection Period.
With respect to each Financed Student Loan submitted to a Guarantor
for a Guarantee Payment, a "Realized Loss" means the excess, if any, of (i) the
unpaid principal balance of such Financed Student Loan on the date it was first
submitted to a Guarantor for a Guarantee Payment over (ii) all amounts received
on or with respect to principal on such Financed Student Loan up through the
earlier to occur of (A) the date a related Guarantee Payment is made or (B) the
last day of the Collection Period occurring 7 months after the date the claim
for such Guarantee Payment is first denied.
MONTHLY ADVANCES
If the Master Servicer has applied for a Guarantee Payment from a
Guarantor, an Interest Subsidy Payment or a Special Allowance Payment from the
Department or an insurance payment from the Secretary, and the Master Servicer
has not received the related payment prior to the end of the Collection Period
immediately preceding the Note Distribution Date or Certificate Distribution
Date on which such amount would be required to be distributed as a payment of
interest, the Representative may, no later than the Determination Date relating
to such Note Distribution Date or Certificate Distribution Date, as the case may
be, deposit into the Monthly Advance Account an amount up to the amount of such
payments applied for but not received (such deposits by the Master Servicer are
referred to herein as "Monthly Advances"). On each related Note Distribution
Date, the Indenture Trustee will distribute from the Monthly Advance Account to
the applicable Noteholders the Monthly Advance for such Note Distribution Date.
On each related Certificate Distribution Date, the Indenture Trustee will
transfer from the Monthly Advance Account to the Eligible Lender Trustee, by
wire transfer no later than 11:00 a.m. New York time, for distribution to the
Certificateholders, the Monthly Advance for such Certificate Distribution Date.
Such Monthly Advances are recoverable by the Representative from the source for
which such Monthly Advance was made.
CREDIT ENHANCEMENT
Reserve Account. Pursuant to the Sale and Servicing Agreement, the
Reserve Account will be created and on each Closing Date on which the Trust
sells a Series of Notes, the Seller will deposit cash or Eligible Investments in
an amount, if any, equal to the Reserve Account Deposit identified in the
related Prospectus Supplement. The Reserve Account will be augmented on the last
Note Distribution Date occurring in January, April, July and October (or, if in
any such month a Certificate Distribution Date occurs after such Note
Distribution Date, on such Certificate Distribution Date) by deposit therein of
the amount, if any, necessary to reinstate the balance of the Reserve Account to
the Specified Reserve Account Balance from the amount of Available Funds
remaining after making all prior distributions on such date as described above
under the heading "--Distributions--Distributions from the Collection Account";
provided, however, that with the consent of the Surety Provider such Available
Funds may be applied as an Additional Principal Payment. Also, if amounts were
transferred from the Reserve Account to cover a Realized Loss on a Financed
Student Loan, any subsequent payments of principal received on or with respect
to such Financed Student Loan will be deposited into the Reserve Account or
applied as an Additional Principal Payment. As described below, subject to
certain limitations, amounts on deposit in the Reserve Account will be released
to Student Holdings the extent that the amount on deposit in the Reserve Account
exceeds the Specified Reserve Account Balance.
If the amount, if any, on deposit in the Reserve Account on any Note
or Certificate Distribution Date (after giving effect to all deposits or
withdrawals therefrom on such Note or Certificate Distribution Date) is greater
than the Specified Reserve Account Balance, subject to certain limitations, the
Administrator will instruct the Indenture Trustee to distribute the amount of
the excess, after payment of any unpaid Excess Servicing Fee, Noteholders'
Interest Carryover, Certificateholders' Interest Carryover, and, if applicable,
certain amounts owing to the Surety Provider under the Insurance Agreement or to
purchase Financed Student Loans for which there has been an uncured breach of
certain representations and warranties, to the holders of the Originators'
Interests and then to Student Holdings. Upon any distribution to the holders of
the Originators' Interests or Student Holdings of amounts from the Reserve
Account, neither the Noteholders nor the Certificateholders will have any rights
in, or claims to, such amounts.
The Reserve Account is intended to enhance the likelihood of timely
receipt by the Noteholders and the Certificateholders of the full amount of
principal and interest due them and to decrease the likelihood that the
Noteholders or the Certificateholders will experience losses. In certain
circumstances, however, the Reserve Account could be depleted. Further, as
described above, amounts otherwise required to be deposited into the Reserve
Account may, with the consent of the Surety Provider, be applied as Additional
Principal Payments. If the amount required to be withdrawn from the Reserve
Account to cover shortfalls in the amount of Available Funds exceeds the amount
of cash in the Reserve Account, a temporary shortfall in the amount of principal
and interest distributed to the Noteholders or the Certificateholders could
result. This could, in turn, increase the average life of the Notes and the
Certificates. Moreover, amounts on deposit in the Reserve Account (other than
amounts in excess of the Specified Reserve Account Balance) will not be
available to cover any aggregate unpaid Servicing Fee Carryovers, Noteholders'
Interest Carryover or Certificateholders' Interest Carryover.
Subordination of the Certificates. The rights of the holders of the
Certificates to receive distributions with respect to interest and principal
will be subordinated to such rights of the holders of the Notes to the extent
described herein. This subordination is intended to enhance the likelihood of
regular receipt by holders of Notes of the full amount of the Noteholders'
Interest Distribution Amount and, after distribution of the Certificateholders'
Interest Distribution Amount, the Noteholders' Principal Distribution Amount.
Surety Bonds. The Note Surety Bonds, issued by the Surety Provider,
will be obtained by the Seller in favor of the Eligible Lender Trustee solely on
behalf of the Noteholders of the related Series. The Note Surety Bonds will,
except as provided below, provide for coverage of timely payment of all interest
and ultimate payment of all principal due on the related Series of Notes;
provided, however, that the Note Surety Bonds will not ensure payment of any
Noteholders' Interest Carryover. See "Description of the Surety Bonds--Note
Surety Bonds."
The Certificate Surety Bonds will, except as provided below, provide
for coverage of timely payment of all interest and ultimate payment of all
principal due on the Certificates; provided, however, that the Certificate
Surety Bonds will not ensure payment of any Certificateholders' Interest
Carryover. The Certificate Surety Bonds will be obtained by the Seller in favor
of the Eligible Lender Trustee solely on behalf of the Certificateholders of the
related Class. See "Description of the Surety Bonds--Certificate Surety Bond."
STATEMENTS TO INDENTURE TRUSTEE AND TRUST
On each Determination Date preceding a Note Distribution Date and
Certificate Distribution Date, the Master Servicer or the Administrator will
provide to the Indenture Trustee for the Indenture Trustee to forward on each
succeeding Note Distribution Date to each Noteholder of the applicable Class,
and to the Eligible Lender Trustee for the Eligible Lender Trustee to forward on
such succeeding Certificate Distribution Date to each Certificateholder of the
applicable Class, a statement, which will include the following information with
respect to such Note Distribution Date and Certificate Distribution Date or the
preceding Collection Period, to the extent applicable (provided, however, that
with respect to each Note Distribution Date other than the first Note
Distribution Date occurring in each month, such statement need only contain the
information set forth in clauses (ii), (iii), (v), and (vii) below):
(i) the amount of the distribution allocable to principal
of each Class of Notes or Certificates, as the case may be;
(ii) the amount of the distribution allocable to interest on each Class
of Notes and Certificates (or in the case of any Accrual Notes during
the related Accrual Period, the amount of interest capitalized and
added to principal), together with the interest rates applicable with
respect thereto (indicating whether such interest rates are based on
the Auction Rate, the LIBOR Rate or other applicable rate as set forth
in the related Prospectus Supplement, as the case may be, or on the Net
Loan Rate, with respect to each Class of Notes and Certificates, and
specifying what each such interest rate would have been if it had been
calculated using the alternate basis);
(iii) the amount of the distribution, if any, allocable to any
Noteholders' Interest Carryover and any Certificateholders' Interest
Carryover, together with the outstanding amount, if any, of each
thereof after giving effect to any such distribution;
(iv) the Pool Balance as of the close of business on the
last day of the preceding Collection Period;
(v) the aggregate outstanding principal balance of each Class of Notes
and Certificates as of such Note Distribution Date or Certificate
Distribution Date, after giving effect to payments allocated to
principal reported under clause (i) above;
(vi) the amount of the Servicing Fee and any Servicing Fee Carryover
allocated to the Master Servicer, the amount of the Administration Fee
allocated to the Administrator, the amount of the Auction Agent Fee
allocated to the Auction Agent, the amount of the Indenture Trustee Fee
allocated to the Indenture Trustee, the amount of the Eligible Lender
Trustee Fee allocated to the Eligible Lender Trustee and the amount of
the Surety Provider Fee allocated to the Surety Provider, respectively,
with respect to such Collection Period, and the amount, if any, of the
Servicing Fee Carryover remaining unpaid after giving effect to any
such payment;
(vii) the amount of the distribution, if any, payable to
the Surety Provider as reimbursement for any unpaid Surety
Bond Payments;
(viii) the amount of the aggregate Realized Losses, if any, for such
Collection Period and the aggregate amount, if any, received (stated
separately for interest and principal) with respect to Financed Student
Loans for which Realized Losses were allocated previously;
(ix) the amount of the distribution attributable to amounts in the
Reserve Account, the amount of any other withdrawals from the Reserve
Account for such Note Distribution Date or Certificate Distribution
Date, the balance of the Reserve Account on such Note Distribution Date
or Certificate Distribution Date, after giving effect to changes
therein on such Note Distribution Date or Certificate Distribution Date
and the then applicable Parity Percentage;
(x) for Note Distribution Dates during each Funding Period, the
portion, if any, of the distribution attributable to amounts on deposit
in the Pre-Funding Account and the Capitalized Pre-Funding Account and
the remaining Pre-Funded Amount on such Note Distribution Date, after
giving effect to changes therein during the related Collection Period;
(xi) for the Note Distribution Dates during each Funding Period, the
aggregate amount, if any, paid by the Eligible Lender Trustee on behalf
of the Trust to purchase Additional Financed Student Loans during the
preceding Collection Period;
(xii) for the first Note Distribution Date on or following the end of
each Funding Period, the amount of any remaining Pre-Funded Amount that
has not been used to make Additional Fundings and is being paid out to
Noteholders;
(xiii) the aggregate amount, if any, paid for Financed Student Loans
purchased from the Trust during the preceding
Collection Period; and
(xiv) the number and principal amount of Financed Student Loans, as of
the preceding Collection Period, that are (i) 30 to 60 days delinquent,
(ii) 61 to 90 days delinquent, (iii) 91 to 120 days delinquent, (iv)
more than 120 days delinquent and (v) for which claims have been filed
with the appropriate Guarantor and which are awaiting payment.
EVIDENCE AS TO COMPLIANCE
The Sale and Servicing Agreement will provide that a firm of
independent public accountants will furnish to the Eligible Lender Trustee and
the Indenture Trustee annually a statement (based on the examination of certain
documents and records and on such accounting and auditing procedures considered
appropriate under the circumstances) as to compliance by the Master Servicer
during the preceding calendar year (or, in the case of the first such
certificate, the period from the Initial Closing Date to December 31, 1995) with
all applicable standards under the Sale and Servicing Agreement relating to the
servicing of the Financed Student Loans.
The Sale and Servicing Agreement will further provide that a firm of
independent public accountants (which may be the same firm referred to in the
immediately preceding paragraph) will furnish to the Eligible Lender Trustee and
the Indenture Trustee annually a statement (based on the examination of certain
documents and records and on such accounting and auditing procedures considered
appropriate under the circumstances) as to compliance by the Administrator
during the preceding calendar year (or, in the case of the first such
certificate, the period from the Initial Closing Date to December 31, 1995) with
all applicable standards under the Sale and Servicing Agreement and the
Administration Agreement relating to the administration of the Trust and the
Financed Student Loans.
The Sale and Servicing Agreement will also provide for delivery to the
Eligible Lender Trustee and the Indenture Trustee, concurrently with the
delivery of each statement of compliance referred to above, of a certificate
signed by an officer of the Master Servicer or the Administrator, as the case
may be, stating that, to his knowledge, the Master Servicer or the
Administrator, as the case may be, has fulfilled its obligations under the Sale
and Servicing Agreement throughout the preceding calendar year (or, in the case
of the first such certificate, the period from the Initial Closing Date to
December 31, 1995) or, if there has been a default in the fulfillment of any
such obligation, describing each such default. Each of the Master Servicer and
the Administrator has agreed to give the Indenture Trustee and the Eligible
Lender Trustee notice of certain Servicer Defaults and Administrator Defaults,
respectively, under the Sale and Servicing Agreement.
Copies of such statements and certificates may be obtained by
Securityholders by a request in writing addressed to the Applicable Trustee.
CERTAIN MATTERS REGARDING THE SERVICER
The Sale and Servicing Agreement will provide that the Master Servicer
may not resign from its obligations and duties as Master Servicer thereunder,
except upon determination that the Master Servicer's performance of such duties
is no longer permissible under applicable law. No such resignation will become
effective until the Indenture Trustee or a successor servicer has assumed the
Master Servicer's servicing obligations and duties under the Sale and Servicing
Agreement.
The Sale and Servicing Agreement will further provide that neither the
Master Servicer nor any of its directors, officers, employees or agents will be
under any liability to the Trust, the Surety Provider, the Noteholders or the
Certificateholders, the Indenture Trustee or the Eligible Lender Trustee for
taking any action or for refraining from taking any action pursuant to the Sale
and Servicing Agreement, or for errors in judgment; provided, however, that
neither the Master Servicer nor any such person will be protected against any
liability that would otherwise be imposed by reason of willful misfeasance, bad
faith or negligence in the performance of its duties thereunder or by reason of
reckless disregard of obligations and its duties thereunder. In addition, the
Sale and Servicing Agreement will provide that the Master Servicer is under no
obligation to appear in, prosecute, or defend any legal action that is not
incidental to its servicing responsibilities under the Sale and Servicing
Agreement and that, in its opinion, may cause it to incur any expense or
liability.
Under the circumstances specified in the Sale and Servicing Agreement,
any entity into which the Master Servicer may be merged or consolidated, or any
entity resulting from any merger or consolidation to which the Master Servicer
is a party, or any entity succeeding to the business of the Master Servicer,
which corporation or other entity in each of the foregoing cases assumes the
obligations of the Master Servicer, will be the successor of the Master Servicer
under the Sale and Servicing Agreement.
MASTER SERVICER DEFAULT; ADMINISTRATOR DEFAULT
"Master Servicer Default" under the Sale and Servicing Agreement will
consist of (i) any failure by the Master Servicer to deliver to the Indenture
Trustee for deposit in any of the Trust Accounts any collections, Guarantee
Payments or other amounts received with respect to the Financed Student Loans,
which failure continues unremedied for two Business Days after written notice
from the Indenture Trustee, the Surety Provider or the Eligible Lender Trustee
is received by the Master Servicer or after discovery by the Master Servicer;
(ii) any failure by the Master Servicer or The Money Store duly to observe or
perform in any material respect any other covenant or agreement in the Sale and
Servicing Agreement which failure materially and adversely affects the rights of
Noteholders, Certificateholders or the Surety Provider and which continues
unremedied for 60 days after the giving of written notice of such failure (A) to
the Master Servicer or The Money Store, as the case may be, by the Indenture
Trustee, the Eligible Lender Trustee, the Surety Provider or the Administrator
or (B) to the Master Servicer or The Money Store, as the case may be, and to the
Indenture Trustee and the Eligible Lender Trustee by holders of Notes or
Certificates, as applicable, evidencing not less than 25% in principal amount of
the outstanding Notes or Certificates; and (iii) certain events of insolvency,
readjustment of debt, marshalling of assets and liabilities, or similar
proceedings with respect to the Master Servicer and certain actions by the
Master Servicer indicating its insolvency, reorganization pursuant to bankruptcy
proceedings or inability to pay its obligations.
"Administrator Default" under the Sale and Servicing Agreement or the
Administration Agreement will consist of (i) any failure by the Administrator to
direct the Indenture Trustee or the Eligible Lender Trustee, as applicable, to
make any required distributions from any of the Trust Accounts, which failure
continues unremedied for two Business Days after written notice from the
Indenture Trustee, the Surety Provider or the Eligible Lender Trustee is
received by the Administrator or after discovery of such failure by the
Administrator; (ii) any failure by the Administrator duly to observe or perform
in any material respect any other covenant or agreement in the Administration
Agreement or the Sale and Servicing Agreement which failure materially and
adversely affects the rights of Noteholders, Certificateholders or the Surety
Provider and which continues unremedied for 60 days after the giving of written
notice of such failure (l) to the Administrator by the Surety Provider, the
Indenture Trustee or the Eligible Lender Trustee or (2) to the Administrator and
to the Indenture Trustee and the Eligible Lender Trustee by holders of Notes or
Certificates, as applicable, evidencing not less than 25% in principal amount of
the outstanding Notes or Certificates; and (iii) certain events of insolvency,
readjustment of debt, marshalling of assets and liabilities, or similar
proceedings with respect to the Administrator and certain actions by the
Administrator indicating its insolvency or inability to pay its obligations.
