<PAGE>
Rule 424(b)(5)
File No. 333-26051
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED JUNE 24, 1997)
$125,000,000
AMERUS HOME EQUITY LOAN TRUST 1997-1
AMERUS BANK
ORIGINATOR
AMERUS LIFE INSURANCE COMPANY
SELLER AND SERVICER
BEAR STEARNS ASSET BACKED SECURITIES, INC.
DEPOSITOR
------------------------
The AmerUs Home Equity Loan Asset-Backed Certificates, Series 1997-1
(collectively, the 'Certificates'), will consist of the Classes identified in
the chart below (the 'Offered Certificates') as well as an additional Class of
Certificates which is not being offered for sale hereunder. The Certificates
will evidence in the aggregate the entire beneficial interest in AmerUs Home
Equity Loan Trust 1997-1 (the 'Trust') to be formed pursuant to a Pooling and
Servicing Agreement (the 'Agreement') among Bear Stearns Asset Backed
Securities, Inc., as Depositor (the 'Depositor'), AmerUs Life Insurance Company,
as Servicer (the 'Servicer'), and The Bank of New York, as Trustee (the
'Trustee').
The Offered Certificates will have the benefit of an irrevocable and
unconditional certificate guaranty insurance policy (the 'Policy') issued by
Ambac Assurance Corporation (the 'Certificate Insurer') pursuant to which the
Certificate Insurer will guarantee certain payments to the holders of the
Offered Certificates as described herein. See 'THE POLICY AND THE CERTIFICATE
INSURER' herein.
[LOGO]
(cover continued on next page)
------------------------
SEE 'RISK FACTORS' HEREIN ON PAGE S-10 AND IN THE PROSPECTUS ON PAGE 15 FOR
CERTAIN FACTORS TO BE CONSIDERED IN PURCHASING THE OFFERED CERTIFICATES.
THE CERTIFICATES DO NOT REPRESENT AN OBLIGATION OF OR INTEREST IN THE DEPOSITOR,
THE ORIGINATOR, THE SELLER, THE SERVICER, THE TRUSTEE OR ANY OF THEIR
RESPECTIVE AFFILIATES. THE CERTIFICATES ARE NOT SAVINGS ACCOUNTS
AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION.
NEITHER THE CERTIFICATES NOR THE UNDERLYING HOME EQUITY LOANS
ARE INSURED OR GUARANTEED BY ANY GOVERNMENTAL ENTITY, THE
DEPOSITOR, THE ORIGINATOR, THE SELLER, THE SERVICER OR
ANY OF THEIR AFFILIATES.
THESE 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 SUPPLEMENT OR THE
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
INITIAL CLASS CERTIFICATE PRICE TO UNDERWRITING PROCEEDS TO
CERTIFICATE BALANCE RATE PUBLIC(1) DISCOUNT DEPOSITOR(1)(2)
<S> <C> <C> <C> <C> <C>
Class A-1 Certificates................ $ 50,000,000.00 (3) 100.00000% 0.275% 99.72500%
Class A-2 Certificates................ $ 36,000,000.00 6.59% 99.98653% 0.350% 99.63653%
Class A-3 Certificates................ $ 21,000,000.00 6.80% 99.97685% 0.450% 99.52685%
Class A-4 Certificates................ $ 18,000,000.00 7.09% 99.99700% 0.6125% 99.38450%
Total................................. $125,000,000.00 $124,989,749.30 $468,207.84 $124,521,541.46
</TABLE>
(1) Plus, for each Class of Offered Certificates (other than the Class A-1
Certificates), accrued interest, if any, at the applicable rate, from
October 1, 1997 to but not including the Closing Date.
(2) Before deducting expenses, estimated to be $350,000.
(3) The Class A-1 Certificates will bear interest at a variable rate based on
'One-Month LIBOR' as described under 'DESCRIPTION OF THE CERTIFICATES'
herein.
------------------------
The Offered Certificates are offered by Bear, Stearns & Co. Inc. (the
'Underwriter') when, as and if issued, delivered to and accepted by the
Underwriter and subject to certain other conditions. See 'Underwriting' herein.
It is expected that delivery of the Offered Certificates will be made in book
entry form only, through the Same Day Funds Settlement System of The Depository
Trust Company, on or about October 24, 1997.
BEAR, STEARNS & CO. INC.
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS OCTOBER 17, 1997.
<PAGE>
(cover page continued)
The property of the Trust will include a pool (the "Pool") of
non-conforming, fixed rate, closed-end home equity loans (the "Initial Home
Equity Loans"). The Trust also will include approximately $30,947,779 on deposit
in the Pre-Funding Account which will be used to purchase additional home equity
loans (the "Subsequent Home Equity Loans," and together with the Initial Home
Equity Loans, the "Home Equity Loans") from time to time as described herein and
funds on deposit in the Capitalized Interest Account. The Home Equity Loans are
secured by either first or second mortgages or deeds of trust primarily on
one-to four-family residential properties.
Distributions of principal and interest on the Offered Certificates
will be made on the 15th day of each month or, if such day is not a Business
Day, then on the succeeding Business Day (each, a "Distribution Date"),
commencing in November 1997. On each Distribution Date, holders of the Offered
Certificates will be entitled to receive, from and to the extent of funds
available in the Distribution Account (as defined herein), distributions with
respect to interest and principal calculated as set forth herein. See
"DESCRIPTION OF THE CERTIFICATES" herein.
There is currently no secondary market for the Offered Certificates.
The Underwriter intends to establish a market in the Offered Certificates but is
not obligated to do so. There can be no assurance that a secondary market for
any of the Offered Certificates will develop, or if one does develop, that it
will continue or offer sufficient liquidity of investment.
The yield to investors in each Class of Offered Certificates will be
sensitive in varying degrees to the rate and timing of principal payments
(including prepayments) on the Home Equity Loans, which generally may be prepaid
in full or in part at any time without penalty. The yield to maturity of a Class
of Offered Certificates purchased at a discount or premium will be more
sensitive to the rate and timing of payments thereon. Holders of the Offered
Certificates should consider, in the case of any such Certificates purchased at
a discount, the risk that a slower than anticipated rate of principal payments
could result in an actual yield that is lower than the anticipated yield and, in
the case of any Offered Certificates purchased at a premium, the risk that a
faster than anticipated rate of principal payments could result in an actual
yield that is lower than the anticipated yield. No representation is made as to
the anticipated rate of prepayments on the Home Equity Loans or as to the
resulting yield to maturity of any Class of Offered Certificates.
An election will be made to treat certain assets of the Trust as a real
estate mortgage investment conduit (a "REMIC") for federal income tax purposes.
As described more fully herein and in the Prospectus, the Offered Certificates
will be designated as "regular interests" in a REMIC. See "CERTAIN FEDERAL
INCOME TAX CONSEQUENCES" in the Prospectus.
----------------------
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR
ENDORSED THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS
UNLAWFUL.
----------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE
OFFERED CERTIFICATES. SUCH TRANSACTIONS MAY INCLUDE STABILIZING BIDS, SYNDICATE
COVERING TRANSACTIONS AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF
THESE ACTIVITIES, SEE "UNDERWRITING."
----------------------
The Certificates offered by this Prospectus Supplement constitute a
separate series of Securities being offered by the Depositor pursuant to its
Prospectus dated June 24, 1997, 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 this Prospectus
Supplement in full.
(ii)
<PAGE>
To the extent statements contained herein do not relate to historical
or current information, this Prospectus Supplement may be deemed to consist of
forward looking statements that involve risks and uncertainties that may
adversely affect the distributions to be made on, or the yield of, the Offered
Certificates, which risks and uncertainties are discussed under "RISK FACTORS"
and "PREPAYMENT AND YIELD CONSIDERATIONS." As a consequence, no assurance can be
given as to the actual distributions on, or the yield of, any Class of the
Offered Certificates.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
There are incorporated herein by reference all documents filed by the
Depositor with the Securities and Exchange Commission pursuant to Sections
13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as amended, on
or subsequent to the date of this Prospectus Supplement and prior to the
termination of the offering of the Offered Certificates. The Depositor will
provide without charge to each person to whom this Prospectus Supplement and
Prospectus are delivered, on request of such person, a copy of any or all of the
documents incorporated herein by reference other than the exhibits to such
documents (unless such exhibits are specifically incorporated by reference in
such documents). Requests should be made in writing to Jonathan Lieberman, Vice
President of Bear Stearns Asset Backed Securities, Inc., at 245 Park Avenue, 4th
Floor, New York, New York 10167.
(iii)
<PAGE>
(This page has been left blank intentionally)
<PAGE>
SUMMARY OF TERMS
The following summary of certain pertinent information is qualified in
its entirety by reference to the detailed information appearing elsewhere in
this Prospectus Supplement and in the accompanying Prospectus. Capitalized terms
used but not defined herein or in the accompanying Prospectus are defined in the
"GLOSSARY OF TERMS" in the Prospectus. Reference is made to the "INDEX OF
DEFINED TERMS" in the Prospectus Supplement.
Trust...............................AmerUs Home Equity Loan Trust 1997-1 (the
"Trust") will be formed pursuant to a
Pooling and Servicing Agreement (the
"Agreement"), to be dated as of October 1,
1997 (the "Cut-Off Date"), among Bear
Stearns Asset Backed Securities, Inc., as
depositor (the "Depositor"), AmerUs Life
Insurance Company, as servicer (together
with any successor in such capacity, the
"Servicer"), and The Bank of New York, as
trustee (the "Trustee"). AmerUs Bank has
been initially appointed as subservicer by
the Servicer and will perform certain
servicing functions under the Agreement. The
property of the Trust will include: a pool
(the "Pool") of non-conforming, fixed rate,
closed-end home equity loans (the "Home
Equity Loans"), secured by either first or
second mortgages or deeds of trust primarily
on one- to four- family residential
properties (the "Mortgaged Properties");
payments in respect of the Home Equity Loans
received on and after the Cut-Off Date;
property that secured a Home Equity Loan
which has been acquired by foreclosure or
deed in lieu of foreclosure; rights under
certain hazard insurance policies covering
the Mortgaged Properties; rights of the
beneficiary under credit life insurance
policies (including any applicable surrender
value) related to the Home Equity Loans;
funds on deposit in the Pre-Funding Account
and the Capitalized Interest Account (each
as defined below); the Depositor's rights
under the Purchase Agreement (defined
herein); and certain other property, as
described more fully herein. In addition,
the Depositor will cause the Certificate
Insurer (as defined below) to issue an
irrevocable and unconditional certificate
guaranty insurance policy (the "Policy") for
the benefit of the Holders of the Offered
Certificates pursuant to which the
Certificate Insurer will guarantee certain
payments to such Holders as described
herein. The Trust is one of the Trust Funds
referred to in the Prospectus.
Securities Offered .................The AmerUs Home Equity Loan Asset-Backed
Certificates, Series 1997-1 (the
"Certificates") will consist of the Class
A-1, Class A-2, Class A-3 and Class A-4
Certificates (collectively, the "Offered
Certificates") and the Class R Certificates.
Only the Offered Certificates are offered
hereby. Any information contained herein
regarding the Class R Certificates is
included solely to permit a better
understanding of the Offered Certificates.
Each Class of Offered Certificates
represents the right to receive payments of
interest at the per annum rate (the
"Certificate Rate") set forth or described
on the cover page hereof and payable
monthly, and payments of principal to the
extent provided below. The Offered
Certificates will be offered for purchase in
minimum dollar denominations of $25,000 and
integral multiples of $1,000 in excess
thereof, provided, however, that one
Certificate of each Class of Offered
Certificates may be issued in an amount
representing the remainder, if any, of such
Class. The "Percentage Interest" evidenced
by an Offered Certificate will be equal to
the percentage derived by dividing the
denomination of such Certificate by the
aggregate denomination of all Certificates
of the same Class as such Certificate.
Registration of the The
Offered Certificates................The Offered Certificates initially will be
represented by one or more certificates
registered in the name of Cede & Co., the
nominee of The Depository Trust Company
("DTC"), and will be available only in the
form of book-entries on the records of DTC,
participating members thereof
("Participants") and other entities, such as
banks, brokers, dealers and trust companies
that clear through or maintain custodial
relationships with a Participant, either
directly or indirectly ("Indirect
Participants"). References herein to
"Holders" reflect the rights of
S-1
<PAGE>
owners of the Offered Certificates only as
they may indirectly exercise such rights
through DTC and Participants, except as
otherwise specified herein. See "RISK
FACTORS-Book-Entry Registration May Affect
Liquidity" and "DESCRIPTION OF THE
CERTIFICATES-Book-Entry Registration"
herein.
Distribution and Record Dates.......Distributions will be made on the 15th day
of each month or, if such 15th day is not a
Business Day, on the succeeding Business Day
(each, a "Distribution Date"), commencing in
November 1997. Distributions on a
Distribution Date will be made to Holders of
record as of the last Business Day of the
month preceding the month in which such
Distribution Date occurs (each, a "Record
Date").
Depositor...........................Bear Stearns Asset Backed Securities, Inc.
(the "Depositor"), a wholly-owned, special
purpose subsidiary of The Bear Stearns
Companies Inc. None of The Bear Stearns
Companies Inc., any other affiliate of the
Depositor, the Seller, the Servicer, the
Trustee or the Originator has guaranteed or
is otherwise obligated with respect to the
Certificates. See "THE DEPOSITOR" in the
Prospectus.
Originator..........................AmerUs Bank, a federal savings bank
chartered under the laws of the United
States. AmerUs Bank is a subsidiary of the
AmerUs Group Co. ("AmerUs Group"), an Iowa
corporation. All of the Home Equity Loans
originally delivered to the Trust (the
"Initial Home Equity Loans") were, and any
Subsequent Home Equity Loans (as defined
below) will be, originated by AmerUs Bank in
the ordinary course of its business. The
Home Equity Loans have been and will be
acquired by the Seller, and subsequently
acquired by the Depositor, in privately
negotiated transactions preceding the
delivery of such Home Equity Loans to the
Trust. AmerUs Bank's corporate headquarters
are located at 418 Sixth Avenue, Des Moines,
Iowa 50309-2499 and its telephone number is
(515) 283-2151. See "THE ORIGINATOR AND THE
SUBSERVICER" herein.
Seller and Servicer.................AmerUs Life Insurance Company, an Iowa
stock life insurance company. AmerUs Life
Holdings, Inc., an Iowa corporation ("AmerUs
Holdings"), owns a majority of the stock in
AmerUs Life. AmerUs Holdings is a subsidiary
of AmerUs Group though neither AmerUs
Holdings nor the Originator are a direct or
indirect parent or subsidiary of the other.
See "THE SERVICER" herein.
Trustee.............................The Bank of New York, a banking corporation
organized and existing under the laws of
the State of New York, will act as trustee
(the "Trustee").
Cut-Off Date........................The opening of business on October 1, 1997.
Closing Date........................On or about October 24, 1997.
The Home Equity Loans...............The Home Equity Loans consist of promissory
notes or other evidences of indebtedness
(the "Mortgage Notes") secured by mortgages,
deeds of trust or other instruments (the
"Mortgages") creating either first or second
liens primarily on one- to four-family
residential properties (the "Mortgaged
Properties"). The Home Equity Loans are the
Mortgage Loans referred to in the
Prospectus. The Home Equity Loans bear fixed
rates (each, a "Loan Rate"). Interest on
each fixed rate Home Equity Loan is
calculated on the "simple interest" or "date
of payment" method. Monthly payments are due
on the date of the month specified in the
related Mortgage Note (each, a "Due Date").
The Due Dates for the Home Equity Loans
occur throughout the month. Except for the
Balloon Loans (defined herein), the Home
Equity Loans are fully amortizing. The
"Principal Balance" of a Home Equity Loan
(other than a Liquidated Home Equity Loan
(as defined herein)) on any day is equal to
its principal balance as of the Cut-Off Date
(or, with respect to a Subsequent Home
Equity Loan, its principal balance
S-2
<PAGE>
as of the applicable Subsequent Cut-Off
Date), minus all collections credited
against the Principal Balance of such Home
Equity Loan. The Principal Balance of a
Liquidated Home Equity Loan after final
recovery of related Liquidation Proceeds
(defined herein) will be zero. With respect
to any Distribution Date, the "Pool Balance"
will be equal to the aggregate of the
Principal Balances of all Home Equity Loans
as of the first day of the related Due
Period. As of the Closing Date,
approximately one Initial Home Equity Loan
with a Principal Balance as of the Cut-Off
Date of approximately $16,883 (the "Low
Coupon Loan") is being sold to the Trust at
a discount because the Loan Rate thereon is
less than the sum of the initial Certificate
Rate on the Class A-4 Certificates and the
Expense Fee Rate (defined herein). See
"DESCRIPTION OF THE HOME EQUITY LOANS"
herein and Appendix A attached hereto.
Pre-Funding Account.................On the Closing Date, an aggregate cash
amount (the "Pre-Funded Amount") not to
exceed approximately $30,947,779 will be
deposited in the Pre-Funding Account. Such
amount will be used to purchase additional
fixed rate home equity loans secured by
first or second liens on Mortgaged
Properties ("Subsequent Home Equity Loans")
for deposit into the Trust and, if required,
to make accelerated payments of principal on
the Offered Certificates. During the period
(the "Pre-Funding Period") from the Closing
Date to the earliest to occur of (i) the
date on which the aggregate amount on
deposit in the Pre-Funding Account is less
than $100,000, (ii) an Event of Default or
Trigger Event under the Agreement, and (iii)
January, 1998, amounts on deposit in the
Pre-Funding Account may be withdrawn from
time to time to acquire Subsequent Home
Equity Loans in accordance with the
Agreement. Any net investment earnings on
the Pre-Funded Amount will be transferred to
the Capitalized Interest Account on each
Distribution Date during the Pre-Funding
Period. Any Pre-Funded Amount remaining in
the Pre-Funding Account at the end of the
Pre-Funding Period will be distributed on
the Distribution Date occurring on or
immediately following the end of the
Pre-Funding Period. If the Pre-Funded Amount
so distributed is less than $100,000, it
will be treated as a principal prepayment
and allocated to the Class or Classes of
Offered Certificates then entitled to
distributions of principal as provided
herein; otherwise such amount will be
distributed as principal of the outstanding
Class or Classes of Offered Certificates,
pro rata, on the basis of their respective
Class Certificate Balances.
Capitalized Interest Account........On the Closing Date, funds will be deposited
in an account (the "Capitalized Interest
Account") created and maintained with the
Trustee. The amount so deposited will be
used by the Trustee on the Distribution
Dates during the Pre-Funding Period to fund
the excess, if any, of the Interest
Remittance Amounts for the Offered
Certificates (as defined below) over the
funds available therefor on such
Distribution Dates. Any funds remaining in
the Capitalized Interest Account at the end
of the Pre-Funding Period will be
distributed to the Holders of the Class R
Certificates.
Final Scheduled Distribution
Dates...............................The Final Scheduled Distribution Dates for
each of the respective Classes of Offered
Certificates are set forth below. However,
it is anticipated that the actual final
Distribution Date for each Class of Offered
Certificates will occur earlier, and could
occur significantly earlier, than the
related Final Scheduled Distribution Date.
See "PREPAYMENT AND YIELD CONSIDERATIONS"
herein.
Final Scheduled
Distribution Date
-----------------
Class A-1 Certificates October 15, 2003
Class A-2 Certificates August 15, 2007
Class A-3 Certificates March 15, 2009
Class A-4 Certificates November 15, 2017
S-3
<PAGE>
Interest............................The Certificate Rate for the Class A-1
Certificates with respect to each Interest
Period will be a per annum rate equal to the
lesser of (a) One-Month LIBOR (calculated as
described herein under "DESCRIPTION OF THE
CERTIFICATES -- Calculation of One-Month
LIBOR") plus 0.085%, (b) 12.0%, and (c) the
weighted average Loan Rate of the Home
Equity Loans in the Pool, net of the Expense
Fee Rate. The Certificates Rate for each
Class of Offered Certificates other than the
Class A-1 Certificates will be as set forth
on the cover page hereof. Holders of the
Offered Certificates will be entitled to
receive on each Distribution Date, to the
extent funds are available therefor,
interest at the applicable Certificate Rate
accrued during the related Interest Period
on the related Class Certificate Balance (as
described below under the caption
"Principal") less the amount of interest,
allocated pro rata to each Class of Offered
Certificates, which would otherwise have
been received with respect to any Mortgage
Loan that was the subject of a reduction in
the amount of monthly interest payment
pursuant to the Solders' and Sailors' Civil
Relief Act of 1940, as amended (a "Civil
Relief Act Shortfall"). The amount of
interest (as described above) payable with
respect to a Class of Offered Certificates
constitutes the "Interest Remittance Amount"
for such Class. The "Interest Period" for
the Class A-1 Certificates with respect to
each Distribution Date will be the period
commencing on the immediately preceding
Distribution Date (or the Closing Date in
the case of the first Distribution Date) and
ending on the day immediately preceding such
Distribution Date and will be calculated on
the basis of the actual number of days
elapsed and a 360-day year. The "Interest
Period" for each Class of Offered
Certificates other than the Class A-1
Certificates will be the calendar month
preceding the month in which such
Distribution Date occurs and will be
calculated on the basis of a 360-day year
consisting of twelve 30-day months. See
"DESCRIPTION OF THE CERTIFICATES" herein.
Notwithstanding the foregoing, on any
Distribution Date after the first
Distribution Date on which the Seller (or a
designee of the Seller) may effect an early
termination of the Trust as described herein
under "DESCRIPTION OF THE CERTIFICATES --
Termination; Retirement of the
Certificates," the Certificate Rate for the
Class A-4 Certificates shall be a per annum
rate equal to 7.59% (the "Class A-4
Stepped-Up Certificate Rate").
Principal ..........................As to any Distribution Date, the "Basic
Principal Amount" will equal the sum of (i)
each payment of principal on a Home Equity
Loan received by the Servicer (exclusive of
amounts described in clauses (ii) and (iii)
below) during the calendar month preceding
the calendar month in which such
Distribution Date occurs (with respect to
any Distribution Date, the "Due Period");
(ii) curtailments (i.e., partial
prepayments) and prepayments in full
received during the related Due Period;
(iii) all Insurance Proceeds and Net
Liquidation Proceeds allocable to recoveries
of principal of Home Equity Loans received
during the related Due Period; (iv) an
amount equal to the excess, if any, of the
Principal Balance (immediately prior to
liquidation) of each Home Equity Loan
liquidated during the related Due Period
over the principal portion of Net
Liquidation Proceeds (defined herein)
received during such Due Period (the
"Unrecovered Class A Portion"); and (v) (a)
the outstanding Principal Balance of any
Home Equity Loan repurchased by the Seller
or its designee as required or permitted by
the Purchase Agreement or the Agreement as
of the related Determination Date (defined
herein) and (b) with respect to any
Defective Home Equity Loan for which the
Originator substitutes an Eligible
Substitute Home Equity Loan (defined herein)
as of the related Determination Date, any
excess of the Principal Balance of such
Defective Home Equity Loan over the sum of
(A) the Principal Balance of such Eligible
Substitute Home Equity Loan plus (B) the
amount of any unreimbursed Servicing
Advances (defined herein) made by the
Servicer with respect to the Home Equity
Loan, in each case to the extent received.
S-4
<PAGE>
As to any Distribution Date and Class of
Offered Certificates, the "Principal
Remittance Amount" will equal the sum of (i)
the lesser of (x) the Basic Principal Amount
or (y) the portion of such Basic Principal
Amount required to be distributed to
increase the Overcollateralization Amount
(defined below) to the Required
Overcollateralization Amount (defined
below), (ii) the related Carry-Forward
Amount (defined below), and (iii) on the
Distribution Date at or immediately
following the end of the Pre-Funding Period,
the amount, if any, remaining in the
Pre-Funding Account (exclusive of any
investment earnings included therein).
Distributions of principal will be allocated
among the Classes of Offered Certificates as
described herein under "DESCRIPTION OF THE
CERTIFICATES - Priority of Distributions."
As described below, Holders of a Class of
Offered Certificates also may receive
distributions of Additional Principal
(defined below) on a Distribution Date.
The Interest Remittance Amount, the
Principal Remittance Amount and the
Additional Principal, if any, for a Class of
Offered Certificates together constitute the
"Class Remittance Amount" for such Class and
each Distribution Date. An amount to cover
any loss on a Liquidated Home Equity Loan
(i.e., the Unrecovered Class A Portion) may
or may not be distributed to the Holders of
the related Class of Offered Certificates on
the Distribution Date which immediately
follows the event of loss. However, the
Holders of such Certificates are entitled to
receive ultimate recovery of 100% of the
original Class Certificate Balance of the
applicable Class of Certificates.
The "Class Certificate Balance" of a Class
of Offered Certificates on any date is equal
to the Class Certificate Balance of such
Class on the Closing Date (the "Original
Class Certificate Balance") minus the
aggregate of amounts actually distributed as
principal to the Holders of such Class of
Offered Certificates.
The "Carry-Forward Amount" of a Class of
Offered Certificates on any Distribution
Date will equal the sum of (a) the excess of
the aggregate of the Class Remittance
Amounts as of each preceding Distribution
Date over the amount of the actual
distributions to the Holders of such Class
of Offered Certificates made on any such
Distribution Date and not subsequently
distributed, and (b) interest on the amount,
if any, of the interest component of the
amount described in clause (a) at
one-twelfth of the applicable Certificate
Rate. See "DESCRIPTION OF THE CERTIFICATES"
herein.
Overcollateralization...............On any Distribution Date on which the
Overcollateralization Amount is less than
the Required Overcollateralization Amount
for such Distribution Date, the Net Excess
Spread, if any, will be used to make
additional distributions of principal of the
Class or Classes of Offered Certificates
then entitled to distributions of principal
("Additional Principal") until the
Overcollateralization Amount equals the
Required Overcollateralization Amount. As to
any Distribution Date, the
"Overcollateralization Amount" will equal
the excess, if any, of (i) the sum of the
Pool Balance and the amount on deposit in
the Pre-Funding Account (exclusive of any
investment earnings included therein) as of
the close of business on the last day of the
related Due Period, over (ii) the aggregate
Class Certificate Balance of the Classes of
Offered Certificates, after giving effect to
the distributions of Principal Remittance
Amount on such Distribution Date. As of the
Closing Date, the Overcollateralization
Amount will be zero. The Agreement provides
that, subject to certain floors, caps and
triggers, the required level of
overcollateralization (the "Required
Overcollateralization Amount") may (i)
increase or decrease over time based on the
delinquency and default experience on the
Home Equity Loans in the Trust, (ii) step
down based on the passage of time and the
amortization of the Home Equity Loans in the
Trust or (iii) be reduced or eliminated by
the Certificate Insurer so long as a
Certificate Insurer Default (defined herein)
does not exist and is not continuing. As to
any Distribution Date: (a) the "Excess
Spread" will equal interest collected or
S-5
<PAGE>
advanced on the Home Equity Loans (including
amounts from the Capitalized Interest
Account to the extent deposited in the
Distribution Account) minus the sum of (i)
the Interest Remittance Amount for the
Classes of Offered Certificates, (ii) the
Servicing Fee, (iii) the Trustee Fee and
(iv) the Premium (the sum of clauses (ii)
through (iv), the "Expense Fees"); (b) the
"Net Excess Spread" will equal the Available
Remittance Amount (defined herein) remaining
after the application thereof to cover the
Required Payments; and (c) the "Required
Payments" equal the sum of the related
Expense Fees (other than the Servicer's
Fee), the Interest Remittance Amount, the
Principal Remittance Amount, reimbursement
of Nonrecoverable Advances (defined below)
previously made by the Servicer and
reimbursement of amounts due the Certificate
Insurer.
The Certificate Insurer.............Ambac Assurance Corporation, a Wisconsin
stock insurance corporation (the
"Certificate Insurer"), will provide a
certificate guaranty insurance policy (the
"Policy") relating to the Offered
Certificates. Subject to the requirements of
the Policy described under "THE POLICY AND
THE CERTIFICATE INSURER" herein, the Policy
unconditionally and irrevocably guarantees
that the full amount of each Insured Payment
(defined herein) will be received by the
Trustee or its successor for distribution by
the Trustee to the Holders from the
Certificate Insurer. The Certificate
Insurer's obligations under the Policy will
be discharged to the extent funds equal to
the amount required to be paid thereunder
are received by the Trustee, whether or not
such funds are properly applied by the
Trustee. The Policy is not cancelable by the
Certificate Insurer for any reason. The
Policy does not (i) guarantee the
Originator's or the Seller's obligation to
repurchase or substitute for Home Equity
Loans (including Subsequent Home Equity
Loans) with respect to which there has been
a breach or representation, (ii) guarantee
any specified rate of prepayments or (iii)
provide funds to redeem the Offered
Certificates on any specified date. The
Agreement provides that to the extent the
Certificate Insurer makes certain payments
under the Policy (the "Insured Payments"),
the Certificate Insurer will be subrogated
to the rights of the Holders of the Offered
Certificates with respect to such Insured
Payments. The Certificate Insurer will
receive reimbursement for such Insured
Payment, but only from the sources and in
the manner provided in the Agreement and the
Insurance and Indemnity Agreement, dated as
of the Closing Date, among the Certificate
Insurer, the Depositor, the Seller, the
Servicer and the Trustee (the "Insurance
Agreement"). Such subrogation and
reimbursement will have no effect on the
Certificate Insurer's obligations under the
Policy.
Servicing...........................The Servicer will be responsible for
servicing, managing and making collections
on the Home Equity Loans. The Servicer will
deposit all collections in respect of the
Home Equity Loans into the Collection
Account as described herein. Not later than
the 10th day of the month (or if such 10th
day is not a Business Day, the preceding
Business Day) (the "Determination Date"),
the Trustee will calculate the amounts to be
paid, as described herein, to the
Certificate Holders on such Distribution
Date. See "DESCRIPTION OF THE CERTIFICATES -
Priority of Distributions" herein. With
respect to each Due Period, the Servicer
will receive from payments in respect of
interest on the Home Equity Loans actually
received, a portion of such payments as a
monthly servicing fee (the "Servicing Fee")
in the amount of 0.50% per annum (the
"Servicing Fee Rate") on the Principal
Balance of each Home Equity Loan as of the
first day of each such Due Period. See
"DESCRIPTION OF THE CERTIFICATES - Servicing
Compensation and Payment of Expenses"
herein. In certain limited circumstances,
the Servicer may resign or be removed, in
which event either the Trustee or, with the
consent of or at the direction of the
Certificate Insurer, a third-party servicer
acceptable to the Certificate Insurer will
be appointed as a successor Servicer. See
"DESCRIPTION OF THE CERTIFICATES-Certain
Matters Regarding the Servicer" herein.
S-6
<PAGE>
Monthly Advances....................Except as set forth in the next sentence,
the Servicer is required to remit to the
Trustee no later than the close of business
on the second Business Day preceding a
Distribution Date for deposit in the
Distribution Account the amount, if any, by
which (a) the sum of (i) the aggregate
interest required to be paid to the holders
of the Offered Certificates and (ii) any
amounts owed to the Certificate Insurer, in
each case on such Distribution Date, exceeds
(b) the amount received by the Servicer in
respect of interest on the Home Equity Loans
in the Pool during the related Due Period
(the "Monthly Advance"). The Servicer is not
required to make any Monthly Advances which
it determines in good faith would be
nonrecoverable. Such Monthly Advances by the
Servicer are reimbursable to the Servicer
subject to certain conditions and
restrictions. See "DESCRIPTION OF THE
CERTIFICATES- Advances" herein.
Prepayment Interest Shortfalls......Not later than the second Business Day
preceding each Distribution Date, the
Servicer is required to remit to the Trustee
up to the amount otherwise payable to the
Servicer as its aggregate Servicing Fee for
the related Due Period, without any right of
reimbursement, an amount equal to, with
respect to each Home Equity Loan as to which
a principal prepayment in full was received
from the Mortgagor during the related Due
Period, the excess, if any, of 30 days'
interest on the Principal Balance of such
Home Equity Loan at the Loan Rate (or at
such lower rate as may be in effect for such
Home Equity Loan because of application of
the Soldiers' and Sailors' Civil Relief Act
of 1940, as amended (the "Civil Relief
Act"), or as a result of any reduction of
the monthly payment due on such Home Equity
Loan as a result of a bankruptcy proceeding
(a "Debt Service Reduction")) minus the
Servicing Fee for such Home Equity Loan over
the amount of interest actually paid by the
related Mortgagor in connection with such
principal prepayment (with respect to all
such Home Equity Loans, the "Prepayment
Interest Shortfall").
Optional Termination by the
Seller..............................On any Distribution Date on which the Pool
Balance is less than 10% of the sum of (i)
the Pool Balance as of the Cut-Off Date and
(ii) the Principal Balance of the Subsequent
Home Equity Loans as of their respective
Subsequent Cut-Off Dates, the Seller (or a
designee of the Seller) will have the option
(or in the absence of the exercise thereof
by the Seller (or a designee of the Seller),
the Certificate Insurer will have the option
after giving notice thereof to the Seller
(or a designee of the Seller)) to purchase,
in whole, the Home Equity Loans and the REO
Property, if any, remaining in the Trust.
See "DESCRIPTION OF THE CERTIFICATES -
Termination; Retirement of the Certificates"
herein.
Optional Purchase of Defaulted
Home Equity Loans ..................The Seller (or a designee of the Seller) has
the option, but is not obligated, to
purchase from the Trust any Home Equity Loan
90 days or more delinquent at a purchase
price equal to the outstanding Principal
Balance as of the date of purchase, plus the
greater of (i) all accrued and unpaid
interest on such Principal Balance and (ii)
30 days' interest on such Principal Balance,
computed at the Loan Rate, net of the
Servicing Fee. See "DESCRIPTION OF THE
CERTIFICATES - Optional Purchase of
Defaulted Home Equity Loans" herein.
S-7
<PAGE>
Certain Federal Tax
Considerations......................For federal income tax purposes, an election
will be made to treat certain assets of the
Trust as a "real estate mortgage investment
conduit" (a "REMIC"). The Offered
Certificates will be designated as "regular
interests" in a REMIC and will be treated as
debt instruments of the REMIC and as
interests of the Trust for federal income
tax purposes with payment terms equivalent
to the terms of such Offered Certificates.
The Holders of the Offered Certificates will
be required to include in income interest on
such Certificates in accordance with the
accrual method of accounting, and the
Offered Certificates may, depending in part
on their issue price, be treated as having
been issued with original issue discount for
federal income tax purposes. The rate of
prepayment on the Home Equity Loans used to
calculate original issue discount, if any,
is 100% of the Prepayment Assumption
(defined herein). No representation is made
that the Home Equity Loans will prepay at
that rate or at any other rate. For further
information regarding the federal income tax
consequences of investing in the Offered
Certificates, see "CERTAIN FEDERAL INCOME
TAX CONSIDERATIONS" in the Prospectus.
ERISA Considerations................Fiduciaries of employee benefit plans
subject to Title I of the Employee
Retirement Income Security Act of 1974, as
amended ("ERISA"), should consider the ERISA
fiduciary investment standards before
authorizing an investment by a plan in the
Offered Certificates. In addition,
fiduciaries of: (i) employee benefit plans
subject to Title I of ERISA, (ii) employee
benefit plans or other retirement
arrangements (including individual
retirement and certain Keogh plans) which
are not subject to ERISA, but which are
subject to Section 4975 of the Internal
Revenue Code of 1986, as amended (the
"Code"), or (iii) any entity whose
underlying assets are deemed to include plan
assets by reason of a plan or account
investing in such entity (each, a "Plan"),
should consult with their legal counsel to
determine whether an investment in the
Offered Certificates will cause the assets
of the Trust ("Trust Assets") to be
considered plan assets pursuant to the plan
asset regulations set forth in 29 C.F.R.
ss.2510.3-101, thereby subjecting the Plan
to the prohibited transaction rules with
respect to the Trust Assets and the Trustee
and Servicer to the fiduciary investment
standards of ERISA, or cause the excise tax
provisions of Section 4975 of the Code to
apply to the Trust Assets, unless some
exemption granted by the Department of Labor
applies to the purchase, sale, transfer or
holding of the Offered Certificates.
The United States Department of Labor has
issued to Bear, Stearns & Co. Inc. an
individual prohibited transaction exemption
(the "Exemption") from certain of the
prohibited transaction rules of ERISA. It is
believed that the Exemption will apply to
the Offered Certificates. Prospective Plan
investors should consult with their legal
advisors concerning the impact of ERISA and
the Code, the applicability of the
Exemption, and the potential consequences in
their specific instances, prior to making an
investment in the Offered Certificates. See
"ERISA CONSIDERATIONS" in the Prospectus.
Legal Investment
Considerations......................The Offered Certificates will not constitute
"mortgage related securities" for purposes
of the Secondary Mortgage Market Enhancement
Act of 1984 ("SMMEA"). Accordingly, many
institutions with legal authority to invest
in comparably rated securities may not be
legally authorized to invest in the Offered
Certificates. See "LEGAL INVESTMENT
CONSIDERATIONS" in the Prospectus.
Certificate Ratings.................It is a condition to the issuance of each
Class of Offered Certificates that they be
rated "AAA" by Standard & Poor's Ratings
Services, a division of The McGraw Hill
Companies, Inc. ("S&P"), and "Aaa" by
Moody's Investors Service, Inc. ("Moody's"
and, together with S&P, the "Rating
Agencies"). A security rating
S-8
<PAGE>
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. In addition, a security
rating does not address or assess the
frequency or likelihood of prepayments on
the Home Equity Loans or the degree to which
such prepayments might differ from those
originally anticipated. A rating also does
not address the possibility that holders of
the Offered Certificates might suffer a
lower than anticipated yield. See "RATINGS"
and "RISK FACTORS- Certificate Rating Is Not
A Recommendation" herein.
S-9
<PAGE>
RISK FACTORS
Investors should consider, among other things and in addition to the
risk factors set forth on page 15 of the Prospectus, the following risk factors
in connection with the purchase of the Offered Certificates.
Trust Is Only Source of Payment. The Offered Certificates do not
represent an interest in, or the obligation of, the Depositor, the Originator,
the Seller, the Servicer, the Trustee or any of their respective affiliates. The
Offered Certificates are not savings accounts and are not insured by the Federal
Deposit Insurance Corporation. The Offered Certificates will be payable solely
from the Trust. There will be no recourse to the Depositor, the Originator, the
Seller, the Servicer, the Trustee or any other person for any failure to receive
distributions on the Offered Certificates. Consequently, Holders of the Offered
Certificates must rely solely upon payments with respect to the Home Equity
Loans and the other assets constituting the Trust, including any amounts
available pursuant to the Policy, for the payment of principal of and interest
on such Certificates. Neither the Offered Certificates nor the Home Equity Loans
are insured or guaranteed by any government agency or instrumentality.
Prepayments May Fluctuate. All of the Home Equity Loans may be prepaid
in whole or in part at any time without penalty. Home equity loans, such as the
Home Equity Loans, have been originated in significant volume only during the
past few years and neither the Depositor nor the Servicer is aware of any
publicly available studies or statistics on the rate of prepayment of such
loans. Generally, home equity loans are not viewed by borrowers as permanent
financing. Accordingly, the Home Equity Loans may experience a higher rate of
prepayment than conventional first mortgage loans. The prepayment experience of
the Trust may be affected by a wide variety of factors, including general
economic conditions, interest rates, the availability of alternative financing,
homeowner mobility and changes in the ability to deduct mortgage interest for
tax purposes. In addition, all of the Home Equity Loans contain due-on-sale
provisions and the Servicer is obligated to enforce such provisions unless such
enforcement is not permitted by applicable law. See "CERTAIN LEGAL ASPECTS OF
THE LOANS --Due-on-Sale Clauses in Mortgage Loans" in the Prospectus. The rate
of prepayment of housing loans and other receivables has fluctuated
significantly in recent years. In general, if prevailing interest rates fall
significantly below the interest rates on the Home Equity Loans, such loans are
likely to prepay at rates higher than if prevailing interest rates remain at or
above the interest rates borne by such loans. Prepayment of a Home Equity Loan
in such a decreasing interest rate environment, and the resulting reinvestment
by the Holders of the Offered Certificates of the prepayment proceeds in such an
environment, may produce a lower than anticipated rate of return to such
Holders.
Pre-Funding of Pool May Result in Prepayments. If the principal amount
of eligible Home Equity Loans available during the Pre-Funding Period is less
than 100% of the original Pre-Funded Amount, the Depositor will have
insufficient Home Equity Loans to sell to the Trust on the Subsequent Transfer
Dates, thereby resulting in prepayments of principal to Holders of one or more
Classes of Offered Certificates as described herein. Any such principal
prepayment may adversely affect the yield to maturity of the applicable Class or
Classes of Offered Certificates. Since prevailing interest rates are subject to
fluctuation, there can be no assurance that investors will be able to reinvest
such a prepayment amount at yields equaling or exceeding the yields on the
related Offered Certificates. It is possible that the yield on any such
reinvestment will be lower, and may be significantly lower, than the yield on
the related Offered Certificates. The ability of the Trust to invest in
Subsequent Home Equity Loans is solely dependent upon whether the Originator is
able to originate home equity loans which meet the requirements for transfer to
the Seller and thenceforth to the Trust under the Purchase Agreement and the
Agreement. The ability of the Originator to originate such home equity loans may
be affected by a variety of social, economic and competitive factors, including
prevailing interest rates, unemployment levels, the rate of inflation, consumer
perception of economic conditions generally and the availability of home loan
financing and similar types of consumer financing. The Originator and the Seller
are unable to determine and have no basis to predict whether and to what extent
economic or social factors will affect the ability of the Originator to
originate Subsequent Home Equity Loans.
Second Mortgages Include Additional Risks. Approximately 82.10% (by
aggregate Principal Balance as of the Cut-Off Date) of the Initial Home Equity
Loans are secured by second mortgages, which are subordinate to the rights of
the mortgagees under the senior mortgage or mortgages encumbering the related
Mortgaged Property ("First Liens"). The proceeds from any foreclosure,
liquidation, insurance or condemnation proceedings will be available to satisfy
the outstanding balance of any such Home Equity Loan only to the extent that the
claims of the mortgagees under such First Liens have been satisfied in full,
including any related foreclosure costs. In addition, the Trust may not
foreclose on a Mortgaged Property securing a second mortgage unless it
forecloses subject to the First Liens, in which case it must either pay the
entire amount due on the First Liens to the mortgagees thereof at or prior to
the foreclosure sale or undertake the obligation to make payments on the First
Liens in the event the mortgagor is in default thereunder. The Trust will not
have any source of funds to satisfy the First Liens or make payments due to the
mortgagees thereof.
S-10
<PAGE>
Fixed Liquidation Expenses May Reduce Liquidation Proceeds. Liquidation
expenses with respect to defaulted home equity loans do not vary directly with
the outstanding principal balance of the loan at the time of default. Therefore,
assuming that a servicer took the same steps in realizing upon a defaulted home
equity loan having a small remaining principal balance as it would in the case
of a defaulted home equity loan having a larger principal balance, the amount
realized after expenses of liquidation would be smaller as a percentage of the
outstanding principal balance of the smaller home equity loan than would be the
case with a larger loan. Because the average outstanding principal balances of
the Home Equity Loans are small relative to the size of the loans in a typical
pool of conventional first mortgages, realizations net of liquidation expenses
on defaulted Home Equity Loans may also be smaller as a percentage of the
principal amount of the Home Equity Loans than would be the case with respect to
a typical pool of conventional first mortgage loans.
Adequacy of the Mortgaged Properties as Security for the Home Equity
Loans. The credit risk of the Home Equity Loans may be adversely affected by,
among other things, a decrease in the value of the Mortgaged Properties
underlying the Home Equity Loans. Factors that could adversely affect the value
of Mortgaged Properties include an overall decline in the residential real
estate market in the areas in which the Mortgaged Properties are located,
particularly in areas that previously have experienced significant appreciation,
a decline in the general condition of the Mortgaged Properties as a result of
the failure of borrowers to adequately maintain the Mortgaged Properties, or the
occurrence of natural disasters that are not necessarily covered by insurance,
such as hurricanes and floods. Many of the Initial Home Equity Loans have high
combined loan-to-value ratios. As of the Cut-Off Date, approximately 64.08% (by
aggregate Principal Balance as of the Cut-Off Date) of the Initial Home Equity
Loans have combined loan-to-value ratios of greater than 90%. Therefore, in such
circumstances, even a relatively small decrease in the value of a Mortgaged
Property could result in the outstanding balance of the related Home Equity Loan
and any senior loans to be greater in the aggregate than the value of the
Mortgaged Property. Any such decrease could extinguish the value of a junior
interest in Mortgaged Property before having any effect on the related senior
interest therein. If such a decline occurs, the rates of delinquency,
foreclosure and loss on the Home Equity Loans could be higher than those
currently experienced in the mortgage lending industry in general. Even assuming
that a Mortgaged Property will provide adequate security for the related Home
Equity Loan, substantial delays could be encountered in connection with the
liquidation of defaulted Home Equity Loans and corresponding delays in the
receipt of related proceeds by the Certificateholders could occur. An action to
foreclose on a Mortgaged Property securing a Home Equity Loan is regulated by
state statutes and rules and is subject to many of the delays and expenses of
other lawsuits if defenses or counterclaims are interposed, potentially
requiring several years to complete. Furthermore, in some states an action to
obtain a deficiency judgment is not permitted following a nonjudicial sale of a
Mortgaged Property. In the event of a default by a mortgagor, these
restrictions, among other things, may impede the ability of the Servicer to
foreclose on or sell Mortgaged Property or obtain any liquidation proceeds
sufficient to repay all amounts due on the related Home Equity Loan.
Geographic Concentration May Affect Performance. Approximately 24.14%,
13.60%, 12.80% and 10.97% (by aggregate Principal Balance as of the Cut-Off
Date) of the Initial Home Equity Loans are secured by Mortgaged Properties
located in Iowa, Illinois, Colorado and Missouri, respectively. To the extent
that any of such states has experienced or may experience in the future weaker
economic conditions or greater rates of decline in real estate values than the
United States generally, such a concentration of the Home Equity Loans may be
expected to exacerbate the foregoing risks. In addition, natural disasters such
as hurricanes and floods affecting the areas in which the Mortgaged Properties
are located may have a disproportionate effect on the Pool due to such
geographic concentration.
Risk of Loan Rates Reducing the Certificate Rate on the Class A-1
Certificates. The Certificate Rate on the Class A-1 Certificates is based upon
the lesser of (i) the value of an index (One-Month LIBOR) plus a specified
margin, (ii) a ceiling rate of 12.0% per annum and (iii) the weighted average
Loan Rate of the Home Equity Loans in the Pool, net of certain expenses. The
Loan Rates of the Home Equity Loans are fixed and do not adjust. As a result, if
One-Month LIBOR rises, the foregoing limitations on the amount of such
Certificate Rate could result in Class A-1 Certificateholders receiving interest
at a rate less than One-Month LIBOR plus the specified margin. In addition, the
weighted average Loan Rate of the Home Equity Loans in the Pool in effect on the
Closing Date will change, and may decrease, over time due to scheduled
amortization of the Home Equity Loans in the Pool, prepayments of the Home
Equity Loans in the Pool, deposits into the Trust of Subsequent Home Equity
Loans, and repurchases of Home Equity Loans by the Seller (or a designee of the
Seller). There can be no assurance that the weighted average Loan Rate of the
Home Equity Loans in the Pool in effect on the Closing Date will not decrease
thereafter.
Balloon Loans May Have Higher Delinquency Rates. Approximately 28.29%
(by aggregate Principal Balance as of the Cut-Off Date) of the Initial Home
Equity Loans have original terms to stated maturity of up to 15 years and
amortization schedules of up to 30 years ("Balloon Loans"), leaving a
substantial payment due at the stated maturity (each, a "Balloon Payment"). The
default risk associated with Balloon Loans may be greater than that associated
with fully amortizing Home Equity Loans due to the relatively large single
payment that borrowers are required to make at stated maturity. The ability of
S-11
<PAGE>
a Mortgagor to repay a Balloon Loan at maturity frequently will depend on such
Mortgagor's ability to refinance the Balloon Loan. The ability of a Mortgagor to
refinance a Balloon Loan will be affected by a number of factors, including the
level of available mortgage rates at the time, the value of the related
Mortgaged Property, the Mortgagor's equity in the related Mortgaged Property,
the financial condition of the Mortgagor, the tax laws and general economic
conditions at the time. None of the Depositor, the Originator, the Seller, the
Servicer, the Certificate Insurer or the Trustee will be obligated to provide
funds to refinance any Home Equity Loan.
Characteristics of Subsequent Home Equity Loans May Be Different. Each
Subsequent Home Equity Loan must satisfy the eligibility criteria set forth in
the Agreement. However, Subsequent Home Equity Loans may be originated by the
Originator using credit criteria different from those which were applied to the
Initial Home Equity Loans and may be of a lesser credit quality. Therefore,
following the transfer of Subsequent Home Equity Loans to the Trust, the
aggregate characteristics of the Home Equity Loans then held by the Trust may
vary from those of the Initial Home Equity Loans. See "DESCRIPTION OF HOME
EQUITY LOANS -- Subsequent Home Equity Loans" herein.
Underwriting Standards May Affect Performance. Pursuant to the
underwriting guidelines of the Originator, the assessment of the
creditworthiness of the related borrower is the primary consideration in
underwriting a Home Equity Loan. See "THE ORIGINATOR'S HOME EQUITY LOAN PROGRAM
- -- Underwriting Procedures" herein. The evaluation of the adequacy of the value
of the related Mortgaged Property in relation to the Home Equity Loan, together
with the amount of all liens senior to the lien of the Home Equity Loan, is
given less consideration. However, the Originator's underwriting standards
generally are less stringent than those of Fannie Mae or Freddie Mac with
respect to a borrower's credit history and in certain other respects. A
borrower's past credit history may not preclude the Originator from making a
loan; however, it may reduce the size (and consequently the combined
loan-to-value ratio) of the loan that the Originator is willing to make.
Although the creditworthiness of the related borrower is the primary
consideration in the underwriting of the Home Equity Loans, no assurance can be
given that the creditworthiness of such borrower will not deteriorate as a
result of future economic and social factors, which deterioration may result in
a delinquency or default by such borrower on the related Home Equity Loan. In
particular, with respect to Home Equity Loans the proceeds of which were used in
whole or in part for debt consolidation, there can be no assurance that,
following the debt consolidation, the related borrower will not incur further
consumer debt to third party lenders. This reloading of debt could impair the
ability of such borrowers to service their debts, which in turn could result in
higher rates of delinquency, default and losses on the Home Equity Loans. As a
result of this approach to underwriting, the Home Equity Loans in the Trust may
experience higher rates of delinquency, foreclosure and losses than mortgage
loans underwritten in a more traditional manner.
Certain Legal Considerations. The Initial Home Equity Loans have been,
and the Subsequent Home Equity Loans will be, transferred from the Originator to
the Seller, an affiliate of the Originator, and transferred from the Seller to
the Depositor. Each such transfer will be treated by the Originator, the Seller
and the Depositor, as applicable, as a sale of the Home Equity Loans. The
Originator has warranted that its transfer to the Seller is or will be, as
applicable, a sale of the Originator's interest in the Home Equity Loans. The
Seller has warranted that its transfer to the Depositor is or will be, as
applicable, a sale of the Seller's interest in the Home Equity Loans. In the
event of an insolvency of the Originator or the Seller, the receiver or
liquidator of such entity may attempt to recharacterize the related sale of the
Home Equity Loans as a borrowing by such entity secured by a pledge of the Home
Equity Loans and possible reductions could occur in the amounts thereof
available for distribution of the Offered Certificates. The Depositor has
warranted in the Agreement that the transfer of the Home Equity Loans to the
Trust is or will be, as applicable, a valid transfer of all of the Depositor's
right, title and interest in the Home Equity Loans to the Trust.
Other Legal Considerations. State laws generally regulate interest
rates and other charges, and require certain disclosures. In addition, many
states have other laws, such as consumer protection laws, unfair and deceptive
practices acts and debt collection practices acts which may apply to the
origination, administration or collection of the Home Equity Loans. Depending on
the provisions of the applicable law, violations of these laws may limit the
ability of the Servicer to collect all or part of the principal of or interest
on the Home Equity Loans, may entitle the borrower to a refund of amounts
previously paid and, in addition, could subject the Servicer to damages and
administrative enforcement. See "CERTAIN LEGAL ASPECTS OF LOANS" in the
Prospectus.
The Home Equity Loans are also subject to federal laws, including:
(i) the Federal Truth-in-Lending Act and Regulation Z
promulgated thereunder, which require certain disclosures to the
borrowers regarding the terms of the Home Equity Loans;
S-12
<PAGE>
(ii) the Equal Credit Opportunity Act and Regulation B
promulgated thereunder, which prohibit discrimination on the basis of
age, race, color, sex, religion, marital status, national origin,
receipt of public assistance or the exercise of any right under the
Consumer Credit Protection Act, in the extension of credit;
(iii) the Fair Credit Reporting Act, which regulates the
use and reporting of information related to the borrower's credit
experience;
(iv) the Fair Debt Collection Practices Act and the Federal
Trade Commission rule on Credit Practices, which regulate practices
used to effect collection on consumer loans;
(v) for Home Equity Loans that were closed after November
7, 1989, the Home Equity Loan Consumer Protection Act of 1988, which
requires additional application disclosures, limits changes that may be
made to loan agreements without the borrower's consent and restricts a
lender's ability to declare a default or to suspend or reduce a
borrower's credit limit to certain enumerated events;
(vi) the Real Estate Settlement Procedures Act and
Regulation X promulgated thereunder, which require certain disclosures
to borrowers regarding settlement costs; and
(vii) the Flood Disaster Protection Act of 1973, as amended by
the National Flood Insurance Reform Act of 1994, which prohibits
certain lending or servicing institutions from making or modifying
loans secured by real estate in certain flood hazard areas unless the
underlying property is covered by appropriate flood insurance.
Violations of certain provisions of these federal laws may limit the
ability of the Servicer to collect all or part of the principal of or interest
on the Home Equity Loans, may subject the Servicer to damages and administrative
enforcement and in addition could be raised by borrowers as a recoupment or
setoff in a collection or foreclosure action. See "CERTAIN LEGAL ASPECTS OF
LOANS" in the Prospectus.
Book-Entry Registration May Affect Liquidity. Issuance of the Offered
Certificates in book-entry form may reduce the liquidity of such Certificates in
the secondary trading market since investors may be unwilling to purchase
Offered Certificates for which they cannot obtain physical certificates.
Since transactions in the Offered Certificates will, in most cases, be
able to be effected only through Participants, Indirect Participants and certain
banks, the ability of a Certificate Owner (defined herein under "DESCRIPTION OF
THE CERTIFICATES-Book-Entry Registration") to pledge an Offered Certificate to
persons or entities that do not participate in the DTC system, or otherwise to
take actions in respect of such certificate, may be limited due to lack of a
physical certificate representing the Certificates.
Certificate Owners may experience some delay in their receipt of
distributions of interest on and principal of the Offered Certificates since
distributions will be required to be forwarded by the Trustee to DTC and DTC
will be required to credit such distributions to the accounts of its
Participants which thereafter will be required to credit them to the accounts of
the applicable Certificate Owners either directly or indirectly through Indirect
Participants. See "DESCRIPTION OF THE CERTIFICATES-Book-Entry Registration"
herein.
Certificate Rating Is Not A Recommendation. The rating of the Offered
Certificates will depend primarily on an assessment by the Rating Agencies of
the Home Equity Loans and upon the claims-paying ability of the Certificate
Insurer. Any reduction in a rating assigned to the claims-paying ability of the
Certificate Insurer below the rating initially given to the Offered Certificates
will likely result in a reduction in the rating of such Certificates. The
ratings by the Rating Agencies of the Offered Certificates are not a
recommendation to purchase, hold or sell the Offered Certificates, inasmuch as
such ratings do not comment as to the market price or suitability for a
particular investor. There is no assurance that the ratings will remain in place
for any given period of time or that the ratings will not be lowered or
withdrawn by the Rating Agencies. Any such reduction in the ratings initially
assigned to the Offered Certificates may adversely affect the market prices and
liquidity of such Certificates.
S-13
<PAGE>
DESCRIPTION OF THE HOME EQUITY LOANS
General
The Initial Home Equity Loans were, and any Subsequent Home Equity
Loans will be, originated by the Originator in accordance with the policies set
forth under "THE ORIGINATOR'S HOME EQUITY LOAN PROGRAM." All of the Initial Home
Equity Loans are, and all Subsequent Home Equity Loans will be, home equity
loans bearing fixed interest rates (the "Loan Rates") and evidenced by
promissory notes (the "Mortgage Notes") secured by deeds of trust, security
deeds or mortgages on Mortgaged Properties.
The Initial Home Equity Loans are secured by first or second mortgages
or deeds of trust on Mortgaged Properties located in 34 states. The Mortgaged
Properties securing the Home Equity Loans consist primarily of owner-occupied
one- to four-family residential properties.
Each Home Equity Loan (including Subsequent Home Equity Loans, if any)
will bear interest at a fixed rate. Certain of the Home Equity Loans will have
original terms to stated maturity of up to 15 years and amortization schedules
of up to 30 years ("Balloon Loans"), leaving a substantial payment due at the
stated maturity (each, a "Balloon Payment").