RIGHTS UPON SERVICER DEFAULT AND ADMINISTRATOR DEFAULT
As long as a Servicer Default under the Sale and Servicing Agreement
or an Administrator Default under the Sale and Servicing Agreement or the
Administration Agreement remains unremedied, the Surety Provider may or, with
the consent of the Surety Provider, the Indenture Trustee or holders of Notes
evidencing not less than 25% in principal amount of then outstanding Notes may,
terminate all the rights and obligations of the Master Servicer under the Sale
and Servicing Agreement, or the Administrator under the Sale and Servicing
Agreement and the Administration Agreement, as the case may be, whereupon a
successor servicer or administrator appointed by the Indenture Trustee and
approved by the Surety Provider or the Indenture Trustee will succeed to all the
responsibilities, duties and liabilities of the Master Servicer under the Sale
and Servicing Agreement, or the Administrator under the Sale and Servicing
Agreement and the Administration Agreement, as the case may be, and will be
entitled to similar compensation arrangements. If, however, a bankruptcy trustee
or similar official has been appointed for the Master Servicer or the
Administrator, and no Servicer Default or Administrator Default other than such
appointment has occurred, such trustee or official may have the power to prevent
the Surety Provider, the Indenture Trustee or the Noteholders from effecting
such a transfer. In the event that the Indenture Trustee is unwilling or unable
to so act, it may appoint, or petition a court of competent jurisdiction for the
appointment of, a successor whose regular business includes the servicing of
student loans. The Indenture Trustee may make such arrangements for compensation
to be paid, which in no event may be greater than the compensation to the Master
Servicer under the Sale and Servicing Agreement or the Administrator under the
Sale and Servicing Agreement and the Administration Agreement, as the case may
be, unless such compensation arrangements will not result in a downgrading of
the Notes and the Certificates by any Rating Agency. In the event a Servicer
Default or an Administrator Default occurs and is continuing, the Surety
Provider, the Indenture Trustee or the Noteholders, as described above, may
remove the Master Servicer or the Administrator, as the case may be, without the
consent of the Eligible Lender Trustee or any of the Certificateholders.
Moreover, only the Surety Provider or, with the consent of the Surety Provider,
the Indenture Trustee or the Noteholders, and not the Eligible Lender Trustee or
the Certificateholders, have the ability to remove the Master Servicer or the
Administrator, as the case may be, if a Servicer Default or an Administrator
Default occurs and is continuing.
WAIVER OF PAST DEFAULTS
The Surety Provider or, with the consent of the Surety Provider, the
holders of Notes evidencing at least a majority in principal amount of the then
outstanding Notes (or the holders of Certificates evidencing not less than a
majority of the outstanding Certificate Balance, in the case of any default
which does not adversely affect the Indenture Trustee or the Noteholders) may,
on behalf of all Noteholders and Certificateholders, waive any default by the
Master Servicer in the performance of its obligations under the Sale and
Servicing Agreement, or any default by the Administrator of its obligations
under the Sale and Servicing Agreement and the Administration Agreement, as the
case may be, and their respective consequences, except a default in making any
required deposits to or payments from any of the Trust Accounts or giving
instructions regarding the same in accordance with the Sale and Servicing
Agreement. Therefore, the Surety Provider and the Noteholders have the ability,
except as noted above, to waive defaults by the Master Servicer and the
Administrator which could materially adversely affect the Certificateholders. No
such waiver will impair the Noteholders' or the Certificateholders' rights with
respect to subsequent defaults.
AMENDMENT
The Transfer and Servicing Agreements may be amended by the parties
thereto, with the consent of the Surety Provider but without the consent of the
Noteholders or the Certificateholders, for the purpose of adding any provisions
to or changing in any manner or eliminating any of the provisions of the
Transfer and Servicing Agreements or of modifying in any manner the rights of
Noteholders or Certificateholders; provided that such action will not, in the
opinion of counsel satisfactory to the Indenture Trustee and the Eligible Lender
Trustee, materially and adversely affect the interest of any Noteholder or
Certificateholder. The Transfer and Servicing Agreements may also be amended by
the Seller, the Administrator, the Master Servicer, the Eligible Lender Trustee
and the Indenture Trustee, as applicable, with the consent of the Surety
Provider and the holders of Notes evidencing at least a majority in principal
amount of the then outstanding Notes and the holders of Certificates evidencing
at least a majority of the Certificate Balance for the purpose of adding any
provisions to or changing in any manner or eliminating any of the provisions of
such Transfer and Servicing Agreements or of modifying in any manner the rights
of Noteholders or the Certificateholders; provided, however, that no such
amendment may (i) increase or reduce in any manner the amount of, or accelerate
or delay the timing of, collections of payments (including any Guarantee
Payments) with respect to the Financed Student Loans or distributions that are
required to be made for the benefit of the Noteholders or the Certificateholders
or (ii) reduce the aforesaid percentage of the Notes or Certificates which are
required to consent to any such amendment, without the consent of the holders of
all the outstanding Notes and Certificates.
INSOLVENCY EVENT
If any of certain events of insolvency or receivership, readjustment
of debt, marshalling of assets and liabilities, or similar proceedings with
respect to Student Holdings or certain actions by Student Holdings indicating
its insolvency or inability to pay its obligations (each, an "Insolvency Event")
occurs, the Financed Student Loans will be liquidated and the Trust will be
terminated 90 days after the date of such Insolvency Event, unless, before the
end of such 90-day period, the Eligible Lender Trustee shall have received
written instructions from the Surety Provider and the holders of the
Certificates (other than Student Holdings) representing more than 50% of the
aggregate unpaid principal amount of the Certificates (not including the
principal amount of Certificates held by Student Holdings) to the effect that
such group disapproves of the liquidation of the Financed Student Loans and
termination of the Trust. Promptly after the occurrence of any Student Holdings
Insolvency Event, notice thereof is required to be given to Noteholders and
Certificateholders and the Surety Provider; provided, however, that any failure
to give such required notice will not prevent or delay termination of the Trust.
Upon termination of the Trust, the Eligible Lender Trustee will direct the
Indenture Trustee promptly to sell the assets of the Trust (other than the Trust
Accounts and the Surety Bonds) in a commercially reasonable manner and on
commercially reasonable terms. The proceeds from any such sale, disposition or
liquidation of the Financed Student Loans will be treated as collections thereon
and deposited in the Collection Account. If the proceeds from the liquidation of
the Financed Student Loans and any amounts on deposit in the Reserve Account are
not sufficient to pay the Notes in full, the amount of principal returned to the
Noteholders will be reduced and the Noteholders will incur a loss to the extent
not covered by the Note Surety Bonds. If such amounts are not sufficient to pay
the Notes and the Certificates in full, the amount of principal returned to the
Certificateholders will be reduced and the Certificateholders will incur a loss
to the extent not covered by the Certificate Surety Bond. The Surety Provider
has no obligation to pay in full the principal of the Certificates until the
Certificate Final Maturity Date.
The Trust Agreement provides that the Eligible Lender Trustee does not
have the power to commence a voluntary proceeding in bankruptcy relating to the
Trust without the unanimous prior approval of all Certificateholders and the
delivery to the Eligible Lender Trustee by each Certificateholder of a
certificate certifying that such Certificateholder reasonably believes that the
Trust is insolvent.
PAYMENT OF NOTES
Upon the payment in full of all outstanding Notes and the satisfaction
and discharge of the Indenture, the Eligible Lender Trustee will succeed to all
the rights of the Indenture Trustee, and the Certificateholders will succeed to
all the rights of the Noteholders, under the Sale and Servicing Agreement,
except as otherwise provided therein.
LIABILITY OF STUDENT HOLDINGS
Under the Trust Agreement, Student Holdings will agree to be liable
directly to an injured party for the entire amount of any losses, claims,
damages or liabilities (other than those incurred by a Noteholder or a
Certificateholder in the capacity of an investor) arising out of or based on the
arrangement created by the Trust Agreement as though such arrangement created a
partnership under the Pennsylvania Revised Uniform Limited Partnership Act in
which the Seller were a general partner.
TERMINATION
The obligations of the Master Servicer, the Seller, the Administrator,
the Auction Agent, the Eligible Lender Trustee and the Indenture Trustee
pursuant to the Transfer and Servicing Agreements will terminate upon (i) the
maturity or other liquidation of the last Financed Student Loan and the
disposition of any amount received upon liquidation of any remaining Financed
Student Loans and (ii) the payment to the Noteholders and the Certificateholders
of all amounts required to be paid to them pursuant to the Transfer and
Servicing Agreements. In order to avoid excessive administrative expense, the
Seller is permitted at its option and with the consent of the Surety Provider to
repurchase from the Eligible Lender Trustee, as of the end of any Collection
Period immediately preceding a Note Distribution Date or Certificate
Distribution Date, if the then outstanding Pool Balance is 10% or less of the
Aggregate Pool Balance, all remaining Financed Student Loans at a price equal to
the aggregate Purchase Amounts thereof as of the end of such Collection Period,
which amounts will be used to retire the Certificates concurrently therewith.
Upon termination of the Trust, all right, title and interest in the Financed
Student Loans and other funds of the Trust, after giving effect to any final
distributions to Noteholders and Certificateholders therefrom, will be conveyed
and transferred to the Seller.
ADMINISTRATOR
Trans-World Insurance Company, in its capacity as Administrator, will
enter into the Administration Agreement with the Trust and the Indenture
Trustee, pursuant to which the Administrator will agree, to the extent provided
therein, (i) to direct the Indenture Trustee to make the required distributions
from the Trust Accounts on each Note Distribution Date and Certificate
Distribution Date, (ii) to prepare (based on the reports received from the
Master Servicer) and provide periodic and annual statements to the Eligible
Lender Trustee and the Indenture Trustee with respect to distributions to
Noteholders and Certificateholders and any related federal income tax reporting
information and (iii) to provide the notices and to perform other administrative
obligations required by the Indenture and the Trust Agreement. As compensation
for the performance of the Administrator's obligations under the Administration
Agreement and as reimbursement for its expenses related thereto, the
Administrator will be entitled to an administration fee equal to the amount set
forth in the related Prospectus Supplement (the "Administration Fee").
DESCRIPTION OF THE SURETY BONDS
The following summary describes certain provisions of the Surety
Bonds. The summary does not purport to be complete and is subject to, and is
qualified in its entirety by reference to, all provisions of the Surety Bonds.
NOTE SURETY BONDS
Each Note Surety Bond, issued by the Surety Provider, will be obtained
by the Seller in favor of the Eligible Lender Trustee on behalf of the Trust and
will be pledged to the Indenture Trustee pursuant to the Indenture. Each Note
Surety Bond will, except as provided below, provide for coverage of timely
payment of all interest, and ultimate payment of all principal, due on the
related Class of Notes. In particular, funds may be drawn under a Note Surety
Bond on any Note Distribution Date and paid to Noteholders of the applicable
Class in an amount equal to the applicable Note Surety Bond Payment for such
Note Distribution Date. The Surety Provider will be required to make Note Surety
Bond Payments to the Indenture Trustee as paying agent on the later of such Note
Distribution Date or the second Business Day following the day on which the
Surety Provider receives a drawing request under the Note Surety Bond from the
Indenture Trustee as paying agent, stating the amount of a Note Surety Bond
Payment that is due.
"Note Surety Bond Payment" means, with respect to any Class of Notes
(A) on each Note Distribution Date the amount equal to the excess, if any, of
the Noteholders' Interest Distribution Amount for the applicable Class of Notes
over the amount on deposit in the Note Distribution Account, after taking into
account the required application of funds in the remaining Trust Accounts (but
excluding any amounts on deposit in the Monthly Advance Account if an automatic
stay has been imposed with respect to the Representative under Section 362(a) of
the United States Bankruptcy Code of 1978, as amended 11 U.S.C. ss. 101 ET
SEQ.), including but not limited to the Reserve Account, pursuant to the Sale
and Servicing Agreement, to the payment of the Noteholders' Interest
Distribution Amount on such Note Distribution Date (an "Interest Deficiency")
and (B) the amount equal to the excess, if any, of the unpaid principal balance
of Notes of a Class on the Final Maturity Date for such Class over amounts on
deposit in the Note Distribution Account, after taking into account the required
application of funds in the remaining Trust Accounts, including but not limited
to the Reserve Account, pursuant to the Sale and Servicing Agreement to the
payment of principal of such Class of Notes on such Final Maturity Date (a
"Principal Deficiency"); provided, however, that "Note Surety Bond Payments"
shall not include any Noteholders' Interest Carryover or any portion of any
Interest Deficiency or Principal Deficiency arising as a result of (i) any tax
liability, including any tax liability imposed on or assessed with respect to
the Trust, the Trust assets, any Noteholder, or any Certificateholder, or (ii)
any tax withholding requirement including any such requirement applicable to
Trust income or Trust distributions.
Each Note Surety Bond is irrevocable and noncancelable.
CERTIFICATE SURETY BONDS
Each Certificate Surety Bond, issued by the Surety Provider, will be
obtained by the Seller in favor of the Eligible Lender Trustee solely on behalf
of the Certificateholders. Each Certificate Surety Bond will, except as provided
below, provide for coverage of timely payment of all interest, and ultimate
payment of all principal, due on the related Class of Certificates. In
particular, funds may be drawn under a Certificate Surety Bond on any
Certificate Distribution Date and paid to Certificateholders of the applicable
Class in an amount equal to the applicable Certificate Surety Bond Payment for
such Certificate Distribution Date. The Surety Provider will be required to make
Certificate Surety Bond Payments to the Eligible Lender Trustee as paying agent
on the later of such Certificate Distribution Date or the second Business Day
following the day on which the Surety Provider receives a drawing request under
the Certificate Surety Bond from the Eligible Lender Trustee as paying agent,
stating the amount of a Certificate Surety Bond Payment that is due.
"Certificate Surety Bond Payment" means, with respect to any Class of
Certificates (A) on each Certificate Distribution Date the amount equal to the
excess, if any, of the Certificateholders' Interest Distribution Amount for the
applicable Class of Certificates over the amount on deposit in the Certificate
Distribution Account, after taking into account the required application of
funds in the remaining Trust Accounts (but excluding any amounts on deposit in
the Monthly Advance Account if an automatic stay has been imposed with respect
to the Representative under Section 362(a) of the United States Bankruptcy Code
of 1978, as amended 11 U.S.C. ss.101 ET SEQ.), including but not limited to the
Reserve Account, pursuant to the Sale and Servicing Agreement, to the payment of
the Certificateholders' Interest Distribution Amount on such Certificate
Distribution Date (an "Interest Deficiency") and (B) the amount equal to the
excess, if any, of the unpaid principal balance of the Certificates of a Class
on the Final Maturity Date for such Class over amounts on deposit in the
Certificate Distribution Account, after taking into account the required
application of funds in the remaining Trust Accounts, including but not limited
to the Reserve Account, pursuant to the Sale and Servicing Agreement, to the
payment of principal of such Class of Certificates on such Final Maturity Date
(a "Principal Deficiency"); provided, however that "Certificate Surety Bond
Payment" shall not include any Certificateholders' Interest Carryover or any
portion of any Interest Deficiency or Principal Deficiency arising as a result
of (i) any tax liability, including any tax liability imposed on or assessed
with respect to the Trust, the Trust assets, any Noteholder, or any
Certificateholder, or (ii) any tax withholding requirement, including any such
requirement applicable to Trust income or Trust distributions.
Each Certificate Surety Bond is irrevocable and noncancelable.
SURETY PROVIDER
AMBAC Indemnity Corporation ("AMBAC") is a Wisconsin-domiciled stock
insurance corporation regulated by the Office of the Commissioner of Insurance
of the State of Wisconsin and licensed to do business in 50 states, the District
of Columbia, and the Commonwealth of Puerto Rico and Guam. AMBAC primarily
insures newly issued municipal and structured finance obligations. AMBAC is a
wholly owned subsidiary of AMBAC Inc., a 100% publicly-held company. Moody's
Investors Service, Inc., Standard & Poor's Ratings Services, a division of The
McGraw-Hill Companies and Fitch Investors Service, Inc. have each assigned a
triple-A claims-paying ability rating to AMBAC.
AMBAC has entered into pro rata reinsurance agreements under which a
percentage of the insurance underwritten pursuant to certain municipal bond
insurance programs of AMBAC has been and will be assumed by a number of foreign
and domestic unaffiliated reinsurers.
The consolidated financial statements of AMBAC and its subsidiaries as
of December 31, 1995 and December 31, 1994 and for the three years ended
December 31, 1995, prepared in accordance with generally accepted accounting
principles, included in the Current Report on Form 8-K/A of AMBAC Inc. (which
was filed with the Commission on March 15, 1996) and the consolidated financial
statements of AMBAC and its subsidiaries as of September 30, 1996 and December
31, 1995 and for the periods ended September 30, 1996 and September 30, 1995,
included in the Quarterly Report on Form 10-Q of AMBAC Inc. for the period ended
September 30, 1996 (which was filed with the Commission on November 14, 1996)
are hereby incorporated by reference into this Prospectus and shall be deemed to
be a part hereof. Any statement contained in a document incorporated herein by
reference shall be modified or superseded for the purposes of the Prospectus to
the extent that a statement contained herein by reference herein also modified
or supersedes such statement. Any statement so modified or superseded shall not
be deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
All financial statements of AMBAC and its subsidiaries included in
documents filed by AMBAC Inc. with the Commission pursuant to Section 13(a),
13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as amended,
subsequent to the date of this Prospectus and prior to the termination of the
offering of the Series 1996-2 Notes shall be deemed to be incorporated by
reference into this Prospectus and to be a part hereof from the respective dates
of filing such documents.
The following table sets forth the capitalization of AMBAC as of
December 31, 1993, December 31, 1994, December 31, 1995 and September 30, 1996,
respectively, in conformity with generally accepted accounting principles. No
material adverse change in the capitalization of AMBAC has occurred since
September 30, 1996.
AMBAC Indemnity Corporation
Consolidated Capitalization Table
<TABLE>
<CAPTION>
($ MILLIONS)
December 31, 1993 December 31, 1994 December 31, 1995 September 30, 1996
(audited) (audited) (audited) (unaudited)
<S> <C> <C> <C> <C>
Unearned $785 $840 $906 $965
Premiums
Other liabilities 192 136 295 282
Stockholder's
equity:
Common Stock 82 82 82 82
Additional paid-in 444 444 481 515
capital
Unrealized gains 68 (46) 87 51
(losses) on
investments, net of
tax
Retained earnings 668 782 907 947
Total stockholder's 1,262 1,262 1,557 1,595
equity
Total liabilities and
stockholder's equity $2,239 $2,238 $2,758 $2,842
</TABLE>
Copies of the financial statements of AMBAC incorporated herein by
reference and copies of AMBAC's annual statement for the year ended December 31,
1995 prepared in accordance with statutory accounting standards are available,
without charge, from AMBA C. The address of AMBAC's administrative offices and
its telep hone number are One State Street Plaza, 17th Floor, New York, New
York, 10004 and (212) 668-0340.
Effective December 31, 1993, AMBAC adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Debt and Equity
Securities" ("Statement 115") with all investments designated as
available-for-sale. As required under Statement 115, prior years' financial
statements have not been restated. The cumulative effect of adopting Statement
115 as of December 31, 1993 was to increase AMBAC's stockholder's equity by
$63.6 million, net of tax. The adoption of Statement 115 had no effect on
earnings.
Neither any Certificate Surety Bond nor any Note Surety Bond is
covered by the property/casualty insurance certificate fund specified in Article
76 of the New York Insurance Laws.
AMBAC makes no representation regarding the Notes and the Certificates
or the advisability of investing in the Notes and the Certificates and makes no
representation regarding, nor has it participated in the preparation of, this
Prospectus other than the information supplied by AMBAC and presented under the
heading "Description of the Surety Bonds."
CERTAIN LEGAL ASPECTS OF THE FINANCED STUDENT LOANS
TRANSFER OF FINANCED STUDENT LOANS
The Seller intends that the transfer of the Financed Student Loans by
it to the Eligible Lender Trustee on behalf of the Trust constitutes a valid
sale or contribution and assignment of such Financed Student Loans. In addition,
the Seller has taken and will take all actions that are required under
applicable state law to perfect the Eligible Lender Trustee's ownership interest
in the Financed Student Loans and the collections with respect thereto.
Notwithstanding the foregoing, if the transfer of the Financed Student Loans is
deemed to be an assignment of collateral as security for the benefit of the
Trust, the Financed Student Loans would be considered general intangibles for
purposes of the applicable Uniform C ommercial Code (the "UCC"). If a transfer
of general intangibles is deemed to be a sale or contribution, then the UCC is
not applicable and no further action under the UCC is required to protect the
Eligible Lender Trustee's interest from third parties.
If the transfer of the Financed Student Loans is deemed to be an
assignment as security for the benefit of the Trust, there are certain limited
circumstances under the UCC in which prior or subsequent transferees of Financed
Student Loans coming in to existence after the Closing Date could have an
interest in such Financed Student Loans with priority over the Eligible Lender
Trustee's interest. A tax or other government lien on property of the Seller
arising prior to the time a Financed Student Loan comes into existence may also
have priority over the interest of the Eligible Lender Trustee in such Financed
Student Loan. Under the Sale and Servicing Agreement, however, the Seller will
warrant that it has transferred the Financed Student Loans to the Eligible
Lender Trustee on behalf of the Trust free and clear of the lien of any third
party. In addition, the Seller will covenant that it will not sell, pledge,
assign, transfer or grant any lien on any Financed Student Loan (or any interest
therein) other than to the Eligible Lender Trustee on behalf of the Trust,
except as provided below.
Pursuant to the Sale and Servicing Agreement, either the Master
Servicer or a sub-servicer as custodian on behalf of the Trust will have custody
of the promissory notes evidencing the Financed Student Loans following the
conveyance of the Financed Student Loans to the Eligible Lender Trustee and the
pledge thereof to the Indenture Trustee. Although the accounts of the Seller
will be marked to indicate the conveyance and the Seller will cause UCC
financing statements to be filed with the appropriate authorities, the Financed
Student Loans will not be physically segregated in the Master Servicer's or such
sub- servicer's offices. If, through inadvertence or otherwise, any of the
Financed Student Loans were sold to another party, or a security interest
therein were granted to another party, that purchased (or took such security
interest in) any of such Financed Student Loans in the ordinary course of its
business and took possession of such Financed Student Loans, then the purchaser
(or secured party) would acquire an interest in the Financed Student Loans
superior to the interest of the Eligible Lender Trustee and the Indenture
Trustee if the purchaser (or secured party) acquired (or took a security
interest in) the Financed Student Loans for new value and without actual
knowledge of the Eligible Lender Trustee's and the Indenture Trustee's
respective interests. See "Description of the Transfer and Servicing
Agreements--Sale of Financed Student Loans; Representations and Warranties" and
"--Servicer Covenants."
CERTAIN MATTERS RELATING TO INSOLVENCY
To the extent that the transfer of the Financed Student Loans from
Seller to the Trust is deemed to create a security interest, and (i) the
interest was validly perfected prior to the Seller's insolvency and at the time
the Seller received consideration for the Financed Student Loans, (ii) such
transfer does not constitute a fraudulent conveyance or transfer, and (iii) the
value of the Financed Student Loans is equal to or greater than the
consideration received by the Seller, such security interest should not be
subject to avoidance and payments to the Trust made prior to the Seller's
insolvency proceeding should not be subject to recovery by the Seller, any
receiver of the Seller in its insolvency proceeding or any of the Seller's
creditors. To the extent, however, that payment is not made to the Trust prior
to the insolvency proceeding, then the timely transfer to the Trust of such
collection may cease. For example, the Seller may be authorized to use the
Financed Student Loans and proceeds thereof if the court in the insolvency
proceeding finds that the Seller has provided the Trust with adequate protection
of the Trust's interest in the Financed Student Loans and proceeds thereof.
CONSUMER PROTECTION LAWS
Numerous federal and state consumer protection laws and related
regulations impose substantial requirements upon lenders a nd servicers involved
in consumer finance. Also, some state laws impose finance charge ceilings and
other restrictions on certain consumer transactions and require contract
disclosures in addition to those required under federal law. These requirements
impose specific statutory liabilities upon lenders who fail to comply with their
provisions. In certain circumstances, the Trust may be liable for certain
violations of consumer protection laws that apply to the Financed Student Loans,
either as assignee from the Seller or as the party directly responsible for
obligations arising after the transfer. With respect to the Federal Loans and
the HEAL LOANS many of these requirements are preempted by the provisions of the
Higher Education Act and the Public Health Service Act. For a discussion of the
Trust's rights if the Financed Student Loans were not originated or serviced in
compliance in all material respects with applicable laws. See "Description of
the Transfer and Servicing Agreements -- Sale of Financed Student Loans;
Representations and Warranties" and "--Servicer Covenants ."
LOAN ORIGINATION AND SERVICING PROCEDURES APPLICABLE TO FINANCED STUDENT LOANS
The Higher Education Act, including the implementing regulations
thereunder (in the case of Federal Loans), the Public Health Service Act and the
regulations thereunder (in the case of HEAL Loans) and the Private Loan Programs
(in the case of the Private Loans) impose specified requirements, guidelines and
procedures with respect to originating and servicing Student Loans such as the
Financed Student Loans. Generally, those procedures require that completed loan
applications be processed, a determination of whether an applicant is an
eligible borrower under applicable standards (including a review of a financial
need analysis in the case of certain Federal Loans) be made, the borrower's
responsibilities under the loan be explained to him or her, the promissory note
evidencing the loan be executed by the borrower and then that the loan proceeds
be disbursed in a specified manner by the lender. After the loan is made, the
lender must establish repayment terms with the borrower, properly administer
deferrals and forbearances and credit the borrower for payments made thereon. If
a borrower becomes delinquent in repaying a loan, a lender or a servicing agent
must perform certain collection procedures (primarily telephone calls and demand
letters) which vary depending upon the length of time a loan is delinquent. The
Master Servicer has agreed pursuant to the Sale and Servicing Agreement to
perform collection and servicing procedures on behalf of the Trust. However,
failure to follow these procedures or failure of the Seller to follow procedures
relating to the origination of any Financed Student Loans could result in
adverse consequences. In the case of any such Federal Loans, any such failure
could result in the Department's refusal to make reinsurance payments to the
Guarantors or to make Interest Subsidy Payments and Special Allowance Payments
to the Eligible Lender Trustee with respect to such Financed Student Loans or in
the Guarantors' refusal to honor their Guarantee Agreements with the Eligible
Lender Trustee with respect to such Financed Student Loans. Failure of the
Guarantors to receive reinsurance payments from the Department could adversely
affect the Guarantors' ability or legal obligation to make Guarantee Payments to
the Eligible Lender Trustee with respect to such Federal Loans. In the case of
the HEAL Loans, failure to make or service properly such HEAL Loans in
accordance with such procedures could adversely affect the Eligible Lender
Trustee's ability to obtain insurance payments from the Secretary. In the case
of the Private Loans, failure to make or service properly such Priv ate Loans in
accordance with such procedures could adversely affect the Eligible Lender
Trustee's ability to obtain Guarantee Payments from the applicable Guarantor.
Loss of any such Guarantee Payments, Interest Subsidy Payments,
Special Allowance Payments or insurance payments from the Secretary could
adversely affect the amount of Available Funds on any Distribution Date and the
Trust's ability to pay principal and interest on the Notes and to make
distributions in respect of the Certificates. Under certain circumstances,
pursuant to the Sale and Servicing Agreement, the Seller is obligated to
repurchase any Financed Student Loan, or the Master Servicer is obligated to
purchase any Financed Student Loan, if a breach of the representations,
warranties or covenants of the Seller or the Master Servicer, as the case may
be, with respect to such Financed Student Loan has a material adverse effect on
the interest of the Trust therein and such breach is not cured within any
applicable cure period (it being understood that any such breach that does not
affect any Guarantor's or the Secretary's obligation to guarantee payment of
such Financed Student Loan will not be considered to have such a material
adverse effect). See "Description of the Transfer and Servicing Agreements--Sale
of Financed Student Loans; Representations and Warranties" and "--Servicer
Covenants ." The failure of the Seller or the Master Servicer to so purchase a
Financed Student Loan would constitute a breach of the Sale and Servicing
Agreement, enforceable by the Eligible Lender Trustee on behalf of the Trust or
by the Indenture Trustee on behalf of the Noteholders, but would not constitute
an Event of Default under the Indenture.
FEDERAL LOANS AND HEAL LOANS GENERALLY NOT SUBJECT TO DISCHARGE IN BANKRUPTCY
Federal Loans and HEAL Loans are generally not dischargeable by a
borrower in bankruptcy pursuant to the Bankruptcy Code, unless (A) such loan
first became due before seven years (exclusive of any applicable suspension of
the repayment period) before the date of the bankruptcy (or, in the case of HEAL
Loans, after expiration of the seven-year period beginning on the first date the
HEAL Loan has gone into repayment) or (B) excepting such debt from discharge
will impose an undue hardship on the debtor and the debtor's dependents.
CERTAIN TAX CONSEQUENCES
Set forth below is a summary of certain Federal income tax consequen
ces of the purchase, ownership and disposition of the Securitie s. Stroock &
Stroock & Lavan, special Federal tax counsel f or the Trust ("Federal Tax
Counsel") is of the opinion that the discussion hereunder fully and fairly
discloses all material Federal tax risks associated with the purchase, ownership
and disposition of the Securities.
This summary does not deal with all aspects of Federal income taxation
applicable to all categories of holders of the Securities, some of which may be
subject to special rules or special treatment under the Federal income tax laws.
For example, it does not discuss the specific tax treatment of Securityh olders
that are insurance companies, banks and certain other financial institutions,
regulated investment companies, individual retirement accounts ("IRA's") life
insurance companies, tax-exempt organizations or dealers in securities.
Furthermore, this summary is based upon present provisions of the Inter nal
Revenue Code of 1986, as amended (the "Code"), the regulations promulgated
thereunder, and judicial or ruling authority , all of which are subject to
change, which change may be retroactive. Moreover, there are no cases or
Internal Revenue Service (the "IRS") rulings on similar transactions involving a
trust that issues debt and equity interests with terms similar to those of the
Notes and the Certificates. As a result, the IRS may disagree with all or part
of the discussion below.
Prospective investors are advised to consult their own tax advisors
with regard to the Federal income tax consequences of the purchase, ownership
and disposition of the Securities, as well as the tax consequences arising under
the laws of any state, foreign country or other jurisdiction. The Trust has been
provided with an opinion of Federal Tax Counsel regarding certain of the Federal
income tax matters discussed below. An opinion of counsel, however, is not
binding on the IRS, and no ruling on any of the issues discussed below will be
sought from the IRS.
The Trust has also been provided with an opinion of Rhoads & Sinon
LLP, special Pennsylvania tax counsel for the Trust ("Pennsylvania Tax Counsel")
regarding certain Pennsylvania tax matters as discussed below. An opinion of
counsel is not binding on the Pennsylvania Department of Revenue and no ruling
on any of the Pennsylvania tax issues discussed below will be sought from the
Pennsylvania Department of Revenue.
CERTAIN FEDERAL TAX CONSEQUENCES WITH RESPECT TO THE NOTES
Tax Characterization of the Notes and the Trust. Federal Tax Counsel
has advised the Trust that based on the terms of the Notes and the transactions
relating to the Financed Student Loans as set forth herein, the Notes will be
treated as debt for Federal income tax purposes. There is, however, no specific
authority with respect to the characterization for Federal income tax purposes
of securities having the same terms as the Notes.
Federal Tax Counsel is also of the opinion that based on the
applicable provisions of the Trust Agreement and related documents and the
minimum denomination of the Certificates, the Trust will not be classified as an
association or publicly traded partnership taxable as a corporation for Federal
income tax purposes. However, there are no authorities directly dealing with
similar transactions. If the IRS were to successfully characterize the Trust as
a corporation for Federal income tax purposes, the income from the Financed
Student Loans (reduced by deductions, possibly including interest on the Notes)
would be subject to Federal income tax at corporate rates, which would reduce
the amounts available to make payments on the Notes. Likewise, if the Trust were
subject to Pennsylvania income or franchise tax, the amount of cash available to
make payments on the Notes would be reduced.
If, contrary to the opinion of Federal Tax Counsel, the IRS
successfully asserted that the Notes were not debt for Federal income tax
purposes, the Notes might be treated as equity interests in the Trust. If so,
the Trust might be taxable as a corporation with the adverse consequences
described above (and the taxable corporation would not be able to deduct
interest on the Notes). The remainder of this discussion assumes that the Notes
will be treated as debt and that the Trust will not be taxable as a
corporation.
Interest Income on the Notes. The stated interest on the Notes will be
taxable to a Noteholder as ordinary income when received or accrued in
accordance with such Noteholder's method of tax ac counting. It is not
anticipated that the Notes will be issued with "original issue discount" within
the meaning of Section 1273 of the Code ("OID"). A holder who purchases a Note
at adiscount that exceeds a statutorily defined de minimis amount will be
subject to the "market discount" rules of the Code, and a holder who purchases a
Note at a premium will be subject to the premium amortization rules of the Code.
Sale or Other Disposition. If a Noteholder sells a Note, the holder
will recognize gain or loss in an amount equal to the difference between the
amount realized on the sale and the holder's adjusted tax basis in the Note. The
adjusted tax basis of a Note to a particular Noteholder will equal the holder's
cost for the Note, increased by any OID (if any), market discount and gain
previously included by such Noteholder in income wi th respect to the Note and
decreased by the amount of bond premium (if any) previously amortized and by the
amount of principal payments previously received by such Noteholder with respect
to such Note. Subject to the rules of the Code concerning market discount on the
Notes, any such gain or loss generally will be capital gain or loss if the note
was held as a capital asset. Capital losses generally may be deducted only to
the extent the Noteholder has capital gains for the taxable year, although under
certain circumstances non-corporate Noteholders can deduct losses in excess of
available capital gains.
Foreign Holders. If interest paid (or accrued) to a Noteholder who is
a nonresident alien, foreign corporation or other non-United States person (a
"foreign person") is not effectively connected with the conduct of a trade or
business within the United States by the foreign person, the interest generally
will be considered "portfolio interest," and generally will not be subject to
United States Federal income tax and withholding tax, if the foreign person (i)
is not actually or constructively a "10 percent shareholder" of the Trust or
Student Holdings (including a holder of 10% of the outstanding Certificates) or
a "controlled foreign corporation" with respect to which the Trust or Student
Holdings is a "related person" within the meaning of the Code and (ii) provides
the person otherwise required to withhold U.S. tax with an appropriate
statement, signed under penalties of perjury, certifying that the beneficial
owner of the Note is a foreign person and providing the foreign person's name
and address. If the information provided in the statement changes, the foreign
person must so inform the person otherwise required to withhold U.S. tax within
30 days of such change. The statement generally must be provided in the year a
payment occurs (prior to such payment) or in either of the two preceding years.
If a Note is held through a securities clearing organization or certain other
financial institutions, the organization or institution may provide a signed
statement to the withholding agent. However, in that case, the signed statement
must be accompanied by a Form W-8 or substitute form provided by the foreign
person that owns the Note. If such interest is not portfolio interest, then it
will be subject to United States Federal income and withholding tax at a rate of
30%, unless reduced or eliminated pursuant to an applicable tax treaty.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a Note by a foreign person will be exempt from United
States Federal income and withholding tax, provided that (i) the gain is not
effectively connected with the conduct of a trade or business in the United
States by the foreign person and (ii) in the case of an individual foreign
person, the foreign individual is not present in the United States for 183 days
or more in the taxable year or does not have a tax home in the United States.
If the interest, gain or income on a Note held by a foreign person is
effectively connected with the conduct of a trade or business in the United
States by the foreign person (although exempt from the withholding tax
previously discussed if the holder provides an appropriate statement), the
holder generally will be subject to United States Federal income tax on the
interest, gain or income at regular Federal income tax rates. In addition, if
the foreign person is a foreign corporation, it may be subject to a branch
profits tax equal to 30% of its "effectively connected earnings and profits"
within the meaning of the Code for the taxable year, as adjusted for certain
items, unless it qualifies for a lower rate under an applicable tax treaty (as
modified by the branch profits tax rules).
Proposed Treasury regulations, which would be effective with respect
to payments made after December 31, 1997 if adopted in their current form, would
provide alternative certification requirements and means for obtaining the
exemption from federal income and withholding tax.
Information Reporting and Backup Withholding. The Trust will be
required to report annually to the IRS, and to each Noteholder of record, the
amount of interest paid on the Notes (and the amount of interest withheld for
Federal income taxes, if any) for each calendar year, except as to exempt
holders (generally, holders that are corporations, tax-exempt organizations,
qualified pension and profit-sharing trusts, individual retirement accounts, or
nonresident aliens who provide certification as to their status as
nonresidents). Accordingly, each holder (other than exempt holders who are not
subject to the reporting requirements) will be required to provide, under
penalties of perjury, a certificate containing the holder's name, address,
correct Federal taxpayer identification number and a statement that the holder
is not subject to backup withholding. Should a nonexempt Noteholder fail to
provide the required certification, the Trust will be required to withhold 31%
of the amount otherwise payable to the holder, and remit the withheld amount to
the IRS as a credit against the holder's Federal income tax liability.