Statistical Information
Set forth below is certain summary statistical information regarding
the Initial Home Equity Loans expected to be included in the Trust as of the
Closing Date. All such information is approximate and is given as of the Cut-Off
Date. More detailed statistical information is set forth in Appendix A. Prior to
the Closing Date, Home Equity Loans may be removed and other Home Equity Loans
may be substituted therefor. In addition, Home Equity Loans may be prepaid at
any time. As a result, certain characteristics of the Initial Home Equity Loans
in the Trust may vary from the characteristics set forth below and in Appendix A
as of the Cut-Off Date.
With respect to the Initial Home Equity Loans as of the Cut-Off Date:
the Principal Balances ranged from $3,200.00 to $232,012.57; the average
Principal Balance was $27,908.67; the Loan Rates ranged from 7.50% to 18.25%;
the weighted average Loan Rate was 11.39%; the original Combined Loan-to-Value
Ratios ranged from 2.92% to 109.30%; the weighted average original Combined
Loan-to-Value Ratio was 90.34%; the remaining terms to stated maturity of the
Balloon Loans was 24 months to 179 months; the weighted average remaining term
to stated maturity of the Balloon Loans was 93 months; the remaining terms to
stated maturity of the non-Balloon Loans ranged from 38 months to 240 months;
the weighted average remaining terms to stated maturity of the non-Balloon Loans
was 143 months; approximately 28.29% of the Initial Home Equity Loans are
Balloon Loans; the number of months since funding ranged from 0 months to 130
months; the weighted average number of months since funding was 4 months; and no
more than 2.4% were secured by Mortgaged Properties located in any one postal
zip code area.
Subsequent Home Equity Loans
The Depositor expects to sell Subsequent Home Equity Loans to the Trust
during the Pre-Funding Period. The purchase price for each Subsequent Home
Equity Loan will equal the outstanding principal balance thereof as of the
opening of business on the first day of the month in which such Subsequent Home
Equity Loan is transferred to the Trust (each, a "Subsequent Cut-Off Date") and
will be paid by withdrawal of funds on deposit in the Pre-Funding Account. The
Subsequent Home Equity Loans may have been originated more recently than, and
may have other characteristics which differ from, the Initial Home Equity Loans.
As a result, following any sale of Subsequent Home Equity Loans to the Trust,
the description of the Home Equity Loans set forth above and in Appendix A may
not accurately reflect the characteristics of all of the Home Equity Loans in
the Trust. However, the Subsequent Home Equity Loans must conform to the
representations and warranties set forth in the Purchase Agreement and the
Agreement. Following the end of the Pre-Funding Period, the Depositor expects
that the Home Equity Loans (including Subsequent Home Equity Loans) in the Trust
will have the following approximate characteristics:
S-14
<PAGE>
Average Unpaid Principal Balance........................no more than $29,000
Minimum Loan Rate.......................................8.75%
Weighted Average Loan Rate..............................at least 11.38%
Weighted Average Remaining Term to Stated Maturity
Balloon.............................................no more than 100 months
Non-Balloon.........................................no more than 150 months
Weighted Average Original Combined
Loan-to-Value Ratio.................................No more than 91%
Single Family...........................................at least 85%
Iowa Home Equity Loans..................................no more than 25%
Balloon Loans...........................................no more than 29%
THE ORIGINATOR AND THE SUBSERVICER
AmerUs Bank (in its capacity as originator of the Home Equity Loans,
the "Originator", in its capacity as the initial subservicer of the Home Equity
Loans, the "Subservicer" and individually, "AmerUs Bank") is a federal savings
bank chartered under the laws of the United States. AmerUs Bank is a subsidiary
of AmerUs Group Co. ("AmerUs Group"), an Iowa corporation. AmerUs Group is a
subsidiary of American Mutual Holding Company. AmerUs Bank will initially act as
subservicer for the Servicer and will perform certain of the Servicer's duties
and obligations under the Agreement. AmerUs Bank has originated and serviced
home equity loans since 1992 and has originated and serviced consumer real
estate secured loan products since the 1920's. The Originator's sources of funds
include deposits, borrowings from the Federal Home Loan Bank and loan sales.
THE SERVICER
AmerUs Life Insurance Company (in its capacity as seller of the Home
Equity Loans, the "Seller", in its capacity as the servicer of the Home Equity
Loans, the "Servicer" and individually, "AmerUs Life") is an Iowa stock life
insurance company and a direct subsidiary of AmerUs Life Holdings Inc. and an
indirect subsidiary of AmerUs Group. The Servicer has initially appointed AmerUs
Bank as subservicer under the Agreement.
THE ORIGINATOR'S HOME EQUITY LOAN PROGRAM
General
The Originator's principal product is a closed end, non-conforming,
fixed rate home equity loan with an original term of no greater than 15 years
and an amortization schedule of no greater than 20 years. The Originator offers
other home equity loan products which will not be included in the Pool. The Home
Equity Loans included in the Pool on the Closing Date fall into one of the
following categories: (i) fully amortizing home equity loans secured by a first
mortgage with a 10 or 15 year term, (ii) fully amortizing home equity loans
secured by a second mortgage with a 4, 5, 7, 10 or 15 year term, (iii) home
equity loans secured by a first mortgage with a 15 year term with payments based
on a 30 year amortization and a balloon payment at the end of year 15, (iv) home
equity loans secured by a second mortgage with a 4 or 5 year term with payments
based on a 15 year amortization and a balloon payment at the end of year 4 or 5,
as applicable, and (v) home equity loans secured by a second mortgage loan with
a 15 year term with payments based on a 30 year amortization and a balloon
payment at the end of year 15.
The Home Equity Loans are, in most instances, non-purchase money
mortgages and are all secured by first or second liens primarily on
owner-occupied one- to four-family residential properties, including townhouses
and individual units in condominiums and planned unit developments. The Home
Equity Loans also include mortgage loans secured by first or second liens on
vacation properties. All of the Home Equity Loans may be prepaid by the
borrowers in whole or in part at any time without penalty. None of the Home
Equity Loans are covered by primary mortgage guaranty insurance policies.
Each Home Equity Loan provides for monthly payments by the borrower on
the related Mortgage Note (the "Mortgagor") according to the "simple interest"
or "date of payment" method and therefore interest is charged to the Mortgagor
S-15
<PAGE>
at the Loan Rate on the outstanding principal balance of the Mortgage Note and
calculated based on the number of days elapsed between receipt of the
Mortgagor's last payment through receipt of the Mortgagor's most current
payment. Such interest is deducted from the Mortgagor's payment amount and the
remainder, if any, of the payment is applied as a reduction to the outstanding
principal balance of the Mortgage Note. Although the Mortgagor is required to
remit equal monthly payments on a specified monthly payment date that would
reduce the outstanding principal balance of such Note to zero at such Note's
maturity date, payments that are made by the Mortgagor after the due date
therefor would cause the outstanding principal balance of the Mortgage Note not
to be reduced to zero. In such a case, the Mortgagor would be required to make
an additional principal payment at the maturity date for such Note. If it were
assumed that all of the Mortgagors on the Initial Home Equity Loans were to pay
on the latest date possible without the Initial Home Equity Loans being in
default, the amount of such additional principal payment would be a de minimis
amount of the aggregate principal balance of the Initial Home Equity Loans as of
the Cut-Off Date. On the other hand, if a Mortgagor makes a payment (other than
a prepayment) before the due date therefor, the reduction in the outstanding
principal balance of the Mortgage Note would occur over a shorter period of time
than would have occurred had it been based on the schedule of amortization in
effect on the Cut-Off Date.
The Originator underwrites each Home Equity Loan based upon the loan
amount requested by the borrower (the "Requested Loan Amount") pursuant to the
procedures discussed below. If a borrower desires to purchase credit life
insurance in connection with obtaining a home equity loan, the Originator may
lend the borrower the funds necessary to purchase such policy. The decision
whether to fund such credit life insurance policy is separate from the
underwriting process with respect to the Requested Loan Amount and is made after
the Requested Loan Amount has been approved and the conditions precedent for
funding the Requested Loan Amount have been satisfied. If the Originator decides
to provide funds for a credit life insurance policy, the amount of the home
equity loan actually funded by the Originator will consist of the Requested Loan
Amount and the amount necessary to purchase the credit life insurance policy.
The surrender value of the credit life insurance policy will be paid to the
Originator in the event that the borrower (i) defaults on the Mortgage Note,
(ii) prepays the Home Equity Loan, or (iii) cancels the credit life insurance
policy. The Originator applies any such monies received to the payment of
principal and interest on the Mortgage Note and, to the extent that the Mortgage
Note has been paid in full, to the borrower.
Underwriting Procedures
The following is a description of the underwriting procedures and
guidelines employed by the Originator with respect to the Home Equity Loans. The
Originator's underwriting process, which is centralized in Des Moines, Iowa, the
site of its corporate headquarters, is intended to assess the applicant's credit
standing and repayment ability and the value and adequacy of the Mortgaged
Property. As of September 30, 1997, the Originator employed 8 underwriters for
home equity loans. The average experience level of the Originator's underwriters
is approximately four years.
Home equity loans, including the Home Equity Loans, are originated
through 12 loan production offices of the Originator (sometimes referred to as
"LPOs") and 45 retail production offices of the Originator (sometimes referred
to as "RPOs"). Loan production offices generate home equity loans through
relationships with independent mortgage brokers and mortgage bankers. LPOs are
located in Chicago, Illinois; Denver, Colorado; St. Louis and Kansas City,
Missouri; Phoenix, Arizona; Minneapolis, Minnesota; Cincinnati, Ohio; Salt Lake
City, Utah; Charlotte, North Carolina; Nashville, Tennessee; and Indianapolis,
Indiana. Retail production offices consist of traditional bank branch offices
and mini-bank branches located in supermarkets, and take applications for loans
directly from consumers. RPOs are located in Iowa, Nebraska, Missouri and
Kansas. Regardless of whether a home equity loan is originated through a LPO or
RPO, each applicant is required to supply the information necessary to complete
an application which generally requires the applicant to provide information
about the applicant's liabilities, income, credit and employment history and
other demographic and personal information. The application is forwarded to an
underwriter in Des Moines who will also obtain a credit bureau report from a
nationally recognized credit reporting agency. The credit bureau report
typically contains information relating to such matters as credit history with
merchants and lenders, installment debt payments and any record of defaults,
bankruptcy, collateral repossessions, suits or judgments. Any adverse
information contained in the credit report must be acceptable (and if requested,
explained) to the underwriter. The Originator's loan origination computer system
will also automatically compute the applicant's debt-to-income ratio based on
the applicant's debts as listed in the credit bureau report.
The underwriter will evaluate the application in accordance with the
Originator's established guidelines. The eligibility criteria for a home equity
loan vary depending upon the combined loan-to-value ratio of the loan, whether
the loan will be secured by a first or second mortgage and whether the loan will
be fully amortizing or a Balloon Loan. In general, the Originator will require
an applicant to fall within the following parameters in the case of any Home
Equity Loan included within the Pool (the specific criteria required are
dependent upon the type of loan): (i) owner-occupied home ownership for a
minimum specified period ranging from six months to two years; (ii) employment
and credit history for a minimum specified period ranging from six months to two
years; (iii) a debt to income ratio no higher than 40% to 45%; (iv) no current
credit
S-16
<PAGE>
delinquencies; (v) either limited 30- and 60-day delinquencies, or no such
delinquencies, during a minimum specified period of time ranging from three
months to two years preceding the application date; and (vi) the
re-establishment of credit and the passage of at least two years since the
discharge of a bankruptcy. Any deviation from these guidelines must be approved
by a senior officer of the Originator.
Once the application is complete, the underwriter will then either
reject the application or approve the application subject to the satisfaction of
certain conditions precedent. Conditionally approved applications are further
processed to verify the accuracy of the information provided, including
employment verification and verification of the value of the Mortgaged Property.
Verification of employment is usually accomplished through review of recent pay
stubs, W-2 forms or income tax returns, or verification of employment with the
applicant's employer.
The Originator verifies the value of the real property using different
methods depending primarily upon the amount of the proposed loan. For all loans
in an amount equal to or greater than $100,000, the Originator usually requires
that a full appraisal of the property be conducted to verify the value of the
collateral. The Originator will accept a copy of a pre-existing appraisal so
long as the appraisal is less than twelve months old and the amount of the loan
is less than $100,000. All appraisals are performed by independent third-party,
fee-based appraisers. Substantially all appraisals are completed on standard
FNMA/FHLMC forms and comport to current FNMA/FHLMC secondary market requirements
for residential property appraisals. Each such appraisal generally includes,
among other things, an inspection of the exterior and interior of the subject
property, photographs of two or more different views of the property and data
from sales within the preceding 12 months of similar properties within the same
general location as the subject property. If the amount of the proposed loan is
under $100,000, the Originator may verify property value through the purchase
price paid for the property if the purchase occurred within twelve months of the
loan origination or through property tax assessment information (but only up to
100% of assessed value for loans over $10,000 and up to 110% of assessed value
of loans under $10,000). Property values for loans less than $50,000 may be
verified through market analysis.
The title requirements of the Originator vary depending upon whether
the real property is located in or outside of the State of Iowa and whether the
Home Equity Loan was originated through a loan production office (a "LPO Loan")
or a retail production office (a "RPO Loan"). For real property located outside
of the State of Iowa, a title insurance policy is required for all LPO Loans,
RPO Loans that are originated through a broker, and RPO Loans in an amount equal
to or greater than $25,000. For real property located in the State of Iowa, an
attorney's opinion, updated abstracting and a title certificate are required for
all LPO Loans, RPO Loans that are originated through a broker in an amount equal
to or greater than $50,000, and RPO Loans in an amount equal to or greater than
$100,000. A title report may be used in lieu of a title insurance policy in the
case of a RPO Loan in an amount less than $25,000 relating to real property
located outside of the State of Iowa or in lieu of an attorney's opinion,
updated abstracting and a title certificate in the case of a RPO Loan in an
amount less than $100,000 relating to real property located in the State of
Iowa.
Any exceptions made to underwriting and documentation policies in
respect of a particular application must be approved by senior management. The
factors considered when determining whether an exception to the general
underwriting and documentation standards should be made include the applicant's
credit history, the type and length of employment, the amount of disposable
income, and the quality and appraised value of the related property.
Upon final approval of the application, the home equity loan is
completed by the applicant's execution of the related loan documents, including
a promissory note and mortgage in exchange for the applicant's access to the
home equity loan. All home equity loans originated through LPOs are closed by
escrow agents approved by the Originator or, if approved by a bank manager, in
the LPO. All home equity loans originated through RPOs are closed by bank
officers.
Certain laws applicable to the Home Equity Loans permit a borrower to
rescind a loan for a certain period of time after loan documents are signed,
termed the rescission period, during which the applicant has the right to cancel
the loan. Home Equity Loans will not be funded by the Originator until the
rescission period has expired. The rescission period may not be waived by the
applicant except as permitted by law.
Servicing of Home Equity Loans
Pursuant to the Agreement, AmerUs Life will act as Servicer of the Home
Equity Loans. The Servicer has initially appointed AmerUs Bank to act as
Subservicer. As of September 30, 1997, the Subservicer had 31 employees
dedicated to collecting and servicing its loan portfolio. The following is a
summary of the Subservicer's collection procedures:
S-17
<PAGE>
Early Delinquencies. An account is considered delinquent if no
payment or only partial payment has been received within ten days after
a payment due date. On the eleventh day the account is automatically
flagged by the computer system and is sent to a collector to initiate
further collection procedures. The collector will initially attempt to
contact the borrower with the goal of obtaining the borrower's promise
to make the overdue payment or to determined the reason for delay.
Computer System and Notices. The Subservicer's collection
system automatically generates a "Late Notice" to the borrower when an
account becomes 10, 20, and 30 days past due. After 30 days any further
notices are sent by collectors from time to time (pre-drafted form
letters are a feature available to the collectors). The collection
system automatically determines which accounts are past due and require
action on any particular day by prompting the collectors. After the
30-day delinquent letter is sent, collection letters will no longer be
automatically generated but will be tailored and mailed to the borrower
taking into account the circumstances.
Notice of Default. If a borrower is 30 days delinquent and the
collector has been unable to make satisfactory arrangements with the
borrower a "Notice to Cure Default" is sent. The borrower then has a
30-day "cure" period before the collector is first able to take any
legal action. However, the collector will continue to make contact with
the borrower until the collector receives a satisfactory payment plan.
60-Day Plus Delinquencies. If a borrower becomes 60 days
delinquent, the collector obtains a new credit bureau report and calls
other creditors for a credit reference. Once a borrower becomes 100
days delinquent, the account is transferred to a supervisor. The
supervisor attempts to collect the past due amount. If unsuccessful,
the secured loan is referred to the Vice President of Collections for
review and approval to transfer the account to Default Administration
for analysis. The collection supervisor will be responsible for
recommending the action to be taken. If the supervisor recommends
foreclosure, all proper notices will be sent and legal counsel will be
retained.
Regulations and practices regarding the liquidation of properties
(e.g., foreclosure) and the rights of the borrower in default vary greatly from
state to state. The Servicer will decide that liquidation is the appropriate
course of action only if a delinquency cannot otherwise be satisfactorily cured.
If the Servicer determines that purchasing a property securing a mortgage loan
will minimize the loss associated with such defaulted loan, the Servicer may bid
at the foreclosure sale for such property or accept a deed in lieu of
foreclosure.
Servicing and collection practices may change in accordance with, among
other things, the Servicer's business judgment, changes in the composition of
the portfolio and applicable laws and regulations. Any realization from the sale
of foreclosed property is deemed a recovery. After the Servicer acquires title
to a mortgaged property by foreclosure or deed in lieu of foreclosure, an
appraisal or broker's price opinion is obtained and an approved realtor is
selected to list and advertise the property. The Servicer may not foreclose on
property securing a junior home equity loan unless it forecloses subject to all
senior mortgages or pays off all senior mortgages.
Delinquency and Loss Experience
Set forth below is the delinquency, foreclosure and loss experience on
the home equity loans serviced by the Subservicer for the periods and at the
dates indicated. The delinquency and loan loss experience represents the
historical experience of the Originator, and there can be no assurance that the
future experience on the Home Equity Loans in the Trust will be the same as, or
more favorable than, that of the total home equity loans in the Originator's
portfolio.
S-18
<PAGE>
DELINQUENCY EXPERIENCE
(Dollars in thousands)
<TABLE>
<CAPTION>
As of June 30, As of September 30,
------------------------------------------------------------------------------
1995 1996 1997 1996 1997
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Number of loans 11,907 16,860 21,233 18,145 21,982
Dollar amount of loans $228,952 $355,318 $492,816 $391,793 $520,170
Delinquency Period(4)(5)
30-59 days(3)
% of number of loans(1) 0.50% 0.78% 1.26% 1.18% 1.60%
% of dollar amount of loans(2) 0.63% 0.92% 1.40% 1.44% 1.74%
60-89 days(3)
% of number of loans(1) 0.14% 0.18% 0.39% 0.34% 0.53%
% of dollar amount of loans(2) 0.17% 0.19% 0.45% 0.35% 0.58%
90 days and over(3)
% of number of loans(1) 0.14% 0.34% 0.95% 0.36% 1.08%
% of dollar amount of loans(2) 0.38% 0.47% 1.02% 0.44% 1.22%
Properties in Process of Foreclosure
% of number of loans(1) 0.08% 0.07% 0.08% 0.09% 0.10%
% of dollar amount of loans(2) 0.19% 0.17% 0.20% 0.32% 0.25%
Total Delinquent or In Process of Foreclosure
% of number of loans(1) 0.86% 1.37% 2.68% 1.96% 3.30%
% of dollar amount of loans(2) 1.37% 1.75% 3.07% 2.55% 3.79%
</TABLE>
- ----------------------
(1) The number of delinquent loans as a percentage of the total "Number of
loans" as of the date indicated
(2) The dollar amount of delinquent loans as a percentage of the total "Dollar
amount of loans" as of date indicated.
(3) Excluding loans in process of foreclosure.
(4) The period of delinquency is based on the number of days payments are
contractually past due.
(5) Real-estate-owned properties are not reflected in this table because the
loans are written-down to net realizable value prior to completion of the
foreclosure. Therefore, any losses relating to those loans would be
reflected in the loss experience table as set forth below.
LOSS EXPERIENCE
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ending Three Months Ending
June 30, September 30,
-----------------------------------------------------------------------------------
1996 1997 1996 1997
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Amount Outstanding $355,318 $492,816 $391,793 $520,170
Average Amount Outstanding during period $338,233 $471,136 $373,556 $506,493
Total Charge-Offs $26.9 $446.8 $340.2 $616.0
Annualized Total Charge-Offs as a percentage
of average amount outstanding 0.03% 0.38% 0.36% 0.49%
Total Write-downs in foreclosure $64.6 $35.1 $0 $84.5
Annualized Total Write-downs as a percentage
of average amount outstanding 0.08% 0.03% 0.00% 0.07%
Total Losses $91.5 $481.9 $340.2 $700.4
Annualized Total Losses as a percentage of
average amount outstanding(1) 0.11% 0.41% 0.36% 0.55%
- ---------------
(1) The Originator experienced an increase in the annualized loss percentage
in the third quarter of 1997. Over 50% of the loan charge-offs were
related to loans originated prior to 1996, via loan production offices. In
early 1996, the Originator centralized key functions in the loan
origination and closing process for loans originated in loan production
offices to AmerUs Bank's home office. It is believed that the third
quarter loss experience is a result of these pre-1996 closing procedures.
These procedures were corrected prior to the origination of greater than
97% of the Home Equity Loans included in the Trust.
S-19
<PAGE>
The delinquency and loss experience set forth above represents the
experience with respect to only a portion of the Originator's loan production
for the periods indicated. The delinquency and loss experience percentages
indicated above are calculated on the basis of the home equity loans serviced as
of the end of the periods indicated. However, because the total amount of loans
originated by the Originator has increased over these periods, the total amount
of loans serviced as of the end of any indicated period will include many loans
which will not have been outstanding long enough to give rise to some or all of
the indicated periods of delinquencies. In the absence of such new originations,
the delinquency and loss experience reflected in the above tables could be
substantially different.
PREPAYMENT AND YIELD CONSIDERATIONS
General
The rate of principal payments on a Class of Offered Certificates, the
aggregate amount of distributions on such Certificates and the yield to maturity
of such Certificates will be related to the rate and timing of payments of
principal on the Home Equity Loans. The rate of principal payments on the Home
Equity Loans will in turn be affected by the amortization schedules of the Home
Equity Loans and by the rate of principal prepayments (including for this
purpose prepayments resulting from refinancing, liquidations of the Home Equity
Loans due to defaults, exercise of due-on-sale clauses, casualties,
condemnations and repurchases by the Seller). The Home Equity Loans may be
prepaid by the Mortgagors at any time without a prepayment penalty.
Prepayments, liquidations and purchases of the Home Equity Loans
(including any optional purchase by the Seller of a defaulted Home Equity Loan
and any optional purchase of the remaining Home Equity Loans in connection with
the termination of the Trust, in each case as described herein) will result in
distributions on the Offered Certificates of principal amounts which would
otherwise be distributed over the remaining terms of the Home Equity Loans. In
addition, any Pre-Funded Amount remaining at the end of the Pre-Funding Period
will be distributed as a prepayment of the Offered Certificates. Since the rate
of payment of principal of the Home Equity Loans will depend on future events
and a variety of factors, no assurance can be given as to such rate or the rate
of principal prepayments. The extent to which the yield to maturity of an
Offered Certificate may vary from the anticipated yield will depend upon the
degree to which such Certificate is purchased at a discount or premium.
The prepayment experience on non-conforming home equity loans may
differ from that on conventional first mortgage loans, primarily due to the
credit quality of the typical borrower. Because the credit histories of many
home equity borrowers may preclude them from other traditional sources of
financing, such borrowers may be less likely to refinance due to a decline in
market interest rates.
The rate of prepayments on the Home Equity Loans cannot be predicted.
Home equity loans such as the Home Equity Loans have been originated in
significant volume only during the last few years and the Depositor is not aware
of any publicly available studies or statistics on the rate of prepayment of
such home equity loans. Generally, home equity loans are not viewed by borrowers
as permanent financing. Accordingly, the Home Equity Loans may experience a
higher rate of prepayment than traditional first mortgage loans. The prepayment
experience of the Trust with respect to the Home Equity Loans may be affected by
a wide variety of factors, including economic conditions, prevailing interest
rate levels, the availability of alternative financing and homeowner mobility
and changes affecting the deductibility for federal income tax purposes of
interest payments on home equity loans. All of the Home Equity Loans contain
"due-on-sale" provisions, and the Servicer is required by the Agreement to
enforce such provisions, unless such enforcement is not permitted by applicable
law. The enforcement of a "due-on-sale" provision will have the same effect as a
prepayment of the related Home Equity Loan. See "CERTAIN LEGAL ASPECTS OF LOANS
- - Due-on-Sale Clauses in Mortgage Loans" in the Prospectus. No assurance can be
given as to the level of prepayments that will be experienced by the Trust.
On or after any Distribution Date on which the Pool Balance is less
than 10% of the sum of (i) the Pool Balance as of the Cut-Off Date and (ii) the
Principal Balance of the Subsequent Home Equity Loans as of their respective
Subsequent Cut-Off Dates, the Seller (or a designee of the Seller) may effect an
early termination of the Trust, resulting in a retirement of the Offered
Certificates. See "DESCRIPTION OF THE CERTIFICATES -- Termination; Retirement of
the Certificates."
Overcollateralization
The overcollateralization features described herein will affect the
rate and timing of principal distributions on the Offered Certificates, and
consequently the average life and yield to maturity. On any Distribution Date on
which the Overcollateralization Amount is less than the Required
Overcollateralization Amount, the Net Excess Spread will be used to reduce the
Class Certificate Balance of the Class of Offered Certificates then entitled to
distributions of principal through the distribution of Additional Principal.
Home Equity Loans with higher Loan Rates contribute more interest to the Excess
Spread than do Home Equity Loans
S-20
<PAGE>
with relatively lower Loan Rates. If Home Equity Loans with higher Loan Rates
were to prepay, the amount of Net Excess Spread could be reduced thereby slowing
the amortization of the Class Certificate Balance of the applicable Class or
Classes of Offered Certificates from the distribution of Additional Principal.
The application of Net Excess Spread to payments of Additional
Principal is intended to create overcollateralization to provide a source of
additional cashflow to cover losses on the Home Equity Loans. If the amount of
losses in a particular Due Period exceeds the amount of Excess Spread for the
related Distribution Date, the amount in respect of principal distributed to the
Offered Certificates on such Distribution Date will be reduced. A draw on the
Policy in respect of principal will not be made until the Pool Balance and the
amount on deposit in the Pre-Funding Account (exclusive of any investment
earnings included therein) is less than the aggregate Class Certificate Balance
of the Offered Certificates, i.e., the Offered Certificates are
undercollateralized.
If the Required Overcollateralization Amount is allowed to step down,
distributions in respect of principal on the Offered Certificates will be made
less rapidly.
As a result of the interaction of the foregoing features, there may be
Distribution Dates on which Holders of the Offered Certificates receive little
or no distributions in respect of principal. The Overcollateralization Amount
may or may not equal the Required Overcollateralization Amount on any
Distribution Date. There can be no assurance as to whether or when the
Overcollateralization Amount may equal the Required Overcollateralization
Amount.
Final Scheduled Distribution Dates
The Final Scheduled Distribution Date for each Class of Offered
Certificates is set forth in "SUMMARY OF TERMS Final Scheduled Distribution
Dates." The Final Scheduled Distribution Dates for the Class A-1, Class A-2 and
Class A-3 Certificates were determined based on the Structuring Assumptions
(defined below) and the assumption that there are no prepayments. The Final
Scheduled Distribution Date for the Class A-4 Certificates was set to equal the
Distribution Date in the month following the month of the latest possible
scheduled maturity date for any of the Home Equity Loans. Since the rate of
distributions in reduction of the Class Certificate Balance of each Class of
Offered Certificates will depend on the rate of payment (including prepayments)
of the Home Equity Loans, the Class Certificate Balance of any such Class could
be reduced to zero significantly earlier or later than the applicable Final
Scheduled Distribution Date. The rate of payments on the Home Equity Loans will
depend on their particular characteristics, as well as on prevailing interest
rates from time to time and other economic factors, and no assurance can be
given as to the actual payment experience of the Home Equity Loans.
Structuring Assumptions
The information in the decrement table has been prepared on the basis
of the following assumed characteristics of the Home Equity Loans and the
following additional assumptions (collectively, the "Structuring Assumptions"):
(i) the Home Equity Loans prepay at the specified percentages of the Prepayment
Assumption (as defined below), (ii) no defaults or delinquencies in the payment
by Mortgagors of principal of and interest on the Home Equity Loans are
experienced, (iii) the initial Class Certificate Balance of each Class of
Offered Certificates is as set forth on the cover page hereof, (iv) interest
accrues on the Class A-1 Certificates in each period at a Certificate Rate of
5.745% and such rate remains constant, and interest accrues on the Class A-2,
Class A-3 and Class A-4 Certificates in each period at a Certificate Rate of
6.57%, 6.76% and 7.15%, respectively, (v) distributions in respect of the
Offered Certificates are received in cash on the 15th day of each month
commencing in November 1997, (vi) other than as indicated in the table, the
Seller (or a designee of the Seller) does not exercise its option to purchase
the Home Equity Loans described herein under "DESCRIPTION OF THE CERTIFICATES -
Termination; Retirement of Certificates" and "Optional Purchase of Defaulted
Home Equity Loans," (vii) the Offered Certificates are purchased on October 23,
1997, (viii) scheduled payments on the Home Equity Loans are received on the
first day of each month commencing in the calendar month of the Closing Date and
are computed prior to giving effect to prepayments received on the last day of
the prior month, (ix) prepayments represent prepayments in full of individual
Home Equity Loans and are received on the last day of each month and include 30
days' interest thereon, commencing in the calendar month of the Closing Date,
(x) the scheduled monthly payment for each Home Equity Loan has been calculated
based on the assumed Home Equity Loan characteristics set forth in the following
table such that each Home Equity Loan will amortize in amounts sufficient to
repay the balance of such Home Equity Loan by its indicated remaining term to
maturity, and (xi) the Trust consists of 8 Home Equity Loans with the
characteristics set forth in the following table. While it is assumed that each
of the Home Equity Loans prepays at the specified percentages of the Prepayment
Assumption, this is not likely to be the case. Moreover, discrepancies will
exist between the characteristics of the actual Home Equity Loans which will be
delivered to the Trustee (including Subsequent Home Equity Loans) and
characteristics of the Home Equity Loans assumed in preparing the tables herein.
S-21
<PAGE>
Prepayments of home equity loans are commonly measured relative to a
prepayment standard or model. The model used with respect to the Offered
Certificates (the "Prepayment Assumption") assumes that the Home Equity Loans
prepay at a rate of 4% CPR in the first month after origination, and an
additional 1.142857% (precisely 16/14ths) each month thereafter until the 15th
month. Beginning in the 15th month and each month thereafter, the Prepayment
Assumption assumes a prepayment rate of 20% CPR. The Constant Prepayment Rate
("CPR") represents an assumed constant rate of prepayment each month, expressed
as an annual rate, relative to the then outstanding principal balance of a pool
of home equity loans for the life of such home equity loans. Neither model
purports to be either an historical description of the prepayment experience of
any pool of home equity loans or a prediction of the anticipated rate of
prepayment of any home equity loans, including the Home Equity Loans to be
included in the Loan Groups.
INITIAL HOME EQUITY LOANS
</TABLE>
<TABLE>
<CAPTION>
Initial Remaining Remaining Original
Mortgage Initial Net Term to Term of Term of
Pool Principal Interest Mortgage Maturity Amortization Amortization Amortization Assumed
Number Balance Rate Rate (in months) (in months) (in months) Method Delivery Date
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 $9,656,395.41 10.938% 10.438% 49 169 174 Balloon Closing Date
2 $16,947,070.21 11.821% 11.321% 118 234 237 Balloon Closing Date
3 $8,981,163.97 9.604% 9.104% 56 56 60 Level Pay Closing Date
4 $4,402,575.55 10.542% 10.042% 82 82 85 Level Pay Closing Date
5 $12,294,727.51 11.080% 10.580% 117 117 121 Level Pay Closing Date
6 $41,770,288.54 11.888% 11.388% 176 176 180 Level Pay Closing Date
</TABLE>
SUBSEQUENT HOME EQUITY LOANS
<TABLE>
<CAPTION>
Initial Remaining Remaining Original
Mortgage Initial Net Term to Term of Term of
Pool Principal Interest Mortgage Maturity Amortization Amortization Amortization Assumed
Number Balance Rate Rate (in months) (in months) (in months) Method Delivery Date
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
7 $8,753,840.78 11.500% 11.000% 93 210 214 Balloon November 1997
8 $22,193,938.03 11.349% 10.849% 143 143 147 Level Pay November 1997
</TABLE>
Decrement Table
The following table indicates, based on the Structuring Assumptions,
the percentages of the initial Class Certificate Balances of the Classes of
Offered Certificates that would be outstanding after each of the dates shown at
various percentages of the Prepayment Assumption and the corresponding weighted
average lives of such Classes. It is not likely that (i) all of the Home Equity
Loans will have the characteristics assumed or (ii) the Home Equity Loans will
prepay at the specified percentages of the Prepayment Assumption or at any other
constant percentage. Moreover, the diverse remaining terms to maturity of the
Home Equity Loans could produce slower or faster principal distributions than
indicated in the table at the specified percentages of the Prepayment
Assumption, even if the weighted average remaining term to maturity of the Home
Equity Loans is consistent with the remaining terms to maturity of the Home
Equity Loans specified in the Structuring Assumptions.
S-22
<PAGE>
Percent of Initial Class Certificate
Balances Outstanding**
<TABLE>
<CAPTION>
Class A-1 Class A-2
Percentage of Prepayment Percentage of Prepayment
Assumption Assumption
Distribution Date 0% 50% 75% 100% 125% 150% 200% 0% 50% 75% 100% 125% 150% 200%
- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percent 100 100 100 100 100 100 100 100 100 100 100 100 100 100
October 1998... 85 68 60 51 42 34 16 100 100 100 100 100 100 100
October 1999... 73 36 18 2 0 0 0 100 100 100 100 80 59 21
October 2000... 59 6 0 0 0 0 0 100 100 77 49 23 * 0
October 2001... 44 0 0 0 0 0 0 100 72 38 8 0 0 0
October 2002... 13 0 0 0 0 0 0 100 28 0 0 0 0 0
October 2003... 0 0 0 0 0 0 0 100 5 0 0 0 0 0
October 2004... 0 0 0 0 0 0 0 80 0 0 0 0 0 0
October 2005... 0 0 0 0 0 0 0 42 0 0 0 0 0 0
October 2006... 0 0 0 0 0 0 0 22 0 0 0 0 0 0
October 2007... 0 0 0 0 0 0 0 0 0 0 0 0 0 0
October 2008... 0 0 0 0 0 0 0 0 0 0 0 0 0 0
October 2009... 0 0 0 0 0 0 0 0 0 0 0 0 0 0
October 2010... 0 0 0 0 0 0 0 0 0 0 0 0 0 0
October 2011... 0 0 0 0 0 0 0 0 0 0 0 0 0 0
October 2012... 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average
Life (in years)*** 3.17 1.59 1.25 1.04 0.90 0.79 0.65 8.01 4.51 3.64 3.04 2.56 2.19 1.70
Weighted Average
Life (in years)**** 3.17 1.59 1.25 1.04 0.90 0.79 0.65 8.01 4.51 3.64 3.04 2.56 2.19 1.70
<CAPTION>
Class A-3 Class A-4
Percentage of Prepayment Percentage of Prepayment
Assumption Assumption
Distribution Date 0% 50% 75% 100% 125% 150% 200% 0% 50% 75% 100% 125% 150% 200%
- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percent ... 100 100 100 100 100 100 100 100 100 100 100 100 100 100
October 1998 ...... 100 100 100 100 100 100 100 100 100 100 100 100 100 100
October 1999 ...... 100 100 100 100 100 100 100 100 100 100 100 100 100 100
October 2000 ...... 100 100 100 100 100 100 35 100 100 100 100 100 100 100
October 2001 ...... 100 100 100 100 72 37 0 100 100 100 100 100 100 81
October 2002 ...... 100 100 94 49 14 0 0 100 100 100 100 100 84 39
October 2003 ...... 100 100 55 14 0 0 0 100 100 100 100 80 53 20
October 2004 ...... 100 73 23 0 0 0 0 100 100 100 84 53 32 9
October 2005 ...... 100 29 0 0 0 0 0 100 100 85 52 31 17 3
October 2006 ...... 100 3 0 0 0 0 0 100 100 62 35 19 9 0
October 2007 ...... 42 0 0 0 0 0 0 100 52 28 14 6 1 0
October 2008 ...... 12 0 0 0 0 0 0 100 34 17 7 2 0 0
October 2009 ...... 0 0 0 0 0 0 0 73 19 8 2 0 0 0
October 2010 ...... 0 0 0 0 0 0 0 47 10 3 0 0 0 0
October 2011 ...... 0 0 0 0 0 0 0 18 2 0 0 0 0 0
October 2012 ...... 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average
Life (in years)*** 10.19 7.62 6.23 5.08 4.34 3.78 2.90 12.91 10.75 9.62 8.52 7.46 6.51 5.40
Weighted Average
Life (in years)**** 10.19 7.62 6.23 5.08 4.34 3.78 2.90 12.13 9.75 8.59 7.50 6.29 5.39 4.13
</TABLE>
- ---------------
* Less than 0.5% but more than zero.
** Rounded to the nearest whole percentage.
*** The weighted average life of an Offered Certificate is determined by (a)
multiplying the amount of the reductions, if any, of the Class Certificate
Balance of such Certificate on each Distribution Date by the number of
years from the date of issuance to such Distribution Date, (b) summing the
results and (c) dividing the sum by the aggregate amount of the reduction
in Class Certificate Balance of such Certificate referred to in clause (a).
**** Assumes that the Seller (or a designee of the Seller) purchases all of the
Home Equity Loans and effects an early termination of the Certificates.
S-23
<PAGE>
DESCRIPTION OF THE CERTIFICATES
The Certificates will be issued pursuant to the Agreement. The
following summaries describe certain provisions of the Agreement. The summaries
do not purport to be complete and are subject to, and are qualified in their
entirety by reference to, all of the provisions of the Agreement. Wherever
particular sections or defined terms of the Agreement are referred to, such
sections or defined terms are hereby incorporated herein by reference.
General
Each Class of Offered Certificates will evidence specified undivided
interests in the Trust. The property of the Trust will consist of, to the extent
provided in the Agreement: (i) the Home Equity Loans; (ii) payments on the Home
Equity Loans received on and after the Cut-Off Date; (iii) Mortgaged Properties
relating to the Home Equity Loans that are acquired by foreclosure or deed in
lieu of foreclosure; (iv) the Collection Account and Distribution Account; (v)
the Capitalized Interest Account: (vi) the Pre-Funding Account; (vii) the
Policy; (viii) certain hazard insurance policies maintained by the borrowers of
the Home Equity Loans or the Servicer in respect thereof; (ix) rights of the
beneficiary under credit life insurance policies (including any applicable
surrender value) related to the Home Equity Loans; and (x) the Depositor's
rights under the Purchase Agreement (defined below).
Book-Entry Registration
The Offered Certificates initially will be registered in the name of
Cede & Co. ("Cede"), the nominee of The Depository Trust Company ("DTC"). DTC
has advised the Depositor as follows: DTC is a limited purpose trust company
organized under the laws of the State of New York, a member of the Federal
Reserve System, a "clearing corporation" within the meaning of the Uniform
Commercial Code ("UCC") and a "clearing agency" registered pursuant to the
provisions of Section 17A of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). DTC was created to hold securities for its participating
organizations ("Participants") and facilitate the clearance and settlement of
securities transactions between Participants through electronic book-entry
changes in their accounts, thereby eliminating the need for physical movement of
certificates. Participants include securities brokers and dealers, banks, trust
companies and clearing corporations and may include certain other organizations.
Indirect access to the DTC system also is available to others such as brokers,
dealers, banks and trust companies that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly ("Indirect
Participant").
Under a book-entry format, beneficial owners of the Offered
Certificates ("Certificate Owners") that are not Participants or Indirect
Participants but desire to purchase, sell or otherwise transfer ownership of
Offered Certificates registered in the name of Cede, as nominee of DTC, may do
so only through Participants and Indirect Participants. In addition, such
Certificate Owners will receive all distributions of principal of and interest
on the Offered Certificates from the Trustee through DTC and its Participants.
Under a book-entry format, Certificate Owners will receive payments after the
related Distribution Date because, while payments are required to be forwarded
to Cede, as nominee for DTC, on each such date, DTC will forward such payments
to its Participants which thereafter will be required to forward them to
Indirect Participants or Certificate Owners. Under a book entry format, it is
anticipated that the only Certificateholder will be Cede, as nominee of DTC, and
that the Certificate Owners will not be recognized by the Trustee as
Certificateholders under the Agreement. The Certificate Owners will only be
permitted to exercise the rights of Certificateholders under the Agreement
indirectly through DTC and its Participants who in turn will exercise their
rights through DTC.
Under the rules, regulations and procedures creating and affecting DTC
and its operations, DTC is required to make book-entry transfers among
Participants on whose behalf it acts with respect to the Offered Certificates
and is required to receive and transmit payments of principal of and interest on
the Offered Certificates. Participants and Indirect Participants with which
Certificate Owners have accounts with respect to the Offered Certificates
similarly are required to make book-entry transfers and receive and transmit
such payments on behalf of their respective Certificate Owners. Accordingly,
although Certificate Owners will not possess certificates, the rules provide a
mechanism by which Certificate Owners will receive distributions and will be
able to transfer their interests.
Certificate Owners who are not Participants may transfer ownership of
the Offered Certificates only through Participants by instructing such
Participants to transfer the Offered Certificates, by book-entry transfer,
through DTC for the account of the purchasers of such Certificates, which
account is maintained with their respective Participants. Under the rules and in
accordance with DTC's normal procedures, transfers of ownership of Offered
Certificates will be executed through DTC and the accounts of the respective
Participants at DTC will be debited and credited. Similarly, the respective
Participants will make debits or credits, as the case may be, on their records
on behalf of the selling and purchasing Certificate Owners.
S-24
<PAGE>
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of Certificate
Owners to pledge the Offered Certificates to persons or entities that do not
participant in the DTC system, or otherwise take actions in respect of such
Certificates may be limited due to the lack of a physical certificate for such
Certificates.
DTC in general advises that it will take any action permitted to be
taken by a Certificate Owner under the Agreement only at the direction of one or
more Participants to whose account with DTC the Offered Certificates are
credited. Additionally, DTC in general advises that it will take such actions
with respect to specified percentages of the Certificate Owners only at the
direction of and on behalf of Participants whose holdings include current
principal amounts of outstanding Offered Certificates that satisfy such
specified percentages. DTC may take conflicting actions with respect to other
current principal amounts of outstanding Offered Certificates to the extent that
such actions are taken on behalf of Participants whose holdings include such
current principal amounts of outstanding Offered Certificates.
Any Offered Certificates initially registered in the name of Cede, as
nominee of DTC, will be issued in fully registered, certificated form to
Certificate Owners or their nominees ("Definitive Certificates"), rather than to
DTC or its nominee only under the following circumstances: (i) the Depositor
advises the Trustee and the Certificate Insurer in writing that DTC is no longer
willing or able to properly discharge its responsibilities as Depository with
respect to the Offered Certificates, and the Trustee or the Depositor is unable
to locate a qualified successor, (ii) the Depositor, at its option, elects to
terminate the book-entry system through DTC, or (iii) after the occurrence of an
Event of Default (defined herein), Certificate Owners representing not less than
50% of the aggregate Class Certificate Balance of the Offered Certificates
advise the Trustee and DTC through Participants in writing that the continuation
of a book-entry system through DTC (or a successor thereto) is no longer in the
best interest of the Certificate Owners. Upon the occurrence of any of such
events, DTC will be required to notify all Participants of the availability
through DTC of Definitive Certificates. Upon surrender by DTC of the
certificates representing the Offered Certificates and instruction for
re-registration, the Trustee will issue the Offered Certificates in the form of
Definitive Certificates, and thereafter the Trustee will recognize the holders
of such Definitive Certificates as Certificateholders. Thereafter, payments of
principal of and interest on the Offered Certificates will be made by the
Trustee directly to Certificateholders in accordance with the procedures set
forth in the Agreement. The final distribution of any Offered Certificate
(whether Definitive Certificates or Offered Certificates registered in the name
of Cede), however, will be made only upon presentation and surrender of such
Certificates on the final Distribution Date at such office or agency as is
specified in the notice of final payment to Certificateholders.
Although DTC has agreed to the foregoing procedures in order to
facilitate transfers of interests in the Offered Certificates among
Participants, it is under no obligation to perform or continue to perform such
procedures, and such procedures may be discontinued at any time. None of the
Depositor, the Originator, the Servicer or the Trustee will have any
responsibility for the performance by DTC or its Participants or Indirect
Participants of their respective obligations under the rules and procedures
governing their operations.
Assignment of Home Equity Loans
The Home Equity Loans have been or will be acquired by (i) the Seller
from the Originator pursuant to that certain Master Agreement of Purchase and
Sale dated March 5, 1997, as amended (the "Transfer Agreement"), between the
Originator and the Seller, and (ii) the Depositor from the Seller pursuant to
the Mortgage Loan Purchase Agreement, dated the Closing Date (the "Purchase
Agreement"), between the Seller and the Depositor. At the time of issuance of
the Certificates, the Depositor will transfer to the Trust all of its right,
title and interest in and to each Home Equity Loan, the related Mortgage Note,
Mortgage and other related documents (collectively, the "Related Documents"),
including all payments received on or with respect to each such Home Equity Loan
on or after the Cut-Off Date (exclusive of payments in respect of accrued
interest on the Home Equity Loans through the related Due Date in the month
preceding the month of the Cut-Off Date). The Depositor also will assign to the
Trustee all of the Depositor's rights under the Purchase Agreement. The Trustee,
concurrently with such transfer, will deliver the Certificates to the Depositor.
Each Home Equity Loan transferred to the Trust will be identified on a schedule
(the "Home Equity Loan Schedule") delivered to the Trustee pursuant to the
Agreement. Such schedule will include information as to the Principal Balance of
each Home Equity Loan as of the Cut-Off Date, as well as information with
respect to the Loan Rate. As of the Closing Date, approximately one Initial Home
Equity Loan with a Principal Balance as of the Cut-Off Date of approximately
$16,883 (the "Low Coupon Loan") is being sold to the Trust at a discount because
the Loan Rate thereon is less than the sum of the initial Certificate Rate on
the Class A-4 Certificates and the Expense Fee Rate (as defined herein).
The Agreement will require that, within the time period specified
therein, the Depositor will deliver or cause to be delivered to the Trustee (or
a custodian, as the Trustee's agent for such purpose) the Home Equity Loans,
endorsed to the Trustee, and the Mortgage and Mortgage Note. In lieu of delivery
of original mortgages, the Depositor may deliver or cause to be
S-25
<PAGE>
delivered true and correct copies thereof which have been certified as to
authenticity by an authorized officer of the Seller, the closing attorney, a
title company officer or by the relevant county recording office.
Under the terms of the Purchase Agreement, the Seller will have 30 days
after the Closing Date to prepare and submit for recording assignments of the
mortgages related to each Home Equity Loan in favor of the Trustee (unless
opinions of counsel satisfactory to the Rating Agencies and the Certificate
Insurer are delivered to the Trustee and the Certificate Insurer to the effect
that recordation of such assignments is not required in the relevant
jurisdictions to protect the interests of the Trustee in the Home Equity Loans).
If the recording information with respect to any assignment of Mortgage is
unavailable within 30 days of the Closing Date, such assignment will be prepared
and recorded promptly after receipt of such information, but in no event later
than one year after the Closing Date.
Within 90 days of the Closing Date, the Trustee will review the Home
Equity Loans and the Related Documents pursuant to the Agreement and if any Home
Equity Loan or Related Document is found to be defective in any material respect
and such defect is not cured within 90 days following notification thereof to
the Seller, the Depositor and the Certificate Insurer by the Trustee, the Seller
will be obligated either (i) to substitute for such Home Equity Loan an Eligible
Substitute Home Equity Loan (as defined below); however, such substitution is
permitted only within two years of the Closing Date, and may not be made unless
an opinion of counsel is provided to the effect that such substitution will not
disqualify the Trust as a REMIC for federal income tax purposes or result in a
prohibited transaction tax under the Code or (ii) to purchase such Home Equity
Loan at a price (the "Purchase Price") equal to the outstanding Principal
Balance of such Home Equity Loan as of the date of purchase, plus the greater of
(x) all accrued and unpaid interest thereon and (y) 30 days' interest thereon,
computed at the Loan Rate, net of the Servicing Fee with respect to such Home
Equity Loan if the Originator is the Servicer, plus the amount of any
unreimbursed Servicing Advances made by the Servicer with respect to such Home
Equity Loan. The Purchase Price will be deposited in the Collection Account on
or prior to the next succeeding Determination Date after such obligation arises.
The obligations of the Seller to repurchase or substitute for a Defective Home
Equity Loan are the sole remedies regarding any defects in the Home Equity Loans
and Related Documents available to the Trustee or the Certificateholders.
In connection with the substitution of an Eligible Substitute Home
Equity Loan, the Seller will be required to deposit in the Collection Account on
or prior to the next succeeding Determination Date after such obligation arises
an amount (the "Substitution Adjustment") equal to the sum of (i) the excess of
the Principal Balance of the related Defective Home Equity Loan over the
Principal Balance of such Eligible Substitute Home Equity Loan, (ii) 30 days'
interest on such excess computed at the Loan Rate, net of the Servicing Fee if
the Seller is the Servicer, and (iii) the amount of any unreimbursed Servicing
Advances and Monthly Advances made by the Servicer with respect to such
Defective Home Equity Loan if the Servicer is not the Seller. The Servicer will
be deemed to have been reimbursed for any Servicing Advances and Monthly
Advances that are not paid pursuant to clause (iii).
An "Eligible Substitute Home Equity Loan" is a home equity loan
substituted by the Seller for a Defective Home Equity Loan which must, on the
date of such substitution, (i) have an outstanding Principal Balance (or in the
case of a substitution of more than one Home Equity Loan for a Defective Home
Equity Loan, an aggregate Principal Balance), not in excess of the Principal
Balance of the Defective Home Equity Loan; (ii) have a fixed Loan Rate not less
than the Loan Rate of the Defective Home Equity Loan; (iii) have a mortgage of
the same or higher level of lien priority as the mortgage relating to the
Defective Home Equity Loan; (iv) have a maturity date not later than November
15, 2016; (v) comply with each representation and warranty as to the Home Equity
Loans set forth in the Purchase Agreement (deemed to be made as of the date of
substitution); and (vi) have a Combined Loan-to-Value Ratio not greater than
that of the Defective Home Equity Loan.
In the Purchase Agreement, the Seller will make certain representations
and warranties with respect to the Home Equity Loans including, among others:
(i) the information with respect to each Home Equity Loan set forth in the Home
Equity Loan Schedule is true and correct in all material respects as of the
Cut-Off Date; (ii) each Mortgage is a valid and subsisting first or second lien
of record on the Mortgaged Property subject, in the case of any second Home
Equity Loan, only to a First Lien on such Mortgaged Property and subject in all
cases to the exceptions to title set forth in the title insurance policy, title
report or opinion with respect to the related Home Equity Loan and all matters
of record or which would be disclosed by an accurate survey, which exceptions
are generally acceptable to mortgage lending companies, and such other
exceptions to which similar properties are commonly subject and which do not
individually, or in the aggregate, materially and adversely affect the benefits
of the security intended to be provided by such Mortgage; (iii) except with
respect to liens released immediately prior to the transfer contemplated in the
Purchase Agreement, each Mortgage Note and the related Mortgage have not been
assigned or pledged and immediately prior to the transfer and assignment therein
contemplated, the Seller held good, marketable and indefeasible title to, and
was the sole owner and holder of, each Home Equity Loan subject to no liens,
charges, mortgages, claims, participation interests, equities, pledges or
security interests of any nature, encumbrances or rights of others
(collectively, a "Lien"); and immediately upon the completion of the transfers
and assignments contemplated in the Agreement, the Trustee
S-26
<PAGE>
will hold good, marketable and indefeasible title, to, and be the sole owner of,
each Home Equity Loan subject to no Liens; (iv) except with respect to
approximately $729,180 aggregate Principal Balance of Home Equity Loans, no Home
Equity Loan was 30 or more days delinquent as of the Cut-Off Date, as measured
at the end of the month; and (v) each Home Equity Loan at the time it was made
complied in all material respects with applicable state and federal laws and
regulations, including, without limitation, usury, equal credit opportunity,
consumer credit, truth-in-lending, real estate settlement procedures and
disclosure laws. No representation or warranty will be made by the Seller or any
other party as to the absence, presence or effect of hazardous wastes or
hazardous substances on any Mortgaged Property.
Upon discovery of a breach of any such representation and warranty
which materially and adversely affects the value of the related Home Equity Loan
or the interests of the Certificateholders or the Certificate Insurer in such
Home Equity Loan, the Seller will have a period of 60 days after discovery or
notice of the breach to effect a cure. If the breach cannot be cured within the
60-day period, the Seller will be obligated to (i) substitute for such Defective
Home Equity Loan an Eligible Substitute Home Equity Loan or (ii) purchase such
Defective Home Equity Loan from the Trust. The same procedure and limitations
that are set forth above for the substitution or purchase of Defective Home
Equity Loans as a result of deficient documentation relating thereto will apply
to the substitution or purchase of a Defective Home Equity Loan as a result of a
breach of a representation or warranty that materially and adversely affects the
value of the related Home Equity Loan or the interests of the Certificateholders
or the Certificate Insurer. The obligations of the Seller to repurchase or
substitute for a Defective Home Equity Loan are the sole remedies regarding any
breach of a representation or warranty with respect thereto available to the
Trustee or the Certificateholders.
The Seller will have similar obligations with respect to any Subsequent
Home Equity Loans delivered to the Trust.
The Depositor will make no representations or warranties with respect
to the Home Equity Loans and will have no obligation (other than to assign to
the Trustee the Depositor's rights under the Purchase Agreement) or liability
with respect to breaches of the Seller's representations or warranties or its
obligations to cure, purchase or substitute for any Defective Home Equity Loan.
Payments on Home Equity Loans; Deposits to Collection Account and Distribution
Account
The Servicer will establish and maintain a separate account (the
"Collection Account") in trust for the benefit of the Trustee on behalf of the
Certificateholders and the Certificate Insurer. The Collection Account will be
an Eligible Account (as defined herein). Subject to the investment provision
described in the following paragraphs, within two Business Days of receipt by
the Servicer of amounts in respect of the Home Equity Loans (excluding amounts
representing the Servicing Fee, reimbursement for previous related Monthly
Advances or Servicing Advances, administrative charges, taxes, assessments,
credit insurance charges, insurance proceeds to be applied to the restoration or
repair of a Mortgaged Property or similar items), the Servicer will deposit such
amounts in the Collection Account. Amounts so deposited may be invested in
Eligible Investments (as described in the Agreement) maturing no later than one
Business Day prior to the date on which the amount on deposit therein is
required to be deposited in the Distribution Account or on such Distribution
Date if approved by the Rating Agencies and the Certificate Insurer.
The Trustee will establish a separate account (the "Distribution
Account") into which will be deposited amounts withdrawn from the Collection
Account for distribution to Certificateholders on a Distribution Date. The
Distribution Account will be an Eligible Account. Amounts on deposit therein may
be invested in Eligible Investments maturing on or before the Business Day prior
to the related Distribution Date.
An "Eligible Account" is an account that is (i) maintained with a
depository institution the deposits in which are insured by the Federal Deposit
Insurance Corporation (the "FDIC") to the limits established by the FDIC and the
short-term debt obligations of which (or in the case of a depository institution
that is the principal subsidiary of a holding company, the short-term debt
obligations of which) are rated at least P-1 by Moody's and A-1 by S&P and the
long-term debt obligations of which are rated at least Aa2 by Moody's and AA by
S&P, (ii) a trust account or accounts maintained with the trust department of a
federal or a state chartered depository institution or a trust company acting in
a fiduciary capacity and, in either case, acceptable to the Certificate Insurer
and the Rating Agencies the long-term debt obligations of which are rated at
least Baa3 by Moody's or (iii) an account or accounts otherwise acceptable to
each Rating Agency and the Certificate Insurer.
Eligible Investments are specified in the Agreement and are limited to
investments which meet the criteria of the Rating Agencies from time to time as
being consistent with their then-current ratings of the Certificates and the
criteria of the Certificate Insurer. All net income and gain realized from
investment of, and all earnings on, funds deposited in the Collection Account
and
S-27
<PAGE>
the Distribution Account shall be for the benefit of the Servicer as additional
servicing compensation and may be withdrawn by the Servicer on or before the
first Business Day of the month following the month in which such income is
received.