CERTAIN PENNSYLVANIA TAX CONSEQUENCES WITH RESPECT TO THE NOTES
There is no authority in Pennsylvania addressing the question of
whether the Notes will be treated as debt or equity for Pennsylvania tax
purposes. Nonetheless, subject to the foregoing uncertainty, Pennsylvania Tax
Counsel has advised the Trust that, assuming the Notes are classified as debt
for federal income tax purposes, the Notes will be treated as debt for
Pennsylvania corporate tax purposes. Assuming the Notes are treated as debt for
Pennsylvania corporate tax purposes, corporate Noteholders not otherwise subject
to tax in Pennsylva nia would not become subject to Corporate Net Income or
Franchise Taxes in Pennsylvania solely because of a Noteholder's ownership of
Notes.
Corporate Noteholders otherwise subject to tax in Pennsylvania will be
required to include the interest on the Notes as well as any gains on the
disposition of the Notes in the computation of the Pennsylvania corporate Net
Income Tax and Capital Stock/Franchise Tax.
Certain Noteholders otherwise subject to tax in certain Pennsylvania
counties which impose the tax on intangible personal property authorized by the
Act of June 17, 1913, P.L. 507 ss. 1, as amended, 72 P.S. ss. 4821, will be
subject to such Intangible Personal Property Tax on the Notes.
CERTAIN FEDERAL TAX CONSEQUENCES WITH RESPECT TO THE CERTIFICATES
Tax Characterization of the Trust. The Seller and the Master Servicer
have agreed, and the Certificateholders will agree by their purchase of
Certificates, to treat the Trust as a partnership for purposes of Federal income
tax, with the assets of the partnership being the assets held by the Trust, the
partners of the partnership being the Certificateholders (including Student
Holdings in its capacity as recipient of distributions from the Reserve
Account), and the Notes being debt of the partnership. However, the proper
characterization of the arrangement involving the Trust, the Certificates, the
Notes, the Seller, Student Holdings and the Master Servicer is not clear because
there is no authority on transactions closely comparable to that contemplated
herein. For Pennsylvania tax purposes, the Trust will be treated as a
Pennsylvania business trust. A Pennsylvania Business Trust qualifying as a
partnership for Federal income tax purposes is exempt from Pennsylvania
Corporate Net Income and Capital Stock/Franchise Taxes.
If the Trust were held to be an "association" taxable as a corporation
for Federal income tax purposes, rather than a partnership, the Trust would be
subject to a corporate level income tax. Any such corporate income tax could
materially reduce or eliminate cash that would otherwise be distributable with
respect to the Certificates (and Certificateholders could be liable for any such
tax that is unpaid by the Trust). However, in the opinion of Federal Tax
Counsel, the Trust will not be classified as an association taxable as a
corporation because it will not have certain "corporate" characteristics
necessary for a business trust to be an association taxable as a corporation.
Even if the Trust were not an association taxable as a corporation
under the rules described above, it would still be subject to corporate income
tax if it were a "publicly traded partnership" taxable as a corporation, but due
to the fact that the Certificates will be issued in minimum denominations to
ensure that the Trust has fewer than 100 partners, Federal Tax Counsel is of the
opinion that the Trust will not be a publicly traded partnership taxable as a
corporation.
As a result of the foregoing, in the opinion of Federal Tax Counsel,
the Trust will not be an association or publicly traded partnership taxable as a
corporation. Nonetheless, because of the lack of cases or rulings on similar
transactions, a variety of alternative characterizations are possible in
addition to the position to be taken by Certificateholders that the Certificates
represent equity interests in a partnership. For example, because the
Certificates have certain features characteristic of debt, the Certificates
might be considered debt of the Trust or of the Seller. Any such
characterization should not result in materially adverse tax consequences to
Certificateholders as compared to the consequences from treatment of the
Certificates as equity in a partnership. The remainder of this summary assumes
that the Certificates represent equity interests in a partnership that owns the
Financed Student Loans.
Partnership Taxation. As a partnership, the Trust will not be subject
to Federal income tax, but each Certificateholder will be required to separately
take into account such holder's allocated share of income, gains, losses,
deductions and credits of the Trust. The Trust's income will consist primarily
of interest earned on the Financed Student Loans (including appropriate
adjustments for market discount, original issue discount and bond premium),
investment income from Eligible Investments in the Trust Accounts and any gain
upon collection or disposition of the Financed Student Loans. The Trust's
deductions will consist primarily of interest accruing with respect to the
Notes, servicing and other fees and losses or deductions upon collection or
disposition of the Financed Student Loans.
The tax items of a partnership are allocable to the partners in
accordance with the Code, Treasury regulations and the part nership agreement
(here, the Trust Agreement and related d ocuments). The Trust Agreement provides
(a) that except as set forth in a Trust Supplement, the Certifica teholders will
be allocated taxable income of the Trust for each Interest Period equal to the
sum of (i) the amount of interest that accrues on the Certificates for such
Interest Period ba sed on the Certificate Rate; (ii) an amount equivalent to
intere st that accrues during such Interest Period on amounts previousl y due on
the Certificates but not yet distributed; and (iii) any Trust income
attributable to discount on the Financed Student Loans that corresponds to any
excess of the principal amount of the Certificates over their initial issue
price and that (b) all remaining taxable income of the Trust will be allocated
to Student Holdings. In addition, the Trust Agreement may provide that certain
"excess nonrecourse liabilities" will be allocated to Student Holdings. It is
believed that this allocation will be valid under applicable Treasury
regulations, although no assurance can be given that the IRS would not require a
greater amount of income to be allocated to Certificateholders. Moreover, under
the foregoing method of allocation, holders may be allocated income equal to the
entire amount of interest accruing on the Certificates for an Interest Period
based on the Certificate Rate plus the other items described above even though
the Trust might not have sufficient cash to make current cash distributions of
such amount. Thus, cash basis holders will in effect be required to report
income from the Certificates on the accrual basis. In addition, because tax
allocations and tax reporting will be done on a uniform basis for all
Certificateholders of one Class but Certificateholders may be purchasing
Certificates at different times and at different prices, Certificateholders may
be required to report on their tax returns taxable income that is greater or
less than the amount reported to them by the Trust.
Additionally, some or all of the taxable income allocated to a
Certificateholder that is a tax-exempt entity will constitute "unrelated
business taxable income," which, under the Code, is generally taxable to such a
holder despite the holder's tax exempt status.
An individual taxpayer may generally deduct miscellaneous itemized
deductions (which do not include interest expenses) only to the extent they
exceed two percent of the individual's adjusted gross income. Those limitations
would apply to an individual Certificateholder's share of expenses of the Trust
(including fees paid to the Master Servicer) and might result in such holder
being taxed on an amount of income that exceeds the amount of cash actually
distributed to such holder over the life of the Trust. Such deductions may also
be subject to reduction under Section 68 of the Code if the individual's
adjusted gross income exceeds certain limits.
The Trust intends to make all tax calculations relating to income and
allocations to Certificateholders on an aggregate basis. If the IRS were to
require that such calculations be made sepa rately for each of the Financed
Student Loans, the Trust might be required to incur additional expense, but it
is believed that there would not be a material adverse effect on
Certificateholders.
Discount and Premium. It is believed that the Financed Student Loans
were not issued (or will not be issued) with OID, and, therefore, the Trust
should not have OID income. However, the purchase price paid by the Trust for
the Financed Student Loans may be greater or less than the remaining principal
balance of the Financed Student Loans at the time of purchase. If so, the
Financed Student Loans will have been acquired at a premium or discount, as the
case may be. (As indicated above, the Trust will make this calculation on an
aggregate basis, but might be required to recompute it on a loan by loan basis.)
The Trust will make an election that will result in any such market discount on
the Financed Student Loans being included in income currently as such discount
accrues over the life of the loans. As indicated above, a portion of such market
discount income wi ll be allocated to Certificateholders. Similarly, the Trust
will make an election to amortize any market premium over the life of the
Financed Student Loans, which could result in additional deductions allocated to
the Certificateholders.
Section 708 Termination. Under Section 708 of the Code, the Trust will
be deemed to terminate for Federal income tax purposes if 50% or more of the
capital and profits interests in the Trust (which include the Certificates and
the Seller's interest) are sold or exchanged within a 12-month period. If such a
termination occurs, the Trust will be considered to distribute its assets to the
partners, who would then be treated as recontributing those assets to the Trust,
as a new partnership. Proposed regulations would provide that if a termination
occurs, the partnership will be considered to transfer its assets and
liabilities to a new partnership in exchange for interests in that new
partnership which it would then be treated as transferring to its partners. The
Trust will not comply with certain technical requirements that might apply when
such a constructive termination occurs. As a result, the Trust may be subject to
certain tax penalties and may incur additional expenses if it is required to
comply with those requirements. Furthermore, the Trust might not be able to
comply due to lack of data.
Disposition of Certificates. Generally, capital gain or loss will be
recognized on a sale of a Certificate in an amount equal to the difference
between the amount realized and the seller's tax basis in the Certificate sold.
A Certificateholder's tax basis in a Certificate will generally equal his cost
increased by his share of Trust income that is includible in his gross income
and decreased by any distributions received with respect to such Certificate. In
addition, both the tax basis in the Certificate and the amount realized on a
sale of a Certificate would include the holder's share of the Notes and other
liabilities of the Trust. A holder acquiring Certificates at different prices
may be required to maintain a single aggregate adjusted tax basis in such
Certificates, and, upon sale or other disposition of some of the Certificates,
allocate a pro rata portion of such aggregate tax basis to the Certificates sold
(rather than maintaining a separate tax basis in each Certificate for purposes
of computing gain or loss on a sale of that Certificate).
Any gain on the sale of a Certificate attributable to the holder's
share of unrecognized accrued market discount on the Financed Student Loans
would generally be treated as ordinary income to the holder and would give rise
to special tax reporting requirements. Thus, to avoid these special reporting
requirements, the Trust will elect to include any such market discount in income
as it accrues. The Trust does not expect to have any other assets that would
give rise to such special reporting requirements.
If a Certificateholder is required to recognize an aggregate amount of
income (not including income attributable to disallowed miscellaneous itemized
deductions described above) over the life of the Certificates that exceeds the
aggregate cash distributions with respect thereto, such excess will generally
give rise to a capital loss upon the retirement of the Certificates.
Allocations Between Transferor and Transferee. In general, the Trust's
taxable income and losses will be determined monthly and the tax items for a
particular calendar month will be apportioned among the Certificateholders in
proportion to the principal amount of Certificates owned by them as of the close
of the last day of such month. As a result, a holder purchasing Certificates may
be allocated tax items (which will affect the tax liability and tax basis of the
holder) attributable to periods before the actual purchase takes place.
The use of such a monthly convention may not be permitted by existing
regulations. If a monthly convention is not allowed (or is allowed only for
transfers of less than all of the partner's interest), taxable income or losses
of the Trust might be reallocated among the Certificateholders. The Seller is
authorized to revise the Trust's method of allocation between transferors and
transferees to conform to a method permitted by any future authority.
Section 754 Election. In the event that a Certificateholder sells a
Certificate at a profit (or loss), the purchasing Certificateholder will have a
higher (or lower) basis in the Certificate than the selling Certificateholder
had. The tax basis of the Trust's assets will not be adjusted to reflect that
higher (or lower) basis unless the Trust files an election under Section 754 of
the Code. In order to avoid the administrative complexities that would be
involved in keeping accurate accounting records, as well as potentially onerous
information reporting requirements, the Trust will not make such an election. As
a result, Certificateholders might be allocated a greater or lesser amount of
Trust income than would be appropriate based on their own purchase price for
Certificates.
Administrative Matters. The Administrator, on behalf of the Trust, is
required to keep or cause to be kept complete and accurate books of the Trust.
Such books will be maintained for financial reporting and tax purposes on an
accrual basis and the taxable year of the Trust will be the calendar year. The
Eligible Lender Trustee will file a partnership information return (IRS Form
1065) with the IRS for each taxable year of the Trust and will report to holders
(and to the IRS) each Certificateholder's allocable share of items of Trust
income and expense on Schedule K-l. The Trust will provide the Schedule K-l
information to nominees that fail to provide the Trust with the information
statement described below and such nominees will be required to forward such
information to the beneficial owners of the Certificates. Generally, holders
must file tax returns that are consistent with the information returns filed by
the Trust or be subject to penalties unless the holder notifies the IRS of all
such inconsistencies.
Under Section 6031 of the Code, any person that holds Certificates as
a nominee on behalf of another person at any time during a calendar year is
required to furnish the Trust with a statement containing certain information on
the nominee, the beneficial owners and the Certificates so held. Such
information includes (i) the name, address and taxpayer identification number of
the nominee and (ii) as to each beneficial owner (x) the name, address and
taxpayer identification number of such person, (y) whether such 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) certain information concerning Certificates that
were held, acquired or transferred on behalf of such person throughout the year.
In addition, brokers and financial institutions that hold Certificates through a
nominee are required to furnish directly to the Trust information as to
themselves and their ownership of Certificates. A clearing agency registered
under Section 17A of the Exchange Act that holds Certificates as a nominee is
not required to furnish any such information statement to the Trust. The
information referred to above for any calendar year must be furnished to the
Trust on or before the following January 31. Nominees, brokers and financial
institutions that fail to provide the Trust with the information described above
may be subject to penalties. The Trust will provide the Schedule K-1 information
to nominees that fail to provide the Trust with the information described above
and such nominees will be required to forward such information to the beneficial
owners of the Certificates.
Student Holdings, as the "tax matters partner," will be responsible
for representing the Certificateholders in any dispute with the IRS. The Code
provides for administrative examination of a partnership as if the partnership
were a separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire before three years after the date on which the
partnership information return is filed. Any adverse determination following an
audit of the return of the Trust by the appropriate taxing authoriti es could
result in an adjustment of the returns of the Certificateholders, and, under
certain circumstances, a Certifica teholder may be precluded from separately
litigating a proposed adjustment to the items of the Trust. An adjustment could
also result in an audit of a Certificateholder's returns and adjustments of
items not related to the income and losses of the Trust.
Backup Withholding. Distributions made on the Certificates and proce
eds from the sale of the Certificates will be subject to a "backup" withholding
tax of 31% if, in general, the Certificateholder fails to comply with certain
identification procedures, unless the holder is an exempt recipient under
applicable provisions of the Code.
Proposed Tax Legislation. Legislation has been introduced before prior
sessions of Congress which would have applied special rules to certain
partnerships having a large number of partners. Under the legislation, certain
computations are made at the partnership level rather than the partner level. In
particular, taxable income is calculated at the partnership level, and is
calculated generally in the same manner as for an individual, except that 70% of
miscellaneous itemized deductions (such as expenses for the production of
nonbusiness income) are disallowed. As a result, all partners (including
corporations) might have a portion of their share of partnership deductions
(other than interest expense) disallowed. No prediction can be made whether
similar legislation will be enacted in the future, the form in which future
legislation might be enacted or the ultimate effective date of such future
legislation.
CERTAIN PENNSYLVANIA TAX CONSEQUENCES WITH RESPECT TO THE CERTIFICATES
Because state and local income and franchise tax laws vary greatly, it
is impossible to predict the income and franchise tax consequences to the
Certificateholders in all of the state and local taxing jurisdictions in which
they are already subject to tax. Certificateholders are urged to consult their
own advisors with respect to state and local income and franchise taxes.
Since the Trust will be classified as a Pennsylvania Business Trust
and not as a partnership for purposes of Pennsylva nia taxation,
Certificateholders other than individuals not other wise subject to taxation in
Pennsylvania will not become su bject to taxation in Pennsylvania solely because
of such Cert ificateholder's ownership of Certificates.
If Pennsylvania were to classify the Trust as a partnership for
purposes of taxation, Pennsylvania may take the position that such
Certificateholders not otherwise subject to taxation in Pennsylvania become
subject to tax in Pennsylvania. Certificateholders which are corporations
subject to tax in Pennsylvania would be required to separately take into account
such holder's allocated share of income, gains, losses, deductions and credits
of the Trust in computing Pennsylvania Corporate Net Income Tax and Capital
Stock/Franchise Tax.
There is no assurance that the foregoing conclusions with respect to
the characterization of the Trust and the Pennsylvania state tax consequences
with respect to the Certificates will not be challenged by the Pennsylvania
taxing authoriti es or, if challenged, that the taxing authorities will not be
successful. If the Trust were subject to an entity level tax in Pennsylvania,
any such tax could materially reduce or eliminate cash that would otherwise be
distributable with respect to the Certificates.
Certain Certificateholders otherwise subject to tax in certain
Pennsylvania counties which impose the tax on intangible personal property
authorized by the Act of June 17, 1913, P.L. 507 ss.1, as amended, 72 P.S. ss.
4821, will be subject to such Intangible Personal Property Tax on the
Certificates.
PENNSYLVANIA TAX CHARACTERISTICS OF THE TRUST
The Trust Agreement contemplates that the Trust will qualify as a
Pennsylvania Business Trust pursuant to 15 Pa. C.S. ss. 9501(a). Under existing
law, as a Pennsylvania Business Trust, if the Trust is classified as a
partnership for federal income tax purposes the Trust will not be subject to
Pennsylvania Corporate Net Income Tax, Capital Stock Tax, Personal Income Tax or
Corporate Loans Tax.
Assuming that the Trust is created in Cumberland County, Pennsylva
nia, a county which does not presently impose the Intangibl e Personal Property
Tax authorized by the Act of June 17, 1913, P.L. 507 ss. 1, as amended, 72 P.S.
ss. 4821, the Trust will not be subject to such Intangible Personal Property Tax
on the Finan ced Student Loans or on other intangible personal property held by
the Trust.