Pre-Funding Account
On the Closing Date, an aggregate cash amount (the "Pre-Funded Amount")
not to exceed approximately $30,947,779 will be deposited in the Pre-Funding
Account. Such amount will be used to purchase Subsequent Home Equity Loans for
deposit into the Trust and, if required, to make accelerated payments of
principal on the Offered Certificates. During the period (the "Pre-Funding
Period") from the Closing Date to the earliest to occur of (a) the date on which
the amount on deposit in the Pre-Funding Account is less than $100,000, (b) an
Event of Default or Trigger Event under the Agreement and (c) January, 1998,
amounts on deposit in the Pre-Funding Account may be withdrawn from time to time
to acquire Subsequent Home Equity Loans in accordance with the Agreement. Any
net investment earnings on the Pre-Funded Amount will be transferred to the
Capitalized Interest Account on each Distribution Date during the Pre-Funding
Period. Any Pre-Funded Amount remaining in the Pre-Funding Account at the end of
the Pre-Funding Period will be distributed on the Distribution Date occurring at
or immediately following the end of the Pre-Funding Period. If the Pre-Funded
Amount so distributed is less than $100,000, it will be treated as a principal
prepayment and allocated to the Class or Classes of Offered Certificates then
entitled to distributions of principal, as provided herein; otherwise such
amount will be distributed as principal of the outstanding Classes of Offered
Certificates, pro rata, on the basis of their respective Class Certificate
Balances.
Capitalized Interest Account
On the Closing Date, funds will be deposited in an account (the
"Capitalized Interest Account") created and maintained with the Trustee. The
amount so deposited will be used by the Trustee on the Distribution Dates in the
Pre-Funding Period to fund the excess, if any, of the Interest Remittance
Amounts for the Offered Certificates over the funds available therefor on such
Distribution Dates. Any funds remaining in the Capitalized Interest Account at
the end of the Pre-Funding Period will be distributed to the Holders of the
Class R Certificates.
Advances
The Servicer is required to remit to the Trustee no later than the
close of business on the second Business Day preceding a Distribution Date for
deposit in the Distribution Account the amount, if any, by which (a) the sum of
(i) the aggregate interest required to be paid to the holders of the Offered
Certificates and (ii) any amounts owed to the Certificate Insurer, in each case
on such Distribution Date, exceeds (b) the amount received by the Servicer in
respect of interest on the Home Equity Loans in the Pool during the related Due
Period (the "Monthly Advance"). The Servicer may fund all or a portion of any
Monthly Advance from funds on deposit in the Collection Account that are not
required to be distributed on the related Distribution Date. Any funds so used
must be replaced on or before the Distribution Date on which such funds will be
required to be distributed.
In the course of performing its servicing obligations, the Servicer
will pay all reasonable and customary "out-of-pocket" costs and expenses
relating to enforcement of the Trust's rights under a Home Equity Loan incurred
in the performance of its servicing obligations, including, but not limited to,
the cost of (i) the preservation, restoration and protection of the Mortgaged
Properties; (ii) any enforcement or judicial proceedings, including
foreclosures, and (iii) the management and liquidation of Mortgaged Properties
acquired in satisfaction of the related Mortgage. Each such expenditure will
constitute a "Servicing Advance."
The Servicer will be reimbursed for Servicing Advances primarily
through late collections on the related Home Equity Loan, including Liquidation
Proceeds, released Mortgaged Property proceeds, Insurance Proceeds and such
other amounts as may be collected by the Servicer from the related Mortgagor or
otherwise relating to the Home Equity Loan in respect of which such unreimbursed
amounts are owed. The Servicer's right to reimbursement through such late
collections is prior to the rights of Certificateholders. The Servicer's right
to reimbursement for unreimbursed Monthly Advances is limited to late
collections of interest on any Home Equity Loan and to Liquidation Proceeds and
Insurance Proceeds on the related Home Equity Loan (as to which it will have
priority over Certificateholders) unless such amounts are insufficient. In such
event (a "Nonrecoverable Advance"), the Servicer will be reimbursed for such
Nonrecoverable Advance from funds on deposit in the Collection Account or the
Distribution Account.
S-28
<PAGE>
The Servicer is not required to make any Monthly Advance or Servicing
Advance which it determines in good faith would be nonrecoverable from amounts
received in respect of the related Home Equity Loan.
Compensating Interest
The Agreement provides that not later than the close of business on the
second Business Day preceding the related Distribution Date, the Servicer will
remit to the Trustee for deposit to the Distribution Account an amount equal to
the lesser of (i) the aggregate of the Prepayment Interest Shortfalls with
respect to prepayments in full for the related Distribution Date resulting from
principal prepayments by Mortgagors during the related Due Period and (ii) the
amount otherwise payable to the Servicer as its aggregate Servicing Fee for such
Due Period. The Servicer will not have the right to reimbursement for any such
amounts.
Priority of Distributions
On or before each Distribution Date, the Trustee will determine the
Overcollateralization Amount after giving effect to the distribution of the
Principal Remittance Amount on such Distribution Date and the amount of the Net
Excess Spread. The "Amount Available" for a Distribution Date will equal the sum
of (i) the Available Remittance Amount, (ii) amounts withdrawn from the
Capitalized Interest Account and any remaining amount on deposit in the
Pre-Funding Account at the end of the Pre-Funding Period, in each case with
respect to such Distribution Date and (iii) any Insured Payments. On each
Distribution Date the Trustee will withdraw from the Distribution Account the
Amount Available, and make distributions thereof in the following order of
priority and to the extent of such Amount Available:
(i) so long as no Certificate Insurer Default exists, to the
Certificate Insurer the monthly premium then due (the
"Premium");
(ii) to the Servicer, Nonrecoverable Advances not previously
reimbursed;
(iii) to the Trustee, the Trustee Fee then due;
(iv) concurrently, to the Class A-l, Class A-2, Class A-3 and Class
A-4 Certificates, an amount allocable to interest equal to the
applicable Interest Remittance Amount;
(v) sequentially, to the Class A-1, Class A-2, Class A-3 and Class
A-4 Certificates, in that order, an amount allocable to
principal equal to the related Principal Remittance Amount,
until their respective Class Certificate Balances have been
reduced to zero;
(vi) to the Certificate Insurer an amount equal to previously
unreimbursed Insured Payments with respect to the Offered
Certificates, together with interest thereon at the rate
referred to in the Insurance Agreement;
(vii) sequentially, to the Class A-l, Class A-2, Class A-3 and Class
A-4 Certificates, in that order, an amount allocable to
principal equal to the Additional Principal, until their
respective Class Certificate Balances have been reduced to
zero;
(viii) to the Certificate Insurer, all other amounts owing to the
Certificate Insurer under the Insurance Agreement;
(ix) to the Depositor or the Servicer, as applicable, certain
reimbursable expenses pursuant to the Agreement;
(x) to the Servicer, any Monthly Advances or Servicing Advances not
previously recovered and not determined to be Nonrecoverable
Advances; and
(xi) to the Class R Certificates, the balance, if any.
Distributions allocable to principal of a Class of Offered Certificates
will not exceed the Class Certificate Balance of such Class immediately prior to
the applicable Distribution Date.
S-29
<PAGE>
The "Additional Principal" for any Distribution Date will equal the
lesser of (i) the amount required to be distributed as principal so that the
Overcollateralization Amount equals the related Required Overcollateralization
Amount and (ii) the Net Excess Spread.
The "Adjusted Net Loan Rate" for any Home Equity Loan and any
Distribution Date will equal the related Loan Rate minus the Expense Fee Rate.
The "Available Remittance Amount" with respect to any Distribution Date
is equal to the sum of all amounts received or required to be paid by the
Servicer or the Seller during the related Due Period with respect to the Home
Equity Loans (exclusive of the Servicing Fee with respect to each Home Equity
Loan, other servicing compensation payable to the Servicer as permitted by the
Agreement and certain amounts available for reimbursement of Monthly Advances
and Servicing Advances, as described above under "Advances") and deposited into
the Collection Account pursuant to the Agreement as of the related Determination
Date, including any Monthly Advances and Compensating Interest.
The "Basic Principal Amount" with respect to any Distribution Date will
equal the sum of (i) each payment of principal on a Home Equity Loan received by
the Servicer (exclusive of amounts described in clauses (ii) and (iii) below),
during the calendar month preceding the calendar month in which such
Distribution Date occurs (with respect to any Distribution Date, the "Due
Period"); (ii) curtailments (i.e., partial prepayments) and prepayments in full
received during the related Due Period; (iii) all Insurance Proceeds and Net
Liquidation Proceeds allocable to recoveries of principal of Home Equity Loans
received during the related Due Period; (iv) an amount equal to the excess, if
any, of the Principal Balance (immediately prior to liquidation) of each Home
Equity Loan liquidated during the related Due Period over the principal portion
of Net Liquidation Proceeds received during such Due Period (the "Unrecovered
Class A Portion"); and (v) (a) the outstanding Principal Balance of any Home
Equity Loan repurchased by the Seller or its designee as required or permitted
by the Purchase Agreement or the Agreement as of the related Determination Date
and (b) with respect to any Defective Home Equity Loan for which the Originator
substitutes an Eligible Substitute Home Equity Loan as of the related
Determination Date, any excess of the Principal Balance of such Defective Home
Equity Loan over the sum of (1) the Principal Balance of such Eligible
Substitute Home Equity Loan plus (2) the amount of any unreimbursed Servicing
Advances made by the Servicer with respect to the Home Equity Loan, in each case
to the extent received.
The "Carry-Forward Amount" for any Class of Offered Certificates on any
Distribution Date will equal the sum of (a) the excess of the aggregate Class
Remittance Amounts as of each preceding Distribution Date over the amount of the
actual distributions to the Holders of such Class of Offered Certificates made
on any such Distribution Date and not subsequently distributed, and (b) interest
on the amount, if any, of the interest component of the amount described in
clause (a) at one-twelfth of the applicable Certificate Rate.
The "Excess Spread" for any Distribution Date will equal interest
collected or advanced on the Home Equity Loans (including amounts from the
Capitalized Interest Account to the extent deposited in the Distribution
Account) minus the sum of (i) the Interest Remittance Amount for the Offered
Certificates and (ii) the Expense Fees.
The "Expense Fee Rate" will equal the sum of the per annum rates at
which the Servicing Fee, the Trustee Fee and the Premium are payable.
The "Interest Remittance Amount" for any Distribution Date and Class of
Offered Certificates will equal interest accrued during the related Interest
Period at the applicable Certificate Rate on the Class Certificate Balance of
such Class of Offered Certificates immediately prior to the related Distribution
Date less any Civil Relief Act Shortfall allocated to such Class of Offered
Certificates for such Distribution Date.
The "Principal Remittance Amount" for any Class of Offered Certificates
and any Distribution Date will be equal to the sum of:
(i) the lesser of (x) the Basic Principal Amount and (y) the
portion of such Basic Principal Amount required to be
distributed to increase the Overcollateralization Amount to
the Required Overcollateralization Amount for such
Distribution Date;
(ii) the Carry-Forward Amount; and
(iii) on the Distribution Date at the end of the Pre-Funding Period,
amounts deposited in the Distribution Account from the
Pre-Funding Account pursuant to the Agreement.
S-30
<PAGE>
A "Liquidated Home Equity Loan" means, as to any Distribution Date, any
Home Equity Loan in respect of which the Servicer has determined, based on the
servicing procedures specified in the Agreement, as of the end of the preceding
Due Period that all Liquidation Proceeds which it expects to recover with
respect to the disposition of the related Mortgaged Property have been
recovered.
The "Net Excess Spread" for any Distribution Date will equal the
Available Remittance Amount remaining after the application thereof to cover the
Required Payments.
"Net Liquidation Proceeds" with respect to a Home Equity Loan are equal
to the Liquidation Proceeds, net of unreimbursed Servicing Fees, Servicing
Advances and Monthly Advances with respect to such Home Equity Loan, up to the
unpaid Principal Balance of the Home Equity Loan plus accrued and unpaid
interest thereon. "Liquidation Proceeds" are the proceeds received in connection
with the liquidation of any Home Equity Loan, whether through trustee's sale,
foreclosure sale or otherwise.
The "Overcollateralization Amount" for any Distribution Date will equal
the excess, if any, of (i) the sum of the Pool Balance and the amount on deposit
in the Pre-Funding Account (exclusive of any investment earnings included
therein) as of the close of business on the last day of the related Due Period,
over (ii) the aggregate Class Certificate Balance of the Offered Certificates,
after giving effect to the distributions of the related Principal Remittance
Amount on such Distribution Date.
The "Required Payments" for any Distribution Date will equal the amount
required to pay the Expense Fees, other than the Servicing Fee, the Interest
Remittance Amounts and the Principal Remittance Amount, to reimburse the
Servicer for Nonrecoverable Advances previously made by the Servicer and to
reimburse the Certificate Insurer for previously unreimbursed Insured Payments,
together with interest thereon at the rate referred to in the Insurance
Agreement.
Calculation of One-Month LIBOR
On the second LIBOR Business Day (as defined below) preceding the
commencement of each Interest Period (each such date, an "Interest Determination
Date"), the Trustee will determine the London interbank offered rate for
one-month United States dollar deposits ("One-Month LIBOR") for such Interest
Period on the basis of the offered rates of the Reference Banks for one-month
United States dollar deposits, as such rates appear on the Telerate Page 3750,
as of 11:00 a.m. (London time) on such Interest Determination Date. As used in
this section, "LIBOR Business Day" means a day on which banks are open for
dealing in foreign currency and exchange in London and New York City; "Telerate
Page 3750" means the display page currently 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); and "Reference Banks"
means leading banks selected by the Trustee and engaged in transactions in
Eurodollar deposits in the international Eurocurrency market (i) with an
established place of business in London, (ii) whose quotations appear on the
Telerate Page 3750 on the Interest Determination Date in question, (iii) which
have been designated as such by the Trustee and (iv) not controlling, controlled
by, or under common control with, the Depositor, the Seller or the Originator.
On each Interest Determination Date, One-Month LIBOR for the related
Interest Period will be established by the Trustee as follows:
(a) If on such Interest Determination Date two or more
Reference Banks provide such offered quotations, One-Month LIBOR for
the related Interest Period will be the arithmetic mean of such offered
quotations (rounded upwards if necessary to the nearest whole multiple
of 0.0625%).
(b) If on such Interest Determination Date fewer than two
Reference Banks provide such offered quotations, One-Month LIBOR for
the related Interest Period will be the higher of (x) One-Month LIBOR
as determined on the previous Interest Determination Date and (y) the
Reserve Interest Rate. The "Reserve Interest Rate" will be the rate per
annum that the Trustee determines to be either (i) the arithmetic mean
(rounded upwards if necessary to the nearest whole multiple of 0.0625%)
of the one-month United States dollar lending rates which New York City
banks selected by the Trustee are quoting on the relevant Interest
Determination Date to the principal London offices of leading banks in
the London interbank market or, in the event that the Trustee can
determine no such arithmetic mean, (ii) the lowest one-month United
States dollar lending rate which New York City banks selected by the
Trustee are quoting on such Interest Determination Date to leading
European banks.
The establishment of One-Month LIBOR on each Interest Determination
Date by the Trustee and the Trustee's calculation of the rate of interest
applicable to the Class A-1 Certificates for the related Interest Period will
(in the absence of manifest error) be final and binding.
S-31
<PAGE>
Reports to Certificateholders
Concurrently with each distribution to the Certificateholders, the
Trustee will forward to each Certificateholder and the Certificate Insurer a
statement setting forth, among other items, the following information with
respect to each Class of Offered Certificates:
(i) the Available Remittance Amount for the related Distribution
Date;
(ii) the related Interest Remittance Amount;
(iii) the related Principal Remittance Amount, stating separately
the components thereof;
(iv) the amount of the Monthly Advances and Compensating Interest
Payments;
(v) the Servicing Fee for such Distribution Date;
(vi) the Additional Principal;
(vii) the Certificate Rate for the Class A-1 Certificates for the
related Distribution Date;
(viii) the Class Certificate Balance, after giving effect to such
distribution;
(ix) the Pool Balance;
(x) the number and aggregate Principal Balances of the Home Equity
Loans as to which the minimum monthly payment is delinquent
for 30-59 days, 60-89 days and 90 or more days, respectively,
as of the end of the preceding Due Period;
(xi) the book value of any real estate which is acquired by the
Trust through foreclosure or grant of deed in lieu of
foreclosure;
(xii) the amount of any Insured Payments for such Distribution Date;
and
(xiii) the amount of the Unrecovered Class A Portions realized during
the related Due Period; the cumulative losses realized since
the Cut-Off Date with separate items indicating gross losses,
principal losses, recoveries, net losses and recovery
expenses.
In the case of information furnished pursuant to clauses (ii) and (iii)
above, the amounts shall be expressed as a dollar amount per Certificate with a
$1,000 denomination.
Within a reasonable period of time after the end of each calendar year,
the Trustee will forward to each Person who was a Certificateholder during the
prior calendar year a statement containing the information set forth in clauses
(ii) and (iii) above aggregated for such calendar year.
Collection and Other Servicing Procedures on Home Equity Loans
The Servicer will make reasonable efforts to collect all payments
called for under the Home Equity Loans and will, consistent with the Agreement,
follow such collection procedures as it follows from time to time with respect
to the home equity loans in its portfolio comparable to the Home Equity Loans.
Consistent with the above, the Servicer may in its discretion waive any late
payment charge or any assumption or other fee or charge that may be collected in
the ordinary course of servicing the Home Equity Loans.
With respect to the Home Equity Loans, the Servicer may arrange with a
borrower a schedule for the payment of interest due and unpaid for a period,
provided that any such arrangement is consistent with the Servicer's policies
with respect to the home equity loans it owns or services and is acceptable to
the Certificate Insurer. With respect to Home Equity Loans that are junior in
priority to a First Lien on a Mortgaged Property, the Servicer has the power
under certain circumstances acceptable to the Certificate Insurer to consent to
a new mortgage lien on such Mortgaged Property having priority over such Home
Equity Loan in connection with the refinancing of such First Lien.
S-32
<PAGE>
Hazard Insurance
Except as set forth in the next paragraph below, the Servicer will
cause to be maintained fire and hazard insurance with extended coverage
customary in the area where the Mortgaged Property is located, in an amount
which is at least equal to the least of (i) the outstanding Principal Balance on
the Home Equity Loan and any related First Lien, (ii) the full insurable value
of the premises securing the Home Equity Loan and (iii) the minimum amount
required to compensate for damage or loss on a replacement cost basis in each
case in an amount not less than such amount as is necessary to avoid the
application of any co-insurance clause contained in the related hazard insurance
policy. Generally, if the Mortgaged Property is in an area identified in the
Federal Register by the Federal Emergency Management Agency as Flood Zone "A",
such flood insurance has been made available and the Servicer determines that
such insurance is necessary in accordance with accepted mortgage servicing
practices of prudent lending institutions servicing similar home equity loans,
the Servicer will cause to be purchased a flood insurance policy with a
generally acceptable insurance carrier, in an amount representing coverage not
less than the least of (a) the outstanding Principal Balance of the Home Equity
Loan and any related First Lien, (b) the full insurable value of the Mortgaged
Property, or (c) the maximum amount of insurance available under the National
Flood Insurance Act of 1968, as amended. The Servicer will also maintain on REO
Property, to the extent such insurance is available, fire and hazard insurance
in the applicable amounts described above, liability insurance and, to the
extent required and available under the National Flood Insurance Act of 1968, as
amended, and the Servicer determines that such insurance is necessary in
accordance with accepted mortgage servicing practices of prudent lending
institutions servicing similar home equity loans, flood insurance in an amount
equal to that required above. Any amounts collected by the Servicer under any
such policies (other than amounts to be applied to the restoration or repair of
the Mortgaged Property, or to be released to the Mortgagor in accordance with
the Servicer's normal mortgage servicing procedures) will be deposited in the
Collection Account, subject to retention by the Servicer to the extent such
amounts constitute servicing compensation or to withdrawal pursuant to the
Agreement.
In the event that the Servicer or a subservicer obtains and maintains a
blanket policy as provided in the Agreement insuring against fire and hazards of
extended coverage on all of the Home Equity Loans, then, to the extent such
policy names the Servicer as loss payee and provides coverage in an amount equal
to the aggregate unpaid principal balance of the Home Equity Loans without
coinsurance and otherwise complies with the requirements of the preceding
paragraph, the Servicer will be deemed conclusively to have satisfied its
obligations with respect to fire and hazard insurance coverage.
Realization Upon Defaulted Home Equity Loans
The Servicer will foreclose upon or otherwise comparably convert to
ownership Mortgaged Properties securing such of the Home Equity Loans as come
into default when, in accordance with applicable servicing procedures under the
Agreement, no satisfactory agreements can be made for the collection of
delinquent payments. In connection with such foreclosure or other conversion,
the Servicer will follow such practices as it deems necessary or advisable and
as are in keeping with its general mortgage servicing activities, provided the
Servicer will not be required to expend its own funds in connection with
foreclosure or other conversion, correction of default on a related First Lien
or restoration of any property unless, in its sole judgment, such foreclosure,
correction or restoration will increase Net Liquidation Proceeds. The Servicer
will be reimbursed out of Liquidation Proceeds for advances of its own funds as
liquidation expenses before any Net Liquidation Proceeds are distributed to
Certificateholders.
Enforcement of Due-On-Sale Clauses
When any Mortgaged Property is about to be conveyed by the obligor, the
Servicer will, to the extent it has knowledge of such prospective conveyance and
prior to the time of the consummation of such conveyance, exercise its rights to
accelerate the maturity of the related Home Equity Loan under the applicable
"due-on-sale" clause, if any, unless it reasonably believes that such clause is
not enforceable under applicable law. In such event, the Servicer is authorized
to accept from or enter into an assumption agreement with the person to whom
such property has been or is about to be conveyed, pursuant to which such person
becomes liable under the Home Equity Loan and pursuant to which the original
obligor is released from liability and such person is substituted as the obligor
and becomes liable under the Home Equity Loan. Any fee collected in connection
with an assumption will be retained by the Servicer as additional servicing
compensation. The terms of a Home Equity Loan may not be changed in connection
with an assumption.
Servicing Compensation and Payment of Expenses
With respect to each Due Period, the Servicer will receive from
interest payments actually received in respect of the Home Equity Loans a
portion of such interest payments as a monthly Servicing Fee in the amount equal
to 0.50% per annum (the "Servicing Fee Rate") on the Principal Balance of each
Home Equity Loan as of the first day of each such Due Period. All
S-33
<PAGE>
assumption fees, late payment charges and other fees and charges, to the extent
collected from borrowers, will be retained by the Servicer as additional
servicing compensation. The Servicer will pay certain ongoing expenses
associated with the Trust and incurred by it in connection with its
responsibilities under the Agreement.
Evidence as to Compliance
The Agreement provides for delivery on or before March 31 in each year,
beginning in March 1998, to the Depositor, the Trustee, the Certificate Insurer
and the Rating Agencies of an annual statement signed by an officer of the
Servicer to the effect that the Servicer has fulfilled its material obligations
under the Agreement throughout the preceding fiscal year, except as specified in
such statement.
On or before March 31 in each year, beginning in March 1998, the
Servicer will furnish a report prepared by a firm of nationally recognized
independent public accountants (who may also render other services to the
Servicer, the Seller or the Originator) to the Depositor, the Trustee, the
Certificate Insurer and the Rating Agencies to the effect that such firm has
examined certain documents and the records relating to servicing of the Home
Equity Loans under the Uniform Single Audit Program for Mortgage Bankers and
such firm's conclusion with respect thereto.
Certain Matters Regarding the Servicer
The Agreement provides that the Servicer may not resign from its
obligations and duties thereunder, except in connection with a permitted
transfer of servicing, unless (i) such duties and obligations are no longer (or
imminently will no longer be) permissible under applicable law or are (or
imminently will be) in material conflict by reason of applicable law with any
other activities of a type and nature presently carried on by it or (ii) upon
the satisfaction of the following conditions: (a) the Servicer has proposed a
successor servicer to the Trustee in writing and such proposed successor
servicer is reasonably acceptable to the Trustee; (b) the Rating Agencies have
confirmed to the Trustee that the appointment of such proposed successor
servicer as the Servicer will not result in the reduction or withdrawal of the
then-current rating of the Offered Certificates without taking the Policy into
account; and (c) such proposed successor servicer is reasonably acceptable to
the Certificate Insurer. No such resignation will become effective until the
Trustee or a successor servicer has assumed the Servicer's obligations and
duties under the Agreement.
The Servicer may perform any of its duties and obligations under the
Agreement through one or more subservicers or delegates, which may be affiliates
of the Servicer. The initial Subservicer shall be AmerUs Bank. Notwithstanding
any such arrangement, the Servicer will remain liable and obligated to the
Trustee, the Certificateholders and the Certificate Insurer for the Servicer's
duties and obligations under the Agreement, without any diminution of such
duties and obligations and as if the Servicer itself were performing such duties
and obligations. The Servicer has initially appointed AmerUs Bank as the
Subservicer and as a result AmerUs Bank will perform certain of the Servicer's
duties and obligations under the Agreement.
The Agreement provides that none of the Depositor, the Servicer or any
of their respective directors, officers, employees or agents will be under any
other liability to the Trust, the Trustee, the Certificateholders or any other
person for any action taken or for refraining from taking any action pursuant to
the Agreement. However, none of such persons will be protected against any
liability which would otherwise be imposed by reason of its willful misconduct,
bad faith or negligence in the performance of its duties under the Agreement or
by reason of reckless disregard of its obligations thereunder. In addition, the
Agreement provides that the Servicer will not be under any obligation to appear
in, prosecute or defend any legal action which is not incidental to the
Servicer's servicing responsibilities under the Agreement. The Servicer may, in
its sole discretion, undertake any such legal action which it may deem necessary
or desirable with respect to the Agreement and the rights and duties of the
parties thereto and the interest of the Certificateholders thereunder.
Any corporation into which the Servicer may be merged or consolidated,
or any corporation resulting from any merger, conversion or consolidation to
which the Servicer shall be a party, or any corporation succeeding to the
business of the Servicer shall, with the prior written consent of the
Certificate Insurer, consent not to be withheld unreasonably, be the successor
of the Servicer, without the execution or filing of any paper or any further act
on the part of any of the parties hereto, anything in the Agreement to the
contrary notwithstanding.
Events of Servicer Termination
The Servicer's rights under the Agreement may be terminated upon the
occurrence of an Event of Default or a Trigger Event. "Events of Default" will
consist of: (i) any failure of the Servicer to deposit in the Collection Account
any deposit required to be made under the Agreement, which failure continues
unremedied for two Business Days after the giving of written notice of such
failure to the Servicer by the Trustee, or to the Servicer and the Trustee by
the Certificate Insurer or Certificateholders of any Class evidencing Percentage
Interests aggregating not less than 25% of such Class; (ii) any failure by
S-34
<PAGE>
the Servicer duly to observe or perform in any material respect any other of its
covenants or agreements in the Agreement which continues unremedied for 30 days
after the giving of written notice of such failure to the Servicer by the
Trustee, or to the Servicer and the Trustee by the Certificate Insurer or
Certificateholders of any Class evidencing Percentage Interests aggregating not
less than 25% of such Class; (iii) any failure by the Servicer to make any
required Servicing Advance, which failure continues unremedied for a period of
30 days after the giving of written notice of such failure to the Servicer by
the Trustee, or to the Servicer and the Trustee by the Certificate Insurer or
Certificateholders of any Class evidencing Percentage Interests aggregating not
less than 25% of such Class; (iv) certain events of insolvency, conservatorship,
readjustment of debt, marshalling of assets and liabilities or similar
proceedings relating to the Servicer and certain actions by the Servicer
indicating insolvency, reorganization or inability to pay its obligations (an
"Insolvency Event"); (v) so long as the Seller is the Servicer, any failure of
the Seller to repurchase or substitute Eligible Substitute Home Equity Loans for
Defective Home Equity Loans as required by the Purchase Agreement; (vi) any
failure to pay any Monthly Advance or any Compensating Interest Payments which
continues unremedied for a period of two Business Days; or (vii) any
insufficiency in the Amount Available excluding Insured Payments occurs on a
Distribution Date resulting in the need for an Insured Payment.
A "Trigger Event" will consist of the delinquency or loss experience on
the Home Equity Loans exceeding certain percentages set forth in the Agreement.
Rights Upon an Event of Servicer Termination
So long as an Event of Default remains unremedied, either the Trustee,
or Certificateholders of any Class evidencing Percentage Interests of at least
51% of such Class, in either case, with the consent of the Certificate Insurer,
or the Certificate Insurer, may terminate all of the rights and obligations of
the Servicer under the Agreement and in and to the Home Equity Loans, whereupon
(unless the Certificate Insurer has appointed an alternate Successor Servicer)
the Trustee will succeed to all the responsibilities, duties and liabilities of
the Servicer under the Agreement (the Trustee or other successor Servicer, the
"Successor Servicer") and will be entitled to similar compensation arrangements,
but not in excess of the existing Servicing Fee unless approved by the
Certificate Insurer. Upon the occurrence of the event described in clause (vi)
in the second preceding paragraph, the Trustee will immediately assume the
duties of the Servicer. The Successor Servicer will be obligated to make Monthly
Advances and Servicing Advances and certain other advances unless it determines
reasonably and in good faith that such advances would not be recoverable. In the
event that the Trustee would be obligated to succeed the Servicer but is
unwilling or unable so to act, it may appoint, or petition a court of competent
jurisdiction for the appointment of, a housing and home finance institution or
other mortgage loan or home equity loan servicer with all licenses and permits
required to perform its obligations under the Agreement and having a net worth
of at least $15,000,000 and acceptable to the Certificate Insurer to act as
Successor Servicer under the Agreement. Pending such appointment, the Trustee
will be obligated to act in such capacity unless prohibited by law. Such
successor will be entitled to receive the same compensation that the Servicer
would otherwise have received (or such lesser compensation as the Trustee and
such successor may agree). A liquidator or receiver for the Servicer may be
empowered to prevent the termination and replacement of the Servicer if the only
Event of Default that has occurred is an Insolvency Event.
Upon the occurrence of a Trigger Event, the Certificate Insurer, in its
sole discretion, may direct the Trustee to remove the Servicer and to appoint a
Successor Servicer.
Amendment
The Agreement may be amended from time to time by the Depositor, the
Servicer and the Trustee, with the consent of the Certificate Insurer and of the
Seller (to the extent a provision to be amended references or affects the
Seller), but without the consent of the Certificateholders, to cure any
ambiguity, to correct or supplement any provisions therein which may be
defective or inconsistent with any other provisions of the Agreement, to add to
the duties of the Depositor or the Servicer, to comply with any requirements
imposed by the Code or any regulation thereunder, or to add or amend any
provisions of the Agreement as required by the Rating Agencies in order to
maintain or improve any rating of the Offered Certificates (it being understood
that, after obtaining the ratings in effect on the Closing Date, none of the
Depositor, the Servicer or the Trustee is obligated to obtain, maintain, or
improve any such rating) or to add any other provisions with respect to matters
or questions arising under the Agreement which shall not be inconsistent with
the provisions of the Agreement, provided that such action will not, as
evidenced by an opinion of counsel, materially and adversely affect the
interests of any Certificateholder or the Certificate Insurer; provided, that
any such amendment will not be deemed to materially and adversely affect the
Certificateholders and no such opinion will be required to be delivered if the
person requesting such amendment obtains a letter from the Rating Agencies
stating that such amendment would not result in a downgrading of the
then-current rating of the Offered Certificates without taking the Policy into
account. The Agreement may also be amended from time to time by the Depositor,
the Servicer and the Trustee, with the consent of Holders of Certificates
evidencing Percentage Interests aggregating not less than 51% of each Class
affected thereby and the Certificate Insurer, for the purpose of adding any
provisions to or changing in any manner or eliminating any of the provisions of
the Agreement or of modifying in any manner the rights of the
Certificateholders, provided that no such
S-35
<PAGE>
amendment will (i) reduce in any manner the amount of, or delay the timing of,
collections of payments on the Certificates or distributions or payments under
the Policy which are required to be made on any Certificate without the consent
of the Certificateholder, (ii) reduce the aforesaid percentage required to
consent to any such amendment, without the consent of the holders of all
Certificates then outstanding, or (iii) modify any representations, warranties,
duties, powers or rights of the Seller without the consent of the Seller.
Notwithstanding the foregoing, the provisions of the Agreement relating to
overcollateralization may be reduced or eliminated by the Certificate Insurer
without the consent of any Certificateholder so long as no Certificate Insurer
Default has occurred and is continuing. A "Certificate Insurer Default" means
the failure to pay any Insured Payment due under the Policy or the occurrence of
certain events of bankruptcy with respect to the Certificate Insurer.
Termination; Retirement of the Certificates
The Trust will terminate on the Distribution Date following the
earliest of (i) the Distribution Date on which the Class Certificate Balance of
each Class of Offered Certificates has been reduced to zero and the Certificate
Insurer has been paid all amounts owed to it pursuant to the Agreement and the
Insurance Agreement, (ii) the final payment or other liquidation of the last
Home Equity Loan in the Trust and the payment of all such amounts pursuant to
the Agreement, and (iii) the optional transfer to the Seller (or a designee of
the Seller) or the Certificate Insurer of the Home Equity Loans, as described
below.
The Seller (or a designee of the Seller) will have the right (and in
the absence of the exercise thereof, the Certificate Insurer shall have the
right after giving notice thereof to the Seller (or a designee of the Seller))
to purchase all remaining Home Equity Loans and REO Properties in the Trust and
thereby effect early retirement of the Certificates, subject to the Pool Balance
of such Home Equity Loans and REO Properties at the time of purchase being less
than or equal to 10% of the sum of the Pool Balance as of the Cut-Off Date and
the Principal Balance of each Subsequent Home Equity Loan as of the applicable
Subsequent Cut-Off Date. In the event the Seller (or a designee of the Seller)
or the Certificate Insurer exercises such option, the purchase price will be at
least equal to (x) 100% of the then outstanding principal balance of each Home
Equity Loan and REO Property plus (y) the greater of (i) the aggregate amount of
accrued and unpaid interest on the Home Equity Loans through the related Due
Period and (ii) 30 days' accrued interest thereon at the Loan Rate, in each case
net of the Servicing Fee plus (z) any amounts due to the Certificate Insurer.
The termination of the Trust will be effected in a manner consistent
with applicable federal income tax regulations and the status of the Trust as a
REMIC.
Optional Purchase of Defaulted Home Equity Loans
The Seller (or a designee of the Seller) has the option, but is not
obligated, to purchase from the Trust any Home Equity Loan 90 days or more
delinquent at a purchase price equal to the outstanding Principal Balance as of
the date of purchase, plus the greater of (i) all accrued and unpaid interest on
such Principal Balance and (ii) 30 days' interest on such Principal Balance,
computed at the Loan Rate, net of the Servicing Fee.
The Trustee
The Bank of New York, a banking corporation organized and existing
under the laws of the State of New York, has been named Trustee pursuant to the
Agreement.
The Trustee may have normal banking relationships with the Depositor,
the Seller, the Originator and the Servicer.
The Trustee may resign at any time, in which event the Depositor will
be obligated to appoint a successor Trustee, as approved by the Certificate
Insurer. The Depositor (with the prior written consent of the Certificate
Insurer) may also remove the Trustee if the Trustee ceases to be eligible to
continue as such under the Agreement or if the Trustee becomes insolvent. Upon
becoming aware of such circumstances, the Depositor will be obligated to appoint
a successor Trustee, as approved by the Certificate Insurer. Any resignation or
removal of the Trustee and appointment of a successor Trustee will not become
effective until acceptance of the appointment by the successor Trustee.
No holder of a Certificate will have any right under the Agreement to
institute any proceeding with respect to the Agreement unless such holder
previously has given to the Trustee and the Certificate Insurer written notice
of default and of the continuance thereof and unless Certificateholders
evidencing Percentage Interests of at least 51% of the applicable Class have
made written request upon the Trustee to institute such proceeding in its own
name as Trustee thereunder and have offered to the Trustee reasonable indemnity
and the Trustee for 60 days has neglected or refused to institute any such
proceeding and unless the Certificate Insurer has consented in writing thereto.
The Trustee will be under no obligation to exercise any of the trusts or powers
vested in it by the Agreement or to make any investigation of matters arising
thereunder or to institute, conduct or defend any litigation thereunder or in
relation thereto at the request, order or direction of any of the
Certificateholders, unless such
S-36
<PAGE>
Certificateholders have offered to the Trustee reasonable security or indemnity
against the cost, expenses and liabilities which may be incurred therein or
thereby.
THE POLICY AND THE CERTIFICATE INSURER
The information set forth in this section has been provided by Ambac
Assurance Corporation (the "Certificate Insurer"). No representation is made by
the Underwriter, the Depositor, the Originator, the Seller or any of their
affiliates as to the accuracy or completeness of any such information.
The Certificate Insurer
The Certificate Insurer 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, the Commonwealth of Puerto Rico and Guam. The Certificate Insurer
primarily insures newly-issued municipal and structured finance obligations. The
Certificate Insurer is a wholly-owned subsidiary of Ambac Financial Group, Inc.
(formerly AMBAC Inc.), a 100% publicly-held company. Moody's, S&P and Fitch
Investors Service, L.P. have each assigned a triple-A claims-paying ability
rating to the Certificate Insurer.
The consolidated financial statements of the Certificate Insurer and
its subsidiaries as of December 31, 1996 and December 31, 1995 and for the three
years ended December 31, 1996, prepared in accordance with generally accepted
accounting principles, included in the Current Report on Form 8-K of AMBAC Inc.
(which was filed with the Securities and Exchange Commission (the "Commission")
on March 12, 1997; Commission File No. 1-10777) and the consolidated financial
statements of the Certificate Insurer and its subsidiaries as of June 30, 1997
and for the periods ending June 30, 1997 and June 30, 1996, included in the
Quarterly Report on Form 10-Q of Ambac Financial Group, Inc. for the period
ended June 30, 1997 (which was filed with the Commission on August 14, 1997) are
hereby incorporated by reference into this Prospectus Supplement 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 this
Prospectus Supplement to the extent that a statement contained herein by
reference herein also modifies 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 Supplement.
All financial statements of the Certificate Insurer and its
subsidiaries included in documents filed by Ambac Financial Group, Inc. with the
Commission pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act
subsequent to the date of this Prospectus Supplement and prior to the
termination of the offering of the Offered Certificates shall be deemed to be
incorporated by reference into this Prospectus Supplement and to be a part
hereof from the respective dates of filing such documents.
The following table sets forth the capitalization of the Certificate
Insurer as of December 31, 1994, December 31, 1995, December 31, 1996 and June
30, 1997, respectively, in conformity with generally accepted accounting
principles.
Ambac Assurance Corporation
Consolidated Capitalization Table
(Dollars in Millions)
<TABLE>
<CAPTION>
December 31, December 31, December 31, June 30,
1994 1995 1996 1997
(audited) (audited) (audited) (unaudited)
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Unearned premiums $ 840 $ 906 $ 995 $1,036
Other liabilities 136 295 259 284
---- ---- ---- ----
Total liabilities $ 976 $1,201 $1,254 $1,320
------ ------ ------ ------
Stockholder's equity
Common Stock $ 82 $ 82 $ 82 $ 82
Additional paid-in capital 444 481 515 520
Unrealized gains (losses)
on investments, net of tax (46) 87 66 64
Retained earnings 782 907 992 1,079
---- ---- ---- ------
Total stockholder's equity $1,262 $1,557 $1,655 $1,745
------ ------ ------ ------
Total liabilities and stockholder's
equity $2,238 $2,758 $2,909 $3,065
====== ====== ====== ======
S-37
<PAGE>
For additional financial information concerning the Certificate
Insurer, see the audited financial statements of the Certificate Insurer
incorporated by reference herein. Copies of the financial statements of the
Certificate Insurer incorporated herein by reference and copies of the Insurer's
annual statement for the year ended December 31, 1996 prepared in accordance
with statutory accounting standards are available, without charge, from the
Certificate Insurer. The address of the insurer's administrative offices and its
telephone number are One State Street Plaza, 17th Floor, New York, New York
10004 and (212) 668-0340.
The Certificate Insurer makes no representation regarding the
Certificates or the advisability of investing in the Offered Certificates and
makes no representation regarding, nor has it participated in the preparation
of, this Prospectus Supplement other than the information supplied by the
Certificate Insurer and presented under this heading "The Policy and the
Certificate Insurer" and in the financial statements incorporated herein by
reference.
The Policy
The Certificate Insurer will issue its Certificate Guaranty Insurance
Policy for the Offered Certificates (the "Policy"). The Policy unconditionally
guarantees the payment of Insured Payments on the Offered Certificates. The
Certificate Insurer will make each required Insured Payment to the Trustee on
the later of (i) the Distribution Date on which such Insured Payment is
distributable to the Certificateholders pursuant to the Agreement; and (ii) the
Business Day next following the day on which the Certificate Insurer shall have
received telephonic or telegraphic notice, subsequently confirmed in writing, or
written notice by registered or certified mail, from the Trustee, specifying
that an Insured Payment is due in accordance with the terms of the Policy.
The Insurer's obligation under the Policy will be discharged to the
extent that funds are received by the Trustee for distribution to the
Certificateholders, whether or not such funds are properly distributed by the
Trustee.
For purposes of the Policy, "Certificateholder" as to a particular
Certificate, does not and may not include the Trust, the Servicer, the
Depositor, the Originator or the Seller.
The Certificate Insurer only insures the timely receipt of interest on
the Offered Certificates and the receipt of the Principal Remittance Amount
payable on each Distribution Date on the Offered Certificates. The Policy does
not guarantee to the Certificateholders any rate of principal payments on the
Offered Certificates and the Policy does not cover any Civil Relief Act
Shortfall. The Policy expires and terminates without any action on the part of
the Certificate Insurer or any other person on the date that is one year and one
day following the date on which the Offered Certificates have been paid in full.
In the absence of payments under the Policy, Certificateholders will
directly bear the credit and other risks associated with their undivided
interest in the Trust.
The Policy is non-cancelable.
The Policy is issued under and pursuant to and shall be construed
under, the laws of the State of New York, without giving effect to the conflict
of laws principles thereof.
THE POLICY IS NOT COVERED BY THE PROPERTY/CASUALTY INSURANCE SECURITY
FUND SPECIFIED IN ARTICLE 76 OF THE NEW YORK INSURANCE LAW.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Offered
Certificates will be used by the Depositor to purchase the Home Equity Loans.
The Home Equity Loans will have been acquired by the Depositor from the Seller
pursuant to the Purchase Agreement, and will have been acquired by the Seller
from the Originator pursuant to the Transfer Agreement.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement (the "Underwriting Agreement") between the Depositor and Bear, Stearns
& Co. Inc. (the "Underwriter"), the Depositor has agreed to sell to the
Underwriter and the Underwriter has agreed to purchase from the Depositor, all
of the Certificates offered hereby, if any are purchased. The Depositor has been
advised by the Underwriter that it proposes initially to offer the Offered
Certificates to the public at the respective offering prices set forth on the
cover page hereof and to certain dealers at such price less a concession not in
excess of the respective amounts set forth in the table below (expressed as a
percentage of the respective Class Certificate Balance). The
S-38
<PAGE>
Underwriter may allow and such dealers may reallow a discount not in excess of
the respective amounts set forth in the table below to certain other dealers.
Selling Reallowance
Class Concession Discount
----- ---------- --------
A-1.......................................... 0.12% 0.065%
A-2.......................................... 0.155% 0.10%
A-3.......................................... 0.205% 0.12%
A-4.......................................... 0.275% 0.125%
The Depositor is an affiliate of the Underwriter.
The Underwriter has advised the Depositor that, pursuant to Regulation
M under the Securities Act of 1933, as amended, certain persons participating in
this offering may engage in transactions, including stabilizing bids, syndicate
covering transactions or the imposition of penalty bids, which may have the
effect of stabilizing or maintaining the market price of the Offered
Certificates of any Class at levels above those that might otherwise prevail in
the open market. A "stabilizing bid" is a bid for or the purchase of the Offered
Certificates of any Class on behalf of the Underwriter for the purpose of fixing
or maintaining the price of such Certificates. A "syndicate covering
transaction" is the bid for or the purchase of Offered Certificates of any Class
on behalf of the Underwriter to reduce a short position incurred by the
Underwriter in connection with this offering. A "penalty bid" is an arrangement
permitting the Underwriter to reclaim the selling concession otherwise accruing
to a syndicate member in connection with this offering if the Offered
Certificates of any Class originally sold by the syndicate member are purchased
by the Underwriter in a syndicate covering transaction and has therefore not
been effectively placed by the syndicate member.
Stabilizing bids and syndicate covering transactions may have the
effect of causing the price of the Offered Certificates of any Class to be
higher than it might be in the absence thereof, and the imposition of penalty
bids might also have an effect on the price of any Offered Certificate to the
extent that it discouraged resale of such Certificate. Neither the Depositor nor
the Underwriter makes any representation or prediction as to the direction or
magnitude of any such effect on the prices for the Offered Certificates. Neither
the Depositor nor the Underwriter makes any representation that the Underwriter
will engage in any such transaction or that, once commenced, any such
transactions will not be discontinued without notice.
The Underwriting Agreement provides that the Depositor will indemnify
the Underwriter against certain liabilities, including liabilities under the
Securities Act of 1933, as amended.
EXPERTS
The consolidated financial statements of Ambac Assurance Corporation as
of December 31, 1996 and 1995 and for the three years ended December 31, 1996
have been incorporated by reference herein 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.
RATINGS
It is a condition to issuance that each Class of Offered Certificates
be rated "AAA" by Standard & Poor's Ratings Services, a division of The McGraw
Hill Companies, Inc., and "Aaa" by Moody's Investors Service, Inc.
A securities rating addresses the likelihood of the receipt by Holders
of distributions on the Home Equity Loans to which they are entitled. The rating
takes into consideration the characteristics of the Home Equity Loans and the
structural, legal and tax aspects associated with the Offered Certificates. The
ratings on the Offered Certificates do not, however, constitute statements
regarding the likelihood or frequency of prepayments on the Home Equity Loans or
the possibility that Holders might realize a lower than anticipated yield. The
ratings assigned to the Offered Certificates will depend primarily upon the
creditworthiness of the Certificate Insurer. Any reduction in a rating assigned
to the claims-paying ability of the Certificate Insurer below the ratings
initially assigned to the Offered Certificates may result in a reduction of one
or more of the ratings assigned to the Offered Certificates.
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 organization. Each securities rating should be evaluated
independently of similar ratings on different securities.
S-39
<PAGE>
LEGAL MATTERS
Certain legal matters with respect to the Certificates and certain tax
matters with respect thereto will be passed upon for the Depositor and the
Underwriter by Brown & Wood LLP, New York, New York. Certain legal matters with
respect to the Certificates will be passed upon for the Servicer and the Seller
by Diane M. Davidson, Esquire, Assistant General Counsel of AmerUs Life
Insurance Company, and by Faegre & Benson LLP, Des Moines, Iowa and Minneapolis,
Minnesota.
S-40
<PAGE>
INDEX OF DEFINED TERMS
Additional Principal.................................................S-5, S-30
Adjusted Net Loan Rate....................................................S-30
Advances..................................................................S-30
Agreement..................................................................S-1
AmerUs Bank...............................................................S-15
AmerUs Group.........................................................S-2, S-15
AmerUs Holdings............................................................S-2
AmerUs Life...............................................................S-15
Amount Available..........................................................S-29
Available Remittance Amount...............................................S-30
Balloon Loans.......................................................S-11, S-14
Balloon Payments....................................................S-11, S-14
Basic Principal Amount...............................................S-4, S-30
Capitalized Interest Account.........................................S-3, S-28
Carry Forward Amount.................................................S-5, S-30
Certificate Holder........................................................S-38
Certificate Insurer..................................................S-6, S-37
Certificate Insurer Default...............................................S-36
Certificate Owners........................................................S-24
Certificate Rate...........................................................S-1
Certificates...............................................................S-1
Civil Relief Act...........................................................S-7
Civil Relief Act Shortfall.................................................S-4
Class A-4 Stepped-Up Certificate Rate......................................S-4
Class Certificate Balance..................................................S-5
Class Remittance Amount....................................................S-5
Code.......................................................................S-8
Collection Account........................................................S-27
Cut-Off Date...............................................................S-1
Debt Service Reduction.....................................................S-7
Depositor.............................................................S-1, S-2
Determination Date.........................................................S-6
DTC..................................................................S-1, S-24
Distribution Account......................................................S-27
Distribution Date..........................................................S-2
Due Date...................................................................S-2
Due Period...........................................................S-4, S-30
Eligible Account..........................................................S-27
Eligible Substitute Home Equity Loan......................................S-26
Events of Default.........................................................S-34
Excess Spread........................................................S-5, S-30
Exchange Act..............................................................S-24
Expense Fee Rate..........................................................S-30
Expense Fees...............................................................S-6
Holders....................................................................S-1
Home Equity Loan Schedule.................................................S-25
Home Equity Loans..........................................................S-1
Insolvency Event..........................................................S-35
Insurance Agreement........................................................S-6
Insured Payments...........................................................S-6
Inital Home Equity Loans...................................................S-2
Interest Determination Date...............................................S-31
Interest Period............................................................S-4
Interest Remittance Amount...........................................S-4, S-30
LIBOR Business Day........................................................S-31
Liquidated Home Equity Loan...............................................S-31
Liquidation Proceeds......................................................S-31
Loan Rate..................................................................S-2
S-41
<PAGE>
Loan Rates.................................................................S-14
Low Coupon Loan.......................................................S-3, S-25
LPO Loan...................................................................S-17
Monthly Advance.......................................................S-7, S-28
Mortgage Notes........................................................S-2, S-14
Mortgaged Properties...................................................S-1, S-2
Mortgages...................................................................S-2
Mortgagor..................................................................S-15
Net Excess Spread.....................................................S-6, S-31
Net Liquidation Proceeds...................................................S-31
Non Recoverable Advance....................................................S-28
Offered Certificates........................................................S-1
One Month LIBOR............................................................S-31
Originator.................................................................S-15
Original Class Certificate Balance..........................................S-5
Overcollateralization Amount..........................................S-5, S-31
Overcollateralization Proceeds.............................................S-31
Percentage Interest.........................................................S-1
Policy.................................................................S-1, S-6
Pool........................................................................S-1
Pool Balance................................................................S-3
Pre Funded Amount.....................................................S-3, S-28
Pre Funding Period.........................................................S-28
Premium....................................................................S-29
Prepayment Assumptions.....................................................S-22
Prepayment Interest Shortfall...............................................S-7
Principal...................................................................S-4
Principal Balance...........................................................S-2
Principal Remittance Amount...........................................S-5, S-30
Purchase Agreement.........................................................S-25
Purchase Price.............................................................S-26
Rating Agencies.............................................................S-8
Record Date.................................................................S-2
Related Documents..........................................................S-25
REMIC.......................................................................S-8
Requested Loan Amount......................................................S-16
Required Overcollateralization Amount.......................................S-5
Required Payments.....................................................S-6, S-31
Reserve Interest Rate..................................................... S-31
RPO Loan...................................................................S-17
Seller.....................................................................S-15
Servicer..............................................................S-1, S-15
Servicing Advance..........................................................S-28
Servicing Fee...............................................................S-6
Servicing Fee Rate....................................................S-6, S-33
Subsequent Cut-Off Date....................................................S-14
Subsequent Home Equity Loans..............................................Cover
Subservicer................................................................S-15
Substitution Adjustment....................................................S-26
Transfer Agreement.........................................................S-25
Trigger Event..............................................................S-35
Trust.......................................................................S-1
Trust Assets................................................................S-8
Trustee................................................................S-1, S-2
Underwriter................................................................S-38
Unrecovered Class A Portion...........................................S-4, S-30
S-42
<PAGE>
APPENDIX A
CERTAIN STATISTICAL INFORMATION
REGARDING THE INITIAL HOME EQUITY LOANS
AS OF THE CUT-OFF DATE
Distribution by Cut-Off Date Principal Balances
</TABLE>
<TABLE>
<CAPTION>
Range of Number of Initial Cut-Off Date % of Cut-Off Date
Cut-Off Date Home Equity Aggregate Aggregate
Principal Balances Loans Principal Balance Principal Balance
------------------ ----------------- ----------------- -----------------
<S> <C> <C> <C>
up to $9,999.99 275 $2,159,439.72 2.30%
$10,000.00 to $19,999.99 1,027 15,905,451.36 16.91
$20,000.00 to $29,999.99 965 23,843,495.64 25.35
$30,000.00 to $39,999.99 474 16,415,487.73 17.45
$40,000.00 to $49,999.99 294 13,211,043.32 14.05
$50,000.00 to $59,999.99 145 7,930,447.69 8.43
$60,000.00 to $69,999.99 86 5,532,521.93 5.88
$70,000.00 to $79,999.99 52 3,821,727.41 4.06
$80,000.00 to $89,999.99 27 2,252,933.89 2.40
$90,000.00 to $99,999.99 11 1,043,526.38 1.11
$100,000.00 to $109,999.99 2 206,215.44 0.22
$110,000.00 to $119,999.99 3 344,913.72 0.37
$120,000.00 to $129,999.99 1 125,000.00 0.13
$130,000.00 to $139,999.99 5 667,679.23 0.71
$170,000.00+ 3 $592,337.73 0.63
- ----------- ----
Total 3,370 $94,052,221.19 100.00%
===== =============== =======
</TABLE>
The average principal balance of the Initial Home Equity Loans as of the Cut-Off
Date was approximately $27,909.
A-1
<PAGE>
Distribution by Geographic Location
of the Mortgaged Properties
<TABLE>
<CAPTION>
Number of Initial Cut-Off Date % of Cut-Off Date
Home Equity Aggregate Aggregate
Geographic Location Loans Principal Balance Principal Balance
------------------- ----- ----------------- -----------------
<S> <C> <C> <C>
Alabama 5 $193,707.60 0.21%
Arizona 157 5,031,088.95 5.35
Arkansas 2 79,191.54 0.08
Colorado 397 12,035,885.81 12.80
Connecticut 1 21,000.00 0.02
Idaho 1 26,886.59 0.03
Illinois 412 12,787,357.77 13.60
Indiana 117 3,326,675.01 3.54
Iowa 881 22,706,299.91 24.14
Kansas 172 4,827,514.54 5.13
Kentucky 16 483,411.43 0.51
Louisiana 2 24,222.18 0.03
Maine 1 32,089.32 0.03
Maryland 9 334,057.92 0.36
Massachusetts 2 66,728.72 0.07
Michigan 10 296,854.40 0.32
Minnesota 118 3,142,366.99 3.34
Mississippi 1 43,414.05 0.05
Missouri 404 10,321,623.88 10.97
North Carolina 109 3,051,226.75 3.24
North Dakota 1 71,782.74 0.08
Nebraska 163 4,509,686.70 4.79
New Mexico 2 73,209.23 0.08
Ohio 189 4,997,400.12 5.31
Oklahoma 10 290,760.81 0.31
South Carolina 7 202,195.82 0.21
South Dakota 21 726,888.10 0.77
Tennessee 36 882,277.84 0.94
Utah 54 1,587,608.33 1.69
Virginia 2 55,608.59 0.06
Washington 4 149,501.96 0.16
West Virginia 1 22,592.00 0.02
Wisconsin 58 1,569,664.40 1.67
Wyoming 5 81,441.19 0.09
- --------- ----
Total 3,370 $94,052,221.19 100.00%
===== ============== =======
</TABLE>
A-2
<PAGE>
Distribution by Original Combined Loan-to-Value Ratios(1)
<TABLE>
<CAPTION>
Range of Number of Initial Cut-Off Date % of Cut-Off Date
Original Combined Home Equity Aggregate Aggregate
Loan-to-Value Ratio Loans Principal Balance Principal Balance
------------------- ----------------- ----------------- ------------------
<S> <C> <C> <C>
0.01% to 10.00% 18 $207,530.46 0.22%
10.01% to 20.00% 51 683,976.31 0.73
20.01% to 30.00% 52 1,023,440.47 1.09
30.01% to 40.00% 39 840,893.88 0.89
40.01% to 50.00% 49 1,080,716.55 1.15
50.01% to 60.00% 81 2,081,452.37 2.21
60.01% to 70.00% 83 1,929,115.93 2.05
70.01% to 80.00% 231 6,224,250.55 6.62
80.01% to 90.00% 647 19,709,259.18 20.96
90.01% to 100.00% 1,912 54,281,643.12 57.71
100.01% to 110.00% 207 5,989,942.37 6.37
--- ------------ ----
Total 3,370 $94,052,221.19 100.00%
===== ============== =======
</TABLE>
- ----------------
(1) The original Combined Loan-to-Value Ratios ("CLTV") shown above are equal,
with respect to each Home Equity Loan, to (i) the sum of (a) the original
principal balance of such Home Equity Loan at the date of origination plus
(b) the remaining balance of the senior lien(s), if any, at the date of
origination of such Home Equity Loan divided by the value of the related
Mortgaged Property, based upon the appraisal made at the time of
origination of such Home Equity Loan. No assurance can be given that the
values of such Mortgaged Properties have remained or will remain at their
levels as of the dates of origination of the related Initial Home Equity
Loans. If the residential real estate market should experience as overall
decline in property values such that the outstanding balances of such Home
Equity Loans together with the outstanding balances of the related first
liens become equal to or greater than the value of the related Mortgaged
Properties, the actual losses could be higher than those now generally
experienced in the mortgage lending industry.
The weighted average Combined Loan-to-Value Ratio of the Initial Home Equity
Loans as of the Cut-Off Date was approximately 90.34%.
Distribution by Loan Rates as of the Cut-Off Date
<TABLE>
<CAPTION>
Number of Initial Cut-Off Date % of Cut-Off Date
Home Equity Aggregate Aggregate
Range of Loan Rates Loans Principal Balance Principal Balance
------------------- ------------------ ----------------- -----------------
<S> <C> <C> <C>
7.000% to 7.999% 1 $16,883.05 0.02%
8.000% to 8.999% 62 1,016,144.68 1.08
9.000% to 9.999% 727 19,722,736.45 20.97
10.000% to 10.999% 608 16,265,998.41 17.29
11.000% to 11.999% 667 17,991,422.75 19.13
12.000% to 12.999% 910 26,703,064.40 28.39
13.000% to 13.999% 340 10,697,266.49 11.37
14.000% to 14.999% 51 1,557,735.84 1.66
15.000% to 15.999% 3 63,435.73 0.07
18.000% to 18.999% 1 17,533.39 0.02
- ----
Total 3,370 $94,052,221.19 100.00%
===== =============== =======
</TABLE>
The weighted average Loan Rate of the Initial Home Equity Loans as of the
Cut-Off Date was approximately 11.39%.
A-3
<PAGE>
Distribution by Remaining Term to Stated Maturity
<TABLE>
<CAPTION>
Number of Initial % of Cut-Off Date
Remaining Months Home Equity Cut-Off Date Aggregate Aggregate
to Stated Maturity Loans Principal Balance Principal Balance
------------------ ------------------ ---------------------- -----------------
<S> <C> <C> <C>
1 to 60 841 $18,346,006.41 19.51%
61 to 120 1,183 33,490,123.26 35.61
121 to 180 1,344 42,131,804.23 44.80
181 to 240 2 84,287.29 0.09
- --------- ----
Total 3,370 $94,052,221.19 100.00%
===== ============== =======
</TABLE>
The weighted average remaining term to stated maturity of the Initial Home
Equity Loans as of the Cut-Off Date was approximately 129 months.
Distribution of Months Since Funding
<TABLE>
<CAPTION>
Number of Initial % of Cut-Off Date
Number of Months Home Equity Cut-Off Date Aggregate Aggregate
Since Funding Loans Principal Balance Principal Balance
---------------- ------------------ ----------------------- -----------------
<S> <C> <C> <C>
0 to 1 1,103 $30,882,030.82 32.83%
2 to 12 2,191 61,278,302.44 65.15
13 to 24 75 1,852,276.12 1.97
25+ 1 39,611.81 0.04
- --------- ----
Total 3,370 $94,052,221.19 100.00%
===== ============== =======
</TABLE>
The weighted average age of the Initial Home Equity Loans as of the Cut-Off Date
was approximately 4 months.
Distribution by Type of Mortgaged Property
<TABLE>
<CAPTION>
Number of Initial % of Cut-Off Date
Home Equity Cut-Off Date Aggregate Aggregate
Property Type Loans Principal Balance Principal Balance
------------- ----------------- ---------------------- -----------------
<S> <C> <C> <C>
Single Family Detached 2,628 $72,786,701.09 79.62%
Single Family Attached 527 15,798,761.48 17.28
Low Rise Condominium 37 880,738.40 0.96
Three- to Four- Family 26 949,532.32 1.04
Duplex 25 591,741.83 0.65
Townhouse 18 385,400.15 0.42
High Rise Condominium 1 22,574.98 0.02
- ---------- ----
Total 3,262 $91,415,450.25 100.00%
===== =============== =======
</TABLE>
Property Type is unavailable for 108 of the Initial Home Equity Loans with a
total principal balance as of the Cut-Off Date of approximately $2,636,771.
A-4
<PAGE>
Distribution by Lien Position
<TABLE>
<CAPTION>
Number of Initial % of Cut-Off Date
Home Equity Cut-Off Date Aggregate Aggregate
Lien Position Loans Principal Balance Principal Balance
------------- ------------------ ---------------------- -----------------
<S> <C> <C> <C>
First Lien 413 $16,831,676.71 17.90%
Second Lien 2,957 77,220,544.48 82.10
----- ------------- -----
Total 3,370 $94,052,221.19 100.00%
===== ============== =======
</TABLE>
Distribution by Occupancy Status
<TABLE>
<CAPTION>
% of Cut-Off Date
Number of Initial Cut-Off Date Aggregate Aggregate
Occupancy Status Home Equity Loans Principal Balance Principal Balance
---------------- ----------------- ---------------------- ------------------
<S> <C> <C> <C>
Owner Occupied 3,370 $94,052,221.19 100.00%
----- -------------- -------
Total 3,370 $94,052,221.19 100.00%
===== ============== =======
</TABLE>
A-5
<PAGE>
(This page has been left blank intentionally)
<PAGE>
PROSPECTUS
BEAR STEARNS ASSET BACKED SECURITIES, INC.
(DEPOSITOR)
Bear Stearns Asset Backed Securities, Inc. (the 'Depositor') may offer from
time to time under this Prospectus and related Prospectus Supplements the
Asset-Backed Notes (the 'Notes') and the Asset-Backed Certificates (the
'Certificates' and, together with the Notes, the 'Securities') which may be sold
from time to time in one or more series (each, a 'Series').
As specified in the related Prospectus Supplement, the Certificates of a
Series will evidence undivided interests in certain assets deposited into a
trust (each, a 'Trust Fund') by the Depositor pursuant to a Pooling and Service
Agreement or a Trust Agreement, as described herein. As specified in the related
Prospectus Supplement, the Notes of a Series will be issued and secured pursuant
to an Indenture and will represent indebtedness of the related Trust Fund. The
Trust Fund for a Series of Securities will include assets purchased from the
seller or sellers specified in the related Prospectus Supplement (the 'Seller')
composed of (a) Primary Assets, which may include one or more pools of (i)
closed-end home equity loans (the 'Mortgage Loans'), secured by mortgages on
one- to four-family residential or mixed-use properties, (ii) home improvement
installment sales contracts and installment loan agreements (the 'Home
Improvement Contracts') which are either unsecured or secured by mortgages on
one- to four-family residential or mixed-use properties, or by purchase money
security interests in the home improvements financed thereby (the 'Home
Improvements') and (iii) securities backed or secured by Mortgage Loans and/or
Home Improvement Contracts, (b) all monies due thereunder net, if and as
provided in the related Prospectus Supplement, of certain amounts payable to the
servicer of the Mortgage Loans and/or Home Improvement Contracts (collectively,
the 'Loans'), which servicer may also be the Seller, specified in the related
Prospectus Supplement (the 'Servicer'), (c) if specified in the related
Prospectus Supplement, funds on deposit in one or more pre-funding amounts
and/or capitalized interest accounts and (d) reserve funds, letters of credit,
surety bonds, insurance policies or other forms of credit support as described
herein and in the related Prospectus Supplement. The amount initially deposited
in a pre-funding account for a Series of Securities will not exceed fifty
percent of the aggregate principal amount of such series of Securities.
(cover continued on next page)
NOTES OF A GIVEN SERIES REPRESENT OBLIGATIONS OF, AND CERTIFICATES OF A
SERIES EVIDENCE BENEFICIAL INTERESTS IN, THE RELATED TRUST FUND ONLY AND ARE NOT
GUARANTEED BY ANY GOVERNMENTAL AGENCY OR BY THE DEPOSITOR, THE SELLER, THE
TRUSTEE, THE SERVICER OR BY ANY OF THEIR RESPECTIVE AFFILIATES OR, UNLESS
OTHERWISE SPECIFIED IN THE RELATED PROSPECTUS SUPPLEMENT, BY ANY OTHER PERSON OR
ENTITY. THE DEPOSITOR'S ONLY OBLIGATIONS WITH RESPECT TO ANY SERIES OF
SECURITIES WILL BE PURSUANT TO CERTAIN REPRESENTATIONS AND WARRANTIES SET FORTH
IN THE RELATED AGREEMENT AS DESCRIBED HEREIN OR IN THE RELATED PROSPECTUS
SUPPLEMENT.
------------------------
SEE 'RISK FACTORS' ON PAGE 15 FOR CERTAIN FACTORS TO BE CONSIDERED IN
PURCHASING THE SECURITIES.
------------------------
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 OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS OR THE PROSPECTUS SUPPLEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
--------------------------------------------------
The Securities offered by this Prospectus and by the related Prospectus
Supplement are offered by Bear, Stearns & Co. Inc. and the other underwriters
set forth in the related Prospectus Supplement, if any, subject to prior sale,
to withdrawal, cancellation or modification of the offer without notice, to
delivery to and acceptance by Bear, Stearns & Co. Inc. and the other
underwriters, if any, and certain further conditions. Retain this Prospectus for
future reference. This Prospectus may not be used to consummate sales of the
Securities offered hereby unless accompanied by a Prospectus Supplement.
------------------------
BEAR, STEARNS & CO. INC.
JUNE 24, 1997
<PAGE>
(Continued from previous page)
Each Series of Securities will be issued in one or more classes (each, a
'Class'). Interest on and principal of the Securities of a Series will be
payable on each Distribution Date specified in the related Prospectus
Supplement, at the times, at the rates, in the amounts and in the order of
priority set forth in the related Prospectus Supplement.
If a Series includes multiple Classes, such Classes may vary with respect
to the amount, percentage and timing of distributions of principal, interest or
both and one or more Classes may be subordinated to other Classes with respect
to distributions of principal, interest or both as described herein and in the
related Prospectus Supplement. If so specified in the related Prospectus
Supplement, the Primary Assets and other assets comprising the Trust Fund may be
divided into one or more Asset Groups and each Class of the related Series will
evidence beneficial ownership of the corresponding Asset Group, as applicable.
The rate of reduction of the aggregate principal balance of each Class of a
Series may depend principally upon the rate of payment (including prepayments)
with respect to the Loans or Underlying Loans relating to the Private
Securities, as applicable. A rate of prepayment lower or higher than anticipated
will affect the yield on the Securities of a Series in the manner described
herein and in the related Prospectus Supplement. Under certain limited
circumstances described herein and in the related Prospectus Supplement, a
Series of Securities may be subject to termination or redemption under the
circumstances described herein and in the related Prospectus Supplement.
If specified in the related Prospectus Supplement, an election may be made
to treat certain assets comprising the Trust Fund for a Series as a 'real estate
mortgage investment conduit' (a 'REMIC') for federal income tax purposes. See
'CERTAIN FEDERAL INCOME TAX CONSIDERATIONS' herein.
2
<PAGE>
PROSPECTUS SUPPLEMENT
The Prospectus Supplement relating to a Series of Securities to be offered
hereunder will, among other things, set forth with respect to such Series of
Securities: (i) the aggregate principal amount, interest rate, and authorized
denominations of each Class of such Securities; (ii) certain information
concerning the Primary Assets, the Seller and any Servicer; (iii) the terms of
any Enhancement with respect to such Series; (iv) the terms of any insurance
related to the Primary Assets; (v) information concerning any other assets in
the related Trust Fund, including any Reserve Fund; (vi) the Final Scheduled
Distribution Date of each Class of such Securities; (vii) the method to be used
to calculate the amount of principal required to be applied to the Securities of
each Class of such Series on each Distribution Date, the timing of the
application of principal and the order of priority of the application of such
principal to the respective Classes and the allocation of principal to be so
applied; (viii) the Distribution Dates and any Assumed Reinvestment Rate (as
defined herein); (ix) additional information with respect to the plan of
distribution of such Securities; and (x) whether a REMIC election will be made
with respect to some or all of the Trust Fund for such Series.
REPORTS TO HOLDERS
Periodic and annual reports concerning the related Trust Fund for a Series
of Securities are required under the related Agreement to be forwarded to
Holders. Unless otherwise specified in the related Prospectus Supplement, such
reports will not be examined and reported on by an independent public
accountant. If so specified in the Prospectus Supplement for a Series of
Securities, such Series or one or more Classes of such Series will be issued in
book-entry form. In such event, (i) owners of beneficial interests in such
Securities will not be considered 'Holders' under the Agreements and will not
receive such reports directly from the related Trust Fund; rather, such reports
will be furnished to such owners through the participants and indirect
participants of the applicable book-entry system and (ii) references herein to
the rights of 'Holders' shall refer to the rights of such owners as they may be
exercised indirectly through such participants. See 'THE AGREEMENTS--Reports to
Holders' herein.
AVAILABLE INFORMATION
The Depositor has filed with the Securities and Exchange Commission a
Registration Statement under the Securities Act of 1933, as amended, with
respect to the Securities. This Prospectus, which forms a part of the
Registration Statement, and the Prospectus Supplement relating to each Series of
Securities contain summaries of the material terms of the documents referred to
herein and therein, but do not contain all of the information set forth in the
Registration Statement pursuant to the Rules and Regulations of the Commission.
For further information, reference is made to such Registration Statement and
the exhibits thereto. Such Registration Statement and exhibits can be inspected
and copied at prescribed rates at the public reference facilities maintained by
the Commission at its Public Reference Section, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at its Regional Office located as follows, Midwest
Regional Office, 500 West Madison Street, Chicago, Illinois 60661; and Northeast
Regional Office, Seven World Trade Center, New York, New York 10048.
Each Trust Fund will be required to file certain reports with the
Commission pursuant to the requirements of the Securities Exchange Act of 1934,
as amended. The Depositor intends to cause each Trust Fund to suspend filing
such reports if and when such reports are no longer required under said Act.
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.
3
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents subsequently filed by or on behalf of the Trust Fund 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'), after the date of this Prospectus and prior to the
termination of any offering of the Securities issued by such Trust Fund 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 in a document incorporated or deemed to be incorporated by reference
herein shall be deemed to be modified or superseded for all 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 modifies or replaces
such statement. Any such statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
The Depositor on behalf of any Trust Fund will provide without charge to
each person to whom this Prospectus is delivered, on the written or oral request
of such person, a copy of any or all of the documents referred to above that
have been or may be incorporated by reference in this Prospectus (not including
exhibits to the information that is incorporated by reference unless such
exhibits are specifically incorporated by reference into the information that
this Prospectus incorporates). Such requests should be directed to the Depositor
at 245 Park Avenue, New York, New York 10167.
4
<PAGE>
SUMMARY OF TERMS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus and by reference to
the information with respect to each Series of Securities contained in the
Prospectus Supplement to be prepared and delivered in connection with the
offering of Securities of such Series. Capitalized terms used and not otherwise
defined herein or in the related Prospectus Supplement shall have the meanings
set forth in the 'GLOSSARY OF TERMS' herein.
<TABLE>
<S> <C>
Securities Offered........................ Asset-Backed Certificates (the 'Certificates') and Asset-Backed Notes
(the 'Notes'). Certificates are issuable from time to time in Series
pursuant to a Pooling and Servicing Agreement or Trust Agreement.
Each Certificate of a Series will evidence an interest in the Trust
Fund for such Series, or in an Asset Group specified in the related
Prospectus Supplement. Notes are issuable from time to time in Series
pursuant to an Indenture. Each Series of Securities will consist of
one or more Classes, one or more of which may be Classes of Compound
Interest Securities, Planned Amortization Class ('PAC') Securities,
Variable Interest Securities, Zero Coupon Securities, Principal Only
Securities, Interest Only Securities, Participating Securities,
Senior Securities or Subordinate Securities. Each Class may differ
in, among other things, the amounts allocated to and the priority of
principal and interest payments, Final Scheduled Distribution Dates,
Distribution Dates and interest rates. The Securities of each Class
will be issued in fully registered form in the denominations
specified in the related Prospectus Supplement. If so specified in
the related Prospectus Supplement, the Securities or certain Classes
of such Securities offered thereby may be available in book-entry
form only.
Depositor................................. Bear Stearns Asset Backed Securities, Inc. (the 'Depositor') was
incorporated in the State of Delaware in June 1995, and is a wholly-
owned, special purpose subsidiary of The Bear Stearns Companies Inc.
None of The Bear Stearns Companies Inc. nor any other affiliate of
the Depositor, the Servicer, the Trustee or the Seller has guaranteed
or is otherwise obligated with respect to the Securities of any
Series. See 'THE DEPOSITOR.'
Interest Payments......................... Interest payments on the Securities of a Series entitled by their
terms to receive interest will be made on each Distribution Date, to
the extent set forth in, and at the applicable rate specified in (or
determined in the manner set forth in), the related Prospectus
Supplement. The interest rate on Securities of a Series may be
variable or change with changes in the rates of interest on the
related Loans or Underlying Loans relating to the Private Securities,
as applicable and/or as prepayments occur with respect to such Loans
or Underlying Loans, as applicable. Interest Only Securities may be
assigned a 'Notional Amount' set forth in the related Prospectus
Supplement which is used solely for convenience in expressing the
calculation of interest and for certain other purposes and does not
represent the right to receive any distributions allocable to
principal. Principal Only Securities may not be entitled to receive
any interest payments or may be entitled to receive only nominal
interest payments. Interest payable on the Securities of a Series on
a Distribution Date will include all interest accrued during the
period
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
specified in the related Prospectus Supplement. See 'DESCRIPTION OF
THE SECURITIES--Payments of Interest.'
Principal Payments........................ All payments of principal of a Series of Securities will be made in
an aggregate amount determined as set forth in the related Prospectus
Supplement and will be paid at the times and will be allocated among
the Classes of such Series in the order and amounts, and will be
applied either on a pro rata or a random lot basis among all
Securities of any such Class, all as specified in the related
Prospectus Supplement.
Final Scheduled Distribution Date of the
Securities.............................. The Final Scheduled Distribution Date with respect to each Class of
Notes is the date no later than which principal thereof will be fully
paid and with respect to each Class of Certificates is the date after
which no Certificates of such Class are expected to remain
outstanding, in each case calculated on the basis of the assumptions
applicable to such Series described in the related Prospectus
Supplement. The Final Scheduled Distribution Date of a Class may
equal the maturity date of the Primary Asset in the related Trust
Fund which has the latest stated maturity or will be determined as
described herein and in the related Prospectus Supplement.
The actual final Distribution Date of the Securities of a Series will
depend primarily upon the rate of payment (including prepayments,
liquidations due to default, the receipt of proceeds from casualty
insurance policies and repurchases) of the Loans or Underlying Loans
relating to the Private Securities, as applicable, in the related
Trust Fund. Unless otherwise specified in the related Prospectus
Supplement, the actual final Distribution Date of any Security is
likely to occur earlier and may occur substantially earlier or may
occur later than its Final Scheduled Distribution Date as a result of
the application of prepayments to the reduction of the principal
balances of the Securities and as a result of defaults on the Primary
Assets. The rate of payments on the Loans or Underlying Loans
relating to the Private Securities, as applicable, in the Trust Fund
for a Series will depend on a variety of factors, including certain
characteristics of such Loans or Underlying Loans, as applicable, and
the prevailing level of interest rates from time to time, as well as
on a variety of economic, demographic, tax, legal, social and other
factors. No assurance can be given as to the actual prepayment
experience with respect to a Series. See 'RISK FACTORS--Yield May
Vary' and 'DESCRIPTION OF THE SECURITIES--Weighted Average Life of
the Securities' herein.
Optional Termination...................... One or more Classes of Securities of any Series may be redeemed or
repurchased in whole or in part, at the Depositor's or the Servicer's
option, at such time and under the circumstances specified in the
related Prospectus Supplement, at the price set forth therein. If so
specified in the related Prospectus Supplement for a Series of
Securities, the Depositor, the Servicer, or such other entity that is
specified in the related Prospectus Supplement, may, at its option,
cause an early termination of the related Trust Fund by repurchasing
all of the Primary Assets remaining in the Trust Fund on or after a
specified date, or on or after such time as the aggregate principal
balance of the Securities of the Series or the Primary Assets
relating
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
to such Series, as specified in the related Prospectus Supplement, is
less than the amount or percentage specified in the related
Prospectus Supplement. See 'DESCRIPTION OF THE SECURITIES--Optional
Redemption, Purchase or Termination.'
In addition, the Prospectus Supplement may provide other
circumstances under which Holders of Securities of a Series could be
fully paid significantly earlier than would otherwise be the case if
payments or distributions were solely based on the activity of the
related Primary Assets.
The Trust Fund............................ The Trust Fund for a Series of Securities will consist of one or more
of the assets described below, as described in the related Prospectus
Supplement.
A. Primary Assets....................... The Primary Assets for a Series may consist of any combination of the
following assets, to the extent and as specified in the related
Prospectus Supplement. The Primary Assets will be purchased from the
Seller or may be purchased by the Depositor in the open market or in
privately negotiated transactions, including transactions with
entities affiliated with the Depositor.
(1) Loans.......................... Primary Assets for a Series will consist, in whole or in part, of
Loans. Some Loans may be delinquent or non-performing as specified in
the related Prospectus Supplement. Loans may be originated by or
acquired from an affiliate of the Depositor and an affiliate of the
Depositor may be an obligor with respect to any such Loan. The Loans
will be conventional contracts or contracts insured by the Federal
Housing Administration ('FHA') or partially guaranteed by the
Veterans Administration ('VA'). See 'The Trust Funds--The Loans' for
a discussion of such guarantees. To the extent provided in the
related Prospectus Supplement, additional Loans may be periodically
added to the Trust Fund, or may be removed from time to time if
certain asset value tests are met, as described in the related
Prospectus Supplement.
The 'Loans' for a Series will consist of (i) closed-end home equity
loans (the 'Mortgage Loans') and (ii) home improvement installment
sales contracts and installment loan agreements (the 'Home
Improvement Contracts'). The Mortgage Loans and the Home Improvement
Contracts are collectively referred to herein as the 'Loans.' Loans
may, as specified in the related Prospectus Supplement, have various
payment characteristics, including balloon or other irregular payment
features, and may accrue interest at a fixed rate or an adjustable
rate.As specified in the related Prospectus Supplement, the Mortgage
Loans will and the Home Improvement Contracts may be secured by
mortgages and deeds of trust or other similar security instruments
creating a lien on a Mortgaged Property, which may be subordinated to
one or more senior liens on the Mortgaged Property, as described in
the related Prospectus Supplement. As specified in the related
Prospectus Supplement, Home Improvement Contracts may be unsecured or
secured by purchase money security interests in the Home Improvements
financed thereby. The Mortgaged Properties and the Home Improvements
are collectively referred to herein as the 'Properties.'
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
The related Prospectus Supplement will describe certain
characteristics of the Loans for a Series, including, without
limitation, and to the extent relevant: (a) the aggregate unpaid
principal balance of the Loans (or the aggregate unpaid principal
balance included in the Trust Fund for the related Series); (b) the
range and weighted average Loan Rate on the Loans and in the case of
adjustable rate Loans, the range and weighted average of the Current
Loan Rates and the Lifetime Rate Caps, if any; (c) the range and the
average outstanding principal balance of the Loans; (d) the weighted
average original and remaining term-to-stated maturity of the Loans
and the range of original and remaining terms-to-stated maturity, if
applicable; (e) the range and Combined Loan-to-Value Ratios or
Loan-to-Value Ratios, as applicable, of the Loans, computed in the
manner described in the related Prospectus Supplement; (f) the
percentage (by principal balance as of the Cut-off Date) of Loans
that accrue interest at adjustable or fixed interest rates; (g) any
enhancement relating to the Loans; (h) the percentage (by principal
balance as of the Cut-off Date) of Loans that are secured by
Mortgaged Properties, Home Improvements or are unsecured; (i) the
geographic distribution of any Mortgaged Properties securing the
Loans; (j) the use and type of each Mortgaged Property securing a
Loan; (k) the lien priority of the Loans; and (l) the delinquency
status and year of origination of the Loans.
(2) Private Securities............. Primary Assets for a Series may consist, in whole or in part, of
Private Securities which include (a) pass-through certificates
representing beneficial interests in loans of the type that would
otherwise be eligible to be Loans (the 'Underlying Loans') or (b)
collateralized obligations secured by Underlying Loans. Such pass-
through certificates or collateralized obligations will have
previously been (a) offered and distributed to the public pursuant to
an effective registration statement or (b) purchased in a transaction
not involving any public offering from a person who is not an
affiliate of the issuer of such securities at the time of sale (nor
an affiliate thereof at any time during the three preceding months);
provided a period of three years has elapsed since the later of the
date the securities were acquired from the issuer or an affiliate
thereof. Although individual Underlying Loans may be insured or
guaranteed by the United States or an agency or instrumentality
thereof, they need not be, and the Private Securities themselves will
not be so insured or guaranteed. See 'THE TRUST FUNDS--Private
Securities.' Unless otherwise specified in the Prospectus Supplement
relating to a Series of Securities, payments on the Private
Securities will be distributed directly to the Trustee as registered
owner of such Private Securities.
The related Prospectus Supplement for a Series will specify (such
disclosure may be on an approximate basis, as described above and
will be as of the date specified in the related Prospectus
Supplement) to the extent relevant and to the extent such information
is reasonably available to the Depositor and the Depositor reasonably
believes such information to be reliable: (i) the aggregate
approximate principal amount and type of any Private Securities to be
included in the Trust Fund for such Series; (ii) certain
</TABLE>
8
<PAGE>
<TABLE>
<S> <C>
characteristics of the Underlying Loans including (A) the payment
features of such Underlying Loans (i.e., whether they are fixed rate
or adjustable rate and whether they provide for fixed level payments,
negative amortization or other payment features), (B) the approximate
aggregate principal amount of such Underlying Loans which are insured
or guaranteed by a governmental entity, (C) the servicing fee or
range of servicing fees with respect to such Underlying Loans, (D)
the minimum and maximum stated maturities of such Underlying Loans at
origination, (E) the lien priority of such Underlying Loans, and (F)
the delinquency status and year of origination of such Underlying
Loans; (iii) the maximum original term-to-stated maturity of the
Private Securities; (iv) the weighted average term-to-stated maturity
of the Private Securities; (v) the pass-through or certificate rate
or ranges thereof for the Private Securities; (vi) the sponsor or
depositor of the Private Securities (the 'PS Sponsor'), the servicer
of the Private Securities (the 'PS Servicer') and the trustee of the
Private Securities (the 'PS Trustee'); (vii) certain characteristics
of enhancement, if any, such as reserve funds, insurance policies,
letters of credit or guarantees, relating to the Loans underlying the
Private Securities, or to such Private Securities themselves; (viii)
the terms on which the Underlying Loans may, or are required to, be
repurchased prior to stated maturity; and (ix) the terms on which
substitute Underlying Loans may be delivered to replace those
initially deposited with the PS Trustee. See 'THE TRUST
FUNDS--Additional Information' herein.
B. Collection and Distribution
Accounts............................. Unless otherwise provided in the related Prospectus Supplement, all
payments on or with respect to the Primary Assets for a Series will
be remitted directly to an account (the 'Collection Account') to be
established for such Series with the Trustee or the Servicer, in the
name of the Trustee. Unless otherwise provided in the related
Prospectus Supplement, the Trustee shall be required to apply a
portion of the amount in the Collection Account, together with
reinvestment earnings from eligible investments specified in the
related Prospectus Supplement, to the payment of certain amounts
payable to the Servicer under the related Agreement and any other
person specified in the Prospectus Supplement, and to deposit a
portion of the amount in the Collection Account into a separate
account (the 'Distribution Account') to be established for such
Series, each in the manner and at the times established in the
related Prospectus Supplement. All amounts deposited in such
Distribution Account will be available, unless otherwise specified in
the related Prospectus Supplement, for (i) application to the payment
of principal of and interest on such Series of Securities on the next
Distribution Date, (ii) the making of adequate provision for future
payments on certain Classes of Securities and (iii) any other purpose
specified in the related Prospectus Supplement. After applying the
funds in the Collection Account as described above, any funds
remaining in the Collection Account may be paid over to the Servicer,
the Depositor, any provider of Enhancement with respect to such
Series (an 'Enhancer') or any other person entitled thereto
</TABLE>
9
<PAGE>
<TABLE>
<S> <C>
in the manner and at the times established in the related Prospectus
Supplement.
C. Pre-Funding and Capitalized Interest
Accounts............................. If specified in the related Prospectus Supplement, a Trust Fund will
include one or more segregated trust accounts (each, a 'Pre-Funding
Account') established and maintained with the Trustee for the related
Series. If so specified, on the closing date for such Series, a
portion of the proceeds of the sale of the Securities of such Series
(such amount, the 'Pre-Funded Amount') will be deposited in the
Pre-Funding Account and may be used to purchase additional Primary
Assets during the period of time, not to exceed six months, specified
in the related Prospectus Supplement (the 'Pre-Funding Period'). The
Primary Assets to be so purchased will be required to have certain
characteristics specified in the related Prospectus Supplement. If
any Pre-Funded Amount remains on deposit in the Pre-Funding Account
at the end of the Pre-Funding Period, such amount will be applied in
the manner specified in the related Prospectus Supplement to prepay
the Notes and/or the Certificates of the applicable Series. The
amount initially deposited in a pre-funding account for a Series of
Securities will not exceed fifty percent of the aggregate principal
amount of such Series of Securities.
If a Pre-Funding Account is established, one or more segregated trust
accounts (each, a 'Capitalized Interest Account') may be established
and maintained with the Trustee for the related Series. On the
closing date for such Series, a portion of the proceeds of the sale
of the Securities of such Series will be deposited in the Capitalized
Interest Account and used to fund the excess, if any, of (x) the sum
of (i) the amount of interest accrued on the Securities of such
Series and (ii) if specified in the related Prospectus Supplement,
certain fees or expenses during the Pre-Funding Period such as
trustee fees and credit enhancement fees, over (y) the amount of
interest available therefor from the Primary Assets in the Trust
Fund. Any amounts on deposit in the Capitalized Interest Account at
the end of the Pre-Funding Period that are not necessary for such
purposes will be distributed to the person specified in the related
Prospectus Supplement.
Enhancement............................... If stated in the Prospectus Supplement relating to a Series, the
Depositor will obtain an irrevocable letter of credit, surety bond,
certificate insurance policy, insurance policy or other form of
credit support (collectively, 'Enhancement') in favor of the Trustee
on behalf of the Holders of such Series and any other person
specified in such Prospectus Supplement from an institution
acceptable to the rating agency or agencies identified in the related
Prospectus Supplement as rating such Series of Securities
(collectively, the 'Rating Agency') for the purposes specified in
such Prospectus Supplement. The Enhancement will support the payments
on the Securities and may be used for other purposes, to the extent
and under the conditions specified in such Prospectus Supplement. See
'ENHANCEMENT.' Enhancement for a Series may include one or more of
the following types of Enhancement, or such other type of Enhancement
specified in the related Prospectus Supplement.
</TABLE>
10
<PAGE>
<TABLE>
<S> <C>
A. Subordinate Securities............... If stated in the related Prospectus Supplement, Enhancement for a
Series may consist of one or more Classes of Subordinate Securities.
The rights of Holders of such Subordinate Securities to receive
distributions on any Distribution Date will be subordinate in right
and priority to the rights of holders of Senior Securities of the
Series, but only to the extent described in the related Prospectus
Supplement.
B. Insurance............................ If stated in the related Prospectus Supplement, Enhancement for a
Series may consist of special hazard insurance policies, bankruptcy
bonds and other types of insurance supporting payments on the
Securities.
C. Reserve Funds........................ If stated in the Prospectus Supplement, the Depositor may deposit
cash, a letter or letters of credit, short-term investments, or other
instruments acceptable to the Rating Agency in one or more reserve
funds to be established in the name of the Trustee (each a 'Reserve
Fund'), which will be used, as specified in such Prospectus
Supplement, by the Trustee to make required payments of principal of
or interest on the Securities of such Series, to make adequate
provision for future payments on such Securities or for any other
purpose specified in the Agreement, with respect to such Series, to
the extent that funds are not otherwise available. In the alternative
or in addition to such deposit, a Reserve Fund for a Series may be
funded through application of all or a portion of the excess cash
flow from the Primary Assets for such Series, to the extent described
in the related Prospectus Supplement.
D. Minimum Principal Payment
Agreement............................ If stated in the Prospectus Supplement relating to a Series of
Securities, the Depositor will enter into a minimum principal payment
agreement (the 'Minimum Principal Payment Agreement') with an entity
meeting the criteria of the Rating Agency, pursuant to which such
entity will provide funds in the event that aggregate principal
payments on the Primary Assets for such Series are not sufficient to
make certain payments, as provided in the related Prospectus
Supplement. See 'ENHANCEMENT--Minimum Principal Payment Agreement.'
E. Deposit Agreement.................... If stated in the Prospectus Supplement, the Depositor and the Trustee
will enter into a guaranteed investment contract or an investment
agreement (the 'Deposit Agreement') pursuant to which all or a
portion of amounts held in the Collection Account, the Distribution
Account or in any Reserve Fund will be invested with the entity
specified in such Prospectus Supplement. The Trustee will be entitled
to withdraw amounts so invested, plus interest at a rate equal to the
Assumed Reinvestment Rate, in the manner specified in the Prospectus
Supplement. See 'ENHANCEMENT--Deposit Agreement.'
Servicing................................. The Servicer will be responsible for servicing, managing and making
collections on the Loans for a Series. In addition, the Servicer, if
so specified in the related Prospectus Supplement, will act as
custodian and will be responsible for maintaining custody of the
Loans and related documentation on behalf of the Trustee. Advances
with respect to delinquent payments of principal or
</TABLE>
11
<PAGE>
<TABLE>
<S> <C>
interest on a Loan will be made by the Servicer only to the extent
described in the related Prospectus Supplement. Such advances will be
intended to provide liquidity only and, unless otherwise specified in
the related Prospectus Supplement, reimbursable to the Servicer from
scheduled payments of principal and interest, late collections, or
from the proceeds of liquidation of the related Loans or from other
recoveries relating to such Loans (including any insurance proceeds
or payments from other credit support). In performing these
functions, the Servicer will exercise the same degree of skill and
care that it customarily exercises with respect to similar
receivables or Loans owned or serviced by it. Under certain limited
circumstances, the Servicer may resign or be removed, in which event
either the Trustee or a third-party servicer will be appointed as
successor servicer. The Servicer will receive a periodic fee as
servicing compensation (the 'Servicing Fee') and may, as specified
herein and in the related Prospectus Supplement, receive certain
additional compensation. See 'SERVICING OF LOANS--Servicing
Compensation and Payment of Expenses' herein.
Federal Income Tax Considerations
A. Debt Securities and REMIC Residual
Securities........................... If (i) an election is made to treat all or a portion of a Trust Fund
for a Series as a 'real estate mortgage investment conduit' (a
'REMIC') or (ii) so provided in the related Prospectus Supplement, a
Series of Securities will include one or more Classes of taxable debt
obligations under the Internal Revenue Code of 1986, as amended (the
'Code'). Stated interest with respect to such Classes of Securities
will be reported by a Holder in accordance with the Holder's method
of accounting except that, in the case of Securities constituting
'regular interests' in a REMIC ('Regular Interests'), such interest
will be required to be reported on the accrual method regardless of a
Holder's usual method of accounting. Securities that are Compound
Interest Securities, Zero Coupon Securities or Interest Only
Securities will, and certain other Classes of Securities may, be
issued with original issue discount that is not de minimis. In such
cases, the Holder will be required to include original issue discount
in gross income as it accrues, which may be prior to the receipt of
cash attributable to such income. If a Security is issued at a
premium, the Holder may be entitled to make an election to amortize
such premium on a constant yield method.
In the case of a REMIC election, a Class of Securities may be treated
as REMIC 'residual interests' ('Residual Interest'). A Holder of a
Residual Interest will be required to include in its income its pro
rata share of the taxable income of the REMIC. In certain
circumstances, the Holder of a Residual Interest may have REMIC
taxable income or tax liability attributable to REMIC taxable income
for a particular period in excess of cash distributions for such
period or have an after-tax return that is less than the after-tax
return on comparable debt instruments. In addition, a portion (or, in
some cases, all) of the income from a Residual Interest (i) may not
be subject to offset by losses from other activities or investments,
(ii) for a Holder that is subject to tax under the Code on unrelated
business taxable income, may be treated as unrelated
</TABLE>
12
<PAGE>
<TABLE>
<S> <C>
business taxable income and (iii) for a foreign holder, may not
qualify for exemption from or reduction of withholding. In addition,
(i) Residual Interests are subject to transfer restrictions and (ii)
certain transfers of Residual Interests will not be recognized for
federal income tax purposes. Further, individual holders are subject
to limitations on the deductibility of expenses of the REMIC. See
'CERTAIN FEDERAL INCOME TAX CONSIDERATIONS.'
B. Non-REMIC Pass-Through Securities.... If so specified in the related Prospectus Supplement, the Trust Fund
for a Series will be treated as a grantor trust and will not be
classified as an association taxable as a corporation for federal
income tax purposes and Holders of Securities of such Series
('Pass-Through Securities') will be treated as owning directly rights
to receive certain payments of interest or principal, or both on the
Primary Assets held in the Trust Fund for such Series. All income
with respect to a Stripped Security (as defined herein) will be
accounted for as original issue discount and, unless otherwise
specified in the related Prospectus Supplement, will be reported by
the Trustee on an accrual basis, which may be prior to the receipt of
cash associated with such income.
C. Owner Trust Securities............... If so specified in the Prospectus Supplement, the Trust Fund will be
treated as a partnership for purposes of federal and state income
tax. Each Noteholder, by the acceptance of a Note of a given Series,
will agree to treat such Note as indebtedness, and each
Certificateholder, by the acceptance of a Certificate of a given
Series, will agree to treat the related Trust as a partnership in
which such Certificateholder is a partner for federal income and
state tax purposes. Alternative characterizations of such Trust and
such Certificates are possible, but would not result in materially
adverse tax consequences to Certificateholders. See 'CERTAIN FEDERAL
INCOME TAX CONSIDERATIONS.'
ERISA Considerations...................... A fiduciary of any employee benefit plan subject to the Employee
Retirement Income Security Act of 1974, as amended ('ERISA'), or the
Code should carefully review with its own legal advisors whether the
purchase or holding of Securities could give rise to a transaction
prohibited or otherwise impermissible under ERISA or the Code. See
'ERISA CONSIDERATIONS.'
Legal Investment.......................... Unless otherwise specified in the related Prospectus Supplement,
Securities of each Series offered by this Prospectus and the related
Prospectus Supplement will not constitute 'mortgage related
securities' under the Secondary Mortgage Market Enhancement Act of
1984 ('SMMEA'). Investors whose investment authority is subject to
legal restrictions should consult their own legal advisors to
determine whether and to what extent the Securities constitute legal
investments for them. See 'LEGAL INVESTMENT.'
Use of Proceeds........................... The Depositor will use the net proceeds from the sale of each Series
for one or more of the following purposes: (i) to purchase the
related Primary Assets, (ii) to repay indebtedness which has been
incurred to obtain funds to acquire such Primary Assets, (iii) to
establish any Reserve Funds described in the related Prospectus
Supplement and (iv) to pay costs of structuring and issuing such
Securities, including
</TABLE>
13
<PAGE>
<TABLE>
<S> <C>
the costs of obtaining Enhancement, if any. If so specified in the
related Prospectus Supplement, the purchase of the Primary Assets for
a Series will be effected by an exchange of Securities with the
Seller of such Primary Assets. See 'USE OF PROCEEDS.'
Ratings................................... It will be a requirement for issuance of any Series that the
Securities offered by this Prospectus and the related Prospectus
Supplement be rated by at least one Rating Agency in one of its four
highest applicable rating categories. The rating or ratings
applicable to Securities of each Series offered hereby and by the
related Prospectus Supplement will be as set forth in the related
Prospectus Supplement. A securities rating should be evaluated
independently of similar ratings on different types of securities. A
securities rating is not a recommendation to buy, hold or sell
securities and does not address the effect that the rate of
prepayments on Loans or Underlying Loans relating to Private
Securities, as applicable, for a Series may have on the yield to
investors in the Securities of such Series. See 'RISK
FACTORS--Ratings Are Not Recommendations.'
</TABLE>
14
<PAGE>
RISK FACTORS
Investors should consider, among other things, the following factors in
connection with the purchase of the Securities.
NO SECONDARY MARKET
There will be no market for the Securities of any Series prior to the
issuance thereof, and there can be no assurance that a secondary market will
develop or, if it does develop, that it will provide Holders with liquidity of
investment or will continue for the life of the Securities of such Series. The
Underwriter(s) specified in the related Prospectus Supplement, expects to make a
secondary market in the Securities, but has no obligation to do so.
PRIMARY ASSETS ARE ONLY SOURCE OF REPAYMENT
The Depositor does not have, nor is it expected to have, any significant
assets. The Securities of a Series will be payable solely from the assets of the
Trust Fund for such Securities. There will be no recourse to the Depositor or
any other person for any default on the Notes or any failure to receive
distributions on the Certificates. Further, unless otherwise stated in the
related Prospectus Supplement, at the times set forth in the related Prospectus
Supplement, certain Primary Assets and/or any balance remaining in the
Collection Account or Distribution Account immediately after making all payments
due on the Securities of such Series and other payments specified in the related
Prospectus Supplement, may be promptly released or remitted to the Depositor,
the Servicer, the Enhancer or any other person entitled thereto and will no
longer be available for making payments to Holders. Consequently, Holders of
Securities of each Series must rely solely upon payments with respect to the
Primary Assets and the other assets constituting the Trust Fund for a Series of
Securities, including, if applicable, any amounts available pursuant to any
Enhancement for such Series, for the payment of principal of and interest on the
Securities of such Series.
Holders of Notes will be required under the Indenture to proceed only
against the Primary Assets and other assets constituting the related Trust Fund
in the case of a default with respect to such Notes and may not proceed against
any assets of the Depositor. There is no assurance that the market value of the
Primary Assets or any other assets for a Series will at any time be equal to or
greater than the aggregate principal amount of the Securities of such Series
then outstanding, plus accrued interest thereon. Moreover, upon an event of
default under the Indenture for a Series of Notes and a sale of the assets in
the Trust Fund or upon a sale of the assets of a Trust Fund for a Series of
Certificates, the Trustee, the Servicer, if any, the Enhancer and any other
service provider specified in the related Prospectus Supplement generally will
be entitled to receive the proceeds of any such sale to the extent of unpaid
fees and other amounts owing to such persons under the related Agreement prior
to distributions to Holders of Securities. Upon any such sale, the proceeds
thereof may be insufficient to pay in full the principal of and interest on the
Securities of such Series.
The only obligations, if any, of the Depositor with respect to the
Securities of any Series will be pursuant to certain representations and
warranties. See 'THE AGREEMENTS--Assignment of Primary Assets' herein. The
Depositor does not have, and is not expected in the future to have, any
significant assets with which to meet any obligation to repurchase Primary
Assets with respect to which there has been a breach of any representation or
warranty. If, for example, the Depositor were required to repurchase a Primary
Asset, its only sources of funds to make such repurchase would be from funds
obtained from the enforcement of a corresponding obligation, if any, on the part
of the originator of the Primary Assets, the Servicer or the Seller, as the case
may be, or from a Reserve Fund established to provide funds for such
repurchases.
LIMITED PROTECTION AGAINST LOSSES
Although any Enhancement is intended to reduce the risk of delinquent
payments or losses to holders of Securities entitled to the benefit thereof, the
amount of such Enhancement will be limited, as set forth in the related
Prospectus Supplement, and will decline and could be depleted under certain
circumstances prior to the payment in full of the related Series of Securities,
and as a result Holders may suffer losses. See 'ENHANCEMENT.'
15
<PAGE>
YIELD MAY VARY
The yield to maturity experienced by a Holder of Securities may be affected
by the rate of payment of principal of the Loans or Underlying Loans relating to
the Private Securities, as applicable. The timing of principal payments of the
Securities of a Series will be affected by a number of factors, including the
following: (i) the extent of prepayments of the Loans or Underlying Loans
relating to the Private Securities, as applicable, which prepayments may be
influenced by a variety of factors; (ii) the manner of allocating principal
payments among the Classes of Securities of a Series as specified in the related
Prospectus Supplement; and (iii) the exercise by the party entitled thereto of
any right of optional termination. See 'DESCRIPTION OF THE SECURITIES--Weighted
Average Life of Securities.' Prepayments may also result from repurchases of
Loans or Underlying Loans, as applicable, due to material breaches of the
Seller's or the Depositor's warranties.
Interest payable on the Securities of a Series on a Distribution Date will
include all interest accrued during the period specified in the related
Prospectus Supplement. In the event interest accrues during the calendar month
prior to a Distribution Date, the effective yield to Holders will be reduced
from the yield that would otherwise be obtainable if interest payable on the
Security were to accrue through the day immediately preceding each Distribution
Date, and the effective yield (at par) to Holders will be less than the
indicated coupon rate. See 'DESCRIPTION OF THE SECURITIES--Payments of
Interest.'
PROPERTY VALUES MAY BE INSUFFICIENT
If the Mortgages in a Trust Fund are primarily junior liens subordinate to
the rights of the mortgagee under the related senior mortgage or mortgages, the
proceeds from any liquidation, insurance or condemnation proceedings will be
available to satisfy the outstanding balance of such junior mortgage only to the
extent that the claims of such senior mortgagees have been satisfied in full,
including any related foreclosure costs. In addition, a junior mortgagee may not
foreclose on the Property securing a junior mortgage unless it forecloses
subject to the senior mortgages, in which case it must either pay the entire
amount due on the senior mortgages to the senior mortgagees at or prior to the
foreclosure sale or undertake the obligation to make payments on the senior
mortgages in the event the mortgagor is in default thereunder. The Trust Fund
will not have any source of funds to satisfy the senior mortgages or make
payments due to the senior mortgagees.
There are several factors that could adversely affect the value of
Properties such that the outstanding balance of the related Loan, together with
any senior financing on the Properties, would equal or exceed the value of the
Properties. Among the factors that could adversely affect the value of the
Properties are an overall decline in the residential real estate market in the
areas in which the Properties are located or a decline in the general condition
of the Properties as a result of failure of borrowers to maintain adequately the
Properties or of natural disasters that are not necessarily covered by
insurance, such as earthquakes and floods. Any such decline could extinguish the
value of a junior interest in a Property before having any effect on the related
senior interest therein. If such a decline occurs, the actual rates of
delinquencies, foreclosure and losses on the junior Loans could be higher than
those currently experienced in the mortgage lending industry in general.
PRE-FUNDING MAY ADVERSELY AFFECT INVESTMENT
If a Trust Fund includes a Pre-Funding Account and the principal balance of
additional Loans delivered to the Trust Fund during the Pre-Funding Period is
less than the original Pre-Funded Amount, the Holders of the Securities of the
related Series will receive a prepayment of principal as and to the extent
described in the related Prospectus Supplement. Any such principal prepayment
may adversely affect the yield to maturity of the applicable Securities. Since
prevailing interest rates are subject to fluctuation, there can be no issuance
that investors will be able to reinvest such a prepayment at yields equaling or
exceeding the yields on the related Securities. It is possible that the yield on
any such reinvestment will be lower, and may be significantly lower, than the
yield on the related Securities.
The ability of a Trust Fund to invest in subsequent Loans during the
related Pre-Funding Period will be dependant on the ability of the Seller to
originate or acquire Loans that satisfy the requirements for transfer to the
Trust Fund. The ability of the Seller to originate or acquire such Loans will be
affected by a variety of social and economic factors, including the prevailing
level of market interest rates, unemployment levels and consumer perceptions of
general economic conditions.
16
<PAGE>
Although subsequent Loans must satisfy the characteristics described in the
related Prospectus Supplement, such Loans may have been originated more recently
than the Loans originally transferred to the Trust Fund and may be of a lesser
credit quality. As a result, the addition of subsequent Loans may adversely
affect the performance of the related Securities.
POTENTIAL LIABILITY FOR ENVIRONMENTAL CONDITIONS
Real property pledged as security to a lender may be subject to certain
environmental risks. Under the laws of certain states, contamination of a
property may give rise to a lien on the property to assure the costs of clean-
up. In several states, such a lien has priority over the lien of an existing
mortgage or owner's interest against such property. In addition, under the laws
of some states and under the federal Comprehensive Environmental Response,
Compensation, and Liability Act of 1980 ('CERCLA'), a lender may be liable, as
an 'owner' or 'operator,' for costs of addressing releases or threatened
releases of hazardous substances that require remedy at a property, if agents or
employees of the lender have become sufficiently involved in the operations of
the borrower, regardless of whether or not the environmental damage or threat
was caused by a prior owner. A lender also risks such liability on foreclosure
of the Mortgaged Property.
CONSUMER PROTECTION LAWS MAY AFFECT LOANS
Applicable state laws generally regulate interest rates and other charges
and require certain disclosures. In addition, other state laws, public policy
and general principles of equity relating to the protection of consumers, unfair
and deceptive practices and debt collection practices may apply to the
origination, servicing and collection of the Loans. Depending on the provisions
of the applicable law and the specific facts and circumstances involved,
violations of these laws, policies and principles may limit the ability of the
Servicer to collect all or part of the principal of or interest on the Loans,
may entitle the borrower to a refund of amounts previously paid and, in
addition, could subject the owner of the Loan to damages and administrative
enforcement.
The Loans are also subject to Federal laws, including:
(i) the Federal Truth in Lending Act and Regulation Z promulgated
thereunder, which require certain disclosures to the borrowers regarding
the terms of the Loans;
(ii) the Equal Credit Opportunity Act and Regulation B promulgated
thereunder, which prohibit discrimination on the basis of age, race, color,
sex, religion, marital status, national origin, receipt of public
assistance or the exercise of any right under the Consumer Credit
Protection Act, in the extension of credit; and
(iii) the Fair Credit Reporting Act, which regulates the use and
reporting of information related to the borrower's credit experience.
The Home Improvement Contracts are also subject to the Preservation of
Consumers' Claims and Defenses regulations of the Federal Trade Commission and
other similar federal and state statutes and regulations (collectively, the
'Holder in Due Course Rules'), which protect the homeowner from defective
craftsmanship or incomplete work by a contractor. These laws permit the obligor
to withhold payment if the work does not meet the quality and durability
standards agreed to by the homeowner and the contractor. The Holder in Due
Course Rules have the effect of subjecting any assignee of the seller in a
consumer credit transaction to all claims and defenses which the obligor in the
credit sale transaction could assert against the seller of the goods.
Violations of certain provisions of these Federal laws may limit the
ability of the Servicer to collect all or part of the principal of or interest
on the Loans and in addition could subject the Trust Fund to damages and
administrative enforcement. See 'CERTAIN LEGAL ASPECTS OF THE LOANS.'
CONTRACTS WILL NOT BE STAMPED
In order to give notice of the right,title and interest of Securityholders
to the Home Improvement Contracts, the Depositor will cause a UCC-1 financing
statement to be executed by the Depositor or the Seller identifying the Trustee
as the secured party and identifying all Home Improvement Contracts as
collateral. Unless otherwise specified in the related Prospectus Supplement, the
Home Improvement Contracts will not be stamped or
17
<PAGE>
otherwise marked to reflect their assignment to the Trust Fund. Therefore, if,
through negligence, fraud or otherwise, a subsequent purchaser were able to take
physical possession of the Home Improvement Contracts without notice of such
assignment, the interest of Securityholders in the Home Improvement Contracts
could be defeated. See 'CERTAIN LEGAL ASPECTS OF THE LOANS--The Home Improvement
Contracts.'
RATINGS ARE NOT RECOMMENDATIONS
It will be a condition to the issuance of a Series of Securities that they
be rated in one of the four highest rating categories by the Rating Agency
identified in the related Prospectus Supplement. Any such rating would be based
on, among other things, the adequacy of the value of the Primary Assets and any
Enhancement with respect to such Series. Such rating should not be deemed a
recommendation to purchase, hold or sell Securities, inasmuch as it does not
address market price or suitability for a particular investor. There is also no
assurance that any such rating will remain in effect for any given period of
time or may not be lowered or withdrawn entirely by the Rating Agency if in its
judgment circumstances in the future so warrant. In addition to being lowered or
withdrawn due to any erosion in the adequacy of the value of the Primary Assets,
such rating might also be lowered or withdrawn, among other reasons, because of
an adverse change in the financial or other condition of an Enhancer or a change
in the rating of such Enhancer's long term debt.
DESCRIPTION OF THE SECURITIES
GENERAL
Each Series of Notes will be issued pursuant to an indenture (the
'Indenture') between the related Trust Fund and the entity named in the related
Prospectus Supplement as trustee (the 'Trustee') with respect to such Series. A
form of Indenture has been filed as an exhibit to the Registration Statement of
which this Prospectus forms a part. The Certificates will also be issued in
Series pursuant to separate agreements (each, a 'Pooling and Servicing
Agreement' or a 'Trust Agreement') among the Depositor, the Servicer, if the
Series relates to Loans, and the Trustee. A form of Pooling and Servicing
Agreement has been filed as an exhibit to the Registration Statement of which
this Prospectus forms a part. A Series may consist of both Notes and
Certificates.
The Seller may agree to reimburse the Depositor for certain fees and
expenses of the Depositor incurred in connection with the offering of the
Securities.
The following summaries describe certain provisions in the Agreements
common to each Series of Securities. The summaries do not purport to be complete
and are subject to, and are qualified in their entirety by reference to, the
provisions of the Agreements and the Prospectus Supplement relating to each
Series of Securities. Where particular provisions or terms used in the
Agreements are referred to, the actual provisions (including definitions of
terms) are incorporated herein by reference as part of such summaries.
Each Series of Securities will consist of one or more Classes of
Securities, one or more of which may be Compound Interest Securities, Variable
Interest Securities, PAC Securities, Zero Coupon Securities, Principal Only
Securities, Interest Only Securities or Participating Securities. A Series may
also include one or more Classes of Subordinate Securities. The Securities of
each Series will be issued only in fully registered form, without coupons, in
the authorized denominations for each Class specified in the related Prospectus
Supplement. Upon satisfaction of the conditions, if any, applicable to a Class
of a Series, as described in the related Prospectus Supplement, the transfer of
the Securities may be registered and the Securities may be exchanged at the
office of the Trustee specified in the Prospectus Supplement without the payment
of any service charge other than any tax or governmental charge payable in
connection with such registration of transfer or exchange. If specified in the
related Prospectus Supplement, one or more Classes of a Series may be available
in book-entry form only.
Unless otherwise provided in the related Prospectus Supplement, payments of
principal of and interest on a Series of Securities will be made on the
Distribution Dates specified in the Prospectus Supplement relating to such
Series by check mailed to Holders of such Series, registered as such at the
close of business on the record date specified in the related Prospectus
Supplement applicable to such Distribution Dates at their addresses appearing on
the security register, except that (a) payments may be made by wire transfer (at
the expense of the Holder requesting payment by wire transfer) in certain
circumstances described in the related Prospectus Supplement and (b) final
payments of principal in retirement of each Security will be made only upon
presentation and surrender of such Security at the office of the Trustee
specified in the Prospectus Supplement.
18
<PAGE>
Notice of the final payment on a Security will be mailed to the Holder of such
Security before the Distribution Date on which the final principal payment on
any Security is expected to be made to the holder of such Security.
Payments of principal of and interest on the Securities will be made by the
Trustee, or a paying agent on behalf of the Trustee, as specified in the related
Prospectus Supplement. Unless otherwise provided in the related Prospectus
Supplement, all payments with respect to the Primary Assets for a Series,
together with reinvestment income thereon, amounts withdrawn from any Reserve
Fund, and amounts available pursuant to any other Enhancement will be deposited
directly into the Collection Account. If provided in the related Prospectus
Supplement, such amounts may be net of certain amounts payable to the related
Servicer and any other person specified in the Prospectus Supplement. Such
amounts thereafter will be deposited into the Distribution Account and will be
available to make payments on the Securities of such Series on the next
Distribution Date. See 'THE TRUST FUNDS--Collection and Distribution Accounts.'
VALUATION OF THE PRIMARY ASSETS
If specified in the related Prospectus Supplement for a Series of Notes,
each Primary Asset included in the related Trust Fund for a Series will be
assigned an initial 'Asset Value.' Unless otherwise specified in the related
Prospectus Supplement, at any time the Asset Value of the Primary Assets will be
equal to the product of the Asset Value Percentage as set forth in the Indenture
and the lesser of (a) the stream of remaining regularly scheduled payments on
the Primary Assets, net, unless otherwise provided in the related Prospectus
Supplement, of certain amounts payable as expenses, together with income earned
on each such scheduled payment received through the day preceding the next
Distribution Date at the Assumed Reinvestment Rate, if any, discounted to
present value at the highest interest rate on the Notes of such Series over
periods equal to the interval between payments on the Notes, and (b) the then
principal balance of the Primary Assets. Unless otherwise specified in the
related Prospectus Supplement, the initial Asset Value of the Primary Assets
will be at least equal to the principal amount of the Notes of the related
Series at the date of issuance thereof.
The 'Assumed Reinvestment Rate,' if any, for a Series will be the highest
rate permitted by the Rating Agency or a rate insured by means of a surety bond,
guaranteed investment contract, Deposit Agreement or other arrangement
satisfactory to the Rating Agency. If the Assumed Reinvestment Rate is so
insured, the related Prospectus Supplement will set forth the terms of such
arrangement.