Although the matter is not free from doubt, Pennsylvania Tax Counsel
is of the opinion, under existing law, that the Trust will not be classified as
a partnership for Pennsylvania corporate tax purposes. However, if the Trust
were to be classified as a partnership for Pennsylvania tax purposes, the Trust
itself would not be subject to any of the foregoing taxes, but the Pennsylvania
taxing authorities may take the position that the Certificateholders not
otherwise subject to tax in Pennsylvania have acquired a taxable nexus in
Pennsylvania by virtue of their ownership of the Certificates.
ERISA CONSIDERATIONS
THE NOTES
Section 406 of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), and/or Section 4975 of the Code prohibit a pension,
profit-sharing or other employee benefit plan or retirement arrangement, as well
as individual retirement accounts and certain types of Keogh Plans (each a
"Plan") from engaging in certain transactions with persons that are "parties in
interest" under ERISA or "disqualified persons" under the Code with respect to
such Plan. A violation of these "prohibited transaction" rules may result in an
excise tax or other penalties and liabilities under ERISA and the Code for such
persons.
Certain transactions involving the purchase, holding or transfer of
the Notes might be deemed to constitute prohibited transactions under ERISA and
the Code if assets of the Trust were deemed to be assets of a Plan. Under a
regulation issued by the United States Department of Labor (the "Plan Assets
Regulation"), the assets of the Trust would be treated as plan assets of a Plan
for the purposes of ERISA and the Code only if the Plan acquires an "equity
interest" in the Trust and none of the exceptions contained in the Plan Assets
Regulation is applicable. An equity interest is defined under the Plan Assets
Regulation as an interest other than an instrument which is treated as
indebtedness under applicable local law and which has no substantial equity
features. Assuming that a Class of Notes is treated as indebtedness without
substantial equity features for purposes of the Plan Assets Regulation then such
Class of Notes will be eligible for purchase by Plans. Without regard to whether
the Notes are treated as an "equity interest" for such purposes, the acquisition
or holding of Notes by or on behalf of a Plan could be considered to give rise
to a prohibited transaction if the Trust or any of its affiliates is or becomes
a party in interest or disqualified person with respect to such Plan, or in the
event that a Note is purchased in the secondary market by a Plan from a party in
interest or disqualified person with respect to such Plan. There can be no
assurance that the Trust or any of its affiliates will not be or become a party
in interest or a disqualified person with respect to a Plan that acquires Notes.
However, one or more of the following prohibited transaction class exemptions
may apply to the acquisition, holding and transfer of the Notes: Prohibited
Transaction Class Exemption ("PTCE") 84-14 (regarding investments by qualified
professional asset managers), PTCE 90-1 (relating to investments by insurance
company pooled separate accounts), PTCE 91-38 (regarding investments by bank
collective investment funds), PTCE 95-60 (regarding investments by insurance
company general accounts) and PTCE 96-23 (regarding investments by in-house
asset managers).
Employee benefit plans that are governmental plans (as defined in
Section 3(32) of ERISA) and certain church plans (as defined in Section 3(33) of
ERISA) are not subject to ERISA requirements.
A Plan fiduciary considering the purchase of Notes should consult its
tax and/or legal advisors regarding whether the assets of the Trust would be
considered Plan assets, the possibility of exemptive relief from the prohibited
transaction rules and other issues and their potential consequences.
THE CERTIFICATES
The Certificates may not be acquired (directly or indirectly) by or on
behalf of any employee benefit plan, retirement arrangement, individual
retirement account or Keogh Plan subject to either Title I of ERISA or Section
4975 of the Code, or any entity (including an insurance company general account)
whose underlying assets include plan assets by reason of a plan's investment in
the entity (each a "Benefit Plan"). By its acceptance of a Certificate, each
Certificateholder will be deemed to have represented and warranted that it is
not a Benefit Plan.
PLAN OF DISTRIBUTION
The Notes will be offered in one or more Series and one or more
Classes either directly by the Seller and The Money Store or through one or more
underwriters or underwriting syndicates ("Underwriters"). The Prospectus
Supplement for each Series of Notes will set forth the terms of the offering of
such Series and of each Class within such Series, including the name or names of
the Underwriters, the proceeds to the Seller, and either the initial public
offering price, the discounts and commissions to the Underwriters and any
discounts or concessions allowed or reallowed to certain dealers, or the method
by which the price at which the Underwriters will sell the Notes will be
determined.
The Notes may be acquired by Underwriters for their own account and
may be resold from time to time in one or more transactions, including
negotiated transactions, at a fixed public offering price or at varying prices
determined at the time of sale. The obligations of any Underwriters will be
subject to certain conditions precedent, and such Underwriters will be severally
obligated to purchase all of a Series of Notes described in the related
Prospectus Supplement, if they are purchased. If Notes of a Series are offered
other than through Underwriters, the related Prospectus Supplement will contain
information regarding the nature of such offering and any agreements to be
entered into between the seller and purchasers of Notes of such Series.
The place and time of delivery for the Notes of a Series in respect of
which this Prospectus is delivered will be set forth in the related Prospectus
Supplement.
EXPERTS
The consolidated financial statements of AMBAC Indemnity Corporation
as of December 31, 1995 and 1994, and for each of the years in the three-year
period ended December 31, 1995, have been incorporated by reference herein and
in the Registration Statement in reliance upon the report of KPMG Peat Marwick
LLP, independent certified public accountants, incorporated by reference herein,
and upon the authority of said firm as experts in accounting and auditing.
The report of KPMG Peat Marwick LLP refers to the adoption of the
Financial Accounting Standards Board's Statements of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions," and No. 112,
"Employers' Accounting for Postemployment Benefits" in 1993.
LEGAL MATTERS
Certain legal matters relating to the Seller, the Master Servicer and
the Administrator will be passed upon by Eric R. Elwin, Esq., Corporate Counsel
of the Seller, and Squire, Sanders & Dempsey, Phoenix, Arizona, and certain
legal matters relating to the validity of the issuance of each Series of Notes
and the Certificates will be passed upon for the Underwriter by Stroock &
Stroock & Lavan, New York, New York. Stroock & Stroock & Lavan has performed
legal services for the Seller and The Money Store Inc. and it is expected that
it will continue to perform such services in the future. Certain federal income
tax and other matters will be passed upon for the Trust by Stroock & Stroock &
Lavan, and certain state income tax and other matters will be passed upon for
the Trust by Rhoads & Sinon LLP, Harrisburg, Pennsylvania. Other parties, if
any, passing upon legal matters for the Trust, the Seller or The Money Store
will be identified in the related Prospectus Supplement.
FINANCIAL INFORMATION
The Seller and The Money Store have determined that their financial
statements are not material to the offering made hereby. The Trust will engage
in no activities other than as described herein. Accordingly, no financial
statements with respect to the Trust is included in this Prospectus.
RATING
It is a condition to the issuance and sale of each Series and Class of
Notes and each Class of Certificates that they each be rated "AAA" by Standard &
Poor's Ratings Services, a division of The McGraw-Hill Companies ("Standard &
Poor's"), and "Aaa" by Moody's Investors Service, Inc. ("Moody's") (or an
equivalent short-term rating for certain Classes of Notes having a Final
Maturity Date of no more than 13 months after the related Closing Date). Each of
Standard & Poor's and Moody's is also referred to herein as a "Rating Agency"
and collectively, as the "Rating Agencies." A securities 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 agency.
<PAGE>
INDEX OF PRINCIPAL TERMS
Set forth below is a list of the defined terms used in this Prospectus
and the pages on which the definitions of such terms may be found herein.
PAGE
ACA................................................................ 58
Accrual Notes...................................................... cover
Accrual Period .................................................... 13
Additional Funding ................................................ 11
Additional Principal Payments ..................................... 16
Additional Student Loans........................................... 72
Administration Agreement .......................................... 7
Administration Fee................................................. 12
Administrator...................................................... 7
Administrator Default.............................................. 83
AFSA............................................................... 7
Aggregate Pool Balance............................................. 27
AMBAC.............................................................. 2
Applicable Trustee................................................. 68
Assigned Rights.................................................... 33
Auction Agent...................................................... 7
Auction Agent Fee.................................................. 12
Auction Period Adjustment.......................................... 62
Auction Rate Certificates.......................................... 2
Auction Rate Notes................................................. cover
Available Funds.................................................... 75
Benefit Plan....................................................... 98
Business Day....................................................... 12
Capitalized Interest Account....................................... 11
Capitalized Pre-Funding Account.................................... 11
Capitalized Pre-Funding Requirement................................ 11
Capped Amount...................................................... 21
Cede............................................................... 29
Certificate Balance................................................ 77
Certificate Distribution Account................................... 14
Certificate Distribution Date...................................... 2
Certificate Final Maturity Date.................................... 26
Certificate Rate................................................... 24
Certificate Record Date............................................ 25
Certificate Surety Bond............................................ cover
Certificate Surety Bond Payment.................................... 19
Certificateholders................................................. 25
Certificateholders' Distribution Amount............................ 77
Certificateholders' Interest Carryover............................. 26
Certificateholders' Interest Carryover Shortfall................... 78
Certificateholders' Interest Distribution Amount................... 78
Certificateholders' Principal Carryover Shortfall.................. 78
Certificateholders' Principal Distribution Amount.................. 78
Certificates....................................................... cover
Class.............................................................. cover
Class Interest Rate................................................ 21
Closing Date....................................................... 2
Code............................................................... 91
Collection Account................................................. 12
Collection Period.................................................. 10
Commission......................................................... 4
Consolidation Loan................................................. 47
Cut-off Date....................................................... 27
Deferral Period.................................................... 44
Deferral Phase..................................................... 9
Definitive Certificates............................................ 69
Definitive Notes................................................... 69
Definitive Securities.............................................. 69
Department......................................................... 2
Depository......................................................... 61
Determination Date................................................. 12
Distribution Accounts.............................................. 14
Distribution Date.................................................. 25
DTC................................................................ 29
Effective Interest Rate............................................ 22
Eligible Deposit Account........................................... 71
Eligible Institution............................................... 71
Eligible Investments............................................... 71
Eligible Lender Trustee............................................ cover
Eligible Lender Trustee Fee........................................ 12
Eligible Student................................................... 40
ERISA.............................................................. 28
Event of Default................................................... 66
Exchange Act....................................................... 4
Expense Account.................................................... 13
Federal Assistance................................................. 42
Federal Loans...................................................... 2
Federal Guarantee Agreements....................................... 39
Federal Program.................................................... 8
Federal Tax Counsel................................................ 91
Final Maturity Date................................................ 23
Financed Student Loans............................................. cover
Forbearance Periods................................................ 34
Funding Period..................................................... 10
Grace Periods...................................................... 34
Guarantee Agreements............................................... 40
Guarantee Payments................................................. 30
Guarantor.......................................................... 9
HEAL Loans......................................................... 2
HEAL Program....................................................... 48
HICA............................................................... 9
Higher Education Act............................................... 40
Indenture.......................................................... 21
Indenture Trustee.................................................. 7
Indenture Trustee Fee.............................................. 12
Index Maturity..................................................... 64
Indirect Participants.............................................. 68
Initial Closing Date............................................... 24
Insolvency Event................................................... 85
Interest Deficiency................................................ 18
Interest Period.................................................... 22
Interest Subsidy Payments.......................................... 42
Investment Earnings................................................ 71
IRS................................................................ 91
LIBOR.............................................................. cover
LIBOR Determination Date........................................... 64
LIBOR Rate......................................................... 61
LIBOR Rate Certificates............................................ 25
LIBOR Rate Notes................................................... cover
Master Indenture................................................... 21
Master Servicer.................................................... 6
Master Servicer Default............................................ 83
Monthly Advance Account............................................ 27
Monthly Advances................................................... 27
Moody's............................................................ 29
Net Loan Rate...................................................... 22
1933 Act........................................................... 4
1992 Amendments.................................................... 42
1993 Amendments.................................................... 42
1993 Technical Amendments.......................................... 42
Note Distribution Account.......................................... 13
Note Distribution Date............................................. cover
Note Record Date................................................... 22
Note Surety Bond................................................... cover
Note Surety Bond Payment........................................... 18
Noteholders........................................................ 22
Noteholders' Distribution Amount................................... 78
Noteholders' Interest Carryover.................................... 23
Noteholders' Interest Carryover Shortfall.......................... 78
Noteholders' Interest Distribution Amount.......................... 78
Noteholders' Principal Carryover Shortfall......................... 79
Noteholders' Principal Distribution Amount......................... 79
Notes.............................................................. cover
Obligors........................................................... 10
OID................................................................ 92
One-Month LIBOR.................................................... 64
Originators' Interest.............................................. 6
Option 4 Loans..................................................... 52
Option 4 Program................................................... 8
PAL Loans.......................................................... 54
PAL Program........................................................ 9
Participants....................................................... 61
Pennsylvania Tax Counsel........................................... 91
PEP Loans.......................................................... 54
PEP Program........................................................ 9
PHEAA.............................................................. 6
Plan............................................................... 98
Plan Assets Regulation............................................. 98
PLUS Loans......................................................... 8
Pool Balance....................................................... 10
Pre-Funded Amount.................................................. 10
Pre-Funding Account................................................ 10
Principal Deficiency............................................... 18
Principal Distribution Amount...................................... 79
Private Loans ..................................................... 2
Private Loan Programs.............................................. 9
Program............................................................ 40
Proprietary School................................................. 40
Prospectus Supplement.............................................. cover
Public Health Service Act.......................................... 8
Purchase Amount.................................................... 71
Purchased Loans.................................................... 7
Rating Agencies.................................................... 29
Realized Loss...................................................... 79
Reference Bank..................................................... 65
Regulations........................................................ 48
Related Documents.................................................. 67
Repayment Phase.................................................... 10
Representative..................................................... 6
Reserve Account.................................................... 16
Reserve Account Deposit............................................ 16
Rules.............................................................. 68
Sale and Servicing Agreement....................................... 8
SBA................................................................ 38
SBA Loans.......................................................... 38
Secretary.......................................................... 2
Securities......................................................... cover
Securities Act..................................................... cover
Securityholders.................................................... 25
Seller............................................................. cover
Serial Loan........................................................ 34
Series............................................................. cover
Servicer........................................................... 7
Servicing Fee...................................................... 12
Servicing Fee Carryover............................................ 21
SLS Loans.......................................................... 8
SLS Program........................................................ 45
Special Allowance Payments......................................... 42
Specified Reserve Account Balance.................................. 17
Stafford Loans..................................................... 42
Standard & Poor's.................................................. 29
Statement 115...................................................... 88
Student Holdings................................................... 8
Subsequent Cut-off Date............................................ 72
Surety Bonds....................................................... 18
Surety Provider.................................................... 7
Surety Provider Fee................................................ 12
T-Bill Rate........................................................ 43
Telerate Page 3750................................................. 65
TERI............................................................... 53
TERI Alternative Loans............................................. 53
TERI Alternative Program........................................... 9
Terms Supplement................................................... 21
The Money Store.................................................... 6
Transaction Fees................................................... 13
Transfer Agreement................................................. 72
Transfer and Servicing Agreements.................................. 70
Transfer Date...................................................... 72
Trust.............................................................. cover
Trust Accounts..................................................... 71
Trust Agreement.................................................... 7
Trust Supplement................................................... 24
UCC................................................................ 89
Underlying Federal Loan............................................ 46
Underwriters....................................................... 99
Unsubsidized Stafford Loans........................................ 45
USAF............................................................... 52
<PAGE>
APPENDIX I
AUCTION PROCEDURES
The following description of the Auction Procedures applies to each
Class of Auction Rate Notes (unless otherwise set forth in a Prospectus
Supplement) and each Class of Auction Rate Certificates (unless otherwise set
forth in a Trust Supplement). The term "Security," as used in this Appendix,
refers to each Class of Auction Rate Notes and each Class of Auction Rate
Certificates, and the term "Securityholder" refers to Noteholders holding
Auction Rate Notes and Certificateholders holding Auction Rate Certificates, as
applicable.
DEFINITIONS
Capitalized terms used herein and not otherwise defined have the
meanings ascribed in the accompanying Prospectus and Prospectus Supplement.
Additionally, the following terms have the meanings ascribed to them:
"All Hold Rate" means ninety percent (90%) of One-Month LIBOR.
"Auction" means the implementation of the Auction Procedures on an
Auction Date.
"Auction Agent" means the initial auction agent under the initial
Auction Agent Agreement unless and until a substitute Auction Agent Agreement
becomes effective, after which "Auction Agent" shall mean the substitute auction
agent.
"Auction Agent Agreement" means the initial Auction Agent Agreement
unless and until a substitute Auction Agent Agreement is entered into, after
which "Auction Agent Agreement" shall mean such substitute Auction Agent
Agreement.
"Auction Agent Fee" has the meaning set forth in the Auction Agent
Agreement.
"Auction Agent Fee Rate" has the meaning set forth in the Auction
Agent Agreement.
"Auction Date" means, with respect to the Initial Period for each
Class of Notes, the date set forth in the related Prospectus Supplement, and
with respect to each Class of Certificates, the date set forth in the Trust
Agreement or Trust Supplement and thereafter, the Business Day immediately
preceding the first day of each Auction Period for each Security, other than:
(A) each Auction Period commencing after the ownership of the
Securities is no longer maintained in Book- Entry Form by the
Securities Depository;
(B) each Auction Period commencing after and during the
continuance of an Event of Default; or
(C) each Auction Period commencing less than two Business Days
after the cure or waiver of an Event of Default.
Notwithstanding the foregoing, the Auction Date for one or more
Auction Periods may be changed pursuant to the Master Indenture and the related
Terms Supplement or the Trust Agreement and the related Trust Supplement, as
described herein.
"Auction Period" means, with respect to each Security, the Interest
Period applicable to such Security during which time the applicable Security
Interest Rate is determined pursuant to the related Terms Supplement or the
Trust Agreement or the related Trust Supplement, which Auction Period (after the
Initial Period for such Security) initially shall consist of between 7-91 days
(as set forth in the related Prospectus Supplement), as the same may be adjusted
pursuant to such Terms Supplement or the Trust Agreement or the related Trust
Supplement.
"Auction Period Adjustment" means an adjustment to the Auction Period
as provided in the related Terms Supplement or the Trust Agreement or the
related Trust Supplement, as applicable, as described herein.