PAYMENTS OF INTEREST
The Securities of each Class by their terms entitled to receive interest
will bear interest (calculated, unless otherwise specified in the related
Prospectus Supplement, on the basis of a 360 day year of twelve 30-day months)
from the date and at the rate per annum specified, or calculated in the method
described, in the related Prospectus Supplement. Interest on such Securities of
a Series will be payable on the Distribution Date specified in the related
Prospectus Supplement. The rate of interest on Securities of a Series may be
variable or may change with changes in the annual percentage rates of the Loans
or Underlying Loans relating to the Private Securities, as applicable included
in the related Trust Fund and/or as prepayments occur with respect to such Loans
or Underlying Loans, as applicable. Principal Only Securities may not be
entitled to receive any interest distributions or may be entitled to receive
only nominal interest distributions. Any interest on Zero Coupon Securities that
is not paid on the related Distribution Date will accrue and be added to the
principal thereof on such Distribution Date.
Interest payable on the Securities on a Distribution Date will include all
interest accrued during the period specified in the related Prospectus
Supplement. In the event interest accrues during the calendar month preceding a
Distribution Date, the effective yield to Holders will be reduced from the yield
that would otherwise be obtainable if interest payable on the Securities were to
accrue through the day immediately preceding such Distribution Date.
PAYMENTS OF PRINCIPAL
On each Distribution Date for a Series, principal payments will be made to
the Holders of the Securities of such Series on which principal is then payable,
to the extent set forth in the related Prospectus Supplement. Such payments will
be made in an aggregate amount determined as specified in the related Prospectus
Supplement and will be allocated among the respective Classes of a Series in the
manner, at the times and in the priority (which may, in certain cases, include
allocation by random lot) set forth in the related Prospectus Supplement.
19
<PAGE>
FINAL SCHEDULED DISTRIBUTION DATE
The Final Scheduled Distribution Date with respect to each Class of Notes
is the date no later than which the principal thereof will be fully paid and
with respect to each Class of a Series of Certificates will be the date on which
the entire aggregate principal balance of such Class is expected to be reduced
to zero, in each case calculated on the basis of the assumptions applicable to
such Series described in the related Prospectus Supplement. The Final Scheduled
Distribution Date for each Class of a Series will be specified in the related
Prospectus Supplement. Since payments on the Primary Assets will be used to make
distributions in reduction of the outstanding principal amount of the
Securities, it is likely that the actual final Distribution Date of any such
Class will occur earlier, and may occur substantially earlier, than its Final
Scheduled Distribution Date.
Furthermore, with respect to a Series of Certificates, unless otherwise
specified in the related Prospectus Supplement, as a result of delinquencies,
defaults and liquidations of the Primary Assets in the Trust Fund, the actual
final Distribution Date of any Certificate may occur later than its Final
Scheduled Distribution Date. No assurance can be given as to the actual
prepayment experience with respect to a Series. See 'Weighted Average Life of
the Securities' below.
SPECIAL REDEMPTION
If so specified in the Prospectus Supplement relating to a Series of
Securities having other than monthly Distribution Dates, one or more Classes of
Securities of such Series may be subject to special redemption, in whole or in
part, on the day specified in the related Prospectus Supplement (a 'Special
Redemption Date') if, as a consequence of prepayments on the Loans or Underlying
Loans, as applicable, relating to such Securities or low yields then available
for reinvestment the entity specified in the related Prospectus Supplement
determines, based on assumptions specified in the applicable Agreement that the
amount available for the payment of interest that will have accrued on such
Securities (the 'Available Interest Amount') through the designated interest
accrual date specified in the related Prospectus Supplement is less than the
amount of interest that will have accrued on such Securities to such date. In
such event and as further described in the related Prospectus Supplement, the
Trustee will redeem a principal amount of outstanding Securities of such Series
as will cause the Available Interest Amount to equal the amount of interest that
will have accrued through such designated interest accrual date for such Series
of Securities outstanding immediately after such redemption.
OPTIONAL REDEMPTION, PURCHASE OR TERMINATION
The Depositor or the Servicer may, at its option, redeem, in whole or in
part, one or more Classes of Notes or purchase one or more Classes of
Certificates of any Series, on any Distribution Date under the circumstances, if
any, specified in the Prospectus Supplement relating to such Series.
Alternatively, if so specified in the related Prospectus Supplement for a Series
of Certificates, the Depositor, the Servicer, or another entity designated in
the related Prospectus Supplement may, at its option, cause an early termination
of a Trust Fund by repurchasing all of the Primary Assets from such Trust Fund
on or after a date specified in the related Prospectus Supplement, or on or
after such time as the aggregate outstanding principal amount of the
Certificates or Primary Assets, as specified in the related Prospectus
Supplement is less than the amount or percentage specified in the related
Prospectus Supplement. Notice of such redemption, purchase or termination must
be given by the Depositor or the Trustee prior to the related date. The
redemption, purchase or repurchase price will be set forth in the related
Prospectus Supplement. If specified in the related Prospectus Supplement, in the
event that a REMIC election has been made, the Trustee shall receive a
satisfactory opinion of counsel that the optional redemption, purchase or
termination will be conducted so as to constitute a 'qualified liquidation'
under Section 860F of the Code.
In addition, the Prospectus Supplement may provide other circumstances
under which Holders of Securities of a Series could be fully paid significantly
earlier than would otherwise be the case if payments or distributions were
solely based on the activity of the related Primary Assets.
WEIGHTED AVERAGE LIFE OF THE SECURITIES
Weighted average life refers to the average amount of time that will elapse
from the date of issue of a security until each dollar of principal of such
security will be repaid to the investor. Unless otherwise specified in the
related Prospectus Supplement, the weighted average life of the Securities of a
Class will be influenced by the
20
<PAGE>
rate at which the amount financed under the Loans or Underlying Loans relating
to the Private Securities, as applicable, included in the Trust Fund for a
Series is paid, which may be in the form of scheduled amortization or
prepayments.
Prepayments on loans and other receivables can be measured relative to a
prepayment standard or model. The Prospectus Supplement for a Series of
Securities will describe the prepayment standard or model, if any, used and may
contain tables setting forth the projected weighted average life of each Class
of Securities of such Series and the percentage of the original principal amount
of each Class of Securities of such Series that would be outstanding on
specified Distribution Dates for such Series based on the assumptions stated in
such Prospectus Supplement, including assumptions that prepayments on the Loans
or Underlying Loans relating to the Private Securities, as applicable, included
in the related Trust Fund are made at rates corresponding to various percentages
of the prepayment standard or model specified in such Prospectus Supplement.
There is, however, no assurance that prepayment of the Loans or Underlying
Loans relating to the Private Securities, as applicable, included in the related
Trust Fund will conform to any level of any prepayment standard or model
specified in the related Prospectus Supplement. The rate of principal
prepayments on pools of loans may be influenced by a variety of factors,
including job related factors such as transfers, layoffs or promotions and
personal factors such as divorce, disability or prolonged illness. Economic
conditions, either generally or within a particular geographic area or industry,
also may affect the rate of principal prepayments. Demographic and social
factors may influence the rate of principal prepayments in that some borrowers
have greater financial flexibility to move or refinance than do other borrowers.
The deductibility of mortgage interest payments, servicing decisions and other
factors also affect the rate of principal prepayments. As a result, there can be
no assurance as to the rate or timing of principal prepayments of the Loans or
Underlying Loans either from time to time or over the lives of such Loans or
Underlying Loans.
The rate of prepayments of conventional housing loans and other receivables
has fluctuated significantly in recent years. In general, however, if prevailing
interest rates fall significantly below the interest rates on the Loans or
Underlying Loans relating to the Private Securities, as applicable, for a
Series, such loans are likely to prepay at rates higher than if prevailing
interest rates remain at or above the interest rates borne by such loans. In
this regard, it should be noted that the Loans or Underlying Loans, as
applicable, for a Series may have different interest rates. In addition, the
weighted average life of the Securities may be affected by the varying
maturities of the Loans or Underlying Loans relating to the Private Securities,
as applicable. If any Loans or Underlying Loans relating to the Private
Securities, as applicable, for a Series have actual terms-to-stated maturity of
less than those assumed in calculating the Final Scheduled Distribution Date of
the related Securities, one or more Classes of the Series may be fully paid
prior to their respective Final Scheduled Distribution Date, even in the absence
of prepayments and a reinvestment return higher than the Assumed Reinvestment
Rate.
21
<PAGE>
THE TRUST FUNDS
GENERAL
The Notes of each Series will be secured by the pledge of the assets of the
related Trust Fund, and the Certificates of each Series will represent interests
in the assets of the related Trust Fund. The Trust Fund of each Series will
include assets purchased from the Seller composed of (i) the Primary Assets,
(ii) amounts available from the reinvestment of payments on such Primary Assets
at the Assumed Reinvestment Rate, if any, specified in the related Prospectus
Supplement, (iii) any Enhancement, (iv) any Property that secured a Loan but
which is acquired by foreclosure or deed in lieu of foreclosure or repossession
and (v) the amount, if any, initially deposited in the Collection Account or
Distribution Account for a Series as specified in the related Prospectus
Supplement.
The Securities will be non-recourse obligations of the related Trust Fund.
The assets of the Trust Fund specified in the related Prospectus Supplement for
a Series of Securities, unless otherwise specified in the related Prospectus
Supplement, will serve as collateral only for that Series of Securities. Holders
of a Series of Notes may only proceed against such collateral securing such
Series of Notes in the case of a default with respect to such Series of Notes
and may not proceed against any assets of the Depositor or the related Trust
Fund not pledged to secure such Notes.
The Primary Assets for a Series will be sold by the Seller to the Depositor
or purchased by the Depositor in the open market or in privately negotiated
transactions, which may include transactions with affiliates and will be
transferred by the Depositor to the Trust Fund. Loans relating to a Series will
be serviced by the Servicer, which may be the Seller, specified in the related
Prospectus Supplement, pursuant to a Pooling and Servicing Agreement, with
respect to a Series of Certificates or a servicing agreement (each, a 'Servicing
Agreement') between the Trust Fund and Servicer, with respect to a Series of
Notes.
As used herein, 'Agreement' means, with respect to a Series of
Certificates, the Pooling and Servicing Agreement or Trust Agreement, and with
respect to a Series of Notes, the Indenture and the Servicing Agreement, as the
context requires.
If so specified in the related Prospectus Supplement, a Trust Fund relating
to a Series of Securities may be a business trust formed under the laws of the
state specified in the related Prospectus Supplement pursuant to a trust
agreement (each, a 'Trust Agreement') between the Depositor and the trustee of
such Trust Fund specified in the related Prospectus Supplement
With respect to each Trust Fund, prior to the initial offering of the
related Series of Securities, the Trust Fund will have no assets or liabilities.
No Trust Fund is expected to engage in any activities other than acquiring,
managing and holding the related Primary Assets and other assets contemplated
herein and in the related Prospectus Supplement and the proceeds thereof,
issuing Securities and making payments and distributions thereon and certain
related activities. No Trust Fund is expected to have any source of capital
other than its assets and any related Enhancement.
Primary Assets included in the Trust Fund for a Series may consist of any
combination of Loans and Private Securities, to the extent and as specified in
the related Prospectus Supplement.
THE LOANS
Mortgage Loans. The Primary Assets for a Series may consist, in whole or
in part, of closed-end home equity loans (the 'Mortgage Loans') secured by
mortgages primarily on Single Family Properties which may be subordinated to
other mortgages on the same Mortgaged Property. The Mortgage Loans may have
fixed interest rates or adjustable interest rates and may provide for other
payment characteristics as described below and in the related Prospectus
Supplement.
Unless otherwise described in the related Prospectus Supplement, the full
principal amount of a Mortgage Loan is advanced at origination of the loan and
generally is repayable in equal (or substantially equal) installments of an
amount sufficient to fully amortize such loan at its stated maturity. As more
fully described in the related Prospectus Supplement, interest on each Mortgage
Loan is calculated on the basis of the outstanding
22
<PAGE>
principal balance of such loan multiplied by the Loan Rate thereon and further
multiplied by a fraction, the numerator of which is the number of days in the
period elapsed since the preceding payment of interest was made and the
denominator is the number of days in the annual period for which interest
accrues on such loan. Unless otherwise described in the related Prospectus
Supplement the original terms to stated maturity of Mortgage Loans will not
exceed 360 months.
The Mortgaged Properties will include Single Family Property (i.e., one-to
four-family residential housing, including Condominium Units and Cooperative
Dwellings) and mixed-use property. Mixed-use properties will consist of
structures of no more than three stories, which include one to four residential
dwelling units and space used for retail, professional or other commercial uses.
Such uses, which will not involve more than 50% of the space in the structure,
may include doctor, dentist or law offices, real estate agencies, boutiques,
newstands, convenience stores or other similar types of uses intended to cater
to individual customers as specified in the related Prospectus Supplement. The
properties may be located in suburban or metropolitan districts. Any such
non-residential use will be in compliance with local zoning laws and
regulations. The Mortgaged Properties may consist of detached individual
dwellings, individual condominiums, townhouses, duplexes, row houses, individual
units in planned unit developments and other attached dwelling units. Each
Single Family Property will be located on land owned in fee simple by the
borrower or on land leased by the borrower for a term at least ten years (unless
otherwise provided in the related Prospectus Supplement) greater than the term
of the related Loan. Attached dwellings may include owner-occupied structures
where each borrower owns the land upon which the unit is built, with the
remaining adjacent land owned in common or dwelling units subject to a
proprietary lease or occupancy agreement in a cooperatively owned apartment
building.
Unless otherwise specified in the related Prospectus Supplement, Mortgages
on Cooperative Dwellings consist of a lien on the shares issued by such
Cooperative Dwelling and the proprietary lease or occupancy agreement relating
to such Cooperative Dwelling.
The aggregate principal balance of Mortgage Loans secured by Mortgaged
Properties that are owner-occupied will be disclosed in the related Prospectus
Supplement. Unless otherwise specified in the Prospectus Supplement, the sole
basis for a representation that a given percentage of the Mortgage Loans are
secured by Single Family Property that is owner-occupied will be either (i) the
making of a representation by the Mortgagor at origination of the Mortgage Loan
either that the underlying Mortgaged Property will be used by the Mortgagor for
a period of at least six months every year or that the Mortgagor intends to use
the Mortgaged Property as a primary residence, or (ii) a finding that the
address of the underlying Mortgaged Property is the Mortgagor's mailing address
as reflected in the Servicer's records. To the extent specified in the related
Prospectus Supplement, the Mortgaged Properties may include non-owner occupied
investment properties and vacation and second homes.
Unless otherwise specified in the related Prospectus Supplement, the
initial Combined Loan-to-Value Ratio of a Loan is computed in the manner
described in the related Prospectus Supplement, taking into account the amounts
of any related senior mortgage loans.
Home Improvement Contracts. The Primary Assets for a Series may consist,
in whole or part, of home improvement installment sales contracts and
installment loan agreements (the 'Home Improvement Contracts') originated by a
home improvement contractor in the ordinary course of business. As specified in
the related Prospectus Supplement, the Home Improvement Contracts will either be
unsecured or secured by the Mortgages primarily on Single Family Properties
which are generally subordinate to other mortgages on the same Mortgaged
Property or by purchase money security interests in the Home Improvements
financed thereby. Unless otherwise specified in the applicable Prospectus
Supplement, the Home Improvement Contracts will be fully amortizing and may have
fixed interest rates or adjustable interest rates and may provide for other
payment characteristics as described below and in the related Prospectus
Supplement.
Unless otherwise specified in the related Prospectus Supplement, the home
improvements (the 'Home Improvements') securing the Home Improvement Contracts
include, but are not limited to, replacement windows, house siding, new roofs,
swimming pools, satellite dishes, kitchen and bathroom remodeling goods and
solar heating panels. The initial Loan-to-Value Ratio of a Home Improvement
Contract will be computed in the manner described in the related Prospectus
Supplement.
23
<PAGE>
Additional Information. The selection criteria which will apply with
respect to the Loans, including, but not limited to, the Combined Loan-to-Value
Ratios or Loan-to-Value Ratios, as applicable, original terms to maturity and
delinquency information, will be specified in the related Prospectus Supplement.
The Loans for a Series may include Loans that do not amortize their entire
principal balance by their stated maturity in accordance with their terms and
require a balloon payment of the remaining principal balance at maturity, as
specified in the related Prospectus Supplement. As further described in the
related Prospectus Supplement, the Loans for a Series may include Loans that do
not have a specified stated maturity.
The Loans will be conventional contracts or contracts insured by the
Federal Housing Administration ('FHA') or partially guaranteed by the Veterans
Administration ('VA'). Loans designated in the related Prospectus Supplement as
insured by the FHA will be insured by the FHA as authorized under the United
States Housing Act of 1937, as amended. Such Loans will be insured under various
FHA programs. These programs generally limit the principal amount and interest
rates of the mortgage loans insured. Loans insured by the FHA generally require
a minimum down payment of approximately 5% of the original principal amount of
the loan. No FHA-insured Loans relating to a Series may have an interest rate or
original principal amount exceeding the applicable FHA limits at the time of
origination of such loan.
The insurance premiums for Loans insured by the FHA are collected by
lenders approved by the Department of Housing and Urban Development ('HUD') and
are paid to the FHA. The regulations governing FHA single-family mortgage
insurance programs provide that insurance benefits are payable either upon
foreclosure (or other acquisition of possession) and conveyance of the mortgaged
premises to HUD or upon assignment of the defaulted Loan to HUD. With respect to
a defaulted FHA-insured Loan, the Servicer is limited in its ability to initiate
foreclosure proceedings. When it is determined, either by the Servicer or HUD,
that default was caused by circumstances beyond the mortgagor's control, the
Servicer is expected to make an effort to avoid foreclosure by entering, if
feasible, into one of a number of available forms of forbearance plans with the
mortgagor. Such plans may involve the reduction or suspension of regular
mortgage payments for a specified period, with such payments to be made upon or
before the maturity date of the mortgage, or the recasting of payments due under
the mortgage up to or beyond the maturity date. In addition, when a default
caused by such circumstances is accompanied by certain other criteria, HUD may
provide relief by making payments to the Servicer in partial or full
satisfaction of amounts due under the Loan (which payments are to be repaid by
the mortgagor to HUD) or by accepting assignment of the loan from the Servicer.
With certain exceptions, at least three full monthly installments must be due
and unpaid under the Loan and HUD must have rejected any request for relief from
the mortgagor before the Servicer may initiate foreclosure proceedings.
HUD has the option, in most cases, to pay insurance claims in cash or in
debentures issued by HUD. Currently, claims are being paid in cash, and claims
have not been paid in debentures since 1965. HUD debentures issued in
satisfaction of FHA insurance claims bear interest at the applicable HUD
debenture interest rate. The Servicer of each FHA-insured Loan will be obligated
to purchase any such debenture issued in satisfaction of such Loan upon default
for an amount equal to the principal amount of any such debenture.
The amount of insurance benefits generally paid by the FHA is equal to the
entire unpaid principal amount of the defaulted Loan adjusted to reimburse the
Servicer for certain costs and expenses and to deduct certain amounts received
or retained by the Servicer after default. When entitlement to insurance
benefits results from foreclosure (or other acquisition of possession) and
conveyance to HUD, the Servicer is compensated for no more than two-thirds of
its foreclosure costs, and is compensated for interest accrued and unpaid prior
to such date but in general only to the extent it was allowed pursuant to a
forbearance plan approved by HUD. When entitlement to insurance benefits results
from assignment of the Loan to HUD, the insurance payment includes full
compensation for interest accrued and unpaid to the assignment date. The
insurance payment itself, upon foreclosure of an FHA-insured Loan, bears
interest from a date 30 days after the mortgagor's first uncorrected failure to
perform any obligation to make any payment due under the Loan and, upon
assignment, from the date of assignment to the date of payment of the claim, in
each case at the same interest rate as the applicable HUD debenture interest
rate as described above.
Loans designated in the related Prospectus Supplement as guaranteed by the
VA will be partially guaranteed by the VA under the Serviceman's Readjustment
Act of 1944, as amended (a 'VA Guaranty'). The Serviceman's Readjustment Act of
1944, as amended, permits a veteran (or in certain instances the spouse of a
24
<PAGE>
veteran) to obtain a mortgage loan guaranty by the VA covering mortgage
financing of the purchase of a one- to four-family dwelling unit at interest
rates permitted by the VA. The program has no mortgage loan limits, requires no
down payment from the purchaser and permits the guarantee of mortgage loans of
up to 30 years' duration.
The maximum guaranty that may be issued by the VA under a VA guaranteed
mortgage loan depends upon the original principal amount of the mortgage loan,
as further described in 38 United States Code Section 1803(a), as amended. The
liability on the guaranty is reduced or increased pro rata with any reduction or
increase in the amount of indebtedness, but in no event will the amount payable
on the guaranty exceed the amount of the original guaranty. The VA may, at its
option and without regard to the guaranty, make full payment to a mortgage
holder of unsatisfied indebtedness on a mortgage upon its assignment to the VA.
With respect to a defaulted VA guaranteed Loan, the Servicer is, absent
exceptional circumstances, authorized to announce its intention to foreclose
only when the default has continued for three months. Generally, a claim for the
guaranty is submitted after liquidation of the Mortgaged Property.
The amount payable under the guaranty will be the percentage of the
VA-insured Loan originally guaranteed applied to indebtedness outstanding as of
the applicable date of computation specified in the VA regulations. Payments
under the guaranty will be equal to the unpaid principal amount of the loan,
interest accrued on the unpaid balance of the loan to the appropriate date of
computation and limited expenses of the mortgagee, but in each case only to the
extent that such amounts have not been recovered through liquidation of the
Mortgaged Property. The amount payable under the guaranty may in no event exceed
the amount of the original guaranty.
The related Prospectus Supplement for each Series will provide information
with respect to the Loans that are Primary Assets as of the Cut-off Date,
including, among other things, and to the extent relevant: (a) the aggregate
unpaid principal balance of the Loans; (b) the range and weighted average Loan
Rate on the Loans, and, in the case of adjustable rate Loans, the range and
weighted average of the current Loan Rates and the Lifetime Rate Caps, if any;
(c) the range and average outstanding principal balance of the Loans; (d) the
weighted average original and remaining term-to-stated maturity of the Loans and
the range of original and remaining terms-to-stated maturity, if applicable; (e)
the range and weighted average of Combined Loan-to-Value Ratios or Loan-to-Value
Ratios for the Loans, as applicable; (f) the percentage (by outstanding
principal balance as of the Cut-off Date) of Loans that accrue interest at
adjustable or fixed interest rates; (g) any special hazard insurance policy or
bankruptcy bond or other enhancement relating to the Loans; (h) the percentage
(by principal balance as of the Cut-off Date) of Loans that are secured by
Mortgaged Properties, Home Improvements or are unsecured; (i) the geographic
distribution of any Mortgaged Properties securing the Loans; (j) the percentage
of Loans (by principal balance as of the Cut-off Date) that are secured by
Single Family Properties, shares relating to Cooperative Dwellings, Condominium
Units, investment property and vacation or second homes; (k) the lien priority
of the Loans; and (l) the delinquency status and year of origination of the
Loans. The related Prospectus Supplement will also specify any other limitations
on the types or characteristics of Loans for a Series.
If information of the nature described above respecting the Loans is not
known to the Depositor at the time the Securities are initially offered,
approximate or more general information of the nature described above will be
provided in the Prospectus Supplement and additional information will be set
forth in a Current Report on Form 8-K to be available to investors on the date
of issuance of the related Series and to be filed with the Commission within 15
days after the initial issuance of such Securities.
PRIVATE SECURITIES
General. Primary Assets for a Series may consist, in whole or in part, of
Private Securities which include pass-through certificates representing
beneficial interests in loans of the type that would otherwise be eligible to be
Loans (the 'Underlying Loans') or (b) collateralized obligations secured by
Underlying Loans. Such pass-through certificates or collateralized obligations
will have previously been (a) offered and distributed to the public pursuant to
an effective registration statement or (b) purchased in a transaction not
involving any public offering from a person who is not an affiliate of the
issuer of such securities at the time of sale (nor an affiliate thereof at any
time during the three preceding months); provided a period of three years
elapsed since the later of the date the securities were acquired from the issuer
or an affiliate thereof. Although individual Underlying Loans
25
<PAGE>
may be insured or guaranteed by the United States or an agency or
instrumentality thereof, they need not be, and Private Securities themselves
will not be so insured or guaranteed.
Private Securities will have been issued pursuant to a pooling and
servicing agreement, a trust agreement or similar agreement (a 'PS Agreement').
The seller/servicer of the Underlying Loans will have entered into the PS
Agreement with the trustee under such PS Agreement (the 'PS Trustee'). The PS
Trustee or its agent, or a custodian, will possess the Underlying Loans.
Underlying Loans will be serviced by a servicer (the 'PS Servicer') directly or
by one or more sub-servicers who may be subject to the supervision of the PS
Servicer.
The sponsor of the Private Securities (the 'PS Sponsor') will be a
financial institution or other entity engaged generally in the business of
lending; a public agency or instrumentality of a state, local or federal
government; or a limited purpose corporation organized for the purpose of, among
other things, establishing trusts and acquiring and selling loans to such
trusts, and selling beneficial interests in such trusts. If so specified in the
Prospectus Supplement, the PS Sponsor may be an affiliate of the Depositor. The
obligations of the PS Sponsor will generally be limited to certain
representations and warranties with respect to the assets conveyed by it to the
related trust. Unless otherwise specified in the related Prospectus Supplement,
the PS Sponsor will not have guaranteed any of the assets conveyed to the
related trust or any of the Private Securities issued under the PS Agreement.
Additionally, although the Underlying Loans may be guaranteed by an agency or
instrumentality of the United States, the Private Securities themselves will not
be so guaranteed.
Distributions of principal and interest will be made on the Private
Securities on the dates specified in the related Prospectus Supplement. The
Private Securities may be entitled to receive nominal or no principal
distributions or nominal or no interest distributions. Principal and interest
distributions will be made on the Private Securities by the PS Trustee or the PS
Servicer. The PS Sponsor or the PS Servicer may have the right to repurchase the
Underlying Loans after a certain date or under other circumstances specified in
the related Prospectus Supplement.
The Underlying Loans may be fixed rate, level payment, fully amortizing
loans or adjustable rate loans or loans having balloon or other irregular
payment features. Such Underlying Loans will be secured by mortgages on
Mortgaged Properties.
Credit Support Relating to Private Securities. Credit support in the form
of Reserve Funds, subordination of other private securities issued under the PS
Agreement, guarantees, letters of credit, cash collateral accounts, insurance
policies or other types of credit support may be provided with respect to the
Underlying Loans or with respect to the Private Securities themselves. The type,
characteristics and amount of credit support will be a function of certain
characteristics of the Underlying Loans and other factors and will have been
established for the Private Securities on the basis of requirements of the
nationally recognized statistical rating organization that rated the Private
Securities.
Additional Information. The Prospectus Supplement for a Series for which
the Primary Assets include Private Securities will specify (such disclosure may
be on an approximate basis and will be as of the date specified in the related
Prospectus Supplement), to the extent relevant and to the extent such
information is reasonably available to the Depositor and the Depositor
reasonably believes such information to be reliable: (i) the aggregate
approximate principal amount and type of the Private Securities to be included
in the Trust Fund for such Series; (ii) certain characteristics of the
Underlying Loans including (A) the payment features of such Underlying Loans
(i.e., whether they are fixed rate or adjustable rate and whether they provide
for fixed level payments or other payment features), (B) the approximate
aggregate principal balance, if known, of such Underlying Loans insured or
guaranteed by a governmental entity, (C) the servicing fee or range of servicing
fees with respect to the Underlying Loans, (D) the minimum and maximum stated
maturities of such Underlying Loans at origination, (E) the lien priority of
such Underlying Loans, and (F) the delinquency status and year of origination of
such Underlying Loans; (iii) the maximum original term-to-stated maturity of the
Private Securities; (iv) the weighted average term-to-stated maturity of the
Private Securities; (v) the pass-through or certificate rate or ranges thereof
for the Private Securities; (vi) the PS Sponsor, the PS Servicer (if other than
the PS Sponsor) and the PS Trustee for such Private Securities; (vii) certain
characteristics of credit support if any, such as Reserve Funds, insurance
policies, letters of credit or guarantees relating to such Loans underlying the
Private Securities or to such Private Securities themselves; (viii) the terms on
which Underlying Loans may, or are required to, be purchased prior to their
stated maturity or the stated maturity of the Private Securities; and
26
<PAGE>
(ix) the terms on which Underlying Loans may be substituted for those originally
underlying the Private Securities.
If information of the nature described above representing the Private
Securities is not known to the Depositor at the time the Securities are
initially offered, approximate or more general information of the nature
described above will be provided in the Prospectus Supplement and the additional
information, if available, will be set forth in a Current Report on Form 8-K to
be available to investors on the date of issuance of the related Series and to
be filed with the Commission within 15 days of the initial issuance of such
Securities.
COLLECTION AND DISTRIBUTION ACCOUNTS
A separate Collection Account will be established by the Trustee or the
Servicer, in the name of the Trustee, for each Series of Securities for receipt
of the amount of cash, if any, specified in the related Prospectus Supplement to
be initially deposited therein by the Depositor, all amounts received on or with
respect to the Primary Assets and, unless otherwise specified in the related
Prospectus Supplement, income earned thereon. Certain amounts on deposit in such
Collection Account and certain amounts available pursuant to any Enhancement, as
provided in the related Prospectus Supplement, will be deposited in a related
Distribution Account, which will also be established by the Trustee for each
such Series of Securities, for distribution to the related Holders. Unless
otherwise specified in the related Prospectus Supplement, the Trustee will
invest the funds in the Collection and Distribution Accounts in Eligible
Investments maturing, with certain exceptions, not later, in the case of funds
in the Collection Account, than the day preceding the date such funds are due to
be deposited in the Distribution Account or otherwise distributed and, in the
case of funds in the Distribution Account, than the day preceding the next
Distribution Date for the related Series of Securities. Eligible Investments
include, among other investments, obligations of the United States and certain
agencies thereof, federal funds, certificates of deposit, commercial paper,
demand and time deposits and banker's acceptances, certain repurchase agreements
of United States government securities and certain guaranteed investment
contracts, in each case, acceptable to the Rating Agency.
Notwithstanding any of the foregoing, amounts may be deposited and
withdrawn pursuant to any Deposit Agreement or Minimum Principal Payment
Agreement as specified in the related Prospectus Supplement.
If specified in the related Prospectus Supplement, a Trust Fund will
include one or more segregated trust accounts (each, a 'Pre-Funding Account')
established and maintained with the Trustee for the related Series. If so
specified, on the closing date for such Series, a portion of the proceeds of the
sale of the Securities of such Series (such amount, the 'Pre-Funded Amount')
will be deposited in the Pre-Funding Account and may be used to purchase
additional Primary Assets during the period of time specified in the related
Prospectus Supplement (the 'Pre-Funding Period'). The Primary Assets to be so
purchased will be required to have certain characteristics specified in the
related Prospectus Supplement. If any Pre-Funded Amount remains on deposit in
the Pre-Funding Account at the end of the Pre-Funding Period, such amount will
be applied in the manner specified in the related Prospectus Supplement to
prepay the Notes and/or the Certificates of the applicable Series.
If a Pre-Funding Account is established, one or more segregated trust
accounts (each, a 'Capitalized Interest Account') may be established and
maintained with the Trustee for the related Series. On the closing date for such
Series, a portion of the proceeds of the sale of the Securities of such Series
will be deposited in the Capitalized Interest Account and used to fund the
excess, if any, of the sum of (i) the amount of interest accrued on the
Securities of such Series and (ii) if specified in the related Prospectus
Supplement, certain fees or expenses during the Pre-Funding Period, over the
amount of interest available therefor from the Primary Assets in the Trust Fund.
Any amounts on deposit in the Capitalized Interest Account at the end of the
Pre-Funding Period that are not necessary for such purposes will be distributed
to the person specified in the related Prospectus Supplement.
27
<PAGE>
ENHANCEMENT
If stated in the Prospectus Supplement relating to a Series of Securities,
simultaneously with the Depositor's assignment of the Primary Assets to the
Trustee, the Depositor will obtain an irrevocable letter of credit, surety bond
or insurance policy, issue Subordinate Securities or obtain any other form of
enhancement or combination thereof (collectively, 'Enhancement') in favor of the
Trustee on behalf of the Holders of the related Series or designated Classes of
such Series from an institution or by other means acceptable to the Rating
Agency. The Enhancement will support the payment of principal and interest on
the Securities, and may be applied for certain other purposes to the extent and
under the conditions set forth in such Prospectus Supplement. Enhancement for a
Series may include one or more of the following forms, or such other form as may
be specified in the related Prospectus Supplement. If so specified in the
related Prospectus Supplement, any of such Enhancement may be structured so as
to protect against losses relating to more than one Trust Fund, in the manner
described therein.
SUBORDINATE SECURITIES
If specified in the related Prospectus Supplement, Enhancement for a Series
may consist of one or more Classes of Subordinate Securities. The rights of
holders of such Subordinate Securities to receive distributions on any
Distribution Date will be subordinate in right and priority to the rights of
Holders of Senior Securities of the Series, but only to the extent described in
the related Prospectus Supplement.
INSURANCE
If stated in the related Prospectus Supplement, Enhancement for a Series
may consist of special hazard insurance policies, bankruptcy bonds and other
types of insurance relating to the Primary Assets, as described below and in the
related Prospectus Supplement.
Pool Insurance Policy. If so specified in the Prospectus Supplement
relating to a Series of Securities, the Depositor will obtain a pool insurance
policy for the Loans in the related Trust Fund. The pool insurance policy will
cover any loss (subject to the limitations described in a related Prospectus
Supplement) by reason of default. but will not cover the portion of the
principal balance of any Loan that is required to be covered by any primary
mortgage insurance policy. The amount and terms of any such coverage will be set
forth in the related Prospectus Supplement.
Special Hazard Insurance Policy. Although the terms of such policies vary
to some degree, a special hazard insurance policy typically provides that, where
there has been damage to Property securing a defaulted or foreclosed Loan (title
to which has been acquired by the insured) and to the extent such damage is not
covered by the standard hazard insurance policy or any flood insurance policy,
if applicable, required to be maintained with respect to such Property, or in
connection with partial loss resulting from the application of the coinsurance
clause in a standard hazard insurance policy, the special hazard insurer will
pay the lesser of (i) the cost of repair or replacement of such Property or (ii)
upon transfer of such Property to the special hazard insurer, the unpaid
principal balance of such Loan at the time of acquisition of such Property by
foreclosure or deed in lieu of foreclosure, plus accrued interest to the date of
claim settlement and certain expenses incurred by the Servicer with respect to
such Property. If the unpaid principal balance plus accrued interest and certain
expenses is paid by the special hazard insurer, the amount of further coverage
under the special hazard insurance policy will be reduced by such amount less
any net proceeds from the sale of such Property. Any amount paid as the cost of
repair of such Property will reduce coverage by such amount. Special hazard
insurance policies typically do not cover losses occasioned by war, civil
insurrection, certain governmental actions, errors in design, faulty workmanship
or materials (except under certain circumstances), nuclear reaction, flood (if
the mortgaged property is in a federally designated flood area), chemical
contamination and certain other risks.
Restoration of the Property with the proceeds described under (i) above is
expected to satisfy the condition under any pool insurance policy that such
Property be restored before a claim under such pool insurance policy may be
validly presented with respect to the defaulted Loan secured by such Property.
The payment described under (ii) above will render unnecessary presentation of a
claim in respect of such Loan under any pool insurance policy. Therefore, so
long as such pool insurance policy remains in effect, the payment by the special
hazard insurer of the cost of repair or of the unpaid principal balance of the
related Loan plus accrued interest and certain
28
<PAGE>
expenses will not affect the total insurance proceeds paid to Holders of the
Securities, but will affect the relative amounts of coverage remaining under the
special hazard insurance policy and pool insurance policy.
Bankruptcy Bond. In the event of a bankruptcy of a borrower, the
bankruptcy court may establish the value of the Property securing the related
Loan at an amount less than the then-outstanding principal balance of such Loan.
The amount of the secured debt could be reduced to such value, and the holder of
such Loan thus would become an unsecured creditor to the extent the outstanding
principal balance of such Loan exceeds the value so assigned to the Property by
the bankruptcy court. In addition, certain other modifications of the terms of a
Loan can result from a bankruptcy proceeding. See 'CERTAIN LEGAL ASPECTS OF
LOANS.' If so provided in the related Prospectus Supplement, the Depositor or
other entity specified in the related Prospectus Supplement will obtain a
bankruptcy bond or similar insurance contract (the 'bankruptcy bond') covering
losses resulting from proceedings with respect to borrowers under the Bankruptcy
Code. The bankruptcy bond will cover certain losses resulting from a reduction
by a bankruptcy court of scheduled payments of principal of and interest on a
Loan or a reduction by such court of the principal amount of a Loan and will
cover certain unpaid interest on the amount of such a principal reduction from
the date of the filing of a bankruptcy petition.
The bankruptcy bond will provide coverage in the aggregate amount specified
in the related Prospectus Supplement for all Loans in the Trust Fund for such
Series. Such amount will be reduced by payments made under such bankruptcy bond
in respect of such Loans, unless otherwise specified in the related Prospectus
Supplement, and will not be restored.
RESERVE FUNDS
If so specified in the Prospectus Supplement relating to a Series of
Securities, the Depositor will deposit into one or more funds to be established
with the Trustee as part of the Trust Fund for such Series or for the benefit of
any Enhancer with respect to such Series (the 'Reserve Funds') cash, a letter or
letters of credit, cash collateral accounts, Eligible Investments, or other
instruments meeting the criteria of the Rating Agency rating any Series of the
Securities in the amount specified in such Prospectus Supplement. In the
alternative or in addition to such deposit, a Reserve Fund for a Series may be
funded over time through application of all or a portion of the excess cash flow
from the Primary Assets for such Series, to the extent described in the related
Prospectus Supplement. If applicable, the initial amount of the Reserve Fund and
the Reserve Fund maintenance requirements for a Series of Securities will be
described in the related Prospectus Supplement.
Amounts withdrawn from any Reserve Fund will be applied by the Trustee to
make payments on the Securities of a Series, to pay expenses, to reimburse any
Enhancer or for any other purpose, in the manner and to the extent specified in
the related Prospectus Supplement.
Amounts deposited in a Reserve Fund will be invested by the Trustee, in
Eligible Investments maturing no later than the day specified in the related
Prospectus Supplement.
MINIMUM PRINCIPAL PAYMENT AGREEMENT
If stated in the Prospectus Supplement relating to a Series of Securities,
the Depositor will enter into a Minimum Principal Payment Agreement with an
entity meeting the criteria of the Rating Agency pursuant to which such entity
will provide certain payments on the Securities of such Series in the event that
aggregate scheduled principal payments and/or prepayments on the Primary Assets
for such Series are not sufficient to make certain payments on the Securities of
such Series, as provided in the Prospectus Supplement.
DEPOSIT AGREEMENT
If specified in a Prospectus Supplement, the Depositor and the Trustee for
such Series of Securities will enter into a Deposit Agreement with the entity
specified in such Prospectus Supplement on or before the sale of such Series of
Securities. The purpose of a Deposit Agreement would be to accumulate available
cash for investment so that such cash, together with income thereon, can be
applied to future distributions on one or more Classes of Securities. The
Prospectus Supplement for a Series of Securities pursuant to which a Deposit
Agreement is used will contain a description of the terms of such Deposit
Agreement.
29
<PAGE>
SERVICING OF LOANS
GENERAL
Customary servicing functions with respect to Loans comprising the Primary
Assets in the Trust Fund will be provided by the Servicer directly pursuant to
the related Servicing Agreement or Pooling and Servicing Agreement, as the case
may be, with respect to a Series of Securities.
COLLECTION PROCEDURES; ESCROW ACCOUNTS
The Servicer will make reasonable efforts to collect all payments required
to be made under the Loans and will, consistent with the terms of the related
Agreement for a Series and any applicable Enhancement, follow such collection
procedures as it follows with respect to comparable loans held in its own
portfolio. Consistent with the above, the Servicer may, in its discretion, (i)
waive any assumption fee, late payment charge, or other charge in connection
with a Loan and (ii) to the extent provided in the related Agreement arrange
with an obligor a schedule for the liquidation of delinquencies by extending the
Due Dates for Scheduled Payments on such Loan.
If specified in the related Prospectus Supplement, the Servicer, to the
extent permitted by law, will establish and maintain escrow or impound accounts
('Escrow Accounts') with respect to Loans in which payments by obligors to pay
taxes, assessments, mortgage and hazard insurance premiums, and other comparable
items will be deposited. Loans may not require such payments under the loan
related documents, in which case the Servicer would not be required to establish
any Escrow Account with respect to such Loans. Withdrawals from the Escrow
Accounts are to be made to effect timely payment of taxes, assessments and
mortgage and hazard insurance, to refund to obligors amounts determined to be
overages, to pay interest to obligors on balances in the Escrow Account to the
extent required by law, to repair or otherwise protect the property securing the
related Loan and to clear and terminate such Escrow Account. The Servicer will
be responsible for the administration of the Escrow Accounts and generally will
make advances to such accounts when a deficiency exists therein.
DEPOSITS TO AND WITHDRAWALS FROM THE COLLECTION ACCOUNT
Unless otherwise specified in the related Prospectus Supplement, the
Trustee or the Servicer will establish a separate account (the 'Collection
Account') in the name of the Trustee. Unless otherwise indicated in the related
Prospectus Supplement, the Collection Account will be an account maintained (i)
at a depository institution, the long-term unsecured debt obligations of which
at the time of any deposit therein are rated by each Rating Agency rating the
Securities of such Series at levels satisfactory to each Rating Agency or (ii)
in an account or accounts the deposits in which are insured to the maximum
extent available by the FDIC or which are secured in a manner meeting
requirements established by each Rating Agency.
Unless otherwise specified in the related Prospectus Supplement, the funds
held in the Collection Account may be invested, pending remittance to the
Trustee, in Eligible Investments. If so specified in the related Prospectus
Supplement, the Servicer will be entitled to receive as additional compensation
any interest or other income earned on funds in the Collection Account.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer, the Depositor, the Trustee or the Seller, as appropriate, will deposit
into the Collection Account for each Series on the Business Day following the
Closing Date any amounts representing Scheduled Payments due after the related
Cut-off Date but received by the Servicer on or before the Closing Date, and
thereafter, within two business days after the date of receipt thereof, the
following payments and collections received or made by it (other than, unless
otherwise provided in the related Prospectus Supplement, in respect of principal
of and interest on the related Primary Assets due on or before such Cut-off
Date):
(i) All payments on account of principal, including prepayments, on
such Primary Assets;
(ii) All payments on account of interest on such Primary Assets after
deducting therefrom, at the discretion of the Servicer but only to the
extent of the amount permitted to be withdrawn or withheld from the
Collection Account in accordance with the related Agreement, the Servicing
Fee in respect of such Primary Assets;
30
<PAGE>
(iii) All amounts received by the Servicer in connection with the
liquidation of Primary Assets or property acquired in respect thereof,
whether through foreclosure sale, repossession or otherwise, including
payments in connection with such Primary Assets received from the obligor,
other than amounts required to be paid or refunded to the obligor pursuant
to the terms of the applicable loan documents or otherwise pursuant to law
('Liquidation Proceeds'), exclusive of, in the discretion of the Servicer,
but only to the extent of the amount permitted to be withdrawn from the
Collection Account in accordance with the related Agreement, the Servicing
Fee, if any, in respect of the related Primary Asset;
(iv) All proceeds under any title insurance, hazard insurance or other
insurance policy covering any such Primary Asset, other than proceeds to be
applied to the restoration or repair of the related Property or released to
the obligor in accordance with the related Agreement;
(v) All amounts required to be deposited therein from any applicable
Reserve Fund for such Series pursuant to the related Agreement;
(vi) All Advances made by the Servicer required pursuant to the
related Agreement; and
(vii) All repurchase prices of any such Primary Assets repurchased by
the Depositor, the Servicer or the Seller pursuant to the related
Agreement.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer is permitted, from time to time, to make withdrawals from the
Collection Account for each Series for the following purposes:
(i) to reimburse itself for Advances for such Series made by it
pursuant to the related Agreement; the Servicer's right to reimburse itself
is limited to amounts received on or in respect of particular Loans
(including, for this purpose, Liquidation Proceeds and amounts representing
proceeds of insurance policies covering the related Property) which
represent late recoveries of Scheduled Payments respecting which any such
Advance was made;
(ii) to the extent provided in the related Agreement, to reimburse
itself for any Advances for such Series that the Servicer determines in
good faith it will be unable to recover from amounts representing late
recoveries of Scheduled Payments respecting which such Advance was made or
from Liquidation Proceeds or the proceeds of insurance policies;
(iii) to reimburse itself from Liquidation Proceeds for liquidation
expenses and for amounts expended by it in good faith in connection with
the restoration of damaged Property and, in the event deposited in the
Collection Account and not previously withheld, and to the extent that
Liquidation Proceeds after such reimbursement exceed the outstanding
principal balance of the related Loan, together with accrued and unpaid
interest thereon to the Due Date for such Loan next succeeding the date of
its receipt of such Liquidation Proceeds, to pay to itself out of such
excess the amount of any unpaid Servicing Fee and any assumption fees, late
payment charges, or other charges on the related Loan;
(iv) in the event it has elected not to pay itself the Servicing Fee
out of the interest component of any Scheduled Payment, late payment or
other recovery with respect to a particular Loan prior to the deposit of
such Scheduled Payment, late payment or recovery into the Collection
Account, to pay to itself the Servicing Fee, as adjusted pursuant to the
related Agreement, from any such Scheduled Payment, late payment or such
other recovery, to the extent permitted by the related Agreement;
(v) to reimburse itself for expenses incurred by and recoverable by or
reimbursable to it pursuant to the related Agreement;
(vi) to pay to the applicable person with respect to each Primary
Asset or REO Property acquired in respect thereof that has been repurchased
or removed from the Trust Fund by the Depositor, the Servicer or the Seller
pursuant to the related Agreement, all amounts received thereon and not
distributed as of the date on which the related repurchase price was
determined;
(vii) to make payments to the Trustee of such Series for deposit into
the Distribution Account, if any, or for remittance to the Holders of such
Series in the amounts and in the manner provided for in the related
Agreement; and
31
<PAGE>
(viii) to clear and terminate the Collection Account pursuant to the
related Agreement.
In addition, if the Servicer deposits in the Collection Account for a
Series any amount not required to be deposited therein, it may, at any time,
withdraw such amount from such Collection Account.
ADVANCES AND LIMITATIONS THEREON
The related Prospectus Supplement will describe the circumstances, if any,
under which the Servicer will make Advances with respect to delinquent payments
on Loans. If specified in the related Prospectus Supplement, the Servicer will
be obligated to make Advances, and such obligation may be limited in amount, or
may not be activated until a certain portion of a specified Reserve Fund is
depleted. Advances are intended to provide liquidity and, except to the extent
specified in the related Prospectus Supplement, not to guarantee or insure
against losses. Accordingly, any funds advanced are recoverable by the Servicer
out of amounts received on particular Loans which represent late recoveries of
principal or interest, proceeds of insurance policies or Liquidation Proceeds
respecting which any such Advance was made. If an Advance is made and
subsequently determined to be nonrecoverable from late collections, proceeds of
insurance policies, or Liquidation Proceeds from the related Loan, the Servicer
may be entitled to reimbursement from other funds in the Collection Account or
Distribution Account, as the case may be, or from a specified Reserve Fund as
applicable, to the extent specified in the related Prospectus Supplement.
MAINTENANCE OF INSURANCE POLICIES AND OTHER SERVICING PROCEDURES
Standard Hazard Insurance; Flood Insurance. Except as otherwise specified
in the related Prospectus Supplement, the Servicer will be required to maintain
or to cause the obligor on each Loan to maintain a standard hazard insurance
policy providing coverage of the standard form of fire insurance with extended
coverage for certain other hazards as is customary in the state in which the
related Property is located. The standard hazard insurance policies will provide
for coverage at least equal to the applicable state standard form of fire
insurance policy with extended coverage for property of the type securing the
related Loans. In general, the standard form of fire and extended coverage
policy will cover physical damage to or destruction of, the related Property
caused by fire, lightning, explosion, smoke, windstorm, hail, riot, strike and
civil commotion, subject to the conditions and exclusions particularized in each
policy. Because the standard hazard insurance policies relating to the Loans
will be underwritten by different hazard insurers and will cover Properties
located in various states, such policies will not contain identical terms and
conditions. The basic terms, however, generally will be determined by state law
and generally will be similar. Most such policies typically will not cover any
physical damage resulting from war, revolution, governmental actions, floods and
other water-related causes, earth movement (including earthquakes, landslides
and mudflows), nuclear reaction, wet or dry rot, vermin, rodents, insects or
domestic animals, theft and, in certain cases, vandalism. The foregoing list is
merely indicative of certain kinds of uninsured risks and is not intended to be
all inclusive. Uninsured risks not covered by a special hazard insurance policy
or other form of Enhancement will adversely affect distributions to Holders.
When a Property securing a Loan is located in a flood area identified by HUD
pursuant to the Flood Disaster Protection Act of 1973, as amended, the Servicer
will be required to cause flood insurance to be maintained with respect to such
Property, to the extent available.
The standard hazard insurance policies covering Properties securing Loans
typically will contain a 'coinsurance' clause which, in effect, will require the
insured at all times to carry hazard insurance of a specified percentage
(generally 80% to 90%) of the full replacement value of the Property, including
the improvements on any Property, in order to recover the full amount of any
partial loss. If the insured's coverage falls below this specified percentage,
such clause will provide that the hazard insurer's liability in the event of
partial loss will not exceed the greater of (i) the actual cash value (the
replacement cost less physical depreciation) of the Property, including the
improvements, if any, damaged or destroyed or (ii) such proportion of the loss,
without deduction for depreciation, as the amount of insurance carried bears to
the specified percentage of the full replacement cost of such Property and
improvements. Since the amount of hazard insurance to be maintained on the
improvements securing the Loans declines as the principal balances owing thereon
decrease, and since the value of the Properties will fluctuate in value over
time, the effect of this requirement in the event of partial loss may be that
hazard insurance proceeds will be insufficient to restore fully the damage to
the affected Property.
32
<PAGE>
Unless otherwise specified in the related Prospectus Supplement, coverage
will be in an amount at least equal to the greater of (i) the amount necessary
to avoid the enforcement of any co-insurance clause contained in the policy or
(ii) the outstanding principal balance of the related Loan. Unless otherwise
specified in the related Prospectus Supplement, the Servicer will also maintain
on REO Property that secured a defaulted Loan and that has been acquired upon
foreclosure, deed in lieu of foreclosure, or repossession, a standard hazard
insurance policy in an amount that is at least equal to the maximum insurable
value of such REO Property. No earthquake or other additional insurance will be
required of any obligor or will be maintained on REO Property acquired in
respect of a defaulted Loan, other than pursuant to such applicable laws and
regulations as shall at any time be in force and shall require such additional
insurance.
Any amounts collected by the Servicer under any such policies of insurance
(other than amounts to be applied to the restoration or repair of the Property,
released to the obligor in accordance with normal servicing procedures or used
to reimburse the Servicer for amounts to which it is entitled to reimbursement)
will be deposited in the Collection Account. In the event that the Servicer
obtains and maintains a blanket policy insuring against hazard losses on all of
the Loans, written by an insurer then acceptable to each Rating Agency which
assigns a rating to such Series, it will conclusively be deemed to have
satisfied its obligations to cause to be maintained a standard hazard insurance
policy for each Loan or related REO Property. This blanket policy may contain a
deductible clause, in which case the Servicer will be required, in the event
that there has been a loss that would have been covered by such policy absent
such deductible clause, to deposit in the Collection Account the amount not
otherwise payable under the blanket policy because of the application of such
deductible clause.
REALIZATION UPON DEFAULTED LOANS
The Servicer will use its reasonable best efforts to foreclose upon,
repossess or otherwise comparably convert the ownership of the Properties
securing the related Loans as come into and continue in default and as to which
no satisfactory arrangements can be made for collection of delinquent payments.
In connection with such foreclosure or other conversion, the Servicer will
follow such practices and procedures as it deems necessary or advisable and as
are normal and usual in its servicing activities with respect to comparable
loans serviced by it. However, the Servicer will not be required to expend its
own funds in connection with any foreclosure or towards the restoration of the
Property unless it determines that (i) such restoration or foreclosure will
increase the Liquidation Proceeds in respect of the related Loan available to
the Holders after reimbursement to itself for such expenses and (ii) such
expenses will be recoverable by it either through Liquidation Proceeds or the
proceeds of insurance. Notwithstanding anything to the contrary herein, in the
case of a Trust Fund for which a REMIC election has been made, the Servicer will
be required to liquidate any Property acquired through foreclosure within two
years after the acquisition of the beneficial ownership of such Property. While
the holder of a Property acquired through foreclosure can often maximize its
recovery by providing financing to a new purchaser, the Trust Fund, if
applicable, will have no ability to do so and neither the Servicer nor the
Depositor will be required to do so.
The Servicer may arrange with the obligor on a defaulted Loan a
modification of such Loan (a 'Modification') to the extent provided in the
related Prospectus Supplement. Such Modifications may only be entered into if
they meet the underwriting policies and procedures employed by the Servicer in
servicing receivables for its own account and meet the other conditions set
forth in the related Prospectus Supplement.
ENFORCEMENT OF DUE-ON-SALE CLAUSES
Unless otherwise specified in the related Prospectus Supplement for a
Series, when any Property is about to be conveyed by the obligor, the Servicer
will, to the extent it has knowledge of such prospective conveyance and prior to
the time of the consummation of such conveyance, exercise its rights to
accelerate the maturity of the related Loan under the applicable 'due-on-sale'
clause, if any, unless it reasonably believes that such clause is not
enforceable under applicable law or if the enforcement of such clause would
result in loss of coverage under any primary mortgage insurance policy. In such
event, the Servicer is authorized to accept from or enter into an assumption
agreement with the person to whom such property has been or is about to be
conveyed, pursuant to which such person becomes liable under the Loan and
pursuant to which the original obligor is released from liability and such
person is substituted as the obligor and becomes liable under the Loan. Any fee
collected in
33
<PAGE>
connection with an assumption will be retained by the Servicer as additional
servicing compensation. The terms of a Loan may not be changed in connection
with an assumption.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
Except as otherwise provided in the related Prospectus Supplement, the
Servicer will be entitled to a periodic fee as servicing compensation (the
'Servicing Fee') in an amount to be determined as specified in the related
Prospectus Supplement. The Servicing Fee may be fixed or variable, as specified
in the related Prospectus
Supplement. In addition, unless otherwise specified in the related Prospectus
Supplement, the Servicer will be entitled to servicing compensation in the form
of assumption fees, late payment charges and similar items, or excess proceeds
following disposition of Property in connection with defaulted Loans.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer will pay certain expenses incurred in connection with the servicing of
the Loans, including, without limitation, the payment of the fees and expenses
of the Trustee and independent accountants, payment of insurance policy premiums
and the cost of credit support, if any, and payment of expenses incurred in
preparation of reports to Holders.
When an obligor makes a principal prepayment in full between Due Dates on
the related Loan, the obligor will generally be required to pay interest on the
amount prepaid only to the date of prepayment. If and to the extent provided in
the related Prospectus Supplement in order that one or more Classes of the
Holders of a Series will not be adversely affected by any resulting shortfall in
interest, the amount of the Servicing Fee may be reduced to the extent necessary
to include in the Servicer's remittance to the Trustee for deposit into the
Distribution Account an amount equal to one month's interest on the related Loan
(less the Servicing Fee). If the aggregate amount of such shortfalls in a month
exceeds the Servicing Fee for such month, a shortfall to Holders may occur.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer will be entitled to reimbursement for certain expenses incurred by it
in connection with the liquidation of defaulted Loans. The related Holders will
suffer no loss by reason of such expenses to the extent expenses are covered
under related insurance policies or from excess Liquidation Proceeds. If claims
are either not made or paid under the applicable insurance policies or if
coverage thereunder has been exhausted, the related Holders will suffer a loss
to the extent that Liquidation Proceeds, after reimbursement of the Servicer's
expenses, are less than the outstanding principal balance of and unpaid interest
on the related Loan which would be distributable to Holders. In addition, the
Servicer will be entitled to reimbursement of expenditures incurred by it in
connection with the restoration of property securing a defaulted Loan, such
right of reimbursement being prior to the rights of the Holders to receive any
related proceeds of insurance policies, Liquidation Proceeds or amounts derived
from other Enhancement. The Servicer is generally also entitled to reimbursement
from the Collection Account for Advances.
Unless otherwise specified in the related Prospectus Supplement, the rights
of the Servicer to receive funds from the Collection Account for a Series,
whether as the Servicing Fee or other compensation, or for the reimbursement of
Advances, expenses or otherwise, are not subordinate to the rights of Holders of
such Series.
EVIDENCE AS TO COMPLIANCE
If so specified in the related Prospectus Supplement, the applicable
Agreement for each Series will provide that each year, a firm of independent
public accountants will furnish a statement to the Trustee to the effect that
such firm has examined certain documents and records relating to the servicing
of the Loans by the Servicer and that, on the basis of such examination, such
firm is of the opinion that the servicing has been conducted in compliance with
such Agreement, except for (i) such exceptions as such firm believes to be
immaterial and (ii) such other exceptions as are set forth in such statement.
If so specified in the related Prospectus Supplement, the applicable
Agreement for each Series will also provide for delivery to the Trustee for such
Series of an annual statement signed by an officer of the Servicer to the effect
that the Servicer has fulfilled its obligations under such Agreement throughout
the preceding calendar year.
34
<PAGE>
CERTAIN MATTERS REGARDING THE SERVICER
The Servicer for each Series will be identified in the related Prospectus
Supplement. The Servicer may be an affiliate of the Depositor and may have other
business relationships with the Depositor and its affiliates.
If an Event of Default occurs under either a Servicing Agreement or a
Pooling and Servicing Agreement, the Servicer may be replaced by the Trustee or
a successor Servicer. Unless otherwise specified in the related Prospectus
Supplement, such Events of Default and the rights of the Trustee upon such a
default under the Agreement for the related Series will be substantially similar
to those described under 'THE AGREEMENTS--Events of Default; Rights Upon Events
of Default--Pooling and Servicing Agreement; Servicing Agreement' herein.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer does not have the right to assign its rights and delegate its duties
and obligations under the related Agreement for each Series unless the successor
Servicer accepting such assignment or delegation (i) services similar loans in
the ordinary course of its business, (ii) is reasonably satisfactory to the
Trustee for the related Series, (iii) has a net worth of not less than the
amount specified in the related Prospectus Supplement, (iv) would not cause any
Rating Agency's rating of the Securities for such Series in effect immediately
prior to such assignment, sale or transfer to be qualified, downgraded or
withdrawn as a result of such assignment, sale or transfer and (v) executes and
delivers to the Trustee an agreement, in form and substance reasonably
satisfactory to the Trustee, which contains an assumption by such Servicer of
the due and punctual performance and observance of each covenant and condition
to be performed or observed by the Servicer under the related Agreement from and
after the date of such agreement. No such assignment will become effective until
the Trustee or a successor Servicer has assumed the servicer's obligations and
duties under the related Agreement. To the extent that the Servicer transfers
its obligations to a wholly-owned subsidiary or affiliate, such subsidiary or
affiliate need not satisfy the criteria set forth above; however, in such
instance, the assigning Servicer will remain liable for the servicing
obligations under the related Agreement. Any entity into which the Servicer is
merged or consolidated or any successor corporation resulting from any merger,
conversion or consolidation will succeed to the Servicer's obligations under the
related Agreement provided that such successor or surviving entity meets the
requirements for a successor Servicer set forth above.
Except to the extent otherwise provided therein, each Agreement will
provide that neither the Servicer, nor any director, officer, employee or agent
of the Servicer, will be under any liability to the related Trust Fund, the
Depositor or the Holders for any action taken or for failing to take any action
in good faith pursuant to the related Agreement, or for errors in judgment;
provided, however, that neither the Servicer nor any such person will be
protected against any breach of warranty or representations made under such
Agreement or the failure to perform its obligations in compliance with any
standard of care set forth in such Agreement, or liability which would otherwise
be imposed by reason of willful misfeasance, bad faith or negligence in the
performance of their duties or by reason of reckless disregard of their
obligations and duties thereunder. Each Agreement will further provide that the
Servicer and any director, officer, employee or agent of the Servicer is
entitled to indemnification from the related Trust Fund and will be held
harmless against any loss, liability or expense incurred in connection with any
legal action relating to the Agreement or the Securities, other than any loss,
liability or expense incurred by reason of willful misfeasance, bad faith or
negligence in the performance of duties thereunder or by reason of reckless
disregard of obligations and duties thereunder. In addition, the related
Agreement will provide that the Servicer is not under any obligation to appear
in, prosecute or defend any legal action which is not incidental to its
servicing responsibilities under such Agreement which, in its opinion, may
involve it in any expense or liability. The Servicer may, in its discretion,
undertake any such action which it may deem necessary or desirable with respect
to the related Agreement and the rights and duties of the parties thereto and
the interests of the Holders thereunder. In such event the legal expenses and
costs of such action and any liability resulting therefrom may be expenses,
costs, and liabilities of the Trust Fund and the Servicer may be entitled to be
reimbursed therefor out of the Collection Account.
35
<PAGE>
THE AGREEMENTS
The following summaries describe certain provisions of the Agreements. The
summaries do not purport to be complete and are subject to, and qualified in
their entirety by reference to, the provisions of the Agreements. Where
particular provisions or terms used in the Agreements are referred to, such
provisions or terms are as specified in the related Agreements.
ASSIGNMENT OF PRIMARY ASSETS
General. At the time of issuance of the Securities of a Series, the
Depositor will transfer, convey and assign to the Trust Fund all right, title
and interest of the Depositor in the Primary Assets and other property to be
transferred to the Trust Fund for a Series. Such assignment will include all
principal and interest due on or with respect to the Primary Assets after the
Cut-off Date specified in the related Prospectus Supplement (except for any
Retained Interests). The Trustee will, concurrently with such assignment,
execute and deliver the Securities.
Assignment of Loans. Unless otherwise specified in the related Prospectus
Supplement, the Depositor will, as to each Loan, deliver or cause to be
delivered to the Trustee, or, as specified in the related Prospectus Supplement
a custodian on behalf of the Trustee (the 'Custodian'), the Mortgage Note
endorsed without recourse to the order of the Trustee or in blank, the original
Mortgage with evidence of recording indicated thereon (except for any Mortgage
not returned from the public recording office, in which case a copy of such
Mortgage will be delivered, together with a certificate that the original of
such Mortgage was delivered to such recording office) and an assignment of the
Mortgage in recordable form. The Trustee, or, if so specified in the related
Prospectus Supplement, the Custodian, will hold such documents in trust for the
benefit of the Holders.
Unless otherwise specified in the related Prospectus Supplement, the
Depositor will as to each Home Improvement Contract deliver or cause to be
delivered to the Trustee (or the Custodian) the original Home Improvement
Contract and copies of documents and instruments related to each Home
Improvement Contract and, other than in the case of unsecured Home Improvement
Contracts, the security interest in the property securing such Home Improvement
Contract. In order to give notice of the right, title and interest of
Securityholders to the Home Improvement Contracts, the Depositor will cause a
UCC-1 financing statement to be executed by the Depositor or the Seller
identifying the Trustee as the secured party and identifying all Home
Improvement Contracts as collateral. Unless otherwise specified in the related
Prospectus Supplement, the Home Improvement Contracts will not be stamped or
otherwise marked to reflect their assignment to the Trust. Therefore, if,
through negligence, fraud or otherwise, a subsequent purchaser were able to take
physical possession of the Home Improvement Contracts without notice of such
assignment, the interest of Securityholders in the Home Improvement Contracts
could be defeated. See 'CERTAIN LEGAL ASPECTS OF THE LOANS--The Home Improvement
Contracts.'
With respect to Loans secured by Mortgages, if so specified in the related
Prospectus Supplement, the Depositor will, at the time of issuance of the
Securities, cause assignments to the Trustee of the Mortgages relating to the
Loans for a Series to be recorded in the appropriate public office for real
property records, except in states where, in the opinion of counsel acceptable
to the Trustee, such recording is not required to protect the Trustee's interest
in the related Loans. If specified in the related Prospectus Supplement, the
Depositor will cause such assignments to be so recorded within the time after
issuance of the Securities as is specified in the related Prospectus Supplement,
in which event, the Agreement may, as specified in the related Prospectus
Supplement, require the Depositor to repurchase from the Trustee any Loan the
related Mortgage of which is not recorded within such time, at the price
described below with respect to repurchases by reason of defective
documentation. Unless otherwise provided in the related Prospectus Supplement,
the enforcement of the repurchase obligation would constitute the sole remedy
available to the Holders or the Trustee for the failure of a Mortgage to be
recorded.
Each Loan will be identified in a schedule appearing as an exhibit to the
related Agreement (the 'Loan Schedule'). Such Loan Schedule will specify with
respect to each Loan: the original principal amount and unpaid principal balance
as of the Cut-off Date; the current interest rate; the current Scheduled Payment
of principal and interest; the maturity date, if any, of the related Mortgage
Note; if the Loan is an adjustable rate Loan, the Lifetime Rate Cap, if any, and
the current index.
36
<PAGE>
Assignment of Private Securities. The Depositor will cause Private
Securities to be registered in the name of the Trustee (or its nominee or
correspondent). The Trustee (or its nominee or correspondent) will have
possession of any certificated Private Securities. Unless otherwise specified in
the related Prospectus Supplement, the Trustee will not be in possession of or
be assignee of record of any underlying assets for a Private Security. See 'THE
TRUST FUNDS--Private Securities' herein. Each Private Security will be
identified in a schedule appearing as an exhibit to the related Agreement (the
'Certificate Schedule'), which will specify the original principal amount,
outstanding principal balance as of the Cut-off Date, annual pass-through rate
or interest rate and maturity date for each Private Security conveyed to the
Trust Fund. In the Agreement, the Depositor will represent and warrant to the
Trustee regarding the Private Securities: (i) that the information contained in
the Certificate Schedule is true and correct in all material respects; (ii)
that, immediately prior to the conveyance of the Private Securities, the
Depositor had good title thereto, and was the sole owner thereof (subject to any
Retained Interest); (iii) that there has been no other sale by it of such
Private Securities; and (iv) that there is no existing lien, charge, security
interest or other encumbrance (other than any Retained Interest) on such Private
Securities.
Repurchase and Substitution of Non-Conforming Primary Assets. Unless
otherwise provided in the related Prospectus Supplement, if any document in the
file relating to the Primary Assets delivered by the Depositor to the Trustee
(or Custodian) is found by the Trustee within 90 days of the execution of the
related Agreement (or promptly after the Trustee's receipt of any document
permitted to be delivered after the Closing Date) to be defective in any
material respect and the Depositor or Seller does not cure such defect within 90
days, or within such other period specified in the related Prospectus
Supplement, the Depositor or Seller will, not later than 90 days or within such
other period specified in the related Prospectus Supplement, after the Trustee's
notice to the Depositor or the Seller, as the case may be, of the defect,
repurchase the related Primary Asset or any property acquired in respect thereof
from the Trustee at a price equal to, unless otherwise specified in the related
Prospectus Supplement, (a) the lesser of (i) the outstanding principal balance
of such Primary Asset and (ii) the Trust Fund's federal income tax basis in the
Primary Asset and (b) accrued and unpaid interest to the date of the next
scheduled payment on such Primary Asset at the rate set forth in the related
Agreement, provided, however, the purchase price shall not be limited in (i)
above to the Trust Fund's federal income tax basis if the repurchase at a price
equal to the outstanding principal balance of such Primary Asset will not result
in any prohibited transaction tax under Section 860F(a) of the Code.
If provided in the related Prospectus Supplement, the Depositor or Seller,
as the case may be, may, rather than repurchase the Primary Asset as described
above, remove such Primary Asset from the Trust Fund (the 'Deleted Primary
Asset') and substitute in its place one or more other Primary Assets (each, a
'Qualifying Substitute Primary Asset') provided, however, that (i) with respect
to a Trust Fund for which no REMIC election is made, such substitution must be
effected within 120 days of the date of initial issuance of the Securities and
(ii) with respect to a Trust Fund for which a REMIC election is made, after a
specified time period, the Trustee must have received a satisfactory opinion of
counsel that such substitution will not cause the Trust Fund to lose its status
as a REMIC or otherwise subject the Trust Fund to a prohibited transaction tax.
Unless otherwise specified in the related Prospectus Supplement, any
Qualifying Substitute Primary Asset will have, on the date of substitution, (i)
an outstanding principal balance, after deduction of all Scheduled Payments due
in the month of substitution, not in excess of the outstanding principal balance
of the Deleted Primary Asset (the amount of any shortfall to be deposited to the
Collection Account in the month of substitution for distribution to Holders),
(ii) an interest rate not less than (and not more than 2% greater than) the
interest rate of the Deleted Primary Asset, (iii) a remaining term-to-stated
maturity not greater than (and not more than two years less than) that of the
Deleted Primary Asset, and will comply with all of the representations and
warranties set forth in the applicable Agreement as of the date of substitution.
Unless otherwise provided in the related Prospectus Supplement, the
above-described cure, repurchase or substitution obligations constitute the sole
remedies available to the Holders or the Trustee for a material defect in a
document for a Primary Asset.
The Depositor or another entity will make representations and warranties
with respect to Primary Assets for a Series. If the Depositor or such entity
cannot cure a breach of any such representations and warranties in all material
respects within the time period specified in the related Prospectus Supplement
after notification by the
37
<PAGE>
Trustee of such breach, and if such breach is of a nature that materially and
adversely affects the value of such Primary Asset, the Depositor or such entity
is obligated to repurchase the affected Primary Asset or, if provided in the
related Prospectus Supplement, provide a Qualifying Substitute Primary Asset
therefor, subject to the same conditions and limitations on purchases and
substitutions as described above.
The Depositor's only source of funds to effect any cure, repurchase or
substitution will be through the enforcement of the corresponding obligations,
if any, of the responsible originator or Seller of such Primary Assets. See
'SPECIAL CONSIDERATIONS--Limited Assets.'
No Holder of Securities of a Series, solely by virtue of such Holder's
status as a Holder, will have any right under the applicable Agreement for such
Series to institute any proceeding with respect to such Agreement, unless such
Holder previously has given to the Trustee for such Series written notice of
default and unless the Holders of Securities evidencing not less than 51% of the
aggregate voting rights of the Securities for such Series have made written
request upon the Trustee to institute such proceeding in its own name as Trustee
thereunder and have offered to the Trustee reasonable indemnity, and the Trustee
for 60 days has neglected or refused to institute any such proceeding.
REPORTS TO HOLDERS
The Trustee or other entity specified in the related Prospectus Supplement
will prepare and forward to each Holder on each Distribution Date, or as soon
thereafter as is practicable, a statement setting forth, to the extent
applicable to any Series, among other things:
(i) the amount of principal distributed to Holders of the related
Securities and the outstanding principal balance of such Securities
following such distribution;
(ii) the amount of interest distributed to Holders of the related
Securities and the current interest on such Securities;
(iii) the amounts of (a) any overdue accrued interest included in such
distribution, (b) any remaining overdue accrued interest with respect to
such Securities or (c) any current shortfall in amounts to be distributed
as accrued interest to Holders of such Securities;
(iv) the amounts of (a) any overdue payments of scheduled principal
included in such distribution, (b) any remaining overdue principal amounts
with respect to such Securities, (c) any current shortfall in receipt of
scheduled principal payments on the related Primary Assets or (d) any
realized losses or Liquidation Proceeds to be allocated as reductions in
the outstanding principal balances of such Securities;
(v) the amount received under any related Enhancement, and the
remaining amount available under such Enhancement;
(vi) the amount of any delinquencies with respect to payments on the
related Primary Assets;
(vii) the book value of any REO Property acquired by the related Trust
Fund; and
(viii) such other information as specified in the related Agreement.
In addition, within a reasonable period of time after the end of each
calendar year the Trustee, unless otherwise specified in the related Prospectus
Supplement, will furnish to each Holder of record at any time during such
calendar year (a) the aggregate of amounts reported pursuant to (i), (ii), and
(iv)(d) above for such calendar year and (b) such information specified in the
related Agreement to enable Holders to prepare their tax returns including,
without limitation, the amount of original issue discount accrued on the
Securities, if applicable. Information in the Distribution Date and annual
statements provided to the Holders will not have been examined and reported upon
by an independent public accountant. However, the Servicer will provide to the
Trustee a report by independent public accountants with respect to the
Servicer's servicing of the Loans. See 'SERVICING OF LOANS--Evidence as to
Compliance' herein.
If so specified in the Prospectus Supplement for a Series of Securities,
such Series or one or more Classes of such Series will be issued in book-entry
form. In such event, owners of beneficial interests in such Securities will not
be considered Holders and will not receive such reports directly from the
Trustee. The Trustee will forward
38
<PAGE>
such reports only to the entity or its nominee which is the registered holder of
the global certificate which evidences such book-entry securities. Beneficial
owners will receive such reports from the participants and indirect participants
of the applicable book-entry system in accordance with the practices and
procedures of such entities.
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT
Pooling and Servicing Agreement; Servicing Agreement. Unless otherwise
specified in the related Prospectus Supplement, Events of Default under the
Pooling and Servicing Agreement for each Series of Certificates relating to
Loans include (i) any failure by the Servicer to deposit amounts in the
Collection Account and Distribution Account to enable the Trustee to distribute
to Holders of such Series any required payment, which failure continues
unremedied for the number of days specified in the related Prospectus Supplement
after the giving of written notice of such failure to the Servicer by the
Trustee for such Series, or to the Servicer and the Trustee by the Holders of
such Series evidencing not less than 25% of the aggregate voting rights of the
Securities for such Series, (ii) any failure by the Servicer duly to observe or
perform in any material respect any other of its covenants or agreements in the
applicable Agreement which continues unremedied for the number of days specified
in the related Prospectus Supplement after the giving of written notice of such
failure to the Servicer by the Trustee, or to the Servicer and the Trustee by
the Holders of such Series evidencing not less than 25% of the aggregate voting
rights of the Securities for such Series, and (iii) certain events of
insolvency, readjustment of debt, marshalling of assets and liabilities or
similar proceedings and certain actions by the Servicer indicating its
insolvency, reorganization or inability to pay its obligations.
So long as an Event of Default remains unremedied under the applicable
Agreement for a Series of Securities relating to the servicing of Loans, unless
otherwise specified in the related Prospectus Supplement, the Trustee for such
Series or Holders of Securities of such Series evidencing not less than 51% of
the aggregate voting rights of the Securities for such Series may terminate all
of the rights and obligations of the Servicer as servicer under the applicable
Agreement (other than its right to recovery of other expenses and amounts
advanced pursuant to the terms of such Agreement which rights the Servicer will
retain under all circumstances), whereupon the Trustee will succeed to all the
responsibilities, duties and liabilities of the Servicer under such Agreement
and will be entitled to reasonable servicing compensation not to exceed the
applicable servicing fee, together with other servicing compensation in the form
of assumption fees, late payment charges or otherwise as provided in such
Agreement.
In the event that the Trustee is unwilling or unable so to act, it may
select, or petition a court of competent jurisdiction to appoint, a finance
institution, bank or loan servicing institution with a net worth specified in
the related Prospectus Supplement to act as successor Servicer under the
provisions of the applicable Agreement. The successor Servicer would be entitled
to reasonable servicing compensation in an amount not to exceed the Servicing
Fee as set forth in the related Prospectus Supplement, together with the other
servicing compensation in the form of assumption fees, late payment charges or
otherwise, as provided in such Agreement.
During the continuance of any Event of Default of a Servicer under an
Agreement for a Series of Securities, the Trustee for such Series will have the
right to take action to enforce its rights and remedies and to protect and
enforce the rights and remedies of the Holders of such Series, and, unless
otherwise specified in the related Prospectus Supplement, Holders of Securities
evidencing not less than 51% of the aggregate voting rights of the Securities
for such Series may direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred upon that Trustee. However, the Trustee will not be under any
obligation to pursue any such remedy or to exercise any of such trusts or powers
unless such Holders have offered the Trustee reasonable security or indemnity
against the cost, expenses and liabilities which may be incurred by the Trustee
therein or thereby. The Trustee may decline to follow any such direction if the
Trustee determines that the action or proceeding so directed may not lawfully be
taken or would involve it in personal liability or be unjustly prejudicial to
the nonassenting Holders.
Indenture. Unless otherwise specified in the related Prospectus
Supplement, Events of Default under the Indenture for each Series of Notes
include: (i) a default for thirty (30) days or more in the payment of any
principal of or interest on any Note of such Series; (ii) failure to perform any
other covenant of the Depositor or the Trust Fund in the Indenture which
continues for a period of sixty (60) days after notice thereof is given in
39
<PAGE>
accordance with the procedures described in the related Prospectus Supplement;
(iii) any representation or warranty made by the Depositor or the Trust Fund in
the Indenture or in any certificate or other writing delivered pursuant thereto
or in connection therewith with respect to or affecting such Series having been
incorrect in a material respect as of the time made, and such breach is not
cured within sixty (60) days after notice thereof is given in accordance with
the procedures described in the related Prospectus Supplement; (iv) certain
events of bankruptcy, insolvency, receivership or liquidation of the Depositor
or the Trust Fund; or (v) any other Event of Default provided with respect to
Notes of that Series.
If an Event of Default with respect to the Notes of any Series at the time
outstanding occurs and is continuing, either the Trustee or the Holders of a
majority of the then aggregate outstanding amount of the Notes of such Series
may declare the principal amount (or, if the Notes of that Series are Zero
Coupon Securities, such portion of the principal amount as may be specified in
the terms of that Series, as provided in the related Prospectus Supplement) of
all the Notes of such Series to be due and payable immediately. Such declaration
may, under certain circumstances, be rescinded and annulled by the Holders of a
majority in aggregate outstanding amount of the Notes of such Series.
If, following an Event of Default with respect to any Series of Notes, the
Notes of such Series have been declared to be due and payable, the Trustee may,
in its discretion, notwithstanding such acceleration, elect to maintain
possession of the collateral securing the Notes of such Series and to continue
to apply distributions on such collateral as if there had been no declaration of
acceleration if such collateral continues to provide sufficient funds for the
payment of principal of and interest on the Notes of such Series as they would
have become due if there had not been such a declaration. In addition, the
Trustee may not sell or otherwise liquidate the collateral securing the Notes of
a Series following an Event of Default other than a default in the payment of
any principal or interest on any Note of such Series for thirty (30) days or
more, unless (a) the Holders of 100% of the then aggregate outstanding amount of
the Notes of such Series consent to such sale, (b) the proceeds of such sale or
liquidation are sufficient to pay in full the principal of and accrued interest
due and unpaid on the outstanding Notes of such Series at the date of such sale
or (c) the Trustee determines that such collateral would not be sufficient on an
ongoing basis to make all payments on such Notes as such payments would have
become due if such Notes had not been declared due and payable, and the Trustee
obtains the consent of the Holders of 66 2/3% of the then aggregate outstanding
amount of the Notes of such Series.
In the event that the Trustee liquidates the collateral in connection with
an Event of Default involving a default for thirty (30) days or more in the
payment of principal of or interest on the Notes of a Series, the Indenture
provides that the Trustee will have a prior lien on the proceeds of any such
liquidation for unpaid fees and expenses. As a result, upon the occurrence of
such an Event of Default, the amount available for distribution to the
Noteholders may be less than would otherwise be the case. However, the Trustee
may not institute a proceeding for the enforcement of its lien except in
connection with a proceeding for the enforcement of the lien of the Indenture
for the benefit of the Noteholders after the occurrence of such an Event of
Default.
Unless otherwise specified in the related Prospectus Supplement, in the
event the principal of the Notes of a Series is declared due and payable, as
described above, the Holders of any such Notes issued at a discount from par may
be entitled to receive no more than an amount equal to the unpaid principal
amount thereof less the amount of such discount which is unamortized.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default shall occur and be continuing with respect
to a Series of Notes, the Trustee will be under no obligation to exercise any of
the rights or powers under the Indenture at the request or direction of any of
the Holders of Notes of such Series, unless such Holders offered to the Trustee
security or indemnity satisfactory to it against the costs, expenses and
liabilities which might be incurred by it in complying with such request or
direction. Subject to such provisions for indemnification and certain
limitations contained in the Indenture, the Holders of a majority of the then
aggregate outstanding amount of the Notes of such Series shall have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee or exercising any trust or power conferred on the
Trustee with respect to the Notes of such Series, and the Holders of a majority
of the then aggregate outstanding amount of the Notes of such Series 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 of such Series affected thereby.
40
<PAGE>
THE TRUSTEE
The identity of the commercial bank, savings and loan association or trust
company named as the Trustee for each Series of Securities will be set forth in
the related Prospectus Supplement. The entity serving as Trustee may have normal
banking relationships with the Depositor or the Servicer. In addition, for the
purpose of meeting the legal requirements of certain local jurisdictions, the
Trustee will have the power to appoint co-trustees or separate trustees of all
or any part of the Trust Fund relating to a Series of Securities. In the event
of such appointment, all rights, powers, duties and obligations conferred or
imposed upon the Trustee by the Agreement relating to such Series will be
conferred or imposed upon the Trustee and each such separate trustee or
co-trustee jointly, or, in any jurisdiction in which the Trustee shall be
incompetent or unqualified to perform certain acts, singly upon such separate
trustee or co-trustee who will exercise and perform such rights, powers, duties
and obligations solely at the direction of the Trustee. The Trustee may also
appoint agents to perform any of the responsibilities of the Trustee, which
agents will have any or all of the rights, powers, duties and obligations of the
Trustee conferred on them by such appointment; provided that the Trustee will
continue to be responsible for its duties and obligations under the Agreement.
DUTIES OF THE TRUSTEE
The Trustee will not make any representations as to the validity or
sufficiency of the Agreement, the Securities or of any Primary Asset or related
documents. If no Event of Default (as defined in the related Agreement) has
occurred, the Trustee is required to perform only those duties specifically
required of it under the Agreement. Upon receipt of the various certificates,
statements, reports or other instruments required to be furnished to it, the
Trustee is required to examine them to determine whether they are in the form
required by the related Agreement. However, the Trustee will not be responsible
for the accuracy or content of any such documents furnished to it by the Holders
or the Servicer under the Agreement.
The Trustee may be held liable for its own negligent action or failure to
act, or for its own misconduct; provided, however, that the Trustee will not be
personally liable with respect to any action taken, suffered or omitted to be
taken by it in good faith in accordance with the direction of the Holders in an
Event of Default. The Trustee is not required to expend or risk its own funds or
otherwise incur any financial liability in the performance of any of its duties
under the Agreement, or in the exercise of any of its rights or powers, if it
has reasonable grounds for believing that repayment of such funds or adequate
indemnity against such risk or liability is not reasonably assured to it.
RESIGNATION OF TRUSTEE
The Trustee may, upon written notice to the Depositor, resign at any time,
in which event the Depositor will be obligated to use its best efforts to
appoint a successor Trustee. If no successor Trustee has been appointed and has
accepted the appointment within 30 days after the giving of such notice of
resignation, the resigning Trustee may petition any court of competent
jurisdiction for appointment of a successor Trustee. The Trustee may also be
removed at any time (i) if the Trustee ceases to be eligible to continue as such
under the Agreement, (ii) if the Trustee becomes insolvent or (iii) by the
Holders of Securities evidencing over 50% of the aggregate voting rights of the
Securities in the Trust Fund upon written notice to the Trustee and to the
Depositor. Any resignation or removal of the Trustee and appointment of a
successor Trustee will not become effective until acceptance of the appointment
by the successor Trustee.
AMENDMENT OF AGREEMENT
Unless otherwise specified in the Prospectus Supplement, the Agreement for
each Series of Securities may be amended by the Depositor, the Servicer (with
respect to a Series relating to Loans), and the Trustee with respect to such
Series, without notice to or consent of the Holders (i) to cure any ambiguity,
(ii) to correct any defective provisions or to correct or supplement any
provision therein, (iii) to add to the duties of the Depositor, the Trust Fund
or Servicer, (iv) to add any other provisions with respect to matters or
questions arising under such Agreement or related Enhancement, (v) to add or
amend any provisions of such Agreement as required by a Rating Agency in order
to maintain or improve the rating of the Securities (it being understood that
none of the Depositor, the Seller, the Servicer or Trustee is obligated to
maintain or improve such rating), or (vi) to comply
41
<PAGE>
with any requirements imposed by the Code; provided that any such amendment
except pursuant to clause (vi) above will not adversely affect in any material
respect the interests of any Holders of such Series, as evidenced by an opinion
of counsel. Any such amendment except pursuant to clause (vi) of the preceding
sentence shall be deemed not to adversely affect in any material respect the
interests of any Holder if the Trustee receives written confirmation from each
Rating Agency rating such Securities that such amendment will not cause such
Rating Agency to reduce the then current rating thereof. Unless otherwise
specified in the Prospectus Supplement, the Agreement for each Series may also
be amended by the Trustee, the Servicer, if applicable, and the Depositor with
respect to such Series with the consent of the Holders possessing not less than
66 2/3% of the aggregate outstanding principal amount of the Securities of such
Series or, if only certain Classes of such Series are affected by such
amendment, 66 2/3% of the aggregate outstanding principal amount of the
Securities of each Class of such Series affected thereby, for the purpose of
adding any provisions to or changing in any manner or eliminating any of the
provisions of such Agreement or modifying in any manner the rights of Holders of
such Series; provided, however, that no such amendment may (a) reduce the amount
or delay the timing of payments on any Security without the consent of the
Holder of such Security; or (b) reduce the aforesaid percentage of the aggregate
outstanding principal amount of Securities of each Class, the Holders of which
are required to consent to any such amendment without the consent of the Holders
of 100% of the aggregate outstanding principal amount of each Class of
Securities affected thereby.
VOTING RIGHTS
The related Prospectus Supplement will set forth the method of determining
allocation of voting rights with respect to a Series.
LIST OF HOLDERS
Upon written request of three or more Holders of record of a Series for
purposes of communicating with other Holders with respect to their rights under
the Agreement, which request is accompanied by a copy of the communication which
such Holders propose to transmit, the Trustee will afford such Holders access
during business hours to the most recent list of Holders of that Series held by
the Trustee.
No Agreement will provide for the holding of any annual or other meeting of
Holders.
BOOK-ENTRY SECURITIES
If specified in the Prospectus Supplement for a Series of Securities, such
Series or one or more Classes of such Series may be issued in book-entry form.
In such event, beneficial owners of such Securities will not be considered
'Holders' under the Agreements and may exercise the rights of Holders only
indirectly through the participants in the applicable book-entry system.
REMIC ADMINISTRATOR
For any Series with respect to which a REMIC election is made, preparation
of certain reports and certain other administrative duties with respect to the
Trust Fund may be performed by a REMIC administrator, who may be an affiliate of
the Depositor.
TERMINATION
Pooling and Servicing Agreement; Trust Agreement. The obligations created
by the Pooling and Servicing Agreement or Trust Agreement for a Series will
terminate upon the distribution to Holders of all amounts distributable to them
pursuant to such Agreement after the earlier of (i) the later of (a) the final
payment or other liquidation of the last Primary Asset remaining in the Trust
Fund for such Series and (b) the disposition of all property acquired upon
foreclosure or deed in lieu of foreclosure or repossession in respect of any
Primary Asset or (ii) the repurchase, as described below, by the Servicer or
other entity specified in the related Prospectus Supplement from the Trustee for
such Series of all Primary Assets and other property at that time subject to
such Agreement. The Agreement for each Series permits, but does not require, the
Servicer or other entity specified in the related Prospectus Supplement to
purchase from the Trust Fund for such Series all remaining Primary Assets at a
price equal to, unless otherwise specified in the related Prospectus Supplement,
100% of the aggregate
42
<PAGE>
Principal Balance of such Primary Assets plus, with respect to any property
acquired in respect of a Primary Asset, if any, the outstanding Principal
Balance of the related Primary Asset at the time of foreclosure, less, in either
case, related unreimbursed Advances (in the case of the Primary Assets, only to
the extent not already reflected in the computation of the aggregate Principal
Balance of such Primary Assets) and unreimbursed expenses (that are reimbursable
pursuant to the terms of the Pooling and Servicing Agreement) plus, in either
case, accrued interest thereon at the weighted average rate on the related
Primary Assets through the last day of the Due Period in which such repurchase
occurs; provided, however, that if an election is made for treatment as a REMIC
under the Code, the repurchase price may equal the greater of (a) 100% of the
aggregate Principal Balance of such Primary Assets, plus accrued interest
thereon at the applicable net rates on the Primary Assets through the last day
of the month of such repurchase and (b) the aggregate fair market value of such
Primary Assets plus the fair market value of any property acquired in respect of
a Primary Asset and remaining in the Trust Fund. The exercise of such right will
effect early retirement of the Securities of such Series, but such entity's
right to so purchase is subject to the aggregate Principal Balance of the
Primary Assets at the time of repurchase being less than a fixed percentage, to
be set forth in the related Prospectus Supplement, of the aggregate Principal
Balance of the Primary Assets as of the Cut-off Date. In no event, however, will
the trust created by the Agreement continue beyond the expiration of 21 years
from the death of the last survivor of certain persons identified therein. For
each Series, the Servicer or the Trustee, as applicable, will give written
notice of termination of the Agreement to each Holder, and the final
distribution will be made only upon surrender and cancellation of the Securities
at an office or agency specified in the notice of termination. If so provided in
the related Prospectus Supplement for a Series, the Depositor or another entity
may effect an optional termination of the Trust Fund under the circumstances
described in such Prospectus Supplement. See 'DESCRIPTION OF THE
SECURITIES--Optional Redemption, Purchase or Termination' herein.
Indenture. The Indenture will be discharged with respect to a Series of
Notes (except with respect to certain continuing rights specified in the
Indenture) upon the delivery to the Trustee for cancellation of all the Notes of
such Series or, with certain limitations, upon deposit with the Trustee of funds
sufficient for the payment in full of all of the Notes of such Series.
In addition to such discharge with certain limitations, the Indenture will
provide that, if so specified with respect to the Notes of any Series, the
related Trust Fund will be discharged from any and all obligations in respect of
the Notes of such Series (except for certain obligations relating to temporary
Notes and exchange of Notes, to register the transfer of or exchange Notes of
such Series, to replace stolen, lost or mutilated Notes of such Series, to
maintain paying agencies and to hold monies for payment in trust) upon the
deposit with the Trustee, in trust, of money and/or direct obligations of or
obligations guaranteed by the United States of America which, through the
payment of interest and principal in respect thereof in accordance with their
terms, will provide money in an amount sufficient to pay the principal of and
each installment of interest on the Notes of such Series on the Final Scheduled
Distribution Date for such Notes and any installment of interest on such Notes
in accordance with the terms of the Indenture and the Notes of such Series. In
the event of any such defeasance and discharge of Notes of such Series, holders
of Notes of such Series would be able to look only to such money and/or direct
obligations for payment of principal and interest, if any, on their Notes until
maturity.
CERTAIN LEGAL ASPECTS OF LOANS
The following discussion contains summaries of certain legal aspects of
mortgage loans, home improvement installment sales contracts and home
improvement installment loan agreements which are general in nature. Because
certain of such legal aspects are governed by applicable state law (which laws
may differ substantially), the summaries do not purport to be complete nor
reflect the laws of any particular state, nor encompass the laws of all states
in which the properties securing the Loans are situated.
MORTGAGES
The Loans for a Series will, and certain Home Improvement Contracts for a
Series may, be secured by either mortgages or deeds of trust or deeds to secure
debt (such Mortgage Loans and Home Improvement Contracts are hereinafter
referred to in this section as 'mortgage loans'), depending upon the prevailing
practice in the state in which the property subject to a mortgage loan is
located. The filing of a mortgage, deed of trust or deed to secure
43
<PAGE>
debt creates a lien or title interest upon the real property covered by such
instrument and represents the security for the repayment of an obligation that
is customarily evidenced by a promissory note. It is not prior to the lien for
real estate taxes and assessments or other charges imposed under governmental
police powers and may also be subject to other liens pursuant to the laws of the
jurisdiction in which the Mortgaged Property is located. Priority with respect
to such instruments depends on their terms, the knowledge of the parties to the
mortgage and generally on the order of recording with the applicable state,
county or municipal office. There are two parties to a mortgage, the mortgagor,
who is the borrower/property owner or the land trustee (as described below), and
the mortgagee, who is the lender. Under the mortgage instrument, the mortgagor
delivers to the mortgagee a note or bond and the mortgage. In the case of a land
trust, there are three parties because title to the property is held by a land
trustee under a land trust agreement of which the borrower/property owner is the
beneficiary; at origination of a mortgage loan, the borrower executes a separate
undertaking to make payments on the mortgage note. A deed of trust transaction
normally has three parties: the trustor, who is the borrower/property owner; the
beneficiary, who is the lender; and the trustee, a third-party grantee. Under a
deed of trust, the trustor grants the property, irrevocably until the debt is
paid, in trust, generally with a power of sale, to the trustee to secure payment
of the obligation. The mortgagee's authority under a mortgage and the trustee's
authority under a deed of trust are governed by the law of the state in which
the real property is located, the express provisions of the mortgage or deed of
trust, and, in some cases, in deed of trust transactions, the directions of the
beneficiary.
FORECLOSURE ON MORTGAGES
Foreclosure of a mortgage is generally accomplished by judicial action.
Generally, the action is initiated by the service of legal pleadings upon all
parties having an interest of record in the real property. Delays in completion
of the foreclosure occasionally may result from difficulties in locating
necessary parties defendant. When the mortgagee's right to foreclosure is
contested, the legal proceedings necessary to resolve the issue can be
time-consuming and expensive. After the completion of a judicial foreclosure
proceeding, the court may issue a judgment of foreclosure and appoint a receiver
or other officer to conduct the sale of the property. In some states, mortgages
may also be foreclosed by advertisement, pursuant to a power of sale provided in
the mortgage. Foreclosure of a mortgage by advertisement is essentially similar
to foreclosure of a deed of trust by nonjudicial power of sale.
Foreclosure of a deed of trust is generally accomplished by a nonjudicial
trustee's sale under a specific provision in the deed of trust which authorizes
the trustee to sell the property upon any default by the borrower under the
terms of the note or deed of trust. In certain states, such foreclosure also may
be accomplished by judicial action in the manner provided for foreclosure of
mortgages. In some states, the trustee must record a notice of default and send
a copy to the borrower-trustor and to any person who has recorded a request for
a copy of a notice of default and notice of sale. In addition, the trustee in
some states must provide notice to any other individual having an interest in
the real property, including any junior lienholders. If the deed of trust is not
reinstated within any applicable cure period, a notice of sale must be posted in
a public place and, in most states, published for a specified period of time in
one or more newspapers. In addition, some state laws require that a copy of the
notice of sale be posted on the property and sent to all parties having an
interest of record in the property. The trustor, borrower, or any person having
a junior encumbrance on the real estate, may, during a reinstatement period,
cure the default by paying the entire amount in arrears plus the costs and
expenses incurred in enforcing the obligation. Generally, state law controls the
amount of foreclosure expenses and costs, including attorney's fees, which may
be recovered by a lender. If the deed of trust is not reinstated, a notice of
sale must be posted in a public place and, in most states, published for a
specified period of time in one or more newspapers. In addition, some state laws
require that a copy of the notice of sale be posted on the property, recorded
and sent to all parties having an interest in the real property.
An action to foreclose a mortgage is an action to recover the mortgage debt
by enforcing the mortgagee's rights under the mortgage. It is regulated by
statutes and rules and subject throughout to the court's equitable powers.
Generally, a mortgagor is bound by the terms of the related mortgage note and
the mortgage as made and cannot be relieved from his default if the mortgagee
has exercised his rights in a commercially reasonable manner. However, since a
foreclosure action historically was equitable in nature, the court may exercise
equitable powers to relieve a mortgagor of a default and deny the mortgagee
foreclosure on proof that either the mortgagor's default was neither willful nor
in bad faith or the mortgagee's action established a waiver, fraud, bad
44
<PAGE>
faith, or oppressive or unconscionable conduct such as to warrant a court of
equity to refuse affirmative relief to the mortgagee. Under certain
circumstances a court of equity may relieve the mortgagor from an entirely
technical default where such default was not willful.
A foreclosure action is subject to most of the delays and expenses of other
lawsuits if defenses or counterclaims are interposed, sometimes requiring up to
several years to complete. Moreover, a non-collusive, regularly conducted
foreclosure sale may be challenged as a fraudulent conveyance, regardless of the
parties' intent, if a court determines that the sale was for less than fair
consideration and such sale occurred while the mortgagor was insolvent and
within one year (or within the state statute of limitations if the trustee in
bankruptcy elects to proceed under state fraudulent conveyance law) of the
filing of bankruptcy. Similarly, a suit against the debtor on the related
mortgage note may take several years and, generally, is a remedy alternative to
foreclosure, the mortgagee being precluded from pursuing both at the same time.
In the case of foreclosure under either a mortgage or a deed of trust, the
sale by the referee or other designated officer or by the trustee is a public
sale. However, because of the difficulty potential third party purchasers at the
sale have in determining the exact status of title and because the physical
condition of the property may have deteriorated during the foreclosure
proceedings, it is uncommon for a third party to purchase the property at a
foreclosure sale. Rather, it is common for the lender to purchase the property
from the trustee or referee for an amount which may be equal to the unpaid
principal amount of the mortgage note secured by the mortgage or deed of trust
plus accrued and unpaid interest and the expenses of foreclosure, in which event
the mortgagor's debt will be extinguished or the lender may purchase for a
lesser amount in order to preserve its right against a borrower to seek a
deficiency judgment in states where such a judgment is available. Thereafter,
subject to the right of the borrower in some states to remain in possession
during the redemption period, the lender will assume the burdens of ownership,
including obtaining hazard insurance, paying taxes and making such repairs at
its own expense as are necessary to render the property suitable for sale. The
lender will commonly obtain the services of a real estate broker and pay the
broker's commission in connection with the sale of the property. Depending upon
market conditions, the ultimate proceeds of the sale of the property may not
equal the lender's investment in the property. Any loss may be reduced by the
receipt of any mortgage guaranty insurance proceeds.
RIGHTS OF REDEMPTION
In some states, after sale pursuant to a deed of trust or foreclosure of a
mortgage, the trustor or mortgagor and foreclosed junior lienors are given a
statutory period in which to redeem the property from the foreclosure sale. The
right of redemption should be distinguished from the equity of redemption, which
is a non-statutory right that must be exercised prior to the foreclosure sale.
In some states, redemption may occur only upon payment of the entire principal
balance of the loan, accrued interest and expenses of foreclosure. In other
states, redemption may be authorized if the former borrower pays only a portion
of the sums due. The effect of a statutory right of redemption is to diminish
the ability of the lender to sell the foreclosed property. The exercise of a
right of redemption would defeat the title of any purchaser at a foreclosure
sale, or of any purchaser from the lender subsequent to foreclosure or sale
under a deed of trust. Consequently the practical effect of a right of
redemption is to force the lender to retain the property and pay the expenses of
ownership until the redemption period has run. In some states, there is no right
to redeem property after a trustee's sale under a deed of trust.
JUNIOR MORTGAGES; RIGHTS OF SENIOR MORTGAGES
The mortgage loans comprising or underlying the Primary Assets included in
the Trust Fund for a Series will be secured by mortgages or deeds of trust which
may be second or more junior mortgages to other mortgages held by other lenders
or institutional investors. The rights of the Trust Fund (and therefore the
Holders), as mortgagee under a junior mortgage, are subordinate to those of the
mortgagee under the senior mortgage, including the prior rights of the senior
mortgagee to receive hazard insurance and condemnation proceeds and to cause the
property securing the mortgage loan to be sold upon default of the mortgagor,
thereby extinguishing the junior mortgagee's lien unless the junior mortgagee
asserts its subordinate interest in the property in foreclosure litigation and,
possibly, satisfies the defaulted senior mortgage. A junior mortgagee may
satisfy a defaulted senior loan in full and, in some states, may cure such
default and bring the senior loan current, in either event adding the amounts
expended to the balance due on the junior loan. In most states, absent a
provision in the mortgage or deed of trust, no notice of default is required to
be given to a junior mortgagee.
45
<PAGE>
The standard form of the mortgage used by most institutional lenders
confers on the mortgagee the right both to receive all proceeds collected under
any hazard insurance policy and all awards made in connection with condemnation
proceedings, and to apply such proceeds and awards to any indebtedness secured
by the mortgage, in such order as the mortgagee may determine. Thus, in the
event improvements on the property are damaged or destroyed by fire or other
casualty, or in the event the property is taken by condemnation, the mortgagee
or beneficiary under underlying senior mortgages will have the prior right to
collect any insurance proceeds payable under a hazard insurance policy and any
award of damages in connection with the condemnation and to apply the same to
the indebtedness secured by the senior mortgages. Proceeds in excess of the
amount of senior mortgage indebtedness, in most cases, may be applied to the
indebtedness of a junior mortgage.
Another provision sometimes found in the form of the mortgage or deed of
trust used by institutional lenders obligates the mortgagor to pay before
delinquency all taxes and assessments on the property and, when due, all
encumbrances, charges and liens on the property which appear prior to the
mortgage or deed of trust, to provide and maintain fire insurance on the
property, to maintain and repair the property and not to commit or permit any
waste thereof, and to appear in and defend any action or proceeding purporting
to affect the property or the rights of the mortgagee under the mortgage. Upon a
failure of the mortgagor to perform any of these obligations, the mortgagee is
given the right under certain mortgages to perform the obligation itself, at its
election, with the mortgagor agreeing to reimburse the mortgagee for any sums
expended by the mortgagee on behalf of the mortgagor. All sums so expended by
the mortgagee become part of the indebtedness secured by the mortgage.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states have imposed statutory prohibitions which limit the remedies
of a beneficiary under a deed of trust or a mortgagee under a mortgage. In some
states, statutes limit the right of the beneficiary or mortgagee to obtain a
deficiency judgment against the borrower following foreclosure or sale under a
deed of trust. A deficiency judgment is a personal judgment against the former
borrower equal in most cases to the difference between the net amount realized
upon the public sale of the real property and the amount due to the lender.
Other statutes require the beneficiary or mortgagee to exhaust the security
afforded under a deed of trust or mortgage by foreclosure in an attempt to
satisfy the full debt before bringing a personal action against the borrower. In
certain other states, the lender has the option of bringing a personal action
against the borrower on the debt without first exhausting such security;
however, in some of these states, the lender, following judgment on such
personal action, may be deemed to have elected a remedy and may be precluded
from exercising remedies with respect to the security. Consequently, the
practical effect of the election requirement, when applicable, is that lenders
will usually proceed first against the security rather than bringing a personal
action against the borrower. Finally, other statutory provisions limit any
deficiency judgment against the former borrower following a foreclosure sale to
the excess of the outstanding debt over the fair market value of the property at
the time of the public sale. The purpose of these statutes is generally to
prevent a beneficiary or a mortgagee from obtaining a large deficiency judgment
against the former borrower as a result of low or no bids at the foreclosure
sale.
In addition to laws limiting or prohibiting deficiency judgments, numerous
other statutory provisions, including the federal bankruptcy laws, the Federal
Soldiers' and Sailors' Relief Act and state laws affording relief to debtors,
may interfere with or affect the ability of the secured lender to realize upon
collateral and/or enforce a deficiency judgment. For example, with respect to
federal bankruptcy law, the filing of a petition acts as a stay against the
enforcement of remedies for collection of a debt. Moreover, a court with federal
bankruptcy jurisdiction may permit a debtor through a Chapter 13 Bankruptcy Code
rehabilitative plan to cure a monetary default with respect to a loan on a
debtor's residence by paying arrearages within a reasonable time period and
reinstating the original loan payment schedule even though the lender
accelerated the loan and the lender has taken all steps to realize upon his
security (provided no sale of the property has yet occurred) prior to the filing
of the debtor's Chapter 13 petition. Some courts with federal bankruptcy
jurisdiction have approved plans, based on the particular facts of the
reorganization case, that effected the curing of a loan default by permitting
the obligor to pay arrearages over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that the
terms of a mortgage loan may be modified if the borrower has filed a petition
under Chapter 13. These courts have suggested that such modifications may
include reducing the amount of each monthly payment, changing the rate of
interest, altering the repayment schedule and reducing the lender's security
interest to the value of the residence, thus leaving the
46
<PAGE>
lender a general unsecured creditor for the difference between the value of the
residence and the outstanding balance of the loan. Federal bankruptcy law and
limited case law indicate that the foregoing modifications could not be applied
to the terms of a loan secured by property that is the principal residence of
the debtor. In all cases, the secured creditor is entitled to the value of its
security plus post-petition interest, attorney's fees and costs to the extent
the value of the security exceeds the debt.
In a Chapter 11 case under the Bankruptcy Code, the lender is precluded
from foreclosing without authorization from the bankruptcy court. The lender's
lien may be transferred to other collateral and/or be limited in amount to the
value of the lender's interest in the collateral as of the date of the
bankruptcy. The loan term may be extended, the interest rate may be adjusted to
market rates and the priority of the loan may be subordinated to bankruptcy
court-approved financing. The bankruptcy court can, in effect, invalidate
due-on-sale clauses through confirmed Chapter 11 plans of reorganization.
The Bankruptcy Code provides priority to certain tax liens over the
lender's security. This may delay or interfere with the enforcement of rights in
respect of a defaulted Loan. In addition, substantive requirements are imposed
upon lenders in connection with the origination and the servicing of mortgage
loans by numerous federal and some state consumer protection laws. The laws
include the federal Truth-in-Lending Act, Real Estate Settlement Procedures Act,
Equal Credit Opportunity Act, Fair Credit Billing Act, Fair Credit Reporting Act
and related statutes and regulations. These federal laws impose specific
statutory liabilities upon lenders who originate loans and who fail to comply
with the provisions of the law. In some cases, this liability may affect
assignees of the loans.
DUE-ON-SALE CLAUSES IN MORTGAGE LOANS
Due-on-sale clauses permit the lender to accelerate the maturity of the
loan if the borrower sells or transfers, whether voluntarily or involuntarily,
all or part of the real property securing the loan without the lender's prior
written consent. The enforceability of these clauses has been the subject of
legislation or litigation in many states, and in some cases, typically involving
single family residential mortgage transactions, their enforceability has been
limited or denied. In any event, the Garn-St. Germain Depository Institutions
Act of 1982 (the 'Garn-St. Germain Act') preempts state constitutional,
statutory and case law that prohibits the enforcement of due-on-sale clauses and
permits lenders to enforce these clauses in accordance with their terms, subject
to certain exceptions. As a result, due-on-sale clauses have become generally
enforceable except in those states whose legislatures exercised their authority
to regulate the enforceability of such clauses with respect to mortgage loans
that were (i) originated or assumed during the 'window period' under the
Garn-St. Germain Act which ended in all cases not later than October 15, 1982,
and (ii) originated by lenders other than national banks, federal savings
institutions and federal credit unions. FHLMC has taken the position in its
published mortgage servicing standards that, out of a total of eleven 'window
period states,' five states (Arizona, Michigan, Minnesota, New Mexico and Utah)
have enacted statutes extending, on various terms and for varying periods, the
prohibition on enforcement of due-on-sale clauses with respect to certain
categories of window period loans. Also, the Garn-St. Germain Act does
'encourage' lenders to permit assumption of loans at the original rate of
interest or at some other rate less than the average of the original rate and
the market rate.
In addition, under federal bankruptcy law, due-on-sale clauses may not be
enforceable in bankruptcy proceedings and may, under certain circumstances, be
eliminated in any modified mortgage resulting from such bankruptcy proceeding.
ENFORCEABILITY OF PREPAYMENT AND LATE PAYMENT FEES
Forms of notes, mortgages and deeds of trust used by lenders may contain
provisions obligating the borrower to pay a late charge if payments are not
timely made, and in some circumstances may provide for prepayment fees or
penalties if the obligation is paid prior to maturity. In certain states, there
are or may be specific limitations, upon the late charges which a lender may
collect from a borrower for delinquent payments. Certain states also limit the
amounts that a lender may collect from a borrower as an additional charge if the
loan is prepaid. Late charges and prepayment fees are typically retained by
servicers as additional servicing compensation.
47
<PAGE>
EQUITABLE LIMITATIONS ON REMEDIES
In connection with lenders' attempts to realize upon their security, courts
have invoked general equitable principles. The equitable principles are
generally designed to relieve the borrower from the legal effect of his defaults
under the loan documents. Examples of judicial remedies that have been fashioned
include judicial requirements that the lender undertake affirmative and
expensive actions to determine the causes of the borrower's default and the
likelihood that the borrower will be able to reinstate the loan. In some cases,
courts have substituted their judgment for the lender's judgment and have
required that lenders reinstate loans or recast payment schedules in order to
accommodate borrowers who are suffering from temporary financial disability. In
other cases, courts have limited the right of a lender to realize upon his
security if the default under the security agreement is not monetary, such as
the borrower's failure to adequately maintain the property or the borrower's
execution of secondary financing affecting the property. Finally, some courts
have been faced with the issue of whether or not federal or state constitutional
provisions reflecting due process concerns for adequate notice require that
borrowers under security agreements receive notices in addition to the
statutorily-prescribed minimums. For the most part, these cases have upheld the
notice provisions as being reasonable or have found that, in cases involving the
sale by a trustee under a deed of trust or by a mortgagee under a mortgage
having a power of sale, there is insufficient state action to afford
constitutional protections to the borrower.
Most conventional single-family mortgage loans may be prepaid in full or in
part without penalty. The regulations of the Office of Thrift Supervision (the
'OTS') prohibit the imposition of a prepayment penalty or equivalent fee for or
in connection with the acceleration of a loan by exercise of a due-on-sale
clause. A mortgagee to whom a prepayment in full has been tendered may be
compelled to give either a release of the mortgage or an instrument assigning
the existing mortgage. The absence of a restraint on prepayment, particularly
with respect to mortgage loans having higher mortgage rates, may increase the
likelihood of refinancing or other early retirements of such mortgage loans.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, enacted in March 1980 ('Title V'), provides that state usury
limitations shall not apply to certain types of residential first mortgage loans
originated by certain lenders after March 31, 1980. Similar federal statutes
were in effect with respect to mortgage loans made during the first three months
of 1980. The OTS, as successor to the Federal Home Loan Bank Board, is
authorized to issue rules and regulations and to publish interpretations
governing implementation of Tide V. Tide V authorizes any state to reimpose
interest rate limits by adopting, before April 1, 1983, a state law, or by
certifying that the voters of such state have voted in favor of any provision,
constitutional or otherwise, which expressly rejects an application of the
federal law. Fifteen states adopted such a law prior to the April 1, 1983
deadline. In addition, even where Title V is not so rejected, any state is
authorized by the law to adopt a provision limiting discount points or other
charges on mortgage loans covered by Title V.
THE HOME IMPROVEMENT CONTRACTS
General. The Home Improvement Contracts, other than those Home Improvement
Contracts that are unsecured or secured by mortgages on real estate (such Home
Improvement Contracts are hereinafter referred to in this section as
'contracts') generally are 'chattel paper' or constitute 'purchase money
security interests' each as defined in the Uniform Commercial Code (the 'UCC').
Pursuant to the UCC, the sale of chattel paper is treated in a manner similar to
perfection of a security interest in chattel paper. Under the related Agreement,
the Depositor will transfer physical possession of the contracts to the Trustee
or a designated custodian or may retain possession of the contracts as custodian
for the Trustee. In addition, the Depositor will make an appropriate filing of a
UCC-1 financing statement in the appropriate states to give notice of the
Trustee's ownership of the contracts. Unless otherwise specified in the related
Prospectus Supplement, the contracts will not be stamped or otherwise marked to
reflect their assignment from the Depositor to the Trustee. Therefore, if
through negligence, fraud or otherwise, a subsequent purchaser were able to take
physical possession of the contracts without notice of such assignment, the
Trustee's interest in the contracts could be defeated.
Security Interests in Home Improvements. The contracts that are secured by
the Home Improvements financed thereby grant to the originator of such contracts
a purchase money security interest in such Home Improvements to secure all or
part of the purchase price of such Home Improvements and related services. A
48
<PAGE>
financing statement generally is not required to be filed to perfect a purchase
money security interest in consumer goods. Such purchase money security
interests are assignable. In general, a purchase money security interest grants
to the holder a security interest that has priority over a conflicting security
interest in the same collateral and the proceeds of such collateral. However, to
the extent that the collateral subject to a purchase money security interest
becomes a fixture, in order for the related purchase money security interest to
take priority over a conflicting interest in the fixture, the holder's interest
in such Home Improvement must generally be perfected by a timely fixture filing.
In general, under the UCC, a security interest does not exist under the UCC in
ordinary building material incorporated into an improvement on land. Home
Improvement Contracts that finance lumber, bricks, other types of ordinary
building material or other goods that are deemed to lose such characterization,
upon incorporation of such materials into the related property, will not be
secured by a purchase money security interest in the Home Improvement being
financed.
Enforcement of Security Interest in Home Improvements. So long as the Home
Improvement has not become subject to the real estate law, a creditor can
repossess a Home Improvement securing a contract by voluntary surrender, by
'self-help' repossession that is 'peaceful' (i.e., without breach of the peace)
or, in the absence of voluntary surrender and the ability to repossess without
breach of the peace, by judicial process. The holder of a contract must give the
debtor a number of days' notice, which varies from 10 to 30 days depending on
the state, prior to commencement of any repossession. The UCC and consumer
protection laws in most states place restrictions on repossession sales,
including requiring prior notice to the debtor and commercial reasonableness in
effecting such a sale. The law in most states also requires that the debtor be
given notice of any sale prior to resale of the unit that the debtor may redeem
it at or before such resale.
Under the laws applicable in most states, a creditor is entitled to obtain
a deficiency judgement from a debtor for any deficiency on repossession and
resale of the property securing the debtor's loan. However, some states impose
prohibitions or limitations on deficiency judgements, and in many cases the
defaulting borrower would have no assets with which to pay a judgement.
Certain other statutory provisions, including federal and state bankruptcy
and insolvency laws and general equitable principles, may limit or delay the
ability of a lender to repossess and resell collateral or enforce a deficiency
judgement.