"Auction Procedures" means the procedures set forth in the related
Terms Supplement or the Trust Agreement or the related Trust Supplement, as
applicable, and described herein by which the Auction Rate applicable to a
Security is determined.
"Auction Rate" means, with respect to any Security, the rate of
interest per annum that results from the implementation of the Auction
Procedures and is determined as described in the Trust Agreement or the related
Terms Supplement or the related Trust Supplement and this Appendix I.
"Authorized Denominations" means, with respect to any Security,
$50,000 and any integral multiple in excess thereof.
"Broker-Dealer" means Smith Barney Inc. or any other broker or dealer
(each as defined in the Securities Exchange Act of 1934, as amended), commercial
bank or other entity permitted by law to perform the functions required of a
Broker- Dealer set forth in the Auction Procedures that (a) is a Participant (or
an affiliate of a Participant), (b) has been appointed as such by the Trust
pursuant to the Indenture or the Administrator on behalf of the Eligible Lender
Trustee pursuant to the Trust Agreement and (c) has entered into a Broker-Dealer
Agreement that is in effect on the date of reference.
"Broker-Dealer Agreement" means each agreement between the Auction
Agent and a Broker-Dealer, and approved by the Trust, pursuant to which the
Broker-Dealer agrees to participate in Auctions as set forth in the Auction
Procedures, as from time to time amended or supplemented.
"Broker-Dealer Fee" has the meaning set forth in the Auction Agent
Agreement.
"Broker-Dealer Fee Rate" has the meaning set forth in the Auction
Agent Agreement.
"Effective Interest Rate" means, for any Financed Student Loan and any
Collection Period, the per annum rate at which such Financed Student Loan
accrues interest during such Collection Period and, in the case of a Federal
Loan, after giving effect to all applicable Interest Subsidy Payments and
Special Allowance Payments due with respect to such Federal Loan.
"Existing Securityholder" means (i) with respect to and for the
purpose of dealing with the Auction Agent in connection with an Auction, a
Person who is a Broker-Dealer listed in the Existing Securityholder Registry at
the close of business on the Business Day immediately preceding such Auction and
(ii) with respect to and for the purpose of dealing with the Broker-Dealer in
connection with an Auction, a Person who is a beneficial owner of any Security.
"Existing Securityholder Registry" means the registry of Persons who
are owners of the Securities, maintained by the Auction Agent as provided in the
Auction Agent Agreement.
"Federal Funds Rate" means, for any date of determination, the federal
funds (effective) rate as published on page 118 of the Dow Jones Telerate
Service (or such other page as may replace that page on that service for the
purpose of displaying comparable rates or prices) on the immediately preceding
Business Day. If no such rate is published on such page on such date, "Federal
Funds Rate" shall mean for any date of determination, the Federal funds
(effective) rate as published by the Federal Reserve Board in the most recent
edition of Federal Reserve Statistical Release No. H.15 (519) that is available
on the Business Day immediately preceding such date.
"Initial Period" means, as to any Security, the period commencing on
the Closing Date of such Security and continuing through the day immediately
preceding the Security Initial Rate Adjustment Date for such Security.
"Interest Period" means, with respect to a Security, the Initial
Period for such Security and each period commencing on the Rate Adjustment Date
for such Security and ending on the day before (i) the next Rate Adjustment Date
for such Security or (ii) the Final Maturity Date of such Security, as
applicable.
"Market Agent" means Smith Barney Inc., New York, New York, in such
capacity under the Indenture, or any successor to it in such capacity
thereunder.
"Maximum Auction Rate" means (i) for Auction Periods of 34 days or
less, either (A) the greater of (1) One-Month LIBOR plus 0.60% or (2) the
Federal Funds Rate plus 0.60% (if both ratings assigned by the Rating Agencies
to the applicable Security are "Aa3" or "AA-" or better) or (B) One-Month LIBOR
plus 1.50% (if any one of the ratings assigned by the Rating Agencies to the
Security is less than "Aa3" or "AA-") or (ii) for Auction Periods of greater
than or equal to 35 days, either (A) the greater of One-Month LIBOR or
Three-Month LIBOR, plus in either case, 0.60% (if both of the ratings assigned
by the Rating Agencies to the applicable Security are "Aa3" or "AA-" or better)
or (B) the greater of One-Month LIBOR or Three-Month LIBOR, plus in either case,
1.50% (if any one of the ratings assigned by the Rating Agencies to the
applicable Security is less than "Aa3" or "AA-"). For purposes of the Auction
Agent and the Auction Procedures, the ratings referred to in this definition
shall be the last ratings of which the Auction Agent has been given notice
pursuant to the Auction Agent Agreement.
"Net Loan Rate" for any Interest Period will equal the weighted
average Effective Interest Rate for the Collection Period immediately preceding
such Interest Period less the amount set forth in the related Prospectus
Supplement.
"Non-Payment Rate" means One-Month LIBOR plus 1.50%, as the same may
be adjusted pursuant to a Terms Supplement or a Trust Supplement.
"Person" means any individual, corporation, estate, partnership, joint
venture, association, joint stock company, trust (including any beneficiary
thereof), unincorporated organization or government or any agency or political
subdivision thereof.
"Potential Securityholder" means any Person (including an Existing
Securityholder that is (i) a Broker-Dealer when dealing with the Auction Agent
and (ii) a potential beneficial owner when dealing with a Broker-Dealer) who may
be interested in acquiring Securities (or, in the case of an Existing
Securityholder thereof, an additional principal amount of Securities).
"Rate Adjustment Date" means, with respect to each Security, the date
on which the applicable Security Interest Rate is effective and means, with
respect to each such Security, the date of commencement of each Auction Period.
"Rate Determination Date" means, with respect to any Security, the
Auction Date, or if no Auction Date is applicable to such Series, the Business
Day immediately preceding the date of commencement of an Auction Period.
"Security Initial Rate" means, (i) with respect to any Class of Notes,
the rate identified as such in the related Prospectus Supplement and (ii) with
respect to any Class of Certificates, the rate identified as such in the Trust
Agreement or the related Trust Supplement.
"Security Initial Rate Adjustment Date" means, with respect to any
Class of Notes, the date identified as such in the related Prospectus Supplement
and, with respect to any Class of Certificates, the date set forth in the Trust
Agreement or the related Trust Supplement.
"Three-Month LIBOR" means the London interbank offered rate for
deposits in U.S. dollars having a maturity of three months commencing on the
related LIBOR Determination Date (the "Three-Month Index Maturity") which
appears on Telerate Page 3750 as of 11:00 a.m., London time, on such LIBOR
Determination Date. If such rate does not appear on Telerate Page 3750, the rate
for that day will be determined on the basis of the rates at which deposits in
U.S. dollars, having the Three Month Index Maturity and in a principal amount of
not less than U.S. $1,000,000, are offered at approximately 11:00 a.m., London
time, on such LIBOR Determination Date to prime banks in the London interbank
market by the Reference Banks. The Auction Agent will request the principal
London office of each of such Reference Banks to provide a quotation of its
rate. If at least two such quotations are provided, the rate for that day will
be the arithmetic mean of the quotations. If fewer than two quotations are
provided, the rate for that day will be the arithmetic mean of the rates quoted
by major banks in New York City, selected by the Auction Agent, at approximately
11:00 a.m., New York City time, on such LIBOR Determination Date for loans in
U.S. dollars to leading European banks having the Three Month Index Maturity and
in a principal amount equal to an amount of not less than U.S. $1,000,000;
provided that if the banks selected as aforesaid are not quoting as mentioned in
this sentence, Three-Month LIBOR in effect for the applicable Interest Period
will be Three- Month LIBOR in effect for the previous Interest Period.
EXISTING SECURITYHOLDERS AND POTENTIAL SECURITYHOLDERS
Participants in each Auction will include: (1) "Existing
Securityholders," which shall mean any Securityholder according to the records
of the Auction Agent at the close of business on the Business Day preceding each
Auction Date; and (ii) "Potential Securityholders," which shall mean any person,
including any Existing Securityholder or a Broker/Dealer, who may be interested
in acquiring Securities (or, in the case of an Existing Securityholder, an
additional principal amount of the Security such Securityholder then holds). See
"--Broker-Dealer."
By purchasing a Security, whether in an Auction or otherwise, each
prospective purchaser of Securities or its Broker-Dealer must agree and will be
deemed to have agreed: (i) to participate in Auctions on the terms described
herein; (ii) so long as the beneficial ownership of the Securities is maintained
in Book-Entry Form to sell, transfer or otherwise dispose of the Securities only
pursuant to a Bid (as defined below) or a Sell Order (as defined below) in an
Auction, or to or through a Broker-Dealer, provided that in the case of all
transfers other than those pursuant to an Auction, the Existing Securityholder
of the Securities so transferred, its Participant or Broker-Dealer advises the
Auction Agent of such transfer; (iii) to have its beneficial ownership of
Securities maintained at all times in Book-Entry Form for the account of its
Participant, which in turn will maintain records of such beneficial ownership,
and to authorize such Participant to disclose to the Auction Agent such
information with respect to such beneficial ownership as the Auction Agent may
request; (iv) that a Sell Order placed by an Existing Securityholder will
constitute an irrevocable offer to sell the principal amount of the Security
specified in such Sell Order; (v) that a Bid placed by an Existing
Securityholder will constitute an irrevocable offer to sell the principal amount
of the Security specified in such Bid if the rate specified in such Bid is
greater than, or in some cases equal to, the Security Interest Rate of such
Security, determined as described herein; and (vi) that a Bid placed by a
Potential Securityholder will constitute an irrevocable offer to purchase the
amount, or a lesser principal amount, of the Security specified in such Bid if
the rate specified in such Bid is, respectively, less than or equal to the
Security Interest Rate of the specified Security, determined as described
herein.
The principal amount of the Securities purchased or sold may be
subject to proration procedures on the Auction Date. Each purchase or sale of
Securities on the Auction Date will be made for settlement on the first day of
the Interest Period immediately following such Auction Date at a price equal to
100% of the principal amount thereof, plus accrued but unpaid interest thereon.
The Auction Agent is entitled to rely upon the terms of any Order submitted to
it by a Broker-Dealer.
Auction Agent
Bankers Trust Company will be appointed as Auction Agent to serve as
agent for the Trust in connection with Auctions. The Indenture Trustee and the
Trust will enter into the Auction Agreement with Bankers Trust Company, as the
Auction Agent. Any Substitute Auction Agent will be (i) a bank, national banking
association or trust company duly organized under the laws of the United States
of America or any state or territory thereof having its principal place of
business in the Borough of Manhattan, New York, or such other location as
approved by the Indenture Trustee and the Market Agent in writing and having a
combined capital stock or surplus of at least $50,000,000, or (ii) a member of
the National Association of Securities Dealers, Inc. having a capitalization of
at least $50,000,000, and, in either case, authorized by law to perform all the
duties imposed upon it under the Indenture and under the Auction Agent
Agreement. The Auction Agent may at any time resign and be discharged of the
duties and obligations created by the Indenture by giving at least 90 days
notice to the Indenture Trustee, the Trust and the Market Agent. The Auction
Agent may be removed at any time by the Indenture Trustee upon the written
direction of the Surety Provider, or, with the consent of the Surety Provider,
the Noteholders of 66-2/3% of the aggregate principal amount of the Notes then
outstanding, by an instrument signed by the Surety Provider or such Noteholders
or their attorneys and filed with the Auction Agent, the Trust, the Indenture
Trustee and the Market Agent upon at least 90 days' notice. Neither resignation
nor removal of the Auction Agent pursuant to the preceding two sentences will be
effective until and unless a Substitute Auction Agent has been appointed and has
accepted such appointment. If required by the Trust or by the Market Agent, with
the Trust's consent, a Substitute Auction Agent Agreement shall be entered into
with a Substitute Auction Agent. Notwithstanding the foregoing, the Auction
Agent may terminate the Auction Agent Agreement if, within 25 days after
notifying the Indenture Trustee, the Trust, the Surety Provider and the Market
Agent in writing that it has not received payment of any Auction Agent Fee due
it in accordance with the terms of the Auction Agent Agreement, the Auction
Agent does not receive such payment.
If the Auction Agent should resign or be removed or be dissolved, or
if the property or affairs of the Auction Agent shall be taken under the control
of any state or federal court or administrative body because of bankruptcy or
insolvency, or for any other reason, the Indenture Trustee, at the direction of
the Trust (after receipt of a certificate from the Market Agent confirming that
any proposed Substitute Auction Agent meets the requirements described in the
immediately preceding paragraph above), shall use its best efforts to appoint a
Substitute Auction Agent.
The Auction Agent is acting as agent for the Trust in connection with
Auctions. In the absence of bad, faith, negligent failure to act or negligence
on its part, the Auction Agent will not be liable for any action taken, suffered
or omitted or any error of judgment made by it in the performance of its duties
under the Auction Agent Agreement and will not be liable for any error of
judgment made in good faith unless the Auction Agent will have been negligent in
ascertaining (or failing to ascertain) the pertinent facts.
The Indenture Trustee will pay the Auction Agent the Auction Agent Fee
on the first Note Distribution Date occurring in each month (or if in any such
month a Certificate Distribution Date occurs prior to such first Note
Distribution Date, on such Certificate Distribution Date), and will reimburse
the Auction Agent upon its request for all reasonable expenses, disbursements
and advances incurred or made by the Auction Agent in accordance with any
provision of the Auction Agent Agreement or the Broker-Dealer Agreements
(including the reasonable compensation and the expenses and disbursements of its
agents and counsel). The Trust will indemnify and hold harmless the Auction
Agent for and against any loss, liability or expense incurred without negligence
or bad faith on the Auction Agent's part, arising out of or in connection with
the acceptance or administration of its agency under the Auction Agent Agreement
and the Broker-Dealer Agreements including the reasonable costs and expenses
(including the reasonable fees and expenses of its counsel) of defending itself
against any such claim or liability in connection with its exercise or
performance of any of its respective duties thereunder and of enforcing this
indemnification provision; provided that the Trust will not indemnify the
Auction Agent as described in this paragraph for any fees and expenses incurred
by the Auction Agent in the normal course of performing its duties under the
Auction Agent Agreement and under the Broker-Dealer Agreements, such fees and
expenses being payable as described above.
Broker-Dealer
Existing Securityholders and Potential Securityholders may participate
in Auctions only by submitting orders (in the manner described below) through a
"Broker-Dealer," including Smith Barney Inc. as the sole Broker-Dealer or any
other broker or dealer (each as defined in the Securities Exchange Act of 1934,
as amended), commercial bank or other entity permitted by law to perform the
functions required of a Broker-Dealer set forth below which (i) is a Participant
or an affiliate of a Participant, (ii) has been selected by the Trust and (iii)
has entered into a Broker-Dealer Agreement with the Auction Agent that remains
effective, in which the Broker-Dealer agrees to participate in Auctions as
described in the Auction Procedures, as from time to time amended or
supplemented.
The Broker-Dealers are entitled to a Broker-Dealer Fee, which is
payable by the Auction Agent from monies received from the Indenture Trustee, on
the first Note Distribution Date occurring in each month (or, if in any such
month a Certificate Distribution Date occurs prior to such Note Distribution
Date, on such Certificate Distribution Date).
Market Agent
In connection with each Series of Notes and the Certificates, the
"Market Agent," will act solely as agent of the Trust and will not assume any
obligation or relationship of agency or trust for or with any of the
Securityholders.
AUCTION PROCEDURES
General
Pursuant to the related Terms Supplement and the Trust Agreement and
the related Trust Supplement, Auctions to establish the Auction Rate for each
Security issued by the Trust will be held on each applicable Auction Date,
except as described below, by application of the Auction Procedures described
herein. Such procedures are to be applicable separately to each Class of Notes
and each Class of Certificates.
The Auction Agent will calculate the Maximum Auction Rate, the All
Hold Rate and One-Month LIBOR or Three- Month LIBOR, as the case may be, on each
Auction Date. The Administrator will calculate and, no later than the Business
Day preceding each Auction Date, will report to the Auction Agent in writing,
the Net Loan Rate. If the ownership of a Security is no longer maintained in
Book-Entry Form, the Indenture Trustee will calculate the Maximum Auction Rate,
and Administrator will report to the Indenture Trustee in writing the Net Loan
Rate, on the Business Day immediately preceding the first day of each Interest
Period commencing after delivery of such Security. If an Event of Default has
occurred, the Indenture Trustee will calculate the Non-Payment Rate on the Rate
Determination Date for (i) each Interest Period commencing after the occurrence
and during the continuance of such Payment Default and (ii) any Interest Period
commencing less than two Business Days after the cure of any Event of Default.
The Auction Agent will determine One-Month LIBOR or the Three-Month LIBOR, as
applicable, for each Interest Period other than the Initial Period for a
Security; provided, that if the ownership of the Securities is no longer
maintained in Book-Entry Form, or if an Event of Default has occurred, then the
Indenture Trustee will determine the One-Month LIBOR or the Three-Month LIBOR,
as applicable, for each such Interest Period. The determination by the Indenture
Trustee or the Auction Agent, as the case may be, of the One-Month LIBOR or the
Three-Month LIBOR, as applicable, will (in the absence of manifest error) be
final and binding upon the Securityholders and all other parties. If calculated
or determined by the Auction Agent, the Auction Agent will promptly advise the
Indenture Trustee of the One- Month LIBOR or the Three-Month LIBOR, as
applicable.
Submission of Orders
So long as the ownership of the Securities is maintained in Book-Entry
Form, an Existing Securityholder may sell, transfer or otherwise dispose of
Securities only pursuant to a Bid or Sell Order (as hereinafter defined) placed
in an Auction or through a Broker-Dealer, provided that, in the case of all
transfers other than pursuant to Auctions, such Existing Securityholder, its
Broker-Dealer or its Participant advises the Auction Agent of such transfer.
Auctions for each Class of Notes and each Class of Certificates will be
conducted on each applicable Auction Date, if there is an Auction Agent on such
Auction Date, in the following manner (such procedures to be applicable
separately to each Class of Notes and each Class of Certificates).