Consumer Protection Laws. The so-called 'Holder-in-Due-Course' rule of the
Federal Trade Commission is intended to defeat the ability of the transferor of
a consumer credit contract which is the seller of goods which gave rise to the
transaction (and certain related lenders and assignees) to transfer such
contract free of notice of claims by the debtor thereunder. The effect of this
rule is to subject the assignee of such a contract to all claims and defenses
which the debtor could assert against the seller of goods. Liability under this
rule is limited to amounts paid under a contract; however, the obligor also may
be able to assert the rule to set off remaining amounts due as a defense against
a claim brought by the Trustee against such obligor. Numerous other federal and
state consumer protection laws impose requirements applicable to the origination
and lending pursuant to the contracts, including the Truth in Lending Act, the
Federal Trade Commission Act, the Fair Credit Billing Act, the Fair Credit
Reporting Act, the Equal Credit Opportunity Act, the Fair Debt Collection
Practices Act and the Uniform Consumer Credit Code. In the case of some of these
laws, the failure to comply with their provisions may affect the enforceability
of the related contract.
Applicability of Usury Laws. Title V provides that, subject to the
following conditions, state usury limitations shall not apply to any contract
which is secured by a first lien on certain kinds of consumer goods. The
contracts would be covered if they satisfy certain conditions, among other
things, governing the terms of any prepayments, late charges and deferral fees
and requiring a 30-day notice period prior to instituting any action leading to
repossession of the related unit.
Title V authorized any state to reimpose limitations on interest rates and
finance charges by adopting before April 1, 1983 a law or constitutional
provision which expressly rejects application of the federal law. Fifteen states
adopted such a law prior to the April 1, 1983 deadline. In addition, even where
Title V was not so rejected, any state is authorized by the law to adopt a
provision limiting discount points or other charges on loans covered by Title V.
49
<PAGE>
INSTALLMENT SALES CONTRACTS
The Loans may also consist of installment sales contracts. Under an
installment sales contract ('Installment Sales Contract') the seller
(hereinafter referred to in this section as the 'lender') retains legal title to
the property and enters into an agreement with the purchaser (hereinafter
referred to in this section as the 'borrower') for the payment of the purchase
price, plus interest, over the term of such contract. Only after full
performance by the borrower of the contract is the lender obligated to convey
title to the property to the purchaser. As with mortgage or deed of trust
financing, during the effective period of the Installment Sales Contract, the
borrower is generally responsible for maintaining the property in good condition
and for paying real estate taxes, assessments and hazard insurance premiums
associated with the property.
The method of enforcing the rights of the lender under an Installment Sales
Contract varies on a state-by-state basis depending upon the extent to which
state courts are willing, or able pursuant to state statute, to enforce the
contract strictly according to the terms. The terms of Installment Sales
Contracts generally provide that upon a default by the borrower, the borrower
loses his or her right to occupy the property, the entire indebtedness is
accelerated, and the buyer's equitable interest in the property is forfeited.
The lender in such a situation does not have to foreclose in order to obtain
title to the property, although in some cases a quiet title action is in order
if the borrower has filed the Installment Sales Contract in local land records
and an ejectment action may be necessary to recover possession. In a few states,
particularly in cases of borrower default during the early years of an
Installment Sales Contract, the courts will permit ejectment of the buyer and a
forfeiture of his or her interest in the property. However, most state
legislatures have enacted provisions by analogy to mortgage law protecting
borrowers under Installment Sales Contracts from the harsh consequences of
forfeiture. Under such statutes, a judicial or nonjudicial foreclosure may be
required, the lender may be required to give notice of default and the borrower
may be granted some grace period during which the Installment Sales Contract may
be reinstated upon full payment of the default amount and the borrower may have
a post-foreclosure statutory redemption right. In other states, courts in equity
may permit a borrower with significant investment in the property under an
Installment Sales Contract for the sale of real estate to share in the proceeds
of sale of the property after the indebtedness is repaid or may otherwise refuse
to enforce the forfeiture clause. Nevertheless, generally speaking, the lender's
procedures for obtaining possession and clear title under an Installment Sales
Contract in a given state are simpler and less time-consuming and costly than
are the procedures for foreclosing and obtaining clear title to a property
subject to one or more liens.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the Soldiers' and Sailors' Civil Relief Act of 1940, members of all
branches of the military on active duty, including draftees and reservists in
military service, (i) are entitled to have interest rates reduced and capped at
6% per annum, on obligations (including Loans) incurred prior to the
commencement of military service for the duration of military service, (ii) may
be entitled to a stay of proceedings on any kind of foreclosure or repossession
action in the case of defaults on such obligations entered into prior to
military service for the duration of military service and (iii) may have the
maturity of such obligations incurred prior to military service extended, the
payments lowered and the payment schedule readjusted for a period of time after
the completion of military service. However, the benefits of (i), (ii), or (iii)
above are subject to challenge by creditors and if, in the opinion of the court,
the ability of a person to comply with such obligations is not materially
impaired by military service, the court may apply equitable principles
accordingly. If a borrower's obligation to repay amounts otherwise due on a Loan
included in a Trust Fund for a Series is relieved pursuant to the Soldiers' and
Sailors' Civil Relief Act of 1940, none of the Trust Fund, the Servicer, the
Depositor nor the Trustee will be required to advance such amounts, and any loss
in respect thereof may reduce the amounts available to be paid to the Holders of
the Securities of such Series. Unless otherwise specified in the related
Prospectus Supplement, any shortfalls in interest collections on Loans or
Underlying Loans relating to the Private Securities, as applicable, included in
a Trust Fund for a Series resulting from application of the Soldiers' and
Sailors' Civil Relief Act of 1940 will be allocated to each Class of Securities
of such Series that is entitled to receive interest in respect of such Loans or
Underlying Loans in proportion to the interest that each such Class of
Securities would have otherwise been entitled to receive in respect of such
Loans or Underlying Loans had such interest shortfall not occurred.
50
<PAGE>
THE DEPOSITOR
GENERAL
The Depositor was incorporated in the State of Delaware in June 1995, and
is a wholly-owned subsidiary of The Bear Stearns Companies Inc. The Depositor's
principal executive offices are located at 245 Park Avenue, New York, New York
10167. Its telephone number is (212) 272-4095.
The Depositor will not engage in any activities other than to authorize,
issue, sell, deliver, purchase and invest in (and enter into agreements in
connection with), and/or to engage in the establishment of one or more trusts
which will issue and sell, bonds, notes, debt or equity securities, obligations
and other securities and instruments ('Depositor Securities') collateralized or
otherwise secured or backed by, or otherwise representing an interest in, among
other things, receivables or pass-through certificates, or participations or
certificates of participation or beneficial ownership in one or more pools of
receivables, and the proceeds of the foregoing, that arise in connection with
loans secured by certain first or junior mortgages on real estate or
manufactured housing and any and all other commercial transactions and
commercial, sovereign, student or consumer loans or indebtedness and, in
connection therewith or otherwise, purchasing, acquiring, owning, holding,
transferring, conveying, servicing, selling, pledging, assigning, financing and
otherwise dealing with such receivables, pass-through certificates, or
participations or certificates of participation or beneficial ownership. Article
Third of the Depositor's Certificate of Incorporation limits the Depositor's
activities to the above activities and certain related activities, such as
credit enhancement with respect to such Depositor Securities, and to any
activities incidental to and necessary or convenient for the accomplishment of
such purposes.
USE OF PROCEEDS
The Depositor will apply all or substantially all of the net proceeds from
the sale of each Series of Securities for one or more of the following purposes:
(i) to purchase the related Primary Assets, (ii) to repay indebtedness which has
been incurred to obtain funds to acquire such Primary Assets, (iii) to establish
any Reserve Funds described in the related Prospectus Supplement and (iv) to pay
costs of structuring and issuing such Securities, including the costs of
obtaining Enhancement, if any. If so specified in the related Prospectus
Supplement, the purchase of the Primary Assets for a Series may be effected by
an exchange of Securities with the Seller of such Primary Assets.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following summary is based on the opinion of Stroock & Stroock & Lavan,
special counsel to the Depositor ('Federal Tax Counsel') as to the anticipated
material federal income tax consequences of the purchase, ownership and
disposition of Securities. The summary does not purport to deal with all aspects
of federal income taxation that may affect particular investors in light of
their individual circumstances, nor with certain types of investors subject to
special treatment under the federal income tax laws. This summary focuses
primarily upon investors who will hold Securities as 'capital assets'
(generally, property held for investment) within the meaning of Section 1221 of
the Code, but much of the discussion is applicable to other investors as well.
Prospective investors are advised to consult their own tax advisers concerning
the federal, state, local and any other tax consequences to them of the
purchase, ownership and disposition of the Securities.
The summary is based upon the provisions of the Code, the regulations
promulgated thereunder, including, where applicable, proposed regulations, and
the judicial and administrative rulings and decisions now in effect, all of
which are subject to change or possible differing interpretations. The statutory
provisions, regulations, and interpretations on which this interpretation is
based are subject to change, and such a change could apply retroactively.
The federal income tax consequences to Holders will vary depending on
whether (i) the Securities of a Series are classified as indebtedness; (ii) an
election is made to treat the Trust Fund relating to a particular Series of
Securities as a real estate mortgage investment conduit ('REMIC') under the
Internal Revenue Code of 1986, as amended (the 'Code'); (iii) the Securities
represent an ownership interest in some or all of the assets included in the
Trust Fund for a Series; or (iv) an election is made to treat the Trust Fund
relating to a particular Series of Certificates as a partnership. The Prospectus
Supplement for each Series of Securities will specify how the
51
<PAGE>
Securities will be treated for federal income tax purposes and will discuss
whether a REMIC election, if any, will be made with respect to such Series.
TAXATION OF DEBT SECURITIES
Status of Regular Interest Securities as Real Property Loans. The regular
interests in a REMIC ('Regular Interest Securities') will be 'real estate
assets' for purposes of Section 856(c)(5)(A) of the Code and assets described in
Section 7701(a)(19)(C) of the Code (assets qualifying under one or both of those
sections, applying each section separately, 'qualifying assets') to the extent
that the REMIC's assets are qualifying assets. However, if at least 95 percent
of the REMIC's assets are qualifying assets, then 100 percent of the Regular
Interest Securities will be qualifying assets. Similarly, income on the Regular
Interest Securities will be treated as 'interest on obligations secured by
mortgages on real property' within the meaning of Section 856(c)(3)(B) of the
Code, subject to the limitations of the preceding two sentences. In addition to
Loans, the REMIC's assets will include payments on Loans held pending
distribution to holders of Regular Interest Securities, amounts in reserve
accounts (if any), other credit enhancements (if any) and possibly buydown funds
('Buydown Funds'). The Loans generally will be qualifying assets under both of
the foregoing sections of the Code. However, Loans that are not secured by
residential real property or real property used primarily for church purposes
may not constitute qualifying assets under Section 7701(a)(19)(c)(v) of the
Code. In addition, to the extent that the principal amount of a Loan exceeds the
value of the property securing the Loan, it is unclear and Federal Tax Counsel
is unable to opine whether the Loans will be qualifying assets. The regulations
under Sections 860A through 860G of the Code (the 'REMIC Regulations') treat
credit enhancements as part of the mortgage or pool of mortgages to which they
relate, and therefore credit enhancements generally should be qualifying assets.
Regulations issued in conjunction with the REMIC Regulations provide that
amounts paid on Loans and held pending distribution to holders of Regular
Interest Securities ('cash flow investments') will be treated as qualifying
assets. It is unclear whether reserve funds or Buydown Funds would also
constitute qualifying assets under any of those provisions.
Interest and Acquisition Discount. Securities representing Regular
Interest Securities are generally taxable to Holders in the same manner as
evidences of indebtedness issued by the REMIC. Stated interest on the Regular
Interest Securities will be taxable as ordinary income and taken into account
using the accrual method of accounting, regardless of the Holder's normal
accounting method. Interest (other than original issue discount) on Securities
(other than Regular Interest Securities) that are characterized as indebtedness
for federal income tax purposes will be includible in income by Holders thereof
in accordance with their usual methods of accounting. Securities characterized
as debt for federal income tax purposes and Regular Interest Securities will be
referred to hereinafter collectively as 'Debt Securities.'
Debt Securities that are Compound Interest Securities will, and certain of
the other Debt Securities may, be issued with 'original issue discount' ('OID').
The following discussion is based in part on the rules governing OID which are
set forth in Sections 1271-1275 of the Code and the Treasury regulations issued
thereunder on February 2, 1994 (the 'OID Regulations'). A Holder should be
aware, however, that the OID Regulations do not adequately address certain
issues relevant to prepayable securities, such as the Debt Securities.
In general, OID, if any, will equal the difference between the stated
redemption price at maturity of a Debt Security and its issue price. A Holder of
a Debt Security must include such OID in gross income as ordinary interest
income as it accrues under a method taking into account an economic accrual of
the discount. In general, OID must be included in income in advance of the
receipt of the cash representing that income. The amount of OID on a Debt
Security will be considered to be zero if it is less than a de minimis amount
determined under the Code.
The issue price of a Debt Security is the first price at which a
substantial amount of Debt Securities of that class are sold to the public
(excluding bond houses, brokers, underwriters or wholesalers). If less than a
substantial amount of a particular class of Debt Securities is sold for cash on
or prior to the Closing Date, the issue price for such class will be treated as
the fair market value of such class on the Closing Date. The issue price of a
Debt Security also includes the amount paid by an initial Debt Security Holder
for accrued interest that relates to a period prior to the issue date of the
Debt Security. The stated redemption price at maturity of a Debt Security
includes the original principal amount of the Debt Security, but generally will
not include distributions of interest if such distributions constitute
'qualified stated interest.'
Under the OID Regulations, interest payments will not qualify as qualified
stated interest unless the interest payments are 'unconditionally payable.' The
OID Regulations state that interest is unconditionally payable if
52
<PAGE>
reasonable legal remedies exist to compel timely payment, or the debt instrument
otherwise provides terms and conditions that make the likelihood of late payment
(other than a late payment that occurs within a reasonable grace period) or
nonpayment of interest a remote contingency, as defined in the OID Regulations.
It is unclear whether the terms and conditions of the Loans underlying the Debt
Securities or the terms and conditions of the Debt Securities are considered
when determining whether the likelihood of late payment or nonpayment of
interest is a remote contingency. Any terms or conditions that do not reflect
arm's length dealing or that the holder does not intend to enforce are not
considered.
Certain Debt Securities will provide for distributions of interest based on
a period that is the same length as the interval between Distribution Dates but
ends prior to each Distribution Date. Any interest that accrues prior to the
Closing Date may be treated under the OID Regulations either (i) as part of the
issue price and the stated redemption price at maturity of the Debt Securities
or (ii) as not included in the issue price or stated redemption price. The OID
Regulations provide a special application of the de minimis rule for debt
instruments with long first accrual periods where the interest payable for the
first period is at a rate which is effectively less than that which applies in
all other periods. In such cases, for the sole purpose of determining whether
original issue discount is de minimis, the OID Regulations provide that the
stated redemption price is equal to the instrument's issue price plus the
greater of the amount of foregone interest or the excess (if any) of the
instrument's stated principal amount over its issue price.
Under the de minimis rule, OID on a Debt Security will be considered to be
zero if such OID is less than 0.25% of the stated redemption price at maturity
of the Debt Security multiplied by the weighted average maturity of the Debt
Security. For this purpose, the weighted average maturity of the Debt Security
is computed as the sum of the amounts determined by multiplying the number of
full years (i.e., rounding down partial years) from the issue date until each
distribution in reduction of stated redemption price at maturity is scheduled to
be made by a fraction, the numerator of which is the amount of each distribution
included in the stated redemption price at maturity of the Debt Security and the
denominator of which is the stated redemption price at maturity of the Debt
Security. Holders generally must report de minimis OID pro rata as principal
payments are received, and such income will be capital gain if the Debt Security
is held as a capital asset. However, accrual method Holders may elect to accrue
all de minimis OID as well as market discount under a constant interest method.
The Holder of a Debt Security issued with OID must include in gross income,
for all days during its taxable year on which it holds such Debt Security, the
sum of the 'daily portions' of such original issue discount. The amount of OID
includible in income by a Holder will be computed by allocating to each day
during a taxable year a pro rata portion of the original issue discount that
accrued during the relevant accrual period. In the case of a Debt Security that
is not a Regular Interest Security and the principal payments on which are not
subject to acceleration resulting from prepayments on the Loans, the amount of
OID includible in income of a Holder for an accrual period (generally the period
over which interest accrues on the debt instrument) will equal the product of
the yield to maturity of the Debt Security and the adjusted issue price of the
Debt Security, reduced by any payments of qualified stated interest. The
adjusted issue price is the sum of its issue price plus prior accruals or OID,
reduced by the total payments made with respect to such Debt Security in all
prior periods, other than qualified stated interest payments.
The amount of OID to be included in income by a Holder of a debt
instrument, such as certain Classes of the Debt Securities, that is subject to
acceleration due to prepayments on other debt obligations securing such
instruments (a 'Pay-Through Security'), is computed by taking into account the
anticipated rate of prepayments assumed in pricing the debt instrument (the
'Prepayment Assumption'). The amount of OID that will accrue during an accrual
period on a Pay-Through Security is the excess (if any) of the sum of (a) the
present value of all payments remaining to be made on the Pay-Through Security
as of the close of the accrual period and (b) the payments during the accrual
period of amounts included in the stated redemption price of the Pay-Through
Security, over the adjusted issue price of the Pay-Through Security at the
beginning of the accrual period. The present value of the remaining payments is
to be determined on the basis of three factors: (i) the original yield to
maturity of the Pay-Through Security (determined on the basis of compounding at
the end of each accrual period and properly adjusted for the length of the
accrual period), (ii) events which have occurred before the end of the accrual
period and (iii) the assumption that the remaining payments will be made in
accordance with the original Prepayment Assumption. The effect of this method is
to increase the portions of OID required to be included in income by a Holder to
take into account prepayments with respect to the Loans at a rate that exceeds
the Prepayment Assumption, and to decrease (but not below zero for any period)
the portions of OID required to be
53
<PAGE>
included in income by a Holder of a Pay-Through Security to take into account
prepayments with respect to the Loans at a rate that is slower than the
Prepayment Assumption. Although OID will be reported to Holders of Pay-Through
Securities based on the Prepayment Assumption, no representation is made to
Holders that Loans will be prepaid at that rate or at any other rate.
The Depositor may adjust the accrual of OID on a Class of Regular Interest
Securities (or other regular interests in a REMIC) in a manner that it believes
to be appropriate, to take account of realized losses on the Loans, although the
OID Regulations do not provide for such adjustments. If the Internal Revenue
Service were to require that OID be accrued without such adjustments, the rate
of accrual of OID for a Class of Regular Interest Securities could increase.
Certain classes of Regular Interest Securities may represent more than one
class of REMIC regular interests. Unless the applicable Prospectus Supplement
specifies otherwise, the Trustee intends, based on the OID Regulations, to
calculate OID on such Securities as if, solely for the purposes of computing
OID, the separate regular interests were a single debt instrument.
A subsequent Holder of a Debt Security will also be required to include OID
in gross income, but such a Holder who purchases such Debt Security for an
amount that exceeds its adjusted issue price will be entitled (as will an
initial Holder who pays more than a Debt Security's issue price) to offset such
OID by comparable economic accruals of portions of such excess.
Effects of Defaults and Delinquencies. Holders will be required to report
income with respect to the related Securities under an accrual method without
giving effect to delays and reductions in distributions attributable to a
default or delinquency on the Loans, except possibly to the extent that it can
be established that such amounts are uncollectible. As a result, the amount of
income (including OID) reported by a Holder of such a Security in any period
could significantly exceed the amount of cash distributed to such Holder in that
period. The Holder will eventually be allowed a loss (or will be allowed to
report a lesser amount of income) to the extent that the aggregate amount of
distributions on the Securities is reduced as a result of a Loan default.
However, the timing and character of such losses or reductions in income are
uncertain and, accordingly, Holders of Securities should consult their own tax
advisors on this point.
Interest-Only Debt Securities. The Trust Fund intends to report income
from interest-only classes of Debt Securities to the Internal Revenue Service
and to holders of interest-only Debt Securities based on the assumption that the
stated redemption price at maturity is equal to the sum of all payments
determined under the applicable prepayment assumption. As a result, such
interest-only Debt Securities Certificates will be treated as having original
issue discount.
Variable Rate Debt Securities. Under the OID Regulations, Debt Securities
paying interest at a variable rate (a 'Variable Rate Debt Security') are subject
to special rules. A Variable Rate Debt Security will qualify as a 'variable rate
debt instrument' if (i) its issue price does not exceed the total noncontingent
principal payments due under the Variable Rate Debt Security by more than a
specified de minimis amount, (ii) it provides for stated interest, paid or
compounded at least annually, at (a) one or more qualified floating rates, (b) a
single fixed rate and one or more qualified floating rates, (c) a single
objective rate or (d) a single fixed rate and a single objective rate that is a
qualified inverse floating rate and (iii) it does not provide for any principal
payments that are contingent, as defined in the OID Regulations, except as
provided in (i), above. Because the OID Regulations relating to contingent
payment debt instruments do not apply to REMIC regular interests, principal
payments on the REMIC Regular Certificates should not be considered contingent
for this purpose.
A 'qualified floating rate' is any variable rate where variations in the
value of such rate can reasonably be expected to measure contemporaneous
variations in the cost of newly borrowed funds in the currency in which the
Variable Rate Debt Security is denominated. A multiple of a qualified floating
rate will generally not itself constitute a qualified floating rate for purposes
of the OID Regulations. However, a variable rate equal to (i) the product of a
qualified floating rate and a fixed multiple that is greater than 0.65 but not
more than 1.35 or (ii) the product of a qualified floating rate and a fixed
multiple that is greater than 0.65 but not more than 1.35, increased or
decreased by a fixed rate will constitute a qualified floating rate for purposes
of the OID Regulations. In addition, under the OID Regulations, two or more
qualified floating rates that can reasonably be expected to have approximately
the same values throughout the term of the Variable Rate Debt Security will be
treated as a single qualified floating rate (a 'Presumed Single Qualified
Floating Rate'). Two or more qualified floating rates with values within 25
basis points of each other as determined on the Variable Rate Debt Security's
issue date will be
54
<PAGE>
conclusively presumed to be a Presumed Single Qualified Floating Rate.
Notwithstanding the foregoing, a variable rate that would otherwise constitute a
qualified floating rate but which is subject to one or more restrictions such as
a cap or floor, will not be a qualified floating rate for purposes of the OID
Regulations unless the restriction is fixed throughout the term of the Variable
Rate Debt Security or the restriction will not significantly affect the yield of
the Variable Rate Debt Security.
An 'objective rate' is a rate that is not itself a qualified floating rate
but which is determined using a single fixed formula and which is based upon
objective financial or economic information. The OID Regulations also provide
that other variable rates may be treated as objective rates if so designated by
the Internal Revenue Service in the future. An interest rate on a REMIC Regular
Certificate that is the weighted average of the interest rates on some or all of
the qualified mortgages held by the REMIC should constitute an objective rate.
Despite the foregoing, a variable rate of interest on a Variable Rate Debt
Security will not constitute an objective rate if it is reasonably expected that
the average value of such rate during the first half of the Variable Rate Debt
Security's term will be either significantly less than or significantly greater
than the average value of the rate during the final half of the Variable Rate
Debt Security's term. Further, an objective rate does not include a rate that is
based on information that is within the control of the issuer (or a party
related to the issuer) or that is unique to the circumstances of the issuer (or
a party related to the issuer). An objective rate will qualify as a 'qualified
inverse floating rate' if such rate is equal to a fixed rate minus a qualified
floating rate and variations in the rate can reasonably be expected to inversely
reflect contemporaneous variations in the qualified floating rate. The OID
Regulations also provide that if a Variable Rate Debt Security provides for
stated interest at a fixed rate for an initial period of less than one year
followed by a variable rate that is either a qualified floating rate or an
objective rate and if the variable rate on the Variable Rate Debt Security's
issue date is intended to approximate the fixed rate, then the fixed rate and
the variable rate together will constitute either a single qualified floating
rate or objective rate, as the case may be (a 'Presumed Single Variable Rate').
If the value of the variable rate and the initial fixed rate are within 25 basis
points of each other as determined on the Variable Rate Debt Security's issue
date, the variable rate will be conclusively presumed to approximate the fixed
rate.
For Variable Rate Debt Securities that qualify as a 'variable rate debt
instrument' under the OID Regulations and provide for interest at either a
single qualified floating rate, a single objective rate, a Presumed Single
Qualified Floating Rate or a Presumed Single Variable Rate throughout the term
(a 'Single Variable Rate Debt Security'), original issue discount is computed as
described above based on the following: (i) stated interest on the Single
Variable Rate Debt Security which is unconditionally payable in cash or property
(other than debt instruments of the issuer) at least annually will constitute
qualified stated interest, (ii) by assuming that the variable rate on the Single
Variable Debt Security is a fixed rate equal to: (a) in the case of a Single
Variable Rate Debt Security with a qualified floating rate or a qualified
inverse floating rate, the value of, as of the issue date, of the qualified
floating rate or the qualified inverse floating rate or (b) in the case of a
Single Variable Rate Debt Security with an objective rate (other than a
qualified inverse floating rate), a fixed rate which reflects the reasonably
expected yield for such Single Variable Debt Security and (iii) the qualified
stated interest allocable to an accrual period is increased (or decreased) if
the interest actually paid during an accrual period exceeds (or is less than)
the interest assumed to be paid under the assumed fixed rate described in (ii),
above.
In general, any Variable Rate Debt Security other than a Single Variable
Rate Debt Security (a 'Multiple Variable Rate Debt Security') that qualifies as
a 'variable rate debt instrument' will be converted into an 'equivalent' fixed
rate debt instrument for purposes of determining the amount and accrual of
original issue discount and qualified stated interest on the Multiple Variable
Rate Debt Security. The OID Regulations generally require that such a Multiple
Variable Rate Debt Security be converted into an 'equivalent' fixed rate debt
instrument by substituting any qualified floating rate or qualified inverse
floating rate provided for under the terms of the Multiple Variable Rate Debt
Security with a fixed rate equal to the value of the qualified floating rate or
qualified inverse floating rate, as the case may be, as of the Multiple Variable
Rate Debt Security's issue date. Any objective rate (other than a qualified
inverse floating rate) provided for under the terms of the Multiple Variable
Rate Debt Security is converted into a fixed rate that reflects the yield that
is reasonably expected for the Multiple Variable Rate Debt Security. In the case
of a Multiple Variable Rate Debt Security that qualifies as a 'variable rate
debt instrument' and provides for stated interest at a fixed rate in addition to
either one or more qualified floating rates or a qualified inverse floating
rate, the fixed rate is initially converted into a qualified floating rate (or a
qualified inverse floating rate, if the Multiple Variable Rate Debt Security
provides for a qualified inverse floating rate). Under such circumstances, the
qualified floating rate or qualified inverse floating
55
<PAGE>
rate that replaces the fixed rate must be such that the fair market value of the
Multiple Variable Rate Debt Security as of the Multiple Variable Rate Debt
Security's issue date is approximately the same as the fair market value of an
otherwise identical debt instrument that provides for either the qualified
floating rate or qualified inverse floating rate rather than the fixed rate.
Subsequent to converting the fixed rate into either a qualified floating rate or
a qualified inverse floating rate, the Multiple Variable Rate Debt Security is
then converted into an 'equivalent' fixed rate debt instrument in the manner
described above.
Once the Multiple Variable Rate Debt Security is converted into an
'equivalent' fixed rate debt instrument pursuant to the foregoing rules, the
amount of original issue discount and qualified stated interest, if any, are
determined for the 'equivalent' fixed rate debt instrument by applying the
original issue discount rules to the 'equivalent' fixed rate debt instrument in
the manner described above. A Holder of the Multiple Variable Rate Debt Security
will account for such original issue discount and qualified stated interest as
if the Holder held the 'equivalent' fixed rate debt instrument. Each accrual
period appropriate adjustments will be made to the amount of qualified stated
interest or original issue discount assumed to have been accrued or paid with
respect to the 'equivalent' fixed rate debt instrument in the event that such
amounts differ from the accrual amount of interest accrued or paid on the
Multiple Variable Rate Debt Security during the accrual period.
If a Variable Rate Debt Security does not qualify as a 'variable rate debt
instrument' under the OID Regulations, then the Variable Rate Debt Security
would be treated as a contingent payment debt obligation. It is not clear under
current law how a Variable Rate Debt Security would be taxed if such Debt
Security were treated as a contingent payment debt obligation since the OID
Regulations relating to contingent payment debt obligations do not apply to
REMIC regular interests.
Market Discount. A purchaser of a Security may be subject to the market
discount rules of Sections 1276-1278 of the Code. A Holder that acquires a Debt
Security with more than a prescribed de minimis amount of 'market discount'
(generally, the excess of the principal amount of the Debt Security over the
purchaser's purchase price) will be required to include accrued market discount
in income as ordinary income in each month, but limited to an amount not
exceeding the principal payments on the Debt Security received in that month
and, if the Securities are sold, the gain realized. Such market discount would
accrue in a manner to be provided in Treasury regulations but, until such
regulations are issued, such market discount would in general accrue either (i)
on the basis of a constant yield (in the case of a Pay-Through Security, taking
into account a prepayment assumption) or (ii) in the ratio of (a) in the case of
Securities (or in the case of a Pass-Through Security, as set forth below, the
Loans underlying such Security) not originally issued with original issue
discount, stated interest payable in the relevant period to total stated
interest remaining to be paid at the beginning of the period or (b) in the case
of Securities (or, in the case of a Pass-Through Security, as described below,
the Loans underlying such Security) originally issued at a discount, OID in the
relevant period to total OID remaining to be paid.
Section 1277 of the Code provides that, regardless of the origination date
of the Debt Security (or, in the case of a Pass-Through Security, the Loans),
the excess of interest paid or accrued to purchase or carry a Security (or, in
the case of a Pass-Through Security, as described below, the underlying Loans)
with market discount over interest received on such Security is allowed as a
current deduction only to the extent such excess is greater than the market
discount that accrued during the taxable year in which such interest expense was
incurred. In general, the deferred portion of any interest expense will be
deductible when such market discount is included in income, including upon the
sale, disposition, or repayment of the Security (or in the case of a
Pass-Through Security, an underlying Loan). A Holder may elect to include market
discount in income currently as it accrues, on all market discount obligations
acquired by such Holder during the taxable year such election is made and
thereafter, in which case the interest deferral rule will not apply.
Premium. A Holder who purchases a Debt Security (other than an Interest
Weighted Security to the extent described above) at a cost greater than its
stated redemption price at maturity, generally will be considered to have
purchased the Security at a premium, which it may elect to amortize as an offset
to interest income on such Security (and not as a separate deduction item) on a
constant yield method. Although no regulations addressing the computation of
premium accrual on securities similar to the Securities have been issued, the
legislative history of the 1986 Act indicates that premium is to be accrued in
the same manner as market discount. Accordingly, it appears that the accrual of
premium on a Class of Pay-Through Securities will be calculated using the
prepayment assumption used in pricing such Class. If a Holder makes an election
to amortize premium on a Debt Security, such election will apply to all taxable
debt instruments (including all REMIC regular interests and
56
<PAGE>
all pass-through certificates representing ownership interests in a trust
holding debt obligations) held by the Holder at the beginning of the taxable
year in which the election is made, and to all taxable debt instruments acquired
thereafter by such Holder, and will be irrevocable without the consent of the
Internal Revenue Service. Purchasers who pay a premium for the Securities should
consult their tax advisers regarding the election to amortize premium and the
method to be employed.
Election to Treat all Interest as Original Issue Discount. The OID
Regulations permit a Holder of a Debt Security to elect to accrue all interest,
discount (including de minimis market or original issue discount) and premium in
income as interest, based on a constant yield method for Debt Securities
acquired on or after April 4, 1994. If such an election were to be made with
respect to a Debt Security with market discount, the Holder of the Debt Security
would be deemed to have made an election to include in income currently market
discount with respect to all other debt instruments having market discount that
such Holder of the Debt Security acquires during the year of the election or
thereafter. Similarly, a Holder of a Debt Security that makes this election for
a Debt Security that is acquired at a premium will be deemed to have made an
election to amortize bond premium with respect to all debt instruments having
amortizable bond premium that such Holder owns or acquires. The election to
accrue interest, discount and premium on a constant yield method with respect to
a Debt Security is irrevocable.
TAXATION OF THE REMIC AND ITS HOLDERS
General. In the opinion of Federal Tax Counsel, if a REMIC election is
made with respect to a Series of Securities, then the arrangement by which the
Securities of that Series are issued will be treated as a REMIC as long as all
of the provisions of the applicable Agreement are complied with and the
statutory and regulatory requirements are satisfied. Securities will be
designated as 'Regular Interests' or 'Residual Interests' in a REMIC, as
specified in the related Prospectus Supplement.
Except to the extent specified otherwise in a Prospectus Supplement, if a
REMIC election is made with respect to a Series of Securities, (i) Securities
held by a domestic building and loan association will constitute 'a regular or a
residual interest in a REMIC' within the meaning of Code Section
7701(a)(19)(C)(xi) (assuming that at least 95% of the REMIC's assets consist of
cash, government saturates, 'loans secured by an interest in real property,' and
other types of assets described in Code Section 7701(a)(19)(C)); and (ii)
Securities held by a real estate investment trust will constitute 'real estate
assets' within the meaning of Code Section 856(c)(6)(B), and income with respect
to the Securities will be considered 'interest on obligations secured by
mortgages on real property or on interests in real property' within the meaning
of Code Section 856(c)(3)(B) (assuming, for both purposes, that at least 95% of
the REMIC's assets are qualifying assets). If less than 95% of the REMIC's
assets consist of assets described in (i) or (ii) above, then a Security will
qualify for the tax treatment described in (i) or (ii) in the proportion that
such REMIC assets are qualifying assets.
REMIC EXPENSES; SINGLE CLASS REMICS
As a general rule, all of the expenses of a REMIC will be taken into
account by Holders of the Residual Interest Securities. In the case of a 'single
class REMIC,' however, the expenses will be allocated, under Treasury
regulations, among the Holders of the Regular Interest Securities and the
Holders of the Residual Interest Securities on a daily basis in proportion to
the relative amounts of income accruing to each Holder on that day. In the case
of a Holder of a Regular Interest Security who is an individual or a
'pass-through interest holder' (including certain pass-through entities but not
including real estate investment trusts), such expenses will be deductible only
to the extent that such expenses, plus other 'miscellaneous itemized deductions'
of the Holder, exceed 2% of such Holder's adjusted gross income. In addition,
for taxable years beginning after December 31, 1990, the amount of itemized
deductions otherwise allowable for the taxable year for an individual whose
adjusted gross income exceeds the applicable amount (which amount will be
adjusted for inflation for taxable years beginning after 1990) will be reduced
by the lesser of (i) 3% of the excess of adjusted gross income over the
applicable amount, or (ii) 80% of the amount of itemized deductions otherwise
allowable for such taxable year. The reduction or disallowance of this deduction
may have a significant impact on the yield of the Regular Interest Security to
such a Holder. In general terms, a single class REMIC is one that either (i)
would qualify, under existing Treasury regulations, as a grantor trust if it
were not a REMIC (treating all interests as ownership interests, even if they
would be classified as debt for federal income tax purposes) or (ii) is similar
to such a trust and which is structured with the principal purpose of avoiding
the single class REMIC rules. Unless otherwise stated in the applicable
Prospectus Supplement, the expenses of the REMIC will be allocated to Holders of
the related Residual Interest Securities.
57
<PAGE>
TAXATION OF THE REMIC
General. Although a REMIC is a separate entity for federal income tax
purposes, a REMIC is not generally subject to entity-level tax. Rather, the
taxable income or net loss of a REMIC is taken into account by the holders of
residual interests. As described above, the regular interests are generally
taxable as debt of the REMIC.
Tiered REMIC Structures. For certain Series of Securities, two or more
separate elections may be held to treat designated portions of the related Trust
Fund as REMICs ('Tiered REMICs') for federal income tax purposes. Upon the
issuance of any such Series of Securities, Federal Tax Counsel will deliver its
opinion generally to the effect that, assuming compliance with all provisions of
the related Pooling and Servicing Agreement, the Tiered REMICs will each qualify
as a REMIC and the REMIC Certificates issued by the Tiered REMICs, respectively,
will be considered to evidence ownership of Regular Certificates or Residual
Certificates in the related REMIC within the meaning of the REMIC Provisions.
Solely for purposes of determining whether the REMIC Certificates will be
'real estate assets' within the meaning of Section 856(c)(5)(A) of the Code, and
'loans secured by an interest in real property' under Section 7701(a)(19)(C) of
the Code, and whether the income on such Certificates is interest described in
Section 856(c)(3)(B) of the Code, the Tiered REMICs will be treated as one
REMIC.
Calculation of REMIC Income. The taxable income or net loss of a REMIC is
determined under an accrual method of accounting and in the same manner as in
the case of an individual, with certain adjustments. In general, the taxable
income or net loss will be the difference between (i) the gross income produced
by the REMIC's assets, including stated interest and any original issue discount
or market discount on loans and other assets, and (ii) deductions, including
stated interest and original issue discount accrued on Regular Interest
Securities, amortization of any premium with respect to Loans, and servicing
fees and other expenses of the REMIC. A Holder of a Residual Interest Security
that is an individual or a 'pass-through interest holder' (including certain
pass-through entities, but not including real estate investment trusts) will be
unable to deduct servicing fees payable on the Loans or other administrative
expenses of the REMIC for a given taxable year, to the extent that such
expenses, when aggregated with such Holder's other miscellaneous itemized
deductions for that year, do not exceed two percent of such Holder's adjusted
gross income.
For purposes of computing its taxable income or net loss, the REMIC should
have an initial aggregate tax basis in its assets equal to the aggregate fair
market value of the regular interests and the residual interests on the Startup
Day (generally, the day that the interests are issued). Such aggregate basis
will be allocated among the assets of the REMIC in proportion to their
respective fair market values.
The OID provisions of the Code apply to loans of individuals originated on
or after March 2, 1984, and the market discount provisions apply to loans
originated after July 18, 1984. Subject to possible application of the de
minimis rules, the method of accrual by the REMIC of OID income on such loans
will be equivalent to the method under which Holders of Pay-Through Securities
accrue original issue discount (i.e., under the constant yield method taking
into account the Prepayment Assumption). The REMIC will deduct OID on the
Regular Interest Securities in the same manner that the Holders of the Regular
Interest ecurities include such discount in income, but without regard to the de
minimis rules. See 'Taxation of Debt Securities' above. However, a REMIC that
acquires loans at a market discount must include such market discount in income
currently, as it accrues, on a constant interest basis.
To the extent that the REMIC's basis allocable to loans that it holds
exceeds their principal amounts, the resulting premium, if attributable to
mortgages originated after September 27, 1985, will be amortized over the life
of the loans (taking into account the Prepayment Assumption) on a constant yield
method. Although the law is somewhat unclear regarding recovery of premium
attributable to loans originated on or before such date, it is possible that
such premium may be recovered in proportion to payments of loan principal.
Prohibited Transactions and Contributions Tax. The REMIC will be subject
to a 100% tax on any net income derived from a 'prohibited transaction.' For
this purpose, net income will be calculated without taking into account any
losses from prohibited transactions or any deductions attributable to any
prohibited transaction that resulted in a loss. In general, prohibited
transactions include: (i) subject to limited exceptions, the sale or other
disposition of any qualified mortgage transferred to the REMIC; (ii) subject to
a limited exception, the sale
58
<PAGE>
or other disposition of a cash flow investment; (iii) the receipt of any income
from assets not permitted to be held by the REMIC pursuant to the Code; or (iv)
the receipt of any fees or other compensation for services rendered by the
REMIC. It is anticipated that a REMIC will not engage in any prohibited
transactions in which it would recognize a material amount of net income. In
addition, subject to a number of exceptions, a tax is imposed at the rate of
100% on amounts contributed to a REMIC after the close of the three-month period
beginning on the Startup Day. The Holders of Residual Interest Securities will
generally be responsible for the payment of any such taxes imposed on the REMIC.
To the extent not paid by such Holders or otherwise, however, such taxes will be
paid out of the Trust Fund and will be allocated pro rata to all outstanding
Classes of Securities of such REMIC.
TAXATION OF HOLDERS OF RESIDUAL INTEREST SECURITIES
The Holder of a Security representing a residual interest (a 'Residual
Interest Security') will take into account the 'daily portion' of the taxable
income or net loss of the REMIC for each day during the taxable year on which
such Holder held the Residual Interest Security. The daily portion is determined
by allocating to each day in any calendar quarter its ratable portion of the
taxable income or net loss of the REMIC for such quarter, and by allocating that
amount among the Holders (on such day) of the Residual Interest Securities in
proportion to their respective holdings on such day.
The Holder of a Residual Interest Security must report its proportionate
share of the taxable income of the REMIC whether or not it receives cash
distributions from the REMIC attributable to such income or loss. The reporting
of taxable income without corresponding distributions could occur, for example,
in certain REMIC issues in which the loans held by the REMIC were issued or
acquired at a discount, since mortgage prepayments cause recognition of discount
income, while the corresponding portion of the prepayment could be used in whole
or in part to make principal payments on REMIC Regular Interests issued without
any discount or at an insubstantial discount. (If this occurs, it is likely that
cash distributions will exceed taxable income in later years.) Taxable income
may also be greater in earlier years of certain REMIC issues as a result of the
fact that interest expense deductions, as a percentage of outstanding principal
on REMIC Regular Interest Securities, will typically increase over time as lower
yielding Securities are paid, whereas interest income with respect to loans will
generally remain constant over time as a percentage of loan principal.
In any event, because the holder of a residual interest is taxed on the net
income of the REMIC, the taxable income derived from a Residual Interest
Security in a given taxable year will not be equal to the taxable income
associated with investment in a corporate bond or stripped instrument having
similar cash flow characteristics and pretax yield. Therefore, the after-tax
yield on the Residual Interest Security may be less than that of such a bond or
instrument.
Limitation on Losses. The amount of the REMIC's net loss that a Holder may
take into account currently is limited to the Holder's adjusted basis at the end
of the calendar quarter in which such loss arises. A Holder's basis in a
Residual Interest Security will initially equal such Holder's purchase price,
and will subsequently be increased by the amount of the REMIC's taxable income
allocated to the Holder, and decreased (but not below zero) by the amount of
distributions made and the amount of the REMIC's net loss allocated to the
Holder. Any disallowed loss may be carried forward indefinitely, but may be used
only to offset income of the REMIC generated by the same REMIC. The ability of
Holders of Residual Interest Securities to deduct net losses may be subject to
additional limitations under the Code, as to which such Holders should consult
their tax advisers.
Distributions. Distributions on a Residual Interest Security (whether at
their scheduled times or as a result of prepayments) will generally not result
in any additional taxable income or loss to a Holder of a Residual Interest
Security. If the amount of such payment exceeds a holder's adjusted basis in the
Residual Interest Security, however, the Holder will recognize gain (treated as
gain from the sale of the Residual Interest Security) to the extent of such
excess.
Sale or Exchange. A Holder of a Residual Interest Security will recognize
gain or loss on the sale or exchange of a Residual Interest Security equal to
the difference, if any, between the amount realized and such Holder's adjusted
basis in the Residual Interest Security at the time of such sale or exchange.
Except to the extent provided in regulations, which have not yet been issued,
any loss upon disposition of a Residual Interest Security
59
<PAGE>
will be disallowed if the selling Holder acquires any residual interest in a
REMIC or similar mortgage pool within six months before or after such
disposition.
Excess Inclusions. The portion of the REMIC taxable income of a Holder of
a Residual Interest Security consisting of 'excess inclusion' income may not be
offset by other deductions or losses, including net operating losses, on such
Holder's federal income tax return. Further, if the Holder of a Residual
Interest Security is an organization subject to the tax on unrelated business
income imposed by Code Section 511, such Holder's excess inclusion income will
be treated as unrelated business taxable income of such Holder. In addition,
under Treasury regulations yet to be issued, if a real estate investment trust,
a regulated investment company, a common trust fund, or certain cooperatives
were to own a Residual Interest Security, a portion of dividends (or other
distributions) paid by the real estate investment trust (or other entity) would
be treated as excess inclusion income. If a Residual Security is owned by a
foreign person, excess inclusion income is subject to tax at a rate of 30% which
may not be reduced by treaty, is not eligible for treatment as 'portfolio
interest' and is subject to certain additional limitations. See 'Tax Treatment
of Foreign Investors.'
The excess inclusion portion of a REMIC's income is generally equal to the
excess, if any, of REMIC taxable income for the quarterly period allocable to a
Residual Interest Security, over the daily accruals for such quarterly period of
(i) 120% of the long term applicable federal rate on the Startup Date multiplied
by (ii) the adjusted issue price of such Residual Interest Security at the
beginning of such quarterly period. The adjusted issue price of a Residual
Interest Security at the beginning of each calendar quarter will equal its issue
price (calculated in a manner analogous to the determination of the issue price
of a Regular Interest Security), increased by the aggregate of the daily
accruals for prior calendar quarters, and decreased (but not below zero) by the
amount of loss allocated to a Holder and the amount of distributions made on the
Residual Interest Security before the beginning of the quarter. The long-term
federal rate, which is announced monthly by the Treasury Department, is an
interest rate that is based on the average market yield of outstanding
marketable obligations of the United States government having remaining
maturities in excess of nine years.
Recently enacted provisions governing the relationship between excess
inclusions and the alternative minimum tax provide that (i) the alternative
minimum taxable income of a taxpayer is based on the taxpayer's regular taxable
income computed without regard to the rule that taxable income cannot be less
than the amount of excess inclusions, (ii) the alternative minimum taxable
income of a taxpayer for a taxable year cannot be less than the amount of excess
inclusions for that year, and (iii) the amount of any alternative minimum tax
net operating loss is computed without regard to any excess inclusions. While
these provisions are generally effective for tax years beginning after December
31, 1986, a taxpayer may elect to have these provisions apply only with respect
to tax years beginning after August 20, 1996.
Under the REMIC Regulations, in certain circumstances, transfers of
Residual Interest Securities may be disregarded. See '--Restrictions on
Ownership and Transfer of Residual Interest Securities' and '--Tax Treatment of
Foreign Investors' below.
Restrictions on Ownership and Transfer of Residual Interest Securities. As
a condition to qualification as a REMIC, reasonable arrangements must be made to
prevent the ownership of a REMIC residual interest by any 'Disqualified
Organization.' Disqualified Organizations include the United States, any State
or political subdivision thereof, any foreign government, any international
organization, or any agency or instrumentality of any of the foregoing, a rural
electric or telephone cooperative described in Section 1381(a)(2)(C) of the
Code, or any entity exempt from the tax imposed by Sections 1399 of the Code, if
such entity is not subject to tax on its unrelated business income. Accordingly,
the applicable Pooling and Servicing Agreement will prohibit Disqualified
Organizations from owning a Residual Interest Security. In addition, no transfer
of a Residual Interest Security will be permitted unless the proposed transferee
shall have furnished to the Trustee an affidavit representing and warranting
that it is neither a Disqualified Organization nor an agent or nominee acing on
behalf of a Disqualified Organization.
If a Residual Interest Security is transferred to a Disqualified
Organization after March 31, 1988 (in violation of the restrictions set forth
above), a substantial tax will be imposed on the transferor of such Residual
Interest Security at the time of the transfer. In addition, if a Disqualified
Organization holds an interest in a pass-through entity after March 31, 1988
(including, among others, a partnership, trust, real estate investment trust,
regulated investment company, or any person holding as nominee), that owns a
Residual Interest Security, the
60
<PAGE>
pass-through entity will be required to pay an annual tax on its allocable share
of the excess inclusion income of the REMIC.
Under the REMIC Regulations, if a Residual Interest Security is a
'noneconomic residual interest,' as described below, a transfer of a Residual
Interest Security to a United States person will be disregarded for all federal
tax purposes unless no significant purpose of the transfer was to impede the
assessment or collection of tax. A Residual Interest Security is a 'noneconomic
residual interest' unless, at the time of the transfer (i) the present value of
the expected future distributions on the Residual Interest Security at least
equals the product of the present value of the anticipated excess inclusions and
the highest rate of tax for the year in which the transfer occurs, and (ii) the
transferor reasonably expects that the transferee will receive distributions
from the REMIC at or after the time at which the taxes accrue on the anticipated
excess inclusions in an amount sufficient to satisfy the accrued taxes. If a
transfer of a Residual Interest Security is disregarded, the transferor would be
liable for any federal income tax imposed upon taxable income derived by the
transferee from the REMIC. The REMIC Regulations provide no guidance as to how
to determine if a significant purpose of a transfer is to impede the assessment
or collection of tax. A similar type of limitation exists with respect to
certain transfers of residual interests by foreign persons to United States
persons. See '--Tax Treatment of Foreign Investors.'
Mark to Market Rules. Prospective purchasers of a Residual Interest
Security should be aware that on December 28, 1993, the Internal Revenue Service
released temporary regulations (the 'Temporary Mark to Market Regulations')
relating to the requirement that a securities dealer mark-to-market securities
held for sale to customers. This mark-to-market requirement applies to all
securities of a dealer, except to the extent that the dealer has specifically
identified a security as held for investment. The Temporary Mark to Market
Regulations provide that for purposes of this mark-to-market requirement, a
'negative value' Residual Interest Security is not treated as a security and
thus may not be marked to market. In addition, a dealer is not required to
identify such Residual Interest Security as held for investment. In general, a
Residual Interest Security has negative value if, as of the date a taxpayer
acquires the Residual Interest Security, the present value of the tax
liabilities associated with holding the Residual Interest Security exceeds the
sum of (i) the present value of the expected future distributions on the
Residual Interest Security, and (ii) the present value of the anticipated tax
savings associated with holding the Residual Interest Security as the REMIC
generates losses. The amounts and present values of the anticipated tax
liabilities, expected future distributions and anticipated tax savings are all
to be determined using (i) the prepayment and reinvestment assumptions adopted
under Section 1272(a)(6), or that would have been adopted had the REMIC's
regular interests been issued with OID, (ii) any required or permitted clean up
calls, or required qualified liquidation provided for in the REMIC's
organizational documents and (iii) a discount rate equal to the 'applicable
Federal rate' (as specified in Section 1274(d)(1)) that would apply to a debt
instrument issued on the date of acquisition of the Residual Interest Security.
Furthermore, the Temporary Mark to Market Regulations provide the IRS with the
authority to treat any Residual Interest Security having substantially the same
economic effect as a 'negative value' residual interest as a 'negative value'
residual interest.
On January 3, 1995, the IRS released proposed regulations under Section 475
(the 'Proposed Mark-to-Market Regulations'). The Proposed Mark-to-Market
Regulations provide that any REMIC Residual Interest acquired after January 3,
1995 cannot be marked to market, regardless of the value of such REMIC residual
interest. The Temporary Mark-to-Market Regulations described above still apply
to any REMIC Residual Interest acquired on or prior to January 3, 1995. Thus,
holders of positive value REMIC Residual Interests acquired on or prior to
January 3, 1995 may continue to mark such residual interests to market for the
entire economic life of such interests.
ADMINISTRATIVE MATTERS
The REMIC's books must be maintained on a calendar year basis and the REMIC
must file an annual federal income tax return. The REMIC will also be subject to
the procedural and administrative rules of the Code applicable to partnerships,
including the determination of any adjustments to, among other things, items of
REMIC income, gain, loss, deduction, or credit, by the IRS in a unified
administrative proceeding.
61
<PAGE>
TAX STATUS AS A GRANTOR TRUST
General. As specified in the related Prospectus Supplement if a REMIC or
partnership election is not made, in the opinion of Federal Tax Counsel, the
Trust Fund relating to a Series of Securities will be classified for federal
income tax purposes as a grantor trust under Subpart E, Part 1 of Subchapter J
of the Code and not as an association taxable as a corporation (the Securities
of such Series, 'Pass-Through Securities'). In some Series there will be no
separation of the principal and interest payments on the Loans. In such
circumstances, a Holder will be considered to have purchased a pro rata
undivided interest in each of the Loans. In other cases ('Stripped Securities'),
sale of the Securities will produce a separation in the ownership of all or a
portion of the principal payments from all or a portion of the interest payments
on the Loans.
Each Holder must report on its federal income tax return its share of the
gross income derived from the Loans (not reduced by the amount payable as fees
to the Trustee and the Servicer and similar fees (collectively, the 'Servicing
Fees')), at the same time and in the same manner as such items would have been
reported under the Holder's tax accounting method had it held its interest in
the Loans directly, received directly its share of the amounts received with
respect to the Loans, and paid directly its share of the Servicing Fees. In the
case of Pass-Through Securities other than Stripped Securities, such income will
consist of a pro rata share of all of the income derived from all of the Loans
and, in the case of Stripped Securities, such income will consist of a pro rata
share of the income derived from each stripped bond or stripped coupon in which
the Holder owns an interest. The Holder of a Security will generally be entitled
to deduct such Servicing Fees under Section 162 or Section 212 of the Code to
the extent that such Servicing Fees represent 'reasonable' compensation for the
services rendered by the Trustee and the Servicer (or third parties that are
compensated for the performance of services). In the case of a noncorporate
Holder, however, Servicing Fees (to the extent not otherwise disallowed, e.g.,
because they exceed reasonable compensation) will be deductible in computing
such Holder's regular tax liability only to the extent that such fees, when
added to other miscellaneous itemized deductions, exceed 2% of adjusted gross
income and may not be deducible to any extent in computing such Holder's
alternative minimum tax liability. In addition, for taxable years beginning
after December 31, 1990, the amount of itemized deductions otherwise allowable
for the taxable year for an individual whose adjusted gross income exceeds the
applicable amount (which amount will be adjusted for inflation in taxable years
beginning after 1990) will be reduced by the lesser of (i) 3% of the excess of
adjusted gross income over the applicable amount or (ii) 80% of the amount of
itemized deductions otherwise allowable for such taxable year.
Discount or Premium on Pass-Through Securities. The Holder's purchase
price of a Pass-Through Security is to be allocated among the Loans in
proportion to their fair market values, determined as of the time of purchase of
the Securities. In the typical case, the Trustee (to the extent necessary to
fulfill its reporting obligations) will treat each Loan as having a fair market
value proportional to the share of the aggregate principal balances of all of
the Loans that it represents, since the Securities, unless otherwise specified
in the applicable Prospectus Supplement, will have a relatively uniform interest
rate and other common characteristics. To the extent that the portion of the
purchase price of a Pass-Through Security allocated to a Loan (other than to a
right to receive any accrued interest thereon and any undistributed principal
payments) is less than or greater than the portion of the principal balance of
the Loan allocable to the Security, the interest in the Loan allocable to the
Pass-Through Security will be deemed to have been acquired at a discount or
premium, respectively.
The treatment of any discount will depend on whether the discount
represents OID or market discount. In the case of a Loan with OID in excess of a
prescribed de minimis amount or a Stripped Security, a Holder of a Security will
be required to report as interest income in each taxable year its share of the
amount of OID that accrues during that year in the manner described above. OID
with respect to a Loan could arise, for example, by virtue of the financing of
points by the originator of the Loan, or by virtue of the charging of points by
the originator of the Loan in an amount greater than a statutory de minimis
exception, in circumstances under which the points are not currently deductible
pursuant to applicable Code provisions. Any market discount or premium on a Loan
will be includible in income, generally in the manner described above, except
that in the case of Pass-Through Securities, market discount is calculated with
respect to the Loans underlying the Security, rather than with respect to the
Security. A Holder that acquires an interest in a Loan originated after July 18,
1984 with more than a de minimis amount of market discount (generally, the
excess of the principal amount of the Loan over the purchaser's allocable
purchase price) will be required to include accrued market discount in income in
the manner set forth above. See '--Taxation of Debt Securities; Market Discount'
and '--Premium' above.
62
<PAGE>
In the case of market discount on a Pass-Through Security attributable to
Loans originated on or before July 18, 1984, the Holder generally will be
required to allocate the portion of such discount that is allocable to a Loan
among the principal payments on the Loan and to include the discount allocable
to each principal payment in ordinary income at the time such principal payment
is made. Such treatment would generally result in discount being included in
income at a slower rate than discount would be required to be included in income
using the method described in the preceding paragraph.
Stripped Securities. A Stripped Security may represent a right to receive
only a portion of the interest payments on the Loans, a right to receive only
principal payments on the Loans, or a right to receive certain payments of both
interest and principal. Certain Stripped Securities ('Ratio Strip Securities')
may represent a right to receive differing percentages of both the interest and
principal on each Loan. Pursuant to Section 1286 of the Code, the separation of
ownership of the right to receive some or all of the interest payments on an
obligation from ownership of the right to receive some or all of the principal
payments results in the creation of 'stripped bonds' with respect to principal
payments and 'stripped coupons' with respect to interest payments. Section 1286
of the Code applies the OID rules to stripped bonds and stripped coupons. For
purposes of computing original issue discount, a stripped bond or a stripped
coupon is treated as a debt instrument issued on the date that such stripped
interest is purchased with an issue price equal to its purchase price or, if
more than one stripped interest is purchased, the ratable share of the purchase
price allocable to such stripped interest.
Servicing Fees in excess of reasonable servicing fees ('excess servicing')
will be treated under the stripped bond rules. If the excess servicing fee is
less than 100 basis points (i.e. 1% interest on the Loan principal balance) or
the Securities are initially sold with a de minimis discount (assuming no
prepayment assumption is required), any non-de minimis discount arising from a
subsequent transfer of the Securities should be treated as market discount. The
IRS appears to require that reasonable servicing fees be calculated on a Loan by
Loan basis, which could result in some Loans being treated as having more than
100 basis points of interest stripped off.
The Code, OID Regulations and judicial decisions provide no direct guidance
as to how the interest and original issue discount rules are to apply to
Stripped Securities and other Pass-Through Securities. Under the method
described above for Pay-Through Securities (the 'Cash Flow Bond Method'), a
prepayment assumption is used and periodic recalculations are made which take
into account with respect to each accrual period the effect of prepayments
during such period. However, the 1986 Act does not, absent Treasury regulations,
appear specifically to cover instruments such as the Stripped Securities which
technically represent ownership interests in the underlying Loans, rather than
being debt instruments 'secured by' those Loans. Nevertheless, it is believed
that the Cash Flow Bond Method is a reasonable method of reporting income for
such Securities, and it is expected that OID will be reported on that basis
unless otherwise specified in the related Prospectus Supplement. In applying the
calculation to Pass-Through Securities, the Trustee will treat all payments to
be received by a Holder with respect to the underlying Loans as payments on a
single installment obligation. The IRS could, however, assert that original
issue discount must be calculated separately for each Loan underlying a
Security.
Under certain circumstances, if the Loans prepay at a rate faster than the
Prepayment Assumption, the use of the Cash Flow Bond Method may accelerate a
Holder's recognition of income. If, however, the Loans prepay at a rate slower
than the Prepayment Assumption, in some circumstances the use of this method may
decelerate a Holder's recognition of income.
Possible Alternative Characterizations. The characterizations of the
Stripped Securities described above are not the only possible interpretations of
the applicable Code provisions. Among other possibilities, the Internal Revenue
Service could contend that (i) in certain Series, each Security is composed of
an unstripped undivided ownership interest in Loans and an installment
obligation consisting of stripped principal payments; (ii) the Securities are
subject to the contingent payment provisions of the Proposed Regulations; or
(iii) each Stripped Security the payments on which consist primarily or solely
of a specified portion of the interest payments on Loans is composed of an
unstripped undivided ownership interest in Loans and an installment obligation
consisting of stripped interest payments.
Given the variety of alternatives for treatment of the Stripped Securities
and the different federal income tax consequences that result from each
alternative, potential purchasers are urged to consult their own tax advisers
regarding the proper treatment of the Securities for federal income tax
purposes.
63
<PAGE>
Character as Qualifying Loans. In the case of Stripped Securities there is
no specific legal authority existing regarding whether the character of the
Securities, for federal income tax purposes, will be the same as the Loans. The
IRS could take the position that the Loans' character is not carried over to the
Securities in such circumstances. To the extent the Trust Fund's assets are
qualifying assets, Pass-Through Securities will be, and, although the matter is
not free from doubt, Stripped Securities should be considered to represent 'real
estate assets' within the meaning of Section 856(c)(6)(B) of the Code, and
'loans secured by an interest in real property' within the meaning of Section
7701(a)(19)(C)(v) of the Code; and interest income attributable to the
Securities should be considered to represent 'interest on obligations secured by
mortgages on real property or on interests in real property' with the meaning of
Section 856(c)(3)(B) of the Code. Reserves or funds underlying the Securities
may cause a proportionate reduction in the above-described qualifying status
categories of Securities.
SALE OR EXCHANGE
Subject to the discussion below with respect to Trust Funds as to which a
partnership election is made, a Holder's tax basis in its Security is the price
such Holder pays for a Security, plus amounts of original issue or market
discount included in income and reduced by any payments received (other than
qualified stated interest payments) and any amortized premium. Gain or loss
recognized on a sale, exchange, or redemption of a Security, measured by the
difference between the amount realized and the Security's basis as so adjusted,
will generally be capital gain or loss, assuming that the Security is held as a
capital asset. In the case of a Security held by a bank, thrift, or similar
institution described in Section 582 of the Code, however, gain or loss realized
on the sale or exchange of a Regular Interest Security will be taxable as
ordinary income or loss. In addition, gain from the disposition of a Regular
Interest Security that might otherwise be capital gain will be treated as
ordinary income to the extent of the excess, if any, of (i) the amount that
would have been includible in the Holder's income if the yield on such Regular
Interest Security had equaled 110% of the applicable federal rate as of the
beginning of such Holder's holding period, over the amount of ordinary income
actually recognized by the Holder with respect to such Regular Interest
Security. For taxable years beginning after December 31, 1993, the maximum tax
rate on ordinary income for individual taxpayers is 39.6% and the maximum tax
rate on long-term capital gains reported after December 31, 1990 for such
taxpayers is 28%. The maximum tax rate on both ordinary income and long-term
capital gains of corporate taxpayers is 35%.
MISCELLANEOUS TAX ASPECTS
Backup Withholding. Subject to the discussion below with respect to Trust
Funds as to which a partnership election is made, a Holder, other than a Holder
of a Residual Interest Security, may, under certain circumstances, be subject to
'backup withholding' at a rate of 31% with respect to distributions or the
proceeds of a sale of certificates to or through brokers that represent interest
or original issue discount on the Securities. This withholding generally applies
if the Holder of a Security (i) fails to furnish the Trustee with its taxpayer
identification number ('TIN'); (ii) furnishes the Trustee an incorrect TIN;
(iii) fails to report properly interest, dividends or other 'reportable
payments' as defined in the Code; or (iv) under certain circumstances, fails to
provide the Trustee or such Holder's securities broker with a certified
statement, signed under penalty of perjury, that the TIN provided is its correct
number and that the Holder is not subject to backup withholding. Backup
withholding will not apply, however, with respect to certain payments made to
Holders, including payments to certain exempt recipients (such as exempt
organizations) and to certain Nonresidents (as defined below). Holders should
consult their tax advisers as to their qualification for exemption from backup
withholding and the procedure for obtaining the exemption.
The Trustee will report to the Holders and to the Servicer for each
calendar year the amount of any 'reportable payments' during such year and the
amount of tax withheld, if any, with respect to payments on the Securities.
TAX TREATMENT OF FOREIGN INVESTORS
Subject to the discussion below with respect to Trust Funds as to which a
partnership election is made, under the Code, unless interest (including OID)
paid on a Security (other than a Residual Interest Security) is considered to be
'effectively connected' with a trade or business conducted in the United States
by a Holder
64
<PAGE>
who is not a United States person, as defined below, ('Nonresidents'), such
interest will normally qualify as portfolio interest (except where (i) the
recipient is a holder, directly or by attribution, of 10% or more of the capital
or profits interest in the issuer, or (ii) the recipient is a controlled foreign
corporation to which the issuer is a related person) and will be exempt from
federal income tax. Upon receipt of appropriate ownership statements, the issuer
normally will be relieved of obligations to withhold tax from such interest
payments. These provisions supersede the generally applicable provisions of
United States law that would otherwise require the issuer to withhold at a 30%
rate (unless such rate were reduced or eliminated by an applicable tax treaty)
on, among other things, interest and other fixed or determinable, annual or
periodic income paid to Nonresidents. Holders of Pass-Through Securities and
Stripped Securities, including Ratio Strip Securities, however, may be subject
to withholding to the extent that the Loans were originated on or before July
18, 1984. For these purposes, the term 'United States person' means (i) a
citizen or resident of the United States, (ii) a corporation, partnership or
other entity created or organized in or under the laws of the United States or
any political subdivision thereof, (iii) an estate whose income is includable in
gross income for United States federal income taxation regardless of its source,
and (iv) a trust for which one or more United States fiduciaries have the
authority to control all substantial decisions and for which a court of the
United States can exercise primary supervision over the trust's administration.
For years beginning before January 1, 1997, the term 'United States person'
shall include a trust whose income in includible in gross income for United
States federal income taxation regardless of source, in lieu of trusts described
in (iv) above, unless the trust elects to have its United States status
determined under the criteria set forth in (iv) above for tax year ending after
August 20, 1996. 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 by which a
holder of a Security could claim the exemption from federal income and
withholding tax.
Interest and OID of Holders who are Nonresidents are not subject to
withholding if they are effectively connected with a United States business
conducted by the Holder. They will, however, generally be subject to the regular
United States income tax.
Payments to Holders of Residual Interest Securities who are Nonresidents
will generally be treated as interest for purposes of the 30% (or lower treaty
rate) United States withholding tax. Nonresidents should assume that such income
does not qualify for exemption from United States withholding tax as 'portfolio
interest.' It is clear that, to the extent that a payment represents a portion
of REMIC taxable income that constitutes excess inclusion income, a Holder of a
Residual Interest Security will not be entitled to an exemption from or
reduction of the 30% (or lower treaty rate) withholding tax rule. If the
payments are subject to United States withholding tax, they generally will be
taken into account for withholding tax purposes only when paid or distributed
(or when the Residual Interest Security is disposed of). The Treasury has
statutory authority, however, to promulgate regulations which would require such
amounts to be taken into account at an earlier time in order to prevent the
avoidance of tax. Such regulations could, for example, require withholding prior
to the distribution of cash in the case of Residual Interest Securities that do
not have significant value. Under the REMIC Regulations, if a Residual Interest
Security has tax avoidance potential, a transfer of a Residual Interest Security
to a Nonresident will be disregarded for all federal tax purposes. A Residual
Interest Security has tax avoidance potential unless, at the time of the
transfer the transferor reasonably expects that the REMIC will distribute to the
transferee residual interest holder amounts that will equal at least 30% of each
excess inclusion, and that such amounts will be distributed at or after the time
at which the excess inclusions accrue and not later than the calendar year
following the calendar year of accrual. If a Nonresident transfers a Residual
Interest Security to a United States person, and if the transfer has the effect
of allowing the transferor to avoid tax on accrued excess inclusions, then the
transfer is disregarded and the transferor continues to be treated as the owner
of the Residual Interest Security for purposes of the withholding tax provisions
of the Code. See '--Excess Inclusions.'
TAX CHARACTERIZATION OF THE TRUST AS A PARTNERSHIP
Federal Tax Counsel will deliver its opinion that a Trust Fund for which a
partnership election is made will not be an association (or publicly traded
partnership) taxable as a corporation for federal income tax purposes. This
opinion will be based on the assumption that the terms of the Trust Agreement
and related documents will be complied with, and on counsel's conclusions that
(1) the Trust Fund will not have certain characteristics necessary for a
business trust to be classified as an association taxable as a corporation and
(2) the nature of the
65
<PAGE>
income of the Trust Fund will exempt it from the rule that certain publicly
traded partnerships are taxable as corporations or the issuance of the
Certificates has been structured as a private placement under an IRS safe
harbor, so that the Trust Fund will not be characterized as a publicly traded
partnership taxable as a corporation.
If the Trust Fund were taxable as a corporation for federal income tax
purposes, the Trust Fund would be subject to corporate income tax on its taxable
income. The Trust Fund's taxable income would include all its income, possibly
reduced by its interest expense on the Notes. Any such corporate income tax
could materially reduce cash available to make payments on the Notes and
distributions on the Certificates, and Certificateholders could be liable for
any such tax that is unpaid by the Trust Fund.
TAX CONSEQUENCES TO HOLDERS OF THE NOTES
Treatment of the Notes as Indebtedness. The Trust Fund will agree, and the
Noteholders will agree by their purchase of Notes, to treat the Notes as debt
for federal income tax purposes. Except as otherwise provided in the related
Prospectus Supplement, Federal Tax Counsel will advise the Depositor that the
Notes will be classified as debt for federal income tax purposes. The discussion
below assumes this characterization of the Notes is correct.
OID, Indexed Securities, etc. The discussion below assumes that all
payments on the Notes are denominated in U.S. dollars, and that the Notes are
not Indexed Securities or Strip Notes. Moreover, the discussion assumes that the
interest formula for the Notes meets the requirements for 'qualified stated
interest' under the OID regulations, and that any OID on the Notes (i.e., any
excess of the principal amount of the Notes over their issue price) does not
exceed a de minimis amount (i.e., 0.25% of their principal amount multiplied by
the number of full years included in their term), all within the meaning of the
OID regulations. If these conditions are not satisfied with respect to any given
Series of Notes, additional tax considerations with respect to such Notes will
be disclosed in the applicable Prospectus Supplement.
Interest Income on the Notes. Based on the above assumptions, except as
discussed in the following paragraph, the Notes will not be considered issued
with OID. The stated interest thereon will be taxable to a Noteholder as
ordinary interest income when received or accrued in accordance with such
Noteholder's method of tax accounting. Under the OID regulations, a Holder of a
Note issued with a de minimis amount of OID must include such OID in income, on
a pro rata basis, as principal payments are made on the Note. It is believed
that any prepayment premium paid as a result of a mandatory redemption will be
taxable as contingent interest when it becomes fixed and unconditionally
payable. A purchaser who buys a Note for more or less than its principal amount
will generally be subject, respectively, to the premium amortization or market
discount rules of the Code.
A holder of a Note that has a fixed maturity date of not more than one year
from the issue date of such Note (a 'Short-Term Note') may be subject to special
rules. An accrual basis Holder of a Short-Term Note (and certain cash method
Holders, including regulated investment companies, as set forth in Section 1281
of the Code) generally would be required to report interest income as interest
accrues on a straight-line basis over the term of each interest period. Other
cash basis Holders of a Short-Term Note would, in general, be required to report
interest income as interest is paid (or, if earlier, upon the taxable
disposition of the Short-Term Note). However, a cash basis Holder of a
Short-Term Note reporting interest income as it is paid may be required to defer
a portion of any interest expense otherwise deductible on indebtedness incurred
to purchase or carry the Short-Term Note until the taxable disposition of the
Short-Term Note. A cash basis taxpayer may elect under Section 1281 of the Code
to accrue interest income on all nongovernment debt obligations with a term of
one year or less, in which case the taxpayer would include interest on the
Short-Term Note in income as it accrues, but would not be subject to the
interest expense deferral rule referred to in the preceding sentence. Certain
special rules apply if a Short-Term Note is purchased for more or less than its
principal amount.
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 market discount, acquisition discount, OID
and gain previously included by such Noteholder in income with 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. Any such gain or loss will be capital gain or loss if
the Note was held as a capital asset, except for gain representing
66
<PAGE>
accrued interest and accrued market discount not previously included in income.
Capital losses generally may be used only to offset capital gains.
Foreign Holders. Interest payments made (or accrued) to a Noteholder who
is a Holder other than a United States Person, as defined below, (a 'foreign
person') generally will be considered 'portfolio interest', and generally will
not be subject to United States federal income tax and withholding tax, if the
interest is not effectively connected with the conduct of a trade or business
within the United States by the foreign person and the foreign person (i) is not
actually or constructively a '10 percent shareholder' of the Trust or the Seller
(including a Holder of 10% of the outstanding Certificates) or a 'controlled
foreign corporation' with respect to which the Trust or the Seller is a 'related
person' within the meaning of the Code and (ii) provides the Owner Trustee or
other person who is otherwise required to withhold U.S. tax with respect to the
Notes with an appropriate statement (on Form W-8 or a similar form), 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 a Note
is held through a securities clearing organization or certain other financial
institutions, the organization or institution may provide the relevant signed
statement to the withholding agent; in that case, however, 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 percent, unless reduced or eliminated pursuant to an applicable tax treaty.
For these purposes, the term 'United States person' means (i) a citizen or
resident of the United States, (ii) a corporation, partnership or other entity
created or organized in or under the laws of the United States or any political
subdivision thereof, (iii) an estate whose income is includable in gross income
for United States federal income taxation regardless of its source, and (iv) a
trust for which one or more United States fiduciaries have the authority to
control all substantial decisions and for which a court of the United States can
exercise primary supervision over the trust's administration. For years
beginning before January 1, 1997, the term 'United States person' shall include
a trust whose income is includible in gross income for United States federal
income taxation regardless of source, in lieu of trusts described in (iv) above,
unless the trust elects to have its United States status determined under the
criteria set forth in (iv) above for tax years ending after August 20, 1996.
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 by which a holder of a Note
could claim the exemption from federal income and withholding tax.
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) such 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 person is not present in the United States for 183 days or
more in the taxable year.
Backup Withholding. Each Holder of a Note (other than an exempt Holder
such as a corporation, tax-exempt organization, qualified pension and
profit-sharing trust, individual retirement account or nonresident alien who
provides certification as to status as a nonresident) 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 Fund will be required to
withhold 31 percent 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.
Possible Alternative Treatments of the Notes. If, contrary to the opinion
of Federal Tax Counsel, the IRS successfully asserted that one or more of the
Notes did not represent debt for federal income tax purposes, the Notes might be
treated as equity interests in the Trust Fund. If so treated, the Trust Fund
might be taxable as a corporation with the adverse consequences described above
(and the taxable corporation would not be able to reduce its taxable income by
deductions for interest expense on Notes recharacterized as equity).
Alternatively, and most likely in the view of Federal Tax Counsel, the Trust
Fund might be treated as a publicly traded partnership that would not be taxable
as a corporation because it would meet certain qualifying income tests.
Nonetheless, treatment of the Notes as equity interests in such a publicly
traded partnership could have adverse tax consequences to certain Holders. For
example, income to certain tax-exempt entities (including pension funds) would
be 'unrelated business taxable income', income to foreign holders generally
would be subject to U.S. tax and U.S. tax return filing and withholding
requirements, and individual Holders might be subject to certain limitations on
their ability to deduct their share of the Trust Fund's expenses.
67
<PAGE>
TAX CONSEQUENCES TO HOLDERS OF THE CERTIFICATES
Treatment of the Trust Fund as a Partnership. The Trust Fund and the
Depositor will agree, and the Certificateholders will agree by their purchase of
Certificates, to treat the Trust Fund as a partnership for purposes of federal
and state income tax, franchise tax and any other tax measured in whole or in
part by income, with the assets of the partnership being the assets held by the
Trust Fund, the partners of the partnership being the Certificateholders, and
the Notes being debt of the partnership. However, the proper characterization of
the arrangement involving the Trust Fund, the Certificates, the Notes, the Trust
Fund and the Servicer is not clear because there is no authority on transactions
closely comparable to that contemplated herein.
A variety of alternative characterizations are possible. For example,
because the Certificates have certain features characteristic of debt, the
Certificates might be considered debt of the Trust Fund. Any such
characterization would not result in materially adverse tax consequences to
Certificateholders as compared to the consequences from treatment of the
Certificates as equity in a partnership, described below. The following
discussion assumes that the Certificates represent equity interests in a
partnership.
Indexed Securities, etc. The following discussion assumes that all
payments on the Certificates are denominated in U.S. dollars, none of the
Certificates are Indexed Securities or Strip Certificates, and that a Series of
Securities includes a single Class of Certificates. If these conditions are not
satisfied with respect to any given Series of Certificates, additional tax
considerations with respect to such Certificates will be disclosed in the
applicable Prospectus Supplement.
Partnership Taxation. As a partnership, the Trust Fund will not be subject
to federal income tax. Rather, 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 Fund. The Trust Fund's income will
consist primarily of interest and finance charges earned on the Loans (including
appropriate adjustments for market discount, OID and bond premium) and any gain
upon collection or disposition of Loans. The Trust Fund'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 Loans.
The tax items of a partnership are allocable to the partners in accordance
with the Code, Treasury regulations and the partnership agreement (here, the
Trust Agreement and related documents). The Trust Agreement will provide, in
general, that the Certificateholders will be allocated taxable income of the
Trust Fund for each month equal to the sum of (i) the interest that accrues on
the Certificates in accordance with their terms for such month, including
interest accruing at the Pass-Through Rate for such month and interest on
amounts previously due on the Certificates but not yet distributed; (ii) any
Trust Fund income attributable to discount on the Loans that corresponds to any
excess of the principal amount of the Certificates over their initial issue
price; (iii) prepayment premium payable to the Certificateholders for such
month; and (iv) any other amounts of income payable to the Certificateholders
for such month. Such allocation will be reduced by any amortization by the Trust
Fund of premium on Loans that corresponds to any excess of the issue price of
Certificates over their principal amount. All remaining taxable income of the
Trust Fund will be allocated to the Depositor. Based on the economic arrangement
of the parties, this approach for allocating Trust Fund income should be
permissible 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, even under the foregoing method of allocation,
Certificateholders may be allocated income equal to the entire Pass-Through Rate
plus the other items described above even though the Trust Fund 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 and Certificateholders may become liable for taxes on Trust
Fund income even if they have not received cash from the Trust Fund to pay such
taxes. In addition, because tax allocations and tax reporting will be done on a
uniform basis for all Certificateholders 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 Fund.
All of the taxable income allocated to a Certificateholder that is a
pension, profit sharing or employee benefit plan or other tax-exempt entity
(including an individual retirement account) will constitute 'unrelated business
taxable income' generally taxable to such a Holder under the Code.
68
<PAGE>
An individual taxpayer's share of expenses of the Trust Fund (including
fees to the Servicer but not interest expense) would be miscellaneous itemized
deductions. Such deductions might be disallowed to the individual in whole or in
part 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 Fund.
The Trust Fund 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 separately for each Loan, the Trust Fund
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 Loans were not issued with
OID and, therefore, the Trust should not have OID income. However, the purchase
price paid by the Trust Fund for the Loans may be greater or less than the
remaining principal balance of the Loans at the time of purchase. If so, the
Loan will have been acquired at a premium or discount, as the case may be. (As
indicated above, the Trust Fund will make this calculation on an aggregate
basis, but might be required to recompute it on a Loan by Loan basis.)
If the Trust Fund acquires the Loans at a market discount or premium, the
Trust Fund will elect to include any such discount in income currently as it
accrues over the life of the Loans or to offset any such premium against
interest income on the Loans. As indicated above, a portion of such market
discount income or premium deduction may be allocated to Certificateholders.
Section 708 Termination. Under Section 708 of the Code, the Trust Fund
will be deemed to terminate for federal income tax purposes if 50% or more of
the capital and profits interests in the Trust Fund are sold or exchanged within
a 12-month period. If such a termination occurs, the Trust Fund will be
considered to distribute its assets to the partners, who would then be treated
as recontributing those assets to the Trust Fund as a new partnership. The Trust
Fund will not comply with certain technical requirements that might apply when
such a constructive termination occurs. As a result, the Trust Fund may be
subject to certain tax penalties and may incur additional expenses if it is
required to comply with those requirements. Furthermore, the Trust Fund 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 Certificates in an amount equal to the difference
between the amount realized and the seller's tax basis in the Certificates sold.
A Certificateholder's tax basis in a Certificate will generally equal the
Holder's cost increased by the Holder's share of Trust Fund income (includible
in income) and decreased by any distributions received with respect to such
Certificate. In addition, both the tax basis in the Certificates 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 Fund. 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 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 Loans would generally be treated as
ordinary income to the Holder and would give rise to special tax reporting
requirements. The Trust Fund does not expect to have any other assets that would
give rise to such special reporting requirements. Thus, to avoid those special
reporting requirements, the Trust Fund will elect to include market discount in
income as it accrues.
If a Certificateholder is required to recognize an aggregate amount of
income (not including income attributable to disallowed 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 Transferors and Transferees. In general, the Trust
Fund'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 its tax liability and
tax basis) attributable to periods before the actual transaction.
69
<PAGE>
The use of such a monthly convention may not be permitted by existing
regulations. If a monthly convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or losses
of the Trust Fund might be reallocated among the Certificateholders. The Trust
Fund's method of allocation between transferors and transferees may be revised
to conform to a method permitted by future regulations.
Section 754 Election. In the event that a Certificateholder sells its
Certificates at a profit (loss), the purchasing Certificateholder will have a
higher (lower) basis in the Certificates than the selling Certificateholder had.
The tax basis of the Trust Fund's assets will not be adjusted to reflect that
higher (or lower) basis unless the Trust Fund were to file 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 Fund will not make such
election. As a result, Certificateholders might be allocated a greater or lesser
amount of Trust Fund income than would be appropriate based on their own
purchase price for Certificates.
Administrative Matters. The Owner Trustee is required to keep or have kept
complete and accurate books of the Trust Fund. Such books will be maintained for
financial reporting and tax purposes on an accrual basis and the fiscal year of
the Trust Fund will be the calendar year. The Trustee will file a partnership
information return (IRS Form 1065) with the IRS for each taxable year of the
Trust Fund and will report each Certificateholder's allocable share of items of
Trust Fund income and expense to Holders and the IRS on Schedule K-1. The Trust
Fund will provide the Schedule K-1 information to nominees that fail to provide
the Trust Fund 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 return filed by the Trust Fund 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 at any time during a calendar year is required to furnish the Trust Fund
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 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 on
Certificates that were held, bought or sold 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 Fund information
as to themselves and their ownership of Certificates. A clearing agency
registered under Section 17A of the Exchange Act is not required to furnish any
such information statement to the Trust Fund. The information referred to above
for any calendar year must be furnished to the Trust Fund on or before the
following January 31. Nominees, brokers and financial institutions that fail to
provide the Trust Fund with the information described above may be subject to
penalties.
The Depositor will be designated as the tax matters partner in the related
Trust Agreement and, as such, 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 Fund by the appropriate taxing authorities
could result in an adjustment of the returns of the Certificateholders, and,
under certain circumstances, a Certificateholder may be precluded from
separately litigating a proposed adjustment to the items of the Trust Fund. 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 Fund.
Tax Consequences to Foreign Certificateholders. It is not clear whether
the Trust Fund would be considered to be engaged in a trade or business in the
United States for purposes of federal withholding taxes with respect to foreign
persons because there is no clear authority dealing with that issue under facts
substantially similar to those described herein. Although it is not expected
that the Trust Fund would be engaged in a trade or business in the United States
for such purposes, the Trust Fund will withhold as if it were so engaged in
order to protect the Trust Fund from possible adverse consequences of a failure
to withhold. The Trust Fund expects to withhold on the portion of its taxable
income that is allocable to a Certificateholder which is a foreign person
70
<PAGE>
pursuant to Section 1446 of the Code, as if such income were effectively
connected to a U.S. trade or business, at a rate of 35% for Holders which are
foreign persons that are taxable as corporations and 39.6% for all other Holders
which are foreign persons. Subsequent adoption of Treasury regulations or the
issuance of other administrative pronouncements may require the Trust Fund to
change its withholding procedures. In determining a Holder's withholding status,
the Trust Fund may rely on IRS Form W-8, IRS Form W-9 or the Holder's
certification of nonforeign status signed under penalties of perjury.
Each Certificateholder which is a foreign person might be required to file
a U.S. individual or corporate income tax return (including, in the case of a
corporation, the branch profits tax) on its share of the Trust Fund's income.
Each Certificateholder which is a foreign person must obtain a taxpayer
identification number from the IRS and submit that number to the Trust Fund on
Form W-8 in order to assure appropriate crediting of the taxes withheld. A
Certificateholder which is a foreign person generally would be entitled to file
with the IRS a claim for refund with respect to taxes withheld by the Trust Fund
taking the position that no taxes were due because the Trust Fund was not
engaged in a U.S. trade or business. However, interest payments made (or
accrued) to a Certificateholder who is a foreign person generally will be
considered guaranteed payments to the extent such payments are determined
without regard to the income of the Trust Fund. If these interest payments are
properly characterized as guaranteed payments, then the interest will not be
considered 'portfolio interest.' As a result, Certificateholders which are
foreign persons will be subject to United States federal income tax and
withholding tax at a rate of 30%, unless reduced or eliminated pursuant to an
applicable treaty. In such case, a Certificateholder which is a foreign person
would only be entitled to claim a refund for that portion of the taxes in excess
of the taxes that should be withheld with respect to the guaranteed payments.
Backup Withholding. Distributions made on the Certificates and proceeds
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.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described in 'Certain
Federal Income Tax Considerations,' potential investors should consider the
state and local income tax consequences of the acquisition, ownership, and
disposition of the Securities. State and local income tax law may differ
substantially from the corresponding federal law, and this discussion does not
purport to describe any aspect of the income tax laws of any state or locality.
Therefore, potential investors should consult their own tax advisors with
respect to the various state and local tax consequences of an investment in the
Securities.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ('ERISA')
and the Code impose certain restrictions on employee benefit plans subject to
ERISA and on plans and other arrangements subject to Section 4975 of the Code
and on persons who are parties in interest or disqualified persons ('parties in
interest') with respect to such plans or arrangements. Certain employee benefit
plans, such as governmental plans and church plans (if no election has been made
under Section 410(d) of the Code), are not subject to the restrictions of ERISA,
and assets of such plans may be invested in the Securities without regard to the
ERISA considerations described below, subject to other applicable federal and
state law. However, any such governmental or church plan which is qualified
under Section 401(a) of the Code and exempt from taxation under Section 501(a)
of the Code is subject to the prohibited transaction rules set forth in Section
503 of the Code.
A fiduciary of an employee benefit plan subject to Title I of ERISA should
consider the fiduciary standards under ERISA in the context of the plan's
particular circumstances before authorizing an investment of a portion of such
plan's assets in the Securities. Accordingly, among other factors, such
fiduciary should consider (i) whether the investment is for the exclusive
benefit of plan participants and their beneficiaries; (ii) whether the
investment satisfies the diversification requirements of Section 404 of ERISA;
(iii) whether the investment is in accordance with the documents and instruments
governing the plan and (iv) whether the investment is prudent, considering the
nature of the investment. Fiduciaries of such plans also should consider ERISA's
prohibition on improper delegation of control over, or responsibility for, plan
assets.
71
<PAGE>
In addition, fiduciaries of employee benefit plans subject to Title I of
ERISA, as well as certain plans or other retirement arrangements not subject to
ERISA but which are subject to Section 4975 of the Code (such as individual
retirement accounts and Keogh plans covering only a sole proprietor or partners)
or any entity, including an insurance company general account whose underlying
assets include plan assets by reason of a plan or account investing in such
entity, (collectively, 'Plans(s)'), should consult with their legal counsel to
determine whether an investment in the Securities will cause the assets of the
Trust Fund to be considered plan assets pursuant to the plan asset regulations
set forth at 29 CFR 2510.3-101 (the 'Regulation'), thereby subjecting the Plan
to the prohibited transaction rules with respect to the Trust Fund and the
Trustee, or any entities providing services with respect to the operation of the
Trust, to the fiduciary investment standards of ERISA, or cause the excise tax
provisions of Section 4975 of the Code to apply to the Trust Fund, unless a
statutory or regulatory exception or an administrative exemption granted by the
Department of Labor ('DOL') applies to the purchase, sale, transfer or holding
of the Securities.
The Regulation contains rules for determining what constitutes the assets
of a Plan. The Regulation provides that, as a general rule, the underlying
assets and properties of corporations, partnerships, trusts and certain other
entities in which a Plan makes an investment in an 'equity interest' will be
deemed for purposes of ERISA to be assets of the Plan unless certain exceptions
apply.
Under the terms of the Regulation, the Trust Fund may be deemed to hold
plan assets by reason of a Plan's investment in a Security; such plan assets
would include an undivided interest in the Primary Assets and any other assets
held by the Trust Fund. In such an event, persons providing services with
respect to the operation of the Trust Fund may be parties in interest, subject
to the fiduciary responsibility provisions of Title I of ERISA, including the
prohibited transaction provisions of Section 406 of ERISA and of Section 4975 of
the Code, with respect to transactions involving such assets unless such
transactions are subject to a statutory or regulatory exception or an
administrative exemption.
One such exception applies if the interest described is treated as
indebtedness under applicable local law and which has no substantial equity
features. Generally, a profits interest in a partnership, an undivided ownership
interest in property and a beneficial ownership interest in a trust are deemed
to be 'equity interests' under the final regulation. If Notes of a particular
Series were deemed to be indebtedness under applicable local law without any
substantial equity features, an investing Plan's assets would include such
Notes, but not, by reason of such purchase, the underlying assets of the Trust
Fund. However, without regard to whether the Notes are treated as an equity
interest for such purposes, the purchase, holding or transfer of Notes by or on
behalf of a Plan could be considered a prohibited transaction if the Depositor
or the Trustee or any of their respective affiliates is, or becomes, a party in
interest or disqualified person with respect to such Plan.
Another such exception applies if the class of equity interests in question
is: (i) 'widely held' (held by 100 or more investors who are independent of the
Depositor and each other); (ii) freely transferable; and (iii) sold as part of
an offering pursuant to (A) an effective registration statement under the
Securities Act of 1933, and then subsequently registered under the Securities
Exchange Act of 1934 or (B) an effective registration statement under Section
12(b) or 12(g) of the Securities Exchange Act of 1934 ('Publicly Offered
Securities'). In addition, the regulation provides that if at all times more
than 75% of the value of all classes of equity interests in the Depositor or the
Trust Fund are held by investors other than benefit plan investors (which is
defined as including both Plans and government plans), the investing Plan's
assets will not include any of the underlying assets of the Depositor or the
Trust Fund.
An additional exemption may also be available to the purchase, holding and
transfer of the Securities. The DOL granted to Bear, Stearns & Co. Inc., an
administrative exemption, Prohibited Transaction Exemption 90-30 (Application
No. D-8207, 55 Fed. Reg. 21461) (1990) (the 'Exemption'), from certain of the
prohibited transaction rules of ERISA with respect to the initial purchase, the
holding and the subsequent resale by Plans of securities representing interests
in asset-backed pass-through trusts that consist of certain receivables, loans
and other obligations that meet the conditions and requirements of the
Exemption, wherever Bear, Stearns & Co. Inc. or its affiliate is the sole
underwriter, manager or co-manager of an underwriting syndicate or is the
selling or placement agent. The obligations covered by the Exemption include
obligations such as the Primary Assets (other than Private Securities which are
not insured or guaranteed by the United States or an agency or instrumentality
thereof, or Home Improvement Contracts that are unsecured). The Exemption will
apply to the acquisition,
72
<PAGE>
holding and transfer of the Securities by a Plan, provided that certain
conditions (certain of which are described below) are met.
Among the conditions which must be satisfied for the Exemption to apply are
the following:
(i) The acquisition of the Securities by a Plan is on terms (including
the price for the Securities) that are at least as favorable to the Plan as
they would be in an arm's-length transaction with an unrelated party;
(ii) The rights and interests evidenced by the Securities acquired by
the Plan are not subordinated to the rights and interests evidenced by
other securities of the trust;
(iii) The Securities acquired by the Plan have received a rating at
the time of such acquisition that is in one of the three highest generic
rating categories from either Standard & Poor's Ratings Group ('Standard &
Poor's'), Moody's Investors Service, Inc. ('Moody's'), Duff & Phelps Inc.
('D&P') or Fitch Investors Service, Inc. ('Fitch');
(iv) The sum of all payments made to the underwriter in connection
with the distribution of the Securities represents not more than reasonable
compensation for underwriting the Securities. The sum of all payments made
to and retained by the seller pursuant to the sale of the obligations to
the trust represents not more than the fair market value of such
obligations. The sum of all payments made to and retained by the servicer
represents not more than reasonable compensation for the servicer's
services under the related servicing agreement and reimbursement of the
servicer's reasonable expenses in connection therewith;
(v) The Trustee must not be an affiliate of any other member of the
Restricted Group (as defined below); and
(vi) The Plan investing in the Securities is an 'accredited investor'
as defined in Rule 501(a)(1) of Regulation D of the Securities and Exchange
Commission under the Securities Act of 1933. The Depositor assumes that
only Plans which are accredited investors under the federal securities laws
will be permitted to purchase the Securities.
The trust also must meet the following requirements:
(i) the corpus of the trust must consist solely of assets of the type
which have been included in other investment pools;
(ii) securities in such other investment pools must have been rated in
one of the three highest generic rating categories of Standard & Poor's,
Moody's, D&P or Fitch for at least one year prior to the Plan's acquisition
of securities; and
(iii) securities evidencing interests in such other investment pools
must have been purchased by investors other than Plans for at least one
year prior to any Plan's acquisition of Securities.
Moreover, the Exemption provides relief from certain self dealing/conflict
of interest prohibited transactions that may occur when the Plan fiduciary
causes a Plan to acquire securities in a trust in which the fiduciary (or its
affiliate) is an obligor on the receivables held in the trust provided that,
among other requirements: (i) in the case of an acquisition in connection with
the initial issuance of Securities, at least fifty (50) percent of each Class of
Securities in which Plans have invested is acquired by persons independent of
the Restricted Group and at least fifty (50) percent of the aggregate interest
in the trust is acquired by persons independent of the Restricted Group; (ii)
such fiduciary (or its affiliate) is an obligor with respect to five (5) percent
or less of the fair market value of the obligations contained in the trust;
(iii) the Plan's investment in Securities does not exceed twenty-five (25)
percent of all of the Securities outstanding after the acquisition; and (iv) no
more than twenty-five (25) percent of the assets of the Plan are invested in
securities representing an interest in one or more trusts containing assets sold
or serviced by the same entity. The Exemption does not apply to Plans sponsored
by the Depositor, the underwriters of the Securities, the Trustee, the Servicer,
any obligor with respect to obligations included in a Trust Fund constituting
more than five (5) percent of the aggregate unamortized principal balance of the
assets in a Trust Fund, or any affiliate of such parties (the 'Restricted
Group').
In the event that the Exemption is not applicable, some other prohibited
transaction class exemption issued by the DOL, including PTCE 95-60 (relating to
insurance company general accounts), PTCE 91-38 (relating to
73
<PAGE>
bank collective funds), PTCE 90-1 (relating to insurance company pooled separate
accounts) and PTCE 84-14 (relating to investments by qualified plan asset
managers) may apply, depending on the circumstances.
Prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA and the Code, the potential application of the
Exemption to the purchase and holding of the Securities and the potential
consequences to their specific circumstances, prior to making an investment in
the Securities. Moreover, each Plan fiduciary should determine whether under the
general fiduciary standards of investment procedure and diversification an
investment in the Securities is appropriate for the Plan, taking into account
the overall investment policy of the Plan and the composition of the Plan's
investment portfolio.
LEGAL INVESTMENT
Unless otherwise specified in the related Prospectus Supplement, the
Securities will not constitute 'mortgage-related securities' within the meaning
of SMMEA. Accordingly, investors whose investment authority is subject to legal
restrictions should consult their own legal advisors to determine whether and to
what extent the Securities constitute legal investments for them.
PLAN OF DISTRIBUTION
The Depositor may offer each Series of Securities through Bear, Stearns &
Co. Inc. ('Bear Stearns') or one or more other firms that may be designated at
the time of each offering of such Securities. The participation of Bear Stearns
in any offering will comply with Schedule E to the By-Laws of the National
Association of Securities Dealers, Inc. The Prospectus Supplement relating to
each Series of Securities will set forth the specific terms of the offering of
such Series of Securities and of each Class within such Series, the names of the
underwriters, the purchase price of the Securities, the proceeds to the
Depositor from such sale, any securities exchange on which the Securities may be
listed, and, if applicable, the initial public offering prices, the discounts
and commissions to the underwriters and any discounts and concessions allowed or
reallowed to certain dealers. The place and time of delivery of each Series of
Securities will also be set forth in the Prospectus Supplement relating to such
Series. Bear Stearns is an affiliate of the Depositor.
LEGAL MATTERS
Unless otherwise specified in the related Prospectus Supplement, certain
legal matters in connection with the Securities will be passed upon for the
Depositor by Stroock & Stroock & Lavan, New York, New York.
74
<PAGE>
GLOSSARY OF TERMS
The following are abbreviated definitions of certain capitalized terms used
in this Prospectus. Unless otherwise provided in a 'Supplemental Glossary' in
the Prospectus Supplement for a Series, such definitions shall apply to
capitalized terms used in such Prospectus Supplement. The definitions may vary
from those in the related Agreement for a Series and the related Agreement for a
Series generally provides a more complete definition of certain of the terms.
Reference should be made to the related Agreement for a Series for a more
compete definition of such terms.
'Accrual Termination Date' means, with respect to a Class of Compound
Interest Securities, the Distribution Date specified in the related Prospectus
Supplement.
'Advance' means cash advanced by the Servicer in respect of delinquent
payments of principal of and interest on a Loan, and for any other purposes
specified in the related Prospectus Supplement.
'Agreement' means, with respect to a Series of Certificates, the Pooling
and Servicing Agreement or Trust Agreement, and, with respect to a Series of
Notes, the Indenture and the Servicing Agreement, as the context requires.
'Appraised Value' means, with respect to property securing a Loan, the
lesser of the appraised value determined in an appraisal obtained at origination
of the Loan or sales price of such property at such time.
'Asset Group' means, with respect to the Primary Assets and other assets
comprising the Trust Fund of a Series, a group of such Primary Assets and other
assets having the characteristics described in the related Prospectus
Supplement.
'Assumed Reinvestment Rate' means, with respect to a Series, the per annum
rate or rates specified in the related Prospectus Supplement for a particular
period or periods as the 'Assumed Reinvestment Rate' for funds held in any fund
or account for the Series.
'Available Distribution Amount' means the amount in the Distribution
Account (including amounts deposited therein from any reserve fund or other fund
or account) eligible for distribution to Holders on a Distribution Date.
'Bankruptcy Code' means the federal bankruptcy code, 11 United States Code
101 et seq., and related rules and regulations promulgated thereunder.
'Business Day' means a day that, in the City of New York or in the city or
cities in which the corporate trust office of the Trustee are located, is
neither a legal holiday nor a day on which banking institutions are authorized
or obligated by law, regulations or executive order to be closed.
'Certificate' means the Asset-Backed Certificates.
'Class' means a Class of Securities of a Series.
'Closing Date' means, with respect to a Series, the date specified in the
related Prospectus Supplement as the date on which Securities of such Series are
first issued.
'Code' means the Internal Revenue Code of 1986, as amended, and regulations
(including proposed regulations) or other pronouncements of the Internal Revenue
Service promulgated thereunder.
'Collection Account' means, with respect to a Series, the account
established in the name of the Servicer for the deposit by the Servicer of
payments received from the Primary Assets.
'Combined Loan-to-Value Ratio' means, with respect to a Loan, the ratio
determined as set forth in the related Prospectus Supplement taking into account
the amounts of any related senior mortgage loans on the related Mortgaged
Property.
'Commission' means the Securities and Exchange Commission.
'Compound Interest Security' means any Security of a Series on which all or
a portion of the interest accrued thereon is added to the principal balance of
such Security on each Distribution Date, through the Accrual
75
<PAGE>
Termination Date, and with respect to which no interest shall be payable until
such Accrual Termination Date, after which interest payments will be made on the
Compound Value thereof.
'Compound Value' means, with respect to a Class of Compound Interest
Securities, the original principal balance of such Class, plus all accrued and
unpaid interest, if any, previously added to the principal balance thereof and
reduced by any payments of principal previously made on such Class of Compound
Interest Securities.
'Condominium' means a form of ownership of real property wherein each owner
is entitled to the exclusive ownership and possession of his or her individual
Condominium Unit and also owns a proportionate undivided interest in all parts
of the Condominium Building (other than the individual Condominium Units) and
all areas or facilities, if any, for the common use of the Condominium Units.
'Condominium Association' means the person(s) appointed or elected by the
Condominium Unit owners to govern the affairs of the Condominium.
'Condominium Building' means a multi-unit building or buildings, or a group
of buildings whether or not attached to each other, located on property subject
to Condominium ownership.
'Condominium Loan' means a Loan secured by a Mortgage on a Condominium Unit
(together with its appurtenant interest in the common elements).
'Condominium Unit' means an individual housing unit in a Condominium
Building.
'Cooperative' means a corporation owned by tenant-stockholders who, through
the ownership of stock, shares or membership securities in the corporation,
receive proprietary leases or occupancy agreements which confer exclusive rights
to occupy specific units and which is described in Section 216 of the Code.
'Cooperative Dwelling' means an individual housing unit in a building owned
by a Cooperative.
'Cooperative Loan' means a housing loan made with respect to a Cooperative
Dwelling and secured by an assignment by the borrower (tenant-stockholder) or
security interest in shares issued by the applicable Cooperative.
'Cut-off Date' means the date designated as such in the related Prospectus
Supplement for a Series.
'Debt Securities' means Securities characterized as indebtedness for
federal income tax purposes, and Regular Interest Securities.
'Deferred Interest' means the excess of the interest accrued on the
outstanding principal balance of a Loan during a specified period over the
amount of interest required to be paid by an obligor on such Loan on the related
Due Date.
'Deposit Agreement' means a guaranteed investment contract or reinvestment
agreement providing for the investment of funds held in a fund or account,
guaranteeing a minimum or a fixed rate of return on the investment of moneys
deposited therein.
'Depositor' means Bear Stearns Asset Backed Securities, Inc.
'Disqualified Organization' means the United States, any State or political
subdivision thereof, any possession of the United States, any foreign
government, any international organization, or any agency or instrumentality of
any of the foregoing, a rural electric or telephone cooperative described in
section 1381(a)(2)(C) of the Code, or any entity exempt from the tax imposed by
sections 1-1399 of the Code, if such entity is not subject to tax on its
unrelated business income.
'Distribution Account' means, with respect to a Series, the account
established in the name of the Trustee for the deposit of remittances received
from the Servicer with respect to the Primary Assets.
'Distribution Date' means, with respect to a Series or Class of Securities,
each date specified as a distribution date for such Series or Class in the
related Prospectus Supplement.
76
<PAGE>
'Due Date' means each date, as specified in the related Prospectus
Supplement for a Series, on which any payment of principal or interest is due
and payable by the obligor on any Primary Asset pursuant to the terms thereof.
'Eligible Investments' means any one or more of the obligations or
securities described as such in the related Agreement.
'Enhancement' means the enhancement for a Series, if any, specified in the
related Prospectus Supplement.
'Enhancer' means the provider of the Enhancement for a Series specified in
the related Prospectus Supplement.
'ERISA' means the Employee Retirement Income Security Act of 1974, as
amended.
'Escrow Account' means an account, established and maintained by the
Servicer for a Loan, into which payments by borrowers to pay taxes, assessments,
mortgage and hazard insurance premiums and other comparable items required to be
paid to the mortgagee are deposited.
'FHLMC' means the Federal Home Loan Mortgage Corporation.
'Final Scheduled Distribution Date' means, with respect to a Class of Notes
of a Series, the date no later than which principal thereof will be fully paid
and with respect to a Class of Certificates of a Series, the date after which no
Certificates of such Class will remain outstanding, in each case based on the
assumptions set forth in the related Prospectus Supplement.
'FNMA' means the Federal National Mortgage Association.
'Holder' means the person or entity in whose name a Security is registered.
'Home Improvements' means the home improvements financed by a Home
Improvement Contract.
'Home Improvement Contract' means any home improvement installment sales
contracts and installment loan agreement which may be unsecured or secured by
purchase money security interest in the Home Improvement financed thereby.
'HUD' means the United States Department of Housing and Urban Development.
'Indenture' means the indenture relating to a Series of Notes between the
Trust Fund and the Trustee.
'Insurance Policies' means certain mortgage insurance, hazard insurance and
other insurance policies required to be maintained with respect to Loans.
'Insurance Proceeds' means amount paid by the insurer under any of the
Insurance Policies covering any Loan or Mortgaged Property.
'Interest Only Securities' means a Class of Securities entitled solely or
primarily to distributions of interest and which is identified as such in the
related Prospectus Supplement.
'IRS' means the Internal Revenue Service.
'Lifetime Rate Cap' means the lifetime limit if any, on the Loan Rate
during the life of each adjustable rate Loan.
'Liquidation Proceeds' means amounts received by the Servicer in connection
with the liquidation of a Loan, net of liquidation expenses.
'Loan Rate' means, unless otherwise indicated herein or in the Prospectus
Supplement, the interest rate borne by a Loan.
'Loans' mean Mortgage Loans and/or Home Improvement Contracts,
collectively. A Loan refers to a specific Mortgage Loan or Home Improvement
Contract, as the context requires.
'Loan-to-Value Ratio' means, with respect to a Loan, the ratio determined
as set forth in the related Prospectus Supplement.
77
<PAGE>
'Minimum Rate' means the lifetime minimum Loan Rate during the life of each
adjustable rate Loan.
'Minimum Principal Payment Agreement' means a minimum principal payment
agreement with an entity meeting the criteria of the Rating Agencies.
'Modification' means a change in any term of a Loan.
'Mortgage' means the mortgage, deed of trust or other similar security
instrument securing a Mortgage Note.
'Mortgage Loan' means a closed-end home equity loan secured by a Mortgaged
Property.
'Mortgage Note' means the note or other evidence of indebtedness of a
Mortgagor under the Loan.
'Mortgagor' means the obligor on a Mortgage Note.
'1986 Act' means the Tax Reform Act of 1986.
'Notes' means the Asset-Backed Notes.
'Notional Amount' means the amount set forth in the related Prospectus
Supplement for a Class of Interest Only Securities.
'PAC' ('Planned Amortization Class Securities') means a Class of Securities
of a Series on which payments of principal are made in accordance with a
schedule specified in the related Prospectus Supplement, based on certain
assumptions stated therein.
'Participating Securities' means Securities entitled to receive payments of
principal and interest and an additional return on investment as described in
the related Prospectus Supplement.
'Pass-Through Security' means a security representing an undivided
beneficial interest in a pool of assets, including the right to receive a
portion of all principal and interest payments relating to those assets.
'Pay Through Security' means Regular Interest Securities and certain Debt
Securities that are subject to acceleration due to prepayment on the underlying
Primary Assets.
'Person' means any individual, corporation, partnership, joint venture,
association, joint stock company, trust (including any beneficiary thereof),
unincorporated organization, or government or any agency or political
subdivision thereof.
'Pooling and Servicing Agreement' means the pooling and servicing agreement
relating to a Series of Certificates among the Depositor, the Servicer (if such
Series relates to Loans) and the Trustee.
'Primary Assets' means the Private Securities and/or Loans, as the case may
be, which are included in the Trust Fund for such Series. A Primary Asset refers
to a specific Private Security or Loan, as the case may be.
'Principal Balance' means, with respect to a Primary Asset and as of a Due
Date, the original principal amount of the Primary Asset, plus the amount of any
Deferred Interest added to such principal amount, reduced by all payments, both
scheduled or otherwise, received on such Primary Asset prior to such Due Date
and applied to principal in accordance with the terms of the Primary Asset.
'Principal Only Securities' means a Class of Securities entitled solely or
primarily to distributions of principal and identified as such in the Prospectus
Supplement.
'Private Security' means a participation or pass-through certificate
representing a fractional, undivided interest in Underlying Loans or
collateralized obligations secured by Underlying Loans.
'Property' means either a Home Improvement or a Mortgaged Property securing
a Loan, as the context requires.
'PS Agreement' means the pooling and servicing agreement, indenture, trust
agreement or similar agreement pursuant to which a Private Security is issued.
'PS Servicer' means the servicer of the Underlying Loans.
78
<PAGE>
'PS Sponsor' means, with respect to Private Securities, the sponsor or
depositor under a PS Agreement.
'PS Trustee' means the trustee designated under a PS Agreement.
'Qualified Insurer' means a mortgage guarantee or insurance company duly
qualified as such under the laws of the states in which the Mortgaged Properties
are located duly authorized and licensed in such states to transact the
applicable insurance business and to write the insurance provided.
'Rating Agency' means the nationally recognized statistical rating
organization (or organizations) which was (or were) requested by the Depositor
to rate the Securities upon the original issuance thereof.
'Regular Interest' means a regular interest in a REMIC.
'REMIC' means a real estate mortgage investment conduit.
'REMIC Administrator' means the Person, if any, specified in the related
Prospectus Supplement for a Series for which a REMIC election is made, to serve
as administrator of the Series.
'REMIC Provisions' means the provisions of the federal income tax law
relating to real estate mortgage investment conduits, which appear at sections
860A through 860G of Subchapter M of Chapter 1 of the Code, and related
provisions, and regulations, including proposed regulations and rulings, and
administrative pronouncements promulgated thereunder, as the foregoing may be in
effect from time to time.
'REO Property' means real property which secured a defaulted Loan,
beneficial ownership of which has been acquired upon foreclosure, deed in lieu
of foreclosure, repossession or otherwise.
'Reserve Fund' means, with respect to a Series, any Reserve Fund
established pursuant to the related Agreement.
'Residual Interest' means a residual interest in a REMIC.
'Retained Interest' means, with respect to a Primary Asset, the amount or
percentaged specified in the related Prospectus Supplement which is not included
in the Trust Fund for the related Series.
'Scheduled Payments' means the scheduled payments of principal and interest
to be made by the borrower on a Primary Asset.
'Securities' means the Notes or the Certificates.
'Seller' means the seller of the Primary Assets to the Depositor identified
in the related Prospectus Supplement for a Series.
'Senior Securityholder' means a holder of a Senior Security.
'Senior Securities' means a Class of Securities as to which the holders'
rights to receive distributions of principal and interest are senior to the
rights of holders of Subordinate Securities, to the extent specified in the
related Prospectus Supplement.
'Series' means a separate series of Securities sold pursuant to this
Prospectus and the related Prospectus Supplement.
'Servicer' means, with respect to a Series relating to Loans, the Person if
any, designated in the related Prospectus Supplement to service Loans for that
Series, or the successors or assigns of such Person.
'Single Family Property' means property securing a Loan consisting of one-
to four-family attached or detached residential housing, including Cooperative
Dwellings.
'Stripped Securities' means Pass-Through Securities representing interests
in Primary Assets with respect to which all or a portion of the principal
payments have been separated from all or a portion of the interest payments.
'Subordinate Securityholder' means a Holder of a Subordinate Security.
'Subordinated Securities' means a Class of Securities as to which the
rights of holders to receive distributions of principal, interest or both is
subordinated to the rights of holders of Senior Securities, and may be
79
<PAGE>
allocated losses and shorfalls prior to the allocation thereof to other Classes
of Securities, to the extent and under the circumstances specified in the
related Prospectus Supplement.
'Trustee' means the trustee under the applicable Agreement and its
successors.
'Trust Fund' means, with respect to any Series of Securities, the trust
holding all money, instruments, securities and other property, including all
proceeds thereof, which are, with respect to a Series of Certificates, held for
the benefit of the Holders by the Trustee under the Pooling and Servicing
Agreement or Trust Agreement or, with respect to a Series of Notes, pledged to
the Trustee under the Indenture as a security for such Notes, including, without
limitation, the Primary Assets (except any Retained Interests), all amounts in
the Distribution Account Collection Account or Reserve Funds, distributions on
the Primary Assets (net of servicing fees), and reinvestment earnings on such
net distributions and any Enhancement and all other property and interest held
by or pledged to the Trustee pursuant to the related Agreement for such Series.
'UCC' means the Uniform Commercial Code.
'Underlying Loans' means loans of the type eligible to be Loans underlying
or securing Private Securities.
'Variable Interest Security' means a Security on which interest accrues at
a rate that is adjusted, based upon a predetermined index, at fixed periodic
intervals, all as set forth in the related Prospectus Supplement.
'Zero Coupon Security' means a Security entitled to receive payments of
principal only.
80
<PAGE>
(This page has been left blank intentionally.)
<PAGE>
(This page has been left blank intentionally.)
<PAGE>
(This page has been left blank intentionally.)
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING
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. 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 CERTIFICATES OFFERED HEREBY NOR AN OFFER OF SUCH
CERTIFICATES 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
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Incorporation of Certain Documents by Reference......... (iii)
Summary of Terms........................................ S-1
Risk Factors............................................ S-10
Description of the Home Equity Loans.................... S-14
The Originator and the Subservicer...................... S-15
The Servicer............................................ S-15
The Originator's Home Equity Loan Program............... S-15
Prepayment and Yield Considerations..................... S-20
Description of the Certificates......................... S-24
The Policy and the Certificate Insurer.................. S-37
Use of Proceeds......................................... S-38
Underwriting............................................ S-38
Experts................................................. S-39
Ratings................................................. S-39
Legal Matters........................................... S-40
Index of Defined Terms.................................. S-41
Certain Statistical Information Regarding the Initial
Home Equity Loans as of the Cut-Off Date.............. A-1
PROSPECTUS
Prospectus Supplement................................... 3
Reports to Holders...................................... 3
Available Information................................... 3
Incorporation of Certain Documents by Reference......... 4
Summary of Terms........................................ 5
Risk Factors............................................ 15
Description of the Securities........................... 18
The Trust Funds......................................... 22
Enhancement............................................. 28
Servicing of Loans...................................... 30
The Agreements.......................................... 36
Certain Legal Aspects of Loans.......................... 43
The Depositor........................................... 51
Use of Proceeds......................................... 51
Certain Federal Income Tax Considerations............... 51
State Tax Considerations................................ 71
ERISA Considerations.................................... 71
Legal Investment........................................ 74
Plan of Distribution.................................... 74
Legal Matters........................................... 74
Glossary of Terms....................................... 75
</TABLE>
UNTIL 90 DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE CERTIFICATES OFFERED HEREBY, 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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
$125,000,000
AMERUS HOME EQUITY
LOAN TRUST 1997-1
AMERUS BANK
(ORIGINATOR)
AMERUS LIFE INSURANCE COMPANY
(SELLER AND SERVICER)
BEAR STEARNS ASSET BACKED
SECURITIES, INC.
(DEPOSITOR)
------------------------
PROSPECTUS SUPPLEMENT
------------------------
BEAR, STEARNS & CO. INC.
OCTOBER 17, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