Prior to the Submission Deadline (defined as 1:00 P.M., eastern time,
on any Auction Date or such other time on any Auction Date by which
Broker-Dealers are required to submit Orders to the Auction Agent as specified
by the Auction Agent from time to time) on each Auction Date relating to a
Security:
(a) each Existing Securityholder of the applicable Security may
submit to a Broker-Dealer by telephone or otherwise information as to: (i) the
principal amount and class of outstanding Securities, if any, held by such
Existing Securityholder which such Existing Securityholder desires to continue
to hold without regard to the Security Interest Rate for such Securities for the
next succeeding Auction Period (a "Hold Order"); (ii) the principal amount and
class of outstanding Securities, if any, which such Existing Securityholder
offers to sell if the Security Interest Rate for such Securities for the next
succeeding Auction Period will be less than the rate per annum specified by such
Existing Securityholder (a "Bid"); and/or (iii) the principal amount and class
of outstanding Securities, if any, held by such Existing Securityholder which
such Existing Securityholder offers to sell without regard to the Security
Interest Rate for such Securities for the next succeeding Auction Period (a
"Sell Order"); and
(b) one or more Broker-Dealers may contact Potential
Securityholders to determine the principal amount and class of Securities which
each such Potential Securityholder offers to purchase, if the Security Interest
Rate for such Securities for the next succeeding Auction Period will not be less
than the rate per annum specified by such Potential Securityholder (also a
"Bid").
Each Hold Order, Bid and Sell Order will be an "Order." Each Existing
Securityholder and each Potential Securityholder placing an Order is referred to
as a "Bidder."
Subject to the provisions described below under "Validity of Orders,"
a Bid by an Existing Securityholder will constitute an irrevocable offer to
sell: (i) the principal amount and class of the outstanding Securities specified
in such Bid if the Security Interest Rate for such Securities will be less than
the rate specified in such Bid, (ii) such principal amount or a lesser principal
amount and class of the outstanding Securities to be determined as described
below in "Acceptance and Rejection of Orders," if the Security Interest Rate for
such Securities will be equal to the rate specified in such Bid or (iii) such
principal amount or a lesser principal amount of the then outstanding Securities
to be determined as described below under "Acceptance and Rejection of Orders,"
if the rate specified therein will be higher than the Security Interest Rate for
such Securities and Sufficient Bids (as defined below) have not been made.
Subject to the provisions described below under "Validity of Orders,"
a Sell Order by an Existing Securityholder will constitute an irrevocable offer
to sell: (i) the principal amount of the Security specified in such Sell Order
or (ii) such
principal amount or a lesser principal amount of outstanding Securities of the
specified Security as described below under "Acceptance and Rejection of
Orders," if Sufficient Bids have not been made.
Subject to the provisions described below under "Validity of Orders,"
a Bid by a Potential Securityholder will constitute an irrevocable offer to
purchase: (i) the principal amount of the Security specified in such Bid if the
Security Interest Rate for such Securities will be higher than the rate
specified in such Bid or (ii) such principal amount or a lesser principal amount
of such Securities as described below in "Acceptance and Rejection of Orders,"
if the Security Interest Rate is equal to the rate specified in such Bid.
Each Broker-Dealer will submit in writing to the Auction Agent prior
to the Submission Deadline on each Auction Date all Orders obtained by such
Broker-Dealer and will specify with respect to each such Order: (i) the name of
the Bidder placing such Order; (ii) the aggregate principal amount and class of
Security that are the subject of such Order; (iii) to the extent that such
Bidder is an Existing Securityholder: (a) the principal amount and class of
Securities, if any, subject to any Hold Order placed by such Existing
Securityholder; (b) the principal amount, and class of Securities, if any,
subject to any Bid placed by such Existing Securityholder and the rate specified
in such Bid; and (c) the principal amount, and class of Securities, if any,
subject to any Sell Order placed by such Existing Securityholder, and (iv) to
the extent such Bidder is a Potential Securityholder, the rate specified in such
Potential Securityholder's Bid.
If any rate specified in any Bid contains more than three figures to
the right of the decimal point, the Auction Agent will round such rate up to the
next highest one-thousandth (.001) of one percent.
If an Order or Orders covering all Securities of the applicable class
held by any Existing Securityholder are not submitted to the Auction Agent prior
to the Submission Deadline, the Auction Agent will deem a Hold Order to have
been submitted on behalf of such Existing Securityholder covering the principal
amount of Securities held by such Existing Securityholder and not subject to an
Order submitted to the Auction Agent.
Neither the Trust, the Owner Trustee, the Indenture Trustee nor the
Auction Agent will be responsible for any failure of a Broker-Dealer to submit
an Order to the Auction Agent on behalf of any Existing Securityholder or
Potential Securityholder.
An Existing Securityholder may submit multiple Orders, of different
types and specifying different rates, in an Auction with respect to Securities
then held by such Existing Securityholder. An Existing Securityholder that
offers to purchase additional Securities is, for purposes of such offer,
treated as a Potential Securityholder.
Any Bid specifying a rate higher than the Maximum Auction Rate will
(i) be treated as a Sell Order if submitted by a Existing Securityholder and
(ii) not be accepted if submitted by a Potential Securityholder.
Validity of Orders
If any Existing Securityholder submits through a Broker-Dealer to the
Auction Agent one or more Orders covering in the aggregate more than the
principal amount of the class of Securities held by such Existing
Securityholder, such Orders will be considered valid as follows and in the order
of priority described below.
HOLD ORDERS. All Hold Orders will be considered valid, but only up to
the aggregate principal amount of the class of Securities held by such Existing
Securityholder, and if the aggregate principal amount of the class of Securities
subject to such Hold Orders exceeds the aggregate principal amount of the class
of Securities held by such Existing Securityholder, the aggregate principal
amount of the class of Securities subject to each such Hold Order will be
reduced pro rata so that the aggregate principal amount of the class of
Securities subject to all such Hold Orders equals the aggregate principal amount
of the class of Securities held by such Existing Securityholder.
BIDS. Any Bid will be considered valid up to an amount equal to the
excess of the principal amount of the class of Securities held by such Existing
Securityholder over the aggregate principal amount of such Security, subject to
any Hold Orders referred to above. Subject to the preceding sentence, if
multiple Bids with the same rate are submitted on behalf of such Existing
Securityholder and the aggregate principal amount of Securities subject to such
Bids is greater than such excess, such Bids will be considered valid up to an
amount equal to such excess. Subject to the two preceding sentences, if more
than one Bid with different rates are submitted on behalf of such Existing
Securityholder, such Bids will be considered valid first in the ascending order
of their respective rates until the highest rate is reached at which such excess
exists and then at such rate up to the amount of such excess. In any event, the
aggregate principal amount of Securities, if any, subject to Bids not valid
under the provisions described above will be treated as the subject of a Bid by
a Potential Securityholder at the rate therein specified.
SELL ORDERS. All Sell Orders will be considered valid up to an amount
equal to the excess of the principal amount of Securities of the class held by
such Existing Securityholder over the aggregate principal amount of Securities
subject to valid Hold Orders and valid Bids as referred to above.
If more than one Bid for a class of Security is submitted on behalf of
any Potential Securityholder, each Bid submitted will be a separate Bid with the
rate and principal amount therein specified. Any Bid or Sell Order submitted by
an Existing Securityholder covering an aggregate principal amount of Securities
not equal to an Authorized Denomination or an integral multiple thereof will be
rejected and will be deemed a Hold Order. Any Bid submitted by a Potential
Securityholder covering an aggregate principal amount of Securities not equal to
an Authorized Denomination or an integral multiple thereof will be rejected. Any
Order submitted in an Auction by a Broker-Dealer to the Auction Agent prior to
the Submission Deadline on any Auction Date will be irrevocable.
A Hold Order, a Bid or a Sell Order that has been determined valid
pursuant to the procedures described above is referred to as a "Submitted Hold
Order," a "Submitted Bid" and a "Submitted Sell Order," respectively
(collectively, "Submitted Orders").
Determination of Sufficient Bid and Bid Auction Rate
Not earlier than the Submission Deadline on each Auction Date, the
Auction Agent will assemble all valid Submitted Orders and will determine:
(a) for the applicable Security, the excess of the total
principal amount of such Securities over the sum of the aggregate principal
amount of such Securities subject to Submitted Hold Orders (such excess being
hereinafter referred to as the "Available Securities"); and
(b) from such Submitted Orders whether the aggregate principal
amount of Securities of such class subject to Submitted Bids by Potential
Securityholders specifying one or more rates equal to or lower than the Maximum
Auction Rate exceeds or is equal to the sum of (i) the aggregate principal
amount of Securities of such class subject to Submitted Bids by Existing
Securityholders specifying one or more rates higher than the Maximum Auction
Rate and (ii) the aggregate principal amount of Securities of such class subject
to Submitted Sell Orders (in the event such excess or such equality exists other
than because all of the Securities are subject to Submitted Hold Orders, such
Submitted Bids by Potential Securityholders above will be hereinafter referred
to collectively as "Sufficient Bids"); and
(c) if Sufficient Bids exist, the "Bid Auction Rate," which
will be the lowest rate specified in such Submitted Bids such that if:
(i) each such Submitted Bid from Existing
Securityholders of such Security specifying such lowest rate
and all other Submitted Bids from Existing Securityholders of
such Security specifying lower rates were rejected (thus
entitling such Existing Securityholders to continue to hold the
principal amount of Securities subject to such Submitted Bids);
and
(ii) each such Submitted Bid from Potential
Securityholders of such Security specifying such lowest rate
and all other Submitted Bids from Potential Securityholders
specifying lower rates, were
accepted, the result would be that such Existing
Securityholders described in subparagraph (c)(i) above
would continue to hold an aggregate principal amount of
Securities which, when added to the aggregate principal amount
of Securities to be purchased by such Potential Securityholders
described in this subparagraph (ii) would equal not less than
the Available Securities.
Determination of Auction Rate and Security Interest Rate, Notice
Promptly after the Auction Agent has made the determinations described
above, the Auction Agent is to advise the Indenture Trustee of the Net Loan
Rate, the Maximum Auction Rate, the All Hold Rate and the components thereof on
the Auction Date, and based on such determinations, the Auction Rate for the
next succeeding Interest Period for the applicable Security as follows:
(a) if Sufficient Bids exist, that the Auction Rate for the
next succeeding Interest Period will be equal to the Bid Auction Rate so
determined;
(b) if Sufficient Bids do not exist (other than because all of
the Securities of the applicable Security are subject to Submitted Hold Orders),
that the Auction Rate for the next succeeding Interest Period will be equal to
the Maximum Auction Rate; or
(c) if all Securities of the applicable Security are subject to
Submitted Hold Orders, that the Auction Rate for the next succeeding Interest
Period will be equal to the All Hold Rate.
Promptly after the Auction Agent has determined the Auction Rate, the
Auction Agent will determine and advise the Indenture Trustee of the Security
Interest Rate for each applicable Security, which rate will be the lesser of (a)
the Auction Rate for each such Security and (b) the Net Loan Rate. In no event
shall a Security Interest Rate exceed the rate (the "Security Interest Rate
Limitation") set forth in the related Prospectus Supplement (with respect to a
Class of Notes) or the Trust Agreement or the related Trust Supplement (with
respect to a Class of Certificates).
Acceptance and Rejection of Orders
Existing Securityholders of the applicable Security will continue to
hold the principal amount of Securities of such class that are subject to
Submitted Hold Orders. If, with respect to a Security, the Net Loan Rate is
equal to or greater than the Bid Auction Rate and if Sufficient Bids, as
described above under "Determination of Sufficient Bids and Bid Auction Rate,"
have been received by the Auction Agent, the Bid Auction Rate will be the
Security Interest Rate, and Submitted Bids and Submitted Sell Orders will be
accepted or rejected and the Auction Agent will take such other action as
provided in the Indenture and described below under "Sufficient Bids."
If the Net Loan Rate is less than the Auction Rate, the Security
Interest Rate will be the Net Loan Rate. If the Auction Rate and the Net Loan
Rate are both greater than the Security Interest Rate Limitation, the Security
Interest Rate for each series shall be equal to the Security Interest Rate
Limitation. If the Auction Agent has not received Sufficient Bids as described
above under "Determination of Sufficient Bids and Bid Auction Rate" (other than
because all of the Securities are subject to Submitted Holds Orders), the
Security Interest Rate will be the lesser of the Maximum Auction Rate or the Net
Loan Rate. In any of the cases described above in this paragraph, Submitted
Orders will be accepted or rejected and the
Auction Agent will take such other action as described below under
"Insufficient Bids."
SUFFICIENT BIDS. If Sufficient Bids have been made with a respect to a
Security and the Net Loan Rate is equal to or greater than the Bid Auction Rate
(in which case the Interest Rate shall be the Bid Auction Rate), all Submitted
Sell Orders will be accepted and, subject to the denomination requirements
described below, Submitted Bids will be accepted or rejected as follows in the
following order of priority and all other Submitted Bids will be rejected:
(a) Existing Securityholders' Submitted Bids specifying any
rate that is higher than the Security Interest Rate will be accepted, thus
requiring each such Existing Securityholder to sell the aggregate principal
amount of Securities subject to such Submitted Bids;
(b) Existing Securityholders' Submitted Bids specifying any
rate that is lower than the Security Interest Rate will be rejected, thus
entitling each such Existing Securityholder to continue to hold the aggregate
principal amount of Securities subject to such Submitted Bids;
(c) Potential Securityholders' Submitted Bids specifying any
rate that is lower than the Security Interest Rate will be accepted;
(d) Each Existing Securityholder's Submitted Bid specifying a
rate that is equal to the Security Interest Rate will be rejected, thus
entitling such Existing Securityholder to continue to hold the aggregate
principal amount of Securities subject to such Submitted Bid, unless the
aggregate principal amount of Securities subject to such Submitted Bids will be
greater than the principal amount of Securities (the "remaining principal
amount") equal to the excess of the Available Securities over the aggregate
principal amount of Securities subject to Submitted Bids described in
subparagraphs (b) and (c) above, in which event such Submitted Bid of such
Existing Securityholder will be rejected in part and such Existing
Securityholder will be entitled to continue to hold the principal amount of
Securities subject to such Submitted Bid, but only in an amount equal to the
aggregate principal amount of Securities obtained by multiplying the remaining
principal amount by a fraction, the numerator of which will be the principal
amount of Securities held by such Existing Securityholder subject to such
Submitted Bid and the denominator of which will be the sum of the principal
amount of Securities subject to such Submitted Bids made by all such Existing
Securityholders that specified a rate equal to the Security Interest Rate; and
(e) Each Potential Securityholder's Submitted Bid specifying a
rate that is equal to the Security Interest Rate will be accepted, but only in
an amount equal to the principal amount of Securities obtained by multiplying
the excess of the aggregate principal amount of Available Securities over the
aggregate principal amount of Securities subject to Submitted Bids described in
subparagraphs (b), (c) and (d) above by a fraction, the numerator of which will
be the aggregate principal amount of Securities subject to such Submitted Bid
and the denominator of which will be the sum of the principal amount of
Securities subject to Submitted Bids made by all such Potential Securityholders
that specified a rate equal to the Security Interest Rate.
INSUFFICIENT BIDS. If Sufficient Bids have not been made with respect
to a Security (other than because all of the Securities of such class are
subject to Submitted Hold Orders) or if the Net Loan Rate is less than the Bid
Auction Rate (in which case the Security Interest Rate shall be the Net Loan
Rate) or if the Security Interest Rate Limitation applies, subject to the
denomination requirements described below, Submitted Orders will be accepted or
rejected as follows in the following order of priority and all other Submitted
Bids will be rejected:
(a) Existing Securityholders' Submitted Bids specifying any
rate that is equal to or lower than the Security Interest Rate will be rejected,
thus entitling such Existing Securityholders to continue to hold the aggregate
principal amount of Securities subject to such Submitted Bids;
(b) Potential Securityholders' Submitted Bids specifying any
rate that is equal to or lower than the Security Interest Rate will be accepted,
and specifying any rate that is higher than the Security Interest Rate will be
rejected; and
(c) each Existing Securityholder's Submitted Bid specifying any
rate that is higher than the Security Interest Rate and the Submitted Sell Order
of each Existing Securityholder will be accepted, thus entitling each Existing
Securityholder that submitted any such Submitted Bid or Submitted Sell Order to
sell the Securities subject to such Submitted Bid or Submitted Sell Order, but
in both cases only in an amount equal to the aggregate principal amount of
Securities obtained by multiplying the aggregate principal amount of Securities
subject to Submitted Bids described in subparagraph (b) above by a fraction, the
numerator of which will be the aggregate principal amount of Securities held by
such Existing Securityholder subject to such Submitted Bid or Submitted Sell
Order and the denominator of which will be the aggregate principal amount of
Securities subject to all such Submitted Bids and Submitted Sell Orders.
ALL HOLD ORDERS. If all Securities of a class are subject
to Submitted Hold Orders, all Submitted Bids will be rejected.
AUTHORIZED DENOMINATIONS REQUIREMENT. If, as a result of the
procedures described above regarding Sufficient Bids and Insufficient Bids, any
Existing Securityholder would be entitled or required to sell, or any Potential
Securityholder would be entitled or required to purchase, a principal amount of
Securities that is not equal to an Authorized Denomination or an integral
multiple thereof, the Auction Agent will, in such manner as in its sole
discretion it will determine, round up or down the principal amount of
Securities to be purchased or sold by any Existing Securityholder or Potential
Securityholder so that the principal amount of Securities purchased or sold by
each Existing Securityholder or Potential Securityholder will be equal to an
Authorized Denomination or an integral multiple in excess thereof. If, as a
result of the procedures described above regarding Insufficient Bids, any
Potential Securityholder would be entitled or required to purchase less than a
principal amount of Securities equal to an Authorized Denomination or any
integral multiple thereof, the Auction Agent will, in such manner as in its sole
discretion it will determine, allocate Securities for purchase among Potential
Securityholders so that only Securities in an Authorized Denomination or any
integral multiples in excess thereof are purchased by any Potential
Securityholder, even if such allocation results in one or more of such Potential
Securityholders not purchasing any Securities.
Based on the results of each Auction, the Auction Agent is to
determine the aggregate principal amount of Securities of each class to be
purchased and the aggregate principal amount of Securities of each class to be
sold by Potential Securityholders and Existing Securityholders on whose behalf
each Broker-Dealer submitted Bids or Sell Orders and, with respect to each
Broker-Dealer, to the extent that such aggregate principal amount of Securities
to be sold differs from such aggregate principal amount of Securities to be
purchased, determine to which other Broker-Dealer or Broker-Dealers acting for
one or more purchasers such Broker-Dealer will deliver, or from which
Broker-Dealers acting for one or more sellers such Broker-Dealer will receive,
as the case may be, Securities.
Any calculation by the Auction Agent (or the Indenture Trustee, if
applicable) of the Security Interest Rate, One- Month LIBOR, Three-Month LIBOR,
the Maximum Auction Rate, the All Hold Rate, the Net Loan Rate and the
Non-Payment Rate will, in the absence of manifest error, be binding on all other
parties.
Notwithstanding anything in the Master Indenture, a related Terms
Supplement or the Trust Agreement to the contrary, no Auction is to be held on
any Auction Date on which there are insufficient moneys held by the Indenture
Trustee under the Master Indenture and available to pay the principal of and
interest due on the applicable Security on the Note Distribution Date or
Certificate Distribution Date immediately following such Auction Date.
Settlement Procedures
The Auction Agent is required to advise each Broker-Dealer that
submitted an Order in an Auction of the Security Interest Rate for a Security
for the next Interest Period and, if such Order was a Bid or Sell Order, whether
such Bid or Sell Order was accepted or rejected, in whole or in part, by
telephone not later than 3:00 pm., eastern time, on the Auction Date if the
Interest Rate is the Auction Rate and not later than 4:00 pm. eastern time on
the Auction Date if the Interest Rate is the Net Loan Rate. Each Broker-Dealer
that submitted an Order on behalf of a Bidder is required to then advise such
Bidder of the applicable Security Interest Rate for the next Interest Period
and, if such Order was a Bid or a Sell Order, whether such Bid or Sell Order was
accepted or rejected, in whole or in part, confirm purchases and sales with each
Bidder purchasing or selling Securities as a result of the Auction and advise
each Bidder purchasing or selling Securities as a result of the Auction to give
instructions to its Participant to pay the purchase price against delivery of
such Securities or to deliver such Securities against payment therefor, as
appropriate. Pursuant to the Auction Agent Agreement, the Auction Agent is to
record each transfer of Securities on the Existing Securityholders Registry to
be maintained by the Auction Agent.
In accordance with DTC's normal procedures, on the Business Day after
the Auction Date, the transactions described above will be executed through DTC,
so long as DTC is the Depository, and the accounts of the respective
Participants at DTC will be debited and credited and Securities delivered as
necessary to effect the purchases and sales of Securities as determined in the
Auction. Purchasers are required to make payment through their Participants in
same-day funds to DTC against delivery through their Participants. DTC will make
payment in accordance with its normal procedures, which now provide for payment
against delivery by its Participants in immediately available funds.
If any Existing Securityholder selling Securities in an Auction fails
to deliver such Securities, the Broker-Dealer of any person that was to have
purchased Securities in such Auction may deliver to such person a principal
amount of Securities that is less than the principal amount of Securities that
otherwise was to be purchased by such person but in any event equal to an
Authorized Denomination or any integral multiple thereof. In such event, the
principal amount of Securities to be delivered will be determined by such
Broker-Dealer. Delivery of such lesser principal amount of Securities will
constitute good delivery. Neither the Indenture Trustee nor the Auction Agent
will have any responsibility or liability with respect to the failure of a
Potential Securityholder, Existing Securityholder or their respective
Broker-Dealer or Participant to deliver the principal amount of Securities or to
pay for the Securities purchased or sold pursuant to an Auction or otherwise.
For a further description of the settlement procedures, see "SETTLEMENT
PROCEDURES."
INDENTURE TRUSTEE NOT RESPONSIBLE FOR AUCTION AGENT, MARKET AGENT AND
BROKER-DEALERS
The Indenture Trustee shall not be liable or responsible for the
actions of or failure to act by the Auction Agent, Market Agent or any
Broker-Dealer under the Master Indenture, the related Terms Supplement or under
the Auction Agent Agreement, the Market Agent Agreement or any Broker-Dealer
Agreement. The Indenture Trustee may conclusively rely upon any information
required to be furnished by the Auction Agent, the Market Agent or any
Broker-Dealer without undertaking any independent review or investigation of the
truth or accuracy of such information.
CHANGES IN AUCTION TERMS
Changes in Auction Period or Periods
While any of the Securities are outstanding, the Administrator, may,
from time to time, change the length of the one or more Auction Periods in order
to conform with then current market practice with respect to similar securities
or to accommodate economic and financial factors that may affect or be relevant
to the length of the Auction Period and the interest rate borne by the
Securities (an "Auction Period Adjustment"). The Administrator will not initiate
such change in the length of the Auction Period unless it shall have received
the written consent from the Market Agent, which consent will not be
unreasonably withheld, not less than three days nor more than 20 days prior to
the effective date of an Auction Period Adjustment. The Administrator will
initiate an Auction Period Adjustment by giving written notice to the Indenture
Trustee, the Auction Agent, the Market Agent, the Surety Provider and the
Securities Depository in substantially the form of, or containing substantially
the information contained in, the Indenture at least 10 days prior to the
Auction Date for such Auction Period.
Any such Auction Period Adjustment shall not result in an Auction
Period of less than 7 days nor more than 91 days. If any such Auction Period
Adjustment will result in an Auction Period of less than the number of days in
the then current Auction Period, the notice described above will be effective
only if it is accompanied by a written statement of the Indenture Trustee, the
Eligible Lender Trustee, the Auction Agent and the Depository to the effect that
they are capable of performing their duties, if any, under the Indenture, the
Auction Agent Agreement and any Broker-Dealer Agreement with respect to such
changed Auction Period.
An Auction Period Adjustment will take effect only if (A) the
Indenture Trustee and the Auction Agent receive, by 11:00 A.M., eastern time, on
the Business Day before the Auction Date for the first such Auction Period, a
certificate from the Trust authorizing an Auction Period Adjustment specified in
such certificate, the certificate of the Market Agent described above and the
written statement of the Indenture Trustee, the Eligible Lender Trustee, the
Auction Agent and the Securities Depository described above and (B) Sufficient
Bids exist at the Auction on the Auction Date for such first Auction Period. If
the condition referred to in (A) is not met, the Security Interest Rate
applicable for the next Auction Period will be determined pursuant to the
Auction Procedures and the Auction Period will be the Auction Period determined
without reference to the proposed change. If the condition referred to in (A) is
met, but the condition referred to in (B) above is not met, the Security
Interest Rate applicable for the next Auction Period will be the lesser of the
Maximum Auction Rate and the Net Loan Rate and the Auction Period will be the
Auction Period determined without reference to the proposed change.
Changes in the Auction Date
The Market Agent, at the written direction of the Trust, may specify
an earlier Auction Date (but in no event more than five Business Days earlier)
than the Auction Date that would otherwise be determined in accordance with the
definition of "Auction Date" with respect to one or more specified Auction
Periods in order to conform with then current market practice with respect to
similar securities or to accommodate economic and financial factors that may
affect or be relevant to the day of the week constituting an Auction Date and
the interest rate borne on the Securities. The Trust will not consent to such
change in the Auction Date unless the Trust will have received from the Market
Agent not less than three days nor more than 20 days prior to the effective date
of such change a written request for consent together with a certificate
demonstrating the need for change in reliance on such factors. The Market Agent
will provide notice of its determination to specify an earlier Auction Date for
one or more Auction Periods by means of a written notice delivered at least 10
days prior to the proposed changed Auction Date to the Indenture Trustee, the
Auction Agent, the Trust and the Depository.
The changes in Auction terms described above may be made with respect
to any class of the Securities. In connection with any change in Auction Terms
described above, the Auction Agent is to provide such further notice to such
parties as is specified in the Auction Agent Agreement.
<PAGE>
APPENDIX II
SETTLEMENT PROCEDURES
These Settlement Procedures apply separately to each class of Securities.
(a) Not later than (i) 3:00 P.M. if the Security Interest Rate is the
Auction Rate or (2) 4:00 p.m. if the Security Interest Rate is the Net Loan
Rate, the Auction Agent is to notify by telephone each Broker-Dealer that
participated in the Auction held on such Auction Date and submitted an Order on
behalf of an Existing Securityholder or Potential Securityholder of:
(i) the Security Interest Rate fixed for the next
Interest Period;
(ii) whether there were Sufficient Bids in such
Auction;
(iii) if such Broker-Dealer (a "Seller's Broker-Dealer")
submitted Bids or Sell Orders on behalf of an Existing Securityholder,
whether such Bid or Sell Order was accepted or rejected, in whole or
in part, and the principal amount of Securities, if any, to be sold by
such Existing Securityholder;
(iv) if such Broker-Dealer (a "Buyer's Broker-Dealer")
submitted a Bid on behalf of a Potential Securityholder, whether such
Bid was accepted or rejected, in whole or in part, and the principal
amount of Securities, if any, to be purchased by such Potential
Securityholder;
(v) if the aggregate amount of Securities to be sold by all
Existing Securityholders on whose behalf such Seller's Broker-Dealer
submitted Bids or Sell Orders exceeds the aggregate principal amount
of Securities to be purchased by all Potential Securityholders on
whose behalf such Buyer's Broker-Dealer submitted a Bid, the name or
names of one or more Buyer's Broker-Dealers and the name of the
Participant, if any, of each such Buyer's Broker-Dealer (an
"Participant") acting for one or more purchasers of such excess
principal amount of Securities and the principal amount of Securities
to be purchased from one or more Existing Securityholders on whose
behalf such Seller's Broker-Dealer acted by one or more Potential
Securityholders on whose behalf each of such Buyer's Broker-Dealers
acted;
(vi) if the principal amount of Securities to be
purchased by all Potential Securityholders on whose behalf
such Buyer's Broker-Dealer submitted a Bid exceeds the amount of
Securities to be sold by all Existing Securityholders on whose behalf
such Seller's Broker-Dealer submitted a Bid or a Sell Order, the name
or names of one or more Seller's Broker-Dealers (and the name of the
Participant, if any, of each such Seller's Broker-Dealer) acting for
one or more sellers of such excess principal amount of Securities and
the principal amount of Securities to be sold to one or more Potential
Securityholders on whose behalf such Buyer's Broker-Dealer acted by
one or more Existing Securityholder on whose behalf each of such
Seller's Broker-Dealers acted; and
(vii) the Auction Date for the next succeeding
Auction.
(b) On each Auction Date, each Broker-Dealer that submitted an Order
on behalf of any Existing Securityholder or Potential Securityholder is to:
(i) advise each Existing Securityholder and Potential
Securityholder on whose behalf such Broker-Dealer submitted a Bid or
Sell Order in the Auction on such Auction Date whether such Bid or
Sell Order was accepted or rejected, in whole or in part;
(ii) in the case of a Broker-Dealer that is a Buyer's
Broker-Dealer, advise each Potential Securityholder on whose behalf
such Buyer's Broker-Dealer submitted a Bid that was accepted, in whole
or in part, to instruct such Potential Securityholder's Participant to
pay to such Buyer's Broker-Dealer (or its Participant) through the
Depository the amount necessary to purchase the principal amount of
the Securities to be purchased pursuant to such Bid against receipt of
such Securities together with accrued interest;
(iii) in the case of a Broker-Dealer that is a Seller's
Broker-Dealer, instruct each Existing Securityholder on whose behalf
such Seller's Broker-Dealer submitted a Sell Order that was accepted,
in whole or in part, or a Bid that was accepted, in whole or in part,
to instruct such Existing Securityholder's Participant to deliver to
such Seller's Broker-Dealer (or its Participant) through the
Depository the principal amount of the Securities to be sold pursuant
to such Order against payment therefor;
(iv) advise each Existing Securityholder on whose behalf such
Broker-Dealer submitted an Order and each Potential Securityholder on
whose behalf such Broker-Dealer submitted a Bid of the Security
Interest Rate for the next Interest Period;
(v) advise each Existing Securityholder on whose
behalf such Broker-Dealer submitted an Order of the next
Auction Date; and
(vi) advise each Potential Securityholder on whose behalf such
Broker-Dealer submitted a Bid that was accepted, in whole or in part,
of the next Auction Date.
(c) On the basis of the information provided to it pursuant to
paragraph (a) above, each Broker-Dealer that submitted a Bid or Sell Order in an
Auction is required to allocate any funds received by it in connection with such
Auction pursuant to paragraph (b)(ii) above, and any Securities received by it
in connection with such Auction pursuant to paragraph (b)(iii) above, among the
Potential Securityholders, if any, on whose behalf such Broker-Dealer submitted
Bids, the Existing Securityholder, if any, on whose behalf such Broker-Dealer
submitted Bids or Sell Orders in such Auction, and any Broker- Dealers
identified to it by the Auction Agent following such Auction pursuant to
paragraph (a)(v) or (a)(vi) above.
(d) On each Auction Date:
(i) each Potential Securityholder and Existing Securityholder
with an Order in the Auction on such Auction Date will instruct its
Participant as provided in (b)(ii) or (b)(iii) above, as the case may
be:
(ii) each Seller's Broker-Dealer that is not a Participant of
the Depository will instruct its Participant to deliver such
Securities through the Depository to a Buyer's Broker-Dealer (or its
Participant) identified to such Seller's Broker-Dealer pursuant to
(a)(v) above against payment therefor; and
(iii) each Buyer's Broker-Dealer that is not a Participant in
the Depository will instruct its Participant to pay through the
Depository to Seller's Broker-Dealer (or its Participant) identified
following such Auction pursuant to (a)(vi) above the amount necessary
to purchase the Securities to be purchased pursuant to (b)(ii) above
against receipt of such Securities.
(e) On the Business Day following each Auction Date;
(i) each Participant for a Bidder in the Auction on such
Auction Date referred to in (d)(i) above will instruct the Depository
to execute the transactions described under (b)(ii) or (b)(iii) above
for such Auction, and the Depository will execute such transactions;
(ii) each Seller's Broker-Dealer or its Participant will
instruct the Depository to execute the transactions described in
(d)(ii) above for such Auction, and the Depository will execute such
transactions; and
(iii) each Buyer's Broker-Dealer or its Participant will
instruct the Depository to execute the transactions described in
(d)(iii) above for such Auction, and the Depository will execute such
transactions.
(f) If an Existing Securityholder selling Securities in an Auction
fails to deliver such Securities (by authorized book-entry), a Broker-Dealer may
deliver to the Potential Securityholder on behalf of which it submitted a Bid
that was accepted a principal amount of Securities that is less than the
principal amount of Securities that otherwise was to be purchased by such
Potential Securityholder. In such event, the principal amount of Securities to
be so delivered will be determined solely by such Broker-Dealer (but only in
Authorized Denominations). Delivery of such lesser principal amount of
Securities will constitute good delivery. Notwithstanding the foregoing terms of
this paragraph (f), any delivery or nondelivery of Securities which will
represent any departure from the results of an Auction, as determined by the
Auction Agent, will be of no effect unless and until the Auction Agent will have
been notified of such delivery or nondelivery in accordance with the provisions
of the Auction Agent Agreement and the Broker-Dealer Agreements. Neither the
Indenture Trustee nor the Auction Agent will have any responsibility or
liability with respect to the failure of a Potential Securityholder, Existing
Securityholder or their Respective Broker-Dealer or Participant to take delivery
of or deliver, as the case may be, the principal amount of the Securities
purchased or sold pursuant to an Auction or otherwise.
<PAGE>
NO DEALER, SALESMAN OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE SELLER, THE MONEY STORE INC. OR THE UNDERWRITERS. THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS DO NOT CONSTITUTE AN OFFER
TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE NOTES
OFFERED HEREBY NOR AN OFFER OF SUCH NOTES TO ANY PERSON IN ANY STATE OR OTHER
JURISDICTION IN WHICH SUCH OFFER WOULD BE UNLAWFUL. THE DELIVERY OF THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS AT ANY TIME DOES NOT IMPLY
THAT INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
TABLE OF CONTENTS
PAGE
PROSPECTUS SUPPLEMENT
Terms of the Series 1996-2 Notes ................. S-2
Previously Issued Securities...................... S-7
Underwriting ..................................... S-8
Annex A - Certain Characteristics of
the Financed Student Loans ..................... A-1
Annex B - Certain Information Relating
to the Guarantors............................... B-1
PROSPECTUS
Prospectus Supplement.............................. iv
Available Information.............................. iv
Reports to Securityholders......................... iv
Incorporation of Certain Documents of Reference.... v
Summary of Terms .................................. 1
Risk Factors ...................................... 29
Formation of Trust ................................ 37
Use of Proceeds ................................... 38
The Seller and the Money Store .................... 38
Pennsylvania Higher Education Assistance Agency ... 39
The Student Loan Financing Business ............... 39
The Financed Student Loan Pool .................... 57
Description of the Securities ..................... 63
Description of the Transfer and Servicing Agreements 74
Description of the Surety Bonds ................... 93
Certain Legal Aspects of the Financed Student Loans 96
Certain Tax Consequences .......................... 98
ERISA Considerations ............................. 105
Plan of Distribution.............................. 106
Experts .......................................... 106
Legal Matters .................................... 106
Financial Information ............................ 107
Rating............................................ 107
Index of Principal Terms ......................... 108
Appendix I - Auction Procedures
Appendix II - Settlement Procedures
<PAGE>
$140,000,000
[THE MONEY STORE LOGO]
CLASSNOTES TRUST 1995-I
(F/K/A EDUCATION LOAN ALLIANCE 1995-I)
SERIES 1996-2
$140,000,000 LIBOR RATE CLASS A-9 NOTES
PROSPECTUS SUPPLEMENT
SMITH BARNEY INC.
CREDIT SUISSE FIRST BOSTON
December 26, 1996
